UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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 September 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
| 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 November 2, 2004 was 18,784,773.
PART I. FINANCIAL INFORMATION
THE MIDLAND COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2004 AND DECEMBER 31, 2003
Amounts in 000’s
| (Unaudited) | ||||||||
| September 30, | Dec. 31, | |||||||
| ASSETS |
2004 |
2003 |
||||||
MARKETABLE SECURITIES AVAILABLE FOR SALE: |
||||||||
Fixed income (cost, $740,810 at September 30, 2004 and |
||||||||
$643,735 at December 31, 2003) |
$ | 765,827 | $ | 671,454 | ||||
Equity (cost, $107,579 at September 30, 2004 and
$87,998 at December 31, 2003) |
189,643 | 174,868 | ||||||
Total |
955,470 | 846,322 | ||||||
CASH |
5,914 | 2,386 | ||||||
ACCOUNTS RECEIVABLE — NET |
104,573 | 81,297 | ||||||
REINSURANCE RECOVERABLES AND
PREPAID REINSURANCE PREMIUMS |
97,327 | 70,990 | ||||||
PROPERTY, PLANT AND EQUIPMENT — NET |
67,760 | 69,328 | ||||||
DEFERRED INSURANCE POLICY ACQUISITION COSTS |
91,934 | 87,873 | ||||||
OTHER ASSETS |
22,034 | 21,309 | ||||||
TOTAL ASSETS |
$ | 1,345,012 | $ | 1,179,505 | ||||
See notes to condensed consolidated financial statements.
THE MIDLAND COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2004 AND DECEMBER 31, 2003
Amounts in 000’s
| (Unaudited) | ||||||||
| September 30, | Dec. 31, | |||||||
| LIABILITIES & SHAREHOLDERS’ EQUITY | 2004 | 2003 | ||||||
UNEARNED INSURANCE PREMIUMS |
$ | 405,480 | $ | 383,869 | ||||
INSURANCE LOSS RESERVES |
260,724 | 204,833 | ||||||
INSURANCE COMMISSIONS PAYABLE |
40,745 | 30,522 | ||||||
FUNDS HELD UNDER REINSURANCE AGREEMENTS
AND REINSURANCE PAYABLES |
13,506 | 6,978 | ||||||
LONG-TERM DEBT |
61,047 | 62,217 | ||||||
OTHER NOTES PAYABLE: |
||||||||
Banks |
11,000 | 30,000 | ||||||
Commercial paper |
4,774 | 3,625 | ||||||
Total |
15,774 | 33,625 | ||||||
DEFERRED FEDERAL INCOME TAX |
45,047 | 47,429 | ||||||
OTHER PAYABLES AND ACCRUALS |
73,755 | 53,974 | ||||||
JUNIOR SUBORDINATED DEBENTURES |
24,000 | — | ||||||
COMMITMENTS AND CONTINGENCIES |
— | — | ||||||
SHAREHOLDERS’ EQUITY: |
||||||||
Common stock (issued and outstanding: 18,783 shares at
September 30, 2004 and 17,643 shares at December 31, 2003
after deducting treasury stock of 4,223
shares and
4,213 shares, respectively) |
959 | 911 | ||||||
Additional paid-in capital |
50,651 | 23,406 | ||||||
Retained earnings |
327,463 | 299,752 | ||||||
Accumulated other comprehensive income |
69,045 | 73,455 | ||||||
Treasury stock — at cost |
(43,184 | ) | (41,442 | ) | ||||
Unvested restricted stock awards |
— | (24 | ) | |||||
Total |
404,934 | 356,058 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
$ | 1,345,012 | $ | 1,179,505 | ||||
See notes to condensed consolidated financial statements.
THE MIDLAND COMPANY
AND SUBSIDIARIES
STATEMENTS OF CONDENSED CONSOLIDATED OPERATIONS (Unaudited)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
Amounts in 000’s (except per share information)
| Nine-Mos. Ended Sept. 30, |
Three-Mos. Ended Sept. 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
REVENUES: |
||||||||||||||||
Insurance: |
||||||||||||||||
Premiums earned |
$ | 503,350 | $ | 474,770 | $ | 169,296 | $ | 164,290 | ||||||||
Net investment income |
27,062 | 24,861 | 9,318 | 8,269 | ||||||||||||
Net realized investment gains |
5,726 | 2,240 | 318 | 1,190 | ||||||||||||
Other insurance income |
10,246 | 10,545 | 1,943 | 3,558 | ||||||||||||
Transportation |
32,701 | 19,736 | 12,006 | 6,915 | ||||||||||||
Total |
579,085 | 532,152 | 192,881 | 184,222 | ||||||||||||
COSTS AND EXPENSES: |
||||||||||||||||
Insurance: |
||||||||||||||||
Losses and loss adjustment expenses |
276,688 | 297,222 | 108,796 | 105,139 | ||||||||||||
Commissions and other policy acquisition costs |
146,469 | 133,676 | 43,207 | 44,953 | ||||||||||||
Operating and administrative expenses |
78,432 | 63,335 | 26,000 | 21,612 | ||||||||||||
Transportation operating expenses |
31,090 | 18,756 | 11,336 | 6,339 | ||||||||||||
Interest expense |
3,886 | 2,782 | 1,325 | 961 | ||||||||||||
Total |
536,565 | 515,771 | 190,664 | 179,004 | ||||||||||||
INCOME BEFORE FEDERAL INCOME TAX |
42,520 | 16,381 | 2,217 | 5,218 | ||||||||||||
PROVISION (CREDIT) FOR FEDERAL INCOME TAX |
11,924 | 3,060 | (207 | ) | 929 | |||||||||||
NET INCOME |
$ | 30,596 | $ | 13,321 | $ | 2,424 | $ | 4,289 | ||||||||
BASIC EARNINGS PER SHARE
OF COMMON STOCK: |
$ | 1.65 | $ | 0.77 | $ | 0.13 | $ | 0.25 | ||||||||
DILUTED EARNINGS PER SHARE
OF COMMON STOCK: |
$ | 1.60 | $ | 0.74 | $ | 0.12 | $ | 0.23 | ||||||||
CASH DIVIDENDS DECLARED PER SHARE
OF COMMON STOCK |
$ | 0.15375 | $ | 0.14250 | $ | 0.05125 | $ | 0.04750 | ||||||||
See notes to condensed consolidated financial statements.
THE MIDLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
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 |
13,321 | 13,321 | $ | 13,321 | ||||||||||||||||||||||||||||
Increase in unrealized gain on
marketable securities, net of federal
income tax of $7,070 |
13,108 | 13,108 | 13,108 | |||||||||||||||||||||||||||||
Other, net of federal income tax of $63 |
117 | 117 | 117 | |||||||||||||||||||||||||||||
Total comprehensive income |
$ | 26,546 | ||||||||||||||||||||||||||||||
Purchase of treasury stock |
(944 | ) | (944 | ) | ||||||||||||||||||||||||||||
Issuance of treasury stock for options
exercised and employee savings plan |
563 | 1,039 | 1,602 | |||||||||||||||||||||||||||||
Cash dividends declared |
(2,511 | ) | (2,511 | ) | ||||||||||||||||||||||||||||
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 | ) | 217 | 213 | ||||||||||||||||||||||||||
BALANCE, SEPTEMBER 30, 2003 |
$ | 911 | $ | 23,200 | $ | 290,636 | $ | 60,798 | $ | (41,512 | ) | $ | (96 | ) | $ | 333,937 | ||||||||||||||||
BALANCE, DECEMBER 31, 2003 |
$ | 911 | $ | 23,406 | $ | 299,752 | $ | 73,455 | $ | (41,442 | ) | $ | (24 | ) | $ | 356,058 | ||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net income |
30,596 | 30,596 | $ | 30,596 | ||||||||||||||||||||||||||||
Decrease in unrealized gain on
marketable securities, net of federal
income tax of $2,628 |
(4,880 | ) | (4,880 | ) | (4,880 | ) | ||||||||||||||||||||||||||
Other, net of federal income tax of $253 |
470 | 470 | 470 | |||||||||||||||||||||||||||||
Total comprehensive income |
$ | 26,186 | ||||||||||||||||||||||||||||||
Common stock issuance |
48 | 25,022 | 25,070 | |||||||||||||||||||||||||||||
Purchase of treasury stock |
(2,770 | ) | (2,770 | ) | ||||||||||||||||||||||||||||
Issuance of treasury stock for options
exercised and employee savings plan |
1,138 | 1,028 | 2,166 | |||||||||||||||||||||||||||||
Cash dividends declared |
(2,885 | ) | (2,885 | ) | ||||||||||||||||||||||||||||
Federal income tax benefit related to the
exercise or granting of stock awards |
1,085 | 1,085 | ||||||||||||||||||||||||||||||
Amortization and cancellation of
unvested restricted stock awards |
24 | 24 | ||||||||||||||||||||||||||||||
BALANCE, SEPTEMBER 30, 2004 |
$ | 959 | $ | 50,651 | $ | 327,463 | $ | 69,045 | $ | (43,184 | ) | $ | — | $ | 404,934 | |||||||||||||||||
See notes to condensed consolidated financial statements.
THE MIDLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
Amount in 000’s
| 2004 |
2003 |
|||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income |
$ | 30,596 | $ | 13,321 | ||||
Adjustments to reconcile net income to net cash
provided by operating activities: |
||||||||
Depreciation and amortization |
8,420 | 6,739 | ||||||
Net realized investment gains |
(6,540 | ) | (2,063 | ) | ||||
Increase (decrease) in unearned insurance premiums |
21,611 | (473 | ) | |||||
Decrease (increase) in deferred insurance policy acquisition costs |
(4,061 | ) | 2,460 | |||||
Decrease (increase) in reinsurance recoverables and prepaid
reinsurance premiums |
(26,337 | ) | 2,368 | |||||
Increase in net accounts receivable |
(23,276 | ) | (2,739 | ) | ||||
Increase in insurance loss reserves |
55,891 | 33,442 | ||||||
Increase in funds held under reinsurance
agreements and reinsurance payables |
6,528 | 3,118 | ||||||
Increase in other accounts payable and accruals |
21,456 | 2,449 | ||||||
Increase in other assets |
(725 | ) | (404 | ) | ||||
Increase in insurance commissions payable |
10,223 | 944 | ||||||
Other-net |
1,567 | 2,776 | ||||||
Net cash provided by operating activities |
95,353 | 61,938 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Purchase of marketable securities |
(421,328 | ) | (382,606 | ) | ||||
Sale of marketable securities |
241,279 | 232,632 | ||||||
Decrease in cash equivalent marketable securities |
8,791 | 39,662 | ||||||
Maturity of marketable securities |
59,412 | 76,860 | ||||||
Acquisition of property, plant and equipment |
(7,144 | ) | (12,049 | ) | ||||
Proceeds from sale of property, plant and equipment |
480 | 280 | ||||||
Net cash used in investing activities |
(118,510 | ) | (45,221 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Decrease in net short-term borrowings |
(17,851 | ) | (20,971 | ) | ||||
Issuance of long-term debt |
— | 7,497 | ||||||
Repayment of long-term debt |
(1,170 | ) | (1,127 | ) | ||||
Issuance of junior subordinated debentures |
24,000 | — | ||||||
Dividends paid |
(2,760 | ) | (2,441 | ) | ||||
Issuance of treasury stock |
2,166 | 1,602 | ||||||
Purchase of treasury stock |
(2,770 | ) | (944 | ) | ||||
Proceeds from common stock issuance |
25,070 | — | ||||||
Net cash provided by (used in) financing activities |
26,685 | (16,384 | ) | |||||
NET INCREASE IN CASH |
3,528 | 333 | ||||||
CASH AT BEGINNING OF PERIOD |
2,386 | 5,975 | ||||||
CASH AT END OF PERIOD |
$ | 5,914 | $ | 6,308 | ||||
INTEREST PAID |
$ | 3,156 | $ | 2,542 | ||||
INCOME TAXES PAID |
$ | 14,800 | $ | 1,500 | ||||
See notes to the condensed consolidated financial statements.
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 nine and three-month periods ended September 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 |
|||||||
Nine months ended September 30: |
||||||||
2004 |
18,561 | 19,100 | ||||||
2003 |
17,411 | 17,919 | ||||||
Three months ended September 30: |
||||||||
2004 |
18,775 | 19,307 | ||||||
2003 |
17,420 | 17,913 | ||||||
3. INCOME TAXES
The federal income tax provisions for the nine and three-month periods ended September 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):
| Nine-Mos. Ended Sept. 30, |
Three-Mos. Ended Sept. 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Federal income tax at statutory rate |
$ | 14,882 | $ | 5,733 | $ | 776 | $ | 1,826 | ||||||||
Tax effect of: |
||||||||||||||||
Tax exempt interest and
excludable dividend income |
(3,146 | ) | (2,773 | ) | (1,059 | ) | (939 | ) | ||||||||
Other — net |
188 | 100 | 76 | 42 | ||||||||||||
Provision (credit) for federal income tax |
$ | 11,924 | $ | 3,060 | $ | (207 | ) | $ | 929 | |||||||
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):
| Nine Months Ended | Three Months Ended | |||||||||||||||||||
| Sept. 30, 2004 |
Sept. 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 | $ | 240,626 | $ | 24,664 | $ | 79,024 | $ | 2,937 | |||||||||||
Other |
n/a | 272,970 | 15,768 | 92,215 | (720 | ) | ||||||||||||||
Unallocated |
$ | 1,248,655 | — | 4,234 | — | 6 | ||||||||||||||
Transportation |
34,682 | 32,701 | 1,274 | 12,006 | 567 | |||||||||||||||
Corporate and all other |
108,939 | — | (3,420 | ) | — | (573 | ) | |||||||||||||
Intersegment Eliminations |
(47,264 | ) | — | — | — | — | ||||||||||||||
Total |
$ | 1,345,012 | $ | 546,297 | $ | 42,520 | $ | 183,245 | $ | 2,217 | ||||||||||
| Nine Months Ended | Three Months Ended | |||||||||||||||||||
| Sept. 30, 2003 |
Sept. 30, 2003 |
|||||||||||||||||||
| Revenues- | Pre-Tax | Revenues- | Pre-Tax | |||||||||||||||||
| Total | External | Income | External | Income | ||||||||||||||||
| Assets |
Customers |
(Loss) |
Customers |
(Loss) |
||||||||||||||||
Reportable Segments: |
||||||||||||||||||||
Insurance: |
||||||||||||||||||||