INTERNATIONAL SHIPHOLDING CORP - 10-Q Quarterly Report

Back to GetFilings.com

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended SEPTEMBER 30, 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: 2-63322

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 Number)
incorporation or organization)

650 POYDRAS STREET NEW ORLEANS, LOUISIANA 70130
- ----------------------------------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)

(504) 529-5461
- ----------------------------------------------------------------------------------------------------------
(Registrant's telephone number, including area code)

NOT APPLICABLE
- --------------------------------------------------------------------------------
(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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
--- ---

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES NO
--- ---

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

PART I - FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS

INTERNATIONAL SHIPHOLDING CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(All Amounts in Thousands Except Share Data)
(Unaudited)

The accompanying notes are an integral part of these statements.

2

INTERNATIONAL SHIPHOLDING CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(All Amounts in Thousands)
(Unaudited)

The accompanying notes are an integral part of these statements.

3

INTERNATIONAL SHIPHOLDING CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(All Amounts in Thousands)
(Unaudited)

The accompanying notes are an integral part of these statements.

4

INTERNATIONAL SHIPHOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All Amounts in Thousands)
(Unaudited)

The accompanying notes are an integral part of these statements.

5

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 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. Employee Benefit Plans

The following table provides the components of net periodic benefit
cost for the pension plan:

(All Amounts in Thousands)

6

The following table provides the components of net periodic benefit
cost for the postretirement benefits plan:

(All Amounts in Thousands)

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 ("Act") 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. In May of 2004, the Financial
Accounting Standards Board ("FASB") issued FASB Staff Position ("FSP") 106-2,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvements, and Modernization Act of 2003, " that provides guidance on
the accounting for the effects of the Act for employers that sponsor
postretirement health care plans that provide drug benefits. We are still
evaluating whether our plan is actuarially equivalent, although its impact on
our financial position and results of operations is not material.

Note 3. 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.

7

The following table presents information about segment profit and loss
for the three months ended September 30, 2004 and 2003:

The following table presents information about segment profit and loss
for the nine months ended September 30, 2004 and 2003:

8

Following is a reconciliation of the totals reported for the operating
segments to the applicable line items in the consolidated financial statements:

Note 4. Unconsolidated Entities

In the fourth quarter of 2003, through our wholly-owned subsidiary,
we acquired a 50% investment in Dry Bulk Cape Holding Inc. ("Dry Bulk"), which
owns two cape-size bulk carrier vessels built in calendar years 2002 and 2003.
We account for our investment in Dry Bulk under the equity method, and as such
our share of the earnings or losses of Dry Bulk is reported, net of taxes, in
our consolidated statements of income. For the nine months ended September 30,
2004, our portion of earnings, net of taxes, was $2.3 million. For the three
months ended September 30, 2004, our portion of earnings net of taxes was
$593,000. In April of 2004, we received a cash distribution of $1.6 million from
Dry Bulk representing first quarter earnings and in July of 2004, we received a
cash distribution of $1 million from Dry Bulk representing second quarter
earnings, which were both recorded as reductions of our investment in Dry Bulk.

At September 30, 2004, we guarantee a portion of the outstanding debt
of Dry Bulk. The guarantee is for the full remaining term of the associated
debt, which was approximately 7 years as of September 30, 2004. Performance by
us would be required under the guarantee in the event of default by Dry Bulk on
its third party debt. This represents non-recourse debt to us. The portion of
the outstanding debt that the we guaranteed at September 30, 2004, was
$30,697,000.

The unaudited combined condensed results of operations of Dry Bulk are
summarized below:

Note 5. 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 three months and nine months
ended September 30, 2004, but

9

were excluded from the computation of diluted earnings per share in the three
months and nine months ended September 30, 2003, as the effect would have been
antidilutive.

Note 6. Comprehensive Income (Loss)

The following table summarizes components of comprehensive income
(loss) for the three months ended September 30, 2004 and 2003:

The following table summarizes components of comprehensive income
(loss) for the nine months ended September 30, 2004 and 2003:

Note 7. 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 filed with the court an extension of time to submit its
bankruptcy plan until March 1, 2005, and an extension of time until May 1, 2005,
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
is an unsecured claim in the bankruptcy proceeding. Under the federal bankruptcy
laws, USGenNE has the right to either accept or reject the charter. If USGenNE
accepts the charter, it is then required to meet its financial obligations under
the charter including the $850,000 pre-petition invoices. If USGenNE rejects the
charter, then Enterprise would have a priority administrative claim with respect
to all amounts due it under the charter related to the post-

10

petition period. At this time, we cannot predict whether the charter will be
accepted or rejected; therefore, we have not provided an allowance for the
pre-petition invoices in our financial statements as of September 30, 2004. In
the event the 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 8. Income Taxes

Under current United States tax law, U.S. companies like us and their
domestic subsidiaries generally are taxed on all income, including in our case
income from shipping operations, whether derived in the United States or abroad.
With respect to any foreign subsidiary in which we hold more than a 50 percent
interest (referred to in the tax laws as controlled foreign corporations, or
"CFCs"), we are treated as having received a current taxable distribution of our
pro rata share of income derived from foreign shipping operations.

The recently-enacted American Jobs Creation Act of 2004 (the "Jobs
Creation Act"), which becomes effective for us on January 1, 2005, will change
the United States tax treatment of our U.S. flag vessels in foreign operations
and foreign flag shipping operations.

We intend to make an election under the Jobs Creation Act to have our
U.S. flag operations (other than those of two ineligible vessels used
exclusively in United States coastwise commerce) taxed under a new "tonnage tax"
regime rather than under the usual U.S. corporate income tax regime. As a result
of that election, our gross income for United States income tax purposes with
respect to our eligible U.S. flag vessels will not include (1) income from
qualifying shipping activities in U.S. foreign trade (i.e., transportation
between the U.S. and foreign ports or between foreign ports), (2) income from
cash, bank deposits and other temporary investments that are reasonably
necessary to meet the working capital requirements of our qualifying shipping
activities, and (3) income from cash or other intangible assets accumulated
pursuant to a plan to purchase qualifying shipping assets.

Under the tonnage tax regime, our taxable income with respect to the
operations of our eligible U.S. flag vessels will be based on a "daily notional
taxable income," which will be taxed at the highest corporate income tax rate.
The daily notional taxable income from the operation of a qualifying vessel will
be 40 cents per 100 tons of the net tonnage of the vessel (up to 25,000 net
tons), and 20 cents per 100 tons of the net tonnage of the vessel in excess of
25,000 net tons. The taxable income of each qualifying vessel will be the
product of its daily notional taxable income and the number of days during the
taxable year that the vessel operates in United States foreign trade.

Under the Jobs Creation Act, the taxable income from the shipping
operations of our CFCs will generally no longer be subject to current United
States income tax but will be deferred until repatriated. Although we are still
analyzing the Jobs Creation Act, we currently estimate that it will result in a
$11.5 million reduction of our deferred tax provision which will be recorded and
reflected in our results of operations in the period in which our election under
the Jobs Creation Act is made. We are awaiting guidance from the Internal
Revenue Service as to the earliest period this election can be made. In
addition, we project that our effective tax rate under the Jobs Creation Act
will be reduced to approximately 25% in fiscal years 2005 and 2006 with a
further reduction to approximately 8% in fiscal years thereafter that the Jobs
Creation Act remains in effect.

11

Note 9. 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.
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 as of January 1, 2004 did not have an impact on the
financial statements.

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 the U.S. Customs Service
relating to foreign repair work; (7) the adequacy of our capital resources and
the availability of additional 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
or increase our government subsidies; (11) the anticipated improvement in the
results of our Mexican Rail-Ferry Service; (12) the potential effects on us of
the American Jobs Creation Act of 2004; and (13) assumptions underlying any of
the foregoing.

12

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
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 their obligations to 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.

CRITICAL ACCOUNTING POLICIES

Set forth below is a discussion of the accounting policies and related
estimates that we believe are the most critical to understanding our
consolidated financial statements, financial condition, and results of
operations and which require complex management judgments, uncertainties and/or
estimates. Information regarding our other accounting policies is included in
the Notes to Consolidated Financial Statements included in our Form 10-K for the
year ended December 31, 2003.

VOYAGE REVENUE AND EXPENSE RECOGNITION

Revenues and expenses relating to our Liner and Rail-Ferry Segments'
voyages are recorded over the duration of the voyage. Revenues and expenses
relating to our other segments' voyages are recorded when earned or incurred
during the reporting period. These segments require no estimates or assumptions
when reporting revenues and expenses. On our Liner Services, the voyage revenues
are known at the beginning of the vessel's voyage and are reported based on
percentage of completion through the date of the financial statements. Variances
from initial revenue voyage estimates are generally not material. Voyage
expenditures are estimated at the beginning of the vessel's voyage based on
historical cost standards and current estimates received from our vendors and
port agents. During the course of the vessel's voyage, typically 30 to 60 days,
actual costs replace the original estimates and become part of the historical
cost standards. Because of our on-going voyage review process, material
variances from our original revenue and expense estimates are reported timely
and generally are not recurring.

13

DEPRECIATION

Provisions for depreciation are computed on the straight-line method
based on estimated useful lives of our depreciable assets. Various methods are
used to estimate the useful lives and salvage values of our depreciable assets
and due to the capital intensive nature of our business and our large base of
depreciable assets, changes in such estimates could have a material effect on
our results of operations.

DRYDOCKING COSTS

We defer certain costs related to the drydocking of our vessels.
Deferred drydocking costs are capitalized as incurred and amortized on a
straight-line basis over the period between drydockings (generally two to five
years). Because drydocking charges can be material in any one period, we believe
that the acceptable deferred method provides a better matching for the
amortization of those costs over future revenue periods benefiting from the
drydocking of our vessel.

INCOME TAXES

Income taxes are accounted for in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
Provisions for income taxes include deferred income taxes that are provided on
items of income and expense, which affect taxable income in one period and
financial income in another. Certain foreign operations are not subject to
income taxation under pertinent provisions of the laws of the country of
incorporation or operation. However, pursuant to U.S. tax laws existing prior to
the changes effected by the Jobs Creation Act, earnings from certain foreign
operations are subject to U.S. income taxes. We had approximately $33 Million of
unused foreign deficit carryforwards as of December 31, 2003. The evaluation of
the recoverability of these deferred tax assets requires management to make
estimates and assumptions with respect to our expected future taxable income.
While we expect to be able to utilize these net operating loss carryforwards
even after the effectiveness of the Jobs Creation Act, actual future taxable
income may differ from our estimates and as such we may be required to record
additional valuation allowances against these assets.

SELF-RETENTION INSURANCE

We maintain provisions for estimated losses under our self-retention
insurance based on estimates of the eventual claims settlement costs. Our policy
is to establish self-insurance provisions for each policy year based on
independent actuarial estimates, and to maintain the provisions at those levels
for the estimated run-off period, approximately two years from the inception of
that period. We believe most claims will be reported, or estimates for existing
claims will be revised, within this two-year period. Subsequent to this two-year
period, self-insurance provisions are adjusted to reflect our current estimate
of loss exposure for the policy year. Our estimates are determined based on
various factors, such as (1) severity of the injury (for personal injuries) and
estimated potential liability based on past judgments and settlements, (2)
advice from legal counsel based on its assessment of the facts of the case and
its experience in other cases, (3) probability of pre-trial settlement which
would mitigate legal costs, (4) historical experience on claims for each
specific type of cargo (for cargo damage claims), and (5) whether our seamen are
employed in permanent positions or temporary revolving positions. It is
reasonably possible that changes in our estimated exposure may occur from time
to time. However, if during this two-year period our estimate of loss exposure
exceeds the actuarial estimate, then additional loss provisions are recorded to
increase the

14

self-insurance provisions to our estimate of the eventual claims' settlement
cost. The measurement of our exposure for self-insurance liability requires
management to make estimates and assumptions that affect the amount of loss
provisions recorded during the reporting period. Actual results could differ
materially from those estimates.

ASBESTOS CLAIMS

We maintain provisions for our estimated losses for asbestos claims
based on estimates of eventual claims settlement costs. Our policy is to
establish provisions based on a range of estimated exposure. We estimate this
potential range of exposure using input from legal counsel and internal
estimates based on the individual deductible levels for each policy year. We are
also indemnified for certain of these claims by the previous owner of one of our
wholly-owned subsidiaries. The measurement of our exposure for asbestos
liability requires management to make estimates and assumptions that affect the
amount of the loss provisions recorded during the period. Our estimates and
assumptions are formed from variables such as the maximum deductible levels in a
claim year, the amount of the indemnification recovery and the claimant's
employment history with the Company. Actual results could differ from those
estimates.

PENSION AND POSTRETIREMENT BENEFITS

Our pension and postretirement benefit costs are calculated using
various actuarial assumptions and methodologies as prescribed by SFAS No. 87,
"Employers' Accounting for Pensions" and SFAS No. 106, "Employers' Accounting
for Postretirement Benefits Other than Pensions." These assumptions include
discount rates, health care cost trend rates, inflation, rate of compensation
increases, expected return on plan assets, mortality rates, and other factors.
We believe that the assumptions utilized in recording the obligations under our
plans are reasonable based on input from our outside actuary and information as
to historical experience and performance. Differences in actual experience or
changes in assumptions may affect our pension and postretirement obligations and
future expense.

RESULTS OF OPERATIONS

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.

15

EXECUTIVE SUMMARY

Our net income for the third quarter of 2004 was $220,000 as compared
to a net loss of $1.6 million for the third quarter of 2003. For the nine months
of 2004, net income was $4.9 million as compared to net income of $3.8 million
for the same period of 2003.

During this quarter, our Liner Services and Rail-Ferry Service,
operating out of the Gulf of Mexico, experienced some weather delays as a result
of hurricanes. This along with higher than anticipated operating cost, primarily
from machinery deficiencies, caused the Rail-Ferry Service results to drop below
the comparable 2003 period. The Liner Services managed to offset the weather
impact with increased cargo volumes in comparison to third quarter 2003 levels.

Our investments in a fleet of cement carriers and two cape-size bulk
carriers showed improvements from the same quarter of 2003 as a result of an
increase in our investment in the two cape-size bulk carriers, which currently
is a 50% interest in each ship versus the 2003 investment of a 12.5% interest in
four vessels, and continued firmness in the charter market for these vessels.

For the first nine months of 2004, income from our Liner Services
improved over the comparable period of 2003 primarily as a result of improved
cargo volume in our foreign flag LASH Liner service and in spite of higher fuel
costs and weather delays. However, during the same period, we experienced a
reduction in the results of our time charter vessels as a result of our U.S.
flag Pure Car/Truck Carriers ("PCTC") carrying less supplemental cargoes, which
are in addition to the time charter agreements. The results of our U.S. flag
PCTCs were further impacted by a casualty on one vessel resulting in twenty-six
unplanned out of service days during the first nine months of 2004. The results
of our U.S. flag Coal Carrier were impacted by an accelerated drydock and other
required repair work and upgrading which resulted in the vessel being out of
service forty-three days in 2004 versus full employment in 2003. Results in the
first nine months of 2004 for our Rail-Ferry Service were down from 2003
primarily as a result of higher operating costs due to unanticipated maintenance
problems, higher fuel costs, added rail hire, and weather delays.

Also contributing to our improved results for the nine months
comparable periods was the loss during the third quarter of 2003 incurred on the
early extinguishment of debt. This resulted from a "make-whole" prepayment
penalty and write off of deferred financing charges associated with the
necessary prepayment of a loan on our U.S. flag Coal Carrier in order to correct
a technical default as reported in previous filings.

Under current United States tax law, U.S. companies like us and their
domestic subsidiaries generally are taxed on all income, whether derived in the
United States or abroad. With respect to foreign subsidiaries in which we hold
more than a 50 percent interest (referred to in the tax laws as controlled
foreign corporations or "CFCs"), we are currently taxed on our pro rata share of
foreign shipping income. The recently-enacted Jobs Creation Act, which becomes
effective for us on January 1, 2005, will change the United States tax treatment
of our domestic and foreign shipping operations. We intend to make an election
under the Jobs Creation Act to have most of our U.S. flag operations taxed under
a new "tonnage tax" regime rather than under the usual U.S. corporate income tax
regime. Once the election is effective, the only federal income tax on the
operations of those vessels will be based on their tonnage, rather than their
contribution to our income or profits. Also under the Jobs Creation Act, the

16

taxable income of our CFCs from foreign shipping operations will be deferred
until repatriated. For further information regarding the Jobs Creation Act, see
Note 8 Income Taxes.

NINE MONTHS ENDED SEPTEMBER 30, 2004
COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2003

GROSS VOYAGE PROFIT

Gross voyage profit decreased 15% from $27.1 million in the first nine
months of 2003 to $23 million in the first nine months of 2004. The changes
associated with each of our segments are discussed below.

Liner Services: Gross voyage loss for this segment improved from a loss
of $1.7 million in the first nine months of 2003 to a loss of $429,000 in the
first nine months of 2004. The improvement was primarily a result of higher
cargo volumes in the first nine months of 2004 compared to 2003 for both our
U.S. flag LASH Liner service and foreign flag LASH Liner service, although the
U.S. flag LASH Liner service experienced less profitable cargo mix in the third
quarter of 2004 as compared to the same period of 2003.

Time Charter Contracts: The decrease in this segment's gross voyage
profit from $25.5 million in the first nine months of 2003 to $22.1 million in
the first nine months of 2004 was attributable primarily to our U.S. flag PCTCs
carrying less supplemental cargoes, which are in addition to the time charter
agreements, during 2004 as compared to 2003. The results of our U.S. flag PCTCs
were also affected by a casualty on one vessel resulting in twenty-six unplanned
out-of-service days in the second quarter of 2004. The results of our U.S. flag
Coal Carrier were affected by an accelerated drydock due to required repair work
and upgrading work resulting in forty-three out-of-service days during the
second and third quarters of 2004. Additionally, our Multi-Purpose vessel,
completed its charter with the Military Sealift Command (" MSC") in early 2003
and was sold shortly thereafter.

Contracts of Affreightment: The decrease in this segment's gross voyage
profit from $4.1 million in the first nine months of 2003 to $3.7 million in the
first nine months of 2004 was primarily due to higher operating costs as a
result of machinery deficiencies and weather delays as a result of hurricanes in
the Gulf of Mexico.

Rail-Ferry Service: Gross voyage loss for this segment increased from a
loss of $2 million in the first nine months of 2003 to a loss of $3.4 million in
the first nine months of 2004. This service experienced higher operating costs
due to unanticipated maintenance problems, higher fuel costs, weather delays as
a result of hurricanes in the Gulf of Mexico, and added rail hire related to
such delays on northbound and southbound rail cargoes.

Other: Gross voyage profit for this segment decreased from $1.2 million
in the first nine months of 2003 to $923,000 in the first nine months of 2004.
The decrease resulted primarily from our 50% owned car transportation truck
company, which has operated at a loss, as well as a casualty on one of our
vessels that our insurance subsidiary covered for the policy year ended June 26,
2004.

OTHER INCOME AND EXPENSE

Interest expense decreased 17.6% from $9.6 million in the first nine
months of 2003 to $7.9 million in the first nine months of 2004. Decreases due
to regularly scheduled payments on outstanding debt and lower interest

17

rates accounted for $1 million of the difference. Reduced cost from the early
repayment of our 7.75% Senior Notes due in 2007, as well as early debt
retirements, accounted for approximately $700,000 of the decrease.

Loss on early extinguishment of debt of $46,000 reported in the first
nine months of 2004 was due to the early retirement of debt associated with our
Molten Sulphur Carrier, as well as the retirement at a slight premium of
$410,000 of our 7.75% Senior Notes due in 2007. The loss of $1.3 million in the
first nine months of 2003 resulted from a "make-whole" prepayment penalty and
write-off of deferred financing charges associated with the necessary prepayment
of the Coal Carrier loan to cure a technical default as described in Note 7
herein. This was partially offset by the retirement at a discount of
approximately $10.7 million of our 7.75% Senior Notes due in 2007.

INCOME TAXES

We had a tax provision of $1.3 million in the first nine months of 2004
and $2.1 million for the first nine months of 2003 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 $260,000 in the first nine months of 2003 to $3 million in the
first nine months of 2004. The improvement was primarily related to our 50%
investment in a company owning two newly built cape-size bulk carriers and our
minority interest in companies owning and operating cement carriers. Our 50%
investment in the cape-size bulk carrier company, which was acquired in November
of 2003, contributed $2.3 million net of taxes in 2004. Our 30% investment in
the cement carrier company contributed $693,000 net of taxes in the first nine
months of 2004 compared to $260,000 net of taxes in the first nine months of
2003.

THREE MONTHS ENDED SEPTEMBER 30, 2004
COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2003

GROSS VOYAGE PROFIT

Gross voyage profit decreased 11.2% from $6.5 million in the third
quarter of 2003 to $5.8 million in the third quarter of 2004. The changes
associated with each of our segments are discussed below.

Liner Services: Gross voyage loss for this segment of $1.2 million was
the same for both the third quarter of 2004 and 2003. While our foreign flag
LASH liner service experienced higher cargo volumes in the third quarter of 2004
compared to 2003, our U.S. flag LASH Liner service experienced less profitable
cargo mix as compared to the same period of 2003.

Time Charter Contracts: The increase in this segment's gross voyage
profit from $6.3 million in the third quarter of 2003 to $7.4 million in the
third quarter of 2004 was primarily a result of the 2003 sale of our
Multi-Purpose vessel, which had operated unprofitably during the third quarter
of 2003, following the termination of its charter with the MSC. Partially
offsetting this increase were lower results of our U.S. flag Coal Carrier, which
was drydocked for unanticipated repairs resulting in eight out-of-service days
during the third quarter of 2004.

18

Contracts of Affreightment: Gross voyage profit for this segment
decreased from $1.6 million in the third quarter of 2003 to $1 million in the
third quarter of 2004, primarily due to higher operating costs as a result of
machinery deficiencies and weather delays as a result of hurricanes in the Gulf
of Mexico.

Rail-Ferry Service: Gross voyage loss for this segment increased from a
loss of $853,000 in the third quarter of 2003 to a loss of $1.7 million in the
third quarter of 2004. The increase in this service's gross voyage loss was
primarily related to unanticipated maintenance problems, higher fuel costs,
weather delays as a result of hurricanes in the Gulf of Mexico, and added rail
hire related to such delays on northbound and southbound rail cargoes.

Other: Gross voyage profit for this segment decreased from $513,000 in
the third quarter of 2003 to a loss of $199,000 in the third quarter of 2004.
The decrease resulted primarily from our 50% owned car transportation truck
company, which has operated at a loss, as well as a casualty on one of our
vessels that our insurance subsidiary covered for the policy year ended June 26,
2004.

OTHER INCOME AND EXPENSE

Interest expense decreased 13.1% from $3 million in the third quarter
of 2003 to $2.6 million in the third quarter of 2004. Decreases due to regularly
scheduled payments on outstanding debt and lower interest rates accounted for
$273,000 of the difference. Reduced cost from the early repayment of our 7.75%
Senior Notes due in 2007, as well as early debt retirements, accounted for
approximately $116,000 of the decrease.

Loss on early extinguishment of debt of $2.6 Million in the third
quarter of 2003 resulted from a "make-whole" prepayment penalty and write-off of
deferred financing charges associated with the necessary prepayment of the Coal
Carrier loan to cure a technical default as described in Note 7 herein.

INCOME TAXES

We had a tax benefit of $260,000 and $795,000 for the third 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 $33,000 in the third quarter of 2003 to $869,000 in the third
quarter of 2004. The improvement was primarily related to our 50% investment in
a company owning two newly built cape-size bulk carriers and our minority
interest in companies owning and operating cement carriers. Our 50% investment
in the cape-size bulk carrier company, which was acquired in November of 2003,
contributed $593,000 net of taxes in 2004. Our 30% investment in the cement
carrier company contributed $276,000 net of taxes in the third quarter of 2004
compared to $33,000 net of taxes in the third quarter of 2003.

19

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 $10.2 million at December 31, 2003,
to $14.5 million at September 30, 2004. Of the $43.3 million in current
liabilities, $13.8 million related to current maturities of long-term debt at
September 30, 2004. Cash and cash equivalents increased during the first nine
months of 2004 by $3 million from $8.9 million at December 31, 2003, to $11.9
million at September 30, 2004. The increase was due to cash provided by
operating activities of $14.5 million and investing activities of $1.5 million,
partially offset by cash used for financing activities of $13 million.

Operating activities generated a positive cash flow after adjusting net
income of $4.9 million for non-cash provisions such as depreciation and
amortization. Cash provided by operating activities also included a decrease in
accounts receivables of $6.9 million primarily due to the timing on collections
of receivables from the MSC and U.S. Department of Transportation and slightly
offset by a decrease in accounts payable and accrued liabilities of $6.2 million
primarily due to the timing of payments to U.S. Customs in 2004. Also included
was cash used of $5.8 million primarily to cover payments for vessel drydocking
costs in 2004.

Cash provided by investing activities of $1.5 million was primarily
related to cash distributions received from our investments in unconsolidated
entities, partially offset by purchases of non-vessel related assets used by our
car transportation truck company and purchases of short-term investments.

Cash used for financing activities of $13 million included $8.9 million
used for regularly scheduled payments of debt, $1 million used to repay draws on
our line of credit made during the same period, $2.5 million used for early
repayment of one of our debt obligations, and $1.5 million used for an
additional payment on our Title XI loan, which was partially offset by draws on
our line of credit of $1 million.

As of September 30, 2004, $14.7 million was available on our $15
million revolving credit facility, which expires in April of 2006. We are
currently negotiating a $70 million revolving credit facility that would replace
this facility if we are able to successfully conclude our negotiations. The
additional credit line would allow us further flexibility to be used, among
other options, on future capital investments and early retirement of debt if the
market is attractive.

Debt and Lease Obligations - We have several vessels under operating
leases, including three PCTCs, one LASH vessel, one 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.

20

The following is a summary of the scheduled maturities by period of our
outstanding debt and lease obligations as of September 30, 2004:

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 as of September 30, 2004, 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.

Registration Statement - On November 2, 2004, we filed a registration
statement on Form S-1 with the Securities and Exchange Commission ("SEC")
related to our offering 800,000 shares of convertible exchangeable preferred
stock (the "Offering"). We expect to receive approximately $40 million and we
intend to use a portion of the proceeds to purchase two used ships and to add a
second cargo deck on each of the two vessels operating in our Rail-Ferry
Service, as well as possibly purchasing certain leased vessels, acquiring
newbuildings and/or other second hand vessels. We will use the remaining
proceeds of this offering to satisfy working capital requirements and for
general corporate purposes.

A registration statement relating to these securities has been filed
with the SEC but has not yet become effective. These securities may not be sold
nor may offers to buy be accepted prior to the time the registration statement
becomes effective. This report shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.

Mexican Rail-Ferry Service Results - Our Rail-Ferry Service provides a
unique combination of rail and water ferry service between the U.S. Gulf and
Mexico. As with any innovative venture, we expected and have experienced an
adjustment period for the market to embrace our alternative transportation
service. However, since the inception of the service in 2001, it has experienced
improvement in gross revenues and operating cash flows overall.

We intend to use a portion of the proceeds from the aforementioned
Offering to add a second deck to each of the two vessels operating in our
Rail-Ferry Service in order to essentially double their capacity. We believe
that these additions will significantly reduce our cost per unit of cargo
carried and significantly increase our cash flow but that will occur only if we
are able to book substantially all of the additional capacity, and we can give
no assurance at this time that we will be successful in doing so. If market
conditions adversely impact those projections, we believe we could find
alternative placement for the two vessels supporting the service. We hope to

21

conclude the necessary shipyard modification contracts shortly and we expect the
vessels to begin shipyard work in mid-2005 returning to service in the second
half of 2005.

Proposed Vessel Purchase - We have entered into an agreement to
purchase two used ships in the fourth quarter of 2004. We intend to use a
portion of the proceeds from the aforementioned Offering for the purchase of
these ships. These vessels will enable us to maintain two of our Maritime
Security Program ("MSP") contracts.

Maritime Security Program Contracts - In 2003, Congress authorized an
extension of the MSP through 2015, increased the number of ships industry-wide
eligible to participate in the program from 47 to 60, and increased MSP payments
to companies in the program, all to be effective on October 1, 2005. Annual
payments for each vessel in the new MSP program will be $2.6 million in years
2006 to 2008, $2.9 million in years 2009 to 2011, and $3.1 million in years 2012
to 2015. On October 15, 2004, we filed applications to extend our seven MSP
contracts for another 10 years, all of which were effectively grandfathered in
the MSP reauthorization. Simultaneously, we offered additional ships for
participation in the MSP. The U.S. Maritime Administration is expected to
announce MSP contract awards on January 14, 2005, and we have no way of knowing
at this time whether we will be awarded contracts for the additional ships.

Dividend Payments - In order 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, and
we have determined that we have no known risks for which assertion of a claim is
probable that are not covered by third party insurance, provided for in our
self-retention insurance reserves or otherwise indemnified. Our environmental
risks primarily relate to oil pollution from the operation of our vessels. We
have pollution liability insurance coverage with a limit of $1 billion per each
occurrence, with a deductible amount of $25,000 for each incident.

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.
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 as of January 1, 2004 did not have an impact on the
financial statements.

22

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

In the ordinary course of our business, we are exposed to foreign
currency, interest rate, and commodity price risks. 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 our cash and short-term
investment portfolio at September 30, 2004 approximated carrying value due to
its short-term duration. The potential decrease in fair value resulting from a
hypothetical 10% increase in interest rates at September 30, 2004 for our
investment portfolio is not material.

The fair value of long-term debt at September 30, 2004, including
current maturities, was estimated to be $169.0 million compared to a carrying
value of $166.1 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 September 30, 2004, would be approximately $1.5 million or
0.9% of the carrying value.

As of September 30, 2004, we have no interest rate swap agreements to
manage our exposure to interest rate risks.

COMMODITY PRICE RISK. As of September 30, 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. A 20% increase in the price of fuel for the period October 1,
2003 through September 30, 2004 would have resulted in an increase of
approximately $2.7 million in our fuel costs for the same period, and in a
corresponding decrease of approximately $0.44 in our earnings per share based on
the shares of our common stock outstanding as of September 30, 2004, assuming
that none of the price increase could have been passed on to our customers
through fuel cost surcharges during the same period.

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) As of the end of the period covered by this report, we conducted an
evaluation of the effectiveness of our "disclosure controls and procedures," as
that phrase is defined in Rules 13a-15(e) and 15d-15(e) 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, our CEO and CFO have concluded that our
disclosure controls and procedures are effective as of the end of the period
covered by this report in timely alerting them to material information required
to be disclosed in our periodic filings with the Securities and Exchange
Commission ("SEC"), and in

23

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.

(b) There have been no changes in our internal control over financial
reporting that occurred during our most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.

PART II - OTHER INFORMATION

ITEM 6.

EXHIBITS

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

24

INTERNATIONAL SHIPHOLDING CORPORATION

/s/ GARY L. FERGUSON
- ---------------------------------------------
Gary L. Ferguson
Vice President and Chief Financial Officer

Date November 12, 2004
-----------------------------------------

25