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  • 10-Q (Aug 7, 2014)
  • 10-Q (Jun 17, 2014)
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GT Advanced Technologies Inc. 10-Q 2014

Documents found in this filing:

  1. 10-Q
  2. Ex-10.3
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Ex-32.1
GTAT Q2 CY2014 - 10Q


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 2014
or
¨
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 ý No ¨
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 ý No ¨
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 ý
Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a 
smaller reporting company)
Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
As of August 1, 2014, approximately 137,539,773 shares of the registrant’s common stock, $0.01 par value per share, were issued and outstanding.
 





GT ADVANCED TECHNOLOGIES INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED June 28, 2014
Table of Contents
 
 
Page
 
 
 
 
 
 





PART I—FINANCIAL INFORMATION
Item 1—Financial Statements

GT Advanced Technologies Inc.
Condensed Consolidated Balance Sheets
(In thousands, except per share data)
(Unaudited)

 
June 28, 2014
 
December 31, 2013
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
333,147

 
$
498,213

Restricted cash
87

 
1,330

Accounts receivable, net
14,021

 
12,377

Inventories
132,647

 
39,087

Deferred costs
11,480

 
2,977

Vendor advances
14,471

 
1,341

Deferred income taxes
24,392

 
17,881

Refundable income taxes
2,758

 
2,759

Prepaid expenses and other current assets
16,179

 
7,003

Total current assets
549,182

 
582,968

Restricted cash

 
93,419

Property, plant and equipment, net
611,465

 
209,760

Intangible assets, net
93,896

 
95,943

Goodwill
56,888

 
54,279

Other assets
196,579


150,912

Total assets
$
1,508,010

 
$
1,187,281

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Current portion of prepayment obligation
$
43,900

 
$

Accounts payable
184,614

 
77,303

Accrued expenses
63,656

 
39,115

Contingent consideration
6,265

 
234

Customer deposits
48,165

 
38,995

Deferred revenue
46,257

 
19,724

Accrued income taxes
678

 
301

Total current liabilities
393,535

 
175,672

Prepayment obligation, net of current portion
306,700

 
172,475

Convertible notes
294,209

 
283,914

Deferred income taxes
16,039

 
23,448

Customer deposits
55,598

 
55,598

Deferred revenue
173,081

 
99,672

Contingent consideration
14,521

 
15,173

Other non-current liabilities
17,711

 
808

Accrued income taxes
20,787

 
28,116

Total liabilities
1,292,181

 
854,876

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, 137,346 and 134,463 shares issued and outstanding as of June 28, 2014 and December 31, 2013, respectively
1,373

 
1,345

Additional paid-in capital
367,560

 
355,916

Accumulated other comprehensive income
789

 
1,259

Accumulated deficit
(153,893
)
 
(26,115
)
Total stockholders' equity
215,829

 
332,405

Total liabilities and stockholders' equity
$
1,508,010

 
$
1,187,281

See accompanying notes to these condensed consolidated financial statements.

1



GT Advanced Technologies Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 28, 2014
 
June 29, 2013
 
June 28, 2014
 
June 29, 2013
Revenue
$
58,000

 
$
168,330

 
$
80,510

 
$
226,106

Cost of revenue (excluding sapphire production ramp up costs)
48,657

 
109,714

 
69,809

 
153,875

     Sapphire production ramp up costs
45,456

 

 
47,355

 

Total cost of revenue
94,113

 
109,714

 
117,164

 
153,875

Gross (loss) profit
(36,113
)
 
58,616

 
(36,654
)
 
72,231

Operating expenses:

 


 

 

Research and development
22,721

 
18,523

 
47,293

 
34,964

Selling and marketing
2,522

 
4,088

 
7,206

 
7,374

General and administrative
17,274

 
16,517

 
36,764

 
31,080

Contingent consideration (income) expense
(538
)
 
(4,310
)
 
1,837

 
(3,974
)
Restructuring charges
3,256

 

 
3,256

 
2,858

Amortization of intangible assets
3,057

 
2,667

 
6,033

 
5,122

Total operating expenses
48,292

 
37,485

 
102,389

 
77,424

(Loss) income from operations
(84,405
)
 
21,131

 
(139,043
)
 
(5,193
)
Other income (expense):

 

 

 

Interest income
91

 
70

 
187

 
164

Interest expense
(10,588
)
 
(6,526
)
 
(23,137
)
 
(14,006
)
Other, net
320

 
(179
)
 
828

 
11

(Loss) income before income taxes
(94,582
)
 
14,496

 
(161,165
)
 
(19,024
)
(Benefit) provision for income taxes
(8,201
)
 
2,549

 
(33,387
)
 
(12,290
)
Net (loss) Income
$
(86,381
)
 
$
11,947

 
$
(127,778
)
 
$
(6,734
)
Net (loss) Income per share:

 

 

 

     Basic
$
(0.63
)
 
$
0.10

 
$
(0.94
)
 
$
(0.06
)
     Diluted
$
(0.63
)
 
$
0.10

 
$
(0.94
)
 
$
(0.06
)
Weighted-average number of shares used in per share calculations:

 

 

 

Basic
136,677

 
120,481

 
136,066

 
119,920

Diluted
136,677

 
122,749

 
136,066

 
119,920


See accompanying notes to these condensed consolidated financial statements.


2



GT Advanced Technologies Inc.
Condensed Consolidated Statements of Comprehensive (Loss) Income
(In thousands, except per share data)
(Unaudited)

 
Three Months Ended
 
Six Months Ended
 
June 28, 2014
 
June 29, 2013
 
June 28, 2014
 
June 29, 2013
Net (loss) income
$
(86,381
)
 
$
11,947

 
$
(127,778
)
 
$
(6,734
)
Other comprehensive income, net of tax:

 


 

 


Change in fair value of cash flow hedging instruments, net of tax effect of $(1), $5, $2 and $11, respectively
(1
)
 
(25
)
 
2

 
(54
)
        Foreign currency translation adjustments
(3
)
 
218

 
(472
)
 
248

Other comprehensive (loss) income
(4
)
 
193

 
(470
)
 
194

Comprehensive (loss) income
$
(86,385
)
 
$
12,140

 
$
(128,248
)
 
$
(6,540
)

See accompanying notes to these condensed consolidated financial statements.
    

3



GT Advanced Technologies Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
Six Months Ended
 
June 28, 2014
 
June 29, 2013
Cash flows from operating activities:
 
 
 
Net loss
$
(127,778
)
 
$
(6,734
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
   Amortization expense
6,033

 
5,122

   Depreciation expense
16,944

 
8,666

   Prepayment obligation and convertible notes discount amortization
15,799

 
5,250

Contingent consideration (income) expense
1,837

 
(3,974
)
   Loss on asset disposals
(667
)
 
181

   Deferred income tax benefit
(28,731
)
 
(14,832
)
   Excess and obsolete inventory and inventory write-downs
8,947

 
970

   Share-based compensation expense
14,363

 
9,328

   Excess tax benefits from share-based awards

 
(3
)
   Amortization of deferred financing costs
696

 
2,262

   Other adjustments, net
2,973

 
275

Changes in operating assets and liabilities (excluding impact of acquired assets and assumed liabilities):
 
 
 
   Restricted cash
1,243

 

   Accounts receivable
(1,702
)
 
13,120

   Inventories
(101,614
)
 
17,689

   Deferred costs
(8,223
)
 
25,481

   Vendor advances
(10,511
)
 
27,055

   Prepaid expenses and other assets
(621
)
 
(579
)
   Accounts payable and accrued expenses
104,316

 
(28,095
)
   Customer deposits
9,171

 
(72,987
)
   Deferred revenue
2,069

 
(53,725
)
   Income taxes
(6,934
)
 
(10,343
)
   Other, net
10

 
171

Net cash used in operating activities
(102,380
)
 
(75,702
)
Cash flows from investing activities:
 
 
 
Restricted cash
307,416

 

Purchases and deposits on property, plant and equipment
(380,814
)
 
(2,699
)
Purchase of certain assets
(3,506
)
 

Proceeds from sale of property, plant and equipment
60



Net cash used in investing activities
(76,844
)
 
(2,699
)
Cash flows from financing activities:
 
 
 
Proceeds from financing sale-leaseback
14,724



Principal payments under credit facility

 
(41,813
)
Proceeds and related excess tax benefits from exercise of share‑based awards
8,003

 
63

Payments related to share repurchases to satisfy statutory minimum tax withholdings
(7,680
)
 
(1,194
)
Deferred financing costs
(328
)
 
(2,266
)
Other financing activities
(136
)
 
(10
)
Net cash provided (used) by financing activities
14,583

 
(45,220
)
Effect of foreign exchange rates on cash
(425
)
 
213

Decrease in cash and cash equivalents
(165,066
)
 
(123,408
)
Cash and cash equivalents at beginning of period
498,213

 
418,095

Cash and cash equivalents at end of period
$
333,147

 
$
294,687

Supplemental cash flow information:
 
 
 
Cash paid for interest, net of capitalized interest
$
6,759

 
$
6,384

Non-cash investing and financing activities:
 
 
 
Increase (decrease) in accounts payable and accrued expenses for property, plant and equipment
$
22,996

 
$
(480
)
Fair value of shares issued for acquisition
$

 
$
14,463

Contingent consideration issued for acquisition
$
3,542

 
$
6,211

Unpaid deferred financing fees
$
54

 
$

Restricted cash received from Apple
$
214,000

 
$

Fair value of prepayment obligation
$
167,300

 
$


See accompanying notes to these condensed consolidated financial statements.


4



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 six months ended June 28, 2014 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 Annual Report on Form 10-K ("Annual Report") for the fiscal year ended December 31, 2013, filed with the SEC on March 10, 2014.

The condensed consolidated balance sheet as of December 31, 2013 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.

Recent Developments

Since the Company's subsidiary, GTAT Corp. entered into the Master Development and Supply Agreement (“MDSA”), facility lease and related agreements with Apple Inc., on October 31, 2013, the Company has expended significant capital resources in order to fund the establishment of its sapphire growth and fabrication facility in Mesa, Arizona ("the facility"). During the three and six months ended June 28, 2014, the Company incurred significant costs in connection with (i) the purchase, installation and qualification of production equipment and related production processes, and (ii) inventory losses and production inefficiencies to date at the facility. Such inventory losses and production inefficiencies are discussed in additional detail below within Note 2, Significant Accounting Policies under the heading Sapphire Production Ramp Up Costs. The capital resources expended in connection with the purchase and installation of production equipment and the costs incurred in commencement of operations have had a significant impact on our liquidity and financial results.

For the three month period ended June 28, 2014, the Company recorded a loss from operations of $84,405 and a net loss of $86,381. For the six month period ended June 28, 2014, the Company incurred a loss from operations of $139,043, a net loss of $127,778, and used $102,380 in cash for operating activities.

Under its Prepayment Agreement with Apple (as described in Note 3, Significant Agreements), the Company is required to repay the Prepayment Amount (as defined in Note 3, Significant Agreements) ratably (on a quarterly basis) over a five year period beginning in January 2015, either as a credit against amounts due from Apple's purchases of sapphire goods under the MDSA or as a direct cash payment. The Prepayment Amount is non-interest bearing. The Company’s obligation to repay the Prepayment Amount may be accelerated under certain circumstances, including if the Company does not meet certain operating metrics or financial covenants. See Note 3 for additional information on the Prepayment Agreement.

The Company is currently in compliance, and based on the Company’s operational plans and financial forecasts, the Company expects to maintain compliance with the operating metrics and financial covenants in the Prepayment Agreement and management believes that the Company will have sufficient cash resources to fund operations for at least the next twelve months.


2. Significant Accounting Policies
Other than as set forth below, the Company’s significant accounting policies are disclosed in Note 2 to the Consolidated Financial Statements included in the Annual Report for the fiscal year ended December 31, 2013.

Sapphire Production Ramp up Costs

In the eight months from October 31, 2013, the date the Company's subsidiary, GTAT Corp. entered into the Master Development and Supply Agreement (“MDSA”), facility lease and related agreements with Apple Inc., to June 28, 2014, the

5

GT Advanced Technologies Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(In thousands, except per share data)

Company has expended significant capital resources in order convert the 1.3 million square foot building in Mesa, Arizona ("the facility") into a sapphire growth and fabrication facility. During the three and six months ended June 28, 2014, the Company incurred significant costs in connection with inventory losses and production inefficiencies as a result of the qualification of sapphire growth and fabrication equipment and the establishment of production processes at the facility. Inventory losses include charges to write down ending inventory to net realizable value, losses realized on inventory produced not deemed to be saleable and inventory spoilage losses resulting from plant construction related interruptions. Production inefficiencies resulted from production process refinements necessary to generate saleable material, qualification of consumable materials that are necessary for the operation of the equipment at the site and the qualification of the supply chain for this operation.

Due to the aforementioned issues, the Mesa operation is operating at a per unit and total cost structure substantially above the targeted cost structure for the facility.

Production start-up expenses were relabeled to Sapphire production ramp up costs and were reclassified from operating expenses to cost of goods sold to correct the presentation in the accompanying consolidated financial statements and footnotes.

Recent Accounting Pronouncements
On May 28, 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”) its final standard on revenue from contracts with customers. ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the revenue model to contracts within its scope, an entity identifies the contract(s) with a customer, identifies the performance obligations in the contract, determines the transaction price, allocates the transaction price to the performance obligations in the contract and recognizes revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 applies to all contracts with customers that are within the scope of other topics in the FASB Accounting Standards Codification ("ASC"). Certain of ASU 2014-09’s provisions also apply to transfers of nonfinancial assets, including in-substance nonfinancial assets that are not an output of an entity’s ordinary activities (i.e., property plant and equipment; real estate; or intangible assets). Existing accounting guidance applicable to these transfers has been amended or superseded. ASU 2014-09 also requires significantly expanded disclosures about revenue recognition. ASU 2014-09 is effective for the Company on January 1, 2017. The Company is currently assessing the potential impact of the adoption of ASU 2014-09 on its consolidated financial statements.
3. Apple Agreements
On October 31, 2013, GTAT Corp. (a wholly-owned subsidiary of the Company) and Apple Inc. (“Apple”) entered into the Master Development and Supply Agreement (“MDSA”), pursuant to which GTAT Corp. will supply sapphire material to Apple. The Company has granted Apple certain intellectual property rights in connection with its sapphire growth technologies and the right to purchase a license for certain other intellectual property of the Company. Pursuant to the terms of the MDSA, the Company granted exclusive rights to Apple under which it agreed to not sell sapphire material or related sapphire growth equipment or technology for use in certain applications. Such exclusivity rights are considered to be a deliverable in the arrangement (as described below). While the MDSA specifies GTAT Corp.'s minimum and maximum supply commitments, Apple has no minimum purchase requirements under the terms of the MDSA.

On October 31, 2013, the Company also entered into a Prepayment Agreement with Apple pursuant to which GTAT Corp. is eligible to receive $578,000 (the “Prepayment Amount”), in four separate installments, receipt of such installments is subject to meeting certain conditions, including technical and performance metrics. The Prepayment Amount is to be used exclusively to purchase components necessary for the manufacture of ASF systems and related equipment principally for use at the Arizona facility leased from an affiliate of Apple. The ASF systems and related equipment will be used exclusively to supply sapphire material to Apple, subject to certain exceptions under which such sapphire can be provided to other parties. The Company is required to repay the Prepayment Amount ratably (on a quarterly basis) over a five year period beginning in January 2015, either as a credit against amounts due from Apple purchases of sapphire goods under the MDSA or as a direct cash payment. The Prepayment Amount is non-interest bearing. The Company’s obligation to repay the Prepayment Amount

6

GT Advanced Technologies Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(In thousands, except per share data)

may be accelerated under certain circumstances, including if the Company does not meet certain financial metrics or meet certain technical and performance covenants. The Company’s obligations under the Prepayment Agreement and MDSA are secured by (i) the assets held by GT Equipment Holdings LLC (see below) (a wholly-owned subsidiary of the Company and the legal owner of the ASF systems and related equipment used in the Arizona facility that were purchased with the Prepayment Amount) and (ii) a pledge of all of the equity interests of GT Equipment Holdings LLC. Due to the debt-like characteristics of the Prepayment Amount, the Company determined the installments of the Prepayment Amount that it receives should be recorded as debt at fair value on the date each installment is received. The difference between the fair value of the debt and the Prepayment Amount proceeds received (“debt discount”) is consideration under the MDSA and accounted for as deferred revenue. The debt discount is being amortized to interest expense over a 6-year period ending December 2019, and interest expense of $10,824 was recognized in the six months ended June 28, 2014. The first three installments of $225,000, $111,000, and $103,000 were received on November 15, 2013, January 23, 2014, and April 4, 2014, respectively. As of June 28, 2014, $350,600 is reflected within prepayment obligation and $100,795 is recorded as deferred revenue.

On October 31, 2013, GTAT Corp. also entered into a lease agreement (the “Arizona Lease”) with an affiliate of Apple in order to lease a facility in Mesa, Arizona that GTAT Corp. uses for the purpose of manufacturing the sapphire material under the MDSA. The annual rent payable by GTAT Corp. is below market and, in accordance with the Arizona Lease, the facility is being leased to GTAT Corp. in phases. The Arizona Lease represents an operating lease with below market rental rates and therefore the Company has recorded a deferred rent asset (favorable lease asset) at fair value at the lease commencement date, with the offset recorded to deferred revenue. As of June 28, 2014, the lease term had commenced for approximately 80% of the facility and the Company has recorded a deferred rent asset of $51,265 that will be recognized as rent expense over the seven-year term of the Arizona Lease on a ratable basis.  Rent expense of $2,388 was recognized in the six months ended June 28, 2014.

The Company has determined the deliverables under its agreements with Apple should be accounted for under the multiple element arrangement guidance. The Company has identified three deliverables in the arrangement, namely, the supply deliverable (supply of sapphire material pursuant to the MDSA), the exclusivity deliverable (which represents the exclusivity rights granted to Apple), and the equipment lease deliverable (as described in the following sentence). The Company concluded that since the arrangement conveys to Apple the right to control the use of the equipment, the arrangement represents an operating lease of the equipment at the Arizona facility to Apple. The Company has estimated the selling price of each deliverable using its best estimate of the selling price (“ESP”). For the supply deliverable, the Company considered the cost to manufacture the product, plus an estimated gross profit margin. The Company considered several factors in estimating the profit margin including its historical experience in selling similar deliverables and normal profit margins in other contract manufacturing environments. Estimated selling price for the exclusivity deliverable was determined using a comparative of multiple discounted cash flow analysis to consider the value of opportunities not available to the Company due to the existence of the exclusivity term. The Company considered several factors in analyzing multiple cash flow scenarios including estimated revenue growth, estimated cost of production and estimated capital expenditure requirements. The discounted cash flow scenarios were compared to produce a cash flow differential that was discounted to present value to arrive at the estimated selling price of the exclusivity deliverable. The estimated selling price for the equipment lease deliverable was determined using a market approach. The key assumptions used in the analysis were the cost of similar leased assets with an estimated market rate of return, an estimated salvage value for similar leased assets and an estimated average service life for comparable assets in the market.
 
At June 28, 2014, the Company has allocated the deferred revenue from the Prepayment Amount and deferred rent asset of an aggregate of $154,525 to the three deliverables based on their relative selling prices. The arrangement consideration allocated to the supply deliverable is recognized as revenue in proportion to the actual number of units of the sapphire material delivered compared to the total number of units of the sapphire material expected to be delivered over the term of the MDSA. The arrangement consideration allocated to the exclusivity provision is recognized on a straight-line basis over the exclusivity period and the arrangement consideration allocated to the equipment lease deliverable, which is accounted for as an operating lease, is recognized on a straight line basis over the term of the MDSA once the assets are placed into service.

During the three months ended June 28, 2014, the Company sold equipment to Apple for $14,724, which had previously been purchased by the Company for the same amount. This equipment has been leased-back to the Company for the term of the MDSA for no explicit lease payment. The Company determined the lease meets the criteria for classification as a capital lease and as a result of the Company retaining substantially all of the benefits and risks of the equipment, has

7

GT Advanced Technologies Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(In thousands, except per share data)

accounted for the sale-leaseback transaction as a financing. The proceeds received from the sale of such equipment to Apple have been recorded by the Company as a financing liability and presented within both other current and non-current liabilities in the Company's Condensed Consolidated Balance Sheets. The financing liability will be accreted to recognize interest cost and will be de-recognized over time as sapphire material is purchased by Apple. The leased equipment is being depreciated over its estimated useful life of seven years and is classified within "Property, plant and equipment, net".
    
In connection with the agreements entered into with Apple, the Company also established a wholly-owned subsidiary, GT Advanced Equipment Holding LLC (the “LLC”). This entity is the legal owner of the ASF systems and related equipment that is being purchased with the Prepayment Amount and, as noted above, the assets of the LLC and the equity interests in the LLC secure the Company’s obligations under the MDSA and the Prepayment Agreement. Upon the receipt of a prepayment installment, GTAT Corp. is required to loan the funds to the LLC for the purpose of purchasing components necessary for the manufacture of ASF systems and related equipment. The LLC will then lease the equipment back to GTAT Corp. for operating purposes. The funds loaned to the LLC are presented as restricted cash until such time as the funds are used to purchase the components necessary for the manufacture of ASF systems and related equipment.

At June 28, 2014, the LLC has legal title to assets totaling $439,000, comprised of machinery and equipment purchased with funds loaned from GTAT Corp.

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. 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 purchase consideration consisted of 3,400 shares of the Company's common stock valued at $14,463 (as of the date of acquisition) and potential contingent consideration of $35,000 based upon the Company meeting certain financial metrics. 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 is included in the Company's results of operations from May 16, 2013, the date of acquisition. The acquired business contributed revenues of $6,796 and a net loss of $5,387 to the Company for the period from acquisition to December 31, 2013. The results of the acquired business are included in the Company's Sapphire business reporting segment.
During the second quarter of 2014, the purchase price (including the estimated contingent consideration) and related allocations for the acquisition were finalized. As a result of the purchase price allocation, the Company recognized $6,258 of goodwill, which was 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 purchase price allocation for the acquisition of Thermal Technology is as follows:
Fair Value of consideration transferred:
 
 
Common stock
 
$
14,463

Contingent consideration obligations
 
6,211

Net working capital adjustment
 
(735
)
Total fair value of consideration
 
$
19,939


 

8

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
 
6,258

Accounts payable and accrued expenses
 
(7,057
)
Customer deposits
 
(2,509
)
Deferred tax liability
 
(2,663
)
Other current liabilities
 
(9
)
Total net assets acquired
 
$
19,939


The purchase consideration included 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 annual revenue achieved through 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 months ended June 28, 2014, the Company recorded contingent consideration expense of $200, related to an increase in the fair value of the liability from the acquisition date.
The acquired intangible assets is comprised of technology of $11,300 and customer relationships of $3,200, with weighted average amortization periods of 8.2 years and 7 years, respectively.
The Company incurred transaction costs of $1,188, which consisted primarily of advisory services and due diligence-related expenses.These costs were recorded as general and administrative expense for the fiscal year ended December 31, 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.
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 three and six month period ended June 28, 2014.
The following table provides the assets and liabilities measured and reported at fair value on a recurring basis at June 28, 2014 and December 31, 2013:

9

GT Advanced Technologies Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(In thousands, except per share data)

 
June 28, 2014
 
 
 
Fair Value Measurements Using
 
Total
Carrying
Value
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets:
 
 
 
 
 
 
 
Money market mutual funds

$206,092

 

$206,092

 

$—

 

$—

Liabilities:
 
 
 
 
 
 
 
Contingent consideration

$20,786

 

$—

 

$—

 

$20,786


 
December 31, 2013
 
 
 
Fair Value Measurements Using
 
Total
Carrying
Value
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets:
 
 
 
 
 
 
 
Money market mutual funds

$462,908

 

$462,908

 

$—

 

$—

Liabilities:
 
 
 
 
 
 
 
Contingent consideration

$15,407

 

$—

 

$—

 

$15,407


The Company's money market mutual funds are valued using readily available quoted market prices for identical assets.
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 operational 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 June 28, 2014, related to the contingent consideration from the acquisition of certain assets of Twin Creeks used in the model include a discount rate of 28% for purposes of discounting the low and base case scenarios associated with achievement of the financial 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 June 28, 2014, related to the contingent consideration from the acquisition of the business of Thermal Technology used in the model include a discount rate of 20% 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 50% each. 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.
During the three months ended June 28, 2014, the Company completed an immaterial acquisition of certain assets. The key assumptions, as of June 28, 2014, related to the contingent consideration from the acquisition of these certain assets were based on a probability-weighted approach derived from assessments of achieving future milestones. The milestones were discounted based on management's estimates of the likelihood of achieving each individual milestone. Such probability of achievement estimates range from 25% to 100%. An increase or decrease in the probability of achievement of any milestone could result in a significant increase or decrease to the estimated fair value of the contingent consideration liability.
The Company recorded contingent consideration (income) expense in the condensed consolidated statements of operations of ($538) and $1,837, respectively, for the three and six months ended June 28, 2014, and ($4,310) and ($3,974) for the three and six months ended June 29, 2013. In each period, the entire amount was allocated to the corporate services reporting segment.

10

GT Advanced Technologies Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(In thousands, except per share data)

Changes in the fair value of the Company's Level 3 contingent consideration obligations during the three and six months ended June 28, 2014 and three and six months ended June 29, 2013 were as follows:
 
Three Months Ended
 
Six Months Ended
 
June 28, 2014
 
June 29, 2013
 
June 28, 2014
 
June 29, 2013
Fair value as of the beginning of the period
$
17,782

 
$
10,651

 
$
15,407

 
$
10,315

Acquisition date fair value of contingent consideration obligations related to acquisitions
3,542

 
6,211

 
3,542

 
6,211

Changes in the fair value of contingent consideration obligations
(538
)
 
(4,310
)
 
1,837

 

($3,974
)
Fair value at the end of the period
$
20,786

 
$
12,552

 
$
20,786

 
$
12,552


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 June 28, 2014 or December 31, 2013.
The following table provides the carrying and fair values of the Company’s prepayment obligations and convertible notes as of June 28, 2014 and December 31, 2013:
 
 
 
 
Fair Value Measurements Using
 
 
Description
 
Total Carrying Value
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Fair Value
3.00% Senior Convertible Notes due 2017












 

June 28, 2014

$
173,969


$


$
537,988


$

 
537,988

December 31, 2013

$
168,153


$


$
300,168


$

 
300,168

3.00% Senior Convertible Notes due 2020












 

June 28, 2014

$
120,240


$


$
368,872


$

 
368,872

December 31, 2013

$
115,761


$


$
217,745


$

 
217,745

Prepayment Obligation












 

June 28, 2014

$
350,600


$


$
350,582


$

 
350,582

December 31, 2013

$
172,475


$


$
172,482


$

 
172,482


The fair values of the 3.00% Senior Convertible Notes due 2017 and 3.00% Senior Convertible Notes due 2020 were calculated using a market approach. The inputs used in the calculation included assumptions at the valuation date of stock price, conversion price, risk-free rate, expected annual dividend yield, expected volatility, bond yield and recovery rate.
The fair value of the prepayment obligation was calculated using a market approach. The inputs used in the calculation were based on comparable long term debt instruments in the market with similar characteristics and terms at the valuation date.
During the six months ended June 28, 2014, certain assets have been measured at fair value on a nonrecurring basis using significant unobservable inputs (Level 3). The following table presents the fair value of the asset as of the measurement date, valuation techniques and related unobservable inputs of the asset:


Fair Value

Valuation Technique(s)

Unobservable Input

Range, Median or Average
Arizona deferred rent benefit

$
51,194


Market Approach

Discount rate

Range

The fair value of the below market operating lease benefit in connection with the Arizona Lease at the lease commencement date was calculated using a market approach. The inputs used in the calculation were based on comparable lease signings and market rents in the surrounding area. The discount rate used, in the opinion of management, best reflects the current market interest rate of a comparable lease arrangement with similar characteristics and terms.
Significant increases or decreases in any of the significant unobservable inputs used could result in significantly higher or lower fair value measurements.

11

GT Advanced Technologies Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(In thousands, except per share data)



12

GT Advanced Technologies Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(In thousands, except per share data)

6. Goodwill and Other Intangible Assets
The following table contains the change in the Company’s goodwill during the six months ended June 28, 2014:


Photovoltaic

Sapphire

Total


Business

Business


          Balance as of December 31, 2013









          Goodwill

$
61,399


$
49,917


$
111,316

          Accumulated impairment losses

(57,037
)



(57,037
)


4,362


49,917


54,279








          Goodwill from immaterial acquisition



2,609


2,609








          Balance as of June 28, 2014






          Goodwill

61,399


52,526


113,925

          Accumulated impairment losses

(57,037
)



(57,037
)
          

$
4,362


$
52,526


$
56,888


No impairment losses have been recorded on the Company's goodwill during the six months ended June 28, 2014.

13

GT Advanced Technologies Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(In thousands, except per share data)

Acquired intangible assets subject to amortization at June 28, 2014 and December 31, 2013 consisted of the following:

 

 
June 28, 2014
 
December 31, 2013

 
Weighted Average Amortization Period (in years)
 
Gross Amount
 
Accumulated Amortization
 
Net
 
Gross Amount
 
Accumulated Amortization
 
Net
Finite-lived intangible assets
 
 
 
 
 
 
 
 
 
 
 
 
Photovoltaic:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Technology
 
9.5
 
$
74,200

 
$
25,126

 
$
49,074

 
$
74,200

 
$
21,694

 
$
52,506

Trade names / Trademarks
 
8.6
 
7,100

 
3,741

 
3,359

 
7,100

 
3,506

 
3,594

Subtotal:
 
 
 
81,300

 
28,867

 
52,433

 
81,300

 
25,200

 
56,100


 
 
 
 
 
 
 
 
 
 
 
 
 
 
Polysilicon:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Technology
 
2.6
 
1,500

 
1,500

 

 
1,500

 
1,500

 

Subtotal:
 
 
 
1,500

 
1,500

 

 
1,500

 
1,500

 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sapphire:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
 
6.3
 
7,900

 
3,191

 
4,709

 
7,300

 
2,616

 
4,684

Technology
 
9.1
 
31,876

 
8,390

 
23,486

 
28,600

 
6,760

 
21,840

Order backlog
 
1.2
 
500

 
500

 

 
500

 
500

 

Trade names
 
8.0
 
1,100

 
539

 
561

 
1,100

 
470

 
630

Non-compete agreements
 
6.2
 
1,110

 
703

 
407

 
1,000

 
611

 
389

Subtotal:
 
 
 
42,486

 
13,323

 
29,163

 
38,500

 
10,957

 
27,543

Total finite-lived intangible assets
 
125,286

 
43,690

 
81,596

 
121,300

 
37,657

 
83,643


 
 
 
 
 
 
 
 
 
 
 
 
 
 
Indefinite-lived intangible assets
 
 
 
 
 
 
 
 
 
 
 
 
In-process research and development
 
 
 
12,300

 

 
12,300

 
12,300

 

 
12,300

Total intangible assets
 
$
137,586

 
$
43,690

 
$
93,896

 
$
133,600

 
$
37,657

 
$
95,943

The weighted average remaining amortization periods for the (i) photovoltaic, (ii) polysilicon and (iii) sapphire intangibles were 6.41 years, 0 years and 5.79 years years, respectively, as of June 28, 2014. As of June 28, 2014, the estimated future amortization expense for the Company's intangible assets is as follows:
Year Ending December 31,
Amortization
Expense
2014 (remaining six months)

$6,248

2015
12,451

2016
12,118

2017
11,651

2018
11,589

2019
11,421

Thereafter
16,118


7. Customer Concentrations

14

GT Advanced Technologies Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(In thousands, except per share data)

The following customers comprised 10% or more of the Company's total revenue or accounts receivable for, or as of, the periods indicated:
 
Three Months Ended
 
Six Months Ended
 
As of
 
June 28, 2014
 
June 29, 2013
 
June 28, 2014
 
June 29, 2013
 
June 28, 2014
 
December 31, 2013
 
Revenue
 
% of Total
 
Revenue
 
% of Total
 
Revenue
 
% of Total
 
Revenue
 
% of Total
 
Accounts Receivable
 
% of Total
 
Accounts Receivable
 
% of Total
Photovoltaic Customers
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer #1
*

 
*

 
*
 
*

 
*

 
*

 
*
 
*

 
$
1,584

 
11
%
 
$
5,543

 
45
%
Polysilicon Customers
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer #2
*

 
*

 
100,542
 
60
%
 
*

 
*

 
100,661
 
45
%
 
*

 
*

 
*

 
*

Customer #3
*

 
*

 
45,268
 
27
%
 
*

 
*

 
45,268
 
20
%
 
*

 
*

 
*

 
*

Customer #4
*

 
*

 
*
 
*

 
*

 
*

 
*
 
*

 
1,947

 
14
%
 
*

 
*

Customer #5
*


*


*

*


*


*


34,915

15
%

*


*


*


*

Sapphire Customers
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer #6
25,248

 
44
%
 
*
 
*

 
26,288

 
33
%
 
*
 
*

 
*

 
*

 
*

 
*

Customer #7
11,446


20
%

*

*


11,490


14
%

*

*


3,292


23
%

*


*

___________________________
* Amounts from these customers were less than 10% of the total as of, or for, the respective period.
The Company requires most of its equipment customers to either post letters of credit or make advance payments of a portion of the selling price prior to delivery of the applicable equipment. Approximately $6,147 (or 44%) and $8,391 (or 68%) of total accounts receivable as of June 28, 2014 and December 31, 2013, respectively, were secured by letters of credit.
8. Inventories
Inventories consisted of the following as of the dates indicated:
 
June 28, 2014
 
December 31, 2013
Raw materials
$
99,872

 
$
29,704

Work-in-process
30,360

 
6,941

Finished goods
2,415

 
2,442

 
$
132,647

 
$
39,087

The increase in the Company’s raw materials is attributable to the sapphire business. The Company's work-in-process inventory is also attributable to the Company’s sapphire business.
9. Other Assets
Other assets consisted of the following as of the dates indicated:

15



 
June 28, 2014
 
December 31, 2013
Inventory
$
49,069


$
50,010

Vendor advances
30,841


37,702

Deferred financing fees
7,362


8,058

Deferred income taxes
33,653


18,872

Deferred costs
26,250


26,528

Deferred rent asset
43,276


2,048

Other
6,128


7,694

 
$
196,579

 
$
150,912


The inventory classified in Other Assets is comprised of equipment purchases for a specific customer who placed an advanced payment to secure the supply of such equipment. The Company is contractually obligated to deliver the inventory to the customer beyond twelve months from the balance sheet date, and as such the inventory is classified in non-current assets.

10. Warranty
The following table presents warranty activities for the periods indicated:
 
 
Six Months Ended
 
 
June 28, 2014
 
June 29, 2013
Product warranty liability, beginning of the period
 
$
11,689

 
$
10,711

Accruals for warranties issued
 
2,079

 
6,637

Settlements made during the period
 
(2,450
)
 
(3,886
)
Product warranty liability, end of period
 
$
11,318

 
$
13,462


11. Property, Plant and Equipment
Property, plant and equipment, net consisted of the following as of the dates indicated:


Estimated Useful Life

June 28, 2014

December 31, 2013
Leasehold improvements

Lesser of useful life or initial lease term

$
27,210


$
22,693

Land

0 years

1,074


1,074

Land improvements

15 years

326


326

Building

40 years

17,606


17,606

Machinery and equipment

3 to 7 years

284,154


53,153

Computer equipment and software

3 to 5 years

14,510


11,451

Furniture and fixtures

5 to 7 years

2,713


2,749

Construction in process


324,774


146,092





672,367


255,144

Less accumulated depreciation



(60,902
)

(45,384
)




$
611,465


$
209,760


Depreciation expense for the three and six months ended June 28, 2014 was $12,795 and $16,944, respectively, compared to depreciation expense for the three and six months ended June 29, 2013 of $4,580 and $8,666, respectively.
Software costs incurred as part of an enterprise resource systems project of $455 and $2,051 were capitalized during the three and six months ended June 28, 2014, respectively.
Machinery and equipment as of June 28, 2014 includes $14,724 of assets that are located at the Arizona facility and are subject to a lease from Apple. For further details of the leasing transaction, see Note 3, Significant Agreements.
The capitalized interest expense was $4,777 and $5,321 for the three and six months ended June 28, 2014, respectively, compared to capitalized interest of $0 for both the three and six months ended June 29, 2013.
As of June 28, 2014, the Company has capitalized $216,020 and $307,721 within machinery and equipment and construction in process, respectively. These assets in the Arizona facility are expected to be used exclusively to supply sapphire material pursuant to the MDSA. These assets secure the Company's obligations under the MDSA and Prepayment Agreement (see Note 3, Significant Agreements). Depreciation on these assets commence after the equipment has completed validation testing and the assets are placed into service to begin producing product for sale. The estimated useful life for these assets is seven years.


16

GT Advanced Technologies Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(In thousands, except per share data)

12. Restructuring Charges and Asset Impairments
Realignment of Manufacturing, Engineering and Supply Chain Resources
On June 26, 2014, the Company realigned its manufacturing, engineering and supply chain resources in an effort to improve effectiveness across its diversified business portfolio. The actions taken were intended to align the Company's previously centralized personnel and operational resources directly with the Company's various businesses. As a result of the realignment, the Company (i) reduced worldwide headcount by approximately 70 positions and (ii) discontinued sapphire fabrication operations at the Company's Salem, Massachusetts facility and focused the facility solely on sapphire material growth. Sapphire fabrication operations will be conducted at another Company facility.

The total charges related to the realignment of $3,256 in the three months ended June 28, 2014 included $1,484 in lease exit costs in the sapphire business segment. In addition, the Company recorded severance charges of $744 and $722 in the photovoltaic and sapphire segments, respectively, and $306 in corporate severance costs. The Company expects to record additional restructuring charges of approximately $1,020 in the three months ended September 27, 2014, related primarily to additional lease exit costs. The estimate of the additional restructuring charges is based on the cease-use date of the fabrication production area which is still to be determined.
Hazelwood Facility Idling
 
On January 10, 2013, the Company announced its plan to idle operations at its Hazelwood, Missouri facility (“Hazelwood facility”), which is included in the photovoltaic segment. The idling of the Hazelwood facility was part of the Company’s effort to reduce costs and optimize its research and development activities. 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. Since the announcement of the plan, the Company has recorded $40,309 of restructuring charges and asset impairments related to the Hazelwood facility, and there have been no additional charges related to this action. All activities related to the idling of the Hazelwood facility are complete.
 
The Company reports expense for its restructuring charges and asset impairments separately in the condensed consolidated statements of operations. The aggregate restructuring charges and accrued expenses for the realignment of manufacturing, engineering and supply chain resources in June 2014 and the idling of the Hazelwood Facility, which are included in accrued expenses on the Company’s condensed consolidated balance sheet as of June 28, 2014, are as follows:


Employee Related Benefits

Lease Exit and Contract Termination Costs

Total
Balance as of December 31, 2013

$
114


$
1,463


$
1,577

Restructuring charges

1,772


1,484


3,256

Cash payments

(32
)

(269
)

(301
)
Balance as of June 28, 2014

$
1,854


$
2,678


$
4,532


13. Income Taxes
The Company accounts for income taxes at each interim period using its estimated annual effective tax rate which takes into account operations in the U.S. and in other tax jurisdictions. Changes in the mix of pre-tax 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 was 20.72% (benefit) for the six months ended June 28, 2014 and 64.6% (benefit) for the six months ended June 29, 2013. The effective tax rate for the six months ended June 28, 2014, was impacted by the recording of a valuation allowance against certain U.S. deferred tax assets, expiration of the U.S. federal research and development tax credit, an unfavorable permanent adjustment related to executive compensation limitations under Section 162(m) of the Internal Revenue Code which is non-deductible for tax purposes, and the jurisdictional mix of income/loss. 


17

GT Advanced Technologies Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(In thousands, except per share data)

Based upon the Company's cumulative U.S. operating results over the current and prior two years and an assessment of expected U.S. future results, the Company concluded in the three months ended June 28, 2014 that it is more likely than not that it would not be able to realize a portion of its U.S. net deferred tax assets generated this year. In determining the amount of the valuation allowance required, the Company considered the net operating losses available to be carried back as well as the realization of research and development and foreign tax credits.

The Company reviews its expected annual effective income tax rates and makes changes on a quarterly basis as necessary based on certain factors such as changes in forecasted annual operating income by jurisdiction; changes to actual or forecasted permanent book to tax differences; impacts from future tax settlements with state, federal or foreign tax authorities; and impacts from tax law changes. Due to the volatility of these factors, the Company’s consolidated effective income tax rate may change significantly on a quarterly basis.

A reconciliation of the change in unrecognized tax benefits for the six months ended June 28, 2014 is as follows:
Unrecognized tax benefits at December 31, 2013

$25,613

Increases related to current year tax positions
1,284

Decreases related to prior year tax positions
(26
)
Settlements with tax authorities

($1,157
)
Unrecognized tax benefits at June 28, 2014

$25,714


The Company also recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. During the six months ended June 28, 2014, the Company recorded an income tax provision of $623, 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’s U.S. tax returns are currently in appeals for fiscal years ended March 28, 2009 and April 3, 2010, and the Company plans to vigorously defend all tax positions taken. The Company has settled examination with the New Hampshire Department of Revenue for its fiscal years ended April 3, 2010, April 2, 2011 and March 31, 2012. The statute of limitations is open for the remainder of the states and all foreign jurisdictions. During the six months ended June 28, 2014 and June 29, 2013, the Company paid $1,937 and $15,804 for estimated taxes, respectively.


14. Commitments and Contingencies
Purchase Commitments
The Company's commitments to purchase raw materials, equipment, research and development and other services from various suppliers and vendors are estimated to be $425,654 and $473,640 as of June 28, 2014 and December 31, 2013, respectively. The majority of these commitments as of June 28, 2014 are due within the next 12 months.

The Company may terminate purchase commitments for DSS inventory components in fiscal 2014 and beyond. The gross amount outstanding under these purchase orders was $3,189 as of June 28, 2014, and the Company will negotiate with the vendors to determine the amount payable upon termination of these purchase orders, as applicable. As of June 28, 2014, $600 has been accrued as certain purchase orders were canceled as of June 28, 2014.

Supply Commitments

In connection with the agreements made with Apple Inc., the Company is required to maintain levels of supply of sapphire material in accordance with the MDSA.
 
Pledged Collateral

In connection with the acquisition of Confluence Solar, the Company has acquired certain assets which are pledged as collateral against customer deposits of $1,987 as of June 28, 2014.
 
The Company has pledged (i) all of the equity interests of GT Equipment Holdings LLC and (ii) all of the assets held by GT Equipment Holdings LLC to secure its obligations under the Prepayment Agreement and the MDSA.

Litigation Contingencies

The Company is subject to various 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.

Indemnification

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. Prepayment Obligation and Convertible Notes
Prepayment Agreement with Apple Inc.

On October 31, 2013, the Company also entered into a Prepayment Agreement with Apple pursuant to which GTAT Corp., a wholly-owned subsidiary, is eligible to receive $578,000 (the “Prepayment Amount”), in four separate installments, receipt of such installments is subject to meeting certain conditions, including technical and performance metrics. The Prepayment Amount is to be used exclusively to purchase components necessary for the manufacture of ASF systems and related equipment principally for use at the Arizona facility leased from Apple. The ASF systems and related equipment will be used exclusively to supply sapphire material to Apple, subject to certain exceptions under which such sapphire can be provided to other parties. The Company is required to repay the Prepayment Amount ratably (on a quarterly basis) over a five year period beginning in January 2015, either as a credit against amounts due from Apple purchases of sapphire goods under the MDSA or as a direct cash payment. The Prepayment Amount is non-interest bearing. The Company’s obligation to repay the Prepayment Amount may be accelerated under certain circumstances, including if the Company does not meet certain financial metrics or meet certain technical and performance covenants. The Company’s obligations under the Prepayment Agreement are secured by (i) the assets held by GT Equipment Holdings LLC (a wholly-owned subsidiary of the Company and the legal owner of the ASF systems and related equipment used in the Arizona facility that were purchased with the Prepayment Amount) and (ii) a pledge of all of the equity interests of GT Equipment Holdings LLC. While the MDSA specifies the Company’s minimum and maximum supply commitments, Apple has no minimum purchase requirements under

18

GT Advanced Technologies Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(In thousands, except per share data)

the terms of the MDSA. The Company determined the installments of the Prepayment Amount that it receives should be recorded as debt at fair value on the date of receipt of each installment. The difference between the fair value of the debt and the Prepayment Amount proceeds received (“debt discount”) is consideration under the MDSA and accounted for as deferred revenue. The debt discount is being amortized to interest expense over a 6-year period ending December 2019 with an effective interest rate of 7.44%, and interest expense of $6,406 and $10,824 was recognized in the three and six months ended June 28, 2014, respectively.  The first three installments of $225,000, $111,000, and $103,000 were received on November 15, 2013, January 23, 2014, and April 4, 2014, respectively. As of June 28, 2014, $350,600 is reflected as Prepayment Obligation and $100,795 is recorded as deferred revenue.

3.00% Convertible Senior Notes due 2017
On September 28, 2012, the Company issued $220,000 aggregate principal amount of 3.00% Convertible Senior Notes due 2017 (the “2017 Notes”). The net proceeds from the issuance of the 2017 Notes were approximately $212,592, after deducting fees paid to the initial purchasers and other offering costs. The 2017 Notes are senior unsecured obligations of the Company, which pay interest in cash semi-annually (on April 1 and October 1 of each year) at a rate of 3.00% per annum beginning on April 1, 2013. The 2017 Notes are governed by an Indenture dated September 28, 2012 with U.S. Bank National Association, as trustee (the “Indenture”). The Notes are not redeemable by the Company.
The 2017 Notes will mature on October 1, 2017, unless earlier repurchased or converted in accordance with their terms prior to such date. The 2017 Notes may be converted, under certain conditions, based on an initial conversion rate of 129.7185 shares of common stock per $1,000 principal amount of 2017 Notes (which represents an initial effective conversion price of the Notes of $7.71 per share), subject to adjustment as described in the Indenture.
The 2017 Notes may be converted by the holder, in multiples of $1,000 principal amount, only under the following circumstances:
prior to April 1, 2017, during any calendar quarter commencing after the calendar quarter ending on December 31, 2012 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
prior to April 1, 2017, during the five business day period after any five consecutive trading day period in which the trading price (as defined in the Indenture) per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day;
prior to April 1, 2017, upon specified corporate events;
on or after April 1, 2017 until the close of business on the second scheduled trading day immediately preceding the maturity date, regardless of the foregoing circumstances.
Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of its common stock or a combination of cash and shares of its common stock, at its election. If the Company satisfies its conversion obligation solely in cash or through payment and delivery, as the case may be, of a combination of cash and shares of its common stock, the amount of cash and shares of common stock, if any, due upon conversion will be based on a daily conversion value (as described in the Indenture), calculated on a proportionate basis for each trading day in a 40 consecutive trading-day conversion period (as described in the Indenture).

In addition, following certain corporate events that occur prior to the maturity date (as described in the Indenture), the Company will adjust the conversion rate for a holder of the 2017 Notes who elects to convert its 2017 Notes in connection with such a corporate event in certain circumstances.

The effective interest rate on the liability component of the 2017 Notes was 10.7% as of June 28, 2014. Interest expense incurred in connection with the 2017 Notes consisted of the following:

19

GT Advanced Technologies Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(In thousands, except per share data)

        
Three Months Ended
 
Six Months Ended
 
June 28, 2014
 
June 28, 2014
Contractual coupon rate of interest
$
1,641

 
$
3,273

Amortization of issuance costs and debt discount
3,186

 
6,299

Interest expense - Convertible Notes
$
4,827

 
$
9,572


The carrying value of the 2017 Notes consisted of the following:
 
June 28, 2014
Principal balance
$
220,000

Discount, net of accumulated amortization of $19,086
(46,031
)
Carrying amount
$
173,969

3.00% Convertible Senior Notes due 2020 
On December 10, 2013, the Company issued $214,000 aggregate principal amount of 3.00% Convertible Senior Notes due 2020 (the “2020 Notes”). The net proceeds from the issuance of the 2020 Notes were approximately $206,530, after deducting fees paid to the initial purchasers and other offering costs. The 2020 Notes are senior unsecured obligations of the Company, which pay interest in cash semi-annually (on June 15 and December 15 of each year) at a rate of 3.00% per annum beginning on June 15, 2014. The 2020 Notes are governed by an Indenture dated December 10, 2013 with U.S. Bank National Association, as trustee (the “2013 Indenture”). The 2020 Notes are not redeemable by the Company.
The 2020 Notes will mature on December 15, 2020, unless earlier repurchased or converted in accordance with their terms prior to such date. The 2020 Notes may be converted, under the conditions specified below, based on an initial conversion rate of 82.5764 shares of common stock per $1,000 principal amount of 2020 Notes (which represents an initial effective conversion price of the Notes of $12.11 per share), subject to adjustment as described in the 2013 Indenture.
The 2020 Notes may be converted by the holder, in multiples of $1,000 principal amount, only under the following circumstances: 
prior to June 15, 2020, during any calendar quarter commencing after the calendar quarter ending on March 31, 2014 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
 prior to June 15, 2020, during the five business day period after any five consecutive trading day period in which the trading price (as defined in the 2013 Indenture) per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day;
prior to June 15, 2020, upon specified corporate events;
on or after June 15, 2020 until the close of business on the second scheduled trading day immediately preceding the maturity date, regardless of the foregoing circumstances.
Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of its common stock or a combination of cash and shares of its common stock, at its election. If the Company satisfies its conversion obligation solely in cash or through payment and delivery, as the case may be, of a combination of cash and shares of its common stock, the amount of cash and shares of common stock, if any, due upon conversion will be based on a daily conversion value (as described in the 2013 Indenture), calculated on a proportionate basis for each trading day in a 40 consecutive trading-day conversion period (as described in the 2013 Indenture).

20

GT Advanced Technologies Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(In thousands, except per share data)

In addition, following certain corporate events that occur prior to the maturity date (as described in the 2013 Indenture), the Company will adjust the conversion rate for a holder of the 2020 Notes who elects to convert its 2020 Notes in connection with such a corporate event in certain circumstances.
The effective interest rate on the liability component of the 2020 Notes was 12.99% as of June 28, 2014. Interest expense incurred in connection with the 2020 Notes consisted of the following:

Three Months Ended

Six Months Ended

June 28, 2014

June 28, 2014
Contractual coupon rate of interest
$
1,614


$
3,210

Amortization of issuance costs and debt discount
2,374


4,692

Interest expense - Convertible Notes
$
3,988


$
7,902

The carrying value of the 2020 Notes consisted of the following:

June 28, 2014
Principal balance
$
214,000

Discount, net of accumulated amortization of $5,010
(93,760
)
Carrying amount
$
120,240

The Company will be required to repay the following principal amounts under the Apple Prepayment Agreement, 2017 Notes and 2020 Notes:
 
 
Principal
 
Fiscal Year Ending
 
Payments
 
2014 (remaining 6 months)
 
$

 
2015
 
87,800

 
2016
 
87,800

 
2017
 
307,800

 
2018
 
87,800

 
2019
 
87,800

 
2020
 
214,000

 
Total
 
$
873,000

 
16. Share‑Based Compensation
The Company recorded $8,653 and $14,363 of expense related to share‑based compensation during the three and six months ended June 28, 2014, respectively, compared to $4,904, and $9,328 of expense related to share‑based compensation during the three and six months ended June 29, 2013, respectively. Share‑based compensation cost capitalized as part of inventory was not material for all periods presented.

During the six months ended June 28, 2014, no option awards were granted to executives or employees of the Company.
During the six months ended June 28, 2014, the Company granted 1,433,845 time-based restricted stock units to certain executives, employees and directors of the Company. Time-based restricted stock units provide for the holder to receive shares of the Company's common stock at the time such units vest or restrictions on such units lapse in accordance with the terms of the restricted stock unit agreement. The total fair value of the restricted stock units, which was based on the fair value of the Company's common stock on the date of grant, was $15,120 or $10.55 per share on a weighted average basis.

21

GT Advanced Technologies Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(In thousands, except per share data)

During the six months ended June 28, 2014, the Company granted certain executives 611,913 performance-based restricted stock units. The total fair value of these restricted stock units, which was based on the fair value of the Company’s common stock on the date of the grant, was $6,009, or $9.82 per share on a weighted average basis.

As of June 28, 2014, the Company had unamortized share-based compensation expense related to stock options, restricted stock unit awards and performance-based restricted stock unit awards of approximately $27,983, after estimated forfeitures, and the expense is expected to be recognized over an estimated weighted average remaining requisite service period of 1.63 years.

17. Stockholders’ Equity
The following table presents the changes in stockholders’ equity for the six months ended June 28, 2014:
 
Common Stock
 
 
 
 
 
 
 
 
 
Shares
 
Par Value
 
Additional
Paid-in Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
Total Stockholders' Equity
Balance as of January 1, 2014
134,463

 
$
1,345

 
$
355,916

 
$
(26,115
)
 
$
1,259

 
$
332,405

Net loss


 


 


 
(127,778
)
 


 
(127,778
)
Other comprehensive loss












(470
)

(470
)
Option exercises and vesting of restricted stock units
3,484

 
34

 
8,003

 


 


 
8,037

Share-based compensation expense


 


 
11,315

 


 


 
11,315

Minimum tax withholding payments for employee share-based awards
(601
)
 
(6
)
 
(7,674
)
 


 


 
(7,680
)
Balance as of June 28, 2014
137,346

 
$
1,373

 
$
367,560

 
$
(153,893
)
 
$
789

 
$
215,829


18. Accumulated Other Comprehensive Income
The following tables summarize the changes in accumulated balances of other comprehensive income for the periods presented:

22

GT Advanced Technologies Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(In thousands, except per share data)

 
 
Three months ended June 28, 2014
 
Six months ended June 28, 2014
 
 
Unrealized Gains and Losses on Cash Flow Hedges
 
Foreign Currency Items
 
Total
 
Unrealized Gains and Losses on Cash Flow Hedges
 
Foreign Currency Items
 
Total
Beginning balance
 
$
(587
)
 
$
1,380

 
$
793

 
$
(590
)
 
$
1,849

 
$
1,259

Other comprehensive (loss) income before reclassification
 
(1
)
 
(3
)
 
(4
)
 
2

 
(472
)
 
(470
)
Amounts reclassified from accumulated other comprehensive income
 

 

 

 

 

 

Ending balance
 
$
(588
)
 
$
1,377

 
$
789

 
$
(588
)
 
$
1,377

 
$
789

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 29, 2013
 
Six months ended June 29, 2013
 
 
Unrealized Gains and Losses on Cash Flow Hedges
 
Foreign Currency Items
 
Total
 
Unrealized Gains and Losses on Cash Flow Hedges
 
Foreign Currency Items
 
Total
Beginning balance
 
$