Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
[ ] 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 1-12688
STEWART INFORMATION SERVICES CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 74-1677330
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1980 Post Oak Blvd., Houston TX 77056
------------------------------------------------------------
(Address of principal executive offices, including zip code)
(713) 625-8100
----------------------------------------------------
(Registrant's telephone number, including area code)
-------------------------------------------------------------------------------
(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, and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of June 30, 2004.
Common 17,052,248
Class B Common 1,050,012
FORM 10-Q
QUARTERLY REPORT
Quarter Ended June 30, 2004
TABLE OF CONTENTS
Item No. Page
-------- ----
Part I - FINANCIAL INFORMATION
1. Financial Statements 1
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
3. Quantitative and Qualitative Disclosures about
Market Risk 11
4. Controls and Procedures 11
Part II - OTHER INFORMATION
1. Legal Proceedings 12
4. Submission of Matters to a Vote of Security Holders 12
5. Other Information 12
6. Exhibits and Reports on Form 8-K 13
Signature 14
As used in this report, "we", "us", "our" and "Stewart" mean Stewart Information
Services Corporation and our subsidiaries unless the context indicates
otherwise.
STEWART INFORMATION SERVICES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE EARNINGS
FOR THE QUARTERS AND SIX MONTHS ENDED
JUNE 30, 2004 and 2003
SECOND QUARTER SIX MONTHS
----------------------------- -------------------------------
JUN 30 JUN 30 JUN 30 JUN 30
2004 2003 2004 2003
--------- -------- --------- -------
($000 Omitted) ($000 Omitted)
Revenues
Title insurance:
Direct operations 241,578 240,145 424,112 431,875
Agency operations 300,595 292,019 558,482 517,584
Real estate information services 17,711 20,834 35,326 39,884
Investment income 5,170 4,535 10,322 9,318
Investment gains - net 402 542 2,106 338
--------- -------- --------- -------
565,456 558,075 1,030,348 998,999
Expenses
Amounts retained by agencies 245,403 239,035 455,455 423,784
Employee costs 152,453 147,178 286,803 279,180
Other operating expenses 81,747 72,599 155,728 139,447
Title losses and related claims 25,807 22,711 45,087 40,667
Depreciation and amortization 8,282 6,168 15,258 12,077
Interest 272 146 490 361
Minority interests 3,860 4,144 6,008 6,482
--------- -------- --------- -------
517,824 491,981 964,829 901,998
--------- -------- --------- -------
Earnings before taxes 47,632 66,094 65,519 97,001
Income taxes 17,671 25,064 24,418 36,096
--------- -------- --------- -------
Net earnings 29,961 41,030 41,101 60,905
========= ======== ========= =======
Average number of shares outstanding -
assuming dilution (000 omitted) 18,192 17,951 18,187 17,895
Earnings per share - basic 1.66 2.30 2.27 3.42
Earnings per share - diluted 1.65 2.29 2.26 3.40
========= ======== ========= =======
Comprehensive earnings:
Net earnings 29,961 41,030 41,101 60,905
Changes in other comprehensive earnings,
net of taxes of $(5,409),$3,107,
$(4,509) and $3,576,respectively (10,046) 5,770 (8,373) 6,642
--------- -------- --------- -------
Comprehensive earnings 19,915 46,800 32,728 67,547
========= ======== ========= =======
See notes to condensed consolidated financial statements.
- 1 -
STEWART INFORMATION SERVICES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 AND DECEMBER 31, 2003
JUN 30 DEC 31
2004 2003
---------- ----------
($000 Omitted)
Assets
Cash and cash equivalents 119,824 114,202
Short-term investments 171,307 153,322
Investments - statutory reserve funds 375,379 375,421
Investments - other 59,995 59,035
Receivables 69,625 79,025
Property and equipment 78,363 74,174
Title plants 49,798 43,216
Goodwill 109,187 79,084
Other assets 63,336 54,388
---------- ----------
1,096,814 1,031,867
========== ==========
Liabilities
Notes payable 41,501 24,583
Accounts payable and accrued liabilities 82,673 82,147
Estimated title losses 280,197 268,089
Deferred income taxes 22,061 22,440
Minority interests 13,844 13,219
Contingent liabilities and commitments (Note 6)
Stockholders' equity
Common and Class B Common Stock and
additional paid-in capital 143,589 141,168
Retained earnings 510,208 469,107
Accumulated other comprehensive earnings 6,646 15,019
Treasury stock - 325,669 shares (3,905) (3,905)
---------- -----------
Total stockholders' equity (18,102,260
shares outstanding at June 30, 2004) 656,538 621,389
---------- -----------
1,096,814 1,031,867
========== ===========
See notes to condensed consolidated financial statements.
- 2 -
STEWART INFORMATION SERVICES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
SIX MONTHS ENDED
-------------------------------
JUN 30 JUN 30
2004 2003
--------- ---------
($000 Omitted)
Cash provided by operating activities (Note) 84,810 83,606
Investing activities:
Purchases of property and equipment and title plants - net (13,896) (16,898)
Proceeds from investments matured and sold 196,205 87,439
Purchases of investments (224,539) (115,542)
Increases in notes receivable (1,953) (434)
Collections on notes receivable 1,697 846
Cash paid for equity investees (2,940) -
Cash paid for acquisitions - net (see below) (42,925) (13,562)
--------- ---------
Cash used for investing activities (88,351) (58,151)
Financing activities:
Distribution to minority interests (6,005) (5,096)
Proceeds from exercise of stock options 873 2,228
Proceeds of notes payable 20,632 9,691
Payments on notes payable (5,051) (4,549)
--------- ---------
Cash provided by financing activities 10,449 2,274
--------- ---------
Effect of changes in foreign currency exchange rates (1,286) 1,305
--------- ---------
Increase in cash and cash equivalents 5,622 29,034
Cash and cash equivalents at beginning of period 114,202 139,156
--------- ---------
Cash and cash equivalents at end of period 119,824 168,190
========= =========
NOTE: Reconciliation of net earnings to the above amounts -
Net earnings 41,101 60,905
Add (deduct):
Depreciation and amortization 15,258 12,077
Provision for title losses in excess of payments 11,881 16,909
Provision for uncollectible amounts - net 268 1,564
Decrease (increase) in accounts receivable - net 9,818 (1,787)
Decrease in accounts payable and accrued
liabilities - net (1,245) (10,826)
Minority interest expense 6,008 6,482
Equity in net earnings of investees (3,576) (2,953)
Dividends received from equity investees 2,258 2,752
Realized investment gains - net (2,106) (338)
Stock bonuses 1,202 788
Increase in deferred taxes 4,071 2,084
Increase in other assets (1,256) (2,090)
Other - net 1,128 (1,961)
--------- ---------
Cash provided by operating activities 84,810 83,606
========= =========
Supplemental information:
Net assets acquired
Goodwill 30,323 11,692
Title plants 4,501 1,355
Other 11,805 4,981
Liabilities assumed (3,704) (4,466)
--------- ---------
Cash paid for acquisitions - net 42,925 13,562
========= =========
See notes to condensed consolidated financial statements.
- 3 -
STEWART INFORMATION SERVICES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Interim Financial Statements
The financial information contained in this report for the three and six month
periods ended June 30, 2004 and 2003, and as of June 30, 2004, is unaudited. In
the opinion of our management, all adjustments necessary for a fair presentation
of this information for all unaudited periods, consisting only of normal
recurring accruals, have been made. The results of operations for the interim
periods are not necessarily indicative of results for a full year. This report
should be read in conjunction with the Company's Annual Report on Form 10-K for
the year ended December 31, 2003.
Certain amounts in the 2003 condensed consolidated financial statements have
been reclassified for comparative purposes. Net earnings, as previously
reported, were not affected.
Note 2: Stock-based Compensation
The Company has two fixed employee stock option plans. The Company accounts for
the plans under the intrinsic value method. Accordingly, no stock-based employee
compensation cost is reflected in net earnings, as all options granted under the
plans had an exercise price equal to the market value of the underlying Common
Stock on the date of grant.
The Company applies APB Opinion No. 25 and related Interpretations in accounting
for its plans. Under SFAS No. 123, compensation cost would be recognized for the
fair value of the employees' purchase rights, which is estimated using the
Black-Scholes model. The Company assumed a dividend yield of 1% and 0%, an
expected life of ten years for each option, expected volatility of 34.9% and
35.7% and a risk-free interest rate of 4.0% and 4.3% for the six months ended
June 30, 2004 and 2003, respectively.
Had compensation cost for the Company's plans been determined consistent with
SFAS No. 123, the Company's net earnings and earnings per share would have been
reduced to the pro forma amounts indicated below:
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------- -----------------
JUN 30 JUN 30 JUN 30 JUN 30
2004 2003 2004 2003
------- ------- ------- -------
($000 Omitted, except per share amounts)
Net Earnings:
As reported 29,961 41,030 41,101 60,905
Stock-based employee compensation
determined under fair value method (232) (134) (1,164) (663)
------- ------- ------- -------
Pro forma 29,729 40,896 39,937 60,242
Earnings per share:
Net earnings - basic 1.66 2.30 2.27 3.42
Pro forma - basic 1.64 2.29 2.21 3.39
Net earnings - diluted 1.65 2.29 2.26 3.40
Pro forma - diluted 1.63 2.28 2.20 3.37
- 4 -
Note 3: Segment Information
Our two reportable segments are title and real estate information. Selected
financial information related to these segments follows:
Real estate
Title information Total
----- ----------- ---------
($000 Omitted)
Revenues:
Three months ended
June 30, 2004 547,745 17,711 565,456
June 30, 2003 537,241 20,834 558,075
Six months ended
June 30, 2004 995,009 35,339 1,030,348
June 30, 2003 959,115 39,884 998,999
Pretax earnings:
Three months ended
June 30, 2004 46,417 1,215 47,632
June 30, 2003 61,520 4,574 66,094
Six months ended
June 30, 2004 63,403 2,116 65,519
June 30, 2003 89,416 7,585 97,001
Identifiable assets:
June 30, 2004 1,052,995 43,819 1,096,814
December 31, 2003 988,384 43,483 1,031,867
Intersegment revenues are insignificant and have been eliminated above.
Note 4: Earnings Per Share
Our basic earnings per share figures were calculated by dividing net earnings by
the weighted average number of shares of Common Stock and Class B Common Stock
outstanding during the reporting period. The only potentially dilutive effect on
earnings per share relates to our stock option plans.
In calculating the effect of the options and determining a figure for diluted
earnings per share, the average number of shares used in calculating basic
earnings per share was increased by 90,000 and 118,000 for the three month
periods ended June 30, 2004 and 2003, respectively, and 101,000 and 107,000 for
the six month periods ended June 30, 2004 and 2003, respectively. For the six
month period and the quarter ended June 30, 2004, 54,808 and 66,500 options,
respectively, were considered antidilutive. For the six month period and quarter
ended June 30, 2003, 7,691 and 0 options, respectively, were considered
antidilutive.
Note 5: Equity in Investees
The amount of earnings from equity investments was $2.6 million and $1.8 million
for the quarters ended June 30, 2004 and 2003, respectively, and $3.6 million
and $3.0 million for the six month periods ended June 30, 2004 and 2003,
respectively. These amounts are included in "title insurance revenues - direct
operations" in the condensed consolidated statements of earnings and
comprehensive earnings.
- 5 -
Note 6: Contingent Liabilities and Commitments
On June 30, 2004, the Company was contingently liable for guarantees of
indebtedness owed primarily to banks and others by unconsolidated equity
investees and other third parties. The guarantees relate primarily to business
expansion and generally expire no later than October 24, 2010. The maximum
potential future payments on the guarantees amount to $1,197,000 for equity
investees and $7,277,000 for other third parties. Management believes that the
related underlying assets and the collateral available, primarily title plants
and the guarantees of corporate stock, would enable the Company to recover any
amounts which might be required to be paid under the guarantees. The Company
believes no provision for losses is needed because no loss is expected on these
guarantees. The Company's accrued liability balance relating to the
non-contingent value of third-party guarantees amounts to $179,000 at June 30,
2004.
In the ordinary course of business, the Company guarantees the third party
indebtedness of its consolidated subsidiaries. On June 30, 2004, the maximum
potential future payments on the guarantees is not more than the notes payable
recorded on the condensed consolidated balance sheets.
- 6 -
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
MANAGEMENT OVERVIEW. We reported net earnings of $30.0 million for the three
months ended June 30, 2004, compared with net earnings of $41.0 million for the
same period of 2003. On a diluted per share basis, net earnings were $1.65 for
the second quarter of 2004, compared with net earnings of $2.29 for the second
quarter of 2003.
A decline in refinancing transactions began in the third quarter of 2003
when mortgage interest rates increased. Rates rose above prior-year levels in
May 2004. While current rates have retreated to the 6 percent level, in June
2004 rates were more than 100 basis points higher than a year ago.
Total revenues increased slightly in the second quarter of this year
compared with the corresponding period in 2003 primarily because of increased
acquisitions, commercial business and home prices. Revenues from direct
operations also increased slightly while order counts declined primarily because
refinancing transactions represented a larger portion of orders in 2003.
However, the company generally earns less revenue on a refinancing transaction.
The pretax profit margin for the quarter ended June 30, 2004 declined compared
with the corresponding quarter of 2003. Periods of record order volumes, such as
those that occurred in 2003, resulted in higher margins because most of the
costs of our business are fixed costs. In addition, technology costs, an
increase in policy losses and litigation reserves, opening new offices and
rising occupancy costs contributed to the lower margins.
CRITICAL ACCOUNTING ESTIMATES. Actual results can differ from the estimates we
report. However, we believe there is no material risk of a change in our
accounting estimates that is likely to have a material impact on our reported
financial condition and operating performance for the six months ended June 30,
2004.
Our most critical accounting estimate is providing title loss reserves.
Estimating future policy loss payments is difficult because claims, by their
nature, are complex and may be paid years after the policy was issued. We base
our estimates on reported claims, historical loss experience and industry
averages. Independent actuaries have reviewed and found our reserves to be
adequate at each year end.
Based on events that may indicate impairment of title plants and other
long-lived assets, and our annual evaluation of goodwill, we estimate and
expense any loss in value to our current operations. There were no amounts
expensed in the six months ended June 30, 2004. We use independent appraisers to
assist us in determining the fair value of our reportable units in assessing
whether an impairment in goodwill exists.
We report premium revenues from agencies primarily when policies are
reported to us. We also accrue for unreported policies where reasonable
estimates can be made. We consider historical reporting patterns, current trends
in interest rates and other factors and known information about the agencies. In
this accrual, we are not estimating future transactions. We are estimating
policies that have already been issued but not yet received by us.
WHAT WE DO. Our primary business is title insurance and settlement-related
services. We close transactions and issue policies on homes, commercial
properties and other real property located in all 50 states, the District of
Columbia and several foreign countries through more than 7,700 issuing
locations, including both direct operations and agencies. We also sell
electronically delivered real estate services and information, as well as
mapping products and geographic information systems, to domestic and foreign
governments and private entities. Our current levels of non-USA operations are
immaterial with respect to our consolidated financial results.
Our business has two main segments: title insurance-related services and
real estate information (REI). These segments are closely related due to the
nature of their operations and common customers.
FACTORS AFFECTING REVENUES. The principal factors that contribute to increases
in our operating revenues for our title and REI segments include:
- declining mortgage interest rates, which usually increase home sales
and refinancing transactions;
- rising home prices;
- higher premium rates;
- increased market share;
- opening of new offices and acquisitions; and
- a higher ratio of commercial transactions that, although relatively
few in number, typically yield higher premiums.
These factors may override the seasonal nature of the title business.
- 7 -
Our employee costs and certain other operating costs are sensitive to
inflation. To the extent inflation causes increases in the prices of homes and
other real estate, premium revenues are also increased. Premiums are determined
in part by the insured values of the transactions we handle.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2004 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2003
OPERATING ENVIRONMENT. According to published industry data, interest rates for
30-year fixed rate mortgages, excluding points, for the first six months of
2004, averaged 5.9% as compared with 5.7% for the corresponding period in 2003.
Interest rates increased significantly in the third quarter of 2003 but trended
slightly downward to 5.4% in March 2004. Rates increased in April and May 2004
to 6.3% and remained steady in June 2004. The rate at the end of June 2004 was
6.3%.
Real estate activity was weaker in the first half of 2004 as compared with
the first half of 2003. Refinancing transactions, in particular, declined
nationwide in the first half of 2004. The ratio of refinancings to total loan
applications was 49.0% for the first six months of 2004, compared with 75.8% for
the same period in 2003. Refinancings usually have lower title insurance premium
rates than real property sales. Existing home sales nationwide increased 10.8%
in the first six months of 2004 over the first six months of 2003.
Our order levels began to decline in the third quarter of 2003, largely as
a result of an increase in interest rates, and remained below prior year levels
during the second quarter of 2004. Rates declined slightly in the first quarter
of 2004 but increased above prior year levels in the second quarter of 2004.
Most industry experts project interest rates to continue at current levels or
move slightly higher. Due to the large number of refinancings completed in 2003,
significantly fewer refinancing transactions are being forecast for 2004.
TITLE REVENUES. Our revenues from direct operations decreased 1.8% in the six
months ended June 30, 2004 as compared with the corresponding period of 2003.
The number of direct closings we handled decreased 21.6% in the first six months
of 2004 compared with the same period in 2003. The decrease in the number of
direct closings we handled is partially offset by an increase in the average
revenue per closing. The average revenue per closing increased 24.5% in the
first six months of 2004 due to a lower ratio of refinancings closed by our
direct operations compared with the same period of 2003. Title insurance
premiums on refinancings are typically less than on real property sales. The
average revenue per closing increase was also due to increased commercial
transactions and home prices.
The largest revenue decreases in direct operations in the first six months
of 2004 were primarily in Colorado, Illinois and Texas. Direct closings relate
only to files closed by our underwriters and subsidiaries and do not include
closings by independent agencies.
Premium revenues from agencies increased 7.9% to $558.5 million in the
first six months of 2004 from $517.6 million in the first six months of 2003. An
increased number of agencies contributed to the increase in 2004. The largest
revenue increases in 2004 were primarily in Virginia, Florida and Maryland,
offset partially by a decrease in California.
On April 27, 2004, the Texas Department of Insurance announced that title
insurance rates will be reduced by 6.5% effective July 1, 2004.
REI REVENUES. Real estate information revenues were $35.3 million in the first
six months of 2004 and $39.9 million in the first six months of 2003. Certain of
our REI products and services are closely related to the volume of real estate
transactions. Therefore, the decrease in refinancing activities has contributed
to the decrease in REI revenues.
INVESTMENTS. Investment income increased 10.8% in the first six months of 2004
compared with the same period of 2003 primarily because of increases in average
balances invested, partially offset by lower yields. Certain investment gains
and losses were realized as part of the ongoing management of the investment
portfolio for the purpose of improving performance.
AGENCY RETENTION. The amounts retained by agencies, as a percentage of revenues
from agency operations, were 81.6% and 81.9% in the first six months of 2004 and
2003, respectively. Amounts retained by title agencies are based on agreements
between the agencies and our title insurance underwriters. The percentage that
amounts retained by agencies bears to agency revenues may vary from period to
period because of the geographical mix of agency operations and the volume of
title revenues.
EMPLOYEE COSTS. Employee costs for the combined business segments increased 2.7%
in the first six months of 2004. The number of persons we employed at both June
30, 2004 and 2003 was approximately 8,600 reflecting the acquisition of new
offices offset by decreased volume. In our REI segment, employee costs decreased
in 2004 primarily due to the decrease in REI volume.
- 8 -
OTHER OPERATING EXPENSES. Other operating expenses for the combined business
segments increased 11.7% in the first six months of 2004. The increase was
primarily in new offices, litigation reserves, premium taxes, rent and
technology cost. Other operating expenses also include outside search fees,
business promotion, telephone, supplies, travel and title plant expenses.
TITLE LOSSES. Provisions for title losses, as a percentage of title operating
revenues, were 4.6% in the first six months of 2004 and 4.3% in the first six
months of 2003.
INCOME TAXES. The provisions for federal, state and foreign income taxes
represented effective tax rates of 37.3% and 37.2% in the first six months of
2004 and 2003, respectively.
THREE MONTHS ENDED JUNE 30, 2004 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2003
OPERATING ENVIRONMENT. According to published industry data, interest rates for
30-year fixed-rate mortgages, excluding points, for the three months ended June
30, 2004, averaged 6.1% as compared with 5.5% for the corresponding period in
2003. At the end of March 2004, interest rates were at 5.4%. Rates increased in
April and May 2004 to 6.3% and remained steady in June 2004. The rate at the end
of June 2004 was 6.3%.
Real estate activity was weaker in the second quarter of 2004 as compared
with the second quarter of 2003. Refinancing transactions, in particular,
declined nationwide in the second quarter of 2004. The ratio of refinancings to
total loan applications was 39.0% for the second quarter of 2004 compared with
74.7% for the same period in 2003. Refinancings usually have lower title
insurance premium rates than real property sales. Existing home sales nationwide
increased 15.9% in the second quarter of 2004 over the same period in 2003.
Our order levels began to decline in the third quarter of 2003, largely as
a result of an increase in interest rates, and remained below prior year levels
during the second quarter of 2004. Rates increased above prior year levels in
the second quarter of 2004. Most industry experts project interest rates to
continue at current levels or move slightly higher. Due to the large number of
refinancings completed in 2003, significantly fewer refinancing transactions are
being forecast for 2004.
TITLE REVENUES. Our revenues from direct operations increased 0.6% in the second
quarter of 2004 as compared with the second quarter of 2003. The number of
direct closings we handled decreased 19.5% in the second quarter of 2004
compared with the corresponding period in 2003. The decrease in the number of
direct closings we handled is offset by an increase in the average revenue per
closing. The average revenue per closing increased 23.6% in the second quarter
of 2004 due to a lower ratio of refinancings closed by our direct operations
compared with the second quarter of 2003. Title insurance premiums on
refinancings are typically less than on real property sales. The average revenue
per closing increase was also due to increased commercial transactions and home
prices.
The largest revenue increase in direct operations in the second quarter of
2004 was in New York, offset by decreases primarily in Texas, Colorado and
Illinois. Direct closings relate only to files closed by our underwriters and
subsidiaries and do not include closings by independent agencies.
Premium revenues from agencies increased 2.9% to $300.6 million in the
second quarter of 2004 from $292.0 million in the second quarter of 2003. An
increased number of agencies contributed to the increase in 2004. The largest
revenue increases in 2004 were primarily in Florida, Maryland and Virginia,
offset partially by a decrease in California.
On April 27, 2004, the Texas Department of Insurance announced that title
insurance rates will be reduced by 6.5% effective July 1, 2004.
REI REVENUES. Real estate information revenues were $17.7 million for the second
quarter of 2004 and $20.8 million for the second quarter of 2003. Certain of our
REI products and services are closely related to the volume of real estate
transactions. Therefore, the decrease in refinancing activities has contributed
to the decrease in REI revenues.
INVESTMENTS. Investment income increased 14.0% in the second quarter of 2004
compared with the second quarter of 2003 primarily because of increases in
average balances invested, partially offset by lower yields. Certain investment
gains and losses were realized as part of the ongoing management of the
investment portfolio for the purpose of improving performance.
AGENCY RETENTION. The amounts retained by agencies, as a percentage of revenues
from agency operations, were 81.6% and 81.9% in the second quarters of 2004 and
2003, respectively. Amounts retained by title agencies are based on agreements
between agencies and our title underwriters. The percentage that amounts
retained by agencies bears to agency revenues may vary from period to period
because of the geographical mix of agency operations and the volume of title
revenues.
- 9 -
EMPLOYEE COSTS. Employee costs for the combined business segments increased 3.6%
in 2004. The number of persons we employed at both June 30, 2004 and 2003 was
approximately 8,600 reflecting the acquisition of new offices offset by
decreased volume. In our REI segment, employee costs decreased in 2004 primarily
due to the decrease in REI volume.
OTHER OPERATING EXPENSES. Other operating expenses for the combined business
segments increased 12.6% in the second quarter of 2004. The increase was
primarily in new offices, technology costs, litigation reserves and rent. Other
operating expenses also include outside search fees, premium taxes, business
promotion, telephone, supplies and travel.
TITLE LOSSES. Provisions for title losses, as a percentage of title operating
revenues, were 4.8% in the second quarter of 2004, compared with 4.3% in the
second quarter of 2003.
INCOME TAXES. The provisions for federal, state and foreign income taxes
represented effective tax rates of 37.1% and 37.9% in the second quarters of
2004 and 2003, respectively. The annual effective tax rate for 2004 is estimated
to be approximately 37.3%.
LIQUIDITY AND CAPITAL RESOURCES. Cash provided by operations was $84.8 million
and $83.6 million for the six months ended June 30, 2004 and 2003, respectively.
Cash flow from operations has been the primary source of financing for additions
to property and equipment, expanding operations, dividends to shareholders and
other requirements. This source may be supplemented by bank borrowings.
The most significant non-operating sources of cash were from proceeds of
investments matured and sold in the amount of $196.2 million and $87.4 million
in the first six months of 2004 and 2003, respectively. We used cash for the
purchases of investments in the amounts of $224.5 million and $115.5 million in
the first six months of 2004 and 2003, respectively.
Acquisitions during the first six months of 2004 and 2003 resulted in
additions to goodwill, excluding reallocations, of $30.3 million and $11.7
million, respectively.
A substantial majority of consolidated cash and investments was held by
Stewart Title Guaranty Company (Guaranty) and its subsidiaries. Cash transfers
between Guaranty and its subsidiaries and the Company are subject to certain
legal restrictions. See Notes 2 and 3 to our consolidated financial statements
included in our Annual Report on Form 10-K for the year ended December 31, 2003.
Our liquidity, excluding Guaranty and its subsidiaries, is comprised of
cash and investments aggregating $25.1 million and short-term liabilities of
$3.5 million at June 30, 2004. We know of no commitments or uncertainties that
are likely to materially affect our ability to fund cash needs.
We consider our capital resources to be adequate. Our capital resources
are represented by a low debt-to-equity ratio, in which notes payable was $41.5
million and stockholders' equity was $656.5 million at June 30, 2004. We are not
aware of any trends, either favorable or unfavorable, that would materially
affect notes payable or stockholders' equity. We do not expect any material
changes in the cost of such resources. Significant acquisitions in the future
could materially affect the notes payable or stockholders' equity balances.
OFF-BALANCE SHEET ARRANGEMENT. We do not have any material source of liquidity
or financing that involves off-balance sheet arrangements.
FORWARD-LOOKING STATEMENTS. All statements included in this report, other than
statements of historical facts or statements addressing activities, events or
developments that we expect or anticipate will or may occur in the future, are
forward-looking statements. Such forward-looking statements are subject to risks
and uncertainties including, among other things, changes in mortgage interest
rates, employment levels, actions of competitors, changes in real estate
markets, general economic conditions, legislation (primarily legislation related
to title insurance) and other risks and uncertainties discussed in our filings
with the Securities and Exchange Commission.
- 10 -
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in our investment strategies, types of
financial instruments held or the risks associated with such instruments which
would materially alter the market risk disclosures made in our Annual Statement
on Form 10-K for the year ended December 31, 2003.
Item 4. Controls and Procedures
Our principal executive officers and our principal financial officer,
based upon their evaluation of our disclosure controls and procedures conducted
as of June 30, 2004, have concluded that those disclosure controls and
procedures are effective.
There have been no changes in our internal controls or in other factors
known to us that could significantly affect these controls, nor were any
corrective actions necessary with regard to significant deficiencies or material
weaknesses.
During the quarter ended June 30, 2004, there has been no change in our
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
- 11 -
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are a party to a number of lawsuits incurred in connection with our
business, most of which are of a routine nature involving disputed policy
claims. In many of these suits, the plaintiff seeks exemplary or treble damages
in excess of policy limits based on the alleged malfeasance of an issuing
agency. We do not expect that any of these proceedings will have a material
adverse effect on our consolidated financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
(a) Our Annual Meeting of Stockholders was held on April 30, 2004 for
the purpose of electing our board of directors.
(b) Proxies for the meeting were solicited pursuant to Section 14 (a) of
the Securities Exchange Act of 1934, and there was no solicitation
in opposition to management's solicitations. All of the Registrant's
nominees were elected.
(c) Stockholder votes with respect to the election of directors at our
Annual Meeting were as follows:
A. Directors Elected by Common Stockholders:
Number of Shares
-------------------------------
Votes For Votes Withheld
---------- --------------
Lloyd Bentsen, III 15,481,651 638,486
Nita B. Hanks 15,496,096 651,041
Dr. E. Douglas Hodo 15,413,733 706,404
Gov. John P. LaWare 15,538,052 582,085
Dr. W. Arthur Porter 15,897,160 222,977
B. Directors Elected by Class B Common Stockholders:
Number of Shares
-------------------------------
Votes For Votes Withheld
---------- --------------
Max Crisp 1,050,012 0
Paul W. Hobby 1,050,012 0
Malcolm S. Morris 1,050,012 0
Stewart Morris, Jr. 1,050,012 0
There were no broker non-votes with respect to the election of directors.
Item 5. Other Information
We paid regular quarterly cash dividends on our Common Stock from 1972
through 1999. During 1999, our Board of Directors approved a plan to repurchase
up to 5% (680,000 shares) of our outstanding Common Stock. The Board also
determined that our regular quarterly dividend should be discontinued in favor
of returning those and additional funds to stockholders through the stock
repurchase plan. Under this plan, we repurchased 116,900 shares of Common Stock
during 2000 and none in 2001 and 2002. No cash dividends were paid during 2002
and 2001. Our Certificate of Incorporation provides that no cash dividends may
be paid on the Class B Common Stock.
In June 2003, the Board voted to recommence a dividend payout in response
to favorable tax law changes. The Board of Directors of Stewart Information
Services Corporation declared an annual cash dividend of $0.46 per share that
was paid on December 19, 2003 to Common stockholders of record on December 5,
2003.
We had a book value per share of $36.27 and $34.47 at June 30, 2004 and
December 31, 2003, respectively. At June 30, 2004, this measure is based on
approximately $656.5 million in stockholders' equity and 18.1 million shares
outstanding. At December 31, 2003, this measure was based on approximately
$621.4 million in stockholders' equity and 18.0 million shares outstanding.
- 12 -
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Those exhibits required to be filed by Item 601 of Regulation S-K are
listed in the Index to Exhibits immediately preceding the exhibits filed
herewith and such listing is incorporated herein by reference.
(b) Reports on Form 8-K:
During the quarterly period covered by this report, we filed a report on
Form 8-K dated April 28, 2004, reporting financial results for the three months
ended March 31, 2004.
- 13 -
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, we have
duly caused this report to be signed on our behalf by the undersigned thereunto
duly authorized.
August 4, 2004
- ----------------
Date
Stewart Information Services Corporation
----------------------------------------
(Registrant)
By: /s/ MAX CRISP
-----------------------------------------------
Max Crisp
(Executive Vice President and Chief Financial
Officer, Secretary-Treasurer, Director and
Principal Financial Officer)
- 14 -
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 - Certificate of Incorporation of the Registrant, as
amended March 19, 2001 (incorporated by reference in this
report from Exhibit 3.1 of Annual Report on Form 10-K for
the fiscal year ended December 31, 2000)
3.2 - By-Laws of the Registrant, as amended March 13, 2000
(incorporated by reference in this report from Exhibit
3.2 of Annual Report on Form 10-K for the fiscal year
ended December 31, 2000)
4. - Rights of Common and Class B Common Stockholders
* 10.1 - Summary of agreements as to payment of bonuses to certain
executive officers (incorporated by reference in this
report from Exhibit 10.1 of Annual Report on Form 10-K
for the fiscal year ended December 31, 2002)
* 10.2 - Deferred Compensation Agreements dated March 10, 1986,
amended July 24, 1990 and October 30, 1992, between the
Registrant and certain executive officers (incorporated
by reference in this report from Exhibit 10.2 of Annual
Report on Form 10-K for the fiscal year ended December
31, 1997)
* 10.3 - Stewart Information Services Corporation 1999 Stock
Option Plan (incorporated by reference in this report
from Exhibit 10.3 of Annual Report on Form 10-K for the
fiscal year ended December 31, 1999)
* 10.4 - Stewart Information Services Corporation 2002 Stock
Option Plan for Region Managers (incorporated by
reference in this report from Exhibit 10.4 of Quarterly
Report on Form 10-Q for the quarter ended March 31, 2002)
31.1 - Certification of Co-Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 - Certification of Co-Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.3 - Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 - Certification of Co-Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 - Certification of Co-Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.3 - Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99.1 - Details of Investments at June 30, 2004 and December 31,
2003
* A management compensation plan, contract or arrangement.