International Shipholding 10-Q 2008
Documents found in this filing:
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the quarterly period ended June 30, 2008
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.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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. . . . . . . . 7,385,801 shares outstanding as of June 30, 2008
INTERNATIONAL SHIPHOLDING CORPORATION
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
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 U.S. Generally Accepted Accounting Principles for complete financial statements. The condensed consolidated balance sheet as of December 31, 2007 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 annual report on Form 10-K for the year ended December 31, 2007. We have made certain reclassifications to prior period financial information in order to conform to current year presentations, including the reclassification of relocation incentive payments received from Alabama agencies from “Other Revenue” to a credit offsetting Administrative and General expense and the removal of our LASH Liner service from “Continuing Operations” to “Discontinued Operations”.
The foregoing 2008 interim results are not necessarily indicative of the results of operations for the full year 2008. Management believes that it has made all adjustments necessary, consisting only of normal recurring adjustments, for a fair presentation of the information shown.
Our policy is to consolidate all subsidiaries in which we hold a greater than 50% voting interest or otherwise control its operating and financial activities. We use the equity method to account for investments in entities in which we hold a 20% to 50% voting interest and have the ability to exercise significant influence over their operating and financial activities. 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.
Revenues and expenses relating to our Rail-Ferry Service segment voyages are recorded over the duration of the voyage. Our voyage expenses are estimated at the beginning of the voyages based on historical actual costs or from industry sources familiar with those types of charges. As the voyage progresses, these estimated costs are revised with actual charges and timely adjustments are made. The expenses are ratably expensed over the voyage based on the number of days in progress at the end of the period. Based on our prior experience, we believe there is no material difference between recording estimated expenses ratably over the voyage versus recording expenses as incurred. Revenues and expenses relating to our other segments' voyages, which require no estimates or assumptions, are recorded when earned or incurred during the reporting period.
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 our pension plan:
The following table provides the components of net periodic benefit cost for our postretirement benefits plan:
We expect to contribute approximately $600,000 to our pension plan in 2008, and we do not expect to make a contribution to our postretirement benefits plan.
Note 3. Operating Segments
Our three operating segments, Time Charter Contracts, Contracts of Affreightment (“COA”), and Rail-Ferry Service, are identified primarily by the characteristics of the contracts and terms under which our vessels are operated. We report in the Other category results of several of our subsidiaries that provide ship charter brokerage and agency services. 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. As a result of our decision to discontinue all of the company’s Liner services in 2007, the results of our Liner service segment are now reflected as discontinued operations.
We allocate interest expense to the segments based on the book values of the vessels owned within each segment.
We do not allocate administrative and general expenses, investment income, gain on sale of investment, gain or loss 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 our subsidiaries that provide specialized services to the operating segments.
The following table presents information about segment profit and loss for the three months ended June 30, 2008 and 2007:
The following table presents information about segment profit and loss for the six months ended June 30, 2008 and 2007:
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
We have a 50% interest in Dry Bulk Cape Holding Inc. (“Dry Bulk”), which owns two Cape-Size Bulk Carriers, one Panamax Bulk Carrier and two Handymax Bulk Carrier Newbuildings on order. We account for this investment under the equity method and our share of earnings or losses is reported in our consolidated statements of income net of taxes. Our portion of the earnings of this investment was $16.4 million and $1.6 million for the three months ended June 30, 2008 and 2007, respectively. For the six months ended June 30, 2008 and 2007, our portion of the earnings of this investment was $17.6 million and $2.7 million, respectively. The 2008 earnings include an after-tax gain on the sale of one of Dry Bulk’s vessels, a Panamax Bulk Carrier in June 2008, of approximately $15.1 million.
We received a cash distribution from Dry Bulk of $2.5 million and $1.0 million in the first six months of 2008 and 2007, respectively. In addition, we also received a cash distribution for our share of the proceeds from the sale of the aforementioned Panamax Bulk Carrier in the amount of $25.5 million in early July 2008.
The unaudited condensed results of operations of Dry Bulk are summarized below:
Note 5. Earnings Per Share
Basic earnings per share was computed based on the weighted average number of common shares issued and outstanding during the relevant periods. Diluted earnings per share also considers dilutive potential common shares, including shares issuable under stock options,and restricted stock grants using the treasury stock method and convertible preferred stock using the if-converted method.
The calculation of basic and diluted earnings per share is as follows (in thousands except share amounts):
Note 6. Comprehensive Income
The following table summarizes components of comprehensive income for the three months ended June 30, 2008 and 2007:
The following table summarizes components of comprehensive income for the six months ended June 30, 2008 and 2007:
The net change in fair value of derivatives of $4.7 million for the second quarter of 2008 represents an increase in the fair value of the six interest rate swap agreements entered into on four of our loans. This increase is due to the reversal in the forward yield curve projections due to the anticipated Federal Reserve interest rate increases in the market place. (See further discussion of interest rate risk in Item 3 – Quantitative and Qualitative Information about Market Risk on page 15)
Note 7. Income Taxes
We recorded a benefit for federal income taxes of $1.8 million on our $858,000 loss from continuing operations before income from unconsolidated entities in the first six months of 2008, reflecting tax losses on operations taxed at the U.S. corporate statutory rate. For the first six months of 2007, our benefit was $899,000 on our $1.3 million of income from continuing operations before income from unconsolidated entities. Our tax benefit increased from the comparable prior year primarily as a result of favorable tax impacts of the sale and leaseback arrangement of our U.S. flag Molten Sulphur vessel and the investment in the Rail Ferry Service’s second decks. We recorded a provision for federal income taxes of $471,000 on our $4.6 million of income from discontinued operations in the first six months of 2008, due to the sale of Liner assets and recognition of sub-part F income. For the same period in 2007, the tax affect on discontinued operations was a provision of $9,000. In the first quarter of 2007 we formally adopted a plan to permanently re-invest all foreign earnings, and accordingly, we have not recorded a tax provision on 2007 or 2008 foreign earnings. For further information on certain tax laws and elections, see our annual report on Form 10-K for the year ended December 31, 2007, including Note G to the financial statements. Our qualifying U.S. flag operations continue to be taxed under a “tonnage tax” regime rather than under the normal U.S. corporate income tax regime.
Note 8. Fair Value Measurements
Effective January 1, 2008, we adopted the provisions of SFAS No. 157, "Fair Value Measurements," for financial assets and financial liabilities. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.
SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. Under SFAS 157, the price in the principal (or most advantageous) market used to measure the fair value of the asset or liability is not adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able and willing to complete a transaction.
SFAS 157 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present value on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, SFAS 157 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
w Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
w Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (including interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.
The following table summarizes our financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2008, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
Note 9. New Accounting Pronouncements
In September of 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” which is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. As discussed further in Note 8, this statement defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. We adopted FAS 157 on January 1, 2008 and the adoption had no effect on our consolidated financial position and results of operation.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Liabilities – including an amendment of FASB Statement No. 155 (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial assets and financial liabilities, and certain nonfinancial instruments that are similar to financial instruments, at fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We adopted SFAS 159 on January 1, 2008 and the adoption had no effect on our consolidated financial position and results of operation.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging activities – an amendment of FASB Statement No. 133. SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. SFAS No. 161 is effective for fiscal years beginning after November 15, 2008. We have not yet determined the impact, if any, the adoption of SFAS No. 161 will have on our consolidated financial position or results of operations.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS No. 162 identifies the sources of accounting principles and provides entities with a framework for selecting the principles used in preparation of financial statements that are presented in conformity with GAAP. The current GAAP hierarchy has been criticized because it is directed to the auditor rather than the entity, it is complex, and it ranks FASB Statements of Financial Accounting Concepts, which are subject to the same level of due process as FASB Statements of Financial Accounting Standards, below industry practices that are widely recognized as generally accepted but that are not subject to due process. The Board believes the GAAP hierarchy should be directed to entities because it is the entity (not its auditors) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. The adoption of FASB 162 is not expected to have a material impact on the Company’s financial position.
Note 10. Discontinued Operations
Our LASH Liner service previously consisted of our U.S. flag LASH service and TransAtlantic LASH service. In 2007, we decided to discontinue both services based on unfavorable market conditions and higher operating costs. We sold two LASH vessels and 225 barges in the first six months of 2007 and the one remaining International flag vessel and the remaining 235 barges in the first quarter of 2008, generating a gain of $9.0 million and $4.6 million for 2007 and 2008, respectively. Total revenues associated with the LASH Liner services were $24.6 million and $0 for the first six months of 2007 and 2008, respectively.
Our U.S. flag LASH service and TransAtlantic LASH service were reported in “Continuing Operations” as a part of our Liner segment in periods prior to June 30, 2007. Both services have been restated to remove the effects of those operations from “Continuing Operations”.
Note 11. Changes in Accounting Estimate
In the first quarter of 2008, we adjusted the salvage value on our two container vessels and on our U.S. flag Coal Carrier. This decision was based on expected future market values for scrap steel and the relatively short remaining economic life of those three vessels. By reducing our depreciation expense, this adjustment increased our net income for the first six months of 2008 by $1.3 million or $.17 per share. The container vessels will be fully depreciated by the end of 2009 and the U.S. flag Coal Carrier by January of 2011.
Note 12. Convertible Exchangeable Preferred Stock
On December 27, 2007 we announced, and on February 1, 2008 we completed, the redemption of our 800,000 outstanding shares of 6% Convertible Exchangeable Preferred Stock. In lieu of cash redemption, holders of 462,382 shares of the Preferred Stock elected to convert their shares into 1,155,955 shares of our common stock. The remaining 337,618 outstanding shares of Preferred Stock were retired for cash (including accrued and unpaid dividends to, but excluding, the redemption date), pursuant to the terms of the Preferred Stock. As a result, we no longer have any shares of the 6% Convertible Exchangeable Preferred Stock outstanding. The total cash payment for the redemption of the Preferred Stock including the accrued and unpaid dividends was $17,306,299. We recognized a charge to earnings of $1.37 million in the first quarter of 2008 from the redemption of the Preferred Stock.
Note 13. Stock Based Compensation
On April 30, 2008, our Compensation Committee granted 175,000 shares of restricted stock to certain executive officers.
The shares vest ratably over the respective vesting period, which is approximately four years for 160,000 shares and approximately three years for 15,000 shares.
The fair value of the Company’s restricted stock, which is determined using the average stock price as of the date of the grant, is applied to the total shares that are expected to fully vest and is amortized to compensation expense on a straight-line basis over the vesting period.
A summary of the activity for restricted stock awards during the three months ended June 30, 2008 is as follows:
The following table summarizes the amortization of compensation cost, which will be included in administrative and general expenses, relating to all of the Company’s restricted stock grants as of June 30, 2008:
For the quarter ended June 30, 2008, the Company’s income before taxes and net income included $148,000 and $96,000, respectively, of stock-based compensation expense charges, while basic and diluted earnings per share were each charged $0.01 per share. There was no stock compensation expense or awards outstanding for the quarter ended June 30, 2007.
Note 14. Stock Repurchase Program
On January 25, 2008, the Company’s Board of Directors approved a share repurchase program for up to a total of 1,000,000 shares of the Company’s common stock. We expect that any share repurchases under this program will be made from time to time for cash in open market transactions at prevailing market prices. The timing and amount of any purchases under the program will be determined by management based upon market conditions and other factors. Purchases may be made pursuant to a program we have adopted under Rule 10b5-1 of the Securities Exchange Act. Through June 30, 2008, we repurchased 289,341 shares of our common stock for $6.7 million. From July 1, 2008 through July 30, 2008, we repurchased an additional 202,231 shares for $4.8 million. Unless and until the Board otherwise provides, this new authorization will remain open indefinitely, or until we reach the 1,000,000 share limit.
Note 15. Subsequent Events
We entered into a new lease agreement on our New York City office which will become effective October 1, 2008, when our existing lease expires. The length of the lease is nine years and nine months, with graduated payments starting after an initial nine month period of free rent. The agreement calls for total annual payments of $451,000 for years one through five and total annual payments of $488,000 for years six through nine. The rent expense will be amortized using the straight-line method over the lease term.
On April 30, 2008, our Compensation Committee authorized change of control agreements that will commit us to pay each of our top three executive officers who are terminated without cause or resigns under certain specified circumstances within specified periods following a change of control of the Company (i) a lump sum cash severance payment equal to a multiple of such officer’s annual salary and bonus, (ii) the officer’s currently pending bonus and (iii) certain other benefits. These agreements became effective August 6, 2008 and are included in the filing of this Form 10-Q under Item 6 – Exhibits on page 16.
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 known and unknown risks, uncertainties and other factors that may cause our actual results to be materially different from the anticipated results expressed or implied by such forward-looking statements. 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; (3) estimated proceeds from sale of assets and the anticipated cost of constructing or purchasing new or existing vessels; (4) estimated fair values of financial instruments, such as interest rate, commodity and currency swap agreements; (5) estimated losses (including independent actuarial estimates) under self-insurance arrangements, as well as estimated gains or losses on certain contracts, trade routes, lines of business or asset dispositions; (6) estimated losses attributable to asbestos claims; (7) estimated obligations, and the timing thereof, to the U.S. Customs Service relating to foreign repair work; (8) the adequacy of our capital resources and the availability of additional capital resources on commercially acceptable terms; (9) our ability to remain in compliance with our debt covenants; (10) anticipated trends in government sponsored military cargoes; (11) our ability to effectively service our debt; (12) financing opportunities and sources (including the impact of financings on our financial position, financial performance or credit ratings), (13) anticipated future operating and financial performance, financial position and liquidity, growth opportunities and growth rates, acquisition and divestiture opportunities, business prospects, regulatory and competitive outlook, investment and expenditure plans, investment results, pricing plans, strategic alternatives, business strategies, and other similar statements of expectations or objectives, and (14) assumptions underlying any of the foregoing. Forward-looking statements may include the words “may,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect,” “plan” or “anticipate” and other similar words.
Our forward-looking statements are based upon our judgment and assumptions as of the date such statements are made concerning future developments and events, many of which are outside of our control. These forward looking statements, and the assumptions upon which such statements are based, are inherently speculative and are subject to uncertainties that could cause our actual results to differ materially from such statements. Important factors that could cause our actual results to differ materially from our expectations may include, without limitation, our ability to (i) identify customers with marine transportation needs requiring specialized vessels or operating techniques; (ii) secure financing on satisfactory terms to acquire, modify, or construct vessels if such financing is necessary to service the potential needs of current or future customers; (iii) obtain new contracts or renew existing contracts which would employ certain of our vessels or other assets upon the expiration of contracts currently in place, on favorable economic terms; (iv) manage the amount and rate of growth of our administrative and general expenses and costs associated with operating certain of our vessels; and (v) manage our growth in terms of implementing internal controls and information systems and hiring or retaining key personnel, among other things.
Other factors include (vi) changes in cargo, charter hire, fuel, and vessel utilization rates; (vii) the rate at which competitors add or scrap vessels in the markets as well as demolition scrap prices and the availability of scrap facilities in the areas in which we operate; (viii) changes in interest rates which could increase or decrease the amount of interest we incur on borrowings with variable rates of interest, and the availability and cost of capital to us; (ix) the impact on our financial statements of nonrecurring accounting charges that may result from our ongoing evaluation of business strategies, asset valuations, and organizational structures; (x) changes in accounting policies and practices adopted voluntarily or as required by accounting principles generally accepted in the United States; (xi) changes in laws and regulations such as those related to government assistance programs and tax rates; (xii) the frequency and severity of claims against us, and unanticipated outcomes of current or possible future legal proceedings; (xiii) unplanned maintenance and out-of-service days on our vessels; (xiv) the ability of customers to fulfill obligations with us; (xv) the performance of unconsolidated subsidiaries; (xvi) our ability to effectively handle our 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; (xvii) other economic, competitive, governmental, and technological factors which may affect our operations; (xviii) political events in the United States and abroad, including terrorism, and the U.S. military's response to those events; (xix) election results, regulatory activities and the appropriation of funds by the U.S. Congress; and (xx) unanticipated trends in operating expenses such as fuel and labor costs and our ability to recover these fuel costs through fuel surcharges.
You should be aware that new factors may emerge from time to time and it is not possible for us to identify all such factors nor can we predict the impact of each such factor on our business or the extent to which any one or more factors may cause actual results to differ from those reflected in any forward-looking statements. You are further cautioned not to place undue reliance on our forward-looking statements, which speak only as of the date of this report. We undertake no obligation to update any of our forward-looking statements for any reason.
Net income for the quarter ended June 30, 2008, which includes an after-tax gain of $15.1 million on the sale of a Panamax Bulk Carrier, was $18.0 million as compared to net income of $7.0 million for the second quarter of 2007, which included net income from discontinued operations of $3.5 million. Excluding the aforementioned gain, net income for the three months ended June 30, 2008 was $2.9 million, compared to $3.5 million for the comparable 2007 period. Gross voyage profits decreased slightly from $7.4 million to $7.2 million for the second quarter of 2007 and 2008, respectively.
We continue to be positive on the outlook for our Rail Ferry segment which generated an improvement of $2.4 million in gross voyage profits for the second quarter of 2008 as compared to the same period of 2007. The significant improvement was achieved utilizing 84% of its cargo capacity up from 70% utilization in the first quarter of 2008. The overall results of the current quarter were negatively impacted by the drop in our Time Charter segment which decreased $2 million, $7.7 million in 2007 to $5.7 million in 2008, primarily due to a decrease in the carriage of supplemental cargoes on our U.S. Flag Pure Car Truck Carriers. This temporary downward result will reverse itself in the upcoming quarter as bookings in the third quarter show that nine month comparable levels will be achieved.
Administrative and general expenses increased from $4.4 million in the second quarter of 2007 to $4.9 million in the second quarter 2008 mainly due to annual salary increases and the introduction of a new executive stock compensation program.
Interest expense decreased from $2.6 million in the second quarter of 2007 to $1.6 million in the second quarter of 2008. The reduction in interest expense is due primarily to the retirement of our 7 ¾% senior notes in October 2007.
On June 27, 2008, Dry Bulk Cape Holding Inc., a company in which we hold a 50% interest, sold one of their vessels, a Panamax Bulk Carrier, for net proceeds of $51.0 million and recognized a gain of $30.2 million. Our share of the net proceeds and after-tax gain was $25.5 million and $15.1 million, respectively. The after-tax gain on the sale is reported under Equity in Net Income of Unconsolidated Entities.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2008
COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2007