Randy Harp - President, Co-Chief Executive Officer and Chief Operating Officer
Steve Williamson - Chief Financial Officer
Pre-Paid Legal Services, Inc. (PPD) Q4 2010 Earnings Call February 16, 2011 8:30 AM ET
Good day ladies and gentlemen, and welcome to the Pre-Paid Legal fourth-quarter earnings results conference call. At this time, all participants' lines are in a listen-only mode. (Operator Instructions) As a reminder, this conference is being recorded.
I would now like to turn the conference over to Mr. Randy Harp, Chief Operation Officer. Please go ahead.
Thank you and good morning. This is Randy Harp, Chief Operating Officer of the Company. I want to welcome you to the 2010 fourth-quarter and year-end earnings conference call for Pre-Paid Legal Services Inc. Joining me here in our home office in Ada, Oklahoma is Steve Williamson, our CFO.
Before we begin, I want to remind everybody that the conference call will contain forward-looking statements, including our expectations of future results and future plans. Actual results might differ materially from those projected in these forward-looking statements. Additional information concerning risk factors that could cause the results to differ materially from these forward-looking statements are contained in our press releases that announce these earnings as well as disclosures in our other public reports on Forms 10K, 10-Q, 8-K and any amendments filed thereto with the SEC, and are available on the SEC EDGAR website as well as our own website, PrePaidLegal.com, under Investor Relations.
As previously announced, we entered into a definitive merger agreement on January 30, 2011 with newly created entities formed by MidOcean Partners, a New York-based private equity firm. The merger agreement provides that MidOcean will acquire all of our outstanding shares for cash, cash premiums of $66.50 per share, or approximately $650 million in aggregate. The closing of the transaction is subject to certain terms and conditions customary for transactions of this type, including receipt of stockholder and regulatory approvals. Additional information regarding the merger will be included in a proxy statement to be filed with the SEC and provided to all shareholders. We will not be responding to e-mail questions regarding the merger on this call.
At this time, I'd like to ask our Chief Financial Officer, Steve Williamson, to step through the more significant financial highlights for both the 2010 fourth quarter and 2010 fiscal year. Steve?
Thanks Randy. First of all, just a big picture of the fourth quarter '10 compared to '09, total revenue was down $7.5 million. Expenses for taxes were down as well, which resulted in a $4.9 million or a 43% increase in net income. There were 7% fewer diluted shares outstanding that brought our diluted earnings per share up 54%. On a sequential basis, membership fees were down $479,000.
Then to kind of step through the fourth-quarter income statement line items by line item, the fourth-quarter 2010 membership fee decreased $3.8 million compared to the fourth quarter of '09, of course as a result of the fewer average fees in force. Associate Services revenue was down $3.6 million, primarily due to lower fee – associate fee revenues, which was a result of fewer new recruits. We had 28,000 new recruits in the fourth quarter of 2010 compared to 62,000 in '09. We also saw a decline of $269,000 in e-Service fees.
Other revenue, which you all know is primarily the amortization of that $10 enrollment fee over a three-year average life, was down $78,000 to $828,000. Membership benefits decreased 5.6% versus a 3.5% decline in membership revenues. That increased decline was due to the new contractual rates that we have with Kroll on our ID theft membership product. For, again, for 2010 versus '09, we had a 33.3% benefit ratio versus a 34% ratio over the 2009 period.
Commissions were down 30% to $26.4 million due to a 22% decline in annual membership fees sold. Commissions per member came in at $225, $29 lower than the prior year and represented 72% of new membership premiums sold.
Associate Services costs was higher than Associate Services revenue at $1.2 million in the fourth quarter 2010 versus $1.3 million for '09, so it came in about the same place on the comparable fourth quarter of '09.
G&A increased $2 million, primarily due to this $2.6 million of additional expenses that we had in conjunction with the special committee activities and their advisors. That was offset by decreases in employee costs, bank service charges, other taxes and postage.
Other expenses decreased $1 million in the fourth quarter '10 compared to '09 due to a $276,000 decrease in interest expense, a $171,000 decrease in depreciation expense and a $492,000 increase in interest income. The net result of the interest income and interest expense was primarily due to the settlement of our Canadian tax issue that we had relative to commissions. We settled that in the fourth quarter, received the payment from CRA. We still have a little left over from Ontario that is to be received more than likely this quarter.
Provision for taxes were approximately 41% for the fourth quarter 2010 and 40% for the fourth quarter of '09. Again, net income was up 33% to $16.3 million. 7% decline in diluted shares outstanding of course due to the buyback program. Fourth-quarter 2010 diluted EPS came in with an increase of 54% to $1.66.
For the full year, membership revenues were down 1%. Just a quick kind of overview of 2010 compared to '09. The benefit ratio was 33.4% compared to 34%. Of course that was due to the new Kroll benefit that we had for this last year, 2010. Going forward, we should be right at that 33.4%.
Commissions ratio was 26.9% compared to 30.6%, driven entirely by the number of units sold and the size of those units. So it just goes in conjunction with what we call premium written, which is the product of the units, new memberships sold, times the average premium of those new units.
G&A ratio was 12.2% for 2010 versus 12.1% for '09. Our tax rate was 39.7% for 2010 compared to 39.2%. We've seen a little bit of a creep-up in our tax rate just mainly due to the increased taxation that we have from some of the states as they kind of change some of the rules that yield them a little more revenue. That resulted in a full-year 2010 net income being up 22% with diluted earnings per share of 35% to $6.80 a share versus $5.04.
We used $189,000 of our cash to purchase about 3000 shares of treasury stock at an average price of $58.62 during the fourth quarter. At 2/31/10, we had 9.76 million shares outstanding. At 12/31/2010, we had cash and unpledged investments of around $71 million and we were debt-free. We did pay off the debt during the fourth quarter.
A summary of how we used the $74 million, we generated $74 million of positive cash flow and we spent $3 million on CapEx, $42 million in paying back our debt, $14 million in a treasury stock buyback program with a net increase of about $15 million in cash and investments.
With that, I'll turn it back to you, Randy.
Thank you Steve. I want to respond to e-mail questions as well, we always do, that Steve either didn't address in his presentation or haven't been addressed in previous filings. Fortunately or unfortunately, we only received two questions from one of our great long-term shareholders and we'll respond to those the best we can.
The first question, I would be interested in any new insights you might have into the short position in PPD stock. I think I last saw the total short shares at 1.4 million shares and I think that was just last month. Those numbers are correct. It was as of January 15 and – or 14 and –
We actually had a new report January 31 and it was virtually unchanged.
As far as insights, I don't know that Steve and I, either one, can provide much insight. We just get the number from the New York Stock Exchange every two weeks and it has been relatively consistent. I think we probably expected a change and haven't seen that. So, I apologize for the lack of insight, but we simply get a number reported to us every two weeks.
The other question that we received, what plans do you have for your free cash flow generation during the next few months you're a public company? As Steve said, we paid off all of our debt in the fourth quarter. We have a substantial amount of cash, certainly expect to generate more during that timeframe. As we always have, we will always be looking to generate the best return for our shareholders, whether that be on – again, just primarily since we paid off our debt, we will be primarily on the investment side, but a very good problem to have and one that we enjoy. It's much better to have a lot of cash and no debt than a lot of debt and no cash.
So I want to wrap up the call just reminding everyone of the value proposition of our membership, a value proposition that we have always believed, continue to believe is a win-win win situation. In the middle of kind of the three elements, our sales Associates, our provider law firms and the company that the most important focal point is and always has been providing value to that fee-paying member. The member has to receive more in value each month as they pay us in cash. They must receive high-quality legal services delivered a customer service friendly manner and each and every time they interact with our law firms. We believe that's the case. We believe they always receive more value than they pay us in cash. We believe they are always better with us than without us. So just a tremendous value proposition we believe that this product represents.
So Steve and I appreciate your confidence, certainly both now and for me over the last 21 years. We don't take it for granted. We appreciate you being on the call today and look forward to our next quarterly earnings call sometime in late April. Thank you.
Ladies and gentlemen, thank you for your participation. That concludes the conference. You may now disconnect.
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