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GTAT > SEC Filings for GTAT > Form 10-Q on 5-Aug-2011All Recent SEC Filings




Quarterly Report

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

This Quarterly Report on Form 10-Q contains "forward-looking statements" that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are "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. Forward-looking statements are identified by the use of words such as, but not limited to, "anticipate," "believe," "continue," "could," "estimate," "prospects," "forecasts," "expect," "intend," "may," "will," "plan," "target," and similar expressions or variations intended to identify forward-looking statements and include statements about our expectations of future periods with respect to, among other things, backlog, backlog conversions, gross margins, timing of when our business segments will recognize revenue and the amount that will be recognized, gross margins in our sapphire business to improve over time, continued investment in new product development and expansion of product base in each segment, increases in research and development spending, range of capital expenditures in fiscal 2012, material impact of accounting rules on financial position and results of operations, timing of revenue recognition, limited impact of change in market interest rates on our investment portfolio, all of the information under "-Factors Affecting the Results of Our Operations," timing of delivery of products, customers substantially performing their contractual obligations, customers renegotiating contracts, timing of recognizing deferred revenue as revenue, sufficiency of cash resources to satisfy working capital requirements, capital expenditures and other cash requirements, customer concentrations, demand for our products, effects of government tariffs, change in tax rates and the reasons therefore, growth of our business and product portfolio, fluctuation of polysilicon revenue, long term prospects for the solar industry and our PV segment, PV business accounting for a majority of our revenue for fiscal year 2011, outcome of litigation, tax rates, our plans to produce and sell crystal sapphire materials and our plans to produce, sell, deliver and install ASF systems. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to factors discussed under the heading titled "Risk Factors" included in this Quarterly Report on Form 10-Q.

Forward-looking statements speak only as of the date of this report or, as of the date given if provided in another filing with the SEC. We undertake no obligation to publicly update or review any forward-looking statements to reflect events or circumstances after the date of such statements.

Company Overview

GT Solar International, Inc., through its subsidiaries (referred to collectively as "we," "us" and "our") is a global provider of polysilicon production technology, multicrystalline ingot growth systems and related photovoltaic manufacturing services for the solar industry, and sapphire growth systems and material for the LED and other specialty markets. Our customers include several of the world's largest solar companies as well as companies in the chemical industry.

On July 29, 2010, we acquired privately-held Crystal Systems, Inc., which we refer to as Crystal Systems, a crystal growth technology company that produces sapphire material used for LED applications, as well as other industrial markets.

We operate through three business segments: our polysilicon business, our photovoltaic, or PV, business and our sapphire business.

Polysilicon Business

Our polysilicon business manufactures and sells chemical vapor deposition, or CVD, reactors, used to react gases at high temperatures to produce polysilicon, the key raw material used in silicon-based solar wafers and cells, while also offerring engineering services and related equipment.

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Photovoltaic Business

Our PV business manufactures and sells directional solidification, or DSS, crystallization furnaces and ancillary equipment used to cast multicrystalline silicon ingots by melting and cooling polysilicon in a precisely controlled process. These ingots are used to make photovoltaic wafers which are, in turn, used to make solar cells. Our PV business provided services related to the production of photovoltaic wafers, cells and modules, referred to as our turnkey business. During the three months ended July 3, 2010, we completed a review of our PV turnkey business and decided to no longer offer these services. This decision was based on our assessment of reduced market opportunities, as well as low gross margins compared to our other product lines. Our decision did not impact the recoverability of any tangible or intangible assets, and we did not incur any significant costs to eliminate this product offering.

Sapphire Business

Our sapphire business manufactures and sells sapphire materials and equipment. Our sapphire material is manufactured using our advanced sapphire crystal growth systems that incorporate the Heat Exchanger Method, or HEM, technology. We commercialized advanced sapphire crystal growth systems, or ASF systems and delivered the first system in May 2011 and expect to deliver additional systems throughout the fiscal year ending March 31, 2012 and beyond. We have limited experience installing and operating the ASF systems in customer facilities. If the ASF system does not operate properly in our customers' facilities, we will not be able to recognize revenue from the sale of ASF systems in a timely manner, or at all. In addition, our sapphire business, and our overall business, would be materially and adversely impacted. In addition to selling ASF systems, we intend to continue production and sale of sapphire materials in selected specialty markets.

Factors Affecting the Results of Our Operations

Demand for our polysilicon and PV products and services are driven by end-user demand for solar power. Key drivers of the demand for solar power include: volatile prices of conventional energy sources; the desire for energy independence to counter perceived geopolitical supply risks surrounding fossil fuels; environmental pollution from fossil fuels and the resulting tightening of emission controls; the competitive cost of energy from alternative renewable energy sources; and government incentive programs that make solar energy more cost competitive and changing consumer preferences towards renewable energy sources.

In addition, our results of operations are affected by a number of other factors including the availability and market price of polysilicon and sapphire material, availability of raw materials, foreign exchange rates, interest rates, commodity prices (particularly molybdenum, steel and graphite prices) and macroeconomic factors, including the availability of capital that may be needed by our customers, as well as political, regulatory and legal conditions in the international markets in which we conduct business, including China.

Our results of operations are affected by a number of other factors including, among other things, when we are able to recognize revenue under our PV, polysilicon and ASF system contracts. Our revenue recognition policies require us to defer revenue recognition in certain circumstances from shipped equipment and recognize revenue at a later date as more fully described under the caption "Note-2 Significant Accounting Policies-Revenue Recognition" in the notes to the condensed consolidated financial statements. Other factors affecting operations include delays in customer acceptances of our products, delays of deliveries of ordered products and our rate of progress in the fulfillment of our obligations under our contracts. A delay in deliveries or cancellations of orders would cause us to have inventories in excess of our short-term needs, and may delay our ability to recognize, or prevent us from recognizing, revenue on contracts in our order backlog.

Changes in the global capital markets have resulted in a more stringent lending environment which in turn has, at times, caused decreased spending within the industries we serve. While we have experienced increased revenue in our PV business during the three months ended July 2, 2011 as compared to the same

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period in the last fiscal year, the international commercial lending environment has not stabilized and if the availability of capital or credit were to become even more limited than we are currently experiencing, we expect that the results of operations attributable to our PV business, and our other business segments, would be negatively impacted.

We are required to make a significant upfront investment in order to fill orders for our PV, polysilicon and sapphire production equipment. In the past we have had customers for our DSS furnaces and CVD reactors place orders and fail to make payments (and while we did not complete these orders, we incurred certain expenses). In an attempt to mitigate such risks, we generally require customers to make non-refundable deposits and/or provide letters of credit on most polysilicon, PV and sapphire equipment orders. These advances, however, may not cover all of the expenses we incur in preparing to fill the applicable order. In addition, we have negotiated extensions of the delivery schedules and other modifications under some of our existing contracts and we expect similar negotiations to occur in the future. When customers fail to make a deposit when due under their contracts, we may terminate, and have terminated, those contracts. When we renegotiate terms of existing contracts with our customers, such negotiations may result in a change in the timing of deliveries and other terms, which may have an impact on our results of operations as more fully described under the heading "Order Backlog."

During the early part of calendar 2010, market demand in the market for polysilicon increased and, in response, worldwide manufacturing capacity of polysilicon exhibited growth, due principally to expansion by existing manufacturers. However, as 2010 progressed, there was an excess of polysilicon manufacturing capacity and the market price for polysilicon experienced significant declines. Notwithstanding the total excess in polysilicon capacity, those market participants without the necessary cost structure will be unable to operate profitably in a lower polysilicon price environment. Accordingly, there will be an even greater focus on reducing production costs among polysilicon manufacturers. Since polysilicon production equipment is one of the principal factors that accounts for the costs of polysilicon production for manufacturers, we expect that for the immediate future there will be substantial pressure by our customers to lower the cost of equipment or they may delay or cancel their purchases of polysilicon production equipment. Even in the face of a consolidating market, we believe we are well positioned to capture a portion of the future demand for polysilicon equipment among the more limited number of manufacturers due to the higher throughput and lower power consumption, leading to greater efficiencies, generated by our reactor equipment. However, the timing of any future purchases is uncertain and it may be a significant amount of time before we see the benefits of any purchases of equipment, if it all.

Much like our other business segments, our PV business is subject to cyclicality in demand for our PV products, particularly our DSS furnace. Revenues from our PV segment grew in fiscal year 2011 as compared to the prior year in large part due to the increased demand among solar manufacturers for our DSS products. We do not, however, expect that solar manufacturers will continue to purchase PV furnaces at the same rate in fiscal 2012, and such decreased demand may continue for a longer period. We believe that, due to consolidation within the solar industry and increasing cost pressures, some of our PV customers are starting to lower capacity utilization rates and delaying expansion projects as they respond to weaker near term end market demand. Due to efficiencies offered by monocrystal silicon and advances in monocrystal silicon production technology, we may experience a longer contraction in end user demand for multicrystalline silicon solar modules than in the past. This contraction has resulted in increased pressure on the margins for our PV products. It is not possible to determine when market demand for multicrystalline solar products will return with any certainty, but initial indications are that the market will exhibit increased demand in fiscal year 2013 or the first half of fiscal year 2014 compared to the same period in 2012. We have begun to develop monocrystal silicon production technology but have not yet commercialized such equipment.

Demand for PV on-grid applications, which in turn impacts the demand for PV manufacturing equipment, has historically been dependent in part on the availability and size of government subsidies and economic incentives. The ability of governments to provide economic incentives may be significantly

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impacted by the recent economic downturn. For example, Germany, which has among the world's largest PV installed base, has implemented reductions in solar feed-in tariff rates for certain solar systems and further reductions in solar feed-in tariff rates may be made in the future. Spain, which has also been a major market for PV products, reduced availability of subsidies in 2009 from 2,400 MW per year to 500 MW per year for solar projects. Conversely, adoption of feed-in-tariffs in China could positively increase market demand. It is difficult to determine the impact that a changing incentive program has on solar module demand and our customers' ability to sell solar modules in a particular geographic market. We believe decreasing costs within the solar value chain will reduce the effect of tariffs on the investment returns for solar projects. In contrast to decreasing incentives in Europe, China continues to maintain policies designed to stimulate its renewable energy sector, including solar power. The changing environment for such government incentive programs creates uncertainty for the solar industry.

We are a new entrant into the sapphire materials and sapphire equipment business. The results of our sapphire business will depend on the demand for sapphire-based materials and products, which will likely result in the majority of our revenue from the sapphire business in fiscal 2012 being attributable to the sale of ASF systems, and that the revenue from the sale of sapphire material will be comparatively smaller. However, we may not be able to recognize revenue pursuant to existing (or future) contracts to sell ASF systems in the expected time frame, in which case, a greater percentage of revenue from our sapphire business will be attributable to our materials business and beyond. We have limited experience installing and operating the ASF systems in customer facilities. During the three months ended July 2, 2011, we did not recognize revenue in connection with the sale of ASF systems. If the ASF system does not operate properly in our customers' facilities, we will not be able to recognize revenue from the sale of systems in a timely manner, or at all. In addition, our sapphire business, and our overall business, would be materially and adversely impacted. The sapphire materials industry has recently begun to show signs of slowing demand and decreased prices charged by sapphire manufacturers. We anticipate long-term demand for sapphire material will be driven, in large part, by general illumination manufacturers. However, in the short-term, the decreased demand for sapphire materials may impact demand for our supplied materials and ASF systems and the timing of which amounts attributable to supplied materials and ASF systems roll-off of backlog and into revenue.

Our quarterly results have fluctuated significantly in the past due to, among other things, the factors cited above, and we expect that our quarterly results will continue to fluctuate significantly in the future for these and other reasons.

Acquisition of Crystal Systems, Inc.

On July 29, 2010, we acquired 100% of the outstanding shares of common stock of privately-held Crystal Systems, a crystalline growth technology company that manufactures sapphire materials used in LED applications and other specialty markets. The purchase consideration consisted of $24.8 million in cash, approximately 5.4 million shares of our common stock valued at $30.9 million (based on the closing market price of our common stock on the date of the acquisition) and a potential additional $18.7 million of contingent consideration based on the attainment of certain financial and technical targets through the period ending March 31, 2012. The fair value of the contingent consideration was $12.5 million at the date of acquisition. We recorded a purchase price adjustment resulting in a reduction in the fair value of consideration by $392 during the three months ended July 2, 2011. We have made contingent consideration payments of approximately $3.5 million through July 2, 2011.

The transaction has been accounted for as a business combination and is included in our results of operations beginning on July 29, 2010, the date of acquisition.

Order Backlog

Our order backlog primarily consists of written contractual commitments and signed purchase orders, deferred revenue (which represents equipment that has been shipped to customers but not yet recognized

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as revenue) and short-term contracts or sales orders for sapphire materials. Substantially all of the contracts in our order backlog for PV, polysilicon and sapphire equipment require the customer to either post a standby letter of credit in our favor and/or make advance payment prior to shipment of equipment.

From the date of a written commitment, we generally would expect to deliver PV and sapphire equipment products over a period ranging from three to nine months and polysilicon products over a period ranging from twelve to eighteen months, however, in certain cases revenue may be recognized over longer periods. Disregarding the effect of any contract terminations or modifications, we would expect to convert approximately 44% of our July 2, 2011 order backlog into revenue during the next twelve months and approximately 56% thereafter. Although most of our orders require substantial non-refundable deposits, our order backlog as of any particular date should not be relied upon as indicative of our revenues for any future period. We began tracking our backlog as a performance measure on a consistent basis during 2007.

If a customer fails to perform its outstanding contractual obligations on a timely basis, and such failure continues after notice of breach and a cure period, we may terminate the contract. Our contracts generally do not contain cancellation provisions and in the event of a customer breach, the customer may be liable for contractual damages. During the three months ended July 2, 2011, we terminated or modified contracts resulting in a $10.4 million reduction in our order backlog (81% of the reduction was from 3 contracts). During the fiscal year ended April 2, 2011, we terminated or modified contracts resulting in a $10.7 million reduction in our order backlog (82% of the reduction was from 3 contracts). During the three months ended July 2, 2011, we did not record any revenue from terminated contracts and during the fiscal year ended April 2, 2011, we recorded revenues of $44.4 million from terminated contracts.

Although we have a reasonable expectation that most of our customers will substantially perform on their contractual obligations, we attempt to monitor those contracts that we believe to be at risk, which include contracts with customers to whom we have sent notices of breach for failure to provide letters of credit or to make payments when due. We conduct negotiations with certain customers who have requested that we extend their delivery schedules or make other contract modifications, or who have not provided letters of credit or made payments in accordance with the terms of their contracts. We engage in a certain level of these negotiations in the ordinary course. We monitor the effect, if any, that these negotiations may have on our future revenue recognition. If we cannot come to an agreement with these customers, our order backlog could be reduced. Other customers with contracts in our order backlog that are not currently under negotiation may approach us with similar requests in the future, or may fail to provide letters of credit or to make payments when due. If we cannot come to an agreement with these customers, our order backlog could be further reduced.

The table below sets forth our order backlog as of July 2, 2011 and April 2, 2011 by business segment:

                                       July 2, 2011           April 2, 2011
                                                % of                    % of
           Product Category         Amount     Backlog     Amount      Backlog
                                              (dollars in millions)
           Photovoltaic business   $    370          16 % $     468          39 %
           Polysilicon business         978          43 %       537          45 %
           Sapphire business            952          41 %       184          16 %

           Total                   $  2,300         100 % $   1,189         100 %

Our order backlog attributable to our PV, polysilicon and sapphire businesses as of July 2, 2011, included deferred revenue of $395.7 million, of which $77.0 million related to our PV business, $317.2 million related to our polysilicon business and $1.5 million related to our sapphire business. Cash received in deposits related to our order backlog where deliveries have not yet occurred was $263.6 million as of July 2, 2011.

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As of July 2, 2011, our order backlog consisted of contracts with 29 PV customers, 16 of which have orders of $3 million or greater, contracts with 14 polysilicon customers, 13 of which have orders of $3 million or greater and contracts with several sapphire customers, 9 of which had orders of greater than $3 million. Our PV, polysilicon and sapphire order backlog as of July 2, 2011, included $554.0 million and $460.4 million attributed to two different customers, each of which individually represents 24% and 20%, respectively, of our order backlog.

Results of Operations

    The following tables set forth the results of operations as a percentage of
revenue for the three months ended July 2, 2011 and July 2, 2010:

                                                   Three Months Ended
                                             July 2, 2011     July 3, 2010
         Statement of Operations Data:*
         Revenue                                       100 %            100 %
         Cost of revenue                                51               66

         Gross profit                                   49               34
         Research and development                        5                3
         Selling and marketing                           3                3
         General and administrative                      7                8
         Amortization of intangible assets               -                -

         Income from operations                         34               20
         Interest income                                 -                -
         Interest expense                               (1 )              -
         Other income (expense), net                     -                -

         Income before income taxes                     33               20
         Provision for income taxes                     10                8

         Net income                                     23 %             12 %

percentages subject to rounding.

Three Months Ended July 2, 2011 compared to Three Months Ended July 3, 2010.

Revenue. The following table sets forth total revenue for the three months ended July 2, 2011 and July 3, 2010:

                                     Three Months Ended
     Business Category          July 2, 2011     July 3, 2010     Change     % Change
                                   (dollars in thousands)
     Photovoltaic business     $      198,628   $      111,441   $ 87,187
     Polysilicon business              23,885           23,725        160
     Sapphire business                  8,583                -      8,583

         Total revenue         $      231,096   $      135,166   $ 95,930           71 %

Revenue from our PV business increased 78% to $198.6 million for the three months ended July 2, 2011 as compared to $111.4 million for the three months ended July 3, 2010. PV revenue is comprised of sales of our DSS furnaces, other equipment, services and ancillary parts and spares. The increase in revenue attributable to the PV business is primarily due to an increase in the number of DSS units on which revenue was recognized during the period offset in part by a decrease in revenue related to our

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turnkey business, for which we no longer offer as an option to our customers. Revenue recognized during the three months ended July 3, 2010 from turnkey projects was $41.1 million and we did not recognize any revenue from turnkey projects in the three months ended July 2, 2011.

Revenue from our polysilicon business for the three months ended July 2, 2011 was consistent with revenue recognized in our polysilicon business for the same period in the prior year. Polysilicon revenue for the three months ended July 2, 2011 substantially relates to contracts that were in our order backlog as of April 2, 2011. Revenue in our polysilicon business is generally recognized upon acceptance of product, whether existing or new, unless acceptance is considered perfunctory. As a result, our polysilicon business tends to have a higher level of deferred revenue than our PV and sapphire businesses. Approximately 80% and 73% of our deferred revenue balance at July 2, 2011 and July 3, 2010, respectively, relates to our polysilicon business.

Included in our backlog are polysilicon contracts that grant contractual rights which require revenue to be recognized ratably over the contract period. Revenue is recognized when all other elements have been delivered and other . . .

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