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EX-31 - EXHIBIT 31.1, CEO CERTIFICATION - TOR MINERALS INTERNATIONAL INCceo31-1.htm
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EX-32 - EXHIBIT 32.1, CEO CERTIFICATION - TOR MINERALS INTERNATIONAL INCceo32-1.htm
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EX-10 - EXHIBIT 10.2, AMENDMENT TO LOAN AGREEMENT WITH HSBC, DATED JUNE 27, 2011 - TOR MINERALS INTERNATIONAL INCexhibit10-2.htm
EX-9 - EXHIBIT 10.3, AMENDMENT TO LOAN AGREEMENT WITH RHB, DATED JUNE 1, 2011 - TOR MINERALS INTERNATIONAL INCexhibit10-3.htm
EX-10 - EXHIBIT 10.4, LOAN AGREEMENT WITH RABOBANK, DATED JULY 3, 2011 - TOR MINERALS INTERNATIONAL INCexhibit10-4.htm
EX-10 - EXHIBIT 10.1, AMENDMENT TO LOAN AGREEMENT WITH HSBC, DATED NOVEMBER 15, 2010 - TOR MINERALS INTERNATIONAL INCexhibit10-1.htm
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 United States
Securities and Exchange Commission

Washington, D. C.  20549

____________________________

FORM 10-Q
____________________________

(Mark One)

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended September 30, 2011

OR

o

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
(Issuer’s telephone number)
____________________________


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 ý

No o

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 ý

No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o

Smaller reporting company ý

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o

No ý

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

Class
Common Stock, $1.25 par value

Shares Outstanding as of October 27, 2011
2,122,373

1



                                                                                                                                                              

Table of Contents

 

Part I - Financial Information

Page No.

Item 1.

Condensed Consolidated Financial Statements

Condensed Consolidated Statements of Income  --
Three and nine months ended September 30, 2011 and 2010

3

Condensed Consolidated Statements of Comprehensive Income (Loss)  --
Three and nine months ended September 30, 2011 and 2010

4

Condensed Consolidated Balance Sheets --
September 30, 2011 and December 31, 2010

5

Condensed Consolidated Statements of Cash Flows --
Nine months ended September 30, 2011 and 2010

6

Notes to the Condensed Consolidated Financial Statements

7

Item 2.

Management's Discussion and Analysis of Financial Condition
and Results of Operations

16

Item 4.

Controls and Procedures

25

Part II - Other Information

Item 6.

Exhibits

26

Signatures

26

Forward Looking Information

Certain portions of this report contain forward-looking statements about the business, financial condition and prospects of 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 market price for Titanium dioxide pigments, changes in foreign currency exchange rates, increases in the price of energy and raw materials, such as ilmenite, 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.  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.  The Company assumes no obligation to provide revisions to any forward-looking statements should circumstances change, except as otherwise required by securities and other applicable laws.  When used in this report, the words “believes,” “estimates,” “plans,” “expects,” “anticipates” and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements.

2



                                                                                                                                                              

TOR Minerals International, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except per share amounts)

 

Three Months
Ended September 30,

 

Nine Months
Ended September 30,

 

 

2011

 

2010

 

2011

 

2010

NET SALES

 $

11,401 

 $

7,543 

 $

31,475 

 $

22,327 

Cost of sales

9,026 

6,234 

24,703 

17,765 

GROSS MARGIN

 

2,375 

 

1,309 

 

6,772 

 

4,562 

Technical services and research and development

74 

66 

206 

184 

Selling, general and administrative expenses

1,098 

846 

3,322 

2,666 

OPERATING INCOME

 

1,203 

 

397 

 

3,244 

 

1,712 

OTHER EXPENSE:

Interest expense

(139)

(110)

(336)

(343)

Gain (loss) on foreign currency exchange rate

63 

(53)

(47)

Other, net

INCOME BEFORE INCOME TAX

 

1,127 

 

234 

 

2,921 

 

1,322 

Income tax expense

60 

(2)

198 

32 

NET INCOME

 $

1,067 

 $

236 

 $

2,723 

 $

1,290 

Less:  Preferred Stock Dividends

15 

15 

45 

Basic Income Available to Common Shareholders

 $

1,067 

 $

221 

 $

2,708 

 $

1,245 

Plus:  6% Convertible Debenture Interest Expense

22 

22 

66 

67 

Plus:  Preferred Stock Dividends

15 

Diluted Income Available to Common Shareholders

 $

1,089 

 $

243 

 $

2,789 

 $

1,312 

 

 

 

 

 

 

 

 

 

Income per common share:

Basic

 $

0.50 

 $

0.12 

 $

1.32 

 $

0.66 

Diluted

 $

0.33 

 $

0.09 

 $

0.86 

 $

0.48 

Weighted average common shares outstanding:

Basic

2,122 

1,908 

2,052 

1,899 

Diluted

3,264 

2,822 

3,234 

2,749 

See accompanying notes.

3



                                                                                                                                                              

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,

 

 

2011

 

2010

 

2011

 

2010

NET INCOME

$

1,067 

 $

236 

$

2,723 

 $

1,290 

OTHER COMPREHENSIVE INCOME, net of tax

Currency translation adjustment, net of tax:

Net foreign currency translation adjustment gain (loss)

(1,305)

1,162 

(546)

1,252 

Other comprehensive income (loss), net of tax

(1,305)

1,162 

(546)

1,252 

COMPREHENSIVE INCOME (LOSS)

$

(238)

 $

1,398 

$

2,177 

 $

2,542 

See accompanying notes.

4



                                                                                                                                                              

TOR Minerals International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except per share amounts)
 

 

September 30,
2011

 

December 31,
2010

 

 

(Unaudited)

 

 

ASSETS

CURRENT ASSETS:

Cash and cash equivalents

 $

2,107 

 $

2,559 

Trade accounts receivable, net

5,755 

3,888 

Inventories

14,952 

11,021 

Other current assets

1,200 

728 

Total current assets

24,014 

18,196 

PROPERTY, PLANT AND EQUIPMENT, net

19,954 

18,952 

OTHER ASSETS

23 

23 

Total Assets

 $

43,991 

 $

37,171 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:

Accounts payable

 $

2,727 

 $

2,544 

Accrued expenses

1,831 

1,436 

Notes payable under lines of credit

1,125 

783 

Export credit refinancing facility

2,683 

264 

Current deferred tax liability

50 

64 

Current maturities - capital leases

12 

46 

Current maturities of long-term debt – financial institutions

820 

533 

Total current liabilities

9,248 

5,670 

LONG-TERM DEBT, EXCLUDING CURRENT MATURITIES

Capital leases

18 

Long-term debt – financial institutions

3,072 

2,847 

Long-term debt – convertible debentures, net

1,201 

1,176 

DEFERRED TAX LIABILITY

739 

582 

Total liabilities

14,268 

10,293 

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY:

Series A 6% convertible preferred stock $.01 par value:
    authorized, 5,000 shares; 5 and 200 shares issued and
    outstanding at 9/30/2011 and 12/31/2010, respectively

Common stock $1.25 par value:  authorized, 6,000 shares;
    2,122 and 1,934 shares issued and outstanding
    at 9/30/2011 and 12/31/2010, respectively

2,652 

2,416 

Additional paid-in capital

25,813 

25,363 

Accumulated deficit

(2,872)

(5,579)

Accumulated other comprehensive income:

Cumulative translation adjustment

4,130 

4,676 

Total shareholders' equity

29,723 

26,878 

Total Liabilities and Shareholders' Equity

 $

43,991 

 $

37,171 

See accompanying notes.

5



                                                                                                                                                              

6



                                                                                                                                                              

TOR Minerals International, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)


Nine Months Ended September 30,

2011

 

2010

CASH FLOWS FROM OPERATING ACTIVITIES:

 

Net Income

$

2,723 

$

1,290 

Adjustments to reconcile net income to net cash
provided by operating activities:

Depreciation

1,544 

1,421 

Share-based compensation

53 

91 

Warrant interest expense

50 

50 

Deferred income taxes

158 

32 

Changes in working capital:

Trade accounts receivables

(1,880)

(640)

Inventories

(4,142)

(827)

Other current assets

(478)

(339)

Accounts payable and accrued expenses

643 

972 

Net cash (used in) provided by operating activities

(1,329)

2,050 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

Additions to property, plant and equipment

(2,733)

(1,026)

Proceeds from sales of property, plant and equipment

17 

Net cash used in investing activities

(2,733)

(1,009)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

Net proceeds from (payments on) lines of credit

339 

(1,725)

Net proceeds from export credit refinancing facility

2,428 

477 

Payments on capital lease

(44)

(96)

Proceeds from (payments on) long-term bank debt

509 

(399)

Proceeds from the issuance of common stock,
        and exercise of common stock options

606 

51 

Preferred stock dividends paid

(30)

(45)

Net cash provided by (used in) financing activities

3,808 

(1,737)

Effect of exchange rate fluctuations on cash and cash equivalents

(198)

258 

Net decrease in cash and cash equivalents

(452)

(438)

Cash and cash equivalents at beginning of year

2,559 

1,002 

Cash and cash equivalents at end of period

$

2,107 

$

564 

Supplemental cash flow disclosures:

 

Interest paid

$

139 

$

343 

Income taxes paid

$

$

Non-cash financing activities:

 

Conversion of debentures

$

25 

$

See accompanying notes.

7



TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

 

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. and its wholly-owned subsidiaries 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 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, 2010, in our Annual Report on Form 10-K filed with the SEC on March 24, 2011.  Operating results for the three and nine month periods ended September 30, 2011, are not necessarily indicative of the results for the year ending December 31, 2011.

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, 2011, income tax expense consisted of federal income tax expense of $6,000 and $18,000, respectively; state income tax expense of $2,000 and $4,000, respectively; and foreign deferred tax expense of $52,000 and $176,000, respectively.  For the three and nine month periods ended September 30, 2010, income tax expense consisted of federal income tax benefit of $12,000; state income tax expense of $3,000 and $8,000, respectively; and foreign deferred tax expense of $7,000 and $24,000, respectively.  Taxes are based on an estimated annualized consolidated effective rate of 6.8% for the year ended December 31, 2011.

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, 2007 through December 31, 2010.  Our state returns, which are filed in Texas and Ohio, are subject to examination for the tax years ended December 31, 2006 through December 31, 2010.  Our tax returns in various non-US jurisdictions are subject to examination for various tax years ended December 31, 2005 through December 31, 2010.

As of January 1, 2011, we did not have any unrecognized tax benefits and there was no change during the nine month period ended September 30, 2011.  In addition, we did not recognize any interest and penalties in our consolidated financial statements during the nine month period ended September 30, 2011.  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

The Company reviewed significant newly issued accounting pronouncements and concluded that they are either not applicable to the Company’s business or that no material effect is expected on the consolidated financial statements as a result of future adoption.

8



TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

 

Note 2.

Debt

Long-term Debt – Financial Institutions

Following is a summary of our long-term debt to financial institutions:

(Unaudited)

(In thousands)

September 30,

December 31,

2011

2010

Fixed Rate term note payable to a U.S. bank, with an interest rate of 6.65% at September 30, 2011, due January 1, 2016, secured by real estate, leasehold improvements, property, plant and equipment, inventory and accounts receivable of our US operation.

$

1,769 

$

2,000 

Term note payable to a U.S. equipment financing company, with an interest rate of 5.24% at September 30, 2011, due April 1, 2013, secured by a Caterpillar front-end loader.

41 

60 

Fixed rate Euro term note payable to a Netherlands bank, with an interest rate of 7.8% at September 30, 2011, due July 1, 2029, secured by TPT's land and office building purchased July 2004.  (€348)

467 

485 

Fixed rate Euro term note payable to a Netherlands bank, with an interest rate of 4.6% at September 30, 2011, due January 31, 2030, secured by TPT's land and building purchased January 2005.  (€346)

465 

482 

Fixed rate Euro term note payable to a Netherlands bank, with an interest rate of 4.05% at September 30, 2011, due July 31, 2015, secured by TPT's assets.  (€196)

263 

312 

Fixed rate Euro term note payable to a Netherlands bank, with an interest rate of 4.25% at September 30, 2011, due July 5, 2014, secured by TPT's assets.  (€661)

887 

U.S. Dollar term note payable to a Malaysian bank which matured May 30, 2011.

41 

Total

3,892 

3,380 

Less current maturities

820 

533 

Total long-term debt and notes payable - financial institutions

$

3,072 

$

2,847 

Six-percent Convertible Subordinated Debentures

As reported in the Company’s Forms 8-K filed with the SEC on May 6, 2009 and August 10, 2009, the Company’s Board of Directors authorized the issuance of its six-percent (6%) convertible subordinated debentures with detachable warrants (the “Debentures”) for the purpose of refinancing, in whole or in part, its debt to the Bank and for general corporate purposes.  Under the current authorization, the Company received, $1,500,000 from the sale of Debentures, due May 4, 2016, from nine accredited investors, four of which are directors of the Company and another of which is a greater than 5% shareholder.  At September 30, 2011, a balance of $1,450,000 remained outstanding on the Debentures.

9



TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

 

Short-term Debt

US Operations

On December 31, 2010, the Company entered into a new U.S. credit agreement (the “Agreement”) with American Bank, N.A. (the “Lender”) which established a $1 million line of credit (the “Line”) which matures July 1, 2012.  The amount which the Company is entitled to borrow from time to time under the line of credit is subject to a borrowing base 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 of credit 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 5.50%.  At September 30, 2011, the Company had no outstanding funds borrowed on the Line.

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, 2011, the ratio of cash flow to debt service was 3.38 to 1.0.

Netherlands Operations

On March 20, 2007, our subsidiary, TOR Processing and Trade, B.V. (“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 4.397%), is secured by TPT’s accounts receivable and inventory.  At September 30, 2011, TPT had utilized €838,000 ($1,125,000) 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 the lenders could foreclose on the assets of TPT.

Malaysian Operations

On June 27, 2011, the Company’s subsidiary, TOR Minerals Malaysia, Sdn. Bhd. (“TMM”), amended its banking facility with HSBC Bank Malaysia Berhad (“HSBC”) to extend the maturity date from April 30, 2011 to April 30, 2012.  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 ($157,000, $2,025,000 and $1,567,000, respectively).

On June 1, 2011, TMM amended its banking facility with RHB Bank Berhad (“RHB”) to extend the maturity date to April 4, 2012.  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 ($313,000, $2,915,000, $376,000 and $7,837,000, respectively).

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, 2011, the outstanding balance on the ECR facilities was RM 8,559,000 ($2,683,000) at a current interest rate of 4.25%.

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.

10



TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

 

Note 3.

Series A Convertible Preferred Stock Dividend

On June 6, 2011, the Company declared a dividend, in the amount of $375 or $0.075 per share, for the quarterly period ended September 30, 2011, payable on October 1, 2011, to the holders of record of the Series A Convertible Preferred Stock as of the close of business on September 5, 2011.

Note 4.

Fair Value Measurements

The following table presents the Company’s financial assets and financial liabilities that are measured and recognized at fair value on a recurring basis, classified under the appropriate level of fair value hierarchy, as of September 30, 2011.  The Company did not hold any non-financial assets and/or non-financial liabilities subject to fair value measurements at September 30, 2011.

 

September 30, 2011

(In thousands)

Balance at
September 30, 2011

Quoted Prices in Active
Markets for Identical Items
(Level 1)

Significant Other Observable Inputs
(Level 2)

Significant
Unobservable Inputs
(Level 3)

Liability for foreign currency
derivative financial instruments
(including forward contracts)

 $

70 

 $

 $

70 

 $

Our foreign currency derivative financial instruments mitigate foreign exchange risks and include forward contracts.

The fair value of the Company’s debt is based on estimates using standard pricing models that take into account the present value of future cash flows as of the balance sheet date.  The computation of the fair value of these instruments is generally 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, 2011

 

December 31, 2010

(In thousands)

 

Carrying
Value

 

Fair
Value

 

Carrying
Value

 

Fair
Value

Long-term debt, including current portion

 $

3,892 

 $

3,776 

 $

3,380 

 $

3,286 

Long-term debt – convertible debentures

1,450 

1,426 

1,475 

1,424 

 $

5,342 

 $

5,202 

 $

4,855 

 $

4,710 

The carrying amounts reported in the 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.

11



TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

 

Note 5.

Capital Leases

On June 27, 2005, TPT entered into a financial lease agreement with De Lage Landen Financial Services, BV for equipment related to the production of ALUPREM.  The cost of the equipment under the capital lease is included in the balance sheets as property, plant and equipment and was $381,181.  Accumulated amortization of the leased equipment at September 30, 2011 was approximately €174,000 ($233,000).  Amortization of assets under capital leases is included in depreciation expense.  The capital lease matured May 27, 2011.

On March 13, 2008, the Company entered into a financial lease agreement with Toyota Financial Services for a forklift.  The cost of the equipment under the capital lease, in the amount of $26,527, is included in the balance sheets as property, plant and equipment.  Accumulated amortization of the leased equipment at September 30, 2011 was approximately $15,000.  Amortization of assets under capital leases is included in depreciation expense.  The capital lease is in the amount of $31,164 including interest of $4,637 (implicit interest rate 6.53%).  The lease term is 60 months with equal monthly installments of $519.  The net present value of the lease at September 30, 2011 was approximately $8,000.

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 $19,093, is included in the consolidated balance sheets as property, plant and equipment.  Accumulated amortization of the leased equipment at September 30, 2011 was approximately $9,000.  Amortization of assets under capital leases is included in depreciation expense.  The capital lease is in the amount of $20,698 including interest of $1,605 (implicit interest rate 5.3%).  The lease term is 36 months with equal monthly installments of $575.  The net present value of the lease at September 30, 2011 was approximately $12,000.

12



TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

 

Note 6.

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,

2011

 

2010

2011

 

2010

Numerator:

Net Income

$

1,067 

$

236 

$

2,723 

$

1,290 

Preferred Stock Dividends

(15)

(15)

(45)

Numerator for basic earnings per share -
income available to common shareholders

1,067 

221 

2,708 

1,245 

Effect of dilutive securities:

6% Convertible Debenture Interest Expense

22 

22 

66 

67 

Preferred Stock Dividends

15 

Numerator for diluted income per share -
income available to common shareholders
after assumed conversions

$

1,089 

$

243 

$

2,789 

$

1,312 

Denominator:

Denominator for basic income per share -
weighted-average shares

2,122 

1,908 

2,052 

1,899 

Effect of dilutive securities:

Employee stock options

37 

12 

40 

10 

Detachable warrants

555 

336 

542 

274 

6% Convertible Debenture

547 

566 

552 

566 

Preferred Stock Dividends

48 

Dilutive potential common shares

1,142 

914 

1,182 

850 

Denominator for diluted income per share -
weighted-average shares and assumed conversions

3,264 

2,822 

3,234 

2,749 

Basic income per common share

$

0.50 

$

0.12 

$

1.32 

$

0.66 

Diluted income per common share

$

0.33 

$

0.09 

$

0.86 

$

0.48 

For the three and nine month periods ended September 30, 2010, approximately 111,000 common shares issuable upon conversion of the 200,000 convertible preferred shares were excluded from the calculation of diluted earnings per share as the conversion price was greater than the average market price of the common shares and, therefore, the effect would be antidilutive.

For the three and nine month periods ended September 30, 2010, approximately 566,000 shares issuable upon conversion of convertible debentures were excluded from the calculation of diluted earnings per share as the conversion price was greater than the average market price of the common shares and, therefore, the effect would be antidilutive.

For the three and nine month periods ended September 30, 2010, approximately 315,000 shares of common stock issuable upon exercise of warrants were excluded from the computation of diluted earnings per share as the effect would be antidilutive.

For the three and nine month periods ended September 30, 2011 and 2010, approximately 24,000 and 153,000, respectively, of shares issuable upon exercise of employee stock options were excluded from the computation of diluted earnings per share because the effect would be antidilutive.

13



TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

 

Note 7.

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, 2011

Net Sales:

Customer sales

$

7,079 

$

2,423 

$

1,899 

$

$

11,401 

Intercompany sales

462 

579 

951 

(1,992)

Total Net Sales

$

7,541 

$

3,002 

$

2,850 

$

(1,992)

$

11,401 

Location profit (loss)

$

717 

$

269 

$

93 

$

(12)

$

1,067 

September 30, 2010

Net Sales:

Customer sales

$

4,753 

$

1,953 

$

837 

$

$

7,543 

Intercompany sales

575 

1,254 

(1,829)

Total Net Sales

$

4,753 

$

2,528 

$

2,091 

$

(1,829)

$

7,543 

Location profit

$

94 

$

308 

$

(125)

$

(41)

$

236 

As of and for the nine months ended:

September 30, 2011

Net Sales:

Customer sales

$

18,329 

$

8,047 

$

5,099 

$

$

31,475 

Intercompany sales

462 

2,207 

5,438 

(8,107)

Total Net Sales

$

18,791 

$

10,254 

$

10,537 

$

(8,107)

$

31,475 

Location profit

$

1,372 

$

911 

$

442 

$

(2)

$

2,723 

Location assets

$

14,654 

$

10,191 

$

19,146 

$

$

43,991 

September 30, 2010

Net Sales:

Customer sales

$

13,951 

$

6,122 

$

2,254 

$

$

22,327 

Intercompany sales

24 

1,532 

3,896 

(5,452)

Total Net Sales

$

13,975 

$

7,654 

$

6,150 

$

(5,452)

$

22,327 

Location profit

$

587 

$

665 

$

(27)

$

65 

$

1,290 

Location assets

$

11,811 

$

7,733 

$

15,273 

$

$

34,817 

14



TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

 

Product sales of inventory between Corpus Christi, TPT and TMM 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 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 US parent company and between subsidiaries are based upon profit margins which represent competitive pricing of similar products.  Intercompany sales consisted of SR, HITOX, ALUPREM and TIOPREM.

Note 8.

Stock Options and Equity Compensation Plan

For the three and nine month periods ended September 30, 2011, the Company recorded stock-based employee compensation expense of $6,000 and $53,000, respectively.  For the three month period ended September 30, 2010, all options were fully vested; therefore, the Company did not recognize any option compensation expense.  For the nine month period ended September 30, 2010, the Company recorded stock-based employee compensation expense of $91,000.  This compensation expense is included in the selling, general and administrative expenses in the accompanying consolidated statements of income.

The Company granted 23,500 and 23,404 options during the nine month periods ended September 30, 2011 and 2010.

As of September 30, 2011, there was approximately $158,000 of stock-based employee compensation expense related to non-vested awards which is expected to be recognized over a weighted average period of 4.33 years.

As all options issued under the Plan are Incentive Stock Options, the Company does not normally receive significant excess tax benefits relating to the compensation expense recognized on vested options.

Note 9.

Inventories

A summary of inventory follows:

(In thousands)

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

Raw materials

$

9,384 

$

6,337 

Work in progress

1,756 

1,343 

Finished goods

2,797 

2,895 

Supplies

1,315 

794 

Total Inventories

15,252 

11,369 

Inventory reserve

(300)

(348)

Net Inventories

$

14,952 

$

11,021 

15



TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

 

Note 10.

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 energy prices and 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 natural gas and 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 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 balance sheet and changes in the fair value are recognized in earnings in the period of the change.

 

At September 30, 2011, we marked these contracts to market, recording $70,000 as a current liability on the balance sheet.  For the three and nine month periods ended September 30, 2011, we recorded a net loss on these contracts of $70,000 and $85,000, respectively, as a component of our net income.  For the three and nine month periods ended September 30, 2010, we recorded a net gain of $30,000 and $143,000, respectively, as a component of our net loss.

 

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)

Asset Derivatives

 

 

September 30,

 

December 31,

Derivative Instrument

 

Location

 

2011

 

2010

Foreign Currency Exchange Contracts

Other Current Assets

 $

 $

11 

 

 

 

 $

 $

11 

 

 

 

 

 

 

 

Liability Derivatives

 

 

September 30,

 

December 31,

Derivative Instrument

 

Location

 

2011

 

2010

Foreign Currency Exchange Contracts

Accrued Expenses

70 

 

 

 

 $

70 

 $

 

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, 2011 and 2010:

 

 

 

 

Amount of (Loss) Gain Recognized in Income
(In thousands)

 

Location of (Loss)

 

Three Months Ended

 

Nine Months Ended

Derivative

 

Gain on Derivative

 

September 30,

 

September 30,

Instrument

 

Instrument

 

2011

 

2010

 

2011

 

2010

Foreign Currency
   Exchange Contracts

Other (Expense) Income

 $

(70)

 $

30 

 $

(85)

 $

143 

16



TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

Company Overview

We are a global specialty chemical 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 US, Asia and Europe.

Our US 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 SR, HITOX and TIOPREM and our European Operation, located in Hattem, Netherlands, manufactures ALUPREM.

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 US 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, 2011 and 2010.

(Unaudited)

(In thousands, except per share amounts)

 

Three Months
Ended September 30,

 

Nine Months
Ended September 30,

 

 

2011

 

2010

 

2011

 

2010

NET SALES

 $

11,401 

 $

7,543 

 $

31,475 

 $

22,327 

Cost of sales

9,026 

6,234 

24,703 

17,765 

GROSS MARGIN

 

2,375 

 

1,309 

 

6,772 

 

4,562 

Technical services and research and development

74 

66 

206 

184 

Selling, general and administrative expenses

1,098 

846 

3,322 

2,666 

OPERATING INCOME

 

1,203 

 

397 

 

3,244 

 

1,712 

OTHER EXPENSE:

Interest expense

(139)

(110)

(336)

(343)

Gain (loss) on foreign currency exchange rate

63 

(53)

(47)

Other, net

INCOME BEFORE INCOME TAX

 

1,127 

 

234 

 

2,921 

 

1,322 

Income tax expense

60 

(2)

198 

32 

NET INCOME

 $

1,067 

 $

236 

 $

2,723 

 $

1,290 

 

 

 

 

 

 

 

 

 

Income per common share:

Basic

 $

0.50 

 $

0.12 

 $

1.32 

 $

0.66 

Diluted

 $

0.33 

 $

0.09 

 $

0.86 

 $

0.48 

17



TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

Net Sales:  Consolidated net sales for the three and nine month periods ended September 30, 2011 increased approximately $3,858,000 or 51% and $9,148,000 or 41%, respectively, as compared to the same three and nine month periods of 2010 when we experienced increases in our consolidated net sales of $1,102,000 or 17% and $4,529,000 or 25%, respectively.

Following is a summary of our consolidated products sales for the three and nine month periods ended September 30, 2011 and 2010 (in thousands).  All inter-company sales have been eliminated.

(Unaudited)

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

Product

2011

2010

Variance

 

2011

2010

Variance

HITOX

$

5,352 

47%

$

2,941 

39%

$

2,411 

82%

$

14,072 

44%

$

8,939 

40%

$

5,133 

57%

ALUPREM

3,680 

32%

2,719 

36%

961 

35%

10,645 

34%

8,038 

36%

2,607 

32%

BARTEX

1,132 

10%

985 

13%

147 

15%

2,944 

9%

2,804 

13%

140 

5%

HALTEX

759 

7%

618 

8%

141 

23%

2,385 

8%

1,977 

9%

408 

21%

TIOPREM

342 

3%

180 

3%

162 

90%

1,119 

4%

266 

1%

853 

321%

OTHER

136 

1%

100 

1%

36 

36%

310 

1%

303 

1%

2%

Total

$

11,401 

100%

$

7,543 

100%

$

3,858 

51%

$

31,475 

100%

$

22,327 

100%

$

9,148 

41%

HITOX sales increased 82% and 57% for the three and nine month periods ended September 30, 2011, respectively, as compared to the same periods in 2010 primarily due to the stabilization and recovery in the paint and plastics end markets, as well as a tight supply of commodity titanium dioxide, which have led to the addition of many new global customers.  This compares to an increase of 2% and 16% for the three and nine month periods ended September 30, 2010, respectively.  Since the end of the quarter, we are seeing increasing competitive pricing pressure from Chinese-based low-grade titanium dioxide producers, which is likely to put near-term pressure on HITOX volumes in Asia and South America.  However, we expect overall average selling prices to continue to increase, as the pricing environment in Europe and North America remains favorable.

ALUPREM sales increased 35% during the third quarter of 2011 and 32% for the nine month period ended September 30, 2011, as compared to the same periods of 2010 primarily due to an increase in sales volume in both the US and Europe.  This compares to an increase of 20% and 18% during the same three and nine month periods of 2010, respectively.

BARTEX sales increased 15% during the third quarter of 2011 and 5% for the nine month period ended September 30, 2011.  This follows an increase of approximately 40% and 47% during the same three and nine month periods of 2010, respectively, primarily due to an increase in volume and our customer base.

HALTEX sales increased 23% and 21% for the three and nine month periods ended September 30, 2011, respectively.  This compares to an increase of 30% and 76% for the same three and nine month periods of 2010, respectively.  The year-over-year increase is related to new business for our OPTILOAD specialty products which are gaining acceptance in the marketplace.

TIOPREM sales increased significantly during the three and nine month periods ended September 30, 2011 as compared to the same periods of 2010 primarily due to the product gaining greater acceptance in the global marketplace.

18



TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Corpus Christi Operation

Our Corpus Christi 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 Corpus Christi operation for the three and nine month periods ended September 30, 2011 and 2010 (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

2011

2010

Variance

 

2011

2010

Variance

HITOX

$

3,369 

47%

$

1,954 

41%

$

1,415 

72%

$

8,244 

45%

$

6,136 

44%

$

2,108 

34%

ALUPREM

1,547 

22%

974 

20%

573 

59%

3,916 

22%

2,544 

18%

1,372 

54%

BARTEX

1,132 

16%

985 

21%

147 

15%

2,944 

16%

2,804 

20%

140 

5%

HALTEX

759 

11%

618 

13%

141 

23%

2,385 

13%

1,977 

14%

408 

21%

TIOPREM

154 

2%

130 

3%

24 

18%

577 

3%

205 

2%

372 

181%

OTHER

118 

2%

92 

2%

26 

28%

263 

1%

285 

2%

(22)

-8%

Total

$

7,079 

100%

$

4,753 

100%

$

2,326 

49%

$

18,329 

100%

$

13,951 

100%

$

4,378 

31%

 

  • HITOX sales during the third quarter increased 62%, 52% and 119% in the US, Canada and South America, respectively, as compared to the same period in 2010 resulting in a net increase for the quarter of 72% (63% volume and 37% price).  This compares to a decrease in the third quarter of 2010 of 6%. 

Year to date, the increase in HITOX sales of 34% is primarily due to an increase in volume of 50% and an increase in price of 50% both of which are related to the tight supply of commodity titanium dioxide resulting in an increase in demand for HITOX from both new and existing customers.  This compares to an increase of 8% during the same nine month period of 2010.  Going forward we anticipate the growth rate in the average price of HITOX sales from the Corpus Christi operation to accelerate due to significant price increases that were implemented during the third and fourth quarters.  HITOX volumes in North America are expected to continue to benefit from both new and existing customers.  HITOX sales in South America, which represents approximately 13% of the HITOX sales from the Corpus Christi operation, are likely to be negatively impacted by increasing competitive pressure from Chinese-based low-grade titanium dioxide producers.

 

  • ALUPREM sales during the third quarter increased 59% as compared to an increase of 9% during the third quarter of 2010 due to an increase in volume.  Year to date, US ALUPREM sales increased 54% as compared to a decrease of 18% during the same nine month period of 2010.  The net change in US sales of ALUPREM was primarily due to new business and expanded requirements of a significant customer.
  • BARTEX sales in the US increased primarily due to an increase in demand from existing customers, as well as new customers.
  • HALTEX sales in the US increased primarily due to new business, an increase in demand and the acceptance of our new product, OPTILOAD, in the market place.

  • TIOPREM sales in the US increased 18% and 181% during the three and nine month periods ended September 30, 2011, respectively, primarily due to the product gaining greater acceptance in the marketplace.

       

19



TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Netherlands Operation

Our subsidiary in the Netherlands, TPT, manufactures and sells ALUPREM to third party customers, as well as to our Corpus Christi operation for distribution to our US customers.  In addition, TPT purchases HITOX from TMM for distribution in Europe.  The following table represents TPT’s ALUPREM and HITOX sales (in thousands) for the three and nine month periods ended September 30, 2011 and 2010 to third party customers.  All inter-company sales have been eliminated.

(Unaudited)

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

Product

2011

2010

Variance

 

2011

2010

Variance

ALUPREM

$

2,133 

88%

$

1,745 

89%

$

388 

22%

$

6,729 

83%

$

5,494 

90%

$

1,235 

22%

HITOX

231 

10%

187 

10%

44 

24%

1,104 

14%

596 

10%

508 

85%

TIOPREM

59 

2%

21 

1%

38 

181%

214 

3%

32 

<1%

182 

569%

Total

$

2,423 

100%

$

1,953 

100%

$

470 

24%

$

8,047 

100%

$

6,122 

100%

$

1,925 

31%

 

  • ALUPREM sales in Europe increased 22% for both the three and nine month periods ended September 30, 2011, primarily related to an increase in volume of approximately 39%, an increase in selling price and product mix of approximately 53% and the effect of changes in the foreign currency of approximately 8%.  This compares to an increase of 27% and 49% for the same three and nine month periods of 2010, respectively.
  • HITOX sales in Europe increased 24% and 85% for the three and nine month periods ended September 30, 2011, respectively, primarily due to a tight supply of commodity titanium dioxide, which has led to an increase in demand from existing customers, as well as new customers.  Year to date, this has resulted in an increase in volume of approximately 25% and an increase in selling price and product mix of approximately 65% and the effect of changes in the foreign currency of approximately 10%.  This compares to a decrease of 9% during the third quarter of 2010 and an increase of 20% for the same nine month period of 2010, respectively.
  • TIOPREM sales in Europe increased significantly during the three and nine month periods ended September 30, 2011, primarily due to the product gaining greater acceptance in the marketplace.

 

20



TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Malaysian Operation

Our subsidiary in Malaysia, TMM, manufactures and sells HITOX and SR to third party customers, as well as to our Corpus Christi operation and TPT.  The following table represents TMM’s sales (in thousands) for the three and nine month periods ended September 30, 2011 and 2010 to third party customers.  All inter-company sales have been eliminated.

(Unaudited)

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

Product

2011

2010

Variance

 

2011

2010

Variance

HITOX

$

1,752 

92%

$

800 

96%

$

952 

119%

$

4,724 

93%

$

2,207 

98%

$

2,517 

114%

TIOPREM

129 

7%

29 

3%

100 

345%

328 

6%

29 

1%

299 

1031%

OTHER

18 

1%

1%

10 

125%

47 

1%

18 

1%

29 

161%

Total

$

1,899 

100%

$

837 

100%

$

1,062 

127%

$

5,099 

100%

$

2,254 

100%

$

2,845 

126%

 

  • HITOX sales in Asia increased 119% and 114% for the three and nine month periods ended September 30, 2011, respectively, primarily related to an increase in volume related to the continuing improvement in the economy and the construction industry in Asia, as well as a tight supply of commodity titanium dioxide, which have led to the addition of many new global customers.  This compares to an increase of 30% and 46% for the same three and nine month periods of 2010, respectively.  We anticipate a slow-down in the growth of the Asian HITOX market due to increasing competitive pricing pressure from Chinese-based low-grade titanium dioxide producers, which is likely to put near-term pressure on HITOX volumes in Asia.
  • TIOPREM sales in Asia increased 345% and 1031% during the three and nine month periods ended September 30, 2011, respectively.  The increase, as compared to the same periods of 2010, is primarily due to the product gaining greater acceptance in the global marketplace.

 

21



TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Consolidated Results

Gross Margin:  For the three month period ended September 30, 2011, gross margin increased 3.5%, from 17.3% for the third quarter 2010 as compared to 20.8% for the same three month period of 2011.  For the nine month period ended September 30, 2011, gross margin increased 1.1% from 20.4% for the nine month period ended September 30, 2010 to 21.5% for the same nine month period of 2011.  An increase in selling price, product mix and a reduction in idle plant time increased the year to date gross margin approximately 65%, 30% and 5%, respectively.  These factors were more than enough to offset cost pressures we faced during the year.  In particular, fuel costs are up approximately 40% year over year and the cost of ilmenite ore has tripled from last year.  As we look at costs for the remainder of the year, we expect fuel and raw material costs will continue to put pressure on margins.  However, despite these pressures, we expect to show year over year improvement in profitability during the fourth quarter due to favorable trends in pricing, increasing sale3s and better plant utilization.

Technical Services and Selling, General, Administrative and Expenses (“SG&A”)Total SG&A expense increased approximately 28.5% during the three month period ended September 30, 2011 as compared to the same period of 2010 primarily related to an increase in salaries of approximately 28%, sales commissions of 47% and legal fees of 20%.  For the nine month period ended September 30, 2011, SG&A expenses increased approximately 23.8% primarily due to an increase in salary expense of 37%, which included a bonus for executive management of $170,000, as well as increases relating to business travel of 50% and sales commissions of 45% which were partially offset by a reduction in accounting fees of 25% and legal fees of 46%.

Interest Expense:  Net interest expense for the third quarter of 2011 increased approximately 26% as compared to the same periods of 2010 primarily due to higher outstanding balances on our line of credit and ECR financing.  For the nine month period ended September 30, 2011 remained relatively flat as compared to the same period of 2010.

Income Taxes:  For the three and nine month periods ended September 30, 2011, income tax expense consisted of federal income tax expense of $6,000 and $18,000, respectively; state income tax expense of $2,000 and $4,000, respectively; and foreign deferred tax expense of $52,000 and $176,000, respectively.  For the three and nine month periods ended September 30, 2010, income tax expense consisted of federal income tax benefit of $12,000; state income tax expense of $3,000 and $8,000, respectively; and foreign deferred tax expense of $7,000 and $24,000, respectively.  Taxes are based on an estimated annualized consolidated effective rate of 6.8% for the year ended December 31, 2011.

22



TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations

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,

2011

2010

Fixed Rate term note payable to a U.S. bank, with an interest rate of 6.65% at September 30, 2011, due January 1, 2016, secured by real estate, leasehold improvements, property, plant and equipment, inventory and accounts receivable of our US operation.

$

1,769 

$

2,000 

Term note payable to a U.S. equipment financing company, with an interest rate of 5.24% at September 30, 2011, due April 1, 2013, secured by a Caterpillar front-end loader.

41 

60 

Fixed rate Euro term note payable to a Netherlands bank, with an interest rate of 7.8% at September 30, 2011, due July 1, 2029, secured by TPT's land and office building purchased July 2004.  (€348)

467 

485 

Fixed rate Euro term note payable to a Netherlands bank, with an interest rate of 4.6% at September 30, 2011, due January 31, 2030, secured by TPT's land and building purchased January 2005.  (€346)

465 

482 

Fixed rate Euro term note payable to a Netherlands bank, with an interest rate of 4.05% at September 30, 2011, due July 31, 2015, secured by TPT's assets.  (€196)

263 

312 

Fixed rate Euro term note payable to a Netherlands bank, with an interest rate of 4.25% at September 30, 2011, due July 5, 2014, secured by TPT's assets.  (€661)

887 

U.S. Dollar term note payable to a Malaysian bank which matured May 30, 2011.

41 

Total

3,892 

3,380 

Less current maturities

820 

533 

Total long-term debt and notes payable - financial institutions

$

3,072 

$

2,847 

Six-percent Convertible Subordinated Debentures

As reported in the Company’s Forms 8-K filed with the SEC on May 6, 2009 and August 10, 2009, the Company’s Board of Directors authorized the issuance of its six-percent (6%) convertible subordinated debentures with detachable warrants (the “Debentures”) for the purpose of refinancing, in whole or in part, its debt to the Bank and for general corporate purposes.  Under the current authorization, the Company received, $1,500,000 from the sale of Debentures, due May 4, 2016, from nine accredited investors, four of which are directors of the Company and another of which is a greater than 5% shareholder.  At September 30, 2011, a balance of $1,450,000 remained outstanding on the Debentures.

23



TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Short-term Debt

US Operations

On December 31, 2010, the Company entered into a new U.S. credit agreement (the “Agreement”) with American Bank, N.A. (the “Lender”) which established a $1 million line of credit (the “Line”) which matures July 1, 2012.  The amount which the Company is entitled to borrow from time to time under the line of credit is subject to a borrowing base 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 of credit 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 5.50%.  At September 30, 2011, the Company had no outstanding funds borrowed on the Line.

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, 2011, the ratio of cash flow to debt service was 3.38 to 1.0.

Netherlands Operation

On March 20, 2007, our subsidiary, TOR Processing and Trade, B.V. (“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 4.397%), is secured by TPT’s accounts receivable and inventory.  At September 30, 2011, TPT had utilized €838,000 ($1,125,000) 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 the lenders could foreclose on the assets of TPT.

Malaysian Operations

On June 27, 2011, the Company’s subsidiary, TOR Minerals Malaysia, Sdn. Bhd. (“TMM”), amended its banking facility with HSBC Bank Malaysia Berhad (“HSBC”) to extend the maturity date from April 30, 2011 to April 30, 2012.  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 ($157,000, $2,025,000 and $1,567,000, respectively).

On June 1, 2011, TMM amended its banking facility with RHB Bank Berhad (“RHB”) to extend the maturity date to April 4, 2012.  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 ($313,000, $2,915,000, $376,000 and $7,837,000, respectively).

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, 2011, the outstanding balance on the ECR facilities was RM 8,559,000 ($2,683,000) at a current interest rate of 4.25%.

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.

24



TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cash and Cash Equivalents

As noted on the following table, cash and cash equivalents decreased $452,000 for the nine months ended September 30, 2011 as compared to a decrease of $438,000 for the nine months ended September 30, 2010.

(Unaudited)

Nine Months Ended September 30,

(In thousands)

 

2011

 

2010

Net cash provided by (used in)

Operating activities

$

(1,329)

$

2,050 

Investing activities

(2,733)

(1,009)

Financing activities

3,808 

(1,737)

Effect of exchange rate fluctuations

(198)

258 

Net change in cash and cash equivalents

$

(452)

$

(438)

Operating Activities

We used $1,329,000 in operating activities during the first nine months of 2011.  Following are the major changes in working capital affected by cash used in operating activities for the nine month period ended September 30, 2011:

  • Accounts Receivable:  Accounts receivable increased $1,880,000 as compared to an increase of $640,000 for the same period in 2010.  The increase in accounts receivable is primarily due to stronger sales in the third quarter 2011 at each of the Company’s three operations as compared to the third quarter of 2010.  Accounts receivable increased $1,082,000 at the Corpus Christi operation and $193,000 and $605,000 at TPT and TMM, respectively.
  • Inventories: Inventories increased $4,142,000 as compared to an increase of $827,000 for the same period in 2010.  Inventories at the Corpus Christi operation increased $595,000 primarily related to an increase in finished goods.  TPT’s increased $113,000 primarily due to an increase in raw materials which was partially offset by a reduction in finished goods; and TMM’s increased $3,434,000 primarily related to raw materials related to the production of Synthetic Rutile.
  • Other Current Assets:  Other current assets increased $478,000 as compared to an increase of $339,000 for the same period in 2010.  At the Corpus Christi operation, prepaid expenses increased $113,000 primarily due to insurance and TMM’s increased $378,000 primarily related to prepaid freight.  TPT’s decreased $13,000 related to prepaid pension expense.
  • Accounts Payable and Accrued Expenses:  Trade accounts payable and accrued expenses increased $643,000 as compared to an increase of $972,000 for the same period in 2010.  Accounts payable and accrued expenses at the Corpus Christi operation decreased $74,000 primarily related to the timing of raw material purchases; TPT’s increased $329,000 primarily related to capital expenditures and raw materials and TMM’s increased $388,000 primarily relating to raw materials for the production of SR.

Investing Activities

We used cash of $2,733,000 in investing activities during the first nine months of 2011 primarily for the purchase of fixed assets as compared to $1,009,000 during the same period 2010.  Net investments for each of our three locations are as follows:

  • Corpus Christi Operation:  We invested approximately $328,000 primarily related to capital maintenance, production equipment and computer equipment, as compared to $530,000 for the same period in 2010.
  • Netherlands Operation:  We invested approximately $2,162,000 at TPT for new equipment to increase production capacity of ALUPREM, as compared to $470,000 for the same period in 2010.
  • Malaysian Operation:  We invested approximately $243,000 at TMM for new equipment to improve the efficiency of SR production, as compared to $9,000 for the same period in 2010.

25



TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Financing Activities

Financing activities provided $3,808,000 during the nine month period ended September 30, 2011 as compared to cash used of $1,737,000 for the same period 2010.  Significant factors relating to financing activities include the following:

  • Lines of Credit:  Borrowings on TPT’s line of credit increased $339,000 as compared to a decrease of $125,000 for the same period 2010.  The funds were primarily used for working capital.  Our domestic line of credit, which has not been utilized during 2011, decreased approximately $1,600,000 during the nine month period ended September 30, 2010.
  • Export Credit Refinancing Facility (ECR):  TMM’s borrowing on the ECR increased $2,428,000 during the nine month period ended September 30, 2011 for working capital related to the production of SR as compared to an increase of $477,000 for the same period in 2010.
  • Capital Leases:  Capital leases decreased approximately $44,000 related to lease payments at both the Corpus Christi operation and at TPT during the first nine months of 2011 as compared to a decrease of approximately $96,000 for the same period in 2010.
  • Long-term Debt – Financial Institutions:  Long-term debt increased approximately $509,000 during the nine month period ended September 30, 2011.  Long-term debt increased approximately $799,000 at TPT related to a new term loan to fund a portion of the plant expansion.  Long-term debt decreased $250,000 at the Corpus Christi operation and $40,000 at TMM.  This compares to a decrease in long-term debt of approximately $399,000 for the same period in 2010.
  • Proceeds from Issuance of Common Stock:  We received $606,000 from the issuance of common stock during the first nine months of 2011 of which $425,000 related to the exercise of warrants and $181,000 to the exercise of stock options.  For the same nine month period of 2010, we received $51,000 from the issuance of common stock of which $25,000 related to the exercise of warrants and $26,000 to the exercise of stock options.
  • Preferred Stock Dividends:  We paid dividends of $30,000 and $45,000 on our Series A convertible preferred stock for the nine month periods ended September 30, 2011 and 2010, respectively.

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 2010 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 has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

 

26



Part II  -  Other Information

Item 6.

Exhibits

(a)

Exhibits

Exhibit 10.1

Amendment to Loan Agreement with HSBC Bank, dated November 15, 2010

Exhibit 10.2

Amendment to Loan Agreement with HSBC Bank, dated June 27, 2011

Exhibit 10.3

Amendment to Loan Agreement with RHB Bank, dated June 1, 2011

Exhibit 10.4

Loan Agreement with Rabobank, dated July 3, 2011

 

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


Signatures:

 

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.

 

TOR Minerals International, Inc.

 

____________

(Registrant)

Date:

October 28, 2011

OLAF KARASCH
Olaf Karasch
President and Chief Executive Officer

Date:

October 28, 2011

BARBARA RUSSELL
Barbara Russell
Chief Financial Officer

27