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TORM > SEC Filings for TORM > Form 10-Q on 31-Oct-2012All Recent SEC Filings

Show all filings for TOR MINERALS INTERNATIONAL INC

Form 10-Q for TOR MINERALS INTERNATIONAL INC


31-Oct-2012

Quarterly Report

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 U.S., Asia and Europe.

Our U.S. Operation, located in Corpus Christi, Texas, manufactures HITOX, BARTEX, HALTEX/OPTILOAD and TIOPREM. The facility is also the global headquarters for the Company. The Asian Operation, located in Ipoh, Malaysia, manufactures 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 U.S. Dollar.

Our business is closely correlated with the construction industry and its demand for materials that use pigments, such as paints and plastics. This has generally led to higher sales in our second and third quarters due to increases in construction and maintenance during warmer weather. Also, pigment consumption is closely correlated with general economic conditions. When the economy is in an expansionary state, there is typically an increase in pigment consumption while a slow down typically results in decreased pigment consumption. When the construction industry or the economy is in a period of decline, TOR's sales and profit are likely to be adversely affected.

Following are our results for the three and nine month periods ended September 30, 2012 and 2011.

                                                                 (Unaudited)
                                                   Three Months               Nine Months
 (In thousands, except per share amounts)      Ended September 30,       Ended September 30,
                                                2012          2011        2012          2011
 NET SALES                                  $   19,914    $  11,401   $   46,830    $  31,475
 Cost of sales                                  16,068        9,026       36,127       24,703
 GROSS MARGIN                                    3,846        2,375       10,703        6,772
 Technical services and research and
development                                         90           74          273          206
 Selling, general and administrative
expenses                                         1,242        1,098        3,825        3,322
 Gain on disposal of assets                         (6)           -           (6)           -
 OPERATING INCOME                                2,520        1,203        6,611        3,244
 OTHER EXPENSE:
 Interest expense                                 (143)        (139)        (397)        (336)
 Gain (loss) on foreign currency exchange
rate                                               (24)          63          (21)           6
 Other, net                                          -            -            1            7
 INCOME BEFORE INCOME TAX                        2,353        1,127        6,194        2,921
 Income tax expense                                516           60        1,402          198
 NET INCOME                                 $    1,837    $   1,067   $    4,792    $   2,723

 Income per common share:
 Basic                                      $     0.62    $    0.50   $     1.77    $    1.32
 Diluted                                    $     0.53    $    0.33   $     1.43    $    0.86


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, 2012 increased approximately $8,513,000 or 75% and $15,355,000 or 49%, respectively, as compared to the same three and nine month periods of 2011 when we experienced increases in our consolidated net sales of $3,858,000 or 51% and $9,148,000 or 41%, respectively.

Following is a summary of our consolidated products sales for the three and nine month periods ended September 30, 2012 and 2011 (in thousands). All inter-company sales have been eliminated.

                               (Unaudited)
                  Three Months Ended September 30,                  Nine Months Ended September 30,
Product          2012            2011          Variance            2012            2011          Variance
HITOX      $  3,914   20%  $  5,352   47%  $ (1,438) -27%    $ 15,232   33%  $ 14,072   44%  $  1,160    8%
ALUPREM       3,664   18%     3,680   32%       (16)   0%      11,726   25%    10,645   34%     1,081   10%
BARTEX        1,787    9%     1,132   10%       655   58%       4,711   10%     2,944    9%     1,767   60%
HALTEX          917    4%       759    7%       158   21%       2,819    6%     2,385    8%       434   18%
TIOPREM         623    3%       342    3%       281   82%       1,377    3%     1,119    4%       258   23%
SYNTHETIC
RUTILE        8,862   45%         -    0%     8,862  N/A       10,410   22%         -    0%    10,410  N/A
OTHER           147    1%       136    1%        11    8%         555    1%       310    1%       245   79%
Total      $ 19,914  100%  $ 11,401  100%  $  8,513   75%    $ 46,830  100%  $ 31,475  100%  $ 15,355   49%

HITOX sales for the third quarter of 2012 decreased 27% primarily due to a decrease in volume of approximately 44% which was partially offset by an increase in the average selling price of approximately 17%. The third quarter decrease in sales volumes has been experienced throughout the titanium dioxide ("TiO2") market as both producers and consumers have been undertaking inventory correction initiatives primarily due to the economic weakness and uncertainty as well as to align production levels and inventories to the current demand levels for TiO2 products. For the nine month period ended September 30, 2012, HITOX sales increased 8% primarily due to an increase in average selling price of approximately 31% offset by a reduction in volume of approximately 23%. This compares to an increase of 82% and 57% for the three and nine month periods ended September 30, 2011, respectively, primarily due to the stabilization and recovery in the paint and plastics end markets, as well as a tight supply of commodity TiO2 which resulted in an increase in volume and average selling price for the nine month period of 33% and 24%, respectively.

ALUPREM sales remained flat during the third quarter of 2012 and increased 10% for the nine month period ended September 30, 2012, as compared to the same periods of 2011 primarily due to an increase in volume of a significant U.S. customer, which was partially offset by a decrease in volume in European sales as this business is being affected by the slowdown in the European economy. This compares to an increase of 35% and 32% during the same three and nine month periods of 2011, respectively.

BARTEX sales increased 58% and 60% during the three and nine month periods ended September 30, 2012. For the three and nine month period, an increase in volume represented approximately 51% of the overall sales increase. This follows an increase of approximately 15% and 5% for the three and nine month periods ended September 30, 2011, respectively.

HALTEX sales increased primarily due to new business for our standard HALTEX and newer OPTILOAD specialty products which are gaining acceptance in the marketplace. For the three and nine month periods ended September 30, 2012, sales increased 21% and 18%, respectively. This compares to an increase of 23% and 21% for the same three and nine month periods of 2011, respectively.


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

TIOPREM sales increased 82% for the three month period ended September 30, 2012, of which approximately 65% related to an increase in volume and 17% to an increase in the average selling price. Year to date, sales increased approximately 23%. For the same three and nine month periods of 2011, sales increased 90% and 321%, respectively.

Synthetic Rutile ("SR") sales represented 45% and 22% of the overall sales for the three and nine month periods ended September 30, 2012, respectively. There were no SR sales in 2011. As long as favorable conditions continue in the market for synthetic rutile, the Company plans to continue to sell SR to third parties and is currently exploring opportunities to expand sales to new customers and for applications outside of the pigment market.

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, 2012 and 2011 (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       2012           2011         Variance            2012            2011         Variance
HITOX    $ 2,880   34%  $ 3,369   47%  $  (489) -15%    $  9,882   38%  $  8,244   45%  $ 1,638  20%
ALUPREM    2,347   27%    1,547   22%      800   52%       7,104   27%     3,916   22%    3,188  81%
BARTEX     1,787   21%    1,132   16%      655   58%       4,711   18%     2,944   16%    1,767  60%
HALTEX       917   11%      759   11%      158   21%       2,819   11%     2,385   13%      434  18%
TIOPREM      555    6%      154    2%      401  260%       1,038    4%       577    3%      461  80%

OTHER 106 1% 118 2% (12) -10% 476 2% 263 1% 213 81% Total $ 8,592 100% $ 7,079 100% $ 1,513 21% $ 26,030 100% $ 18,329 100% $ 7,701 42%

HITOX sales decreased 15% for the three month period ended September 30, 2012, primarily due to a decrease in volume of approximately 31% which was partially offset by an increase in selling price of 16%. U.S. sales decreased approximately 28% while sales in Canada, Mexico and South America increased approximately 17%, 18% and 21%, respectively, as compared to the same period in 2011. This compares to an increase in the third quarter of 2011 of 72% of which volume and selling price represented 34% and 38%, respectively. Year to date, HITOX sales increased 20%, primarily related to an increase in the average selling price of 32% offset by a decrease in volume of 12%. HITOX sales in the U.S., Canada and Mexico increased 14%, 71% and 81%, respectively, while sales in South America decreased 21% as compared to the same nine month period of 2011. For the nine month period ended September 30, 2011, HITOX sales increased 34%, of which volume and selling price presented 14% and 20%, respectively.

ALUPREM sales during the third quarter increased 52%, as compared to an increase of 59% during the third quarter of 2011. Year to date, U.S. ALUPREM sales increased 81%, as compared to an increase of 54% during the same nine month period of 2011. The year-over-year increases are primarily due to an increase in volume of a significant customer.

TIOPREM sales in the U.S. increased 260% and 80% the three and nine month periods ended September 30, 2012, respectively. For the quarter ended September 30, 2012, volume increased 232% and the average selling price increased 28%. Year to date, volume increased 52% and selling price increased approximately 28%. During the same nine month period of 2011, sales increased significantly due primarily to an increase in volume of approximately 148% and an increase in average selling price of approximately 33% as the product gained greater acceptance in the U.S. market.


               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
U.S. 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, 2012 and
2011 to third party customers.  All inter-company sales have been eliminated.

                           (Unaudited)
              Three Months Ended September 30,               Nine Months Ended September 30,
Product       2012           2011         Variance          2012           2011          Variance
ALUPREM  $ 1,317   80%  $ 2,133   88%  $ (816) -38%    $ 4,622   79%  $ 6,729   83%  $ (2,107) -31%
HITOX        317   19%      231   10%      86   37%      1,142   20%    1,104   14%        38    3%
TIOPREM       11    1%       59    2%     (48) -81%         54    1%      214    3%      (160) -75%
Total    $ 1,645  100%  $ 2,423  100%  $ (778) -32%    $ 5,818  100%  $ 8,047  100%  $ (2,229) -28%

ALUPREM sales in Europe decreased 38% and 31% for the three and nine month periods ended September 30, 2012, respectively, primarily due to a decrease in volume of 40% for the quarter and 33% year to date. The decrease in volume is primarily the result of the current weakness in the European economy. This compares to an increase of 22% during both same the three and nine month periods of 2011.

HITOX sales in Europe increased 37% during the third quarter of 2012, primarily due to an increase in volume of 14% and an increase in the average selling price of 23%. For the nine month period ended September 30, 2012, HITOX sales experienced only a modest increase of 3%. This compares to an increase in sales of 24% and 85% for the same three and nine month periods of 2011, respectively. For the nine month period ended September 30, 2011, volume increased 33% and selling price increased sales 52%.

TIOPREM sales in Europe represented 1% of TPT's sales during the three and nine month periods ended September 30, 2012. For the three and nine month periods ended September 30, 2012, sales decreased 81% and 75%, respectively, primarily due to a decline in the European economy. This follows significant increases in volume during the same three and nine month periods of 2011 as product gained greater acceptance in the European market. For the same three and nine month periods of 2011, TIOPREM sales increased 181% and 569%, respectively.


               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, 2012 and 2011 to third party customers.  All
inter-company sales have been eliminated.

                              (Unaudited)
                 Three Months Ended September 30,                 Nine Months Ended September 30,
Product         2012           2011          Variance            2012           2011          Variance
HITOX      $   717    7%  $ 1,752   92%  $ (1,035) -59%    $  4,208   28%  $ 4,724   93%  $   (516) -11%
TIOPREM         57    1%      129    7%       (72) -56%         285    2%      328    6%       (43) -13%
SYNTHETIC
RUTILE       8,862   92%        -    0%     8,862  N/A       10,410   69%        -    0%    10,410  N/A
OTHER           41   <1%       18    1%        23  128%          79    1%       47    1%        32   68%
Total      $ 9,677  100%  $ 1,899  100%  $  7,778  410%    $ 14,982  100%  $ 5,099  100%  $  9,883  194%

HITOX sales in Asia decreased 59% and 11% for the three and nine month periods ended September 30, 2012, respectively. For the quarter ended September 30, 2012, a decrease in volume represented 74% of the decline in sales, which was partially offset by an increase in the average selling price of 15%. Year to date, sales decreased 11% due to decrease in volume of 43% offset by an increase in the average selling price of approximately 32%. This compares to an increase of 119% and 114% for the same three and nine month periods of 2011, respectively, primarily related to an increase in volume 85% and 92%, respectively, and selling price of 34% and 22%.
TIOPREM sales in Asia decreased 56% and 13% during the three and nine month periods ended September 30, 2012. The year-over-year decrease is primarily related to a decrease in volume of 61% and 29%, respectively, offset by an increase in the average selling price of 5% and 16%, respectively.

SR sales represented 92% and 69% of TMM's sales for the three and nine month periods ended September 30, 2012. There were no SR sales in 2011. As long as favorable conditions continue in the market for synthetic rutile, the Company plans to continue to sell SR to third parties and is currently exploring opportunities to expand sales to new customers and for applications outside of the pigment market.


               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 month periods ended September 30, 2012 and 2011.

                                     (Unaudited)
                        Three Months             Nine Months
 (In thousands)     Ended September 30,      Ended September 30,
                     2012         2011        2012         2011
 NET SALES       $   19,914    $ 11,401   $   46,830    $ 31,475
 Cost of sales       16,068       9,026       36,127      24,703
 GROSS MARGIN    $    3,846    $  2,375   $   10,703    $  6,772
 GROSS MARGIN %          19%         21%          23%         22%

For the three month period ended September 30, 2012, gross margin decreased approximately 2%. Increases in raw materials and energy costs reduced the gross margin approximately 3%, a temporary reduction in operating efficiencies related to incremental maintenance resulted in a decrease of approximately 4% and the product mix sold during the quarter accounted for a reduction of approximately 3%. Partially offsetting these negative factors was the impact of an increase in the average selling price of approximately 5%.

For the nine month period ended September 30, 2012, gross margin increased approximately 1%. Year to date, gross margin increased primarily due to an increase in the selling price of approximately 11%. Increases in raw materials and energy costs reduced the gross margin approximately 7%, and a reduction in operating efficiencies resulted in a decrease of approximately 3%.

Selling, General, Administrative and Expenses ("SG&A"):

SG&A expense increased approximately 14% during the three month period ended September 30, 2012, primarily due to an increase for bad debt of approximately 7% and professional fees and services of approximately 4%. For the nine month period ended September 30, 2012, SG&A expenses increased approximately 16%, primarily due to an increase in selling expenses and professional fees and services which increased approximately 4% and 6%, respectively.

Interest Expense: Net interest expense for the three and nine month periods ended September 30, 2012 increased approximately $4,000 and $61,000, respectively, as compared to the same periods of 2011, primarily due to an increase in our long and short-term financing.

Income Taxes: For the three and nine month periods ended September 30, 2012, income tax expense consisted of federal income tax expense of approximately $105,000 and $688,000, respectively; state income tax expense of approximately $3,000 and $8,000, respectively; and foreign deferred tax expense of approximately $408,000 and $706,000, respectively. 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 year ended December 31, 2012, taxes are based on an estimated annualized consolidated effective tax rate of 22.7%.


               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,
                                                           2012              2011
Fixed Rate term note payable to a U.S. bank, with
an interest rate of 6.65% at September 30, 2012,
due January 1, 2016, secured by real estate,
leasehold improvements, property, plant and
equipment, inventory and accounts receivable of
our U.S. operation.                                 $         1,404    $        1,680
Term note payable to a U.S. equipment financing
company, with an interest rate of 5.24% at
September 30, 2012, due April 1, 2013, secured by
a Caterpillar front-end loader.                                  16                35
Fixed rate Euro term note payable to a
Netherlands bank, with an interest rate of 7.8%
at September 30, 2012, due July 1, 2029, secured
by TPT's land and office building purchased July
2004.  (304)                                                   390               413
Fixed rate Euro term note payable to a
Netherlands bank, with an interest rate of 4.6%
at September 30, 2012, due January 31, 2030,
secured by TPT's land and building purchased
January 2005.  (304)                                           390               412
Fixed rate Euro term note payable to a
Netherlands bank, with an interest rate of 4.05%
at September 30, 2012, due July 31, 2015, secured
by TPT's assets.  (121)                                        155               205
Fixed rate Euro term note payable to a
Netherlands bank, with an interest rate of 4.25%
at September 30, 2012, due July 5, 2014, secured
by TPT's assets.  (393)                                        505               736
Malaysian Ringgit term note payable to a
Malaysian bank, with an interest rate of 5.2% at
September 30, 2012, due March 1, 2015, secured by
TMM's property, plant and eqiupment. (RM 2,365)                 774                 -
Total                                                         3,634             3,481
Less current maturities                                         818               813
Total long-term debt and notes payable -
financial institutions                              $         2,816    $        2,668

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. The Company received $1,500,000 from the sale of Debentures, due May 4, 2016, from nine accredited investors, four of whom are directors of the Company and another of whom is a greater than 5% shareholder.

On May 3, 2012, the five remaining holders, four of whom are directors of the Company and another whom is a greater than 5% shareholder, of our Debentures converted their Debentures, and the Company issued 547,172 shares of common stock upon conversion of such Debentures.


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

Short-term Debt

U.S. Operations

On December 31, 2010, the Company entered into a U.S. credit agreement (the "Agreement") with American Bank, N.A. (the "Lender") which established a $1,000,000 line of credit (the "Line"). On March 1, 2012, the Company entered into the first amendment to the Agreement with the Lender which increased the Line from $1,000,000 to $2,000,000 and extended the maturity date from July 1, 2012 to October 15, 2013. 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 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, 2012, the Company had $1,750,000 borrowed on the Line at a rate of 5.50%.

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, 2012, the ratio of cash flow to debt service was 6.93 to 1.0.

Netherlands Operations

On March 20, 2007, our subsidiary, TPT, entered into a short-term credit facility (the "Credit Facility") with Rabobank which increased TPT's line of credit from 650,000 to 1,100,000. The Credit Facility was renewed on January 1, 2010 and has no stated maturity date. The Credit Facility, which has a variable interest rate of bank prime plus 2.8% (currently at 3.419%), is secured by TPT's accounts receivable and inventory. At September 30, 2012, TPT had utilized 743,000 ($954,000) 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 bank could foreclose on the assets of TPT.


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