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 March 31, 2004
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 1-6026
The Midland Company
| Ohio | 31-0742526 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
7000 Midland Boulevard, Amelia, Ohio 45102-2607
(513) 943-7100
N/A
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 þ. No o.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes þ. No o.
The number of common shares outstanding as of May 3, 2004 was 18,743,312.
PART I. FINANCIAL INFORMATION
THE MIDLAND COMPANY
AND SUBSIDIARIES
| (Unaudited) | ||||||||
| March 31, | Dec. 31, | |||||||
| ASSETS |
2004 |
2003 |
||||||
MARKETABLE SECURITIES AVAILABLE FOR SALE: |
||||||||
Fixed income (cost, $667,033 at March 31, 2004 and
$643,735 at December 31, 2003) |
$ | 698,381 | $ | 671,454 | ||||
Equity (cost, $93,721 at March 31, 2004 and
$87,998 at December 31, 2003) |
175,342 | 174,868 | ||||||
Total |
873,723 | 846,322 | ||||||
CASH |
4,663 | 2,386 | ||||||
ACCOUNTS RECEIVABLE - NET |
82,010 | 81,297 | ||||||
REINSURANCE RECOVERABLES AND
PREPAID REINSURANCE PREMIUMS |
75,398 | 70,990 | ||||||
PROPERTY, PLANT AND EQUIPMENT - NET |
70,839 | 69,328 | ||||||
DEFERRED INSURANCE POLICY ACQUISITION COSTS |
84,239 | 87,873 | ||||||
OTHER ASSETS |
21,161 | 21,309 | ||||||
TOTAL ASSETS |
$ | 1,212,033 | $ | 1,179,505 | ||||
See notes to condensed consolidated financial statements.
THE MIDLAND COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2004 AND DECEMBER 31, 2003
Amounts in 000’s
| (Unaudited) | ||||||||
| March 31, | Dec. 31, | |||||||
| LIABILITIES &
SHAREHOLDERS’ EQUITY |
2004 |
2003 |
||||||
UNEARNED INSURANCE PREMIUMS |
$ | 368,542 | $ | 383,869 | ||||
INSURANCE LOSS RESERVES |
209,650 | 204,833 | ||||||
INSURANCE COMMISSIONS PAYABLE |
34,705 | 30,522 | ||||||
FUNDS HELD UNDER REINSURANCE AGREEMENTS
AND REINSURANCE PAYABLES |
8,884 | 6,978 | ||||||
LONG-TERM DEBT |
61,831 | 62,217 | ||||||
OTHER NOTES PAYABLE: |
||||||||
Banks |
24,000 | 30,000 | ||||||
Commercial paper |
4,053 | 3,625 | ||||||
Total |
28,053 | 33,625 | ||||||
DEFERRED FEDERAL INCOME TAX |
46,856 | 47,429 | ||||||
OTHER PAYABLES AND ACCRUALS |
58,063 | 53,974 | ||||||
COMMITMENTS AND CONTINGENCIES |
— | — | ||||||
SHAREHOLDERS’ EQUITY: |
||||||||
Common stock (issued and outstanding: 18,737 shares at
March 31, 2004 and 17,643 shares at December 31, 2003
after deducting treasury stock of 4,269 shares and
4,213 shares, respectively) |
959 | 911 | ||||||
Additional paid-in capital |
49,912 | 23,406 | ||||||
Retained earnings |
315,640 | 299,752 | ||||||
Accumulated other comprehensive income |
72,391 | 73,455 | ||||||
Treasury stock - at cost |
(43,453 | ) | (41,442 | ) | ||||
Unvested restricted stock awards |
— | (24 | ) | |||||
Total |
395,449 | 356,058 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
$ | 1,212,033 | $ | 1,179,505 | ||||
See notes to condensed consolidated financial statements.
THE MIDLAND COMPANY
AND SUBSIDIARIES
| 2004 |
2003 |
|||||||
REVENUES: |
||||||||
Insurance: |
||||||||
Premiums earned |
$ | 163,639 | $ | 153,278 | ||||
Net investment income |
8,543 | 8,395 | ||||||
Net realized investment gains (losses) |
4,706 | (1,763 | ) | |||||
Other insurance income |
4,245 | 3,471 | ||||||
Transportation |
9,300 | 5,845 | ||||||
Other |
188 | 62 | ||||||
Total |
190,621 | 169,288 | ||||||
COSTS AND EXPENSES: |
||||||||
Insurance: |
||||||||
Losses and loss adjustment expenses |
79,325 | 78,647 | ||||||
Commissions and other policy acquisition costs |
51,693 | 47,805 | ||||||
Operating and administrative expenses |
25,079 | 21,988 | ||||||
Transportation operating expenses |
9,064 | 5,805 | ||||||
Interest expense |
1,019 | 939 | ||||||
Total |
166,180 | 155,184 | ||||||
INCOME BEFORE FEDERAL INCOME TAX |
24,441 | 14,104 | ||||||
PROVISION FOR FEDERAL INCOME TAX |
7,593 | 4,055 | ||||||
NET INCOME |
$ | 16,848 | $ | 10,049 | ||||
BASIC EARNINGS PER SHARE OF COMMON STOCK |
$ | 0.93 | $ | 0.58 | ||||
DILUTED EARNINGS PER SHARE OF COMMON STOCK |
$ | 0.90 | $ | 0.56 | ||||
CASH DIVIDENDS PER SHARE OF COMMON STOCK - DECLARED |
$ | .05125 | $ | .0475 | ||||
See notes to condensed consolidated financial statements.
THE MIDLAND COMPANY AND SUBSIDIARIES
| Accumulated | Unvested | |||||||||||||||||||||||||||||||
| Additional | Other Com- | Restricted | Compre- | |||||||||||||||||||||||||||||
| Common | Paid-In | Retained | prehensive | Treasury | Stock | hensive | ||||||||||||||||||||||||||
| Stock |
Capital |
Earnings |
Income |
Stock |
Awards |
Total |
Income |
|||||||||||||||||||||||||
BALANCE, DECEMBER 31, 2002 |
$ | 911 | $ | 22,516 | $ | 279,826 | $ | 47,573 | $ | (41,605 | ) | $ | (313 | ) | $ | 308,908 | ||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net income |
10,049 | 10,049 | $ | 10,049 | ||||||||||||||||||||||||||||
Decrease in unrealized gain on
marketable securities, net of related
income tax effect of $1,251 |
(2,343 | ) | (2,343 | ) | (2,343 | ) | ||||||||||||||||||||||||||
Other, net of federal income tax of $10 |
(19 | ) | (19 | ) | (19 | ) | ||||||||||||||||||||||||||
Total comprehensive income |
$ | 7,687 | ||||||||||||||||||||||||||||||
Purchase of treasury stock |
(380 | ) | (380 | ) | ||||||||||||||||||||||||||||
Issuance of treasury stock for options
exercised and employee savings plan |
322 | 632 | 954 | |||||||||||||||||||||||||||||
Cash dividends declared |
(836 | ) | (836 | ) | ||||||||||||||||||||||||||||
Amortization and cancellation of
unvested restricted stock awards |
71 | 71 | ||||||||||||||||||||||||||||||
BALANCE, MARCH 31, 2003 |
$ | 911 | $ | 22,838 | $ | 289,039 | $ | 45,211 | $ | (41,353 | ) | $ | (242 | ) | $ | 316,404 | ||||||||||||||||
BALANCE, DECEMBER 31, 2003 |
$ | 911 | $ | 23,406 | $ | 299,752 | $ | 73,455 | $ | (41,442 | ) | $ | (24 | ) | $ | 356,058 | ||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net income |
16,848 | 16,848 | $ | 16,848 | ||||||||||||||||||||||||||||
Decrease in unrealized gain on
marketable securities, net of related
income tax effect of $567 |
(1,054 | ) | (1,054 | ) | (1,054 | ) | ||||||||||||||||||||||||||
Other, net of federal income tax of $5 |
(10 | ) | (10 | ) | (10 | ) | ||||||||||||||||||||||||||
Total comprehensive income |
$ | 15,784 | ||||||||||||||||||||||||||||||
Public stock offering |
48 | 25,022 | 25,070 | |||||||||||||||||||||||||||||
Purchase of treasury stock |
(2,452 | ) | (2,452 | ) | ||||||||||||||||||||||||||||
Issuance of treasury stock for options
exercised and employee savings plan |
512 | 441 | 953 | |||||||||||||||||||||||||||||
Cash dividends declared |
(960 | ) | (960 | ) | ||||||||||||||||||||||||||||
Federal income tax benefit related to the
exercise or granting of stock awards |
972 | 972 | ||||||||||||||||||||||||||||||
Amortization and cancellation of
unvested restricted stock awards |
24 | 24 | ||||||||||||||||||||||||||||||
BALANCE, MARCH 31, 2004 |
$ | 959 | $ | 49,912 | $ | 315,640 | $ | 72,391 | $ | (43,453 | ) | $ | — | $ | 395,449 | |||||||||||||||||
See notes to condensed consolidated financial statements.
THE MIDLAND COMPANY AND SUBSIDIARIES
| 2004 |
2003 |
|||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income |
$ | 16,848 | $ | 10,049 | ||||
Adjustments to reconcile net income to net cash
provided by operating activities: |
||||||||
Depreciation and amortization |
2,803 | 2,144 | ||||||
Net realized investment losses (gains) |
(4,538 | ) | 862 | |||||
Decrease in unearned insurance premiums |
(15,327 | ) | (19,621 | ) | ||||
Decrease in deferred insurance policy acquisition costs |
3,634 | 5,454 | ||||||
Decrease (increase) in reinsurance recoverables and prepaid
reinsurance premiums |
(4,408 | ) | 4,368 | |||||
Decrease (increase) in net accounts receivable |
(713 | ) | 4,272 | |||||
Increase (decrease) in insurance loss reserves |
4,817 | (3,312 | ) | |||||
Increase in funds held under reinsurance
agreements and reinsurance payables |
1,906 | 1,126 | ||||||
Increase (decrease) in other accounts payable and accruals |
5,870 | (565 | ) | |||||
Decrease in other assets |
148 | 542 | ||||||
Increase (decrease) in insurance commissions payable |
4,183 | (407 | ) | |||||
Other-net |
542 | 1,333 | ||||||
Net cash provided by operating activities |
15,765 | 6,245 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Purchase of marketable securities |
(144,984 | ) | (142,072 | ) | ||||
Sale of marketable securities |
89,616 | 79,286 | ||||||
Decrease in cash equivalent marketable securities |
14,308 | 46,707 | ||||||
Maturity of marketable securities |
15,895 | 27,045 | ||||||
Acquisition of property, plant and equipment |
(4,390 | ) | (1,079 | ) | ||||
Proceeds from sale of property, plant and equipment |
239 | 39 | ||||||
Net cash provided by (used in) investing activities |
(29,316 | ) | 9,926 | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Proceeds from common stock issuance |
25,070 | — | ||||||
Decrease in net short-term borrowings |
(5,572 | ) | (13,998 | ) | ||||
Issuance of treasury stock |
953 | 954 | ||||||
Dividends paid |
(1,785 | ) | (767 | ) | ||||
Purchase of treasury stock |
(2,452 | ) | (380 | ) | ||||
Repayment of long-term debt |
(386 | ) | (376 | ) | ||||
Net cash provided by (used in) financing activities |
15,828 | (14,567 | ) | |||||
NET INCREASE IN CASH |
2,277 | 1,604 | ||||||
CASH AT BEGINNING OF PERIOD |
2,386 | 5,975 | ||||||
CASH AT END OF PERIOD |
$ | 4,663 | $ | 7,579 | ||||
INTEREST PAID |
$ | 878 | $ | 897 | ||||
INCOME TAXES PAID |
$ | 1,500 | $ | — | ||||
See notes to the condensed consolidated financial statements.
THE MIDLAND COMPANY AND SUBSIDIARIES
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of The Midland Company and subsidiaries (Midland) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Financial information as of December 31, 2003 has been derived from the audited consolidated financial statements of the Company. Revenue and operating results for the three-month period ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. For further information, refer to the audited consolidated financial statements and footnotes thereto for the year ended December 31, 2003 included in Midland’s Annual Report on Form 10-K.
Certain prior period amounts have been reclassified to conform to current period presentation.
2. EARNINGS PER SHARE
Earnings per share (EPS) of common stock amounts are computed by dividing net income by the weighted average number of shares outstanding during the period for basic EPS, plus the dilutive share equivalents for stock options and performance based stock awards for diluted EPS. Shares used for EPS calculations were as follows (000’s):
| For Basic EPS |
For Diluted EPS |
|||||||
Three months ended March 31: |
||||||||
2004 |
18,154 | 18,644 | ||||||
2003 |
17,387 | 17,829 | ||||||
3. INCOME TAXES
The federal income tax provisions for the three-month periods ended March 31, 2004 and 2003 are different from amounts derived by applying the statutory tax rates to income before federal income tax as follows (000’s):
| 2004 |
2003 |
|||||||
Federal income tax at statutory rate |
$ | 8,554 | $ | 4,937 | ||||
Tax effect of: |
||||||||
Tax exempt interest and
excludable dividend income |
(1,022 | ) | (909 | ) | ||||
Other - net |
61 | 27 | ||||||
Provision for federal income tax |
$ | 7,593 | $ | 4,055 | ||||
4. SEGMENT DISCLOSURES
Since the Company’s annual report for 2003, there have been no changes in reportable segments or the manner in which Midland determines reportable segments or measures segment profit or loss. Summarized segment information for the interim periods for 2004 and 2003 is as follows (000’s):
THE MIDLAND COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Continued)
4. SEGMENT DISCLOSURES (cont’d)
| Three Months Ended March 31, 2004 |
Three Months Ended March 31, 2003 |
|||||||||||||||||||||||
| Revenues- | Pre-Tax | Revenues- | Pre-Tax | |||||||||||||||||||||
| Total | External | Income | Total | External | Income | |||||||||||||||||||
| Assets |
Customers |
(Loss) |
Assets |
Customers |
(Loss) |
|||||||||||||||||||
Reportable Segments: |
||||||||||||||||||||||||
Insurance: |
||||||||||||||||||||||||
Manufactured housing |
n/a | $ | 79,909 | $ | 12,336 | n/a | $ | 82,375 | $ | 15,592 | ||||||||||||||
Other |
n/a | 87,975 | 8,571 | n/a | 74,374 | 1,266 | ||||||||||||||||||
Unallocated |
$ | 1,142,237 | — | 3,770 | $ | 1,007,248 | — | (2,077 | ) | |||||||||||||||
Transportation |
31,931 | 9,300 | 119 | 22,737 | 5,845 | 1 | ||||||||||||||||||
Corporate and all other |
85,692 | — | (355 | ) | 58,352 | — | (678 | ) | ||||||||||||||||
Intersegment Eliminations |
(47,827 | ) | — | — | (28,482 | ) | — | — | ||||||||||||||||
Total |
$ | 1,212,033 | $ | 177,184 | $ | 24,441 | $ | 1,059,855 | $ | 162,594 | $ | 14,104 | ||||||||||||
Intersegment revenues are insignificant. Revenues reported above, by definition, exclude investment income and realized gains. For pre-tax income reported above, insurance investment income is allocated to Manufactured Housing and Other while realized gains and losses are included in Unallocated. Certain amounts are not allocated to segments (“n/a” above) by the Company.
5. STOCK OPTIONS
Midland accounts for stock options under the recognition and measurement provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations. As such, no compensation cost has been recognized for the stock option plans. Had the Company accounted for stock based employee compensation under the fair value method (SFAS 123), the Company’s net income and earnings per share for the three months ended March 31, 2004 and 2003 would have been reduced to the pro forma amounts indicated below (amounts in 000’s, except per share data):
| For the Three Months Ended March 31 |
||||||||
| 2004 |
2003 |
|||||||
Net Income as Reported |
$ | 16,848 | $ | 10,049 | ||||
Deduct: Total stock-based employee
compensation determined under fair
value based method for all awards,
net of related tax effects |
360 | 308 | ||||||
Pro forma Net Income |
$ | 16,488 | $ | 9,741 | ||||
Basic Shares |
18,154 | 17,387 | ||||||
Diluted Shares |
18,644 | 17,829 | ||||||
Earnings per share: |
||||||||
Basic - as reported |
$ | 0.93 | $ | 0.58 | ||||
Basic - pro forma |
0.91 | 0.56 | ||||||
Diluted - as reported |
$ | 0.90 | $ | 0.56 | ||||
Diluted - pro forma |
0.88 | 0.55 | ||||||
Compensation expense in the pro-forma disclosure is not indicative of future amounts as options vest over several years and additional grants are generally made each year.
THE MIDLAND COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Continued)
6. DERIVATIVE FINANCIAL INSTRUMENTS
Midland adopted Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” on January 1, 2001, which established reporting standards for derivative instruments and hedging activities and requires recognition of all derivatives as either assets or liabilities in the consolidated balance sheet and measurement of those instruments at fair value. At March 31, 2004, Midland’s investment portfolio included approximately $51.0 million of convertible securities, some of which contain embedded derivatives. The embedded conversion options are valued separately, and the change in the market value on the embedded options is reported in net realized investment gains (losses). For the three-month periods ended March 31, 2004 and 2003, Midland recorded pre-tax gains (losses) on these securities of $168,000 and $(901,000), respectively.
During March 2002, Midland entered into a series of interest rate swap agreements to convert $30 million of its floating-rate debt to a fixed rate. The swaps qualify as cash flow hedges and are deemed to be 100% effective and thus the changes in the fair value of the swap agreements are recorded as a separate component of shareholders’ equity and have no income statement impact. At March 31, 2004 and 2003, the accumulated derivative losses recorded in Other Comprehensive Income, net of deferred taxes, amounted to $942,000 and $1,283,000, respectively. The swaps mature on December 1, 2005.
7. DEFINED BENEFIT PENSION PLANS
Midland has a funded qualified defined benefit pension plan and an unfunded non-qualified defined benefit pension plan. The measurement date for Midland’s defined benefit retirement plans is December 31. The components of net periodic pension cost related to both plans for the three-month periods ended March 31, 2004 and 2003 are (000’s):
| For the Three Months Ended March 31 |
||||||||
| 2004 |
2003 |
|||||||
Service cost |
$ | 218 | $ | 189 | ||||
Interest cost |
396 | 364 | ||||||
Expected return on assets |
(398 | ) | (394 | ) | ||||
Amortization of transition asset |
(18 | ) | (24 | ) | ||||
Amortization of prior service cost |
8 | 8 | ||||||
Amortization of net loss |
27 | 13 | ||||||
Net periodic benefit cost |
$ | 233 | $ | 156 | ||||
The Company prepaid its required cash contribution of $0.6 million