by Matt Margolis
GT Advanced Technologies reported their Q4 2013 financials on 2/24/14. During the call GT indicated that they spent $50 million of capital in Q4 2013 and they deployed over $180 million of PP&E mostly in Arizona. They also indicated that they planned on spending $500-600 million in capital expenditures in 2014. Apple’s prepayment amount of $578 million was to fund the purchase of furnaces, I am now assuming that $50m of the $578m was spent in 2013 and the remaining $528m will be spent over the 1H of 2014.
However, GT’s latest filing Form DEF 4A filed on 4/22/14, right in the middle of GT’s compensation program details indicated that GT, “re-directed its sapphire equipment inventory and supply chain capacity to preparing for its expanded sapphire material operations”. GT’s supply chain capacity re-direct likely indicates that GT shifted their current sapphire production equipment from other clients to Apple and began growing sapphire boules for Apple beginning in Q4 2013, from their production facility in Salem, MA. I know for certain GT was looking to hire sapphire growth employees for second and third shift in Salem during Q4 2013 as evidenced by various job postings. This recent filing might provide the most significant proof yet, that GTAT began growing sapphire for Apple during Q4, 2013.
NEOs did not receive a bonus payment under the 162( m) Incentive Plan. During the latter part of Fiscal 2013, as the Company re-directed its sapphire equipment inventory and supply chain capacity to preparing for its expanded sapphire material operations, it became apparent that the metrics forthe 162(m) Incentive Plan payout, established early in Fiscal 2013, would not be met.
According to GT’s Q4 2013 Investor Financial Summary GT’s inventory in Q4 dropped $71m, from $160m to $89m, which most likely represents the amount of sapphire growth furnaces that were re-directed from GT’s inventory to the Mesa, AZ sapphire plant during Q4 2013.
I had previously estimated the number of ASF furnaces likely to land inside the Mesa, AZ facility at 2,300 furnaces. Based on the sapphire equipment inventory re-direct indicating in the filing and my understanding of the language in the $578 million prepayment agreement I am upping my ASF furnace estimate to 2,800 to 3,000 from 2,300.
My previous ASF Furnace Estimate/Assumption from March is Below
GT announced that they had deployed $180m of PPE (majority to Apple). Import records indicate that GT HK’s worldwide operations shipped furnaces from HK to Mesa, AZ. GT management also stated, that they would spend $500-600m in capital expenditures, with most of the heavy lifting occurring over the first half of the year. Assuming GT is spending $500m of capital expenditures and $180m that is being deployed from existing PPE this would allow them to purchase approximately 2,300 furnaces to grow sapphire boules.
Full Disclosure: I am long GTAT and have no plans to buy or sell any holdings