Note 1. | Accounting Policies |
Basis of Presentation and Use of Estimates
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). The interim condensed consolidated financial statements include the consolidated accounts of TOR Minerals International, Inc. (“TOR”, “we”, “us”, “our” or the “Company”) and its wholly-owned subsidiaries, TOR Processing and Trade, B.V. (“TPT”) and TOR Minerals Malaysia, Sdn. Bhd. (“TMM”), with all significant intercompany transactions eliminated. In our opinion, all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the consolidated financial position, results of operations and cash flows for the interim periods presented have been made. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such SEC rules and regulations. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2012, in our Annual Report on Form 10-K filed with the SEC on March 7, 2013. Operating results for the three and nine month periods ended September 30, 2013, are not necessarily indicative of the results for the year ending December 31, 2013.
Income Taxes
The Company records income taxes using the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
For the three and nine month periods ended September 30, 2013, income tax expense consisted of federal income tax benefit of approximately $103,000 and $88,000, respectively; state income tax expense of approximately $2,000 and $7,000, respectively; and foreign tax expense of approximately $134,000 and $148,000, respectively. For the three and nine month periods ended September 30, 2012, income tax expense consisted of federal income tax expense of approximately $105,000 and $688,000, respectively; state income tax expense of approximately $3,000 and $8,000, respectively; and foreign tax expense of approximately $408,000 and $706,000, respectively. Taxes are based on an estimated annualized consolidated effective tax rate of 26.3% for the year ended December 31, 2013.
When accounting for uncertainties in income taxes, we evaluate all tax years still subject to potential audit under the applicable state, federal and foreign income tax laws. We are subject to taxation in the United States, Malaysia and The Netherlands. Our federal income tax returns in the United States are subject to examination for the tax years ended December 31, 2010 through December 31, 2012. Our state returns, which are filed in Texas and Ohio, are subject to examination for the tax years ended December 31, 2009 through December 31, 2012. Our tax returns in various non-U.S. jurisdictions are subject to examination for various tax years ended December 31, 2007 through December 31, 2012.
As of January 1, 2012, we did not have any unrecognized tax benefits and there was no change during the nine month period ended September 30, 2013. In addition, we did not recognize any interest and penalties in our consolidated financial statements during the nine month period ended September 30, 2013. If any interest or penalties related to any income tax liabilities are imposed in future reporting periods, we expect to record both of these items as components of income tax expense.
Recently Adopted and Recently Issued Accounting Standards
On February 5, 2013, the Financial Accounting Standards Board issued an amendment to the disclosure requirements for reporting reclassifications out of accumulated other comprehensive income (“AOCI”). The new requirements were effective for the first interim or annual period beginning after December 15, 2012. The amendment requires companies to present information about reclassification adjustments from accumulated other comprehensive income to the income statement, including the income statement line items affected by the reclassification. The information must be presented in the financial statements in a single note or on the face of the financial statements. The new accounting guidance also requires the disclosure to be cross referenced to other financial statement disclosures for reclassification items that are not reclassified directly to net income in their entirety in the same reporting period. TOR adopted the new requirements in the first quarter of 2013; however, the adoption of this guidance did not have an effect on its consolidated financial position, results of operations or cash flows.
Long-term Debt – Financial Institutions
Following is a summary of our long-term debt to financial institutions:
| | (Unaudited) | | |
(In thousands) | | September 30, | | December 31, |
| | 2013 | | 2012 |
Fixed Rate term note payable to a U.S. bank, with an interest rate of 5.5% at September 30, 2013, due January 1, 2016, secured by real estate, leasehold improvements, property, plant and equipment, inventory and accounts receivable of our U.S. operation. | $ | 1,013 | $ | 1,309 |
Fixed rate Euro term note payable to a Netherlands bank, with an interest rate of 3.85% at September 30, 2013, due July 1, 2029, secured by TPT's land and office building purchased July 2004. (€260) | | 352 | | 363 |
Fixed rate Euro term note payable to a Netherlands bank, with an interest rate of 3.3% at September 30, 2013, due January 31, 2030, secured by TPT's land and building purchased January 2005. (€285) | | 386 | | 395 |
Fixed rate Euro term note payable to a Netherlands bank, with an interest rate of 4.05% at September 30, 2013, due July 31, 2015, secured by TPT's assets. (€71) | | 95 | | 143 |
Fixed rate Euro term note payable to a Netherlands bank, with an interest rate of 4.25% at September 30, 2013, due July 5, 2014, secured by TPT's assets. (€159) | | 216 | | 442 |
Malaysian Ringgit term note payable to a Malaysian bank, with an interest rate of 5.2% at September 30, 2013, due March 1, 2015, secured by TMM's property, plant and equipment. (RM 2,917) | | 895 | | 866 |
| | | | |
Total | | 2,957 | | 3,518 |
Less current maturities | | 1,111 | | 1,202 |
Total long-term debt - financial institutions | $ | 1,846 | $ | 2,316 |
U.S. Operation
On October 24, 2013, the Company agreed to change the loan agreement with American Bank, N.A. (the “Lender”). Under the terms of the change, the Lender lowered the required ratio of cash flow to debt service to 1.0 to 1.0 as measured on a rolling four quarter basis beginning with the four quarter period ending December 31, 2013 and continuing through the four quarter period ending December 31, 2014. Thereafter, the required ratio of cash flow to debt service shall be 1.25 to 1.0 measured on a rolling four quarter basis as originally detailed in the loan agreement.
Asian Operation
On October 25, 2013, TMM entered into an agreement with RHB Bank Berhad (“RHB”), a Malaysian Bank, to amend the banking facility currently in place between TMM & RHB. Under the terms of the agreement, RHB granted a new term loan to TMM in the amount of RM 3,200,000 Malaysian Ringgits ($1,018,300). Under the terms of the agreement, the term loan will be amortized over a period of five (5) years, and the interest rate will be 1.25% per annum above the RHB’s base lending rate, which is currently 6.6% per annum. The funds will be used to finance part of the cost of plant improvements to increase efficiency and production capacity.
On October 25, 2013, TMM entered into an agreement with HSBC Bank Malaysia Berhad (“HSBC”), a Malaysian Bank, to amend the banking facility currently in place between TMM & HSBC. Under the terms of the agreement, HSBC granted a new term loan to TMM in the amount of RM 5,000,000 Malaysian Ringgits ($1,591,090). Under the terms of the agreement, the term loan will be amortized over a period of five (5) years, and the interest rate will be 2.0% per annum above the HSBC’s base lending rate, which is currently 6.6% per annum. The funds will be used to finance part of the cost of plant improvements to increase efficiency and production capacity.
Short-term Debt
U.S. Operation
On December 31, 2010, the Company entered into a credit agreement (the “Agreement”) with American Bank, N.A. (the “Lender”) which established a $1,000,000 line of credit (the “Line”), and on March 1, 2012, the Line was increased from $1,000,000 to $2,000,000. On May 15, 2013, the Company and the Lender entered into the second amendment which extended the maturity date from October 15, 2013 to October 15, 2014 and reduced the minimum interest rate floor from 5.5% to 4.5%. Under the terms of the Agreement, the amount the Company is entitled to borrow under the Line is subject to a borrowing base, which is based on the loan value of the collateral pledged to the Lender to secure the indebtedness owing to the Lender by the Company. Amounts advanced under the Line bear interest at a variable rate equal to one percent per annum point above the Wall Street Journal Prime Rate as such prime rate changes from time to time, with a minimum floor rate of 4.50%. At September 30, 2013, the Company had an outstanding balance on the Line of $700,000.
Under the terms of the Agreement, the Company must maintain a ratio of cash flow to debt service of at least 1.25 to 1.0 measured on a rolling four quarter basis. At September 30, 2013, the ratio of cash flow to debt service was 1.49 to 1.0.
European Operation
On March 20, 2007, TPT, entered into a short-term credit facility (the “Credit Facility”) with Rabobank which increased TPT’s line of credit from €650,000 to €1,100,000. The Credit Facility was renewed on January 1, 2010 and has no stated maturity date. The Credit Facility, which has a variable interest rate of bank prime plus 2.8% (currently at 3.42%), is secured by TPT’s accounts receivable and inventory. At September 30, 2013, TPT had utilized €899,000 ($1,216,000) of its short-term credit facility.
TPT’s loan agreements covering both the Credit Facility and the term loans include subjective acceleration clauses that allow Rabobank to accelerate payment if, in the judgment of the bank, there are adverse changes in our business. We believe that such subjective acceleration clauses are customary in The Netherlands for such borrowings. However, if demand is made by Rabobank, we may be unable to refinance the demanded indebtedness, in which case Rabobank could foreclose on the assets of TPT.
Asian Operation
On May 21, 2013, TMM, amended its banking facility with HSBC to extend the maturity date from April 30, 2013 to April 30, 2014. The HSBC facility includes the following in Malaysian Ringgits (“RM”): (1) overdraft of RM 500,000; (2) an import/export line (“ECR”) of RM 6,460,000; and (3) a foreign exchange contract limit of RM 5,000,000 ($153,000, $1,983,000 and $1,534,000, respectively).
On April 17, 2013, TMM amended its banking facility with RHB to extend the maturity date from March 5, 2013 to March 24, 2014. The RHB facility includes the following: (1) an overdraft line of credit up to RM 1,000,000; (2) an ECR of RM 9,300,000; (3) a bank guarantee of RM 1,200,000; and (4) a foreign exchange contract limit of RM 25,000,000 ($307,000, $2,854,000, $368,000 and $7,673,000, respectively). At September 30, 2013, the outstanding balance on the line of credit was RM 700,000 ($215,000) at a current interest rate of 4.83% and RM 2,405,000 ($738,000) was outstanding on the foreign exchange contract at a current interest rate of 2.80%.
The banking facilities with both HSBC and RHB bear an interest rate on the overdraft facilities at 1.25% over bank prime and the ECR facilities bear interest at 1.0% above the funding rate stipulated by the Export-Import Bank of Malaysia Berhad. The ECR, a government supported financing arrangement specifically for exporters, is used by TMM for short-term financing of up to 180 days against customers’ and inter-company shipments. At September 30, 2013, the outstanding balance on the ECR facilities was RM 12,935,000 ($3,970,000) at a current interest rate of 5.0%.
The borrowings under both the HSBC and the RHB short term credit facilities are subject to certain subjective acceleration covenants based on the judgment of the banks and a demand provision that provide that the banks may demand repayment at any time. We believe such a demand provision is customary in Malaysia for such facilities. The loan agreements are secured by TMM’s property, plant and equipment. However, if demand is made by HSBC or RHB, we may be unable to refinance the demanded indebtedness, in which case, the lenders could foreclose on the assets of TMM. The credit facilities prohibit TMM from paying dividends, and the HSBC facility further prohibits loans to related parties without the prior consent of HSBC.
The following table summarizes the valuation of our financial instruments recorded on a fair value basis as of December 31, 2012 and September 30, 2013.
| | Fair Value Measurements |
(In thousands) | | Total | | Quoted Prices
in Active
Markets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) |
Liability | | | | | | | | |
December 31, 2012 | | | | | | | | |
Currency forward contracts | $ | (1) | $ | - | $ | (1) | $ | - |
September 30, 2013 | | | | | | | | |
Currency forward contracts | $ | (23) | $ | - | $ | (23) | $ | - |
Our foreign currency derivative financial instruments mitigate foreign currency exchange risks and include forward contracts. The forward contracts are marked-to-market at each balance sheet date with any resulting gain or loss recognized in income as part of the gain or loss on foreign currency exchange rate included under “Other Expense” on the Company’s consolidated income statement. The fair value of the currency forward contracts is determined using Level 2 inputs based on the currency rate in effect at the end of the reporting period.
The fair value of the Company’s debt is based on estimates using standard pricing models and Level 2 inputs, including the Company’s estimated borrowing rate, that take into account the present value of future cash flows as of the consolidated and condensed balance sheet date. The computation of the fair value of these instruments is performed by the Company. The carrying amounts and estimated fair values of the Company’s long-term debt, including current maturities, are summarized below:
| | September 30, 2013 | | December 31, 2012 |
(In thousands) | | Carrying
Value | | Fair
Value | | Carrying
Value | | Fair
Value |
Long-term debt, including
current portion | $ | 2,957 | $ | 2,883 | $ | 3,518 | $ | 3,455 |
The carrying amounts reported in the consolidated and condensed balance sheet for cash and cash equivalents, trade receivables, payables and accrued liabilities and short-term borrowings approximate fair value due to the short term nature of these instruments. Accordingly, these items have been excluded from the above table.
On August 1, 2010, the Company entered into a financial lease agreement with Dell Financial Services for new computer servers. The cost of the equipment under the capital lease, in the amount of $22,000, is included in the consolidated balance sheets as property, plant and equipment. Accumulated amortization of the leased equipment at September 30, 2013 was approximately $22,000. The capital lease is in the amount of $20,698 including interest of $1,605 (implicit interest rate 5.3%). The 36 month lease was fully amortized on August 1, 2013.
On September 4, 2011, TPT entered into a financial lease agreement with Diependael Leasing, BV for equipment related to the production of ALUPREM. The cost of the equipment under the capital lease, in the amount of €38,360 ($51,882), is included in the consolidated balance sheets as property, plant and equipment. Accumulated amortization of the leased equipment at September 30, 2013 was approximately €25,000 ($33,800). The capital lease is in the amount of €41,256 ($55,799) including interest of €2,896 ($3,917) (implicit interest rate 4.786%). The lease term is 36 months with equal monthly installments of €1,146 ($1,550). The net present value of the lease at September 30, 2013 was €12,310 ($17,000).
Note 5. | Calculation of Basic and Diluted Earnings per Share |
The following table sets forth the computation of basic and diluted earnings per share:
(in thousands, except per share amounts) | | Three Months
Ended September 30, | | Nine Months
Ended September 30, |
| | 2013 | | 2012 | | 2013 | | 2012 |
Numerator: | | | | | | | | |
Net Income | $ | 113 | $ | 1,837 | $ | 188 | $ | 4,792 |
Numerator for basic earnings per share -
income available to common shareholders | | 113 | | 1,837 | | 188 | | 4,792 |
Effect of dilutive securities: | | | | | | | | |
6% Convertible Debenture Interest Expense | | - | | - | | - | | 36 |
Numerator for diluted income per share -
income available to common shareholders
after assumed conversions | $ | 113 | $ | 1,837 | $ | 188 | $ | 4,828 |
Denominator: | | | | | | | | |
Denominator for basic income per share -
weighted-average shares | | 3,012 | | 2,968 | | 2,999 | | 2,714 |
Effect of dilutive securities: | | | | | | | | |
Employee stock options | | 8 | | 25 | | 2 | | 33 |
Detachable warrants | | 402 | | 448 | | 270 | | 454 |
6% Convertible Debenture | | - | | - | | - | | 182 |
Dilutive potential common shares | | 410 | | 473 | | 272 | | 669 |
Denominator for diluted income per share -
weighted-average shares and assumed conversions | | 3,422 | | 3,441 | | 3,271 | | 3,383 |
Basic income per common share | $ | 0.04 | $ | 0.62 | $ | 0.06 | $ | 1.77 |
Diluted income per common share | $ | 0.03 | $ | 0.53 | $ | 0.06 | $ | 1.43 |
For the three and nine month periods ended September 30, 2013 and 2012, approximately 88,000 and 45,000, respectively, of shares issuable upon exercise of employee stock options were excluded from the calculation of diluted earnings per share as the exercise price was greater than the average market price of the common shares and, therefore, the effect would be anti-dilutive.
Note 6. | Segment Information |
The Company and its subsidiaries operate in the business of pigment manufacturing and related products in three geographic segments. All United States manufacturing is done at the facility located in Corpus Christi, Texas. Foreign manufacturing is done by the Company’s wholly-owned subsidiaries, TMM, located in Malaysia, and TPT, located in The Netherlands. A summary of the Company’s manufacturing operations by geographic area is presented below:
(In thousands) | | United States
(Corpus Christi) | | Europe
(TPT) | | Asia
(TMM) | | Inter-Company
Eliminations | | Consolidated |
| | | | | | | | | | |
As of and for the three months ended: | | | | | | | | |
September 30, 2013 | | | | | | | | | | |
Net Sales: | | | | | | | | | | |
Customer sales | $ | 7,680 | $ | 2,124 | $ | 1,066 | $ | - | $ | 10,870 |
Intercompany sales | | 53 | | 1,674 | | 1,703 | | (3,430) | | - |
Total Net Sales | $ | 7,733 | $ | 3,798 | $ | 2,769 | $ | (3,430) | $ | 10,870 |
| | | | | | | | | | |
Location income (loss) | $ | (389) | $ | 353 | $ | 80 | $ | 69 | $ | 113 |
| | | | | | | | | | |
September 30, 2012 | | | | | | | | | | |
Net Sales: | | | | | | | | | | |
Customer sales | $ | 8,592 | $ | 1,645 | $ | 9,677 | $ | - | $ | 19,914 |
Intercompany sales | | 11 | | 1,910 | | 1,379 | | (3,300) | | - |
Total Net Sales | $ | 8,603 | $ | 3,555 | $ | 11,056 | $ | (3,300) | $ | 19,914 |
| | | | | | | | | | |
Location income | $ | 447 | $ | 293 | $ | 1,195 | $ | (98) | $ | 1,837 |
As of and for the nine months ended: | | | | | | | | |
September 30, 2013 | | | | | | | | | | |
Net Sales: | | | | | | | | | | |
Customer sales | $ | 23,264 | $ | 6,300 | $ | 3,465 | $ | - | $ | 33,029 |
Intercompany sales | | 110 | | 4,997 | | 7,342 | | (12,449) | | - |
Total Net Sales | $ | 23,374 | $ | 11,297 | $ | 10,807 | $ | (12,449) | $ | 33,029 |
| | | | | | | | | | |
Location income (loss) | $ | (361) | $ | 618 | $ | (113) | $ | 44 | $ | 188 |
| | | | | | | | | | |
Location assets | $ | 21,048 | $ | 11,305 | $ | 26,268 | $ | - | $ | 58,621 |
| | | | | | | | | | |
September 30, 2012 | | | | | | | | | | |
Net Sales: | | | | | | | | | | |
Customer sales | $ | 26,030 | $ | 5,818 | $ | 14,982 | $ | - | $ | 46,830 |
Intercompany sales | | 52 | | 4,735 | | 7,350 | | (12,137) | | - |
Total Net Sales | $ | 26,082 | $ | 10,553 | $ | 22,332 | $ | (12,137) | $ | 46,830 |
| | | | | | | | | | |
Location income | $ | 2,036 | $ | 585 | $ | 2,322 | $ | (151) | $ | 4,792 |
| | | | | | | | | | |
Location assets | $ | 19,053 | $ | 10,306 | $ | 30,485 | $ | - | $ | 59,844 |
Product sales of inventory between U.S., European and Asian operations are based on inter-company pricing, which includes an inter-company profit margin. In the geographic information, the location loss from all locations is reflective of these inter-company prices, as is inventory at the U.S. operation prior to elimination adjustments. Such presentation is consistent with the internal reporting reviewed by the Company’s chief operating decision maker. The elimination entries include an adjustment to the cost of sales resulting from the adjustment to ending inventory to eliminate inter-company profit, and the reversal of a similar adjustment from a prior period. To the extent there are net increases or declines period over period in U.S. inventories that include an inter-company component, the net effect of these adjustments can decrease or increase location profit.
Sales from the subsidiary to the Company and between subsidiaries are based upon profit margins which represent competitive pricing of similar products. Inter-company sales consisted of SR, HITOX, ALUPREM and TIOPREM.
For the three and nine month periods ended September 30, 2013, the Company recorded stock-based employee compensation expense of $23,000 and $85,000, respectively. For the three and nine month periods ended September 30, 2012, the Company recorded stock-based employee compensation expense of $13,000 and $71,000, respectively. This compensation expense is included in the selling, general and administrative expenses in the accompanying consolidated statements of income.
The Company granted 21,000 options during each of the nine month periods ended September 30, 2013 and 2012.
As of September 30, 2013, there was approximately $390,000 of stock-based employee compensation expense related to non-vested awards which is expected to be recognized over a weighted average period of 3.42 years.
As most options issued under the 2000 Incentive Plan are incentive stock options, the Company does not normally receive significant excess tax benefits relating to the compensation expense recognized on vested options.
A summary of inventory follows:
(In thousands) | | | | | | September 30, | | December 31, |
| | | | | | 2013 | | 2012 |
Raw materials | | | | | $ | 17,652 | $ | 14,002 |
Work in progress | | | | | | 2,837 | | 2,848 |
Finished goods | | | | | | 5,698 | | 5,238 |
Supplies | | | | | | 1,028 | | 868 |
Total Inventories | | | | | | 27,215 | | 22,956 |
Inventory reserve | | | | | | (74) | | (61) |
Net Inventories | | | | | $ | 27,141 | $ | 22,895 |
The Company has exposure to certain risks relating to its ongoing business operations, including financial, market, political and economic risks. The following discussion provides information regarding our exposure to the risks of changing foreign currency exchange rates. The Company has not entered into foreign currency contracts for trading or speculative purposes in the past, nor do we currently anticipate entering into such contracts for trading or speculative purposes in the future.
Foreign Currency Forward Contracts
We manage the risk of changes in foreign currency exchange rates, primarily at our Asian Operation, through the use of foreign currency contracts. Foreign exchange contracts are used to protect the Company from the risk that the eventual cash flows resulting from transactions in foreign currencies, including sales and purchases transacted in a currency other than the functional currency, will be adversely affected by changes in exchange rates. We report the fair value of the derivatives on our consolidated and condensed balance sheets and changes in the fair value are recognized in earnings in the period of the change.
At September 30, 2013, we marked these contracts to market, recording $23,000 as a current liability on the consolidated and condensed balance sheet. For the three and nine month periods ended September 30, 2013, we recorded a net loss on these contracts of $23,000 and a net gain of $1,000, respectively, as a component of our net income. For the three and nine month periods ended September 30, 2012, we recorded a net gain of $88,000 and $75,000, respectively, as a component of our net income.
The following table summarizes the gross fair market value of all derivative instruments, which are not designated as hedging instruments and their location in our Condensed Consolidated Balance Sheet:
(In thousands) |
Liability Derivatives |
| | | | September 30, | | December 31, |
Derivative Instrument | | Location | | 2013 | | 2012 |
Foreign Currency Exchange Contracts | | Accrued Expenses | $ | 23 | $ | 1 |
The following table summarizes the impact of the Company’s derivatives on the condensed consolidated financial statements of operations for the three and nine month periods ended September 30, 2013 and 2012:
| | | | Amount of Gain (Loss) Recognized in Income
(In thousands) |
| | Location of Gain | | Three Months Ended | | Nine Months Ended |
Derivative | | (Loss) on Derivative | | September 30, | | September 30, |
Instrument | | Instrument | | 2013 | | 2012 | | 2013 | | 2012 |
Foreign Currency
Exchange Contracts | | Loss on foreign currency
exchange rate | $ | (23) | $ | 88 | $ | 1 | $ | 75 |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
Company Overview
We are a global specialty mineral company engaged in the business of manufacturing and marketing mineral products for use as pigments, pigment extenders, engineered fillers and flame retardants used in the manufacture of paints, industrial coatings, plastics, and catalysts applications. We have operations in the U.S., Asia and Europe.
Our U.S. Operation, located in Corpus Christi, Texas, manufactures HITOX, BARTEX, HALTEX/OPTILOAD and TIOPREM. The facility is also the global headquarters for the Company. The Asian Operation, located in Ipoh, Malaysia, manufactures Synthetic Rutile (“SR”), HITOX and TIOPREM and our European Operation, located in Hattem, Netherlands, manufactures ALUPREM and BARYPREM.
Operating expenses in the foreign locations are primarily in local currencies. Accordingly, we have exposure to fluctuation in foreign currency exchange rates. These fluctuations impact the translation of sales, earnings, assets and liabilities from local currency to the U.S. Dollar.
Our business is closely correlated with the construction industry and its demand for materials that use pigments, such as paints and plastics. This has generally led to higher sales in our second and third quarters due to increases in construction and maintenance during warmer weather. Also, pigment consumption is closely correlated with general economic conditions. When the economy is in an expansionary state, there is typically an increase in pigment consumption while a slow down typically results in decreased pigment consumption. When the construction industry or the economy is in a period of decline, TOR's sales and profit are likely to be adversely affected.
Following are our results for the three and nine month periods ended September 30, 2013 and 2012.
| | (Unaudited) |
(In thousands, except per share amounts) | | Three Months
Ended September 30, | | Nine Months
Ended September 30, |
| | 2013 | | 2012 | | 2013 | | 2012 |
NET SALES | $ | 10,870 | $ | 19,914 | $ | 33,029 | $ | 46,830 |
Cost of sales | | 9,289 | | 16,068 | | 28,242 | | 36,127 |
GROSS MARGIN | | 1,581 | | 3,846 | | 4,787 | | 10,703 |
Technical services and research and development | | 135 | | 90 | | 459 | | 273 |
Selling, general and administrative expenses | | 1,119 | | 1,242 | | 3,644 | | 3,825 |
(Gain) loss on disposal of assets | | - | | (6) | | 10 | | (6) |
OPERATING INCOME | | 327 | | 2,520 | | 674 | | 6,611 |
OTHER EXPENSE: | | | | | | | | |
Interest expense, net | | (103) | | (143) | | (286) | | (397) |
Loss on foreign currency exchange rate | | (84) | | (24) | | (151) | | (21) |
Other, net | | 6 | | - | | 18 | | 1 |
INCOME BEFORE INCOME TAX | | 146 | | 2,353 | | 255 | | 6,194 |
Income tax expense | | 33 | | 516 | | 67 | | 1,402 |
NET INCOME | $ | 113 | $ | 1,837 | $ | 188 | $ | 4,792 |
| | | | | | | | |
Income per common share: | | | | | | | | |
Basic | $ | 0.04 | $ | 0.62 | $ | 0.06 | $ | 1.77 |
Diluted | $ | 0.03 | $ | 0.53 | $ | 0.06 | $ | 1.43 |
Results of Operations
Net Sales: Consolidated net sales for the three and nine month periods ended September 30, 2013 decreased approximately $9,044,000, or 45%, and $13,801,000, or 29%, respectively, as compared to the same three and nine month periods of 2012 when we experienced increases in our consolidated net sales of $8,513,000 or 75% and $15,355,000 or 49%, respectively. The decline in sales for both the three and nine month periods is primarily related to a decrease in the sale of our SR and HITOX products, both of which continue to be affected by weakness in the broader market for titanium dioxide (“TiO2”).
Following is a summary of our consolidated products sales for the three and nine month periods ended September 30, 2013 and 2012 (in thousands). All inter-company sales have been eliminated.
| | (Unaudited) | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
Product | | 2013 | | 2012 | | Variance | | | 2013 | | 2012 | | Variance |
HITOX | $ | 3,717 | 34% | $ | 3,914 | 20% | $ | (197) | -5% | | $ | 11,553 | 35% | $ | 15,232 | 33% | $ | (3,679) | -24% |
ALUPREM | | 3,432 | 32% | | 3,377 | 18% | | 55 | 2% | | | 10,456 | 32% | | 10,795 | 25% | | (339) | -3% |
BARTEX /
BARYPREM | | 2,135 | 19% | | 2,074 | 9% | | 61 | 3% | | | 6,180 | 19% | | 5,642 | 10% | | 538 | 10% |
HALTEX /
OPTILOAD | | 877 | 8% | | 917 | 4% | | (40) | -4% | | | 2,627 | 8% | | 2,819 | 6% | | (192) | -7% |
TIOPREM | | 408 | 4% | | 623 | 3% | | (215) | -35% | | | 1,555 | 4% | | 1,377 | 3% | | 178 | 13% |
SYNTHETIC
RUTILE | | 96 | 1% | | 8,862 | 45% | | (8,766) | -99% | | | 96 | <1% | | 10,410 | 22% | | (10,314) | -99% |
OTHER | | 205 | 2% | | 147 | 1% | | 58 | 39% | | | 562 | 2% | | 555 | 1% | | 7 | 1% |
Total | $ | 10,870 | 100% | $ | 19,914 | 100% | $ | (9,044) | -45% | | $ | 33,029 | 100% | $ | 46,830 | 100% | $ | (13,801) | -29% |
HITOX sales decreased 5% for the three month period ended September 30, 2013, primarily due to a decrease in selling price of approximately 12% which was partially offset by an increase in volume of 7%. This compares to a decrease of 27% for the same three month period of 2012, primarily due to a decrease in volume of 44%, which was partially offset by an increase in selling price of approximately 17%.
For the nine month period ended September 30, 2013, HITOX sales declined 24%, primarily due to a decrease in volume and selling price of approximately 19% and 5%, respectively. This compares to an increase of approximately 8% for the nine month period ended September 30, 2012, primarily due to an increase in average selling price of approximately 31%, offset by a reduction in volume of approximately 23%.
The decrease in sales volumes has been experienced throughout the TiO2 market as both producers and consumers have been undertaking inventory correction initiatives, primarily due to the economic weakness and uncertainty as well as to align production levels and inventories to the current demand levels for TiO2 products.
ALUPREM sales increased 2% for the three month period ended September 30, 2013, primarily due to an increase in selling price in the European market, as well as the effect of the change in the foreign currency rate between the Euro and the U.S. Dollar as the Euro gained strength on the U.S. Dollar. The impact on our consolidated ALUPREM sales was an increase in selling price of approximately 3% and approximately 2% related to the change in currency rate. Our consolidated sales volume declined approximately 3%, primarily due to a decrease in volume of one of our significant U.S. customers, which was partially offset by an increase in volume in our European sales. For the three month period ended September 30, 2012, ALUPREM sales were flat in comparison with the prior year.
For the nine month period ended September 30, 2013, ALUPREM sales decreased approximately 3%, primarily related to decrease in volume in volume and selling price of approximately 2% and 2%, respectively, which was partially offset by the impact of the foreign currency rate, which increased sales approximately 1%. The year-to-date decrease in sales volume is primarily related to a decrease in the order pattern of one of our significant U.S. customers, which was partially offset by an increase in volume in our European sales; whereas, for the nine month period ended September 30, 2012, our consolidated ALUPREM sales increased approximately 10%, primarily due to an increase in volume related of a significant U.S. customer.
BARTEX/BARYPREM sales increased approximately 3% during the three month period ended September 30, 2013, primarily due to an increase in volume of approximately 0.5%, selling price of approximately 2.2% and the effect of the change in foreign currency of approximately 0.3%. This compares to an increase of approximately 58%, primarily related to an increase in volume and selling price of 51% and 7%, respectively, during the same three month period of 2012.
For the nine month period ended September 30, 2013, BARTEX/BARYPREM sales increased approximately 10% of which volume represented approximately 4.5%, selling price approximately 4.5% and the effect of the change in foreign currency rate increased sales approximately 1%. During the nine month period ended September 30, 2012, sales increased approximately 60% of which volume represented approximately 51% and selling price approximately 9%.
HALTEX/OPTILOAD sales decreased 4% during the three month period ended September 30, 2013, primary due to lower average selling prices from a change in product mix which reduced sales approximately 5%. Partially offsetting this reduction was an increase in volume of 1%. For the three month period ended September 30, 2012, HALTEX/OPTILOAD sales increased approximately 21% in volume.
For the nine month period ended September 30, 2013, HALTEX/OPTILOAD sales decreased 7%, primarily due to a reduction in volume of approximately 4% and a change in the product mix of approximately 3%. HALTEX/OPTILOAD volumes increased approximately 18% during the nine month period ended September 30, 2012.
TIOPREM sales decreased 35% for the three month period ended September 30, 2013, primarily due to a decrease in volume of approximately 28% and a decrease in selling price of approximately 7%. This compares to an increase of 82% for the three month period ended September 30, 2012, of which volume represented approximately 65% and selling price approximately 17%.
For the nine month period ended September 30, 2013, TIOPREM sales increased approximately 13% of which volume represented approximately 20% and the effect of the change in foreign currency increased sales approximately 1%. A decrease in selling price, primarily related to product mix, reduced sales approximately 8%. For the nine month period ended September 30, 2012, sales increased 23%, primarily due to an increase in volume.
Synthetic Rutile (“SR”) sales represented approximately 1% of our total consolidated sales for the three month period ended September 30, 2013, as compared to approximately 45% for the same three month period of 2012. For the nine month period ended September 30, 2013, SR sales represented less than 1% of our total consolidated sales. This compares to 22% for the same nine month period of 2012. During 2012, favorable market trends allowed us to sell a significant quantity of SR to new customers; whereas, during 2013, weak market conditions have limited our ability to sell SR to third parties.
U.S. Operation
Our U.S. Operation manufactures and sells HITOX, BARTEX, HALTEX/OPTILOAD and TIOPREM to third party customers. In addition, we purchase ALUPREM and HITOX from our subsidiaries, TPT and TMM, for distribution in the Americas. Following is a summary of net sales for our U.S. Operation for the three and nine month periods ended September 30, 2013 and 2012 (in thousands), as well as a summary of the material changes. All inter-company sales have been eliminated.
| | (Unaudited) | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
Product | | 2013 | | 2012 | | Variance | | | 2013 | | 2012 | | Variance |
HITOX | $ | 2,438 | 32% | $ | 2,880 | 34% | $ | (442) | -15% | | $ | 7,458 | 32% | $ | 9,882 | 38% | $ | (2,424) | -25% |
ALUPREM | | 2,012 | 26% | | 2,347 | 27% | | (335) | -14% | | | 6,256 | 27% | | 7,104 | 27% | | (848) | -12% |
BARTEX | | 1,823 | 24% | | 1,787 | 21% | | 36 | 2% | | | 5,105 | 22% | | 4,711 | 18% | | 394 | 8% |
HALTEX /
OPTILOAD | | 877 | 11% | | 917 | 11% | | (40) | -4% | | | 2,627 | 11% | | 2,819 | 11% | | (192) | -7% |
TIOPREM | | 365 | 5% | | 555 | 6% | | (190) | -34% | | | 1,337 | 6% | | 1,038 | 4% | | 299 | 29% |
OTHER | | 165 | 2% | | 106 | 1% | | 59 | 56% | | | 481 | 2% | | 476 | 2% | | 5 | 1% |
Total | $ | 7,680 | 100% | $ | 8,592 | 100% | $ | (912) | -11% | | $ | 23,264 | 100% | $ | 26,030 | 100% | $ | (2,766) | -11% |
HITOX sales decreased 15% for the three month period ended September 30, 2013, primarily due to a decrease in volume of approximately 9% and selling price of 6%, respectively, due primarily to a weakening in the global TiO2 market. This compares to a decrease of 15% for the three month period ended September 30, 2012, primarily due to a decrease in volume of approximately 31% which was partially offset by an increase in selling price of 16%.
For the nine month period ended September 30, 2013, the decrease in HITOX sales of 25% is primarily related to a decrease in volume of 21% and selling price of 4%. During the same nine month period of 2012, sales increased 20%, primarily due to a tight supply of commodity titanium dioxide, resulting in an increase in selling price of approximately 32%, which was partially offset by a decrease in volume of 12%. The year over year decrease in volume is primarily related to the weakening in the global TiO2 market.
ALUPREM sales during the third quarter decreased approximately 14% as compared to an increase of 52% during the third quarter of 2012. For the nine month period ended September 30, 2013, U.S. ALUPREM sales decreased 12% as compared to an increase of 81% during the same nine month period of 2012. The decrease in sales for the three and nine month periods ended September 30, 2013 is due to a change in the ordering pattern of one of our significant U.S. customers.
BARTEX sales increased approximately 2% for the three month period ended September 30, 2013, primarily due to an increase in selling price. This compares to an increase of approximately 58%, primarily related to an increase in volume and selling price of 51% and 7%, respectively. For the nine month periods ended September 30, 2013 and 2012, BARTEX sales increased 8% and 60%, respectively, primarily due to an increase in volume of 3% and 51%, respectively, and an increase in selling price of 5% and 9%, respectively.
TIOPREM sales decreased approximately 34% during the three month period ended September 30, 2013, primarily due to a decrease in volume and selling price of approximately 27% and 7%, respectively, due to the impact of the weakening global TiO2 market. For the three month period ended September 30, 2012, TIOPREM sales increased approximately 260% due to an increase in volume and selling price of approximately 232% and 28%, respectively.
For the nine month period ended September 30, 2013, TIOPREM sales increased approximately 29%, primarily due to an increase in volume of approximately 41% which was partially offset by a decrease in selling price of approximately 12%. For the same nine month period of 2012, TIOPREM sales increased approximately 80%, primarily due to an increase in volume and selling price of approximately 52% and 28%, respectively.
European Operation
Our subsidiary in The Netherlands, TPT, manufactures and sells ALUPREM and BARYPREM to third party customers, as well as to our U.S. Operation for distribution to U.S. customers. In addition, TPT purchases HITOX from TMM for distribution in Europe. The following table represents TPT’s net sales (in thousands) for the three and nine month periods ended September 30, 2013 and 2012 to third party customers. All inter-company sales have been eliminated.
| | (Unaudited) | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
Product | | 2013 | | 2012 | | Variance | | | 2013 | | 2012 | | Variance |
ALUPREM | $ | 1,420 | 67% | $ | 1,030 | 57% | $ | 390 | 38% | | $ | 4,200 | 67% | $ | 3,691 | 62% | $ | 509 | 14% |
HITOX | | 370 | 17% | | 317 | 19% | | 53 | 17% | | | 952 | 15% | | 1,142 | 20% | | (190) | -17% |
BARYPREM | | 312 | 15% | | 287 | 23% | | 25 | 9% | | | 1,075 | 17% | | 931 | 17% | | 144 | 15% |
TIOPREM | | 22 | 1% | | 11 | 1% | | 11 | 100% | | | 73 | 1% | | 54 | 1% | | 19 | 35% |
Total | $ | 2,124 | 100% | $ | 1,645 | 100% | $ | 479 | 29% | | $ | 6,300 | 100% | $ | 5,818 | 100% | $ | 482 | 8% |
ALUPREM sales in Europe increased 38% for the three month period ended September 30, 2013, primarily due to an increase in volume, selling price and the effect of the change in foreign currency as the EURO strengthen against the U.S. Dollar of approximately 23%, 7% and 8%, respectively. This compares to a decrease of 38% for the three month period ended September 30, 2012, primarily due to decrease in volume of approximately 40%, which was partially offset by an increase in selling price of approximately 2%.
For the nine month period end September 30, 2013, ALUPREM sales increased approximately 14%, primarily due to an increase in volume and the effect of the change in foreign currency as the EURO strengthen against the U.S. Dollar of approximately 16% and 4%, respectively, which was partially offset by a decrease in selling price of approximately 6%. For the nine month period ended September 30, 2012, ALUPREM sales decreased approximately 31%, primarily due to a decrease in volume of approximately 33%, which was partially offset by an increase in selling price of approximately 2%.
HITOX sales in Europe increased approximately 17% for the three month period ended September 30, 2013, primarily due to an increase in volume and the effect of the change in foreign currency as the EURO strengthen against the U.S. Dollar of approximately 21% and 4%, respectively, which was partially offset by a decrease in selling price of approximately 8%. This compares to an increase of 37% during the three month period ended September 30, 2012, primarily due to an increase in volume and selling price of approximately 14% and 23%, respectively.
For the nine month period ended September 30, 2013, HITOX sales decreased approximately 17%, primarily due to a decrease in volume, selling price and the effect of the change in foreign currency of approximately 10%, 2% and 5%. For the nine month period ended September 30, 2012, HITOX sales increased approximately 3% primarily related to volume.
BARYPREM sales in Europe increased approximately 9% for the three month period ended September 30, 2013, primarily due to an increase in volume, selling price and the effect of the change in foreign currency as the EURO strengthen against the U.S. Dollar of approximately 2%, 5% and 2%, respectively. For the nine month period ended September 30, 2013, sales increased approximately 15% due to an increase in volume, selling price and the effect of the change in foreign currency of approximately 8%, 2% and 5%, respectively. This follows significant increases in volume during the same three and nine month periods of 2012 as the product gained greater acceptance in the European market.
TIOPREM sales in Europe increase approximately 100% during the three month period ended September 30, 2013, primarily due to an increase in volume, selling price and the effect of the change in foreign currency as the EURO strengthen against the U.S. Dollar of approximately 64%, 9% and 27%, respectively. For the nine month period ended September 30, 2013, sales increased approximately 35%, primarily due to an increase in volume, selling price and the effect of the change in foreign currency of approximately 18%, 5% and 12%, respectively. For the three and nine month periods ended September 30, 2012, sales decreased 81% and 75%, respectively, primarily due to a decline in volume resulting from a weak European economy.
Asian Operation
Our subsidiary in Malaysia, TMM, manufactures and sells HITOX and SR to third party customers, as well as to our U.S. Operation and TPT. The following table represents TMM’s sales (in thousands) for the three and nine month periods ended September 30, 2013 and 2012 to third party customers. All inter-company sales have been eliminated.
| | (Unaudited) | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
Product | | 2013 | | 2012 | | Variance | | | 2013 | | 2012 | | Variance |
HITOX | $ | 909 | 85% | $ | 717 | 7% | $ | 192 | 27% | | $ | 3,143 | 91% | $ | 4,208 | 28% | $ | (1,065) | -25% |
TIOPREM | | 21 | 2% | | 57 | 1% | | (36) | -63% | | | 145 | 4% | | 285 | 2% | | (140) | -49% |
SR | | 96 | 9% | | 8,862 | 92% | | (8,766) | -99% | | | 96 | 3% | | 10,410 | 69% | | (10,314) | -99% |
OTHER | | 40 | 4% | | 41 | <1% | | (1) | -2% | | | 81 | 2% | | 79 | 1% | | 2 | 3% |
Total | $ | 1,066 | 100% | $ | 9,677 | 100% | $ | (8,611) | -89% | | $ | 3,465 | 100% | $ | 14,982 | 100% | $ | (11,517) | -77% |
HITOX sales in Asia increased approximately 27% for the three month period ended September 30, 2013, primarily due to an increase in volume of approximately 62%, which was partially offset by a decrease in selling price of approximately 35%. This compares to an decrease of approximately 59% for the same three period of 2012, primarily related to a decrease in volume of approximately 74%, which was partially offset by an increase in selling price of approximately 15%.
For the nine month period ended September 30, 2013, HITOX sales decreased approximately 25%, primarily due to a decrease in volume and selling price of approximately 18% and 8%, respectively, which was partially offset by the effect of the change in the foreign currency exchange rate as the U.S. Dollar strengthened against the MR resulting in an increase in sales of approximately 1%. For the nine month period ended September 30, 2012, HITOX sales decreased approximately 11%, primarily due to a decrease in volume of approximately 43%, which was partially offset by an increase in selling price of approximately 32%.
TIOPREM sales in Asia decreased approximately 63% during the three month period ended September 30, 2013, primarily related to a decrease in volume. This compares to a decrease of approximately 56% during the same three month period of 2012, primarily related to a decrease in volume of approximately 61%, which was partially offset by an increase in selling price of approximately 5%.
For the nine month period ended September 30, 2013, TIOPREM sales decreased approximately 49% due primarily to a decrease in volume of approximately 51%, which was partially offset by an increase in selling price and the effect of the change in the foreign currency exchange rate of approximately 1% each. This compares to a decrease of approximately 13% related to a decrease in volume of approximately 29%, which was partially offset by an increase in selling price of approximately 16%.
SR sales represented approximately 9% of TMM’s total sales for the three month period ended September 30, 2013, as compared to approximately 92% for the same three month period of 2012. The decrease in SR sales of approximately 99% for the third quarter 2013 relates to a decrease in volume and selling price of approximately 98% and 1%; whereas, the increase in the third quarter of 2012 related to volume.
For the nine month period ended September 30, 2013, SR sales represented approximately 3% of TMM’s total sales. This compares to 69% for the same nine month period of 2012. The year to date decrease in SR sales of approximately 99% relates to a decrease in volume and selling price of approximately 98% and 1%, respectively; whereas, the 2012 year to date increase related to volume. During 2012, favorable market trends allowed us to sell a significant quantity of SR to new customers; whereas, during 2013, weak market conditions have limited our ability to sell SR to third parties.
Other Consolidated Results
Gross Margin: The following table represents our net sales, cost of sales and gross margin for the three and nine month periods ended September 30, 2013 and 2012.
| | (Unaudited) |
(In thousands) | | Three Months
Ended September 30, | | Nine Months
Ended September 30, |
| | 2013 | | 2012 | | 2013 | | 2012 |
NET SALES | $ | 10,870 | $ | 19,914 | $ | 33,029 | $ | 46,830 |
Cost of sales | | 9,289 | | 16,068 | | 28,242 | | 36,127 |
GROSS MARGIN | $ | 1,581 | $ | 3,846 | $ | 4,787 | $ | 10,703 |
GROSS MARGIN % | | 15 % | | 19 % | | 14 % | | 23 % |
For the three month period ended September 30, 2013, gross margin decreased approximately 4%. For the third quarter, the primary factors influencing the decrease in gross margin include a decrease in selling price of approximately 5% and an increase in the cost of raw materials and energy costs of approximately 6%, which were partially offset by improved operating efficiencies, resulting in an increase in the gross margin of approximately 7%.
For the nine month period ended September 30, 2013, gross margin decreased approximately 9%. The primary factors influencing the decrease in gross margin include a decrease in selling price of approximately 5% and an increase in the cost of raw materials of approximately 6%, which were partially offset by improved operating efficiencies, resulting in an increase in the gross margin of approximately 2%.
Selling, General, Administrative and Expenses (“SG&A”): SG&A expense decreased approximately 10% during the three month period ended September 30, 2013, primarily due to a reduction in selling expense and legal fees of approximately 6% and 4%, respectively.
For the nine month period ended September 30, 2013, SG&A expenses decreased approximately 5%, primarily due to a decrease in selling expense, consulting fees and legal fees of approximately 2%, 2% and 3%, respectively, which was partially offset by an increase in accounting fees of approximately 2%, respectively.
Interest Expense: Net interest expense for the three and nine month periods ended September 30, 2013 decreased approximately $40,000 and $111,000, respectively, as compared to the same periods of 2012, primarily due to a decrease in our average outstanding long and short-term financing, as well as a reduction in interest rates on our long-term debt in the U.S. and on two term loans at TPT.
Income Taxes: For the three and nine month periods ended September 30, 2013, income tax expense consisted of federal income tax benefit of approximately $103,000 and $88,000, respectively; state income tax expense of approximately $2,000 and $7,000, respectively; and foreign tax expense of approximately $134,000 and $148,000, respectively. For the three and nine month periods ended September 30, 2012, income tax expense consisted of federal income tax expense of approximately $105,000 and $688,000, respectively; state income tax expense of approximately $3,000 and $8,000, respectively; and foreign tax expense of approximately $408,000 and $706,000, respectively. Taxes are based on an estimated annualized consolidated effective tax rate of 26.3% for the year ended December 31, 2013.
Liquidity, Capital Resources and Other Financial Information
Long-term Debt – Financial Institutions
Following is a summary of our long-term debt to financial institutions:
| | (Unaudited) | | |
(In thousands) | | September 30, | | December 31, |
| | 2013 | | 2012 |
Fixed Rate term note payable to a U.S. bank, with an interest rate of 5.5% at September 30, 2013, due January 1, 2016, secured by real estate, leasehold improvements, property, plant and equipment, inventory and accounts receivable of our U.S. operation. | $ | 1,013 | $ | 1,309 |
Fixed rate Euro term note payable to a Netherlands bank, with an interest rate of 3.85% at September 30, 2013, due July 1, 2029, secured by TPT's land and office building purchased July 2004. (€260) | | 352 | | 363 |
Fixed rate Euro term note payable to a Netherlands bank, with an interest rate of 3.3% at September 30, 2013, due January 31, 2030, secured by TPT's land and building purchased January 2005. (€285) | | 386 | | 395 |
Fixed rate Euro term note payable to a Netherlands bank, with an interest rate of 4.05% at September 30, 2013, due July 31, 2015, secured by TPT's assets. (€71) | | 95 | | 143 |
Fixed rate Euro term note payable to a Netherlands bank, with an interest rate of 4.25% at September 30, 2013, due July 5, 2014, secured by TPT's assets. (€159) | | 216 | | 442 |
Malaysian Ringgit term note payable to a Malaysian bank, with an interest rate of 5.2% at September 30, 2013, due March 1, 2015, secured by TMM's property, plant and eqiupment. (RM 2,917) | | 895 | | 866 |
| | | | |
Total | | 2,957 | | 3,518 |
Less current maturities | | 1,111 | | 1,202 |
Total long-term debt - financial institutions | $ | 1,846 | $ | 2,316 |
U.S. Operation
On October 24, 2013, Company agreed to change the loan agreement with American Bank, N.A. (the “Lender”). Under the terms of the change, the Lender lowered the required ratio of cash flow to debt service to 1.0 to 1.0 as measured on a rolling four quarter basis beginning with the four quarter period ending December 31, 2013 and continuing through the four quarter period ending December 31, 2014. Thereafter, the required ratio of cash flow to debt service shall be 1.25 to 1.0 measured on a rolling four quarter basis as originally detailed in of the loan agreement.
Asian Operation
On October 25, 2013, TMM entered into an agreement with RHB to amend the banking facility currently in place between TMM & RHB. Under the terms of the agreement, RHB granted a new term loan to TMM in the amount of RM 3,200,000 Malaysian Ringgits ($1,018,300). Under the terms of the agreement, the term loan will be amortized over a period of five (5) years and the interest rate will be 1.25% per annum above the Bank’s base lending rate which is currently 6.6% per annum. The funds will be used to finance part of the cost of plant improvements to increase efficiency and production capacity.
On October 25, 2013, TMM entered into an agreement with HSBC to amend the banking facility currently in place between TMM & HSBC. Under the terms of the agreement, HSBC granted a new term loan to TMM in the amount of RM 5,000,000 Malaysian Ringgits ($1,591,090). Under the terms of the agreement, the term loan will be amortized over a period of five (5) years and the interest rate will be 2.0% per annum above the Bank’s base lending rate which is currently 6.6% per annum. The funds will be used to finance part of the cost of plant improvements to increase efficiency and production capacity.
Short-term Debt
U.S. Operation
On December 31, 2010, the Company entered into a credit agreement (the “Agreement”) with American Bank, N.A. (the “Lender”) which established a $1,000,000 line of credit (the “Line”), and on March 1, 2012, the Line was increased from $1,000,000 to $2,000,000. On May 15, 2013, the Company and the Lender entered into the second amendment which extended the maturity date from October 15, 2013 to October 15, 2014 and reduced the minimum interest rate floor from 5.5% to 4.5%. Under the terms of the Agreement, the amount the Company is entitled to borrow under the Line is subject to a borrowing base, which is based on the loan value of the collateral pledged to the Lender to secure the indebtedness owing to the Lender by the Company. Amounts advanced under the Line bear interest at a variable rate equal to one percent per annum point above the Wall Street Journal Prime Rate as such prime rate changes from time to time, with a minimum floor rate of 4.50%. At September 30, 2013, the Company had an outstanding balance on the Line of $700,000.
Under the terms of the Agreement, the Company must maintain a ratio of cash flow to debt service of at least 1.25 to 1.0 measured on a rolling four quarter basis. At September 30, 2013, the ratio of cash flow to debt service was 1.49 to 1.0.
European Operation
On March 20, 2007, TPT entered into a short-term credit facility (the “Credit Facility”) with Rabobank which increased TPT’s line of credit from €650,000 to €1,100,000. The Credit Facility was renewed on January 1, 2010 and has no stated maturity date. The Credit Facility, which has a variable interest rate of bank prime plus 2.8% (currently at 3.42%), is secured by TPT’s accounts receivable and inventory. At September 30, 2013, TPT had utilized €899,000 ($1,216,000) of its short-term credit facility.
TPT’s loan agreements covering both the Credit Facility and the term loans include subjective acceleration clauses that allow Rabobank to accelerate payment if, in the judgment of the bank, there are adverse changes in our business. We believe that such subjective acceleration clauses are customary in The Netherlands for such borrowings. However, if demand is made by Rabobank, we may be unable to refinance the demanded indebtedness, in which case Rabobank could foreclose on the assets of TPT.
Asian Operation
On May 21, 2013, TMM amended its banking facility with HSBC to extend the maturity date from April 30, 2013 to April 30, 2014. The HSBC facility includes the following in Malaysian Ringgits (“RM”): (1) overdraft of RM 500,000; (2) an import/export line (“ECR”) of RM 6,460,000; and (3) a foreign exchange contract limit of RM 5,000,000 ($153,000, $1,983,000 and $1,534,000, respectively).
On April 17, 2013, TMM amended its banking facility with RHB to extend the maturity date from March 5, 2013 to March 24, 2014. The RHB facility includes the following: (1) an overdraft line of credit up to RM 1,000,000; (2) an ECR of RM 9,300,000; (3) a bank guarantee of RM 1,200,000; and (4) a foreign exchange contract limit of RM 25,000,000 ($307,000, $2,854,000, $368,000 and $7,673,000, respectively). At September 30, 2013, the outstanding balance on the line of credit was RM 700,000 ($215,000) at a current interest rate of 4.83% and RM 2,405,000 ($738,000) was outstanding on the foreign exchange contract at a current interest rate of 2.80%.
The banking facilities with both HSBC and RHB bear an interest rate on the overdraft facilities at 1.25% over bank prime and the ECR facilities bear interest at 1.0% above the funding rate stipulated by the Export-Import Bank of Malaysia Berhad. The ECR, a government supported financing arrangement specifically for exporters, is used by TMM for short-term financing of up to 180 days against customers’ and inter-company shipments. At September 30, 2013, the outstanding balance on the ECR facilities was RM 12,935,000 ($3,970,000) at a current interest rate of 5.0%.
The borrowings under both the HSBC and the RHB short term credit facilities are subject to certain subjective acceleration covenants based on the judgment of the banks and a demand provision that provide that the banks may demand repayment at any time. We believe such a demand provision is customary in Malaysia for such facilities. The loan agreements are secured by TMM’s property, plant and equipment. However, if demand is made by HSBC or RHB, we may be unable to refinance the demanded indebtedness, in which case, the lenders could foreclose on the assets of TMM. The credit facilities prohibit TMM from paying dividends, and the HSBC facility further prohibits loans to related parties without the prior consent of HSBC.
Cash and Cash Equivalents
As noted on the following table, cash and cash equivalents decreased $1,000,000 for the nine months ended September 30, 2013 as compared to a decrease of $1,823,000 for the nine months ended September 30, 2012.
| | (Unaudited) |
| | Nine Months Ended September 30, |
(In thousands) | | 2013 | | 2012 |
Net cash provided by (used in) | | | | |
Operating activities | $ | (1,447) | $ | (1,842) |
Investing activities | | (3,527) | | (3,060) |
Financing activities | | 4,102 | | 3,010 |
Effect of exchange rate fluctuations | | (128) | | 69 |
Net decrease in cash and cash equivalents | $ | (1,000) | $ | (1,823) |
Operating Activities
Operating activities used $1,447,000 in cash during the first nine months of 2013 as compared to using cash of $1,842,000 during the same period of 2012. Following are the major changes in working capital affecting cash used by operating activities for the nine month period ended September 30, 2013:
- Accounts Receivable: Accounts receivable increased $903,000 as compared to an increase of $9,499,000 for the same period in 2012 which included a large SR sale billed in September 2012. The current year increase in accounts receivable is primarily due to stronger sales in the third quarter 2013 compared to the fourth quarter of 2012. Accounts receivable increased $585,000 at the U.S. Operation, $237,000 at TPT and $81,000 at TMM.
- Inventories: Inventories increased $5,011,000 as compared to an increase of $1,601,000 for the same period in 2012. Inventories at the U.S. Operation increased $982,000, primarily related to an increase in finished goods. TMM’s inventory increased approximately $4,124,000, primarily related to an increase in SR feedstock. TPT’s inventory decreased approximately $95,000, primarily due to a decrease in raw materials.
- Other Current Assets: Other current assets decreased $814,000 as compared to an increase of $788,000 for the same period in 2012. Other current assets at the U.S. Operation decreased $270,000 and TMM’s decreased approximately $667,000, primarily related to the timing of deposits paid on inventory and equipment purchases. TPT’s increased $123,000, primarily due to the prepayment of payroll taxes.
- Accounts Payable and Accrued Expenses: Trade accounts payable and accrued expenses increased $1,135,000 as compared to an increase of $2,684,000 for the same period in 2012. Accounts payable and accrued expenses at the U.S. Operation decreased $1,025,000, primarily related to the timing of raw material purchases; TPT’s increased $97,000, primarily related to capital expenditures; and TMM’s increased $2,063,000, primarily relating to raw materials for the production of SR and capital expenditures.
Investing Activities
We used $3,527,000 of cash in investing activities during the first nine months of 2013, primarily for the purchase of fixed assets as compared to $3,060,000 during the same period 2012. Net investments for each of our three locations are as follows:
- U.S. Operation: We invested approximately $645,000, primarily related to capital maintenance and production equipment, as compared to $1,068,000 for the same period in 2012.
- European Operation: We invested approximately $974,000 at TPT for production equipment, as compared to $1,161,000 for the same period in 2012.
- Asian Operation: We invested approximately $1,908,000 at TMM, primarily related to capital improvements in our SR production facility to improve yield and efficiencies, as compared to $831,000 for the same period in 2012.
Financing Activities
Financing activities provided cash of $4,102,000 during the nine month period ended September 30, 2013 as compared to $3,010,000 for the same period 2012. Significant factors relating to financing activities include the following:
· U.S. Operation: Borrowings on our U.S. line of credit increased $700,000 during the first nine months of 2013 as compared to $1,750,000 during the same period of 2012.
· European Operation: Borrowings on TPT’s line of credit increased $195,000 during the nine month period ended September 30, 2013 as compared to an increase of $255,000 during the same period of 2012.
· Asian Operation: Borrowings on TMM’s line of credit decreased $91,000 during the nine month period ended September 30, 2013 as compared to a decrease of $349,000 during the same period of 2012.
- Export Credit Refinancing Facility (ECR): TMM’s borrowing on the ECR increased $3,600,000 during the nine month period ended September 30, 2013 for working capital related to the production of SR as compared to an increase of $1,032,000 for the same period in 2012.
- Capital Leases: Capital leases decreased approximately $30,000 during the first nine months of 2013 as compared to an increase of approximately $5,000 for the same period in 2012.
· U.S. Operation: Our U.S. long-term debt decreased $296,000 and $295,000 for the nine month periods ended September 30, 2013 and 2012, respectively.
· European Operation: TPT’s long-term debt decreased $326,000 and $310,000 for the nine month periods ended September 30, 2013 and 2012, respectively.
· Asian Operation: TMM’s long-term debt increased $83,000 and $774,000 for the nine month periods ended September 30, 2013 and 2012, respectively.
- Proceeds from Issuance of Common Stock: We received $267,000 from the issuance of common stock during the first nine months of 2013 related to the exercise of stock options. For the same nine month period of 2012, we received $148,000 from the issuance of common stock related to the exercise of stock options.
Off-Balance Sheet Arrangements and Contractual Obligations
No material changes have been made to the “Off-Balance Sheet Arrangements and Contractual Obligations” noted in the Company’s 2012 Annual Report on Form 10-K.
Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, management of the Company has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective (i) to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms; and (ii) to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Changes in Internal Controls
During the last fiscal quarter, there were no changes in the Company's internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) that have materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.
