Insperity - 10-Q quarterly report FY

 

(Exact name of registrant as specified in its charter)

(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 is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

     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 30, 2008, 25,340,647 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.

See accompanying notes.

See accompanying notes.

See accompanying notes.

See accompanying notes.

     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, 2008 and 2007, revenues from the Company’s Texas markets represented 31% and 32% of the Company’s total revenues, respectively.

     In April 2008, the Company purchased certain assets and operations of USDatalink, Limited, an employee screening services company, for $4.2 million, including $420,000 to be paid in April 2009. An additional $300,000 is payable in 2009 upon the satisfaction of certain conditions, as specified in the purchase agreement.

     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, 2007. The Consolidated Balance Sheet at December 31, 2007, 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, 2008, and the Consolidated Statements of Operations, Cash Flows and Stockholders’ Equity for the periods ended September 30, 2008 and 2007, 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.

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

     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 policy with United, which was first obtained in January 2002, 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 claims trends, plan design and migration, participant demographics and other factors are incorporated into the benefits costs.

     Additionally, since the plan’s inception in January 2002, 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 cash funded 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 cash funded 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. As of September 30, 2008, Plan Costs were less than the net cash funded to United by $29.3 million. As this amount is in excess of the agreed-upon $9.0 million surplus maintenance level, the $20.3 million balance is included in prepaid insurance, a current asset, on the Company’s Consolidated Balance Sheet.

     The Company’s workers’ compensation coverage (the “ACE Program”) is currently provided by ACE Group of Companies (“ACE”). Under the arrangement with ACE, Administaff 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.

     Prior to October 1, 2007, workers’ compensation coverage (the “AIG Program”) was provided through selected member insurance companies of American International Group, Inc. (“AIG”). The AIG Program structure was consistent with the ACE Program. AIG remains the carrier for all claim activity incurred between September 1, 2003 and September 30, 2007.

     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 healthcare and indemnity coverage whereby claims are paid over numerous years following the date of injury. Accordingly, the accrual of related incurred costs in each reporting period includes estimates, which take into account the ongoing development of claims and therefore requires a significant level of judgment. The Company estimates its workers’ compensation costs by applying an aggregate loss development rate to worksite employee payroll levels.

     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, Administaff reduced accrued workers’ compensation costs by $8.3 million in 2008 and $15.9 million in 2007 for changes in estimated losses related to prior reporting periods. Workers’ compensation cost estimates are discounted to present value at a rate based upon the U.S. Treasury rates that correspond with the weighted average estimated claim payout period (the average discount rate utilized in 2008 and 2007 was 2.8% and 4.8%, 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 accrued workers’ compensation claims for the nine months ended September 30, 2008 and 2007:

     Under both the ACE and AIG Programs, a portion of Administaff’s monthly premiums are set aside to fund the payment of claims, and any excess premiums funded into the program are returned to the Company subsequent to the end of the policy period. As of September 30, 2008, the total funds held by ACE and AIG were $86.1 million, of which $35.7 million is included in restricted cash and $50.4 million is included in deposits in the Company’s Consolidated Balance Sheets.

     The Company invests its excess cash in federal government and municipal-based money market funds and debt instruments of U.S. municipalities. Administaff’s investments do not include any asset-backed securities with underlying collateral of sub-prime mortgages or home equity loans, nor do they include any collateralized debt obligations or collateralized loan obligations. All highly liquid investments with stated maturities of three months or less from date of purchase are classified as cash equivalents. Liquid investments with stated maturities of greater than three months are classified as marketable securities in current assets, while less liquid investments are classified as marketable securities in non-current assets.

     The following table summarizes the Company’s investments in cash equivalents and marketable securities held by investment managers and overnight investments:

     The Company’s overnight holdings fluctuate based on the timing of the client’s payroll processing cycle. Included in the overnight holdings balance as of September 30, 2008, are $69.7 million in withholdings associated with federal and state income taxes, employment taxes and other payroll deductions; as well as $19.2 million in client prepayments. Please read “Cash Flows from Operating Activities — Timing of Customer Payments/Payrolls,” on page 28 for additional information.

     The Company accounts for marketable securities in accordance with SFAS No. 115, Accounting for Certain Investments in 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 September 30, 2008 and December 31, 2007, all of the Company’s investments in marketable securities were classified as available-for-sale, and as a result, were reported at fair value.

     On January 1, 2008, the Company adopted SFAS No. 157 “Fair Value Measurements” (SFAS 157), for financial assets and liabilities. This statement 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:

     The following table summarizes the levels of fair value measurements of the Company’s financial assets:

     During the quarter ended September 30, 2008, the Company liquidated all of its Auction Rate Securities, including the $7.9 million classified as non-current assets (Level 3) at June 30, 2008, resulting in no gain or loss upon the sale.

     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. As of September 30, 2008, the Company had repurchased 11,114,725 shares at a total cost of $219.3 million, including 756,883 shares at a total cost of $19.6 million during the nine months ended September 30, 2008, under this authorization.

     During the first and second quarters of 2008, the board of directors declared quarterly dividends of $0.11 per share of common stock. During the third quarter of 2008, the board of directors increased the quarterly dividend to $0.13 per share of common stock. During the nine months ended September 30, 2008 and 2007, total paid dividends were $9.1 million and $9.0 million, respectively.

     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:

     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.

     During the second quarter 2008, the State of Colorado Department of Labor and Employment Unemployment Insurance Division (the “Division”) notified the Company of its identification of discrepancies, originating in 2002, regarding the application of the provisions of the Employment Security Act of Colorado. The Division has indicated that it is reviewing Administaff’s prior corporate reorganizations to determine whether the state unemployment accounts of certain Administaff subsidiaries should be combined into a single account, which could result in higher rates for certain prior and prospective periods. The Division has not issued a formal assessment of any additional taxes owed. The Company does not believe that the Division has any valid basis for assessing additional taxes and intends to defend itself vigorously. As a result of the uncertainty regarding the outcome of this matter, at this time the Company is unable to determine the ultimate additional tax liability, if any, related to this matter.

     The following discussion should be read in conjunction with our 2007 annual report on Form 10-K, as well as with our consolidated financial statements and notes thereto included in this quarterly report on Form 10-Q.

     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 us 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 our estimates, including those related to health and workers’ compensation insurance claims experience, state unemployment and payroll taxes, client bad debts, income taxes, property and equipment, goodwill and other intangibles, and contingent liabilities. Management bases 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:

     In September 2006, FASB Statement 157, “Fair Value Measurements” (“SFAS 157”) was issued. SFAS 157 establishes a framework for measuring fair value by providing a standard definition of fair value as it applies to assets and liabilities. SFAS 157, 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 has released FASB Staff Position No. FAS 157-b, Effective Date of FASB Statement No. 157,which delayed the effective date of Statement 157 for all non-financial assets and non-financial liabilities until fiscal years beginning after November 15, 2008. Accordingly, we adopted SFAS on January 1, 2008 for our financial assets and liabilities only. The adoption of SFAS 157 for our financial assets and liabilities did not have a material impact on our consolidated

financial statements and we do not anticipate a material impact when applied to our non-financial assets and liabilities.

     In December 2007, the FASB Statement 141R, “Business Combinations” (“SFAS 141R”) was issued. SFAS 141R replaces SFAS 141. SFAS 141R requires the acquirer of a business to recognize and measure the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at fair value. SFAS 141R also requires transactions costs related to the business combination to be expensed as incurred. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Our effective date will be January 1, 2009. We have not yet determined the impact of SFAS 141R, if any, on our consolidated financial statements, because the impact of SFAS 141R is fact-specific and will not be invoked until we acquire a business after the effective date.

          Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007.

          The following table presents certain information related to Administaff’s results of operations for the three months ended September 30, 2008 and 2007.

          Revenues

          Our revenues for the third quarter of 2008 increased 10.1% over the 2007 period due to a 6.1% increase in the average number of worksite employees paid per month and a 3.7%, or $42, increase in revenues per worksite employee per month.

          By region, our revenue growth over the third quarter of 2007 and revenue distribution for the quarter ended September 30, 2008 were as follows:

          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 third quarter of 2008, client retention improved, while new client sales declined and the net change in existing clients remained constant compared to the 2007 period.

          Gross Profit

          Gross profit for the third quarter of 2008 increased 13.9% to $85.5 million, compared to the third quarter of 2007. The average gross profit per worksite employee increased 7.7% to $239. 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 3.7% per worksite employee per month, our primary direct costs, which include payroll taxes, benefits and workers’ compensation expenses, increased 2.7% to $939 per worksite employee per month in the third quarter of 2008 versus $914 in the second quarter of 2007.

          Operating Expenses

          The following table presents certain information related to the Company’s operating expenses for the three months ended September 30, 2008 and 2007.

          Operating expenses increased 15.8% to $68.6 million compared to the third quarter of 2007. Operating expense per worksite employee increased to $191 per month in the 2008 period from $176 in the 2007 period. The components of operating expenses changed as follows:

          Other Income (Expense)

          Other income (expense) decreased from $2.9 million in the third quarter of 2007 to $1.7 million in the 2008 period, due primarily to a decline in interest rates.

          Income Tax Expense

          Our provision for income taxes differed from the U.S. statutory rate of 35% primarily due to state income taxes and non-deductible expenses.

          Net Income

          Operating and net income per worksite employee per month was $47 and $33 in the 2008 period, versus $47 and $36 in the 2007 period.

          Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007.

          The following table presents certain information related to Administaff’s results of operations for the nine months ended September 30, 2008 and 2007.

          Revenues

          Our revenues for the nine months ended September 30, 2008, increased 11.2% over the 2007 period due to a 7.2% increase in the average number of worksite employees paid per month and a 3.8%, or $45, increase in revenues per worksite employee per month.

          By region, our revenue growth over the first nine months of 2007 and revenue distribution for the nine months ended September 30, 2008 were as follows:

          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, 2008, client retention, as a percentage of the worksite employee base, improved, while new client sales and the net change in existing clients declined compared to the 2007 period.

          Gross Profit

          Gross profit for the first nine months of 2008 increased 15.6% to $256.2 million, compared to the first nine months of 2007. The average gross profit per worksite employee increased 7.9% to $245 per month in the 2008 period from $227 per month in the 2007 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 3.8% per worksite employee per month, our primary direct costs, which include payroll taxes, benefits and workers’ compensation expenses, increased 2.8% to $995 per worksite employee per month in the first nine months of 2008 versus $968 in the first nine months of 2007.

          Operating Expenses

          The following table presents certain information related to the Administaff’s operating expenses for the nine months ended September 30, 2008 and 2007.

          Operating expenses increased 15.9% to $205.7 million compared to the first nine months of 2007. Operating expense per worksite employee increased to $196 per month in the 2008 period from $182 in the 2007 period. The components of operating expenses changed as follows:

          Other Income (Expense)

          Other income (expense) decreased from $8.9 million in the first nine months of 2007 to $6.1 million in the 2008 period, due primarily to a decline in interest rates.

          Income Tax Expense

          Our provision for income taxes differed from the U.S. statutory rate of 35% primarily due to state income taxes and non-deductible expenses.

          Net Income

          Operating and net income per worksite employee per month was $48 and $34 in the 2008 period, versus $45 and $35 in the 2007 period.

          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 generally accepted accounting principles (“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.

          We periodically evaluate our liquidity requirements, capital needs and availability of resources in view of, among other things, expansion plans, dividends, debt service requirements and other operating cash needs. To meet short and long-term liquidity requirements, including payment of direct costs, operating expenses and dividends, 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 $189.7 million in cash and cash equivalents and marketable securities at September 30, 2008, including approximately $69.7 million for withheld federal and state income taxes, employment taxes and other payroll deductions, and $19.2 million in customer prepayments that were payable in October 2008. At September 30, 2008, we had working capital of $108.9 million compared to $97.2 million at December 31, 2007. We currently believe that our cash on hand, marketable securities and cash flows from operations will be adequate to meet our liquidity requirements for the remainder of 2008. 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

          Our cash flows from operating activities in 2008 decreased $16.3 million from 2007. 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:

          Cash Flows Used in Investing Activities

          Cash flows provided by investing activities were $48.4 million during the nine months ended September 30, 2008. We liquidated approximately $74.6 million in marketable securities and reinvested the funds into cash equivalents. In addition, we invested approximately $22.6 million in capital expenditures and $3.8 million in the acquisition of USDatalink, an employment screening services company.

          Cash Flows Used in Financing Activities

          Cash flows used in financing activities were $24.0 million. During the first nine months of 2008, we repurchased $19.6 million in treasury stock and paid $9.1 million in dividends.

          As previously disclosed, after capital constraints and downgrades from various rating agencies, our former workers’ compensation insurance carrier, Lumbermens Mutual Casualty Company, a unit of Kemper Insurance Companies (“Kemper”) has entered into a “run-off.” If the run-off process is not successful and Kemper is placed into a formal liquidation or a similar proceeding, most states have established guaranty associations to pay the remaining claims. However, the guaranty associations of certain states, including Texas, may attempt to return the liability for such remaining claims to Administaff, which may have a material adverse effect on net income in the reported period. For more information regarding Kemper, as well as the effect on us of the bankruptcy of another former workers compensation insurance carrier, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Factors That May Affect Future Results and the Market Price of Common Stock- Increases in Workers’ Compensation Costs” on page 40 of our Form 10-K for the year ended December 31, 2007, filed with the SEC.

          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, 2008.

          There has been no change in our internal controls over financial reporting that occurred during the three months ended September 30, 2008, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

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

          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) 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; (iv) the effectiveness of our sales and marketing efforts; (v) changes in the competitive environment in the PEO industry, including the entrance of new competitors and our ability to renew or replace client companies; (vi) our liability for worksite employee payroll and benefits costs; and (vii) an adverse final judgment or settlement of claims against Administaff. These factors are discussed in detail in our 2007 annual report on Form 10-K under “Factors That May Affect Future Results and the Market Price of Common Stock” on page 40, 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.

          The following additional factors may also have an effect on our results of operations.

          Current economic conditions may adversely affect our industry, business and results of operations.

          The United States economy is currently undergoing a period of slowdown and unprecedented volatility, which some observers view as a possible recession, and the future economic environment may continue to be less favorable than that of recent years. In addition, recent disruptions in national and international credit markets have lead to a scarcity of credit, tighter lending standards and higher interest rates on business loans. A prolonged economic downturn or a continuing scarcity of credit could adversely affect the financial condition and levels of business activity of our clients. This may in turn 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 determine not to outsource those services to us. In addition, worsening economic conditions may impair our ability to attract new clients. If any of these circumstances remain in effect for an extended period of time, there could be a material adverse effect on our financial results.

          The failure of our insurance carriers could have a material adverse effect on us.

          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 has approved over $100 billion in emergency loans to AIG Parent. 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 September 30, 2008, AIG held funds of $43.4 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 a formal liquidation 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 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 16 and “—Other Matters” on page 29.

          The following table provides information about purchases by Administaff during the three months ended September 30, 2008, of equity securities that are registered by Administaff pursuant to Section 12 of the Exchange Act:

          (a) List of exhibits.

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.