1
INTERNATIONAL SHIPHOLDING CORPORATION AND SUBSIDIARIES
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
--------------
__ 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: 2-63322
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INTERNATIONAL SHIPHOLDING CORPORATION
----------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-2989662
- -------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
650 Poydras Street New Orleans, Louisiana 70130
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(504) 529-5461
- ------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
Required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing 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___________ NO____x____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock $1 Par Value 6,082,887 shares (March 31, 2004)
- ------------------------------- --------------------- -----------------
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PART I - FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
INTERNATIONAL SHIPHOLDING CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(All Amounts in Thousands Except Share Data)
(Unaudited)
Three Months Ended
March 31,
2004 2003
--------- ---------
Revenues $ 65,843 $ 64,806
Operating Expenses:
Voyage Expenses 51,215 49,618
Vessel and Barge Depreciation 4,627 4,654
--------- ---------
Gross Voyage Profit 10,001 10,534
--------- ---------
Administrative and General Expenses 4,106 4,011
Loss (Gain) on Sale of Other Assets 7 (4)
--------- ---------
Operating Income 5,888 6,527
--------- ---------
Interest and Other:
Interest Expense 2,722 3,481
Loss on Sale of Investment 623 -
Investment Income (168) (228)
Other Income - (22)
Loss (Gain) on Early Extinguishment of Debt 31 (1,260)
--------- ---------
3,208 1,971
--------- ---------
Income Before Provision for Income Taxes
and Equity in Net Income of Unconsolidated Entities 2,680 4,556
--------- ---------
Provision for Income Taxes:
Current 105 -
Deferred 887 1,587
State 3 42
--------- ---------
995 1,629
--------- ---------
Equity in Net Income of Unconsolidated
Entities (Net of Applicable Taxes) 1,212 67
--------- ---------
Net Income $ 2,897 $ 2,994
========= =========
Basic and Diluted Earnings Per Share:
Net Income $ 0.48 $ 0.49
========= =========
Weighted Average Shares of Common Stock Outstanding:
Basic 6,082,887 6,082,887
Diluted 6,092,666 6,082,887
The accompanying notes are an integral part of these statements.
3
INTERNATIONAL SHIPHOLDING CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(All Amounts in Thousands)
(Unaudited)
March 31, December 31,
ASSETS 2004 2003
------------ ------------
Current Assets:
Cash and Cash Equivalents $ 14,408 $ 8,881
Restricted Cash 6,541 7,406
Marketable Securities 3,065 2,650
Accounts Receivable, Net of Allowance
for Doubtful Accounts of $269 and $327
in 2004 and 2003, Respectively:
Traffic 19,163 23,070
Agents' 4,613 4,119
Claims and Other 6,732 9,438
Deferred Income Tax 144 144
Net Investment in Direct Financing Lease 2,181 2,128
Other Current Assets 5,161 6,295
Material and Supplies Inventory, at
Lower of Cost or Market 3,169 3,177
Current Assets Held for Disposal 89 89
------------ ------------
Total Current Assets 65,266 67,397
------------ ------------
Investment in Unconsolidated Entities 10,287 8,413
------------ ------------
Net Investment in Direct Financing Lease 48,557 49,136
------------ ------------
Vessels, Property, and Other
Equipment, at Cost:
Vessels and Barges 324,429 324,413
Other Equipment 6,753 5,233
Terminal Facilities 140 345
Furniture and Equipment 4,206 4,304
------------ ------------
335,528 334,295
Less - Accumulated Depreciation (115,785) (111,154)
------------ ------------
219,743 223,141
------------ ------------
Other Assets:
Deferred Charges, Net of Accumulated
Amortization of $15,274 and $14,614
in 2004 and 2003, Respectively 12,477 12,319
Acquired Contract Costs, Net of Accumulated
Amortization of $21,794 and $21,430
in 2004 and 2003, Respectively 8,731 9,095
Due from Related Parties 2,535 2,535
Other 10,215 10,415
------------ ------------
33,958 34,364
------------ ------------
$ 377,811 $ 382,451
============ ============
The accompanying notes are an integral part of these statements.
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INTERNATIONAL SHIPHOLDING CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(All Amounts in Thousands)
(Unaudited)
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' INVESTMENT 2004 2003
------------ ------------
Current Liabilities:
Current Maturities of Long-Term Debt $ 13,815 $ 14,866
Accounts Payable and Accrued Liabilities 31,934 35,510
Federal Income Tax Payable 105 183
------------ ------------
Total Current Liabilities 45,854 50,559
------------ ------------
Billings in Excess of Income Earned
and Expenses Incurred 3,980 5,271
------------ ------------
Long-Term Debt, Less Current Maturities 160,308 164,144
------------ ------------
Other Long-Term Liabilities:
Deferred Income Taxes 21,365 19,565
Claims and Other 21,260 21,545
------------ ------------
42,625 41,110
------------ ------------
Commitments and Contingent Liabilities
Stockholders' Investment:
Common Stock 6,756 6,756
Additional Paid-In Capital 54,450 54,450
Retained Earnings 72,827 69,930
Less - Treasury Stock (8,704) (8,704)
Accumulated Other Comprehensive Loss (285) (1,065)
------------ ------------
125,044 121,367
------------ ------------
$ 377,811 $ 382,451
============ ============
The accompanying notes are an integral part of these statements.
5
INTERNATIONAL SHIPHOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' INVESTMENT
(All Amounts in Thousands)
(Unaudited)
Accumulated
Additional Other
Common Paid-In Retained Treasury Comprehensive
Stock Capital Earnings Stock Income(Loss) Total
----------------------------------------------------------
Balance at
December 31, 2002 $6,756 $54,450 $64,439 ($8,704) ($1,714) $115,227
Comprehensive Income:
Net Income for Year Ended
December 31, 2003 - - 5,491 - - 5,491
Other Comprehensive
Income (Loss):
Unrealized Holding
Gain on Marketable
Securities, Net of
Deferred Taxes
of $207 - - - - 387 387
Net Change in Fair
Value of Derivatives,
Net of Deferred
Taxes of $141 - - - - 262 262
--------
Total Comprehensive Income 6,140
----------------------------------------------------------
Balance at
December 31, 2003 $6,756 $54,450 $69,930 ($8,704) ($1,065) $121,367
----------------------------------------------------------
Comprehensive Income:
Net Income for the
Period Ended
March 31, 2004 - - 2,897 - - 2,897
Other Comprehensive
Income (Loss):
Recognition of
Unrealized Holding
Loss on Marketable
Securities, Net of
Deferred Taxes
of $216 - - - - 402 402
Unrealized Holding
Gain on Marketable
Securities, Net of
Deferred Taxes
of $14 - - - - 26 26
Net Change in Fair
Value of Derivatives,
Net of Deferred
Taxes of $189 - - - - 352 352
--------
Total Comprehensive Income 3,677
----------------------------------------------------------
Balance at
March 31, 2004 $6,756 $54,450 $72,827 ($8,704) ($285) $125,044
==========================================================
The accompanying notes are an integral part of these statements.
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INTERNATIONAL SHIPHOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All Amounts in Thousands)
(Unaudited)
Three Months Ended March 31,
2004 2003
------------ ------------
Cash Flows from Operating Activities:
Net Income $ 2,897 $ 2,994
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation 4,759 4,887
Amortization of Deferred Charges
and Other Assets 1,813 1,861
Deferred Provision for Federal
Income Taxes 887 1,587
Equity in Net Income of Unconsolidated
Entities (1,212) (67)
Loss (Gain) on Sale of Other Assets 7 (4)
Loss (Gain) on Early Extinguishment of Debt 31 (1,260)
Loss on Sale of Investment 623 -
Changes in:
Accounts Receivable 8,153 (2,407)
Inventories and Other Current Assets 1,116 1,722
Other Assets 182 (498)
Accounts Payable and Accrued Liabilities (2,667) 2,735
Federal Income Taxes Payable (238) (92)
Billings in Excess of Income Earned
and Expenses Incurred (3,509) (313)
Other Long-Term Liabilities (1,527) (1,706)
------------ ------------
Net Cash Provided by Operating Activities 11,315 9,439
------------ ------------
Cash Flows from Investing Activities:
Net Investment in Direct Financing Lease 526 462
Additions to Vessels and Other Assets (1,366) (1,912)
Additions to Deferred Charges (483) (179)
Proceeds from Sale of Vessels and Other
Assets - 50
Purchase of and Proceeds from Short
Term Investments (378) 61
Net Decrease (Increase) in Restricted
Cash Account 865 (377)
Other Investing Activities - (17)
------------ ------------
Net Cash Used by Investing Activities (836) (1,912)
------------ ------------
Cash Flows from Financing Activities:
Proceeds from Issuance of Debt - 10,000
Repayment of Debt (4,887) (16,951)
Additions to Deferred Financing Charges (64) (61)
Other Financing Activities (1) 1,380
------------ ------------
Net Cash Used by Financing Activities (4,952) (5,632)
------------ ------------
Net Increase in Cash and Cash Equivalents 5,527 1,895)
Cash and Cash Equivalents at Beginning of Period 8,881 4,419
------------ ------------
Cash and Cash Equivalents at End of Period $ 14,408 $ 6,314
============ ============
The accompanying notes are an integral part of these statements.
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2004
(Unaudited)
Note 1. Basis of Preparation
We have prepared the accompanying unaudited interim financial statements
pursuant to the rules and regulations of the Securities and Exchange
Commission, and we have omitted certain information and footnote
disclosures required by generally accepted accounting principles for complete
financial statements. The condensed consolidated balance sheet as of December
31, 2003 has been derived from the audited financial statements at that date.
We suggest that you read these interim statements in conjunction with the
financial statements and notes thereto included in our Form 10-K for the year
ended December 31, 2003. We have made certain reclassifications to prior
period financial information in order to conform to current year presentations.
The foregoing 2004 interim results are not necessarily indicative of the
results of operations for the full year 2004. Interim statements are subject
to possible adjustments in connection with the annual audit of our accounts for
the full year 2004. Management believes that all adjustments necessary,
consisting only of normal recurring adjustments, for a fair presentation of the
information shown have been made.
Our policy is to consolidate all subsidiaries in which we hold a greater
than 50% voting interest and to use the equity method to account for
investments in entities in which we hold a 20% to 50% voting interest. We use
the cost method to account for investments in entities in which we hold less
than 20% voting interest and in which we cannot exercise significant influence
over operating and financial activities.
We have eliminated all significant intercompany accounts and transactions.
Note 2. Operating Segments
Our four operating segments, Liner Services, Time Charter Contracts,
Contracts of Affreightment, and Rail-Ferry Service, are identified primarily by
the characteristics of the contracts and terms under which our vessels and
barges are operated. We report in the Other category results of several of our
subsidiaries that provide ship charter brokerage, agency, and other specialized
services primarily to our operating segments. We manage each reportable
segment separately, as each requires different resources depending on the
nature of the contract or terms under which each vessel within the segment
operates.
We do not allocate administrative and general expenses, investment income,
other income, losses or gains on early extinguishment of debt, equity in net
income of unconsolidated entities, or income taxes to our segments.
Intersegment revenues are based on market prices and include revenues earned by
subsidiaries that provide specialized services to the operating segments. The
following table presents information about segment profit and loss for the
three months ended March 31, 2004 and 2003:
8
(All Amounts in Thousands)
Time
Liner Charter Contracts of Rail-Ferry
Services Contracts Affreightment Service Other Elim. Total
- -------------------------------------------------------------------------------
2004
Revenues from external
customers $23,232 $29,079 $ 3,995 $ 4,056 $ 5,481 - $65,843
Intersegment
revenues - - - - 3,113 (3,113) -
Vessel and barge
depreciation 856 2,283 604 729 155 - 4,627
Gross voyage
Profit (loss) 462 7,715 1,301 (864) 1,387 - 10,001
Interest expense 221 1,550 391 505 55 - 2,722
Loss on sale of
other assets - - - - (7) - (7)
Segment profit (loss)
before investment income,
loss on sale of investment, loss on
early extinguishment of debt,
administrative and general expenses,
equity in net income of
unconsolidated entities,
and taxes $ 241 $ 6,165 $ 910 ($1,369) $ 1,325 - $ 7,272
- -------------------------------------------------------------------------------
2003
Revenues from external
customers $20,141 $32,732 $ 4,004 $ 3,171 $ 4,758 - $64,806
Intersegment
revenues - - - - 3,497 (3,497) -
Vessel and barge
depreciation 819 2,431 604 729 71 - 4,654
Gross voyage
(loss) profit (9) 9,718 1,249 (733) 309 - 10,534
Interest expense 298 2,017 497 639 30 - 3,481
Gain on sale of
other assets - - - - 4 - 4
Segment (loss) profit
before investment income,
other income, gain on early
extinguishment of debt,
administrative and general
expenses, equity in net income
of unconsolidated entities,
and taxes ($ 307) $ 7,701 $ 752 ($1,372) $ 283 - $ 7,057
- -------------------------------------------------------------------------------
Following is a reconciliation of the totals reported for the operating
segments to the applicable line items in the consolidated financial statements:
(All Amounts in Thousands) Three Months Ended March 31,
2004 2003
---------- ----------
Total profit for reportable segments $7,272 $7,057
Unallocated amounts:
Loss on sale of investment (623) -
Investment income 168 228
Other income - 22
Loss (gain) on early extinguishment of debt (31) 1,260
Administrative and general expenses (4,106) (4,011)
---------- ----------
Income before provision for income taxes and
equity in net income of unconsolidated entities $2,680 $4,556
========== ==========
Note 3. Earnings Per Share
Basic and diluted earnings per share were computed based on the weighted
average number of common shares issued and outstanding during the relevant
periods. Stock options covering 475,000 shares were included in the
computation of diluted earnings per share in the first three months of 2004,
but were excluded from the computation of diluted earnings per share in the
first three months of 2003, as the effect would have been antidilutive.
9
Note 4. Coal Carrier Contract
As previously reported, our wholly owned subsidiary, Enterprise Ship
Company, Inc. ("Enterprise"), time charters the U.S. Flag coal carrier, ENERGY
ENTERPRISE, to US Generating New England, Inc. ("USGenNE"), an indirect
subsidiary of PG&E Corporation. On July 8, 2003, USGenNE filed a petition for
bankruptcy protection under Chapter 11 of the United States Bankruptcy Code and
has subsequently received from the court an extension of time to submit its
bankruptcy plan until July 2, 2004, and an extension of time until September 1,
2004, to solicit acceptance to its plan. USGenNE is current in all of its
obligations to Enterprise under the time charter except for approximately
$850,000 of pre-petition invoices covering charter hire and related expenses.
The $850,000 of pre-petition invoices owed to us is an unsecured claim in the
bankruptcy proceeding. Under the federal bankruptcy laws, USGenNE has the
right to either accept or reject the time charter. If USGenNE accepts the
time charter, it is then required to meet its payment and financial obligations
under the time charter including the $850,000 pre-petition invoices. If
USGenNE ultimately rejects the time charter, then Enterprise would have a
priority administrative claim with respect to all amounts due it under the
time charter related to the post-petition period. At this time, we cannot
predict whether the time charter will be accepted or rejected, therefore, we
have not made an allowance for the pre-petition invoices on our financial
statements as of March 31, 2004. In the event the time charter is ultimately
rejected, management believes the vessel can be utilized in alternative
employment without incurring a material impairment to the vessel's carrying
value, although we can give no assurance at this time. Although, USGenNE has
continued to use the vessel in 2004 through the date of this report, we can
give no assurance whether USGenNE will continue to use the vessel through the
end of the year.
Note 5. Employee Benefit Plans
The following table provides the components of net periodic benefit cost
for the plans:
Pension Plan Postretirement Benefits
----------------------- -----------------------
(All Amounts in Thousands) Three Months Ended Three Months Ended
March 31, March 31,
2004 2003 2004 2003
----------------------- -----------------------
COMPONENTS OF NET PERIODIC
BENEFIT COST:
Service cost $ 137 $ 117 $ 19 $ 16
Interest cost 308 298 147 149
Expected return on plan assets (346) (300) - -
Amortization of prior service
cost 2 2 - -
Amortization of net actuarial
loss 23 47 25 17
----------------------- -----------------------
Net periodic benefit cost $ 124 $ 164 $ 191 $ 182
======================= =======================
We contributed $143,000 to our pension plan in the first quarter of 2004.
We do not expect to make any further contributions to our pension plan in 2004
and we do not expect to make any contributions to our post retirement benefits
plan in 2004.
In December of 2003, the Medicare Prescription Drug, Improvements, and
Modernization Act of 2003 was signed into law. In addition to including
numerous other provisions that have potential effects on an employer's retiree
health plan, the Medicare law included a special subsidy for employers that
sponsor retiree health plans with prescription drug benefits that are at least
as favorable as the new Medicare Part D benefit. We have elected the delayed
accounting treatment. Future FASB action could affect amounts shown in this
report.
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Note 6. Unconsolidated Entities
In the fourth quarter of 2003, we acquired a 50% investment in Dry Bulk
Cape Holding Inc., which owns two cape-size bulk carrier vessels built in
Calendar Years 2002 and 2003. This investment is accounted for under the
equity method, and our share of earnings or losses is reported in our
consolidated statements of income net of taxes. For the three months ended
March 31, 2004, our portion of earnings net of taxes was 1.1 Million. In April
of 2004, we received a cash distribution of $1.6 Million.
The unaudited combined condensed results of operations of Dry Bulk Cape
Holding Inc. are summarized below:
(Amounts in Thousands) Three Months Ended
March 31, 2004
------------------
Operating Revenue $ 5,682
Operating Income $ 4,100
Net Income $ 3,324
Note 7. New Accounting Pronouncements
In January of 2003, the FASB issued Financial Accounting Series
Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest
Entities." FIN 46 requires a variable interest entity to be consolidated by the
primary beneficiary of the entity, where the company is subject to a majority
of the risk of loss from the variable interest entity's activities or entitled
to receive a majority of the entity's residual returns, or both. In general, a
variable interest entity is a corporation, partnership, trust, or any other
legal structure used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. FIN
46 also requires disclosures about variable interest entities that the company
is not required to consolidate but in which it has a significant variable
interest. The provisions of FIN 46 are effective immediately for those
variable interest entities created after January 31, 2003. On December 24,
2003, the FASB issued a revision to FIN 46, which among other things deferred
the effective date for certain variable interests. Application is required
for interests in special-purpose entities in the period ending after December
15, 2003 and application is required for all other types of variable interest
entities in the period ending after March 31, 2004. We have investments in
certain unconsolidated entities in which we have less than 100% ownership. We
have evaluated these investments and determined that we do not have any
investments in variable interest entities. Therefore, the adoption of FIN No.
46 did not have an impact on the financial statements.
In September of 2003, the Securities and Exchange Commission approved a
Statement of Position ("SOP") on "Accounting for Certain Costs and Activities
Related to Property, Plant and Equipment." This proposed SOP provided guidance
on accounting for certain costs and activities relating to property, plant, and
equipment ("PP&E") and incorporated the following principles; (1) PP&E consists
of one or more components, which should be recorded at cost, (2) a PP&E
component should be depreciated over its expected useful life, and (3) the
costs of a replacement PP&E component and the component replaced should not
concurrently be recorded as assets. Costs related to PP&E that are incurred
during the in-service stage should be charged to expense as incurred unless the
costs are incurred
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for the acquisition or construction of additional components or the replacement
of existing components. Our current policy on drydocking costs is to defer
these costs and amortize them over the period between drydockings. The SOP was
presented for FASB clearance early in 2004 and in April of 2004, the FASB voted
unanimously not to clear the draft SOP.
In December of 2003, the FASB revised SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." The revised
statement retains the disclosure requirements of the original statement and
requires additional annual disclosures including information describing the
types of plan assets, investment strategy, measurement dates, plan obligations,
and cash flows. In addition to expanded annual disclosures, the revised
statement requires the components of net periodic benefit cost to be disclosed
in interim periods. This statement is effective for financial statements with
fiscal years ended after December 15, 2003, and the interim period disclosures
are effective for interim periods beginning after December 15, 2003. The
additional interim disclosures required by the revised statement are included
in this report.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-Looking Statements
- --------------------------
Certain statements made by us or on our behalf in this report or elsewhere
that are not based on historical facts are intended to be "forward-looking
statements" within the meaning of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements are based
on beliefs and assumptions about future events that are inherently
unpredictable and are therefore subject to significant risks and uncertainties.
In this report, the terms "we," "us," "our," and "the Company" refer to
International Shipholding Corporation and its subsidiaries.
Such statements include, without limitation, statements regarding (1)
estimated fair values of capital assets, the recoverability of the cost of
those assets, the estimated future cash flows attributable to those assets, and
the appropriate discounts to be applied in determining the net present values
of those estimated cash flows; (2) estimated scrap values of assets held for
disposal; (3) estimated fair values of financial instruments, such as interest
rate and commodity swap agreements; (4) estimated losses (including independent
actuarial estimates) under self-insurance arrangements, as well as estimated
losses on certain contracts, trade routes, lines of business and asset
dispositions; (5) estimated losses attributable to asbestos claims; (6)
estimated obligations, and the timing thereof, to U.S. Customs relating to
foreign repair work; (7) the adequacy and availability of capital resources on
commercially acceptable terms; (8) our ability to remain in compliance with our
debt covenants; (9) anticipated trends in government sponsored cargoes; (10)
our ability to maintain our government subsidies; and (11) the anticipated
improvement in the results of our Mexican Rail-Ferry Service.
We caution readers that certain important factors have affected, and are
likely in the future to affect, our ability to achieve our expectations in
those areas and in others, including our actual consolidated results of
12
operations. Such factors may, and in some cases are likely to, cause future
results to differ materially from those expressed in or implied by any forward-
looking statements made in this report or elsewhere by us or on our behalf.
Such factors include, without limitation, (1) political events in the United
States and abroad, including terrorism, and the U.S. military's response to
those events; (2) election results, regulatory activities and the appropriation
of funds by the U.S. Congress; (3) charter hire rates and vessel utilization
rates; (4) unanticipated trends in operating expenses such as fuel and labor
costs; (5) trends in interest rates, and the availability and cost of capital
to us; (6) the frequency and severity of claims against us, and unanticipated
court results and changes in laws and regulations; (7) our success in renewing
existing contracts and securing new ones, in each case on favorable economic
terms; (8) unplanned maintenance and out-of-service days; (9) the ability of
customers to fulfill obligations with us; (10) the performance of our
unconsolidated subsidiaries, (11) the uncertain future of our Coal Carrier
contract with USGenNE, and (12) our ability to effectively handle our
substantial leverage by servicing and meeting the covenant requirements in each
of our debt instruments, thereby avoiding any defaults under those instruments
and avoiding cross defaults under others.
A more complete description of certain of these important factors is
contained in our Form 10-K filed with the Securities and Exchange Commission
for the year ended December 31, 2003.
General
- -------
Our vessels are operated under a variety of charters, liner services, and
contracts. The nature of these arrangements is such that, without a material
variation in gross voyage profits (total revenues less voyage expenses and
vessel and barge depreciation), the revenues and expenses attributable to a
vessel deployed under one type of charter or contract can differ substantially
from those attributable to the same vessel if deployed under a different
type of charter or contract. Accordingly, depending on the mix of charters or
contracts in place during a particular accounting period, our revenues and
expenses can fluctuate substantially from one period to another even though the
number of vessels deployed, the number of voyages completed, the amount of
cargo carried and the gross voyage profit derived from the vessels remain
relatively constant. As a result, fluctuations in voyage revenues and expenses
are not necessarily indicative of trends in profitability, and our management
believes that gross voyage profit is a more appropriate measure of performance
than revenues. Accordingly, the discussion below addresses variations in gross
voyage profits rather than variations in revenues.
Executive Summary
- -----------------
During the first quarter of 2003, we realized a before tax gain of
approximately $1.26 million resulting from the retirement at a discount of
approximately $7.9 million of our 7.75% Unsecured Notes scheduled to mature
in 2007. Excluding this gain, first quarter of 2003 net income was $2.2
million compared to first quarter of 2004 net income of $2.9 million, or an
improvement of approximately $700,000 in the current quarter.
The 50% investment that was made in the fourth quarter of 2003 in the two
Capesize bulk carriers that operate in an international bulk carrier pool
contributed to our improved results. Cargo volumes on our commercial liner
services continued the higher trend that we experienced in the fourth quarter
of 2003. As a result, both our
13
U.S. Flag and Foreign Flag LASH Liner Services showed improvements from the
comparable period in 2003. Our three U.S. Flag Roll-On/Roll-Off vessels
chartered to the Military Sealift Command ("MSC") and our Molten Sulphur
Carrier which operates under a long-term contract produced acceptable results.
The U.S. Flag Coal Carrier whose charterer, USGenNE, is under bankruptcy
protection, operated the entire quarter for that charterer (see Part I, Note 4.
Coal Carrier Contract for further discussion).
Our U.S. Flag Pure Car/Truck Carriers ("PCTCs") experienced a slight drop
from the comparable 2003 period while the foreign flag PCTCs operated with
satisfactory results in the quarter. While cargo volume on our Rail-Ferry
Service between Mobile, Alabama and Coatzacoalcos, Mexico continued to improve,
we had some unanticipated first quarter operating expenses which negatively
impacted results. We expect continued support from our clients in the service.
The minority investment in the cement carrier company produced expected results
while our 50% joint venture in the over the road domestic car transportation
trucking company produced better results when compared to the first quarter of
2003.
RESULTS OF OPERATIONS
------------------------
THREE MONTHS ENDED MARCH 31, 2004
COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2003
Gross Voyage Profit
- -------------------
Gross voyage profit decreased 5.1% from $10.5 Million in the first quarter
of 2003 to $10 Million in the first quarter of 2004. The changes associated
with each of our segments are discussed below.
Liner Services: Gross voyage profit for this segment improved from a loss
of $9,000 in the first quarter of 2003 to a profit of $462,000 in the first
quarter of 2004. The improvement was primarily a result of higher cargo
volumes in the first quarter of 2004 compared to 2003 for both our U.S. Flag
LASH Liner service and Foreign Flag LASH Liner service.
Time Charter Contracts: The decrease in this segment's gross voyage
profit from $9.7 Million in the first quarter of 2003 to $7.7 Million in the
first quarter of 2004 was primarily a result of our U.S. Flag PCTCs carrying
less supplemental cargoes, in addition to the time charter agreements, during
2004 as compared to 2003. Additionally, our Multi-Purpose vessel, which
previously operated under charter to the MSC, contributed to the first quarter
of 2003 results. The vessel completed its charter in early 2003 and was sold
shortly thereafter.
Contracts of Affreightment: Gross voyage profit for this segment
increased slightly from $1.2 Million in the first quarter of 2003 to $1.3
Million in the first quarter of 2004. Although cargo volume increased,
operating costs also increased.
Rail-Ferry Service: Gross voyage loss for this segment increased slightly
from a loss of $733,000 in the first quarter of 2003 to a loss of $864,000 in
the first quarter of 2004. While cargo volume improved, the service
experienced unanticipated operating expenses during the first quarter of 2004.
Other: Gross voyage profit for this segment increased from $309,000 in
the first quarter of 2003 to $1.4 Million in the first quarter of 2004. The
increase resulted primarily from improved results of our insurance
14
subsidiary, which operates solely to cover self-retained insurance risks, due
to reductions of prior period policy reserves, as well as improved results from
our 50% owned car transportation truck company.
Other Income and Expense
- ------------------------
Interest expense decreased 21.8% from $3.5 Million in the first quarter of
2003 to $2.7 Million in the first quarter of 2004. Decreases due to regularly
scheduled payments on outstanding debt and lower interest rates accounted for
$440,000 of the difference. Reduced cost from the early repayment of our 7.75%
Senior Notes, as well as early debt retirements, accounted for approximately
$319,000 of the decrease.
Loss on early extinguishment of debt of $31,000 in the first quarter of
2004 was due to the early retirement of debt associated with our Molten Sulphur
Carrier. The gain of $1,260,000 in the first quarter of 2003 resulted from the
retirement at a discount of approximately $7.9 Million of our 7.75% Senior
Notes due in 2007.
Income Taxes
- ------------
We had a tax provision of $1 Million and $1.6 Million for the first
quarter of 2004 and 2003, respectively, at the statutory rate of 35% for both
periods.
Equity in Net Income of Unconsolidated Entities
- -----------------------------------------------
Equity in net income of unconsolidated entities, net of taxes, increased
from $67,000 in the first quarter of 2003 to $1.2 Million in the first quarter
of 2004. The improvement was primarily related to our 50% investment in a
company owning two newly built cape-size bulk carrier vessels and our minority
interest in companies owning and operating cement carrying vessels. Our 50%
investment in the cape-size bulk carrier company, which was acquired in
November of 2003, contributed $1.1 Million net of taxes in 2004. Our 30%
investment in the cement carrier company contributed $112,000 net of taxes in
the first quarter of 2004 compared to $67,000 net of taxes in the first quarter
of 2003.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The following discussion should be read with the more detailed
Consolidated Condensed Balance Sheets and Consolidated Statements of Cash Flows
included elsewhere herein as part of our Consolidated Financial Statements.
Our working capital increased from $16.8 Million at December 31, 2003, to
$19.4 Million at March 31, 2004. Of the $45.9 Million in current liabilities,
$13.8 Million related to the current maturities of long-term debt at March 31,
2004. Cash and cash equivalents increased during the first quarter of 2004 by
$5.5 Million from $8.9 Million at December 31, 2003, to $14.4 Million at March
31, 2004. The increase was due to cash provided by operating activities of
$11.3 Million, partially offset by cash used for investing activities of $1
Million and financing activities of $5 Million.
15
Operating activities generated a positive cash flow after adjusting net
income of $2.9 Million for non-cash provisions such as depreciation and
amortization. Cash used for investing activities of $1 Million was primarily
for purchases of non-vessel related assets used by our car transportation truck
company.
Cash used for financing activities of $5 Million included $2.5 Million
used for regularly scheduled payments of debt, and $2.5 Million used for early
repayment of one of our debt obligations.
As of March 31, 2004, $14.5 Million was available on our $15 Million
revolving credit facility, which expires in April of 2006.
Debt and Lease Obligations - We have several vessels under operating
leases, including three PCTCs, one LASH vessel, one Ice Strengthened
Breakbulk/Multi Purpose vessel, a Container vessel and a Tanker vessel. We
also conduct certain of our operations from leased office facilities and use
certain transportation and other equipment under operating leases. Our
obligations associated with these leases are summarized in the table below.
The following is a summary of the scheduled maturities by period of our
outstanding debt and lease obligations as of March 31, 2004:
Apr. 1-
Debt and Lease Dec. 31,
Obligations (000's) 2004 2005 2006 2007 2008 Thereafter
- -------------------------------------------------------------------------------
Long-term debt (including
current maturities) $ 11,448 $ 12,366 $ 10,804 $ 80,381 $ 7,468 $ 51,793
Operating leases 18,358 19,060 19,073 18,948 16,893 91,558
------------------------------------------------------
Total by period $ 29,806 $ 31,426 $ 29,877 $ 99,329 $ 24,361 $143,351
======================================================
Debt Covenant Compliance Status - We have met all of the financial
covenants under our various debt agreements, the most restrictive of which
include the working capital, leverage ratio, minimum net worth, and interest
coverage ratio, after these were amended for the full year 2002. We also met,
as of March 31, 2004, the more restrictive financial covenants that became
effective in 2003, and believe we will continue to meet them throughout 2004,
although we can give no assurance to that effect.
If our cash flow and capital resources are not sufficient to fund our debt
service obligations, we may be forced to reduce or delay capital expenditures,
sell assets, obtain additional equity capital, enter into additional financings
of our unencumbered vessels or restructure debt.
Mexican Service Results - We expect the results of the Mexican Service to
improve and contribute to our cash flows. If market conditions adversely
impact those projections, we believe we could find alternative placement for
the two vessels supporting the service.
Dividend Payments - In view of the impairment loss recognized on Assets
Held for Disposal during 2001, and to comply with certain financial covenants
under our debt agreements, the suspension of quarterly dividend payments on our
common shares of stock remains in effect.
Environmental Issues - We have not been notified that we are a potentially
responsible party in connection with any environmental matters.
16
NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
In January of 2003, the FASB issued Financial Accounting Series
Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest
Entities." FIN 46 requires a variable interest entity to be consolidated by
the primary beneficiary of the entity, where the company is subject to a
majority of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns, or both. In
general, a
variable interest entity is a corporation, partnership, trust, or any other
legal structure used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. FIN
46 also requires disclosures about variable interest entities that the company
is not required to consolidate but in which it has a significant variable
interest. The provisions of FIN 46 are effective immediately for those variable
interest entities created after January 31, 2003. On December 24, 2003, the
FASB issued a revision to FIN 46, which among other things deferred the
effective date for certain variable interests. Application is required for
interests in special-purpose entities in the period ending after December 15,
2003 and application is required for all other types of variable interest
entities in the period ending after March 31, 2004. We have investments in
certain unconsolidated entities in which we have less than 100% ownership. We
have evaluated these investments and determined that we do not have any
investments in variable interest entities. Therefore, the adoption of FIN No.
46 did not have an impact on the financial statements.
In September of 2003, the Securities and Exchange Commission approved a
Statement of Position ("SOP") on "Accounting for Certain Costs and Activities
Related to Property, Plant and Equipment." This proposed SOP provided guidance
on accounting for certain costs and activities relating to property, plant, and
equipment ("PP&E") and incorporated the following principles; (1) PP&E consists
of one or more components, which should be recorded at cost, (2) a PP&E
component should be depreciated over its expected useful life, and (3) the
costs of a replacement PP&E component and the component replaced should not
concurrently be recorded as assets. Costs related to PP&E that are incurred
during the in-service stage should be charged to expense as incurred unless the
costs are incurred for the acquisition or construction of additional components
or the replacement of existing components. Our current policy on drydocking
costs is to defer these costs and amortize them over the period between
drydockings. The SOP was presented for FASB clearance early in 2004 and in
April of 2004, the FASB voted unanimously not to clear the draft SOP.
In December of 2003, the FASB revised SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." The revised
statement retains the disclosure requirements of the original statement and
requires additional annual disclosures including information describing the
types of plan assets, investment strategy, measurement dates, plan obligations,
and cash flows. In addition to expanded annual disclosures, the revised
statement requires the components of net periodic benefit cost to be disclosed
in interim periods. This statement is effective for financial statements with
fiscal years ended after December 15, 2003, and the interim period disclosures
are effective for interim periods beginning after December 15, 2003. The
additional interim disclosures required by the revised statement are included
in this report.
17
ITEM 3.
QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK
In the ordinary course of our business, we are exposed to foreign
currency, interest rate, and commodity price risk. We utilize derivative
financial instruments including forward exchange contracts, interest rate swap
agreements, and commodity swap agreements to manage certain of these exposures.
We hedge only firm commitments or anticipated transactions and do not use
derivatives for speculation. We neither hold nor issue financial instruments
for trading purposes.
Interest Rate Risk. The fair value of long-term debt at March 31, 2004,
including current maturities, was estimated to be $178.3 Million compared to a
carrying value of $174.1 Million. The potential increase in fair value
resulting from a hypothetical 10% decrease in the average interest rates
applicable to our long-term debt at March 31, 2004, would be approximately $1.7
Million or 1% of the carrying value.
The fair value of the interest rate swap agreement discussed in our Form
10-K was a liability of $515,000 at March 31, 2004, estimated based on the
amount that the banks would receive or pay to terminate the swap agreements at
the reporting date taking into account current market conditions and interest
rates. A hypothetical 10% decrease in interest rates as of March 31, 2004,
would not result in a material change in the fair value of the liability.
Commodity Price Risk. In January of 2004, we entered into a fuel hedge
agreement for the month of February for 3,000 metric tons at a contract price
of $140 per metric ton of fuel. As of March 31, 2004, we have no commodity
swap agreements to manage our exposure to price risk related to the purchase of
the estimated 2004 fuel requirements for our Liner Services or Rail-Ferry
Service segment.
Foreign Exchange Rate Risk. There were no material changes in market risk
exposure for the foreign currency risk described in our Form 10-K filed with
the Securities and Exchange Commission for the year ended December 31, 2003.
ITEM 4.
CONTROLS AND PROCEDURES
(a) Within the 90-day period prior to filing this report, we conducted an
evaluation of the effectiveness of our "disclosure controls and procedures," as
that phrase is defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934. The evaluation was carried out under the supervision and
with the participation of our management, including our Chief Executive Officer
("CEO") and Chief Financial Officer ("CFO").
Based on that evaluation, the CEO and CFO have concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information required to be disclosed in our periodic filings with the
Securities and Exchange Commission ("SEC"), and in ensuring that the
information required to be disclosed in those filings is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules
and forms.
18
(b) Subsequent to the date of the evaluation, there were no significant
changes in our internal controls or in other factors that could significantly
affect the internal controls, including any corrective actions with regard to
significant deficiencies and material weaknesses.
PART II - OTHER INFORMATION
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our Annual Meeting of Shareholders was held April 28, 2004. The matters
voted upon and the results of the voting were as follows:
(1) Election of Board of Directors:
Nominee Shares Voted For Withheld Authority
-------------------- ----------------------- -------------------
Niels W. Johnsen 4,533,735 996,218
Erik F. Johnsen 4,053,735 1,476,218
Niels M. Johnsen 4,533,517 996,436
Erik L. Johnsen 4,533,774 996,179
Harold S. Grehan, Jr. 4,044,053 1,485,900
Raymond V. O'Brien, Jr. 5,491,452 38,501
Edwin Lupberger 5,491,454 38,499
Edward K. Trowbridge 5,491,709 38,244
H. Merritt Lane III 5,491,748 38,205
(2) Ratification of Ernst & Young LLP, certified public accountants, as our
independent auditors for the fiscal year ending December 31, 2004:
Shares Voted For 5,526,145
Shares Voted Against 1,195
Abstentions 2,612
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
Part II Exhibits: 3 Restated Certificate of
Incorporation, as amended, and
By-Laws of the Registrant
(filed with the Securities and
Exchange Commission as Exhibit
3 to the Registrant's Form
10-Q for the quarterly period
ended June 30, 1996, and
incorporated herein by
reference)
31.1 Certification of Chief
Executive Officer Pursuant to
19
Section 302 of the Sarbanes-
Oxley Act of 2002
31.2 Certification of Chief
Financial Officer Pursuant to
Section 302 of the Sarbanes-
Oxley Act of 2002
32.1 Certification of Chief
Executive Officer Pursuant to
18 U.S.C. Section 1350 as
Adopted Pursuant to Section
906 of the Sarbanes-Oxley
Act of 2002
32.2 Certification of Chief
Financial Officer Pursuant to
18 U.S.C. Section 1350 as
Adopted Pursuant to Section
906 of the Sarbanes-Oxley
Act of 2002
(b) On April 29, 2004, we filed a current report on Form 8-K to furnish the
public announcement of our first quarter 2004 earnings.
20
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNATIONAL SHIPHOLDING CORPORATION
/s/ Gary L. Ferguson
_____________________________________________
Gary L. Ferguson
Vice President and Chief Financial Officer
May 12, 2004
Date ___________________________