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GTAT > SEC Filings for GTAT > Form 10-Q on 7-Nov-2012All Recent SEC Filings




Quarterly Report

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

Cautionary Statements Concerning Forward-Looking Statements

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:

† anticipated decrease, and subsequent elimination of, governmental incentives for renewable energy usage (and the reasons therefore), including solar energy and PV installations, and that the loss of these incentives may hamper the growth of the solar industry (and reduce demand for PV equipment);

† the HiCz™ equipment offering will be commercially available during calendar 2013;

† the HiCz™ equipment offering is expected to increase cell efficiencies and enable customers to produce high performance monocrystalline silicon ingots at lower costs;

† the HiCz™ equipment offering is expected to lower the cost of monocrystalline ingot technology and produce high efficiency monocrystalline solar ingots, both of which are expected to make it more competitive with wafers produced using the traditional batch Cz technology;

† our goal to lower the cost of producing high quality polysilicon for our customers by providing more efficient plant designs and increasing the throughput and efficiency of SDR reactors;

† expected synergies between the Company's experience in equipment development and the Confluence Solar acquired technology is expected to drive new product development;

† positioned to successfully compete for future market demand in polysilicon and expectations regarding the ability to deliver polysilicon equipment with greater efficiencies and performance;

† sapphire manufacturing trends;

† expectation that polysilicon margins in subsequent periods to increase if and when final payments are received on certain polysilicon contracts for which polysilicon equipment and services have been delivered;

† timing of delivery of our equipment products;

† expectation that our customers will substantially perform on their contracts;

† expectation that customers with contracts in backlog may attempt to modify their obligations (and Company may agree to such changes);

† technological advances are lowering manufacturing costs in the markets in which the Company operates;

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† oversupply or decreased demand in the end-markets served by our equipment customers will have an adverse impact on our business (and may require we sell equipment at prices below our historical price) and that these conditions will continue into calendar 2013;

† the Company expects to make acquisitions of businesses or technologies (or make investments in businesses or technologies) that will result in the diversification of our business (but intends to continue principally as an equipment supplier) and the impact of such diversification;

† likelihood of customers going to other equipment suppliers is increasing;

† the market demand for multicrystalline PV products will not return to previous levels and will remain limited (and the reasons therefore);

† potential future uses and demand for multicrystalline PV based on technology advancements in solar wafers;

† dependence on a limited number of customers will continue for the foreseeable future;

† anticipated future decreased demand (and selling price) for DSS multicrystalline furnaces and the reasons therefore (including the transition to newer PV technologies);

† we expect to grow our business;

† Company's success in PV market will depend upon success in commercializing monocrystallization technology:

† acquisition of Confluence Solar is intended to expand PV product portfolio and expand business into more advanced crystal growth technology;

† we expect to increase product portfolio and increase revenue as a result of more product offerings;

† DSS MonoCast™ product and the HiCz™ equipment product are both expected to improve ingot performance compared to multicrystalline silicon materials (and HiCz™ will, over an extended period of time, supersede the DSS MonoCast™ product);

† expectation that interest expense will increase in future periods due to our 3.0% convertible senior notes due 2017;

† outsourcing of a portion of equipment manufacturing requires minimal capital expenditures;

† expectation to recognize revenue from sales to customers in Asia and Europe in the future;

† Company may continue to increase presence in China;

† purchasers of ASF systems will use the systems principally for LED and LED-related purposes (including lighting);

† potential new markets for sapphire material (and the opportunity these markets represent for sapphire equipment);

† certain parties are expected to enter into hedging arrangements in connection with their mandatorily exchangeable notes, the 3.0% senior convertible notes due 2017 (and certain other instruments) (and the impact on our stock price);

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† Company does not anticipate paying dividends in the foreseeable future;

† Company will continue to sell sapphire and HiCz material into selected markets from its pilot facilities in Massachusetts and Missouri;

† price for sapphire material will remain low for the short-term;

† information identified under the heading "Factors Affecting the Results of Our Operations;"

† information identified under the heading "Risk Factors;"

† margins for DSS multicrystalline furnaces may decrease (and the reasons for such decrease);

† continued investment in new products, increased rate of R&D spending and expansion of certain existing product bases;

† total capital expenditures in the fiscal year ending March 30, 2013 (and the uses thereof) and that the amount may be greater due to growth strategy;

† future uses for amounts of available cash;

† we will have sufficient cash to satisfy working capital requirements for foreseeable future;

† expectation that demand for our products will continue to remain limited for the short-term amongst our customers in China;

† it is the Company's intent to settle the principal amount of its 3.0% convertible senior notes due 2017 in cash;

† expect a large percentage of future revenue will be derived from customers outside the U.S.;

† resolution of routine legal proceedings and claims will not have a material effect on the financial statements; and

† material amounts not expected to be paid by Company under indemnification provisions.

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 other date as specified in 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, and disclaim any obligation, to publicly update or review any forward-looking statements to reflect events or circumstances after the date of such statements.

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Company Overview

GT Advanced Technologies Inc., through its subsidiaries (referred to collectively as "we," "us" and "our") is a diversified technology company with innovative crystal growth equipment and solutions for the global solar, LED and electronics industries. Our products are designed to accelerate the adoption of new advanced materials that improve performance and lower the cost of manufacturing.

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 silicon deposition reactors, or SDR, 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. In addition, the polysilicon business sells hydrochlorination technology and equipment which is utilized to convert silicon tetrachloride into trichlorosilane (TCS), which is used as seed material in the manufacture of high purity silicon. Hydrochlorination technology is designed to improve the efficiency and lowers the costs of polysilicon production.

Photovoltaic Business

Our PV business manufactures and sells directional solidification, or DSS, crystallization furnaces and ancillary equipment used to cast crystalline 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.

We have made two advances in our PV segment. First, in January 2012, we announced the commercial availability of our DSS MonoCast™ growth technology. This technology is designed to generate silicon ingots with greater efficiencies than the silicon ingots developed with multicrystalline growth equipment. In addition, we are currently developing an equipment offering based on the continuously-fed Czochralski (HiCz™) growth technology. While both our MonoCast™ equipment offering and our HiCz™ efforts are targeted at improving the ingot performance compared to that of multicrystalline silicon materials, we expect that, over an extended period of time, HiCz™ will ultimately supersede our MonoCast™ offerings. We have not yet commercialized the HiCz™ monocrystalline equipment, we do, however, expect to continue to sell HiCz™ monocrystalline material, manufactured at our pilot production plant in Hazelwood, Missouri, into select markets.

Sapphire Business

Our sapphire business manufactures and sells sapphire material and equipment. Our sapphire material is manufactured using our advanced sapphire crystal growth furnace, or ASF system. During fiscal year 2012 we began shipping and commissioning ASF systems for our customers and began recognizing revenue on these systems during the latter part of the fiscal year 2012. In addition to selling ASF systems, we intend to continue production and sale of sapphire materials in selected specialty markets on a limited scale.

Recent Developments

On October 31, 2012, we announced plans to streamline our worldwide operations to better align our cost structure with current market conditions and enhance our ability to pursue strategic growth initiatives. These steps included consolidating our existing business units into a single Crystal Growth Systems (CGS) group and cost reduction actions which included reducing our global workforce by approximately 25 percent.

Change in Fiscal Year End

On April 16, 2012, we amended our amended and restated by-laws to provide that our fiscal year will end on December 31 of each year. Prior to this amendment, our by-laws had provided that our fiscal year ended on the Saturday closest to March 31st of each year. As a result of this change to our fiscal year end, we will report a nine-month transition period consisting of the period from April 1, 2012 to December 31, 2012, and our 2013 fiscal year will begin on January 1, 2013 and end on December 31, 2013. In this Quarterly Report on Form 10-Q we are however required, under standard accounting practice, to continue to refer to the fiscal year ending March 30, 2013 until the new fiscal year commences on January 1, 2013.

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Factors Affecting the Results of Our Operations

The following are some of the factors that we expect will affect our future results of operations:

† Demand for our polysilicon and PV products and services are driven by end-user demand for solar power and demand for our sapphire products are driven by end-user demand for sapphire material, LED-quality material in particular. In each of our three business segments, the end-user demand for the output of our equipment has either declined substantially or supply has surpassed demand. In order to decrease inventories, we believe that companies selling polysilicon, solar cells and wafers and sapphire material, including some of our customers, have had to sell at prices that provide little or no margin. In certain cases, customers' have been unable to decrease inventories. We expect that these circumstances will continue through the remainder of calendar year 2012 and into calendar year 2013. As a result, much of our business for the remainder of calendar year 2012 will result from filling orders in our backlog and we do not expect, during this time, that our backlog will increase during the same period.

† The current limited demand for our products or the excess capacity in the end markets our customers serve is exacerbated by trade tensions between China and the U.S. Most recently, in October 2012, the U.S. Commerce Department issued a final ruling and levied anti-dumping duties ranging from 18.32% to 249.96% on billions of dollars of solar panels and cells from China (and set countervailing duties from 14.78% to 15.97%). This final ruling will negatively impact our equipment customers in China. This follows a May 2012 Department of Commerce announcement of a preliminary determination that China had violated fair trade policies by ''dumping'' into the U.S. certain solar products at prices that were intended to advantage Chinese manufacturers. The Chinese government responded by saying these actions were deliberately provoking trade friction between the two nations. In July 2012, the Chinese Ministry of Commerce opened investigations on imports of solar-grade polysilicon from the U.S. and South Korea, that may result in trade duties on polysilicon imports from the U.S. and South Korean polysilicon manufacturers. In addition, the European Union has commenced an investigation into whether Chinese solar equipment manufacturers have dumped equipment into the E.U. in violation of trade regulations. If the E.U. imposes duties in connection with this investigation, it could harm our business since many of our Chinese customers sell into the E.U. While this risk may be mitigated to some extent if manufacturing of solar wafers and cells shifted from China to Europe (or locations in other parts of the globe) as there may be increased demand in Europe for polysilicon and PV equipment that cannot be satisfied from China at comparable prices, the E.U. may not allow Chinese companies to avoid the duties by transferring manufacturing operations to Europe. In response to the E.U. investigation, in November 2012, the Chinese Ministry of Commerce announced that it was commencing a trade investigation into European exports of solar-grade polysilicon. Retaliatory tariffs and trade tensions with China and the U.S. and Europe (as well as South Korea, where some of our equipment customers are located) is causing uncertainty in the industry and is having a material adverse impact on our business since we sell into China and our equipment customers sell end products into Europe and the U.S.

† Changes in the global capital markets have resulted in a more stringent lending environment which in turn has caused decreased spending within the industries we serve. We believe the negative impact of a more stringent lending environment has resulted in decreased demand for all of our products. The international commercial lending environment has not stabilized and if the availability of capital or credit remains constrained (including in China) or if capital or credit were to become even more limited, we expect that our results of operations, would continue to be negatively impacted.

† The sovereign debt crisis in Europe has led to economic instability, depreciation of the euro, fiscal austerity, reduction in government support for certain programs (including solar incentives) and slowing growth in the entire region. While we have very limited sales to customers in Europe, a portion of the end-users of solar power and LED materials are located in Europe, and as a result, our equipment customers have been negatively impacted by the sovereign debt crisis. We expect that this crisis will cause further decrease in demand for our polysilicon, sapphire and PV equipment offerings. In addition, there is increasing evidence that this economic instability is impacting other regions as well, including China, and may be directly impacting our equipment customers.

† Margins on our PV equipment, particularly our DSS multicrystalline furnaces, decreased significantly during the quarter ended September 29, 2012. We expect that the average selling prices for this equipment will continue to remain low as we transition the focus of our PV sales to our monocrystalline (MonoCast) and HiCz furnaces over

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the next twenty-four to thirty-six months. In addition, we have a significant amount of contracts in our backlog related to the DSS multicrystalline furnace. Customers may request that we renegotiate terms of existing contracts to obtain lower prices or request that (in lieu of the equipment they ordered) they receive newer technology that we have developed, and such negotiations may result in reduced prices and reduction in the number of units to be delivered and a change in other terms, which may have an impact on our results of operations and our order backlog. As margins are dropping in the solar wafer and cell industry, PV companies may require these types of changes to their production equipment contracts in order to continue to maintain operations.

† There is an excess of polysilicon manufacturing capacity and the market price for polysilicon has significantly declined. As a result, we expect that there will be a greater focus on reducing production costs among polysilicon manufacturers, putting substantial pressure on our customers to lower the cost of equipment they purchase from us or to delay or cancel their purchases of polysilicon production equipment. These factors may also produce consolidation in the industry. We believe we are well positioned to capture a portion of the future demand for polysilicon equipment among the more limited number of manufacturers by delivering equipment with higher throughput and lower power consumption, leading to greater efficiencies. 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 at all.

† Some of our PV customers have lowered capacity utilization rates and delayed or terminated expansion projects as they respond to weaker end market demand. We do not expect that the market demand for multicrystalline PV products will return to previous levels, and it may remain very limited (particularly as a result of improvements in monocrystalline growth technologies). In an effort to respond to anticipated future demand for more efficient PV cells and wafers, we recently commercially launched our DSS MonoCast growth technology and expect to launch our HiCz equipment offering in 2013. However, we may not recognize substantial revenues from these products for several quarters, if at all, and they may not generate revenue in amounts previously recognized through DSS multicrystalline furnace sales.

† Demand for PV on-grid applications (and, in turn, our PV equipment) has historically been dependent in part on the availability and size of government subsidies and incentives. We believe that governments are moving more aggressively 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. We believe decreasing costs within the solar value chain will help to off-set, in part, the effect of tariffs on the investment returns for solar projects. The reduction in government incentive programs, however, creates uncertainty for the solar industry.

† The price for sapphire material has recently experienced significant decreases. We expect that current decreased prices will continue. Consequently, we anticipate that demand for our ASF systems will also remain lower than in previous quarters. Further, customers may request delivery of ASF systems be delayed until the price of sapphire recovers which would delay the timing of which amounts attributable to ASF systems roll-off of backlog and into revenue and the timing on which we enter into new contracts to sell ASF systems. Additionally, we may receive requests to cancel deliveries, which would reduce our backlog.

† In the past, one of the expected future drivers of demand for sapphire was expected to be, in large part, the increased use of sapphire materials in general illumination. To this point, that broad adoption of LED in lighting is slower than expected. As a result, the future demand for ASF systems attributable to this market are not expected to increase markedly in the immediate future. However, the use of sapphire in industrial applications and consumer electronics has been adopted to a limited extent, and could lead to new market opportunities for the ASF system. While the use of sapphire in these applications is still in the very early stages, it represents a potential market and may result in increased demand for sapphire manufacturing equipment.

† Our business plan is focused on growing and diversifying our product and technology offerings including into markets or industries that are unrelated to those markets we currently serve. We are, however, an equipment company and we currently expect that future acquisitions, investments or development arrangements will be for the purpose of accessing technologies that will enable us to provide industrial equipment to our customers. If we are successful in developing, investing in or acquiring technologies or companies from third parties, our company may be viewed by the market in the future as other than a solar and sapphire company and our stock may be valued differently than is currently the case depending on what markets we serve in the future.

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† In addition, our results of operations are affected by a number of other factors including the availability and market price of polysilicon, alumina material and certain process consumables, 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.

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 amounts for 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. Although most of our orders require 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.

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 cash damages resulting from the material breach of the terms of the agreement. During the six months ended September 29, 2012, we terminated or modified contracts resulting in a $88.3 million reduction in our order backlog (99% of the reduction was attributable to two contracts). During the fiscal year ended March 31, 2012, we terminated or modified contracts resulting in a $135.9 million reduction in our order backlog (74% of the reduction was attributable to six contracts). During the six months ended September 29, 2012, we recorded revenues of $8.5 million from terminated contracts and during the fiscal year ended March 31, 2012, we recorded revenues of $35.5 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. From time to time in the ordinary course of business, 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 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. If we do come to an agreement with customers extending delivery schedules, the timing of expected revenue recognition could be pushed into later periods than we had anticipated.

The table below sets forth our order backlog as of September 29, 2012 and . . .

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