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GTAT > SEC Filings for GTAT > Form 10-Q on 9-Nov-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, the performance characteristics of the materials generated using DSS MonoCastTM growth technology and CCz growth technology, the timing of commercialization of our MonoCastTM growth technology and CCz growth technology, plans for monocrystalline production, ability to recognize revenue on ASF unit sales, all of the information under the caption "-Factors Affecting the Results of Our Operations," that MonoCastTM and CCz growth technologies will complement each other, ability to offer PV equipment that produces high-efficiency solar ingots (and will lower PV production costs), impact of greater demand for monocrystalline production equipment on existing PV equipment offerings, expanding operations in China, future business acquisitions, expanding workforce in our sapphire business and at Confluence Solar, Inc., the amounts invested in money market mutual funds are not at material risk of being lost, large percentage of future revenue to come from outside U.S., delivery time for products in each of our segments, backlog, backlog conversions, results of re-negotiations of existing contracts and impact on backlog, timing of revenue recognition for polysilicon and other products, variability of gross margins and the reasons therefore for the Company and certain business segments, expected improvement in sapphire gross margins, increased research and development spending, continued investment in new product development and expansion of product base in each segment, future tax rates, future capital expenditures for fiscal year ending March 31, 2012 (and the uses of those amounts), ability to commercialize DSS MonoCastTM and CCz growth technologies, sufficiency of cash resources to satisfy working capital requirements, capital expenditures and other cash requirements, potential use of cash on strategic opportunities, timing of expiration of stand-by letters of credit, impact on the Company of the adoption of accounting pronouncements, cyclicality of the markets we operate in, sale of sapphire equipment will account for significant amount of sapphire segment's revenue, impact of European and global economic environment on money market funds (and the extent of our exposure to riskier investments), customers substantially performing their contractual obligations, timing of recognizing deferred revenue as revenue, demand for our products, effects of government tariffs, growth of our business and product portfolio, outcome of unresolved litigation and the impact of the derivative suit on Company financial statements, impact of general economic conditions and the credit market on our business and continued customer concentration. 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 in Part II, Item 1A "Risk Factors" and included elsewhere in this Quarterly Report on Form 10-Q.

Forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q 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 Advanced Technologies 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

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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.

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 offering engineering services and related equipment.

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 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.

Recently, we made two advances in our PV segment. First, our research and development efforts recently resulted in production testing of our new DSS MonoCastTM growth technology. This technology is expected to generate silicon ingots with greater mostly monocrystalline efficiencies than the silicon ingots developed with multicrystalline growth equipment. We expect to commercialize our DSS MonoCastTM equipment solutions in the first calendar quarter of 2012. This equipment solution includes furnaces as well as upgrades to certain DSS furnaces currently used by our customers. Second, we acquired Confluence Solar, Inc., or Confluence Solar, in August 2011, which is a producer of monocrystalline silicon materials using Czochralski growth production methods. We are, however, currently in the process of developing an equipment offering based on Confluence Solar's continuously-fed Czochralski (CCz) growth technology. We intend the CCz equipment offering will be complementary to our MonoCast efforts, both of which are targeted at improving the ingot performance compared to that of multicrystalline silicon materials. We have not yet commercialized the CCz monocrystalline equipment, we do, however, expect to continue to sell monocrystalline material, manufactured at our pilot plant in Hazelwood, Missouri, into select markets.

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 delivered the first advanced sapphire crystal growth systems, or ASF systems, in May 2011 and have begun volume shipments of the ASF system which are in the process of being installed in customer facilities. We have, however, limited experience installing and operating the ASF systems in customer facilities. Although the first ASF units installed at a customer facility met the required performance standards, if the ASF system does not operate properly in our other customers' facilities, we will not be able to recognize revenue from the sale of ASF systems in a timely manner, or at all. If we are unable to recognize revenue, or such recognition is delayed, under existing contracts to sell ASF systems, 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.

Corporate Name Change

Effective August 8, 2011, we changed our name from GT Solar International, Inc. to GT Advanced Technologies Inc. The name change was effected pursuant to Delaware law by the merger of a wholly-owned subsidiary into the Company.

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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; 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 (including 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 included elsewhere in this Quarterly Report on Form 10-Q. 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. Our PV segment, for example, has reported decreased revenue for both the three and six months ended October 1, 2011. We believe, that this decrease is due, in part, to tighter lending conditions in all markets, particularly China. We believe the negative impact of a more stringent lending environment will result in decreased demand for our other products as well, including ASF units. The international commercial lending environment has not stabilized and if the availability of capital or credit remains as constrained as it is currently (including in China) or if capital or credit were to become even more limited, we expect that the results of operations attributable to our PV business, and our other business segments, would continue to be negatively impacted.

In addition, the current sovereign debt crisis in Europe has led to macroeconomic instability, fiscal austerity and slowing growth in the entire region. While we generate only a small portion of our total revenue to sales to customers in Europe, a significant portion of the end-users of solar power and sapphire materials are located in Europe. We expect that customers for our equipment will be negatively impacted by the sovereign debt crisis as they will have decreased demand for the silicon and sapphire materials generated using our furnaces. We expect that this will have a corresponding decrease in demand for our polysilicon, sapphire and PV products. Given the continued uncertainty in European markets, it is impossible to determine how long this period of instability will continue. In addition, there is some evidence that this economic instability is impacting the periphery of Europe and other regions as well and could impact our equipment customers.

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 order to prepare to complete delivery under the contract terms). 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

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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, certain of those contracts. When we renegotiate terms of existing contracts with our customers, such negotiations may result in a change in the timing of deliveries, reduction in the number of units to be delivered and other terms, which may have an impact on our results of operations as more fully described under the heading "Order Backlog."

During 2009 and 2010, market demand for polysilicon increased and, in response, worldwide manufacturing capacity of polysilicon grew, due principally to expansion by existing manufacturers. In 2011, 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. Solar manufacturers have decreased the rate at which they purchase PV furnaces, which accounts in part for the decreased revenue for our PV business segment in the three and six months ended October 1, 2011 and, as such decreased demand may continue into the future for a longer period. We believe that, due to consolidation within the solar industry and increasing cost pressures, some of our PV customers have lowered capacity utilization rates and delayed expansion projects as they respond to weaker near term end market demand. Further, due to efficiencies offered by monocrystalline silicon and advances in monocrystalline 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, or if it will return at all, 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 fiscal year 2012. In an effort to respond to anticipated future demand for monocrystalline silicon, we had undertaken internal efforts to develop DSS MonoCastTM growth technology, which is expected to generate silicon ingots with greater efficiencies. In addition, in August 2011, we purchased Confluence Solar which is a manufacturer of monocrystalline silicon material using the continuously-fed Czochralski growth technology. We are developing an equipment offering based on the CCz growth process. We expect that the CCz equipment offering will be complementary to our MonoCast efforts, both of which are targeted at improving the ingot performance compared to that of multi-crystalline silicon materials. There are, however, no certainties that there will be any meaningful demand for monocrystalline silicon or that the prices charged to manufacture such silicon will make our MonoCast or CCz products attractive to end-users.

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 impacted by the recent economic downturn, particularly in Europe, where many of the end-users for solar

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cells are located. 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. We believe that governments are moving more aggressively than they have in the past to reduce all forms of governmental assistance to the solar industry and we expect that governmental subsidies, feed-in tariffs and similar supports will be eliminated in their entirety in the near future. 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, particularly Europe. We believe decreasing costs within the solar value chain will reduce the effect of tariffs on the investment returns for solar projects. The changing environment for such government incentive programs, however, 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, or at all, in which case, a greater percentage of revenue from our sapphire business will be attributable to our materials business. We have limited experience installing and operating the ASF systems in customer facilities. During the six months ended October 1, 2011, we did not recognize revenue in connection with the sale of ASF systems. Although the first ASF units installed at a customer facility met the required performance standards, if the ASF system does not operate properly in our other customers' facilities, we will not be able to recognize revenue from the sale of systems in a timely manner, or at all, which would result in a material adverse impact on our sapphire business and our overall business. The sapphire materials industry has recently experienced decreased prices charged by manufacturers for sapphire wafers. 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, including among illumination companies, will negatively impact demand for our materials and ASF systems and may delay the timing of which amounts attributable to 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 Confluence Solar, Inc.

On August 24, 2011, we acquired 100% of the outstanding shares of stock of privately-held Confluence Solar, Inc., the developer of HiCzTM, a continuously-fed Czochralski (CCz) growth technology, that enables the production of high efficiency monocrystalline solar ingots. The purchase consideration consisted of $61.1 million in cash and a potential additional $20.0 million of contingent consideration based on the attainment of a financial target, an operational target and certain operational targets. A component of the purchase price remains subject to working capital adjustments that have not been finalized.

The acquisition of Confluence Solar is intended to expand our PV product portfolio and expand our business into more advanced crystal growth technologies that are designed to increase cell efficiencies and enable our customers to produce higher performance monocrystalline silicon at lower costs than existing technologies. We expect that the Confluence Solar technologies will complement our own DSS MonoCastTM equipment development project. At this time, our efforts in the CCz crystal growth area are focused on commercializing equipment and technologies for monocrystalline silicon producers, although we are still in the development stage and no product is commercially available. We will, however, continue to sell limited volumes of CCz material to customers, but it will be in selected markets.

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We are obligated to make expenditures in the Confluence Solar business to fund capital purchases of at least $25.0 million, which is expected to be substantially funded by the middle of the calendar year 2012.

The transaction has been accounted for as a business combination and is included in our results of operations beginning on August 24, 2011, the date of acquisition. The acquired business did not contribute revenues for the period from August 24, 2011 to October 1, 2011. The results of the acquired business are included in our PV business segment.

We incurred transaction costs of approximately $1.2 million, which consisted primarily of advisory services and due diligence fees, in connection with the Confluence Solar acquisition. These costs have been recorded as general and administrative expense for the three and six months ended October 1, 2011.

Order Backlog

Our order backlog primarily consists of amounts due under written contractual commitments and signed purchase orders for PV, polysilicon and sapphire equipment not yet shipped to customers, deferred revenue (which represents equipment that has been shipped to customers but not yet recognized 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 52% of our October 1, 2011 order backlog into revenue during the next twelve months and approximately 48% 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 six months ended October 1, 2011, we terminated or modified contracts resulting in a $26.8 million reduction in our order backlog (88% of the reduction was from 2 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 six months ended October 1, 2011, we recorded revenues of $29.1 million 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 . . .

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