The Company
InsperityTM, a trusted advisor to America’s
best businesses for more than 25 years,
provides an array of human resource and
business solutions designed to help improve
business performance. Insperity Business
Performance Advisors offer the most
comprehensive Workforce OptimizationSM
(PEO) solution in the marketplace that
delivers administrative relief, big company
benefits, reduced liabilities and a systematic
way to improve productivity. Additional
offerings include MidMarket SolutionsSM,
Performance Management, Expense
Management, Time and Attendance, Orga-
nizational Planning, Employment Screening,
Recruiting Services, Retirement Services,
Business Insurance and Technology Services.
Insperity business performance solutions
support more than 100,000 businesses with
over 2 million employees. With 2010 revenues
in excess of $1.7 billion, Insperity operates in
58 offices throughout the United States.
Company Facts
v Founded in 1986, IPO 1997
v 58 offices
v Corporate headquarters in Houston
v Regional Service Centers in Atlanta,
Dallas, Houston and Los Angeles
v Accredited by Employer Services
Assurance Corporation (ESAC)
Mission Statement
The mission of Insperity is to help businesses
succeed so communities prosper.
Insperity Values
v Integrity as the cornerstone of personal
and corporate conduct
v Respect for the worth of the individual
v Achieving goals through servant
leadership and teamwork
v Commitment to high standards and the
pursuit of excellence
v Accountability as a means to elevate
individual and corporate performance
v Innovation as a fundamental driver of
long-term success
v Embracing change as an opportunity to
learn and improve
v Contributing to the communities where
we live and work
v Perseverance through an abiding faith
and optimism
Contents
Financial Highlights
Letter to Stakeholders
Our New Brand Strategy
Board of Directors
Financial Review
Officers
Corporate Information
1
2
4
6
7
inside back cover
inside back cover
Financial Highlights
Year ended December 31,
2010
2009
2008
2007
2006
(in thousands, except per share and statistical data)
Income Statement Data:
Revenues(1)
Gross profit
Operating income
Net income
$ 1,719,752
$ 1,653,096
$ 1,724,434
$ 1,569,977
$ 1,389,464
298,536
287,967
343,739
305,922
282,729
37,060
22,440
27,033
16,574
64,982
45,780
62,214
47,492
61,565
46,506
Diluted net income per share(2)
$
0.86
$
0.65
$
1.76
$
1.72
$
1.63
Balance Sheet Data:
Working capital
Total assets
$ 144,479
$
127,627
$
98,414
$
97,180
$
128,401
659,845
576,470
616,840
560,651
561,515
Total debt/capital lease obligations
—
—
537
1,166
1,749
Total stockholders’ equity
240,395
223,160
208,479
198,675
228,445
Cash dividends per share
$
0.52
$0.52
$
0.48
$
0.44
$
0.36
Statistical Data:
Average number of worksite employees
paid per month during period
107,014
108,736
116,957
110,291
100,675
Revenues per worksite employee
per month(3)
Gross profit per worksite employee
per month
Operating income per worksite
employee per month
$
$
$
1,339
232
29
$
$
$
1,267
221
21
$
$
$
1,229
245
46
$
$
$
1,186
$
1,150
231
$
234
47
$
51
(1) Gross billings of $10.169 billion, $9.856 billion, $10.372 billion, $9.437 billion and $8.055 billion, less worksite employee
payroll cost of $8.449 billion, $8.203 billion, $8.648 billion, $7.867 billion and $6.666 billion, respectively.
(2) Diluted net income per share has been reduced by the following amounts to reflect the two-class earnings per share
method: 2009 - $0.01; 2008 - $0.03; 2007 - $0.02; and 2006 - $0.01.
(3) Gross billings of $7,919, $7,553, $7,391, $7,130 and $6,667 per worksite employee per month, less payroll cost of $6,580,
$6,286, $6,162, $5,944 and $5,517 per worksite employee per month, respectively.
- 1 -
To Our Fellow Stakeholders
Building on a quarter of a century of providing vital
human resource services to our nation’s businesses,
Administaff has become Insperity, a new brand backed
by an innovative strategy for meeting the ongoing
performance needs of America’s best companies. The
name Insperity is drawn from the linked entrepreneurial
goals of inspiration and prosperity, and boldly restates
our ongoing vision of helping businesses succeed.
As we prepared to launch our new brand, 2010 saw
Insperity make a strong recovery in both growth and
profitability, and take advantage of key opportunities
to strengthen its cash position. In addition, the
Company announced two acquisitions in the areas
of expense reporting, time and attendance tracking
and, in early January 2011, organizational planning,
furthering our ability to serve more companies
through complementary business services. We are
excited about the new Insperity brand and what it
signifies, energized by a fresh strategy to deliver our
expanded offering and eager to further support
America’s entrepreneurial companies.
2010 Financial Performance
Revenues increased 4.0 percent in 2010 to $1.7 billion, on
a 5.7 percent increase in revenues per worksite employee
per month and a 1.6 percent decrease in the average num-
ber of paid worksite employees largely due to a reduction
of worksite employees in early 2010. Gross profit increased
3.7 percent to $298.5 million, and diluted net income
per share increased 32.3 percent to $0.86 from $0.65.
Net income rose from $16.6 million in 2009 to $22.4
million in 2010, and client satisfaction levels remained
at an all-time high of 99 percent for the third year in
a row.
During 2010, we repurchased $7.9 million of the Com-
pany’s shares, and paid dividends totaling $13.5 million.
Insperity generated more than $61.1 million in EBITDA
plus stock-based compensation during the year and
increased operating income by 37.1 percent to
$37.1 million.
These financial results not only affirm a solid return to
the increasing profitability and growth experienced by
Insperity, but also help to lay the groundwork for extend-
ing our brand and serving a larger number of businesses,
employees and their families in 2011 and beyond.
v Returning to Growth – By the end of 2010, Insperity
reversed a downward unit growth event from 2009
caused by the recession and resumed a growth pat-
tern seen in previous economic recoveries, averaging
111,249 worksite employees in the fourth quarter.
The reasons for this increase include a retooled sales
engine, continued high levels of client retention and
net gains from hiring within our client base. In addi-
tion, the Company built a strong pipeline of qualified
prospects, improved MidMarket sales and increased
full-service core market sales. The combination of
these factors, coupled with the implementation of
our new adjacent business development strategy,
sets the stage for continued growth in 2011.
- 2 -
The past year was instrumental for Insperity in proving
once again the Company’s ability to progress in the
midst of a tepid economy, while addressing the varied
needs of complementary target markets. The result is
a company that is financially strong with substantial
cash reserves and no debt, and is growing its client
base through strategic market extension and a broad-
ened product mix. Just as 2010 built upon our successful
business model of the first 25 years, I firmly believe that
our current transformation will prove to be the driving
force behind Insperity’s future growth and profitability.
In closing, I want to thank our corporate staff for
their hard work and dedication in providing first-class
business performance improvement services to our
clients and implementing our exciting new brand. In
addition, I am sincerely appreciative to our Board of
Directors for its valuable counsel and guidance
regarding our 2010 performance and the Company’s
strategic branding efforts. Last year, I said that I looked
forward to a productive 2010, and it certainly was a
successful year on many levels. I can already see that
2011 is another milestone period in the Company’s
timeline of helping businesses succeed so communities
prosper. Our new brand represents the resourcefulness
we are using to meet that goal for even more compa-
nies and employees in America, and I look forward to a
dynamic and profitable year.
Sincerely,
Paul J. Sarvadi
Chairman and Chief Executive Officer
March 31, 2011
v Resuming Increases in Profitability – In addition
to resuming our growth momentum, the Company
has experienced a return to increasing profitability.
This accomplishment is particularly notable given the
prolonged sluggish pace of the nation’s economic
recovery. To help our clients, we implemented
moderate price decreases for our services during
the most severe phase of the downturn, but during
2010, the Company was able to show a slight
recovery toward our previous rates as clients
renewed. Additionally, a significant portion of
Insperity’s profit increases for 2010 were the result
of effective direct cost management involving
workers’ compensation insurance, benefits costs
(including costs related to COBRA participants)
and payroll tax costs. If the national economy
improves in 2011 as some project, any associated
revenue increases, coupled with continued direct
cost management efforts, may help position
the Company for further profit increases.
v Implementing a New Strategy – Our new name is
backed by a new and exciting growth strategy
centered on the implementation of our adjacent
business development plan. The primary goal of
this effort is to develop profitable adjacent business
units with recurring revenue streams, strong growth
potential and substantial cross-selling opportunities
that feed our core Workforce Optimization business.
In September, we formally launched eight adjacent
business offerings following our “Build, Buy, Partner”
approach. This introduction was the first step
in expanding the identity of Insperity beyond
Workforce Optimization and evolving into a
business performance improvement company
with the ability to help businesses succeed in a
variety of ways. The resulting Company changes
were born out of the desire to grow the primary
business faster and more consistently, while capital-
izing on the many strengths and assets Insperity has
developed over the last 25 years. We are confident
that we have the right plan and the right people to
properly execute this new strategy.
- 3 -
Insperity: A New Brand Backed
by a Dynamic Strategy
The name Insperity draws meaning from our 25 years
of support to the business community and simulta-
neously sets the stage for providing even more services
to expanded markets over the next quarter of a century.
Our strategy for achieving this goal is based on four key
elements that explode our market potential to
American businesses.
v Leveraging our financial strength By tapping the
Company’s strong cash reserves, Insperity has been
able to strategically and conservatively make key
acquisitions and fund important expansion efforts
that allow us to serve even more businesses. A solid
balance sheet with little or no debt has long been a
hallmark of our financial position and equips us to
serve clients more effectively and efficiently.
v Executing our Adjacent Business Development Plan
For the last few years, the Company has been acquir-
ing complementary client services using a “Build,
Buy, Partner” approach. The launch of our Adjacent
Business Development Plan was the first step in
expanding the identity of the Company beyond our
core business, now called Workforce Optimization,
and evolving into a business performance improve-
ment company with the ability to help businesses
thrive using a range of services.
u We “Build” certain business performance solutions
from the ground up, such as Insperity Recruiting
Services and Insperity Retirement Services.
u At other times, Insperity may “Buy” complementary
business units, either as existing companies or by
acquiring potentially profitable assets, including
products and processes. We have used this approach
to purchase USDatalink (Insperity Employment
Screening), PerformSmart (Insperity Performance
Management), ExpensAble (Insperity Expense Man-
agement), Galaxy Technologies (Insperity Time and
Attendance), and OrgPlus (Insperity Organizational
Planning). The last four business units now or will
soon provide Software as a Service (SaaS) products
and services to our clients.
u Finally, we may “Partner” with firms like we have
done with Lockton Affinity Group to offer key
business insurance coverage, and with CompuCom
to provide vital technology support. It is worth
noting that these two relationships exemplify how
we can meet growing client demands for such ser-
vices and further leverage our resources and small
and medium-sized business channels.
v Broadening our product offerings to help all customers
While the preceding point addresses the method of
executing our plan, this component speaks more to
the mix of products and services in that plan. Busi-
nesses often go through progressive stages of devel-
opment with each having different levels of need.
Rather than focusing only on those that require the
complete Workforce Optimization solution, Insperity
is now or will soon be organized to meet many of the
essential needs of our nation’s businesses.
v Expanding our client base Markets are generally
composed of firms that vary in size, offerings and
maturity, among other things. There may even be a
significant degree of category overlap when a company
is transitioning from one stage to another. Our goal is
to assist clients in focusing on their core businesses
wherever they may be in the growth process. As
Insperity implements its Adjacent Business Develop-
ment Plan, we will continue to develop our target
markets and enlarge our client base.
- 4 -
This approach provides Insperity with increased oppor-
tunity to grow our core Workforce Optimization business
and the overall revenue and earnings of the Company.
Historically, the lion’s share of our revenue and profit
comes from the 5,700+ clients and 110,000+ associated
worksite employees using the complete Workforce
Optimization solution. Now, through our adjacent busi-
nesses, Insperity supports more than 100,000 small to
medium-sized companies representing 2 million employees.
In April 2011, Insperity celebrated its 25th anniversary.
Over the past quarter of a century, we established a new
industry and developed the most successful business
model in our market. The Company built a national sales
and service infrastructure, replicating processes and pro-
grams that produced consistent growth and profitability.
What started years ago as our primary objective of help-
ing businesses succeed, remains unchanged in principle,
but dynamic in application. Insperity, both in word and
deed, is the next step in our journey.
We intend to leverage our 300+ professional Business
Performance Advisors and Consultants, our substantial
marketing expertise and the 30,000 Workforce
Optimization prospects that we see face-to-face each
year in order to grow the revenues of each of our Adja-
cent Business Units.
Our core Workforce Optimization solution remains the
best way we can help businesses improve their perfor-
mance. However, Insperity will now be able to offer
some level of business performance assistance to
every prospect we call on. Additionally, nine out of 10
companies not currently qualified for Workforce Opti-
mization are well suited for one or more of our business
performance solutions, each of which in turn becomes
an incubator and feeder for our core services.
The financial leverage of this new strategy is substantial.
Insperity is adding significant ways to grow profitably
from the major investment it is already making every day
to get in front of owners of small and medium-sized busi-
nesses. The relatively modest add-on investment to offer
complementary products and services through our cur-
rent sales organization represents a small percentage of
the overall costs of our sales infrastructure, but provides
the Company with vital market expansion opportunities .
- 5 -
Board of Directors
Michael W. Brown I Independent Director
Mr. Brown, age 65, joined the Company as a Class I direc-
tor in November 1997. He is a member of the Company’s
Finance, Risk Management and Audit Committee and the
Nominating and Corporate Governance Committee. Mr.
Brown is the past Chairman of the Nasdaq Stock Market
Board of Directors and a past governor of the National
Association of Securities Dealers. Mr. Brown joined
Microsoft Corporation in 1989 as its Treasurer and became its Chief Financial
Officer in 1993, in which capacity he served until his retirement in July 1997.
Prior to joining Microsoft, Mr. Brown spent 18 years with Deloitte & Touche LLP.
Mr. Brown is also a director of EMC Corporation, Stifel Financial Corporation and
VMware, Inc. and formerly served as a director of Thomas Weisel Partners, and
serves on the audit committees of EMC Corporation and VMware, Inc. Mr. Brown
also serves or has served as a director, trustee or advisor of several private busi-
ness, civic or charitable organizations. Mr. Brown holds a Bachelor of Science in
Economics from the University of Washington in Seattle.
Jack M. Fields, Jr. I Independent Director
Mr. Fields, age 59, joined the Company as a Class III director
in January 1997 following his retirement from the United
States House of Representatives, where he served for 16
years. Mr. Fields is a member of the Company’s Compen-
sation Committee and the Nominating and Corporate
Governance Committee. During 1995 and 1996, Mr. Fields
served as Chairman of the House Telecommunications
and Finance Subcommittee, which has jurisdiction and oversight of the Federal
Communications Commission and the Securities and Exchange Commission.
Mr. Fields has been Chief Executive Officer of the Twenty-First Century Group in
Washington, D.C. since January 1997. Mr. Fields serves on the Board of Directors
for AIM Mutual Funds, and also serves or has served as a director, trustee or advi-
sor of several private business, civic or charitable organizations. Mr. Fields earned
a Bachelor of Arts in 1974 from Baylor University and graduated from Baylor Law
School in 1977.
Dr. Eli Jones I Independent Director
Dr. Jones, age 49, joined the Company as a Class I director
in April 2004. He is Chairman of the Company’s Compen-
sation Committee and a member of the Nominating and
Corporate Governance Committee. Dr. Jones is Dean of
the E. J. Ourso College of Business and Ourso Distinguished
Professor of Business at Louisiana State University. Prior
to joining the faculty at Louisiana State University, he was
Professor of Marketing and Associate Dean at the C.T. Bauer College of Business
at the University of Houston from 2007 to 2008; an Associate Professor of
Marketing from 2002 to 2007; and an Assistant Professor from 1997 until 2002.
He taught at Texas A&M University for several years before joining the faculty of
the University of Houston. Before becoming a professor, Dr. Jones worked in sales
and sales management for three Fortune 100 companies: Quaker Oats, Nabisco,
and Frito-Lay. He received his Bachelor of Science degree in journalism in 1982,
his MBA in 1986, and his Ph.D. in 1997 from Texas A&M University.
Paul S. Lattanzio I Independent Director
Mr. Lattanzio, age 47, has been a Class III director of the
Company since 1995. He is a member of the Company’s
Finance, Risk Management and Audit Committee and
the Nominating and Corporate Governance Committee.
Mr. Lattanzio has been President of Star Avenue Capital,
LLC since May 2010. Prior to that, he most recently served
as a Senior Managing Director and head of Bear Growth
Capital Partners, a private equity group, from July 2003 to January 2009. He
served as a Managing Director for TD Capital Communications Partners (f/k/a
Toronto Dominion Capital), a venture capital investment firm, from July 1999
until July 2002. From February 1998 to March 1999, he was a co-founder and
Senior Managing Director of NMS Capital Management, LLC, a $600 million
private equity fund affiliated with NationsBanc Montgomery Securities. Prior
to NMS Capital, Mr. Lattanzio served in several positions with various affiliates
of Bankers Trust New York Corporation for over 13 years, most recently as a
Managing Director of BT Capital Partners, Inc. Mr. Lattanzio has experience in
a variety of investment banking disciplines, including mergers and acquisitions,
private placements and restructuring. Mr. Lattanzio received his Bachelor of
Science in economics with honors from the University of Pennsylvania’s
Wharton School of Business in 1984.
- 6 -
Gregory E. Petsch I Independent Director
Mr. Petsch, age 60, joined the Company as a Class I direc-
tor in October 2002. He is Chairman of the Company’s
Nominating and Corporate Governance Committee and
a member of the Compensation Committee. Mr. Petsch
retired from Compaq Computer Corporation in 1999
where he had held various positions since 1983, most
recently as Senior Vice President of Worldwide Manufac-
turing and Quality beginning in 1991. Prior to joining Compaq, he worked for 10
years for Texas Instruments. Mr. Petsch serves or has served as a director, trustee
or advisor of several private business, civic or charitable organizations. In 1992,
Mr. Petsch was voted Manufacturing Executive of the Year by Upside Magazine,
and from 1993 to 1995, he was nominated Who’s Who of Global Business Leaders.
He is founder and President of Petsch Foundation, Inc. He earned a Bachelor of
Business Technology degree from the University of Houston in 1978.
Richard G. Rawson I Management Director
Mr. Rawson, age 62, President of the Company and its
subsidiaries, is a Class III director and has been a director
of the Company since 1989. He has been President since
August 2003. Before being elected President, he served
as Executive Vice President of Administration, Chief
Financial Officer and Treasurer of the Company from
February 1997 until August 2003. Prior to that, he served
as Senior Vice President, Chief Financial Officer and Treasurer of the Company
since 1989. Prior to joining the Company in 1989, Mr. Rawson was a Senior
Financial Officer and Controller for several companies in the manufacturing
and seismic data processing industries. Mr. Rawson has served the National
Association of Professional Employer Organizations (“NAPEO”) as President,
First Vice President, Second Vice President and Treasurer, as well as Chairman
of the Accounting Practices Committee of NAPEO. Mr. Rawson has a Bachelor
of Business Administration in finance from the University of Houston.
Paul J. Sarvadi I Management Director
Mr. Sarvadi, age 54, Chairman of the Board and Chief
Executive Officer and co-founder of the Company and its
subsidiaries, is a Class II director and has been a director
since the Company’s inception in 1986. He has also served
as the Chairman of the Board and Chief Executive Officer
of the Company since 1989 and as President of the
Company from 1989 until August 2003. He attended Rice
University and the University of Houston prior to starting and operating several
small companies. Mr. Sarvadi has served as President of NAPEO and was a mem-
ber of its Board of Directors for five years. In 2001, 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.
Austin P. Young I Independent Director
Mr. Young, age 70, joined the Company as a Class II director
in January 2003. He is Chairman of the Company’s Finance,
Risk Management and Audit Committee and a member of
the Nominating and Corporate Governance Committee.
Mr. Young served as Senior Vice President, Chief Financial
Officer and Treasurer of CellStar Corporation from 1999
to December 2001 when he retired. From 1996 to 1999,
he served as Executive Vice President - Finance and Administration of Metamor
Worldwide, Inc. Mr. Young also held the position of Senior Vice President and
Chief Financial Officer of American General Corporation for over eight years
and was a partner in the Houston and New York offices of KPMG before joining
American General. Mr. Young currently serves as a Director and Chairman of the
Audit Committees of Tower Group, Inc. and Amerisafe, Inc. He holds an account-
ing degree from the University of Texas.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
⌧ Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 2010.
or
(cid:134) 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)
Delaware
(State or other jurisdiction of
incorporation or organization)
19001 Crescent Springs Drive
Kingwood, Texas
(Address of principal executive offices)
76-0479645
(I.R.S. Employer
Identification No.)
77339
(Zip Code)
Registrant's Telephone Number, Including Area Code: (281) 358-8986
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, par value $0.01 per share
Rights to Purchase Series A Junior Participating Preferred Stock
New York Stock Exchange
New York Stock Exchange
(Title of class)
(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 ⌧ No (cid:134)
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 (cid:134) No ⌧
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes ⌧ No (cid:134)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate
website, if any, every Interactive Data 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 ⌧ No (cid:134)
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 registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:134)
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.
Large accelerated filer ⌧
Non-accelerated filer (cid:134) (Do not check if a smaller reporting company)
Accelerated filer (cid:134)
Smaller reporting company (cid:134)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes (cid:134) No ⌧
As of February 7, 2011, 26,117,931 shares of the registrant’s common stock, par value $0.01 per share,
were outstanding. As of the last business day of the registrant’s most recently completed second quarter, the
aggregate market value of the common stock held by non-affiliates (based upon the June 30, 2010, closing price of
the common stock as reported by the New York Stock Exchange) was approximately $547 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 May 17, 2011, which the registrant intends to file within 120 days of the end of the fiscal
year.
TABLE OF CONTENTS
Part I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business ......................................................................................................................... 2
Risk Factors ................................................................................................................... 16
Unresolved Staff Comments .......................................................................................... 22
Properties ....................................................................................................................... 22
Legal Proceedings .......................................................................................................... 23
Submission of Matters to a Vote of Security Holders .................................................... 23
Item S-K 401(b).
Executive Officers of the Registrant .............................................................................. 24
Part II
Item 5.
Item 6.
Item 7.
Market for the Registrant’s Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity Securities .................... 26
Selected Financial Data ................................................................................................. 28
Management’s Discussion and Analysis of Financial Condition
and Results of Operations .......................................................................................... 29
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk ........................................ 43
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Financial Statements and Supplementary Data .............................................................. 44
Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ............................................................................................ 44
Controls and Procedures ................................................................................................ 44
Other Information .......................................................................................................... 44
Part III
Directors, Executive Officers and Corporate Governance ............................................. 45
Executive Compensation ............................................................................................... 45
Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters ............................................................................... 45
Certain Relationships and Related Transactions, and Director Independence .............. 45
Principal Accounting Fees and Services ........................................................................ 45
Part IV
Item 15.
Exhibits, Financial Statement Schedules ....................................................................... 46
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, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
ITEM 1. BUSINESS.
General
Administaff is a human resource (“HR”) services company. Our primary HR service is our professional
employer organization (“PEO”) service, which 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 HR services since inception.
In addition to our PEO service, we provide business performance improvement services and software
solutions to assist small to medium-sized businesses. These services include record keeping for defined contribution
plans, recruiting and employee screening services, and software solutions for employee expense management, time
and attendance, performance management, and organizational planning, which we offer via desktop applications and
software as a service (“SaaS”) delivery models.
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 our website 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 website free of charge as soon as reasonably
practicable after such material is electronically filed with, or furnished to, the SEC.
Our Personnel Management System, included in our PEO service, 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 designed
to 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 client’s 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
- 2 -
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.
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, 2010, we had 51 sales offices in 24 markets. Our long-term strategy is to operate
approximately 90 sales offices located in 40 strategically selected markets.
Our national expansion strategy also includes multiple service centers, which coordinate PEO services for
clients on a regional basis and localized face-to-face human resource services. As of December 31, 2010, we had
four regional service centers, and had human resource and client service personnel located in a majority of our 24
sales markets, which serviced an average of 111,249 worksite employees per month in the fourth quarter of 2010.
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:
•
•
•
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;
the need to provide competitive healthcare and related benefits to attract and retain employees;
the increasing costs associated with health and workers’ compensation insurance coverage, workplace
safety programs, employee-related complaints and litigation; and
• 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, 37 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 37 of these states. The cost of compliance
with these regulations is not material to our financial position or results of operations.
- 3 -
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:
• benefits and payroll administration;
• health and workers’ compensation insurance programs;
• personnel records management;
• employer liability management;
• employee recruiting and selection;
• employee performance management; and
•
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:
•
Internal Revenue Code (the “Code”);
• Federal Income Contribution Act (FICA);
• Federal Unemployment Tax Act (FUTA);
• Fair Labor Standards Act (FLSA)*;
• Employee Retirement Income Security Act,
as amended (ERISA);
• Consolidated Omnibus Budget Reconcilia-
•
tion Act of 1985 (COBRA)*;
Immigration Reform and Control Act
(IRCA);
• Title VII (Civil Rights Act of 1964)*;
• Americans with Disabilities Act (ADA)*;
• Age Discrimination in Employment Act
(ADEA)*;
• The Family and Medical Leave Act (FMLA)*;
• Health Insurance Portability and
Accountability Act (HIPAA);
• Drug-Free Workplace Act*;
• Occupational Safety and Health Act
(OSHA)*;
• Worker Adjustment and Retraining
Notification Act (WARN)*;
• Uniformed Services Employment and
Reemployment Rights Act (USERRA);
• State unemployment and employment
security laws;
• State workers’ compensation laws; and
• Health Care and Education Reconciliation
• Patient Protection and Affordable Care Act;
Act of 2010.
* And similar state 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:
• administrative functions;
• benefit plans administration;
• personnel management; and
• employer liability management.
Mid-market Offering. We believe the mid-market sector, which we define as those companies with
employees ranging from 150 to 2,000 worksite employees, has historically been under-served by the PEO industry.
As a result, we have undertaken an effort over the past four years to refine our sales and marketing strategies, as well
as our service delivery approach. Currently we have a dedicated sales management and consulting staff who
concentrate solely on the mid-market sector. In addition, we have service personnel who have been trained and
specialize in the mid-market sector. The mid-market sector, which represented approximately 15% of our total paid
worksite employees during 2010, increased 11% over 2009.
- 4 -
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:
• payroll processing;
• payroll tax deposits;
• quarterly payroll tax reporting;
• employee file maintenance;
• unemployment claims processing; and
• workers’ compensation claims reporting.
Benefit Plans Administration. We maintain several benefit plans including the following:
• a group health plan;
• a health care flexible spending account plan;
• an educational assistance plan;
• an adoption assistance plan;
• group term life insurance;
• group universal life insurance coverage;
• accidental death and dismemberment insurance;
• short-term and long-term disability insurance;
• a 401(k) retirement plan; and
• 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:
• drafting and reviewing personnel policies and employee handbooks;
• designing job descriptions;
• performing prospective employee screening and background investigations;
• designing performance appraisal processes and forms;
• professional development and issues-oriented training;
• employee counseling;
• substance abuse awareness training;
• drug testing;
• outplacement services; and
• compensation guidance.
- 5 -
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 that we share with our clients, we may 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 workplace accidents and consequently, workers’ compensation claims. We also provide
guidance to clients for avoiding discrimination, sexual harassment and civil rights violations, and participate in
termination decisions to attempt to minimize liability on those grounds. While we do not provide legal services to
our clients, 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 who 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:
• WebPayrollSM for the submission and approval of payroll data;
•
•
•
•
•
•
•
•
•
•
•
•
client-specific payroll information and reports;
employee information, including online check stubs and pay history reports;
employee benefits enrollment and changes;
employee-specific benefits content, including summary plan descriptions and enrollment status;
access to 401(k) plan information through the Retirement Service CenterSM;
online human resources forms;
best practices human resource management process maps and process overviews;
an online personnel guide;
e-Learning web-based training;
online recruiting services;
links to benefits providers and other key vendors; and
frequently asked questions.
MarketPlaceSM. Through our many alliances with best-of-class providers, Administaff’s MarketPlace is an
eCommerce portal that brings a wide range of product and services to our clients, worksite employees and their
families. MarketPlace also features the Business Network, where our clients can offer their products and services to
other clients and worksite employees.
Adjacent Business Unit Offerings
In 2010, we began to execute an Adjacent Business Unit (“ABU”) growth strategy, which seeks to expand
the number of business performance improvement services available to our current and prospective client base. A
key element of the ABU strategy includes the acquisition of certain human resource technology companies that
provide services through a SaaS delivery model, as well as record keeping for defined contribution plans, recruiting
and employee screening services. Administaff also looks to leverage the existing customer relationships of the
ABUs to cross sell our PEO services and various ABU services. During 2010, total ABU revenues unrelated to PEO
services were less than 1% of our total revenues. The following are the key components of our ABU services:
Performance Management Software. In 2010, we announced the rebranding of our human resource
software offering, PerformSmart, formerly known as HRTools, and launched Performance Now Online, the newly
developed SaaS solution for employee performance reviews. The new product expands and complements our
existing small business software applications related to job descriptions, performance reviews, and personnel
policies and procedures. We plan to integrate these applications into our PEO services in 2011 and will continue to
sell to small business customers through online subscription arrangements, packaged software ordered online, or
through various reseller arrangements.
- 6 -
Employment Screening Services. Our employment screening services company, USDatalink, offers a
customized approach to background-check reporting for companies, including our PEO clients, 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.
Expense Management Software. Our expense management software division, ExpensAble, delivers
employee expense management solutions that automate employee expense reporting, enforce travel and expense
policies, and provide management reporting and analysis. The software is delivered both as a SaaS solution and as a
desktop software product.
Time and Attendance Software. Our time and attendance software division, Galaxy Technologies, provides
small to medium-sized businesses, including PEO clients, with software, hardware and services to track, allocate,
and analyze employee resources and provide inputs into customers’ payroll processing and accounting systems. The
software is delivered both as a SaaS solution and as a desktop software product.
Organizational Planning Software. In January 2011, we entered the organizational planning and analysis
software solution business with our acquisition of certain assets from HumanConcepts associated with the OrgPlus
desktop product lines for small and medium-sized businesses and a source code license for a SaaS based version.
OrgPlus facilitates the creation, management and communication of detailed organization charts.
Client Service Agreement
All PEO clients execute an Administaff CSA. The CSA generally provides for an on-going relationship
between Administaff and the PEO client. The CSA generally is 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 client’s
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 Administaff’s 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 Administaff’s improving profitability over the course of
the year for those clients because of the typical pattern of incurred payroll tax costs.
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
• 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);
• Workers’ compensation compliance, procurement, management and reporting;
- 7 -
• Compliance with COBRA, HIPAA and ERISA (for each employee benefit plan sponsored solely by
the
in other governmental
regulations governing
Administaff), as well as monitoring changes
employer/employee relationship and updating the client when necessary; and
• Employee benefits administration of plans sponsored solely by Administaff.
Client
• Payment, through Administaff, of commissions, bonuses, paid leaves of absence and severance payments;
• Payment and related tax reporting and remittance of non-qualified deferred compensation and equity based
compensation;
• Ownership and protection of all client intellectual property rights;
• Compliance with OSHA regulations, EPA regulations, FLSA, FMLA, WARN, USERRA and state and local
equivalents and compliance with government contracting provisions;
• Compliance with the National Labor Relations Act (“NLRA”), including all organizing efforts and expenses
related to a collective bargaining agreement and related benefits;
• Professional licensing requirements, fidelity bonding and professional liability insurance;
• Products produced and/or services provided; and
• COBRA, HIPAA and ERISA compliance for client-sponsored benefit plans.
Joint
Implementation of policies and practices relating to the employee/employer relationship; and
•
• 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 employment 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.
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 client’s 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.
- 8 -
PEO Clients
Administaff’s PEO services provide 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 clients with 150 to 2,000 employees as mid-market clients. These clients, which
represented approximately 15% of our total client base as of December 2010, are marketed to and serviced by sales
and service personnel, who specialize in the mid-market sector. 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 2010 revenue change compared to 2009 and
revenue distribution for the year ended December 31, 2010, was as follows:
Revenue Change % of Total Revenues
Northeast.........................................................
Southeast.........................................................
Central ............................................................
Southwest .......................................................
West ................................................................
11.5%
0.7%
1.3%
0.7%
3.1%
24.2%
10.8%
14.8%
30.7%
19.5%
As part of our client selection strategy, we generally do not offer our PEO 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 PEO 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:
Industry
% of Client Base
Computer and information services
Management, administration and consulting services
Finance, insurance and real estate
Manufacturing
Wholesale trade
Engineering, accounting and legal services
Medical services
Construction
Retail trade
Other
21
16
14
8
8
7
6
5
5
10
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 2010 and 2009, our retention rate was approximately 80%
and 76%, respectively. Administaff’s client retention record over the last five years reflects that approximately 77%
of our PEO clients remain for more than one year. 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 client’s non-compliance or inability to make timely payments; and (iv) competition from other
PEOs or business services firms.
- 9 -
Marketing and Sales
As of December 31, 2010, we had 51 sales offices located in 24 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. Administaff’s markets and their respective year of entry are as
follows:
Market
Sales Offices
Initial
Entry Date
Houston
San Antonio
Austin
Orlando
Dallas/Fort Worth
Atlanta
Phoenix
Chicago
Washington D.C.
Denver
Los Angeles
Charlotte
St. Louis
San Francisco
New York
Baltimore
New Jersey
San Diego
Boston
Minneapolis
Raleigh
Jacksonville
Kansas City
Columbus
5
1
1
1
4
4
2
2
3
2
5
1
1
3
4
1
2
1
2
2
1
1
1
1
1986
1989
1989
1989
1993
1994
1995
1995
1995
1996
1997
1997
1998
1998
1999
2000
2000
2001
2001
2002
2006
2007
2007
2010
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.
- 10 -
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 human resource services and to more successfully reach our target market. We have
an agreement with the Professional Golf Association Champions Tour to be the title sponsor of the annual
Administaff Small Business Classic professional golf tournament held annually in Houston, Texas. In addition, we
have arrangements with Arnold Palmer and Jim Nantz, a sports commentator, to serve as our national
spokespersons. Our marketing campaigns use this event and the relationships with Mr. Palmer and Mr. Nantz 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 PEO clients,
and ultimately, prospective PEO client census reports. A prospective PEO client’s census report reflects information
gathered by the sales representative about the prospect’s 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
Administaff’s proprietary pricing model to the census data, leading to the preparation of a bid. Concurrent with this
process, we evaluate the prospective client’s 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 through its PEO services, which
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 2007 through 2009 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 2007 through 2009, our staff
support ratio averaged 49% higher than the PEO industry average, while gross profit per worksite employee and
operating income per worksite employee exceeded industry averages by 124% and 140%, 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.
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 PEO service providers in the United States. Our largest national competitors include PEO
divisions of large business services companies such as Automatic Data Processing, Inc. and Paychex, Inc., and other
PEOs, such as TriNet. In addition, we compete to some extent with: i) fee-for-service providers such as payroll
processors and human resource consultants; ii) human resource technology solution companies; and iii) large
- 11 -
regional PEOs in certain areas of the country. As Administaff and other large PEO service providers 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, Unity
Health Plans 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,
2013, subject to cancellation by either party upon 180 days notice. For a discussion of our contract with United,
please read Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations -
Critical Accounting Policies and Estimates – Benefits Costs” on page 31.
Our workers’ compensation coverage (the “ACE Program”) has been provided through an arrangement
with ACE since 2007. 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
the ACE Program, please read Item 7. “Management’s Discussion and Analysis of Financial Condition and Results
of Operations - Critical Accounting Policies and Estimates – Workers’ Compensation Costs” on page 32.
Information Technology
Administaff utilizes a variety of information technology capabilities to provide its human resource services
to PEO 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:
human resource management;
benefits and defined contribution plan administration;
payroll processing;
client invoicing and collection;
• worksite employee enrollment;
•
•
•
•
• management information and reporting; and
•
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.
Administaff has hosting facilities located at our corporate headquarters in Kingwood, Texas (a suburb of
Houston), and in Bryan, Texas. The hosting facilities house all of our business applications, telecommunications
equipment and network equipment. Each hosting facility houses a mix of primary production applications, disaster
recovery, replication and back-up applications, and pre-production environments. Both hosting facilities are
designed to run all of our critical business applications and have sufficient capacity to handle all of our operations on
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a stand-alone basis, if required. Periodically, we perform testing to ensure the disaster recovery capabilities remain
effective and available. The Company also utilizes additional leased hosting facilities for certain of its sales offices.
We have a state-of-the-art network infrastructure, which ensures appropriate connectivity exists among all
of our facilities and employees, and which provides appropriate Internet connectivity to conduct business with our
clients and worksite employees. 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 Regulations
Administaff’s PEO 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, 37 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 PEO 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:
•
•
•
•
•
•
•
a 401(k) retirement plan;
a cafeteria plan under Code Section 125;
a group health plan, which includes medical, dental, vision and prescription drug coverage, as well as a
worklife program;
a welfare benefits plan, which includes life, disability and accidental death and dismemberment
coverage;
a health care flexible spending account plan;
an educational assistance plan; and
an adoption assistance plan.
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
- 13 -
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
individual’s work. Among the factors that appear to have been considered more important by the IRS are:
•
•
•
the employer’s degree of behavioral control (the extent of instructions, training and the nature of the
work);
the financial control or the economic aspects of the relationship; and
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).
Patient Protection and Affordable Care Act. The Patient Protection and Affordable Care Act (“PPACA”)
was signed into law on March 23, 2010. The PPACA was subsequently amended on March 30, 2010 by the Health
Care and Education Reconciliation Act of 2010 (the “Reconciliation Act”). The PPACA and Reconciliation Act
(collectively the “Act”) entail sweeping health care reforms with staggered effective dates from 2010 through 2018,
and many provisions in the Act require the issuance of additional guidance from the U.S. Department of Labor, the
Internal Revenue Service, the U.S. Department of Health & Human Services, and the states. Because many
provisions of the Act do not become operative until future years, the Act did not have a material adverse impact on
our results of operations in 2010, and we do not expect the Act to have a material adverse impact on our results of
operations in 2011. However, given the length and complexity of the Act, the extended time period over which the
reforms will be implemented, and the unknown impact of yet to be issued regulatory guidance, we are unable to
determine the impact of the Act on our health insurance plan in future periods.
The number and complex nature of federal and state regulations facing employers has continued to increase
over time, including the enactment of the Act. We believe that additional regulatory burdens placed on employers
can increase the demand for our services because small and medium-sized businesses are especially challenged by
such governmental regulations due to limited resources and the lack of expertise. As a co-employer in the PEO
relationship, the Company assumes or shares many of the employer-related responsibilities and assists our clients to
comply with many employment-related governmental regulations. Historically, the Company believes that it has
successfully marketed the compliance component of our service offering and that our compliance-related services
have increased the value proposition of our service offering. However, currently we are unable to determine the
impact the Act will have in future periods on the costs we will incur to comply with the Act, our ability to match any
resulting increased costs with pricing, our ability to attract and retain clients, our business model and our results of
operations.
Our review of the Act is ongoing, but we have initially identified certain provisions that could materially
affect the Company. Beginning in 2010, the Act provides for a small business tax credit for eligible companies
offering health care coverage to employees. Based upon information contained in the Congressional Record, which
specifically references professional employer organizations, we believe that these tax credits will be available to our
clients that meet the qualification requirements. However, the Act and subsequently issued IRS guidance do not
expressly address the issue of whether qualifying small business clients of a professional employer organization are
entitled to the tax credits. At this time, we are unable to determine whether this issue will have an adverse effect on
our operations or our ability to attract and retain clients.
Beginning in 2011, the Act contains a number of mandates for health insurance plans, some of which are
already standard in our group health plan. For mandates not already included, we have worked with our insurance
carriers to incorporate the required changes. One of the 2011 mandates, the requirement to extend dependent child
coverage to age 26, was implemented in the second quarter of 2010 with respect to certain dependent children
already covered under our plan. The Act also provides certain exemptions for “grandfathered plans” in existence on
March 23, 2010. Administaff did not claim a grandfathered plan exemption. While we are unable to determine the
impact of these required plan changes and grandfathered plan rules at this time, in future periods they may result in
increased costs to the Company and could affect our ability to attract and retain clients. Additionally, contractual
- 14 -
arrangements and competitive market conditions may limit or delay our ability to increase service fees to offset the
associated potential increased costs.
Beginning in 2014, the Act provides for the establishment of state insurance exchanges (“Exchanges”) to
make health insurance available to individuals and small employers (initially defined as 100 or less employees).
Small business tax credits and subsidies will be available to qualifying businesses and individuals who purchase
health insurance through the Exchanges. Also in 2014, the Act implements “pay or play” penalties for large
employers (those with at least 50 full-time equivalent employees) who fail to offer “minimum essential coverage” or
affordable coverage to employees. In 2018, the Act implements rules imposing excise taxes on employers who offer
excessive health benefits under so-called “Cadillac plans.” We anticipate taking appropriate steps to avoid, to the
extent necessary and possible, incurring any such excise taxes. At this time, we are unable to determine the effect
the Exchanges, “pay or play” penalties, and excise taxes will have on our costs, our ability to match pricing with any
increased costs, our results of operations and our ability to attract and retain clients.
Moreover, multiple lawsuits challenging the constitutionality of the Act are currently pending in the federal
court system. There have been conflicting rulings issued in these lawsuits as to whether or not certain provisions of
the Act are constitutional. Most recently, on January 31, 2011, a federal court in Florida ruled that the entire Act
was unconstitutional. The final resolution of these legal challenges is subject to the appellate process and may
ultimately require a ruling by the United States Supreme Court.
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 Company’s 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.
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:
• withholding of income tax requirements governed by Code Section 3401, et seq.;
•
•
obligations under FICA, governed by Code Section 3101, et seq.; and
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.
- 15 -
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 Administaff’s prior
years’ compensation experience in each state. Certain rates are determined, in part, by each client’s own
compensation experience. In addition, states have the ability under law to increase unemployment tax rates to cover
deficiencies in the unemployment tax funds. Due to the recent deterioration in U.S. economic activity and the
associated reductions in employment levels, the state unemployment funds have experienced a significant increase
in the number of unemployment claims. Accordingly, state unemployment tax rates increased substantially in 2010
and 2011. 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, 37 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 37 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.
Corporate Office Employees
We had approximately 1,900 corporate employees as of December 31, 2010. We believe our relations with
our corporate employees are good. None of our corporate employees is covered by a collective bargaining
agreement.
Intellectual Property
Administaff currently has registered trademarks, copyrights and other intellectual property. We believe our
trademarks as a whole are of considerable importance to our business.
- 16 -
ITEM 1A. RISK FACTORS.
Factors That May Affect Future Results and the Market Price of Common Stock
Continued Effects of the Economic Recession may Adversely Affect our Industry, Business and Results
of Operations
Over the past several years, the United States economy has experienced negative economic conditions.
Although conditions have improved over the last year, the future economic environment may continue to be less
favorable than in years past. 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. The continued effects of the
economic recession 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 significantly
impacted our 2009 results. The decline in U.S. economic activity and associated reductions in employment levels in
2009 and the latter half of 2008 impacted the Company’s small business customer base and target market. Our
average worksite employees per month in 2009 declined 7.0% compared to 2008. However, during 2010, our
average number of paid worksite employees increased 8.0% from the first quarter of 2010 to 111,249 in the fourth
quarter of 2010. Continued or increased negative economic conditions could have a material adverse effect on our
future financial results.
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:
•
payment of the salaries and wages for work performed by worksite employees, regardless of
whether the client timely pays us the associated service fee;
• withholding and payment of federal and state payroll taxes with respect to wages and salaries
•
reported by Administaff; and
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, 2013, 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
- 17 -
condition or results of operations. For additional information related to our health insurance costs, please read Item
7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting
Policies and Estimates – Benefits Costs,” on page 31.
Health Care Reform could Affect the Company’s Health Insurance Plan
The Patient Protection and Affordable Care Act (“PPACA”) was signed into law on March 23, 2010. The
PPACA was subsequently amended on March 30, 2010 by the Health Care and Education Reconciliation Act of
2010 (the “Reconciliation Act”). The PPACA and Reconciliation Act (collectively the “Act”) entail sweeping
health care reforms with staggered effective dates from 2010 through 2018, and many provisions in the Act require
the issuance of additional guidance from the U.S. Department of Labor, the Internal Revenue Service, the U.S.
Department of Health & Human Services, and the states.
The number and complex nature of federal and state regulations facing employers has continued to increase
over time, including the enactment of the Act. As a co-employer in the PEO relationship, the Company assumes or
shares many of the employer-related responsibilities and assists our clients to comply with many employment-
related governmental regulations. However, currently we are unable to determine the impact the Act will have in
future periods on the costs we will incur to comply with the Act, our ability to match any resulting increased costs
with pricing, our ability to attract and retain clients, our business model and our results of operations.
We are currently unable to determine all of the impacts of the required plan changes and provisions
resulting from the Act. In future periods the changes may result in increased costs to the Company and could affect
our ability to attract and retain clients. Additionally, contractual arrangements and competitive market conditions
may limit or delay our ability to increase service fees to offset any associated potential increased costs. For
additional information related to PPACA, please read Item 1. “Business – Industry Regulations – Patient Protection
and Affordable Care Act,” on page 14.
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 has been provided through an arrangement with ACE since 2007.
Under our current arrangement with ACE, we bear the economic burden for the first $1 million layer of claims per
occurrence and the economic burden for claims over $1 million, up to a maximum aggregate amount of $5 million
per policy year for claims that exceed the first $1 million. ACE bears the burden for all claims in excess of these
levels. 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. “Management’s Discussion and Analysis of Financial Condition and Results of Operations
- Critical Accounting Policies and Estimates – Workers’ Compensation Costs” on page 32.
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, 2011. 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.
- 18 -
Our Ability to Adjust and Collect Service Fees for Increases in Unemployment Tax Rates may be Limited
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 prior years’
compensation experience in each state. Prior to the receipt of final tax rate notices, we estimate our expected SUI
tax rate in those states for which tax rate notices have not yet been received. In addition, some states have the ability
under law to increase unemployment tax rates retroactively to cover deficiencies in the unemployment fund. Due to
the recent deterioration in U.S. economic activity and the associated reductions in employment levels, the state
unemployment funds have experienced a significant increase in the number of unemployment claims. Accordingly,
state unemployment tax rates increased substantially in 2010 and 2011. 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. For
additional information related to state unemployment taxes, please read Note 11 to the financial statements,
“Commitments and Contingencies,” on page F-27.
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 20% in 2010. There can be no assurance that the number of
contract cancellations will continue at these levels and such cancellations may increase in the future due to various
factors, including but not limited to, economic conditions in the markets we operate.
Established Competitors and New Market Entrants may have Greater Resources that Give Them
Competitive Advantage over Us
The human resource services industry, including 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 or larger. We also encounter competition from “fee for service” companies such as payroll
processing firms, insurance companies and human resource consultants. Our competitors include the PEO divisions
of large business services companies, such as Automatic Data Processing, Inc. and Paychex, Inc. The PEO divisions
of such large business services companies with substantially greater resources than Administaff 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 client’s conduct, we may not
be able to collect on such a contractual indemnification claim and thus may be responsible for satisfying such
- 19 -
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.
While many states do not explicitly regulate PEOs, 37 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 13%, 28%
and 16%, respectively, of our worksite employees for the year ended December 31, 2010. 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:
•
•
•
income tax withholding requirements;
obligations under the Federal Income Contribution Act (“FICA”); and
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.
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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-six 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
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, 2010, AIG held funds of $23.2 million, which is included in restricted cash and deposits
on the Company’s 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 Company’s 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 Administaff’s 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 company’s 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
- 21 -
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 “Management’s
Discussion and Analysis of Financial Condition and Results of Operations ─ Critical Accounting Policies and
Estimates ─ Workers’ Compensation Costs” on page 32.
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 Company’s operations could result in increased costs. The Company’s
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.
Failure to Integrate or Realize the Expected Return on Our new Adjacent Business Strategy, Including
Acquisitions, could have a Material and Adverse Impact on our Financial Condition and Results of Operations
We have recently adopted a strategy to market and sell products and services outside of the core PEO
service. As a part of this strategy, periodically we make strategic long-term decisions to invest in and/or acquire
new companies, business units or assets. New business strategies and the acquisition of new businesses involve risk,
including those associated with integrating the operations, technologies and personnel. Failure to effectively
integrate newly acquired businesses could result in us not achieving anticipated revenues and cost savings.
Acquiring new businesses could also result in the loss of customers, employees or the diversion of management’s
attention from other business concerns. 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. The failure to effectively integrate new acquisitions, the diversion of management’s attention from
other business concerns, or the occurrence of an impairment, could have a material adverse effect on our financial
condition or operating results.
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 long-term growth and expansion goals. We believe that short-term leased
facilities are readily available if needed to accommodate near-term needs if they arise. We will continue to evaluate
the need for additional facilities based on the extent of our product and service offerings, the rate of customer
growth, the geographic distribution of our customer 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 a technology hosting facility.
- 22 -
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 34% 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 19% 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 23% 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 24% of our worksite employee
base, is located in a 45,000 square foot facility under lease until 2012.
Sales Offices
As of December 31, 2010, we had PEO sales and service personnel in 36 facilities located in 24 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, 2010, we had 51 sales offices in these
24 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.
Other Offices
We maintain seven leased facilities and one Company-owned facility, which are utilized by various
administrative support personnel as well as ABU operations.
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 11 to financial statements on page F-27, 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, 2010.
- 23 -
ITEM S-K 401 (b). EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth the names, ages (as of February 7, 2011) and positions of the Company’s
executive officers:
Name
Age
Position
Paul J. Sarvadi ....................................... 54 Chairman of the Board and Chief Executive Officer
Richard G. Rawson ................................ 62
A. Steve Arizpe ..................................... 53
Jay E. Mincks ........................................ 57
Douglas S. Sharp ................................... 49
Daniel D. Herink ................................... 44
President
Executive Vice President of Client Services and Chief Operating
Officer
Executive Vice President of Sales and Marketing
Senior Vice President of Finance, Chief Financial Officer and
Treasurer
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. 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 Houston’s
C.T. Bauer College of Business Dean’s 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 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.
- 24 -
Dan Herink joined Administaff in 2000 as Assistant General Counsel and was promoted to Associate General
Counsel in 2002. He was elected to his current position in May 2007. In his prior responsibilities with Administaff,
Herink led the Company’s 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 earned his Bachelor of Science degree in business administration from the University
of Nebraska and a Doctorate of Jurisprudence from the University of Texas School of Law, where he was a member of
the Texas Law Review and The Order of the Coif.
- 25 -
PART II
ITEM 5. MARKET FOR THE REGISTRANT’S 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 7,
2011, there were 357 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.
2010
High
Low
Dividends
per Share
First Quarter ..........................................................................
Second Quarter ......................................................................
Third Quarter .........................................................................
Fourth Quarter .......................................................................
$ 25.16
27.52
29.15
29.72
$ 16.46
21.05
20.74
25.07
2009
First Quarter ..........................................................................
Second Quarter ......................................................................
Third Quarter .........................................................................
Fourth Quarter .......................................................................
$ 24.44
30.63
28.07
27.30
$ 18.04
20.18
20.95
21.90
$
$
0.13
0.13
0.13
0.13
0.13
0.13
0.13
0.13
Dividend Policy
During 2010 and 2009, the Company paid dividends of $13.5 million and $13.3 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, 2010:
Period
10/01/2010 –
10/31/2010
11/01/2010 –
11/30/2010
12/01/2010 –
12/31/2010
Total
Total Number
of Shares
Purchased (1)
Average Price
Paid per Share
Total Number of Shares
Purchased as Part of
Publicly Announced
Program (2)
Maximum Number of
Shares that May Yet
be Purchased Under
the Program (2)
—
—
—
—
$
$
—
—
—
—
12,360,607
12,360,607
12,360,607
12,360,607
1,139,393
1,139,393
1,139,393
1,139,393
(1)
(2)
Since 1999, our Board of Directors has approved the repurchase of up to an aggregate amount of 13,500,000
shares of Administaff common stock, of which 12,360,607 shares had been repurchased as of December 31,
2010. We did not repurchase any shares of common stock during the three months ended December 31,
2010.
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.
- 26 -
Performance Graph
The following graph compares our cumulative total stockholder return since December 31, 2005, with the
Standard & Poor’s Small Cap 600 Index and the Standard & Poor’s 1500 Composite Human Resources and
Employment Services Index. 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, 2005.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Administaff, Inc., the S&P Smallcap 600 Index
and the S&P 1500 Composite Human Resources and Employment Services index
$140
$120
$100
$80
$60
$40
$20
$0
12/05
12/06
12/07
12/08
12/09
12/10
Administaff, Inc.
S&P Smallcap 600
S&P 1500 Composite Human Resources and Employment Services
*$100 invested on 12/31/05 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Copyright© 2011 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
12/05
12/06
12/07
12/08
12/09
12/10
Administaff, Inc.
S&P Smallcap 600
S&P 1500 Composite Human Resources and Employment Services
100.00
100.00
100.00
102.61
115.12
121.73
68.72
114.78
94.73
53.82
79.11
67.34
59.94
99.34
89.90
76.20
125.47
107.11
This graph shall not be deemed “filed” for purposes of Section 18 of the Securities and Exchange Act of 1934, as
amended (the “Exchange Act”), or otherwise subject to the liabilities of that section, nor shall it be deemed
incorporated by reference in any filing under the Securities Act of 1933 or the Exchange Act, regardless of any general
incorporation language in such filing.
- 27 -
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. “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” on page 29.
Income Statement Data:
2010
2009
Year ended December 31,
2008
2007
2006
(in thousands, except per share and statistical data)
Revenues(1) ................................................ $ 1,719,752 $ 1,653,096
287,967
Gross profit ...............................................
27,033
Operating income ......................................
16,574
Net income ................................................
Diluted net income per share(2) .................. $
0.65
298,536
37,060
22,440
0.86 $
Balance Sheet Data:
Working capital ......................................... $ 144,479 $ 127,627
576,470
Total assets ................................................
—
Total debt/capital lease obligations............
223,160
Total stockholders’ equity .........................
0.52
Cash dividends per share ........................... $
659,845
—
240,395
0.52 $
$ 1,724,434
343,739
64,982
45,780
1.76
$
$ 1,569,977
305,922
62,214
47,492
1.72
$
$ 1,389,464
282,729
61,565
46,506
1.63
$
$
$
98,414
616,840
537
208,479
0.48
$
$
97,180
560,651
1,166
198,675
0.44
$ 128,401
561,515
1,749
228,445
0.36
$
Statistical Data:
Average number of worksite employees
paid per month during period .................
Revenues per worksite employee
per month(3) ............................................
Gross profit per worksite employee
per month ...............................................
Operating income per worksite employee
per month ...............................................
_________________
$
$
$
107,014
108,736
116,957
110,291
100,675
1,339
$
1,267
232
$
221
29
$
21
$
$
$
1,229
245
46
$
$
$
1,186
231
47
$
$
$
1,150
234
51
(1)
(2)
(3)
Gross billings of $10.169 billion, $9.856 billion, $10.372 billion, $9.437 billion and $8.055 billion, less
worksite employee payroll cost of $8.449 billion, $8.203 billion, $8.648 billion, $7.867 billion and $6.666
billion, respectively.
Diluted net income per share has been reduced by the following amounts to reflect the two-class earnings per
share method: 2009 - $0.01; 2008 - $0.03; 2007 - $0.02; and 2006 - $0.01.
Gross billings of $7,919, $7,553, $7,391, $7,130 and $6,667 per worksite employee per month, less payroll cost
of $6,580, $6,286, $6,162, $5,944 and $5,517 per worksite employee per month, respectively.
- 28 -
ITEM 7. MANAGEMENT’S 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 Item 1A. Risk
Factors on page 17 and the uncertainties set forth from time to time in our other public reports and filings and public
statements.
Overview
Our PEO services 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 and medium-sized 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.
While the decline in U.S. economic activity and the associated reductions in employment levels significantly
impacted us in 2009, we implemented strategic plans to minimize the impact of these developments in 2010. Our
business plan included, but was not limited to, an increase in our comprehensive service fee in an attempt to recover
the higher costs associated with higher COBRA enrollment, and reductions in operating expenses through a 5%
reduction in workforce.
We ended 2010 averaging 111,249 paid worksite employees in the fourth quarter, which represents an 8.0%
increase over the first quarter of 2010. Approximately 15% of our paid worksite employees are in our mid-market
sector, which is defined as companies with 150 to 2,000 worksite employees. Our paid mid-market worksite
employees increased 11% in 2010 over 2009. We expect the average number of paid worksite employees to increase
to a range of 112,500 to 113,000 in the first quarter of 2011.
Our 2010 average gross profit per worksite employee per month was $232, an $11 increase over 2009.
Higher gross profit per worksite employee per month in 2010 compared to 2009 was primarily the result of a $72
revenue increase, which was offset by a $61 direct cost increase. The direct cost increase was due primarily to
expected increases in medical and payroll tax costs.
Operating expenses were relatively flat in 2010 at $261.5 million; however, this amount includes
approximately $5.0 million associated with acquisition costs and operating expenses related to two acquisitions made
during the year. On a per worksite employee per month basis, operating expenses increased from $200 in 2009 to
$204 in 2010.
Our net income in 2010 was $22.4 million, a $5.9 million increase compared to 2009. We ended 2010 with
working capital of $144.5 million. During 2010, we paid $13.5 million in dividends and repurchased shares at a cost
of $7.9 million.
- 29 -
Revenues
We account for our revenues in accordance with Accounting Standards Codification (“ASC”) 605-45,
Revenue Recognition. Our PEO 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 employee’s 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 PEO revenue-generating activities are:
employment-related taxes (“payroll taxes”);
costs of employee benefit plans; and
•
•
• workers’ compensation costs.
Payroll taxes consist of the employer’s 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 PEO 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.
• 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.
- 30 -
• 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, and
acquisition transaction expenses;
administrative costs, such as postage, printing and supplies;
employee travel expenses; and
repairs and maintenance costs.
• Commissions – Commission expense consists of amounts paid to sales managers and representatives.
Commissions are based on the number of new accounts sold and 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
Administaff’s 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
Administaff’s 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, Unity Health Plans and Tufts, all of which provide fully insured
policies or service contracts.
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) estimated completion rates based upon recent claim development patterns under
the plan; and (iii) the number of participants in the plan, including both active and COBRA enrollees.
- 31 -
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 plan’s 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, 2010, Plan Costs were less than the premiums paid and owed to United by
$28.9 million. As this amount is in excess of the agreed-upon $9.0 million surplus maintenance level, the $19.9
million balance is included in prepaid insurance, a current asset, on our Consolidated Balance Sheet. The
premiums owed to United at December 31, 2010, were $12.1 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 $759.5 million in 2010:
Change in
Completion Rate
(2.5)%
(1.0)%
1.0%
2.5%
Change in
Benefits Costs
(in thousands)
$
(12,832)
(5,133)
5,133
12,832
Change in
Net Income
(in thousands)
$ 7,571
3,028
(3,028)
(7,571)
• Workers’ compensation costs – Since October 1, 2007, our workers’ compensation coverage has been provided
through our arrangement with the 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, and
effective October 1, 2010, we also bear the economic burden for a maximum aggregate amount of $5 million per
policy year for claim amounts that exceed the first $1 million. ACE bears the economic burden for all claims in
excess of these levels. 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. 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”).
Because we bear the economic burden for claims up to the levels noted above, 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.
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 Company’s workers’ compensation claims cost estimates. During the years ended December 31, 2010
and 2009, Administaff reduced accrued workers’ compensation costs by $6.2 million and $5.7 million,
respectively, for changes in estimated losses related to prior reporting periods. Workers’ compensation cost
- 32 -
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 2010 and 2009 was 1.4%
and 1.8%, 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 $45.6 million in 2010:
Change in Loss
Development Rate
Change in Workers’
Compensation Costs
(in thousands)
(5.0)%
(2.5)%
2.5%
5.0%
$
(1,841)
(920)
920
1,841
Change in
Net Income
(in thousands)
$
1,086
543
(543)
(1,086)
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. In 2010, we received $15.6 million for the
return of excess claim funds related to the ACE program, which reduced deposits. As of December 31, 2010, we
had restricted cash of $41.2 million and deposits of $51.7 million. We have estimated and accrued $96.9 million
in incurred workers’ compensation claim costs as of December 31, 2010. 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.
- 33 -
• 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 PEO 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 client’s 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
We believe that we have implemented the accounting pronouncements with a material impact on our financial
statement and do not believe there are any new or pending announcements that will materially impact our financial
position or results of operations.
- 34 -
Results of Operations
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009.
The following table presents certain information related to the Company’s results of operations for the years
ended December 31, 2010 and 2009.
Year ended December 31,
2009
2010
% Change
(in thousands, except per share and statistical data)
Revenues (gross billings of $10.169 billion and $9.856
billion, less worksite employee payroll cost of $8.449
billion and $8.203 billion, respectively) ...........................
Gross profit ...........................................................................
Operating expenses ...............................................................
Operating income .................................................................
Other income ........................................................................
Net income ............................................................................
Diluted net income per share of common stock ....................
Statistical Data:
Average number of worksite employees paid per month .....
Revenues per worksite employee per month(1) .....................
Gross profit per worksite employee per month .....................
Operating expenses per worksite employee per month ........
Operating income per worksite employee per month ...........
Net income per worksite employee per month .....................
_______________
$ 1,719,752
298,536
261,476
37,060
961
22,440
0.86
$ 1,653,096
287,967
260,934
27,033
1,616
16,574
0.65
$
107,014
1,339
232
204
29
17
$
108,736
1,267
221
200
21
13
4.0%
3.7%
0.2%
37.1%
(40.5)%
35.4%
32.3%
(1.6)%
5.7%
5.0%
2.0%
38.1%
30.8%
(1) Gross billings of $7,919 and $7,553 per worksite employee per month, less payroll cost of $6,580 and $6,286 per
worksite employee per month, respectively.
Revenues
Our revenues, which represent gross billings net of worksite employee payroll cost, increased 4.0% compared
to 2009, due to a 5.7%, or $72 increase in revenues per worksite employee per month, offset in part by a 1.6%
decrease in the average number of worksite employees paid per month. The 5.7% increase in revenues per worksite
employee per month was due primarily to increases in the benefits and payroll tax pricing to offset anticipated
increases in these direct costs.
By region, our revenue change from 2009 and revenue distribution for years ended December 31, 2010 and
2009 were as follows:
2010
Year ended December 31,
2009
(in thousands)
% Change
Northeast............................... $
Southeast...............................
Central ..................................
Southwest .............................
West ......................................
412,233
184,223
251,756
522,518
331,916
1,702,646
17,106
Other revenue .......................
Total revenue ........................ $ 1,719,752
$ 369,761
182,888
248,544
518,828
321,935
1,641,956
11,140
$ 1,653,096
11.5%
0.7%
1.3%
0.7%
3.1%
3.7%
53.6%
4.0%
- 35 -
Year ended December 31,
2010
2009
( % of total revenue)
24.2%
10.8%
14.8%
30.7%
19.5%
100.0%
22.5%
11.1%
15.2%
31.6%
19.6%
100.0%
Our growth in the number of worksite employees paid 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. In 2010, our
average number of paid worksite employees decreased 1.6% compared to 2009. However, during 2010 our average
number of paid worksite employees increased 8.0% from the first quarter of 2010 to 111,249 in the fourth quarter of
2010, as the net change in existing clients, new client sales and client retention improved throughout 2010.
Gross Profit
Gross profit increased 3.7% to $298.5 million compared to 2009. The average gross profit per worksite
employee increased 5.0% to $232 per month in 2010 versus $221 in 2009. 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 5.7% to $1,339 on 2010 versus 2009, our
direct costs, which primarily include payroll taxes, benefits and workers’ compensation expenses, increased 5.8% to
$1,107 per worksite employee per month. The primary direct cost components changed as follows:
• Benefits costs – The cost of group health insurance and related employee benefits increased $29 per worksite
employee per month, or 6.0%, on a per covered employee basis compared to 2009. This increase was due to
expected medical cost increases, as well as higher claims associated with increased COBRA participation
resulting from the severe economic environment and the American Recovery and Reinvestment Act of 2009, as
amended (“ARRA”). ARRA provided a federal subsidy for COBRA premiums and extended the election period
for certain terminated employees. The net costs of claims per COBRA enrollee are approximately double the cost
of claims associated with active enrollees. The number of individuals electing COBRA coverage has declined
from 7.2% in the fourth quarter of 2009 to 5.5% in the fourth quarter of 2010. The percentage of worksite
employees covered under our health insurance plan was 74.3% in 2010 versus 74.8% in 2009. Please read “—
Critical Accounting Policies and Estimates – Benefits Costs” on page 31 for a discussion of our accounting for
health insurance costs.
• Workers’ compensation costs – Workers’ compensation costs decreased 4.1%, but increased $1 per worksite
employee per month compared to 2009. As a percentage of non-bonus payroll cost, workers’ compensation costs
decreased to 0.60% in 2010 from 0.64% in 2009. During 2010, the Company recorded reductions in workers’
compensation costs of $6.2 million, or 0.08% of non-bonus payroll costs, for changes in estimated losses related
to prior reporting periods, compared to $5.7 million, or 0.08% of non-bonus payroll costs in 2009. The 2010
period costs include the impact of a 1.4% discount rate used to accrue workers’ compensation loss claims,
compared to a 1.8% discount rate used in the 2009 period. Please read “—Critical Accounting Policies and
Estimates – Workers’ Compensation Costs” on page 32 for a discussion of our accounting for workers’
compensation costs.
• Payroll tax costs – Payroll taxes increased 5.3%, or $31 per worksite employee per month compared to 2009.
Payroll taxes as a percentage of payroll cost increased from 6.96% in 2009 to 7.11% in 2010. The increases in
payroll tax costs were due primarily to higher state unemployment tax rates, which increased approximately 50%
over the 2009 period as a result of unemployment claims experienced during the economic recession and a 4.7%
increase in average payroll cost per worksite employee per month.
- 36 -
Operating Expenses
The following table presents certain information related to our operating expenses for the years ended
December 31, 2010 and 2009.
Year ended December 31,
2010
2009
(in thousands)
% Change
Year ended December 31,
2010
2009 % Change
(per worksite employee per month)
Salaries, wages and payroll taxes
Stock–based compensation
General and administrative expenses
Commissions
Advertising
Depreciation and amortization
Total operating expenses
$ 146,901
8,126
63,214
11,881
16,447
14,907
$ 261,476
$ 144,086
10,064
62,381
11,800
16,011
16,592
$ 260,934
2.0%
(19.3)%
1.3%
0.7%
2.7%
(10.2)%
0.2%
$
$
115
6
49
9
13
12
204
$
$
110
8
48
9
12
13
200
4.5%
(25.0)%
2.1%
—
8.3%
(7.7)%
2.0%
Operating expenses of $261.5 million were relatively flat compared to 2009. The 2010 operating expenses
included $5.0 million related to acquisition costs and ongoing operating expenses associated with the ExpensAble and
Galaxy Technologies acquisitions. Operating expenses per worksite employee per month increased to $204 in 2010
versus $200 in 2009. The components of operating expenses changed as follows:
• Salaries, wages and payroll taxes of corporate and sales staff increased 2.0%, or $5 per worksite employee per
month compared to 2009, primarily due to an increase in our incentive compensation accrual associated with
our improved operating results compared to 2009.
• Stock-based compensation decreased 19.3%, or $2 per worksite employee per month compared to 2009, due
primarily to a large number of forfeitures in 2010 as a result of employee terminations. 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 increased 1.3%, or $1 per worksite employee per month.
• Commissions expense increased 0.7%, but remained flat on a per worksite employee per month basis compared to
2009.
• Advertising costs increased 2.7%, or $1 per worksite employee per month compared to 2009.
• Depreciation and amortization expense decreased 10.2%, or $1 per worksite employee per month compared to the
2009 period, due primarily to the reduction in capital expenditures during 2009 and 2010.
Other Income
Other income decreased to $961,000 in 2010 compared to $1.6 million in 2009, due to the continued decline
in interest rates.
Income Tax Expense
During 2010 we incurred federal and state income tax expense of $15.6 million on pre-tax income of $38.0
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 slightly by tax-exempt interest income. Our effective income tax rate was 41.0%
in the 2010 period compared to 42.1% in the 2009 period.
- 37 -
Net Income
Net income for 2010 was $22.4 million, or $0.86 per diluted share, compared to $16.6 million, or $0.65 per
diluted share in 2009. On a per worksite employee per month basis, net income was $17 in 2010 compared to $13 in
2009.
Results of Operations
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008.
The following table presents certain information related to the Company’s results of operations for the years
ended December 31, 2009 and 2008.
Year ended December 31,
2008
2009
% 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) ...........................
Gross profit ...........................................................................
Operating expenses ...............................................................
Operating income .................................................................
Other income ........................................................................
Net income ............................................................................
Diluted net income per share of common stock ....................
Statistical Data:
Average number of worksite employees paid per month .....
Revenues per worksite employee per month(1) .....................
Gross profit per worksite employee per month .....................
Operating expenses per worksite employee per month ........
Operating income per worksite employee per month ...........
Net income per worksite employee per month .....................
_______________
$ 1,653,096
287,967
260,934
27,033
1,616
16,574
0.65
$ 1,724,434
343,739
278,757
64,982
7,035
45,780
1.76
$
108,736
1,267
221
200
21
13
$
116,957
1,229
245
199
46
33
(4.1)%
(16.2)%
(6.4)%
(58.4)%
(77.0)%
(63.8)%
(63.1)%
(7.0)%
3.1%
(9.8)%
0.5%
(54.3)%
(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.
- 38 -
By region, our revenue change from 2008 and revenue distribution for years ended December 31, 2009 and
2008 were as follows:
2009
Year ended December 31,
2008
(in thousands)
% Change
Northeast............................... $
Southeast...............................
Central ..................................
Southwest .............................
West ......................................
363,268
183,091
249,145
569,655
345,736
1,710,895
13,539
Other revenue .......................
Total revenue ........................ $ 1,653,096 $ 1,724,434
369,761 $
182,888
248,544
518,828
321,935
1,641,956
11,140
1.8%
(0.1)%
(0.2)%
(8.9)%
(6.9)%
(4.0)%
(17.7)%
(4.1)%
Year ended December 31,
2009
2008
( % of total revenue)
22.5%
11.1%
15.2%
31.6%
19.6%
100.0%
21.2%
10.7%
14.6%
33.3%
20.2%
100.0%
Our growth in the number of paid worksite employees 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.
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% to $1,267 in 2009 versus 2008, our
direct costs, which primarily include payroll taxes, benefits and workers’ compensation expenses, increased 6.3% to
$1,046 per worksite employee per month. 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 ARRA. ARRA provided a federal subsidy for
COBRA premiums and extended the election period for certain terminated employees. 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. 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 31 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 32 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.
- 39 -
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,
2009
2008
(in thousands)
% Change
Year ended December 31,
2009
2008 % Change
(per worksite employee per month)
Salaries, wages and payroll taxes
Stock–based compensation
General and administrative expenses
Commissions
Advertising
Depreciation and amortization
Total operating expenses
$ 144,086
10,064
62,381
11,800
16,011
16,592
$ 260,934
$ 153,538
9,970
69,348
12,665
17,666
15,570
$ 278,757
(6.2)%
0.9%
(10.0)%
(6.8)%
(9.4)%
6.6%
(6.4)%
$
$
110
8
48
9
12
13
200
$
$
110
7
49
9
13
11
199
—
14.3%
(2.0)%
—
(7.7)%
18.2%
0.5%
Operating expenses decreased 6.4% to $260.9 million in 2009 compared to 2008. 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.
- 40 -
Net Income
Net income for 2009 was $16.6 million, or $0.65 per diluted share, compared to $45.8 million, or $1.76 per
diluted share in 2008. On a per worksite employee per month basis, net income was $13 in 2009 compared to $33 in
2008.
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,
% Change
2009
(in thousands, except per worksite employee)
2010
GAAP to non-GAAP reconciliation:
Payroll cost (GAAP)
Less: bonus payroll cost
Non-bonus payroll cost
$ 8,449,484
839,066
$ 7,610,418
$ 8,202,743
750,351
$ 7,452,392
Payroll cost per worksite employee (GAAP)
$
6,580
$
6,286
Less: Bonus payroll cost per worksite employee
Non-bonus payroll cost per worksite employee $
654
5,926
$
575
5,711
3.0%
11.8%
2.1%
4.7%
13.7%
3.8%
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, potential acquisitions, 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 or significant acquisitions 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 $278.2 million in cash, cash equivalents and
marketable securities at December 31, 2010, of which approximately $128.8 million was payable in early January
2011 for withheld federal and state income taxes, employment taxes and other payroll deductions, and $8.1 million in
customer prepayments that were payable in January 2011. At December 31, 2010, we had working capital of $144.5
million compared to $127.6 million at December 31, 2009. We currently believe that our cash on hand, marketable
securities and cash flows from operations will be adequate to meet our liquidity requirements for 2011. 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.
- 41 -
Cash Flows from Operating Activities
Our cash flows from operating activities in 2010 were $78.8 million. Our primary source of cash from
operations is the comprehensive service fee and payroll funding we collect from our PEO 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
client’s 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, 2010, which ended on a Friday, client prepayments were $8.1 million and accrued worksite
employee payroll was $109.7 million. 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.
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 $40.3 million in 2010 and $43.4 million in 2009. However, our estimates of
workers’ compensation loss costs were $32.7 million and $33.3 million in 2010 and 2009, respectively.
During 2010 and 2009, we received $15.6 million and $17.0 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 health care 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 $28.9 million surplus, $19.9 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, 2010. The premiums owed to United at December 31, 2010,
were $12.1 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
increased 35.4% to $22.4 million in 2010 from $16.6 million in 2009. Please read “Results of Operations –
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009” on page 35.
Cash Flows Used in Investing Activities
Our cash flows used in investing activities were $58.6 million during 2010. We invested $39.0 million, net,
in marketable securities, $12.9 million in acquisitions and $6.8 million in capital expenditures.
Cash Flows Used in Financing Activities
Our cash flows used in financing activities were $12.5 million during 2010, primarily due to $13.5 million in
dividends paid.
- 42 -
Contractual Obligations and Commercial Commitments
The following table summarizes our contractual obligations and commercial commitments as of
December 31, 2010, and the effect they are expected to have on our liquidity and capital resources (in thousands):
Contractual obligations:
Total
Less than
1 Year
1-3 Years
3-5 Years
More than
5 Years
Non-cancelable operating leases
Purchase obligations (1)
Other long-term liabilities:
$ 50,129
12,192
$ 14,116
4,861
$ 22,006
2,771
$ 10,163
1,410
$ 3,844
3,150
Accrued workers’ compensation
claim costs(2)
Estimated acquisition payouts(3)
Total contractual cash
96,934
3,897
39,204
2,636
25,386
1,261
22,596
—
9,748
—
obligations
$ 163,152
$ 60,817
$ 51,424
$ 34,169
$ 16,742
(1)
(2)
The table includes purchase obligations associated with non-cancelable contracts individually greater than
$100,000 and one year.
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 32.
(3) Estimated acquisition costs include short and long-term amounts estimated to be paid in connection with earn
outs and contractual arrangements. For additional discussion on acquisition costs, please read Note 5,
“Acquisitions,” on page F-21.
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.
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 maximize 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,
which are primarily prefunded municipal bonds that are secured by escrow funds containing U.S. Government
Securities.
The following table presents information about our available-for-sale marketable securities as of December
31, 2010 (dollars in thousands):
Principal
Maturities
Coupon
Interest Rate
Effective
Yield
2011
2012
Total
Fair Market Value
$ 32,480
9,150
$ 41,630
$ 43,367
5.75%
5.88%
5.78%
0.57%
0.89%
0.64%
- 43 -
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, 2010.
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 management’s
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, 2010. Ernst & Young, LLP, our independent registered public accounting firm, also
attested to our internal control over financial reporting. Management’s report and the independent registered public
accounting firm’s attestation report are included in our 2010 Consolidated Financial Statements on pages F-3 and F-4
under the captions entitled “Management’s 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, 2010, that has materially affected, or is reasonably likely to materially affect, our internal
controls over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
- 44 -
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
2014 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 website at
www.administaff.com. Changes in and waivers to the Code of Ethics for the Company’s directors, executive officers
and certain senior financial officers will be posted on our Internet website within five business days and maintained for
at least 12 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 4: 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.
- 45 -
ITEM 15. EXHIBITS FINANCIAL STATEMENT SCHEDULES.
(a)
1.
Financial Statements of the Company
PART IV
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.
(a)
2.
Financial Statement Schedules
The required information is included in the Consolidated Financial Statements or Notes thereto.
(a)
3.
List of Exhibits
3.1
3.2
3.3
4.1
4.2
4.3
10.1†
10.2†
10.3†
10.4†
10.5†
10.6†
10.7†
10.8†
10.9†
Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the
Registrant’s Registration Statement on Form S-1 (No. 33-96952)).
Amended and Restated Bylaws of Administaff, Inc. dated November 13, 2007
(incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-
K filed on November 16, 2007).
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).
Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the
Registrant’s Registration Statement on Form S-1 (No. 33-96952)).
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 Registrant’s Current Report on Form 8-
K filed on November 16, 2007).
Form of Rights Certificate (included as Exhibit B to the Rights Agreement).
Administaff, Inc. 1997 Incentive Plan (incorporated by reference to Exhibit 99.1 to the
Registrant’s Registration Statement on Form S-8 (No. 333-85151)).
First Amendment to the Administaff, Inc. 1997 Incentive Plan (incorporated by
reference to Exhibit 99.2 to the Registrant’s Registration Statement on Form S-8 (No.
333-85151)).
Second Amendment to the Administaff, Inc. 1997 Incentive Plan (incorporated by
reference to Exhibit 99.3 to the Registrant’s Registration Statement on Form S-8 (No.
333-85151)).
Third Amendment to the Administaff, Inc. 1997 Incentive Plan (incorporated by
reference to Exhibit 99.4 to the Registrant’s Registration Statement on Form S-8 (No.
333-85151)).
Fourth Amendment to the Administaff, Inc. 1997 Incentive Plan (incorporated by
reference to Exhibit 99.5 to the Registrant’s Registration Statement on Form S-8 (No.
333-85151)).
Administaff, Inc. 2001 Incentive Plan, as amended and restated (incorporated by
reference to Appendix A to the Registrant’s definitive proxy statement on Schedule
14A filed on March 18, 2009 (No. 1-13998)).
Form of Incentive Stock Option Agreement (1997 Plan) (incorporated by reference to
Exhibit 10.7 to the Registrant’s Form 10-K filed for the year ended December 31,
2004).
Form of Incentive Stock Option Agreement (2001 Plan – 3 year vesting) (incorporated
by reference to Exhibit 10.8 to the Registrant’s Form 10-K filed for the year ended
December 31, 2004).
Form of Incentive Stock Option Agreement (2001 Plan – 5 year vesting) (incorporated
by reference to Exhibit 10.9 to the Registrant’s Form 10-K filed for the year ended
December 31, 2004).
- 46 -
10.10†
10.11†
10.12†
10.13
10.14
10.15
10.16
10.17
10.18
10.19†
10.20
Form of Director Stock Option Agreement (Initial Grant) (incorporated by reference to
Exhibit 10.10 to the Registrant’s Form 10-K filed for the year ended December 31,
2004).
Form of Director Stock Option Agreement (Annual Grant) (incorporated by reference
to Exhibit 10.11 to the Registrant’s Form 10-K filed for the year ended December 31,
2004).
Form of Restricted Stock Agreement (incorporated by reference to Exhibit 10.12 to the
Registrant’s Form 10-K filed for the year ended December 31, 2004).
Administaff, Inc. Nonqualified Stock Option Plan (incorporated by reference to Exhibit
99.6 to the Registrant’s Registration Statement on Form S-8 (No. 333-85151)).
First Amendment to Administaff, Inc. Nonqualified Stock Option Plan, effective
August 7, 2001 (incorporated by reference to Exhibit 10.8 to the Registrant’s Form 10-
K for the year ended December 31, 2002).
Second Amendment to Administaff, Inc. Nonqualified Stock Option Plan, effective
January 28, 2003 (incorporated by reference to Exhibit 10.9 to the Registrant’s Form
10-K for the year ended December 31, 2002).
Administaff, Inc. Amended and Restated Employee Stock Purchase Plan effective
April 1, 2002 (incorporated by reference to Exhibit 10.10 to the Registrant’s Form 10-
K for the year ended December 31, 2002).
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 Registrant’s Form 10-K for the year ended December 31, 2002).
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 Registrant’s Form 10-K for the year ended December 31, 2003).
Board of Directors Compensation Arrangements (incorporated by reference to Form 8-
K dated February 7, 2005).
Administaff, Inc. 2008 Employee Stock Purchase Plan (incorporated by reference to
Exhibit 10.1 to the Registrant’s 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 Registrant’s 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 Registrant’s 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 Registrant’s Form 10-Q for the
quarter ended June 30, 2002).
10.24(+) Amendment to Various Agreements between United Healthcare Insurance Company
10.25
and Administaff of Texas, Inc. (incorporated by reference to Exhibit 10.1 to the
Registrant’s Form 10-Q for the quarter ended June 30, 2005).
Houston Service Center Operating Lease Amendment (incorporated by reference to
Exhibit 10.27 to the Registrant’s 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
Registrant’s 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
Registrant’s Form 10-Q for the quarter ended June 30, 2007).
- 47 -
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
Registrant’s Form 10-Q for the quarter ended June 30, 2007).
10.29(+)* Letter Agreement dated October 1, 2010, between Administaff of Texas, Inc. and
31.2*
21.1*
23.1*
24.1*
31.1*
UnitedHealthcare Insurance Company.
Subsidiaries of Administaff, Inc.
Consent of Independent Registered Public Accounting Firm.
Powers of Attorney.
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
101.INS** XBRL Instance Document.
101.SCH** XBRL Taxonomy Schema Document.
101.DEF** XBRL Extension Definition Document.
_____________________
32.1*
32.2*
*
**
(1)
†
(+)
Filed herewith.
Filed electronically with this report.
Attached as exhibit 101 to this report are the following documents formatted in XBRL
(Extensible Business Reporting Language): (i) the Consolidated Statements of Operations
for the years ended December 31, 2010, 2009 and 2008; (ii) the Consolidated Balance
Sheets at December 31, 2010 and 2009; and (iii) the Consolidated Statements of Cash
Flows for the years ended December 31, 2010, 2009 and 2008. Users of this data are
advised pursuant to Rule 406T of Regulation S-T this interactive data file is deemed not
filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the
Securities Act of 1933, additionally the data is deemed not filed for purposes of Section 18
of the Securities Exchange Act of 1934, and is not subject to liability under these sections.
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.
- 48 -
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 14, 2011.
ADMINISTAFF, INC.
By: /s/Douglas S. Sharp
Douglas S. Sharp
Senior Vice President of 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 14, 2011:
Title
Chairman of the Board, Chief Executive Officer
and Director
(Principal Executive Officer)
President and Director
Senior Vice President of Finance
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Signature
/s/Paul J. Sarvadi
Paul J. Sarvadi
/s/Richard G.Rawson
Richard G. Rawson
/s/Douglas S.Sharp
Douglas S. Sharp
*
Michael W. Brown
*
Jack M. Fields, Jr.
Eli Jones
*
*
Paul S. Lattanzio
*
Gregory E. Petsch
*
Austin P. Young
* By: /s/ Daniel D. Herink
Daniel D. Herink, attorney-in-fact
Director
- 49 -
Director
Director
Director
Director
Director
Director
ADMINISTAFF, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm ...................................................................................... F-2
Management’s Report on Internal Control ................................................................................................................ F-3
Report of Independent Registered Public Accounting Firm
on Internal Control over Financial Reporting......................................................................................................... F-4
Consolidated Balance Sheets as of December 31, 2010 and 2009 ............................................................................. F-5
Consolidated Statements of Operations for the years ended
December 31, 2010, 2009 and 2008 ....................................................................................................................... F-7
Consolidated Statements of Stockholders’ Equity for the years ended
December 31, 2010, 2009 and 2008 ....................................................................................................................... F-8
Consolidated Statements of Cash Flows for the years ended
December 31, 2010, 2009 and 2008 ..................................................................................................................... F-10
Notes to Consolidated Financial Statements ............................................................................................................ 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, 2010 and
2009, and the related Consolidated Statements of Operations, Stockholders’ Equity and Cash Flows for each of the
three years in the period ended December 31, 2010. These financial statements are the responsibility of the
Company’s 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 financial statements referred to above present fairly, in all material respects, the consolidated
financial position of Administaff, Inc. at December 31, 2010 and 2009, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31, 2010, 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, 2010, 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 14, 2011 expressed an unqualified opinion thereon.
/s/Ernst & Young LLP
Houston, Texas
February 14, 2011
F-2
MANAGEMENT’S REPORT ON INTERNAL CONTROL
The Company has assessed the effectiveness of its internal control over financial reporting as of December 31, 2010
based on criteria established by Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO Framework”). The Company’s management is responsible for
establishing and maintaining adequate internal controls over financial reporting. The Company’s independent
registered public accountants that audited the Company’s financial statements as of December 31, 2010 have issued
an attestation report on management’s assessment of the effectiveness of the Company’s 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 company’s 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 Company’s 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 management’s opinion, the Company
has maintained effective internal control over financial reporting as of December 31, 2010, based on criteria
established in the COSO Framework.
/s/Paul J.Sarvadi
Paul J. Sarvadi
Chairman of the Board and
Chief Executive Officer
/s/Douglas S. Sharp
Douglas S. Sharp
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, 2010, based on
criteria established in Internal Control—Integrated 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 Management’s Report on Internal Control. Our
responsibility is to express an opinion on the company’s 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 company’s 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 company’s 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 company’s 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, 2010, 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, 2010 and 2009, and the related
Consolidated Statements of Operations, Stockholders’ Equity, and Cash Flows for each of the three years in the
period ended December 31, 2010 of Administaff, Inc. and our report dated February 14, 2011 expressed an
unqualified opinion thereon.
/s/Ernst & Young LLP
Houston, Texas
February 14, 2011
F-4
ADMINISTAFF, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
December 31,
2010
December 31,
2009
Current assets:
Cash and cash equivalents ...........................................................
Restricted cash .............................................................................
Marketable securities ...................................................................
$
Accounts receivable, net:
Trade ....................................................................................
Unbilled ................................................................................
Other .....................................................................................
Prepaid insurance .........................................................................
Other current assets ......................................................................
Income taxes receivable ...............................................................
Deferred income taxes .................................................................
Total current assets ...............................................................
Property and equipment:
Land .............................................................................................
Buildings and improvements .......................................................
Computer hardware and software ................................................
Software development costs ........................................................
Furniture and fixtures ..................................................................
Aircraft ........................................................................................
Accumulated depreciation and amortization .......................................
Total property and equipment, net ........................................
Other assets:
Prepaid health insurance ..............................................................
Deposits – health insurance .........................................................
Deposits – workers’ compensation ..............................................
Goodwill and other intangible assets, net ....................................
Other assets ..................................................................................
Total other assets ..................................................................
Total assets .......................................................................
$
234,829
41,204
43,367
1,194
134,187
6,726
24,978
8,528
1,808
1,267
498,088
3,260
64,953
67,714
27,482
35,164
31,524
230,097
(154,070)
76,027
9,000
2,640
51,731
21,251
1,108
85,730
659,845
$
$
227,085
36,436
6,037
2,899
106,601
13,092
14,484
6,317
2,692
2,578
418,221
3,260
64,692
65,980
25,372
35,499
31,524
226,327
(145,153)
81,174
9,000
2,785
55,744
8,487
1,059
77,075
576,470
F-5
ADMINISTAFF, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands)
LIABILITIES AND STOCKHOLDERS’ EQUITY
December 31,
2010
December 31,
2009
Current liabilities:
Accounts payable ............................................................................
Payroll taxes and other payroll deductions payable ........................
Accrued worksite employee payroll cost ........................................
Accrued health insurance costs .......................................................
Accrued workers’ compensation costs ............................................
Accrued corporate payroll and commissions ..................................
Other accrued liabilities ..................................................................
Total current liabilities .............................................................
$
Noncurrent liabilities:
Accrued workers’ compensation costs ............................................
Other accrued liabilities ..................................................................
Deferred income taxes ....................................................................
Total noncurrent liabilities .......................................................
3,309
145,096
109,697
15,419
42,081
23,743
14,264
353,609
55,730
1,261
8,850
65,841
$
1,857
127,597
93,138
6,374
37,049
16,178
8,401
290,594
52,014
—
10,702
62,716
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, 2010 and 2009 .............
Additional paid-in capital ...............................................................
Treasury stock, at cost – 4,757 and 5,226 shares at December 31,
2010 and 2009, respectively ........................................................
Accumulated other comprehensive income, net of tax ...................
Retained earnings ...........................................................................
Total stockholders’ equity .......................................................
Total liabilities and stockholders’ equity ..............................
—
—
309
135,607
(124,464)
21
228,922
240,395
659,845
$
309
138,551
(135,712)
3
220,009
223,160
576,470
$
See accompanying notes.
F-6
ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Revenues (gross billings of $10.169 billion, $9.856
billion and $10.372 billion, less worksite employee
payroll cost of $8.449 billion, $8.203 billion and
$8.648 billion, respectively) ..........................................
Direct costs:
Payroll taxes, benefits and workers’
Year ended December 31,
2010
2009
2008
$ 1,719,752
$ 1,653,096
$
1,724,434
compensation costs.....................................................
Gross profit .......................................................................
1,421,216
298,536
1,365,129
287,967
1,380,695
343,739
Operating expenses:
Salaries, wages and payroll taxes ..................................
Stock-based compensation .............................................
General and administrative expenses .............................
Commissions .................................................................
Advertising ....................................................................
Depreciation and amortization .......................................
Operating income ..............................................................
146,901
8,126
63,214
11,881
16,447
14,907
261,476
37,060
Other income:
Interest income ..............................................................
961
Income before income tax expense ...................................
38,021
Income tax expense ...........................................................
15,581
144,086
10,064
62,381
11,800
16,011
16,592
260,934
27,033
1,616
28,649
12,075
Net income ........................................................................ $
22,440
$
16,574
Basic net income per share of common stock ................... $
0.86
$
Diluted net income per share of common stock ................ $
0.86
$
0.65
0.65
$
$
$
153,538
9,970
69,348
12,665
17,666
15,570
278,757
64,982
7,035
72,017
26,237
45,780
1.78
1.76
See accompanying notes.
F-7
ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
Common Stock
Issued
Shares Amount
Additional
Paid-In
Capital
Treasury
Stock
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
Total
30,839
$ 309
$ 138,640
$ (123,600)
$
5
$ 183,321
$ 198,675
―
―
―
―
―
(2,415)
(38,082)
5,606
―
―
821
—
―
—
—
―
—
2,352
17
—
―
―
—
30,839
―
―
—
$ 309
―
―
—
$ 139,415
—
7,601
523
—
―
―
—
$ (147,952)
$
―
―
―
―
―
(1,873)
(2,024)
4,711
―
―
(372)
—
―
—
—
―
—
1,462
(81)
—
—
—
—
30,839
—
—
—
$ 309
—
—
—
$ 138,551
—
8,602
951
—
—
—
—
$ (135,712)
$
―
―
―
―
―
―
―
―
―
17
―
(12,411)
(38,082)
3,191
821
9,970
540
(12,411)
(5)
―
―
―
―
45,780
―
$ 216,707
(5)
45,780
45,775
$ 208,479
—
—
—
—
—
—
3
—
—
3
―
―
(2,024)
2,838
―
(372)
—
―
(13,272)
10,064
870
(13,272)
—
16,574
—
$ 220,009
3
16,574
16,577
$ 223,160
Balance at December 31, 2007
Purchase of treasury stock,
at cost
Exercise of stock options
Income tax benefit from
stock-based compensation,
net
Stock-based compensation
expense
Other
Dividends paid
Change in unrealized loss on
marketable securities, net
of tax:
Unrealized loss
Net income
Comprehensive income
Balance at December 31, 2008
Purchase of treasury stock,
at cost
Exercise of stock options
Income tax expense from
stock-based compensation,
net
Stock-based compensation
expense
Other
Dividends paid
Change in unrealized gain on
marketable securities, net of
tax:
Unrealized gain:
Net income
Comprehensive income
Balance at December 31, 2009
F-8
ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Continued)
(in thousands)
Common Stock
Issued
Shares Amount
Additional
Paid-In
Capital
Treasury
Stock
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
Total
30,839
$ 309
$ 138,551
$ (135,712)
$
3
$ 220,009
$ 223,160
―
―
―
―
―
(1,963)
(7,852)
9,146
―
―
—
―
—
—
―
—
25
(966)
(40)
—
—
—
—
30,839
—
—
—
$ 309
—
—
—
$ 135,607
—
9,092
862
—
—
—
—
$ (124,464)
$
—
—
—
—
—
—
18
—
—
21
―
―
―
(7,852)
7,183
25
—
―
(13,527)
8,126
822
(13,527)
—
22,440
—
$ 228,922
18
22,440
22,458
$ 240,395
Balance at December 31, 2009
Purchase of treasury stock,
at cost
Exercise of stock options
Income tax benefit from
stock-based compensation,
net
Stock-based compensation
expense
Other
Dividends paid
Change in unrealized gain on
marketable securities, net of
tax:
Unrealized gain
Net income
Comprehensive income
Balance at December 31, 2010
See accompanying notes.
F-9
ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net income ...................................................................................
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ..............................................
Amortization of marketable securities ..................................
Stock-based compensation ...................................................
Deferred income taxes ..........................................................
Changes in operating assets and liabilities,
net of acquisitions:
Restricted cash ..................................................................
Accounts receivable ..........................................................
Prepaid insurance ..............................................................
Other current assets ...........................................................
Other assets.......................................................................
Accounts payable ..............................................................
Payroll taxes and other payroll deductions payable ..........
Accrued worksite employee payroll expense ....................
Accrued health insurance costs .........................................
Accrued workers’ compensation costs ..............................
Accrued corporate payroll, commissions and other
accrued liabilities ...........................................................
Income taxes payable/receivable ......................................
Total adjustments .........................................................
Net cash provided by operating activities ................
Cash flows from investing activities:
Marketable securities:
Purchases ..............................................................................
Proceeds from maturities ......................................................
Proceeds from dispositions ...................................................
Cash exchanged for acquisitions, net of cash acquired ................
Property and equipment:
Purchases ..............................................................................
Proceeds from dispositions ...................................................
Net cash provided by (used in) investing activities ..
Year ended December 31,
2009
2008
2010
$ 22,440
$ 16,574
$ 45,780
14,950
1,650
8,126
1,179
(4,768)
(18,874)
(10,494)
(2,141)
4,180
1,136
17,499
16,559
9,045
8,748
9,556
49
56,400
78,840
(60,003)
18,301
2,748
(12,918)
(6,764)
54
(58,582)
16,561
—
10,064
(4,397)
30
2,501
14,427
418
698
(1,150)
3,931
(36,816)
(8,341)
4,446
(10,188)
(7,927)
(15,743)
831
(6,039)
225
―
(720)
(8,019)
36
(14,517)
15,541
—
9,970
5,363
(1,148)
9,741
(6,516)
(462)
(4,722)
(2,229)
9,737
19,548
(4,582)
8,351
6,249
7,169
72,010
117,790
―
3,895
70,746
(3,780)
(26,714)
124
44,271
F-10
ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in thousands)
Year ended December 31,
2009
2008
2010
Cash flows from financing activities:
Purchase of treasury stock ...........................................................
Dividends paid .............................................................................
Proceeds from the exercise of stock options ................................
Principal repayments on capital lease obligations .......................
Income tax benefit from stock-based compensation ....................
Other ............................................................................................
Net cash used in financing activities ........................
$
(7,852)
(13,527)
7,183
—
860
822
(12,514)
$
(2,024)
(13,272)
2,838
(537)
706
870
(11,419)
$ (38,082)
(12,411)
3,191
(629)
1,727
540
(45,664)
Net increase (decrease) in cash and cash equivalents .........................
Cash and cash equivalents at beginning of year .................................
Cash and cash equivalents at end of year ............................................
7,744
227,085
$ 234,829
(25,105)
252,190
$ 227,085
116,397
135,793
$ 252,190
Supplemental disclosures:
Cash paid for income taxes ..........................................................
$ 13,492
$ 23,694
$ 11,978
See accompanying notes.
F-11
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010
1. Accounting Policies
Description of Business
Administaff, Inc. (the “Company”) is a human resource (“HR”) services company. Our primary HR service
is our professional employer organization (“PEO”) service, which 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.
In addition to our PEO service, we provide business performance improvement services and software
solutions to assist small to medium size companies. These services include record keeping for defined contribution
plans, recruiting and employee screening services, and software solutions for employee expense management, time
and attendance, performance management, and organizational planning offered via desktop applications and
software as a service (“SaaS”) delivery models.
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 party’s 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 Company’s 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 Company’s 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 client’s 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 2010, 2009 and 2008, revenues from the Company’s Texas
markets represented 28%, 29% and 31%, while California represented 15%, 15% and 16% of the Company’s total
revenues, respectively.
F-12
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Revenue and Direct Cost Recognition
The Company accounts for its PEO revenues in accordance with Accounting Standards Codification
(“ASC”) 605-45, Revenue Recognition, Principal Agent Considerations. The Company’s PEO 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 Company’s 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 Company’s
operating results are significantly impacted by the Company’s ability to accurately estimate, control and manage its
direct costs relative to the revenues derived from the markup component of the Company’s gross billings.
Consistent with its revenue recognition policy, the Company’s direct costs do not include the payroll cost of
its worksite employees. The Company’s direct costs associated with its revenue generating activities are primarily
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 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 and marketable securities.
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. 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, 2010 and 2009, all of the Company’s 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 uses the specific identification method of determining the cost basis in
computing realized gains and losses on the sale of its available-for-sale securities. 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 Company’s
marketable securities approximate fair value due to the effective 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
1-5 years
Computer hardware and software, and acquired technologies .......................
Software development costs...........................................................................
3 years
5-7 years
Furniture and fixtures .....................................................................................
20 years
Aircraft ...........................................................................................................
Software development costs relate primarily to software coding, system interfaces and testing of the
Company’s 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 software products 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 Company’s 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.
Goodwill and Other Intangible Assets
The Company’s goodwill and intangible assets are subject to the provisions of ASC 350, Intangibles –
Goodwill and Other. Accordingly, goodwill and other indefinite-lived intangible assets are tested for impairment on
F-14
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
an annual basis or when indicators of impairment exist, and written down when impaired. As of December 31, 2010
and 2009, 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.
Administaff’s 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 amortization as of December 31,
2010 and 2009, for each class of intangible assets and goodwill (in thousands):
2010
2009
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carryin
g
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Amortizable intangible assets:
Trademarks
Customer relationships
Goodwill
Total goodwill and intangible assets
PerformSmart (formerly HRTools.com)
USDatalink
ExpensAble
Galaxy Technologies
$
$
$
1,785
6,959
14,327
23,071
5,058
4,450
4,681
8,882
$
(568)
(1,252)
—
$ 1,217
5,707
14,327
$
1,613
2,190
5,705
$
(394)
(627)
―
$ (1,820)
$ 21,251
$
9,508
$ (1,021)
$ 1,219
1,563
5,705
$ 8,487
$
$
(688)
(746)
(208)
(178)
4,370
3,704
4,473
8,704
5,058
4,450
—
—
$
(547)
(474)
—
—
$ 4,511
3,976
—
—
$
23,071
$ (1,820)
$ 21,251
$
9,508
$ (1,021)
$ 8,487
The Company’s amortization expense related to purchased intangible assets other than goodwill was
$799,000 in 2010, $408,000 in 2009 and $340,000 in 2008, and is estimated to be $1.2 million in 2011 and 2012,
$1.1 million in 2013 and 2014, and $900,000 in 2015.
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, Unity Health Plans and Tufts, all of which provide fully insured
policies or service contracts.
The policy with United provides the majority of the Company’s 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) estimated completion rates based upon recent claim development patterns under
the plan; 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 plan’s 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 Company’s 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
F-15
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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, 2010, Plan Costs were less than the net premiums paid
and owed to United by $28.9 million. As this amount is in excess of the agreed-upon $9.0 million surplus
maintenance level, the $19.9 million balance is included in prepaid insurance, a current asset, in the Company’s
Consolidated Balance Sheet. The premiums owed to United at December 31, 2010, were $12.1 million, which is
included in accrued health insurance costs, a current liability in the Company’s Consolidated Balance Sheet.
Workers’ Compensation Costs
The Company’s workers’ compensation coverage has been provided through an arrangement with the ACE
Group of Companies (“the ACE Program”) since 2007. The ACE Program is fully insured in that ACE has the
responsibility to pay all claims incurred regardless of whether the Company satisfies its responsibilities. Through
September 30, 2010, the Company bore the economic burden for the first $1 million layer of claims per occurrence
and the insurance carrier was and remains responsible for the economic burden for all claims in excess of such first
$1 million layer.
Effective for the ACE Program year beginning on October 1, 2010, in addition to the Company bearing the
economic burden for the first $1 million layer of claims per occurrence, the Company will also bear the economic
burden for those claims exceeding $1 million, up to a maximum aggregate amount of $5 million per policy year.
Because the Company bears the economic burden for claims up to the levels noted above, such claims,
which are the primary component of the Company’s workers’ compensation costs, are recorded in the period
incurred. Workers’ compensation insurance includes ongoing health care 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 Company’s workers’ compensation claims cost estimates. During the year ended December
31, Administaff reduced accrued workers’ compensation costs by $6.2 million and $5.7 million, respectively, in
2010 and 2009, 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 rates utilized in 2010 and 2009 were 1.4%
and 1.8%, respectively) and are accreted over the estimated claim payment period and included as a component of
direct costs in the Company’s 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, 2010 and 2009 (in thousands):
Year ended
2010
2009
Beginning balance ..........................................
Accrued claims ...............................................
Present value discount ....................................
Paid claims .....................................................
Ending balance ...............................................
$ 88,450
34,345
(1,675)
(24,186)
$ 96,934
$ 83,055
35,525
(2,203)
(27,927)
$ 88,450
Current portion of accrued claims ..................
Long-term portion of accrued claims .............
$ 41,204
55,730
$ 96,934
$ 36,436
52,014
$ 88,450
The current portion of accrued workers’ compensation costs at December 31, 2010 and 2009, includes
$877,000 and $613,000, respectively, of workers’ compensation administrative fees.
As of December 31, the undiscounted accrued workers’ compensation costs were $111.5 million in 2010
and $103.8 million in 2009.
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 Company’s Consolidated Balance Sheets. In 2010, the
Company received $15.6 million for the return of excess claim funds related to the ACE program, which reduced
deposits. As of December 31, 2010, the Company had restricted cash of $41.2 million and deposits of $51.7 million.
The Company’s 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 Company’s Consolidated Balance
Sheets.
Stock-Based Compensation
At December 31, 2010, 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.
Company-Sponsored 401(k) Plans
Under the Company’s 401(k) plan for corporate employees (the “Corporate Plan”), the Company matched
50% of eligible corporate employees’ contributions, up to 6% of the employee’s eligible compensation in 2010 and
F-17
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2009, and 100% of eligible corporate employees’ contributions, up to 6% of the employee’s eligible compensation in
2008. Under the Company’s 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 2010, 2009
and 2008, the Company made matching contributions to the Corporate and Worksite Employee Plans of $49.6
million, $47.7 million and $52.0 million, respectively. Of these contributions, $47.5 million, $45.1 million and
$47.3 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 2010 presentation.
Subsequent Events
The company has evaluated subsequent events through the date the financial statements were issued and
filed with the Securities and Exchange Commission.
New Accounting Pronouncements
We believe that we have implemented the accounting pronouncements with a material impact on our
financial statements and do not believe there are any new or pending announcements that will materially impact our
financial position or results of operations.
F-18
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2.
Cash, Cash Equivalents and Marketable Securities
The following table summarizes the Company’s investments in cash equivalents and marketable securities
held by investment managers and overnight investments:
Overnight Holdings
Money market funds (cash equivalents) ...............................................
Investment Holdings
Money market funds (cash equivalents) ...............................................
Marketable securities ............................................................................
Cash held in demand accounts .................................................................
Outstanding checks ..................................................................................
Total cash, cash equivalents and marketable securities .................
Cash and cash equivalents ........................................................................
Marketable securities ................................................................................
December 31,
2010
2009
(in thousands)
$ 157,680
$ 152,402
72,258
43,367
273,305
31,295
(26,404)
$ 278,196
93,517
6,037
251,956
2,981
(21,815)
$ 233,122
$ 234,829
43,367
$ 278,196
$ 227,085
6,037
$ 233,122
The Company’s cash and overnight holdings fluctuate based on the timing of the client’s payroll processing
cycle. Included in the cash balance as of December 31, 2010 and December 31, 2009, are $128.8 million and $115.4
million, respectively, in withholdings associated with federal and state income taxes, employment taxes and other
payroll deductions, as well as $8.1 million and $13.1 million, respectively, in client prepayments.
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.
F-19
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following tables summarize the levels of fair value measurements of the Company’s financial assets:
Fair Value Measurements
(in thousands)
December 31,
2010
Level 1
Level 2
Level 3
Money market funds ......................................
Municipal bonds ............................................
Total .......................................................
$ 229,938
43,367
$ 273,305
$ 229,938
—
$ 229,938
$
$
—
43,367
43,367
$
$
—
—
—
Fair Value Measurements
(in thousands)
December 31,
2009
Level 1
Level 2
Level 3
Money market funds ......................................
Municipal bonds ............................................
Total .......................................................
$ 245,919
6,037
$ 251,956
$ 245,919
—
$ 245,919
$
$
—
6,037
6,037
$
$
—
—
—
The municipal bond securities valued as Level 2 investments are primarily pre-refunded municipal bonds
that are secured by escrow funds containing U.S. government securities. Valuation techniques used by the Company
to measure fair value for these securities during the period consisted primarily of third party pricing services that
utilized actual market data such as trades of comparable bond issues, broker/dealer quotations for the same or similar
investments in active markets and other observable inputs.
The following is a summary of the Company’s available-for-sale marketable securities as of December 31,
2010 and 2009:
December 31, 2010:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(in thousands)
Estimated
Fair Value
Municipal bonds ..........................................
$ 43,330
$
63
$
(26)
$ 43,367
December 31, 2009:
Municipal bonds ..........................................
$ 6,034
$
4
$
(1)
$ 6,037
For the years ended December 31, 2010, 2009 and 2008, the Company had no realized gains or losses
recognized on sales of available-for-sales marketable securities.
F-20
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
As of December 31, 2010, the contractual maturities of the Company’s marketable securities were as follows:
Amortized
Cost
Estimated
Fair Value
(in thousands)
Less than one year .....................................
One to five years .......................................
Total ..........................................................
$
33,503
9,827
$ 43,330
$
$
33,537
9,830
43,367
3.
Accounts Receivable
The Company’s accounts receivable is primarily composed of trade receivables and unbilled receivables.
The Company’s trade receivables, which represent outstanding gross billings to customers, are reported net of
allowance for doubtful accounts of $988,000 and $1.3 million as of December 31, 2010 and 2009, respectively. The
Company establishes an allowance for doubtful accounts based on management’s 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, 2010 and 2009,
unbilled accounts receivable consisted of the following:
2010
2009
(in thousands)
Accrued worksite employee payroll cost .............
Unbilled revenues ................................................
Customer prepayments ........................................
Unbilled accounts receivable ...............................
$ 109,697
32,613
(8,123)
$ 134,187
$
93,138
26,537
(13,074)
$ 106,601
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, 2010, the Company had $51.7 million of workers’ compensation long-term deposits.
Please see Note 1 for a discussion of our accounting policies for workers’ compensation costs.
5.
Acquisitions
The Company accounts for its acquisitions in accordance with ASC 805, Business Combinations, which
requires allocation of the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed
based on the fair value at the date of purchase. The purchase price in excess of the identifiable assets and liabilities
is recorded to goodwill, $8.6 million in 2010. All acquisition related costs are expensed as incurred and recorded in
operating expenses. The Company includes operations associated with acquisitions from the date of acquisition
forward.
F-21
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In June 2010, the Company acquired OneMind Connect, Inc. which conducts business under the name
“ExpensAble”, and provides expense report management solutions delivered as both a Software as a Service
(“SaaS”) and as a desktop software product. The acquisition of ExpensAble extends the sales opportunity of the
Company’s human resource services as well as the solutions available to the Company’s current and prospective
clients. The Company paid $5.5 million upon the closing of the transaction and expects to pay an additional $1.0
million in 2011 based on the terms of the agreement. Additional consideration, up to $3.0 million, may be paid
during 2011 through 2013 if specific revenue levels are achieved.
In July 2010, the Company acquired certain assets from Galaxy Technologies, Inc. in an effort to expand
the sales opportunity of its human resource services as well as the solutions available to the Company’s current and
prospective clients. The primary assets acquired include time and attendance software solutions, which are delivered
through a SaaS model and as a desktop software product, and the associated customer base. The Company paid $7.4
million upon the closing of the transaction. Additional consideration, up to $2.8 million, may be paid during 2011
and 2012 if specific revenue levels are achieved.
6.
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:
Deferred tax liabilities:
Prepaid assets ..................................................................................
Depreciation ....................................................................................
Software development costs ............................................................
Other ...............................................................................................
Total deferred tax liabilities .......................................................
Deferred tax assets:
Accrued incentive compensation .....................................................
Net operating loss carryforward ......................................................
Workers’ compensation accruals.....................................................
Long-term capital loss carry-forward ..............................................
Accrued rent ....................................................................................
Stock-based compensation ..............................................................
Uncollectible accounts receivable ...................................................
Total deferred tax assets ............................................................
Valuation allowance ........................................................................
Total net deferred tax assets .......................................................
December 31,
2010
2009
(in thousands)
$ (10,051)
(8,390)
(1,198)
(751)
(20,390)
$
(6,021)
(7,842)
(1,270)
(406)
(15,539)
3,100
2,360
3,055
188
1,260
2,657
375
12,995
(188)
12,807
—
—
2,648
184
1,343
2,931
493
7,599
(184)
7,415
Net deferred tax liabilities...................................................................
$
(7,583)
$
(8,124)
Net current deferred tax assets (liabilities) .........................................
Net noncurrent deferred tax liabilities ................................................
$
$
1,267
(8,850)
(7,583)
$
$
2,578
(10,702)
(8,124)
F-22
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The components of income tax expense are as follows:
Year ended December 31,
2010
2009
2008
(in thousands)
Current income tax expense:
Federal............................................................................................. $ 12,668
1,734
State ................................................................................................
14,402
Total current income tax expense ..............................................
Deferred income tax (benefit) expense:
Federal.............................................................................................
State ................................................................................................
Total deferred income tax (benefit) expense ..............................
1,033
146
1,179
Total income tax expense ..................................................... $ 15,581
$ 14,478
1,994
16,472
$ 19,171
1,703
20,874
(4,162)
(235)
(4,397)
$ 12,075
5,111
252
5,363
$ 26,237
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 benefit of $25,000 in 2010,
net income tax expense of $372,000 in 2009, and net income tax benefit of $821,000 in 2008, 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,
2010
2009
2008
(in thousands)
Expected income tax expense at 35% ................................................. $ 13,307
1,273
State income taxes, net of federal benefit ...........................................
1,092
Nondeductible expenses .....................................................................
(89)
Tax-exempt interest income ................................................................
(2)
Other, net ............................................................................................
Reported total income tax expense ..................................................... $ 15,581
$ 10,027
1,053
1,093
(103)
5
$ 12,075
$ 25,206
1,372
906
(1,098)
(149)
$ 26,237
The Company has capital loss carryforwards totaling approximately $510,000 that will expire during 2012,
but can only be used to offset future capital gains. The Company has a valuation allowance of $510,000 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.
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As
of December 31, 2010, 2009 and 2008, the Company made no provisions for interest or penalties related to uncertain
tax positions. The tax years 2007 through 2010 remain open to examination by the Internal Revenue Service of the
United States.
7.
Stockholders’ Equity
The Company’s Board of Directors (the “Board”) has authorized a program to repurchase up to 13,500,000
shares of the Company’s 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 repurchased 271,739 shares under this program during 2010. In addition, 97,419 shares were withheld
during 2010 to satisfy tax withholding obligations for the vesting of restricted stock awards. These purchases are not
subject to the repurchase program. During 2009, the Company did not repurchase shares under the repurchase
program; however, 87,932 shares were withheld during 2009 to satisfy tax withholding obligations for the vesting of
F-23
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
restricted stock awards. As of December 31, 2010, the Company had repurchased 12,360,607 shares under this
program at a total cost of approximately $243.7 million. As a result, the Company has the authorization to
repurchase an additional 1,139,393 shares.
During each quarter of 2010 and 2009 the Board declared a dividend of $0.13 per share of common stock ,
resulting in a total of $13.5 million and $13.3 million in dividend payments paid by the Company in 2010 and 2009,
respectively.
At December 31, 2010, 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 Administaff’s Share Purchase Rights Plan (the “Rights Plan”). Each issued share of the Company’s 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.
8.
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 participant’s 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, 2010, 1,041,716 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.
The Administaff Nonqualified Stock Option Plan (the “Nonqualified Plan”) provided for options to
purchase shares of the Company’s common stock that were granted to employees who were 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.
F-24
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Stock Option Awards
The following summarizes stock option activity and related information:
2010
Weighted
Average
Exercise
Price
Shares
Year ended December 31,
2009
Weighted
Average
Exercise
Price
Shares
2008
Weighted
Average
Exercise
Price
Shares
(in thousands, except per share amounts)
1,409
$ 26.02
1,610
$ 24.76
1,823
$ 23.48
9
(381)
(434)
603
603
23.20
18.86
43.10
18.20
18.20
12
(195)
(18)
1,409
1,409
27.87
14.52
39.76
26.02
26.02
13
(223)
(3)
1,610
1,610
$ 23.20
$ 27.87
28.69
14.27
43.69
$ 24.76
$ 24.76
$ 28.69
$ 6,694
$ 2,005
$ 5,279
$ 1,902
$ 5,289
$ 3,059
Outstanding – beginning of
year
Granted
Exercised
Cancelled
Outstanding – end of year
Exercisable – end of year
Weighted average fair value of
options granted during year
Intrinsic value of options
outstanding at year end
Intrinsic value of options
exercised during the year
The following summarizes information related to stock options outstanding at December 31, 2010:
Range of Exercise Prices
Shares
Options Outstanding & Exercisable
Weighted
Weighted Average
Average
Remaining
Exercise
Contractual
Price
Life (Years)
(share amounts in thousands)
$ 4.02
$ 10.01
$ 15.01
$ 20.01
$ 25.01
Total
to
to
to
to
to
$ 10.00
$ 15.00
$ 20.00
$ 25.00
$ 28.69
55
116
203
190
39
603
2.3
2.9
2.3
1.2
5.6
2.3
$ 6.87
$ 12.75
$ 17.53
$ 23.47
$ 27.99
$ 18.20
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
Company’s shares currently outstanding. The Company has recognized $8.1 million, $10.1 million and $10.0
million of compensation expense associated with the restricted stock awards in 2010, 2009 and 2008, respectively.
As of December 31, 2010, unrecognized compensation expense associated with the unvested shares outstanding was
$8.3 million and is expected to be recognized over a weighted average period of 22 months.
F-25
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following summarizes restricted stock awards as of December 31, 2010, 2009 and 2008:
Year ended December 31,
2010
2009
2008
Weighted
Average
Market
Value at
Grant Date
Weighted
Average
Market
Value at
Grant Date
Shares
Shares
(in thousands, except per share amounts)
Weighted
Average
Market
Value at
Grant Date
Shares
Non-vested — beginning of year
Granted
Vested
Cancelled/Forfeited
Non-vested — end of year
690
474
(336)
(53)
775
$
$
24.30
17.55
19.96
23.61
19.43
669
347
(306)
(20)
690
$
$
29.77
20.92
22.47
25.64
24.30
528
415
(267)
(7)
669
$ 34.09
24.61
26.21
26.22
$ 29.77
9.
Net Income Per Share
The Company utilizes the two-class method to compute net income per share. The two-class method
allocates a portion of net income to participating securities, which include unvested awards of share-based payments
with non-forfeitable rights to receive dividends. Net income allocated to unvested share-based payments is excluded
from net income allocated to common shares. Basic net income per share is computed by dividing net income
allocated to common shares by the weighted average number of common shares outstanding during the period.
Diluted net income per share is computed by dividing net income allocated to common shares by the weighted
average number of common shares outstanding during the period, plus the dilutive effect of outstanding stock
options.
The following table summarizes the net income allocated to common shares and the basic and diluted
shares used in the net income per share computations for the years ended December 31, 2010, 2009 and 2008:
Year ended December 31,
2010
2009
2008
Net income
Less income allocated to participating securities
Net income allocated to common shares
$
$
22,440 $
657
21,783 $
16,574 $
462
16,112 $
45,780
889
44,891
Weighted average common shares outstanding
Incremental shares from assumed conversions of common
stock options
Adjusted weighted average common shares outstanding
25,254
24,768
25,233
114
25,368
148
24,916
247
25,480
Potentially dilutive securities not included in weighted
average share calculation due to anti-dilutive effect
372
541
692
The 2009 and 2008 net income per share amounts have been adjusted to reflect the utilization of the two-class
method, resulting in a reduction to the basic and diluted net income per share of $0.02 and $0.01, and $0.03 and
$0.03 per share, for the years ended December 31, 2009 and 2008, respectively.
F-26
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10.
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 $14.0
million, $14.1 million and $12.1 million in 2010, 2009 and 2008, respectively. At December 31, 2010, future
minimum rental payments under noncancelable operating leases are as follows (in thousands):
2011 .............................................................................
2012 .............................................................................
2013 .............................................................................
2014 .............................................................................
2015 .............................................................................
Thereafter ....................................................................
Total minimum lease payments ...................................
Operating
Leases
$ 14,116
12,148
9,858
6,536
3,627
3,844
$ 50,129
11.
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,
2010 future non-cancelable purchase and service obligations greater than $100,000 and one year were as follows (in
thousands):
2011 .....................................................
2012 .....................................................
2013 .....................................................
2014 .....................................................
2015 .....................................................
Thereafter ............................................
Total obligations ...........................
$ 4,861
1,489
1,282
780
630
3,150
$ 12,192
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, except as set forth below, management believes the final outcome of
such litigation will not have a material adverse effect on the Company’s financial position or results of operations.
As a result of a 2001 corporate restructuring, we filed for a transfer of our state unemployment tax reserve
account with the Employment Development Department of the State of California (“EDD”). The EDD approved our
request for transfer of the reserve account in May 2002 and also notified the Company of its new contribution rates
based upon the approved transfer. In December 2003, the Company received a Notice of Duplicate Accounts and
Notification of Assessment (“Notice”) from the EDD. The Notice stated that the EDD was collapsing the accounts
of the Company’s subsidiaries into the account of the entity with the highest unemployment tax rate. The Notice
also retroactively imposed the higher unemployment insurance rate on all of the Company’s California employees
for 2003, resulting in an assessment of $5.6 million. In January 2004, the Company filed petitions with an
administrative law judge of the California Unemployment Insurance Appeals Board (“ALJ”) to protest the validity of
the Notice, asserting several procedural and substantive defenses. The Company’s appeal is still pending and no
date has been set for a hearing.
One procedural defense included in the Company’s appeal asserts that EDD failed to meet the statutory
requirement related to serving a proper notice within the stipulated time frame and that all of the statutes of
F-27
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
limitations concerning EDD’s ability to reassess or modify unemployment tax rates for the periods addressed in the
Notice had expired (“Notification Defense”). On November 18, 2010, the 3rd Circuit Court of California (the
“Appeals Court”) issued a ruling in favor of EDD regarding a dispute involving a taxpayer who made arguments
similar to the Company’s Notification Defense (“Screaming Eagle Case”). In the Screaming Eagle Case, the Appeals
Court upheld a trial court decision which held that the EDD did follow proper procedures when it assessed the
taxpayer. The taxpayer has appealed the Screaming Eagle Case to the Supreme Court of California. If the Appeals
Court’s decision in the Screaming Eagle Case is ultimately upheld, it would potentially eliminate Administaff’s
Notification Defense. While the specific facts and circumstances of the Company’s dispute are not identical to the
Screaming Eagle Case, the Screaming Eagle Case does call into question the Company’s Notification Defense,
pending final determination by the Supreme Court of California. In addition to the Notification Defense, the
Company will continue to vigorously assert its additional defenses. If the Company does not ultimately prevail in its
arguments and the assessment is upheld, the Company may recognize an increase in its payroll tax expense in a
future period.
12. Quarterly Financial Data (Unaudited)
March 31
June 30
Sept. 30
Dec. 31
(in thousands, except per share amounts)
Quarter ended
Year ended December 31, 2010:
Revenues .............................................
Gross profit .........................................
Operating income ................................
Net income ..........................................
Basic net income per share .................
Diluted net income per share ..............
$ 457,662
72,685
3,761
2,299
0.09
0.09
Year ended December 31, 2009:
Revenues .............................................
Gross profit .........................................
Operating income (loss) ......................
Net income (loss) ................................
Basic net income (loss) per share ........
Diluted net income (loss) per share(1) ..
$ 461,979
83,561
12,897
8,166
0.33
0.33
$ 412,418
71,357
8,569
5,118
0.20
0.20
$ 404,312
71,967
8,605
5,385
0.22
0.21
$ 414,146
73,686
12,078
7,234
0.28
0.28
$ 390,908
71,101
9,563
5,832
0.23
0.23
$ 435,526
80,808
12,652
7,789
0.30
0.30
$ 395,897
61,338
(4,032)
(2,809)
(0.11)
(0.11)
(1)The 2009 net income per share amounts have been adjusted to reflect the utilization of the two-class EPS method,
resulting in a reduction to diluted net income per share of $0.01 in the quarter ended June 30, 2009. See Note 9 on
page F-26 for additional information related to the two-class method.
13.
Subsequent Event
In January 2011, the Company acquired certain assets from Human Concepts, a provider of workforce
decision support solutions. Administaff acquired ownership of the OrgPlus desktop software product line, targeted
at small and medium-sized businesses, and its associated customer base, as well as a source code license for a SaaS
based version. OrgPlus facilitates creation, management and communication of detailed organizational charts. The
acquisition represents Administaff’s continued business strategy to expand the sales opportunity of its human
resource services as well as the solutions available to the Company’s current and target clients. The Company paid
$10.8 million upon the closing of the transaction and expects to pay an additional $1.2 million in 2011 based on the
terms of the agreement.
F-28
GAAP to Non-GAAP Reconciliation
Net income (GAAP)
Interest expense
Income tax expense
Depreciation and amortization
EBITDA
Stock-based compensation
Year ended
December 31,
2010
22,440
—
15,581
14,907
52,928
8,126
61,054
$
$
$
$
2009
16,574
18
12,075
16,592
45,259
10,064
55,323
$
$
$
$
EBITDA represents net income computed in accordance with generally accepted accounting principles (“GAAP”), plus
interest expense, income tax expense, depreciation and amortization expense. Administaff management believes
EBITDA is often a useful measure of the company’s operating performance, as it allows for additional analysis of the
company’s operating results separate from the impact of taxes and capital and financing transactions on earnings.
EBITDA is not a financial measure prepared in accordance with GAAP and may be different from similar measures used
by other companies. EBITDA should not be considered as a substitute for, or superior to, measures of financial
performance prepared in accordance with GAAP. Administaff includes EBITDA in this report because the Company
believes it is useful to investors in allowing for greater transparency related to the Company’s operating performance
during the periods presented. Investors are encouraged to review the reconciliation of the non-GAAP financial measures
used in this report to the most directly comparable GAAP financial measure as provided in the tables above.
Officers
Paul J. Sarvadi
Chairman and Chief Executive Officer
Richard G. Rawson
President
A. Steve Arizpe
Executive Vice President of Client Services and
Chief Operating Officer
Jay E. Mincks
Executive Vice President of Sales and Marketing
Daniel D. Herink
Senior Vice President of Legal, General Counsel
and Secretary
Douglas S. Sharp
Senior Vice President of Finance, Chief Financial
Officer and Treasurer
Mark W. Allen
Senior Vice President of Strategic Planning
Jim Allison
Senior Vice President of Pricing and Cost Analysis
Gregory R. Clouse
Senior Vice President of Service Operations
Betty L. Collins
Senior Vice President of Corporate
Human Resources
Jason Cutbirth
Senior Vice President of Marketing
Samuel G . Larson
Senior Vice President of Enterprise and
Technology Solutions
Ronald M. McGee
Senior Vice President of Property and Casualty
Products and Services
Larry Shaffer
Senior Vice President of of Adjacent Business
Development
Corporate Information
Corporate Headquarters
19001 Crescent Springs Drive
Kingwood, Texas 77339-3802
281-358-8986
Sales Department
800-465-3800
Website
www.insperity.com
Independent Auditors
Ernst & Young LLP
5 Houston Center
1401 McKinney, Suite 1200
Houston, Texas 77010
Legal Counsel
Baker Botts LLP
One Shell Plaza
910 Louisiana
Houston, Texas 77002-4995
Board of Directors
Members of the Board of Directors can be contacted at
directors@insperity.com.
Common Stock
Insperity, Inc.’s common stock is traded on the New York Stock
Exchange under the symbol “NSP.”
Transfer Agent and Registrar
BNY Mellon Shareowner Services
480 Washington Boulevard
Jersey City, New Jersey 07310-1900
866-229-4421
TDD for Hearing Impaired: 800-231-5469
Foreign Shareholders: 201-680-6578
TDD Foreign Shareholders: 201-680-6610
Website: www.bnymellon.com/shareowner/isd
Annual Meeting
Insperity, Inc.’s Annual Meeting of Stockholders will be held at
3 p.m. CDT on Tuesday, May 17, 2011, at the Company’s corporate
headquarters, Centre I, in the Auditorium, located at 22900
Highway 59N (Eastex Freeway), Kingwood, Texas 77339.
Investor Relations
Stockholders are encouraged to contact the Company with
questions or requests for information. Copies of the Company’s
Annual Report on Form 10-K as filed with the Securities and
Exchange Commission are available without charge upon
written request.
Inquiries should be directed to:
Investor Relations Administrator
Insperity, Inc.
19001 Crescent Springs Drive
Kingwood, Texas 77339-3802
281-348-3987
CORPORATE OFFICE
19001 Crescent Springs Drive
Kingwood, Texas 77339-3802
INV-O10-1270
Workforce Optimization
MidMarket Solutions
Performance Management
Expense Management
Time and Attendance
Organizational Planning
Recruiting Services
Employment Screening
Retirement Services
Business Insurance
Technology Services
The Compass logo, Insperity and Inspiring Business Performance are trademarks of Insperity, Inc. TimeStar and OrgPlus
are trademarks of Insperity Business Services, L.P. Workforce Optimization and MidMarket Solutions are service marks of
Insperity, Inc. ExpensAble is a registered trademark of Insperity Expense Management, Inc. Insperity, Inc. or its affiliates
may also have trademark rights in other terms used herein.
800-465-3800
insperity.com