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ZOLT > SEC Filings for ZOLT > Form 10-Q on 9-Aug-2013All Recent SEC Filings

Show all filings for ZOLTEK COMPANIES INC

Form 10-Q for ZOLTEK COMPANIES INC


9-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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 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 heavily on a fragmented and inefficient supply chain. Consequently, we are taking steps to accelerate the commercialization process. We design new equipment and develop 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 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 sheet molding compound 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.

On April 2, 2013, Zoltek announced that its Board of Directors had commenced a process of exploring and evaluating strategic alternatives to maximize shareholder value, and that the Company had engaged J.P. Morgan Securities LLC as the Company's financial advisor. However, there can be no assurance that that this review will result in the Company pursuing any transaction or that a transaction, if pursued, will be completed. The Company does not intend to announce further developments regarding the process until its Board of Directors either completes its review or enters into a definitive agreement for a possible transaction.

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, is located at this new facility. We have also recently added pultrusion capacity and are now selling a line of pultrusion products.

? Operating Cash Flow and Cash Management. Our operations provided $7.5 million of cash during the first nine months of fiscal 2013. Our operations provided $8.3 million of cash during the first nine months of fiscal 2012. Cash used for inventory was $14.0 million and decreased accounts receivable provided cash of $11.2 million during 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 $9.6 million of capital expenditures during the first nine months 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 nine months of fiscal 2013, the HUF strengthened against the U.S. dollar by 2.2% from the first nine months of fiscal 2012 and the Mexican Peso strengthened against the U.S. dollar by 5.2% from the first nine months of fiscal 2012. This resulted in higher processing costs in the respective countries. During the first nine months of fiscal 2013, the Euro strengthened against the U.S. dollar by 0.8% from the first nine months of fiscal 2012 resulting in increased revenue and some increased costs. The Company's financial statements will continue to be impacted by foreign currency volatility.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2013 COMPARED TO THREE MONTHS ENDED JUNE 30, 2012

The Company's sales decreased 37.0%, or $17.8 million, to $30.3 million in the third quarter of fiscal 2013 from $48.1 million in the third quarter of fiscal 2012. During the third quarter of fiscal 2013, volume of product shipments decreased 29.4% compared to the third quarter of 2012, which accounted for a decrease in revenue of approximately $15.4 million. Carbon fiber sales decreased 45.3%, or $18.0 million, to $21.6 million in the third quarter of fiscal 2013 from $39.6 million in the third quarter of fiscal 2012 due to decreased shipments to wind customers. Wind energy demand was adversely affected by the expiration of tax credits in the United States as of December 31, 2012, and by weakened demand in Europe and Asia. Although the United States tax credits were renewed in January 2013, there is a substantial lead time in planning, financing and constructing the wind generation capacity expansion encouraged by the applicable tax credits. Technical fiber sales increased 5.9%, or $0.4 million, to $8.3 million in the third quarter of fiscal 2013 from $7.9 million in the third quarter of fiscal 2012 due to increased shipments to aircraft brake customers.


The Company's cost of sales decreased by 34.5%, or $12.7 million, to $24.1 million in the third quarter of fiscal 2013 from $36.8 million in the third quarter of fiscal 2012. The decrease in cost of sales reflected decreased sales of 37.0% discussed above and decreased raw material costs. Costs of our primary raw material, ACN, decreased by approximately 10% from the third quarter of fiscal 2012. Carbon fiber cost of sales decreased by 43.2%, or $13.6 million, to $17.8 million for the third quarter of fiscal 2013 from $31.4 million for the third quarter of fiscal 2012. The decrease in carbon fiber cost of sales reflected decreased sales of 45.3% as discussed above. Technical fiber cost of sales increased by 27.7% or $1.3 million, to $6.1 million for the third quarter of fiscal 2013 from $4.8 million for the third quarter of fiscal 2012 as a result of increased sales of 5.9% as discussed above and increased inventory costs through reduced production levels.

The Company's gross profit decreased by $5.1 million, to $6.2 million, or 20.5% of sales in the third quarter of fiscal 2013 from $11.3 million, or 23.5% of sales in the third quarter of fiscal 2012. During the third quarter of fiscal 2013, available unused capacity costs increased to $3.0 million compared to the third quarter of fiscal 2012 when gross margin was negatively impacted by $0.7 million of available unused capacity costs. Carbon fiber gross profit percentage decreased to 17.6% for the third quarter of fiscal 2013 compared to 20.7% for the third quarter of fiscal 2012. Carbon fiber gross profit decreased to $3.8 million from $8.2 million during these respective periods. The decreases in carbon fiber gross profit and margin resulted primarily from decreased production levels associated with decreased sales of 45.3% as discussed above. Technical fiber gross profit decreased to $2.2 million, or 26.4% of sales, in the third quarter of fiscal 2013 from $3.1 million, or 38.9% of sales, in the third quarter of fiscal 2012. The decreases in technical fiber gross profit and margin resulted from increased inventory costs through reduced production levels.

Application and market development costs were $1.7 million for the third quarters of fiscal 2013 and fiscal 2012, respectively. 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, CNG, electrical transmission, consumer electronics and alternate energy technologies.

Selling, general and administrative expenses increased to $3.5 million in the third quarter of fiscal 2013 compared to $3.2 million in the third quarter of fiscal 2012. The Company recorded $0.1 million for the cost of employee and director services received in exchange for equity instruments under ASC 718 during the third quarter of fiscal 2013 and fiscal 2012. The Company additionally recorded $0.2 million for the cost associated with our strategic alternative process during the third quarter of 2013.

Operating income from the third quarter of fiscal 2013 was $1.0 million, a decline from operating income of $6.4 million reported during the third quarter of fiscal 2012. Carbon fiber operating income decreased to $2.1 million in the third quarter of fiscal 2013 from income of $6.8 million in the third quarter of fiscal 2012. Operating income from technical fibers decreased to $2.1 million in the third quarter of fiscal 2013 from $2.8 million in the third quarter of fiscal 2012. The decrease in operating income resulted primarily from the decrease in gross profit described above.

Loss on foreign currency translations was $1.2 million for the third quarter of fiscal 2013, compared to a loss of $0.1 million for the third quarter of fiscal 2012. During the three months ended June 30, 2013, the Euro and the U.S. dollar weakened in value against the HUF as compared to the three months ended June 30, 2012 when the Euro and U.S. dollar also weakened in value against the HUF. As most of the Company's Hungarian accounts receivables are denominated in Euros and U.S. dollars, the weakening in value of the Euro and U.S. dollar resulted in a loss recognized in our Hungarian 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 expense, net, was less than $0.1 million in the third quarter of fiscal 2013 compared to an expense of $0.6 million in the third 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 third quarter of fiscal 2013 and $0.3 million of expense for the third quarter of fiscal 2012. An expense of $0.3 million was incurred related to the local Hungarian municipality tax, $0.2 million was incurred related to Hungarian federal taxes and less than $0.1 million was recorded related to U.S. and Mexico minimum tax payments. Our utilization of tax loss carryforwards in Hungary is limited to only 50% of taxable income in fiscal 2013 and beyond. During the third quarter of fiscal 2012, $0.3 million of expense related to the local Hungarian municipality tax and less than $0.1 million of expense was recorded related to U.S. and Mexico minimum tax payments.

The foregoing resulted in a net loss of $0.9 million for the third quarter of fiscal 2013 compared to net income of $5.6 million for the third quarter of fiscal 2012. Similarly, the Company reported losses of $0.03 per share on a basic and diluted basis for the third quarter of fiscal 2013 and income of $0.16 per share on a basic and diluted basis for the third quarter of fiscal 2012. The weighted average basic common shares outstanding were 34.4 million for the third quarters of both fiscal 2013 and 2012. The weighted average diluted common shares outstanding were 34.8 million and 34.4 million for the third quarters of fiscal 2013 and 2012, respectively.


NINE MONTHS ENDED JUNE 30, 2013 COMPARED TO NINE MONTHS ENDED JUNE 30, 2012

The Company's sales decreased 30.0%, or $42.6 million, to $99.5 million in the first nine months of fiscal 2013 from $142.1 million in the first nine months of fiscal 2012. During the first nine months of fiscal 2013, volume of product shipments decreased 27.2% compared to the first nine months of 2012, which accounted for a decrease in revenue of approximately $38.8 million. Carbon fiber sales decreased 34.5%, or $39.7 million, to $74.5 million in the first nine months of fiscal 2013 from $115.2 million in the first nine months of fiscal 2012 due to decreased shipments to wind customers. Technical fiber sales decreased 10.2%, or $2.5 million, to $22.6 million in the first nine months of fiscal 2013 from $25.1 million in the first nine months of fiscal 2012 due to decreased shipments to aircraft brake customers in the first half of fiscal 2013.

The Company's cost of sales decreased by 27.7%, or $29.5 million, to $77.2 million in the first nine months of fiscal 2013 from $106.7 million in the first nine months of fiscal 2012. The decrease in cost of sales reflected decreased sales of 30.0% discussed above. Costs of our primary raw material, ACN, decreased by approximately 7.1% from the first nine months of fiscal 2012. Carbon fiber cost of sales decreased by 31.2%, or $27.8 million, to $61.3 million for the first nine months of fiscal 2013 from $89.1 million for the first nine months of fiscal 2012. The decrease in carbon fiber cost of sales reflected decreased sales of 34.5% as discussed above. Technical fiber cost of sales decreased 7.0% or $1.1 million, to $14.8 million for the first nine months of fiscal 2013 from $15.9 million for the first nine months of fiscal 2012 as a result of decreased sales of 10.2% as discussed above.

The Company's gross profit decreased by $13.1 million, to $22.3 million, or 22.4% of sales in the first nine months of fiscal 2013 from $35.4 million, or 24.9% of sales in the first nine months of fiscal 2012. During the first nine months of fiscal 2013, available unused capacity costs increased to $7.7 million compared to the first nine months of fiscal 2012 when gross margin was negatively impacted by $2.1 million of available unused capacity costs. Carbon fiber gross profit percentage decreased to 18.8% for the first nine months of fiscal 2013 compared to 22.6% for the first nine months of fiscal 2012. Carbon fiber gross profit decreased to $14.2 million from $26.1 million during these respective periods. Technical fiber gross profit decreased to $7.8 million, or 34.5% of sales, in the first nine months of fiscal 2013 from $9.3 million, or 36.8% of sales, in the first nine months of fiscal 2012. The decrease in gross profit and margin resulted primarily from decreased sales as discussed above.

Application and market development costs were $6.0 million for the first nine months of fiscal 2013 and $5.3 million for the first nine months 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 $10.0 million in the first nine months of fiscal 2013 and $9.8 million the first nine months of fiscal 2012. The Company recorded $0.4 million for the cost of employee and director services received in exchange for equity instruments under ASC 718 during the first nine months of fiscal 2013, a decrease of $0.4 million from the expense of $0.8 million recorded during the first nine months of fiscal 2012. The Company additionally recorded $0.2 million for the cost associated with our strategic alternative process during the first nine months of 2013.

Operating income from the first nine months of fiscal 2013 was $6.3 million, a decline from operating income of $20.3 million during the first nine months of fiscal 2012. This decrease resulted primarily from a decrease in gross profit of $13.1 million and an increase in research and development expenses of $0.7 million. Carbon fiber operating income decreased to $8.6 million in the first nine months of fiscal 2013 from income of $21.2 million in the first nine months of fiscal 2012. The decrease resulted from a decrease in gross profit as discussed above. Operating income from technical fibers decreased to $7.4 million in the first nine months of fiscal 2013 from $8.3 million in the first nine months of fiscal 2012. The decrease in technical fiber operating income resulted from the decrease in gross profit described above.

Gain on foreign currency translations was $0.5 million for the first nine months of fiscal 2013, compared to a gain of $0.3 million for the first nine months of fiscal 2012. During the first nine months of fiscal 2013, the Euro and the U.S. dollar strengthened in value against the HUF compared to the first nine months of fiscal 2012 when the Euro strengthened in value and the U.S. dollar weakened in value against the HUF. As most of the Company's Hungarian accounts receivables are denominated in Euros and U.S. dollars, the strengthening in value of the Euro and U.S. dollar resulted in a gain recognized in our Hungarian 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, net, was $0.1 million for the first nine months of fiscal 2013 compared to an expense $0.8 million for the first nine months of fiscal 2012. Other expense, net consists primarily of gains and losses from the disposal of fixed assets.

Income tax expense was $1.1 million for the first nine months of fiscal 2013 compared to an expense of $1.1 million for the first nine months of fiscal 2012. An expense of $0.8 million was incurred related to the local Hungarian municipality tax. $0.2 million was incurred related to Hungarian federal taxes and $0.1 million was recorded related to U.S. and Mexico minimum tax payments. During the first nine months of fiscal 2012, an expense of $1.0 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 $5.4 million for the first nine months of fiscal 2013 compared to a net income of $18.6 million for first nine months of fiscal 2012. Similarly, the Company reported income per share of $0.16 and $0.54 on a basic and diluted basis for the first nine months of fiscal 2013 and 2012, respectively. The weighted average basic common shares outstanding were 34.4 million for both the first nine months of fiscal 2013 and 2012. The weighted average diluted common shares outstanding were 34.5 million and 34.4 million for the first nine months of fiscal 2013 and 2012, respectively.

Liquidity and Capital Resources

The Company believes its cash currently on hand, cash flow from operations, and cash available from unused credit facilities should be sufficient to fund its identified liquidity needs during fiscal 2013.

Cash Provided By (Used In) Continuing Operating Activities

Operating activities provided $7.5 million of cash for the first nine months of fiscal 2013. The change in inventory levels used $14.0 million of cash during the first nine months of fiscal 2013. The Company continues its efforts to increase sales and expects over time, to reduce production levels to better match sales levels, if necessary. Cash flows were positively affected by depreciation of $13.8 million for the first nine months of fiscal 2013, which was included in the operating income of $6.3 million. Accounts receivables decreased by $11.2 million during the first nine months of fiscal 2013 reflecting decreased sales. Payables and accrued expenses decreased by $9.9 million.

Operating activities provided $8.3 million of cash for the first nine months of fiscal 2012. Inventory levels used $16.4 million during the first nine months of fiscal 2012 in anticipation of increased sales levels, including increases in consigned inventory, which represents contractually required finished goods inventory levels for certain key customers. Cash flows were positively affected by depreciation of $13.3 million for the first nine months of fiscal 2012, which was included in the operating income of $20.3 million. Increased sales increased accounts receivables by $8.8 million during the first nine months of fiscal 2012.

Cash Used In Investing Activities

Net cash used in investing activities for the first nine months of fiscal 2013 was $9.4 million, which primarily consisted of capital expenditures for existing production lines and new equipment. The change in property and equipment, net was primarily impacted by $9.6 million of capital expenditures and depreciation expense of $13.8 million.

Net cash used in investing activities for the first nine months of fiscal 2012 was $17.0 million, which primarily consisted of capital expenditures for existing production lines and new equipment. Approximately $8.8 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 $18.0 million of capital expenditures and depreciation expense of $13.3 million. Capital expenditures included $6.8 million related to the purchase of the building in St. Peters, Missouri and the related move of our prepreg operations.

Cash Used In Financing Activities

Net cash used by financing activities was $3.2 million for the first nine months of fiscal 2013 resulting primarily from repayment of our notes payable.

Net cash provided by financing activities was $21.1 million for the first nine months of fiscal 2012. During the third quarter of fiscal 2012, Zoltek Zrt. entered into a $17.1 million term loan secured by the Company's facilities in Hungary, which loan is guaranteed by the Company. Zoltek Zrt. will utilize the proceeds of the loan to supplement working capital and other general corporate purposes. The Company also borrowed $10.0 million under its term loan, the proceeds of which were used to repay its former U.S. bank line of credit.

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