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| ZOLT > SEC Filings for ZOLT > Form 10-Q on 1-Feb-2013 | All Recent SEC Filings |
1-Feb-2013
Quarterly Report
General
Zoltek Companies, Inc. is an applied technology and advanced materials company. Our mission is to lead the commercialization of carbon fiber through our development of a price-competitive, high-performance reinforcement for composites used in a broad range of commercial products which we sell under the Panex® trade name. In addition to manufacturing carbon fiber, we produce an intermediate product, a stabilized and oxidized acrylic fiber used in flame- and heat-resistant applications which we sell under the Pyron® trade name.
We led the development of the carbon fiber commercialization concept and we believe we are the largest manufacturer primarily focused on producing low-cost carbon fibers for commercial applications. We have spent over 15 years developing and refining our proprietary technology and manufacturing processes and building capacity.
During 2006, we began our transformation from primarily a development business to an operational phase and continued our expansion plans that were first announced in 2005. Also during 2006, the demand from commercial carbon fibers continued to increase substantially and the aerospace and commercial applications diverged. We believe that this divergence will persist over a long period and validates our commercialization strategy.
Zoltek's mission to commercialize carbon fibers has proven successful over the past several years, but the development of large volume applications has been constrained because converting commercial carbon fibers to a finished product depends to a large degree on a fragmented and inefficient supply chain. Consequently, we are taking steps to accelerate the commercialization process. We are designing new equipment and developing new processing methods to support the commercialization strategy. The goal is to develop higher-throughput, lower-cost conversion methods designed to consolidate the supply chain and open new market applications. These value-added, or "composite intermediate" products and processes, are being coordinated by Zoltek's research and development (R&D) group.
In 2010, Zoltek announced the formation of Zoltek Automotive, a subsidiary established to accelerate the incorporation of carbon fiber products into automotive applications. Zoltek Automotive seeks to lead the commercialization effort in the automotive applications, which we believe will ultimately be the largest user of carbon fibers. This group seeks to incorporate new developments in process equipment and manufacturing techniques into automotive manufacturing applications.
As a part of this effort, in March 2012, Zoltek announced its collaboration with Magna Exteriors and Interiors, an operating unit of Magna International, Inc., to develop carbon fiber sheet molding compounds for the automotive industry. Magna Incorporated, based in Aurora, Ontario, Canada, is the largest automotive parts manufacturer in North America. The newly developed carbon fiber material combines Zoltek's Panex 35® commercial carbon fiber with Magna's EpicBlendSMC™ sheet molding compound formulations. The new material allows Magna to offer an expanded range of lightweight parts and sub-systems for automotive, commercial truck and other markets. Magna Exteriors and Interiors markets the sheet molding compound directly to molders.
We are aggressively marketing our products to obtain new business in both existing and new applications. New applications tend to require relatively long sales cycles due to the qualification of carbon fibers into new product development manufacturing and engineering. Targeted application areas include wind energy, deep sea drilling, infrastructure, automotive, aerospace secondary structures and aircraft brakes. During 2010, we added additional sales personnel in Asia, focusing on markets in China, India and Korea and have begun to see some success through new customers and sales in those regions.
In order to manage our business, we focus on two separate business segments:
carbon fibers and technical fibers (oxidized acrylic fibers). We also manage the
corporate/other segment which consists of legacy and ancillary operations not
directly related to the carbon fiber or technical fiber segments.
KEY PERFORMANCE INDICATORS
Our management monitors and analyzes several key performance indicators within each of these segments to manage our business and evaluate our financial and operating performance, including:
Revenue. In the short-term, management closely reviews the volume of product shipments and indicated customer requirements in order to forecast revenue and cash receipts. In the longer-term, management believes that revenue growth through new product applications is the best indicator of whether we are achieving our objective of commercializing carbon fiber. We expect that new applications, including those we are attempting to facilitate, will positively affect demand for our products.
Gross profit. Management focuses on improving the gross profit over the long-term while leading the commercialization of carbon fiber and controlling associated costs. The Company's strategy is to maintain available unused capacity that positions the Company to capture opportunities in emerging applications.
Operating expenses. Our operating expenses are driven by headcount and related administrative costs, marketing costs, and research and development costs. We monitor headcount levels in specific geographic and operational areas. We believe that research and development expenditures will be the primary means by which we can facilitate new product applications.
Cash flow from operating activities. Management believes that operating cash flow is meaningful to investors because it provides a view of Zoltek with respect to sustainability of our ongoing operations and the extent to which we may or may not require external capital. Operating cash flow also provides meaningful insight into the management of our working capital.
Liquidity and cash flows. Due to the variability in revenue, our cash position fluctuates. We closely monitor our expected cash levels, particularly as they relate to operating cash flow, days' sales outstanding, days' payables outstanding and inventory turnover. Management aggressively pursues any past due receivables and seeks to actively manage inventory levels in order to effectively balance working capital with the Company's strategy of assuring customers availability of supply. Management also monitors debt levels and the financing costs associated with debt.
BUSINESS TRENDS
Zoltek management has focused its efforts on building on the long-term vision of Zoltek as the leader in commercialization of carbon fibers as a low-cost but high performance reinforcement for composites. Management primarily emphasizes the following areas:
· Increased Sales Efforts in Selected International Markets. We have identified international markets with high growth potential for our existing and emerging commercial applications. Accordingly, we have added sales personnel and increased our marketing efforts in Asia.
· Business Development in Emerging Applications. We have identified emerging applications for our products with high growth potential across a variety of industries and regions. In November 2011, we took a major step toward growing our carbon fiber prepreg capabilities by opening a new 135,000 square foot facility outside of St. Louis, Missouri. One of our goals is to leverage our leadership in commercial carbon fibers to become the leading provider of commercial carbon fiber prepreg in the global marketplace. Our research and development center, to support our targeted applications with high volume manufacturing and processing technologies, will also be located at this new facility.
· Operating Cash Flow and Cash Management. Due to a 23.7% decrease in sales, we reported negative operating cash flow of $4.2 million during the first quarter of fiscal 2013. We reported positive operating cash flow of $3.6 million during the first quarter of fiscal 2012. Cash used for inventory was $11.8 million and decreased accounts receivable provided cash of $6.6 million during the first quarter of fiscal 2013. We have established collection targets and payment targets for all customers and suppliers to improve control over our days' sales outstanding and days' payables outstanding. The Company reported $2.9 million of capital expenditures during the first quarter of fiscal 2013. The Company intends to utilize operating cash flow and existing credit lines in order to accommodate working capital and capital expenditure requirements for the remainder of fiscal 2013.
· Foreign Currency Volatility. During the first quarter of fiscal 2013, the HUF strengthened against the U.S. dollar by 3.3% from the fourth quarter of fiscal 2012 and the Mexican Peso strengthened against the U.S. dollar by 1.9% from the fourth quarter of fiscal 2012. This resulted in higher processing costs in the respective countries. The Euro strengthened against the U.S. dollar by 3.6% from the fourth quarter of fiscal 2012 resulting in increased revenue. The Company's financial statements will continue to be impacted by foreign currency volatility.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2012 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
2011
The Company's sales decreased 23.7%, or $11.1 million, to $35.9 million in the first quarter of fiscal 2013 from $47.0 million in the first quarter of fiscal 2012.During the first quarter of fiscal 2013, volume of product shipments decreased 23.9% compared to the first quarter of 2012, which accounted for a decrease in revenue of approximately $10.4 million. Sales were adversely affected by weakness in Europe as customers significantly slowed their purchases in December 2012 and by uncertainties in the United States over whether the United States government would extend the wind energy tax credit. As part of the budget deal announced in January, the government did extend the wind energy tax credit. Additionally the weakening of the Euro as compared to the first three months of fiscal 2012 resulted in a $0.5 million decrease in total revenue. Carbon fiber sales decreased 23.8%, or $9.0 million, to $28.7 million in the first quarter of fiscal 2013 from $37.7 million in the first quarter of fiscal 2012 due to decreased shipments to wind customers. Technical fiber sales decreased 25.4%, or $2.2 million, to $6.6 million in the first quarter of fiscal 2013 from $8.8 million in the first quarter of fiscal 2012 due to decreased shipments to aircraft brake customers. As noted above, carbon fiber sales in the United States were adversely affected by the scheduled expiration of the wind energy tax credit which was not renewed until January, 2013.
The Company's cost of sales decreased by 20.9%, or $7.1 million, to $26.8 million in the first quarter of fiscal 2013 from $33.9 million in the first quarter of fiscal 2012. The decrease in cost of sales reflected decreased sales of 23.7% discussed above. Carbon fiber cost of sales decreased by 19.8%, or $5.5 million, to $22.2 million for the first quarter of fiscal 2013 from $27.7 million for the first quarter of fiscal 2012. The decrease in carbon fiber cost of sales reflected decreased sales of 23.8% as discussed above. Technical fiber cost of sales decreased by 27.8% or $1.6 million, to $4.1 million for the first quarter of fiscal 2013 from $5.7 million for the first quarter of fiscal 2012 as a result of a 25.4% decrease in sales as discussed above.
The Company's gross profit decreased by $4.1 million, to $9.1 million, or 25.3% of sales in the first quarter of fiscal 2013 from $13.2 million, or 28.0% of sales in the first quarter of fiscal 2012. Carbon fiber gross profit margin decreased to 22.8% for the first quarter of fiscal 2013 compared to 26.6% for the first quarter of fiscal 2012. Carbon fiber gross profit decreased to $6.5 million from $10.0 million. The decreases in carbon fiber gross profit and gross profit percentage resulted primarily from decreased production levels in conjunction with lower sales. Costs of our primary raw material, ACN, also decreased by approximately 2.9% from the first quarter of fiscal 2012. Technical fiber gross profit decreased to $2.5 million, or 37.2% of sales, in the first quarter of fiscal 2013 from $3.1 million, or 35.1% of sales, in the first quarter of fiscal 2012. The decreases in technical fiber gross profit resulted primarily from decreased production levels in conjunction with lower sales.
Application and market development costs were $2.1 million for the first quarter of fiscal 2013 and $1.7 million for the first quarter of fiscal 2012. These costs included product development efforts, product trials and sales and product development personnel and related travel. Targeted emerging applications include automobile components, offshore oil and gas drilling, fire/heat barrier and alternate energy technologies.
Selling, general and administrative expenses were $3.4 million in the first quarter of fiscal 2013 and $3.3 million for the first quarter of fiscal 2012. The Company recorded $0.2 million for the cost of employee and director services received in exchange for equity instruments under ASC 718 during the first quarter of fiscal 2013, an increase of $0.1 million from the expense of $0.1 million in the first quarter of fiscal 2012.
Operating income from the first quarter of fiscal 2013 was $3.6 million, a decline from operating income of $8.2 million during the first quarter of fiscal 2012. This decrease resulted primarily from a decrease in gross profit of $4.1 million and an increase in research and development expenses of $0.4 million. Carbon fiber operating income decreased to $4.6 million in the first quarter of fiscal 2013 from $8.3 million in the first quarter of fiscal 2012. The decrease resulted from a decrease in gross profit as discussed above. Operating income from technical fibers decreased to $2.3 million in the first quarter of fiscal 2013 from $2.7 million in the first quarter of fiscal 2012. The decrease in technical fiber operating income resulted from the decrease in gross profit described above.
Loss on foreign currency translations was $0.1 million for the first quarter of fiscal 2013, compared to a $2.2 million gain for the first quarter of fiscal 2012. During the first three months of fiscal 2013 and 2012, the Euro strengthened and the U.S. dollar weakened in value against the HUF. The weakening value of the U.S. dollar during the first three months of fiscal 2013 resulted in a small loss recognized in our Hungarian subsidiary. Our Euro receivable exposure was offset by our Euro term loan entered into by our Hungary subsidiary. The translation of the Hungarian subsidiary's financial statements from its functional currency (HUF) to U.S. dollars is not included in determining net income for the period but is recorded in accumulated other comprehensive loss in equity.
Other income (expense), net, was a $0.1 million gain in the first quarter of fiscal 2013 and a $0.2 million loss in the first quarter of fiscal 2012. Other expense, net consists primarily of gains and losses from the disposal of fixed assets.
Income tax expense was $0.6 million for the first quarter of fiscal 2013 and $0.4 million for the first quarter of fiscal 2012. An expense of $0.2 million was incurred related to the local Hungarian municipality tax and less than $0.1 million was recorded related to U.S. and Mexico minimum tax payments. The Company recognized $0.4 million in Hungarian federal income tax, as our utilization of tax loss carryforwards is limited to only 50% of taxable income in fiscal 2013 and beyond. During the first quarter of fiscal 2012, an expense of $0.4 million was incurred related to the local Hungarian municipality tax and less than $0.1 million was recorded related to U.S. and Mexico minimum tax payments.
The foregoing resulted in net income of $3.0 million for the first quarter of fiscal 2013 compared to an income of $9.7 million for first quarter of fiscal 2012. Similarly, the Company reported income per share of $0.09 and income per share of $0.28 per share on a basic and diluted basis for the first quarter of fiscal 2013 and 2012, respectively. The weighted average basic common shares outstanding were 34.4 million for the first quarters of both fiscal 2013 and 2012. The weighted average diluted common shares outstanding were 34.4 million for the first quarter of fiscal 2013 and 2012.
Liquidity and Capital Resources
The Company believes its cash currently on hand, cash flow from operations, and anticipated credit facilities should be sufficient to fund its identified liquidity needs during fiscal 2013.
Operating activities used $4.2 million of cash for the first quarter of fiscal 2013. Inventory levels used $11.8 million during the first quarter of fiscal 2013. Cash flows were positively affected by depreciation of $4.7 million for the first quarter of fiscal 2013, which was included in the operating income of $3.6 million. The decline in sales decreased accounts receivables by $6.6 million during the first quarter of fiscal 2013 resulting in a positive effect to cash provided by operating activities. Payables and accrued expenses decreased by $2.4 million.
Operating activities provided $3.6 million of cash for the first quarter of fiscal 2012. Inventory levels used $7.7 million during the first quarter of fiscal 2012. Cash flows were positively affected by depreciation of $4.4 million for the first quarter of fiscal 2012, which was included in the operating income of $8.2 million. Increased sales increased accounts receivables by $4.9 million during the first quarter of fiscal 2012 resulting in a negative effect to cash provided by operating activities. Payables and accrued expenses increased by $1.2 million.
Net cash used in investing activities for the first quarter of fiscal 2013 was $3.7 million, which primarily consisted of capital expenditures on existing production lines and new equipment. The change in property and equipment, net was primarily impacted by $2.9 million of capital expenditures and depreciation expense of $4.7 million.
Net cash used in investing activities for the first quarter of fiscal 2012 was $6.4 million, which primarily consisted of capital expenditures on existing production lines and new equipment. Approximately $10.8 million of the decline in property and equipment, net was caused by the decline in value of the HUF, which is the functional currency of our Hungarian operations. The change in property and equipment, net was also impacted by $7.0 million of capital expenditures and depreciation expense of $4.4 million. Capital expenditures included $2.6 million related to the purchase of the building in St. Peters, Missouri to be used as a new location for our prepreg and pultrusion manufacturing and research and development activities.
Historically, cash used in investing activities has been expended for equipment additions and the expansion of the Company's carbon fiber and technical fiber production capacity.
Net cash used by financing activities was $1.6 million for the first quarter of fiscal 2013 resulting primarily from repayment of our notes payable.
Net cash used by financing activities was $2.8 million for the first quarter of fiscal 2012 resulting from repayment of the line of credit.
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