United States Securities and Exchange Commission
Washington, D. C. 20549
____________________________
FORM 10-Q
____________________________
|
(Mark One)
| |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2016
OR
|
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from __________ to __________ Commission file number 0-17321
TOR MINERALS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
|
Delaware
(State or other jurisdiction of incorporation or organization)
| 74-2081929
(I.R.S. Employer Identification No.) |
722 Burleson Street, Corpus Christi, Texas 78402
(Address of principal executive offices)
|
(361) 883-5591
(Registrant’s telephone number, including area code)
____________________________
|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the 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 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. |
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 ☒ |
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. |
Class
Common Stock, $1.25 par value | Shares Outstanding as of October 26, 2016
3,541,703 |
| | | | | | | |
Forward Looking Information
This Quarterly Report on Form 10-Q (the “Report”), including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2, contains forward-looking statements about the business, financial condition and prospects of TOR Minerals International, Inc. (the “Company”). The actual results of the Company could differ materially from those indicated by the forward-looking statements because of various risks and uncertainties including, without limitation, changes in demand for the Company’s products, changes in competition, economic conditions, fluctuations in exchange rates, changes in the cost of energy, fluctuations in market price for titanium dioxide (“TiO2”) pigments, interest rate fluctuations, changes in the capital markets, changes in tax and other laws and governmental rules and regulations applicable to the Company’s business, and other risks indicated in the Company’s filings with the Securities and Exchange Commission, including those set forth in the Company’s Annual Report on Form 10-K under Item 1A. Risk Factors. These risks and uncertainties are beyond the ability of the Company to control, and, in many cases, the Company cannot predict all of the risks and uncertainties that could cause its actual results to differ materially from those indicated by the forward-looking statements. When used in this report, the words “believes,” “estimates,” “plans,” “expects,” “anticipates,” “foresees,” “intends,” “may,” “likely,” “should” and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements.
Item 1. | Financial Statements and Supplementary Data |
TOR Minerals International, Inc. and Subsidiaries |
Condensed Consolidated Statements of Operations |
(Unaudited) |
(In thousands, except per share amounts) |
| | | | | | | | |
| | | | | | | | |
| | Three Months
Ended September 30, | | Nine Months
Ended September 30, |
| | 2016 | | 2015 | | 2016 | | 2015 |
NET SALES | $ | 10,036 | $ | 8,988 | $ | 29,458 | $ | 29,066 |
Cost of sales | | 8,452 | | 7,877 | | 25,379 | | 26,108 |
GROSS MARGIN | | 1,584 | | 1,111 | | 4,079 | | 2,958 |
Technical services, research and development | | 56 | | 44 | | 146 | | 143 |
Selling, general and administrative expenses | | 1,068 | | 943 | | 2,972 | | 3,034 |
Loss on disposal of assets | | 4 | | 38 | | 3 | | 38 |
OPERATING INCOME (LOSS) | | 456 | | 86 | | 958 | | (257) |
OTHER INCOME (EXPENSE): | | | | | | | | |
Interest expense, net | | (43) | | (37) | | (140) | | (177) |
Gain (loss) on foreign currency exchange rate | | 20 | | (157) | | (59) | | (134) |
Other, net | | - | | 9 | | 28 | | 18 |
Total Other Expense | | (23) | | (185) | | (171) | | (293) |
INCOME (LOSS) BEFORE INCOME TAX | | 433 | | (99) | | 787 | | (550) |
Income tax expense (benefit) | | 142 | | 22 | | 165 | | (132) |
NET INCOME (LOSS) | $ | 291 | $ | (121) | $ | 622 | $ | (418) |
| | | | | | | | |
Earnings (loss) per common share: | | | | | | | | |
Basic | $ | 0.08 | $ | (0.04) | $ | 0.19 | $ | (0.14) |
Diluted | $ | 0.08 | $ | (0.04) | $ | 0.18 | $ | (0.14) |
Weighted average common shares outstanding: | | | | | | | | |
Basic | | 3,542 | | 3,014 | | 3,319 | | 3,014 |
Diluted | | 3,550 | | 3,014 | | 3,398 | | 3,014 |
| | | | | | | | |
See accompanying notes to the condensed consolidated financial statements. |
TOR Minerals International, Inc. and Subsidiaries |
Condensed Consolidated Statements of Comprehensive Income (Loss) |
(Unaudited) |
(In thousands) |
| | | | | | | | |
| | | | | | | | |
| | Three Months
Ended September 30, | | Nine Months
Ended September 30, |
| | 2016 | | 2015 | | 2016 | | 2015 |
NET INCOME (LOSS) | $ | 291 | $ | (121) | $ | 622 | $ | (418) |
OTHER COMPREHENSIVE INCOME (LOSS), net of tax | | | | | | | | |
Currency translation adjustment, net of tax: | | | | | | | | |
Net foreign currency translation adjustment (loss) gain | | (110) | | (1,662) | | 456 | | (3,161) |
Other comprehensive (loss) income, net of tax | | (110) | | (1,662) | | 456 | | (3,161) |
COMPREHENSIVE INCOME (LOSS) | $ | 181 | $ | (1,783) | $ | 1,078 | $ | (3,579) |
| | | | | | | | |
See accompanying notes to the condensed consolidated financial statements. | | | | |
TOR Minerals International, Inc. and Subsidiaries |
Condensed Consolidated Balance Sheets |
(Unaudited) |
(In thousands, except per share amounts) |
| | | | |
| | September 30,
2016 | | December 31,
2015 |
ASSETS | | | | |
CURRENT ASSETS: | | | | |
Cash and cash equivalents | $ | 3,082 | $ | 813 |
Trade accounts receivable, net | | 4,606 | | 3,534 |
Inventories, net | | 13,153 | | 13,988 |
Other current assets | | 906 | | 878 |
Total current assets | | 21,747 | | 19,213 |
PROPERTY, PLANT AND EQUIPMENT, net | | 16,837 | | 17,472 |
DEFERRED TAX ASSET, foreign | | 8 | | 19 |
OTHER ASSETS | | 4 | | 4 |
Total Assets | $ | 38,596 | $ | 36,708 |
| | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | |
CURRENT LIABILITIES: | | | | |
Accounts payable | $ | 2,404 | $ | 2,432 |
Accrued expenses | | 1,461 | | 1,007 |
Notes payable under lines of credit | | 80 | | 179 |
Export credit refinancing facility | | 726 | | 1,108 |
Current maturities of long-term debt – financial institutions | | 1,288 | | 1,485 |
Total current liabilities | | 5,959 | | 6,211 |
LONG-TERM DEBT - FINANCIAL INSTITUTIONS | | 3,084 | | 3,479 |
DEFERRED TAX LIABILITY, domestic | | 192 | | 262 |
Total liabilities | | 9,235 | | 9,952 |
COMMITMENTS AND CONTINGENCIES | | | | |
SHAREHOLDERS' EQUITY: | | | | |
Common stock $1.25 par value: authorized, 6,000 shares; 3,542 shares issued and outstanding at September 30, 2016 and 3,014 at December 31, 2015 | | 4,428 | | 3,767 |
Additional paid-in capital | | 30,502 | | 29,636 |
Accumulated deficit | | (4,643) | | (5,265) |
Accumulated other comprehensive loss | | (926) | | (1,382) |
Total shareholders' equity | | 29,361 | | 26,756 |
Total Liabilities and Shareholders' Equity | $ | 38,596 | $ | 36,708 |
| | | | |
See accompanying notes to the condensed consolidated financial statements. |
TOR Minerals International, Inc. and Subsidiaries |
Condensed Consolidated Statements of Cash Flows |
(Unaudited) |
(In thousands) |
| | | | |
| | Nine Months Ended September 30, |
| | 2016 | | 2015 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | |
Net Income (Loss) | $ | 622 | $ | (418) |
Adjustments to reconcile net income (loss) to net cash
provided by operating activities: | | | | |
Depreciation | | 1,916 | | 2,123 |
Loss on disposal of assets | | 3 | | 38 |
Stock-based compensation | | 130 | | 104 |
Deferred income tax benefit | | (61) | | (178) |
Provision for (Recovery of) bad debts | | (237) | | 23 |
Changes in working capital: | | | | |
Trade accounts receivables | | (751) | | 302 |
Inventories | | 1,105 | | 3,568 |
Other current assets | | (5) | | (414) |
Accounts payable and accrued expenses | | 341 | | (1,431) |
Net cash provided by operating activities | | 3,063 | | 3,717 |
| | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | |
Additions to property, plant and equipment | | (894) | | (4,174) |
Restricted Cash | | - | | (1,561) |
Net cash used in investing activities | | (894) | | (5,735) |
| | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | |
Proceeds from lines of credit | | 85 | | 2,663 |
Payments on lines of credit | | (191) | | (2,567) |
Proceeds from export credit refinancing facility | | 1,853 | | 3,420 |
Payments on export credit refinancing facility | | (2,280) | | (4,619) |
Proceeds from long-term bank debt | | - | | 3,740 |
Payments on long-term bank debt | | (765) | | (735) |
Proceeds from the issuance of common stock through exercise of warrants | | 1,398 | | - |
Net cash provided by financing activities | | 100 | | 1,902 |
Effect of foreign currency exchange rate fluctuations on cash and cash equivalents | | - | | (453) |
Net increase (decrease) in cash and cash equivalents | | 2,269 | | (569) |
Cash and cash equivalents at beginning of period | | 813 | | 2,657 |
Cash and cash equivalents at end of period | $ | 3,082 | $ | 2,088 |
| | | | |
Supplemental cash flow disclosures: | | | | |
Interest paid | $ | 113 | $ | 112 |
Income taxes paid | $ | 73 | $ | 349 |
| | | | |
See accompanying notes to the condensed consolidated financial statements. |
Note 1. | Accounting Policies |
Basis of Presentation and Use of Estimates
The accompanying interim condensed consolidated financial statements (the “financial statements”) have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”). The 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, BV (“TPT”) and TOR Minerals Malaysia, Sdn. Bhd. (“TMM”). All significant intercompany transactions have been eliminated. All adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the condensed 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 SEC rules and regulations. These financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2015, in our Annual Report on Form 10-K filed with the SEC on March 7, 2016. Operating results for the nine month period ended September 30, 2016, are not necessarily indicative of the results for the year ending December 31, 2016.
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.
Income taxes consisted of federal income tax expense of approximately $23,000, state income tax expense of approximately $1,000 and foreign tax expense of approximately $118,000 for the three month period ended September 30, 2016, as compared to a federal tax expense of approximately $237,000, state tax expense of approximately $5,000 and foreign tax benefit of approximately $220,000 for the same three month period in 2015.
For the nine month period ended September 30, 2016, income taxes consisted of federal income tax benefit of approximately $71,000, state income tax expense of approximately $4,000 and foreign tax expense of approximately $232,000, as compared to a federal tax benefit of approximately $31,000, state tax expense of approximately $5,000 and foreign tax benefit of approximately $106,000 for the same nine month period in 2015.
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, 2013 through December 31, 2015. Our state tax return, which is filed in Texas, is subject to examination for the tax years ended December 31, 2011 through December 31, 2015. Our tax returns in various non-U.S. jurisdictions are subject to examination for various tax years dating back to December 31, 2011.
As of January 1, 2016, we did not have any unrecognized tax benefits and there was no change during the nine month period ended September 30, 2016. In addition, we did not recognize any interest and penalties in our financial statements during the three and nine month periods ended September 30, 2016. 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.
TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
Note 2. | Debt and Notes Payable |
Long-term Debt – Financial Institutions
Following is a summary of our long-term debt to financial institutions as of September 30, 2016 and December 31, 2015, in thousands:
| | | | |
| | September 30, 2016 | | December 31, 2015 |
Fixed rate Euro term note payable to a Netherlands bank, with an interest rate of 3.85% at September 30, 2016, due July 1, 2029, secured by TPT's land and buildings. (Balance in Euro at September 30, 2016, €202) | $ | 227 | $ | 235 |
Fixed rate Euro term note payable to a Netherlands bank, with an interest rate of 3.3% at September 30, 2016, due January 31, 2030, secured by TPT's land and buildings. (Balance in Euro at September 30, 2016, €229) | | 257 | | 264 |
Fixed rate Euro term note payable to a Netherlands bank, with an interest rate of 3.0% per annum, due December 31, 2025, is secured by TPT's land and buildings. (Balance in Euro at September 30, 2016, €925) | | 1,039 | | 1,087 |
Variable rate Euro term note payable to a Netherlands bank, with a EURIBOR interest rate plus bank margin of 2.3% per annum, due December 31, 2020, is secured by substantially all of TPT's assets. (Balance in Euro at September 30, 2016, €1,997) | | 2,244 | | 2,554 |
Malaysian Ringgit term note payable to a Malaysian bank, with an interest rate 2% above the bank base lending rate, which was 5.2% at September 30, 2016, due October 25, 2018, secured by TMM's property, plant and equipment. (Balance in Ringgit at September 30, 2016, RM 2,500) | | 605 | | 756 |
Malaysian Ringgit term note payable to a Malaysian bank, with an interest rate 2% above the bank base lending rate, secured by TMM's property, plant and equipment. Paid in full at maturity, March 31, 2016. | | - | | 68 |
Total | | 4,372 | | 4,964 |
Less current maturities | | 1,288 | | 1,485 |
Total long-term debt - financial institutions | $ | 3,084 | $ | 3,479 |
| | | | |
TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
Short-term Debt
U.S. Operations
On December 31, 2010, the Company entered into a credit 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 to the credit agreement which reduced the minimum interest rate floor from 5.5% to 4.5%. On May 15, 2015, the Company and the Lender entered into the Fifth Amendment to the credit agreement which extended the Line from October 15, 2015 to October 15, 2016.
On June 23, 2016, the Company and the Lender amended and restated the credit agreement (the “Agreement”). Under the terms of the Agreement, the Lender extended the maturity date on the Line from October 15, 2016 to October 15, 2017. In addition, the Company requested that the Lender reduce the Line from $2,000,000 to $1,000,000. Under the terms of the Agreement, the Company is required to maintain positive net earnings before taxes, interest, depreciation, amortization and all other non-cash charges on a rolling four-quarter basis. The Company was in compliance with all covenants at September 30, 2016.
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 4.5%. At September 30, 2016, no funds were outstanding on the Line.
European Operations
On July 13, 2015, TPT amended the short-term banking facility (the “Amended Agreement”) with Rabobank. Under the terms of the Amended Agreement, the TPT line of credit was reduced from €1,100,000 to €500,000 ($1,236,000 to $562,000 at September 30, 2016) and interest was changed from a variable interest rate of bank prime plus 2.8% to the average 1-month EURIBOR plus the bank margin of 3.3%, which was 2.9% at September 30, 2016. No funds were outstanding on the TPT line of credit at September 30, 2016.
Asian Operations
On August 24, 2015, TMM amended its short-term banking facility with HSBC to extend the maturity date from June 30, 2015 to June 30, 2016. TMM is currently negotiating with HSBC to extend the maturity date to June 30, 2017. The HSBC facility includes the following in RM: (1) overdraft line of credit of RM 500,000 ($121,000 at September 30, 2016); (2) an import/export line (“ECR”) of RM 10,460,000 ($2,533,000 at September 30, 2016); and (3) a foreign exchange contract limit of RM 5,000,000 ($1,211,000 at September 30, 2016). At September 30, 2016, the outstanding balance on the ECR was RM 3,000,000 ($726,000 at September 30, 2016) at a current interest rate of 5.0%; and the outstanding balance on the overdraft line of credit was RM 330,000 ($80,000 at September 30, 2016) at a current interest rate of 7.85%.
On August 15, 2014, TMM amended its short term banking facility with RHB Bank Berhad (“RHB”) to extend the maturity date from March 24, 2014 to April 1, 2015. TMM is currently negotiating with RHB to extend the maturity date to April 21, 2017. The RHB facility includes the following: (1) an overdraft line of credit up to RM 1,000,000 ($242,000 at September 30, 2016); (2) an ECR of RM 7,300,000 ($1,768,000 at September 30, 2016); (3) a bank guarantee of RM 1,200,000 ($291,000 at September 30, 2016); and (4) a foreign exchange contract limit of RM 25,000,000 ($6,054,000 at September 30, 2016). At September 30, 2016, no funds were outstanding on the RHB facility.
The banking facilities with both HSBC and RHB bear an interest rate on the respective overdraft facilities at 1.25% over bank prime, and the respective ECR facilities bear interest at 1.0% above the funding rate stipulated by the Export-Import Bank of Malaysia Berhad. The ECR facilities, which are a government supported financing arrangement specifically for exporters, are used by TMM for short-term financing of up to 180 days against customers’ and inter-company shipments.
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 provides that the banks may demand repayment at any time. 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. While repatriation is allowed in the form of dividends, the credit facilities prohibit TMM from paying dividends, and the HSBC facility further prohibits loans to related parties without the prior consent of HSBC.
TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
Note 3. | Fair Value Measurements |
The following table summarizes the valuation of our financial instruments recorded on a fair value basis as of September 30, 2016 and December 31, 2015. The Company did not hold any non-financial assets and/or non-financial liabilities subject to fair value measurements at September 30, 2016 or at December 31, 2015. The fair value of our financial instruments as of September 30, 2016, was zero.
| | Fair Value Measurements |
(In Thousands) | | Total | | Quoted Prices
in Active
Markets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) |
Current Liability | | | | | | | | |
December 31, 2015 | | | | | | | | |
Currency forward contracts | $ | 6 | $ | - | $ | 6 | $ | - |
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 rates included under “Other Expense” on the Company’s consolidated statement of operations. 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 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, 2016 | | December 31, 2015 |
(In Thousands) | | Carrying
Value | | Fair
Value | | Carrying
Value | | Fair
Value |
Long-term debt, including
current portion | $ | 4,372 | $ | 3,937 | $ | 4,964 | $ | 4,438 |
| | | | | | | | |
The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, trade receivables, payables and accrued liabilities, accrued income taxes and short-term borrowings approximate fair values due to the short-term nature of these instruments; accordingly, these items have been excluded from the above table.
TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
Following is a summary of inventory at September 30, 2016 and December 31, 2015, in thousands:
| | | | | | September 30, | | December 31, |
| | | | | | 2016 | | 2015 |
Raw materials | | | | | $ | 7,139 | $ | 6,310 |
Work in progress | | | | | | 1,843 | | 4,168 |
Finished goods | | | | | | 3,825 | | 3,552 |
Supplies | | | | | | 775 | | 784 |
Total Inventories | | | | | | 13,582 | | 14,814 |
Inventory reserve | | | | | | (429) | | (826) |
Net Inventories | | | | | $ | 13,153 | $ | 13,988 |
| | | | | | | | |
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, |
| | 2016 | | 2015 | | 2016 | | 2015 |
Numerator: | | | | | | | | |
Net Income (Loss) - basic and diluted | $ | 291 | $ | (121) | $ | 622 | $ | (418) |
| | | | | | | | |
Denominator: | | | | | | | | |
Denominator for basic earnings (loss) per share -
weighted-average shares | | 3,542 | | 3,014 | | 3,319 | | 3,014 |
Effect of dilutive securities: | | | | | | | | |
Employee stock options | | 8 | | - | | 3 | | - |
Warrants | | - | | - | | 76 | | - |
Dilutive potential common shares | | 8 | | - | | 79 | | - |
Denominator for diluted earnings (loss) per share -
weighted-average shares and assumed conversions | | 3,550 | | 3,014 | | 3,398 | | 3,014 |
Basic earnings (loss) per common share | $ | 0.08 | $ | (0.04) | $ | 0.19 | $ | (0.14) |
Diluted earnings (loss) per common share | $ | 0.08 | $ | (0.04) | $ | 0.18 | $ | (0.14) |
| | | | | | | | |
For the three and nine month periods ended September 30, 2016, approximately 130,000 employee stock options were excluded from the calculation of diluted earnings per share as the exercise price was greater than the market price of the common shares and, therefore, the effect would be anti-dilutive.
For the three and nine month periods ended September 30, 2015, approximately 146,000 employee stock options were excluded from the calculation of diluted earnings per share as the effect would be anti-dilutive.
TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
Note 6. | Segment Information |
The Company and its subsidiaries operate in the business of pigment manufacturing and related products in three geographic segments – United States, European and Asian. Our chief operating decision maker, or CODM, regularly reviews financial information about our segments in order to allocate resources and evaluate performance.
Product sales of inventory between the U.S., European and Asian operations are based on inter-company pricing, which includes an inter-company profit margin. The segment income (loss), included in the table below, from each location is reflective of these inter-company prices, as is inventory at the Corpus Christi location 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/declines period over period in Corpus Christi inventories that include an inter-company component, the net effect of these adjustments can decrease/increase location profit.
Sales from the subsidiary to the parent company are based upon profit margins which represent competitive pricing of similar products. Intercompany sales consist primarily of ALUPREM®, Synthetic Rutile, HITOX® and TIOPREM®.
A summary of the Company’s manufacturing operations by geographic segment is presented below:
(In Thousands) | | United States
(Corpus Christi) | | Europe
(TPT) | | Asia
(TMM) | | Inter-Company
Eliminations | | Consolidated |
| | | | | | | | | | |
For the three months ended: | | | | | | | | |
September 30, 2016 | | | | | | | | | | |
Net Sales: | | | | | | | | | | |
Customer sales | $ | 7,227 | $ | 2,249 | $ | 560 | $ | - | $ | 10,036 |
Intercompany sales | | 34 | | 2,051 | | 1,353 | | (3,438) | | - |
Total Net Sales | $ | 7,261 | $ | 4,300 | $ | 1,913 | $ | (3,438) | $ | 10,036 |
| | | | | | | | | | |
Segment income (loss) | $ | 9 | $ | 325 | $ | (22) | $ | (21) | $ | 291 |
| | | | | | | | | | |
September 30, 2015 | | | | | | | | | | |
Net Sales: | | | | | | | | | | |
Customer sales | $ | 6,308 | $ | 2,059 | $ | 621 | $ | - | $ | 8,988 |
Intercompany sales | | 33 | | 1,418 | | 789 | | (2,240) | | - |
Total Net Sales | $ | 6,341 | $ | 3,477 | $ | 1,410 | $ | (2,240) | $ | 8,988 |
| | | | | | | | | | |
Segment income (loss) | $ | (229) | $ | 138 | $ | (210) | $ | 180 | $ | (121) |
| | | | | | | | | | |
TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
Note 6. | Segment Information (continued) |
(In Thousands) | | United States
(Corpus Christi) | | Europe
(TPT) | | Asia
(TMM) | | Inter-Company
Eliminations | | Consolidated |
| | | | | | | | | | |
For the nine months ended: | | | | | | | | | |
September 30, 2016 | | | | | | | | | | |
Net Sales: | | | | | | | | | | |
Customer sales | $ | 20,596 | $ | 6,954 | $ | 1,908 | $ | - | $ | 29,458 |
Intercompany sales | | 87 | | 5,336 | | 3,672 | | (9,095) | | - |
Total Net Sales | $ | 20,683 | $ | 12,290 | $ | 5,580 | $ | (9,095) | $ | 29,458 |
| | | | | | | | | | |
Segment income (loss) | $ | (269) | $ | 892 | $ | 24 | $ | (25) | $ | 622 |
As of September 30, 2016 | | | | | | | | | |
Segments assets | $ | 17,819 | $ | 14,478 | $ | 6,299 | $ | - | $ | 38,596 |
For the nine months ended: | | | | | | | | | |
September 30, 2015 | | | | | | | | | | |
Net Sales: | | | | | | | | | | |
Customer sales | $ | 20,485 | $ | 6,418 | $ | 2,163 | $ | - | $ | 29,066 |
Intercompany sales | | 37 | | 3,456 | | 4,343 | | (7,836) | | - |
Total Net Sales | $ | 20,522 | $ | 9,874 | $ | 6,506 | $ | (7,836) | $ | 29,066 |
| | | | | | | | | | |
Segment income (loss) | $ | (327) | $ | 152 | $ | (356) | $ | 113 | $ | (418) |
As of September 30, 2015 | | | | | | | | | |
Segment assets | $ | 17,026 | $ | 13,769 | $ | 12,676 | $ | - | $ | 43,471 |
| | | | | | | | | | |
Note 7. | Stock Options and Equity Compensation Plan |
For the three and nine month periods ended September 30, 2016, the Company recorded stock-based employee compensation expense of $45,000 and $130,000, respectively, as compared to $29,000 and $104,000 for the same three and nine month periods of 2015, respectively. This compensation expense is included in “selling, general and administrative expenses” in the accompanying consolidated statements of operations.
The Company granted 49,000 and 6,000 stock options during the nine month periods ended September 30, 2016 and 2015, respectively.
As of September 30, 2016, there was approximately $180,000 of compensation expense related to non-vested awards. This expense is expected to be recognized over a weighted average period of approximately one year.
TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
Note 8. | Derivatives and Other Financial Instruments |
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 these 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. The foreign exchange contracts are used to mitigate uncertainty and volatility and to cover underlying exposures.
Foreign Currency Forward Contracts
We manage the risk of changes in foreign currency exchange rates, primarily at our Malaysian operation, through the use of foreign currency contracts. Foreign currency 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 balance sheets and changes in the fair value are recognized in earnings in the period of the change.
At September 30, 2016, we marked these contracts to market resulting in a zero balance to be included on the consolidated balance sheets as the outstanding contracts were perfectly hedged.
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 consolidated balance sheets at September 30, 2016 and December 31, 2015, in thousands:
Liability Derivatives |
Derivative Instrument | | Location | | September 30, 2016 | | December 31, 2015 |
Foreign Currency
Exchange Contracts | | Accrued Expenses | $ | - | $ | 6 |
| | | | | | |
For the three and nine month periods ended September 30, 2016, we recognized a gain on these contracts of $4,000 and $6,000, respectively, as compared to a net loss of $51,000 and $72,000 for the three and nine month periods ended September 30, 2015, respectively. The gain (loss) on our foreign currency contracts is located under “Gain (loss) on foreign currency exchange rate” on our condensed consolidated statements of operations.
The following table summarizes, in thousands, the impact of the Company’s derivatives on the consolidated financial statements of operations for the three and nine month periods ended September 30, 2016 and 2015:
| | | | Amount of Gain (Loss) Recognized in Operations |
Derivative | | Location of Gain
(Loss) on Derivative | | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
Instrument | | Instrument | | 2016 | | 2015 | | 2016 | | 2015 |
Foreign Currency
Exchange Contracts | | Gain (loss) on foreign
currency exchange rate | $ | 4 | $ | (51) | $ | 6 | $ | (72) |
| | | | | | | | | | |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
Company Overview
We are a global producer of high performance, specialty mineral products focused on product innovation and technical support. Our specialty mineral products, which include flame retardant and smoke suppressant fillers, engineered fillers, and TiO2-color hybrid pigments, are designed for use in plastics, coating and paint applications, as well as a wide range of other industrial applications. With operations in the United States, Europe and Asia, our mission is to bring high value products and superior levels of service to our customers to help ensure their success.
Our U.S. operation, located in Corpus Christi, Texas, is also the global headquarters for the Company. The U.S. operation manufactures HITOX, BARTEX, HALTEX/OPTILOAD and TIOPREM. TPT, our European operation, located in Hattem, The Netherlands, manufactures ALUPREM alumina based products and BARYPREM and our Asian operation, located in Ipoh, Malaysia, manufactures HITOX and TIOPREM.
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 currencies 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 slowdown in the economy typically results in decreased pigment consumption. When the construction industry or the economy is in a period of decline, TOR's sales and profits are likely to be adversely affected.
We manage our business in three geographical segments – United States, European and Asia (See Note 6 to our condensed consolidated financial statements). Product sales of inventory between the U.S., European and Asian operations are based on inter-company pricing, which includes an inter-company profit margin. Our chief operating decision maker, or CODM, regularly reviews financial information about our segments in order to allocate resources and evaluate performance. Our CODM assesses segment performance based on Segment sales and Segment Adjusted EBITDA, which we define as net income (loss) before depreciation and amortization, interest expense, bad debt expense, foreign currency gains and losses, income taxes, and other items which management does not believe reflect the underlying performance of the segment.
TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Below are our results for the three and nine months ended September 30, 2016 and 2015.
| | (Unaudited) |
(In thousands, except per share amounts) | | Three Months
Ended September 30, | | Nine Months
Ended September 30, |
| | 2016 | | 2015 | | 2016 | | 2015 |
NET SALES | $ | 10,036 | $ | 8,988 | $ | 29,458 | $ | 29,066 |
Cost of sales | | 8,452 | | 7,877 | | 25,379 | | 26,108 |
GROSS MARGIN | | 1,584 | | 1,111 | | 4,079 | | 2,958 |
Technical services, research and development | | 56 | | 44 | | 146 | | 143 |
Selling, general and administrative expenses | | 1,068 | | 943 | | 2,972 | | 3,034 |
Gain on disposal of assets | | 4 | | 38 | | 3 | | 38 |
OPERATING INCOME (LOSS) | | 456 | | 86 | | 958 | | (257) |
OTHER INCOME (EXPENSE): | | | | | | | | |
Interest expense, net | | (43) | | (37) | | (140) | | (177) |
Gain (loss) on foreign currency exchange rate | | 20 | | (157) | | (59) | | (134) |
Other, net | | - | | 9 | | 28 | | 18 |
INCOME (LOSS) BEFORE INCOME TAX | | 433 | | (99) | | 787 | | (550) |
Income tax expense (benefit) | | 142 | | 22 | | 165 | | (132) |
NET INCOME (LOSS) | $ | 291 | $ | (121) | $ | 622 | $ | (418) |
| | | | | | | | |
Earnings (loss) per common share: | | | | | | | | |
Basic | $ | 0.08 | $ | (0.04) | $ | 0.19 | $ | (0.14) |
Diluted | $ | 0.08 | $ | (0.04) | $ | 0.18 | $ | (0.14) |
TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
The Company and its subsidiaries operate in three geographic segments. Product sales between the U.S., Asian and European operations are based on inter-company pricing which includes an inter-company profit margin. The inter-company sales are excluded from our consolidated sales and from the sales of each of our three geographic segments.
Net Sales: Consolidated net sales increased approximately 12% and 1% for the three and nine month periods ended September 30, 2016, respectively, as compared to the same three and nine month periods of 2015. The increase was primarily due to a decrease in selling price and the impact of the change in foreign currency exchange rates as both the Euro and the Malaysian Ringgit weakened against the U.S. Dollar.
Below is a summary of our consolidated products sales for the three and nine month periods ended September 30, 2016 and 2015 (in thousands).
| | (Unaudited) | | | | | | | | | |
| | Three Months Ended September 30, | | | Nine Months Ended September 30, |
Product | | 2016 | | 2015 | | Variance | | | 2016 | | 2015 | | Variance |
ALUPREM | $ | 4,529 | 45% | $ | 3,457 | 39% | $ | 1,072 | 31% | | $ | 12,345 | 42% | $ | 10,237 | 35% | $ | 2,108 | 21% |
HITOX | | 1,860 | 19% | | 2,357 | 26% | | (497) | -21% | | | 6,384 | 22% | | 8,475 | 29% | | (2,091) | -25% |
BARTEX/
BARYPREM | | 2,174 | 22% | | 2,018 | 23% | | 156 | 8% | | | 6,466 | 22% | | 6,557 | 23% | | (91) | -1% |
HALTEX/
OPTILOAD | | 1,276 | 13% | | 848 | 9% | | 428 | 50% | | | 3,367 | 11% | | 2,714 | 9% | | 653 | 24% |
TIOPREM | | 135 | 1% | | 116 | 1% | | 19 | 16% | | | 603 | 2% | | 553 | 2% | | 50 | 9% |
SYNTHETIC
RUTILE | | - | 0% | | - | 0% | | - | 0% | | | - | 0% | | 14 | <1% | | (14) | -100% |
OTHER | | 62 | <1% | | 192 | 2% | | (130) | -68% | | | 293 | 1% | | 516 | 2% | | (223) | -43% |
Total | $ | 10,036 | 100% | $ | 8,988 | 100% | $ | 1,048 | 12% | | $ | 29,458 | 100% | $ | 29,066 | 100% | $ | 392 | 1% |
| | | | | | | | | | | | | | | | | | | |
ALUPREM sales increased 31% for the three month period ended September 30, 2016, primarily related to an increase in volume of 35%, which was partially offset by a decrease in selling price of 4%.
For the nine month period ended September 30, 2016, ALUPREM sales increased 21%, primarily due to an increase in volume of 24%, which was partially offset by a decrease in selling price 3%.
ALUPREM volume increased as a result of an increase in our customer base as well as an increase in orders from existing customers in both the U.S. and European markets, while the decrease in selling price relates to a U.S. customer. The selling price for this customer will continue to be below last year’s selling price for the balance of 2016. The order pattern of our largest ALUPREM customers can vary significantly from quarter to quarter and does not necessarily follow a normal seasonal pattern.
HITOX sales decreased 21% for the three month period ended September 30, 2016, primarily due to a reduction in volume of 11% and a 10% reduction in selling price.
For the nine month period ended September 30, 2016, HITOX sales decreased 25%, primarily due to a reduction in volume of 15%, a reduction of 8% in selling price and the impact of the change in the foreign currency exchange rates of 2% as the Malaysian Ringgit weakened against the U.S. Dollar.
The decrease in sales volume and selling price of HITOX are primarily due to the continued weakness in the global TiO2 market, as well as aggressive pricing pressure from producers of white TiO2 in China. We expect this pressure to continue to affect both volume and pricing of our global TiO2 product sales for the balance of the year, and we expect conditions in the TiO2 market to remain difficult for the next several years.
TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations
BARTEX®/BARYPREM® sales increased 8% for the three month period ended September 30, 2016, primarily due to increases in volume and product mix of 6% and 2%, respectively, primarily related to orders from both new and existing customers.
For the nine month period ended September 30, 2016, BARTEX/BARYPREM sales decreased 1%, primarily due to a decrease in volume of 2%, which was partially offset by a shift in product mix of 1%. The decrease in volume was primarily related to a reduction in orders from one of our large U.S. BARTEX customers, which was partially offset by an increase in volume at our European operation.
HALTEX®/OPTILOAD® sales increased 50% and 24% for the three and nine month periods ended September 30, 2016, respectively, primarily due to an increase in volume of 61% and 27%, respectively, which was offset by a shift in product mix of 11% and 3%, respectively. The increase in volume was primarily due to an increase in our customer base, as well as an increase in requirements for existing customers.
TIOPREM sales increased 16% for the three month period ended September 30, 2016, primarily due to an increase in volume of 52%, which was partially offset by a shift in product mix of 36%. The increase in volume was primarily related to the timing of existing customers’ inventory requirements.
For the nine month period ended September 30, 2016, TIOPREM sales increased 9%, primarily due to an increase in volume of 31%, which was partially offset by a reduction in selling price 21% and the impact of the change in foreign currency of 1% as the Malaysian Ringgit weakened against the U.S. Dollar.
Synthetic Rutile (“SR”) – For the three and nine month periods ended September 30, 2016, there were no sales of SR to third parties. For the three and nine month periods ended September 30, 2015, our collective SR sales revenue from third-party customers was approximately $14,000. While producers of white TiO2 in China have contributed to the overall weakness in the global TiO2 market, we typically only produce SR for our own internal consumption. Separately, in 2015, we made a strategic decision to take our SR production capacity out of service. We are currently supplementing our existing SR inventory with product produced by alternate sources. By making this strategic move, we expect cost savings as well as a reduction in our SR inventory levels over the next 12 months.
Other Product sales decreased 68% and 43% for the three and nine month periods ended September 30, 2016, respectively, primarily due to a decrease in volume and selling price in the U.S. and Asia.
TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations
U.S. Operations
Below is a summary of net sales for our U.S. operation for the three and nine month periods ended September 30, 2016 and 2015 (in thousands). All inter-company sales have been eliminated.
| | (Unaudited) | | | | | | | | | |
| | Three Months Ended September 30, | | | Nine Months Ended September 30, |
Product | | 2016 | | 2015 | | Variance | | | 2016 | | 2015 | | Variance |
ALUPREM | $ | 2,809 | 39% | $ | 1,827 | 29% | $ | 982 | 54% | | $ | 6,890 | 34% | $ | 5,202 | 26% | $ | 1,688 | 32% |
HITOX | | 1,124 | 15% | | 1,563 | 25% | | (439) | -28% | | | 3,959 | 19% | | 5,883 | 29% | | (1,924) | -33% |
BARTEX | | 1,848 | 26% | | 1,778 | 28% | | 70 | 4% | | | 5,547 | 27% | | 5,736 | 28% | | (189) | -3% |
HALTEX/
OPTILOAD | | 1,276 | 18% | | 848 | 13% | | 428 | 50% | | | 3,367 | 16% | | 2,714 | 13% | | 653 | 24% |
TIOPREM | | 108 | 1% | | 100 | 2% | | 8 | 8% | | | 540 | 3% | | 467 | 2% | | 73 | 16% |
OTHER | | 62 | 1% | | 192 | 3% | | (130) | -68% | | | 293 | 1% | | 483 | 2% | | (190) | -39% |
Total | $ | 7,227 | 100% | $ | 6,308 | 100% | $ | 919 | 15% | | $ | 20,596 | 100% | $ | 20,485 | 100% | $ | 111 | 1% |
ALUPREM sales increased 54% for the three month period ended September 30, 2016, primarily related to an increase in volume of 61%, which was partially offset by a decrease in selling price of 7%.
For the nine month period ended September 30, 2016, ALUPREM sales increased 32%, primarily due to an increase in volume of 44%, which was partially offset by a decrease in selling price of 12%.
The change in volume and selling price primarily relate to a significant U.S. customer. While the order pattern of this customer can vary significantly from quarter to quarter, the selling price will continue to be below last year’s price for the balance of 2016.
HITOX sales decreased 28% for the three month period ended September 30, 2016, primarily due to reductions in volume and selling price of 19% and 9%, respectively.
For the nine month period ended September 30, 2016, HITOX sales decreased 33%, primarily due to reductions in volume and selling price of 25% and 8%, respectively.
The decrease in sales volume and selling price of HITOX are primarily due to the continued weakness in the global TiO2 market, as well as aggressive pricing pressure from producers of white TiO2 in China. We expect this pressure to continue to affect both volume and pricing of our global TiO2 product sales for the balance of the year, and we expect conditions in the TiO2 market to remain difficult for the next several years.
BARTEX sales increased 4% for the three month period ended September 30, 2016, primarily due to increases in volume and product mix of 2% and 2%, respectively.
For the nine month period ended September 30, 2016, BARTEX sales decreased 3%, primarily due to a decrease in volume of 4%, which was partially offset by a shift in product mix of 1%. The decrease in volume was primarily related to a reduction in orders from one of our large U.S. BARTEX customers, which was partially offset by an increase in volume at our European operation.
HALTEX/OPTILOAD sales increased 50% and 24% for the three and nine month periods ended September 30, 2016, respectively, primarily due to an increase in volume of 61% and 27%, respectively, which was offset by a shift in product mix of 11% and 3%, respectively. The increase in volume was primarily due to an increase in our customer base, as well as an increase in requirements for existing customers.
TIOPREM sales for the three and nine month periods ended September 30, 2016 increased 8% and 16%, respectively, primarily due to an increase in volume of 50% and 40%, respectively, which was offset by a shift in product mix of 42% and 24%, respectively.
Other Product sales for the three and nine month periods ended September 30, 2016 decreased 68% and 39%, respectively, due to a decrease in volume of 63% and 35%, respectively, and a decrease in selling price of 5% and 4%, respectively.
TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations
European Operations
TPT manufactures and sells ALUPREM to third-party customers, as well as to our U.S. operations for distribution to our North American customers. TPT purchases HITOX from our Asian operation and TIOPREM from our U.S. operation for distribution in Europe. The following table represents TPT’s sales (in thousands) for the three and nine month periods ended September 30, 2016 and 2015 to third-party customers. All inter-company sales have been eliminated.
| | (Unaudited) | | | | | | | | | |
| | Three Months Ended September 30, | | | Nine Months Ended September 30, |
Product | | 2016 | | 2015 | | Variance | | | 2016 | | 2015 | | Variance |
ALUPREM | $ | 1,720 | 76% | $ | 1,630 | 79% | $ | 90 | 6% | | $ | 5,455 | 79% | $ | 5,035 | 78% | $ | 420 | 8% |
BARYPREM | | 326 | 15% | | 240 | 12% | | 86 | 36% | | | 919 | 13% | | 821 | 13% | | 98 | 12% |
HITOX | | 203 | 9% | | 173 | 8% | | 30 | 17% | | | 561 | 8% | | 533 | 8% | | 28 | 5% |
TIOPREM | | - | 0% | | 16 | 1% | | (16) | -100% | | | 19 | < 1% | | 29 | 1% | | (10) | -34% |
Total | $ | 2,249 | 100% | $ | 2,059 | 100% | $ | 190 | 9% | | $ | 6,954 | 100% | $ | 6,418 | 100% | $ | 536 | 8% |
| | | | | | | | | | | | | | | | | | | |
ALUPREM sales in Europe increased 6% for the three month period ended September 30, 2016, primarily due to an increase in sales volume of 7%, which was partially offset by a change in product mix of 1%.
For the nine month period ended September 30, 2016, ALUPREM sales increased 8%, primarily due to changes in product mix and sales volume of 4% and 4%, respectively.
The increase in volume and change in product mix for European ALUPREM sales revenue is primarily related to an increase in demand by existing and new customers as well as an expansion in the diversity of our ALUPREM products.
BARYPREM sales in Europe increased 36% for the three month period ended September 30, 2016 due to an increase in volume of 35% and the impact of the change in foreign currency which increased sales revenue 1% as the Euro strengthened against the U.S. Dollar.
For the nine month period ended September 30, 2016, BAYPREM sales increased 12%, primarily due to an increase in volume of 13%, which was partially offset by a change in product mix of 1%.
HITOX sales in Europe increased 17% during the three month period ended September 30, 2016, primarily due to an increase in volume of 23%, which was partially offset by a decrease in selling price of 6%.
For the nine month period ended September 30, 2016, HITOX sales increased 5%, primarily due to an increase in volume of 13%, which was partially offset by a decrease in selling price of 7% and the impact of the change in foreign currency which decreased sales revenue 1%.
The European HITOX sales continue to be impacted by the overall weakness in the global TiO2 market.
TIOPREM sales decreased 100% for the three month period ended September 30, 2016, due to a decrease in volume primarily related to the timing of orders from existing customers.
For the nine month period ended September 30, 2016, TIOPREM sales decreased 34%, primarily due to decreases in volume and selling price of 19% and 15%, respectively.
TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Asian Operations
TMM manufactures and sells HITOX and TIOPREM to third-party customers, as well as to our U.S. and European operations. The following table represents TMM’s sales (in thousands) for the three and nine month periods ended September 30, 2016 and 2015 to third-party customers. All inter-company sales have been eliminated.
| | (Unaudited) | | | | | | | | | |
| | Three Months Ended September 30, | | | Nine Months Ended September 30, |
Product | | 2016 | | 2015 | | Variance | | | 2016 | | 2015 | | Variance |
HITOX | $ | 533 | 95% | $ | 621 | 100% | $ | (88) | -14% | | $ | 1,864 | 98% | $ | 2,059 | 95% | $ | (195) | -9% |
TIOPREM | | 27 | 5% | | - | 0% | | 27 | 100% | | | 44 | 2% | | 57 | 3% | | (13) | -23% |
SYNTHETIC
RUTILE | | - | 0% | | - | 0% | | - | 0% | | | - | 0% | | 14 | <1% | | (14) | -100% |
OTHER | | - | 0% | | - | 0% | | - | 0% | | | - | 0% | | 33 | 2% | | (33) | -100% |
Total | $ | 560 | 100% | $ | 621 | 100% | $ | (61) | -10% | | $ | 1,908 | 100% | $ | 2,163 | 100% | $ | (255) | -12% |
| | | | | | | | | | | | | | | | | | | |
HITOX sales in Asia decreased 14% for the three month period ended September 30, 2016, primarily due to a decrease in selling price of 15%, which was partially offset by an increase in volume of 1%.
For the nine month period ended September 30, 2016, HITOX sales decreased 9%, primarily due to a decrease in selling price and the impact of the change in foreign currency of 9% and 8%, respectively, which was partially offset by an increase in volume of 8%.
The HITOX market in Asia continues to decline due to the weakness in the TiO2 market, as well as the entry into the TiO2 market by producers of white TiO2 in China. We expect this pressure to continue to affect pricing of our global TiO2 product sales for the balance of the year, and we expect conditions in the TiO2 market to remain difficult for the next several years.
TIOPREM sales in Asia increased for the three month period ended September 30, 2016, due to an increase in volume.
For the nine month period ended September 30, 2016, TIOPREM sales decreased 23%, primarily due to a decrease in volume and the impact of the change in foreign currency of 12% and 11%, respectively.
Synthetic Rutile (“SR”) – For the three and nine month periods ended September 30, 2016, there were no sales of SR to third parties. For the three and nine month periods ended September 30, 2015, our collective SR sales revenue from third-party customers was approximately $14,000. While producers of white TiO2 in China have contributed to the overall weakness in the global TiO2 market, we typically only produce SR for our own internal consumption. Separately, in 2015, we made a strategic decision to take our SR production capacity out of service. We are currently supplementing our existing SR inventory with product produced by alternate sources. By making this strategic move, we expect cost savings as well as a reduction in our SR inventory levels over the next 12 months.
Other Product sales volume decreased 100% for the nine month period ended September 30, 2016, due to a decrease in the sale of TMM’s by-products.
TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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, 2016 and 2015, in thousands.
| | (Unaudited) |
| | Three Months
Ended September 30, | | Nine Months
Ended September 30, |
| | 2016 | | 2015 | | 2016 | | 2015 |
NET SALES | $ | 10,036 | $ | 8,988 | $ | 29,458 | $ | 29,066 |
Cost of sales | | 8,452 | | 7,877 | | 25,379 | | 26,108 |
GROSS MARGIN | $ | 1,584 | $ | 1,111 | $ | 4,079 | $ | 2,958 |
GROSS MARGIN % | | 16% | | 12% | | 14% | | 10% |
For each of the three and nine month periods ended September 30, 2016, gross margin increased approximately 4% as compared to the same three and nine month period of 2015, primarily due to higher production volume and improved efficiencies, primarily at TPT, which increased the gross margin approximately 2%, and the elimination of idle plant costs related to the SR plant at TMM improved the gross margin approximately 2%.
Selling, General, Administrative and Expenses (“SG&A”): SG&A expense increased approximately 13% during the three month period ended September 30, 2016, primarily related to increases in professional fees, sales expense and salaries of approximately 5%, 4% and 3%, respectively.
For the nine month period ended September 30, 2016, SG&A expense decreased approximately 2%, primarily related to a decrease in selling expense of approximately 8%, which was partially offset by increases in salaries and professional fees of approximately 4% and 2%, respectively.
Interest Expense: Net interest expense increased approximately $6,000 for the three month period ended September 30, 2016, primarily due to an increase in our average long-term financing at our European Operation, and decreased $37,000 for the nine month period ended September 30, 2016 due to a decrease in our average long-term and short-term financing at the U.S. and Asian operations, which was partially offset by an increase at the European operation.
Income Taxes: Income taxes consisted of federal income tax expense of approximately $23,000, state income tax expense of approximately $1,000 and foreign tax expense of approximately $118,000 for the three month period ended September 30, 2016, as compared to a federal tax expense of approximately $237,000, state tax expense of approximately $5,000 and foreign tax benefit of approximately $220,000 for the same three month period in 2015.
For the nine month period ended September 30, 2016, income taxes consisted of federal income tax benefit of approximately $71,000, state income tax expense of approximately $4,000 and foreign tax expense of approximately $232,000, as compared to a federal tax benefit of approximately $31,000, state tax expense of approximately $5,000 and foreign tax benefit of approximately $106,000 for the same nine month period in 2015.
The increase in income tax expense for the three and nine month periods ended September 30, 2016, relates to an increase in taxable income for the three and nine month periods of 2016.
TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Liquidity
Long-term Debt – Financial Institutions
A schedule of our long-term debt to financial institutions as of September 30, 2016 and December 31, 2015 is included in Note 2 to the condensed consolidated financial statements on page 8.
Our current maturities of long-term debt, as well as other current maturities, will be paid with current cash and cash generated from operations.
Short-term Debt
U.S. Operations
On December 31, 2010, the Company entered into a credit 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 to the credit agreement which reduced the minimum interest rate floor from 5.5% to 4.5%. On May 15, 2015, the Company and the Lender entered into the Fifth Amendment to the credit agreement which extended the Line from October 15, 2015 to October 15, 2016.
On June 23, 2016, the Company and the Lender amended and restated the credit agreement (the “Agreement”). Under the terms of the Agreement, the Lender extended the maturity date on the Line from October 15, 2016 to October 15, 2017. In addition, the Company requested that the Lender reduce the Line from $2,000,000 to $1,000,000. Under the terms of the Agreement, the Company is required to maintain positive net earnings before taxes, interest, depreciation, amortization and all other non-cash charges on a rolling four-quarter basis. The Company was in compliance with all covenants at September 30, 2016.
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 4.5%. At September 30, 2016, no funds were outstanding on the Line.
European Operations
On July 13, 2015, TPT amended the short-term banking facility (the “Amended Agreement”) with Rabobank. Under the terms of the Amended Agreement, the TPT line of credit was reduced from €1,100,000 to €500,000 ($1,236,000 to $562,000 at September 30, 2016) and interest was changed from a variable interest rate of bank prime plus 2.8% to the average 1-month EURIBOR plus the bank margin of 3.3%, which was 2.9% at September 30, 2016. No funds were outstanding on the TPT line of credit at September 30, 2016.
Asian Operations
On August 24, 2015, TMM amended its short-term banking facility with HSBC to extend the maturity date from June 30, 2015 to June 30, 2016. TMM is currently negotiating with HSBC to extend the maturity date to June 30, 2017. The HSBC facility includes the following in RM: (1) overdraft line of credit of RM 500,000 ($121,000 at September 30, 2016); (2) an import/export line (“ECR”) of RM 10,460,000 ($2,533,000 at September 30, 2016); and (3) a foreign exchange contract limit of RM 5,000,000 ($1,211,000 at September 30, 2016). At September 30, 2016, the outstanding balance on the ECR was RM 3,000,000 ($726,000 at September 30, 2016) at a current interest rate of 5.0%; and the outstanding balance on the overdraft line of credit was RM 330,000 ($80,000 at September 30, 2016) at a current interest rate of 7.85%.
On August 15, 2014, TMM amended its short term banking facility with RHB Bank Berhad (“RHB”) to extend the maturity date from March 24, 2014 to April 1, 2015. TMM is currently negotiating with RHB to extend the maturity date to April 21, 2017. The RHB facility includes the following: (1) an overdraft line of credit up to RM 1,000,000 ($242,000 at September 30, 2016); (2) an ECR of RM 7,300,000 ($1,768,000 at September 30, 2016); (3) a bank guarantee of RM 1,200,000 ($291,000 at September 30, 2016); and (4) a foreign exchange contract limit of RM 25,000,000 ($6,054,000 at September 30, 2016). At September 30, 2016, no funds were outstanding on the RHB facility.
TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The banking facilities with both HSBC and RHB bear an interest rate on the respective overdraft facilities at 1.25% over bank prime, and the respective ECR facilities bear interest at 1.0% above the funding rate stipulated by the Export-Import Bank of Malaysia Berhad. The ECR facilities, which are a government supported financing arrangement specifically for exporters, are used by TMM for short-term financing of up to 180 days against customers’ and inter-company shipments.
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 provides that the banks may demand repayment at any time. 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. While repatriation is allowed in the form of dividends, 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
Cash and cash equivalents increased $2,269,000 from December 31, 2015 to September 30, 2016. Operating activities provided $3,063,000 and financing activities provided $100,000; and we used $894,000 in investing activities during the nine months ended September 30, 2016.
| | (Unaudited) |
| | Nine Months Ended September 30, |
(In thousands) | | 2016 | | 2015 |
Net cash provided by (used in) | | | | |
Operating activities | $ | 3,063 | $ | 3,717 |
Investing activities | | (894) | | (5,735) |
Financing activities | | 100 | | 1,902 |
Effect of exchange rate fluctuations | | - | | (453) |
Net increase (decrease) in cash and cash equivalents | $ | 2,269 | $ | (569) |
Operating Activities
Below are the major changes in working capital affecting cash provided by operating activities during the nine month period ended September 30, 2016.
Trade Accounts Receivable: Accounts receivable used cash of $751,000 during the first nine months of 2016. The increase in accounts receivable is primarily related to the timing of sales between the fourth quarter of 2015 and the third quarter of 2016, primarily at the U.S. operation. Accounts receivable increased $704,000 and $53,000 at the U.S. operation and at TPT, respectively, and decreased $6,000 at TMM.
Inventories: Inventories provided cash of $1,105,000 during the first nine months of 2016. Inventories at the U.S. operation decreased $355,000, primarily related to a decrease in raw materials. TMM’s inventory decreased approximately $1,482,000, primarily related to a decrease in raw materials and work in progress. TPT’s inventory increased approximately $732,000, primarily related to an increase in raw materials.
Other Current Assets: Other current assets used cash of $5,000 during the first nine months of 2016. Current assets at the U.S. operation increased $37,000. TMM’s current assets increased $84,000, primarily related to the timing of insurance premiums. TPT’s current assets decreased $116,000, primarily due to timing of a VAT tax refund and a reduction in equipment deposits, which were partially offset by an increase related to the timing of insurance premiums.
TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Accounts Payable and Accrued Expenses: Trade accounts payable and accrued expenses provided cash of $341,000 during the first nine months of 2016. Accounts payable and accrued expenses at the U.S. operation and at TPT increased $335,000 and $50,000, respectively, primarily related to the purchase of raw materials. At TMM, accounts payable and accrued expenses decreased $44,000, primarily related to the timing of purchases.
Investing Activities
We used cash of $894,000 in investing activities during the first nine months of 2016 related to equipment purchases and plant expansion at our U.S. and European locations. Net investments are as follows:
Financing Activities
Financing activities provided cash of $100,000 during the nine month period ended September 30, 2016. Significant factors relating to financing activities include the following:
Lines of Credit
U.S. Operation: Borrowings on our U.S. line of credit were not utilized by the Company during the nine month period ended September 30, 2016.
European Operation: Borrowings on TPT’s line of credit were not utilized during the nine month period ended September 30, 2016.
Asian Operation: Borrowings on TMM’s line of credit decreased $106,000 during the nine month period ended September 30, 2016.
Export Credit Refinancing Facility (ECR): TMM’s borrowing on the ECR decreased $427,000 during the nine month period ended September 30, 2016.
Long-term Debt:
European Operation: TPT’s long-term debt decreased $512,000 for the nine month period ended September 30, 2016.
Asian Operation: TMM’s long-term debt decreased $253,000 for the nine month period ended September 30, 2016.
Issuance of Common Stock: We received approximately $1,398,000 from the issuance of 527,681 shares of common stock related to the exercise of detachable warrants, with an exercise price of $2.65. The warrants were issued in May 2009 with our six percent (6%) convertible subordinated debentures and matured May 4, 2016.
TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 2015 Annual Report on Form 10-K.
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 SEC 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 are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
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As reported in the Company’s filing on Form 8-K filed with the Securities and Exchange Commission on May 2, 2016, on April 29, 2016, three holders, two of whom are directors of the Company and another who is a greater than 5% shareholder, exercised 377,360 warrants which were issued in August 2009. In addition, several other holders exercised 128,304 warrants. Upon exercise and receipt of the aggregate exercise price of $1,340,010, the Company issued 505,664 shares of common stock to the investors.
Prior to maturity on May 4, 2016, two other holders exercised 22,017 warrants with an aggregate exercise price of $53,345, which increased the total shares of common stock issued to 527,681 at an aggregate exercise price of $1,398,355. The Company used the proceeds for working capital purposes.
No underwriters were involved in the foregoing sale of securities and there were no expenses related to the issuance. The common stock to be issued upon exercise of the warrants was issued in reliance upon the exemption from registration provided by Section 4(2) under the Securities Act of 1933, as amended, based on the private sale of securities. The sale of the common stock issued upon exercise of these warrants was registered with the Securities and Exchange Commission (the “SEC”) on Form S-3 (Registration No. 333-175054), filed with the SEC on June 30, 2011.
(a) | Exhibits | |
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| Exhibit 31.1 | Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| Exhibit 31.2 | Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| Exhibit 32.1 | Certification of Chief Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| Exhibit 32.2 | Certification of Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| TOR Minerals International, Inc. | | |
| ____________ | | |
| (Registrant) | | |
| | | |
Date: | November 3, 2016 | | OLAF KARASCH
Olaf Karasch
President and Chief Executive Officer |
| | | |
Date: | November 3, 2016 | | BARBARA RUSSELL
Barbara Russell
Chief Financial Officer |
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