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Administaff Announces Second Quarter Results
- Higher-Than-Expected Health Claims Result in
Net Loss - Unit Growth Accelerates to 12.7% in Spite of Increased
Pricing
HOUSTON, Aug 1, 2002 -- Administaff,
Inc. (NYSE: ASF), the nation's leading Professional Employer Organization,
today announced results for the second quarter and six months ended
June 30, 2002. For the second quarter, the company reported a net
loss and diluted net loss per share of $3.2 million and $0.11, versus
net income of $3.8 million and diluted net income per share of $0.13
in the 2001 period.
The company's average number of worksite employees paid per month
in the second quarter of 2002 increased 4.1% over the first quarter,
from 73,488 to 76,477, a net gain of approximately 1,000 employees
per month. These results were primarily due to a significant improvement
in client retention combined with strong sales of new accounts.
On a year-over-year basis, worksite employees paid increased 12.7%,
which combined with a 4.2% increase in gross markup per worksite
employee and a 2.0% decrease in fee payroll cost per worksite employee,
produced revenue growth for the second quarter of 11.1% to $1.2
billion.
Gross profit decreased 12.0% to $36.6 million,
due primarily to higher benefits cost. The average gross profit
per worksite employee per month decreased 22.1% to $159 in the second
quarter of 2002, versus $204 in the 2001 period. The company's benefits
cost per worksite employee increased $89 per month as a result of
a 28.1% increase in the cost per covered employee. This increase
was partially offset by a 4.2%, or $36, increase in gross markup
per worksite employee per month, and a decrease in the payroll tax
cost per worksite employee of $8 per month due to a lower payroll
average.
"Although we are very disappointed in the
higher-than-expected level of medical claims costs, we now have
sufficient claims data with our new carrier to provide improved
visibility with regard to our costs going forward," said Richard
G. Rawson, executive vice president of administration and chief
financial officer. "This improved visibility will enable us
to better align cost increases with pricing for new and renewing
business."
"We are taking significant steps to manage
our way through the challenges of rising health care costs and the
difficult employment environment," said Paul J. Sarvadi, president
and chief executive officer. "I believe that these steps will
restore operating income to our target range of $20 to $30 per worksite
employee per month in 2003."
Operating expenses increased 15.7% over the
2001 period to $42.5 million. On a per worksite employee basis,
operating expenses increased 2.2% to $185 per month in the 2002
period from $181 per month in the 2001 period, primarily due to
higher depreciation and amortization expense. The resulting operating
loss for the second quarter of 2002 was $6.0 million, compared to
operating income of $4.8 million in the 2001 period.
Year-to-Date Results
For the six months ended June 30, 2002, the
company reported a net loss and diluted net loss per share of $8.9
million and $0.32, versus a net loss and diluted net loss per share
of $563,000 and $0.02 for the same period in 2001.
Year-to-date revenues increased 10.6% to $2.3
billion, due to a 10.8% increase in the average number of worksite
employees paid per month and a 4.7% increase in gross markup per
worksite employee per month, partially offset by a 1.3% decrease
in fee payroll cost per worksite employee per month.
Gross profit for the six months ended June 30,
2002 decreased 3.2% to $67.1 million, due primarily to higher benefits
cost. The average gross profit per worksite employee per month decreased
12.9% to $149, versus $171 in the 2001 period. The company's benefits
cost per worksite employee increased $73 per month as a result of
a 23.6% increase in the cost per covered employee. This increase
was partially offset by a 4.7%, or $40, increase in gross markup
per worksite employee per month, and a decrease in the payroll tax
cost per worksite employee of $8 per month due to a lower payroll
average.
Year-to-date operating expenses increased 13.9%
over the 2001 period. Operating expenses per worksite employee per
month increased to $185 from $180 in the 2001 period, primarily
due to higher depreciation and amortization expense. The resulting
operating loss for the six months ended June 30, 2002, was $16.1
million compared to an operating loss of $3.7 million in the 2001
period.
Historically, the company's earnings pattern
has included losses in the first quarter, followed by improved profitability
in subsequent quarters throughout the year. This pattern is due
to the effects of employment-related taxes that are based on each
employee's cumulative earnings up to specified wage levels, causing
employment-related taxes to be highest in the first quarter and
then decline over the course of the year.
Other Developments for the Quarter
-- IRS agreement on 401(k) Plan. In late May, Administaff completed
a
closing agreement with the Internal Revenue Service (IRS) related
to
Administaff's 401(k) Plan (the Plan). As a result of the agreement,
the IRS has closed its audit of the Plan and has granted full relief
on the exclusive benefit issue raised during the audit. The agreement
recognizes and preserves Administaff's ability to maintain its current
plan structure through December 31, 2003. Thereafter, the company
intends to comply with recently published IRS guidelines (Revenue
Procedure 2002-21), which provide a structure for the design of
PEO
defined contribution plans. Administaff is continuing to review
the
IRS guidance and its application to the Plan. However, the company
expects that the changes required by the IRS guidance will not have
a
material adverse effect on its financial condition or results of
operations.
-- State Unemployment Taxes. As a result of
a corporate restructuring
plan completed in January 2002, Administaff filed for a partial
transfer of compensation experience used to determine unemployment
tax
rates with nine states, including Texas. The company estimated and
recorded its unemployment tax expense during the first six months
of
2002 using tax rates in those states that were based on its
expectation that these partial transfer applications would be
approved. All states have approved the company's applications with
the exception of Texas. Pending completion of the approval process,
Administaff has paid its unemployment taxes to the State of Texas
at
the higher new employer rate as required. The company, however,
has
continued to record its expense at the expected lower rate and has
recorded an asset totaling approximately $6 million for the refund
expected to be received upon approval of the application. In
June 2002, the company received an initial determination from the
Texas Workforce Commission (TWC) that its partial transfer application
was denied. The company is vigorously pursuing an appeal of this
ruling with the TWC. At this time, the opinion of the company's
outside counsel is that it is more likely than not that the company
will ultimately succeed in having its application approved. If facts
or events were to indicate that it was probable that Administaff's
application would ultimately be denied, the company would be required
to recognize this asset as additional unemployment tax expense in
the
period of such determination.
-- $30 Million Credit Facility. In June, Administaff
obtained a
$30 million, six-month revolving line of credit with JPMorgan Chase
that is secured primarily by real estate assets. This facility
replaced the company's former $21 million cash-secured line of credit
with JPMorgan Chase.
-- UnitedHealthcare. In June, Administaff and
UnitedHealthcare finalized
the terms of their health insurance contract. In line with this
agreement, UnitedHealthcare continues to serve as Administaff's
anchor
carrier in providing nationwide coverage.
-- HR PowerHouse(SM). Administaff and IBM expanded
their marketing
relationship in June with the launch of HR PowerHouse, an online
portal that delivers a wide range of human resources information,
tools and expertise to small business owners and the public. HR
PowerHouse is accessible via Administaff's home page at
www.administaff.com and in the Business Links section of IBM's Small
Business Center, located at www.ibm.com/smallbusiness . Administaff
expects that HR PowerHouse will soon become available through the
Web
sites of other alliance companies.
-- CIGNA. In April, Administaff expanded its
national health insurance
carrier network with the addition of an Exclusive Provider Program
(EPP) offered by CIGNA HealthCare. This new network option is
available to worksite employees who live in EPP-covered areas in
seven
states -- Connecticut, Massachusetts, Michigan, Nevada, North
Carolina, Oklahoma and Pennsylvania.
-- Cleveland Sales Office. Administaff entered
the Ohio market in June
with the opening of its 38th sales office. Cleveland, which ranks
as
the largest metropolitan area in Ohio and is home to thousands of
small and medium-sized businesses matching the Administaff target
profile, represents the company's 21st market.
Administaff will be hosting a conference
call today at 11:00 a.m. EDT to discuss the quarterly results and
business trends, and answer questions from investment analysts.
To listen in, call 800-451-7724 and use conference ID "Administaff."
The call may also be accessed via the Internet at www.administaff.com
.
Administaff's Personnel Management System includes
employment administration, benefits management, government compliance,
recruiting and selection, employer liability management, training
and development, performance management and owner support. These
core services are complemented by an eBusiness strategy that includes
the Employee Service Center(SM), an interactive eService platform
that provides clients and worksite employees with information and
resources to help maximize the benefit of their Administaff services.
The Employee Service Center also features My MarketPlace(SM), an
eCommerce portal that offers value-added products and services from
best-of-class providers such as American Express, AT&T, Continental
Airlines, Dell, IBM and Spiegel.
Administaff currently operates 38 sales
offices in 21 major markets: Atlanta, Austin, Baltimore, Boston,
Charlotte, Chicago, Cleveland, Dallas, Denver, Houston, Los Angeles,
Minneapolis/St. Paul, New Jersey, New York City, Orlando, Phoenix,
San Antonio, San Diego, San Francisco, St. Louis and Washington,
D.C.
(Note: The statements contained in this
press release that are not historical facts are forward-looking
statements that involve a number of risks and uncertainties. Therefore,
the actual results of 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; (iii) changes in Administaff's
direct costs and operating expenses; (iv) the estimated costs and
effectiveness of capital projects and investments in technology
and infrastructure; (v) Administaff's ability to effectively implement
its eBusiness strategy; (vi) the effectiveness of Administaff's
sales and marketing efforts, including the company's marketing arrangements
with other companies; and (vii) changes in the competitive environment
in the Professional Employer Organization industry. These factors
are described in further detail in Administaff's filings with the
Securities and Exchange Commission.)
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