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GT Advanced Technologies Inc. 10-Q 2013

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 28, 2013

 

or

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period              to             

 

Commission file number: 001-34133

 

GT Advanced Technologies Inc.

(Exact name of registrant as specified in its charter)

 

Delaware
 (State of incorporation)

 

03-0606749
 (I.R.S. Employer Identification No.)

 

 

 

243 Daniel Webster Highway

Merrimack, New Hampshire
 (Address of principal executive offices)

 

03054
(Zip Code)

 

Registrant’s telephone number, including area code: (603) 883-5200

 

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 o

 

Indicated 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 Regulations S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a 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 x

 

Accelerated filer o

 

Non-accelerated filer o (Do not

check if a

smaller reporting company)

 

Smaller reporting company o

 

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

 

As of November 1, 2013, approximately 123,830,191 shares of the registrant’s common stock, $0.01 par value per share, were issued and outstanding.

 

 

 



Table of Contents

 

GT ADVANCED TECHNOLOGIES INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED September 28, 2013

 

Table of Contents

 

 

Page

PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements:

 

 

Condensed Consolidated Balance Sheets (unaudited)

1

 

Condensed Consolidated Statements of Operations (unaudited)

2

 

Condensed Consolidated Statements of Comprehensive (Loss) Income (unaudited)

3

 

Condensed Consolidated Statements of Cash Flows (unaudited)

4

 

Notes to Condensed Consolidated Financial Statements (unaudited)

5

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

28

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

43

Item 4.

Controls and Procedures

44

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

44

Item 1A.

Risk Factors

44

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

70

Item 3.

Defaults Upon Senior Securities

71

Item 4.

Mine Safety Disclosures

71

Item 5.

Other Information

71

Item 6.

Exhibits

71

Signatures

 

73

 



Table of Contents

 

PART I—FINANCIAL INFORMATION

 

Item 1—Financial Statements

 

GT Advanced Technologies Inc.

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

(Unaudited)

 

 

 

September 28, 2013

 

December 31, 2012

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

258,472

 

$

418,095

 

Accounts receivable, net

 

7,471

 

23,829

 

Inventories

 

123,189

 

133,286

 

Deferred costs

 

2,274

 

30,248

 

Vendor advances

 

12,630

 

32,440

 

Deferred income taxes

 

22,937

 

28,226

 

Refundable income taxes

 

 

1,516

 

Prepaid expenses and other current assets

 

6,340

 

9,168

 

Total current assets

 

433,313

 

676,808

 

Property, plant and equipment, net

 

65,755

 

77,980

 

Other assets

 

92,081

 

86,920

 

Intangible assets, net

 

98,918

 

90,516

 

Deferred cost

 

26,344

 

24,423

 

Goodwill

 

54,765

 

48,021

 

Total assets

 

$

771,176

 

$

1,004,668

 

Liabilities and stockholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term debt

 

$

9,063

 

$

7,250

 

Accounts payable

 

20,326

 

44,848

 

Accrued expenses

 

46,947

 

30,928

 

Contingent consideration

 

1,294

 

4,901

 

Customer deposits

 

36,218

 

111,777

 

Deferred revenue

 

13,700

 

86,098

 

Accrued income taxes

 

11,982

 

21,716

 

Total current liabilities

 

139,530

 

307,518

 

Long-term debt

 

86,875

 

132,313

 

Convertible notes

 

165,390

 

157,440

 

Deferred income taxes

 

6,034

 

24,459

 

Customer deposits

 

55,598

 

71,340

 

Deferred revenue

 

48,613

 

35,848

 

Contingent consideration

 

16,229

 

5,414

 

Other non-current liabilities

 

2,418

 

2,323

 

Accrued income taxes

 

27,748

 

25,762

 

Total liabilities

 

$

548,435

 

$

762,417

 

Commitments and contingencies (Note 14)

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, 10,000 shares authorized, none issued and outstanding

 

 

 

Common stock, $0.01 par value; 500,000 shares authorized, 123,758 and 119,293 shares issued and outstanding as of September 28, 2013 and December 31, 2012, respectively

 

1,237

 

1,193

 

Additional paid-in capital

 

208,631

 

183,565

 

Accumulated other comprehensive income

 

1,066

 

806

 

Retained earnings

 

11,807

 

56,687

 

Total stockholders’ equity

 

222,741

 

242,251

 

Total liabilities and stockholders’ equity

 

$

771,176

 

$

1,004,668

 

 

See accompanying notes to these condensed consolidated financial statements.

 

1



Table of Contents

 

GT Advanced Technologies Inc.

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 28, 2013

 

September 29, 2012

 

September 28, 2013

 

September 29, 2012

 

Revenue

 

$

40,291

 

$

110,061

 

$

266,397

 

$

631,203

 

Cost of revenue

 

22,514

 

75,033

 

176,389

 

383,641

 

Gross profit

 

17,777

 

35,028

 

90,008

 

247,562

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

21,075

 

18,767

 

56,039

 

47,954

 

Selling and marketing

 

3,496

 

3,123

 

10,870

 

9,657

 

General and administrative

 

17,427

 

15,428

 

48,507

 

45,731

 

Contingent consideration expense (income)

 

4,971

 

(9,943

)

997

 

(9,261

)

Restructuring charges

 

4,010

 

 

6,868

 

 

Amortization of intangible assets

 

2,976

 

2,538

 

8,098

 

7,631

 

Total operating expenses

 

53,955

 

29,913

 

131,379

 

101,712

 

(Loss) income from operations

 

(36,178

)

5,115

 

(41,371

)

145,850

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

122

 

27

 

286

 

50

 

Interest expense

 

(6,456

)

(1,620

)

(20,462

)

(3,398

)

Other, net

 

62

 

(431

)

73

 

(968

)

(Loss) income before income taxes

 

(42,450

)

3,091

 

(61,474

)

141,534

 

(Benefit) provision for income taxes

 

(4,304

)

747

 

(16,594

)

45,360

 

Net (loss) income

 

$

(38,146

)

$

2,344

 

$

(44,880

)

$

96,174

 

Net (loss) income per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.31

)

$

0.02

 

$

(0.37

)

$

0.81

 

Diluted

 

$

(0.31

)

$

0.02

 

$

(0.37

)

$

0.80

 

Weighted-average number of shares used in per share calculations:

 

 

 

 

 

 

 

 

 

Basic

 

122,183

 

118,769

 

119,752

 

118,873

 

Diluted

 

122,183

 

119,874

 

119,752

 

120,126

 

 

See accompanying notes to these condensed consolidated financial statements.

 

2



Table of Contents

 

GT Advanced Technologies Inc.

Condensed Consolidated Statements of Comprehensive (Loss) Income

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 28,
2013

 

September 29,
2012

 

September 28,
2013

 

September 29,
2012

 

Net (loss) income

 

$

(38,146

)

$

2,344

 

$

(44,880

)

$

96,174

 

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

 

Change in fair value of cash flow hedging instruments, net of tax effect of $0, ($274), $11 and ($1,268), respectively

 

 

338

 

(54

)

1,752

 

Foreign currency translation adjustments

 

66

 

192

 

314

 

(62

)

Other comprehensive income

 

66

 

530

 

260

 

1,690

 

Comprehensive (loss) income

 

$

(38,080

)

$

2,874

 

$

(44,620

)

$

97,864

 

 

See accompanying notes to these condensed consolidated financial statements.

 

3



Table of Contents

 

GT Advanced Technologies Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 28,
2013

 

September 29,
2012

 

Cash flows from operating activities:

 

 

 

 

 

Net (loss) income

 

$

(44,880

)

$

96,174

 

Adjustments to reconcile net (loss) income to net cash used in operating activities:

 

 

 

 

 

Amortization expense

 

8,098

 

7,631

 

Depreciation expense

 

11,881

 

10,256

 

Convertible notes discount amortization

 

7,950

 

62

 

Contingent consideration expense (income)

 

997

 

(13,991

)

Impairment on long lived assets

 

4,010

 

 

Deferred income tax expense (benefit)

 

(23,057

)

(6,275

)

Provision for excess and obsolete inventory

 

1,848

 

4,106

 

Share-based compensation expense

 

13,883

 

13,091

 

Excess tax benefits from share-based awards

 

(242

)

(285

)

Amortization of deferred financing costs

 

2,914

 

697

 

Loss on disposal of assets

 

966

 

2,038

 

Other adjustments, net

 

500

 

864

 

Changes in operating assets and liabilities (excluding impact of acquired assets and assumed liabilities):

 

 

 

 

 

Restricted cash

 

 

96,202

 

Accounts receivable

 

17,510

 

39,185

 

Inventories

 

13,246

 

(22,435

)

Deferred costs

 

26,069

 

189,172

 

Vendor advances

 

21,747

 

(23,204

)

Prepaid expenses and other assets

 

1,542

 

2,086

 

Accounts payable and accrued expenses

 

(14,738

)

(25,495

)

Customer deposits

 

(93,812

)

(56,283

)

Deferred revenue

 

(59,633

)

(337,900

)

Income taxes

 

(6,216

)

896

 

Other, net

 

254

 

704

 

Net cash used in operating activities

 

(109,163

)

(22,704

)

Cash flows from investing activities:

 

 

 

 

 

Purchases and deposits on property, plant and equipment

 

(3,710

)

(35,541

)

Other investing activities

 

52

 

293

 

Net cash used in investing activities

 

(3,658

)

(35,248

)

Cash flows from financing activities:

 

 

 

 

 

Borrowings under credit facility

 

 

145,000

 

Principal payments under credit facility

 

(43,625

)

(1,813

)

Proceeds from issuance of convertible notes

 

 

220,000

 

Cash paid for bond hedges

 

 

(57,923

)

Proceeds from issuance of warrants

 

 

41,623

 

Proceeds and related excess tax benefits from exercise of share-based awards

 

358

 

1,507

 

Payments of contingent consideration from business combinations

 

 

(4,903

)

Payments related to share repurchases to satisfy statutory minimum tax withholdings

 

(1,516

)

(1,153

)

Deferred financing costs

 

(2,266

)

(11,471

)

Other financing activities

 

(35

)

(498

)

Net cash (used in) provided by financing activities

 

(47,084

)

330,369

 

Effect of foreign exchange rates on cash

 

282

 

(76

)

(Decrease) increase in cash and cash equivalents

 

(159,623

)

272,341

 

Cash and cash equivalents at beginning of period

 

418,095

 

206,878

 

Cash and cash equivalents at end of period

 

$

258,472

 

$

479,219

 

Supplemental cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

8,254

 

$

2,470

 

Non-cash investing and financing activities:

 

 

 

 

 

Decrease in accounts payable and accrued expenses for property, plant and equipment

 

$

(683

)

$

(3,469

)

Fair value of shares issued for acquisition

 

$

14,463

 

$

 

Contingent consideration issued for acquisition

 

$

6,211

 

$

 

Unpaid deferred financing costs

 

 

635

 

 

See accompanying notes to these condensed consolidated financial statements.

 

4



Table of Contents

 

GT Advanced Technologies Inc.

Notes to Condensed Consolidated Financial Statements

(In thousands, except per share data)

 

1. Basis of Presentation

 

These accompanying unaudited condensed consolidated financial statements of GT Advanced Technologies Inc. and subsidiaries (the “Company”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and the Securities and Exchange Commission’s (“SEC”) instructions for interim financial information. In the opinion of management, the accompanying financial statements contain all adjustments consisting of normal recurring adjustments necessary to present fairly in all material respects the financial position, results of operations and cash flows for the periods presented. The results for the three and nine months ended September 28, 2013 are not necessarily indicative of the results to be expected for any other interim period or for any future year. The accompanying financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company’s Transition Report on Form 10-K (“Transition Report”) for the nine-month period ended December 31, 2012, filed with the SEC on March 1, 2013.

 

The condensed consolidated balance sheet as of December 31, 2012 has been derived from the audited financial statements as of that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

 

Reclassifications

 

Certain reclassifications have been made to prior year financial statements to conform to the current year presentation. Specifically, contingent consideration income of $9,943 and $9,261 for the three and nine-month periods ended September 29, 2012, respectively, was previously included in general and administrative expense, but is now stated separately in the Company’s condensed consolidated statements of operations.

 

Recent Developments

 

The polysilicon, photovoltaic (“PV”) and sapphire (including LED) industries continue to face the significant challenges described in the Company’s Transition Report, including, among others, (i) oversupply of, or limited demand for, end products that are manufactured with equipment sold by the Company; (ii) ongoing trade disputes between the U.S., European Union and South Korea, on the one hand, and China on the other, which have adversely impacted the businesses of the Company’s customers in China (where a majority of the Company’s customers are located) continues to create uncertainty among the Company’s customers and the industries the Company serves; (iii) liquidity challenges being faced by companies in the polysilicon, PV and sapphire industries, due in part to changes in the global capital markets which have resulted in a more stringent lending environment which in turn has caused decreased spending within the industries the Company serves, as customers try to preserve their liquidity; (iv) deterioration of the financial health of the Company’s customers and (v) structural changes in the PV industry which, the Company believes, will require that any recovery in the PV market will be driven by changes in monocrystalline technology and development of other materials for higher efficiency solar cells. As a result, demand for existing multicrystalline products (DSS) will be very limited.

 

Taking these factors into account, during December 2012, the Company took a number of strategic actions, including, (i) intending to discontinue any significant future investments in the DSS product line and (ii) determining that the vast majority of the amounts in the Company’s backlog attributable to DSS equipment is at risk of not converting into revenue and, accordingly, future sales of DSS will be limited. The Company has taken a number of strategic actions, including idling the Company’s continuously-fed Czochralski (HiCz) Hazelwood facility in St. Louis and shifting the related research and development to Merrimack, New Hampshire. HiCz is a growth technology designed to enable the production of high efficiency monocrystalline solar cells. The factors above triggered impairment assessments that resulted in impairment charges in December 2012 of $60,192 related to PV inventory, $8,352 related to all remaining PV vendor advances, $57,037 related to PV goodwill, and $29,261 related to certain long-lived, intangible and other assets located at the Company’s HiCz Hazelwood facility.

 

For the three month period ended September 28, 2013, the Company incurred a loss from operations of $36,178 and a net loss of $38,146. For the nine month period ended September 28, 2013, the Company incurred a loss from operations of $41,371, a net loss of $44,880, and used $109,163 in cash for operating activities.

 

5



Table of Contents

 

GT Advanced Technologies Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(In thousands, except per share data)

 

On October 30, 2013, the Company terminated the 2012 Credit Agreement (the “Credit Agreement”).  As of September 28, 2013, there was approximately $96,000 outstanding borrowings under the 2012 Term Facility which was paid in full on October 30, 2013 by using available cash.  As of October 30, 2013, there are no amounts outstanding under the 2012 Revolving Credit Facility and no outstanding stand-by letters of credit under the 2012 Revolving Credit Facility.  In connection with the termination of the 2012 Credit Agreement, the Company expects to recognize a charge in the fourth quarter of approximately $3,639 relating to deferred issuance costs that will be written off upon the termination of the agreement.  For additional information, refer to Note 21, Subsequent Events.

 

Management believes that the Company has sufficient cash resources to fund operations for at least the next twelve months.

 

SDR-400™

 

During the nine months ended September 28, 2013, the Company determined that it had obtained sufficient evidence that the SDR-400, a product within the Polysilicon business unit, is an established product in accordance with the Company’s revenue recognition policy and accordingly, there is no longer uncertainty around meeting the requirements of customer acceptance conditions in agreements that contain the standard or demonstrated objective specifications of the SDR-400. In concluding that the SDR-400 is now an established product, the Company considered the stability of the product’s technology, the ability to test the product prior to shipment, and the historical performance results of over 30 product installations at one of our customers’ facilities.  As a result of classifying the SDR-400as an established product, the Company recognized revenue and gross profit of $3,080 and $681, and $148,740 and $59,501, in the three and nine months ended September 28, 2013, respectively, from two customer arrangements that included SDR-400™’s prior to formal customer acceptance of the products.  Non-refundable payments received under these customer arrangements exceed the recognized revenue and were previously recorded as deferred revenue. The Company continues to report deferred revenue related to these arrangements for advance payments on other deliverables included in the arrangements.  Revenue recognized in the nine months ended September 28, 2013 related to the SDR-400 was material to both the Polysilicon reporting segment and the consolidated results within the Company’s condensed consolidated statement of operations.

 

2. Significant Accounting Policies

 

The Company’s significant accounting policies are disclosed in Note 2 to the Consolidated Financial Statements included in the Transition Report. There were no significant changes to the significant accounting policies during the nine months ended September 28, 2013.

 

3. Recent Accounting Pronouncements

 

In July 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-11, Income Taxes (Topic 740): Presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance eliminates diversity in practice surrounding the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The new guidance requires entities to net an unrecognized tax benefit with a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if the carryforward would be used to settle additional tax due upon disallowance of a tax position. The amendment is effective for fiscal periods beginning after December 15, 2013 with early adoption permitted. We do not expect the adoption of this guidance to have a material impact on our financial statements.

 

Recently Adopted Accounting Pronouncements

 

Effective January 1, 2013, the Company adopted Accounting Standards Update (ASU) No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The guidance is intended to provide disclosure on items reclassified out of accumulated other comprehensive income either in the notes or parenthetically on the face of the income statement. The required disclosure is in Note 18 below.

 

6



Table of Contents

 

GT Advanced Technologies Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(In thousands, except per share data)

 

4. Acquisitions

 

Acquisition of Certain Assets of Thermal Technology, LLC

 

On May 16, 2013, the Company acquired substantially all of the business of Thermal Technology, LLC, (“Thermal Technology”), a developer and seller of a wide range of high temperature thermal and vacuum products used in the fabrication of advanced materials that are deployed across multiple industries including LED, medical devices, oil and gas and automotive.  This acquisition was achieved by the Company acquiring an entity to which certain assets and trade payables of Thermal Technology had been transferred immediately prior to the acquisition.  The acquisition of Thermal Technology provides the Company with key technologies that will allow the Company, it believes, to address new markets with production equipment options that can be optimized around customers’ specific needs. The purchase consideration consisted of 3.4 million shares of the Company’s common stock valued at an aggregate of $14,463 (as of the date of acquisition) and potential contingent consideration of $35,000 based upon meeting certain financial metrics. The final purchase price is subject to a net working capital adjustment, dependent upon the level of working capital at the acquisition date, that has not yet been finalized.  The fair value of the contingent consideration was $6,211 at the date of acquisition.

 

The transaction has been accounted for as a business combination and the results are included in the Company’s results of operations from May 16, 2013, the date of acquisition. The acquired business contributed revenues of $3,545 and a loss of $3,071 to the consolidated results of the Company for the period from acquisition to September 28, 2013. The results of the acquired business are included in the Company’s sapphire business reporting segment.

 

Significant judgment is required in estimating the fair value of intangible assets acquired in a business combination and in assigning their respective useful lives. The fair value estimates are based on available historical information and on future expectations and assumptions deemed reasonable by management.

 

The Company employs the income method to estimate the fair value of intangible assets, which is based on forecasts of the expected future cash flows attributable to the respective assets. Significant estimates and assumptions inherent in the valuations reflect a consideration of other marketplace participants, and include the amount and timing of future cash flows (including expected growth rates and profitability), the underlying product life cycles, economic barriers to entry, a brand’s relative market position and the discount rate applied to the cash flows, among others.

 

Each period the Company will revalue the contingent consideration obligations associated with the acquisition to fair value and record changes in the fair value as contingent consideration expense or income. Increases or decreases in the fair value of the contingent consideration obligations can result from changes in assumed discount periods and rates, changes in the assumed timing and amount of revenue and expense estimates and changes in assumed probability with respect to the attainment of certain financial and operational metrics. Significant judgment is employed in determining these assumptions as of the acquisition date and for each subsequent period. Accordingly, future business and economic conditions, as well as changes in any of the assumptions described above, can materially impact the amount of contingent consideration expense (income) recorded in any given period.

 

As of September 28, 2013, the purchase price (including the estimated contingent consideration) and related allocations for the acquisition are preliminary. The Company is currently in the process of investigating the facts and circumstances existing as of the acquisition date in order to finalize its valuation and establish the related tax basis. As a result of the preliminary purchase price allocation, the Company recognized $6,744 of goodwill, which is primarily due to the expected future cash flows from synergies with the operations of the Company and assembled workforce. The goodwill created by the transaction is nondeductible for tax purposes. A summary of the preliminary purchase price allocation for the acquisition of Thermal Technology business is as follows:

 

Fair value of consideration transferred:

 

Common stock

 

$

14,463

 

Contingent consideration obligations

 

6,211

 

Preliminary estimate of net working capital adjustment

 

(735

)

Total fair value of consideration

 

$

19,939

 

 

7



Table of Contents

 

GT Advanced Technologies Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(In thousands, except per share data)

 

Fair value of assets acquired and liabilities assumed:

 

Accounts receivable

 

$

1,008

 

Inventory

 

7,861

 

Property, plant and equipment

 

1,700

 

Deferred tax asset

 

411

 

Other assets

 

439

 

Intangible assets

 

14,500

 

Goodwill

 

6,744

 

Accounts payable and accrued expenses

 

(7,057

)

Customer deposits

 

(2,509

)

Deferred tax liability

 

(3,149

)

Other current liabilities

 

(9

)

Total net assets acquired

 

$

19,939

 

 

The purchase consideration includes contingent consideration payable by the Company upon the attainment of certain financial targets through the period ending December 31, 2018. Specifically, the contingent consideration is based upon a portion of revenue achieved for the remainder of 2013 to 2018, subject to certain thresholds and a cap on total payments. The Company determined the fair value of the contingent consideration obligations based on a probability-weighted income approach derived from future revenue estimates. The undiscounted range of outcomes that the Company used to value the contingent consideration arrangement was between $7,507 and $20,205. During the three and nine months ended September 28, 2013, the Company recorded contingent consideration income of $1,075 and $934, respectively, related to change in the fair value of the liability at September 28, 2013.

 

The Company incurred transaction costs of $1,188, which consisted primarily of legal and accounting fees. These costs have been recorded as general and administrative expense for the nine months ended September 28, 2013. The acquisition of Thermal Technology’s business did not have a material effect on the Company’s results of operations. Pro forma results of operations have not been presented due to the immaterial impact the amounts would have had on the Company’s historical results of operations.

 

Acquisition of Certain Assets of Twin Creeks Technologies, Inc.

 

On November 8, 2012, the Company acquired certain assets and intellectual property of Twin Creeks Technologies, Inc. (“Twin Creeks”), a privately owned company involved in the development of an ion implanter technology, which the Company refers to as the Hyperion ion implanter. The assets were purchased from Twin Creeks’ lenders in a private sale for total consideration with a fair value of $15,372. The purchase consideration consisted of $10,172 in cash and a potential additional $40,000 of contingent consideration. The fair value of the contingent consideration was estimated at $5,200 at the date of acquisition.

 

The acquisition of these select assets, including the associated in-process research and development, is intended to have a broad application in the production of engineered substrates for power semiconductors, uses within the sapphire and LED industries and thin wafers for solar applications and certain other potential applications. In addition, the Company expects to pursue the development of thin sapphire laminates for use in applications such as cover and touch screen devices.

 

The transaction has been accounted for as a business combination and is included in the Company’s results of operations from the acquisition date of November 8, 2012. The acquired assets did not contribute revenues from the acquisition date to September 28, 2013.  The goodwill created by the transaction is expected to be deductible for tax purposes.  The results of the acquired assets, including goodwill, are included in the Company’s PV and sapphire segments.

 

As of September 28, 2013, the valuation of acquired assets, and assumed liabilities is preliminary. The Company is in the process of investigating the facts and circumstances existing as of the acquisition date in order to finalize its valuation.

 

8



Table of Contents

 

GT Advanced Technologies Inc.

Notes to Condensed Consolidated Financial Statements

(In thousands, except per share data)

 

Based on new information gathered about facts and circumstances that existed as of the acquisition date related to the valuation of certain acquired assets and assumed liabilities, the Company updated the preliminary valuations of assets acquired during the three months ended March 30, 2013 which resulted in an increase to goodwill of $2,000 and a decrease to deferred tax assets of $2,000 as reflected in the table below. The adjustments have been retrospectively applied to the December 31, 2012 balance sheet. These adjustments had no impact on the statement of operations or statement of cash flows. A summary of the preliminary purchase price allocation for the acquisition of certain assets and assumed liabilities of Twin Creeks is as follows:

 

Fair value of consideration transferred:

 

Cash

 

$

10,172

 

Contingent consideration obligations

 

5,200

 

Total fair value of consideration

 

$

15,372

 

 

Fair value of assets acquired and liabilities assumed:

 

Property, plant and equipment

 

$

1,529

 

Other assets

 

23

 

In-process research and development

 

12,300

 

Goodwill

 

2,907

 

Accounts payable

 

(1,362

)

Other current liabilities

 

(25

)

Total net assets acquired

 

$

15,372

 

 

The purchase consideration includes contingent consideration payable by the Company in the form of a royalty on net sales of hydrogen ion implantation systems, related equipment, parts and accessories and materials made from hydrogen ion implantation systems and of royalties from any sub-licenses granted by the Company of the underlying intellectual property acquired. These payments are subject to the Company’s right to set-off up to $6,000 for infringement claims brought by third-parties related to the intellectual property acquired. The royalty amount payable is capped at the earlier of payment of $40,000 of royalties or the end of the 15-year term of the license agreement. The Company determined the fair value of the contingent consideration obligations based on a probability-weighted income approach derived from assessments of future revenue. The weighted-average undiscounted probable outcome that the Company initially used to value the contingent consideration arrangement was $27,562. During the three and nine months ended September 28, 2013, the Company recorded contingent consideration expense of $6,046 and $6,747, respectively, related to change in the fair value of the liability at September 28, 2013.

 

Intangible assets are composed of the estimated fair value of acquired in-process research and development (“IPR&D”) related to the Hyperion™ ion implanter technology. At the date of acquisition and through September 28, 2013, the Hyperion™ ion implanter technology had not reached commercial technological feasibility nor had an alternative future use and is therefore considered to be IPR&D. The estimated fair value was determined using a probability-weighted income approach, which discounts expected future cash flows to present value. The projected cash flows from the Hyperion™ tool were based on certain key assumptions, including estimates of future revenue and expenses and taking into account the stage of development of the technology at the acquisition date and the time and resources needed to complete development. The Company used a discount rate of 28% and cash flows that have been probability-adjusted to reflect the risks of product commercialization. This discount rate used is comparable to the estimated internal rate of return on Twin Creeks operations and represents the rate that market participants would use to value the intangible assets.

 

The major risks and uncertainties associated with the timely and successful completion of development of the IPR&D include the Company’s ability to demonstrate technological feasibility of the product and to successfully complete this task

 

9



Table of Contents

 

GT Advanced Technologies Inc.

Notes to Condensed Consolidated Financial Statements

(In thousands, except per share data)

 

within budgeted costs. Consequently, the eventual realized value of the acquired IPR&D may vary from its estimated fair value at the date of acquisition.

 

The acquisition of certain select assets of Twin Creeks did not have a material effect on the Company’s results of operations for the three and nine months ended September 28, 2013. Pro forma results of operations have not been presented due to the immaterial impact the amounts would have had on the Company’s historical results of operations.

 

5. Fair Value Measurements

 

Fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants based on assumptions that market participants would use in pricing an asset or liability. As a basis for classifying the assumptions used, a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value, is applied as follows: (Level 1) observable inputs such as quoted prices in active markets for identical assets or liabilities; (Level 2) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. There were no transfers between such levels in the nine month period ended September 28, 2013.

 

The following table provides the assets and liabilities measured and reported at fair value on a recurring basis at September 28, 2013 and December 31, 2012:

 

 

 

September 28, 2013

 

 

 

Total
Carrying

 

Fair Value Measurements Using

 

 

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

Money market mutual funds

 

$

179,144

 

$

179,144

 

$

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

17,523

 

$

 

$

 

$

17,523

 

 

 

 

December 31, 2012

 

 

 

Total
Carrying

 

Fair Value Measurements Using

 

 

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

Money market mutual funds

 

$

200,041

 

$

200,041

 

$

 

$

 

Forward foreign exchange contracts

 

230

 

 

230

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

10,315

 

$

 

$

 

$

10,315

 

 

The Company’s money market mutual funds are valued using readily available quoted market prices for identical assets.

 

The Company’s counterparties to its forward foreign exchange contracts are financial institutions. These forward foreign exchange contracts are measured at fair value using a valuation which represents a good faith estimate of the midmarket value of the position, based on estimated bids and offers for the positions, which are updated each reporting period. The Company considers the effect of credit standings in these fair value measurements (level 2). There have been no changes in the valuation techniques used to measure the fair value of the Company’s forward foreign exchange contracts (see Note 8 below for additional information about the Company’s derivatives and hedging activities).

 

10



Table of Contents

 

GT Advanced Technologies Inc.

Notes to Condensed Consolidated Financial Statements

(In thousands, except per share data)

 

The Company has classified contingent consideration related to its acquisitions within Level 3 of the fair value hierarchy because the fair value is derived using significant unobservable inputs, which include discount rates and probability-weighted cash flows. The Company determined the fair value of its contingent consideration obligations based on a probability-weighted income approach derived from financial performance estimates and probability assessments of the attainment of certain targets. The Company establishes discount rates to be utilized in its valuation models based on the cost to borrow that would be required by a market participant for similar instruments. In determining the probability of attaining certain technical, financial and operation targets, the Company utilizes data regarding similar milestone events from its own experience, while considering the inherent difficulties and uncertainties in developing a product. On a quarterly basis, the Company reassesses the probability factors associated with the financial, operational and technical targets for its contingent consideration obligations. Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period.

 

The key assumptions as of September 28, 2013 related to the contingent consideration from the acquisition of certain assets of Twin Creeks used in the model include: (i) discount rate of 28% for purposes of discounting the low and base case scenarios associated with achievement of the revenue based earn-out. The probabilities assigned to these scenarios were 25%, and 75% for the low and base case scenarios, respectively. An increase or decrease in the probability of achievement of any scenario could result in a significant increase or decrease to the estimated fair value of the contingent consideration liability.

 

The key assumptions as of September 28, 2013 related to the contingent consideration from the acquisition of substantially all of the business of Thermal Technology used in the model include: (i) discount rate of 20.4% for purposes of discounting the most likely scenario associated with achievement of the revenue based earn-out. An increase or decrease in the probability of achievement of the projected revenues could result in a significant increase or decrease to the estimated fair value of the contingent consideration liability.

 

During the three months ended June 29, 2013, the Company reversed the contingent consideration liability related to the Confluence Solar acquisition with a corresponding reduction to contingent consideration expense.  This reversal of approximately $4,816 was the result of failing to achieve the required operational and technical targets required to earn such consideration.

 

The Company recorded contingent consideration expense (income) in the condensed consolidated statements of operations of $4,971 and $997 for the three and nine months ended September 28, 2013 and ($9,943) and ($9,261) for the three and nine months ended September 29, 2012, and all of which was allocated to the corporate services reporting segment.  Changes in the fair value of the Company’s Level 3 contingent consideration obligations during the three and nine months ended September 28, 2013 and three and nine months ended September 29, 2012 were as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 28,
2013

 

September 29,
2012

 

September 28, 2013

 

September 29,
2012

 

Fair value as of the beginning of the period

 

$

12,552

 

$

14,762

 

$

10,315

 

$

23,713

 

Acquisition date fair value of contingent consideration obligations related to acquisitions

 

 

 

6,211

 

 

Changes in the fair value of contingent consideration obligations

 

4,971

 

(9,943

)

997

 

(9,261

)

Payments of contingent consideration obligations

 

 

 

 

(9,633

)

Fair value at the end of the period

 

$

17,523

 

$

4,819

 

$

17,523

 

$

4,819

 

 

The carrying amounts reflected in the Company’s condensed consolidated balance sheets for cash, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses and customer deposits approximate fair value due to their short-term maturities. The Company did not hold any short-term investments at September 28, 2013 or December 31, 2012. The following table provides the carrying and fair values of the Company’s long-term debt obligations and convertible notes as of September 28, 2013 and December 31, 2012:

 

11



Table of Contents

 

GT Advanced Technologies Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(In thousands, except per share data)

 

 

 

 

 

Fair Value Measurements Using

 

Description

 

Total Carrying Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Fair Value

 

2012 Term Facility, including current portion

 

 

 

 

 

 

 

 

 

 

 

September 28, 2013

 

$

95,938

 

$

 

$

96,138

 

$

 

$

96,138

 

December 31, 2012

 

$

139,563

 

$

 

$

139,563

 

$

 

$

139,563

 

3.00% Senior Convertible Notes

 

 

 

 

 

 

 

 

 

 

 

September 28, 2013

 

$

165,390

 

$

 

$

282,659

 

$

 

$

282,659

 

December 31, 2012

 

$

157,440

 

$

 

$

157,300

 

$

 

$

157,300

 

 

Certain assets have been measured at fair value on a nonrecurring basis using significant unobservable inputs (Level 3). The following table presents nonrecurring fair value measurements recognized for the nine-month period ended September 28, 2013 and for the nine-month period ended December 31, 2012

 

 

 

September 28, 2013

 

December 31, 2012

 

 

 

Fair Value

 

Total Losses

 

Fair Value

 

Total Losses

 

Long-lived asset group at our Hazelwood facility

 

$

1,155

 

$

4,010

 

$

5,165

 

$

29,261

 

 

For Level 3 assets that were measured at fair value on a non-recurring basis during the nine-month period ended September 28, 2013, the following table presents the fair value of those assets as of the measurement date, valuation techniques and related unobservable inputs of those assets:

 

 

 

Fair Value

 

Valuation Technique(s)

 

Unobservable
Input

 

Range, Median
or Average

 

Long-lived asset group at our Hazelwood facility

 

$

1,155

 

Cost Approach and Market Approach

 

Depreciation factors

 

Average of 75%

 

 

The fair value of the long-lived asset group of the Hazelwood facility at December 31, 2012 was calculated based on a probability assessment of potential outcomes. An estimation of fair value, assuming the assets would be used by a market participant as is, was determined using a cost approach which was based on current replacement and/or reproduction costs of the asset as new, less depreciation factors attributable to physical, functional and economic obsolescence and utilizing data from various indexes. A separate estimate of fair value was determined using a market approach assuming an orderly liquidation. At December 31, 2012, equal weighting was applied to the cost and market approaches, however, due to a lack of interest by market participants, the Company’s fair value as of September 28, 2013 of $1,155 is primarily based on expected value upon liquidation.

 

Significant changes in any of the significant unobservable inputs used could result in significantly higher or lower fair value measurements.

 

6. Goodwill and Other Intangible Assets

 

The following table contains the change in the Company’s goodwill during the nine months ended September 28, 2013:

 

 

 

Photovoltaic

 

Sapphire

 

 

 

 

 

Business

 

Business

 

Total

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2012

 

 

 

 

 

 

 

Goodwill

 

$

61,399

 

$

43,659

 

$

105,058

 

Accumulated impairment losses

 

(57,037

)

 

(57,037

)

 

 

$

4,362

 

$

43,659

 

$

48,021

 

 

 

 

 

 

 

 

 

Acquisition of Thermal Technology, LLC

 

 

6,744

 

6,744

 

 

 

 

 

 

 

 

 

Balance as of September 28, 2013

 

 

 

 

 

 

 

Goodwill

 

$

61,399

 

$

50,403

 

$

111,802

 

Accumulated impairment losses

 

(57,037

)

 

(57,037

)

 

 

$

4,362

 

$

50,403

 

$

54,765

 

 

As noted in Note 4, during the three months ended March 30, 2013, the Company updated the preliminary valuation of assets acquired of Twin Creeks, which resulted in an increase to goodwill of $2,000 and a decrease to deferred tax assets of $2,000.  This adjustment was retrospectively recorded as of December 31, 2012 in the balance sheet and table above.

 

No impairment losses have been recorded on the Company’s goodwill during the nine months ended September 28, 2013.

 

Acquired intangible assets subject to amortization at September 28, 2013 and December 31, 2012 consisted of the following:

 

12



Table of Contents

 

GT Advanced Technologies Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(In thousands, except per share data)

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

September 28, 2013

 

December 31, 2012

 

 

 

Amortization

 

Gross

 

Accumulated

 

 

 

Gross

 

Accumulated

 

 

 

 

 

Period

 

Amount

 

Amortization

 

Net

 

Amount

 

Amortization

 

Net

 

Finite-lived intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Photovoltaic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Technology

 

9.5 years

 

$

74,200

 

$

19,977

 

$

54,223

 

$

72,200

 

$

14,951

 

$

57,249

 

Trade names / Trademarks

 

8.6 years

 

7,100

 

3,388

 

3,712

 

7,100

 

3,036

 

4,064

 

Subtotal:

 

 

 

81,300

 

23,365

 

57,935

 

79,300

 

17,987

 

61,313

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Polysilicon:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Technology

 

2.6 years

 

1,500

 

1,500

 

 

1,500

 

1,500

 

 

Subtotal:

 

 

 

1,500

 

1,500

 

 

1,500

 

1,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sapphire:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

6.4 years

 

7,300

 

2,331

 

4,969

 

4,100

 

1,651

 

2,449

 

Technology

 

9.3 years

 

28,600

 

5,983

 

22,617

 

17,300

 

4,181

 

13,119

 

Order backlog

 

1.2 years

 

500

 

500

 

 

500

 

500

 

 

Trade names

 

8.0 years

 

1,100

 

435

 

665

 

1,100

 

332

 

768

 

Non-compete agreements

 

5.8 years

 

1,000

 

568

 

432

 

1,000

 

433

 

567

 

Subtotal:

 

 

 

38,500

 

9,817

 

28,683

 

24,000

 

7,097

 

16,903

 

Total finite-lived intangible assets

 

 

 

121,300

 

34,682

 

86,618

 

104,800

 

26,584

 

78,216

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indefinite-lived intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In-process research and development

 

 

 

12,300

 

 

12,300

 

12,300

 

 

12,300

 

Total intangible assets

 

 

 

$

133,600

 

$

34,682

 

$

98,918

 

$

117,100

 

$

26,584

 

$

90,516

 

 

The weighted average remaining amortization periods for the (i) photovoltaic, (ii) polysilicon and (iii) sapphire intangibles were 7.09 years, 0 years and 6.44 years, respectively, as of September 28, 2013. As of September 28, 2013, the estimated future amortization expense for the Company’s intangible assets is as follows:

 

Year Ending December 31,

 

Amortization
Expense

 

2013 (remaining three months)

 

$

2,975

 

2014

 

11,881

 

2015

 

11,852

 

2016

 

11,519

 

2017

 

11,052

 

2018

 

10,990

 

Thereafter

 

38,649

 

 

13



Table of Contents

 

GT Advanced Technologies Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(In thousands, except per share data)

 

7. Customer Concentrations

 

The following customers comprised 10% or more of the Company’s total revenue or accounts receivable for the, or as of, the periods indicated:

 

 

 

Three Months Ended

 

Nine Months Ended

 

As of

 

 

 

September 28, 2013

 

September 29, 2012

 

September 28, 2013

 

September 29, 2012

 

September 28, 2013

 

December 31, 2012

 

 

 

 

 

% of

 

 

 

% of

 

 

 

% of

 

 

 

% of

 

Accounts

 

% of

 

Accounts

 

% of

 

 

 

Revenue

 

Total

 

Revenue

 

Total

 

Revenue

 

Total

 

Revenue

 

Total

 

Receivable

 

Total

 

Receivable

 

Total

 

Photovoltaic Customers

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer #1

 

*

 

*

 

*

 

*

 

*

 

*

 

*

 

*

 

*

 

*

 

$

2,478

 

10

%

Polysilicon Customers

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer #2

 

$

17,600

 

44

%

*

 

*

 

*

 

*

 

*

 

*

 

*

 

*

 

*

 

*

 

Customer #3

 

7,919

 

20

%

*

 

*

 

$

108,579

 

41

%

*

 

*

 

*

 

*

 

*

 

*

 

Customer #4

 

*

 

*

 

*

 

*

 

45,268

 

17

%

*

 

*

 

*

 

*

 

9,085

 

38

%

Customer #5

 

*

 

*

 

*

 

*

 

34,915

 

13

%

*

 

*

 

*

 

*

 

*

 

*

 

Customer #6 (1)

 

*

 

*

 

$

43,459

 

39

%

*

 

*

 

$

139,337

 

22

%

*

 

*

 

*

 

*

 

Customer #7

 

*

 

*

 

39,142

 

36

%

*

 

*

 

*

 

*

 

$

1,200

 

16

%

3,248

 

14

%

Customer #8

 

*

 

*

 

*

 

*

 

*

 

*

 

82,316

 

13

%

*

 

*

 

*

 

*

 

Customer #9

 

*

 

*

 

*

 

*

 

*

 

*

 

77,870

 

12

%

*

 

*

 

*

 

*

 

Customer #10

 

*

 

*

 

*

 

*

 

*

 

*

 

*

 

*

 

1,450

 

19

%

*

 

*

 

Sapphire Customers

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer #11

 

*

 

*

 

*

 

*

 

*

 

*

 

63,950

 

10

%

*

 

*

 

*

 

*

 

 


*                      Amounts from these customers were less than 10% of the total as of, or for, the respective period.

 

(1)                   Presented in the table are revenues from a significant customer in the Polysilicon segment.  Total revenue recognized from this customer for the three months ended September 29, 2012 was $43,769 or 40% of total revenue.  Total revenue recognized from this customer for the nine months ended September 29, 2012 was $174,127 or 28% of total revenue. Not included in the table above for the three and nine months ended September 29, 2012 are $310 or less than 1% and $34,790 or 6% of total revenue for these periods for sales to this customer that have been included in the Sapphire segment.

 

The Company requires most of its customers to either post letters of credit and/or make advance payments of a portion of the selling price prior to delivery. Approximately $3,174 (or 42%) and $16,557 (or 69%) of total accounts receivable as of September 28, 2013 and December 31, 2012, respectively, were secured by letters of credit.

 

8. Derivative and Hedging Activities

 

The Company enters into forward foreign currency exchange contracts to hedge portions of foreign currency denominated inventory purchases. These contracts typically expire within 12 months of entering into the contract. As of September 28, 2013, the Company had no open forward foreign currency exchange contracts.

 

14



Table of Contents

 

GT Advanced Technologies Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(In thousands, except per share data)

 

The following table sets forth the balance sheet locations and fair value of the Company’s forward foreign currency exchange contracts at December 31, 2012:

 

Instruments Designated as Cash Flow Hedges

 

 

 

Balance Sheet
Location

 

December 31, 2012

 

Forward foreign currency exchange contracts—assets

 

Prepaid expenses and other current assets

 

$

230

 

 

The following table sets forth the effect of the Company’s forward foreign currency exchange contracts designated as hedging instruments on the condensed consolidated statements of operations for the three and nine months ended September 28, 2013 and September 29, 2012:

 

Instruments Designated as Cash Flow Hedges

 

 

 

Amount of

 

Location of Gain or

 

Amount of Gain or

 

Location of

 

 

 

 

 

(Gain) or Loss

 

(Loss) Reclassified

 

(Loss) Reclassified

 

Gain or (Loss)

 

Amount of Gain or

 

 

 

Recognized in OCI

 

from AOCI

 

from AOCI

 

Recognized in

 

(Loss) Recognized in

 

 

 

on Derivative

 

into Income

 

into Income

 

Income on Derivative

 

Income on Derivative

 

 

 

(Effective Portion)

 

(Effective Portion)

 

(Effective Portion)

 

(Ineffective Portion)

 

(Ineffective Portion)

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

September 28, 2013

 

$

 

Cost of revenue

 

$

 

Other, net

 

$

 

September 29, 2012

 

173

 

Cost of revenue

 

(498

)

Other, net

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

 

 

September 28, 2013

 

4

 

Cost of revenue

 

60

 

Other, net

 

 

September 29, 2012

 

641

 

Cost of revenue

 

(2,775

)

Other, net

 

 

 

Derivatives Not Designated as Hedging Instruments

 

 

 

Location of

 

 

 

 

 

Gain or (Loss)

 

Amount of Gain or

 

 

 

Recognized in

 

(Loss) Recognized in

 

 

 

Income on Derivative

 

Income on Derivative

 

Three Months Ended

 

 

 

 

 

September 28, 2013

 

Other, net

 

$

 

September 29, 2012

 

Other, net

 

(287

)

Nine Months Ended

 

 

 

 

 

September 28, 2013

 

Other, net

 

$

 

September 29, 2012

 

Other, net

 

(886

)

 

15



Table of Contents

 

GT Advanced Technologies Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(In thousands, except per share data)

 

During the nine months ended September 28, 2013, there were no losses reclassified into earnings as a result of the Company discontinuing cash flow hedging. No amount of accumulated gain included in other comprehensive income as of September 28, 2013 is expected to be reclassified into earnings over the next twelve months.

 

9. Inventories

 

Inventories consisted of the following:

 

 

 

September 28, 2013

 

December 31, 2012

 

Raw materials

 

$

109,137

 

$

97,957

 

Work-in-process

 

8,563

 

5,100

 

Finished goods

 

5,489

 

30,229

 

 

 

$

123,189

 

$

133,286

 

 

10. Other Assets

 

Other assets consisted of the following:

 

 

 

September 28, 2013

 

December 31, 2012

 

 

 

 

 

 

 

Inventory

 

$

36,724

 

$

33,834

 

Vendor advances

 

18,524

 

20,664

 

Deferred financing fees

 

7,945

 

8,787

 

Deferred income taxes

 

21,222

 

15,424

 

Other

 

7,666

 

8,211

 

 

 

$

92,081

 

$

86,920

 

 

11. Warranty

 

The following table presents warranty activities:

 

 

 

Nine Months Ended

 

 

 

September 28, 2013

 

September 29, 2012

 

 

 

 

 

 

 

Product warranty liability, beginning of the period

 

$

10,711

 

$

4,764

 

Accruals for warranties issued

 

7,157

 

9,029

 

Payments under warranty

 

(5,500

)

(4,578

)

Product warranty liability, end of period

 

$

12,368

 

$

9,215

 

 

16



Table of Contents

 

GT Advanced Technologies Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(In thousands, except per share data)

 

12. Restructuring Charges and Asset Impairments

 

October 2012 Restructuring

 

As part of a program to reduce costs and increase operational efficiencies, the Company announced, on October 31, 2012, a plan to streamline worldwide operations to better align its cost structure with market conditions by reducing its global workforce and closing or consolidating certain facilities. In the nine months ended September 28, 2013 the Company recorded $362 of severance related expense, of which $145, $159, $14 and $44 related to the corporate, PV, polysilicon and sapphire segments, respectively.

 

Hazelwood Facility Idling

 

On January 10, 2013, the Company announced its plan to idle operations at its Hazelwood, Missouri facility (“Hazelwood facility”). The idling of the Hazelwood facility is part of the Company’s effort to reduce costs and optimize its research and development activities and the idling of the facility was completed by March 30, 2013. In connection with this action, the Company terminated the employment of 37 of the Hazelwood facility employees at various dates in the first quarter of fiscal 2013. The Company determined that as of December 31, 2012 it was probable that employees would be entitled to receive severance and related benefits and that these amounts were estimable and accordingly recorded the expense during the three months ended December 31, 2012. In connection with the idling of the Hazelwood facility, the Company recorded $29,782 of restructuring and asset impairment expense during the three months ended December 31, 2012 to the PV segment, comprised of $521 of severance and related benefits and $29,261 for the write-down to fair value of certain long-lived, intangible assets and other assets associated with the Hazelwood facility. During the three months ended September 28, 2013, the Company recorded $4,010 of additional asset impairment expense related to the certain long-lived intangible assets and other assets noted above. At December 31, 2012, equal weighting was applied to the cost and market approaches, however, due to a lack of interest by market participants, the Company’s fair value as of September 28, 2013 of $1,155 is primarily based on expected value upon liquidation. During the nine months ended September 28, 2013, the Company recorded $1,854 of additional charges related to the Hazelwood facility’s lease exit costs, $642 of other contract termination costs related to this facility and $4,010 of impairment charges related to the fair value of the HiCz fixed assets, respectively. The Company has determined the long-lived asset group of the Hazelwood facility, which has a carrying value of $1,155, does not meet the held-for-sale criteria at September 28, 2013.

 

The Company reports expense for its restructuring charges and asset impairments separately in the condensed consolidated statements of operations. The restructuring charges and remaining accrued expenses, which are included in accrued expenses on the Company’s condensed consolidated balance sheet as of September 28, 2013 are as follows:

 

 

 

Employee Related
Benefits

 

Lease Exit and Contract
Termination Costs

 

Asset Impairments

 

Total

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2012

 

$

2,076

 

$

133

 

$

 

$

2,209

 

Charges

 

362

 

2,496

 

4,010

 

6,868

 

Cash payments

 

(2,044

)

(1,065

)

 

(3,109

)

Asset impairments

 

 

 

(4,010

)

(4,010

)

Balance as of September 28, 2013

 

$

394

 

$

1,564

 

$

 

$

1,958

 

 

13. Income Taxes

 

The Company has concluded that the effective tax rate for the year is no longer sensitive to the projected ordinary income for the year given that small fluctuations in profits do have a material impact on the effective tax rate. As a result and in accordance with authoritative guidance for accounting for income taxes in interim periods, the Company has computed its provision using its estimated annual effective tax rate which takes into account operations in the U.S. and in other tax

 

17



Table of Contents

 

GT Advanced Technologies Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(In thousands, except per share data)

 

jurisdictions. Changes in the mix of income recognized between the U.S. and foreign tax jurisdictions impacts the Company’s effective tax rate. Any discrete tax adjustments are recorded in the specific quarter they arise.

 

The Company’s effective tax rate for the three and nine months ended September 28, 2013 and September 29, 2012, was 10.1% and 26.9%, and 24.2% and 32%, respectively. The effective rate differs from the U.S. federal statutory rate due to a favorable permanent adjustment related to contingent consideration which is non-includable for tax purposes and the jurisdictional mix of income/loss. The Company incurred proportionally larger losses in the U.S., a higher tax jurisdiction than in lower tax jurisdictions, namely Hong Kong.

 

A reconciliation of the change in unrecognized tax benefits for the nine months ended September 28, 2013 is as follows:

 

Unrecognized tax benefits at December 31, 2012

 

$

26,322

 

Increases related to current year tax positions

 

272

 

Increases related to prior year tax positions

 

372

 

Settlements with tax authorities

 

(1,464

)

Unrecognized tax benefits at September 28, 2013

 

$

25,502

 

 

The Company also recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. During the three and nine month period ending September 28, 2013, the Company recorded an income tax provision of $277 and $355, respectively, related to interest and penalty accruals.

 

The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company is subject to examination by federal, state, and foreign tax authorities. The Company’s U.S. tax returns have been settled through fiscal years ending March 31, 2008. The Company continues to be under examination by the Internal Revenue Service, or IRS for its fiscal years ending March 28, 2009 and April 3, 2010. In addition, the statute of limitations is open for all state and foreign jurisdictions.  During the nine months ended September 28, 2013 and September 29, 2012, the Company paid $16,109 and $51,079 for estimated taxes, respectively.

 

In September 2013, the U.S. Department of the Treasury and the Internal Revenue Service released final regulations relating to guidance on applying tax rules to amounts paid to acquire, produce or improve tangible personal property as well as rules for materials and supplies. These regulations are effective for tax years beginning on or after January 1, 2014, with early adoption permitted. Transition guidance providing the procedural rules to comply with such regulations is expected to be released in the near term. The Company is currently assessing these rules, but does not believe there will be a material impact on the condensed consolidated financial statements when they are adopted.

 

14. Commitments and Contingencies

 

Purchase Commitments

 

The Company’s commitments to purchase raw materials, research and development and other services from various suppliers and vendors are estimated to be $329,147 and $214,611 as of September 28, 2013 and December 31, 2012, respectively. The majority of these commitments as of September 28, 2013 are due within the next twelve months.

 

As a result of the factors outlined under the “Recent Developments” in Note 1 above, the Company expects to terminate purchase commitments with vendors for DSS inventory components in fiscal 2013 and beyond. These purchase contracts generally require a payment to the vendors to reimburse them for costs incurred, if any, through the termination date. No amount has been accrued as of September 28, 2013, as these purchase orders have not been terminated at September 28, 2013. The gross amount of remaining purchases under these purchase orders was $14,284 as of September 28, 2013, and the Company may negotiate with the vendors to determine the amount payable upon termination of these purchase orders.

 

18



Table of Contents

 

GT Advanced Technologies Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(In thousands, except per share data)

 

Litigation Contingencies

 

The Company is subject to various routine legal proceedings and claims incidental to its business which management believes will not have a material effect on the Company’s financial position, results of operations or cash flows.

 

In October 2013, the Company settled a vendor contract dispute. The terms of the settlement, which includes no admission of liability or wrongdoing by the Company or by any other defendants, provides for a full and complete release of all claims that were or could have been brought against the Company. The Company paid $3,250 in the fourth quarter to settle this matter. The Company has recorded this expense in general and administrative expense during the three months ended September 28, 2013.

 

Customer Indemnifications

 

In certain cases, the Company indemnifies, under pre-determined conditions and limitations, its customers for infringement of third-party intellectual property rights by the Company’s products or services (and, in limited instances, the Company also indemnifies other third parties for certain potential damages). The Company generally seeks to limit its liability for such indemnity to an amount not to exceed the sales price of the products or services (or the price paid for products or services) subject to its indemnification obligations, but not all agreements contain such limitations on liability. The Company does not believe, based on information available, that it is probable that any material amounts will be paid under these indemnification provisions.

 

15. Long-Term Debt and Convertible Notes

 

Bank of America Credit Agreement

 

On January 31, 2012, the Company, its principal U.S. operating subsidiary (the “U.S. Borrower”) and its Hong Kong subsidiary (the “Hong Kong Borrower”) entered into a credit agreement (the “2012 Credit Agreement”), with Bank of America, N.A., as administrative agent, Swing Line Lender and L/C Issuer (or “Bank of America”) and the lenders from time to time party thereto. The 2012 Credit Agreement consists of a term loan facility (the “2012 Term Facility”) provided to the U.S. Borrower in an aggregate principal amount of $75,000 with a final maturity date of January 31, 2016, a revolving credit facility (the “U.S. Revolving Credit Facility”) available to the U.S. Borrower in an aggregate principal amount of $25,000 with a final maturity date of January 31, 2016 (this revolving facility is no longer available pursuant to the 2013 Amendment) and a revolving credit facility (the “Hong Kong Revolving Credit Facility”; together with the U.S. Revolving Credit Facility, the “2012 Revolving Credit Facility”; and together with the 2012 Term Facility, the “2012 Credit Facilities”) available to the Hong Kong Borrower in an aggregate principal amount of $150,000 (which was reduced to $125,000 pursuant to the 2013 Amendment) with a final maturity date of January 31, 2016.<