UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended December 31, 2009.
or
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from
to
Commission File No. 1-13998
Administaff, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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76-0479645
(I.R.S. Employer
Identification No.) |
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19001 Crescent Springs Drive |
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Kingwood, Texas
(Address of principal executive offices)
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77339
(Zip Code) |
Registrants Telephone Number, Including Area Code: (281) 358-8986
Securities Registered Pursuant to Section 12(b) of the Act:
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Common Stock, par value $0.01 per share
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New York Stock Exchange |
Rights to Purchase Series A Junior Participating Preferred Stock
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New York Stock Exchange |
(Title of class)
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(Name of Exchange on Which Registered) |
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 þ
Indicate by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No þ
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Date File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best of registrants
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. o
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 definition of
large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of
the Exchange Act.
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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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 þ
As of February 8, 2010, 25,573,638 shares of the registrants common stock, par value
$0.01 per share, were outstanding. As of the last business day of the registrants most recently
completed second quarter, the aggregate market value of the common stock held by non-affiliates
(based upon the June 30, 2009 closing price of the common stock as reported by the New York Stock
Exchange) was approximately $511 million.
DOCUMENTS INCORPORATED BY REFERENCE
Part III information is incorporated by reference from the proxy statement for the annual
meeting of stockholders to be held April 19, 2010, which the registrant intends to file within 120
days of the end of the fiscal year.
PART I
Unless otherwise indicated, Administaff, the Company, we, our and us are used in
this annual report to refer to the businesses of Administaff, Inc. and its consolidated
subsidiaries. This annual report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can
identify such forward-looking statements by the words expects, intends, plans, projects,
believes, estimates, likely, possibly, probably, goal, objective, assume,
outlook, guidance, predicts, appears, indicator and similar expressions. In the normal
course of business, in an effort to help keep our stockholders and the public informed about our
operations we may, from time to time, issue such forward-looking statements, either orally or in
writing. Generally, these statements relate to business plans or strategies, projected or
anticipated benefits or other consequences of such plans or strategies, or projections involving
anticipated revenues, earnings or other aspects of operating results. We base the forward-looking
statements on our current expectations, estimates and projections. We caution you that these
statements are not guarantees of future performance and involve risks, uncertainties and
assumptions that we cannot predict. In addition, we have based many of these forward-looking
statements on assumptions about future events that may prove to be inaccurate. Therefore, the
actual results of the future events described in such forward-looking statements in this annual
report, or elsewhere, could differ materially from those stated in such forward-looking statements.
Among the factors that could cause actual results to differ materially are the risks and
uncertainties discussed in this annual report, including, without limitation, factors discussed in
Item 1, Business, Item 1A, Risk Factors, and Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations, including the factors discussed under the caption
Factors That May Affect Future Results and the Market Price of Common Stock, beginning on page
38.
ITEM 1. BUSINESS.
General
Administaff is a professional employer organization (PEO) that provides a comprehensive
Personnel Management SystemSM encompassing a broad range of services, including benefits
and payroll administration, health and workers compensation insurance programs, personnel records
management, employer liability management, employee recruiting and selection, employee performance
management and employee training and development services to small and medium-sized businesses in
strategically selected markets. We were organized as a corporation in 1986 and have provided PEO
services since inception. We also perform employee screening services and recordkeeping services
for defined contribution plans, and offer human resource products, services and information via
small business software applications and online Web sites.
Our principal executive offices are located at 19001 Crescent Springs Drive, Kingwood, Texas
77339. Our telephone number at that address is (281) 358-8986 and the Companys Web site address
is http://www.administaff.com. Our stock is traded on the New York Stock Exchange under the symbol
ASF. Periodic Securities and Exchange Commission (SEC) filings, including our annual reports
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and if applicable,
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 are available through our Web site free of charge as soon as reasonably
practicable after such material is electronically filed with, or furnished to, the SEC.
Our Personnel Management System is designed to improve the productivity and profitability of
small and medium-sized businesses. It relieves business owners and key executives of many
employer-related administrative and regulatory burdens, which enables them to focus on the core
competencies of their businesses. It also promotes employee performance through human resource
management techniques that improve employee satisfaction. We provide the Personnel Management
System by entering into a Client Service Agreement (CSA), which establishes a three-party
relationship whereby we and our client act as co-employers of the employees who work at the
clients location (worksite employees). Under the CSA, we assume responsibility for personnel
administration and compliance with most employment-related governmental regulations, while the
client retains the employees services in its business and remains the employer for various other
purposes. We charge a comprehensive service fee (comprehensive service fee or gross billing),
which is invoiced concurrently with the processing of payroll for the worksite employees of the
client. The comprehensive service fee consists of the payroll of our worksite employees and a
markup computed as a percentage of the payroll cost of the worksite employees.
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We accomplish the objectives of the Personnel Management System through a High
Touch/High Tech approach to service delivery. In advisory areas, such as recruiting, employee
performance management and employee training, we employ a high touch approach designed to ensure
that our clients receive the personal attention and expertise needed to create a customized human
resources solution. For transactional processing, we employ a high tech approach that provides
secure, convenient information exchange among Administaff, our clients and our worksite employees,
creating efficiencies for all parties. The primary component of the high tech portion of our
strategy is the Employee Service Center (ESC). The ESC is our Web-based interactive PEO service
delivery platform, which is designed to provide automated, personalized PEO services to our clients
and worksite employees.
As of December 31, 2009, we had 50 sales offices in 23 markets. Our long-term strategy is to
operate approximately 90 sales offices located in 40 strategically selected markets.
Our national expansion strategy also includes regionalized data processing for payroll and
benefits transactions and localized face-to-face human resource services. As of December 31, 2009,
we had four regional service centers, and had human resource and client service personnel located
in a majority of our 23 sales markets, which serviced an average of 107,025 worksite employees per
month in the fourth quarter of 2009.
PEO Industry
The PEO industry began to evolve in the early 1980s largely in response to the burdens placed
on small and medium-sized employers by an increasingly complex legal and regulatory environment.
While various service providers were available to assist these businesses with specific tasks, PEOs
emerged as providers of a more comprehensive range of services relating to the employer/employee
relationship. In a PEO arrangement, the PEO assumes certain aspects of the employer/employee
relationship as defined in the contract between the PEO and its client. Because PEOs provide
employer-related services to a large number of employees, they can achieve economies of scale that
allow them to perform employment-related functions more efficiently, provide a greater variety of
employee benefits and devote more attention to human resources management than a client can
individually.
We believe the key factors driving demand for PEO services include:
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the focus on growth and productivity of the small and medium-sized business community
in the United States, utilizing outsourcing to concentrate on core competencies; |
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the need to provide competitive healthcare and related benefits to attract and retain
employees; |
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the increasing costs associated with health and workers compensation insurance
coverage, workplace safety programs, employee-related complaints and litigation; and |
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complex regulation of employment issues and the related costs of compliance,
including the allocation of time and effort to such functions by owners and key
executives. |
A significant factor in the development of the PEO industry has been increasing recognition
and acceptance of PEOs and the co-employer relationship by federal and state governmental
authorities. Administaff and other industry leaders, in concert with the National Association of
Professional Employer Organizations (NAPEO), have worked with the relevant governmental entities
for the establishment of a regulatory framework that protects clients and employees, discourages
unscrupulous and financially unsound companies, and promotes further development of the industry.
Currently, 34 states have enacted legislation either recognizing PEOs or requiring licensing,
registration, or certification, and several others are considering such regulation. Such laws vary
from state to state but generally provide for monitoring the fiscal responsibility of PEOs. State
regulation assists in screening insufficiently capitalized PEO operations and helps to resolve
interpretive issues concerning employee status for specific purposes under applicable state law.
We have actively supported such regulatory efforts and are currently recognized, licensed,
registered, certified or pursuing registration in all 34 of these states. The cost of compliance
with these regulations is not material to our financial position or results of operations.
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Service Offerings
PEO Services
We serve small and medium-sized businesses by providing our Personnel Management System, which
encompasses a broad range of services, including:
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benefits and payroll administration; |
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health and workers compensation insurance programs; |
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personnel records management; |
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employer liability management; |
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employee recruiting and selection; |
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employee performance management; and |
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training and development services. |
The Personnel Management System is designed to attract and retain high-quality employees,
while relieving client owners and key executives of many employer-related administrative and
regulatory burdens. Among the employment-related laws and regulations that may affect a client are
the following:
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Internal Revenue Code (the Code); |
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Federal Income Contribution Act (FICA); |
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Federal Unemployment Tax Act (FUTA); |
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Fair Labor Standards Act (FLSA)*; |
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Employee Retirement Income Security Act,
as amended (ERISA); |
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Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA)*; |
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Immigration Reform and Control Act
(IRCA); |
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Title VII (Civil Rights Act of 1964)*; |
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Americans with Disabilities Act (ADA)*; |
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Age Discrimination in Employment Act
(ADEA)*; |
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The Family and Medical Leave Act (FMLA)*; |
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Health Insurance Portability and
Accountability Act (HIPAA); |
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Drug-Free Workplace Act*; |
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Occupational Safety and Health Act
(OSHA)*; |
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Worker Adjustment and Retraining
Notification Act (WARN); |
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Uniformed Services Employment and
Reemployment Rights Act (USERRA); |
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State unemployment and employment
security laws; and |
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State workers compensation laws. |
While these regulations are complex, and in some instances overlapping, we assist our clients
in achieving
compliance with these regulations by providing services in four primary categories:
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administrative functions; |
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benefit plans administration; |
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personnel management; and |
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employer liability management. |
All of the following services are included in the Personnel Management System and are
available to all clients:
Administrative Functions. Administrative functions encompass a wide variety of processing and
record keeping tasks, mostly related to payroll administration and government compliance. Specific
examples include:
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payroll processing; |
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payroll tax deposits; |
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quarterly payroll tax reporting; |
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employee file maintenance; |
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unemployment claims processing; and |
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workers compensation claims reporting. |
Benefit Plans Administration. We maintain several benefit plans including the following:
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a group health plan; |
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a health care flexible spending account plan; |
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an educational assistance plan; |
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an adoption assistance plan; |
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group term life insurance; |
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group universal life insurance coverage; |
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accidental death and dismemberment insurance; |
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short-term and long-term disability insurance; |
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a 401(k) retirement plan; and |
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a cafeteria plan. |
The group health plan includes medical, dental, vision and prescription drug coverage, as well
as a worklife program. All benefit plans are provided to eligible employees based on the specific
eligibility provisions of each plan. We are the policyholder responsible for the costs and
premiums associated with any group insurance policies that provide benefits under these plans, and
we act as plan sponsor and administrator of the plans. We negotiate the terms and costs of the
plans, maintain the plans in accordance with applicable federal and state regulations and serve
as liaison for the delivery of such benefits to worksite employees. COBRA coverage is
extended to eligible terminated worksite and corporate employees and other eligible individuals, in
accordance with applicable law. We believe this variety and quality of benefit plans are generally
not available to employees in our small and medium-sized business target market and are usually
offered only by larger companies that can spread program costs over a much larger group of
employees. As a result, we believe the availability of these benefit plans provides our clients
with a competitive advantage that small and medium-sized businesses are typically unable to attain
on their own.
Personnel Management. We provide a wide variety of personnel management services that give
our clients access to resources normally found only in the human resources departments of large
companies. All clients have access to our comprehensive personnel guide, which sets forth a
systematic approach to administering personnel policies and practices, including recruiting,
discipline and termination procedures. Other human resources services we provide include:
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drafting and reviewing personnel policies and employee handbooks; |
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designing job descriptions; |
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performing prospective employee screening and background investigations; |
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designing performance appraisal processes and forms; |
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professional development and issues-oriented training; |
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employee counseling; |
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substance abuse awareness training; |
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drug testing; |
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outplacement services; and |
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compensation guidance. |
Employer Liability Management. Under the CSA, we assume many of the employment-related
responsibilities associated with the administrative functions, benefit plans administration and
personnel management services we provide. For many of those employment-related responsibilities
that are the responsibility of the client or we share with our clients, we can assist our clients
in managing and limiting exposure. This includes first time and ongoing safety-related risk
management reviews, as well as the implementation of safety programs designed to reduce workers
compensation claims. We also provide guidance to clients for avoiding liability claims for
discrimination, sexual harassment and civil rights violations, and participate in termination
decisions to attempt to minimize liability on those grounds. We employ in-house and external
counsel, specializing in several areas of employment law, who have broad experience in disputes
concerning the employer/employee relationship and
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provide support to our human resources service
specialists. As part of our comprehensive service, we also maintain employment practice liability
insurance coverage for ourselves and our clients, monitor changing government regulations and
notify clients of the potential effect of such changes on employer liability.
Employee Service CenterSM. The Employee Service Center (ESC) is our Web-based
interactive PEO service delivery platform, which is designed to provide automated, personalized PEO
content and services to our clients and worksite employees. The ESC provides a wide range of
functionality, including:
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WebPayrollSM for the submission and approval of payroll data; |
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client-specific payroll information and reports; |
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employee information, including online check stubs and pay history reports; |
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employee-specific benefits content, including summary plan descriptions and
enrollment status; |
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access to 401(k) plan information through the Retirement Service
CenterSM; |
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online human resources forms; |
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best practices human resource management process maps and process overviews; |
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an online personnel guide; |
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e-Learning Web-based training; |
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online recruiting services; |
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links to benefits providers and other key vendors; and |
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frequently asked questions. |
MarketPlaceSM. Through our many alliances with best-of-class providers,
Administaffs MarketPlace is an eCommerce portal that brings a wide range of product and service
offerings to our clients, worksite employees and their families. MarketPlace also features the
Business Network, where our clients can offer their products and services as well.
HR Software Products. In 2005, we acquired HRTools.com, an online Web site for human
resources products, services and information. The acquisition also included small business
software applications related to job descriptions, performance reviews, and personnel policies and
procedures. The applications are sold primarily to small business customers through online
subscription arrangements, packaged software ordered online, or through various reseller
arrangements. We are currently redeveloping the technological platform to a software as a
service delivery model.
Employment Screening Services. In 2008, we acquired the operations of USDatalink, Ltd., an
employment screening services company. The acquisition allows us to leverage our HR service
capabilities to our PEO customers, through operating synergies. USDatalink offers a customized
approach to background-check reporting for companies that outsource this portion of their
employment-screening process. Services include criminal records checks; verifying employment
history or education; conducting driving record, civil record and credit history checks; and
confirming extraordinary credentials.
Client Service Agreement
All PEO clients execute an Administaff Client Service Agreement (CSA). The CSA generally
provides for an on-going relationship, subject to termination by Administaff or the client upon 30
days written notice or upon shorter notice in the event of default. The CSA establishes our
comprehensive service fee, which is subject to periodic adjustments to account for changes in the
composition of the clients workforce, employee benefit election changes and statutory changes that
affect our costs. Under the provisions of the CSA, clients active in January of any year are
obligated to pay the estimated payroll tax component of the comprehensive service fee in a manner
that reflects the pattern of incurred payroll tax costs. This practice aligns clients payments to
Administaff for payroll taxes with Administaffs obligations to make payments to tax authorities,
which are higher in the earlier part of the year, and decrease as limits on wages subject to
payroll tax, are reached. New clients enrolling subsequent to January of any year are invoiced at
a relatively constant rate throughout the remaining portion of the year, resulting in Administaffs
improving profitability over the course of the year for those clients because of the typical
pattern of incurred payroll tax costs.
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The CSA also establishes the division of responsibilities between Administaff and the client
as co-employers. Pursuant to the CSA, we are responsible for personnel administration and are
liable for compliance with certain employment-related government regulations. In addition, we
assume liability for payment of salaries and
wages (as well as related payroll taxes) of our worksite employees and responsibility for
providing specified employee benefits to such persons. These liabilities are not contingent on the
prepayment by the client of the associated comprehensive service fee and, as a result of our
employment relationship with each of our worksite employees, we are liable for payment of salary
and wages to the worksite employees as reported by the client and are responsible for providing
specified employee benefits to such persons, regardless of whether the client pays the associated
comprehensive service fee. The client retains the employees services and remains liable for
complying with certain government regulations, compliance with which requires control of the
worksite or daily supervisory responsibility or is otherwise beyond our ability to assume. A third
group of responsibilities and liabilities are shared by Administaff and the client where such joint
responsibility is appropriate. The specific division of applicable responsibilities under the
majority of CSAs are as follows:
Administaff
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Payment of wages and salaries as reported by the client and related tax reporting and
remittance (local, state and federal withholding, FICA, FUTA, state unemployment); |
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Workers compensation compliance, procurement, management and reporting; |
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Compliance with COBRA, HIPAA and ERISA (for each employee benefit plan sponsored solely by
Administaff), as well as monitoring changes in other governmental regulations governing the
employer/employee relationship and updating the client when necessary; and |
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Employee benefits administration of plans sponsored solely by Administaff. |
Client
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Payment, through Administaff, of commissions, bonuses, paid leaves of absence and severance
payments; |
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Payment and related tax reporting and remittance of non-qualified deferred compensation and
equity based compensation; |
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Assignment to, and ownership of, all client intellectual property rights; |
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Compliance with OSHA regulations, EPA regulations, FLSA, FMLA, WARN, USERRA and state and
local equivalents and compliance with government contracting provisions; |
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Compliance with the National Labor Relations Act (NLRA), including all organizing efforts
and expenses related to a collective bargaining agreement and related benefits; |
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Professional licensing requirements, fidelity bonding and professional liability insurance; |
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Products produced and/or services provided; and |
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COBRA, HIPAA and ERISA compliance for client-sponsored benefit plans. |
Joint
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Implementation of policies and practices relating to the employee/employer relationship;
and |
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Compliance with all federal, state and local employment laws, including, but not limited to
Title VII of the Civil Rights Act of 1964, ADEA, Title I of ADA, the Consumer Credit
Protection Act, and immigration laws and regulations. |
We maintain employers practice liability insurance coverages (including coverages for our
clients) to manage our exposure for various employee-related claims, and as a result, the costs in
excess of insurance premiums we incur with respect to this exposure have historically been
insignificant to our operating results.
Because we are a co-employer with the client for some purposes, it is possible that we could
incur liability for violations of such laws, even if we are not responsible for the conduct giving
rise to such liability. The CSA addresses this issue by providing that the client will indemnify
us for liability incurred to the extent the liability is attributable to conduct by the client.
Notwithstanding this contractual right to indemnification, it is possible that we could be unable
to collect on a claim for indemnification and may therefore be ultimately responsible for
satisfying the liability in question.
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In most instances, clients are required to remit their comprehensive service fees no later
than one day prior to the applicable payroll date by wire transfer or automated clearinghouse
transaction. Although we are ultimately liable, as the employer for payroll purposes, to pay
employees for work previously performed, we retain the ability to terminate immediately the CSA and
associated worksite employees or to require prepayment, letters of credit or other collateral upon
deterioration in a clients financial condition or upon non-payment by a client. These rights, the
periodic nature of payroll and the overall quality of our client base have resulted in an excellent
overall collections history.
Customers
Administaff provides a value-added, full-service human resources solution we believe is most
suitable to a specific segment of the small and medium-sized business community. We target
successful businesses with 10 to 2,000 employees that recognize the advantage in the strategic use
of high-performance human resource practices. We refer to customers with 150 to 2,000 employees as
mid-market customers. These customers, which represented approximately 12% of the total customer
base as of December 2009, are marketed to and serviced by dedicated sales and service personnel.
We have set a long-term goal to serve approximately 10% of the overall small- and medium-sized
business community. We serve clients and worksite employees located throughout the United States.
By region, our revenue change compared to 2008 and revenue distribution for the year ended December
31, 2009 was as follows:
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Revenue Change |
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% of Total Revenues |
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Northeast |
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1.8 |
% |
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22.5 |
% |
Southeast |
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(0.1 |
)% |
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11.1 |
% |
Central |
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(0.2 |
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15.2 |
% |
Southwest |
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(8.9 |
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31.6 |
% |
West |
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(6.9 |
)% |
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19.6 |
% |
As part of our client selection strategy, we generally do not offer our services to businesses
falling within certain specified NAICS (North American Industry Classification System) codes,
attempting to minimize our exposure to certain industries we believe present a higher employer risk
such as employee injury, high turnover or litigation. All prospective clients are evaluated
individually on the basis of workers compensation risk, group medical history (where permitted by
law), unemployment history, operating stability and human resource practices.
Our client base is broadly distributed throughout a wide variety of industries including:
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Computer and information services 21%; |
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Management, administration and consulting services 17%; |
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Finance, insurance and real estate 14%; |
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Manufacturing 8%; |
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Engineering, accounting and legal services 7%; |
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Medical services 7%; |
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Wholesale trade 7%; |
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Construction 5%; |
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Retail trade 5%; and |
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Other 9%. |
This diverse client base lowers our exposure to downturns or volatility in any particular
industry. However, our performance could be affected by a downturn in one of these industries or
by general economic conditions within the small and medium-sized business community.
We focus heavily on client retention. During 2009 and 2008, our retention rate was
approximately 76% and 79%, respectively. Administaffs client retention record over the last five
years reflects that approximately 76% of our clients remain for more than one year, and that the
retention rate improves for clients who remain with us for longer periods, up to approximately 80%
for clients in their fifth year with Administaff. The average annual retention rate over the last
five years was approximately 79%. Client attrition is attributable to a variety of factors,
including: (i) client non-renewal due to price or service factors; (ii) client business failure,
sale, merger, or disposition; (iii) our termination of the CSA resulting from the clients
non-compliance or inability to make timely payments; and (iv) competition from other PEOs or
business services firms.
- 8 -
Marketing and Sales
As of December 31, 2009, we had 50 sales offices located in 23 markets. Our long-term goal is
to operate 90 sales offices in 40 strategically selected markets. Our sales offices typically
consist of six to eight sales representatives, a district sales manager and an office
administrator. To take advantage of economic efficiencies, multiple sales offices may share a
physical location. Administaffs markets and their respective year of entry are as follows:
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|
|
Initial |
|
Market |
|
Sales Offices |
|
|
Entry Date |
|
Houston |
|
|
5 |
|
|
|
1986 |
|
San Antonio |
|
|
1 |
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|
1989 |
|
Austin |
|
|
1 |
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|
|
1989 |
|
Orlando |
|
|
1 |
|
|
|
1989 |
|
Dallas/Fort Worth |
|
|
4 |
|
|
|
1993 |
|
Atlanta |
|
|
4 |
|
|
|
1994 |
|
Phoenix |
|
|
2 |
|
|
|
1995 |
|
Chicago |
|
|
2 |
|
|
|
1995 |
|
Washington D.C. |
|
|
3 |
|
|
|
1995 |
|
Denver |
|
|
2 |
|
|
|
1996 |
|
Los Angeles |
|
|
5 |
|
|
|
1997 |
|
Charlotte |
|
|
1 |
|
|
|
1997 |
|
St. Louis |
|
|
1 |
|
|
|
1998 |
|
San Francisco |
|
|
3 |
|
|
|
1998 |
|
New York |
|
|
4 |
|
|
|
1999 |
|
Baltimore |
|
|
1 |
|
|
|
2000 |
|
New Jersey |
|
|
2 |
|
|
|
2000 |
|
San Diego |
|
|
1 |
|
|
|
2001 |
|
Boston |
|
|
2 |
|
|
|
2001 |
|
Minneapolis |
|
|
2 |
|
|
|
2002 |
|
Raleigh |
|
|
1 |
|
|
|
2006 |
|
Jacksonville |
|
|
1 |
|
|
|
2007 |
|
Kansas City |
|
|
1 |
|
|
|
2007 |
|
Our existing and future markets were identified using a systematic market evaluation and
selection process.
We continue to evaluate a broad range of factors in the selection process, using a market
selection model that weights various criteria we believe are reliable predictors of successful
penetration based on our experience. Among the factors we consider are:
|
|
|
market size, in terms of small and medium-sized businesses engaged in selected
industries that meet our risk profile; |
|
|
|
|
market receptivity to PEO services, including the regulatory environment and
relevant history with other PEO providers; |
|
|
|
|
existing relationships within a given market, such as vendor or client
relationships; |
|
|
|
|
expansion cost issues, such as advertising and overhead costs; |
|
|
|
|
direct cost issues that bear on our effectiveness in controlling and managing the
cost of our services, such as workers compensation and health insurance costs,
unemployment risks and various legal and other factors; |
|
|
|
|
a comparison of the services we offer to alternatives available to small and
medium-sized businesses in the relevant market, such as the cost to the target clients
of procuring services directly or through other PEOs; and |
|
|
|
|
long-term strategy issues, such as the general perception of markets and our
estimate of the long-term revenue growth potential of the market. |
- 9 -
Each of our expansion markets, beginning with Dallas in 1993, was selected in this manner.
Our marketing strategy is based on the application of techniques that have produced consistent
and predictable results in the past. We develop a mix of national and local advertising media and
a placement strategy tailored to each individual market. After selecting a market and developing
our marketing mix, but prior to entering the market, we engage in an organized media and public
relations campaign to prepare the market for our entry and to begin the process of generating sales
leads. We market our services through various business promotions and a broad range of media
outlets, including television, radio, newspapers, periodicals, direct mail and the Internet. We
employ public relations firms for most of our markets as well as advertising consultants to
coordinate and implement our marketing campaigns. We have developed an inventory of television,
radio and newsprint advertisements, which are utilized in this effort. We continuously seek to
develop new marketing approaches and campaigns to capitalize on changes in the competitive
landscape for our PEO service and to more successfully reach our target market.
In 2004, we entered into an agreement with the Professional Golf Association Champions Tour to
become the title sponsor of the annual Administaff Small Business Classic professional golf
tournament held in Houston, Texas. In addition, we have entered into a lifetime arrangement with
Arnold Palmer to be our national spokesperson, which may be terminated upon notice by either party.
Our marketing campaigns use this event and the relationship with Mr. Palmer as a focal point of
our brand marketing efforts.
Our organic growth model generates sales leads from five primary sources: direct sales
efforts, advertising, referrals, marketing alliances and the Internet. These leads result in
initial presentations to prospective clients, and ultimately, prospective client census reports. A
prospective clients census report reflects information gathered by the sales representative about
the prospects employees, including job classification, state of employment, workers compensation
claims history, group medical information (where permitted by law), salary and desired level of
benefits. This information is entered into our customized bid system, which applies Administaffs
proprietary pricing model to the census data, leading to the preparation of a bid. Concurrent with
this process, we evaluate the prospective clients workers compensation, health insurance,
employer practices and financial stability from a risk management perspective. Upon completion of
a favorable risk evaluation, the sales representative presents the bid and attempts to enroll the
prospect. Our selling process typically takes approximately 90 days for clients with less than 150
employees, and up to approximately 180 days for larger clients.
Competition
Administaff provides a value-added, full-service human resources solution we believe is most
suitable to a specific segment of the small and medium-sized business community. This full-service
approach is exemplified by our commitment to provide a high level of service and technology
personnel, which has produced a ratio of corporate staff to worksite employees (the staff support
ratio) that is higher than average for the PEO industry. Based on an analysis of the 2006 through
2008 annual NAPEO surveys of the PEO industry, we have successfully leveraged our full-service
approach into significantly higher returns for Administaff on a per worksite employee per month
basis. During the three-year period from 2006 through 2008, our staff support ratio averaged 46%
higher than the PEO industry average, while gross profit per worksite employee and operating income
per worksite employee exceeded industry averages by 126% and 165%, respectively.
Competition in the PEO industry revolves primarily around quality of services, scope of
services, choice and quality of benefits packages, reputation and price. We believe reputation,
national presence, regulatory expertise, financial resources, risk management and information
technology capabilities distinguish leading PEOs from the rest of the industry. We also believe we
compete favorably in these areas.
- 10 -
Due to the differing geographic regions and market segments in which most PEOs operate, and
the relatively low level of market penetration by the industry, we consider our primary competition
to be the traditional in-house provision of human resource services. The PEO industry is highly
fragmented, and we believe Administaff is one of the largest PEOs in the United States. Our
largest national competitors include TriNet and PEO divisions of large business services companies
such as Automatic Data Processing, Inc. and Paychex, Inc. In addition, we compete to some extent
with: i) fee-for-service providers such as payroll processors and human resource consultants; ii)
independent business outsourcing companies; and iii) large regional PEOs in certain areas of the
country. As Administaff and other large PEOs expand nationally, we expect that competition may
intensify.
Vendor Relationships
Administaff provides benefits to its worksite employees under arrangements with a variety of
vendors. We consider our contracts with UnitedHealthcare (United) and member insurance companies
of ACE American Insurance Company (ACE) to be the most significant elements of our employee
benefits package. These contracts would be the most difficult to replace.
We provide group health insurance coverage to our worksite employees through a national
network of carriers including United, Kaiser Permanente, Blue Shield of California, Hawaii Medical
Service Association and Tufts, all of which provide fully insured policies or service contracts.
The health insurance contract with United provides approximately 91% of our health insurance
coverage and expires on December 31, 2010, subject to cancellation by either party upon 180 days
notice. For a discussion of our contract with United, please read Item 7. Managements Discussion
and Analysis of Financial Condition and Results of Operations Critical Accounting Policies and
Estimates Benefits Costs on page 25.
Our workers compensation coverage (the ACE Program) is currently provided through ACE.
Under our arrangement with ACE, we bear the economic burden for the first $1 million layer of
claims per occurrence. ACE bears the economic burden for all claims in excess of such first $1
million layer. The ACE Program is a fully insured policy whereby ACE has the responsibility to pay
all claims incurred under the policy regardless of whether we satisfy our responsibilities. For
additional discussion of our policy with ACE, please read Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations Critical Accounting Policies and
Estimates Workers Compensation Costs on page 26.
Information Technology
Administaff utilizes a variety of information technology capabilities to provide its human
resource services to clients and worksite employees and for its own administrative and management
information requirements.
Administaff Information Management System (AIMS) is our proprietary PEO information system
and utilizes both purchased and internally developed software applications. This system manages
transactions and information unique to the PEO industry and to Administaff, including:
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|
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worksite employee enrollment; |
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|
|
|
human resource management; |
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|
|
|
benefits and defined contribution plan administration; |
|
|
|
|
payroll processing; |
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|
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|
client invoicing and collection; |
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|
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|
management information and reporting; and |
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|
|
|
sales bid calculations. |
Central to the system are transaction processing capabilities that allow us to process a high
volume of payroll, invoice, and bid transactions that meet the specific needs of our clients and
prospects. We administer our employee benefits through a proprietary application designed to
process employee eligibility and enrollments, manage carrier relationships, and maintain a variety
of plan offerings. Our retirement services operations are conducted utilizing an industry leading
retirement plan administration application in a third-party hosted environment. We utilize
commercially available software for other business functions such as finance and accounting,
contract and litigation management, sales force activity management and customer relationship
management.
- 11 -
The Employee Service Center is our proprietary web-based PEO service delivery platform. With
its integration into AIMS, the ESC is designed to provide automated, personalized PEO content and
services to our clients and worksite employees. For a description of the functionality provided
through the ESC, please read PEO Services Employee Service Center on page 6.
Administaffs primary data center is located at our corporate headquarters in Kingwood, Texas
(a suburb of Houston). Substantially all of our business applications, telecommunications
equipment and network equipment are hosted in this data center. We maintain a disaster recovery
data center in a leased facility in Bryan, Texas. This data center is fully equipped with the
hardware and software necessary to run all of our critical business applications and has sufficient
capacity to handle all of our operations for short periods of time, if required. Periodically, we
perform testing to ensure the disaster recovery capabilities remain effective and available.
We have invested substantially in our network infrastructure to ensure appropriate
connectivity exists between our service centers in Atlanta, Dallas, Houston and Los Angeles, our
district sales offices, our disaster recovery facility and our corporate offices, and to provide
appropriate Internet connectivity to conduct business through the Employee Service Center. The
network infrastructure is provided through industry standard core network hardware and via
high-speed network services provided by multiple vendors.
We have incorporated a variety of measures to maintain the security and privacy of the
information managed through our systems and applications. These measures include industry standard
technologies designed to protect, monitor and assess the network environment; best practice
security policies and procedures; and standard access controls designed to control access to
sensitive and private information.
Industry Regulation
Administaffs operations are affected by numerous federal and state laws relating to tax,
insurance and employment matters. By entering into a co-employer relationship with our worksite
employees, we assume certain obligations and responsibilities of an employer under these federal
and state laws. Because many of these federal and state laws were enacted prior to the development
of nontraditional employment relationships, such as PEOs, temporary employment and outsourcing
arrangements, many of these laws do not specifically address the obligations and responsibilities
of nontraditional employers. Currently, 34 states have passed laws that recognize PEOs or require
licensing, registration or certification requirements for PEOs, and several others are considering
such regulation.
Certain federal and state statutes and regulations use the terms employee leasing or staff
leasing to describe the arrangement among a PEO and its clients and worksite employees. The terms
employee leasing, staff leasing and professional employer arrangements are generally
synonymous in such contexts and describe the arrangements we enter into with our clients and
worksite employees.
As an employer, we are subject to federal statutes and regulations governing the
employer/employee relationship. Subject to the issues discussed below, we believe that our
operations are in compliance, in all material respects, with all applicable federal statutes and
regulations.
Employee Benefit Plans
We offer various employee benefits plans to eligible employees, including our worksite
employees. These
plans include:
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a 401(k) retirement plan; |
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|
a cafeteria plan under Code Section 125; |
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|
a group health plan, which includes medical, dental, vision and prescription drug
coverage, as well as a worklife program; |
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|
a welfare benefits plan, which includes life, disability and accidental death and
dismemberment coverage; |
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|
a health care flexible spending account plan; |
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|
an educational assistance plan; and |
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|
an adoption assistance plan. |
- 12 -
Generally, employee benefit plans are subject to provisions of the Code, ERISA, and COBRA.
Employer Status. In order to qualify for favorable tax treatment under the Code, employee
benefit plans must be established and maintained by an employer for the exclusive benefit of its
employees. Generally, an entity is an employer of individuals for federal employment tax
purposes if an employment relationship exists between the entity and the individuals under the
common law test of employment. In addition, the officers of a corporation are deemed to be
employees of that corporation for federal employment tax purposes. The common law test of
employment, as applied by the IRS, involves an examination of approximately 20 factors to ascertain
whether an employment relationship exists between a worker and a purported employer. Generally,
the test is applied to determine whether an individual is an independent contractor or an employee
for federal employment tax purposes and not to determine whether each of two or more companies is a
co-employer. Substantial weight is typically given to the question of whether the purported
employer has the right to direct and control the details of an individuals work. Among the
factors that appear to have been considered more important by the IRS are:
|
|
|
the employers degree of behavioral control (the extent of instructions, training
and the nature of the work); |
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|
|
the financial control or the economic aspects of the relationship; and |
|
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|
|
the intended relationship of the parties (whether employee benefits are provided,
whether any contracts exist, whether services are ongoing or for a project, whether
there are any penalties for discharge/termination, and the frequency of the business
activity). |
ERISA Requirements. Employee pension and welfare benefit plans are also governed by ERISA.
ERISA defines employer as any person acting directly as an employer, or indirectly in the
interest of an employer, in relation to an employee benefit plan. ERISA defines the term
employee as any individual employed by an employer. The United States Supreme Court has held
that the common law test of employment must be applied to determine whether an individual is an
employee or an independent contractor under ERISA. A definitive judicial interpretation of
employer in the context of a PEO or employee leasing arrangement has not been established.
If Administaff were found not to be an employer with respect to worksite employees for ERISA
purposes, its plans would not comply with ERISA. Further, as a result of such finding Administaff
and its plans would not enjoy, with respect to worksite employees, the preemption of state laws
provided by ERISA and could be subject to varying state laws and regulations, as well as to claims
based upon state common laws. Even if such a finding were made, we believe we would not be
materially adversely affected because we could continue to make available similar benefits at
comparable costs.
In addition to ERISA and the Code provisions discussed herein, issues related to the
relationship between Administaff and its worksite employees may also arise under other federal
laws, including other federal income tax laws.
401(k) Retirement Plans. The Companys 401(k) Retirement Plans are operated pursuant to
guidance provided by the Internal Revenue Service under Revenue Procedure 2002-21 and Revenue
Procedure 2003-86, each of which provides guidance for the operation of defined contribution plans
maintained by PEOs that benefit worksite employees. This guidance provides qualification standards
for PEO plans which, if met, negate the inquiry of
common law employer status for purposes of the exclusive benefit rule.
- 13 -
Federal Employment Taxes
As a co-employer, Administaff assumes responsibility and liability for the payment of federal
and state employment taxes with respect to wages and salaries paid to our worksite employees.
There are essentially three types of federal employment tax obligations:
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|
|
withholding of income tax requirements governed by Code Section 3401, et seq.; |
|
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|
obligations under FICA, governed by Code Section 3101, et seq.; and |
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|
obligations under FUTA, governed by Code Section 3301, et seq. |
Under these Code sections, employers have the obligation to withhold and remit the employer portion
and, where applicable, the employee portion of these taxes.
Code Section 3401, which applies to federal income tax withholding requirements,
contains an exception to the general common law test applied to determine whether an entity is an
employer for purposes of federal income tax withholding. Section 3401(d)(1) states that if the
person for whom services are rendered does not have control of the payment of wages, the employer
for this purpose is the person having control of the payment of wages. The Treasury regulations
issued under Section 3401(d)(1) state that a third party can be deemed to be the employer of
workers under this section for income tax withholding purposes where the person for whom services
are rendered does not have legal control of the payment of wages. While Section 3401(d) (1) has
been examined by several courts, its ultimate scope has not been delineated. Moreover, the IRS has
to date relied extensively on the common law test of employment in determining liability for
failure to comply with federal income tax withholding requirements.
Accordingly, while we believe that we can assume the withholding obligations for worksite
employees, in the event we fail to meet these obligations, the client may be held ultimately liable
for those obligations. While this interpretive issue has not to our knowledge discouraged clients
from enrolling with Administaff, there can be no assurance that a definitive adverse resolution of
this issue would not do so in the future. These interpretive uncertainties may also impact our
ability to report employment taxes on our own account rather than the accounts of our clients.
State Unemployment Taxes
We record our state unemployment (SUI) tax expense based on taxable wages and tax rates
assigned by each state. State unemployment tax rates vary by state and are determined, in part,
based on Administaffs prior years compensation experience in each state. Certain rates are
determined, in part, by each clients own compensation experience. In addition, states have the
ability under law to increase unemployment tax rates to cover deficiencies in the unemployment tax
funds. Rate notices are typically provided by the states during, or prior to, the first quarter of
each year; however, some notices are received later. Until we receive the final tax rate notices,
we estimate our expected SUI rate in those particular states.
State Regulation
While many states do not explicitly regulate PEOs, 34 states have adopted provisions for
licensing, registration, certification or recognition of PEOs, and several others are considering
such regulation. Such laws vary from state to state but generally provide for monitoring 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 law. The Company is in
compliance with the requirements in all 34 states. Regardless of whether a state has licensing,
registration or certification requirements for PEOs, we must comply with a number of other state
and local regulations that could impact our operations.
- 14 -
Corporate Office Employees
We had approximately 1,950 corporate office and sales employees as of December 31, 2009. We
believe our relations with our corporate office and sales employees are good. None of our
corporate office and sales employees is covered by a collective bargaining agreement.
Intellectual Property
Administaff currently has registered trademarks, copyrights and other intellectual property.
Although the Administaff mark is the most material trademark to our business, our trademarks as a
whole are also of considerable importance to us.
- 15 -
ITEM 1A. RISK FACTORS.
Information on the Companys risk factors is included in Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations Factors that May Affect Future Results
and the Market Price of Common Stock on page 38.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
We believe our current facilities are adequate for the purposes for which they are intended
and they provide sufficient capacity to accommodate our expansion goals. We will continue to
evaluate the need for additional facilities based on the rate of growth in worksite employees, the
geographic distribution of the worksite employee base and our long-term service delivery
requirements.
Corporate Facilities
Our corporate headquarters is located in Kingwood, Texas, in a 327,000 square foot office
campus-style facility. This 28-acre company-owned office campus includes approximately nine acres
of undeveloped land for future expansion. All development and support operations are located in
the Kingwood facility, along with our record retention center and primary data processing center.
Our information technology disaster recovery processing center is located in a leased facility in
Bryan, Texas.
In 2008 we acquired a one-third acre parcel of land to construct a conference facility in
Georgia and completed the construction of the 7,000 square foot facility in 2009.
Service Centers
We currently have four regional service centers located in Atlanta, Dallas, Houston and Los
Angeles.
The Atlanta service center, which currently services approximately 33% of our worksite
employee base, is located in a 40,000 square foot facility under lease until 2014.
The Dallas service center, which currently services approximately 20% of our worksite employee
base, is located in a 47,500 square foot facility, which is under lease until 2016.
The Houston service center, which currently services approximately 25% of our worksite
employee base, is located in a 60,600 square foot facility under lease until 2014. In addition to
the service center operations, the facility also contains corporate support operations.
The Los Angeles service center, which currently services approximately 22% of our worksite
employee base, is located in a 45,000 square foot facility under lease until 2012.
Sales Offices
As of December 31, 2009, we had sales and service personnel in 36 facilities located in 23
sales markets throughout the United States. All of the facilities are leased facilities, and some
of these facilities are shared by multiple sales offices and/or client service personnel. As of
December 31, 2009, we had 50 sales offices in these 23 markets. To take advantage of economic
efficiencies, multiple sales offices may share a physical location. Each sales office is typically
staffed by six to eight sales representatives, a district sales manager and an office
administrator. In addition, we have placed certain client service personnel in a majority of our
sales markets to provide high-quality, localized service to our clients in those major markets. We
expect to continue placing various client service personnel in sales markets as a critical mass of
clients is attained in each market.
- 16 -
ITEM 3. LEGAL PROCEEDINGS.
We are not a party to any material pending legal proceedings other than ordinary routine
litigation incidental to our business that we believe would not have a material adverse effect on
our financial condition or results of operations. Please read Note 10 to financial statements,
which is incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of our security holders, through solicitation of proxies
or otherwise, during the quarter ended December 31, 2009.
- 17 -
ITEM S-K 401 (b). EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth the names, ages (as of February 8, 2010) and positions of the
Companys executive officers:
|
|
|
|
|
Name |
|
Age |
|
Position |
Paul J. Sarvadi |
|
53 |
|
Chairman of the Board and Chief Executive Officer |
Richard G. Rawson |
|
61 |
|
President |
A. Steve Arizpe |
|
52 |
|
Executive Vice President of Client Services and Chief Operating Officer |
Jay E. Mincks |
|
56 |
|
Executive Vice President of Sales and Marketing |
Douglas S. Sharp |
|
48 |
|
Senior Vice President of Finance, Chief Financial Officer and Treasurer |
Daniel D. Herink |
|
43 |
|
Senior Vice President of Legal, General Counsel and Secretary |
Paul J. Sarvadi has served as Chairman of the Board and Chief Executive Officer since August
2003. Mr. Sarvadi co-founded Administaff in 1986 and served as Vice President and Treasurer of the
Company from its inception in 1986 through April 1987, as Vice President from April 1987 through
1989 and as President and Chief Executive Officer from 1989 to August 2003. Prior to founding
Administaff, Mr. Sarvadi started and operated several small businesses. Mr. Sarvadi has served as
President of NAPEO and was a member of its Board of Directors for five years. He also served as
President of the Texas Chapter of NAPEO for three of the first four years of its existence. Mr.
Sarvadi was selected as the 2001 National Ernst & Young Entrepreneur Of The Year® for
service industries. In 2004, he received the Conn Family Distinguished New Venture Leader Award
from Mays Business School at Texas A&M University. In 2007, he was inducted into the Texas
Business Hall of Fame.
Richard G. Rawson has served as President since August 2003. He served as
Executive Vice President, Administration, Chief Financial Officer and Treasurer from February 1997
to August 2003. He joined Administaff in 1989 as Senior Vice President, Chief Financial Officer,
and Treasurer. He previously served as a Senior Financial Officer and Controller for several
companies in the manufacturing and seismic data processing industries. Mr. Rawson has served as
President, First Vice President, Second Vice President and Treasurer of NAPEO as well as Chairman
of the NAPEO Accounting Practices Committee. Mr. Rawson also serves on the University of Houstons
C.T. Bauer College of Business Deans Executive Advisory Board and on the Board of Directors of the
YMCA of Greater Houston.
A. Steve Arizpe has served as Executive Vice President of Client Services and Chief Operating
Officer since August 2003. He joined Administaff in 1989 and has served in a variety of roles,
including Houston Sales Manager, Regional Sales Manager and Vice President of Sales. Prior to
joining Administaff, Mr. Arizpe served in sales and sales management roles for two large
corporations.
Jay E. Mincks has served as Executive Vice President of Sales and Marketing since January
1999. Mr. Mincks served as Vice President of Sales and Marketing from February 1997 through
January 1999. He joined Administaff in 1990 and has served in a variety of other roles, including
Houston Sales Manager and Regional Sales Manager for the Western United States. Prior to joining
Administaff, Mr. Mincks served in a variety of positions, including management positions, in the
sales and sales training fields with various large companies.
Douglas S. Sharp has served as Senior Vice President of Finance, Chief Financial Officer and
Treasurer since May 2008. He served as Vice President of Finance, Chief Financial Officer and
Treasurer from August 2003 until May 2008. Mr. Sharp joined Administaff in January 2000 as Vice
President of Finance and Controller. From July 1994 until he joined Administaff, he served as
Chief Financial Officer for Rimkus Consulting Group, Inc. Prior to that, he served as Controller
for a small publicly held company; as Controller for a large software company; and as an Audit
Manager for Ernst & Young LLP. Mr. Sharp has served as a member of the Accounting Practices
Committee of NAPEO.
- 18 -
Daniel D. Herink has served as Senior Vice President of Legal, General Counsel and Secretary
since May 2008. He served as Vice President of Legal, General Counsel and Secretary from May 2007
until May 2008. Mr. Herink joined Administaff in 2000 as Assistant General Counsel and was
promoted to Associate General Counsel in 2002. In his prior responsibilities with Administaff, Mr.
Herink led the Companys litigation and property and casualty insurance practice areas and also
worked extensively on transactional matters. He previously served as an attorney at Rodriguez,
Colvin & Chaney, L.L.P. and McGinnis, Lochridge & Kilgore, L.L.P. He was named a Texas Super
Lawyers Rising Star by Texas Monthly in 2005 and 2007. Mr. Herink is also a certified public
accountant.
- 19 -
PART II
ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES.
Price Range of Common Stock
Our common stock is traded on the New York Stock Exchange under the symbol ASF. As of
February 8, 2010, there were 367 holders of record of the common stock. This number does not
include stockholders for whom shares were held in nominee or street name. The following table
sets forth the high and low sales prices for the common stock as reported on the New York Stock
Exchange transactional tape.
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|
|
|
|
|
|
|
|
|
|
|
Dividends |
|
|
|
High |
|
|
Low |
|
|
per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
24.44 |
|
|
$ |
18.04 |
|
|
$ |
0.13 |
|
Second Quarter |
|
|
30.63 |
|
|
|
20.18 |
|
|
|
0.13 |
|
Third Quarter |
|
|
28.07 |
|
|
|
20.95 |
|
|
|
0.13 |
|
Fourth Quarter |
|
|
27.30 |
|
|
|
21.90 |
|
|
|
0.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
31.60 |
|
|
$ |
22.82 |
|
|
$ |
0.11 |
|
Second Quarter |
|
|
31.60 |
|
|
|
23.55 |
|
|
|
0.11 |
|
Third Quarter |
|
|
30.00 |
|
|
|
24.75 |
|
|
|
0.13 |
|
Fourth Quarter |
|
|
27.16 |
|
|
|
13.36 |
|
|
|
0.13 |
|
Dividend Policy
During 2009 and 2008, the Company paid dividends of $13.3 million and $12.4 million,
respectively. The payment of dividends is made at the discretion of our Board of Directors and
depends upon our operating results, financial condition, capital requirements, general business
conditions and such other factors as our Board of Directors deems relevant.
Issuer Purchases of Equity Securities
The following table provides information about our purchases of Administaff common stock
during the three months ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number |
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
of Shares that May |
|
|
|
Total Number |
|
|
|
|
|
|
Shares Purchased as |
|
|
Yet be Purchased |
|
|
|
of Shares |
|
|
Average Price |
|
|
Part of Publicly |
|
|
Under the |
|
Period |
|
Purchased(1) |
|
|
Paid per Share |
|
|
Announced Program(2) |
|
|
Program(2) |
|
10/01/2009 -
10/31/2009 |
|
|
|
|
|
$ |
|
|
|
|
12,088,868 |
|
|
|
411,132 |
|
11/01/2009 -
11/30/2009 |
|
|
|
|
|
|
|
|
|
|
12,088,868 |
|
|
|
411,132 |
|
12/01/2009 -
12/31/2009 |
|
|
|
|
|
|
|
|
|
|
12,088,868 |
|
|
|
411,132 |
|
Total |
|
|
|
|
|
$ |
|
|
|
|
12,088,868 |
|
|
|
411,132 |
|
|
|
|
(1) |
|
Since 1999, our Board of Directors has approved the repurchase of up to an aggregate
amount of 12,500,000 shares of Administaff common stock, of which 12,088,868 shares had been
repurchased as of December 31, 2009. We did not repurchase any shares of common stock during
the three months ended December 31, 2009. |
|
(2) |
|
Unless terminated earlier by resolution of the Board of Directors, the repurchase
program will expire when we have repurchased all shares authorized for repurchase under the
repurchase program. |
- 20 -
Performance Graph
The following graph compares our cumulative total stockholder return since December 31, 2004
with the Standard & Poors Small Cap 600 Index, the Standard & Poors 1500 Composite Human
Resources and Employment Services Index and a peer group index composed of other companies with
similar business models (Peer Group.) The graph assumes that the value of the investment in our
common stock and each index (including reinvestment of dividends) was $100 on December 31, 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/04 |
|
|
12/05 |
|
|
12/06 |
|
|
12/07 |
|
|
12/08 |
|
|
12/09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administaff, Inc. |
|
|
100.00 |
|
|
|
337.48 |
|
|
|
346.29 |
|
|
|
231.90 |
|
|
|
181.63 |
|
|
|
202.29 |
|
S&P Smallcap 600 |
|
|
100.00 |
|
|
|
107.68 |
|
|
|
123.96 |
|
|
|
123.59 |
|
|
|
85.19 |
|
|
|
106.97 |
|
Peer Group |
|
|
100.00 |
|
|
|
107.92 |
|
|
|
116.42 |
|
|
|
115.99 |
|
|
|
99.00 |
|
|
|
114.56 |
|
S&P 1500 Composite
Human Resources and
Employment Services |
|
|
100.00 |
|
|
|
116.25 |
|
|
|
138.57 |
|
|
|
105.44 |
|
|
|
68.11 |
|
|
|
93.50 |
|
The peer group is comprised of the following companies: Automatic Data Processing and
Paychex, Inc. Gevity HR was acquired in 2009 and removed from the peer group. The total return
for each member of this peer group has been weighted to each members stock market capitalization.
- 21 -
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data set forth below should be read in conjunction with
the Consolidated Financial Statements and accompanying Notes and Item 7. Managements Discussion
and Analysis of Financial Condition and Results of Operations, on page 23.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(in thousands, except per share and statistical data) |
|
Income Statement Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues(1) |
|
$ |
1,653,096 |
|
|
$ |
1,724,434 |
|
|
$ |
1,569,977 |
|
|
$ |
1,389,464 |
|
|
$ |
1,169,612 |
|
Gross profit |
|
|
287,967 |
|
|
|
343,739 |
|
|
|
305,922 |
|
|
|
282,729 |
|
|
|
235,756 |
|
Operating income |
|
|
27,033 |
|
|
|
64,982 |
|
|
|
62,214 |
|
|
|
61,565 |
|
|
|
43,767 |
|
Net income |
|
|
16,574 |
|
|
|
45,780 |
|
|
|
47,492 |
|
|
|
46,506 |
|
|
|
29,983 |
|
Diluted net income per share |
|
$ |
0.66 |
|
|
$ |
1.79 |
|
|
$ |
1.74 |
|
|
$ |
1.64 |
|
|
$ |
1.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
|
$ |
127,627 |
|
|
$ |
98,414 |
|
|
$ |
97,180 |
|
|
$ |
128,401 |
|
|
$ |
93,235 |
|
Total assets |
|
|
576,470 |
|
|
|
616,840 |
|
|
|
560,651 |
|
|
|
561,515 |
|
|
|
495,439 |
|
Total debt/capital lease obligations |
|
|
|
|
|
|
537 |
|
|
|
1,166 |
|
|
|
1,749 |
|
|
|
34,890 |
|
Total stockholders equity |
|
|
223,160 |
|
|
|
208,479 |
|
|
|
198,675 |
|
|
|
228,445 |
|
|
|
182,429 |
|
Cash dividends per share |
|
$ |
0.52 |
|
|
$ |
0.48 |
|
|
$ |
0.44 |
|
|
$ |
0.36 |
|
|
$ |
0.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statistical Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of worksite employees
paid per month during period |
|
|
108,736 |
|
|
|
116,957 |
|
|
|
110,291 |
|
|
|
100,675 |
|
|
|
88,780 |
|
Revenues per worksite employee
per month(2) |
|
$ |
1,267 |
|
|
$ |
1,229 |
|
|
$ |
1,186 |
|
|
$ |
1,150 |
|
|
$ |
1,098 |
|
Gross profit per worksite employee
per month |
|
$ |
221 |
|
|
$ |
245 |
|
|
$ |
231 |
|
|
$ |
234 |
|
|
$ |
221 |
|
Operating income per worksite
employee
per month |
|
$ |
21 |
|
|
$ |
46 |
|
|
$ |
47 |
|
|
$ |
51 |
|
|
$ |
41 |
|
|
|
|
(1) |
|
Gross billings of $9.856 billion, $10.372 billion, $9.437 billion, $8.055 billion
and $6.633 billion, less worksite employee payroll cost of $8.203 billion, $8.648 billion,
$7.867 billion, $6.666 billion and $5.463 billion, respectively. |
|
(2) |
|
Gross billings of $7,553, $7,391, $7,130, $6,667 and $6,226 per worksite employee
per month, less payroll cost of $6,286, $6,162, $5,944, $5,517 and $5,128 per worksite
employee per month, respectively. |
- 22 -
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
You should read the following discussion in conjunction with our Consolidated Financial
Statements and related Notes included elsewhere in this annual report. Historical results are not
necessarily indicative of trends in operating results for any future period.
The statements contained in this annual report that are not historical facts are
forward-looking statements that involve a number of risks and uncertainties. The actual results of
the future events described in such forward-looking statements in this annual report could differ
materially from those stated in such forward-looking statements. Among the factors that could cause
actual results to differ materially are the risks and uncertainties discussed in this Item 7 under
Factors that May Affect Future Results and the Market Price of Common Stock on page 38 and the
uncertainties set forth from time to time in our other public reports and filings and public
statements.
Overview
We provide a comprehensive Personnel Management System that encompasses a broad range of
services, including benefits and payroll administration, health and workers compensation insurance
programs, personnel records management, employer liability management, employee recruiting and
selection, employee performance management, and employee training and development services. Our
long-term strategy continues to be aggregating the best small businesses in the United States on
the common platform of our unique human resource service offering, thereby leveraging our buying
power to provide additional valuable services to clients. Our overall operating results can be
measured in terms of revenues, payroll costs, gross profit or operating income per worksite
employee per month. We often use the average number of worksite employees paid during a period as
our unit of measurement in analyzing and discussing our results of operations.
The decline in the U.S. economic activity and associated reductions in employment levels have
impacted our customer base and target markets. Our average number of worksite employees paid in
2009 decreased 7.0% compared to 2008 to 108,736. We ended 2009 averaging 107,025 paid worksite
employees in the fourth quarter, which represents a 9.9% decrease compared to the fourth quarter of
2008. We expect the number of paid worksite employees to decline to a range of 102,500 to 103,000
in the first quarter of 2010.
Our 2009 average gross profit per worksite employee per month was $221, a $24 decrease
compared to 2008. Lower gross profit per worksite employee in 2009 compared to 2008 was primarily
the result of a 6.3% direct cost increase, which was partially offset by a 3.1% pricing increase.
The direct cost increase was due primarily to higher than expected medical costs. The cost of
group health insurance and related employee benefits increased $53 per worksite employee per month,
or 8.6% on a per covered employee basis compared to 2008, due to increased utilization by active
participants as well as higher claims associated with increased COBRA participation resulting from
the severe economic environment and the recently enacted American Recovery and Reinvestment Act of
2009 (ARRA) legislation. Please read Factors That May Affect Future Results and the Market
Price of Common Stock on page 38 for a discussion of ARRA.
Operating expenses decreased by 6.4% in 2009 to $260.9 million. Operating expenses
decreased due to cost savings initiatives implemented throughout the Company. On a per worksite
employee per month basis, operating expenses increased from $199 in 2008 to $200 in 2009.
Our net income in 2009 was $16.6 million, a $29.2 million decrease compared to 2008. This
decrease included a $5.4 million decline in interest income as a result of lower interest rates.
We ended 2009 with working capital of $127.6 million. During 2009, we paid $13.3 million in
dividends.
- 23 -
While the decline in the U.S. economic activity and the associated reductions in employment
levels have significantly impacted us in 2009, we are taking corrective actions to offset the
impact of these developments in 2010. We are currently implementing a business plan which
includes, but is not limited to, an increase in our comprehensive service fee in an attempt to
recover the anticipated on-going costs of COBRA and reduce operating expenses, including a
reduction of our corporate employees by approximately 5%.
Revenues
We account for our revenues in accordance with Accounting Standards Codification (ASC)
605-45, Revenue Recognition. Our gross billings to clients include the payroll cost of each
worksite employee at the client location and a markup computed as a percentage of each worksite
employees payroll cost. We invoice the gross billings concurrently with each periodic payroll of
our worksite employees. Revenues, which exclude the payroll cost component of gross billings, and
therefore, consist solely of the markup, are recognized ratably over the payroll period as worksite
employees perform their service at the client worksite. This markup includes pricing components
associated with our estimates of payroll taxes, benefits and workers compensation costs, plus a
separate component related to our HR services. We include revenues that have been recognized but
not invoiced in unbilled accounts receivable on our Consolidated Balance Sheets.
Our revenues are primarily dependent on the number of clients enrolled, the resulting number
of worksite employees paid each period and the number of worksite employees enrolled in our benefit
plans. Because our total markup is computed as a percentage of payroll cost, revenues are also
affected by the payroll cost of worksite employees, which may fluctuate based on the composition of
the worksite employee base, inflationary effects on wage levels and differences in the local
economies of our markets.
Direct Costs
The primary direct costs associated with our revenue generating activities are:
|
|
|
employment-related taxes (payroll taxes); |
|
|
|
|
costs of employee benefit plans; and |
|
|
|
|
workers compensation costs. |
Payroll taxes consist of the employers portion of Social Security and Medicare taxes under
FICA, federal unemployment taxes and state unemployment taxes. Payroll taxes are generally paid as
a percentage of payroll cost. The federal tax rates are defined by federal regulations. State
unemployment tax rates are subject to claim histories and vary from state to state.
Employee benefits costs are comprised primarily of health insurance premiums and claims costs
(including dental and pharmacy costs), but also include costs of other employee benefits such as
life insurance, vision care, disability insurance, education assistance, adoption assistance, a
flexible spending account and a worklife program.
Workers compensation costs include administrative and risk charges paid to the insurance
carrier, and claims costs, which are driven primarily by the frequency and severity of claims.
Gross Profit
Our gross profit per worksite employee is primarily determined by our ability to accurately
estimate and control direct costs and our ability to incorporate changes in these costs into the
gross billings charged to clients, which are subject to contractual arrangements that are typically
renewed annually. We use gross profit per worksite employee per month as our principal measurement
of relative performance at the gross profit level.
Operating Expenses
|
|
Salaries, wages and payroll taxes Salaries, wages and payroll taxes are primarily a
function of the number of corporate employees and their associated average pay and any
additional incentive compensation. Our corporate employees include client services, sales and
marketing, benefits, legal, finance, information technology and
administrative support personnel. |
- 24 -
|
|
Stock-based compensation Our stock-based compensation primarily relates to the
recognition of non-cash compensation expense over the vesting period of restricted stock
awards. |
|
|
|
General and administrative expenses Our general and administrative expenses primarily
include: |
|
|
|
rent expenses related to our service centers and sales offices; |
|
|
|
|
outside professional service fees related to legal, consulting and accounting
services; |
|
|
|
|
administrative costs, such as postage, printing and supplies; |
|
|
|
|
employee travel expenses; and |
|
|
|
|
repairs and maintenance costs associated with our facilities and technology
infrastructure. |
|
|
Commissions Commission expense consists of amounts paid to sales personnel. Commissions
for sales personnel are based on a percentage of revenue generated by such personnel. |
|
|
|
Advertising Advertising expense primarily consists of media advertising and other
business promotions in our current and anticipated sales markets, including the Administaff
Small Business Classic sponsorship. |
|
|
|
Depreciation and amortization Depreciation and amortization expense is primarily a
function of our capital investments in corporate facilities, service centers, sales offices
and technology infrastructure. |
Income Taxes
Administaffs provision for income taxes typically differs from the U.S. statutory rate of
35%, due primarily to state income taxes and non-deductible expenses. Deferred income taxes
reflect the net tax effects of temporary differences between the carrying amounts of assets and
liabilities used for financial reporting purposes and the amounts used for income tax purposes.
Significant items resulting in deferred income taxes include prepaid assets, accruals for workers
compensation expenses, stock-based compensation and depreciation. Changes in these items are
reflected in our financial statements through a deferred income tax provision.
Critical Accounting Policies and Estimates
Administaffs discussion and analysis of our financial condition and results of operations are
based upon our Consolidated Financial Statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation of these financial
statements requires our management to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and
liabilities. On an ongoing basis, we evaluate these estimates, including those related to health
and workers compensation insurance claims experience, client bad debts, income taxes, property and
equipment, goodwill and other intangibles, and contingent liabilities. We base these estimates on
historical experience and on various other assumptions that management believes to be reasonable
under the circumstances, the results of which form the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates.
We believe the following accounting policies are critical and/or require significant judgments
and estimates used in the preparation of our Consolidated Financial Statements:
|
|
Benefits costs We provide group health insurance coverage to our worksite employees
through a national network of carriers including UnitedHealthcare (United), PacifiCare,
Kaiser Permanente, Blue Shield of California, Hawaii Medical Service Association and Tufts,
all of which provide fully insured policies or service contracts. |
- 25 -
|
|
The health insurance contract with United provides the majority of our health insurance
coverage. As a result of certain contractual terms, we have accounted for this plan since its
inception using a partially self-funded insurance accounting model. Accordingly, we record the
costs of the United plan, including an estimate of the incurred claims, taxes and administrative
fees (collectively the Plan Costs), as benefits expense in the Consolidated Statements of Operations. The estimated incurred claims are based upon: (i) the
level of claims processed during the quarter; (ii) recent claim development patterns under the
plan, to estimate a completion rate; and (iii) the number of participants in the plan, including
both active and COBRA enrollees. Each reporting period, changes in the estimated ultimate costs
resulting from claim trends, plan design and migration, participant demographics and other
factors are incorporated into the benefits costs. |
|
|
|
Additionally, since the plans inception, under the terms of the contract, United establishes
cash funding rates 90 days in advance of the beginning of a reporting quarter. If the Plan
Costs for a reporting quarter are greater than the premiums paid and owed to United, a deficit
in the plan would be incurred and we would accrue a liability for the excess costs on our
Consolidated Balance Sheet. On the other hand, if the Plan Costs for the reporting quarter are
less than the premiums paid and owed to United, a surplus in the plan would be incurred and we
would record an asset for the excess premiums on our Consolidated Balance Sheet. The terms of
the arrangement with United require us to maintain an accumulated cash surplus in the plan of
$9.0 million, which is reported as long-term prepaid insurance. As of December 31, 2009, Plan
Costs were less than the premiums paid and owed to United by $16.7 million. As this amount is in
excess of the agreed-upon $9.0 million surplus maintenance level, the $7.7 million balance is
included in prepaid insurance, a current asset, on our Consolidated Balance Sheet. The premiums
and taxes owed to United at December 31, 2009, were $3.4 million, which is included in accrued
health insurance costs, a current liability, on our Consolidated Balance Sheet. |
|
|
|
We believe the use of recent claims activity is representative of incurred and paid trends
during the reporting period. The estimated completion rate used to compute incurred but not
reported claims involves a significant level of judgment. Accordingly, an increase (or
decrease) in the completion rates used to estimate the incurred claims would result in an
increase (or decrease) in benefits costs and net income would decrease (or increase)
accordingly. |
|
|
|
The following table illustrates the sensitivity of changes in the completion rates on our
estimate of total benefit costs of $733.6 million in 2009: |
|
|
|
|
|
|
|
|
|
|
|
Change in |
|
|
Change in |
|
Change in |
|
Benefits Costs |
|
|
Net Income |
|
Completion Rate |
|
(in thousands) |
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
(2.5)% |
|
$ |
(12,310 |
) |
|
$ |
7,140 |
|
(1.0)% |
|
|
(4,924 |
) |
|
|
2,856 |
|
1.0% |
|
|
4,924 |
|
|
|
(2,856 |
) |
2.5% |
|
|
12,310 |
|
|
|
(7,140 |
) |
|
|
Workers compensation costs Since October 1, 2007, our workers compensation coverage has
been provided through our arrangement with ACE Group of Companies (ACE). Under our
arrangement with ACE (the ACE Program), we bear the economic burden for the first $1 million
layer of claims per occurrence. ACE bears the economic burden for all claims in excess of
such first $1 million layer. The ACE Program is a fully insured policy whereby ACE has the
responsibility to pay all claims incurred under the policy regardless of whether we satisfy
our responsibilities. Prior to our current relationship with ACE, our coverage from September
1, 2003 through September 30, 2007 was provided through selected member insurance companies of
American International Group, Inc. (the AIG Program). The AIG Program coverage and
structure was consistent with the ACE Program. |
|
|
Because we bear the economic burden of the first $1 million layer of claims per occurrence, such
claims, which are the primary component of our workers compensation costs, are recorded in the
period incurred. Workers compensation insurance includes ongoing healthcare and indemnity
coverage whereby claims are paid over numerous years following the date of injury. Accordingly,
the accrual of related incurred costs in each reporting period includes estimates, which take
into account the ongoing development of claims and therefore requires a significant level of
judgment. |
- 26 -
|
|
We employ a third party actuary to estimate our loss development rate, which is primarily based
upon the nature of worksite employees job responsibilities, the location of worksite employees,
the historical frequency and severity of workers compensation claims, and an estimate of future
cost trends. Each reporting period, changes in the actuarial assumptions resulting from changes in actual claims experience and other trends
are incorporated into the Companys workers compensation claims cost estimates. During the
years ended December 31, 2009 and 2008, Administaff reduced accrued workers compensation costs
by $5.7 million and $9.8 million, respectively, for changes in estimated losses related to prior
reporting periods. Workers compensation cost estimates are discounted to present value at a
rate based upon the U.S. Treasury rates that correspond with the weighted average estimated
claim payout period (the average discount rate utilized in 2009 and 2008 was 1.8% and 2.6%,
respectively) and are accreted over the estimated claim payment period and included as a
component of direct costs in our Consolidated Statements of Operations. |
|
|
|
Our claim trends could be greater than or less than our prior estimates, in which case we would
revise our claims estimates and record an adjustment to workers compensation costs in the
period such determination is made. If we were to experience any significant changes in
actuarial assumptions, our loss development rates could increase (or decrease) which would
result in an increase (or decrease) in workers compensation costs and a resulting decrease (or
increase) in net income reported in our Consolidated Statement of Operations. |
|
|
|
The following table illustrates the sensitivity of changes in the loss development rate on our
estimate of workers compensation costs totaling $47.6 million in 2009: |
|
|
|
|
|
|
|
|
|
|
|
Change in Workers |
|
|
Change in |
|
Change in Loss |
|
Compensation Costs |
|
|
Net Income |
|
Development Rate |
|
(in thousands) |
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
(5.0)% |
|
$ |
(1,850 |
) |
|
$ |
1,091 |
|
(2.5)% |
|
|
(925 |
) |
|
|
546 |
|
2.5% |
|
|
925 |
|
|
|
(546 |
) |
5.0% |
|
|
1,850 |
|
|
|
(1,091 |
) |
|
|
At the beginning of each policy period, the insurance carrier establishes monthly funding
requirements comprised of premium costs and funds to be set aside for payment of future claims
(claim funds). The level of claim funds is primarily based upon anticipated worksite employee
payroll levels and expected workers compensation loss rates, as determined by the carrier.
Monies funded into the program for incurred claims expected to be paid within one year are
recorded as restricted cash, a short-term asset, while the remainder of claim funds are included
in deposits, a long-term asset in our Consolidated Balance Sheets. As of December 31, 2009, we
had restricted cash of $36.4 million and deposits of $55.7 million. We have estimated and
accrued $88.5 million in incurred workers compensation claim costs as of December 31, 2009.
Our estimate of incurred claim costs expected to be paid within one year are recorded as accrued
workers compensation costs and included in short-term liabilities, while our estimate of
incurred claim costs expected to be paid beyond one year are included in long-term liabilities
on our Consolidated Balance Sheets. |
|
|
Contingent liabilities We accrue and disclose contingent liabilities in our Consolidated
Financial Statements in accordance with ASC 450-10, Contingencies. U.S. generally accepted
accounting principles (GAAP) requires accrual of contingent liabilities that are considered
probable to occur and that can be reasonably estimated. For contingent liabilities that are
considered reasonably possible to occur, financial statement disclosure is required, including
the range of possible loss if it can be reasonably determined. From time to time we disclose
in our financial statements issues that we believe are reasonably possible to occur, although
we cannot determine the range of possible loss in all cases. As issues develop, we evaluate
the probability of future loss and the potential range of such losses. If such evaluation
were to determine that a loss was probable and the loss could be reasonably estimated, we
would be required to accrue our estimated loss, which would reduce net income in the period
that such determination was made. |
|
|
Deferred taxes We have recorded a valuation allowance to reduce our deferred tax assets
to the amount that is more likely than not to be realized. While we have considered future
taxable income and ongoing prudent and feasible tax planning strategies in assessing the need
for the valuation allowance, our ability to realize our deferred tax assets could change from
our current estimates. If we determine that we would be able to realize our deferred tax
assets in the future in excess of the net recorded amount, an adjustment to reduce the
valuation allowance would increase net income in the period that such determination is made.
Likewise, should we determine that we will not be able to realize all or part of our net
deferred tax assets in the future, an adjustment
to increase the valuation allowance would reduce net income in the period such determination is
made. |
- 27 -
|
|
Allowance for doubtful accounts We maintain an allowance for doubtful accounts for
estimated losses resulting from the inability of our customers to pay their comprehensive
service fees. We believe that the success of our business is heavily dependent on our ability
to collect these comprehensive service fees for several reasons, including: |
|
|
|
the fact that we are at risk for the payment of our direct costs and worksite employee
payroll costs regardless of whether our clients pay their comprehensive service fees; |
|
|
|
|
the large volume and dollar amount of transactions we process; and |
|
|
|
|
the periodic and recurring nature of payroll, upon which the comprehensive service fees
are based. |
|
|
To mitigate this risk, we have established very tight credit policies. We generally require our
clients to pay their comprehensive service fees no later than one day prior to the applicable
payroll date. In addition, we maintain the right to terminate the CSA and associated worksite
employees or to require prepayment, letters of credit or other collateral if a clients
financial position deteriorates or if the client does not pay the comprehensive service fee. As
a result of these efforts, losses related to customer nonpayment have historically been low as a
percentage of revenues. However, if our clients financial conditions were to deteriorate
rapidly, resulting in nonpayment, our accounts receivable balances could grow and we could be
required to provide for additional allowances, which would decrease net income in the period
that such determination was made. |
|
|
Property and equipment Our property and equipment relate primarily to our
facilities and related improvements, furniture and fixtures, computer hardware and software
and capitalized software development costs. These costs are depreciated or amortized over the
estimated useful lives of the assets. If we determine that the useful lives of these assets
will be shorter than we currently estimate, our depreciation and amortization expense could be
accelerated, which would decrease net income in the periods of such a determination. In
addition, we periodically evaluate these costs for impairment. If events or circumstances
were to indicate that any of our long-lived assets might be impaired, we would assess
recoverability based on the estimated undiscounted future cash flows to be generated from the
applicable asset. In addition, we may record an impairment loss, which would reduce net
income, to the extent that the carrying value of the asset exceeded the fair value of the
asset. Fair value is generally determined using an estimate of discounted future net cash
flows from operating activities or upon disposal of the asset. |
|
|
Goodwill and other intangibles Goodwill is tested for impairment on
an annual basis and between annual tests in certain circumstances, and written down when
impaired. Purchased intangible assets other than goodwill are amortized over their useful
lives unless these lives are determined to be indefinite. Our purchased intangible assets are
carried at cost less accumulated amortization. Amortization is computed over the estimated
useful lives of the respective assets, five to ten years. |
New Accounting Pronouncements
In September 2006, Financial Accounting Standards Board (FASB) ASC 820 (formerly SFAS 157),
Fair Value Measurements, was issued. ASC 820 establishes a framework for measuring fair value by
providing a standard definition of fair value as it applies to assets and liabilities. ASC 820,
which does not require any new fair value measurements, clarifies the application of other
accounting pronouncements that require or permit fair value measurements. Our effective date was
initially January 1, 2008. However, the FASB delayed the effective date of ASC 820 for all
non-financial assets and non-financial liabilities until fiscal years beginning after November 15,
2008. Accordingly, we adopted ASC 820 for our financial assets and liabilities on January 1, 2008
and adopted ASC 820 for our non-financial assets and liabilities on January 1, 2009. The adoption
did not have a material impact on our Consolidated Financial Statements.
In December 2007, FASB ASC 805 (formerly SFAS 141R) Business Combinations, was issued. ASC
805 replaced and updated previous business combination standards. Under the new standard, the
acquirer of a business is required to recognize and measure the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest in the acquiree at fair value. The standard
also requires transactions costs related to the business combination to be expensed as incurred.
ASC 805 applies prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after December 15, 2008.
Our effective date was January 1, 2009. We have not yet determined the impact of ASC 805, if any,
on our
Consolidated Financial Statements; because the impact is fact-specific and will not be invoked
until we acquire a business after the effective date.
- 28 -
In June 2008, the FASB issued ASC 260 (formerly FASB Staff Position EITF 03-6-1), Determining
Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. ASC
260 concludes that unvested restricted share awards that pay nonforfeitable cash dividends are
participating securities and are subject to the two-class method of computing earnings per share.
Our effective date for ASC 260 was January 1, 2009. The adoption of ASC 260 did not have a
material impact on our Consolidated Financial Statements.
In May 2009, FASB ASC 855 (formerly SFAS 165), Subsequent Events, was issued. ASC 855
establishes general standards of accounting for and disclosure of events that occur after the
balance sheet date (subsequent events), but before the financial statements are issued or
available to be issued and requires disclosure of the date through which the entity has evaluated
subsequent events and the basis for that date. ASC 855 is effective for interim and annual periods
ending after June 15, 2009; we adopted ASC 855 for the quarter ended June 30, 2009. We evaluated
subsequent events through the time we filed our Form 10-K with the Securities and Exchange
Commission on February 11, 2010. The adoption did not have a material impact on our Consolidated
Financial Statements.
In June 2009, FASB ASC 105 (formerly SFAS 168), The FASB Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting Principles, was issued. ASC 105 is the single
official source of authoritative U.S. GAAP, superseding all other accounting literature except that
issued by the Securities and Exchange Commission. As of July 2009, only one level of authoritative
U.S. GAAP exists. All other literature will be considered non-authoritative. The Codification
does not change U.S. GAAP; instead, it introduces a new referencing system that is designed to be
an easily accessible, user-friendly online research system. ASC 105 is effective for financial
statements issued for interim and annual periods ending after September 15, 2009. The Company
adopted ASC 105 for the quarter ended September 30, 2009. The adoption did not have a material
impact on our Consolidated Financial Statements.
- 29 -
Results of Operations
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008.
The following table presents certain information related to the Companys results of
operations for the years ended December 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2009 |
|
|
2008% |
|
|
Change |
|
|
|
(in thousands, except per share and statistical data) |
|
Revenues (gross billings of $9.856 billion and
$10.372 billion, less worksite employee payroll cost
of $8.203 billion and $8.648 billion, respectively |
|
$ |
1,653,096 |
|
|
$ |
1,724,434 |
|
|
|
(4.1 |
)% |
Gross profit |
|
|
287,967 |
|
|
|
343,739 |
|
|
|
(16.2 |
)% |
Operating expenses |
|
|
260,934 |
|
|
|
278,757 |
|
|
|
(6.4 |
)% |
Operating income |
|
|
27,033 |
|
|
|
64,982 |
|
|
|
(58.4 |
)% |
Other income |
|
|
1,616 |
|
|
|
7,035 |
|
|
|
(77.0 |
)% |
Net income |
|
|
16,574 |
|
|
|
45,780 |
|
|
|
(63.8 |
)% |
Diluted net income per share of common stock |
|
|
0.66 |
|
|
|
1.79 |
|
|
|
(63.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Statistical Data: |
|
|
|
|
|
|
|
|
|
|
|
|
Average number of worksite employees paid per month |
|
|
108,736 |
|
|
|
116,957 |
|
|
|
(7.0 |
)% |
Revenues per worksite employee per month(1) |
|
$ |
1,267 |
|
|
$ |
1,229 |
|
|
|
3.1 |
% |
Gross profit per worksite employee per month |
|
|
221 |
|
|
|
245 |
|
|
|
(9.8 |
)% |
Operating expenses per worksite employee per month |
|
|
200 |
|
|
|
199 |
|
|
|
0.5 |
% |
Operating income per worksite employee per month |
|
|
21 |
|
|
|
46 |
|
|
|
(54.3 |
)% |
Net income per worksite employee per month |
|
|
13 |
|
|
|
33 |
|
|
|
(60.6 |
)% |
|
|
|
(1) |
|
Gross billings of $7,553 and $7,391 per worksite employee per month less payroll
cost of $6,286 and $6,162 per worksite employee per month, respectively. |
Revenues
Our revenues, which represent gross billings net of worksite employee payroll cost, decreased
4.1% compared to 2008, due to a 7.0% decrease in the average number of worksite employees paid per
month, offset in part by a 3.1%, or $38, increase in revenues per worksite employee per month. The
3.1% increase in revenues per worksite employee per month was due primarily to increases in the
benefits and payroll tax pricing related to our direct costs.
By region, our revenue change from 2008 and revenue distribution for years ended December 31,
2009 and 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
Year ended December 31, |
|
|
|
2009 |
|
|
2008% |
|
|
Change |
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
|
( % of total revenue) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northeast |
|
$ |
369,761 |
|
|
$ |
363,268 |
|
|
|
1.8 |
% |
|
|
22.5 |
% |
|
|
21.2 |
% |
Southeast |
|
|
182,888 |
|
|
|
183,091 |
|
|
|
(0.1 |
)% |
|
|
11.1 |
% |
|
|
10.7 |
% |
Central |
|
|
248,544 |
|
|
|
249,145 |
|
|
|
(0.2 |
)% |
|
|
15.2 |
% |
|
|
14.6 |
% |
Southwest |
|
|
518,828 |
|
|
|
569,655 |
|
|
|
(8.9 |
)% (a) |
|
|
31.6 |
% |
|
|
33.3 |
% |
West |
|
|
321,935 |
|
|
|
345,736 |
|
|
|
(6.9 |
)% (a) |
|
|
19.6 |
% |
|
|
20.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,641,956 |
|
|
|
1,710,895 |
|
|
|
(4.0 |
)% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Other revenue |
|
|
11,140 |
|
|
|
13,539 |
|
|
|
(17.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
1,653,096 |
|
|
$ |
1,724,434 |
|
|
|
(4.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The decline in revenue in 2009 as compared to 2008 was primarily due to
the loss of four mid-market clients in early 2009. |
- 30 -
Our unit growth rate is affected by three primary sources new client sales, client
retention and the net change in existing clients through worksite employee new hires and layoffs.
During 2009, our average number of worksite employees declined by 7.0%, as the net change in
existing clients, new client sales and client retention declined as compared to 2008.
The decline in U.S. economic activity and associated reductions in employment levels in 2009
and the latter half of 2008 have impacted the Companys customer base and target market. We expect
the number of paid worksite employees to decline to a range of 102,500 to 103,000 in the first
quarter of 2010.
Gross Profit
Gross profit decreased 16.2% to $288.0 million compared to 2008. The average gross profit per
worksite employee decreased 9.8% to $221 per month in 2009 versus $245 in 2008. Our pricing
objectives attempt to maintain or improve the gross profit per worksite employee by increasing
revenue per worksite employee to match or exceed changes in primary direct costs and operating
expenses.
While our revenues per worksite employee per month increased 3.1%, our direct costs, which
primarily include payroll taxes, benefits and workers compensation expenses, increased 6.3% to
$1,046 per worksite employee per month in 2009 versus $984 in 2008. The primary direct cost
components changed as follows:
|
|
Benefits costs The cost of group health insurance and related employee benefits increased
$53 per worksite employee per month, or 8.6% on a per covered employee basis compared to 2008.
This increase was due to increased utilization by active participants, as well as higher
claims associated with increased COBRA participation resulting from the severe economic
environment and the enactment of the ARRA. The net costs of COBRA claims per enrollee are
approximately double the cost of claims associated with active enrollees. In addition, the
number of individuals electing COBRA coverage has increased from 3.8% of participants in the
United Plan in the second quarter of 2008 to 7.2% in the fourth quarter of 2009. Please read
Factors That May Affect Future Results and the Market Price of Common Stock on page 38 for a
discussion of ARRA. The percentage of worksite employees covered under our health
insurance plan was 74.8% in 2009 versus 73.5% in 2008. Please read Critical Accounting
Policies and Estimates Benefits Costs on page 25 for a discussion of our accounting for
health insurance costs. |
|
|
Workers compensation costs Workers compensation costs decreased 4.4%, but increased $1
per worksite employee per month compared to 2008. As a percentage of non-bonus payroll cost,
workers compensation costs increased to 0.64% in 2009 from 0.63% in 2008. During 2009, the
Company recorded reductions in workers compensation costs of $5.7 million, or 0.08% of
non-bonus payroll costs, for changes in estimated losses related to prior reporting periods,
compared to $9.8 million, or 0.13% of non-bonus payroll costs in 2008. The 2009 period costs
include the impact of a 1.8% discount rate used to accrue workers compensation loss claims,
compared to a 2.6% discount rate used in the 2008 period. Please read Critical Accounting
Policies and Estimates Workers Compensation Costs on page 26 for a discussion of our
accounting for workers compensation costs. |
|
|
Payroll tax costs Payroll taxes decreased 4.9%, but increased $10 per worksite employee
per month compared to 2008, due to a 2.0% increase in average payroll cost per worksite
employee per month. Payroll taxes as a percentage of payroll cost increased from 6.94% in
2008 to 6.96% in 2009. |
- 31 -
Operating Expenses
The following table presents certain information related to our operating expenses for the
years ended December 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
Year ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
|
|
(in thousands) |
|
|
(per worksite employee per month) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and payroll taxes |
|
$ |
144,086 |
|
|
$ |
153,538 |
|
|
|
(6.2 |
)% |
|
$ |
110 |
|
|
$ |
110 |
|
|
|
|
|
Stock-based compensation |
|
|
10,064 |
|
|
|
9,970 |
|
|
|
0.9 |
% |
|
|
8 |
|
|
|
7 |
|
|
|
14.3 |
% |
General and administrative expenses |
|
|
62,381 |
|
|
|
69,348 |
|
|
|
(10.0 |
)% |
|
|
48 |
|
|
|
49 |
|
|
|
(2.0 |
)% |
Commissions |
|
|
11,800 |
|
|
|
12,665 |
|
|
|
(6.8 |
)% |
|
|
9 |
|
|
|
9 |
|
|
|
|
|
Advertising |
|
|
16,011 |
|
|
|
17,666 |
|
|
|
(9.4 |
)% |
|
|
12 |
|
|
|
13 |
|
|
|
(7.7 |
)% |
Depreciation and amortization |
|
|
16,592 |
|
|
|
15,570 |
|
|
|
6.6 |
% |
|
|
13 |
|
|
|
11 |
|
|
|
18.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
260,934 |
|
|
$ |
278,757 |
|
|
|
(6.4 |
)% |
|
$ |
200 |
|
|
$ |
199 |
|
|
|
0.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses decreased 6.4% to $260.9 million. Operating expenses per worksite employee
per month increased to $200 in 2009 versus $199 in 2008. The components of operating expenses
changed as follows:
|
|
Salaries, wages and payroll taxes of corporate and sales staff decreased 6.2%, and
remained flat on a per worksite employee per month basis compared to 2008. During 2009,
we initiated a number of operating expense savings measures, including the absence of
merit salary increases and reductions in 401(k) match for corporate employees. In
addition, incentive compensation expense was lower due to reduced operating results in
2009 as compared to 2008. |
|
|
Stock-based compensation increased $94,000 over 2008. The stock-based compensation expense
represents amortization of restricted stock awards granted to employees and the annual stock
grant made to non-employee directors. Please read Note 1 to the Consolidated Financial
Statements on page F-17 for additional information. |
|
|
General and administrative expenses decreased 10.0%, or $1 per worksite employee per month,
due to various cost-saving initiatives implemented in 2009, including reductions in travel,
overnight postage, repairs and maintenance, training and printing. |
|
|
Commissions expense decreased 6.8%, but remained flat on a per worksite employee per month
basis compared to 2008. |
|
|
Advertising costs decreased 9.4%, or $1 per worksite employee per month compared to 2008,
due to cost-saving efforts in 2009 as well as lower advertising rates. |
|
|
Depreciation and amortization expense increased 6.6%, or $2 per worksite employee per month
compared to the 2008 period, due primarily to depreciation associated with investments in
computer software in the latter half of 2008. |
Other Income
Other income decreased to $1.6 million in 2009 compared to $7.0 million in 2008, due to the
significant decline in interest rates.
Income Tax Expense
During 2009 we incurred federal and state income tax expense of $12.1 million on pre-tax
income of $28.6 million. Our provision for income taxes differed from the US statutory rate of 35%
primarily due to state income taxes and non-deductible expenses, offset slightly by tax-exempt
interest income. Our effective income tax rate was
42.1% in the 2009 period compared to 36.4% in the 2008 period, due to increases in state income
taxes and non-deductible items, and a decline in tax-exempt interest income.
- 32 -
Net Income
Net income for 2009 was $16.6 million, or $0.66 per diluted share, compared to $45.8 million,
or $1.79 per diluted share in 2008. On a per worksite employee per month basis, net income was $13
in 2009 compared to $33 in 2008.
Results of Operations
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007.
The following table presents certain information related to the Companys results of
operations for the years ended December 31, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
% Change |
|
|
|
(in thousands, except per share and statistical data) |
|
Revenues (gross billings of $10.372 billion and
$9.437 billion, less worksite employee payroll cost
of $8.648 billion and $7.867 billion, respectively |
|
$ |
1,724,434 |
|
|
$ |
1,569,977 |
|
|
|
9.8 |
% |
Gross profit |
|
|
343,739 |
|
|
|
305,922 |
|
|
|
12.4 |
% |
Operating expenses |
|
|
278,757 |
|
|
|
243,708 |
|
|
|
14.4 |
% |
Operating income |
|
|
64,982 |
|
|
|
62,214 |
|
|
|
4.4 |
% |
Other income |
|
|
7,035 |
|
|
|
11,225 |
|
|
|
(37.3 |
)% |
Net income |
|
|
45,780 |
|
|
|
47,492 |
|
|
|
(3.6 |
)% |
Diluted net income per share of common stock |
|
|
1.79 |
|
|
|
1.74 |
|
|
|
2.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Statistical Data: |
|
|
|
|
|
|
|
|
|
|
|
|
Average number of worksite employees paid per month |
|
|
116,957 |
|
|
|
110,291 |
|
|
|
6.0 |
% |
Revenues per worksite employee per month(1) |
|
$ |
1,229 |
|
|
$ |
1,186 |
|
|
|
3.6 |
% |
Gross profit per worksite employee per month |
|
|
245 |
|
|
|
231 |
|
|
|
6.1 |
% |
Operating expenses per worksite employee per month |
|
|
199 |
|
|
|
184 |
|
|
|
8.2 |
% |
Operating income per worksite employee per month |
|
|
46 |
|
|
|
47 |
|
|
|
(2.1 |
)% |
Net income per worksite employee per month |
|
|
33 |
|
|
|
36 |
|
|
|
(8.3 |
)% |
|
|
|
(1) |
|
Gross billings of $7,391 and $7,130 per worksite employee per month less payroll
cost of $6,162 and $5,944 per worksite employee per month, respectively. |
Revenues
Our revenues, which represent gross billings net of worksite employee payroll cost, increased
9.8% over 2007 due to a 6.0% increase in the average number of worksite employees paid per month
and a 3.6%, or $43, increase in revenues per worksite employee per month. The 3.6% increase in
revenues per worksite employee per month was due primarily to increases in the benefits pricing and
payroll tax components related to our direct costs.
- 33 -
By region, our revenue change over 2007 and revenue distribution for years ended December 31,
2008 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
Year ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
% Change |
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
|
(% of total revenues) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northeast |
|
$ |
363,268 |
|
|
$ |
311,468 |
|
|
|
16.6 |
% |
|
|
21.2 |
% |
|
|
20.0 |
% |
Southeast |
|
|
183,091 |
|
|
|
166,115 |
|
|
|
10.2 |
% |
|
|
10.7 |
% |
|
|
10.7 |
% |
Central |
|
|
249,145 |
|
|
|
220,728 |
|
|
|
12.9 |
% |
|
|
14.6 |
% |
|
|
14.2 |
% |
Southwest |
|
|
569,655 |
|
|
|
533,893 |
|
|
|
6.7 |
% |
|
|
33.3 |
% |
|
|
34.2 |
% |
West |
|
|
345,736 |
|
|
|
325,613 |
|
|
|
6.2 |
% |
|
|
20.2 |
% |
|
|
20.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,710,895 |
|
|
|
1,557,817 |
|
|
|
9.8 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Other revenue |
|
|
13,539 |
|
|
|
12,160 |
|
|
|
11.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
1,724,434 |
|
|
$ |
1,569,977 |
|
|
|
9.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our unit growth rate is affected by three primary sources new client sales, client retention
and the net change in existing clients through worksite employee new hires and layoffs. During the
first nine months of 2008, our unit growth rate over 2007 was 7.2%. During the fourth quarter of
2008, our growth rate slowed to 2.9% as the net change in existing clients and client retention
declined as compared to the fourth quarter of 2007. The net result was a 6.0% increase in number
of worksite employees paid in 2008 as compared to 2007.
The decline in U.S. economic activity and associated reductions in employment levels in the
latter half of 2008 has impacted the Companys small business customer base and target market. In
January 2009, the Companys number of paid worksite employees declined 4.4% from the fourth quarter
of 2008 to 113,571, as the net employee reductions within the existing client base and number of
client terminations exceeded new client sales.
Gross Profit
Gross profit increased 12.4% to $343.7 million compared to 2007. The average gross profit per
worksite employee increased 6.1% to $245 per month in 2008 versus $231 in 2007. Our pricing
objectives attempt to maintain or improve the gross profit per worksite employee by increasing
revenue per worksite employee to match or exceed changes in primary direct costs and operating
expenses.
While our revenues per worksite employee per month increased 3.6%, our direct costs, which
primarily include payroll taxes, benefits and workers compensation expenses, increased 3.0% to
$984 per worksite employee per month in 2008 versus $955 in 2007. The primary direct cost
components changed as follows:
|
|
Benefits costs The cost of group health insurance and related employee benefits increased
$15 per worksite employee per month, or 2.5% on a per covered employee basis, compared to
2007. The 2008 benefits costs reflect the impact of costs saving associated with plan design
changes implemented on January 1, 2008. The percentage of worksite employees covered under
our health insurance plan was 73.5% in 2008 versus 73.2% in 2007. Please read Critical
Accounting Policies and Estimates Benefits Costs on page 25 for a discussion of our
accounting for health insurance costs. |
|
|
Workers compensation costs Workers compensation costs increased $8 per worksite
employee per month compared to 2007. As a percentage of non-bonus payroll cost, workers
compensation costs increased to 0.63% in 2008 from 0.51% in 2007. During 2008, the Company
recorded reductions in workers compensation costs of $9.8 million, or 0.13% of non-bonus
payroll costs, for changes in estimated losses related to prior reporting periods, compared to
$19.6 million, or 0.28% of non-bonus payroll costs in 2007. Please read Critical Accounting
Policies and Estimates Workers Compensation Costs on page 26 for a discussion of our
accounting for workers compensation costs. |
|
|
Payroll tax costs Payroll taxes increased $8 per worksite employee per month compared to
2007, due to a 3.7% increase in average payroll cost per worksite employee per month. Payroll
taxes as a percentage of payroll cost decreased from 7.06% in 2007 to 6.94% in 2008, due to
higher average payroll and lower state unemployment tax rates in 2008. |
- 34 -
Operating Expenses
The following table presents certain information related to our operating expenses for the
years ended December 31, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
Year ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
% Change |
|
|
2008 |
|
|
2007 |
|
|
% Change |
|
|
|
(in thousands) |
|
|
(per worksite employee per month) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and payroll taxes |
|
$ |
153,538 |
|
|
$ |
131,648 |
|
|
|
16.6 |
% |
|
$ |
110 |
|
|
$ |
99 |
|
|
|
11.1 |
% |
Stock-based compensation |
|
|
9,970 |
|
|
|
7,513 |
|
|
|
32.7 |
% |
|
|
7 |
|
|
|
6 |
|
|
|
16.7 |
% |
General and administrative expenses |
|
|
69,348 |
|
|
|
62,453 |
|
|
|
11.0 |
% |
|
|
49 |
|
|
|
47 |
|
|
|
4.3 |
% |
Commissions |
|
|
12,665 |
|
|
|
11,795 |
|
|
|
7.4 |
% |
|
|
9 |
|
|
|
9 |
|
|
|
|
|
Advertising |
|
|
17,666 |
|
|
|
14,143 |
|
|
|
24.9 |
% |
|
|
13 |
|
|
|
11 |
|
|
|
18.2 |
% |
Depreciation and amortization |
|
|
15,570 |
|
|
|
16,156 |
|
|
|
(3.6 |
)% |
|
|
11 |
|
|
|
12 |
|
|
|
(8.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
278,757 |
|
|
$ |
243,708 |
|
|
|
14.4 |
% |
|
$ |
199 |
|
|
$ |
184 |
|
|
|
8.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses increased 14.4% to $278.8 million. Operating expenses per worksite
employee per month increased 8.2% to $199 in 2008 versus $184 in 2007. The components of operating
expenses changed as follows:
|
|
Salaries, wages and payroll taxes of corporate and sales staff increased 16.6%, or $11, per
worksite employee per month compared to 2007. During 2008, the number of corporate employees
increased 11.7%, including a 15.9% increase in sales representatives. The average pay for
corporate employees increased 5.3% as compared to 2007. |
|
|
Stock-based compensation increased $1 per worksite employee per month. Stock-based
compensation expense represents the vesting of restricted stock awards and the annual stock
grant made to non-employee directors. Please read Note 1 to the Consolidated Financial
Statements on page F-17 for additional information. |
|
|
General and administrative expenses increased 11.0%, or $2 per worksite employee per month,
due primarily to: (i) consulting fees associated with the HRTools.com software development and
enhancement initiatives; (ii) expenses associated with the opening and relocating of sales
offices; and (iii) increased travel expenses. |
|
|
Commissions expense increased 7.4%, but remained flat on a per worksite employee per month
basis compared to 2007. |
|
|
Advertising costs increased 24.9%, or $2 per worksite employee per month compared to 2007,
due to an increase in business promotions and sponsorships designed to increase lead
generation activity. |
|
|
Depreciation and amortization expense decreased 3.6%, or $1 per worksite employee per
month. During 2007, a $1.2 million impairment charge related to software associated with the
2005 acquisition of HRTools.com was included in depreciation and amortization. |
Other Income
Other income decreased to $7.0 million in 2008 compared to $11.2 million in 2007, due to the
significant decline in interest rates and a shift to more conservative investments due to
deteriorating market conditions.
Income Tax Expense
During 2008 we incurred federal and state income tax expense of $26.2 million on pre-tax
income of $72.0 million. Our provision for income taxes differed from the US statutory rate of 35%
primarily due to state income taxes and non-deductible expenses, offset by tax-exempt interest
income. Our effective income tax rate was 36.4% in the 2008 period compared to 35.3% in the 2007
period, due to a decline in tax-exempt interest income associated with the
decision to shift our current investment holdings from municipal bond funds into more liquid
investment funds.
- 35 -
Net Income
Net income for 2008 was $45.8 million, or $1.79 per diluted share, compared to $47.5 million,
or $1.74 per diluted share in 2007. On a per worksite employee per month basis, net income
decreased 8.3% to $33 in 2008 from $36 in 2007.
Non-GAAP Financial Measures
Non-bonus payroll cost is a non-GAAP financial measure that excludes the impact of bonus
payrolls paid to our worksite employees. Bonus payroll cost varies from period to period, but has
no direct impact to our ultimate workers compensation costs under the current program. As a
result, our management refers to non-bonus payroll cost in analyzing, reporting and forecasting our
workers compensation costs. Non-GAAP financial measures are not prepared in accordance with GAAP
and may be different from non-GAAP financial measures used by other companies. Non-GAAP financial
measures should not be considered as a substitute for, or superior to, measures of financial
performance prepared in accordance with GAAP. We include these non-GAAP financial measures because
we believe they are useful to investors in allowing for greater transparency related to the costs
incurred under our current workers compensation program. Investors are encouraged to review the
reconciliation of the non-GAAP financial measures used to their most directly comparable GAAP
financial measures as provided in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
|
|
(in thousands, except per worksite employee) |
|
GAAP to non-GAAP reconciliation: |
|
|
|
|
|
|
|
|
|
|
|
|
Payroll cost (GAAP) |
|
$ |
8,202,743 |
|
|
$ |
8,647,774 |
|
|
|
(5.1 |
)% |
Less: bonus payroll cost |
|
|
750,351 |
|
|
|
809,474 |
|
|
|
(7.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Non-Bonus payroll cost |
|
$ |
7,452,392 |
|
|
$ |
7,838,300 |
|
|
|
(4.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payroll cost per worksite employee (GAAP) |
|
$ |
6,286 |
|
|
$ |
6,162 |
|
|
|
2.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Bonus payroll cost per worksite employee |
|
|
575 |
|
|
|
577 |
|
|
|
(0.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Non-bonus payroll cost per worksite employee |
|
$ |
5,711 |
|
|
$ |
5,585 |
|
|
|
2.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
Liquidity and Capital Resources
We periodically evaluate our liquidity requirements, capital needs and availability of
resources in view of, among other things, our expansion plans, debt service requirements and other
operating cash needs. To meet short- term liquidity requirements, which are primarily the payment
of direct and operating expenses, we rely primarily on cash from operations. Longer-term projects
may be financed with debt or equity. We have in the past sought, and may in the future seek, to
raise additional capital or take other steps to increase or manage our liquidity and capital
resources. We had $233.1 million in cash and cash equivalents and marketable securities at
December 31, 2009, of which approximately $115.4 million was payable in early January 2010 for
withheld federal and state income taxes, employment taxes and other payroll deductions, and $13.1
million in customer prepayments that were payable in January 2010. At December 31, 2009, we had
working capital of $127.6 million compared to $98.4 million at December 31, 2008. We currently
believe that our cash on hand, marketable securities and cash flows from operations will be
adequate to meet our liquidity requirements for 2010. We will rely on these same sources, as well
as public and private debt or equity financing, to meet our longer-term liquidity and capital
needs.
- 36 -
Cash Flows from Operating Activities
Our cash flows from operating activities in 2009 were $831,000. Our primary source of cash
from operations is the comprehensive service fee and payroll funding we collect from our clients.
The level of cash and cash equivalents, and thus our reported cash flows from operating activities
are significantly impacted by various external and internal factors, which are reflected in part by
the changes in our balance sheet accounts. These include
the following:
|
|
Timing of client payments / payrolls We typically collect our comprehensive service fee,
along with the clients payroll funding, from clients at least one day prior to the payment of
worksite employee payrolls and associated payroll taxes. Therefore, the last business day of
a reporting period has a substantial impact on our reporting of operating cash flows. For
example, many worksite employees are paid on Fridays and at month-end; therefore, operating
cash flows decrease in the reporting periods that end on a Friday. In the year ended December
31, 2009, which ended on a Thursday, client prepayments were $13.1 million and accrued
worksite employee payroll was $93.1 million. In the year ended December 31, 2008, which ended
on a Wednesday, client prepayments were $49.3 million and accrued worksite employee payroll
was $130.0 million. |
|
|
Workers compensation plan funding Under our workers compensation insurance
arrangements, we make monthly payments to the carriers comprised of premium costs and funds to
be set aside for payment of future claims (claim funds). These pre-determined amounts are
stipulated in our agreements with the carriers, and are based primarily on anticipated
worksite employee payroll levels and workers compensation loss rates during the policy year.
Changes in payroll levels from those that were anticipated in the arrangements can result in
changes in the amount of the cash payments, which will impact our reporting of operating cash
flows. Our claim funds paid, based upon anticipated worksite employee payroll levels and
workers compensation loss rates, were $43.4 million in 2009 and $45.4 million in 2008.
However, our estimates of workers compensation loss costs were $33.3 million and $34.7
million in 2009 and 2008, respectively. During 2009 and 2008, we received $17.0 million and
$19.8 million, respectively, for the return of excess claim funds related to the workers
compensation program, which resulted in an increase to working capital. |
|
|
Medical plan funding Our healthcare contract with United establishes participant cash
funding rates 90 days in advance of the beginning of a reporting quarter. Therefore, changes
in the participation level of the United Plan have a direct impact on our operating cash
flows. In addition, changes to the funding rates, which are solely determined by United based
primarily upon recent claim history and anticipated cost trends, also have a significant
impact on our operating cash flows. Since inception of the United Plan, premiums paid and
owed to United have exceeded Plan Costs, resulting in a $16.7 million surplus, $7.7 million of
which is reflected as a current asset, and $9.0 million of which is reflected as a long-term
asset on our Consolidated Balance Sheets at December 31, 2009. The premiums and taxes owed to
United at December 31, 2009, were $3.4 million, which is included in accrued health insurance
costs, a current liability, on our Consolidated Balance Sheet. |
|
|
Operating results Our net income has a significant impact on our operating cash flows.
Our net income decreased 63.8% to $16.6 million in 2009 from $45.8 million in 2008. Please
read Results of Operations Year Ended December 31, 2009 Compared to Year Ended December 31,
2008 on page 30. |
Cash Flows Used in Investing Activities
Our cash flows used in investing activities were $14.5 million during 2009. We invested $8.0
million in capital expenditures, including $5.4 million in computer hardware and software and $2.6
million in facility improvements. In addition, we invested $6.0 million in marketable securities.
Cash Flows Used in Financing Activities
Our cash flows used in financing activities were $11.4 million during 2009, primarily due to
$13.3 million in dividends paid.
- 37 -
Contractual Obligations and Commercial Commitments
The following table summarizes our contractual obligations and commercial commitments as of
December 31, 2009, and the effect they are expected to have on our liquidity and capital resources
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
More than |
|
|
|
Total |
|
|
1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
5 Years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cancelable operating leases |
|
$ |
53,687 |
|
|
$ |
13,455 |
|
|
$ |
22,160 |
|
|
$ |
13,183 |
|
|
$ |
4,889 |
|
Purchase obligations (1) |
|
|
9,483 |
|
|
|
6,463 |
|
|
|
2,218 |
|
|
|
802 |
|
|
|
|
|
Other long-term liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued workers compensation
claim costs(2) |
|
|
88,450 |
|
|
|
34,432 |
|
|
|
23,709 |
|
|
|
21,111 |
|
|
|
9,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations |
|
$ |
151,620 |
|
|
$ |
54,350 |
|
|
$ |
48,087 |
|
|
$ |
35,096 |
|
|
$ |
14,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The table includes purchase obligations associated with non-cancelable
contracts individually greater than $100,000 and one year. |
|
(2) |
|
Accrued workers compensation claim costs include the short and long-term
amounts. For more information, please read Critical Accounting Policies and Estimates
Workers Compensation Costs, on page 26. |
Seasonality, Inflation and Quarterly Fluctuations
We believe the effects of inflation have not had a significant impact on our results of
operations or financial condition.
Factors That May Affect Future Results and the Market Price of Common Stock
Economic Conditions may Continue to Adversely Affect our Industry, Business and Results of
Operations
During the past year, the United States economy has experienced negative economic conditions.
The future economic environment may continue to be less favorable than previous years. In
addition, disruptions in national and international credit markets have lead to a scarcity of
credit, tighter lending standards and higher interest rates on business loans. A prolonged
economic downturn or a continuing scarcity of credit could adversely affect the financial condition
and levels of business activity of our clients. Recent economic conditions have had, and may
continue to have, a corresponding negative impact on our operating results as some of our clients
may suffer business failures, and others may react to worsening conditions by reducing their
employee headcount, lowering their wage and bonus levels, lowering their spending on other human
resources benefits and services or determining not to outsource those services to us. In addition,
economic conditions may impair our ability to attract new clients. These circumstances have
impacted our 2009 results. If they remain in effect for an extended period of time, there could be
a material adverse effect on our future financial results.
The decline in U.S. economic activity and associated reductions in employment levels in 2009
and the latter half of 2008 has impacted the Companys small business customer base and target
market. We averaged 108,736 paid worksite employees per month in 2009, a 7.0% decline compared to
2008. We expect the number of paid worksite employees to decline to a range of 102,500 to 103,000
in the first quarter of 2010.
We Assume Liability for Worksite Employee Payroll, Payroll Taxes and Benefits Costs and are
Responsible for their Payment Regardless of the Amount Billed to or Paid by our Clients
Under the CSA, we become a co-employer of worksite employees and assume the obligations to pay
the salaries, wages and related benefits costs and payroll taxes of such worksite employees. We
assume such obligations as a principal, not as an agent of the client. Our obligations include
responsibility for:
- 38 -
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payment of the salaries and wages for work performed by worksite employees,
regardless of whether the client timely pays us the associated service fee; |
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withholding and payment of federal and state payroll taxes with respect to wages
and salaries reported by Administaff; and |
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providing benefits to worksite employees even if our costs to provide such
benefits exceed the fees the client pays us. |
If a client does not pay us, or if the costs of benefits we provide to worksite employees exceed
the fees a client pays us, our ultimate liability for worksite employee payroll and benefits costs
could have a material adverse effect on our financial condition or results of operations.
Increases in Health Insurance Premiums or Inability to Secure Replacement Contracts on
Competitive Terms could have a Material Adverse Effect on our Financial Condition or Results of
Operations
Maintaining health insurance plans that cover worksite employees is a significant part of our
business. Our primary health insurance contract expires on December 31, 2010, subject to
cancellation by either party upon 180 days notice. In the event we are unable to secure
replacement contracts on competitive terms, significant disruption to our business could occur.
Health insurance premiums are in part determined by our claims experience and comprise a
significant portion of our direct costs. We employ extensive risk management procedures in an
attempt to control our claims incidence and structure our benefits contracts to provide as much
cost stability as possible. However, if we experience a sudden and unexpected large increase in
claim activity, our health insurance costs could increase. Claim activity levels are impacted by a
number of factors, including, but not limited to, macro-economic changes, proposed and enacted
regulatory changes and medical outbreaks. Contractual arrangements with our clients limit our
ability to incorporate such increases into service fees, which could result in a delay before such
increases could be reflected in service fees. As a result, such increases could have a material
adverse effect on our financial condition or results of operations. For additional information
related to our health insurance costs, please read Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations Critical Accounting Policies and Estimates
Benefits Costs, on page 25.
Health Care Reform Could Affect the Companys Health Insurance Plan
President Obama has stated that health care reform is a top legislative priority and that one
of his highest goals is to enact health care reform legislation. Congress is currently considering
sweeping health care reform legislation, with various proposals pending in both the House and the
Senate. Accordingly, there is ongoing debate and uncertainty concerning the details and timing of
such reform, how it will be funded, and whether reform legislation will ultimately pass and become
law. We do not believe that any of the current legislative proposals under consideration would
expressly eliminate our ability to provide a health insurance plan as a co-employer of worksite
employees. However, given the uncertain nature of the legislative process, we are unable to
determine the impact such reform would have on our operations, if enacted.
Extension of COBRA Continuation Coverage Could Adversely Affect Total Health Care Plan Costs
The American Recovery and Reinvestment Act of 2009 (ARRA), as amended on December 19, 2009
by the Department of Defense Appropriations Act for Fiscal Year 2010, provides a 65% subsidy for
COBRA continuation coverage premiums for up to fifteen months for employees who are involuntarily
terminated during the period from September 1, 2008 through February 28, 2010. Under ARRA,
Administaff pays the 65% subsidy and then is reimbursed by the federal government through a credit
against payroll taxes. The remaining 35% is paid by individual participants electing COBRA. Plan
Costs include the net difference between the premiums collected and the associated cost of any
COBRA claims. Historically, the net cost of COBRA claims per enrollee has been approximately
double the cost of a non-COBRA enrollee. The subsidy of COBRA premiums mandated by ARRA, coupled
with the severe economic environment, has contributed to an increase in the number of individuals
electing COBRA coverage, from 3.8% of participants in the United Plan in the second quarter of 2008
to 7.2% in the fourth quarter of 2009. The increased number of COBRA participants has resulted in
an increase in claim activity levels, resulting in higher benefits costs incurred and decreased
profitability in 2009. Depending on the number of
participants electing COBRA and the resulting claim activity levels, COBRA-related claims have the
potential to increase total Plan Costs in future periods as well. Contractual arrangements with
our clients limit our ability to incorporate such increases into service fees, which could result
in a delay before such increases could be reflected in service fees. As a result, such increases
could have a material adverse effect on our results of operations. The end date for the ARRA
subsidy is currently May 2011; however, it has been extended once and may be extended again.
- 39 -
Increases in Workers Compensation Costs or Inability to Secure Replacement Coverage on
Competitive Terms could Lead to a Significant Disruption to our Business
Our workers compensation coverage (the ACE Program) is currently provided through member
insurance companies of ACE American Insurance Company (ACE). Under our arrangement with ACE, we
bear the economic burden for the first $1 million layer of claims per occurrence. ACE bears the
economic burden for all claims in excess of such first $1 million layer. The ACE Program is a
fully insured policy whereby ACE has the responsibility to pay all claims incurred under the policy
regardless of whether we satisfy our responsibilities. For additional discussion of our policy with
ACE, please read Item 7. Managements Discussion and Analysis of Financial Condition and Results
of Operations Critical Accounting Policies and Estimates Workers Compensation Costs on page
26.
Workers compensation costs are a significant portion of our direct costs. If we were to
experience a sudden and unexpected large increase in the number or severity of claims, our workers
compensation costs could increase, which could have a material adverse effect on our results of
operations or financial condition.
The current workers compensation coverage with ACE expires on September 30, 2010. In the
event we are unable to secure replacement coverage on competitive terms, significant disruption to
our business could occur.
Our Captive Insurance Subsidiary Tax Status could be Challenged Resulting in an Acceleration
of Income Tax Payments
In conjunction with the formation of the current workers compensation program in 2003, we
formed a wholly owned captive insurance subsidiary (the Captive). We recognize the Captive as an
insurance company for federal income tax purposes, with respect to our consolidated federal income
tax return. In the event the Internal Revenue Service (IRS) were to determine that the Captive
does not qualify as an insurance company, we could be required to make accelerated income tax
payments to the IRS that we otherwise would have deferred until future periods.
Our Ability to Adjust and Collect Service Fees for Increases in Unemployment Tax Rates may be
Limited
We record our state unemployment tax expense based on taxable wages and tax rates assigned by
each state. State unemployment tax rates vary by state and are determined, in part, based on prior
years compensation experience in each state. Should our claim experience increase, our
unemployment tax rates could increase. In addition, some states have the ability under law to
increase unemployment tax rates retroactively to cover deficiencies in the unemployment fund.
Generally, our contractual agreements allow us to incorporate such increases into our service fees
upon the effective date of the rate change. However, our ability to fully adjust service fees in
our billing systems and collect such increases over the remaining term of the customers contracts
could be limited, resulting in a potential tax increase not being fully recovered. As a result,
such increases could have a material adverse effect on our financial condition or results of
operations.
Our Contracts may be Cancelled on Short Notice. Our Inability to Renew Client Contracts or
Attract New Clients could Materially and Adversely Affect our Financial Conditions and Results of
Operations
Our standard CSA can generally be cancelled by us or the client with 30 days notice.
Accordingly, the short-term nature of the CSA makes us vulnerable to potential cancellations by
existing clients, which could materially and adversely affect our financial condition and results
of operations. In addition, our results of operations are dependent in part upon our ability to
retain or replace our clients upon the termination or cancellation of the CSA. Our client
attrition rate was approximately 24% in 2009. There can be no assurance that the number of
contract cancellations will continue at these levels or increase in the future due to various
factors, including but not
limited to, economic conditions in the markets we operate.
- 40 -
Established Competitors and New Market Entrants may have Greater Resources that Give Them
Competitive Advantage over Us
The PEO industry is highly fragmented. Many PEOs have limited operations and fewer than 1,000
worksite employees, but there are several industry participants that are comparable to our size.
We also encounter competition from fee for service companies such as payroll processing firms,
insurance companies and human resource consultants. Several of our competitors are TriNet and PEO
divisions of large business services companies, such as Automatic Data Processing, Inc. and
Paychex, Inc. Such companies have substantially greater resources than Administaff. Accordingly,
the PEO divisions of such large business services companies may be able to provide their PEO
services at more competitive prices than we may be able to offer. Moreover, we expect that as the
PEO industry grows and its regulatory framework becomes better established, well-organized
competition with greater resources than we have may enter the PEO market, possibly including large
fee for service companies currently providing a more limited range of services.
We may be Subject to Liabilities for Client and Employee Actions
A number of legal issues remain unresolved with respect to the co-employment arrangement
between a PEO and its worksite employees, including questions concerning the ultimate liability for
violations of employment and discrimination laws. Our CSA establishes the contractual division of
responsibilities between Administaff and our clients for various personnel management matters,
including compliance with and liability under various governmental regulations.
We maintain certain general insurance coverages (including coverages for our clients) to
manage certain exposure for various employee-related claims, and as a result, the costs in excess
of insurance premiums we incur with respect to this exposure have historically been insignificant
to our operating results.
Because we act as a co-employer, we may be subject to liability for violations of various
employment and discrimination laws despite these contractual provisions, even if we do not
participate in such violations. Although the CSA provides that the client is to indemnify us for
any liability attributable to the clients conduct, we may not be able to collect on such a
contractual indemnification claim and thus may be responsible for satisfying such liabilities to
the extent that such liabilities are not covered or insured against under our insurance policies.
In addition, worksite employees may be deemed to be our agents, which may subject us to liability
for the actions of such worksite employees.
Changes in Federal, State and Local Regulation or our Inability to Obtain Licenses under New
Regulatory Frameworks could have a Material Adverse Effect on our Results of Operations or
Financial Condition
As a major employer, our operations are affected by numerous federal, state and local laws and
regulations relating to labor, tax, benefit, insurance and employment matters. By entering into a
co-employer relationship with employees assigned to work at client locations, we assume certain
obligations and responsibilities of an employer under these laws. However, many of these laws
(such as ERISA and federal and state employment tax laws) do not specifically address the
obligations and responsibilities of non-traditional employers such as PEOs, and the definition of
employer under these laws is not uniform. In addition, many of the states in which we operate
have not addressed the PEO relationship for purposes of compliance with applicable state laws
governing the employer/employee relationship. Any adverse application of new or existing federal
or state laws to the PEO relationship with our worksite employees and client companies could have a
material adverse effect on our results of operations or financial condition.
The United States Congress is currently considering various legislative proposals which are
intended to stimulate job growth. Certain of those proposals provide for job creation tax credits
to eligible businesses. There is uncertainty as to the details and timing of such legislation,
which businesses could be eligible, how it will be funded, and whether it will pass and become
law. In the event the proposed legislation is enacted, it is possible that the eligibility of
clients of professional employer organizations to receive such tax credits may not be addressed or
may be unclear. A lack of certainty over whether our clients and prospects remain eligible for
such tax credits could have an adverse impact on our business. Given the uncertain nature of the
legislative process, the Company is unable to determine the impact the proposed legislation would
have on our operations, if enacted.
- 41 -
While many states do not explicitly regulate PEOs, 34 states have passed laws that have
recognition, licensing, certification or registration requirements for PEOs, and several other
states are considering such regulation. Such laws vary from state to state, but generally provide
for monitoring 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
law. While we generally support licensing regulation because it serves to validate the PEO
relationship, we may not be able to satisfy licensing requirements or other applicable regulations
for all states. In addition, there can be no assurance that we will be able to renew our licenses
in all states.
Geographic Market Concentration makes our Results of Operations Vulnerable to Economic Factors
Our Houston, Texas (including Houston), and California markets accounted for approximately
14%, 29% and 16%, respectively, of our worksite employees for the year ended December 31, 2009.
Accordingly, while we have a goal of expanding in our current markets and into new markets, for the
foreseeable future, a significant portion of our revenues may be subject to economic factors
specific to Texas and California.
A Determination that a Client is Liable for Employment Taxes not Paid by a PEO may Discourage
Clients from Contracting with us in the Future
Under the CSA, we assume sole responsibility and liability for paying federal employment taxes
imposed under the Code with respect to wages and salaries we pay our worksite employees. There are
essentially three types of federal employment tax obligations:
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income tax withholding requirements; |
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obligations under the Federal Income Contribution Act (FICA); and |
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obligations under the Federal Unemployment Tax Act (FUTA). |
Under the Code, employers have the obligation to withhold and remit the employer portion and,
where applicable, the employee portion of these taxes. Most states impose similar employment tax
obligations on the employer. While the CSA provides that we have sole legal responsibility for
making these tax contributions, the IRS or applicable state taxing authority could conclude that
such liability cannot be completely transferred to us. Accordingly, in the event that we fail to
meet our tax withholding and payment obligations, the client may be held jointly and severally
liable for those obligations. While this interpretive issue has not, to our knowledge, discouraged
clients from enrolling with Administaff, a definitive adverse resolution of this issue may
discourage clients from enrolling in the future.
Potential Disclosure of Sensitive or Private Information could Damage our Reputation and
Impact our Operating Results
Unauthorized access or unintentional disclosure of personal information could damage our
reputation and operating results. While we strive to comply with all applicable data protection
laws and regulations, and maintain stringent privacy and security policies and procedures, any
failure or perceived failure to adequately protect sensitive information may result in negative
publicity and / or proceedings or actions against us by government entities or others, which could
potentially have an adverse affect on our business.
Forty-five states and the District of Columbia have enacted notification rules concerning
privacy and data protection. It is possible that these laws may be interpreted and applied in a
manner that is inconsistent with our data practices. If so, in addition to the possibility of
fines, this could result in an order requiring that we change our data practices, which could have
a material effect on our business. Complying with these various laws could cause us to incur
substantial costs or require us to change our business practices in a manner adverse to our
business.
The Failure of our Insurance Carriers could have a Material Adverse Effect on Us
Administaff contracts with various insurance carriers to provide certain insurance coverages
as a part of our Personnel Management System, which includes health insurance, workers
compensation insurance and employment practices liability insurance. In addition, Administaff
obtains insurance coverage for various commercial risks in our
- 42 -
business such as property insurance, errors and omissions insurance, general liability
insurance, fiduciary liability insurance, automobile liability insurance, and directors and
officers liability insurance. The failure of any insurance carrier providing such coverage could
leave Administaff exposed to uninsured risk and could have a material adverse effect upon
Administaff.
During the third quarter of 2008, it was publicly reported that American International Group,
Inc. (AIG Parent) experienced significant financial difficulties, and the United States Federal
Reserve (Federal Reserve) approved emergency financial assistance to AIG Parent. AIG Parent
received additional financial assistance from the Federal Reserve in 2009. Selected member
insurance companies of AIG Parent (the Selected Member Carriers) provide employment practices
liability (EPL) insurance to Administaff and our clients, and also remain as the carriers for all
workers compensation claim activity incurred between September 1, 2003 and September 30, 2007. As
of December 31, 2009, AIG held funds of $27.3 million, which is included in restricted cash and
deposits on the Companys Consolidated Balance Sheet, to pay remaining claims under the AIG
workers compensation program. Although AIG Parent has publicly stated that its Selected Member
Carriers remain well-capitalized and financially secure, in the event that the Selected Member
Carriers fail and are placed into receivership or a similar proceeding, the claim funds held by AIG
would not necessarily be used to pay the Companys remaining workers compensation claims.
Instead, the claims could be paid by guaranty associations that have been established by most
states, many of which could in turn attempt to return the liability for such claims to Administaff.
Moreover, in the event of a failure of the carrier providing the EPL insurance, Administaff may be
responsible for the payment of any such claims. Any such events could have a material adverse
effect on Administaffs financial condition and results of operations.
In 2003, facing continued capital constraints and a series of downgrades from various rating
agencies, our former workers compensation insurance carrier for the two-year period ending
September 2003, Lumbermens Mutual Casualty Company, a unit of Kemper Insurance Companies
(Kemper), made the decision to substantially cease underwriting operations and voluntarily
entered into run-off. A run-off is the professional management of an insurance companys
discontinued distressed or nonrenewed lines of insurance and associated liabilities outside of a
judicial proceeding. In the event the run-off process is not successful and Kemper is forced into
receivership or a similar proceeding, most states have established guaranty funds to pay remaining
claims. However, the guaranty associations in some states, including Texas, have asserted that
state law returns the liability for open claims under such policies to the insured, as we
experienced when another former insurance carrier, Reliance Insurance Company (Reliance), was
placed into liquidation in 2001. In that case, the Texas state guaranty association asserted that
it was entitled to full reimbursement from us for workers compensation benefits paid by the
association. Although we settled that dispute within the limits of insurance coverage we had
secured to cover potential claims returned to us related to the Reliance policies, we have no
similar insurance coverage for the Kemper claims. If one or more states were to assert that
liability for open claims with Kemper should be returned to us, we may be required to make a
payment to the state covering estimated claims attributable to us. Any such payment would reduce
net income, which may have a material adverse effect on net income in the reported period.
For additional information about our workers compensation insurance, please read
Managements Discussion and Analysis of Financial Condition and Results of Operations Critical
Accounting Policies and Estimates Workers Compensation Costs on page 26.
New and Higher State and Municipal Taxes could have a Material and Adverse Impact on our
Financial Condition and Results of Operations
Many states and municipalities in which the Company operates have experienced economic
slowdowns. This decline in economic activity has resulted in reductions of tax revenues and
corresponding budget deficits. In response to the budget shortfalls, many states and
municipalities have increased or enacted new taxes on businesses operating within their tax
jurisdiction, including but not limited to, business activity taxes and income taxes. In addition,
many states and municipalities have increased their audit activity in an effort to identify
additional tax revenues. New tax assessments on the Companys operations could result in increased
costs. The Companys ability to adjust its service fees and incorporate additional tax assessments
into its billing system could be limited. As a result, such higher taxes could have a material
adverse impact on our financial condition or results of operations.
- 43 -
Failure to Integrate and/or Realize the Expected Return on Acquisitions could have a Material
and Adverse Impact on our Financial Condition and Results of Operations
Periodically, we make strategic long-term decisions to invest in and/or acquire new companies,
business units or assets. We may have difficulty integrating the operations into our business
model in a timely or efficient manner, which could reduce or eliminate the expected synergies and
return on investment. In addition, based on market conditions or changes in operating plans, the
fair value of our investments could decline, requiring us to record an impairment charge for all or
a portion of the investment. Failure to successfully integrate or the occurrence of impairment
could have a material adverse effect on our financial condition or operating results.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are primarily exposed to market risks from fluctuations in interest rates and the effects
of those fluctuations on the market values of our cash equivalent short-term investments and our
available-for-sale marketable securities. The cash equivalent short-term investments consist
primarily of overnight investments, which are not significantly exposed to interest rate risk,
except to the extent that changes in interest rates will ultimately affect the amount of interest
income earned on these investments. The available-for-sale marketable securities are subject to
interest rate risk because these securities generally include a fixed interest rate. As a result,
the market values of these securities are affected by changes in prevailing interest rates.
We attempt to limit our exposure to interest rate risk primarily through diversification and
low investment turnover. Our investment policy is designed to minimize after-tax interest income
while preserving our principal investment. As a result, our marketable securities consist of
tax-exempt short and intermediate-term debt securities.
The following table presents information about our available-for-sale marketable securities as
of December 31, 2009 (dollars in thousands):
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Principal |
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Coupon |
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Effective |
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Maturities |
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Interest Rate |
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Yield |
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2010 |
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$ |
2,175 |
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6.2 |
% |
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0.4 |
% |
2011 |
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2,500 |
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5.9 |
% |
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0.8 |
% |
2012 |
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1,000 |
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5.0 |
% |
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1.5 |
% |
2013 |
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2014 |
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Thereafter |
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Total |
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$ |
5,675 |
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5.9 |
% |
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0.8 |
% |
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Fair Market Value |
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$ |
6,037 |
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this Item 8 is contained in a separate section of this Annual
Report. See Index to Consolidated Financial Statements on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
In accordance with Exchange Act Rules 13a-15 and 15a-15, we carried out an evaluation, under
the supervision and with the participation of management, including our Chief Executive Officer and
Chief Financial
Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period
covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were effective as of December 31,
2009.
- 44 -
Design and Evaluation of Internal Control over Financial Reporting
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we included a report of
managements assessment of the design and effectiveness of our internal controls as part of this
Annual Report on Form 10-K for the fiscal year ended December 31, 2009. Ernst & Young, LLP, our
independent registered public accounting firm, also attested to our internal control over financial
reporting. Managements report and the independent registered public accounting firms attestation
report are included in our 2009 Consolidated Financial Statements on pages F-3 and F-4 under the
captions entitled Managements Report on Internal Control over Financial Reporting and Report of
Independent Registered Public Accounting Firm on Internal Control over Financial Reporting, and
are incorporated herein by reference.
There has been no change in our internal controls over financial reporting that occurred
during the three months ended December 31, 2009 that has materially affected, or is reasonably
likely to materially affect, our internal controls over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
- 45 -
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Some of the information required by this item is incorporated by reference to the information
set forth under the captions Proposal Number 1: Election of Directors Nominees Class III
Directors (For Terms Expiring at the 2013 Annual Meeting), Directors Remaining in Office, and
Section 16(a) Beneficial Ownership Reporting Compliance in our definitive Proxy Statement to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after
the end of the fiscal year covered by this report (the Administaff Proxy Statement).
Code of Business Conduct and Ethics
Our Board of Directors adopted our Code of Business Conduct and Ethics (the Code of Ethics),
which meets the requirements of Rule 303A.10 of the New York Stock Exchange Listed Company Manual
and Item 406 of Regulation S-K. You can access our Code of Ethics on the Corporate Governance page
of our Web site at www.administaff.com. Changes in and waivers to the Code of Ethics for the
Companys directors, executive officers and certain senior financial officers will be posted on our
Internet Web site within five business days and maintained for at least twelve months.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference to the information set
forth under the captions Proposal Number 1: Election of Directors Director Compensation and
Executive Compensation in the Administaff Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information required by this item is incorporated by reference to the information set
forth under the caption Security Ownership of Certain Beneficial Owners and Management in the
Administaff Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.
The information required by this item is incorporated by reference to the information set
forth under the caption Proposal Number 1: Election of Directors Certain Relationships and
Related Transactions in the Administaff Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this item is incorporated by reference to the information set
forth under the caption Proposal Number 2: Ratification and Appointment of Independent Public
Accountants Fees of Ernst & Young LLP and Finance, Risk Management and Audit Committee
Pre-Approval Policy for Audit and Non-Audit Services in the Administaff Proxy Statement.
- 46 -
PART IV
ITEM 15. EXHIBITS FINANCIAL STATEMENT SCHEDULES.
(a) |
1. |
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Financial Statements of the Company |
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The Consolidated Financial Statements listed by the Registrant on the accompanying
Index to Consolidated Financial Statements (see page F-1) are filed as part of
this Annual Report. |
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(a) |
2. |
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Financial Statement Schedules |
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The required information is included in the Consolidated Financial Statements or
Notes thereto. |
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(a) |
3. |
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List of Exhibits |
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3.1 |
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Certificate of Incorporation (incorporated by reference to
Exhibit 3.1 to the Registrants Registration Statement on Form S-1 (No.
33-96952)). |
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3.2 |
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Amended and Restated Bylaws of Administaff, Inc. dated
November 13, 2007 (incorporated by reference to Exhibit 3.1 to the
Registrants Current Report on Form 8-K filed on November 16, 2007). |
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3.3 |
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Certificate of Designation of Series A Junior Participating
Preferred Stock setting forth the terms of the Preferred Stock (included as
Exhibit A to the Rights Agreement). |
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4.1 |
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Specimen Common Stock Certificate (incorporated by
reference to Exhibit 4.1 to the Registrants Registration Statement on Form
S-1 (No. 33-96952)). |
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4.2 |
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Rights Agreement dated as of November 13, 2007 between
Administaff, Inc. and Mellon Investor Services, LLC, as Rights Agent (the
Rights Agreement) (incorporated by reference to Exhibit 4.1 to the
Registrants Current Report on Form 8-K filed on November 16, 2007). |
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4.3 |
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Form of Rights Certificate (included as Exhibit B to the
Rights Agreement). |
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|
10.1 |
|
Administaff, Inc. 1997 Incentive Plan (incorporated by
reference to Exhibit 99.1 to the Registrants Registration Statement on Form
S-8 (No. 333-85151)). |
|
|
10.2 |
|
First Amendment to the Administaff, Inc. 1997 Incentive Plan
(incorporated by reference to Exhibit 99.2 to the Registrants Registration
Statement on Form S-8 (No. 333-85151)). |
|
|
10.3 |
|
Second Amendment to the Administaff, Inc. 1997 Incentive
Plan (incorporated by reference to Exhibit 99.3 to the Registrants
Registration Statement on Form S-8 (No. 333-85151)). |
|
|
10.4 |
|
Third Amendment to the Administaff, Inc. 1997 Incentive Plan
(incorporated by reference to Exhibit 99.4 to the Registrants Registration
Statement on Form S-8 (No. 333-85151)). |
|
|
10.5 |
|
Fourth Amendment to the Administaff, Inc. 1997 Incentive
Plan (incorporated by reference to Exhibit 99.5 to the Registrants
Registration Statement on Form S-8 (No. 333-85151)). |
|
|
10.6 |
|
Administaff, Inc. 2001 Incentive Plan, as amended and
restated (incorporated by reference to Appendix A to the Registrants
definitive proxy statement on Schedule 14A filed on March 18, 2009 (No.
1-13998)). |
|
|
10.7 |
|
Form of Incentive Stock Option Agreement (1997 Plan)
(incorporated by reference to Exhibit 10.7 to the Registrants Form 10-K filed
for the year ended December 31, 2004). |
|
|
10.8 |
|
Form of Incentive Stock Option Agreement (2001 Plan 3 year
vesting) (incorporated by reference to Exhibit 10.8 to the Registrants Form
10-K filed for the year ended December 31, 2004). |
|
|
10.9 |
|
Form of Incentive Stock Option Agreement (2001 Plan 5 year
vesting) (incorporated by reference to Exhibit 10.9 to the Registrants Form
10-K filed for the year ended December 31, 2004). |
|
|
10.10 |
|
Form of Director Stock Option Agreement (Initial Grant) (incorporated by
reference to Exhibit 10.10 to the Registrants Form 10-K filed for the year
ended December 31, 2004). |
- 47 -
|
10.11 |
|
Form of Director Stock Option Agreement (Annual Grant) (incorporated by
reference to Exhibit 10.11 to the Registrants Form 10-K filed for the year
ended December 31, 2004). |
|
|
10.12 |
|
Form of Restricted Stock Agreement (incorporated by reference to Exhibit
10.12 to the Registrants Form 10-K filed for the year ended December 31,
2004). |
|
|
10.13 |
|
Administaff, Inc. Nonqualified Stock Option Plan (incorporated
by reference to Exhibit 99.6 to the Registrants Registration Statement on Form
S-8 (No. 333-85151)). |
|
|
10.14 |
|
First Amendment to Administaff, Inc. Nonqualified Stock Option
Plan, effective August 7, 2001 (incorporated by reference to Exhibit 10.8 to
the Registrants Form 10-K for the year ended December 31, 2002). |
|
|
10.15 |
|
Second Amendment to Administaff, Inc. Nonqualified Stock
Option Plan, effective January 28, 2003 (incorporated by reference to Exhibit
10.9 to the Registrants Form 10-K for the year ended December 31, 2002). |
|
|
10.16 |
|
Administaff, Inc. Amended and Restated Employee Stock Purchase
Plan effective April 1, 2002 (incorporated by reference to Exhibit 10.10 to the
Registrants Form 10-K for the year ended December 31, 2002). |
|
|
10.17 |
|
First Amendment to Administaff, Inc. Amended and Restated
Employee Stock Purchase Plan, effective July 31, 2002 (incorporated by
reference to Exhibit 10.11 to the Registrants Form 10-K for the year ended
December 31, 2002). |
|
|
10.18 |
|
Second Amendment to Administaff, Inc. Amended and Restated
Employee Stock Purchase Plan, effective August 15, 2003 (incorporated by
reference to Exhibit 10.12 to the Registrants Form 10-K for the year ended
December 31, 2003). |
|
|
10.19 |
|
Board of Directors Compensation Arrangements (incorporated by reference to
Form 8-K dated February 7, 2005). |
|
|
10.20 |
|
Administaff, Inc. 2008 Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.1 to the Registrants Registration
Statement on Form S-8 (No. 333-151275)). |
|
|
10.21 |
(+) |
Minimum Premium Financial Agreement by and between Administaff of Texas,
Inc. and United Healthcare Insurance Company, Hartford, Connecticut
(incorporated by reference to Exhibit 10.3 to the Registrants Form 10-Q for
the quarter ended June 30, 2002). |
|
|
10.22 |
(+) |
Minimum Premium Administrative Services Agreement by and between
Administaff of Texas, Inc. and United Healthcare Insurance Company, Hartford,
Connecticut (incorporated by reference to Exhibit 10.4 to the Registrants Form
10-Q for the quarter ended June 30, 2002). |
|
|
10.23 |
(+) |
Amended and Restated Security Deposit Agreement by and between Administaff
of Texas, Inc. and United Healthcare Insurance Company, Hartford, Connecticut
(incorporated by reference to Exhibit 10.5 to the Registrants Form 10-Q for
the quarter ended June 30, 2002). |
|
|
10.24 |
(+) |
Amendment to Various Agreements between United Healthcare Insurance Company
and Administaff of Texas, Inc. (incorporated by reference to Exhibit 10.1 to
the Registrants Form 10-Q for the quarter ended June 30, 2005). |
|
|
10.25 |
|
Houston Service Center Operating Lease Amendment (incorporated
by reference to Exhibit 10.27 to the Registrants Form 10-K for the year ended
December 31, 2004). |
|
|
10.26 |
(+) |
Letter Agreement dated April 21, 2007, between Administaff of Texas, Inc.
and UnitedHealthcare Insurance Company (incorporated by reference to Exhibit
10.1 to the Registrants Form 10-Q for the quarter ended June 30, 2007). |
|
|
10.27 |
(+) |
Amendment to Minimum Premium Financial Agreement, as amended and restated
effective January 1, 2005, by and between Administaff of Texas, Inc., and
UnitedHealthcare Insurance Company (incorporated by reference to Exhibit 10.2
to the Registrants Form 10-Q for the quarter ended June 30, 2007). |
- 48 -
|
10.28 |
(+) |
Amendment to Minimum Premium Administrative Services Agreement,
as amended and restated effective January 1, 2005, by and between
Administaff of Texas, Inc., and UnitedHealthcare Insurance Company
(incorporated by reference to Exhibit 10.3 to the Registrants Form 10-Q for the quarter ended June 30,
2007).
|
|
|
21.1 |
* |
Subsidiaries of Administaff, Inc. |
|
|
23.1 |
* |
Consent of Independent Registered Public Accounting Firm. |
|
|
24.1 |
* |
Powers of Attorney. |
|
|
31.1 |
* |
Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. |
|
|
31.2 |
* |
Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. |
|
|
32.1 |
* |
Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. |
|
|
32.2 |
* |
Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
* |
|
Filed herewith. |
|
|
|
Management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Form 10-K.
(+) Confidential treatment has been requested for this exhibit and
confidential portions have been filed with the Securities and Exchange
Commission. |
|
(+) |
|
Confidential treatment has been requested for this exhibit and
confidential portions have been filed with the Securities and Exchange
Commission. |
- 49 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
Administaff, Inc. has duly caused this report to be signed in its behalf by the undersigned,
thereunto duly authorized, on February 11, 2010.
|
|
|
|
|
|
ADMINISTAFF, INC.
|
|
|
By: |
/s/ Douglas S. Sharp
|
|
|
|
Douglas S. Sharp |
|
|
|
Senior Vice President, Finance
Chief Financial Officer and Treasurer |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of Administaff, Inc. in the capacities indicated on
February 11, 2010:
|
|
|
Signature |
|
Title |
|
|
|
/s/ Paul J. Sarvadi
Paul J. Sarvadi
|
|
Chairman of the Board, Chief Executive Officer
and Director
(Principal Executive Officer) |
|
|
|
/s/ Richard G. Rawson
Richard G. Rawson
|
|
President and Director |
|
|
|
/s/ Douglas S. Sharp
Douglas S. Sharp
|
|
Senior Vice President, Finance
Chief Financial Officer and Treasurer
(Principal Financial Officer) |
|
|
|
|
|
Director |
|
|
|
|
|
Director |
|
|
|
|
|
Director |
|
|
|
|
|
Director |
|
|
|
|
|
Director |
|
|
|
/s/ Austin P. Young
Austin P. Young
|
|
Director |
|
|
|
|
|
|
|
|
* By: |
/s/ Daniel D. Herink
|
|
|
|
Daniel D. Herink, attorney-in-fact |
|
|
|
|
|
|
- 50 -
ADMINISTAFF, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
F-2 |
|
|
|
|
|
|
|
|
|
F-3 |
|
|
|
|
|
|
|
|
|
F-4 |
|
|
|
|
|
|
|
|
|
F-5 |
|
|
|
|
|
|
|
|
|
F-7 |
|
|
|
|
|
|
|
|
|
F-8 |
|
|
|
|
|
|
|
|
|
F-10 |
|
|
|
|
|
|
|
|
|
F-12 |
|
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Administaff, Inc.
We have audited the accompanying Consolidated Balance Sheets of Administaff, Inc. as of December
31, 2009 and 2008, and the related Consolidated Statements of Operations, Stockholders Equity and
Cash Flows for each of the three years in the period ended December 31, 2009. These financial
statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements 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 Consolidated Financial Statements referred to above present fairly, in all
material respects, the consolidated financial position of Administaff, Inc. at December 31, 2009
and 2008, and the consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Administaff, Inc.s internal control over financial reporting as of December
31, 2009, based on criteria established in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 11,
2010 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Houston, Texas
February 11, 2010
F-2
MANAGEMENTS REPORT ON INTERNAL CONTROL
The Company has assessed the effectiveness of its internal control over financial reporting as of
December 31, 2009 based on criteria established by Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO Framework). The
Companys management is responsible for establishing and maintaining adequate internal controls
over financial reporting. The Companys independent registered public accountants that audited the
Companys financial statements as of December 31, 2009 have issued an attestation report on
managements assessment of the effectiveness of the Companys internal control over financial
reporting, which appears on page F-4.
Internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. Internal control
over financial reporting includes those policies and procedures that: (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements. Because of the inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies and procedures may
deteriorate.
The Companys assessment of the effectiveness of its internal control over financial reporting
included testing and evaluating the design and operating effectiveness of its internal controls.
In managements opinion, the Company has maintained effective internal control over financial
reporting as of December 31, 2009, based on criteria established in the COSO Framework.
|
|
|
|
|
/s/Paul J. Sarvadi
Paul J. Sarvadi
|
|
/s/Douglas S. Sharp
Douglas S. Sharp
|
|
|
Chairman of the Board and
Chief Executive Officer
|
|
Senior Vice President of Finance
Chief Financial Officer and Treasurer |
|
|
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Administaff, Inc.
We have audited Administaff, Inc.s internal control over financial reporting as of December 31,
2009, based on criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Administaff,
Inc.s management is responsible for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial reporting
included in the accompanying Managements Report on Internal Control. Our responsibility is to
express an opinion on the companys internal control over financial reporting 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 effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Administaff, Inc. maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2009, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Administaff, Inc. as of December 31, 2009
and 2008, and the related Consolidated Statements of Operations, Stockholders Equity, and Cash
Flows for each of the three years in the period ended December 31, 2009 of Administaff, Inc. and
our report dated February 11, 2010 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Houston, Texas
February 11, 2010
F-4
ADMINISTAFF, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
227,085 |
|
|
$ |
252,190 |
|
Restricted cash |
|
|
36,436 |
|
|
|
36,466 |
|
Marketable securities |
|
|
6,037 |
|
|
|
225 |
|
Accounts receivable, net: |
|
|
|
|
|
|
|
|
Trade |
|
|
2,899 |
|
|
|
4,908 |
|
Unbilled |
|
|
106,601 |
|
|
|
116,173 |
|
Other |
|
|
13,092 |
|
|
|
4,012 |
|
Prepaid insurance |
|
|
14,484 |
|
|
|
28,911 |
|
Other current assets |
|
|
6,317 |
|
|
|
6,735 |
|
Income taxes receivable |
|
|
2,692 |
|
|
|
|
|
Deferred income taxes |
|
|
2,578 |
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
418,221 |
|
|
|
449,620 |
|
|
|
|
|
|
|
|
|
|
Property and equipment: |
|
|
|
|
|
|
|
|
Land |
|
|
3,260 |
|
|
|
3,260 |
|
Buildings and improvements |
|
|
64,692 |
|
|
|
63,016 |
|
Computer hardware and software |
|
|
65,980 |
|
|
|
67,198 |
|
Software development costs |
|
|
25,372 |
|
|
|
23,162 |
|
Furniture and fixtures |
|
|
35,499 |
|
|
|
35,307 |
|
Aircraft |
|
|
31,524 |
|
|
|
31,548 |
|
|
|
|
|
|
|
|
|
|
|
226,327 |
|
|
|
223,491 |
|
Accumulated depreciation and amortization |
|
|
(145,153 |
) |
|
|
(134,152 |
) |
|
|
|
|
|
|
|
Total property and equipment, net |
|
|
81,174 |
|
|
|
89,339 |
|
|
|
|
|
|
|
|
|
|
Other assets: |
|
|
|
|
|
|
|
|
Prepaid health insurance |
|
|
9,000 |
|
|
|
9,000 |
|
Deposits health insurance |
|
|
2,785 |
|
|
|
2,585 |
|
Deposits workers compensation |
|
|
55,744 |
|
|
|
56,435 |
|
Goodwill and other intangible assets, net |
|
|
8,487 |
|
|
|
8,595 |
|
Other assets |
|
|
1,059 |
|
|
|
1,266 |
|
|
|
|
|
|
|
|
Total other assets |
|
|
77,075 |
|
|
|
77,881 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
576,470 |
|
|
$ |
616,840 |
|
|
|
|
|
|
|
|
F-5
ADMINISTAFF, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands)
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
1,857 |
|
|
$ |
3,007 |
|
Payroll taxes and other payroll deductions payable |
|
|
127,597 |
|
|
|
123,666 |
|
Accrued worksite employee payroll cost |
|
|
93,138 |
|
|
|
129,954 |
|
Accrued health insurance costs |
|
|
6,374 |
|
|
|
14,715 |
|
Accrued workers compensation costs |
|
|
37,049 |
|
|
|
38,028 |
|
Accrued corporate payroll and commissions |
|
|
16,178 |
|
|
|
25,692 |
|
Other accrued liabilities |
|
|
8,401 |
|
|
|
10,032 |
|
Income tax payable |
|
|
|
|
|
|
4,157 |
|
Deferred income taxes |
|
|
|
|
|
|
1,956 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
290,594 |
|
|
|
351,207 |
|
|
|
|
|
|
|
|
|
|
Noncurrent liabilities: |
|
|
|
|
|
|
|
|
Accrued workers compensation costs |
|
|
52,014 |
|
|
|
46,589 |
|
Deferred income taxes |
|
|
10,702 |
|
|
|
10,565 |
|
|
|
|
|
|
|
|
Total noncurrent liabilities |
|
|
62,716 |
|
|
|
57,154 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock, par value $0.01 per share: |
|
|
|
|
|
|
|
|
Shares authorized 20,000 |
|
|
|
|
|
|
|
|
Shares issued and outstanding none |
|
|
|
|
|
|
|
|
Common stock, par value $0.01 per share: |
|
|
|
|
|
|
|
|
Shares authorized 60,000 |
|
|
|
|
|
|
|
|
Shares issued 30,839 at December 31, 2009 and 2008 |
|
|
309 |
|
|
|
309 |
|
Additional paid-in capital |
|
|
138,551 |
|
|
|
139,415 |
|
Treasury stock, at cost 5,226 and 4,622 shares at
December 31, 2009 and 2008, respectively |
|
|
(135,712 |
) |
|
|
(147,952 |
) |
Accumulated other comprehensive income, net of tax |
|
|
3 |
|
|
|
|
|
Retained earnings |
|
|
220,009 |
|
|
|
216,707 |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
223,160 |
|
|
|
208,479 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
576,470 |
|
|
$ |
616,840 |
|
|
|
|
|
|
|
|
See accompanying notes.
F-6
ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues (gross billings of $9.856 billion,
$10.372 billion and $9.437 billion, less
worksite employee payroll cost of $8.203
billion, $8.648 billion and $7.867 billion,
respectively) |
|
$ |
1,653,096 |
|
|
$ |
1,724,434 |
|
|
$ |
1,569,977 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs: |
|
|
|
|
|
|
|
|
|
|
|
|
Payroll taxes, benefits and workers
compensation costs |
|
|
1,365,129 |
|
|
|
1,380,695 |
|
|
|
1,264,055 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
287,967 |
|
|
|
343,739 |
|
|
|
305,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and payroll taxes |
|
|
144,086 |
|
|
|
153,538 |
|
|
|
131,648 |
|
Stock-based compensation |
|
|
10,064 |
|
|
|
9,970 |
|
|
|
7,513 |
|
General and administrative expenses |
|
|
62,381 |
|
|
|
69,348 |
|
|
|
62,453 |
|
Commissions |
|
|
11,800 |
|
|
|
12,665 |
|
|
|
11,795 |
|
Advertising |
|
|
16,011 |
|
|
|
17,666 |
|
|
|
14,143 |
|
Depreciation and amortization |
|
|
16,592 |
|
|
|
15,570 |
|
|
|
16,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
260,934 |
|
|
|
278,757 |
|
|
|
243,708 |
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
27,033 |
|
|
|
64,982 |
|
|
|
62,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
1,616 |
|
|
|
7,035 |
|
|
|
11,225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
28,649 |
|
|
|
72,017 |
|
|
|
73,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
12,075 |
|
|
|
26,237 |
|
|
|
25,947 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
16,574 |
|
|
$ |
45,780 |
|
|
$ |
47,492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share of common stock |
|
$ |
0.67 |
|
|
$ |
1.81 |
|
|
$ |
1.78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share of common stock |
|
$ |
0.66 |
|
|
$ |
1.79 |
|
|
$ |
1.74 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-7
ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Issued |
|
|
Paid-In |
|
|
Treasury |
|
|
Comprehensive |
|
|
Retained |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Stock |
|
|
Income (Loss) |
|
|
Earnings |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006 |
|
|
30,839 |
|
|
$ |
309 |
|
|
$ |
135,942 |
|
|
$ |
(55,405 |
) |
|
$ |
(131 |
) |
|
$ |
147,730 |
|
|
$ |
228,445 |
|
Purchase of treasury stock,
at cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(80,521 |
) |
|
|
|
|
|
|
|
|
|
|
(80,521 |
) |
Exercise of stock options |
|
|
|
|
|
|
|
|
|
|
(2,618 |
) |
|
|
6,554 |
|
|
|
|
|
|
|
|
|
|
|
3,936 |
|
Income tax benefit from
stock-based
compensation, net |
|
|
|
|
|
|
|
|
|
|
2,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,936 |
|
Stock-based compensation
expense |
|
|
|
|
|
|
|
|
|
|
2,124 |
|
|
|
5,389 |
|
|
|
|
|
|
|
|
|
|
|
7,513 |
|
Other |
|
|
|
|
|
|
|
|
|
|
256 |
|
|
|
383 |
|
|
|
|
|
|
|
|
|
|
|
639 |
|
Dividends paid |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,901 |
) |
|
|
(11,901 |
) |
Change in unrealized loss on
marketable securities,
net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(129 |
) |
|
|
|
|
|
|
(129 |
) |
Unrealized gain |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
265 |
|
|
|
|
|
|
|
265 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,492 |
|
|
|
47,492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007 |
|
|
30,839 |
|
|
$ |
309 |
|
|
$ |
138,640 |
|
|
$ |
(123,600 |
) |
|
$ |
5 |
|
|
$ |
183,321 |
|
|
$ |
198,675 |
|
Purchase of treasury stock,
at cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(38,082 |
) |
|
|
|
|
|
|
|
|
|
|
(38,082 |
) |
Exercise of stock options |
|
|
|
|
|
|
|
|
|
|
(2,415 |
) |
|
|
5,606 |
|
|
|
|
|
|
|
|
|
|
|
3,191 |
|
Income tax benefit from
stock-based
compensation, net |
|
|
|
|
|
|
|
|
|
|
821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
821 |
|
Stock-based compensation
expense |
|
|
|
|
|
|
|
|
|
|
2,352 |
|
|
|
7,601 |
|
|
|
|
|
|
|
17 |
|
|
|
9,970 |
|
Other |
|
|
|
|
|
|
|
|
|
|
17 |
|
|
|
523 |
|
|
|
|
|
|
|
|
|
|
|
540 |
|
Dividends paid |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,411 |
) |
|
|
(12,411 |
) |
Change in unrealized loss
on marketable
securities, net of
tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
|
|
|
|
(5 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,780 |
|
|
|
45,780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
|
30,839 |
|
|
$ |
309 |
|
|
$ |
139,415 |
|
|
$ |
(147,952 |
) |
|
$ |
|
|
|
$ |
216,707 |
|
|
$ |
208,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-8
ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (Continued)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Issued |
|
|
Paid-In |
|
|
Treasury |
|
|
Comprehensive |
|
|
Retained |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Stock |
|
|
Income (Loss) |
|
|
Earnings |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
|
30,839 |
|
|
$ |
309 |
|
|
$ |
139,415 |
|
|
$ |
(147,952 |
) |
|
$ |
|
|
|
$ |
216,707 |
|
|
$ |
208,479 |
|
Purchase of treasury stock,
at cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,024 |
) |
|
|
|
|
|
|
|
|
|
|
(2,024 |
) |
Exercise of stock options |
|
|
|
|
|
|
|
|
|
|
(1,873 |
) |
|
|
4,711 |
|
|
|
|
|
|
|
|
|
|
|
2,838 |
|
Income tax expense from
stock-based compensation,
net |
|
|
|
|
|
|
|
|
|
|
(372 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(372 |
) |
Stock-based compensation
expense |
|
|
|
|
|
|
|
|
|
|
1,462 |
|
|
|
8,602 |
|
|
|
|
|
|
|
|
|
|
|
10,064 |
|
Other |
|
|
|
|
|
|
|
|
|
|
(81 |
) |
|
|
951 |
|
|
|
|
|
|
|
|
|
|
|
870 |
|
Dividends paid |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,272 |
) |
|
|
(13,272 |
) |
Change in unrealized gain
on marketable securities,
net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
3 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,574 |
|
|
|
16,574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
|
30,839 |
|
|
$ |
309 |
|
|
$ |
138,551 |
|
|
$ |
(135,712 |
) |
|
$ |
3 |
|
|
$ |
220,009 |
|
|
$ |
223,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-9
ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
16,574 |
|
|
$ |
45,780 |
|
|
$ |
47,492 |
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
16,561 |
|
|
|
15,541 |
|
|
|
16,548 |
|
Stock-based compensation |
|
|
10,064 |
|
|
|
9,970 |
|
|
|
7,513 |
|
Deferred income taxes |
|
|
(4,397 |
) |
|
|
5,363 |
|
|
|
4,370 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash |
|
|
30 |
|
|
|
(1,148 |
) |
|
|
2,087 |
|
Accounts receivable |
|
|
2,501 |
|
|
|
9,741 |
|
|
|
(12,111 |
) |
Prepaid insurance |
|
|
14,427 |
|
|
|
(6,516 |
) |
|
|
657 |
|
Other current assets |
|
|
418 |
|
|
|
(462 |
) |
|
|
(1,873 |
) |
Other assets |
|
|
698 |
|
|
|
(4,722 |
) |
|
|
(4,120 |
) |
Accounts payable |
|
|
(1,150 |
) |
|
|
(2,229 |
) |
|
|
1,434 |
|
Payroll taxes and other payroll deductions payable |
|
|
3,931 |
|
|
|
9,737 |
|
|
|
(2,997 |
) |
Accrued worksite employee payroll expense |
|
|
(36,816 |
) |
|
|
19,548 |
|
|
|
15,588 |
|
Accrued health insurance costs |
|
|
(8,341 |
) |
|
|
(4,582 |
) |
|
|
4,081 |
|
Accrued workers compensation costs |
|
|
4,446 |
|
|
|
8,351 |
|
|
|
(2,788 |
) |
Accrued corporate payroll, commissions and other
accrued liabilities |
|
|
(10,188 |
) |
|
|
6,249 |
|
|
|
(172 |
) |
Income taxes payable/receivable |
|
|
(7,927 |
) |
|
|
7,169 |
|
|
|
(725 |
) |
|
|
|
|
|
|
|
|
|
|
Total adjustments |
|
|
(15,743 |
) |
|
|
72,010 |
|
|
|
27,492 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
831 |
|
|
|
117,790 |
|
|
|
74,984 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases |
|
|
(6,039 |
) |
|
|
|
|
|
|
(87,643 |
) |
Proceeds from maturities |
|
|
225 |
|
|
|
3,895 |
|
|
|
86,877 |
|
Proceeds from dispositions |
|
|
|
|
|
|
70,746 |
|
|
|
11,296 |
|
Cash received for note receivable |
|
|
|
|
|
|
|
|
|
|
173 |
|
Acquisition of USDatalink |
|
|
(720 |
) |
|
|
(3,780 |
) |
|
|
|
|
Property and equipment: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases |
|
|
(8,019 |
) |
|
|
(26,714 |
) |
|
|
(12,868 |
) |
Proceeds from dispositions |
|
|
36 |
|
|
|
124 |
|
|
|
52 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
(14,517 |
) |
|
|
44,271 |
|
|
|
(2,113 |
) |
F-10
ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury stock |
|
$ |
(2,024 |
) |
|
$ |
(38,082 |
) |
|
$ |
(80,521 |
) |
Dividends paid |
|
|
(13,272 |
) |
|
|
(12,411 |
) |
|
|
(11,901 |
) |
Proceeds from the exercise of stock options |
|
|
2,838 |
|
|
|
3,191 |
|
|
|
3,936 |
|
Principal repayments on capital lease obligations |
|
|
(537 |
) |
|
|
(629 |
) |
|
|
(583 |
) |
Income tax benefit from stock-based compensation |
|
|
706 |
|
|
|
1,727 |
|
|
|
2,936 |
|
Other |
|
|
870 |
|
|
|
540 |
|
|
|
639 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(11,419 |
) |
|
|
(45,664 |
) |
|
|
(85,494 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(25,105 |
) |
|
|
116,397 |
|
|
|
(12,623 |
) |
Cash and cash equivalents at beginning of year |
|
|
252,190 |
|
|
|
135,793 |
|
|
|
148,416 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
227,085 |
|
|
$ |
252,190 |
|
|
$ |
135,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes |
|
$ |
23,694 |
|
|
$ |
11,978 |
|
|
$ |
22,501 |
|
See accompanying notes.
F-11
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
1. Accounting Policies
Description of Business
Administaff, Inc. (the Company) is a professional employer organization (PEO). As a PEO,
the Company provides a bundled comprehensive service for its clients in the area of personnel
management. The Company provides its comprehensive service through its Personnel Management
System, which encompasses a broad range of human resource functions, including payroll and benefits
administration, health and workers compensation insurance programs, personnel records management,
employer liability management, employee recruiting and selection, employee performance management,
and employee training and development.
The Company provides its comprehensive service by entering into a co-employment relationship
with its clients, under which the Company and its clients each take responsibility for certain
portions of the employer-employee relationship. The Company and its clients designate each partys
responsibilities through its Client Services Agreement (CSA), under which the Company becomes the
employer of its worksite employees for most administrative and regulatory purposes.
As a co-employer of its worksite employees, the Company assumes most of the rights and
obligations associated with being an employer. The Company enters into an employment agreement
with each worksite employee, thereby maintaining a variety of employer rights, including the right
to hire or terminate employees, the right to evaluate employee qualifications or performance, and
the right to establish employee compensation levels. Typically, the Company only exercises these
rights in consultation with its clients or when necessary to ensure regulatory compliance. The
responsibilities associated with the Companys role as employer include the following obligations
with regard to its worksite employees: (i) to compensate its worksite employees through wages and
salaries; (ii) to pay the employer portion of payroll-related taxes; (iii) to withhold and remit
(where applicable) the employee portion of payroll-related taxes; (iv) to provide employee benefit
programs; and (v) to provide workers compensation insurance coverage.
In addition to its assumption of employer status for its worksite employees, the Companys
comprehensive service also includes other human resource functions for its clients to support the
effective and efficient use of personnel in their business operations. To provide these functions,
the Company maintains a significant staff of professionals trained in a wide variety of human
resource functions, including employee training, employee recruiting, employee performance
management, employee compensation, and employer liability management. These professionals interact
and consult with clients on a daily basis to help identify each clients service requirements and
to ensure that the Company is providing appropriate and timely personnel management services.
The Company provides its comprehensive service to small and medium-sized businesses in
strategically selected markets throughout the United States. During 2009, 2008 and 2007, revenues
from the Companys Texas markets represented 29%, 31% and 32%, while California represented 15%,
16% and 17% of the Companys total revenues, respectively.
F-12
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Revenue and Direct Cost Recognition
The Company accounts for its revenues in accordance with Accounting Standards Codification
(ASC) 605-45, Revenue Recognition, Principal Agent Considerations. The Companys revenues are
derived from its gross billings, which are based on (i) the payroll cost of its worksite employees;
and (ii) a markup computed as a percentage of the payroll cost. The gross billings are invoiced
concurrently with each periodic payroll of its worksite employees. Revenues, which exclude the
payroll cost component of gross billings, and therefore, consist solely of markup, are recognized
ratably over the payroll period as worksite employees perform their service at the client worksite.
Revenues that have been recognized but not invoiced are included in unbilled accounts receivable
on the Companys Consolidated Balance Sheets.
In determining the pricing of the markup component of the gross billings, the Company takes
into consideration its estimates of the costs directly associated with its worksite employees,
including payroll taxes, benefits and workers compensation costs, plus an acceptable gross profit
margin. As a result, the Companys operating results are significantly impacted by the Companys
ability to accurately estimate, control and manage its direct costs relative to the revenues
derived from the markup component of the Companys gross billings.
Consistent with its revenue recognition policy, the Companys direct costs do not include the
payroll cost of its worksite employees. The Companys direct costs associated with its revenue
generating activities are comprised of all other costs related to its worksite employees, such as
the employer portion of payroll-related taxes, employee benefit plan premiums and workers
compensation insurance costs.
Segment Reporting
The Company operates in one reportable segment under ASC 280, Segment Reporting.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of Administaff, Inc. and its wholly
owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with United States generally accepted
accounting principles, requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual results could differ
from those estimates.
Concentrations of Credit Risk
Financial instruments that could potentially subject the Company to concentration of credit
risk include accounts receivable.
Cash, Cash Equivalents and Marketable Securities
The Company invests its excess cash in federal government and municipal-based money market
funds and debt instruments of U.S. municipalities. Administaffs investments do not include any
asset-backed securities with underlying collateral of sub-prime mortgages or home equity loans, nor
do they include any collateralized debt obligations or collateralized loan obligations. All highly
liquid investments with stated maturities of three months or less from date of purchase are
classified as cash equivalents. Liquid investments with stated maturities of greater than three
months are classified as marketable securities in current assets.
F-13
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company accounts for marketable securities in accordance with ASC 320, Investments Debt
and Equity Securities. The Company determines the appropriate classification of all marketable
securities as held-to-maturity, available-for-sale or trading at the time of purchase, and
re-evaluates such classification as of each balance sheet date. At December 31, 2009 and 2008, all
of the Companys investments in marketable securities were classified as available-for-sale, and as
a result, were reported at fair value. Unrealized gains and losses are reported as a component of
accumulated other comprehensive income (loss) in stockholders equity. The amortized cost of debt
securities is adjusted for amortization of premiums and accretion of discounts from the date of
purchase to maturity. Such amortization is included in interest income as an addition to or
deduction from the coupon interest earned on the investments. The Company follows its investment
managers methods of determining the cost basis in computing realized gains and losses on the sale
of its available-for-sale securities, which includes both the specific identification and average
cost methods. Realized gains and losses are included in other income.
Fair Value of Financial Instruments
The carrying amounts of cash, cash equivalents, accounts receivable and accounts payable
approximate their fair values due to the short-term maturities of these instruments. The carrying
amount of the Companys marketable securities and capital leases approximate fair value due to the
stated interest rates approximating market rates.
Property and Equipment
Property and equipment are recorded at cost and are depreciated over the estimated useful
lives of the related assets using the straight-line method. The estimated useful lives of property
and equipment for purposes of computing depreciation are as follows:
|
|
|
|
|
Buildings and improvements |
|
5-30 |
years |
Computer hardware and software |
|
1-5 |
years |
Software development costs |
|
3 |
years |
Furniture and fixtures |
|
5-7 |
years |
Aircraft |
|
20 |
years |
Software development costs relate primarily to software coding, system interfaces and testing
of the Companys proprietary professional employer information systems and are accounted for in
accordance with ASC 350-40, Internal Use Software. Capitalized software development costs are
amortized using the straight-line method over the estimated useful lives of the software, generally
three years.
The Company accounts for its HRTools.com software in accordance with ASC 985-20, Costs of
Software to be Sold. This Topic establishes standards of financial accounting and reporting for the
costs of computer software to be sold, leased, or otherwise marketed as a separate product or as
part of a product or process, whether internally developed and produced or purchased.
The Company periodically evaluates its long-lived assets for impairment in accordance with ASC
360-10, Property, Plant, and Equipment. ASC 360-10 requires that an impairment loss be recognized
for assets to be disposed of or held-for-use when the carrying amount of an asset is deemed to not
be recoverable. If events or circumstances were to indicate that any of the Companys long-lived
assets might be impaired, the Company would assess recoverability based on the estimated
undiscounted future cash flows to be generated from the applicable asset. In addition, the Company
may record an impairment loss to the extent that the carrying value of the asset exceeded the fair
value of the asset. Fair value is generally determined using an estimate of discounted future net
cash flows from operating activities or upon disposal of the asset.
F-14
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company is currently redeveloping the technological platform for the HRTools.com software
products; as a result, the unamortized software costs were written down to the net realizable
value, resulting in an impairment charge of $1.2 million in 2007, which is included in amortization
expense in the Consolidated Statement of Operations.
Goodwill and Other Intangible Assets
The Companys goodwill and intangible assets are subject to the provisions of ASC 350,
Intangibles Goodwill and Other. Accordingly, goodwill and other intangible assets are tested
for impairment on an annual basis or when indicators of impairment exist, and written down when
impaired. As of December 31, 2009 and 2008, no impairment write downs were necessary. Furthermore,
ASC 350 requires purchased intangible assets other than goodwill to be amortized over their useful
lives unless these lives are determined to be indefinite. Administaffs purchased intangible assets
are carried at cost less accumulated amortization. Amortization is computed over the estimated
useful lives of the respective assets, five to ten years.
The following table provides the gross carrying amount and accumulated depreciation as of
December 31, 2009 and 2008, for each class of intangible assets and goodwill (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
|
Accumulated |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
|
Amortization |
|
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks |
|
$ |
1,613 |
|
|
$ |
(394 |
) |
|
$ |
1,613 |
|
|
$ |
(233 |
) |
Customer relationships |
|
|
2,190 |
|
|
|
(627 |
) |
|
|
2,190 |
|
|
|
(380 |
) |
Goodwill |
|
|
5,705 |
|
|
|
|
|
|
|
5,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total goodwill and intangible assets |
|
$ |
9,508 |
|
|
$ |
(1,021 |
) |
|
$ |
9,208 |
|
|
$ |
(613 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HRTools.com |
|
$ |
5,058 |
|
|
$ |
(547 |
) |
|
$ |
5,058 |
|
|
$ |
(410 |
) |
USDatalink |
|
|
4,450 |
|
|
|
(474 |
) |
|
|
4,150 |
|
|
|
(203 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,508 |
|
|
$ |
(1,021 |
) |
|
$ |
9,208 |
|
|
$ |
(613 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys amortization expense related to purchased intangible assets other than goodwill
was $408,000 in 2009, $340,000 in 2008 and $137,000 in 2007, and is estimated to be $403,000 per
year from 2010 through 2012 and $318,000 in 2013 and 2014.
Health Insurance Costs
The Company provides group health insurance coverage to its worksite employees through a
national network of carriers including UnitedHealthcare (United), PacifiCare, Kaiser Permanente,
Blue Shield of California, Hawaii Medical Service Association and Tufts, all of which provide fully
insured policies or service contracts.
The policy with United provides the majority of the Companys health insurance coverage. As a
result of certain contractual terms, the Company has accounted for this plan since its inception
using a partially self-funded insurance accounting model. Accordingly, Administaff records the
costs of the United Plan, including an estimate of the incurred claims, taxes and administrative
fees (collectively the Plan Costs) as benefits expense in the Consolidated Statements of
Operations. The estimated incurred claims are based upon: (i) the level of claims processed during
each quarter; (ii) recent claim development patterns under the plan, to estimate a completion rate;
and (iii) the number of participants in the plan, including both active and COBRA enrollees.
Each reporting period, changes in the estimated ultimate costs resulting from claim trends, plan
design and migration, participant demographics and other factors are incorporated into the benefits
costs.
F-15
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Additionally, since the plans inception, under the terms of the contract, United establishes
cash funding rates 90 days in advance of the beginning of a reporting quarter. If the Plan Costs
for a reporting quarter are greater than the premiums paid and owed to United, a deficit in the
plan would be incurred and a liability for the excess costs would be accrued in the Companys
Consolidated Balance Sheet. On the other hand, if the Plan Costs for the reporting quarter are
less than the premiums paid and owed to United, a surplus in the plan would be incurred and the
Company would record an asset for the excess premiums in its Consolidated Balance Sheet. The terms
of the arrangement require Administaff to maintain an accumulated cash surplus in the plan of $9.0
million, which is reported as long-term prepaid insurance. As of December 31, 2009, Plan Costs
were less than the net premiums paid and owed to United by $16.7 million. As this amount is in
excess of the agreed-upon $9.0 million surplus maintenance level, the $7.7 million balance is
included in prepaid insurance, a current asset, in the Companys Consolidated Balance Sheet. The
premiums and taxes owed to United at December 31, 2009, were $3.4 million, which is included in
accrued health insurance costs, a current liability in the Companys Consolidated Balance Sheet.
Workers Compensation Costs
Since October 1, 2007, the Companys workers compensation coverage has been provided through
an arrangement with ACE Group of Companies (ACE). Under the arrangement with ACE (the ACE
Program), the Company bears the economic burden for the first $1 million layer of claims per
occurrence. ACE bears the economic burden for all claims in excess of such first $1 million layer.
The ACE Program is a fully insured policy whereby ACE has the responsibility to pay all claims
incurred under the policy regardless of whether Administaff satisfies its responsibilities. Prior
to the current relationship with ACE, coverage from September 1, 2003 through September 30, 2007
was provided through selected member insurance companies of American International Group, Inc. (the
AIG Program). The AIG Program coverage and structure was consistent with the ACE Program.
Because the Company bears the economic burden of the first $1 million layer of claims per
occurrence, such claims, which are the primary component of the Companys workers compensation
costs, are recorded in the period incurred. Workers compensation insurance includes ongoing
healthcare and indemnity coverage whereby claims are paid over numerous years following the date of
injury. Accordingly, the accrual of related incurred costs in each reporting period includes
estimates, which take into account the ongoing development of claims and therefore requires a
significant level of judgment.
The Company employs a third party actuary to estimate its loss development rate, which is
primarily based upon the nature of worksite employees job responsibilities, the location of
worksite employees, the historical frequency and severity of workers compensation claims, and an
estimate of future cost trends. Each reporting period, changes in the actuarial assumptions
resulting from changes in actual claims experience and other trends are incorporated into the
Companys workers compensation claims cost estimates. During the year ended December 31,
Administaff reduced accrued workers compensation costs by $5.7 million in 2009 and $9.8 million in
2008, for changes in estimated losses related to prior reporting periods. Workers compensation
cost estimates are discounted to present value at a rate based upon the U.S. Treasury rates that
correspond with the weighted average estimated claim payout period (the average discount rate
utilized in 2009 and 2008 was 1.8% and 2.6%, respectively) and are accreted over the estimated
claim payment period and included as a component of direct costs in the Companys Consolidated
Statements of Operations.
F-16
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table provides the activity and balances related to incurred but not reported
workers compensation claims for the years ended December 31, 2009 and 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
83,055 |
|
|
$ |
74,433 |
|
Accrued claims |
|
|
35,525 |
|
|
|
38,159 |
|
Present value discount |
|
|
(2,203 |
) |
|
|
(3,466 |
) |
Paid claims |
|
|
(27,927 |
) |
|
|
(26,071 |
) |
|
|
|
|
|
|
|
Ending balance |
|
$ |
88,450 |
|
|
$ |
83,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of accrued claims |
|
$ |
36,436 |
|
|
$ |
36,466 |
|
Long-term portion of accrued claims |
|
|
52,014 |
|
|
|
46,589 |
|
|
|
|
|
|
|
|
|
|
$ |
88,450 |
|
|
$ |
83,055 |
|
|
|
|
|
|
|
|
As of December 31, the undiscounted accrued workers compensation costs were $103.8 million in
2009 and $98.5 million in 2008.
At the beginning of each policy period, the insurance carrier establishes monthly funding
requirements comprised of premium costs and funds to be set aside for payment of future claims
(claim funds). The level of claim funds is primarily based upon anticipated worksite employee
payroll levels and expected workers compensation loss rates, as determined by the insurance
carrier. Monies funded into the program for incurred claims expected to be paid within one year
are recorded as restricted cash, a short-term asset, while the remainder of claim funds are
included in deposits, a long-term asset in the Companys Consolidated Balance Sheets. As of
December 31, 2009, the Company had restricted cash of $36.4 million and deposits of $55.7 million.
The Companys estimate of incurred claim costs expected to be paid within one year are
recorded as accrued workers compensation costs and included in short-term liabilities, while its
estimate of incurred claim costs expected to be paid beyond one year are included in long-term
liabilities on the Companys Consolidated Balance Sheets.
Stock-Based Compensation
At December 31, 2009, the Company has three stock-based employee compensation plans. The
Company accounts for these plans under the recognition and measurement principles of ASC 718,
Compensation Stock Compensation, which requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the income statement based on their fair
values.
The Company generally makes annual grants of restricted and unrestricted stock under its
stock-based incentive compensation plans to its directors, officers and other management.
Restricted stock grants to officers and other management vest over three to five years from the
date of grant. Annual stock grants issued to directors are 100% vested on the grant date. Shares
of restricted stock are based on fair value on date of grant and the associated expense net of
estimated forfeitures is recognized over the vesting period.
F-17
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Company-Sponsored 401(k) Plans
Under the Companys 401(k) plan for corporate employees (the Corporate Plan), the Company
matched 50% of eligible corporate employees contributions, up to 6% of the employees eligible
compensation in 2009, and 100% of eligible corporate employees contributions, up to 6% of the
employees eligible compensation in 2008 and 2007. Under the Companys separate 401(k) plan for
worksite employees (the Worksite Employee Plan), the
match percentage for worksite employees ranges from 0% to 6%, as determined by each client company.
Matching contributions under the Corporate Plan and the Worksite Employee Plan are immediately
vested. During 2009, 2008 and 2007, the Company made matching contributions to the Corporate and
Worksite Employee Plans of $47.7 million, $52.0 million and $44.0 million, respectively. Of these
contributions, $45.1 million, $47.3 million and $39.8 million were made under the Worksite Employee
Plan on behalf of worksite employees. The remainder represents matching contributions made under
the Corporate Plan on behalf of corporate employees.
Advertising
The Company expenses all advertising costs as incurred.
Income Taxes
The Company uses the liability method in accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on differences between financial reporting
and income tax carrying amounts of assets and liabilities and are measured using the enacted tax
rates and laws in effect when the differences are expected to reverse.
Reclassifications
Certain prior year amounts have been reclassified to conform to the 2009 presentation.
Subsequent Events
The Company has evaluated subsequent events through the time these financial statements in the
Form 10-K report were filed with the Securities and Exchange Commission on February 11, 2010.
New Accounting Pronouncements
In September 2006, Financial Accounting Standards Board (FASB) ASC 820 (formerly SFAS 157),
Fair Value Measurements, was issued. ASC 820 establishes a framework for measuring fair value by
providing a standard definition of fair value as it applies to assets and liabilities. ASC 820,
which does not require any new fair value measurements, clarifies the application of other
accounting pronouncements that require or permit fair value measurements. Our effective date was
initially January 1, 2008. However, the FASB delayed the effective date of ASC 820 for all
non-financial assets and non-financial liabilities until fiscal years beginning after November 15,
2008. Accordingly, the Company adopted ASC 820 for its financial assets and liabilities on January
1, 2008 and adopted ASC 820 for its non-financial assets and liabilities on January 1, 2009. The
adoption did not have a material impact on the Companys Consolidated Financial Statements.
In December 2007, FASB ASC 805 (formerly SFAS 141R) Business Combinations, was issued. ASC
805 replaced and updated previous business combination standards. Under the new standard, the
acquirer of a business is required to recognize and measure the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest in the acquiree at fair value. The standard
also requires transactions costs related to the business combination to be expensed as incurred.
ASC 805 applies prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after December 15, 2008.
The Companys effective date was January 1, 2009. The Company has not yet determined the impact of
ASC 805, if any, on its Consolidated Financial Statements, because the impact is fact-specific and
will not be invoked until the Company acquires a business after the effective date.
F-18
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In June 2008, the FASB issued ASC 260 (formerly FASB Staff Position EITF 03-6-1), Determining
Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. ASC
260 concludes that unvested restricted share awards that pay nonforfeitable cash dividends are
participating securities and are subject to the two-class method of computing earnings per share.
The Companys effective date for ASC 260 was January 1, 2009. The adoption of ASC 260 did not have
a material impact on the Companys Consolidated Financial Statements.
In May 2009, FASB ASC 855 (formerly SFAS 165), Subsequent Events, was issued. ASC 855
establishes general standards of accounting for and disclosure of events that occur after the
balance sheet date (subsequent events), but before the financial statements are issued or
available to be issued and requires disclosure of the date through which the entity has evaluated
subsequent events and the basis for that date. ASC 855 is effective for interim and annual periods
ending after June 15, 2009; the Company adopted ASC 855 for the quarter ended June 30, 2009. The
Company evaluated subsequent events through the time the Form 10-K was filed with the Securities
and Exchange Commission on February 11, 2010. The adoption did not have a material impact on the
Companys Consolidated Financial Statements.
In June 2009, FASB ASC 105 (formerly SFAS 168), The FASB Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting Principles, was issued. ASC 105 is the single
official source of authoritative U.S. GAAP, superseding all other accounting literature except that
issued by the Securities and Exchange Commission. As of July 2009, only one level of authoritative
U.S. GAAP exists. All other literature will be considered non-authoritative. The Codification
does not change U.S. GAAP; instead, it introduces a new referencing system that is designed to be
an easily accessible, user-friendly online research system. ASC 105 is effective for financial
statements issued for interim and annual periods ending after September 15, 2009. The Company
adopted ASC 105 for the quarter ended September 30, 2009. The adoption did not have a material
impact on the Companys Consolidated Financial Statements.
2. Cash, Cash Equivalents and Marketable Securities
The following table summarizes the Companys investments in cash equivalents and marketable
securities held by investment managers and overnight investments:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Overnight Holdings |
|
|
|
|
|
|
|
|
Money market funds (cash equivalents) |
|
$ |
152,402 |
|
|
$ |
181,594 |
|
|
|
|
|
|
|
|
|
|
Investment Holdings |
|
|
|
|
|
|
|
|
Money market funds (cash equivalents) |
|
|
93,517 |
|
|
|
85,127 |
|
Marketable securities |
|
|
6,037 |
|
|
|
225 |
|
|
|
|
|
|
|
|
Total |
|
$ |
251,956 |
|
|
$ |
266,946 |
|
|
|
|
|
|
|
|
The Companys overnight holdings fluctuate based on the timing of the clients payroll
processing cycle. Included in the overnight holdings balance as of December 31, 2009, are $115.4
million in withholdings associated with federal and state income taxes, employment taxes and other
payroll deductions; as well as $13.1 million in client prepayments. Please read Cash Flows from
Operating Activities Timing of Client Payments/Payrolls, on page 37 for additional information.
F-19
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company accounts for its financial assets in accordance with ASC 820, Fair Value
Measurement. This standard defines fair value, establishes a framework for measuring fair value
and expands disclosures about fair value measurements. The fair value measurement disclosures are
grouped into three levels based on valuation factors:
|
|
|
Level 1 quoted prices in active markets using identical assets; |
|
|
|
Level 2 significant other observable inputs, such as quoted prices for similar
assets or liabilities, quoted prices in markets that are not active, or other
observable inputs, and |
|
|
|
Level 3 significant unobservable inputs. |
The following table summarizes the levels of fair value measurements of the Companys
financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements |
|
|
|
(in thousands) |
|
|
|
December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
245,919 |
|
|
$ |
245,919 |
|
|
$ |
|
|
|
$ |
|
|
Municipal bonds |
|
|
6,037 |
|
|
|
6,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
251,956 |
|
|
$ |
251,956 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements |
|
|
|
(in thousands) |
|
|
|
December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
266,721 |
|
|
$ |
266,721 |
|
|
$ |
|
|
|
$ |
|
|
Municipal bonds |
|
|
225 |
|
|
|
225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
266,946 |
|
|
$ |
266,946 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of the Companys available-for-sale marketable securities as of
December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local government securities |
|
$ |
6,034 |
|
|
$ |
4 |
|
|
$ |
(1 |
) |
|
$ |
6,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,034 |
|
|
$ |
4 |
|
|
$ |
(1 |
) |
|
$ |
6,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local government securities |
|
$ |
225 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
225 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-20
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 31, 2009, 2008 and 2007, the Companys realized gains and losses
recognized on sales of available-for-sales marketable securities, using specific identification,
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Realized |
|
|
|
Realized Gains |
|
|
Realized Losses |
|
|
Gains (Losses) |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
1 |
|
|
|
(407 |
) |
|
|
(406 |
) |
As of December 31, 2009, the contractual maturities of the Companys marketable securities
were as follows:
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Estimated |
|
|
|
Cost |
|
|
Fair Value |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
Less than one year |
|
$ |
2,230 |
|
|
$ |
2,230 |
|
One to five years |
|
|
3,804 |
|
|
|
3,807 |
|
Six to ten years |
|
|
|
|
|
|
|
|
Greater than ten years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,034 |
|
|
$ |
6,037 |
|
|
|
|
|
|
|
|
3. Accounts Receivable
The Companys accounts receivable is primarily composed of trade receivables and unbilled
receivables. The Companys trade receivables, which represent outstanding gross billings to
clients, are reported net of allowance for doubtful accounts of $1.3 million and $977,000 as of
December 31, 2009 and 2008, respectively. The Company establishes an allowance for doubtful
accounts based on managements assessment of the collectability of specific accounts and by making
a general provision for other potentially uncollectible amounts.
The Company makes an accrual at the end of each accounting period for its obligations
associated with the earned but unpaid wages of its worksite employees and for the accrued gross
billings associated with such wages. These accruals are included in accrued worksite employee
payroll cost and unbilled accounts receivable; however, these amounts are presented net in the
Consolidated Statements of Operations. The Company generally requires clients pay invoices for
service fees no later than one day prior to the applicable payroll date. As such, the Company
generally does not require collateral. Customer prepayments directly attributable to unbilled
accounts receivable have been netted against such receivables as the gross billings have been
earned and the payroll cost has been incurred, thus the Company has the legal right of offset for
these amounts. As of December 31, 2009 and 2008, unbilled accounts receivable consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
Accrued worksite employee payroll cost |
|
$ |
93,138 |
|
|
$ |
129,954 |
|
Unbilled revenues |
|
|
26,537 |
|
|
|
35,551 |
|
Customer prepayments |
|
|
(13,074 |
) |
|
|
(49,332 |
) |
|
|
|
|
|
|
|
Unbilled accounts receivable |
|
$ |
106,601 |
|
|
$ |
116,173 |
|
|
|
|
|
|
|
|
F-21
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Deposits
The contractual arrangement with United for health insurance coverage requires Administaff to
maintain an accumulated cash surplus in the plan of $9.0 million, which is reported as long-term
prepaid health insurance. Please see Note 1 for a discussion of our accounting policies for health
insurance costs.
As of December 31, 2009, the Company had $55.7 million of workers compensation long-term
deposits. Please see Note 1 for a discussion of our accounting policies for workers compensation
costs.
5. Income Taxes
Deferred taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities used for financial reporting purposes and the amounts used for
income tax purposes. Significant components of the net deferred tax assets and net deferred tax
liabilities as reflected on the Consolidated Balance Sheets are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Prepaid assets |
|
$ |
(6,021 |
) |
|
$ |
(10,968 |
) |
Depreciation |
|
|
(7,842 |
) |
|
|
(8,160 |
) |
Software development costs |
|
|
(1,270 |
) |
|
|
(706 |
) |
Other |
|
|
(406 |
) |
|
|
(142 |
) |
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
(15,539 |
) |
|
|
(19,976 |
) |
|
|
|
|
|
|
|
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Workers compensation accruals |
|
|
2,648 |
|
|
|
2,778 |
|
Long-term capital loss carry-forward |
|
|
184 |
|
|
|
184 |
|
State unemployment tax accruals |
|
|
|
|
|
|
164 |
|
Accrued rent |
|
|
1,343 |
|
|
|
1,340 |
|
Stock-based compensation |
|
|
2,931 |
|
|
|
2,807 |
|
Uncollectible accounts receivable |
|
|
493 |
|
|
|
366 |
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
7,599 |
|
|
|
7,639 |
|
Valuation allowance |
|
|
(184 |
) |
|
|
(184 |
) |
|
|
|
|
|
|
|
Total net deferred tax assets |
|
|
7,415 |
|
|
|
7,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities |
|
$ |
(8,124 |
) |
|
$ |
(12,521 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current deferred tax assets (liabilities) |
|
$ |
2,578 |
|
|
$ |
(1,956 |
) |
Net noncurrent deferred tax liabilities |
|
|
(10,702 |
) |
|
|
(10,565 |
) |
|
|
|
|
|
|
|
|
|
$ |
(8,124 |
) |
|
$ |
(12,521 |
) |
|
|
|
|
|
|
|
F-22
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The components of income tax expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
Current income tax expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
14,478 |
|
|
$ |
19,171 |
|
|
$ |
20,328 |
|
State |
|
|
1,994 |
|
|
|
1,703 |
|
|
|
1,248 |
|
|
|
|
|
|
|
|
|
|
|
Total current income tax expense |
|
|
16,472 |
|
|
|
20,874 |
|
|
|
21,576 |
|
Deferred income tax (benefit) expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(4,162 |
) |
|
|
5,111 |
|
|
|
4,091 |
|
State |
|
|
(235 |
) |
|
|
252 |
|
|
|
280 |
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax (benefit) expense |
|
|
(4,397 |
) |
|
|
5,363 |
|
|
|
4,371 |
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense |
|
$ |
12,075 |
|
|
$ |
26,237 |
|
|
$ |
25,947 |
|
|
|
|
|
|
|
|
|
|
|
As a result of nonqualified stock option exercises, disqualifying dispositions of certain
employee incentive stock options and vesting of restricted stock awards, the Company had net income
tax expense of $372,000 in 2009, and net income tax benefits of $821,000 and $2.9 million in 2008
and 2007, respectively. The income tax benefit or expense was reported as a component of
additional paid-in capital.
The reconciliation of income tax expense computed at U.S. federal statutory tax rates to the
reported income tax expense from continuing operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected income tax expense at 35% |
|
$ |
10,027 |
|
|
$ |
25,206 |
|
|
$ |
25,704 |
|
State income taxes, net of federal benefit |
|
|
1,053 |
|
|
|
1,372 |
|
|
|
1,152 |
|
Nondeductible expenses |
|
|
1,093 |
|
|
|
906 |
|
|
|
754 |
|
Tax-exempt interest income |
|
|
(103 |
) |
|
|
(1,098 |
) |
|
|
(1,814 |
) |
Valuation allowance against long-term capital loss carry-forward |
|
|
|
|
|
|
|
|
|
|
142 |
|
Other, net |
|
|
5 |
|
|
|
(149 |
) |
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
Reported total income tax expense |
|
$ |
12,075 |
|
|
$ |
26,237 |
|
|
$ |
25,947 |
|
|
|
|
|
|
|
|
|
|
|
The Company has capital loss carryforwards totaling approximately $500,000 that will expire
during 2012, but can only be used to offset future capital gains. The Company has a valuation
allowance of $500,000 against these related deferred tax assets as it is uncertain that the Company
will be able to utilize the capital loss carryforwards prior to their expiration. In addition, the
Company has incurred net operating losses at the subsidiary level for state income tax purposes
totaling $3.5 million ($262,000 tax effected) that expire from 2010 to 2028.
The Company recognizes interest and penalties related to uncertain tax positions in income tax
expense. As of December 31, 2009, 2008 and 2007, the Company made no provisions for interest or
penalties related to uncertain tax positions. The tax years 2006 through 2009 remain open to
examination by the Internal Revenue Service of the United States.
The 2009 state income tax expense, net of federal benefit, includes $196,000 of adjustments to
deferred tax liabilities resulting from higher state tax rates. The income tax rate for the year
ended December 31, was 42.1% in 2009 and 36.4% in 2008.
F-23
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Stockholders Equity
The Companys Board of Directors (the Board) has authorized a program to repurchase up to
12,500,000 shares of the Companys outstanding common stock. The purchases are to be made from
time to time in the open market or directly from stockholders at prevailing market prices based on
market conditions or other factors. The Company did not repurchase shares under this program
during 2009. However, 87,932 shares were withheld during 2009 to satisfy tax withholding
obligations for the vesting of restricted stock awards. These purchases are not subject to the
repurchase program. During 2008, the Company repurchased 1,731,025 shares at a cost of $38.1
million. As of December 31, 2009, the Company had repurchased 12,088,868 shares under this program
at a total cost of approximately $237.7 million. As a result, the Company has the authorization to
repurchase an additional 411,132 shares.
During each quarter of 2009 and the third and fourth quarters of 2008 the Board declared a
dividend of $0.13 per share of common stock and $0.11 per share of common stock in the first and
second quarters of 2008, resulting in a total of $13.3 million and $12.4 million in dividend
payments paid by the Company in 2009 and 2008, respectively.
At December 31, 2009, 20 million shares of preferred stock were authorized and were designated
as Series A Junior Participating Preferred Stock that is reserved for issuance on exercise of
preferred stock purchase rights under Administaffs Share Purchase Rights Plan (the Rights Plan).
Each issued share of the Companys common stock has one preferred stock purchase right attached to
it. No preferred shares have been issued and the rights are not currently exercisable. The Rights
Plan expires on November 13, 2017.
7. Incentive Plans
The Administaff, Inc. 1997 Incentive Plan, as amended, and the 2001 Incentive Plan, as
amended, (collectively, the Incentive Plans) provide for options and other stock-based awards
that may be granted to eligible employees and non-employee directors of the Company or its
subsidiaries. The 2001 Incentive Plan is currently the only Administaff plan under which
stock-based awards may be granted. No new stock-based awards may be made under any other plan.
The Incentive Plans are administered by the Compensation Committee of the Board of Directors (the
Committee). The Committee has the power to determine which eligible employees will receive
awards, the timing and manner of the grant of such awards, the exercise price of stock options
(which may not be less than market value on the date of grant), the number of shares and all of the
terms of the awards. The Board may at any time amend or terminate the Incentive Plans. However,
no amendment that would impair the rights of any participant, with respect to outstanding grants,
can be made without the participants prior consent. Stockholder approval of amendments to the
Incentive Plans is necessary only when required by applicable law or stock exchange rules. The
1997 Incentive Plan expired on April 24, 2005; therefore no new grants may be made under the Plan.
At December 31, 2009, 1,374,250 shares of common stock were available for future grants under the
2001 Incentive Plan. The Incentive Plans permit stock options, including nonqualified stock
options and options intended to qualify as incentive stock options within the meaning of Section
422 of the Internal Revenue Code (the Code), stock awards, phantom stock awards, stock
appreciation rights, performance units, and other stock-based awards and cash awards, all of which
may or may not be subject to the achievement of one or more performance objectives. The purposes
of the Incentive Plans generally are to retain and attract persons of training, experience and
ability to serve as employees of the Company and its subsidiaries and to serve as non-employee
directors of the Company, to encourage the sense of proprietorship of such persons and to stimulate
the active interest of such persons in the development and financial success of the Company and its
subsidiaries.
F-24
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Administaff Nonqualified Stock Option Plan (the Nonqualified Plan) provided for options
to purchase shares of the Companys common stock that were granted to employees who are not
officers. An aggregate of 3,600,000 shares of common stock of the Company were authorized to be
issued under the Nonqualified Plan. Although there are unissued shares remaining, no new awards
may be granted under the Nonqualified Plan. The Committee may at any time terminate or amend the
Nonqualified Plan, provided that no such amendment may adversely affect the rights of optionees
with regard to outstanding options.
Stock Option Awards
The following summarizes stock option activity and related information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
|
|
(in thousands, except per share amounts) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding beginning of
year |
|
|
1,610 |
|
|
$ |
24.76 |
|
|
|
1,823 |
|
|
$ |
23.48 |
|
|
|
2,127 |
|
|
$ |
22.02 |
|
Granted |
|
|
12 |
|
|
|
27.87 |
|
|
|
13 |
|
|
|
28.69 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(195 |
) |
|
|
14.52 |
|
|
|
(223 |
) |
|
|
14.27 |
|
|
|
(301 |
) |
|
|
13.10 |
|
Cancelled |
|
|
(18 |
) |
|
|
39.76 |
|
|
|
(3 |
) |
|
|
43.69 |
|
|
|
(3 |
) |
|
|
32.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding end of year |
|
|
1,409 |
|
|
|
26.02 |
|
|
|
1,610 |
|
|
$ |
24.76 |
|
|
|
1,823 |
|
|
$ |
23.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable end of year |
|
|
1,409 |
|
|
|
26.02 |
|
|
|
1,610 |
|
|
$ |
24.76 |
|
|
|
1,823 |
|
|
$ |
23.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of
options granted during year |
|
|
|
|
|
$ |
27.87 |
|
|
|
|
|
|
$ |
28.69 |
|
|
|
|
|
|
$ |
|
|
Intrinsic value of options
outstanding at year end |
|
$ 5,279 |
|
|
$ 5,289 |
|
|
$ 15,519 |
|
Intrinsic value of options
exercised during the year |
|
$ 1,902 |
|
|
$ 3,059 |
|
|
$ 7,142 |
|
The following summarizes information related to stock options outstanding at December 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding & Exercisable |
|
|
|
|
|
|
|
Weighted Average |
|
|
Weighted |
|
|
|
|
|
|
|
Remaining |
|
|
Average |
|
|
|
|
|
|
|
Contractual |
|
|
Exercise |
|
Range of Exercise Prices |
|
Shares |
|
|
Life (Years) |
|
|
Price |
|
(share amounts in thousands) |
|
$ 4.02 to $10.00 |
|
|
75 |
|
|
|
3.3 |
|
|
$ |
7.24 |
|
$10.01 to $15.00 |
|
|
126 |
|
|
|
3.9 |
|
|
$ |
12.83 |
|
$15.01 to $20.00 |
|
|
530 |
|
|
|
1.7 |
|
|
$ |
18.54 |
|
$20.01 to $30.00 |
|
|
255 |
|
|
|
2.4 |
|
|
$ |
24.39 |
|
$30.01 to $43.69 |
|
|
423 |
|
|
|
0.7 |
|
|
$ |
43.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,409 |
|
|
|
1.8 |
|
|
$ |
26.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
F-25
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Restricted Stock Awards
Restricted common shares, under fixed plan accounting, are generally measured at fair value on
the date of grant based on the number of shares granted, estimated forfeitures and the quoted price
of the common stock. Such value is recognized as compensation expense over the corresponding
vesting period, three to five years for the Companys shares currently outstanding. The Company
has recognized $10.1 million, $10.0 million and $7.5 million of compensation expense associated
with the restricted stock awards in 2009, 2008 and 2007, respectively. As of December 31, 2009,
unrecognized compensation expense associated with the non-vested shares outstanding was $9.0
million and is expected to be recognized over a weighted average period of 20 months.
The following summarizes restricted stock awards as of December 31, 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Market |
|
|
|
|
|
|
Market |
|
|
|
|
|
|
Market |
|
|
|
|
|
|
|
Value at |
|
|
|
|
|
|
Value at |
|
|
|
|
|
|
Value at |
|
|
|
Shares |
|
|
Grant Date |
|
|
Shares |
|
|
Grant Date |
|
|
Shares |
|
|
Grant Date |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested beginning
of year |
|
|
669,468 |
|
|
$ |
29.77 |
|
|
|
528,049 |
|
|
$ |
34.09 |
|
|
|
404,793 |
|
|
$ |
30.33 |
|
Granted |
|
|
347,272 |
|
|
|
20.92 |
|
|
|
414,948 |
|
|
|
24.61 |
|
|
|
296,302 |
|
|
|
35.53 |
|
Vested |
|
|
(305,980 |
) |
|
|
22.47 |
|
|
|
(267,227 |
) |
|
|
26.21 |
|
|
|
(171,345 |
) |
|
|
39.28 |
|
Cancelled/Forfeited |
|
|
(20,370 |
) |
|
|
25.64 |
|
|
|
(6,302 |
) |
|
|
26.22 |
|
|
|
(1,701 |
) |
|
|
27.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested end of year |
|
|
690,390 |
|
|
$ |
24.30 |
|
|
|
669,468 |
|
|
$ |
29.77 |
|
|
|
528,049 |
|
|
$ |
34.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8. Earnings Per Share
The numerator used in the calculations of both basic and diluted net income per share for all
periods presented was net income. The denominator for each period presented was determined as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
|
24,768 |
|
|
|
25,233 |
|
|
|
26,660 |
|
Effect of dilutive securities treasury stock method: |
|
|
|
|
|
|
|
|
|
|
|
|
Common stock options |
|
|
148 |
|
|
|
247 |
|
|
|
537 |
|
Restricted stock awards |
|
|
192 |
|
|
|
97 |
|
|
|
67 |
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding plus
effect of dilutive securities |
|
|
25,108 |
|
|
|
25,577 |
|
|
|
27,264 |
|
|
|
|
|
|
|
|
|
|
|
Options and/or restricted stock awards to purchase 541,000, 692,000 and 808,000 shares of
common stock were not included in the diluted net income per share calculation for 2009, 2008 and
2007, respectively, because their inclusion would have been anti-dilutive.
F-26
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Leases
The Company leases various office facilities, furniture, equipment and vehicles under
operating lease arrangements, some of which contain rent escalation clauses. Most of the leases
contain purchase and/or renewal options at fair market and fair rental value, respectively. Rental
expense relating to all operating leases was $14.1 million, $12.1 million and $10.5 million in
2009, 2008 and 2007, respectively. At December 31, 2009, future minimum rental payments under
noncancelable operating leases are as follows (in thousands):
|
|
|
|
|
|
|
Operating |
|
|
|
Leases |
|
|
|
|
|
|
2010 |
|
$ |
13,455 |
|
2011 |
|
|
12,087 |
|
2012 |
|
|
10,073 |
|
2013 |
|
|
8,135 |
|
2014 |
|
|
5,048 |
|
Thereafter |
|
|
4,889 |
|
|
|
|
|
Total minimum lease payments |
|
$ |
53,687 |
|
|
|
|
|
10. Commitments and Contingencies
The Company enters into non-cancelable fixed purchase and service obligations in the ordinary
course of business. These arrangements primarily consist of advertising commitments and service
contracts. At December 31, 2009 future non-cancelable purchase and service obligations greater
than $100,000 and one year were as follows (in thousands):
|
|
|
|
|
2010 |
|
$ |
6,463 |
|
2011 |
|
|
1,359 |
|
2012 |
|
|
859 |
|
2013 |
|
|
652 |
|
2014 |
|
|
150 |
|
Thereafter |
|
|
|
|
|
|
|
|
Total obligations |
|
$ |
9,483 |
|
|
|
|
|
The Company is a defendant in various lawsuits and claims arising in the normal course of
business. Management believes it has valid defenses in these cases and is defending them
vigorously. While the results of litigation cannot be predicted with certainty, management
believes the final outcome of such litigation will not have a material adverse effect on the
Companys financial position or results of operations.
F-27
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
|
|
March 31 |
|
|
June 30 |
|
|
Sept. 30 |
|
|
Dec. 31 |
|
|
|
(in thousands, except per share amounts) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
461,979 |
|
|
$ |
404,312 |
|
|
$ |
390,908 |
|
|
$ |
395,897 |
|
Gross profit |
|
|
83,561 |
|
|
|
71,967 |
|
|
|
71,101 |
|
|
|
61,338 |
|
Operating income (loss) |
|
|
12,897 |
|
|
|
8,605 |
|
|
|
9,563 |
|
|
|
(4,032 |
) |
Net income (loss) |
|
|
8,166 |
|
|
|
5,385 |
|
|
|
5,832 |
|
|
|
(2,809 |
) |
Basic net income (loss) per share |
|
|
0.33 |
|
|
|
0.22 |
|
|
|
0.23 |
|
|
|
(0.11 |
) |
Diluted net income (loss) per share |
|
|
0.33 |
|
|
|
0.22 |
|
|
|
0.23 |
|
|
|
(0.11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
456,066 |
|
|
$ |
420,469 |
|
|
$ |
421,914 |
|
|
$ |
425,985 |
|
Gross profit |
|
|
86,607 |
|
|
|
84,061 |
|
|
|
85,499 |
|
|
|
87,572 |
|
Operating income |
|
|
17,986 |
|
|
|
15,572 |
|
|
|
16,923 |
|
|
|
14,501 |
|
Net income |
|
|
13,156 |
|
|
|
10,987 |
|
|
|
11,929 |
|
|
|
9,708 |
|
Basic net income per share |
|
|
0.52 |
|
|
|
0.43 |
|
|
|
0.47 |
|
|
|
0.39 |
|
Diluted net income per share |
|
|
0.51 |
|
|
|
0.43 |
|
|
|
0.46 |
|
|
|
0.39 |
|
F-28