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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

     
(Mark One)
    
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2004

OR

     
o
  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

(Exact name of registrant as specified in its charter)
     
Ohio   31-0742526
  		 
 
(State or other jurisdiction of incorporation
or organization) 		  (I.R.S. Employer Identification No.)

7000 Midland Boulevard, Amelia, Ohio 45102-2607

(Address of principal executive offices) (Zip Code)

(513) 943-7100

(Registrant’s telephone number, including area code)

N/A

(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 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 August 5, 2004 was 18,769,685.

1

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
ITEM 2. THE MIDLAND COMPANY AND SUBSIDIARIES MANAGEMENT’S DISCUSSION AND ANALYSIS OF            FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION THE MIDLAND COMPANY AND SUBSIDIARIES JUNE 30, 2004
Item 1. Legal Proceedings
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
EX-15
EX-31.1
EX-31.2
EX-32.1
EX-32.2

Table of Contents

PART I. FINANCIAL INFORMATION
THE MIDLAND COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 AND DECEMBER 31, 2003
Amounts in 000’s

                 
    (Unaudited)    
    June 30,   Dec. 31,
ASSETS
   2004
   2003
MARKETABLE SECURITIES AVAILABLE FOR SALE:
                
Fixed income (cost, $706,423 at June 30, 2004 and $643,735 at December 31, 2003)
   $ 717,839     $ 671,454  
Equity (cost, $107,832 at June 30, 2004 and $87,998 at December 31, 2003)
     187,806       174,868  
 
    
 		      
 		  
Total
     905,645       846,322  
 
    
 		      
 		  
CASH
     5,011       2,386  
 
    
 		      
 		  
ACCOUNTS RECEIVABLE — NET
     87,745       81,297  
 
    
 		      
 		  
REINSURANCE RECOVERABLES AND PREPAID REINSURANCE PREMIUMS
     75,227       70,990  
 
    
 		      
 		  
PROPERTY, PLANT AND EQUIPMENT — NET
     68,981       69,328  
 
    
 		      
 		  
DEFERRED INSURANCE POLICY ACQUISITION COSTS
     90,031       87,873  
 
    
 		      
 		  
OTHER ASSETS
     21,538       21,309  
 
    
 		      
 		  
TOTAL ASSETS
   $ 1,254,178     $ 1,179,505  
 
    
 		      
 		  

See notes to condensed consolidated financial statements.

2

Table of Contents

THE MIDLAND COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 AND DECEMBER 31, 2003
Amounts in 000’s

                 
    (Unaudited)    
    June 30,   Dec. 31,
LIABILITIES & SHAREHOLDERS' EQUITY
   2004
   2003
UNEARNED INSURANCE PREMIUMS
   $ 393,715     $ 383,869  
 
    
 		      
 		  
INSURANCE LOSS RESERVES
     217,791       204,833  
 
    
 		      
 		  
INSURANCE COMMISSIONS PAYABLE
     44,378       30,522  
 
    
 		      
 		  
FUNDS HELD UNDER REINSURANCE AGREEMENTS AND REINSURANCE PAYABLES
     8,382       6,978  
 
    
 		      
 		  
LONG-TERM DEBT
     61,442       62,217  
 
    
 		      
 		  
OTHER NOTES PAYABLE:
                
Banks
     7,000       30,000  
Commercial paper
     4,778       3,625  
 
    
 		      
 		  
Total
     11,778       33,625  
 
    
 		      
 		  
DEFERRED FEDERAL INCOME TAX
     39,528       47,429  
 
    
 		      
 		  
OTHER PAYABLES AND ACCRUALS
     60,324       53,974  
 
    
 		      
 		  
JUNIOR SUBORDINATED DEBENTURES
     24,000       —  
 
    
 		      
 		  
COMMITMENTS AND CONTINGENCIES
     —       —  
 
    
 		      
 		  
SHAREHOLDERS’ EQUITY:
                
Common stock (issued and outstanding: 18,766 shares at June 30, 2004 and 17,643 shares at December 31, 2003 after deducting treasury stock of 4,240 shares and 4,213 shares, respectively)
     959       911  
Additional paid-in capital
     50,313       23,406  
Retained earnings
     326,002       299,752  
Accumulated other comprehensive income
     58,785       73,455  
Treasury stock — at cost
     (43,219 )     (41,442 )
Unvested restricted stock awards
     —       (24 )
 
    
 		      
 		  
Total
     392,840       356,058  
 
    
 		      
 		  
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
   $ 1,254,178     $ 1,179,505  
 
    
 		      
 		  

See notes to condensed consolidated financial statements.

3

Table of Contents

THE MIDLAND COMPANY
AND SUBSIDIARIES
STATEMENTS OF CONDENSED CONSOLIDATED OPERATIONS (Unaudited)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003
Amounts in 000’s (except per share information)

                                 
    Six-Mos. Ended June 30,
   Three-Mos. Ended June 30,
    2004
   2003
   2004
   2003
REVENUES:
                                
Insurance:
                                
Premiums earned
   $ 334,054     $ 310,480     $ 170,415     $ 157,202  
Net investment income
     17,744       16,592       9,030       8,123  
Net realized investment gains
     5,408       1,050       702       2,813  
Other insurance income
     8,303       6,987       4,041       3,528  
Transportation
     20,695       12,821       11,395       6,976  
 
    
 		      
 		      
 		      
 		  
Total
     386,204       347,930       195,583       178,642  
 
    
 		      
 		      
 		      
 		  
COSTS AND EXPENSES:
                                
Insurance:
                                
Losses and loss adjustment expenses
     167,892       192,083       88,567       113,436  
Commissions and other policy acquisition costs
     103,262       88,723       51,569       40,918  
Operating and administrative expenses
     52,432       41,723       27,353       19,735  
Transportation operating expenses
     19,754       12,417       10,690       6,612  
Interest expense
     2,561       1,821       1,542       882  
 
    
 		      
 		      
 		      
 		  
Total
     345,901       336,767       179,721       181,583  
 
    
 		      
 		      
 		      
 		  
INCOME (LOSS) BEFORE FEDERAL INCOME TAX
     40,303       11,163       15,862       (2,941 )
PROVISION (CREDIT) FOR FEDERAL INCOME TAX
     12,131       2,131       4,538       (1,924 )
 
    
 		      
 		      
 		      
 		  
NET INCOME (LOSS)
   $ 28,172     $ 9,032     $ 11,324     $ (1,017 )
 
    
 		      
 		      
 		      
 		  
BASIC EARNINGS (LOSSES) PER SHARE OF COMMON STOCK:
   $ 1.53     $ 0.52     $ 0.60     $ (0.06 )
DILUTED EARNINGS (LOSSES) PER SHARE OF COMMON STOCK:
   $ 1.48     $ 0.51     $ 0.58     $ (0.06 )
CASH DIVIDENDS DECLARED PER SHARE OF COMMON STOCK
   $ 0.1025     $ 0.0950     $ 0.05125     $ 0.04750  

See notes to condensed consolidated financial statements.

4

Table of Contents

THE MIDLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (Unaudited)
Amounts in 000’s

                                                                 
                            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
                     9,032                               9,032     $ 9,032  
Increase in unrealized gain on marketable securities, net of federal income tax of $8,961
                             16,620                       16,620       16,620  
Other, net of federal income tax of $47
                             (86 )                     (86 )     (86 )
 
                                                            
 		  
Total comprehensive income
                                                           $ 25,566  
 
                                                            
 		  
Purchase of treasury stock
                                     (445 )             (445 )        
Issuance of treasury stock for options exercised and employee savings plan
             434                       932               1,366          
Cash dividends declared
                     (1,674 )                             (1,674 )        
Federal income tax benefit related to the exercise or granting of stock awards
             123                                       123          
Amortization and cancellation of unvested restricted stock awards
             (2 )                     (2 )     144       140          
 
    
 		      
 		      
 		      
 		      
 		      
 		      
 		        
BALANCE, JUNE 30, 2003
   $ 911     $ 23,071     $ 287,184     $ 64,107     $ (41,120 )   $ (169 )   $ 333,984          
 
    
 		      
 		      
 		      
 		      
 		      
 		      
 		        
BALANCE, DECEMBER 31, 2003
   $ 911     $ 23,406     $ 299,752     $ 73,455     $ (41,442 )   $ (24 )   $ 356,058          
Comprehensive income:
                                                                
Net income
                     28,172                               28,172     $ 28,172  
Decrease in unrealized gain on marketable securities, net of federal income tax of $8,120
                             (15,078 )                     (15,078 )     (15,078 )
Other, net of federal income tax of $220
                             408                       408       408  
 
                                                            
 		  
Total comprehensive income
                                                           $ 13,502  
 
                                                            
 		  
Common stock issuance
     48       25,022                                       25,070          
Purchase of treasury stock
                                     (2,550 )             (2,550 )        
Issuance of treasury stock for options exercised and employee savings plan
             852                       773               1,625          
Cash dividends declared
                     (1,922 )                             (1,922 )        
Federal income tax benefit related to the exercise or granting of stock awards
             1,033                                       1,033          
Amortization and cancellation of unvested restricted stock awards
                                             24       24          
 
    
 		      
 		      
 		      
 		      
 		      
 		      
 		        
BALANCE, JUNE 30, 2004
   $ 959     $ 50,313     $ 326,002     $ 58,785     $ (43,219 )   $ —     $ 392,840          
 
    
 		      
 		      
 		      
 		      
 		      
 		      
 		        

See notes to condensed consolidated financial statements.

5

Table of Contents

THE MIDLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE SIX-MONTHS ENDED JUNE 30, 2004 AND 2003
Amount in 000’s

                 
    2004
   2003
CASH FLOWS FROM OPERATING ACTIVITIES:
                
Net income
   $ 28,172     $ 9,032  
Adjustments to reconcile net income to net cash provided by operating activities:
                
Depreciation and amortization
     5,912       4,351  
Net realized investment gains
     (5,166 )     (1,340 )
Increase (decrease) in unearned insurance premiums
     9,846       (7,780 )
Decrease (increase) in deferred insurance policy acquisition costs
     (2,158 )     2,988  
Decrease (increase) in reinsurance recoverables and prepaid reinsurance premiums
     (4,237 )     7,508  
Increase in net accounts receivable
     (6,448 )     (5,726 )
Increase in insurance loss reserves
     12,958       16,616  
Increase in funds held under reinsurance agreements and reinsurance payables
     1,404       624  
Increase in other accounts payable and accruals
     8,836       6,166  
Decrease (increase) in other assets
     (229 )     1,117  
Increase in insurance commissions payable
     13,856       84  
Other-net
     796       1,797  
 
    
 		      
 		  
Net cash provided by operating activities
     63,542       35,437  
 
    
 		      
 		  
CASH FLOWS FROM INVESTING ACTIVITIES:
                
Purchase of marketable securities
     (272,536 )     (226,151 )
Sale of marketable securities
     134,039       148,832  
Decrease in cash equivalent marketable securities
     21,065       21,625  
Maturity of marketable securities
     39,140       50,578  
Acquisition of property, plant and equipment
     (5,787 )     (6,911 )
Proceeds from sale of property, plant and equipment
     386       166  
 
    
 		      
 		  
Net cash used in investing activities
     (83,693 )     (11,861 )
 
    
 		      
 		  
CASH FLOWS FROM FINANCING ACTIVITIES:
                
Proceeds from common stock issuance
     25,070       —  
Decrease in net short-term borrowings
     (21,847 )     (15,804 )
Issuance of treasury stock
     1,625       1,366  
Dividends paid
     (2,747 )     (1,604 )
Purchase of treasury stock
     (2,550 )     (445 )
Repayment of long-term debt
     (775 )     (750 )
Issuance of junior subordinated debentures
     24,000       —  
 
    
 		      
 		  
Net cash provided by (used in) financing activities
     22,776       (17,237 )
 
    
 		      
 		  
NET INCREASE IN CASH
     2,625       6,339  
CASH AT BEGINNING OF PERIOD
     2,386       5,975  
 
    
 		      
 		  
CASH AT END OF PERIOD
   $ 5,011     $ 12,314  
 
    
 		      
 		  
INTEREST PAID
   $ 1,917     $ 1,710  
INCOME TAXES PAID
   $ 11,800     $ 1,500  

See notes to the condensed consolidated financial statements.

6

Table of Contents

THE MIDLAND COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Continued)

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 six and three-month periods ended June 30, 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
Six months ended June 30:
                
2004
     18,453       18,977  
 
    
 		      
 		  
2003
     17,405       17,883  
 
    
 		      
 		  
Three months ended June 30:
                
2004
     18,752       19,259  
 
    
 		      
 		  
2003
     17,424       17,424  
 
    
 		      
 		  

3. INCOME TAXES

The federal income tax provisions for the three and six-month periods ended June 30, 2004 and 2003 are different from amounts derived by applying the statutory tax rates to income before federal income tax as follows (000’s):

                                 
    Six-Mos. Ended June 30,
   Three-Mos. Ended June 30,
    2004
   2003
   2004
   2003
Federal income tax at statutory rate
   $ 14,106     $ 3,907     $ 5,552     $ (1,030 )
Tax effect of:
                                
Tax exempt interest and excludable dividend income
     (2,087 )     (1,834 )     (1,064 )     (925 )
Other — net
     112       58       50       31  
 
    
 		      
 		      
 		      
 		  
Provision (credit) for federal income tax
   $ 12,131     $ 2,131     $ 4,538     $ (1,924 )
 
    
 		      
 		      
 		      
 		  

7

Table of Contents

THE MIDLAND COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Continued)

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):

                                         
    Six Months Ended June 30, 2004
   Three Months Ended June 30, 2004
            Revenues-   Pre-Tax   Revenues-   Pre-Tax
    Total   External   Income   External   Income
    Assets
   Customers
   (Loss)
   Customers
   (Loss)
Reportable Segments:
                                        
Insurance:
                                        
Manufactured housing
     n/a     $ 161,602     $ 21,727     $ 80,680     $ 9,391  
Other
     n/a       180,755       16,488       93,776       7,917  
Unallocated
   $ 1,170,586       —       4,228       —       458  
Transportation
     33,874       20,695       707       11,395       588  
Corporate and all other
     108,583       —       (2,847 )     —       (2,492 )
Intersegment Eliminations
     (58,865 )     —       —       —       —  
 
    
 		      
 		      
 		      
 		      
 		  
Total
   $ 1,254,178     $ 363,052     $ 40,303     $ 185,851     $ 15,862  
 
    
 		      
 		      
 		      
 		      
 		  
                                         
    Six Months Ended June 30, 2003
   Three Months Ended June 30, 2003
            Revenues-   Pre-Tax   Revenues-   Pre-Tax
    Total   External   Income   External   Income
    Assets
   Customers
   (Loss)
   Customers
   (Loss)
Reportable Segments:
                                        
Insurance:
                                        
Manufactured housing
     n/a     $ 165,828     $ 14,621     $ 82,452     $ (971 )