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Zoltek Companies, Inc. (ZOLT)

F1Q09 (Qtr End 12/31/08) Earnings Call

February 10, 11:00 am ET

Executives

Zsolt Rumy - President, CEO

Andy Whipple - VP, CAO

Analysts

Michael Lew - ThinkPanmure LLC

Joe Maxa - Dougherty & Company LLC

Michael Carboy - Signal Hill Capital LLC

Presentation

Operator

Good day and welcome to Zoltek's first quarter 2009 earnings results conference call. Just a reminder, today's call is being recorded. And now, for introductions and opening remarks, I would like to turn the call over to Mr. Zsolt Rumy, President and Chief Executive Officer for Zoltek. Please go ahead, Sir.

Zsolt Rumy

Good morning. Welcome to our first-quarter conference call. As usual, I have a group of our management team here, including Andy Whipple, who is our Chief Accounting Officer. I'll get him to the floor to tell you about our forward-looking statement weasel words. After that, he has some information on the financial report that is not part of the press release, but that we considered might be interesting to you. Andy?

Andy Whipple

Thanks, Zsolt. I'll just take the next few minutes. I'll cover some highlights of our first quarter operating results versus the prior year, and I will also provide some comments regarding forward-looking statements and certain non-GAAP financial measures.

During today's call, we'll refer to certain non-GAAP financial measures. We've reconciled these measures to GAAP figures in our earnings release, which is available on our website at zoltek.com.

We will also be making certain forward-looking statements today. Please review our Safe Harbor language found in our press release and our SEC filings, which describe factors that could cause our actual results to differ materially from those projected by us in our forward-looking statements.

With regard to our year-over-year results, as we noted in the earnings release, our first-quarter 2009 net sales decreased 3.6% to $38.6 million, and this compared to the prior year's amount of $40.1 million. Our cost of sales aligned with this; we saw a decrease of 3.2%, from $29.3 million to $28.4 million. I know that Zsolt will be covering sales and cost of sales in his part of the conversation, so I won't spend time addressing those particular areas.

With regard to SG&A expense, for the first quarter they were $4.8 million. This compared to the prior year, where we had approximately $4.1 million. The increase year-over-year primarily had to do with the underwater stock options out there. This non-cash cost to us was approximately $950,000 for the quarter.

We also had to include approximately $350,000, which was a catch-up entry associated with adjusting our forfeiture rate per FAS 123R.

Unfortunately, pursuant to the FAS, we have to continue to monitor our forfeiture rate and adjust it throughout the life of the options. As I said, the charge for the quarter was $350,000 just for that specific (inaudible).

With regard to income tax expense, of course, our income taxes are derived primarily from our Hungarian operations. We saw a decrease from a $1 million in the prior year to $600,000 in the current quarter. We had two basic components to the decrease; one was a change -- a decrease in the value of the HUF year-over-year.

The change in the functional currency for Hungary causes the loan that's due to the parent company, which is a US dollar-denominated loan, to have experienced an unrealized loss. For Hungary and their taxes, they have what I would refer to as an AMT tax, alternative minimum tax, that factors in that unrealized loss and, as a result, that actually brings down our tax expense in Hungary.

But we also had a FIN 48 reserve, which is another accounting reserve required in the prior year, associated with our intercompany transactions. That was about a $300,000 reserve that was taken last year that wasn't repeated in the current quarter.

With regard to capital spending, for the quarter it was $8.3 million, versus the prior year's quarter, which was $12.5 million. As we have completed our construction in Hungary and have got to the end of our construction in Mexico, of course, our capital spending is declining.

In the prior year's quarter, we had capitalized interest of almost $1.6 million. In the current quarter, we had no capitalized interest. Again, the Hungarian construction has wound down and that's where our capitalized interest had been associated.

In our foreign currency translation adjustment for the quarter, we had a $27.5 million charge. This was primarily due to a devaluation of the HUF against the US dollar of approximately 12%, and a devaluation of the Mexican peso of approximately 19%. The charge associated with the devaluation of the HUF was approximately 19 million of that charge, with the peso approximately 8.5 million.

As a part of our expansion into Mexico, we had initially set up the functional currency in Mexico as the Mexican peso. As a result of finishing construction and starting sales, and our sales being denominated in US dollars, effective November 1st, we changed our functional currency to the US dollar. As a result of that change in our functional currency, we will certainly limit our exposure to the Mexican peso in the financial income statement.

And then a final point, with regards to liquidity, as of December 31, 2008, we had unrestricted cash of $17.5 million. We continue to generate positive EBITDA; our current ratio is over 2.0, and our long-term debt is only 2.2 million. So we feel very comfortable with our financial position; we feel that we are in a solid financial spot at this point in time.

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