International Shipholding 10-Q 2012
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the quarterly period ended March 31, 2012
11 North Water Street, Suite 18290, Mobile, Alabama 36602
(Address of principal executive offices) (Zip Code)
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 þ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ Accelerated filer þ
Non-accelerated filer ¨ Smaller Reporting Company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No þ
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. . . . . . . . 7,203,860 shares outstanding as of March 31, 2012
INTERNATIONAL SHIPHOLDING CORPORATION
In this report, the terms “we,” “us,” “our,” and the “Company” refer to International Shipholding Corporation and its subsidiaries. In addition, the term “GAAP” means U.S. generally accepted accounting principles, the term “Newbuilding” means a vessel that is under construction, the term “Notes” means the Notes to our Consolidated Financial Statements contained elsewhere in this report, the term “PCTC” means a Pure Car/Truck Carrier vessel, the term “SEC” means the U.S. Securities and Exchange Commission, and the term “USD” means U.S. Dollars.
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.
The accompanying notes are an integral part of these statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
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 as permitted thereunder we have omitted certain information and footnote disclosures required by U.S. Generally Accepted Accounting Principles (GAAP) for complete financial statements. 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, 2011. The condensed consolidated balance sheet as of December 31, 2011 included in this report has been derived from the audited financial statements at that date.
The foregoing 2012 interim results are not necessarily indicative of the results of operations for the full year 2012. Management believes that it has made all adjustments necessary, consisting only of normal recurring adjustments, for a fair statement of the information shown.
Our policy is to consolidate each subsidiary 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 or economic interest and have the ability to exercise significant influence over their operating and financial activities, and the cost method to account for investments in entities in which we hold a 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 and Contracts of Affreightment segment’s 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. 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 limited estimates or assumptions, are recorded when earned or incurred during the reporting period.
We have eliminated all significant intercompany balances, accounts and transactions.
Note 2. Operating Segments
Our five operating segments, Time Charter Contracts – U.S. Flag, Time Charter Contracts – International Flag, Contracts of Affreightment (“COA”), Rail-Ferry Service and Other, are identified primarily by the characteristics of the contracts and terms under which our vessels are operated. We report in the Other category the results of several of our subsidiaries that provide ship charter brokerage, ship management services and agency services. Also included in the Other category are corporate related items, results of insignificant operations, and income and expense items not allocated to the other reportable segments. We manage each reportable segment separately, as each requires different resources depending on the nature of the contract or terms under which the vessels within the segment operate.
We allocate interest expense to the segments in proportion to the book values of the vessels owned within each segment. We do not allocate to our segments administrative and general expenses, gain on Dry Bulk transaction, gain on sale of other assets, derivative income or income taxes, gain on sale of investment, other income from vessel financing, investment income, foreign exchange gain, and equity in net (loss) income of unconsolidated entities. Intersegment revenues are based on market prices and include revenues earned by our subsidiaries that provide specialized services to our operating companies.
The following table presents information about segment profit and loss for the three months ended March 31, 2012 and 2011:
*Information used by Chief Decision Makers.
The following table is a reconciliation of the totals reported for the operating segments to the applicable line items in the consolidated financial statements:
Note 3. Unconsolidated Entities
In December 2009, we acquired for $6.25 million a 25% investment in Oslo Bulk AS (“Oslo Bulk”) which in 2008 contracted to build eight new Mini Bulkers. During 2010, we invested an additional $3.9 million in Oslo Bulk Holding Pte. Ltd.. (formerly “Tony Bulkers”), an affiliate of Oslo Bulk AS, for our 25% share of the installment payments for two additional new Mini-Bulkers. These investments are accounted for under the equity method and our share of earnings or losses is reported in our consolidated statements of income, net of taxes. All ten of these Mini-Bulkers are managed by an affiliate of Oslo Bulk. We paid $750,000 into Oslo Bulk in the first quarter of 2012 for working capital purposes. Our portion of the aggregate earnings of Oslo Bulk and Tony Bulkers, which included final 2011 income adjustments of $304,000 recorded in the first quarter of 2012, was a profit of $42,000 for the three months ended March 31, 2012. Our share of the first quarter 2011 Oslo Bulk and Tony Bulkers’ results was a loss of $43,000.
Our 2011 first quarter results also included our portion of earnings of Dry Bulk Cape Holding Inc. (“Dry Bulk”). In 2003, we acquired for $3,479,000 a 50% investment in Dry Bulk. Historically, we have accounted for this investment under the equity method and our share of earnings or losses has been reported in our consolidated statements of income, net of taxes. On March 25, 2011, we acquired 100% ownership of Dry Bulk. Following the acquisition, Dry Bulk’s results are no longer accounted for under the equity method. For further information on this acquisition, see Note 4 below.
Our portion of earnings of Dry Bulk for the first three months of 2011, recorded under the equity method, was $1.3 million. During the first quarter of 2011 we received a $750,000 cash dividend distribution from Dry Bulk prior to acquiring full ownership of it on March 25, 2011.
Our portion of the earnings of our remaining investments in unconsolidated entities for the three months ended March 31, 2012 and 2011 were losses of $112,000 and $32,000, respectively.
Note 4. Dry Bulk Cape Holding, Inc. Step Acquisition
On March 25, 2011, Cape Holding, Ltd. (one of our indirect wholly-owned subsidiaries) and DryLog Ltd. completed a transaction that restructured their respective 50% interests in Dry Bulk.
Prior to this transaction, Dry Bulk controlled through various subsidiaries two Capesize vessels and two Handymax Newbuildings. In connection with this transaction, (i) Cape Holding, Ltd. increased its ownership in Dry Bulk from 50% to 100% and (ii) in consideration, DryLog Ltd. received ownership of two former Dry Bulk subsidiaries holding one Capesize vessel and one shipbuilding contract relating to a Handymax vessel scheduled to be delivered in the second quarter of 2012. Following the transfer of these subsidiaries, Dry Bulk continued to control, through two subsidiaries, one Cape Size vessel and one shipbuilding contract relating to a Handymax vessel delivered in January of 2012. As a result of completing this transaction, we now own 100% of Dry Bulk and have complete control of the two remaining vessels.
During the first quarter of 2011, we retained an independent, third party firm with shipping industry experience to assist us in determining the fair value of Dry Bulk and the fair value of our previous 50% interest in Dry Bulk.
At the time of the acquisition, the assets of Dry Bulk consisted of cash, trade receivables, prepayments, inventory, two Capesize vessels, two Handymax vessels under construction and time charter agreements on the two Capesize vessels which expire in early 2013 and are currently fixed at attractive time charter rates. Current liabilities consisted primarily of accrued interest on debt and the non-current liabilities consisting primarily of floating rate bank borrowings. With the exception of the Capesize vessels and the intangible value assigned to the above-market time charter contracts, the fair value of all assets and liabilities were equal to the carrying values.
As of March 31, 2011, the combined appraised value for both Capesize vessels was $84.0 million as compared to the book value of approximately $53.6 million. In determining the appraised fair value of the Capesize vessels, the cost and comparable sales approaches were used with equal weight applied to each approach. In addition to the fair value adjustment on the Capesize vessels, an intangible asset was established reflecting the difference between the existing value of the time charter contracts in place as compared to current market rates for similar vessels under short-term contracts, discounted back to present value. Based on the income approach, the fair value of the intangible asset was calculated to be $5.2 million and will be amortized over the remaining life of the contract, which is set to expire on January 7, 2013. As a result of the combined fair value adjustments noted above, we concluded that the total fair value of the net assets of Dry Bulk acquired was $69.0 million.
In order to arrive at the fair value of our existing interest in Dry Bulk, 50% of the total fair value of $69.0 million was discounted by 5.1%, reflecting our lack of control of Dry Bulk as a 50% owner. The discount rate of 5.1% was derived from a sample of recent industry data. As a result, we concluded that the fair value of our existing 50% interest was $32.7 million.
Under Accounting Standards Codification (“ASC”) 805, a step up to fair value is required when an equity interest changes from a non-controlling interest to a controlling interest (step acquisition). Based on the step up from a 50% interest to a 100% interest in Dry Bulk, a gain of approximately $18.3 million was generated by taking the difference between the fair value of our previously held 50% interest less the book value of the previously held interest. This calculation is shown below:
(Amounts in thousands)
Fair Value of Previously Held 50% Interest $32,700
Less: Book Value of Previously Held Interest (14,400)
Gain on Previously Held 50% Interest $18,300
We also recognized a bargain purchase gain of $0.5 million with respect to the step up to fair value of the 50% interest we acquired, calculated as follows:
(Amounts in thousands)
Fair Value of Net Assets Acquired $69,000
Less: Fair Value of Purchase Consideration (35,800)
Less: Fair Value of Previously Held 50% Interest (32,700)
Bargain Purchase Gain $ 500
Previously, we accounted for our non-controlling interest in Dry Bulk under the equity method. We now include the financial results of Dry Bulk in our consolidated financial results.
Note 5. Gain on Sale of Other Assets
In March 2012 we sold two of our International Flag Pure Car Truck Carriers (“PCTC”), the Asian King and Asian Emperor, to Norwegian Car Carriers ASA. As a result of this transaction, we received total gross proceeds of $73.9 million and realized a gain of $3.8 million. These proceeds were used to pay down approximately $36.1 million of debt. Please refer to our Current Report Form 8-K dated March 26, 2012 for further information.
Note 6. Income Taxes
We recorded a provision for income taxes of $168,000 on our $8.2 million of income before taxes and equity in net (loss) income of unconsolidated entities for the three months ended March 31, 2012. For the three months ended March 31, 2011 our income tax provision was $208,000 on our $23.1 million of income before taxes and equity in net (loss) income of unconsolidated entities. These provision amounts represent our qualifying U.S. flag operations, which continue to be taxed under a “tonnage tax” regime rather than under the normal U.S. corporate income tax regime. We established a valuation allowance against deferred tax assets in 2010 because, based on available information, we could not conclude that it was more likely than not that the full amount of deferred tax assets generated primarily by NOL carryforwards and AMT credits would be realized through the generation of taxable income in the near future. We have and will continue to evaluate the need for a valuation allowance on an annual basis. For further information on certain tax laws and elections, see our Annual Report on Form 10-K filed for the year ended December 31, 2011, including “Note G-Income Taxes” to the consolidated financial statements included therein.
Note 7. Changes in Accounting Estimate
Based on company policy, we review the reasonableness of our salvage values every three years, based on the most recent three year average price of scrap steel per metric ton. In the first quarter of 2012 we reviewed and adjusted the salvage values on eight of our vessels, based on what we believe was a material change in the market value of scrap steel. The adjustments resulted in increasing the salvage values and reducing our depreciation expense on these eight vessels by approximately $3.8 million annually. This adjustment increased both our pre-tax and net income by $945,000, or $0.13 per share, for the three months ended March 31, 2012. (Due to the company being in a valuation allowance position there is no impact on taxes.)
Note 8. Earnings Per Share
We compute basic earnings per share based on the weighted average number of common shares issued and outstanding during the relevant periods. Diluted earnings per share also reflects dilutive potential common shares, including shares issuable under restricted stock grants using the treasury stock method.
The calculation of basic and diluted earnings per share is as follows (Amounts in thousands except share data):
Note 9. Stockholders’ Equity
A summary of the changes in Stockholders’ equity for the three months ended March 31, 2012, is as follows:
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. In 2008, we repurchased 491,572 shares of our common stock for $11.5 million. Thereafter, we suspended repurchases until the second quarter of 2010, when we repurchased 223,051 shares of our common stock for $5.2 million. Unless and until the Board otherwise provides, this authorization will remain open indefinitely, or until we reach the 1,000,000 share limit.
This table provides certain information with respect to the Company’s purchase of shares of its common stock during the first three months of 2012:
On February 1, 2012 and March 9, 2012, 13,665 and 16,439 shares of common stock, respectively, were retired in order to meet tax liabilities associated with the vesting of Restricted Stock grants by our executive officers.
During the three months ended March 31, 2012, we paid cash dividends as follows:
We paid an additional $314,000 in cash dividends related to unvested stock awards that accrued quarterly dividend payments, paid upon the shares vesting in the first quarter of 2012.
Note 10. Stock Based Compensation
A summary of the activity for stock awards during the three months ended March 31, 2012 is as follows:
For the three months ended March 31, 2012, our income before taxes and net income included $340,000 and $221,000, respectively, of stock-based compensation expense charges, which reduced both basic and diluted earnings per share by $0.03 per share. For the three months ended March 31, 2011, our income before taxes and net income included $577,000 and $375,000, respectively, of stock-based compensation expense charges, which reduced both basic and diluted earnings per share by $0.05 per share.
On January 18, 2012, our independent Directors received unrestricted stock awards of 5,712 shares from the 2011 Stock Incentive Plan.
Note 11. Sale and Leaseback Transaction
On February 22, 2012, we completed a sale and leaseback transaction with Wells Fargo Bank Northwest, National Association, of our 2007-built PCTC, the Green Bay. The transaction generated gross proceeds of $59.0 million, which we used to pay down debt of $54.5 million. We are leasing the vessel back under a ten year lease agreement with early buyout options that can be exercised in 2017 and 2019. The sale resulted in a gain of $14.9 million, which has been recorded as a deferred liability on the balance sheet and will be recognized over the term of the lease. Please refer to our Current Report Form 8-K dated February 22, 2012 for further information.
Note 12. Fair Value Measurements
ASC 820 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 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 ASC 820, 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, and (iii) able and willing to complete a transaction.
Fair value measurements require the use of valuation techniques that are consistent with one or more of the following: the market approach, the income approach 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. The fair value of our interest rate swap agreements is based upon the approximate amounts required to settle the contracts. 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 under the circumstances. In that regard, ASC 820 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) or inputs that are derived principally from or corroborated by market data by correlation or other means.
w Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity's own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.
The following table summarizes certain of our financial assets and financial liabilities measured at fair value on a recurring and non-recurring basis as of March 31, 2012, segregated by the above-described levels of valuation inputs:
(1) Represents the appraised fair value of the Rail-Ferry vessels after the impairment charge taken in the third quarter of 2010. The valuation technique used was a weighted average of the cost, comparable sales and income approach. The carrying value of the Rail-Ferry vessels ($33.9 million as of March 31, 2012) no longer equals the fair value.
The carrying amounts of accounts receivable, accounts payable and accrued liabilities approximate fair value at March 31, 2012 and December 31, 2011. We estimated the fair value of our variable rate long-term debt at March 31, 2012, including current maturities, to equal the carrying value due to the variable rate nature of the debt as well as to the underlying value of the collateral.
Note 13. Marketable Securities
We have categorized all marketable securities as available-for-sale securities. Management performs a quarterly evaluation of marketable securities for any other-than-temporary impairment. We determined that none of our securities were impaired as of March 31, 2012.
The following table includes cost and valuation information on our investment securities at March 31, 2012:
Note 14. Derivative Instruments
We use derivative instruments to manage certain foreign currency and interest rate risk exposures. We do not use derivative instruments for speculative trading purposes. All derivative instruments are recorded on the balance sheet at fair value. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is recorded to other comprehensive income, and is reclassified to earnings when the derivative instrument is settled. Any ineffective portion of changes in the fair value of the derivative is reported in earnings. None of our derivative contracts contain credit-risk related contingent features that would require us to settle the contract upon the occurrence of such contingency. However, all of our contracts contain clauses specifying events of default under specified circumstances, including failure to pay or deliver, breach of agreement, default under the specific agreement to which the hedge relates, bankruptcy, misrepresentation and the occurrence of certain transactions. The remedy for default is settlement in entirety or payment of the fair value of the contracts, which is $7.9 million in the aggregate for all of our contracts, with no posted collateral as of March 31, 2012. The unrealized loss related to our derivative instruments included in accumulated other comprehensive loss, net of taxes was $7.4 million as of March 31, 2012 and $8.6 million as of December 31, 2011.
The notional and fair value amounts of our derivative instruments as of March 31, 2012 were as follows:
The effect of derivative instruments designated as cash flow hedges on our condensed consolidated statement of income for the three months ended March 31, 2012 was as follows:
Interest Rate Swap Agreements
We enter into interest rate swap agreements to manage well-defined interest rate risks. The Company records the fair value of the interest rate swaps as an asset or liability on its balance sheet. The Company’s interest rate swaps are accounted for as effective cash flow hedges. Accordingly, the effective portion of the change in fair value of the swap is recorded in Other Comprehensive Income.
As of March 31, 2012, we had the following swap contracts outstanding:
*Notional amount converted from Yen at March 31, 2012 at a Yen to USD exchange rate of 82.82
Foreign Exchange Rate Risk.
We have entered into foreign exchange contracts to hedge certain firm foreign currency purchase commitments. In 2011, we entered into four forward purchase contracts which expire in 2012. The first was for Mexican Pesos for $750,000 U.S. Dollar equivalents at an exchange rate of 12.1818, the second was for Mexican Pesos for $1,200,000 U.S. Dollar equivalents at an exchange rate of 12.4717, the third was for Mexican Pesos for $450,000 U.S. Dollar equivalents at an exchange rate of 13.036 and the fourth was for Mexican Pesos for $750,000 U.S. Dollar equivalents at an exchange rate of 14.0292. In March 2012, we purchased approximately 125 million Yen to cover our June 15, 2012 installment payment under a Yen-denominated loan at an exchange rate of 83.34 to 1 USD, or a USD equivalent of $1,500,000. Our Mexican Peso foreign exchange contracts represent approximately 100% of our projected Peso exposure.
The following table summarizes the current value of these contracts:
Note 15. Employee Benefit Plans
The following table provides the components of net periodic benefit cost for our pension plan and postretirement benefits plan for the three months ended March 31, 2012 and 2011:
We contributed $400,000 to our pension plan for the three months ended March 31, 2012 and anticipate making approximately $1.2 million additional contributions for the remainder of 2012.
Note 16. Long-Term Debt
Long-term debt consisted of the following on the dates set forth below:
(1) We entered into a variable rate financing agreement with ING Bank N.V., London branch on June 20, 2011 for a seven year facility to finance the acquisition of a Cape Size vessel and a Handymax Bulk Carrier Newbuilding, both of which were assumed in the acquisition of Dry Bulk. Pursuant to the terms of the facility, the lender agreed to provide a secured term loan facility divided into two tranches: Tranche A, fully drawn on June 20, 2011 in the amount of $24.2 million, and Tranche B, providing up to $23.3 million of additional credit. Under Tranche B, $6.1 million was drawn in November 2011 and the final draw of $12.7 million was made on January 24, 2012.
(2) In March, 2012, the 5th amendment to the unsecured line of credit extended the expiration date until April 2014. At December 31, 2011, we had $9.5 million drawn and during the first quarter of 2012, an additional $18.5 million was drawn. The entire $28 million was repaid by March 31, 2012. Associated with this credit facility is a commitment fee of .125% per year on the undrawn portion of this facility.
(3) In the first quarter of 2012, proceeds from the sale of capital assets were used to pay off three loans and additional principal was paid on two loans, including approximately $10 million of the Japanese Yen facility.
(4) We have interest rate swap agreements in place to fix the interest rates on these variable rate notes payables.
As of March 31, 2012, the Company was in compliance with all financial covenants related to its debt obligations, and we believe that we will continue to meet such covenants in the near future.
Note 17. New Accounting Pronouncements
In May 2011, the Financial Accounting Standard Board (“FASB”) issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ASU 2011-04 clarifies some existing concepts, eliminates wording differences between U.S. GAAP and International Financial Reporting Standards (“IFRS”), and in some limited cases, changes some principles to achieve convergence between U.S. GAAP and IFRS. ASU 2011-04 results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and IFRS. ASU 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. ASU 2011-04 became effective for International Shipholding Corporation beginning on December 15, 2011. The adoption of ASU 2011-04 did not have a material effect on our operating results or financial position.
In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income , which requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income, or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of equity. ASU 2011-05 became effective for International Shipholding Corporation for the quarters beginning on December 15, 2011. The adoption of ASU 2011-05 did not have a material effect on our operating results or financial position, and have applied these new requirements in the first quarter of 2012.
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.
Such forward-looking statements include, without limitation, statements regarding (1) 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; (2) 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; (3) estimated scrap values of assets; (4) estimated proceeds from selling assets and the anticipated cost of constructing or purchasing new or existing vessels; (5) estimated fair values of financial instruments, such as interest rate and currency swap agreements; (6) estimated losses under self-insurance arrangements, as well as estimated gains or losses on certain contracts, trade routes, lines of business or asset dispositions; (7) estimated losses attributable to asbestos claims or other litigation; (8) estimated obligations, and the timing thereof, relating to vessel repair or maintenance work; (9) the adequacy of our capital resources and the availability of additional capital resources on commercially acceptable terms; (10) our ability to remain in compliance with applicable regulations and our debt covenants; (11) anticipated trends in government sponsored cargoes; (12) our ability to effectively service our debt; (13) financing opportunities and sources (including the impact of financings on our financial position, financial performance or credit ratings); (14) changes in laws, regulations or tax rates, or the outcome of pending legislative or regulatory initiatives; and (15) assumptions underlying any of the foregoing.
Important factors that could cause our actual results to differ materially from our expectations include our ability to:
Other factors that could cause our actual results to differ materially from our expectations include, without limitation:
Due to these uncertainties, we cannot assure that we will attain our anticipated results, that our judgments or assumptions will prove correct, or that unforeseen developments will not occur. Accordingly, you are cautioned not to place undue reliance upon any of our forward-looking statements, which speak only as of the date made. Additional risks that we currently deem immaterial or that are not presently known to us could also cause our actual results to differ materially from those expected in our forward-looking statements. Except for meeting our ongoing obligations under the federal securities laws, we undertake no obligation to update or revise for any reason any forward-looking statements made by us or on our behalf, whether as a result of new information, future events or developments, changed circumstances or otherwise.
For additional information on our forward-looking statements and risks, see Items 1, 1A and 7 of our Annual Report on Form 10-K for the year ended December 31, 2011, and Part II, Item 1A, of this report.
Overview of First Quarter 2012
We operate a diversified fleet of U.S. and International flag vessels that provide international and domestic maritime transportation services to commercial and governmental customers primarily under medium to long-term contracts. Our business strategy consists of identifying growth opportunities as market needs change, utilizing our extensive experience to meet those needs, and continuing to maintain a diverse portfolio of medium to long-term contracts, as well as protect our long-standing customer base by providing quality transportation services.
During the first quarter of 2012, we completed two significant transactions that further strengthens the balance sheet, provides additional liquidity and better positions us to pursue accretive growth opportunities. With these two transactions, we believe we are able to maximize the value of the assets sold and to monetize that value.
On February 22, 2012, we, through one of our wholly owned subsidiaries, completed the sale and leaseback of our 2007-built U.S. Flag PCTC, Green Bay. Our sale of the vessel generated approximately $59 million in proceeds, which were used to pay off approximately $54.5 million in debt. We continue to maintain commercial and operating control of the vessel under the existing charter party agreement with no change to the charter hire rates. See page 31 under Liquidity and Capital Resources for more information.
On March 26 and 27, 2012, we, through one of our wholly owned subsidiaries, completed the sale of two of our International Flag PCTC Vessels, Asian King and Asian Emperor. The Company received approximately $73.9 million in proceeds, paid down approximately $36.1 million in debt and generated a gain of approximately $3.8 million. With the sale of these two vessels, our revenues and gross voyage profits are expected to decrease on an annual basis by approximately $17 million and $11.6 million, respectively, based on operating results immediately preceding the sale. However, we believe with the additional liquidity, the available room to leverage additional debt and the ability to draw from a $200 million prospectus shelf registration, we have positioned ourself well for potential growth investment opportunities that create more value for our shareholders.
Also during the first quarter of 2012, we redelivered three U.S. Flag RO/RO vessels we operated for the Military Sealift Command. The contracts, which were previously extended numerous times, expired in February 2012. On average, the contracts represented approximately 10% of our total revenues in 2011. During the quarter, we took delivery of one Handymax Bulk Carrier Newbuilding, which was named the Bulk Americas. The vessel entered into a revenue sharing agreement and is trading worldwide under short-term charter agreements.
Consolidated Financial Performance – First Quarter 2012 vs. First Quarter 2011
Overall net income decreased from $24.1 million in the first quarter of 2011 to $7.9 million in the first quarter of 2012. Included in the first quarter 2012 results was a $3.8 million gain from the above-discussed sale of two International Flag PCTC Vessels. Included in the first quarter 2011 results was an $18.7 million gain generated from our acquisition of 100% of Dry Bulk, a company in which we previously held a 50% investment. Excluding these aforementioned transactions, our net income for the first quarter of 2012 decreased by $1.3 million year over year. Other items of note include:
Segment Performance – First Quarter 2012 vs. First Quarter 2011
Time Charter Contracts – U.S. Flag
Time Charter Contracts – International Flag
Contract of Affreightment (“COA”)
Financial Discipline & Strong Balance Sheet
Overview of Fleet
As of March 31, 2012, our fleet consisted of 37 vessels (including one Newbuilding to be chartered in), of which 16 we owned 100% directly through our wholly owned subsidiaries. Of the 16 vessels, 14 are under individual fixed time charters varying from short, medium and long term in length and all 14 operated within our Time Charter Contracts - International Flag and Time Charter Contracts – U.S. Flag segments. Two vessels operate on a voyage to voyage basis providing service to a number of regular shippers in our Rail-Ferry segment. In February 2012, the operating contracts for three vessels that we previously operated for the MSC expired. For additional information on our vessels, please see the fleet list below.
Our Time Charter segments, which are primarily serviced by our PCTC vessels generally operating under medium to long-term contracts, provide us with a fixed income stream and consistent cash flow, with revenues only impacted by the amount of our off-hire time. The average firm contract charterhire period for our International Flag PCTC fleet and U.S. Flag PCTC fleet is approximately one year and 2.3 years as of the end of the quarter, respectively. In addition to this contractually fixed income, we also earn from time to time supplemental income as a result of chartering our U.S. Flag PCTC vessels back for the carriage of supplemental cargo when available.
Because of recent downturns in our revenues and the overall condition of the global economy, we test our long-lived assets quarterly to determine whether or not our projected cash flows exceed the vessel’s carrying amount. Based on this assessment, we believe that no impairment existed at March 31, 2012.