FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _________
Commission file number 0-3658
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THE FIRST AMERICAN CORPORATION
---------------------------------
(Exact name of registrant as specified in its charter)
Incorporated in California 95-1068610
-------------------------- ---------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporatio or organization)
1 First American Way, Santa Ana, California 92707-5913
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(Address of principal executive offices) (Zip Code)
(714)800-3000
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
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 X No
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports to be filed by Section 12,13 or 15(d) of the Securities Exchange Act of
1934 subsequent to the distribution of securities under a plan confirmed by a
court.
Yes ___________ No ___________
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
$1 par value - 68,617,958 shares as of November 6, 2001
1
INFORMATION INCLUDED IN REPORT
------------------------------
Part I: Financial Information
Item 1. Financial Statements (Unaudited)
A. Condensed Consolidated Balance Sheets
B. Condensed Consolidated Statements of Income and Comprehensive Income
C. Condensed Consolidated Statements of Cash Flows
D. Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Part II: Other Information
Item 6. Exhibits and Reports of Form 8-K
Items 1- 5 have been omitted because they are not applicable with
respect to the current reporting period.
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.
THE FIRST AMERICAN CORPORATION
---------------------------------
(Registrant)
/s/ Thomas A. Klemens
--------------------------------
Thomas A. Klemens
Executive Vice President
Chief Financial Officer
/s/ Max O. Valdes
--------------------------------
Max O Valdes
Vice President
Chief Accounting Officer
Date: November 12, 2001
2
Part I: Financial Information
---------------------
Item 1: Financial Statements
--------------------
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
------------------------
Condensed Consolidated Balance Sheets
-------------------------------------
September 30, 2001
(unaudited) December 31, 2000
--------------------- ---------------------
Assets
Cash and cash equivalents $ 596,733,000 $ 300,905,000
---------------------- --------------------
Accounts and accrued income receivable, net 281,158,000 204,177,000
---------------------- --------------------
Income tax receivable 19,472,000
--------------------
Investments:
Deposits with savings and loan associations and banks 33,087,000 31,900,000
Debt securities 253,766,000 209,407,000
Equity securities 52,162,000 58,720,000
Other long-term investments 110,423,000 92,703,000
---------------------- --------------------
449,438,000 392,730,000
---------------------- --------------------
Loans receivable 105,089,000 94,452,000
---------------------- --------------------
Property and equipment, at cost 750,216,000 662,198,000
Less- accumulated depreciation (287,734,000) (227,110,000)
---------------------- --------------------
462,482,000 435,088,000
---------------------- --------------------
Title plants and other indexes 303,859,000 290,072,000
---------------------- --------------------
Assets acquired in connection with claim settlements
(net of valuation reserves of $1,101,000 and $1,000,000) 30,126,000 27,846,000
---------------------- --------------------
Deferred income taxes 16,166,000 11,519,000
---------------------- --------------------
Goodwill and other intangibles, net 431,954,000 346,156,000
---------------------- --------------------
Other assets 102,367,000 77,320,000
---------------------- --------------------
$ 2,779,372,000 $ 2,199,737,000
====================== ====================
Liabilities and Stockholders' Equity
Demand deposits $ 92,018,000 $ 81,289,000
---------------------- --------------------
Accounts payable and accrued liabilities 334,508,000 267,567,000
---------------------- --------------------
Deferred revenue 279,112,000 261,673,000
---------------------- --------------------
Reserve for known and incurred but not reported claims 303,864,000 284,607,000
---------------------- --------------------
Income taxes payable 58,383,000
----------------------
Notes and contracts payable (Note 5) 422,239,000 219,838,000
---------------------- --------------------
Minority interests in consolidated subsidiaries 126,628,000 114,526,000
---------------------- --------------------
Mandatorily redeemable preferred securities of
the Company's subsidiary trust whose sole assets
are the Company's $100,000,000 8.5% deferrable
interest subordinated notes due 2012 100,000,000 100,000,000
---------------------- --------------------
Stockholders' equity:
Preferred stock, $1 par value
Authorized - 500,000 shares; outstanding - none
Common stock, $1 par value
Authorized - 180,000,000 shares
Outstanding - 68,300,000 and 63,887,000 shares 68,300,000 63,887,000
Additional paid-in capital 264,112,000 172,468,000
Retained earnings 730,500,000 628,913,000
Accumulated other comprehensive income (292,000) 4,969,000
---------------------- --------------------
1,062,620,000 870,237,000
---------------------- --------------------
$ 2,779,372,000 $ 2,199,737,000
---------------------- --------------------
See notes to condensed consolidated financial statements.
3
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
------------------------
Condensed Consolidated Statements of Income and Comprehensive Income
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(Unaudited)
For the Three Months Ended For the Nine Months Ended
September 30 September 30
----------------------------------- ---------------------------------------
2001 2000 2001 2000
----------- ------------- -------------- -------------
Revenues
Operating revenues $952,776,000 $730,490,000 $2,610,969,000 $2,126,571,000
Investment and other income 30,232,000 19,770,000 66,822,000 45,788,000
------------ ------------ -------------- --------------
983,008,000 750,260,000 2,677,791,000 2,172,359,000
------------ ------------ -------------- --------------
Expenses
Salaries and other personnel costs 331,727,000 260,250,000 917,942,000 773,513,000
Premiums retained by agents 255,384,000 192,803,000 661,206,000 585,398,000
Other operating expenses 216,854,000 176,845,000 622,373,000 511,994,000
Provision for title losses and other claims 52,661,000 36,764,000 129,676,000 104,327,000
Depreciation and amortization 27,820,000 22,790,000 77,925,000 61,112,000
Premium taxes 6,758,000 5,396,000 17,470,000 16,318,000
Interest 8,449,000 6,655,000 22,314,000 18,709,000
------------ ------------ -------------- --------------
899,653,000 701,503,000 2,448,906,000 2,071,371,000
------------ ------------ -------------- --------------
Income before income taxes and
minority interests 83,355,000 48,757,000 228,885,000 100,988,000
Income taxes 30,500,000 19,000,000 83,200,000 39,200,000
------------ ------------ -------------- ---------------
Income before minority interests 52,855,000 29,757,000 145,685,000 61,788,000
Minority interests 11,160,000 5,358,000 30,697,000 11,355,000
------------ ------------ -------------- ---------------
Net income 41,695,000 24,399,000 114,988,000 50,433,000
------------ ------------ -------------- ---------------
Other comprehensive income, net of tax
Unrealized gain (loss) on securities 817,000 1,115,000 (102,000) 1,213,000
Minimum pension liability adjustment (75,000) 175,000 (190,000) -
------------ ------------ -------------- ---------------
742,000 1,290,000 (292,000) 1,213,000
------------ ------------ -------------- ---------------
Comprehensive income $ 42,437,000 $ 25,689,000 $ 114,696,000 $ 51,646,000
============ ============ ============== ===============
Net income per share (Note 2):
Basic $ .61 $ .38 $ 1.75 $ 0.79
============ ============ ============== ===============
Diluted $ .55 $ .37 $ 1.59 $ 0.77
============ ============ ============== ===============
Cash dividends per share $ .07 $ .06 $ .20 $ .18
============ ============ ============== ===============
Weighted average number of shares (Note 2):
Basic 67,844,000 63,526,000 65,877,000 63,689,000
============ ============ ============== ===============
Diluted 78,872,000 66,088,000 74,529,000 65,700,000
============ ============ ============== ===============
See notes to condensed consolidated financial statements.
4
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
------------------------
Condensed Consolidated Statements of Cash Flows
-----------------------------------------------
(Unaudited)
For the Nine Months Ended
September 30
------------------------------
2001 2000
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Cash flows from operating activities:
Net income $ 114,988,000 $ 50,433,000
Adjustments to reconcile net income to cash
provided by operating activities-
Provision for title losses and other claims 129,676,000 104,327,000
Depreciation and amortization 77,925,000 61,112,000
Minority interests in net income 30,697,000 11,355,000
Other, net (14,189,000) (201,000)
Changes in assets and liabilities excluding effects of
company acquisitions and noncash transactions-
Claims paid, including assets acquired, net of recoveries (113,069,000) (98,582,000)
Net change in income tax accounts 75,253,000 29,351,000
Increase in accounts and accrued income receivable (71,788,000) (14,031,000)
Increase (decrease) in accounts payable and accrued liabilities 56,561,000 (15,382,000)
Increase (decrease) in deferred revenue 15,269,000 (11,140,000)
Other, net (19,115,000) (6,500,000)
------------- -------------
Cash provided by operating activities 282,208,000 110,742,000
------------- -------------
Cash flows from investing activities:
Net cash effect of company acquisitions/dispositions (15,407,000) (39,908,000)
Net increase in deposits with banks (1,063,000) (3,997,000)
Net increase in loans receivable (10,637,000) (4,594,000)
Purchases of debt and equity securities (154,974,000) (40,580,000)
Proceeds from sales of debt and equity securities 53,397,000 46,426,000
Proceeds from maturities of debt securities 55,537,000 11,302,000
Net decrease in other investments 4,560,000 972,000
Capital expenditures (96,311,000) (112,846,000)
Proceeds from sale of property and equipment 1,766,000 1,509,000
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Cash used for investing activities (163,132,000) (141,716,000)
------------- -------------
Cash flows from financing activities:
Net change in demand deposits 10,729,000 (1,963,000)
Proceeds from issuance of debt 210,000,000 3,575,000
Repayment of debt (22,357,000) (16,661,000)
Proceeds from exercise of stock options 9,173,000 1,546,000
Repurchase of company shares (20,758,000)
Distributions to minority shareholders (17,392,000) (5,125,000)
Cash dividends (13,401,000) (11,423,000)
------------- -------------
Cash provided by (used for) financing activities 176,752,000 (50,809,000)
------------- -------------
Net increase (decrease) in cash and cash equivalents 295,828,000 (81,783,000)
Cash and cash equivalents - Beginning of year 300,905,000 350,010,000
- End of third quarter
------------- -------------
$ 596,733,000 $ 268,227,000
============= =============
Supplemental information:
Cash paid during the three quarters for:
Interest $ 18,525,000 $ 17,722,000
Premium taxes $ 14,353,000 $ 17,142,000
Income taxes $ 22,622,000 $ 21,931,000
Noncash investing and financing activities:
Shares issued for stock bonus plan $ 225,000 $ 226,000
Shares issued for employee savings plan $ 8,283,000
Liabilities incurred in connection with company acquisitions $ 36,750,000 $ 44,740,000
Purchase of minority interest $ 1,203,000 $ 12,804,000
Company acquisitions in exchange for common stock $ 78,376,000
See notes to condensed consolidated financial statements.
5
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
------------------------
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
(Unaudited)
Note 1 - Basis of Condensed Consolidated Financial Statements
- -------------------------------------------------------------
The condensed consolidated financial information included in this report has
been prepared in conformity with the accounting principles and practices
reflected in the consolidated financial statements included in the annual report
filed with the Securities and Exchange Commission for the preceding calendar
year. All adjustments are of a normal recurring nature and are, in the opinion
of management, necessary to a fair statement of the consolidated results for the
interim periods. This report should be read in conjunction with the Company's
Annual Report on Form 10-K for the year ended December 31, 2000.
Note 2 - Earnings Per Share
- ---------------------------
For the Three Months For the Nine Months
Ended Ended
September 30 September 30
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2001 2000 2001 2000
================================================================
Numerator:
Net Income-numerator for basic net income per share $41,695,000 $24,399,000 $114,988,000 $50,433,000
Effect of dilutive securities
Convertible debt - interest expense (net of tax) 1,783,000 - 3,441,000 -
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Net Income-numerator for dilutive net income per share $43,478,000 $24,399,000 $118,429,000 $50,433,000
================================================================
Denominator
Weighted average shares-denominator
For basic net income per share 67,844,000 63,526,000 65,877,000 63,689,000
Effect of dilutive securities:
Employee stock options 2,418,000 2,562,000 3,320,000 2,011,000
Convertible debt 8,610,000 - 5,332,000 -
----------------------------------------------------------------
Denominator for diluted net income per share 78,872,000 66,088,000 74,529,000 65,700,000
================================================================
Basic net income per share $ 0.61 $ 0.38 $ 1.75 $ 0.79
================================================================
Diluted net income per share $ 0.55 $ 0.37 $ 1.59 $ 0.77
================================================================
For the three and nine months ended September 30, 2001, 4,000,398 and 2,564,285
stock options, respectively, were excluded from the computation of diluted
earnings per share due to their antidilutive effect.
Note 3 - Business Combinations
- ------------------------------
In May 2001, the Company acquired Credit Management Solutions, Inc (CMSI), a
provider of credit automation software and services in a stock-for-stock
transaction. As a result of the acquisition, CMSI shareholders received 0.2841
newly issued shares of the Company's common stock for each CMSI share. The
Company issued 2,272,542 shares of common stock and accounted for this
transaction under the purchase method of accounting. Goodwill of $46.9 million
was recorded and is being amortized on a straight-line basis over its estimated
useful life of 25 years. The Company has included CMSI in its consumer
information segment.
Assuming the acquisition had occurred on January 1, 2000, pro forma revenues,
net income and net income per diluted share would have been $2.69 billion,
$112.4 million and $1.48 respectively for the nine months ended September 30,
2001; and $2.19 billion, $47.6 million and $.70, respectively for the nine
months ended September 30, 2000. The pro forma results include amortization of
goodwill. The pro forma results exclude certain merger-related costs and are
not necessarily indicative of the operating results that would have been
obtained had the acquisition occurred at the beginning of the period, nor are
they indicative of future operating results.
6
In addition, during the nine months ended September 30, 2001, the Company
acquired twelve companies. The purchase method of accounting was used for all of
the acquisitions. The twelve acquisitions accounted for under the purchase
method of accounting were individually not material and are included in the
following business segments: ten in the title insurance segment, one in the
real estate information segment and one in the consumer information segment.
The aggregate purchase price was $17.4 million in cash, $12.5 million in notes
payable and forgiven notes receivable and 976,235 shares of the Company's common
stock. The purchase price of each was allocated to the assets acquired and
liabilities assumed based on estimated fair values and approximately $44.4
million in goodwill was recorded. Goodwill is being amortized on a straight-line
basis over its estimated useful life ranging from 20 to 30 years. The operating
results of these acquired entities were included in the Company's consolidated
financial statements from their respective acquisition dates.
Assuming all of the current-year acquisitions (including CMSI) had occurred
January 1, 2000, pro forma revenues, net income and net income per diluted share
would have been $2.71 billion, $111.7 million and $1.46, respectively for the
nine months ended September 30, 2001; and $2.21 billion, $48.8 million and $.71,
respectively for the nine months ended September 30, 2000. All pro forma results
include amortization of goodwill and interest expense on acquisition debt. The
pro forma results exclude certain merger-related costs and are not necessarily
indicative of the operating results that would have been obtained had the
acquisitions occurred at the beginning of the periods presented, nor are they
indicative of future operating results.
In February 2001, the Company announced the sale of its subsidiary, Contour
Software, Inc., to Ellie Mae(SM), Inc., in exchange for cash, notes and an
interest in Ellie Mae. As a result of the transaction, the Company recorded a
deferred gain of $14.2 million. Contour had been included in the Company's real
estate information segment.
On July 20, 2001, the Financial Accounting Standards Board ("the FASB") issued
Statement of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS 141"). This statement addresses financial accounting and reporting for
business combinations and supersedes APB Opinion No. 16, "Business
Combinations". All business combinations in the scope of SFAS 141 are to be
accounted for using one method, the purchase method. The provisions of SFAS
141 apply to all business combinations initiated or closed after June 30, 2001.
Management of the Company anticipates that the adoption of SFAS 141 will not
have a significant effect on the Company's earnings or financial position.
On July 20, 2001, the FASB issued Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). This statement
addresses financial accounting and reporting for goodwill and other intangible
assets and supersedes APB Opinion No. 17, "Intangible Assets". SFAS 142
addresses how goodwill and other intangible assets should be accounted for in
the financial statements. Goodwill and intangible assets that have indefinite
useful lives will not be amortized, but rather will be tested at least annually
for impairment. Intangible assets that have finite useful lives will continue
to be amortized over their useful lives, but without the constraint of an
arbitrary ceiling. The provisions of SFAS 142 are required to be applied
starting with fiscal years beginning after December 15, 2001, and apply to all
goodwill and other intangible assets recognized in the financial statements at
that date. Goodwill and intangible assets acquired after June 30, 2001, will be
subject immediately to the nonamortization and amortization provisions of SFAS
142. Management is in the process of assessing the impact of implementing SFAS
142 on the Company's earnings and financial position. Management estimates the
adoption of the nonamortization provision of SFAS 142 will increase income
before income taxes and minority interests in 2002 by approximately $18.0
million, or $0.20 per diluted share, excluding the effects of impairment, if
any.
Note 4 - Segment Information
- ----------------------------
The Company's operations include three reportable segments. Selected financial
information about the Company's operations by segment is as follows:
Operating revenues:
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------------------------- ------------------------------------------
($000) ($000)
2001 % 2000 % 2001 % 2000 %
------------------------------------------------- ------------------------------------------
Title Insurance 693,235 73 521,998 71 1,870,045 72 1,527,258 72
Real Estate Information 181,042 19 141,501 20 527,736 20 408,151 19
Consumer Information 78,499 8 66,991 9 213,188 8 191,162 9
------------------------------------------------ ------------------------------------------
Total $952,776 100 $730,490 100 $2,610,969 100 $2,126,571 100
================================================= ==========================================
7
Income before income taxes and minority interests:
Three Months Ended Nine Months Ended
September 30 September 30
---------------------------------- ------------------------------------
($000) ($000)
2001 % 2000 % 2001 % 2000 %
-------- --- -------- --- -------- --- --------- ---
Title Insurance $ 38,004 38 $ 30,543 50 $120,185 44 $ 73,752 53
Real Estate Information 50,112 51 19,915 33 126,298 47 36,030 26
Consumer Information 10,742 11 10,347 17 24,278 9 28,876 21
-------- --- -------- --- -------- --- -------- ---
Total before corporate expenses 98,858 100 60,805 100 270,761 100 138,658 100
=== === === ===
Corporate expenses (15,503) (12,048) (41,876) (37,670)
-------- -------- -------- --------
Total $ 83,355 $ 48,757 $228,885 $100,988
======== ======== ======== ========
Note 5 - Senior Convertible Debentures
- ---------------------------------------
On April 24, 2001, the Company sold $175 million of 4.5% senior convertible
debentures due 2008. The Company also sold an additional $35 million of these
debentures in connection with the exercise of an over-allotment option. This
transaction was a private placement pursuant to Rule 144A and Regulation S under
the Securities Act of 1933. The Company registered the debentures and any
common shares issued upon conversion on August 8, 2001. The debentures are
convertible into common shares of the Company at $28 per share. The Company may
redeem some or all of the senior convertible debentures at any time on or after
April 15, 2004. The net proceeds of the offering will be used to finance
acquisitions of businesses, repay outstanding indebtedness, buy out minority
interests in existing subsidiaries and for general corporate purposes.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
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of Operations
-------------
Certain statements made in this 10-Q, including those relating to the effects of
eliminating high-cost contractors that are servicing claims in the Company's
home warranty business and anticipated cash requirements, are forward looking.
Risks and uncertainties exist which may cause results to differ materially from
those set forth in these forward-looking statements. Factors that could cause
the anticipated results to differ from those described in the forward-looking
statements include: interest rate fluctuations; changes in the performance of
the real estate markets; general volatility in the capital markets; changes in
applicable government regulations; consolidation among the Company's significant
customers and competitors; legal proceedings commenced by the California
attorney general and related litigation; the Company's continued ability to
identify businesses to be acquired; changes in the Company's ability to
integrate businesses which it acquires; and other factors described in the
Company's Annual Report on Form 10-K for the year ended December 31, 2000, filed
with the Securities and Exchange Commission. The forward-looking statements
speak only as of the date they are made. The Company does not undertake to
update forward-looking statements to reflect circumstances or events that occur
after the date the forward-looking statements are made.
RESULTS OF OPERATIONS
Three and nine months ended September 30:
OVERVIEW
High mortgage interest rates and seasonal factors in the fourth quarter of 1999
resulted in a low inventory of open orders going into the first quarter of 2000.
This, coupled with the relatively weak real estate economy present during the
first half of 2000, resulted in a significant decrease in revenues and profits
for the first half of 2000 when compared with the same period of the prior year.
During the second half of 2000, real estate activity began to increase as a
result of declining mortgage interest rates. New order counts in the latter
part of the third quarter began to show favorable comparisons with the same
period of 1999. This trend continued through the fourth quarter of 2000 and
resulted in a significant increase in revenues and profits for the second half
of 2000 when compared with the same period of the prior year, and in a high
inventory of open orders going into the first quarter of 2001. During the first
quarter of 2001, the continuation of lower mortgage interest rates resulted in a
significant increase in refinance transactions. This trend continued through
the second and third quarters and, coupled with the relatively steady level of
resale transactions and the positive results of the Company's cost-containment
programs, resulted in net income for the third quarter of 2001 of $41.7 million,
or $0.55 per diluted share. These results included certain onetime charges (net
of investment gains) totaling $3.8 million on an after-tax basis, or $0.05 per
diluted share. Excluding these items, net income for the third quarter of 2001
was $45.5 million, or $0.60 per diluted share, compared with net income for the
third quarter of 2000 of $24.4 million, or $0.37 per diluted share.
8
OPERATING REVENUES
Set forth below is a summary of operating revenues for each of the Company's
segments.
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------------------- -----------------------------------------
($000) ($000)
2001 % 2000 % 2001 % 2000 %
--------- ---- -------- --- ---------- --- ----------- ----
Title Insurance:
Direct operations $375,342 40 $280,152 38 $1,050,715 40 $ 799,585 38
Agency operations 317,893 33 241,846 33 819,330 32 727,673 34
--------- ---- --------- ---- ---------- ---- ---------- ----
693,235 73 521,998 71 1,870,045 72 1,527,258 72
Real Estate Information 181,042 19 141,501 20 527,736 20 408,151 19
Consumer Information 78,499 8 66,991 9 213,188 8 191,162 9
--------- ---- --------- ---- ---------- ---- ---------- ----
Total $952,776 100 $730,490 100 $2,610,969 100 $2,126,571 100
========= ==== ========= ==== ========== ==== ========== ====
Title Insurance. Operating revenues from direct title operations increased
34.0% and 31.4% for the three and nine months ended September 30, 2001, when
compared with the same periods of the prior year. These increases were
primarily due to a significant increase in the number of title orders closed by
the Company's direct operations, offset in part by a decrease in the average
revenues per order closed. The Company's direct operations closed 354,200 and
984,300 title orders during the current three and nine month periods,
respectively, increases of 43.7% and 33.4% when compared with 246,500 and
737,700 title orders closed during the same periods of the prior year. These
increases were primarily due to the factors mentioned above in the Overview
section. The average revenues per order closed were $1,060 and $1,067 for the
three and nine months ended September 30, 2001, respectively, decreases of 6.8%
and 1.6% when compared with the same periods of the prior year. These decreases
were primarily due to the shift in the mix of closings from resale to refinance,
offset in part by appreciating home values. Operating revenues from agency
operations increased 31.4% and 12.6% for the three and nine months ended
September 30, 2001, respectively, when compared with the same periods of the
prior year. These increases were primarily due to the same factors affecting
direct title operations, compounded by the timing of the reporting of agency
remittances.
Real Estate Information. Real estate information operating revenues increased
27.9% and 29.3% for the three and nine months ended September 30, 2001,
respectively, when compared with the same periods of the prior year. These
increases were primarily due to the increase in refinance activity, coupled with
$5.1 million and $22.7 million of operating revenues contributed by new
acquisitions for the respective periods.
Consumer Information. Consumer information operating revenues increased 17.2%
and 11.5% for the three and nine months ended September 30, 2001, respectively,
when compared with the same periods of the prior year. These increases were
primarily attributable to an increased awareness and acceptance of this business
segment's products, as well as $8.1 million and $12.7 million of operating
revenues contributed by new acquisitions for the respective periods. These
increases were offset in part by a $2.6 million and $10.2 million reduction in
operating revenues, for the three and nine months ended September 30, 2001,
respectively, at the Company's property and casualty division as a result of
exiting the lender-placed insurance business.
INVESTMENT AND OTHER INCOME
Investment and other income totaled $30.2 million and $66.8 million for the
three and nine months ended September 30, 2001, respectively, representing
increases of $10.5 million, or 52.9%, and $21.0 million, or 45.9%, when compared
with the same periods of the prior year. These increases primarily reflect $4.6
million and $13.7 million of increased earnings from our affiliated companies,
as well as $5.9 million and $3.9 million in increased net capital gains, for the
three and nine months ended September 30, 2001, respectively.
TOTAL OPERATING EXPENSES
Title Insurance. Salaries and other personnel costs were $235.3 million and
$645.0 million for the three and nine months ended September 30, 2001,
respectively, increases of $55.5 million, or 30.9%, and $109.4 million, or
20.4%, when compared with the same periods of the prior year. Excluding
acquisitions and severance costs, these increases were $50.3 million, or 28.0%,
and $94.9 million, or 17.7%, respectively. These increases were primarily due
to an increase in staff costs in the production area caused by the significant
increase in new title orders. The Company's direct title operations opened
453,900
9
and 1,351,300 new orders during the three and nine months ended September 30,
2001, respectively, increases of 45.5% and 42.0% when compared with the same
periods of the prior year. Also contributing to the increase in salaries and
other personnel costs were increased commissions, which reflect the increase in
closed orders, offset in part by personnel efficiencies. Salaries and other
personnel costs as a percentage of net operating revenues were 53.3% for the
current quarter and 54.6% for the same quarter of the prior year.
Agents retained $255.4 million and $661.2 million of title premiums generated by
agency operations for the three and nine months ended September 30, 2001,
respectively, which compares with $192.8 million and $585.4 million for the same
periods of the prior year. The percentage of title premiums retained by agents
ranged from 79.7% to 80.7% due to regional variances (i.e., the agency share
varies from region to region and thus the geographical mix of agency revenues
causes this variation).
Other operating expenses were $119.5 million and $339.8 million for the three
and nine months ended September 30, 2001, respectively, increases of $25.7
million, or 27.4%, and $76.3 million, or 28.9%, when compared with the same
periods of the prior year. Excluding acquisitions, these increases were $24.4
million, or 26.0%, and $70.0 million, or 26.5%, respectively. These increases
were primarily the result of incremental costs incurred to service the
significant increase in orders processed, offset in part by management's cost
control programs.
The provision for title losses as a percentage of title insurance operating
revenues included a $7.9 million revision to a previous estimate for loss
reserves at one of the Company's title insurance subsidiaries purchased in 1998.
This revision was made during the current quarter and reflects higher than
anticipated claims experience. Excluding this revision, the provision for title
losses as a percentage of title insurance operating revenues was 3.8% for the
nine months ended September 30, 2001 and 3.7% for the same period of the prior
year.
Premium taxes for title insurance were $15.9 million and $14.6 million for the
nine months ended September 30, 2001 and 2000, respectively. Expressed as a
percentage of title insurance operating revenues, premium taxes were
approximately 0.8% and 1.0% for the nine months ended September 30, 2001 and
2000, respectively. Premium tax rates vary from state to state. Accordingly,
the geographical mix of title insurance premiums accounts for the fluctuation in
rate.
Real Estate Information. Real estate information personnel and other operating
expenses were $132.9 million and $389.5 million for the three and nine months
ended September 30, 2001, respectively, increases of 14.5% and 12.6% when
compared with the same periods of the prior year. Included in personnel and
other operating expenses for the current periods were charges of $1.8 million
related to the restructuring of the Company's field service operations and $2.6
million of impaired asset write-offs at the Company's appraisal division.
Excluding these one-time items and acquisitions, real estate personnel and other
operating expenses increased $7.3 million, or 6.3%, and $24.0 million, or 6.9%,
for the three and nine months ended September 30, 2001. These increases were
primarily the result of incremental costs incurred to service the significant
increase in business volume, offset in part by the results of the Company's
cost-containment programs.
Consumer Information. Consumer information personnel and other operating
expenses were $51.2 million and $142.2 million for the three and nine months
ended September 30, 2001, respectively, increases of 23.2% and 17.1% when
compared with the same periods of the prior year. Excluding acquisitions, the
increases were $0.9 million, or 2.2%, and $8.2 million, or 6.7%, respectively.
These increases were primarily attributable to costs incurred servicing the
increased business volume. The provision for consumer information losses
principally reflects home warranty claims. The provision for home warranty
losses, expressed as a percentage of home warranty operating revenues, was 54.8%
for the nine months ended September 30, 2001, and 52.0% for the same period of
the prior year. This increase was primarily due to an increase in the average
number of claims per contract, which was primarily due to the expansion of this
business into new geographical markets. The Company's management has been
eliminating high-cost contractors that are servicing claims in new geographic
areas and is achieving positive results. The home warranty loss provision rate
was 53.8% for the current quarter, 54.5% for the second quarter and 56.2% for
the first quarter of 2001. The Company's management expects continued
improvement in claim costs per contract in future periods.
10
INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS
Set forth below is a summary of income before income taxes and minority
interests for each of the Company's segments.
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------------- --------------------------------------
($000) ($000)
2001 % 2000 % 2001 % 2000 %
-------- --- -------- --- ----------- --- -------- ---
Title Insurance $ 38,004 38 $ 30,543 50 $ 120,185 44 $ 73,752 53
Real Estate Information 50,112 51 19,915 33 126,298 47 36,030 26
Consumer Information 10,742 11 10,347 17 24,278 9 28,876 21
-------- --- -------- --- ---------- --- -------- ---
Total before corporate expenses 98,858 100 61,805 100 270,761 100 138,658 100
=== === === ===
Corporate expenses (15,503) (12,048) (41,876) (37,670)
-------- -------- ---------- --------
Total $ 83,355 $ 48,757 $ 228,885 $100,988
======== ======== ========== ========
In general, the title insurance business is a lower profit margin business when
compared to the Company's other segments. The lower profit margins reflect the
high cost of producing title evidence whereas the corresponding revenues are
subject to regulatory and competitive pricing restraints. Due to this
relatively high proportion of fixed costs, title insurance profit margins
generally improve as closed order volumes increase. In addition, title
insurance profit margins are affected by the composition (residential or
commercial) and type (resale, refinancing or new construction) of real estate
activity. Profit margins from resale and new construction transactions are
generally higher than from refinancing transactions because in many states there
are premium discounts on, and cancellation rates are higher for, refinance
transactions. Title insurance profit margins are also affected by the
percentage of operating revenues generated by agency operations. Profit margins
from direct operations are generally higher than from agency operations due
primarily to the large portion of the premium that is retained by the agent.
Real estate information pretax profits are generally unaffected by the type of
real estate activity but increase or decrease based on the volume of residential
real estate loan transactions. Consumer information profits are unaffected by
real estate or mortgage interest rate activity and increase as the level of
business volume increases. Corporate expenses increased $3.5 million and $4.2
million for the three and nine months ended September 30, 2001, respectively,
when compared with the same periods of the prior year. These increases were
primarily due to an increase in corporate interest expense due primarily to the
issuance of the Company's $210.0 million senior convertible debentures in April
of 2001.
INCOME TAXES
The effective income tax rate (income tax expense as a percentage of pretax
income after minority interest expense) was 42.0% for the nine months ended
September 30 2001, and 43.7% for the same period of the prior year. The decrease
in effective rate was primarily attributable to changes in the ratio of
permanent differences to pretax profits. A large portion of the Company's
minority interest expense is attributable to a limited liability company
subsidiary, which for tax purposes, is treated as a partnership. Accordingly, no
income taxes have been provided for that portion of the minority interest
expense.
MINORITY INTERESTS
Minority interest expense was $11.2 million and $30.7 million for the three and
nine months ended September 30, 2001, respectively, increases of $5.8 million
and $19.3 million when compared with the same periods of the prior year. These
increases were primarily attributable to the increase in operating results of
the Company's joint venture with Experian resulting primarily from the
previously noted increase in refinance activity.
NET INCOME
Net income for the three and nine months ended September 30, 2001, was $41.7
million, or $0.55 per diluted share, and $115.0 million, or $1.59 per diluted
share, respectively. Net income for the three and nine months ended September
30, 2000, was $24.4 million, or $0.37 per diluted share, and $50.4 million, or
$0.77 per diluted share, respectively.
11
LIQUIDITY AND CAPITAL RESOURCES
Total cash and cash equivalents increased $295.8 million and decreased $81.8
million for the nine months ended September 30, 2001 and 2000, respectively.
The increase for the current period was primarily due to cash provided by
operating activities and the proceeds received from the issuance of the
Company's $210.0 million senior convertible debentures (see Note 5 to the
Condensed Consolidated Financial Statements), offset in part by capital
expenditures and purchases of debt and equity securities. The decrease for the
prior-year period was primarily due to capital expenditures and the repurchase
of Company shares, offset in part by cash provided by operating activities.
Notes and contracts payable as a percentage of total capitalization increased to
24.7% at September 30, 2001 from 16.9% at December 31, 2000. This increase was
primarily due to the issuance of the $210.0 million senior convertible
debentures.
On October 12, 2001, the Company entered into a credit agreement that provided
for a $200.0 million line of credit. This agreement supercedes the Company's
prior credit agreements that were due to expire in July 2002. Under the terms of
the new credit agreement, the Company is required to maintain minimum levels of
capital and earnings and meet predetermined debt to capitalization ratios. The
Company's line of credit is currently unused.
Management believes that all of its anticipated operating cash requirements for
the immediate future will be met from internally generated funds.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
The Company's primary exposure to market risk relates to interest rate risk
associated with certain other financial instruments. Although the Company
monitors its risk associated with fluctuations in interest rates, it does not
currently use derivative financial instruments to hedge these risks.
The Company is also subject to equity price risk as related to its equity
securities. Although the Company has operations in certain foreign countries,
these operations, in the aggregate, are not material to the Company's financial
condition or results of operations.
There have been no material changes in the Company's risk since filing its Form
10K for the year ended December 31, 2000.
12
Part II: Other Information
-----------------
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(10)(a) Amendment No. 2 dated August 1, 2001, to Pension
Restoration Plan.
(10)(b) Credit Agreement dated as of October 12, 2001, between the
First American Corporation and The Chase Manhattan Bank.
(b) Reports on Form 8-K
During the quarterly period covered by this report, the Company filed
reports on Form 8-K dated August 1, 2001 (announcing the Company's
earnings for second quarter 2001). Subsequent to such quarterly
period, the Company filed reports on Form 8-K dated October 25, 2001
(announcing the Company's earnings for the third quarter 2001).
13
EXHIBIT INDEX Sequentially
Exhibit No. Description Numbered Page
(10)(a) Amendment No. 2 dated August 1, 2001, to Pension
Restoration Plan.
(10)(b) Credit Agreement dated as of October 12, 2001, between
the First American Corporation and The Chase Manhattan
Bank.
14