UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

Form 10-K

(Mark One)

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

For the fiscal year ended December 31, 2013

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 No. 001-10852

 

International Shipholding Corporation

(Exact name of registrant as specified in its charter)

 

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ☐ No ☑

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐  No ☑

 

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 ☑    No ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ☑

 

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 ☑   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. (Check one):

Large accelerated filer   ☐  Accelerated filer ☑      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 ☑

 

The aggregate market value of the voting common equity held by non-affiliates of the registrant, computed by reference to the closing price of the registrant’s common stock on June 28, 2013, was approximately $133,084,823.

Date    Amount

June 28, 2013         $133,084,823

 

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

Common stock, $1 par value. . . . . . . . 7,252,820 shares outstanding as of March 5, 2014

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive proxy statement to be furnished in connection with registrant’s 2014 annual meeting of stockholders are incorporated by reference into Part III of this Form 10-K.

 

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INTERNATIONAL SHIPHOLDING CORPORATION

 

TABLE OF CONTENTS

 

 

 

 

 

 

In this report, the terms “we,” “us,” “our” and the “Company” refer to International Shipholding Corporation and its subsidiaries.  In addition, the term “COA” means a Contract of Affreightment, the term “MSP” means Maritime Security Program, the term “MSC” means the U.S. Navy’s Military Sealift Command, 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 “RO/RO” means a Roll-On/Roll-Off vessel, and the term “SEC” means the U.S. Securities and Exchange Commission.

 

 

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PART I

ITEM 1.  BUSINESS

 

General

 

Through our subsidiaries, 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 time charters or contracts of affreightment.  As of December 31, 2013 we owned or operated 50 ocean-going vessels, which consisted of:

We own 100% of 21 of these 50 vessels.  Of the remaining vessels, 15 vessels are 23.7% to 25% owned by us, 8 vessels are leased, bareboat chartered or time chartered by us, and 6 vessels are operated by us under operating contracts.

On November 30, 2012, we acquired U.S. United Ocean Services, LLC (“UOS”), which substantially expanded our commercial U.S. coastwise transportation operations. 

Our fleet is operated by our principal subsidiaries, Central Gulf Lines, Inc. (“Central Gulf”), Waterman Steamship Corporation (“Waterman”), Enterprise Ship Company, Inc., UOS, CG Railway, Inc. (“CG Railway”), LCI Shipholdings, Inc. (“LCI”), Sulphur Carriers, Inc. (“SCI”) and East Gulf Shipholding, Inc. (“East Gulf”).    Our other subsidiaries, including LMS Shipmanagement, Inc. (“LMS”) and N. W. Johnsen & Co., Inc., provide ship management, ship charter brokerage, agency and other specialized services.

Additional information on our vessels appears on the Fleet Statistics Schedule located in our combined 2013 Annual Report and 10-K report furnished to our stockholders, as well as Item 7 of this annual report.  

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Operating Segments

 

As discussed further in Item 7 of this annual report, following our acquisition of UOS in late 2012, we replaced our prior operating segments with the following new segments. 

 

New Segments

 

Jones Act:  The Merchant Marine Act of 1920, or the MMA, regulates maritime commerce in U.S. waters between U.S. ports. Section 27 of the MMA, better known as the Jones Act, requires that all goods transported by water between U.S. ports be carried aboard U.S. Flag vessels, which are constructed in the U.S., owned by U.S. citizens and crewed by U.S. citizens.

 

With our acquisition of UOS, we believe that we now have the largest Jones Act dry bulk fleet capacity. Vessels deployed under our Jones Act segment serve both Eastern U.S. coasts and the Gulf of Mexico and operate as the primary marine transporter of coal for The Tampa Electric Company (“TECO”) and the primary marine transporter of unfinished phosphate rock for The Mosaic Company (“Mosaic”). 

 

Under our Jones Act segment, we deploy (i) two Bulk Carriers, three Integrated Tug-Barge units, each consisting of one tug and one barge, and one Harbor Tug acquired in the UOS acquisition, (ii) one Belt Self-Unloading Coal Carrier to transport coal, under a time charter, and (iii) one vessel that transports Molten Sulphur under a contract of affreightment.  Currently, the two Bulk Carriers primarily transport coal and phosphate for TECO and Mosaic, respectively but are capable of transporting grain and other PL-480 preference cargoes overseas.  The three Integrated Tug-Barge units and the Harbor Tug operate primarily under contracts of affreightment with TECO and Mosaic.  We also own one additional Integrated Tug-Barge unit acquired from UOS which is currently inactive but could be opportunistically deployed based upon market demand.  Coal, petroleum coke, phosphate rock, sulphur and fertilizer are the principal cargoes carried by our Jones Act vessels. 

 

We own all of the aforementioned vessels with the exception of the Molten Sulphur carrier, which we sold under a sale/leaseback arrangement in November 2012, with a buy back option in 2017. For more information on our Sale/Leasebacks see Note M - Leases.

 

Pure Car Truck Carriers:  Under our Pure Car Truck Carriers segment, we deploy seven PCTCs,  five of which are U.S. Flag vessels and two of which are International Flag vessels.  These vessels transport all types of vehicles, from fully assembled passenger cars to construction machinery and equipment in large numbers on multiple internal decks.

 

All of our PCTCs operate under time charters.  Under these contracts, we fully equip the vessel and are responsible for normal operating expenses, repairs, crew wages, and insurance, while the charterer is responsible for voyage expenses, such as fuel, port and stevedoring expenses.  In addition to contractually fixed time charter hire income, we also earn from time to time supplemental voyage income as a result of chartering back our PCTCs for the carriage of supplemental cargo. 

 

We have operated PCTCs since 1986 when we entered into contracts with major Japanese companies.  We own both of our International Flag PCTCs,  each of which is employed under a long-term time charter contract. We own two of our five U.S. Flag PCTCs and lease the other three U.S Flag PCTCs with buy back options in 2015 and 2017.    

 

Dry Bulk Carriers: Our modern, diversified bulk carrier fleet ranges in size, design and classification from an 8,028 metric deadweight ton Mini-Bulk Carrier to a 170,578 metric deadweight ton Capesize Bulk Carrier.  Our Dry Bulk vessels carry a wide variety of cargoes, including iron ore, coal, steel, forest and agricultural products. 

 

The vessels which we deploy in this segment include (i) one Supramax Bulk Carrier, which we own and operate under a revenue-sharing agreement with European partners, (ii) four Handysize Bulk Carriers, three of which we own and one of which we time charter, operate under another revenue-sharing agreement, and (iii) a Capesize Bulk Carrier which is currently under a time charter contract through late 2014. Under our revenue-sharing agreements, we and the other participating vessel owners receive monthly distributions of net cash flow from time charter and voyage contracts based on a participating vessel’s performance capability compared with other participating vessels operating under the revenue-sharing agreement.    

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Between 2009 and November 2013, we acquired a 25% shareholding interest in 15 Mini-Bulk carriers included within our Dry Bulk Carriers segment.  On July 1, 2013, a stock issuance to an unaffiliated co-investor caused our interest in six of the vessels to be reduced to 23.7%.  These Mini-Bulkers are deployed in the spot market or on short to medium term time charters and voyage contracts.  We believe these arrangements expand our global commercial and operational network. 

 

Rail-Ferry:  Our Rail-Ferry segment uses our two Roll-on/Roll-off Special Purpose double deck vessels, which carry rail cars between the U.S. Gulf Coast and Mexico in regularly scheduled waterborne service.  The service provides departures every four days from Mexico and the U.S. Gulf, respectively, for a three-day transit between ports. Since 2007, we have conducted these operations out of our terminal in Mobile, Alabama and a terminal in Coatzacoalcos, Mexico, which we upgraded in 2007 to accommodate the vessels’ newly-installed second decks that doubled their carrying capacity.  We own a 49% interest in Terminales Transgolfo, S.A. de C.V., which owns and operates the rail terminal in Coatzacoalcos, Mexico. 

 

We believe this unique service provides a cost effective alternative route for shippers between Mexico and the Eastern United States providing more efficient direct service and the option of not crossing the Texas-Mexican border. Trade for this segment is primarily driven by commodities such as forest products, sugar, metals, minerals, plastics and chemicals.

 

In August 2012, we acquired two related businesses that own and operate a certified rail-car repair facility near the port of Mobile, Alabama.  For further information on this acquisition, see Note B - Acquisitions. We plan to continue to use these businesses to service and repair third party customers as well as rail-cars that are transported via our Rail-Ferry vessels. We believe this acquisition allows us to integrate two established services and retain revenue and profits related to the cleaning and repairs of rail-cars that were previously contracted to a third party.

 

Specialty Contracts:  Our Specialty Contracts segment is comprised of vessels owned or chartered not otherwise described above, operating under unique contracts.  This segment includes (i) two Container vessels which are on time charter to another shipping company, (ii) two Multi-Purpose vessels, two Tankers, and three Container vessels which have serviced our contract since 1995 to transport fuel and supplies for an Indonesian mining company, (iii) one Multi-Purpose Heavy Lift Dry Cargo vessel which is time chartered to another shipping company, and (iv) one Multi-Purpose Ice Strengthened vessel deployed in the spot market.  

 

Other: This segment consists of operations that include ship and cargo charter brokerage and agency services provided to unaffiliated companies and our operating companies, and other specialized services provided to our operating subsidiaries.  These services facilitate our operations by allowing us to avoid reliance on third parties to provide these essential services.  Also reported within this segment are corporate-related items and income and expense items not allocated to our other reportable segments.

 

Business Strategy

 

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. We seek to deploy our fleet primarily under medium to long-term time charter contracts or contracts of affreightment. Our current fleet enables us to serve niche markets with diverse cargo needs. Our business strategy focuses on identifying growth opportunities as market needs change, utilizing our extensive experience to meet those needs, maintaining a diverse portfolio of medium to long-term contracts, and maintaining strong relations with our long-standing customer base by providing quality transportation services.  From time to time, we deploy our vessels under short-term arrangements, particularly when we believe that more attractive opportunities could arise in the future.

 

 

History

 

Our Company was originally founded as Central Gulf Steamship Corporation in 1947 by the late Niels F. Johnsen and his sons, Niels W. Johnsen and Erik F. Johnsen, both of whom served as past CEOs and former directors prior to their retirements.  Central Gulf was privately held until 1971 when it merged with Trans Union Corporation (“Trans Union”).  In 1978, International Shipholding Corporation was formed to act as a holding company for Central Gulf, LCI, and certain other affiliated companies in connection with the 1979 spin‑off by Trans Union of our common stock to Trans Union’s stockholders.  In 1986 we acquired the assets of Forest Lines, in 1989 we acquired Waterman and in late 2012 we acquired UOS.  Since our spin‑off from Trans Union, we have continued to act solely as a holding company, and our only significant assets are the capital stock of our subsidiaries.

 

 

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Competitive Strengths

 

Diversification.  Our strategy for many years has been to seek and obtain contracts that provide predictable cash flows and contribute to a diversification of operations.  These diverse operations vary from chartering vessels to the United States government, to chartering vessels to a wide range of commercial customers for the transport of a broad range of products, including automobiles, coal, minerals, paper, steel, wood products, mining supplies, molten sulfur, and standard size railroad cars. 

 

Predictable Operating Cash Flows. Our operations have historically generated cash flows sufficient to cover our debt service requirements and operating expenses, including the recurring drydocking requirements of our fleet.  For the years ended December 31, 2013, 2012, and 2011 approximately 72%, 60%, and 63%, respectively, of our gross revenues were from fixed contracts. The length and structure of our contracts, the creditworthiness of our customers, and our diversified customer and cargo bases all contribute to our ability to consistently meet such requirements in an industry that is cyclical in nature.  Our medium to long-term time charters provide for a daily charter hire rate that is payable whether or not the charterer utilizes the vessel.  These time charters require the charterer to pay certain voyage operating costs, including fuel, port, and stevedoring expenses, and in some cases include cost escalation features covering certain of our expenses.  In addition, our contracts of affreightment guarantee a minimum amount of cargo for transportation.  Our cash flow from operations was approximately $23.6 million, $9.8 million, and $46.3 million for the years ended December 31, 2013, 2012 and 2011, respectively, after deducting cash used for drydocking payments of approximately $18.2 million, $11.3 million and $6.8 million for each of these years, respectively. 

 

Longstanding Customer Relationships. Historically, we have maintained strong relationships with a variety of creditworthy customers for many years.  Substantially all of our current cargo contracts and time charter agreements are renewals or extensions of previous agreements.  In recent years, we have been successful in winning extensions or renewals of a substantial majority of all of our contracts.  We believe that our longstanding customer relationships are in part due to our excellent reputation for providing quality specialized maritime service in terms of on-time performance, minimal cargo damage claims and reasonable time charter and freight rates.

 

Experienced Management Team.  Our management team has substantial experience in the shipping industry.  Our Chief Executive Officer, President, and Chief Financial Officer have over 114 years of collective experience with our Company.  We believe that the experience of our management team is important to maintaining long-term relationships with our customers.

 

Marketing

 

We maintain marketing staffs in New York, Mobile, Tampa, Singapore, and Shanghai and a network of marketing agents in major cities around the world who market our time charter and contracts of affreightment services.  We market our Rail-Ferry Service under the brand name CG Railway.  We market our remaining transportation services under the brand names Central Gulf, Waterman, East Gulf, and UOS (doing business as Coastal Carriers).  We advertise our services in trade publications in the United States and abroad. 

Insurance

 

We maintain protection and indemnity (“P&I”) insurance to cover liabilities arising out of our ownership and operation of vessels with the Standard Club Europe Ltd. (“The Club”), which is a mutual ship owners’ insurance organization commonly referred to as a P&I club.  The Club is a participant in and subject to the rules of its respective international group of P&I associations.  The premium terms and conditions of the P&I coverage provided to us are governed by the rules of The Club.

 

We maintain hull and machinery insurance policies on each of our vessels in amounts related to the value of each vessel.  This insurance coverage, which includes increased value, is maintained with a syndicate of hull underwriters from the U.S., British, Dutch, Japanese and French insurance markets.  We maintain war risk insurance on each of our vessels in an amount equal to each vessel’s total insured hull value.  War risk insurance is placed through U.K. insurance markets and covers physical damage to the vessels and P&I risks for which coverage would be excluded by reason of war exclusions under either the hull policies or the rules of the P&I club.  Our war risk insurance also covers liability to third parties caused by war or terrorism, but does not cover damages to our land-based assets caused by war or terrorism.

 

The P&I insurance also cover our vessels against liabilities arising from the discharge of oil or hazardous substances in U.S., international, and foreign waters, subject to various exclusions. 

 

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We also maintain loss of hire insurance with U.S., British, Dutch and French insurance markets to cover our loss of revenue in the event that a vessel is unable to operate for a certain period of time due to loss or damage arising from the perils covered by the hull and machinery policy and war risk policy. 

 

Insurance coverage for shoreside property, shipboard consumables and inventory, spare parts, workers’ compensation, office contents, and general liability risks is maintained with underwriters in U.S. and British markets.

 

Insurance premiums for the coverage described above vary from year to year depending upon our loss record and market conditions.  In order to reduce premiums, we maintain certain deductible and co‑insurance provisions that we believe are prudent and generally consistent with those maintained by other shipping companies.  Certain exclusions under our insurance policies could limit our ability to receive payment for our losses (See Note H – Self-Retention Insurance).

 

For a further discussion of terrorism and insurance risks, see the various disclosures under “Risk Factors” in Item 1A of this annual report, generally, and the subheading “Marine transportation is inherently risky, and insurance may be insufficient to cover losses that may occur to our assets or result from our operations,” in particular.

 

Tax Matters

 

The American Jobs Creation Act of 2004  (“Jobs Creation Act”), under which we made an election effective January 1, 2005, changed the United States tax treatment of operations for both our U.S. and International Flag vessels.  As a result of the election made in accordance with the provisions of the Jobs Creation Act, our U.S. subsidiaries owning and/or operating qualifying vessels are taxed under a “tonnage tax” regime as opposed to the traditional corporate income tax regime.  Income for U.S. income tax purposes with respect to qualifying shipping activities of U.S. Flag vessels excludes (1) income from qualifying shipping activities in U.S. foreign trade, (2) income from bank deposits and temporary investments that are reasonably necessary to meet the working capital requirements of qualifying shipping activities and (3) income from cash or other intangible assets accumulated pursuant to a plan to purchase qualifying shipping assets.  Qualifying U.S. Flag vessels are assessed a tax based on “daily notional shipping income”, derived from the net tonnage of the qualifying vessel(s).  The daily notional shipping income is 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.  This daily notional shipping income is taxed at the highest corporate income tax rate (currently 35%) with no allowances for offsetting deductions or credits.  All of our other U.S. operations are taxed under the regular U.S. corporate income tax regime and at the statutory tax rate.

 

The Jobs Creation Act also provided for the deferred recognition of taxable income from shipping operations of controlled foreign corporations until that income is repatriated.  We plan to indefinitely re-invest our foreign earnings, and accordingly we have not provided deferred taxes against those earnings.  The principal reasons for this position are as follows: maintenance of foreign flag fleet, future expansion of foreign flag fleet and U.S. Flag fleet’s operating cash flow needs are adequately met by its operations. 

 

The American Taxpayer Relief Act of 2012, enacted on January 2, 2013, extended the active financing exception from Subpart F income.  The extension was retroactive from January 1, 2012 through December 31, 2013.  For 2012, we reflected our active financing income as a reduction to our current year U.S. net operating loss.  During the first quarter of 2013, we increased our U.S. net operating loss carryforward $2.0 million to reflect the retroactive application of the new law.

 

For additional tax information, see “Critical Accounting Policies” in Item 7 of this annual report, and Note J – Income Taxes included in the financial pages of this annual report.

 

Regulation

 

Our operations between the United States and foreign countries are subject to the Shipping Act of 1984 (the “Shipping Act”), which is administered by the Federal Maritime Commission, and certain provisions of the Federal Water Pollution Control Act, the Oil Pollution Act of 1990, the Act to Prevent Pollution from Ships, and the Comprehensive Environmental Response Compensation and Liability Act, all of which are administered by the U.S. Coast Guard and other federal agencies, and certain other international, federal, state, and local laws and regulations, including international conventions and laws and regulations of the flag nations of our vessels.  On October 16, 1998, the Ocean Shipping Reform Act of 1998 was enacted, which amended the Shipping Act to promote the growth and development of United States exports through certain reforms in the regulation of ocean transportation.  This legislation, in part, repealed the requirement that a common carrier or conference file tariffs with the Federal Maritime Commission, replacing it with a requirement that tariffs be open to public inspection in an electronically available, automated tariff system.  Furthermore, the legislation required that only the essential terms of service contracts be published and made available to the public. 

 

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On October 8, 1996, Congress adopted the Maritime Security Act of 1996, which created the MSP and authorized the payment of $2.1 million per year, per ship for 47 U.S. Flag ships through the fiscal year ending September 30, 2005.  This program eliminated the trade route restrictions imposed by the previous federal program and provides flexibility to operate freely in the competitive market.  On December 20, 1996, Waterman entered into four MSP operating agreements with the United States Maritime Administration (“MarAd”), and Central Gulf entered into three MSP operating agreements with MarAd.  We also participate in the Voluntary Intermodal Sealift Agreement (“VISA”) program.  Under this VISA program, and as a condition of participating in the MSP, we have committed to providing vessel capacity for the movement of military cargoes in times of war or national emergency.  By law, the MSP is subject to annual appropriations from Congress.  In the event that sufficient appropriations are not made for the MSP by Congress in any fiscal year, the Maritime Security Act of 1996 permits MSP participants, such as Waterman and Central Gulf, to re‑flag their vessels under foreign registry expeditiously.  In 2003, Congress authorized an extension of the MSP through 2015, increased the number of ships eligible to participate in the program from 47 to 60, and increased MSP payments to companies in the program, all made effective on October 1, 2005.  Authorized annual payments per fiscal year for each vessel for the current MSP program were $2.9 million for years 2009 to 2011, and $3.1 million for years 2012 to 2015, subject to annual appropriation by the Congress, which is not assured.  On October 15, 2004, Waterman and Central Gulf each filed applications to extend their MSP operating agreements for another ten years through September 30, 2015, all seven of which were effectively grandfathered in the MSP reauthorization.  Simultaneously, we offered an additional ship for participation in the MSP.  On January 12, 2005, MarAd awarded Central Gulf four MSP operating agreements and Waterman four MSP operating agreements, effective October 1, 2005, for a net increase of one MSP operating agreement.  On January 7, 2011, the President signed into law legislation that extended the MSP under its current terms and conditions through September 30, 2025.  The terms of the MSP contracts of Waterman and Central Gulf currently run through September 30, 2015.  On January 2, 2013, the President signed into law the National Defense Authorization Act for Fiscal Year 2013 which included a comprehensive reauthorization of the Maritime Security Program. Shortly thereafter, Waterman and Central Gulf executed amendments that extended all of their pre-existing MSP contracts through September 30, 2025. Authorized annual payments per fiscal year for each vessel under the new law, will be $3.1 million for years 2015 to 2018, $3.5 million for years 2019 to 2021, and $3.7 million for years 2022 to 2025.    

 

Under the Merchant Marine Act, U.S. Flag vessels are subject to requisition or charter to the U.S. Government’s MSC whenever the President declares that national security requires such action.  The owners of any such vessels must receive just compensation as provided in the Merchant Marine Act, but there is no assurance that lost profits, if any, will be fully recovered.  In addition, during any extension period under each MSC charter or contract, the MSC has the right to terminate the charter or contract on 30 days notice. 

 

Certain laws governing our operations, as well as our U.S. coastwise transportation contracts, require us to be at least 75% owned by U.S. citizens.  We monitor our stock ownership to verify our continuing compliance with these requirements.  Our certificate of incorporation allows our Board of Directors to restrict the acquisition of our capital stock by non‑U.S. citizens.  Under our certificate of incorporation, our Board of Directors may, in the event of a transfer of our capital stock that would result in non-U.S. citizens owning more than 23% (the “permitted amount”) of our total voting power, declare such transfer to be void and ineffective.  In addition, our Board of Directors may, in its sole discretion, deny voting rights and withhold dividends with respect to any shares of our capital stock owned by non-U.S. citizens in excess of the permitted amount.  Furthermore, our Board of Directors is entitled under our certificate of incorporation to redeem shares owned by non-U.S. citizens in excess of the permitted amount in order to reduce the ownership of our capital stock by non-U.S. citizens to the permitted amount.

 

We are required by various governmental and quasi‑governmental agencies to obtain permits, licenses, and certificates with respect to our vessels.  The kinds of permits, licenses, and certificates required depend upon such factors as the country of registry, the commodity transported, the waters in which the vessel operates, the nationality of the vessel’s crew, the age of the vessel, and our status as a vessel owner or charterer.  We believe that we have, or can readily obtain, all permits, licenses, and certificates necessary to permit our vessels to operate. 

 

The International Maritime Organization (“IMO”) amended the International Convention for the Safety of Life at Sea (“SOLAS”), to which the United States is a party, to require nations that are parties to SOLAS to implement the International Safety Management (“ISM”) Code.  The ISM Code requires that responsible companies, including owners or operators of vessels engaged on foreign voyages, develop and implement a safety management system to address safety and environmental protection in the management and operation of vessels.  Companies and vessels to which the ISM Code applies are required to receive certification and documentation of compliance.  Vessels operating without such certification and documentation in the U.S. and ports of other nations that are parties to SOLAS may be denied entry into ports, detained in ports or fined.  We implemented a comprehensive safety management system and obtained timely IMO certification and documentation for our companies and all of our vessels.  In addition, our ship management subsidiary, LMS Shipmanagement, Inc., is certified under the ISO 9001-2008 Quality Standard. We believe that we are in compliance in all material respects with applicable ISM regulations.

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In 2003, SOLAS was again amended to require parties to the convention to implement the International Ship and Port Facility Security (“ISPS”) Code.  The ISPS Code requires owners and operators of vessels engaged on foreign voyages to conduct vulnerability assessments and to develop and implement company and vessel security plans, as well as other measures, to protect vessels, ports and waterways from terrorist and criminal acts.  In the U.S., these provisions were implemented through the Maritime Transportation Security Act of 2002 (“MTSA”).  These provisions became effective on July 1, 2004.  As with the ISM Code, companies and vessels to which the ISPS Code applies must be certificated and documented.  Vessels operating without such certification and documentation in the U.S. and ports of other nations that are parties to SOLAS may be denied entry into ports, detained in ports or fined.  Vessels subject to fines in the U.S. are liable in rem, which means vessels may be subject to arrest by the U.S. government.  For U.S. Flag vessels, company and vessel security plans must be reviewed and approved by the U.S. Coast Guard.  We have conducted the required security assessments and submitted plans for review and approval as required, and we believe that we are in compliance in all material respects with applicable ISPS Code and MTSA security requirements.

 

The Coast Guard and Maritime Transportation Act of 2004 amended the Oil Pollution Act of 1990 (“OPA”) to require owners or operators of all non-tanker vessels of 400 gross tons or greater to develop and submit plans for responding, to the maximum extent practicable, to worst case discharges and substantial threats of discharges of oil from these vessels.  This statute extends to all types of vessels of 400 gross tons or greater. The vessel response planning requirements of the OPA had previously only applied to tanker vessels.  We have submitted response plans timely for our vessels, and have received Coast Guard approval for all of our vessels.

 

Also, under the OPA, vessel owners, operators and bareboat charterers are jointly, severally and strictly liable for all response costs and other damages arising from oil spills from their vessels in waters subject to U.S. jurisdiction, with certain limited exceptions.  Other damages include, but are not limited to, natural resource damages, real and personal property damages, and other economic damages such as net loss of taxes, royalties, rents, profits or earning capacity, and loss of subsistence use of natural resources.  For non-tanker vessels, the OPA limits the liability of responsible parties to the greater of $1,000 per gross ton or $854,400.  The limits of liability do not apply if it is shown that the discharge was proximately caused by the gross negligence or willful misconduct of, or a violation of a federal safety, construction or operating regulation by, the responsible party, an agent of the responsible party or a person acting pursuant to a contractual relationship with the responsible party.  Further, the limits do not apply if the responsible party fails or refuses to report the incident, or to cooperate and assist in oil spill removal activities.  Additionally, the OPA specifically permits individual states to impose their own liability regimes with regard to oil discharges occurring within state waters, and some states have implemented such regimes.

 

The Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) also applies to owners and operators of vessels, and contains a similar liability regime for cleanup and removal of hazardous substances and natural resource damages.  Liability under CERCLA is limited to the greater of $300 per gross ton or $5 million per vessel.

 

Under the OPA, vessels are required to establish and maintain with the U.S. Coast Guard evidence of financial responsibility sufficient to meet the highest limit of their potential liability under the act.  Under U.S. Coast Guard regulations, evidence of financial responsibility may be demonstrated by insurance, surety bond, self-insurance or guaranty.  An owner or operator of more than one vessel must demonstrate financial responsibility for the entire fleet in an amount equal to the financial responsibility of the vessel having greatest maximum liability under the OPA and CERCLA.  We insure each of our vessels with pollution liability insurance in the amounts required by law.  A catastrophic spill could exceed the insurance coverage available, in which event our financial condition and results of operations could be adversely affected.

 

Many countries have ratified and follow the liability plan adopted by the IMO as set out in the International Convention on Civil Liability for Oil Pollution Damage of 1969 (the “1969 Convention”) and the Convention for the Establishment of an International Fund for Oil Pollution of 1971.  Under these conventions, the registered owner of a vessel is strictly liable for pollution damage caused in the territorial seas of a state party by the discharge of persistent oil, subject to certain defenses.  Liability is limited to approximately $183 per gross registered ton (a unit of measurement of the total enclosed spaces in a vessel) or approximately $19.3 million, whichever is less.  If a country is a party to the 1992 Protocol to the International Convention on Civil Liability for Oil Pollution Damage (the “1992 Protocol”), the maximum liability limit is $82.7 million.  The limit of liability is tied to a unit of account that varies according to a basket of currencies.  The right to limit liability is forfeited under the 1969 Convention when the discharge is caused by the owner's actual fault and under the 1992 Protocol when the discharge is caused by the owner's intentional or reckless misconduct.  Vessels operating in waters of states that are parties to these conventions must provide evidence of insurance covering the liability of the owner.  In jurisdictions that are not parties to these conventions, various legislative schemes or common law govern.  We believe that our pollution insurance policy covers the liability under the IMO regimes.

 

Competition

 

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The shipping industry is intensely competitive and is influenced by economic and political events largely outside the control of shipping companies.  Varying economic factors can cause wide swings in freight rates and sudden shifts in traffic patterns or shipping needs.  Vessel redeployments and new vessel construction can lead to an overcapacity of vessels offering the same service or operating in the same market.  Changes in the political or regulatory environment can also create competition that is not necessarily based on normal considerations of profit and loss.  Several of our competitors have greater resources than we do.  Our strategy is to reduce the effects of cyclical market conditions by operating specialized vessels in niche market segments and deploying a substantial number of our vessels under medium to long-term time contracts with creditworthy customers and on trade routes where we have established market share.  We also seek to compete effectively in the traditional areas of price, reliability and timeliness of service. 

Our Jones Act and PCTC segments primarily include medium and long-term contracts with long standing customers.  With the acquisition of UOS, we believe we have strengthened our position in the domestic coastal trade by assembling the largest Jones Act dry bulk carrier fleet by capacity.  While our U.S. Flag PCTCs operate worldwide in markets where International Flag vessels with foreign crews predominate, we believe that our U.S. Flag PCTCs can compete effectively in obtaining renewals of existing contracts if we are able to continue to participate in the MSP, continue to receive cooperation from our seamen’s unions in controlling costs and carry U.S. Flag supplemental cargoes.

 

Our Rail-Ferry segment faces competition principally from companies who transport cargo over land rather than water including railroads and trucking companies that cross land borders.

 

In our Dry Bulk Carriers segment we are part of three revenue-sharing agreements with two separate European partners. The vessels in the revenue sharing agreements are employed under short term and spot market time charter and voyage charters. In addition, to augmenting our worldwide offices, we believe these partnerships expand our global commercial and operational network.

 

For additional information, see “Risk Factors” in Item 1A of this annual report, generally, and the subheading “We operate in a highly competitive industry,” in particular.

 

Contracts

 

We derive a substantial portion of our revenue under medium to long-term contracts, including time charters and contracts of affreightment.

 

Time charters are marine transportation contracts under which we retain operating control over the vessel, but our charterer obtains the right for a specified period of time to direct the movements and utilization of the vessel in exchange for payment of a specified daily rate.  Under these contracts, we typically fully equip the vessel and are responsible for normal operating expenses, repairs, crew wages, and insurance, while the charterer is responsible for voyage expenses, such as fuel, port and stevedoring expenses.

 

Contracts of affreightment are marine transportation contracts by which we undertake to provide space on our vessels for the carriage of specified goods or a specified quantity of goods on a single voyage or series of voyages over a given period of time, generally at our cost, between named ports or within certain geographical areas in return for the payment of an agreed amount per unit of cargo carried.

 

Employees

 

As of December 31, 2013, we employed approximately 472 shipboard personnel and 153 shoreside personnel.  We consider relations with our employees to be excellent.

 

All of Central Gulf, Waterman, UOS and our other U.S. shipping companies’ shipboard personnel are covered by collective bargaining agreements.  Some of these agreements relate to particular vessels and have terms corresponding with the terms of their respective vessel’s charter. We have experienced no strikes or other significant labor problems during the last ten years.

 

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Available Information

 

Our internet address is www.intship.com.  We make available free of charge through our website our annual report on Form 10-K, proxy statement for our annual meeting of stockholders, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.  The information found on our website is not part of this or any other report.

 

Unless otherwise indicated, information contained in this annual report and other documents filed by us under the federal securities laws concerning our views and expectations regarding the marine transportation industry are based on estimates made by us using data from industry sources, and on assumptions made by us based on our management’s knowledge and experience in the markets in which we operate and the marine transportation industry.    We believe these estimates and assumptions are accurate on the date made.  However, this information may prove to be inaccurate because it cannot always be verified with certainty.  You should be aware that we have not independently verified data from industry or other third-party sources and cannot guarantee its accuracy or completeness.  Our estimates and assumptions involve risks and uncertainties and are subject to change based on various factors, including those discussed immediately below in Item 1A of this annual report.

 

Investors may also read and copy any materials filed with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

 

 

ITEM 1A.  RISK FACTORS

 

The following discussion of “risk factors” identifies the most significant risks or uncertainties that could (i) materially and adversely affect our business, financial condition, results of operations, liquidity or prospects or (ii) cause our actual results to differ materially from our anticipated results or other expectations.  The following information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition; and Results of Operation” and our Consolidated Financial Statements and related Notes included elsewhere in this report.  Please note that the following discussion is not intended to comprehensively list all risks or uncertainties faced by us.  Our operations or actual results could also be similarly impacted by additional risks and uncertainties that are not currently known to us, which we currently deem to be immaterial or that are not specific to us, such as general economic conditions.

Our industry is cyclical and has experienced a recent decline in the demand for certain of the services we offer, which could negatively impact our revenues and earnings.

Historically, the shipping industry has been cyclical.  The nature, timing and degree of changes to industry conditions are generally unpredictable and are impacted by factors beyond our control.  Various factors influence the demand for our transportation services, including changes in (i) worldwide demand for the commercial products we carry, (ii) the volume of cargoes we carry for or the amount of services we provide to the U.S. government, and (iii) the supply and demand of vessels. The worldwide supply of vessels generally increases with deliveries of new, refurbished or converted vessels and decreases with the scrapping of older vessels. If the available supply of vessels exceeds the number of vessels being scrapped, vessel capacity and competition in the markets where we operate may increase.  In the absence of a corresponding increase in the demand for these vessels, the charter hire and cargo rates for our vessels could fluctuate significantly and result in, among other things, lower operating revenues, earnings and asset values.  In addition, the utilization rates of our vessels could decrease, particularly those that operate in the spot market or periodically carry supplemental cargoes.    

We may not be able to renew our time charters and contracts when they expire at favorable rates or at all. 

During the year ended December 31, 2013, we received approximately 72% of our revenue from time charters and other fixed contracts.    However, there can be no assurance that any of these charters or contracts, which are generally for periods of one year or more, will be renewed. 

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Moreover, you should be aware that shipping rates are based on several factors that are unpredictable and beyond our control.  Accordingly, even if we are able to renew our charters or other contracts when they lapse, we may not be able to earn rates comparable to those received under the expired charters or contracts, which would adversely affect our revenues and earnings.  In the event we cannot deploy a vessel at economically viable rates, we may opt to lay up the vessel until such time that spot or charter rates become attractive again.  During the period of lay-up, the vessel will continue to incur expenditures such as insurance and maintenance costs.

From time to time, we enter into charter agreements with various agencies or departments of the U.S. government that allow the customer to terminate the agreement at any time without cause, subject to the payment of certain early termination fees.

If our exposure to the spot market increases, our revenues could suffer and our expenses could increase.

Currently we deploy 48% of our vessels in the spot market, where rates are typically volatile and subject to short-term market fluctuations.  The spot market for marine transportation services is highly competitive, and charter rates for most dry cargo vessels in the spot market are currently low in relation to historical rates over the past couple of decades.  If we deploy a greater percentage of our vessels in the spot market, we may experience a lower overall utilization of our fleet through waiting time or ballast voyages, leading to a decline in our operating revenue and gross profit.  Moreover, to the extent our vessels are employed in the spot market voyage contracts, both our revenue from vessels and our operating costs will likely be more significantly impacted by increases in fuel costs.

We operate in a highly competitive industry. 

The shipping industry is intensely competitive and can be influenced by economic and political events that are largely outside the control of shipping companies.  Many of our current and potential competitors:

 

Changes in the political or regulatory environment can also create competition that is not necessarily based on normal considerations of profit and loss.  Consequently, there can be no assurance that we will be able to deploy our vessels on economically attractive terms, maintain attractive freight rates, pass cost increases through to our customers or otherwise successfully compete against our competitors. Any failure to remain competitive in the shipping industry could have an adverse effect on our results of operations and financial condition.

Competition could adversely impact us in several ways, including (i) the loss of customers and market share, (ii) the possibility of customers reducing their usage of our vessels or services, (iii) our need to expend substantial time or money on vessel acquisitions or capital improvement projects, (iv) our need to lower prices or increase marketing expenses to remain competitive and (v) our inability to diversify by successfully offering new marine transportation services.

A significant amount of our revenues were derived from four customers, and our revenues could decrease significantly if these customers were lost or their revenue decreased.

For the years ended December 31, 2013, 2012, and 2011, we derived 27%, 41%, and 34% of our revenues, respectively, from contracts with various agencies or departments of the U.S. government.  Likewise, we derived 12.6%, 15.3%, and 15% of our revenues for the same periods, respectively, from contracts with a Japanese company.  Additionally, we derived 21% of our 2013 revenue from two major U.S. corporations.  We are unable to assure you that these customers will continue to contract with us on similar terms, or will not decide to contract with our competitors or perform their own shipping functions themselves.  Our inability or failure to continue to retain these customer relationships, to continue to employ our vessels at rates comparable to those historically earned from these customers, or to charter these vessels otherwise in a reasonable period of time or at all could adversely affect our operations and performance. Specifically, Congress has recently reduced levels of the U.S. government’s discretionary spending on a wide range of programs, including “sequestration” and other reductions of military spending.  Future additional cuts in discretionary spending could adversely affect our revenue derived from the U.S. government (See Note O – Significant Operations).

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Economic conditions, a prolonged economic downturn, economic uncertainty, an increase in trade protectionism or a change in trade patterns in the markets where we operate may have a material adverse effect on our business, financial condition and results of operations.

The demand for our transportation services has been and will continue to be affected by domestic and global economic conditions.  Worldwide economic growth has been sluggish since 2008, which has contributed to lower charter rates for marine transportation services since then.  Many experts believe that a confluence of factors in the United States, Europe, Asia and developing economies could result in a prolonged period of economic downturn, slow growth or economic uncertainty.  If these conditions persist, our customers and potential customers may experience deterioration in their business, which may result in a lower demand for our transportation services or impair the ability of our customers or other third parties to pay amounts owed to us.  Moreover, our business, financial condition, results of operations, ability to pay dividends and our future prospects will likely be materially and adversely affected by a prolonged economic downturn in any of these countries or regions.

The demand for our transportation services is also exposed to the risk that increases in trade protectionism or changes in trade patterns will adversely affect our business. If global economic conditions remain slack and uncertain, governments may turn to trade barriers to protect their domestic industries against foreign imports, thereby depressing the demand for shipping. Similarly, if changes in production costs or other factors cause manufacturing companies to locate a greater share of their production facilities nearer to their consumers, then demand for our shipping services could be further depressed. Either of these could have a material adverse effect on our financial condition, results of operations, ability to pay dividends and future prospects.

If Congress does not make sufficient appropriations under the National Defense Authorization Act for any fiscal year, we may not continue to receive certain payments.

If Congress does not make sufficient appropriations under the National Defense Authorization Act for any fiscal year, we may not continue to receive annual payments with respect to certain of our U.S. Flag vessels that we have committed to the federal government under the U.S. Maritime Security Program.  Under this program, which is currently in effect through 2025, each participating vessel received annual payments of $3.1 million in 2012.  However, our 2013 payment was reduced to $2.8 million due to sequestration cuts but our 2014 payment is scheduled to equal the full annual payment of $3.1 million per vessel. As of December 31, 2013,  eight of our vessels operated under contracts issued under this program.  Since payments under this program are subject to annual appropriations by Congress and are not guaranteed, we cannot assure that we will continue to receive these annual payments, in full or in part.

We cannot assure that we will be able to comply with all of our loan covenants.

All of our credit agreements impose restrictions or limitations on our business and require us to comply with various loan covenants.  The restrictions or limitations these covenants place on us include limitations on our ability to freely: (i) consolidate or merge; (ii) incur new or certain types of debt; (iii) engage in transactions with affiliates; (iv) create liens or permit them to exist on our assets; and (v) directly invest in assets other than vessels without being subject to various financial covenant ratios.  These financial covenants include covenants that stipulate minimum levels of net worth, working capital and earnings, liquidity and maximum levels of debt and debt leverage.  Our ability to satisfy these and other covenants depends on our results of operations and ability to respond to changes in business and economic conditions.  Several of these matters are beyond our control or may be significantly restricted, and, as a result, we may be prevented from engaging in transactions that otherwise might be considered beneficial to us and our stockholders.

While we currently believe that we have available options to prevent or mitigate any covenant breaches, we cannot assure that we will be able to implement them timely or at all, or that they will enable us to meet all of our current covenants.  In the unanticipated event that our cash flow and capital resources are not sufficient to fund our debt service obligations, we could be forced to reduce or delay capital expenditures, sell assets, obtain additional capital, enter into financings of our unencumbered vessels or restructure debt. For further detailed information on our compliance with our financial covenants as of December 31, 2013, see below in this report “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Debt Covenants.”

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Because our debt obligations are represented by separate agreements with different lenders, in some cases the breach of any of these covenants or other default under one agreement may create an event of default under other agreements, resulting in the acceleration of our obligation to pay principal, interest and potential penalties under such other agreements (even though we may otherwise be in compliance with all of our obligations under those agreements). Thus, an event of default under a single agreement, including one that is technical in nature or otherwise not material, could result in the acceleration of significant indebtedness under multiple lending agreements. If amounts outstanding under such agreements were to be accelerated, there can be no assurance that our assets would generate sufficient cash flow to repay the accelerated indebtedness, or that our lenders would not proceed against the collateral securing that indebtedness.

Our business would be adversely affected if we failed to comply with the Jones Act, or if this law was modified or repealed.

A portion of our incumbent shipping operations and substantially all of the shipping operations we acquired from UOS are conducted in the U.S. coastwise trade. Under U.S. federal laws known as the “Jones Act,” this trade is restricted to vessels built in the United States, owned and manned by U.S. citizens and registered under U.S. Flag.  Our failure to comply with these restrictions could subject us to severe penalties, including the permanent loss of the right to engage in U.S. coastwise trade.  If the Jones Act were repealed, substantially amended or waived, it could potentially result in additional competition from vessels built in generally lower-cost foreign shipyards and owned and manned by foreign nationals, which could have an adverse effect on our business, results of operations and financial condition. We cannot assure you that the Jones Act will not be repealed or modified in a way that would be detrimental to our business.

Terrorist attacks, piracy and international hostilities can affect the transportation industry, which could adversely affect our business.

Terrorist attacks or piracy attacks against merchant ships, the outbreak of war, or the existence of international hostilities could adversely affect us in several ways, including:

 

Over the past several years, piracy attacks on merchant ships have remained high, particularly in the Gulf of Aden and off the East Coast of Africa.  Our industry is a sector of the economy that we believe is particularly likely to be adversely impacted by the effects of political instability, terrorist attacks, war, international hostilities or piracy.  In addition, we conduct operations in Indonesia, Southern Mexico, West Africa, the Arabian Gulf, and other areas that are particularly likely to be exposed to the risk of these potential adverse effects.

The market value of vessels fluctuates significantly, which could adversely affect our liquidity, result in breaches of our financing agreements or otherwise adversely affect our financial condition.

The market values of vessels fluctuate over time.  The fluctuation in market value of vessels over time is based upon various factors, including:

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Declining values of our vessels could adversely affect us in several respects, including reducing our liquidity by limiting our ability to raise cash by refinancing vessels.  Declining vessel values could also result in a breach of loan covenants or trigger events of default under relevant financing agreements that require us to maintain certain loan-to-value ratios.  In such instances, if we are unable or unwilling to pledge additional collateral to offset the decline in vessel values, our lenders could accelerate our debt and foreclose on our vessels pledged as collateral for the loans.

In addition, accounting pronouncements require that we periodically review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.  Measurement of the impairment charge is based on the fair value of the asset as provided by third parties as compared to its carrying value.  In this respect, management regularly reviews the carrying amount of our vessels in connection with the estimated recoverable amount for each vessel.  Such reviews may from time to time result in asset write-downs that could adversely affect our financial condition and results of operations. 

We have a  significant amount of intangible assets on our balance sheet.  If our intangible assets became impaired, we may suffer a reduction in our earnings and stockholders’ equity.

Under generally accepted accounting principles, intangible assets must be tested for impairment on an annual basis or more frequently whenever events or circumstances indicate that their carrying value may not be recoverable.  If our intangible assets are determined to be impaired in the future, we may be required to record significant, non-cash charges to earnings during the period in which the impairment is determined, which would reduce our net income and subsequently reduce our stockholders’ equity.

As a holding company with no operations of our own, we rely on payments from our operating companies to meet our obligations.

As a holding company without any material assets or operations, substantially all of our income and operating cash flow is dependent upon the earnings of our subsidiaries and the distribution of those earnings to us or upon loans or other payments of funds by those subsidiaries to us.  As a result, we rely upon our subsidiaries to generate the funds necessary to meet our obligations, including the payment of amounts owed under our long-term debt, or to declare and make dividend payments to the holders of our securities.  The ability of our subsidiaries to generate sufficient cash flow from operations to allow us and them to make scheduled payments on our respective obligations will depend on their future financial performance, which will be affected by a range of economic, competitive and business factors, many of which are outside of our control. Additionally, our subsidiaries are separate and distinct legal entities and have no obligation to pay any amounts owed by us or, subject to limited exceptions for tax-sharing purposes, to make any funds available to us to repay our debt or other obligations, whether by dividends, loans or other payments.  The amount of dividends that our subsidiaries may pay is restricted by the law of the jurisdiction in which they were formed.  In addition, our rights to receive assets of any subsidiary upon its liquidation, reorganization or default scenarios that continue will also be effectively subordinated to the claims of creditors of that subsidiary, including trade creditors. 

Our business and financial alternatives could be constrained by our current obligations and any future borrowings.

We are highly leveraged.  In addition to the liabilities recorded on our consolidated balance sheets as of December 31, 2013, we owe substantial amounts under our long-term operating leases.  For more information, see “Management’s Discussion and Analysis of Financial Conditions and Results of Operations – Liquidity and Capital Resources – Contractual Obligations and Other Commitments” appearing elsewhere in this report.

Our leverage could have material adverse consequences for us, including:

 

The effect of each of these factors could be intensified if we increase our borrowings or lease commitments.

We expect to periodically require financing to meet our debt obligations as they come due.  Due to the unstable economy and the current credit market environment, we may not be able to refinance maturing debt at terms that are as favorable as those from which we previously benefited, at terms that are acceptable to us or at all.  In connection with executing our business strategies, from time to time we evaluate the possibility of acquiring additional vessels or businesses, and we may elect to finance such acquisitions by incurring additional indebtedness.  Moreover, if we were to suffer uninsured material losses or liabilities, we could be required to borrow to fund liabilities that we could not pay with our operating cash flow. Our ability to arrange additional financing will depend on, among other factors, our financial position and performance, as well as prevailing market conditions and other factors beyond our control.  We cannot assure you that we will be able to obtain additional financing on terms acceptable to us or at all.  If we are able to obtain additional financing, our credit may be adversely affected and our ability to satisfy our obligations under our current indebtedness could be adversely affected.

We cannot assure you that our access to the public debt and equity markets will remain free of disruptions.

In the future, we may consider selling debt and/or equity securities to raise additional funds, including refinancing a portion of our maturing debt.  Our ability to arrange any such financing will depend on, among other factors, our financial position and performance, as well as prevailing market conditions and other factors beyond our control.  Prevailing market conditions could be adversely affected by disruptions in domestic or overseas sovereign debt markets, contractions or limited growth in the economy or other similar adverse economic developments in the U.S. or abroad.  Instability in the global financial markets has from time to time resulted in periodic volatility in the capital markets.  This volatility could limit our access to the credit markets, leading to higher borrowing costs or, in some cases, the inability to obtain financing on terms that are as favorable as those from which we previously benefitted, on terms that are acceptable to us, or at all.  Any such failure to obtain additional financing could jeopardize our ability to repay, refinance or reduce our debt obligations.

We are subject to certain risks with respect to our counterparties on contracts, and failure of such counterparties to meet their obligations could cause us to suffer losses or otherwise adversely affect our business.

The ability of our counterparties to perform their obligations under their contracts with us will depend upon a number of factors that are beyond our control and may include, among other things, general economic conditions and the overall financial condition of these counterparties, especially in light of the current global financial weakness.  If our counterparties fail to honor their obligations under their agreements with us, we could sustain significant losses or a reduction in our vessel usage, both of which could have an adverse effect on our financial condition, results of operations and cash flows.

Older vessels have higher operating costs and are potentially less desirable to charterers. 

The average age of the vessels in our fleet that we own or lease, excluding our vessels engaged in U.S. coastwise trade, is approximately 12 years (nine years if our partially-owned Mini-Bulk Carriers built in 2010 and 2011 are included in the average).  The average age of our vessels actively engaged in U.S. coastwise trade is approximately 33 years (which reflects the longer vessel lives typically associated with vessels deployed in this trade).  See below in this report “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Executive Summary– Overview of Fleet.”  In general, capital expenditures and other costs necessary for maintaining a vessel in good operating condition increase and become more difficult to estimate with accuracy as the age of the vessel increases. Moreover, customers generally prefer modern vessels over older vessels, which place the older vessels at a competitive disadvantage, especially in weak markets. In addition, changes in governmental regulations, compliance with classification society standards and customer requirements or competition may require us to make additional expenditures for

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alterations or the addition of new equipment.  In order to make such alterations or add such equipment, we may be required to take our vessels out of service, thereby reducing our revenues. Expenditures such as these may also require us to incur additional debt or raise additional capital. There can be no assurance that market or general economic conditions will enable us to replace our existing vessels with new vessels, justify the expenditures necessary to maintain our older vessels in good operating condition or enable us to operate our older vessels profitably during the remainder of their estimated useful lives.

Our Rail-Ferry Segment has a history of losses, and we can give no assurances as to its future gross voyage profitability.

As a result of a reduction in future anticipated cash flows generated by our rail-ferry service that we began operating in 2001, we recognized a non-cash impairment charge of $25.4 million in the third quarter of 2010 to reduce the carrying value of these assets to their estimated fair value. With the reduced capital cost and an increase in cargoes, this segment was profitable for the last three years.  We cannot assure that this service will be operated profitably in the future.

Our business and operations are highly regulated, which can adversely affect our operations. 

Our business and the shipping industry in general are subject to increasingly stringent laws and regulations governing our vessels, including workers’ health and safety, and the staffing, construction, operation, insurance and transfer of our vessels.  Compliance with or the enforcement of these laws and regulations could have an adverse effect on our business, results of operations or financial condition. For example, in the event of war or national emergency, our U.S. Flag vessels are subject to requisition by the U.S. government. Although we would be entitled to compensation in the event of a requisition of our vessels, the amount and timing of such payments would be uncertain and there would be no guarantee that such amounts would be paid, or if paid, would fully satisfy lost profits associated with the requisition.

In addition, we are required by various governmental and quasi-governmental agencies to obtain and maintain certain permits, licenses and certificates with respect to our operations. In certain instances, the failure to obtain or maintain these authorizations could have an adverse effect on our business. We may also be required to periodically modify operating procedures or alter or introduce new equipment for our existing vessels to appropriately respond to changes in governmental regulation.

Our business and the operation of our vessels are subject to extensive international, national and local environmental, health and safety laws in the jurisdictions in which our vessels operate, as well as in the country or countries of their registration.  Compliance with these laws and regulations can be costly.  Failure to comply with these laws and regulations may result in penalties, sanctions or, in certain cases, the ultimate suspension or termination of our operations.  International, national and local laws imposing liability for oil spills are also becoming increasingly stringent.  Some impose joint, several, and in some cases, unlimited liability on owners, operators and charterers regardless of fault.  We could be held liable as an owner, operator or charterer under these laws.  In addition, under certain circumstances, we could also be held accountable under these laws for acts or omissions of our affiliates, our charterers or other parties in connection with the management or operation of our vessels.  Liability for a catastrophic spill could exceed the insurance coverage we have available, and result in our having to liquidate assets to pay claims.  In addition, we may be required to contribute to funds established by regulatory authorities for the remediation of oil pollution damage or to provide financial assurances for oil spill liability to regulatory authorities.

Regulation of our customers’ businesses could further impact our operations.

The profitability and viability of certain of our customers’ businesses are dependent upon laws and regulations governing their operations.  Laws that restrict or preclude their operations could reduce demand for certain vessels.  Specifically, currently-pending U.S. governmental proposals to enhance the regulation of carbon emissions could, over time, reduce the demand for our coal-carrying vessels.

Increased inspection procedures and tighter import and export controls could increase costs and disrupt our business.

International shipping is subject to various security and customs inspections and related procedures in countries of origin and destination.  Inspection procedures can result in the seizure of contents of our vessels, delays in the loading, offloading or delivery of cargoes, and the levying of customs, duties, fines and other penalties against us.

It is possible that changes to inspection procedures could impose additional financial and legal obligations on us.  Furthermore, changes to inspection procedures could also impose additional costs and obligations on our customers and may, in certain cases, render the shipment of certain types of cargo impractical.  Any such changes or developments may have a material adverse effect on our business, financial condition, results of operations and cash flows.

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Our failure to pass inspection by classification societies and regulators could result in one or more of our vessels being unemployable unless and until they pass inspection, resulting in a loss of revenues from such vessels for that period.

The hull and machinery of every commercial vessel must be classed by an international classification society authorized by its country of registry, as well as being subject to survey and inspection by shipping regulatory bodies. The international classification society certifies that a vessel is safe and seaworthy in accordance with the applicable rules and regulations of the country of registry of the vessel and the United Nations Safety of Life at Sea Convention.

Due to the age of several of our vessels, the repairs and remediation required in connection with classification society surveys and inspections may be extensive and require significant expenditures. Additionally, until such time as certain repairs and remediation required in connection with such surveys and inspections are completed (or if any vessel fails such a survey or inspection), the vessel may be unable to trade between ports and, therefore, would be unemployable. Any such loss of the use of a vessel could have an adverse impact on our financial condition and results of operations, and any such impact may be material.

We face periodic drydocking costs for our vessels, which can be substantial. 

Vessels must be drydocked periodically for regulatory compliance and for maintenance and repair.  Our drydocking requirements are subject to associated risks, including delay and cost overruns, lack of necessary equipment, unforeseen engineering problems, employee strikes or other work stoppages, unanticipated cost increases, inability to obtain necessary certifications and approvals and shortages of materials or skilled labor. A significant delay in drydockings could have an adverse effect on our contract commitments. The cost of repairs and renewals required at each drydock are difficult to predict with certainty and can be substantial.  Our insurance does not cover these costs.

Marine transportation is inherently risky, and insurance may be insufficient to cover losses that may occur to our assets or result from our operations.    

The operations of our vessels are subject to various inherent risks, including:

 

The occurrence of any of these events may result in, among other things, damage to or loss of our vessels and our vessels' cargo or other property, delays in delivery of cargo, damage to other vessels and the environment, loss of revenues, termination of vessel charters or other contracts, fines, penalties or other restrictions on conducting business, damage to our reputation and customer relationships, and injury to personnel.  Such occurrences may also result in a significant increase in our operating costs or liability to third parties. 

Although we maintain insurance coverage against most of these risks at levels our management considers to be customary in the industry, risks may arise for which we are not adequately insured.  Various claims, such as loss of hire, may not be covered by our policies.  Additionally, any particular claim may be subject to deductibles or other coverage restrictions, the aggregate impact of which could be material.  We cannot assure you that we will be able to renew our existing insurance coverage at commercially reasonable rates or that insurance will remain available at reasonable rates for each of our foreseeable risks that we seek to insure, especially those relating to terrorism or piracy.  Similarly, we cannot assure you that our insurance coverage will be adequate to cover future claims as they arise, or that available insurance will cover all foreseeable risks, particularly those involving catastrophic environmental liability.  Any uninsured or underinsured loss could have an adverse effect on our financial performance or condition.

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Additionally, certain of our insurance coverage is maintained through mutual “protection and indemnity” associations, which are mutual insurance clubs whose members must contribute payments to cover losses sustained by other club members.  As a mutual club, a substantial portion of its continued viability to effectively manage liability risks is reliant upon the premiums paid by its members. As a member of such associations, we may incur the obligation to satisfy payments in addition to previously established or budgeted premiums to the extent member claims would surpass the reserves of the association. We may be subject to calls or premiums in amounts based not only on our own claim records, but also the claim records of all other members (or the members of affiliated clubs) over which we have no control. Our payment of these calls could result in significant additional expenses.  In addition, we cannot assure you that other association members called upon to pay our claims will be able to do so, particularly since the exposure to such calls would be concentrated among a limited number of shipping companies facing the same types of risks as ours.

We are subject to risks associated with operating internationally. 

Our non-domestic operations are subject to varying degrees of regulation in each of the foreign jurisdictions in which we provide services. Local laws and regulations, and their interpretation and enforcement, differ significantly among those jurisdictions, and can change significantly over time. Future regulatory, judicial and legislative changes or interpretations may have a material adverse effect on our ability to deliver services in foreign jurisdictions.

In addition to these international regulatory risks, some of the other risks inherent in conducting business internationally include:

 

Many of these risks are beyond our control, and we cannot predict the nature or the likelihood of the occurrence or corresponding effect of any such events, each of which could have an adverse effect on our financial condition and results of operations.

Moreover, in order to effectively compete in certain foreign jurisdictions, it is frequently necessary or required to establish joint ventures, strategic alliances or vessel revenue sharing arrangements with other shipping companies or local operators, partners or agents.  Reliance on local operators, partners or agents could expose us to the risk of being unable to control the scope or quality of our overseas services or products, or being held liable under the FCPA or other anti-corruption laws for actions taken by our strategic or local partners or agents even though these partners or agents may not themselves be subject to the FCPA or other applicable anti-

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corruption laws.  Any determination that we have violated the FCPA or other anti-corruption laws could have a material adverse effect on our business, results of operations, reputation or prospects.

Our vessels could be seized by maritime claimants, which could result in a significant loss of earnings and cash flow for the related off-hire period.

Under general maritime law in many jurisdictions, crew members, vessel mortgagees, suppliers of goods and services to a vessel, shippers of cargo and other parties may be entitled to a maritime lien against a vessel for unsatisfied debts or claims for damages.  In many jurisdictions, a maritime lienholder may enforce its lien by either arresting or attaching a vessel through foreclosure proceedings.  The arrest or attachment of one or more of our vessels could result in a significant loss of earnings and cash flow during the detainment period.

In some jurisdictions, under the extended “sister ship” theory of liability, a claimant may arrest not only the vessel with respect to which the claimant’s maritime lien has arisen, but also any associated vessel under common ownership or control.  Consequently, a claim may be asserted against us or any of our subsidiaries or our vessels for the liability of one or more of the other vessels we own.  While we have insurance coverage for these types of claims, we cannot guarantee it will cover all of our potential exposure.

If we are unable to attract and retain skilled crew members, our reputation and ability to operate safely and efficiently may be harmed.

Our continued success depends in significant part on the continued services of the officers and seamen who operate our vessels.  The market for qualified, experienced officers and seamen is extremely competitive and has grown more so in recent periods for a variety of reasons.  We cannot assure you that we will continue to be successful in our efforts to recruit and retain properly skilled personnel at commercially reasonable salaries.  Any failure to do so could adversely affect our ability to operate cost-effectively.

A substantial number of our shipboard employees are unionized. In the event of a strike or other work stoppage, our business and operations may be adversely affected. 

As of December 31, 2013, all of our U.S. shipboard personnel were unionized employees covered by collective bargaining agreements. 

Given the prevalence of maritime trade unions and their corresponding influence over its members, the shipping industry is vulnerable to work stoppages and other potentially disruptive actions by employees. We may also have difficulty successfully negotiating renewals to our collective bargaining agreements with these unions or face resistance to any future efforts to place restraints on wages, reduce labor costs or moderate work practices. Any of these events may result in strikes, work disruptions and have other potentially adverse consequences. While we have experienced no strikes, work stoppages or other significant labor problems during the last ten years, we cannot assure that such events will not occur in the future or be material in nature.  In the event we experience one or more strikes, work stoppages or other labor problems, our business and, in turn, our results of operations may be adversely affected.

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Increases in costs for pension and healthcare benefits for our active and retired employees may reduce our profitability and liquidity and increase our funding commitments.

Our costs of maintaining our pension, healthcare and other plans, and the future funding requirements for these plans, are affected by several factors, most of which are outside our control, including:

 

Domestically, we participate in and make periodic contributions to various multi-employer pension plans under union and industry-wide agreements that generally provide defined benefits to employees covered by collective bargaining agreements.  Funding requirements for benefit obligations of multi-employer pension plans are subject to certain regulatory requirements and we may be required to make cash contributions which may be material to one or more of these plans to satisfy certain underfunded benefit obligations. In addition, if a multi-employer plan fails to satisfy the minimum funding requirements, the Internal Revenue Service may impose certain penalties and taxes.

 

Absent an applicable exemption, a contributor to a multi-employer plan is liable, upon termination or withdrawal from the plan, for its proportionate share of the plan’s underfunded vested liability.  Based on the limited information available from plan administrators, which we cannot independently validate, we believe that our portion of the contingent liability in the case of a full withdrawal or termination may be material to our financial position and results of operations. Moreover, in the event that any other contributing employer withdraws from any plan that is underfunded, and such employer (or any member in its controlled group) cannot satisfy its obligations under the plan at the time of withdrawal, then we, along with the other remaining contributing employers, would be liable for our proportionate share of such plan’s unfunded vested benefits.

Delays or cost overruns in building new vessels (including the failure to deliver new vessels) could harm us.

Building new vessels is subject to risks of delay (including the failure to timely deliver new vessels to customers) or cost overruns caused by one or more of the following:

 

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Significant delays, cost overruns and failure to timely deliver new vessels we have committed to service our customers could adversely affect us in several ways, including delaying the implementation of our business strategies or materially increasing our cost of servicing our commitments to our customers.

Some of our employees are covered by laws limiting our protection from exposure to certain claims.

Some of our employees are covered by several maritime laws, statutes and regulations which circumvent and nullify certain liability limits established by state workers’ compensation laws, including provisions of the Jones Act, the Death on the High Seas Act, and the Seamen’s Wage Act. We are not generally protected by the limits imposed by state workers’ compensation statutes for these particular employees, and as a result, our exposure for claims asserted by these employees may be greater than would otherwise be the case.

We are subject to the control of our principal stockholders. 

As of March 1, 2014, two of our current directors, Niels M. Johnsen and Erik L. Johnsen, and their respective family members and affiliated entities, beneficially owned an aggregate of 20.8% of our common stock.  Niels M. Johnsen and Erik L. Johnsen are also executive officers of the Company, and their respective fathers were formerly executive officers and directors.  As a result, the Johnsen family may have the ability to exert significant influence over our affairs and management, including the election of directors, delaying or preventing a change of control transaction, and effecting other corporate actions requiring stockholder approval.

Because some of our expenses are incurred in foreign currencies, we are exposed to exchange rate risks.

 

While we incur most of our expenses in U.S. dollars, we have in the past incurred operating expenses in other currencies, most notably the Mexican Peso and Indonesian Rupiah. Declines in the value of the U.S. dollar relative to the currencies in these jurisdictions, or other currencies in which we may in the future incur expenses, would increase the U.S. dollar cost of paying these expenses and thus would adversely affect our results of operations.

We selectively enter into hedging derivative contracts, which can result in higher than market interest rates and charges against our income.

In the ordinary course of our business, we are exposed to foreign currency, interest rate and commodity price risks.  From time to time, we utilize derivative financial instruments including interest rate swap agreements and forward exchange contracts, and in the past we have also utilized 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.  Nevertheless, even though our hedging strategies are designed to manage our exposure to interest rate fluctuations, entering into swaps and forward exchange contracts is inherently risky.  The derivative strategies that we employ in the future may not be successful or effective, and we could, as a result, incur substantial additional interest costs or charges against our income.  For further information, see “Item 7a – Quantitative and Qualitative Disclosure About Market Risk”.

Loss of our senior management or other key personnel could have an adverse effect on our business, financial condition and results of operations.

Our future success will depend, in significant part, upon the continued services of our senior management team and other key personnel, especially those of our Chief Executive Officer, President, and Chief Financial Officer, who have substantial experience in the shipping industry and over 114 years of collective experience with us. We believe that the experience of our senior management team is a vital component to maintain long-term relationships with our customers.  Similarly, UOS’ Senior management team will be integral to maintaining long-term relationships with UOS’ Key customers.  The loss of the services of any of these individuals could adversely affect our future operating results, and we may have to incur significant costs to find sufficient replacements for them, if available.

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We are susceptible to severe weather and natural disasters.

Given the nature and scope of our operations, we are constantly vulnerable to disruption as a result of adverse weather conditions, including hurricanes, typhoons, earthquakes and other natural disasters. These types of events may, among other things:

 

Any of these factors, especially to the extent not fully covered by insurance, could have an adverse effect on our business, financial condition and results of operation.

We are exposed to various tax risks.

As a taxpayer, we are subject to frequent and regular audits and examinations by the Internal Revenue Service, as well as state and local tax authorities.  Because the ultimate outcomes of these matters are uncertain, we can give no assurance as to whether an adverse result from one or more of them will have a material effect on our financial results.

We believe that we should not be subject to tax under the laws of any country other than the United States or Singapore in which we conduct activities or in which our customers are located.  However, our belief is based on our understanding of the tax laws of those countries, and our tax position is subject to review and possible challenge by taxing authorities and to possible changes in law or interpretation.  We cannot determine in advance the extent to which certain jurisdictions may require us to pay tax or to make payments in lieu of tax.  In addition, payments due to us from our customers could potentially be subject to tax claims.

Our business is subject to potential security breaches and attacks.

We rely on information technology networks and systems, including the Internet, to process, transmit and store electronic information, to manage or support a variety of our business operations, transactions and processes, and to maintain various records, which may include personally identifiable information of customers, employees or other third parties.  We make significant efforts to maintain the security and integrity of these types of information and systems (and maintain contingency plans in the event of security breaches or system disruptions).  Nonetheless, we cannot assure you that our security efforts and measures will prevent unauthorized access to our systems, loss or destruction of data, account takeovers, or other forms of cyber-attacks or similar events, whether caused by mechanical failures, human error, fraud, malice, sabotage or otherwise.  The frequency, scope and sophistication of cyber-attacks continue to grow, which increases the possibility that our security measures will be unable to prevent our systems’ improper functioning or the improper disclosure of personally identifiable information.  Any failure to maintain the proper functioning, security and availability of our information systems could interrupt our operations, damage our reputation, or subject us to claims, any of which could materially and adversely affect us.

We are exposed to risks arising out of recent legislation affecting U.S. public companies, including risks relating to evaluations of controls required by Section 404 of the Sarbanes-Oxley Act.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act, and related regulations implemented thereunder, have increased legal and financial compliance costs and made some activities more time consuming.  Any future failure to successfully or timely complete annual assessments of our internal controls required by Section 404 of the Sarbanes-Oxley Act could subject us to sanctions or investigation by regulatory authorities, which could in turn adversely affect our financial results or investors’ confidence in us.  If we fail to maintain effective controls and procedures, we may be unable to provide financial information in a timely and reliable manner, which could in certain instances limit our ability to borrow or raise capital.

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If conditions or assumptions differ from the judgments, assumptions or estimates used in our critical accounting policies, the accuracy of our financial statements and related disclosures could be affected.

The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles requires us to make judgments, assumptions and estimates that affect the amounts reported in our Consolidated Financial Statements and accompanying Notes.  For a discussion of our Critical Accounting Policies, see below in this report ”Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies.” If future events or assumptions differ significantly from the judgments, assumptions and estimates in our critical accounting policies, these events or assumptions could have a material impact on our Consolidated Financial Statements and related disclosures.

Provisions in our organizational documents would make it difficult for a third party to acquire us, even if such a transaction is beneficial to our stockholders.

Our organizational documents:

In addition, as noted under “– Risk Factors Related To Our Business – We are subject to the control of our principal stockholders,” the Johnsen family beneficially owns a substantial portion of our common stock.  These provisions and circumstances could deter a third party from tendering for the purchase of some or all of our shares. These provisions and circumstances may have the effect of impeding, delaying or preventing changes of control of the ownership and management of ISH, even if such transactions would have significant benefits to our stockholders.

We cannot assure you that quarterly dividends on, or any other payments in respect of, our outstanding capital stock will be made timely or at all.

For the reasons noted below, we cannot assure you that we will be able to pay quarterly dividends on our common stock at the current rate, timely or at all. Likewise, we cannot assure you that we will be able to pay quarterly dividends on, or make other payments in respect of, our Series A and Series B Preferred Shares timely or at all.  Quarterly dividends on our common stock and the Series A and Series B Preferred Shares will be paid from funds legally available for such purpose when, as and if declared by our Board of Directors.  You should be aware that certain factors may influence our decision, or adversely affect our ability, to pay dividends on our common stock or our Series A and Series B Preferred Shares, including, among other things:

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Based on its evaluation of these and other relevant factors, our Board of Directors may, in its sole discretion, decide not to declare a dividend on our common stock or our Series A or B Preferred Shares for any quarterly period for any reason, regardless of whether we have funds legally available for such purposes. Holders of our common stock should be aware that terms of our Series A and B Preferred Shares further limit our ability, under certain circumstances, to make dividend or other payments in respect of our common stock.

Our acquisition of UOS in late 2012 subjected us to various risks; any additional future acquisitions of vessels or businesses by us would subject us to additional business, operating and industry risks, the impact of which cannot presently be evaluated, and could adversely impact our capital structure.

Since acquiring UOS in late 2012, we have been devoted significant management attention and resources to integrating the business practices and operations of UOS with our operations.  We have incurred and expect to continue to incur certain non-administration expenses in connection with integrating many of UOS’s operations, policies and procedures with ours. These expenses include wage and benefit increases necessary to integrate UOS’s non-union vessel personnel into our unions. While we have assumed that a certain amount of integration expenses will continue to be incurred, there are a number of factors beyond our control that could affect the total amount or the timing of these expenses.

From time to time in the future we may pursue other acquisition opportunities in an effort to implement our business strategies.  Acquisitions may be of individual or groups of vessels or of businesses.  To the extent we acquire a business that is financially unstable or is otherwise subject to a high level of risk, we may be affected by the currently unascertainable risks of that business.  Accordingly, there is no current basis for you to evaluate the possible merits or risks of the particular business or assets that we may acquire.  In addition, the financing of any future acquisition completed by us could adversely impact our capital structure as any such financing would likely include the issuance of additional securities or the borrowing of additional funds.  Except as required by law or the rules of any securities exchange on which our securities might be listed at the time we seek to consummate an acquisition, we do not expect to ask our stockholders to vote on any proposed acquisition.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None

 

ITEM 2.  PROPERTIES

 

Vessels

 

Of the 50 ocean‑going vessels operating in our fleet at March 1, 2014, twenty-one were 100% owned by us, fifteen were 23.7% to 25% owned by us, eight were leased, bareboat chartered or time chartered by us, and six were operated by us under operating contracts.    

 

Under governmental regulations, insurance policies, and certain of our financing agreements and charters, we are required to maintain our vessels in accordance with standards of seaworthiness, safety, and health prescribed by governmental regulations or promulgated by certain vessel classification societies. We have implemented the quality and safety management program mandated by the IMO and have obtained certification of all vessels currently required to have a Safety Management Certificate.  We seek to maintain our vessels in accordance with governmental regulations and the highest classification standards of the International Association of Classification Societies Ltd. 

 

Certain of the vessels owned by our subsidiaries are mortgaged to various lenders to secure such subsidiaries’ long-term debt (See Note F – Long-Term Debt).

 

Other Properties

 

We lease our current corporate headquarters in Mobile, Alabama, our administrative, sales and chartering office in New York, our administrative office and warehouse in Tampa, and our agency and chartering office in Shanghai.  In 2013, the aggregate annual rental payments under these operating leases totaled approximately $1.5 million.

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ITEM 3. LEGAL PROCEEDINGS

 

We have been named as a defendant in numerous lawsuits claiming damages related to occupational diseases, primarily related to asbestos and hearing loss.  We believe that most of these claims against us are without merit, and that insurance and the indemnification of a previous owner of one of our subsidiaries mitigate our exposure (For additional information, See Note L – Commitments and Contingencies).

 

In the normal course of our operations, we become involved in various litigation matters including, among other things, claims by third parties for alleged property damages, personal injuries and other matters.  While the outcome of such claims cannot be predicted with certainty, we believe that our insurance coverage and reserves with respect to such claims are adequate and that such claims should not have a material adverse effect on our business or financial condition (For additional information, See Note L – Commitments and Contingencies).

 

On June 23, 2009, a complaint was filed in U.S. District Court of Oregon by ten plaintiffs against approximately 40 defendants, including Waterman, which is one of our wholly owned subsidiaries. The suit was filed for contribution and recovery of both past and future cost associated with the investigation and remediation of the Portland Harbor Superfund Site. Based on our review to date, we believe our exposure, if any, would be limited to an insurance deductible which we believe would be immaterial.

 

We do not believe, based on current knowledge, that any of the foregoing legal proceedings or claims are likely to have a material adverse effect on our financial position, results of operations or cash flows, although we cannot provide any assurances to this effect.

 

ITEM  4.  Mine Safety Disclosures

 

Not Applicable

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PART II

 

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

Our common stock is listed on the New York Stock Exchange and is traded under the symbol ISH.  The following table sets forth the high and low sales prices, along with the quarterly dividends, for each of the quarters indicated.

 

 

 

 

 

 As described in greater detail in Item 1A of this report, the declaration and payment of dividends is at the discretion of our Board of Directors, and will depend upon our financial results, cash requirements, future prospects and other factors deemed relevant by the Board of Directors.

 

As of March 5, 2014, there were approximately 343 stockholders of record of our common stock.  As of March 5, 2014, the closing stock price of our common stock was $32.00.

 

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Performance Graph

 

The following graph compares the cumulative total shareholder return of our Common Stock to that of the (i) S&P 500 Index, (ii) an Industry Peer Group (which consists of Diana Shipping Inc., Kirby Corporation, and Baltic Trading Ltd.), and (iii) our predecessor Industry Peer Group (which consisted of Diana Shipping Inc., Kirby Corporation, and Eagle Bulk Shipping Inc. and which is referred to below as the “Old Peer Group”) for the Company's last five fiscal years.  We believe the new peer group provides a better comparison by substituting a new company whose structure and size is more similar to ours.

 

 

*Assumes $100 invested at the close of trading on the last trading day in 2008 in ISH common stock, the S&P 500, and the Industry Peer Group.  Also assumes reinvestment of dividends.

 

 

 

 

In accordance with New York Stock Exchange rules, Niels M. Johnsen, our Chief Executive Officer, has certified to the NYSE that, as of May 16, 2013, he was not aware of any violation by us of the NYSE’s corporate governance listing standards.    This certification is to be submitted to the NYSE each year no later than 30 days after our annual stockholders meeting.

 

Our Chief Executive Officer and Chief Financial Officer certifications required for 2013 by Section 302 of the Sarbanes-Oxley Act of 2002 are included as exhibits to this Form 10-K. 

 

Equity Compensation Plans

 

The information in Item 12 of this annual report regarding equity compensation plans is incorporated herein by reference.

 

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Stock Repurchases

 

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 our 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.

 

We did not repurchase any of our shares of common stock during 2013.  As of December 31, 2013, we had 285,377 shares available to be purchased under our 2008 repurchase plan.

 

 

 

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ITEM 6.  SELECTED FINANCIAL DATA 

 

INTERNATIONAL SHIPHOLDING CORPORATION

SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA

 

 

The following summary of selected consolidated financial data is not covered by the auditors' report appearing elsewhere herein. However, in the opinion of management, the summary of selected consolidated financial data includes all adjustments necessary for a fair representation of each of the years presented.

 

This summary should be read in conjunction with the consolidated financial statements and the notes thereto appearing elsewhere in this annual report.

 

 

 

 

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ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Notice Regarding Forward-Looking Statements

This report on Form 10-K and other documents filed or furnished by us under the federal securities laws include, and future oral or written statements or press releases by us and our management may include, forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and as such may involve known and unknown risks, uncertainties, and other factors that may cause our actual results to be materially different from the anticipated future results expressed or implied by such forward-looking statements.  Forward-looking statements may include the words “may,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect,” “plan,” “anticipate,” “project,” “seek,” “hope,” “should” or “could” and other similar words.

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) the impact of estimated dry cargo world-wide fleet supply and demand fundamentals on time charter and voyage rates; (4) estimated scrap values of assets; (5) estimated proceeds from selling assets and the anticipated cost of constructing or purchasing new or existing vessels; (6) estimated fair values of financial instruments, such as interest rate, commodity and currency swap agreements; (7) estimated losses under self-insurance arrangements, as well as estimated gains or losses on certain contracts, trade routes, lines of business or asset dispositions; (8) estimated losses attributable to asbestos claims or other litigation; (9) estimated obligations, and the timing thereof, relating to vessel repair or maintenance work; (10) the adequacy of our capital resources and the availability of additional capital resources on commercially acceptable terms; (11) our ability to remain in compliance with applicable regulations and our debt covenants; (12) anticipated trends in supplemental cargoes; (13) our ability to effectively service our debt; (14) financing opportunities and sources (including the impact of financings on our financial position, financial performance or credit ratings); (15) changes in laws, regulations or tax rates, or the outcome of pending legislative or regulatory initiatives; and (16) assumptions underlying any of the foregoing. 

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 those anticipated, estimated, projected, expressed or implied include our ability to:

 

Other factors that could cause our actual results to differ materially from our expectations include, without limitation:

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These and other uncertainties related to our business are described in greater detail in Item 1A of this annual report as updated by quarterly and other reports or documents that we file with the SEC after the date of such annual report.

 

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, see Items 1, 1A and 7 of this report. 

 

 

CRITICAL ACCOUNTING POLICIES

 

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, which require management to make estimates in the application of its accounting policies based on the best assumptions, judgments, and opinions of management. Following is a discussion of the accounting policies that involve a higher degree of judgment and the methods of their application. For a description of all of our material accounting policies, see Note A – Significant Accounting Policies to our Consolidated Financial Statements set forth in Item 8.

 

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Voyage Revenue and Expense Recognition

 

We currently generate the majority of our revenue from time charters and voyage charters. Time charter revenue is for a specific period of time at a specific rate per day, and is generally not as complex or as subjective as voyage charters. Revenues and expenses relating to our Rail-Ferry and Jones Act segments’ 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 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. 

 

Vessel Lives and Depreciation

 

The carrying value of each of our vessels represents its original cost at the time it was delivered or purchased, less depreciation and/or impairment charges, if applicable. We depreciate our vessels on a straight-line basis over their estimated useful lives, estimated based on the type and age of the vessel (See Note A- Summary of Significant Accounting Policies). Depreciation is based on cost less the estimated residual salvage value. Salvage, or scrap, value is based on a vessel’s lightweight tonnage (“lwt”) multiplied by a scrap rate to compute each vessel’s salvage value. We apply an initial scrap rate equal to the average applicable scrap rates for the 36 months preceding the date the vessel is initially placed in service. An increase in the useful life of a vessel or in its salvage value would have the effect of decreasing the annual depreciation charge. On the other hand, a decrease in the useful life of a vessel or in its salvage value would have the effect of increasing the annual depreciation charge. The useful life and scrap value of all our vessels are reviewed every three years or when specific events or changes occur. Specifically, every three years the scrap value is reviewed and compared to the most recent three-year average of steel prices. The review was performed for the 2012 fiscal year with adjustments to our salvage values reflecting the latest three-year average for steel prices. If management feels an adjustment is warranted, the salvage value is adjusted based on this updated steel price. 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.

Impairment of Long-Lived Assets

 

We review the carrying amounts of our vessels for possible impairment when events or circumstances indicate that the carrying value of a particular vessel may not be recoverable.  The carrying values of the vessels may not represent their fair market value at any point in time because the market prices of vessels tend to fluctuate with changes in charter rates, second hand vessel sales, the cost of newbuildings, general economic conditions and various other factors. Historically, both charter rates and vessel values tend to be cyclical. There can be no assurance as to how long charter rates and vessel values will remain at the current levels or whether they will improve by any significant degree. We record impairment losses only when events occur that cause us to believe that the future cash flows for any individual vessel will be less than its carrying value. In such instances, we would recognize an impairment charge in the period in which we determine that the estimate of the undiscounted future cash flows expected to result from the use of the vessel and its eventual disposition is less than the vessel’s carrying amount, and the fair value is below the carrying amount. We estimate undiscounted future cash flows on an individual vessel basis, or in groups of like kind vessels which can be interchanged to meet the needs of the customers that the vessels serve.

 

In developing estimates of future cash flows, we make assumptions about future charter rates, our ability to deploy the vessel, ship operating expenses, drydock cost, residual values and the estimated remaining useful life of the vessel.  Specifically, in estimating future charter rates, management takes into consideration rates currently in effect for existing time charter contracts and estimated daily time charter rates for each vessel class for the unfixed days over the estimated remaining lives of each of the vessels. The estimated daily time charter rates used for the unfixed days are based on a combination of (i) internally forecasted rates developed for and approved by our senior management, and (ii) the trailing 10-year historical average rates, based on annual average charter rates published by a third party maritime research service. We performed a sensitivity analysis by calculating the impact on our dry bulk fleet by using a one, three and five year average charter rate. Using a three and five year average charter rate our projected cash flows continue to support our carrying amount. However, if we were to use the one year average charter rate our Handysize and Supramax Bulk Carriers projected cash flows would not support the carrying amount and step two of the impairment analysis would be performed. We believe given the remaining useful life of the dry bulk fleet, the ten year average is the most appropriate length of time to use. We estimate our operating expenses and drydock requirements based on historical and budgeted costs and are adjusted for assumed inflation. We develop estimates of each of our vessel’s residual values  based upon management’s projections of the vessel’s scrap value and estimate the remaining useful life based on the type of vessel and the overall condition. We believe that the assumptions used to evaluate potential impairments are reasonable and appropriate and believe our assumptions have generally been accurate, particularly with respect to vessels with which we have substantial operating experience and that are deployed under fixed contracts. Nonetheless, given the volatility of spot market charter rates and our industry, our estimates of future cash flows and fair

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values have been and are expected to remain subject to significant fluctuations, particularly during periods when charter rates, expenses or prevailing industry conditions change abruptly. You should be aware that our assumptions are subjective and that we cannot guarantee the accuracy of these assumptions or the estimates derived there from. We review our estimates on a monthly, quarterly and annual basis through the budgeting process. As part of our quarterly review process, we test the reasonableness of our estimates by reviewing the sensitivity of our carrying values by calculating a break-even charter rate that would need to be earned in order to cover the current carrying values of our vessels.

 

Drydocking Costs 

 

We defer certain costs related to the drydocking of our vessels.  There are two methods that are used by the shipping industry to account for drydockings: (a) the deferral method where drydocking costs are capitalized when incurred and amortized over the period of the next scheduled drydock; and (b) expensing drydocking costs in the period it is incurred. We use the deferral method of accounting for drydock costs. Under the deferral method, drydock costs are capitalized and amortized on a straight-line basis until the estimated date of the next drydock. We believe the deferral method better matches costs with revenue rather than expensing the costs as incurred. We use judgment when estimating the period between drydocks performed, depending on the age and type of vessel, its cargoes and other criteria.  Typically, we estimate the date between drydockings to be between 24 and 60 months.  If circumstances change, we will change the length of the amortization period, which can result in adjustments to the amortization of drydock expense (See Note N – Deferred Charges and Intangible Assets).

 

Costs capitalized as part of the drydocking include direct costs that are incurred as part of the drydocking to meet regulatory requirements. Major expenditures that add economic life to the vessel, increase the vessel’s earnings capacity or improve the vessel’s efficiency are depreciated over the remaining economic life of the vessel. Direct costs include the shipyard costs, parts, inspection fees, steel, blasting and painting. Expenditures for normal maintenance and repairs, whether incurred as part of the drydocking or not, are expensed as incurred. Unamortized drydocking costs of vessels that are sold are written off and included in the calculation of the resulting gain or loss in the period of the vessel’s sale.

 

Self-Retention Insurance

 

We maintain provisions for estimated losses under our self-retention insurance based on estimates of the eventual claims settlement costs. 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.  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 estimated losses for asbestos claims based on estimates of eventual defense and 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 believe that insurance and the indemnification of a previous owner of one of our wholly-owned subsidiaries will partially mitigate our exposure.  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 reporting 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 materially from those estimates.

 

Income Taxes

 

Income taxes are accounted for in accordance with ASC Topic 740 (“ASC 740”). 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.  As described further in Item 1 of this report, our qualifying U.S. flag operations are taxed under the “tonnage tax” regime rather than under the U.S. corporate income tax regime.

 

Certain foreign operations are exempt from foreign income taxation under existing provisions of the laws of those jurisdictions.  Pursuant to existing U.S. tax laws, earnings from certain foreign operations will be subject to U.S. income tax when

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those earnings are repatriated.  Our intention has been and remains to indefinitely re-invest approximately $2.8 million, $4.4 million, and $24.4 million of our 2013, 2012 and 2011 respective foreign earnings (losses excluded) in our foreign subsidiaries and, accordingly, we have not provided deferred taxes against those earnings. The principal reasons for this position are as follows: maintenance of International Flag fleet, future expansion of International Flag fleet and U.S. Flag fleet’s operating cash flow needs are adequately met by its operations. 

 

The American Taxpayer Relief Act of 2012, enacted on January 2, 2013, extended the active financing exception from Subpart F income.  The extension was retroactive from January 1, 2012 through December 31, 2013.  For 2013, the Company has reflected its active financing income as an approximately  $2.0 million reduction to its current year U.S. net operating loss.  During the first quarter of 2013, the Company’s U.S. net operating loss carryforward was increased by approximately $2.0 million to reflect the retroactive application of the new law (See Note J- Income Taxes).

   

We account for uncertain tax positions in accordance with ASC 740. ASC 740 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements.  ASC 740 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.

 

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During 2010, as a result of the deferred tax assets created by the continued losses of the U.S. filing group, we moved to an overall net deferred tax asset position and determined that the establishment of a valuation allowance was warranted.  We recorded a valuation allowance, with the net deferred tax asset being reduced to zero as of December 31, 2010.  Based upon the evaluation of all available evidence, our position is that we are more-likely-than-not to realize the future tax benefit of our net U.S. deferred tax assets and we reversed the existing valuation allowance against these assets as of December 31, 2013. 

 

In considering the reversal of the valuation allowance, we gave consideration to the following factors:

 

•We file a consolidated U. S. corporate income tax return for our eligible domestic members.

•Projected future earnings.

•Future reversals of taxable temporary differences.

•Profitable operations from acquired operations.

 

Since the acquisition of UOS was concluded very late in 2012, we have monitored the effectiveness of the integration of UOS operations into our operations.  Our 2013 operating results and its latest projections, prepared during December 2013/January 2014, confirm that integration of UOS is creating incremental value and we have concluded is generating profitable results.  We are confident that contract negotiations with UOS’s largest customers will result in continued profitable results, as recently evidenced by the December 2013 extension of UOS’s contract with Mosaic.  As part the projection process, we have undertaken a  sensitivity analysis which reflects that even in the event contract negotiations proved unsuccessful with either of these two key customers UOS would continue to generate significant operating profit.  We believe the projections provide strong evidence of significant profitability to be incurred in the non-tonnage tax regime companies.  Considering all the analysis undertaken in the fourth quarter as described above,  our conclusion is that it is more likely than not, that we will recognize the benefit of our federal tax attributes and therefore, we have reversed the previously recorded valuation allowance as of December 31, 2013.

Derivative Instruments and Hedging Activities

Under ASC Topic 815, in order to consider a derivative instrument as a hedge, (i) we must designate the instrument as a hedge of future transactions, and (ii) the instrument must reduce our exposure to the applicable risk.  If the above criteria are not met, we must record the fair market value of the instrument at the end of each period and recognize the related gain or loss through earnings.  If the instrument qualifies as a hedge, net settlements under the agreement are recognized as an adjustment to earnings, while changes in the fair market value of the hedge are recorded through Stockholders’ Equity in Other Comprehensive Income (Loss).  We currently employ, or have employed in the recent past, interest rate swap agreements and foreign currency contracts.

 

Pension and Postretirement Benefits

 

Our pension and postretirement benefit costs are calculated using various actuarial assumptions and methodologies as prescribed by ASC Topic 715. These assumptions include discount rates, health care cost trend rates, inflation rates, rate of compensation increases, and 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. The increase in the discount rate from 3.75% to 4.75% from 2012 to 2013, respectively, decreased the projected benefit obligation by approximately $4.3 million and decreased the accumulated postretirement benefit obligation by $1.7 million. The rate of return on the fair value of assets was greater than the assumed rate of 7.75% resulting in an investment gain of approximately $3.0 million.

 

ASC Topic 715 requires balance sheet recognition of the overfunded or underfunded status of pension and postretirement benefit plans.  Under ASC Topic 715, actuarial gains and losses, prior service costs or credits, and any remaining transition assets or obligations that have not been recognized under previous accounting standards must be recognized in Accumulated Other Comprehensive Income (Loss), net of tax effects, until they are amortized as a component of net periodic benefit cost.  In addition, the measurement date, the date at which plan assets and the benefit obligation are measured, is required to be the company’s fiscal year end. 

 

Business Combinations and Goodwill

 

We account for business combinations by using the acquisition method of accounting which requires that the assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date.  The excess of the consideration transferred over the net assets acquired is recorded as goodwill. Any changes in the estimated fair values of the net assets recorded for acquisitions prior to the finalization of more detailed analysis, but not to exceed one year from the date of acquisition, will change the amount of

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the purchase price allocable to goodwill.  All acquisition costs are expensed as incurred and are included in the Administrative and General Expenses section of the Income Statement.

 

Executive Summary

 

Overall Strategy

 

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 niche market growth opportunities, utilizing our extensive experience to meet those opportunities, maintaining a diverse portfolio of medium to long-term contracts, and maintaining strong relations with our long-standing customer base by providing quality transportation services.

 

Overview

 

With the acquisition of UOS at the end of 2012, we substantially expanded our commercial U.S. coastwide transportation operations and became a market leader in Jones Act dry bulk fleet capacity. The acquisition contributed approximately $92 million in additional gross revenues during 2013, as compared to 2012, and solidified our business strategy by providing us with additional fixed revenues and predictable cash flows.  During the first quarter of 2013, we reactivated one of the two laid up UOS Tug/Barges, which afforded us with the additional capacity and flexibility to partially offset the loss of vessels due to a heavy schedule of drydocks during the rest of 2013.  In addition, we exercised our option to purchase a Tug/Barge unit from a Lessor, which option we acquired with the purchase of UOS. 

 

We successfully accessed the capital markets in February of 2013 and in August of 2013 and raised approximately $56.6 million, before underwriter fees and related costs, through two preferred stock offerings.  The proceeds allowed us to strengthen our balance sheet, reactivate the aforementioned Tug/Barge unit, acquire the contract for a newbuilding “eco” Handysize Bulk  Carrier and invest in a new joint venture for two chemical tankers.  In September of 2013, we entered into a U.S. Flag Senior Secured Credit Facility. This Secured Credit Facility included a term loan facility in the principal amount of $45 million and a revolving credit facility (“LOC”) in the principal amount up to $50 million. This Secured Credit Facility provides us more flexibility with our covenants, further monetizes the value of our U.S. assets and increases our LOC from $30 million to $50 million.

 

During 2013, we continued to strengthen our portfolio of fixed contracts by extending a time charter contract on one of our PCTC vessels. We also reached a multi-year extension of our agreement with Mosaic beyond 2014. Our fixed contract revenues as a percent of our total revenues were approximately 72%  at  the end of 2013 and we expect our fixed revenues for 2014 will be approximately 65% based on the  expected higher revenue contributions from our Dry Bulk segment.

 

In the latter half of 2013, we began to see worldwide dry bulk shipping rates firm up and stabilize. Dry bulk market rates for Capesize Bulk Carriers and the Supramax Bulk Carriers experienced the largest market improvements while Handysize Carriers experienced smaller improvements in rates. We believe we are positioned well in the dry bulk market to benefit from any continued improvement in rates.  

 

Change in Segments

 

Following our acquisition of UOS in late 2012, we internally restructured our business to reorganize our prior operating segments (listed below) with the following new segments:

 

 

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We believe this new segmentation, better aligns our segment disclosures with the information now reviewed by our chief operating decision maker. All prior period data for each of our segments has been restated based on this new segmentation methodology.

 

 

2013 Consolidated Financial Performance

 

For the full year of 2013, net income was $18.2 million, a decrease of $3.8 million as compared to the full year of 2012. Included in the 2013 results were a $14.0 million tax benefit from the reversal of a tax valuation allowance and $5.9 million foreign exchange gain on our Yen Credit Facility. Included in our 2012 results were a $16.6 million gain from the sale of assets and a $5.5 million foreign exchange gain. Excluding the above transactions, our adjusted results would have been a loss of $1.7 million for 2013 as compared to a loss of $169,000 in 2012. Revenues improved by $66.7 million or 27% due primarily to the acquisition of UOS in late 2012, partially offset by a drop in our supplemental cargo revenues and our MSP revenues due to the impact from sequestration budget cuts. Our operating income improved from $7.3 million, after excluding the $16.6 million gain from the sale of assets, in 2012 to $9.6 million in 2013. Interest expense decreased from $10.4 million to $9.5 million due to lower outstanding debt obligation in 2013 as compared to 2012. The results from our unconsolidated entities decreased by $1.5 million year over year, primarily due to lower results from our investment in Mini-Bulk carriers.  Our tax benefit improved from a $157,000 benefit for the full year of 2012 to a benefit of $12.0 million for the same period in 2013 due to the above mentioned reversal of our tax valuation allowance balance as of December 31, 2012, partially offset by deferred tax expenses in 2013 from taxable income of our Jones Act segment.

 

Balance Sheet

 

 

Overview of Fleet

As of December 31, 2013, our fleet consisted of 50 vessels, 21 of which are 100% owned indirectly through our wholly-owned subsidiaries.  Of these 21 vessels, 17 have been employed on fixed time charters, contracts of affreightment, revenue sharing agreements. Three of the remaining vessels operate in the spot voyage market or on short-term time charters, and one is inactive.

 

The majority of our revenues are derived from medium to long-term contracts which generally provide us with fixed income streams and predictable cash flows. As of March 1, 2014 (excluding charter’s options):

 

 

On a quarterly basis, if a triggering event is identified, we evaluate our long-lived assets to determine whether or not our projected cash flows exceed the vessel’s carrying amount. Based on this assessment, we believe that no impairments existed at December 31, 2013.  As of this same date, the total aggregated fair value of the vessels that we own, based on the most recent appraisals, was $467.5 million as compared to the total aggregated net book value of $427.2 million.

 

Our 2013 variable revenues are generated by (i) our Handysize and Supramax vessels which operate in revenue sharing agreements; (ii) the results of our Rail-Ferry operations; and (iii) the carriage of supplemental cargoes  on our U.S. Flag PCTCs.

 

 

 

 

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The following table lists the vessels in our fleet as of December 31, 2013:

 

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Management Gross Voyage Profit Financial Measures

In connection with discussing the results of our various operating segments in this report, we refer to “gross voyage profit,” a metric that management reviews to assist in monitoring and managing our business.  The following table provides a reconciliation of consolidated gross voyage profit to consolidated operating income.

 

 

 

 

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Year Ended December 31, 2013 

Compared to Year Ended December 31, 2012

 

 

 

 

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Revenues and Gross Voyage Profits

 

The following table shows the breakout of revenues by segment between fixed and variable for the years 2013 and 2012, respectively:

 

 

The changes in revenue and expenses associated with each of our segments are discussed within the gross voyage profit margin analysis below.

 

Jones Act: Overall segment revenues increased from $33.7 million in 2012 to $122.8 million in 2013. The increase of $89.0 million was primarily the result of reflecting UOS operations for twelve months in 2013 as compared to one month in 2012, which accounted for $92 million of incremental revenue in 2013. In addition to the UOS revenues, our incumbent vessels, the Molten Sulphur carrier and Belt Self-Unloading Coal Carrier vessel in this segment also recorded a slight increase year over year. The segment’s gross voyage profit increased from $6.5 million in 2012 to $27.5 million in 2013, also primarily due to the addition of the UOS vessels (approximately $27.4 million), partially offset by higher cost associated with the sale leaseback of our Molten Sulphur Carrier and amortization of the UOS intangible assets (approximately $4.6 million). There were no significant changes in the vessel operating costs year over year.

 

Pure Car Truck Carriers: Overall segment revenues decreased by 17% or $18.9 million when comparing 2013 to 2012. The decrease in revenues is primarily attributable to (i) lower supplemental cargoes carried (approximately $12.9 million), (ii) lower MSP payments from the government due to sequestration budget cuts (approximately $2.0 million), and (iii) lower charter payments for one of our International flag vessels (approximately $1.2 million).  Gross voyage profit decreased from $27.8 million in 2012 to $15.5 million in 2013, reflecting the impact from the decrease in revenues mention above as well as higher cost associated with the sale leaseback of two PCTCs. Excluding the higher sale leaseback expense and operating costs associated with the reflagging of the vessel, there were no significant changes in the vessel operating costs year over year.

 

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Rail-Ferry:  Revenues for this segment increased from $33.3 million in 2012 to $37.2 million in 2013 primarily due to an increase in northbound cargo carried in 2013 and due to lower revenues in 2012 associated with a bridge outage near our terminal in Mexico. The gross voyage profit also increased from $3.5 million in 2012 to $6.7 million in 2013 due to the aforementioned factors as well as slightly lower operating costs in 2013. 

 

Dry Bulk Carriers: Segment revenues decreased from $26.1 million in 2012 to $21 million in 2013 due to lower charter rates earned by our vessels year over year. The gross voyage profit for this segment decreased by $5.9 million or 85% primarily due to the drop in revenues, as well as lower results from our minority equity investment in Mini-Bulkers. There were no significant changes in the vessel operating costs year over year.

 

Specialty Contracts: Segment revenues decreased from $35.5 million in 2012 to $34.4 million in 2013 and gross voyage profit decreased from $8.7 million in 2012 to $3.3 million in 2013. The decrease in the gross voyage profit results is due to the lower revenues and gross voyage profits earned from our Ice Strengthened Multi-Purpose vessel which was redelivered by MSC in September of 2012 and subsequently reflagged to international flag and operated on a spot market basis.  

Other:  For this segment, gross voyage profit decreased from $1.3 million in 2012 to $1.1 million in 2013 due to lower brokerage commissions earned.

 

Other Income and Expenses

 

Administrative and general expenses (A&G) decreased from $23.2 million in 2012 to $22.7 million in 2013.    

 

The following table shows the significant A&G components for the twelve months ended December 31, 2013 and 2012:

 

 

 

 

 

The decrease of $500,000 in A & G expenses is primarily due to professional fees incurred during the fourth quarter of 2012 related to the UOS acquisition, partially offset by the incremental UOS overhead to manage UOS’ Tampa office.

 

Interest Expense decreased from $10.4 million in 2012 to $9.5 million in 2013 due to lower outstanding debt in 2013 and non-recurring bank fees incurred in 2012 related to our acquisition of UOS.

 

Derivative Loss decreased from $485,000 in 2012 to $438,000 in 2013. These losses represent the mark-to-market adjustment associated with the ineffectiveness portion of a fixed interest rate swap and the termination of interest rate swaps contracts due to early debt retirements. For additional information, see Items 1A and 7A of this report and Note A – Significant Accounting Policies appearing at page F-9 of this report.

 

(Gain) Loss on Sale of Investments decreased from a gain of $580,000 in 2012 to $0 in 2013. We did not hold any marketable securities in 2013.

 

Other Income from Vessel Financing decreased from $2.4 million in 2012 to $2.1 million in 2013 due to lower interest earned on a note receivable relating to vessels we sold to an Indonesian company in the third quarter of 2009. 

 

Investment Income decreased from $470,000 in 2012 to $114,000 in 2013 due to lower cash balances available to invest in 2013.

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Foreign Exchange Gain of $5.9 million in 2013, an increase from a $5.5 million gain in 2012, is associated with the 2008 financing of a PCTC under a Yen-denominated arrangement in which our payment obligations for U.S. financial reporting purposes fluctuated with exchange rates until December 2013, when we entered into currency hedge transactions.  The gain is due to the revaluation of our Yen-denominated loan and the weakening of the value of the Yen since the end of 2012.  The exchange gain was based on a change in the exchange rate of 86.74 Yen to 1 USD at December 31, 2012 compared to 102.53 Yen to 1 USD at December 31, 2013, which is the rate governing our obligations under our December 2013 currency hedging transactions  (See Note R – Fair Value of Financial Instruments, Derivatives, and Marketable Securities). 

 

Income Taxes

 

We recorded a benefit for income taxes of $11.9 million on our $7.9 million of income before Equity in Net (Loss)/Income of Unconsolidated Entities for the year ended December 31, 2013.  For the year ended December 31, 2012 our benefit for income tax benefit was $157,000 on our $22.0 million of income before Equity in Net Income (Loss) of Unconsolidated Entities.  This favorable change in our tax benefit was the result of a $14.0 million reversal of a valuation allowance in the fourth quarter of 2013. With the acquisition of UOS in November 2012 and taking into consideration the projected taxable earnings from our Jones Act segment in future periods, we believe it is more likely than not that we will realize the deferred tax assets. 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.  For additional information, see Note – J Income Taxes.

 

 

Equity in Net (Loss) Income of Unconsolidated Entities

 

Equity in Net (Loss) Income of Unconsolidated Entities, net of taxes, decreased from a loss of $215,000 in 2012 to a loss of approximately $1.7 million in 2013.  The decrease is primarily associated with the negative results from our minority equity investment in the Mini-Bulk carriers.

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Year Ended December 31, 2012

compared to year ended december 31, 2011

 

 

 

 

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Revenues and Gross Voyage Profits

 

The following table shows the breakout of revenues by segment between fixed and variable for the years 2012 and 2011, respectively:

 

 

The changes in revenue and expenses associated with each of our segments are discussed within the gross voyage profit margin analysis below.

 

Jones Act: Overall segment revenues increased by 13% or $3.9 million when comparing 2012 to 2011. The increase was due to the addition of $7.6 million of revenues generated by the UOS vessels in December of 2012, partially offset by slightly lower revenues generated by our incumbent Jones Act vessels. The segment’s gross voyage profit increased from $2.1 million in 2011 to $6.5 million in 2012, also primarily due to the addition of the UOS vessels, and reduced operating costs.

 

Pure Car Truck Carriers: Overall segment revenues decreased by 7% or $8.9 million when comparing 2012 to 2011.  The decrease was driven primarily by the sale of two PCTCs in the first quarter of 2012.  The segment’s gross voyage profit decreased from $36.4 million in 2011 to $27.8 million in 2012, also due primarily to the sale.  Our fixed contract revenues for this segment were $68.9 million and $80.4 million in 2012 and 2011, respectively. Our variable revenues of $44.7 million and $41.9 million for the same periods in 2012 and 2011, respectively, represent revenues derived from supplemental cargoes.

 

Rail-Ferry:  Revenues for this segment decreased from $36.4 million in 2011 to $33.3 million in 2012 due to lower cargo volume and a bridge outage near the Mexican terminal that curtailed our operations for several weeks in 2012.  Gross voyage profit also decreased from $5.4 million in 2011 to $3.5 million in 2012 due to the aforementioned factors.

 

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Dry Bulk Carriers: Segment revenues increased from $20.2 million in 2011 to $26.1 million in 2012 due to our Supramax Bulk Carrier and two time chartered Handysize Bulk Carriers placed in service during 2012, but gross voyage profit for this segment decreased from $10.3 million in 2011 to $7.0 million due to lower rates overall in 2012.

Specialty Contracts: Segment revenues decreased from $52.0 million in 2011 to $35.5 million in 2012 and gross voyage profit decreased from $16.1 million in 2011 to $8.7 million in 2012 due to the termination of three MSC contracts. All three MSC contracts were terminated in February 2012. In 2011, these three contracts represented 10.1% of our total consolidated revenue and 58.0% of the segment revenue.

Other: For this segment, gross voyage profit increased from $318,000 in 2011 to $1.3 million in 2012 due to the synergies associated with foreign flag ship management services that we transitioned to an unaffiliated ship management company in 2012.

 

Other Income and Expenses

 

Administrative and general expenses (A&G) increased from $21.0 million in 2011 to $23.2 million in 2012. 

 

The following table shows the significant A&G components for the twelve months ended December 31, 2012 and 2011:

 

 

 

 

As noted above, the aggregate increase of $2.3 million in A & G expenses is primarily due to the UOS acquisition.

 

Interest Expense stayed consistent at approximately $10.4 million in 2012 and 2011.

 

Derivative Loss increased from $101,000 in 2011 to $485,000 in 2012. These losses represent the mark-to-market adjustment associated with the ineffectiveness portion of a fixed interest rate swap and the termination of interest rate swaps contracts due to early debt retirements. For additional information, see Items 1A and 7A of this report and Note A - Significant Accounting Policies appearing at page F-9 of this report.

 

(Gain) Loss on Sale of Investments increased from a $747,000 loss in 2011 to a gain of $580,000 in 2012. This was primarily due to a gain on the sale of marketable securities in 2012, contrasted with a loss on the sale of our 50% interest in an unconsolidated entity in 2011.

 

Other Income from Vessel Financing decreased from $2.7 million in 2011 to $2.4 million in 2012 due to lower interest earned on a note receivable relating to vessels we sold to an Indonesian company in the third quarter of 2009.

 

Investment Income decreased from $637,000 in 2011 to $470,000 in 2012 due to higher cash balances in 2011, higher average balances of interest-bearing debt securities in 2011, and an adjustment on returns for the prior year.

 

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Foreign Exchange Gain of $5.5 million in 2012, an improvement of $8.5 million when compared to the $3.1 million loss in 2011, is associated with the Yen-denominated financing of a PCTC.  The gain is due to the revaluation of our Yen-denominated loan and the weakening of the value of the Yen since the end of 2011.  The exchange gain was based on a change in the exchange rate of 76.92 Yen to 1 USD at December 31, 2011 compared to 86.74 Yen to 1 USD at December 31, 2012.

 

Income Taxes

 

We recorded a benefit for income taxes of $157,000 on our $22.0 million of income before Equity in Net (Loss)/Income of Unconsolidated Entities for the year ended December 31, 2012.  For the year ended December 31, 2011 our provision for income tax benefit was $680,000 on our $32.6 million of income before Equity in Net Income (Loss) of Unconsolidated Entities.  This favorable change resulted from a decrease in required valuation allowance referable to a 2012 business acquisition and a reduction in foreign withholding tax.  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.

 

Equity in Net (Loss) Income of Unconsolidated Entities

 

Equity in Net (Loss) Income of Unconsolidated Entities, net of taxes, improved from a loss of $410,000 in 2011 to a loss of $215,000 in 2012.

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

The following discussion should be read in conjunction with the more detailed Consolidated Balance Sheets and Consolidated Statements of Cash Flows included in the financial pages of this report.

 

Historical Information

 

The following table presents selected financial information as of and for the years ended December 31, 2013, December 31, 2012 and December 31, 2011 (All Amounts in Thousands):

 

 

 

(1)  Defined as the difference between our total current assets and total current liabilities.

 

Working Capital

 

Our working capital increased from $12.3 million at December 31, 2012 to $16.6 million at December 31, 2013. This $4.3 million increase in working capital was primarily driven by a slight increase in cash and cash equivalents partially offset by a decrease in current payables and a decrease in accounts receivable. The slight increase in cash and cash equivalents was a result of cash provided by operating activities of $23.8 million and cash provided by financing activities of $8.9 million, which was partially offset by net cash used in investing activities of $32.5 million.  Total current liabilities of $70.5 million as of December 31, 2013 included $19.2 million of current maturities of long-term debt.

 

During 2012, our working capital decreased from $17.6 million at December 31, 2011 to $12.3 million at December 31, 2012.  Cash and cash equivalents also decreased during 2012 by $1.6 million to a total of $19.9 million.  This decrease was due to net cash provided by operating activities of $9.8 million and net cash provided by investing activities of $80.7 million, offset by net cash used in financing activities of $92.1 million.  Of the $76.9 million in current liabilities at December 31, 2012, $26.0 million related to current maturities of long-term debt as of such date.

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Restricted Cash

 

As of December 31, 2013, we had $8.5 million of cash classified as restricted cash, of which $6.0 million is associated with a performance guarantee and $2.5 million is associated with a covenant to maintain a minimum loan to value ratio on loans associated with the financing of one Capesize vessel, one Supramax Bulk Carrier, and three Handysize Bulk Carriers.

 

At December 31, 2012, we had $8.0 million of cash classified as restricted cash; of which $2.0 million was associated with a lien on a UOS vessel and $6.0 million was collateral pledged for the above-described performance guarantees.

 

Of the $20.0 million of cash and cash equivalents reflected on our Consolidated Balance Sheet as of December 31, 2013, approximately $12.3 million is held overseas and is subject to our non-repatriation commitment discussed under the heading “Tax Matters” in Item 1 of this annual report.  Consequently, these funds are available for use in the United States only to the extent of repayment of obligations owed to parent.

 

 

Net Cash Provided by Operating Activities

 

Net cash provided by operating activities of $23.8 million for 2013 was generated after adjusting net income of $18.2 million upward for non-cash items such as (i) depreciation of $25.0 million, (ii) amortization of deferred charges and intangible assets of $17.3 million, and (iii) non-cash stock based compensation of $1.4 million, which were partially offset by (A) a non-cash foreign currency exchange gain of $5.9 million, (B) $18.2 million in drydocking charges, and (C) various other items specified in our Consolidated Statements of Cash Flows.

 

During 2012, net cash provided by operating activities of $9.8 million was generated after adjusting for the items listed in our Consolidated Statements of Cash Flows, including non-cash items such as (i) depreciation of $25.0 million and (ii) amortization of deferred charges and intangible assets of $11.0 million, which were offset by (A) a non-cash foreign currency exchange gain of $5.5 million, (B) $11.3 million in drydocking charges, and (C) a $16.6 million gain on the sale of assets.

 

During 2011, net cash provided by operating activities of $46.3 million was generated after adjusting for the items listed in our Consolidated Statements of Cash Flows, including non-cash items such as (i) depreciation of $26.4 million, (ii) amortization of deferred charges of $9.0 million, and (iii) a non-cash foreign currency exchange loss of $3.1 million.  These items were partially offset by (A) drydocking charges of $6.8 million and (B) an $18.8 million non-cash gain on an acquisition relating to the purchase of Dry Bulk.  In addition, we received cash dividends of $750,000 from Dry Bulk prior to acquiring the remaining 50% interest therein.

 

Net Cash (Used In) Provided by Investing Activities

 

Net cash used in investing activities of $32.5 million for 2013 consisted of $32.5 million of capital expenditures primarily on our UOS fleet, a $2.7 million minority investment in two chemical tankers, an additional investment of $784,000 in Oslo Bulk Shipping Pte. Ltd., a $499,000 increase in restricted cash and a final post-closing adjustment payment of $2.5 million in connection with our acquisition of UOS.  These cash outlays were partially offset by $6.0 million from cash received on note receivables and $558,000 of principal payments received under a direct financing lease.

 

During 2012, net cash provided by investing activities of $80.7 million included capital expenditures of $50.7 million, $112.9 million related to the acquisitions of UOS and two other companies, an increase of $1.1 million in restricted cash required under one of our financing agreements and investments in unconsolidated entities of $1.0 million, offset by $3.9 million of principal payments received under direct financing leases, $225.0 million of proceeds from the sale of assets, $12.4 million from proceeds from sales of marketable securities and $4.8 million from cash received on note receivables.  The proceeds from the sale of assets include $154.0 million from the sale and leaseback of four vessels and $71.3 million from the sale of two vessels.

 

During 2011, net cash used in investing activities of $100.8 million included capital expenditures of $109.6 million, classifying $8.9 million as restricted cash as required under one of our financing agreements and investments in unconsolidated entities of $2.5 million, offset by principal payments received under direct financing leases of $5.6 million, $7.1 million of cash assumed in connection with our acquisition of 100% of Dry Bulk, $2.4 million from proceeds from sales of marketable securities and $4.7 million from cash received on note receivables.  Included in the $109.6 million of 2011 capital expenditures were $11.9 million for the final installment payment related to three Handysize Bulk Carriers delivered in January 2011, $64.5 million for the purchase pursuant to early buy outs of two previously leased PCTC vessels, $12.3 million of installment payments on the Supramax Bulk Carrier assumed in our acquisition of Dry Bulk and $21.0 million for the acquisition of a 2000-built Multi-Purpose Ice Strengthened vessel.

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Net Cash Provided by (Used In) Financing Activities

 

Net cash provided by financing activities of $8.9 million for 2013 included approximately $53.3 million of net proceeds from the issuance of preferred stock and $76.0 million of proceeds from debt issuances, which was largely offset by $23.6 million of regularly scheduled debt payments, $36.8 million used for the early repayment of our U.S. credit facilities, $48.3  million of payments to reduce our line of credit indebtedness and $9.6 million of common stock and preferred stock dividend payments.

 

During 2012, net cash used in financing activities of $92.1 million included outflows for debt payments of $220.3 million, of which $39.1 million related to regularly scheduled debt payments, $66.5 million constituted payments to reduce our line of credit indebtedness and $114.7 million related to the early repayment of debt.  These debt payments and our cash dividend payments of $8.4 million were partially offset by proceeds of $12.7 million from the final bank draw on a term loan for a Supramax Bulk Carrier delivered in January of 2012, $30.0 million for UOS vessels and total draws on our line of credit of $95.3 million.

 

During 2011, net cash provided by financing activities of $56.1 million included outflows of regularly scheduled debt payments of $27.9 million, a line of credit payment of $10.0 million in the first quarter of 2011, a payment of $28.6 million to discharge debt assumed in connection with acquiring full control of Dry Bulk and cash dividend payments of $11.0 million.  These cash outflows were offset by proceeds of $58.1 million from the final bank draw on the facility agreement to finance the construction and delivery of three Handysize Bulk Carriers delivered in January 2011 and the refinancing of the loan on a Capesize vessel in connection with the Dry Bulk transaction, $45.9 million received under a secured term loan facility agreement related to the purchase of two previously leased PCTC vessels, $6.2 million received on a term loan for an installment payment on the Supramax Bulk Carrier delivered in January 2012, $15.7 million of loan proceeds to purchase the 2000-built Multi-Purpose Ice Strengthened vessel and a draw on our line of credit of $9.5 million in December 2011, which we repaid in full in January 2012.

 

Capital Expenditures

 

Our capital expenditures relate primarily to the purchase of vessels and capital improvements that enhance the value or safety of our vessels.

 

In addition to our periodic vessel purchases, we regularly incur drydocking and other capital expenditures on an ongoing basis in order to extend the useful life of our vessels, to improve and modernize our fleet, to comply with various requirements or standards imposed by insurers or governmental or quasi-governmental authorities, and to upgrade our on-shore infrastructure. The amount of our capital expenditures is influenced by, among other things, changes in regulatory, quasi-regulatory or insurance requirements or standards, drydocking schedules for our various vessels, demand for our services, cash flow generated by our operations, and cash required for other purposes. As noted below, our total capital expenditures for 2013, which we funded through working capital, were approximately $50.7 million.

 

 

Based on our current plans and strategies, we estimate expected capital improvements and drydock expenditures of $3.0 million and $10.6 million, respectively, for the year ended December 31, 2014.  In addition, we expect to contribute another $3.8 million in 2014 towards the construction of a Handysize vessel scheduled for delivery in 2015.  For information on our capital expenditures for years preceding 2013, please see our prior periodic reports filed with the SEC.

 

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Debt Obligations

 

On September 24, 2013, we terminated our previously-existing revolving credit facility scheduled to expire in September 2014 and five-year variable rate financing agreement that we entered into on November 30, 2012.  Concurrently with these terminations, we and our domestic subsidiaries entered into a new senior secured credit facility (“Credit Facility”) that (i) increased our borrowing capacity to $95.0 million, with a potential increase to $145.0 million, (ii) reduced our covenant restrictions, (iii) extended the maturity date of our facility to September 24, 2018, (iv) further monetized the value of our U.S. assets, and (v) allowed us to refinance and retire all indebtedness outstanding under our previously-existing revolving credit facility and five-year variable rate financing agreement.  The total amount paid off on September 24, 2013 was approximately $46.6 million, of which $21.0 million was drawn from the new revolving credit facility under the Credit Facility.

 

The Credit Facility includes a term loan facility in the principal amount of $45.0 million and a revolving credit facility LOC in the principal amount of $50 million. The LOC includes a $20.0 million sublimit for the issuance of standby letters of credit and a $5.0 million sublimit for swingline loans.  The Credit Facility carries an accordion feature, whereby an additional term loan of up to $50.0 million may be advanced subject to certain financial requirements.  The Credit Facility has four lenders, each with commitments ranging from $15.0 million to $30.0 million. As of December 31, 2013, we had $21.0 million of borrowings and $3.7 million of letters of credit outstanding under our LOC, leaving an available balance of approximately $25.3 million.

 

The Credit Facility includes usual and customary covenants and events of default for credit facilities of its type.  Our ability to borrow under the Credit Facility is conditioned upon continued compliance with such covenants, including, among others, (i) covenants that restrict our ability to engage in certain asset sales, mergers or other fundamental changes, to incur liens or to engage in various other transactions or activities and (ii) various financial covenants, including those that stipulate that we maintain a consolidated leverage ratio of 4.5 to 1.0 through the fiscal quarter ending December 31, 2013, and 4.25 to 1.0 thereafter, liquidity of not less than $15.0 million through the fiscal quarter ending December 31, 2013, and $20.0 million thereafter, and a consolidated net worth of not less than the sum of $228.0 million plus 50% of our consolidated net income earned after December 31, 2011 plus 100% of the proceeds of all issuances of equity interests received after December 31, 2011 (with all such terms or amounts as defined in or determined under the Credit Facility). For more information on our compliance with these covenants, see “– Debt Covenants” below.

 

Lease Obligations

 

As of December 31, 2013, we held six vessels under operating contracts, seven vessels under bareboat charter or lease agreements and one vessel under time charter. The types of vessels held under these agreements include (i) a Molten-Sulphur carrier in our Jones Act segment, (ii) three Pure Car Truck Carriers that operate under our PCTC segment, (iii) one Handysize Bulk Carrier that operates in our Dry Bulk Carriers segment, and (iv) two Multi-Purpose vessels, a Tanker, five Container vessels, and one Heavy Lift vessel, all of which operate in our Specialty Contracts segment.

 

Our vessel operating lease agreements have early buy-out options and fair value purchase options that enable us to purchase the vessels under certain specified circumstances.  The lease agreements impose, among other things, defined minimum working capital and net worth requirements, and prohibit us from incurring, without prior written consent, additional debt or lease obligations, subject to certain specified exceptions.

 

On February 22, 2012, we completed a sale and leaseback transaction with Wells Fargo Trust of our 2007-built PCTC.  The sale generated 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 we can exercise in 2017 and 2019 under certain specified circumstances.  The sale resulted in a gain of $14.9 million, which we recorded as a deferred gain on the balance sheet and recognize as income over the length of the lease.

 

In March of 2012, we sold two of our PCTCs.  This transaction generated total proceeds of $73.9 million, and resulted in a gain of $3.8 million. These proceeds were used to pay down approximately $36.1 million of debt.

 

On June 15, 2012, we exercised the early buy-out of the operating lease related to our Molten-Sulphur Carrier. On November 27, 2012, we sold this vessel to BMO Harris Equipment Finance Company for approximately $32.0 million cash and commenced a seven-year lease agreement with an early buy-out option that can be exercised in 2017 under certain specified circumstances. This lease is classified as an operating lease, with the $8.0 million gain on this sale-leaseback being deferred and recognized over the term of the lease.

 

On November 27, 2012, we sold a 1998-built PCTC to CapitalSource Bank for approximately $31.0 million cash and commenced a six-year lease agreement with an early buy-out option that can be exercised in 2017. This lease is classified as an operating lease, with the $11.7 million gain on this sale-leaseback being deferred and recognized over the term of the lease.

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We used the net proceeds of approximately $63.0 million from the November 27, 2012 transactions to finance a portion of the purchase price for our acquisition of UOS, which was completed on November 30, 2012.

 

On December 27, 2012, we sold a 1999-built PCTC to BB&T Equipment Finance for $32.0 million cash and commenced a six-year lease agreement with an early buy-out option that can be exercised in 2015 or in 2017 under certain specified circumstances.  This lease is classified as an operating lease.

In conjunction with the acquisition of UOS in November 2012, we acquired four Tug/Barge units, two Bulkers and one Harbor Tug. One of the four Tug/Barge units was leased to UOS through December 2013. At the end of the lease term, the acquired lease provided UOS with a purchase option permitting UOS to purchase both the  Tug and Barge. Prior to the closing of our acquisition, UOS exercised the purchase option through a legally binding agreement. We acquired the lease agreement as part of our acquisition of UOS, including the binding purchase commitment, and were therefore obligated to purchase the unit. On September 25, 2013 we concluded the purchase of the  Tug/Barge unit for $7.2 million.

 

We also conduct certain of our operations from leased office facilities.  On September 19, 2013, we executed a five year lease agreement for office space in Tampa, Florida.  These offices serve the employees of UOS as well as employees from LMS and are located in the same building as the previous lease agreement. The lease calls for graduated payments that will be straight-lined over the 60 month term of the lease. In addition to the Tampa office, we signed a new two year lease agreement for our Shanghai, China office space. This lease is effective October 1, 2013 through September 30, 2015.

 

As previously announced, we intend to relocate our corporate headquarters from Mobile, Alabama to New Orleans, Louisiana during the fourth quarter of 2015 after we complete renovations of a new facility in downtown New Orleans.  Our renovation and moving costs will be partially offset by approximately $10.2 million in incentives offered by the State of Louisiana.  We are planning to terminate our Mobile office lease in 2015 and in doing so we will incur approximately $3.0 million in lease termination expenses.

 

Debt Covenants

 

Substantially all of our credit agreements require us to comply with various loan covenants, including financial covenants that require minimum levels of net worth, working capital and interest expense coverage and a maximum amount of debt leverage.

 

As of December 31, 2013, the Company was in compliance with all financial covenants related to its debt obligations and we believe, based on current circumstances, that it is likely that we will continue to meet such covenants in the near future. The following table represents the actual and required covenant amounts for the twelve months ending December 31, 2013:

 

 

 

 

In the unanticipated event that our cash flow and capital resources are not sufficient to fund our debt service obligations, we could be forced to reduce or delay capital expenditures, sell assets, seek additional capital, enter into financings involving our unencumbered vessels or restructure debt. To the extent we are required to seek additional capital; our efforts could be hampered by

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the on-going uncertainty in the credit markets (See Item 1A. Risk Factors). We presently have variable to fixed interest rate swaps on 16% of our long-term debt.

 

 

 

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Contractual Obligations and Other Commitments

 

The following is a summary of the scheduled maturities by period of our debt and lease obligations that were outstanding as of December 31, 2013:

 

 

 

*  Not reflected as liabilities in our balance sheets

 

** The Terminal Obligation is our obligation to the Alabama State Port Authority related to the terminal upgrades in Mobile, Alabama, to be paid by us over the ten year terminal lease, which began in 2007. We expect to meet this long-term obligation, reported in other long-term liabilities, by the usage fees paid by our Rail-Ferry vessels in the Mobile port.

 

The above table is limited solely to contractual obligations as of December 31, 2013 and does not include contributions that we expect to make to our pension plan and the union sponsored pension plans in 2013 and beyond, as described further below and in Note I – Employee Benefit Plans.

 

Pension Obligations

 

We contributed $1.6 million to our pension plan for the twelve months ended December 31, 2013. We anticipate contributing approximately $600,000 for 2014.

 

Preferred Stock Issuance

 

On February 21, 2013, we sold 250,000 shares of our 9.5% Series A Cumulative Redeemable Perpetual Preferred Stock, $1.00 par value per share, with a liquidation preference of $100.00 per share.

 

On August 1, 2013, we sold 316,250 shares of our 9.00% Series B Cumulative Redeemable Perpetual Preferred Stock, $1.00 par value per share, with a liquidation preference of $100.00 per share, including 41,250 shares sold pursuant to an over-allotment option granted to the underwriters for the offering.

 

Shelf Registration Statement and Other Matters

 

On December 4, 2013, the SEC declared effective our new universal shelf registration statement, which enables us to sell up to $200 million of certain registered debt and equity securities.  The new registration statement replaces our 2010 universal shelf registration statement, under which we issued $56.5 million of preferred stock.

 

We routinely evaluate the acquisition of additional vessels or businesses and from time to time evaluate possible vessel divestitures.  At any given time, we may be engaged in discussions or negotiations regarding acquisitions or dispositions.  We generally do not announce our acquisitions or dispositions until we have entered into a definitive agreement.  We may require additional financing in connection with any such acquisitions, the consummation of which could have a material impact on our financial condition or operations.

 

 

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Current Economic and Market Issues

 

Slow growth and uncertainties in the worldwide economy continue.  Nonetheless, customers who have owed us payments under our fixed contracts have generally paid us in full as per contract terms and conditions.  For more information, see our list of risk factors included in Item 1A of this report. 

 

As we continuously evaluate our pension plan investment diversification, we worked with our outside investment consultants and added new category funds, as well as replaced or altered the percentage of dollar investment placed in our current funds in our portfolio. We also increased our equity exposure.  Our new pension benchmark mix is 70% equities and 30% fixed instruments.  The additions of certain actively managed funds were selected to enhance our current passively managed selections.  We contributed $1.6 million to our pension fund for the plan year 2013 to help offset a potential increase in future liabilities. Due to market changes and the easing of the U.S. government’s bond buy-back policy, the discount rate increased by a full percent. As a result of this change in the discount rate and an improved return on plan assets, we were in a 104.6% funded status as of December 31, 2013. We will continue to monitor the pension plan quarterly with our investment consultants and will make any necessary adjustments if and when we deem them to be necessary (See Note I-Employee Benefit Plans).

 

Dry Bulk Carriers

 

In November 2009, we contracted with a Far Eastern shipyard to construct three double hull Handysize Bulk Carriers.  We made payments of $17.0 million in the fourth quarter of 2009 and $71.0 million in 2010 for these vessels. All three vessels were delivered in January 2011.  On August 2, 2010, we entered into a $55.2 million Senior Secured Term Loan Facility Agreement to finance the construction and delivery installment payments under separate shipbuilding contracts for these three vessels.  The outstanding debt balance on this credit facility was $45.1 million as of December 31, 2013 with the facility based on a 15-year amortization and maturing in 2017.

 

As a result of increasing our ownership in Dry Bulk from 50% to 100% on March 25, 2011, we presently own a 100% interest in a Supramax Bulk Carrier, which was delivered in January 2012.  Our total investment in this vessel is approximately $41.6 million.  During the period of construction up to delivery, we contributed $20.2 million through December 31, 2011.  On June 20, 2011, we entered into a secured loan facility agreement in the amount of $47.5 million, divided into two tranches:  Tranche A, which provided $24.2 million used to refinance and repay existing indebtedness of $22.0 million related to a Capesize vessel assumed in connection with the Dry Bulk acquisition, and Tranche B which provided up to $23.3 million to finance the remaining installment payments on the Supramax Bulk Carrier.  Under Tranche B, we made draws for $6.1 million in November 2011 and $12.7 million in January 2012 and contributed another $2.0 million and $8.7 million upon launching of the vessel and final delivery in January 2012. As of December 31, 2013, we owed $16.7 million on this credit facility. For further information on this agreement, see our Current Report on Form 8-K, dated June 20, 2011.

 

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. All of the Mini-Bulkers were delivered from the shipyard and deployed as of July 2011.  During 2010, we invested an additional $3.9 million in Oslo Bulk Holding Pte Ltd. (formerly “Tony Bulkers”), an affiliate of Oslo Bulk, for our 25% share of the installment payments for two additional new Mini-Bulkers, both of which were delivered from the shipyard and deployed as of July 2011. We paid approximately $1.6 million in January 2011 for our remaining share of installment payments associated with these two Mini-Bulkers. Additional investments of $750,000 and $250,000 were made in 2012 to Oslo Bulk and Oslo Bulk Holding Pte. Ltd., respectively. In December 2012, we contributed $500,000 towards our share of a bank guarantee to finance four Mini-Bulkers delivered in early 2013.  In November 2013, we contributed $284,000 towards our share of a minimum value covenant. Additionally in 2013 we acquired a fifteenth vessel using our existing equity. 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 fifteen of these Mini-Bulkers are managed by an affiliate of Oslo Bulk. 

 

In October 2013, we invested $2.7 million towards a minority interest in Saltholmen Shipping PTE LTD, which has contracted to build two chemical tankers scheduled to be delivered in the first quarter of 2014. We anticipate contributing an additional $5.8 million in the first quarter of 2014.

 

Dividend Payments

 

The payment of dividends to common stockholders and preferred stockholders are at the discretion of our Board of Directors. On October 29, 2008, our Board of Directors authorized the reinstitution of a quarterly cash common stock dividend program beginning in the fourth quarter of 2008. Since then, the Board of Directors has declared a cash common stock dividend each quarter.

 

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On April 10, 2013, the Board of Directors declared a dividend of $1.79 per share, representing a pro-rata payment for the partial dividend period from February 21, 2013, to April 29, 2013, on our 9.5% Series A Cumulative Redeemable Perpetual Preferred Stock. The dividend was paid on April 30, 2013 to preferred stockholders as of record on April 29, 2013.  On April 24, 2013, the Board of Directors declared a dividend of $0.25 per share of common stock to common stockholders of record as of May 16, 2013, which was paid on June 3, 2013.

 

On July 17, 2013, the Board of Directors declared a dividend of $2.375 per share on our 9.5% Series A Cumulative Redeemable Perpetual Preferred Stock paid on July 30, 2013 to preferred stockholders of record on July 29, 2013. On July 31, 2013, the Board of Directors declared a dividend of $0.25 per share of common stock to common stockholders of record as of August 16, 2013, which was paid on September 4, 2013.

 

On October 8, 2013, the Board of Directors declared a dividend of $2.375 per share on our 9.5% Series A Cumulative Perpetual Preferred Stock to preferred stockholders of record on October 29, 2013, which was paid on October 30, 2013.    On October 8, 2013, the Board of Directors declared a dividend of $2.25 per share on our 9.0% Series B Cumulative Perpetual Preferred Stock to preferred stockholders of record on October 29, 2013, which was paid on October 30, 2013. On October 30, 2013, the Board of Directors declared a dividend of $0.25 per share of common stock to common stockholders of record as of November 15, 2013, which was paid on December 3, 2013.

 

On January 7, 2014, the Board of Directors declared a dividend of $2.375 and $2.25 per share on our 9.5% Series A Cumulative Perpetual Preferred Stock and 9.0% Series B Cumulative Perpetual Preferred Stock, respectively, to preferred stockholders of record on January 29, 2014, which was paid on January 30, 2014.    Additionally, the Board of Directors declared a dividend of $0.25 per share of common stock to common stockholders of record as of February 17, 2014, which was paid on March 3, 2014.

 

Environmental Issues

 

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 occurrence, with deductible amounts not exceeding $250,000 for each incident. Certain international maritime organizations have proposed various regulations relating to marine fuel, emissions and ballast water that could in the aggregate increase our operating costs.

 

Off Balance Sheet Arrangements

 

During its normal course of business, we have made certain indemnities, commitments and guarantees under which we may be required to make payments in relation to certain transactions. The duration of these indemnities, commitments and guarantees varies, and in certain cases, is indefinite. Many of these indemnities, commitments and guarantees provide for limitations on the maximum potential future payments we could be obligated to make. However, we are unable to estimate the maximum amount of liability related to our indemnities, commitments and guarantees because such liabilities are contingent upon the occurrence of events that are not reasonably determinable. We believe that any liability for these indemnities, commitments and guarantees would not be material to the accompanying consolidated financial statements. Accordingly, no significant amounts have been accrued for indemnities, commitments and guarantees.

 

New Accounting Pronouncements

 

In January 2013, the Financial Accounting Standard Board (“FASB”) issued ASU 2013-01, "Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities" to amend Accounting Standards Codification Topic 210, "Balance Sheet".  The amendment is to clarify that the scope of Update 2011-11 applies to derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or subject to an enforceable master netting arrangement or similar agreement.  ASU 2013-01 is effective for fiscal years beginning on or after January 1, 2013 and interim and annual periods thereafter. We adopted ASU 2013-01 in the first quarter of 2013 and the application of the new requirements did not have a material effect on our operating results or financial position.

 

In February 2013, the FASB issued ASU 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income" to amend Accounting Standards Codification Topic 220, "Comprehensive Income".  The amendment requires an entity to provide information about the amounts reclassified out of other comprehensive income by component. Entities are also required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under US GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts

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that are not required under US GAAP to be reclassified in their entirety to net income, an entity is required to cross reference to other disclosures required under US GAAP that provide additional details about those amounts ASU 2013-02 is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2012. We adopted ASU 2013-02 in the first quarter of 2013 and the application of the new requirements did not have a material effect on our operating results or financial position.

 

In February 2013, the FASB issued ASU 2013-04, “Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date (a consensus of the Emerging Issues Task Force)”, to amend Accounting Standards Codification Topic 405, “Liabilities”.  This guidance requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date. This stipulates that (1) it will include the amount the entity agreed to pay for the arrangement between them and the other entities that are also obligated to the liability and (2) any additional amount the entity expects to pay on behalf of the other entities. The objective of this update is to provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements. ASU 2013-04 is effective for fiscal periods (and interim reporting periods within those years) beginning after December 15, 2013. We are currently evaluating the adoption of this standard.

 

In March 2013, the FASB issued ASU 2013-05,“Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity” to amend Accounting Standards Codification Topic 830, “ Foreign Currency Matters”. The objective of the amendments in this Update is to resolve the diversity in practice about whether Subtopic 810-10, Consolidation—Overall, or Subtopic 830-30, Foreign Currency Matters—Translation of Financial Statements, applies to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity. ASU 2013-05 is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013.  We are currently evaluating the adoption of this standard.

 

In July 2013, the FASB issued ASU No. 2013-10, “Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes” (a consensus of the FASB Emerging Issues Task Force), which permits the use of the Fed Funds Effective Swap Rate (also referred to as the Overnight Index Swap Rate), in addition to the U.S. government rate (UST) and London Interbank Offered Rate (LIBOR), as a U.S. benchmark interest rate for hedge accounting purposes under FASB ASC Topic 815, Derivatives and Hedging. Entities should apply the ASU prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. We are currently evaluating the adoption of this standard.

 

In July 2013, the FASB issued ASU No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (a consensus of the FASB Emerging Issues Task Force), which requires an entity to present an unrecognized tax benefit as a reduction of a deferred tax asset for an net operating loss (NOL) carryforward, or similar tax loss or tax credit carryforward, rather than as a liability when (1) the uncertain tax position would reduce the NOL or other carryforward under the tax law of the applicable jurisdiction and (2) the entity intends to use the deferred tax asset for that purpose. The ASU does not require new recurring disclosures. It is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013 and December 15, 2014, for public and nonpublic entities, respectively. Early adoption and retrospective application are permitted. We are currently evaluating the adoption of this standard.

 

ITEM 7a.  QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 interest rate swap agreements and forward exchange contracts, and in the past we have also utilized commodity swap agreements, to manage certain of these exposures. We hedge firm commitments or anticipated transactions and do not enter into derivatives for speculative purposes. 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 December 31, 2013 approximated its carrying value due to the short-term duration of the underlying securities. The potential decrease in fair value resulting from a hypothetical 10% change in interest rates at quarter-end for our investment portfolio is not material.

 

The fair value of long-term debt, which is calculated based on the current rates offered to us versus current market rates on our outstanding obligations, is approximately $196.6 million as of December 31, 2013. 

We enter into interest rate swap agreements to manage well-defined interest rate risks. We record the fair value of the interest rate swaps as an asset or liability on our balance sheet. We have a variable-to-fixed interest rate swap with respect to a Yen-based

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facility for the financing of a PCTC delivered in March 2010. The notional amount under this contract is approximately $46.7 million (based on a Yen to USD exchange rate of 105.31 as of December 31, 2013). With the bank exercising its option to reduce the underlying Yen loan from 80% to 65% funding of the vessel’s delivery cost, the 15% reduction represents the ineffective portion of this swap, which consists of the portion of the derivative instrument that is no longer supported by underlying borrowings. The change in fair value related to the ineffective portion of this swap is reflected in our results of operations for the year ended December 31, 2013 is a $362,000 gain. We currently have only the aforementioned open interest rate swap agreement with a  commercial bank. For this agreement, we are the fixed rate payer and the commercial bank is the floating rate payer. 

 

The fair value of this agreement at December 31, 2013, which is estimated based on the amount that the banks would receive or pay to terminate the swap agreements at the reporting date, taking into account current market conditions and interest rates, was a liability of $3.7 million. A hypothetical 10% decrease in interest rates as of December 31, 2013, would have resulted in a liability of $4.1 million.

 

Commodity Price Risk

 

As of December 31, 2013, we did not have commodity swap agreements in place to manage our exposure to the risk of increases in the price of fuel necessary to operate both our Rail-Ferry and Jones Act segments. We have fuel surcharges and escalation adjustments in place for both of these segments, which we believe mitigated the price risk for those services during 2013. We estimated that a 20% increase in the average price of fuel for the period January 1, 2013 through December 31, 2013 would have resulted in an increase of approximately $971,000 in our fuel costs for the same period, and in a corresponding decrease of approximately $0.13 in our basic earnings per share based on the shares of our common stock outstanding as of December 31, 2013. The additional fuel costs assume revenue from escalation adjustments but that no additional revenue would be generated from fuel surcharges, even though we believe that we could have passed on to our customers some or all of the fuel price increases through the aforementioned fuel surcharges during the same period, subject to the need to maintain competitive freight rates. Our time charterers in the PCTCs, Dry Bulk Carriers and Specialty Contracts segments are responsible for purchasing vessel fuel requirements under governing time charters; thus, our fuel price risk is currently limited to any voyage charters concluded within our Dry Bulk Carriers segment.

 

Foreign Currency Exchange Rate Risk

 

We entered into foreign exchange contracts to hedge certain firm purchase commitments during 2012, the first quarter of 2013 and the third and fourth quarters of 2013. These contracts mature on various dates during 2013 and 2014. The fair value of these contracts at December 31, 2013 is a liability of $709,000. The potential fair value of these contracts that would have resulted from a hypothetical 10% adverse change in the exchange rates would be a liability of $780,000. Approximately $748,000 of this loss relates to forward Japanese Yen contracts that are offset by a like mark to market gain being reported under Interest and Other on our Consolidated Statements of Income for the Japanese Yen loan restatement, and described in Note R – Fair Value of Financial Instruments, Derivatives, and Marketable Securities. 

 

On January 23, 2008, a wholly-owned subsidiary of the Company entered into a Senior Secured Term Loan Facility denominated in Japanese Yen for the purchase of a Newbuilding PCTC, which was completed and delivered in March 2010. The decision to enter into this Yen loan was driven by the lower Yen interest rates versus the USD interest rates at that time.  Subsequently, we entered into a variable-to-fixed Yen interest rate swap (the “Facility”) designed to set the interest at 2.065%.  In June 2009, we received notification that our lender would be exercising its option to reduce the Yen financing on this vessel from 80% to 65% of the delivered vessel cost. The loan was fully drawn in March 2010 to the full amount available of Yen 5,102,500,000. Under current accounting guidelines, since this Facility is not denominated in our functional currency, the outstanding principal balance of the Facility as of the end of each reporting period is to be revalued in terms of USD, with any adjustments in the principal amount of USD owed recorded to earnings. Prior to December 2013, due to the amount of the Facility, we had sustained fluctuations that could have caused material swings in our reported results.  In December 2013, we entered into three Yen forward currency contracts for the full amount of the outstanding Facility.  As such, any future fluctuations of the Yen will no longer affect our reported results.  The average rate of exchange for the Yen has now been locked at 102.53.  Also at the time of entering into these contracts, we negotiated our Yen Facility with the current Lenders, which will now allow for that Facility to be converted to a USD based Facility at the above exchange rate.  All Facility terms and the final maturity will remain as currently reflected upon conversion. 

 

There was a significant change in the Yen to USD exchange rate at December 31, 2013 compared to December 31, 2012, resulting in a $5.9 million foreign exchange gain for the year ended December 31, 2013.  This amount is reported under Interest and Other on our Consolidated Statements of Income.

 

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

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The information required by Item 8 begins on page F-1 of this Form 10-K.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

 

ITEM 9a.  CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our Securities Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

As of December 31, 2013, we conducted an evaluation of the effectiveness of our disclosure controls and procedures.  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 as of December 31, 2013, our CEO and CFO have concluded that our disclosure controls and procedures are effective.  Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Management’s Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2013.  In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework (1992).  Based on our assessment, management has concluded that, as of December 31, 2013, our internal control over financial reporting is effective based on those criteria. 

 

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2013 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm as stated in their report, which appears herein. 

 

Changes in Internal Control over Financial Reporting

 

During the quarter ended December 31, 2013, we did not make any changes to our internal control over financial reporting that materially affected, or that we believe are reasonably likely to materially affect, our internal control over financial reporting. 

 

ITEM 9b.  OTHER INFORMATION

None.

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PART III

 

ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

We have adopted a written Code of Business Conduct and Ethics applicable to all officers, directors and employees, including our principal executive officer, principal financial officer and principal accounting officer.  In addition, (i) the audit, compensation and nominating and governance committees of our board have each adopted written charters governing their operations and (ii) our board has adopted written corporate governance guidelines.  Interested persons may obtain a copy of these materials without charge by writing to International Shipholding Corporation, Attention: Manuel G. Estrada, Vice President and Chief Financial Officer, 11 North Water Street,  RSA Battle House Tower, 18th Floor, Mobile,  Alabama 36602.  Copies are also available on the Investor Relations section of our website at www.intship.com.

 

The information relating to Directors and Executive Officers called for by Item 10 will be included in our definitive proxy statement to be filed pursuant to Section 14(a) of the Securities Exchange Act of 1934, and is incorporated herein by reference.

 

 

ITEM 11.  EXECUTIVE COMPENSATION

 

The information called for by Item 11 will be included in our definitive proxy statement to be filed pursuant to Section 14(a) of the Securities Exchange Act of 1934, and is incorporated herein by reference.

 

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

Equity Compensation Plan Information

 

The following table sets forth information as of December 31, 2013:  

 

 

 

 

Other

The balance of the information called for by Item 12 will be included in our definitive proxy statement to be filed pursuant to Section 14(a) of the Securities Exchange Act of 1934, and is incorporated herein by reference.

 

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

The information called for by Item 13 will be included in our definitive proxy statement to be filed pursuant to Section 14(a) of the Securities Exchange Act of 1934, and is incorporated herein by reference.

 

 

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ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES

 

The information called for by Item 14 will be included in our definitive proxy statement to be filed pursuant to Section 14(a) of the Securities Exchange Act of 1934, and is incorporated herein by reference.

 

PART IV

 

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

The following financial statements, schedules and exhibits are filed as part of this report:

 

(a)  1.    Financial Statements

(i) The following financial statements and related notes are included on pages F-1 through F-55 of this Form 10- K:

 

Report of Independent Registered Public Accounting Firm

Consolidated Statements of Income for the years ended December 31, 2013, 2012 and 2011

Consolidated Statements of Comprehensive Income for the years ended December 31, 2013, 2012 and 2011

Consolidated Balance Sheets at December 31, 2013 and 2012

Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2013, 2012 and 2011

Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011

Notes to Consolidated Financial Statements

 

2.    Financial Statement Schedules

The following financial statement schedules are included on page S-1 of this Form 10-K.

Schedule I -- Valuation and Qualifying Accounts and Reserves

 

All other financial statement schedules are not required under the related instructions or are inapplicable and therefore have been omitted.

 

3.    Exhibits

 

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*These exhibits filed with this 10-K report

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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.

 

INTERNATIONAL SHIPHOLDING CORPORATION

(Registrant)

 

/s/ Manuel G. Estrada

March 13, 2014By ______________________________

Manuel G. Estrada

Vice President and Chief Financial Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

 

INTERNATIONAL SHIPHOLDING CORPORATION

(Registrant)

 

/s/ Niels M. Johnsen

March 13, 2014By ____________________________

Niels M. Johnsen

Chief Executive Officer and

Chairman of the Board

 

/s/ Erik L. Johnsen

March 13, 2014By ____________________________

Erik L. Johnsen

President and Director

 

/s/ Edwin A. Lupberger

March 13, 2014By ____________________________

Edwin A. Lupberger

Director

 

/s/ H. Merritt Lane III

March 13, 2014By ____________________________

H. Merritt Lane III

Director

 

/s/ T. Lee Robinson, Jr.

March 13, 2014By ____________________________

T. Lee Robinson, Jr.

Director

 

/s/ James J. McNamara

March 13, 2014By ____________________________

James J. McNamara

Director

 

 

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/s/ Kenneth H. Beer

March 13, 2014By ____________________________

Kenneth H. Beer

Director

 

/s/ Harris V. Morrissette

March 13, 2014By ____________________________

Harris V. Morrissette

Director

 

/s/ Manuel G. Estrada

March 13, 2014 By ____________________________

Manuel G. Estrada

Vice President and Chief Financial Officer

 

/s/ Kevin M. Wilson

March 13, 2014By __________________________

Kevin M. Wilson

Controller