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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC   20549

FORM 10-Q
(Mark one)
[X]     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the three months ended December 31, 2012
OR

[  ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from ___________ to ___________

Commission File No. 0-20600
 
 
ZOLTEK COMPANIES, INC.
(Exact name of registrant as specified in its charter)
 
Missouri   43-1311101
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
     
3101 McKelvey Road, St. Louis, Missouri   63044
(Address of principal executive offices)   (Zip Code)
                                                                                                                                                                                         
Registrant's telephone number, including area code:  (314) 291-5110

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities 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 x   No __

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 Yes__  No __

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one).
Large Accelerated Filer ____ Accelerated Filer   X                Non-accelerated Filer ____ Smaller Reporting Company ____

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes __ No   x                         

Indicate the number of shares outstanding of each of the registrant's classes of common stock as of the latest practicable date:  As of January 28, 2013, 34,360,319 shares of Common Stock, $.01 par value, were outstanding.
 
 
 

 
 
ZOLTEK COMPANIES, INC.
 INDEX
 
PART I.  FINANCIAL INFORMATION
 
Item 1.
Financial Statements (Unaudited)
   
 
Condensed Consolidated Balance Sheets – December 31, 2012 and September 30, 2012
   
 
Condensed Consolidated Statements of Operations – Three Months Ended December 31, 2012 and 2011
   
 
Condensed Consolidated Statements of Comprehensive Income – Three Months Ended December 31, 2012 and 2011
   
 
Condensed Consolidated Statement of Changes in Shareholders’ Equity – Three Months Ended December 31, 2012
   
 
Condensed Consolidated Statements of Cash Flows – Three Months Ended December 31, 2012 and 2011
   
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
   
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
   
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
   
Item 4.
Controls and Procedures
   
PART II.  OTHER INFORMATION
 
Item 1.
Legal Proceedings
   
Item 5.  
Other Information
   
Item 6.
Exhibits
   
SIGNATURES
 
EXHIBIT INDEX
 
 
2

 

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements
 
 
ZOLTEK COMPANIES, INC.
CONSOLIDATED BALANCE SHEET
(Amounts in thousands, except share and per share data)
 
   
(Unaudited)
December 31,
2012
   
September 30,
2012
 
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 20,481     $ 29,935  
Accounts receivable, less allowance for doubtful accounts of $231 and $223
    29,449       35,918  
Inventories, net
    79,935       67,942  
VAT receivable
    7,576       6,190  
Other current assets
    5,915       2,617  
Total current assets
    143,356       142,602  
Property and equipment, net
    214,592       215,650  
Other assets
    501       436  
Total assets
  $ 358,449     $ 358,688  
                 
Liabilities and shareholders' equity
               
Current liabilities:
               
Current maturities of long-term debt
  $ 4,278     $ 4,161  
Trade accounts payable
    11,237       12,473  
Accrued expenses and other liabilities
    7,603       8,687  
Construction payables
    1,028       1,784  
Total current liabilities
    24,146       27,105  
Long-term debt
    21,529       22,978  
Hungarian grant - allowance against future depreciation
    6,644       6,777  
Deferred tax liabilties
    473       473  
Liabilities carried at fair value
    358       384  
Total liabilities
    53,150       57,717  
Commitments and contingencies (See Note 7)
               
Shareholders' equity:
               
Preferred stock, $.01 par value, 1,000,000 shares authorized, no shares issued and outstanding
    -       -  
Common stock, $.01 par value, 50,000,000 shares authorized, 34,350,319 and 34,355,192 shares issued and outstanding at December 31, 2012 and September 30, 2012
    344       344  
Additional paid-in capital
    482,056       481,743  
Accumulated other comprehensive loss
    (44,789 )     (45,827 )
Accumulated deficit
    (132,312 )     (135,289 )
Total shareholders' equity
    305,299       300,971  
Total liabilities and shareholders' equity
  $ 358,449     $ 358,688  

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
 
 
3

 

ZOLTEK COMPANIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Amounts in thousands, except share and per share data)
(Unaudited)
 
   
Three months ended December 31,
 
   
2012
   
2011
 
             
Net sales
  $ 35,877     $ 47,046  
Cost of sales
    26,800       33,868  
Gross profit
    9,077       13,178  
Application and development costs
    2,067       1,695  
Selling, general and administrative expenses
    3,361       3,277  
Operating income
    3,649       8,206  
Other (expense) income:
               
Interest expense, net
    (117 )     (34 )
(Loss) gain on foreign currency transactions
    (50 )     2,169  
Other income (expense), net
    80       (184 )
Loss on liabilities carried at fair value
    -       (10 )
Income from operations before income taxes
    3,562       10,147  
Income tax expense
    585       444  
                 
Net income
  $ 2,977     $ 9,703  
                 
Basic income per share
  $ 0.09     $ 0.28  
Diluted income per share
  $ 0.09     $ 0.28  
                 
Weighted average common shares outstanding – basic
    34,355,152       34,368,192  
Weighted average common shares outstanding – diluted
    34,412,453       34,391,084  

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
 
 
4

 
 
ZOLTEK COMPANIES, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited)
 
   
Three months ended December 31,
 
   
2012
   
2011
 
Net income
  $ 2,977     $ 9,703  
Foreign currency translation adjustment
    1,012       (16,026 )
Change in unrealized fair value of cash flow hedge, net of tax of $0
    26       -  
                 
Comprehensive income (loss)
  $ 4,015     $ (6,323 )
 
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
 
 
5

 
 
ZOLTEK COMPANIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(Amounts in thousands)
(Unaudited)
 
   
Total
 Shareholders’
 Equity
   
Common
 Stock
   
Additional
 Paid-In
 Capital
   
Accumulated
Other
 Comprehensive
 Income (Loss)
   
Accumulated
Earnings
(Deficit)
 
Balance, September 30, 2012
  $ 300,971     $ 344     $ 481,743     $ (45,827 )   $ (135,289 )
                                         
Comprehensive income
    4,015                       1,038       2,977  
Stock option expense
    233               233                  
Vesting of restricted stock
    79               79                  
Difference between compensation and change in liability for restricted stock awards
    1               1                  
Balance, December 31, 2012
  $ 305,299     $ 344     $ 482,056     $ (44,789 )   $ (132,312 )

 
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
 
 
6

 
 
ZOLTEK COMPANIES, INC.
  CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
 
   
Three months ended December 31,
 
   
2012
   
2011
 
Cash flows from operating activities:
           
Net income
  $ 2,977     $ 9,703  
Adjustments to reconcile net income to net cash from operating activities:
               
Depreciation
    4,658       4,425  
Amortization of financing fees and debt discount
    15       -  
Loss on liabilities carried at fair value
    -       10  
Foreign currency transaction losses (gains)
    88       (1,555 )
Stock compensation expense
    240       89  
Loss on disposal of assets
    -       15  
Changes in assets and liabilities:
               
Decrease (increase) in accounts receivable
    6,611       (4,908 )
Increase in inventories
    (11,777 )     (7,677 )
(Increase) decrease in other current assets and other assets
    (4,660 )     2,362  
Decrease in trade accounts payable
    (1,318 )     (6 )
(Decrease) increase in accrued expenses and other liabilities
    (1,072 )     1,178  
Net cash (used in) provided by operations
    (4,238 )     3,636  
                 
Cash flows from investing activities:
               
Purchases of property and equipment
    (2,907 )     (7,029 )
(Decrease) increase in construction payables
    (756 )     649  
Net cash used in investing activities
    (3,663 )     (6,380 )
                 
Cash flows from financing activities:
               
Payment of financing fees
    (65 )     -  
Repayment of credit lines
    -       (2,756 )
Repayment of notes payable
    (1,498 )     -  
Net cash used in financing activities
    (1,563 )     (2,756 )
                 
Effect of exchange rate changes on cash and cash equivalents
    10       (411 )
Net (decrease) in cash and cash equivalents
    (9,454 )     (5,911 )
Cash and cash equivalents at beginning of period
    29,935       16,980  
Cash and cash equivalents at end of period
  $ 20,481     $ 11,069  

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
 
 
7

 
 
ZOLTEK COMPANIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.  ORGANIZATION AND BASIS OF PRESENTATION
 
            Zoltek Companies, Inc. is a holding company, which operates through wholly-owned subsidiaries, Zoltek Corporation, Zoltek Zrt., Zoltek de Mexico SA de CV, Zoltek de Occidente SA de CV, Engineering Technology Corporation (“Entec Composite Machines”), Zoltek Properties, Inc., and Zoltek Automotive, LLC. Zoltek Corporation (“Zoltek”) develops, manufactures and markets carbon fibers and related products, including carbon fibers preimpregnated with resin known as “prepreg,” and technical fibers in the United States. Carbon fibers are a low-cost but high performance reinforcement for composites used as the primary building material in everyday commercial products. Technical fibers are an intermediate product used in heat- resistant applications such as aircraft brakes. Zoltek Zrt. is a Hungarian subsidiary that manufactures and markets carbon fibers and technical fibers and manufactures acrylic fiber precursor raw material used in production of carbon fibers and technical fibers. Zoltek de Mexico SA de CV and Zoltek de Occidente SA de CV are Mexican subsidiaries that manufacture carbon fibers and precursor raw material. Entec Composite Machines manufactures and markets filament winding and pultrusion equipment used in the production of large volume composite parts. The Company’s primary sales markets are in Europe and the United States; however, the Company has an increasing presence in Asia. Unless the context otherwise indicates, references to the “Company” are to Zoltek Companies, Inc. and its subsidiaries.
 
Certain prior year amounts have been reclassified to conform to the current year presentation.

Basis of Presentation
 
The accompanying condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2012, which includes consolidated financial statements and notes thereto. In the opinion of management, all normal recurring adjustments and estimates considered necessary have been included. The results of operations of any interim period are not necessarily indicative of the results that may be expected for a full fiscal year.

The unaudited interim condensed consolidated financial statements include the accounts and transactions of the Company and its wholly-owned subsidiaries. Adjustments resulting from the currency translation of financial statements of the Company’s foreign subsidiaries are reflected as “Accumulated other comprehensive loss” within shareholders’ equity. Gains and losses from foreign currency transactions are included in the condensed consolidated statements of operations as “Other income (expense).” All significant inter-company transactions and balances have been eliminated in consolidation.

Adoption of New Accounting Standards

In July 2012, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) No. 2012-02, which permits an entity to make a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset, other than goodwill is impaired.  If an entity concludes, based on an evaluation of all relevant qualitative factors, that it is not more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, it will not be required to perform the quantitative impairment for that asset.  The ASU is effective for impairment tests performed for fiscal years beginning after September 15, 2012 (the Company’s fiscal year 2013), with early adoption permitted.  The adoption of ASU 2012-02 did not have a material impact on the Company’s consolidated financial statements.
 
 
8

 
 
2.      INVENTORIES

Inventories, net of reserves, consist of the following (in thousands):
 
   
December 31,
2012
   
September 30,
2012
 
Raw materials
  $ 10,363     $ 8,631  
Work-in-process
    13,772       15,192  
Finished goods
    52,883       40,787  
Consigned inventory
    2,567       2,896  
Supplies and other
    350       436  
    $ 79,935     $ 67,942  

Inventories are valued at the lower of cost or market and are removed from inventory under the first-in-first-out method (“FIFO”). Cost of inventory includes material, labor and overhead. The Company recorded inventory valuation reserves of $0.6 and $0.7 million as of December 31, 2012 and September 30, 2012, respectively, to reduce the carrying value of inventories to a net realizable value. Consigned inventory represents contractually required finished goods inventory levels for certain key customers physically located at customer sites.  If future demand or market conditions are less favorable than the Company’s projections, additional inventory write-downs may be required and would be reflected in cost of sales on the Company’s statement of operations in the period in which the determination is made.

3.             SEGMENT INFORMATION

The Company’s strategic business units are based on product lines which are comprised of three reportable segments: carbon fibers, technical fibers and corporate/other products. The carbon fibers segment manufactures commercial carbon fibers used as reinforcement material in composites and related products, including prepregs. The technical fibers segment manufactures oxidized acrylic fibers and specialty carbon fibers used to manufacture aircraft brake pads and for heat/fire barrier applications. These two segments also facilitate development of product and process applications to increase the demand for carbon fibers and technical fibers. The carbon fibers and technical fibers segments’ production facilities are located geographically in the United States, Hungary and Mexico. The remaining business represented in the corporate/other products segment relates to water treatment and electrical services provided by the Hungarian operations and costs associated with the corporate headquarters.
 
 
9

 


Management evaluates the performance of its segments on the basis of operating income (loss) contribution. The following tables present financial information on the Company’s segments as of and for the three months then ended December 31, 2012 and 2011 (in thousands):
 
   
Three months ended December 31, 2012
 
   
Carbon Fibers
   
Technical Fibers
   
Corporate/ Other
   
Total
 
Net sales
  $ 28,715     $ 6,590     $ 572     $ 35,877  
Cost of sales
    22,178       4,139       483       26,800  
Gross profit
    6,537       2,451       89       9,077  
Operating income (loss)
    4,571       2,346       (3,268 )     3,649  
Depreciation
    4,167       370       121       4,658  
Capital expenditures
    851       1,769       287       2,907  
 
   
Three months ended December 31, 2011
 
   
Carbon Fibers
   
Technical Fibers
   
Corporate/ Other
   
Total
 
Net sales
  $ 37,679     $ 8,834     $ 533     $ 47,046  
Cost of sales
    27,661       5,729       478       33,868  
Gross profit
    10,018       3,105       55       13,178  
Operating income (loss)
    8,318       2,749       (2,861 )     8,206  
Depreciation
    3,986       322       117       4,425  
Capital expenditures
    6,610       207       212       7,029  
 
   
Total Assets
 
   
Carbon Fibers
   
Technical Fibers
   
Corporate/ Other
   
Total
 
December 31, 2012
  $ 310,443     $ 33,173     $ 14,833     $ 358,449  
September 30, 2012
  $ 301,440     $ 31,597     $ 25,651     $ 358,688  
 
4.             EARNINGS PER SHARE

In accordance with Accounting Standards Codification (“ASC”) 260, the Company has evaluated its diluted income per share calculation. The Company had outstanding stock compensation at December 31, 2012 and outstanding warrants and stock options at December 31, 2011 which were not included in the determination of diluted income per share because these shares were anti-dilutive.

The following is the diluted impact of the stock options on net income per share for the three months ended December 31, 2012 and 2011 respectively:

   
Three months ended December 31,
 
   
2012
   
2011
 
Numerators:
           
Net income
  $ 2,977     $ 9,703  
                 
Denominators:
               
Average shares outstanding – basic
    34,355       34,368  
Impact of stock options
    57       23  
Average shares outstanding – diluted
    34,412       34,391  
                 
Basic income per share
  $ 0.09     $ 0.28  
Diluted income per share
  $ 0.09     $ 0.28  
 
 
10

 

5.              FINANCING TRANSACTIONS

HUNGARIAN GRANT
 
The Hungarian government has pledged a grant of 2.9 billion HUF to Zoltek’s Hungarian subsidiary, which translated at the December 31, 2012 exchange rate, is approximately $13.2 million. The grant is intended to provide a portion of the capital resources to modernize the subsidiary’s facility, establish a research and development center, and support buildup of manufacturing capacity of carbon fibers. As of December 31, 2012, Zoltek’s Hungarian subsidiary has received approximately 2.6 billion HUF ($11.8 million) in grant funding. These funds have been recorded as a liability on the Company’s consolidated balance sheet. The liability is being amortized over the life of the assets procured by the grant funds, offsetting the depreciation expense from the assets into which the proceeds of the grant are invested. The Company has presented bank guarantees amounting to 120% of the amount of the grant as received.
 
The Company may be required to repay all or a portion of the grant if, among other things, the Hungarian subsidiary: fails to obtain revenue targets; fails to employ an average annual staff of at least 1,200 employees; fails to utilize regional suppliers for at least 45% of its purchases; fails to obtain consent from the Hungarian government prior to selling assets created with grant funds; fails to use grant funds in accordance with the grant agreement; fails to provide appropriate security for the grant; makes or made an untrue statement or supplies or supplied false data in the grant agreement, grant application or during the time of the grant; defaults on its obligations by more than 30 days; withdraws any consents it gave in the grant agreement; or causes a partial or complete failure or hindrance of the project that is the subject of the grant. These targets must be achieved during a five-year measurement period from October 2013 to October 2018. As of December 31, 2012, the Hungarian subsidiary had fewer than 900 employees. Although there can be no assurance, the Company anticipates it will comply with the requirements of the grant agreement when the measurement period begins. However, if Zoltek Zrt. is unable to comply with them or obtain an amendment of the requirements, it would be required to pay back all or a portion of the grant funds, which could have a material adverse effect on our future revenues and business, results of operations, financial condition or cash flow.
 
FINANCING ACTIVITY
 
Hungarian Financing
 
On June 15, 2012, Zoltek Zrt. completed an amended credit facility with Raiffeisen Bank Zrt. (the “Lender”) pursuant to which Zoltek Zrt. and the Lender entered into a Credit Facility Agreement, dated as of June 1, 2012, and a Restated and Amended Uncommitted Credit Line Agreement, dated as of June 1, 2012. Under the credit facility, the Lender agreed to provide Zoltek Zrt.: (1) a term facility in the maximum amount of 13.6 million EUR ($18.0 million at the December 31, 2012 exchange rate) (the “Term Facility”); and (2) a multicurrency overdraft facility in the amount of up to 1.12 billion HUF ($5.1 million at the December 31, 2012 exchange rate) (the “Revolving Facility”).
 
The Term Facility is a five-year term loan and bears interest at 4.17% per annum. Principal under the Term Facility is payable semi-annually in equal installments. The Revolving Facility is a revolving credit facility that expires on March 29, 2013 and has a total commitment of 1.120 billion HUF subject to a borrowing base. In addition to the Term Facility and the Revolving Facility, Zoltek Zrt. has obtained from the Lender a bank guaranty in the amount of HUF 3.48 billion ($15.8 million at the December 31, 2012 exchange rate) as required by the Hungarian government grant. The obligations of Zoltek Zrt. under this credit facility are guaranteed by the Company.
 
This credit facility contains representations and warranties, and a requirement that Zoltek Zrt. maintain a minimum current asset ratio and minimum annual EBITDA, in addition to other covenants. The Company was in compliance with all covenants as of December 31, 2012. Zoltek Zrt. had previously maintained a credit facility with the Lender, which expired May 30, 2012 and the facility was replaced with the new facility. As of December 31, 2012, the Company had borrowed $16.3 million under this new credit facility.
 
U.S. Financing
 
On March 30, 2012, Zoltek Companies, Inc. entered into a $10 million term loan with Enterprise Bank & Trust (the “Enterprise Loan”) secured by the real property associated with its facilities in the St. Louis, Missouri area. The Enterprise Loan is a seven-year term loan maturing March 30, 2019. Principal of the Enterprise Loan is payable monthly with a balloon payment due at maturity. The Enterprise Loan bears interest at an annual rate equal to one-month LIBOR plus 3%. The Company contemporaneously entered into a swap agreement that fixes the interest rate on the Enterprise Loan at 4.75% per annum. The loan agreement contains representations and warranties, and a requirement that the Company, on a consolidated basis, maintain minimum fixed charge coverage and leverage ratios, in addition to other covenants. The Company was in compliance with all covenants as of December 31, 2012. As of December 31, 2012, the principal balance of this term loan was $9.6 million.
 
The Company primarily utilized the proceeds of the Enterprise Loan to repay all outstanding balances under the Company's former U.S. revolving credit facility with its former U.S. bank; the refinanced borrowings had been incurred in connection with the purchase of our St. Peters, Missouri plant.
 
On April 27, 2012, the Company entered into a $15 million revolving credit agreement with JPMorgan Chase, N.A., with annual interest based on LIBOR plus 2.5%, adjusted monthly. The revolving credit facility is subject to a borrowing base and financial covenants and expires on April 27, 2015. The Company was in compliance with all covenants as of December 31, 2012. As of December 31, 2012, the Company had no borrowings under this revolving credit agreement.
 
 
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The Company had no borrowings under credit lines as of both December 31, 2012 and September 30, 2012. The Company’s long-term debt consists of the following (amounts in thousands):
 
   
December 31,
2012
   
September 30,
2012
 
             
US term loan
  $ 9,555     $ 9,667  
Hungarian term facility
    16,252       17,472  
Total long-term debt including current maturities
  $ 25,807     $ 27,139  
Less:  amounts payable within one year
    (4,278 )     (4,161 )
Total long-term debt, less current maturities
  $ 21,529     $ 22,978  


6.         STOCK COMPENSATION EXPENSE

The Company maintains long-term incentive plans that authorize the Board of Directors or its Compensation Committee (the “Committee”) to grant key employees, officers and directors of the Company incentive or nonqualified stock options, stock appreciation rights, performance shares, restricted shares and performance units. The Committee determines the prices and terms at which awards may be granted along with the duration of the restriction periods and performance targets. All issuances are granted out of shares authorized, as the Company has no treasury stock.

Stock option awards

During fiscal 2012 the Company awarded performance-based based stock options with separate performance conditions in fiscal years 2012, 2013, and 2014, to named executive officers and other key employees. The Company will recognize compensation expense related to each separate service period during the respective period. As of December 31, 2012 the maximum number of performance-based options available to vest subject to certain operating performance targets is 685,000 and subject to the performance measures in a given fiscal year.

The following table summarizes information for options currently outstanding and exercisable at December 31, 2012:
 
     
Options Outstanding
 
Range of
 Exercise Prices
   
Number
   
Wtd. Avg.
 Remaining
Life (years)
   
Wtd. Avg.
 Exercise
Price
   
Aggregate
 Intrinsic
Value
 
  $ 5.47 - 5.72       917,305       7     $ 5.71     $ 1,869,629  
  8.02 - 8.60       105,175       5       8.32       -  
  11.94 - 24.12       115,000       4       15.40       -  
  31.07 - 36.73       75,000       3       33.33       -  
  $ 5.47 - 36.73       1,212,480                     $ 1,869,629  
 
     
Options Exercisable
 
Range of
Exercise Prices
   
 
 
Number
   
Wtd. Avg.
Remaining
Life (years)
   
Wtd. Avg.
Exercise
Price
   
Aggregate
Intrinsic
Value
 
  $5.47 - 5.72       262,305       7     $ 5.69     $ 539,979  
  8.02 - 8.60       67,675       2       8.49       -  
  11.94 - 24.12       115,000       4       15.40       -  
  31.07 - 36.73       75,000       3       33.33       -  
  $5.47 - 36.73       519,980                     $ 539,979  
 
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The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
 
Assumptions
 
Fiscal 2012
   
Fiscal 2011
   
Fiscal 2010
 
Expected life of option (years)
    3 - 5       5       3.8  
Risk-free interest rate
    0.4% - 0.8%       2.4 %     0.4 %
Volatility of stock
    72% - 79%       73 %     77 %
Forfeiture rate
    0% - 16%       0 %     0 %
 
Volatility, expected term and dividend yield assumptions were based on the Company’s historical experience. The risk-free rate was based on a U.S. treasury note with a maturity similar to the option grant’s expected term.

Restricted stock awards

Under the Company’s equity incentive plans, employees and directors may be granted restricted stock awards with participation rights which are valued based upon the fair market value on the date of the grant. In accordance with ASC 718, the Company determined its practice of settling vested restricted shares in cash resulted in a modification in fiscal 2010 from equity to liability accounting for the remaining unvested restricted shares. The fair value of the modified liability award is measured each reporting date through settlement and any adjustments to increase or decrease the liability are recorded either as compensation cost or a charge to equity. During the first quarter of fiscal 2013, 15,000 shares of restricted stock vested.
 
The Company recorded into selling and general administrative expense for its corporate/other products segment the cost of employee services received in exchange for equity instruments based on the grant-date fair value of those instruments in accordance with the provisions of ASC 718, which was $0.2 million for the three months ended December 31, 2012, and $0.1 million for the three months ended December 31, 2011. There were no recognized tax benefits during the three months ended December 31, 2012 or 2011, as any benefit is offset by the Company's full valuation allowance on its net deferred tax asset. The number of options for performance-based shares is based on the probability of achieving expected targets.

7.   COMMITMENTS AND CONTINGENCIES

CONCENTRATION OF CREDIT RISK
 
 Zoltek's carbon fiber products are primarily sold to customers in the wind energy and composite industries and its technical fibers are primarily sold to customers in the aerospace industry. Entec Composite Machines’ products are primarily sold in the composite industry. The Company performs ongoing credit evaluations and generally requires collateral for significant export sales to new customers. The Company maintains reserves for potential credit losses and such losses have been within management's expectations.

In the three months ended December 31, 2012 and 2011, the Company reported aggregate sales of $17.6 million and $18.2 million, respectively, to Vestas Wind Systems, a leading wind turbine manufacturer. In the three months ended December 31, 2011, the Company also reported aggregate sales of $5.7 million to a manufacturer of fabrics for the composite industry, including materials for production of wind turbines.

ENVIRONMENTAL
 
The Company's operations generate various hazardous wastes, including gaseous, liquid and solid materials. The operations of the Company's carbon fibers and technical fibers business segments utilize thermal oxidation of various by-product streams designed to comply with applicable laws and regulations. The plants produce air emissions that are regulated and permitted by various environmental authorities. The plants are required to verify by performance tests that certain emission rates are not exceeded. The Company does not believe that compliance by its carbon fibers and technical fibers operations with applicable environmental regulations will have a material adverse effect upon the Company's future capital expenditure requirements, results of operations or competitive position. There can be no assurance, however, as to the effect of interpretation of current laws or future changes in federal, state or international environmental laws or regulations on the business segment's results of operations or financial condition.
 
SOURCES OF SUPPLY
 
As part of its growth strategy, the Company has developed and manufactures its own precursor acrylic fibers and all of its carbon fibers and technical fibers. The primary source of raw material for precursor is ACN (acrylonitrile), which is a commodity product with multiple sources.
 
 
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8.   INCOME TAXES

 
The Company currently has net operating loss carryforwards available to offset future tax liabilities. The Company has recorded a full valuation allowance against its deferred tax assets in Hungary, the United States and Mexico. The valuation allowance will be retained until there is sufficient positive evidence to conclude that it is more likely than not that the tax benefits associated with the deferred tax asset, or some portion of them, will be realized. In the consolidated balance sheet, the Company classifies its deferred tax assets and liabilities as either current or non-current, according to the expected reversal date of the temporary differences as of the reporting date.

As of December 31, 2012, we had uncertain tax positions which may change as a result of the outcomes of audits. The Company tracks uncertain tax positions under the guidance of ASC 740-10.  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.  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. 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.  During the first quarter of fiscal 2012, the Company recognized a $0.3 million expense as we adjusted our Hungarian effective tax rate to reflect a change to tax law. An additional $0.1 million was incurred related to the local Hungarian municipality tax and $0.1 million was recorded related to U.S. and Mexico minimum tax payments.  A tax benefit of approximately $0.2 million was recorded related to an increase in the Hungarian subsidiary’s deferred tax position.  
 
9.   FAIR VALUE MEASUREMENT OF INSTRUMENTS

 
Zoltek adopted ASC 820 on October 1, 2008.  ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  The fair value hierarchy for disclosure of fair value measurements under ASC 820 is as follows:
 
Level 1 – Valuations based on quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.
 
Level 2 – Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
 
Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
The fair value of the restricted shares is determined using the current market price for the shares and an estimated forfeiture rate, an unobservable input.  Although the market price of the shares is based on quoted market prices in an active market, the forfeiture rate is considered to be a significant input and therefore we have deemed the liability associated with the restricted shares to be Level 3.

Interest Rate Swap

On March 30, 2012, the Company entered into an interest rate swap agreement that fixes the interest rate on its term loan in order to manage the risk associated with changes in interest rates. This interest rate derivative instrument has been designated as a cash flow hedge of our expected interest payments under the FASB’s ASC Topic 815, “Derivatives and Hedging.” This instrument effectively converts variable interest payments on the term loan into fixed payments. In a cash flow hedge, the effective portion of the change in fair value of the hedging derivative is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings during the same period in which the hedged item affects earnings. The change in fair value of any ineffective portion of the hedging derivative is recognized immediately in earnings. The fair value of the interest rate swap is determined using an internal valuation model which relies on the expected LIBOR yield curve as the most significant input.  Additionally included in the model are estimates of counterparty and the Company’s non-performance risk as the most significant inputs. Because each of these inputs are directly observable or can be corroborated by observable market data, we have categorized the interest rate swap as Level 2 within the fair value hierarchy.

Warrants and Restricted Shares

The Company adopted ASC 815-40 on October 1, 2009. In connection with the adoption, the Company determined that its outstanding warrants as of the adoption date, which included warrants issued in May 2006, July 2006, October 2006, and December 2006, were not indexed to the Company’s own stock. These warrants were treated as a fair value liability, which requires separate accounting pursuant to ASC 815-40. The fair value of the warrants was reclassified from equity to a fair value liability on October 1, 2009. The Company used a Black-Scholes pricing model to determine the fair value of the warrants. Fair values under the Black-Scholes model are partially based on the expected remaining life of the warrants, which is an unobservable input. Therefore, we have deemed the fair value liability associated with the outstanding warrants to have Level 3 inputs. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
 
 
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The fair value of warrants, restricted shares and swap as of December 31, 2012 and September 30, 2012, was as follows (amounts in thousands, except per share amounts):
 
Description
 
Wtd. Avg
Fair Value
Per Share
   
Shares
Issuable Upon
Exercise
   
Total
   
Level 1
   
Level 2
   
Level 3
 
                                     
Warrants -- December 2006 Issuance
                               
As of December 31, 2012
    -       -       -       -       -       -  
As of September 30, 2012
    -       827,789       -       -       -       -  
                                                 
Restricted Shares
                                               
As of December 31, 2012
    -       -       -       -       -       -  
As of September 30, 2012
    7.33       15,000       110       -       -       110  
                                                 
Interest Rate Swap
                                               
As of December 31, 2012
                    358       -       358       -  
As of September 30, 2012
                    384       -       384       -  

During the first quarter of fiscal 2013, warrants to purchase 827,789 shares expired. The restricted shares balance increased by less than $0.1 million related to an increase in fair value which was offset by the settlement of $0.1 million (15,000 shares) that vested during the quarter.  There was no balance outstanding at December 31, 2012, as compared to a $0.1 million balance at September 30, 2012. There were no shares of restricted stock outstanding as of December 31, 2012.

Derivatives designated as hedging instruments
 
Change in Unrealized Gain
 
       
Interest Rate Swap
     
       
Three months ended December 31, 2012
  $ 26  
Three months ended December 31, 2011
  $ -  
 
We did not record any ineffectiveness in earnings related to the interest rate swap for the three months ended December 31, 2012 and 2011. As of December 31, 2012, no deferred gains or losses are expected to be reclassified into earnings as interest expense related to the interest rate swap over the next twelve months as we expect the hedging relationship will remain unchanged.
 
10.      FOREIGN CURRENCY TRANSLATION

The Company’s Hungarian subsidiary, Zoltek Zrt. has a functional currency of the HUF. As a result, the Company is exposed to foreign currency risks related to this investment. The consolidated balance sheet of Zoltek Zrt. was translated from Hungarian Forints to U.S. dollars, at the exchange rate in effect at the applicable balance sheet date, while its consolidated statement of operations was translated using the average exchange rates in effect for the periods presented.  The related translation adjustments are reported as other comprehensive income (loss) within shareholders’ equity.  Gains and losses from foreign currency transaction of Zoltek Zrt. are included in the results of operations as other income (expense). The HUF strengthened by 0.9% against the U.S. dollar during the first quarter of fiscal 2013 compared to the fourth quarter of fiscal 2012. This currency fluctuation caused a decrease of $1.0 million in our accumulated other comprehensive loss for the three months ended December 31, 2012.
 
The functional currency of Zoltek de Mexico is the U.S. dollar.
 
 
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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 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.
 
 
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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 ApplicationsWe 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.
 
 
17

 
 
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.
 
 
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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.
 
     Cash (Used) In Provided By Continuing Operating Activities
 
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.
 
      Cash Used In Investing Activities
 
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.
 
     Cash Used Financing Activities
 
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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Item 3.      Quantitative and Qualitative Disclosures About Market Risk
 
Foreign Currency Risk
 
The consolidated balance sheets of the Company's international subsidiaries, Zoltek Zrt. and Zoltek de Mexico, were translated from Hungarian Forints and Mexican Pesos to U.S. dollars, respectively, at the exchange rates in effect at the applicable balance sheet date, while their consolidated statements of operations were translated using the average exchange rates in effect for the periods presented. The related translation adjustments are reported as other comprehensive income (loss) within shareholders' equity. Gains and losses from foreign currency transactions of Zoltek Zrt. are included in the results of operations in other expenses.  The Company views as long-term its investments in Zoltek Zrt. and Zoltek de Mexico. Zoltek Zrt. has a functional currency of the HUF. As a result, the Company is exposed to foreign currency risks related to this investment. The functional currency of Zoltek de Mexico is the U.S. dollar. The Company does not currently employ a foreign currency hedging strategy related to the sales from Hungary or Mexico. Neither Hungary nor Mexico is considered to be a highly inflationary or deflationary economy.
 
As of December 31, 2012, the Company had a long-term loan of $108.0 million to its Zoltek Zrt. subsidiary denominated in U.S. dollars. The potential loss in value of the Company's net foreign currency investment in Zoltek Zrt. resulting from a hypothetical 10% adverse change in quoted foreign currency exchange rate of the HUF against the U.S. dollar at December 31, 2012 and 2011 amounted to $10.8 million and $10.8 million, respectively.  The Company does not expect repayment of the loan in the foreseeable future. As such, the Company considers this loan as a permanent investment.  In addition, Zoltek Zrt. routinely sells its products to customers located primarily throughout Europe in sales transactions that are denominated in foreign currencies other than the HUF. Also, Zoltek Zrt. has debt that is denominated in foreign currencies other than the HUF.
 
  As of December 31, 2012, the Company had a long-term loan to its Zoltek de Mexico subsidiary. There is no potential loss in value of the Company's net foreign currency investment in Zoltek de Mexico resulting from an adverse change in quoted foreign currency exchange rate of the Mexican Peso against the U.S. dollar at December 31, 2012 because Zoltek de Mexico’s functional currency is the U.S. dollar.  The Company does not expect repayment of the loan in the foreseeable future. As such, the Company considers this loan as a permanent investment.
 
Commodity Price Risk
 
We are exposed to commodity price risk arising from changes in the market price of certain raw materials, such as ACN and utilities.  Due to competition and market conditions, volatile price increases cannot always be passed on to our customers. Management assesses commodity price trends on a regular basis and seeks to adjust purchasing accordingly. The Company does not currently utilize derivative instruments to hedge purchases of commodities.

*  *  *
Special Note Regarding Forward-Looking Statements
 
This quarterly report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934 as amended (the “Exchange Act”).  Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements.

The forward-looking statements contained in this report are inherently subject to risks and uncertainties.  The Company’s actual results could differ materially from those in the forward-looking statements.  The factors that might cause such differences include, among others, our ability to: (1) successfully adapt to recessionary conditions in the global economy and substantial volatility in order rates from our wind energy customers, including our principal customer Vestas Wind Systems; (2) penetrate existing, identified and emerging markets, including entering into new supply agreements with large volume customers; (3) continue to improve efficiency at our manufacturing facilities on a timely and cost-effective basis; (4) successfully add new planned capacity for the production of carbon fiber, precursor raw materials and prepregs and meet our obligations under long-term supply agreements; (5) operate profitably; (6) increase or maintain our borrowing at acceptable costs; (7) manage changes in customers’ forecasted requirements for our products; (8) continue investing in application and market development for a range of applications; (9) manufacture low-cost carbon fibers and profitably market them despite fluctuations in raw material and energy costs; (10) successfully operate our Mexican facility to produce acrylic fiber precursor and carbon fibers; (11) successfully continue operations at our Hungarian facility if natural gas supply disruptions occur; (12) successfully prosecute patent litigation; (13) successfully facilitate adoption of our carbon fibers by the auto industry for use in high-volume applications; (14) establish and grow prepreg capacity; (15) speed development of low-cost carbon fiber sheet molding compounds for the automotive industry pursuant to our global collaborative partnership with Magna Exteriors and Interiors; and (16) manage the risks identified under “Risk Factors” and elsewhere in our filings with the SEC.

*  *  *
 
 
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Item 4.    Controls and Procedures

Evaluation of Controls and Procedures

As of the end of the period covered by this report, an evaluation was carried out by management, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended.  The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed in reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures as of December 31, 2012, were effective 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 Securities and Exchange Commission’s rules and forms.

There has been no change in our internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 
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ZOLTEK COMPANIES, INC.
 
PART II. OTHER INFORMATION
   
Item 1. Legal Proceedings.
   
  None.
   
Item 6. Exhibits.
   
  See Exhibit Index
 
 
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SIGNATURE

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.
 
 
Zoltek Companies, Inc.
        (Registrant)
 
       
Date:  January 31, 2013  
By:
/s/ ZSOLT RUMY  
    Zsolt Rumy  
    Chief Executive Officer  
       
                                                                   
 
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EXHIBIT INDEX
 
Exhibit Number
Description of Document
 
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.

31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
 
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 

101.INS**
XBRL Instance
 
101.SCH**
XBRL Taxonomy Extension Schema
 
101.CAL**
XBRL Taxonomy Extension Calculation
 
101.DEF**
XBRL Taxonomy Extension Definition
 
101.LAB**
XBRL Taxonomy Extension Labels
 
101.PRE**
XBRL Taxonomy Extension Presentation
 
** XBRL
information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.


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