UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Administaff, Inc.

(Exact name of registrant as specified in its charter)

Delaware		76-0479645
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
19001 Crescent Springs Drive
Kingwood, Texas		77339
(Address of principal executive offices)		(Zip Code)

(Registrant’s Telephone Number, Including Area Code): (281) 358-8986

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive 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 o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of October 27, 2009, 25,615,992 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.

 

 

TABLE OF CONTENTS

Part I
Item 1. Financial Statements			3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			14
Item 3. Quantitative and Qualitative Disclosures About Market Risk			31
Item 4. Controls and Procedures			31
Part II
Item 1. Legal Proceedings			32
Item 1a. Risk Factors			32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			33
Item 6. Exhibits			34
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I

ITEM 1.		FINANCIAL STATEMENTS

ADMINISTAFF, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)

ASSETS

		September 30,				December 31,
		2009				2008
		(Unaudited)
Current assets:
Cash and cash equivalents		$	194,666			$	252,190
Restricted cash			35,422				36,466
Marketable securities			—				225
Accounts receivable, net:
Trade			669				4,908
Unbilled			159,216				116,173
Other			7,963				4,012
Prepaid insurance			11,370				28,911
Other current assets			10,598				6,735
Total current assets			419,904				449,620
Property and equipment:
Land			3,260				3,260
Buildings and improvements			64,756				63,016
Computer hardware and software			67,951				67,198
Software development costs			24,939				23,162
Furniture and fixtures			35,154				35,307
Aircraft			31,524				31,548
			227,584				223,491
Accumulated depreciation and amortization			(144,032	)			(134,152	)
Total property and equipment, net			83,552				89,339
Other assets:
Prepaid health insurance			9,000				9,000
Deposits – health insurance			2,785				2,585
Deposits – workers’ compensation			53,107				56,435
Goodwill and other intangible assets, net			8,584				8,595
Other assets			1,165				1,266
Total other assets			74,641				77,881
Total assets		$	578,097			$	616,840

ADMINISTAFF, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands)

LIABILITIES AND STOCKHOLDERS’ EQUITY

		September 30,				December 31,
		2009				2008
		(Unaudited)
Current liabilities:
Accounts payable		$	2,103			$	3,007
Payroll taxes and other payroll deductions payable			67,818				123,666
Accrued worksite employee payroll cost			151,868				129,954
Accrued health insurance costs			4,914				14,715
Accrued workers’ compensation costs			36,152				38,028
Accrued corporate payroll and commissions			15,079				25,692
Other accrued liabilities			9,351				10,032
Income tax payable			3,055				4,157
Deferred income taxes			—				1,956
Total current liabilities			290,340				351,207
Noncurrent liabilities:
Accrued workers’ compensation costs			50,269				46,589
Deferred income taxes			10,692				10,565
Total noncurrent liabilities			60,961				57,154
Commitments and contingencies
Stockholders’ equity:
Common stock			309				309
Additional paid-in capital			138,360				139,415
Treasury stock, at cost			(138,021	)			(147,952	)
Retained earnings			226,148				216,707
Total stockholders’ equity			226,796				208,479
Total liabilities and stockholders’ equity		$	578,097			$	616,840

See accompanying notes.

ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Revenues (gross billings of $2.322 billion $2.560 billion, $7.223 billion and $7.570 billion, less worksite employee payroll cost of $1.931 billion, $2.138 billion, $5.966 billion and $6.271 billion, respectively)		$	390,908			$	421,914			$	1,257,199			$	1,298,449
Direct costs:
Payroll taxes, benefits and workers’ compensation costs			319,807				336,415				1,030,570				1,042,282
Gross profit			71,101				85,499				226,629				256,167
Operating expenses:
Salaries, wages and payroll taxes			34,644				39,373				108,940				113,779
Stock-based compensation			2,184				2,337				7,881				7,630
General and administrative expenses			15,111				16,642				47,111				52,304
Commissions			2,807				3,211				8,976				9,579
Advertising			2,632				3,062				10,057				10,998
Depreciation and amortization			4,160				3,951				12,599				11,396
			61,538				68,576				195,564				205,686
Operating income			9,563				16,923				31,065				50,481
Interest income			478				1,733				1,415				6,076
Income before income tax expense			10,041				18,656				32,480				56,557
Income tax expense			4,209				6,727				13,097				20,485
Net income		$	5,832			$	11,929			$	19,383			$	36,072
Basic net income per share of common stock		$	0.23			$	0.47			$	0.78			$	1.42
Diluted net income per share of common stock		$	0.23			$	0.46			$	0.77			$	1.40

See accompanying notes.

ADMINISTAFF, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2009
(in thousands)
(Unaudited)

		Common Stock								Additional
		Issued								Paid-In				Treasury				Retained
		Shares				Amount				Capital				Stock				Earnings				Total
Balance at December 31, 2008			30,839			$	309			$	139,415			$	(147,952	)		$	216,707			$	208,479
Purchase of treasury stock, at cost			—				—				—				(2,024	)			—				(2,024	)
Exercise of stock options			—				—				(1,817	)			4,581				—				2,764
Income tax expense from stock-based compensation, net			—				—				(424	)			—				—				(424	)
Stock-based compensation expense			—				—				1,275				6,606				—				7,881
Other			—				—				(89	)			768				—				679
Dividends paid			—				—				—				—				(9,942	)			(9,942	)
Net income / comprehensive income			—				—				—				—				19,383				19,383
Balance at September 30, 2009			30,839			$	309			$	138,360			$	(138,021	)		$	226,148			$	226,796

See accompanying notes.

ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

		Nine Months Ended
		September 30,
		2009				2008
Cash flows from operating activities:
Net income		$	19,383			$	36,072
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization			12,562				11,385
Stock-based compensation			7,881				7,630
Deferred income taxes			(2,824	)			3,962
Changes in operating assets and liabilities:
Restricted cash			1,044				(371	)
Accounts receivable			(42,755	)			(40,980	)
Prepaid insurance			17,541				(825	)
Other current assets			(2,868	)			(3,198	)
Other assets			3,654				906
Accounts payable			(904	)			(760	)
Payroll taxes and other payroll deductions payable			(55,848	)			(33,659	)
Accrued worksite employee payroll expense			21,914				45,944
Accrued health insurance costs			(9,801	)			(5,811	)
Accrued workers’ compensation costs			1,804				5,058
Accrued corporate payroll, commissions and other accrued liabilities			(10,790	)			678
Income taxes payable/receivable			(2,170	)			3,239
Total adjustments			(61,560	)			(6,802	)
Net cash provided by (used in) operating activities			(42,177	)			29,270
Cash flows from investing activities:
Marketable securities:
Proceeds from dispositions			225				74,641
Cash exchanged for acquisition			(720	)			(3,780	)
Property and equipment			(6,469	)			(22,478	)
Net cash provided by (used in) investing activities			(6,964	)			48,383

ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in thousands)
(Unaudited)

		Nine Months Ended
		September 30,
		2009				2008
Cash flows from financing activities:
Purchase of treasury stock		$	(2,024	)		$	(19,615	)
Dividends paid			(9,942	)			(9,128	)
Other			3,583				4,767
Net cash used in financing activities			(8,383	)			(23,976	)
Net (decrease) increase in cash and cash equivalents			(57,524	)			53,677
Cash and cash equivalents at beginning of period			252,190				135,793
Cash and cash equivalents at end of period		$	194,666			$	189,470

See accompanying notes.

ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2009

1. Basis of Presentation

Administaff, Inc. (“Administaff” or the “Company”) is a professional employer organization (“PEO”). As a PEO, the Company provides a bundled comprehensive service for its clients in the area of personnel management. The Company provides its comprehensive service through its Personnel Management System, which encompasses a broad range of human resource functions, including payroll and benefits administration, health and workers’ compensation insurance programs, personnel records management, employer liability management, employee recruiting and selection, employee performance management, and employee training and development. For the nine months ended September 30, 2009 and 2008, revenues from the Company’s Texas markets represented 30% and 31% of the Company’s total revenues, respectively.

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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.

The accompanying consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2008. The Consolidated Balance Sheet at December 31, 2008 has been derived from the audited financial statements at that date, but does not include all of the information or footnotes required by accounting principles generally accepted in the United States for complete financial statements. The Company’s Consolidated Balance Sheet at September 30, 2009, and the Consolidated Statements of Operations, Cash Flows and Stockholders’ Equity for the periods ended September 30, 2009 and 2008, have been prepared by the Company without audit. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary to present fairly the consolidated financial position, results of operations and cash flows, have been made. Certain prior year amounts have been reclassified to conform to the 2009 presentation. The Company has evaluated subsequent events through the time these financial statements in the Form 10-Q report were filed with the Securities and Exchange Commission on November 2, 2009.

The results of operations for the interim periods are not necessarily indicative of the operating results for a full year or of future operations.

2. Accounting Policies

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 Cross and Blue Shield of Georgia, Blue Shield of California, Hawaii Medical Service Association and Tufts, all of which provide fully insured policies or service contracts.

The health insurance contract with United provides 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 the quarter; (ii) recent claim development patterns under the plan, to estimate a completion rate; and (iii) the number of participants in the plan. 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 the Company would accrue a liability for the excess costs on its Consolidated Balance Sheet. On the other hand, if the Plan Costs for the reporting quarter are less than the premiums paid and owed to United, a surplus in the plan would be incurred and the Company would record an asset for the excess premiums on its Consolidated Balance Sheet. The terms of the arrangement require the Company to maintain an accumulated cash surplus in the plan of $9.0 million, which is reported as long-term prepaid insurance. As of September 30, 2009, Plan Costs were less than the net premiums paid and owed to United by $17.2 million. As this amount is in excess of the agreed-upon $9.0 million surplus maintenance level, the $8.2 million balance is included in prepaid insurance, a current asset, on the Company’s Consolidated Balance Sheet. The premiums and taxes owed to United at September 30, 2009 were $1.8 million, which is included in accrued health insurance costs, a current liability on the Company’s Consolidated Balance Sheet.

Workers’ Compensation Costs

Since October 1, 2007, the Company’s workers’ compensation coverage has been provided through its arrangement with ACE Group of Companies (“ACE”). Under the Company’s arrangement with ACE (the “ACE Program”), the Company bears the economic burden for the first $1 million layer of claims per occurrence. ACE bears the economic burden for all claims in excess of such first $1 million layer. The ACE Program is a fully insured policy whereby ACE has the responsibility to pay all claims incurred under the policy regardless of whether the Company satisfies its responsibilities. The Company’s workers’ compensation coverage from September 1, 2003 through September 30, 2007 was provided through selected member insurance companies of American International Group, Inc. (the “AIG Program”). The AIG Program coverage and structure was consistent with the ACE Program.

Because the Company bears the economic burden of the first $1 million layer of claims per occurrence, such claims, which are the primary component of the 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 nine months ended September 30, 2009 and 2008, Administaff reduced accrued workers’ compensation costs by $5.2 million and $8.3 million, respectively, for changes in estimated losses related to prior reporting periods. Workers’ compensation cost estimates are discounted to present value at a rate based upon the U.S. Treasury rates that correspond with the weighted average estimated claim payout period (the average discount rates utilized in 2009 and 2008 were 1.8% and 2.8%, 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.

The following table provides the activity and balances related to incurred but not paid workers’ compensation claims for the nine months ended September 30, 2009 and 2008 (in thousands):

		2009				2008
		(in thousands)
Beginning balance, January 1,		$	83,055			$	74,433
Accrued claims			25,834				26,916
Present value discount			(1,704	)			(2,698	)
Paid claims			(21,494	)			(19,168	)
Ending balance		$	85,691			$	79,483
Current portion of accrued claims		$	35,422			$	35,689
Long-term portion of accrued claims			50,269				43,794
		$	85,691			$	79,483

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. As of September 30, 2009, the Company had restricted cash of $35.4 million and deposits of $53.1 million.

3. Cash Equivalents

The Company accounts for financial assets and liabilities at fair value. The fair value 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.

As of September 30, 2009, the Company had level 1 investments of $195.9 million held in money market funds.

The Company’s overnight holdings fluctuate based on the timing of the client’s payroll processing cycle. Included in the cash and cash equivalents balance as of September 30, 2009, and December 31, 2008, are $57.6 million and $108.8 million in withholdings associated with federal and state income taxes, employment taxes and other payroll deductions; as well as $25.2 million and $49.3 million in customer prepayments, respectively. Please read “Cash Flows from Operating Activities – Timing of Customer Payments/Payrolls,” on page 28 for additional information.

4. Stockholders’ Equity

The Company’s Board of Directors (the “Board”) has authorized a program to repurchase up to 12,500,000 shares of the Company’s outstanding common stock. The Company has repurchased 12,088,868 shares under this program at a total cost of approximately $237.7 million. No shares were repurchased under the repurchase program during the nine months ended September 30, 2009. However, 87,932 shares were withheld during the first nine months of 2009 to satisfy tax withholding obligations for the vesting of restricted stock awards. These purchases are not subject to the repurchase program. As of September 30, 2009, the Company had the authorization to repurchase an additional 411,132 shares.

The Board declared quarterly dividends of $0.13 in the first three quarters of 2009 and the third quarter of 2008, and $0.11 per share of common stock in the first and second quarters of 2008, resulting in a total of $9.9 million and $9.1 million in dividend payments paid by the Company in 2009 and 2008, respectively.

5. Net Income Per Share

The numerator used in the calculations of both basic and diluted net income per share for all periods presented was net income. The denominator for each period presented was determined as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Basic net income per share – weighted average shares outstanding			24,850				25,392				24,717				25,406
Effect of dilutive securities – treasury stock method:
Common stock options			154				298				150				300
Restricted stock awards			201				147				163				87
			355				445				313				387
Diluted net income per share – weighted average shares outstanding plus effect of dilutive securities			25,205				25,837				25,030				25,793
Potentially dilutive securities not included in weighted average share calculation due to anti-dilutive effect			489				453				560				600

6. Commitments and Contingencies

The Company is a defendant in various lawsuits and claims arising in the normal course of business. Management believes it has valid defenses in these cases and is defending them vigorously. While the results of litigation cannot be predicted with certainty, management believes the final outcome of such litigation will not have a material adverse effect on the Company’s financial position or results of operations.

ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

You should read the following discussion in conjunction with our 2008 annual report on Form 10-K, as well as our consolidated financial statements and notes thereto included in this quarterly report on Form 10-Q.

Critical Accounting Policies and Estimates

Our 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 Cross and Blue Shield of Georgia, Blue Shield of California, Hawaii Medical Service Association and Tufts, all of which provide fully insured policies or service contracts.
		The health insurance contract with United provides the majority of our health insurance coverage. As a result of certain contractual terms, we have accounted for this plan since its inception using a partially self-funded insurance accounting model. Accordingly, we record the costs of the United plan, including an estimate of the incurred claims, taxes and administrative fees (collectively the “Plan Costs”), as benefits expense in the Consolidated Statements of Operations. The estimated incurred claims are based upon: (i) the level of claims processed during the quarter; (ii) recent claim development patterns under the plan, to estimate a completion rate; and (iii) the number of participants in the plan. 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 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 September 30, 2009, Plan Costs were less than the premiums paid and owed to United by $17.2 million. As this amount is in excess of the agreed-upon $9.0 million surplus maintenance level, the $8.2 million balance is included in prepaid insurance, a current asset, on our Consolidated Balance Sheet. The premiums and taxes owed to United at September 30, 2009 were $1.8 million, which is included in accrued health insurance costs, a current liability, on our Consolidated Balance Sheet.
•		Workers’ compensation costs – Since October 1, 2007, our workers’ compensation coverage has been provided through our arrangement with ACE Group of Companies (“ACE”). Under our arrangement with ACE (the “ACE Program”), we bear the economic burden for the first $1 million layer of claims per occurrence. ACE bears the economic burden for all claims in excess of such first $1 million layer. The ACE Program is a fully insured policy whereby ACE has the responsibility to pay all claims incurred under the policy regardless of whether we satisfy our responsibilities. Our workers’ compensation coverage from September 1, 2003 through September 30, 2007 was provided through selected member insurance companies of American International Group, Inc. (the “AIG Program”). The AIG Program coverage and structure was consistent with the ACE Program.
		Because we bear the economic burden of the first $1 million layer of claims per occurrence, such claims, which are the primary component of our workers’ compensation costs, are recorded in the period incurred. Workers’ compensation insurance includes ongoing 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.
		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 nine months ended September 30, 2009 and 2008, Administaff reduced accrued workers’ compensation costs by $5.2 million and $8.3 million, respectively, for changes in estimated losses related to prior reporting periods. Workers’ compensation cost estimates are discounted to present value at a rate based upon the U.S. Treasury rates that correspond with the weighted average estimated claim payout period (the average discount rates utilized in 2009 and 2008 were 1.8% and 2.8%, respectively) and are accreted over the estimated claim payment period and included as a component of direct costs in our Consolidated Statements of Operations.

•		Contingent liabilities – We accrue and disclose contingent liabilities in our Consolidated Financial Statements in accordance with Accounting Standards Codification (“ASC”) 450-10 (formerly Statement of Financial Accounting Standards “SFAS” No. 5, Accounting for 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.
•		Allowance for doubtful accounts – We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to pay their comprehensive service fees. We believe that the success of our business is heavily dependent on our ability to collect these comprehensive service fees for several reasons, including:

	•		the fact that we are at risk for the payment of our direct costs and worksite employee payroll costs regardless of whether our clients pay their comprehensive service fees;
	•		the large volume and dollar amount of transactions we process; and
	•		the periodic and recurring nature of payroll, upon which the comprehensive service fees are based.

To mitigate this risk, we have established very tight credit policies. We generally require our clients to pay their comprehensive service fees no later than one day prior to the applicable payroll date. In addition, we maintain the right to terminate the Client Service Agreement 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 condition were to deteriorate rapidly, resulting in nonpayment, our accounts receivable balances could grow and we could be required to provide for additional allowances, which would decrease net income in the period that such determination was made.

•		Property and equipment – Our property and equipment relate primarily to our facilities and related improvements, furniture and fixtures, computer hardware and software and capitalized software development costs. These costs are depreciated or amortized over the estimated useful lives of the assets. If we determine that the useful lives of these assets will be shorter than we currently estimate, our depreciation and amortization expense could be accelerated, which would decrease net income in the periods of such a determination. In addition, we periodically evaluate these costs for impairment. If events or circumstances were to indicate that any of our long-lived assets might be impaired, we would assess recoverability based on the estimated undiscounted future cash flows to be generated from the applicable asset. In addition, we may record an impairment loss, which would reduce net income, to the extent that the carrying value of the asset exceeded the fair value of the asset. Fair value is generally determined using an estimate of discounted future net cash flows from operating activities or upon disposal of the asset.
•		Goodwill and other intangibles – Goodwill is tested for impairment on an annual basis and between annual tests in certain circumstances, and written down when impaired. Purchased intangible assets other than goodwill are amortized over their useful lives unless these lives are determined to be indefinite. Our purchased intangible assets are carried at cost less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, five to ten years.

New Accounting Pronouncements

In September 2006, Financial Accounting Standards Board (“FASB”) ASC 820-10 (formerly SFAS 157), “Fair Value Measurements” was issued. ASC 820-10 establishes a framework for measuring fair value by providing a standard definition of fair value as it applies to assets and liabilities. ASC 820-10, which does not require any new fair value measurements, clarifies the application of other accounting pronouncements that require or permit fair value measurements. Our effective date was initially January 1, 2008. However, the FASB delayed the effective date of ASC 820-10 for all non-financial assets and non-financial liabilities until fiscal years beginning after November 15, 2008. Accordingly, we adopted ASC 820-10 for our financial assets and liabilities on January 1, 2008 and adopted ASC 820-10 for our non-financial assets and liabilities on January 1, 2009. The adoption did not have a material impact on our consolidated financial statements.

In June 2008, the FASB issued ASC 260-10 (formerly FASB Staff Position No. EITF 03-6-1), “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities”. ASC 260-10 concludes that unvested restricted share awards that pay nonforfeitable cash dividends are participating securities and are subject to the two-class method of computing earnings per share. Our effective date for ASC 260-10 was January 1, 2009. The adoption of ASC 260-10 did not have a material impact on our Consolidated Financial Statements.

In May 2009, FASB ASC 855-10 (formerly SFAS No. 165), “Subsequent Events” was issued. ASC 855-10 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date (“subsequent events”), but before the financial statements are issued or available to be issued and requires disclosure of the date through which the entity has evaluated subsequent events and the basis for that date. ASC 855-10 is effective for interim and annual periods ending after June 15, 2009; the Company adopted ASC 855-10 for the quarter ended June 30, 2009. The Company evaluated subsequent events through the time we filed our Form 10-Q with the Securities and Exchange Commission on November 2, 2009. The adoption did not have a material impact on our Consolidated Financial Statements.

In June 2009, FASB ASC 105-10 (formerly SFAS 168), “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles” was issued. ASC 105-10 is the single official source of authoritative U.S. GAAP, superseding all other accounting literature except that issued by the Securities and Exchange Commission. As of July 2009, only one level of authoritative U.S. GAAP exists. All other literature will be considered non-authoritative. The Codification does not change U.S. GAAP; instead, it introduces a new referencing system that is designed to be an easily accessible, user-friendly online research system. ASC 105-10 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company adopted ASC 105-10 for the quarter ended September 30, 2009. The adoption did not have a material impact on our Consolidated Financial Statements.

Results of Operations

Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008.

The following table presents certain information related to Administaff’s results of operations for the three months ended September 30, 2009 and 2008.

		Three months ended September 30,
		2009				2008				% Change
		(in thousands, except per share and statistical data)
Revenues (gross billings of $2.322 billion and $2.560 billion, less worksite employee payroll cost of $1.931 billion and $2.138 billion, respectively		$	390,908			$	421,914				(7.3	)%
Gross profit			71,101				85,499				(16.8	)%
Operating expenses			61,538				68,576				(10.3	)%
Operating income			9,563				16,923				(43.5	)%
Other income			478				1,733				(72.4	)%
Net income			5,832				11,929				(51.1	)%
Diluted net income per share of common stock			0.23				0.46				(50.0	)%
Statistical Data:
Average number of worksite employees paid per month			107,625				119,389				(9.9	)%
Revenues per worksite employee per month(1)		$	1,211			$	1,178				2.8	%
Gross profit per worksite employee per month			220				239				(7.9	)%
Operating expenses per worksite employee per month			191				191				—
Operating income per worksite employee per month			30				47				(36.2	)%
Net income per worksite employee per month			18				33				(45.5	)%

Revenues

Our revenues for the third quarter of 2009 decreased 7.3% compared to the 2008 period due to a 9.9% decrease in the average number of worksite employees paid per month, partially offset by a 2.8%, or $33 increase in revenues per worksite employee per month.

By region, our revenues compared to the third quarter of 2008 and revenue distribution for the quarters ended September 30, 2009 and 2008 were as follows:

		Three months ended September 30,												Three months ended September 30,
		2009				2008				% Change				2009				2008
		(in thousands)												(% of total revenues)
Northeast		$	87,448			$	88,430				(1.1	)%			22.5	%			21.1	%
Southeast			43,844				44,900				(2.4	)%			11.3	%			10.7	%
Central			58,538				60,730				(3.6	)%			15.1	%			14.5	%
Southwest			122,344				139,731				(12.4	)%			31.5	%			33.4	%
West			76,111				84,968				(10.4	)%			19.6	%			20.3	%
			388,285				418,759				(7.3	)%			100.0	%			100.0	%
Other revenue			2,623				3,155				(16.9	)%
Total revenue		$	390,908			$	421,914				(7.3	)%

Our unit growth rate is affected by three primary sources – new client sales, client retention and the net change in existing clients through worksite employee new hires and layoffs. During the third quarter of 2009, our average number of worksite employees declined 9.9% as the net change in existing clients, new client sales and client retention declined as compared to the third quarter of 2008.

The decline in U.S. economic activity and associated reductions in employment levels in 2009 and the latter half of 2008 have impacted the Company’s customer base and target market. The net employee reductions within our existing client base and number of client terminations have exceeded new client sales.

Gross Profit

Gross profit for the third quarter of 2009 decreased 16.8% to $71.1 million, compared to the third quarter of 2008. The average gross profit per worksite employee decreased 7.9% to $220 per month in the 2009 period from $239 per month in the 2008 period. 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 increased 2.8% per worksite employee per month, our primary direct costs, which include payroll taxes, benefits and workers’ compensation expenses, increased 5.5% to $991 per worksite employee per month in the third quarter of 2009 versus $939 in the third quarter of 2008.

•

Benefits costs – The cost of group health insurance and related employee benefits increased $57 per worksite employee per month, or 9.3% on a cost per covered employee basis compared to the third quarter of 2008, due to increased utilization by active participants as well as higher claims associated with increased COBRA participation resulting from the severe economic environment and the recently enacted American Recovery and Reinvestment Act of 2009 (“ARRA”) legislation. Please read “Other Matters” on page 29 for a discussion of ARRA. The percentage of worksite employees covered under our health insurance plans was 74.6% in the 2009 period compared to 73.3% in the 2008 period. Please read “Critical Accounting Policies and Estimates – Benefits Costs” on page 14 for a discussion of our accounting for health insurance costs.

	•		Workers’ compensation costs – Workers’ compensation costs decreased 22.9%, or $5 per worksite employee per month compared to the third quarter of 2008. As a percentage of non-bonus payroll cost, workers’ compensation costs decreased to 0.53% in the 2009 period from 0.63% in the 2008 period. During the 2009 period, the Company recorded reductions in workers’ compensation costs of $3.6 million, or 0.20% of non-bonus payroll costs, for changes in estimated losses related to prior reporting periods compared to $2.8 million, or 0.14% of non-bonus payroll costs, in the 2008 period. The 2009 period costs include the impact of a 2.0% discount rate used to accrue workers’ compensation loss claims, compared to a 3.0% discount rate used in the 2008 period. Please read “Critical Accounting Policies and Estimates – Workers’ Compensation Costs” on page 15 for a discussion of our accounting for workers’ compensation costs.
	•		Payroll tax costs – Payroll taxes decreased 9.4%, but increased $2 per worksite employee per month compared to the third quarter of 2008, in line with the increase in the average payroll cost per worksite employee per month. Payroll taxes as a percentage of payroll cost were 6.5% in the 2009 period compared to 6.4% in the 2008 period.

Operating Expenses

The following table presents certain information related to the Company’s operating expenses for the three months ended September 30, 2009 and 2008.

		Three months ended September 30,												Three months ended September 30,
		2009				2008				% Change				2009				2008				% Change
		(in thousands)												(per worksite employee per month)
Salaries, wages and payroll taxes		$	34,644			$	39,373				(12.0	)%		$	107			$	110				(2.7	)%
Stock–based compensation			2,184				2,337				(6.5	)%			7				6				16.7	%
General and administrative expenses			15,111				16,642				(9.2	)%			47				46				2.2	%
Commissions			2,807				3,211				(12.6	)%			9				9				—
Advertising			2,632				3,062				(14.0	)%			8				9				(11.1	)%
Depreciation and amortization			4,160				3,951				5.3	%			13				11				18.2	%
Total operating expenses		$	61,538			$	68,576				(10.3	)%		$	191			$	191				—

Operating expenses decreased 10.3% to $61.5 million compared to the third quarter of 2008. Operating expense per worksite employee per month in the 2009 period remained consistent with the 2008 period at $191. The components of operating expenses changed as follows:

•

Salaries, wages and payroll taxes of corporate and sales staff decreased 12.0%, or $3 per worksite employee per month compared to the 2008 period. During 2009 we initiated a number of operating expense savings measures, including the deferral of merit salary increases and reductions in 401(k) match for corporate employees. In addition, incentive compensation is lower due to reduced operating results in 2009 as compared to 2008.

•

Stock-based compensation decreased 6.5%, but increased $1 per worksite employee per month compared to the 2008 period. The stock-based compensation expense represents amortization of restricted stock awards granted to employees over the vesting period.

•

General and administrative expenses decreased 9.2%, but increased $1 per worksite employee per month compared to the third quarter of 2008, due to various cost-saving initiatives implemented in 2009, including reductions in travel, postage, repairs and maintenance, training and printing.

•

Commissions expense decreased 12.6% due to a lower average number of paid worksite employees, but remained flat on a per worksite employee per month basis compared to the 2008 period.

•

Advertising costs decreased 14.0%, or $1 per worksite employee per month compared to the third quarter of 2008, due to cost-saving efforts initiated in 2009 as well as lower advertising rates.

•

Depreciation and amortization expense increased 5.3% 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 (Expense)

Other income (expense) decreased from $1.7 million in the third quarter of 2008 to approximately $478,000 in the 2009 period due to the significant decline in interest rates.

Income Tax Expense

Our effective income tax rate was 41.9% in the 2009 period compared to 36.1% in the 2008 period due to the impact of non-deductible expenses on lower pre-tax income, as well as lower tax exempt interest income. Our provision for income taxes differed from the U.S. statutory rate of 35% primarily due to state income taxes and non-deductible expenses.

Operating and Net Income

Operating and net income per worksite employee per month was $30 and $18 in the 2009 period, versus $47 and $33 in the 2008 period.

Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008.

The following table presents certain information related to Administaff’s results of operations for the nine months ended September 30, 2009 and 2008.

		Nine months ended September 30,
		2009				2008				% Change
		(in thousands, except per share and statistical data)
Revenues (gross billings of $7.223 billion and $7.570 billion, less worksite employee payroll cost of $5.966 billion and $6.271 billion, respectively		$	1,257,199			$	1,298,449				(3.2	)%
Gross profit			226,629				256,167				(11.5	)%
Operating expenses			195,564				205,686				(4.9	)%
Operating income			31,065				50,481				(38.5	)%
Other income			1,415				6,076				(76.7	)%
Net income			19,383				36,072				(46.3	)%
Diluted net income per share of common stock			0.77				1.40				(45.0	)%
Statistical Data:
Average number of worksite employees paid per month			109,306				116,360				(6.1	)%
Revenues per worksite employee per month(1)		$	1,278			$	1,240				3.1	%
Gross profit per worksite employee per month			230				245				(6.1	)%
Operating expenses per worksite employee per month			199				196				1.5	%
Operating income per worksite employee per month			32				48				(33.3	)%
Net income per worksite employee per month			20				34				(41.2	)%

Revenues

Our revenues for the nine months ended September 30, 2009, decreased 3.2% compared to the 2008 period due to a 6.1% decrease in the average number of worksite employees paid per month, partially offset by a 3.1%, or $38 increase in revenues per worksite employee per month.

By region, our revenues compared to the first nine months of 2008 and revenue distribution for the nine months ended September 30, 2009 and September 30, 2008 were as follows:

		Nine months ended September 30,												Nine months ended September 30,
		2009				2008				% Change				2009				2008
		(in thousands)												(% of total revenues)
Northeast		$	279,828			$	274,104				2.1	%			22.4	%			21.3	%
Southeast			139,062				137,222				1.3	%			11.1	%			10.6	%
Central			189,833				187,516				1.2	%			15.2	%			14.6	%
Southwest			395,126				428,680				(7.8	)%			31.7	%			33.3	%
West			245,058				260,877				(6.1	)%			19.6	%			20.2	%
			1,248,907				1,288,399				(3.1	)%			100.0	%			100.0	%
Other revenue			8,292				10,050				(17.5	)%
Total revenue		$	1,257,199			$	1,298,449				(3.2	)%

Our growth rate is affected by three primary sources – new client sales, client retention and the net change in existing clients through worksite employee new hires and layoffs. During the nine months ended September 30, 2009, our average number of worksite employees paid per month declined 6.1% as the net change in existing clients, new client sales and client retention declined compared to the 2008 period.

Gross Profit

Gross profit for the first nine months of 2009 decreased 11.5% to $226.6 million, compared to the first nine months of 2008. The average gross profit per worksite employee decreased 6.1% to $230 per month in the 2009 period from $245 per month in the 2008 period. 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 increased 3.1% per worksite employee per month, our primary direct costs, which include payroll taxes, benefits and workers’ compensation expenses, increased 5.3% to $1,048 per worksite employee per month in the first nine months of 2009 versus $995 in the first nine months of 2008.

•

Benefits costs – The cost of group health insurance and related employee benefits increased $45 per worksite employee per month, or 6.6% on a per covered employee basis compared to 2008, due in part to higher claims associated with increased COBRA participation resulting from the severe economic environment and the recently enacted American Recovery and Reinvestment Act of 2009 (“ARRA”) legislation. Please read “Other Matters” on page 29 for a discussion of ARRA. The percentage of worksite employees covered under our health insurance plans was 74.9% in the 2009 period compared to 73.3% in the 2008 period. Please read “Critical Accounting Policies and Estimates – Benefits Costs” on page 14 for a discussion of our accounting for health insurance costs.

	•		Workers’ compensation costs – Workers’ compensation costs decreased 3.0%, or $1 per worksite employee per month compared to the first nine months of 2008. As a percentage of non-bonus payroll cost, workers’ compensation costs increased to 0.63% in the 2009 period from 0.62% in the 2008 period. During the 2009 period, we recorded reductions in workers’ compensation costs of $5.2 million, or 0.09% of non-bonus payroll costs, for changes in estimated losses related to prior reporting periods, compared to $8.3 million, or 0.14% of non-bonus payroll costs, in the 2008 period. The 2009 period costs include the impact of an average discount rate of 1.8% used to accrue workers’ compensation loss claims, compared to an average discount rate of 2.8% in the 2008 period. Please read “Critical Accounting Policies and Estimates – Workers’ Compensation Costs” on page 15 for a discussion of our accounting for workers’ compensation costs.
	•		Payroll tax costs – Payroll taxes decreased 4.2%, but increased $9 per worksite employee per month compared to the first nine months of 2008, in line with the increase in average payroll cost per worksite employee per month. Payroll taxes as a percentage of payroll cost were 7.5% in the 2009 period compared to 7.4% in the 2008 period.

Operating Expenses

The following table presents certain information related to Administaff’s operating expenses for the nine months ended September 30, 2009 and 2008.

		Nine months ended September 30,												Nine months ended September 30,
		2009				2008				% Change				2009				2008				% Change
		(in thousands)												(per worksite employee per month)
Salaries, wages and payroll taxes		$	108,940			$	113,779				(4.3	)%		$	111			$	109				1.8	%
Stock–based compensation			7,881				7,630				3.3	%			8				7				14.3	%
General and administrative expenses			47,111				52,304				(9.9	)%			48				50				(4.0	)%
Commissions			8,976				9,579				(6.3	)%			9				9				—
Advertising			10,057				10,998				(8.6	)%			10				10				—
Depreciation and amortization			12,599				11,396				10.6	%			13				11				18.2	%
Total operating expenses		$	195,564			$	205,686				(4.9	)%		$	199			$	196				1.5	%

Operating expenses decreased 4.9% to $195.6 million compared to the first nine months of 2008. Operating expense per worksite employee increased to $199 per month in the 2009 period from $196 per month in the 2008 period. The components of operating expenses changed as follows:

•

Salaries, wages and payroll taxes of corporate and sales staff decreased 4.3% due to cost-saving initiatives implemented during 2009, including the deferral of merit increases and reduction in 401(k) match for corporate employees. In addition, incentive compensation was lower due to reduced operating results in the 2009 period as compared to the 2008 period. On a per worksite employee per month basis, salaries, wages and payroll taxes increased $2 compared to the 2008 period, due to the decline in the number of paid worksite employees.

•

Stock-based compensation expense increased 3.3%, or $1 per worksite employee per month compared to the 2008 period. Stock-based compensation expense represents amortization of restricted stock awards granted to employees over the vesting period.

•

General and administrative expenses decreased 9.9%, or $2 per worksite employee per month compared to the first nine months of 2008, due to cost-saving initiatives implemented across the company, including reductions in travel, postage and consulting.

•

Commissions expense decreased 6.3%, due to a lower average number of paid worksite employees, and remained flat on a per worksite employee per month basis compared to the 2008 period.

•

Advertising costs decreased 8.6% and remained flat on a per worksite employee per month basis, due to cost-saving efforts in 2009 including lower advertising rates.

•

Depreciation and amortization expense increased 10.6%, 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 (Expense)

Other income (expense) decreased from $6.1 million in the first nine months of 2008 to $1.4 million in the 2009 period, due primarily to a decline in interest rates.

Income Tax Expense

Our effective income tax rate was 40.3% in the 2009 period compared to 36.2% in the 2008 period due to the impact of non-deductible expenses on lower pre-tax income, as well as lower tax exempt interest income. Our provision for income taxes differed from the U.S. statutory rate of 35% primarily due to state income taxes and non-deductible expenses.

Operating and Net Income

Operating and net income per worksite employee per month was $32 and $20 in the 2009 period, versus $48 and $34 in the 2008 period.

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.

		Three months ended												Nine months ended
		September 30,								%				September 30,								%
		2009				2008				Change				2009				2008				Change
		(in thousands, except per worksite employee data)
Payroll cost (GAAP)		$	1,930,950			$	2,137,954				(9.7	)%		$	5,965,854			$	6,271,168				(4.9	)%
Less: Bonus payroll cost			91,375				131,647				(30.6	)%			409,000				477,565				(14.4	)%
Non-bonus payroll cost		$	1,839,575			$	2,006,307				(8.3	)%		$	5,556,854			$	5,793,603				(4.1	)%
Payroll cost per worksite employee (GAAP)		$	5,981			$	5,969				0.2	%		$	6,064			$	5,988				1.3	%
Less: Bonus payroll cost per worksite employee			283				367				(22.9	)%			415				456				(9.0	)%
Non-bonus payroll cost per worksite employee		$	5,698			$	5,602				1.7	%		$	5,649			$	5,532				2.1	%

Liquidity and Capital Resources

We periodically evaluate our liquidity requirements, capital needs and availability of resources in view of, among other things, our expansion plans, debt service requirements and other operating cash needs. To meet short- and long-term liquidity requirements, including payment of direct and operating expenses and repaying debt, we rely primarily on cash from operations. However, 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 $194.7 million in cash and cash equivalents at September 30, 2009, of which approximately $57.6 million was payable in early October 2009 for withheld federal and state income taxes, employment taxes and other payroll deductions, and approximately $25.2 million were customer prepayments that were payable in October 2009. At September 30, 2009, we had working capital of $129.6 million compared to $98.4 million at December 31, 2008. We currently believe that our cash on hand and cash flows from operations will be adequate to meet our liquidity requirements for the remainder of 2009. 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.

Cash Flows from Operating Activities

Cash used in operating activities in 2009 was $42.2 million. Our primary source of cash from operations is the comprehensive service fee and payroll funding we collect from our clients. The level of cash and cash equivalents, and thus our reported cash flows from operating activities are significantly impacted by various external and internal factors, which are reflected in part by the changes in our balance sheet accounts. These include the following:

	•		Timing of customer 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; therefore, operating cash flows decrease in the reporting periods that end on a Friday. In the period ended September 30, 2009, which ended on a Wednesday, customer prepayments were $25.2 million and accrued worksite employee payroll was $151.9 million. In the period ended December 31, 2008, which also ended on a Wednesday, customer prepayments were $49.3 million and accrued worksite employee payroll was $130.0 million.
	•		Workers’ compensation plan funding – Under our workers’ compensation insurance arrangements, we make monthly payments to the carriers comprised of premium costs and funds to be set aside for payment of future claims (“claim funds”). These pre-determined amounts are stipulated in our agreements with the carriers, and are based primarily on anticipated worksite employee payroll levels and workers’ compensation loss rates during the policy year. Changes in payroll levels from those that were anticipated in the arrangements can result in changes in the amount of the cash payments, which will impact our reporting of operating cash flows. Our claim funds paid, based upon anticipated worksite employee payroll levels and workers’ compensation loss rates, were $31.1 million in the first nine months of 2009 and $32.1 million for the 2008 period. However, our estimate of workers’ compensation loss costs was $24.1 million and $24.2 million in 2009 and 2008, respectively. During 2009 and 2008, we received $14.6 million and $19.8 million, respectively, for the return of excess claim funds related to the workers’ compensation program, which resulted in an increase to working capital.
	•		Medical plan funding – Our 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 owed and cash funded to United has exceeded Plan Costs, resulting in an $17.2 million surplus, $8.2 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 Sheet at September 30, 2009. The premiums and taxes owed to United at September 30, 2009, were $1.8 million, which is included in accrued health insurance costs, a current liability, on our Consolidated Balance Sheets.

•

Operating results – Our net income has a significant impact on our operating cash flows. Our net income decreased 46.3% to $19.4 million in the nine months ended September 30, 2009 compared to $36.1 million in the 2008 period. Please read Results of Operations –Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008 on page 23.

Cash Flows Used in Investing Activities

Cash flows used in investing activities were $7.0 million for the nine months ended September 30, 2009. We invested approximately $6.5 million in capital expenditures during the first nine months of 2009.

Cash Flows Used in Financing Activities

Cash flows used in financing activities were $8.4 million, including $9.9 million in dividends paid in the nine months ended September 30, 2009.

Other Matters

The American Recovery and Reinvestment Act of 2009

The ARRA was signed into law on February 17, 2009. ARRA provides a 65% subsidy for COBRA continuation coverage premiums for up to nine months for employees involuntarily terminated during the period from September 1, 2008 through December 31, 2009. Under ARRA, Administaff pays the 65% subsidy and then is reimbursed by the federal government through a credit against payroll taxes. The remaining 35% is paid by individual participants electing COBRA. Plan Costs include the net difference between the premiums collected and the associated cost of any COBRA claims. The subsidy of COBRA premiums mandated by ARRA, coupled with the severe economic environment, has contributed to an increase in the number of individuals electing COBRA coverage under our health insurance plans. The increased number of COBRA participants has resulted in an increase in claim activity levels, resulting in higher benefits costs incurred in 2009. Depending on the number of participants electing COBRA and the resulting claim activity levels, COBRA-related claims have the potential to increase total Plan Costs in future periods as well. The end date for the ARRA subsidy is currently September 30, 2010.

Health Care Reform

President Obama has stated that health care reform is a top legislative priority and that it is his goal to enact reform legislation before the end of 2009. Congress is currently considering sweeping health care reform legislation, with various proposals pending in both the House and the Senate. There is ongoing debate and uncertainty concerning the details and timing of such reform, how it will be funded, and whether reform legislation will ultimately pass and become law. The Company does not believe that any of the current legislative proposals under consideration would expressly eliminate the Company’s ability to provide a health insurance plan as a co-employer of worksite employees. However, given the uncertain nature of the legislative process, the Company is unable to determine the impact such reform would have on its operations, if enacted.

ITEM 3.		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. Our cash equivalent short-term investments consist primarily of overnight investments and money market funds, 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.

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.

ITEM 4.		CONTROLS AND PROCEDURES.

In accordance with the Securities Exchange Act of 1934 Rules 13a-15 and 15d-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 September 30, 2009.

There has been no change in our internal controls over financial reporting that occurred during the three months ended September 30, 2009, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

PART II

ITEM 1.		LEGAL PROCEEDINGS.

Please read Note 6 to financial statements, which is incorporated herein by reference.

ITEM 1a.		RISK FACTORS

The statements contained herein that are not historical facts are forward-looking statements within the meaning of the federal securities laws (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,” “target,” “assume,” “outlook,” “guidance,” “predicts,” “appears,” “indicator” and similar expressions. Forward-looking statements involve a number of risks and uncertainties. In the normal course of business, Administaff, Inc., in an effort to help keep our stockholders and the public informed about our operations, 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, unit growth, profit per worksite employee, pricing, operating expenses or other aspects of operating results. We base the forward-looking statements on our current expectations, estimates and projections. These statements are not guarantees of future performance and involve risks and uncertainties 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 could differ materially from those stated in such forward-looking statements. Among the factors that could cause actual results to differ materially are: (i) changes in general economic conditions; (ii) regulatory and tax developments and possible adverse application of various federal, state and local regulations; (iii) the ability to secure competitive replacement contracts for health insurance and workers’ compensation contracts at expiration of current contracts; (iv) increases in health insurance costs and workers’ compensation rates and underlying claims trends, financial solvency of workers’ compensation carriers and other insurers, state unemployment tax rates, liabilities for employee and client actions or payroll-related claims, changes in the costs of expanding into new markets, and failure to manage growth of our operations; (v) the effectiveness of our sales and marketing efforts; (vi) changes in the competitive environment in the PEO industry, including the entrance of new competitors and our ability to renew or replace client companies; (vii) our liability for worksite employee payroll and benefits costs; (viii) our liability for disclosure of sensitive or private information; and (ix) an adverse final judgment or settlement of claims against Administaff. These factors are discussed in detail in our 2008 annual report on Form 10-K under “Factors That May Affect Future Results and the Market Price of Common Stock” on page 38, and elsewhere in this report. Any of these factors, or a combination of such factors, could materially affect the results of our operations and whether forward-looking statements we make ultimately prove to be accurate.

ITEM 2.		UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides information about purchases by Administaff during the three months ended September 30, 2009, of equity securities that are registered by Administaff pursuant to Section 12 of the Exchange Act:

										Total Number of				Maximum Number
										Shares Purchased as				of Shares that may
		Total Number								Part of Publicly				yet be Purchased
		of Shares				Average Price				Announced				under
Period		Purchased(1)(2)				Paid per Share				Program(2)				the Program (2)
07/01/2009 – 07/31/2009			—			$	—				12,088,868				411,132
08/01/2009 – 08/31/2009			—				—				12,088,868				411,132
09/01/2009 – 09/30/2009			1,298				27.15				12,088,868				411,132
Total			1,298			$	27.15				12,088,868				411,132

ITEM 6.		EXHIBITS

(a) List of exhibits.

31.1*		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		Administaff, Inc.
Date: November 2, 2009		By:		/s/ Douglas S. Sharp
				Douglas S. Sharp
				Senior Vice President of Finance,
				Chief Financial Officer and Treasurer
				(Principal Financial and Duly Authorized Officer)

EXHIBIT INDEX

Exhibit
Number		Description
31.1*		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.