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 March 30, 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 |
|
03-0606749 |
|
|
|
20 Trafalgar Square |
|
03063 |
Registrants 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 |
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Accelerated filer o |
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|
|
Non-accelerated filer o |
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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 May 2, 2013, approximately 119,405,660 shares of the registrants 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 March 30, 2013
GT Advanced Technologies Inc.
Condensed Consolidated Balance Sheets
(In thousands, except per share data)
(Unaudited)
|
|
March 30, 2013 |
|
December 31, 2012 |
| ||
Assets |
|
|
|
|
| ||
Current assets: |
|
|
|
|
| ||
Cash and cash equivalents |
|
$ |
320,226 |
|
$ |
418,095 |
|
Accounts receivable, net |
|
20,389 |
|
23,829 |
| ||
Inventories |
|
150,742 |
|
133,286 |
| ||
Deferred costs |
|
47,937 |
|
30,248 |
| ||
Vendor advances |
|
9,907 |
|
32,440 |
| ||
Deferred income taxes |
|
42,420 |
|
28,226 |
| ||
Refundable income taxes |
|
567 |
|
1,516 |
| ||
Prepaid expenses and other current assets |
|
8,792 |
|
9,168 |
| ||
Total current assets |
|
600,980 |
|
676,808 |
| ||
Property, plant and equipment, net |
|
74,414 |
|
77,980 |
| ||
Other assets |
|
87,198 |
|
86,920 |
| ||
Intangible assets, net |
|
88,061 |
|
90,516 |
| ||
Deferred cost |
|
24,352 |
|
24,423 |
| ||
Goodwill |
|
48,021 |
|
48,021 |
| ||
Total assets |
|
$ |
923,026 |
|
$ |
1,004,668 |
|
Liabilities and stockholders equity |
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
| ||
Current portion of long-term debt |
|
$ |
7,250 |
|
$ |
7,250 |
|
Accounts payable |
|
45,292 |
|
44,848 |
| ||
Accrued expenses |
|
34,163 |
|
30,928 |
| ||
Contingent consideration |
|
4,901 |
|
4,901 |
| ||
Customer deposits |
|
80,499 |
|
111,777 |
| ||
Deferred revenue |
|
103,333 |
|
86,098 |
| ||
Accrued income taxes |
|
6,319 |
|
21,716 |
| ||
Total current liabilities |
|
281,757 |
|
307,518 |
| ||
Long-term debt |
|
92,313 |
|
132,313 |
| ||
Convertible notes |
|
160,044 |
|
157,440 |
| ||
Deferred income taxes |
|
19,812 |
|
24,459 |
| ||
Customer deposits |
|
64,384 |
|
71,340 |
| ||
Deferred revenue |
|
42,848 |
|
35,848 |
| ||
Contingent consideration |
|
5,750 |
|
5,414 |
| ||
Other non-current liabilities |
|
2,466 |
|
2,323 |
| ||
Accrued income taxes |
|
26,104 |
|
25,762 |
| ||
Total liabilities |
|
$ |
695,478 |
|
$ |
762,417 |
|
Commitments and contingencies (Note 12) |
|
|
|
|
| ||
Stockholders equity: |
|
|
|
|
| ||
Preferred stock, 10,000 shares authorized, none issued and outstanding |
|
|
|
|
| ||
Common stock, $0.01 par value; 500,000 shares authorized, 119,397 and 119,293 shares issued and outstanding as of March 30, 2013 and December 31, 2012, respectively |
|
1,194 |
|
1,193 |
| ||
Additional paid-in capital |
|
187,541 |
|
183,565 |
| ||
Accumulated other comprehensive income |
|
807 |
|
806 |
| ||
Retained earnings |
|
38,006 |
|
56,687 |
| ||
Total stockholders equity |
|
227,548 |
|
242,251 |
| ||
Total liabilities and stockholders equity |
|
$ |
923,026 |
|
$ |
1,004,668 |
|
See accompanying notes to these condensed consolidated financial statements.
GT Advanced Technologies Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
|
|
Three Months Ended |
| ||||
|
|
March 30, |
|
March 31, |
| ||
Revenue |
|
$ |
57,776 |
|
$ |
353,890 |
|
Cost of revenue |
|
44,161 |
|
201,562 |
| ||
Gross profit |
|
13,615 |
|
152,328 |
| ||
Operating expenses: |
|
|
|
|
| ||
Research and development |
|
16,441 |
|
15,248 |
| ||
Selling and marketing |
|
3,286 |
|
2,707 |
| ||
General and administrative |
|
14,563 |
|
15,170 |
| ||
Contingent consideration expense |
|
336 |
|
527 |
| ||
Restructuring charges |
|
2,858 |
|
|
| ||
Amortization of intangible assets |
|
2,455 |
|
2,546 |
| ||
Total operating expenses |
|
39,939 |
|
36,198 |
| ||
(Loss) income from operations |
|
(26,324 |
) |
116,130 |
| ||
Other income (expense): |
|
|
|
|
| ||
Interest income |
|
94 |
|
17 |
| ||
Interest expense |
|
(7,480 |
) |
(799 |
) | ||
Other, net |
|
190 |
|
(52 |
) | ||
(Loss) income before income taxes |
|
(33,520 |
) |
115,296 |
| ||
(Benefit) provision for income taxes |
|
(14,839 |
) |
36,223 |
| ||
Net (loss) income |
|
$ |
(18,681 |
) |
$ |
79,073 |
|
Net (loss) income per share: |
|
|
|
|
| ||
Basic |
|
$ |
(0.16 |
) |
$ |
0.66 |
|
Diluted |
|
$ |
(0.16 |
) |
$ |
0.65 |
|
Weighted-average number of shares used in per share calculations: |
|
|
|
|
| ||
Basic |
|
119,348 |
|
119,407 |
| ||
Diluted |
|
119,348 |
|
120,738 |
|
See accompanying notes to these condensed consolidated financial statements.
GT Advanced Technologies Inc.
Condensed Consolidated Statements of Comprehensive (Loss) Income
(In thousands, except per share data)
(Unaudited)
|
|
Three Months Ended |
| ||||
|
|
March 30, 2013 |
|
March 31, |
| ||
Net (loss) income |
|
$ |
(18,681 |
) |
$ |
79,073 |
|
Other comprehensive income (loss), net of tax: |
|
|
|
|
| ||
Change in fair value of cash flow hedging instruments, net of tax effect of $6 and ($931), respectively |
|
(29 |
) |
1,384 |
| ||
Foreign currency translation adjustments |
|
30 |
|
(57 |
) | ||
Other comprehensive income |
|
1 |
|
1,327 |
| ||
Comprehensive (loss) income |
|
$ |
(18,680 |
) |
$ |
80,400 |
|
See accompanying notes to these condensed consolidated financial statements.
GT Advanced Technologies Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
|
|
Three Months Ended |
| ||||
|
|
March 30, 2013 |
|
March 31, 2012 |
| ||
Cash flows from operating activities: |
|
|
|
|
| ||
Net (loss) income |
|
$ |
(18,681 |
) |
$ |
79,073 |
|
Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
|
|
|
|
| ||
Amortization expense |
|
2,455 |
|
2,546 |
| ||
Depreciation expense |
|
4,086 |
|
3,217 |
| ||
Convertible notes discount amortization |
|
2,604 |
|
|
| ||
Contingent consideration expense |
|
336 |
|
(812 |
) | ||
Loss on asset disposals |
|
181 |
|
|
| ||
Deferred income tax benefit |
|
(16,506 |
) |
(1,055 |
) | ||
Provision for excess and obsolete inventory |
|
477 |
|
1,007 |
| ||
Share-based compensation expense |
|
4,423 |
|
4,170 |
| ||
Excess tax benefits from share-based awards |
|
(3 |
) |
(193 |
) | ||
Amortization of deferred financing costs |
|
1,609 |
|
178 |
| ||
Other adjustments, net |
|
185 |
|
707 |
| ||
Changes in operating assets and liabilities (excluding impact of acquired assets and assumed liabilities): |
|
|
|
|
| ||
Restricted cash |
|
|
|
96,202 |
| ||
Accounts receivable |
|
3,422 |
|
(14,894 |
) | ||
Inventories |
|
(20,815 |
) |
4,119 |
| ||
Deferred costs |
|
(17,617 |
) |
128,687 |
| ||
Vendor advances |
|
24,469 |
|
(12,263 |
) | ||
Prepaid expenses and other assets |
|
(1,643 |
) |
4,255 |
| ||
Accounts payable and accrued expenses |
|
4,806 |
|
(36,283 |
) | ||
Customer deposits |
|
(38,235 |
) |
26,214 |
| ||
Deferred revenue |
|
24,236 |
|
(234,893 |
) | ||
Income taxes |
|
(14,088 |
) |
36,110 |
| ||
Other, net |
|
335 |
|
259 |
| ||
Net cash (used in) provided by operating activities |
|
(53,964 |
) |
86,351 |
| ||
Cash flows from investing activities: |
|
|
|
|
| ||
Purchases and deposits on property, plant and equipment |
|
(1,585 |
) |
(14,142 |
) | ||
Other investing activities |
|
|
|
205 |
| ||
Net cash used in investing activities |
|
(1,585 |
) |
(13,937 |
) | ||
Cash flows from financing activities: |
|
|
|
|
| ||
Borrowings under credit facility |
|
|
|
75,000 |
| ||
Principal payments under credit facility |
|
(40,000 |
) |
|
| ||
Proceeds and related excess tax benefits from exercise of share-based awards |
|
46 |
|
1,045 |
| ||
Payments of contingent consideration from business combinations |
|
|
|
(428 |
) | ||
Payments related to share repurchases to satisfy statutory minimum tax withholdings |
|
(121 |
) |
(281 |
) | ||
Deferred financing costs |
|
(2,266 |
) |
(3,451 |
) | ||
Other financing activities |
|
(2 |
) |
(205 |
) | ||
Net cash (used in) provided by financing activities |
|
(42,343 |
) |
71,680 |
| ||
Effect of foreign exchange rates on cash |
|
23 |
|
(69 |
) | ||
(Decrease) Increase in cash and cash equivalents |
|
(97,869 |
) |
144,025 |
| ||
Cash and cash equivalents at beginning of period |
|
418,095 |
|
206,878 |
| ||
Cash and cash equivalents at end of period |
|
$ |
320,226 |
|
$ |
350,903 |
|
Supplemental cash flow information: |
|
|
|
|
| ||
Cash paid for interest |
|
$ |
1,449 |
|
$ |
568 |
|
Non-cash investing and financing activities: |
|
|
|
|
| ||
(Decrease) increase in accounts payable and accrued expenses for property, plant and equipment |
|
$ |
(577 |
) |
$ |
4,406 |
|
See accompanying notes to these condensed consolidated financial statements.
GT Advanced Technologies Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(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 Commissions (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 months ended March 30, 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 Companys 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 expense of $527 for the three-month period ended March 31, 2012, was previously included in general and administrative expense, but is now stated separately in the Companys 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 Companys 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 Companys customers in China (where a majority of the Companys customers are located) and continues to create uncertainty among the Companys 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 Companys 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 technology and that demand for existing multicrystalline products (DSS) will be very limited.
Taking these factors into account, during December 2012, the Company determined that, (i) it would discontinue any significant future investments in the DSS product line and (ii) the vast majority of the amounts in the Companys 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 Companys HiCz Hazelwood facility in St. Louis and shifting the related research and development to Merrimack, New Hampshire. These factors 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 Companys HiCz Hazelwood facility.
For the three month period ended March 30, 2013, the Company incurred a loss from operations of $26.3 million, a net loss of $18.7 million, and used $54.0 million in cash for operating activities.
GT Advanced Technologies Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) Continued
(In thousands, except per share data)
On February 27, 2013, the Company, Bank of America N.A. and certain lenders agreed to amend certain provisions of the 2012 Credit Agreement, the relevant terms of which are described in Note 15, Long Term Debt and Convertible Notes (the 2013 Amendment). The 2013 Amendment was obtained as the Company anticipated that it may not have been able to maintain compliance with certain financial covenants as of March 30, 2013 (or for the remainder of 2013). The 2013 Amendment waives the application of the leverage and interest coverage ratios through June 2014 (the waiver period) and requires the Company to comply with new financial covenants during the waiver period. The new financial covenants require us to maintain at all times minimum levels of liquidity, as defined in the 2013 Amendment, and quarterly cumulative minimum amounts of Consolidated Adjusted Earnings Before Interest, Tax, Depreciation and Amortization, as defined in the 2013 Amendment. Based on the Companys forecasts, the Company expects to be in compliance with the revised financial covenants through the waiver period. In the event that the Company is unable to achieve its operating forecasts, the Company could be required to pay all outstanding amounts due under the Credit Agreement.
Management believes that the Company has sufficient cash resources to fund operations for at least the next twelve months including repayment of amounts outstanding under the Credit Agreement, if necessary.
2. Significant Accounting Policies
The Companys significant accounting policies are disclosed in Note 2 to the Consolidated Financial Statements included in the Transition Report for the nine-month period ended December 31, 2012, filed with the SEC on March 1, 2013. There were no significant changes to the significant accounting policies during the three months ended March 30, 2013.
3. Recent Accounting Pronouncements
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.
4. Acquisitions
Acquisition of Certain Assets of Twin Creeks Technologies, Inc.
On November 8, 2012 (Acquisition Date), 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, and 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. 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 Companys results of operations from the Acquisition Date. The acquired assets did not contribute revenues from the Acquisition Date to December 31, 2012. In addition, costs incurred were not material to the Companys consolidated results in the same time period. 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 Companys photovoltaic (PV) and sapphire segments.
As of March 30, 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. 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 $2.0 million and a decrease to deferred tax assets of $2.0 million as reflected in the table below. The
GT Advanced Technologies Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) Continued
(In thousands, except per share data)
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 Companys 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 runs for the 15-year term of the license agreement and is capped at $40,000. 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 months ended March 30, 2013, the Company recorded contingent consideration expense of $336 related to the accretion of the liability to its fair value at March 30, 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 Acquisition Date and through March 30, 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 include the Companys ability to demonstrate technological feasibility of the product and to successfully complete this task 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 Companys results of operations for the three months ended March 30, 2013. Pro forma results of operations have not been presented due to the immaterial nature of these amounts.
GT Advanced Technologies Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) Continued
(In thousands, except per share data)
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 month period ended March 30, 2013.
The following table provides the assets and liabilities measured and reported at fair value on a recurring basis at March 30, 2013 and December 31, 2012:
|
|
March 30, 2013 |
| ||||||||||
|
|
Total |
|
Fair Value Measurements Using |
| ||||||||
|
|
Value |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
| ||||
Assets: |
|
|
|
|
|
|
|
|
| ||||
Money market mutual funds |
|
$ |
200,087 |
|
$ |
200,087 |
|
$ |
|
|
$ |
|
|
Forward foreign exchange contracts |
|
4 |
|
|
|
4 |
|
|
| ||||
Liabilities: |
|
|
|
|
|
|
|
|
| ||||
Contingent consideration |
|
$ |
10,651 |
|
$ |
|
|
$ |
|
|
$ |
10,651 |
|
|
|
December 31, 2012 |
| ||||||||||
|
|
Total |
|
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 Companys money market mutual funds are valued using readily available quoted market prices for identical assets.
The Companys 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 Companys forward foreign exchange contracts (see Note 8 below for additional information about the Companys derivatives and hedging activities).
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
GT Advanced Technologies Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) Continued
(In thousands, except per share data)
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 March 30, 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, base and high case scenarios associated with achievement of the revenue based earn-out. The probabilities assigned to these scenarios were 45%, 50% and 5% for the low, base and high 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.
During the three months ended March 30, 2013, there was no change in the fair value of the contingent consideration liability related to the Confluence Solar acquisition.
The Company recorded contingent consideration expense in the condensed consolidated statements of operations of $336 for the three months ended March 30, 2013 and $527 for the three months ended March 31, 2012, and all of which was allocated to the corporate services reporting segment. Changes in the fair value of the Companys Level 3 contingent consideration obligations during the three months ended March 30, 2013 and three months ended March 31, 2012 were as follows:
|
|
Three Months Ended |
| ||||
|
|
March 30, 2013 |
|
March 31, 2012 |
| ||
Fair value as of the beginning of the period |
|
$ |
10,315 |
|
$ |
23,713 |
|
Acquisition date fair value of contingent consideration obligations related to acquisitions |
|
|
|
|
| ||
Changes in the fair value of contingent consideration obligations |
|
336 |
|
527 |
| ||
Payments of contingent consideration obligations |
|
|
|
(1,767 |
) | ||
Fair value at the end of the period |
|
$ |
10,651 |
|
$ |
22,473 |
|
The carrying amounts reflected in the Companys 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 March 30, 2013 or December 31, 2012. The following table provides the carrying and fair values of the Companys long-term debt obligations and 3.0% convertible senior notes due 2017 as of March 30, 2013 and December 31, 2012:
|
|
|
|
Fair Value Measurements Using |
| ||||||||||
Description |
|
Total Carrying Value |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Fair Value |
| ||||
2012 Term Facility, including current portion |
|
|
|
|
|
|
|
|
|
|
| ||||
March 30, 2013 |
|
$ |
99,563 |
|
$ |
|
|
$ |
99,862 |
|
$ |
|
|
99,862 |
|
December 31, 2012 |
|
$ |
139,563 |
|
$ |
|
|
$ |
139,563 |
|
$ |
|
|
139,563 |
|
3.00% Senior Convertible Notes |
|
|
|
|
|
|
|
|
|
|
| ||||
March 30, 2013 |
|
$ |
160,044 |
|
$ |
|
|
$ |
166,734 |
|
$ |
|
|
166,734 |
|
December 31, 2012 |
|
$ |
157,440 |
|
$ |
|
|
$ |
157,300 |
|
$ |
|
|
157,300 |
|
GT Advanced Technologies Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) Continued
(In thousands, except per share data)
6. Goodwill and Other Intangible Assets
Other than the purchase price adjustments in connection with the acquisition of certain assets of Twin Creeks as described in Note 4 above, which we retrospectively recorded as of December 31, 2012, there were no changes to the carrying value of goodwill during the three months ended March 30, 2013.
Acquired intangible assets subject to amortization at March 30, 2013 and December 31, 2012 consisted of the following:
|
|
Weighted |
|
March 30, 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 |
|
$ |
72,200 |
|
$ |
16,606 |
|
$ |
55,594 |
|
$ |
72,200 |
|
$ |
14,951 |
|
$ |
57,249 |
|
Trade names / Trademarks |
|
8.6 years |
|
7,100 |
|
3,153 |
|
3,947 |
|
7,100 |
|
3,036 |
|
4,064 |
| ||||||
Subtotal: |
|
|
|
79,300 |
|
19,759 |
|
59,541 |
|
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 |
|
6.0 years |
|
4,100 |
|
1,822 |
|
2,278 |
|
4,100 |
|
1,651 |
|
2,449 |
| ||||||
Technology |
|
10.0 years |
|
17,300 |
|
4,613 |
|
12,687 |
|
17,300 |
|
4,181 |
|
13,119 |
| ||||||
Order backlog |
|
1.2 years |
|
500 |
|
500 |
|
|
|
500 |
|
500 |
|
|
| ||||||
Trade names |
|
8.0 years |
|
1,100 |
|
367 |
|
733 |
|
1,100 |
|
332 |
|
768 |
| ||||||
Non-compete agreements |
|
5.8 years |
|
1,000 |
|
478 |
|
522 |
|
1,000 |
|
433 |
|
567 |
| ||||||
Subtotal: |
|
|
|
24,000 |
|
7,780 |
|
16,220 |
|
24,000 |
|
7,097 |
|
16,903 |
| ||||||
Total finite-lived intangible assets |
|
|
|
104,800 |
|
29,039 |
|
75,761 |
|
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 |
|
|
|
$ |
117,100 |
|
$ |
29,039 |
|
$ |
88,061 |
|
$ |
117,100 |
|
$ |
26,584 |
|
$ |
90,516 |
|
The weighted average remaining amortization periods for the (i) photovoltaic, (ii) polysilicon and (iii) sapphire intangibles were 7.51 years, 0 years and 6.23 years, respectively, as of March 30, 2013. As of March 30, 2013, the estimated future amortization expense for the Companys intangible assets is as follows:
GT Advanced Technologies Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) Continued
(In thousands, except per share data)
Year Ending December 31, |
|
Amortization |
| |
2013 (remaining nine months) |
|
$ |
7,365 |
|
2014 |
|
9,799 |
| |
2015 |
|
9,770 |
| |
2016 |
|
9,437 |
| |
2017 |
|
8,970 |
| |
2018 |
|
8,908 |
| |
Thereafter |
|
21,512 |
| |
7. Customer Concentrations
The following customers comprised 10% or more of the Companys total revenue or accounts receivable for the, or as of, the periods indicated:
|
|
Three Months Ended |
|
As of |
| ||||||||||||||||
|
|
March 30, 2013 |
|
March 31, 2012 |
|
March 30, 2013 |
|
December 31, 2012 |
| ||||||||||||
|
|
|
|
% of |
|
|
|
% of |
|
Accounts |
|
% of |
|
Accounts |
|
% of |
| ||||
|
|
Revenue |
|
Total |
|
Revenue |
|
Total |
|
Receivable |
|
Total |
|
Receivable |
|
Total |
| ||||
Photovoltaic Customers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Customer #1 |
|
* |
|
* |
|
* |
|
* |
|
$ |
2,592 |
|
13 |
% |
* |
|
* |
| |||
Customer #2 |
|
* |
|
* |
|
* |
|
* |
|
* |
|
* |
|
$ |
2,478 |
|
10 |
% | |||
Polysilicon Customers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Customer #3 |
|
$ |
34,915 |
|
60 |
% |
* |
|
* |
|
* |
|
* |
|
* |
|
* |
| |||
Customer #4 (1) |
|
* |
|
* |
|
$ |
52,994 |
|
15 |
% |
* |
|
* |
|
* |
|
* |
| |||
Customer #5 |
|
* |
|
* |
|
82,316 |
|
23 |
% |
* |
|
* |
|
* |
|
* |
| ||||
Customer #6 |
|
* |
|
* |
|
* |
|
* |
|
* |
|
* |
|
3,248 |
|
14 |
% | ||||
Customer #7 |
|
* |
|
* |
|
* |
|
* |
|
* |
|
* |
|
9,085 |
|
38 |
% | ||||
Customer #8 |
|
* |
|
* |
|
* |
|
* |
|
2,484 |
|
12 |
% |
* |
|
* |
| ||||
Sapphire Customers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Customer #9 |
|
10,462 |
|
18 |
% |
40,169 |
|
11 |
% |
7,722 |
|
38 |
% |
* |
|
* |
| ||||
* Amounts from these customers were less than 10% of the total as of, or for, the respective period.
(1) Total revenue recognized from this customer for the three months ended March 31, 2012 was $86,766, or 24% of total revenue. Not included in the table above for the three months ended March 31, 2012 is $33,772, or 9% of total revenue for that period for sales to this customer that have been included in the sapphire business.
The Company requires most of its customers to either post letters of credit or make advance payments of a portion of the selling price prior to delivery. Approximately $13,131 (or 64%) and $16,557 (or 69%) of total accounts receivable as of March 30, 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 March 30, 2013, the Company had forward foreign currency exchange contracts with notional amounts of 1,885 Euros.
GT Advanced Technologies Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) Continued
(In thousands, except per share data)
The following table sets forth the balance sheet locations and fair value of the Companys forward foreign currency exchange contracts at March 30, 2013 and December 31, 2012:
|
|
Balance Sheet |
|
March 30, 2013 |
|
December 31, 2012 |
| ||
Instruments Designated as Cash Flow Hedges |
|
|
|
|
|
|
| ||
Forward foreign currency exchange contractsassets |
|
Prepaid expenses and other current assets |
|
$ |
4 |
|
$ |
230 |
|
The following table sets forth the effect of the Companys forward foreign currency exchange contracts designated as hedging instruments on the condensed consolidated statements of operations for the three months ended March 30, 2013 and March 31, 2012:
Instruments Designated as Cash Flow Hedges
|
|
Amount of |
|
Location of Gain or |
|
Amount of Gain or |
|
Location of Gain or |
|
Amount of Gain or |
| |||
Three Months Ended |
|
|
|
|
|
|
|
|
|
|
| |||
March 30, 2013 |
|
$ |
35 |
|
Cost of revenue |
|
$ |
|
|
Other, net |
|
$ |
|
|
March 31, 2012 |
|
$ |
(1,385 |
) |
Cost of revenue |
|
$ |
(930 |
) |
Other, net |
|
$ |
|
|
During the three months ended March 30, 2013, there were no losses reclassified into earnings as a result of the Company discontinuing cash flow hedging. Approximately $19 of accumulated gain included in other comprehensive income as of March 30, 2013 is expected to be reclassified into earnings over the next twelve months.
9. Inventories
Inventories consisted of the following:
|
|
March 30, 2013 |
|
December 31, 2012 |
| ||
Raw materials |
|
$ |
104,533 |
|
$ |
97,957 |
|
Work-in-process |
|
6,250 |
|
5,100 |
| ||
Finished goods |
|
39,959 |
|
30,229 |
| ||
|
|
$ |
150,742 |
|
$ |
133,286 |
|
10. Other Assets
Other assets consisted of the following:
GT Advanced Technologies Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) Continued
(In thousands, except per share data)
|
|
March 30, 2013 |
|
December 31, 2012 |
| ||
|
|
|
|
|
| ||
Inventory |
|
$ |
36,724 |
|
$ |
33,834 |
|
Vendor advances |
|
19,000 |
|
20,664 |
| ||
Deferred financing fees |
|
9,251 |
|
8,787 |
| ||
Deferred income taxes |
|
12,766 |
|
15,424 |
| ||
Other |
|
9,457 |
|
8,211 |
| ||
|
|
$ |
87,198 |
|
$ |
86,920 |
|
11. Warranty
The following table presents warranty activities:
|
|
Three Months Ended |
| ||||
|
|
March 30, 2013 |
|
March 31, 2012 |
| ||
|
|
|
|
|
| ||
Product warranty liability, beginning of the period |
|
$ |
10,711 |
|
$ |
4,764 |
|
Accruals for warranties issued |
|
2,574 |
|
2,639 |
| ||
Payments under warranty |
|
(2,134 |
) |
(1,178 |
) | ||
Product warranty liability, end of period |
|
$ |
11,151 |
|
$ |
6,225 |
|
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 current market conditions by reducing its global workforce and closing or consolidating certain facilities. In the three months ended March 30, 2013, the Company recorded $362 of severance related expense in connection with the streamlining of operations, 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 cease operations at its Hazelwood, Missouri facility (Hazelwood facility). The idling of the Hazelwood facility is part of the Companys 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 March 30, 2013, the Company recorded $1,854 of additional charges related to the Hazelwood facilitys lease exit costs and $642 of other contract termination costs related to this facility. The Company has determined the long-lived asset group of the Hazelwood facility, which has a carrying value of $5,165, does not meet the held-for-sale criteria at March 30, 2013.
GT Advanced Technologies Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) Continued
(In thousands, except per share data)
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 Companys condensed consolidated balance sheet as of March 30, 2013 are as follows:
|
|
Employee Related Benefits |
|
Lease Exit and |
|
Total |
| |||
Balance as of December 31, 2012 |
|
$ |
2,076 |
|
$ |
133 |
|
$ |
2,209 |
|
Charges |
|
362 |
|
2,496 |
|
2,858 |
| |||
Cash Payments |
|
(1,142 |
) |
(259 |
) |
(1,401 |
) | |||
Balance as of March 30, 2013 |
|
$ |
1,296 |
|
$ |
2,370 |
|
$ |
3,666 |
|
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 Companys effective tax rate. Any discrete tax adjustments are recorded in the specific quarter they arise.
The Companys effective tax rate was 44.3% (benefit) for the three-month period ended March 30, 2013 and 31.4% provision for the three-month period ended March 31, 2012. The effective tax rate for the three months ended March 30, 2013, was impacted by a favorable provision to prior tax return adjustments as well as the reinstatement of the Federal Research and Development credit. 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 Companys consolidated effective income tax rate can change significantly on a quarterly basis.
A reconciliation of the change in unrecognized tax benefits for the three months ended March 30, 2013 is as follows:
Unrecognized tax benefits at December 31, 2012 |
|
$ |
26,322 |
|
Increases related to current year tax positions |
|
106 |
| |
Increases related to prior year tax positions |
|
267 |
| |
Settlements with tax authorities |
|
$ |
(980 |
) |
Unrecognized tax benefits at March 30, 2013 |
|
$ |
25,715 |
|
The Company also recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. During the three-month period ending March 30, 2013, the Company recorded an income tax benefit of $199, which was the result of reversing certain 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 Companys 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. As of March 30, 2013, the Company has classified approximately $1,221 of unrecognized tax benefits as current. These unrecognized tax benefits relate to positions under examination for the fiscal 2009 and fiscal 2010 tax years. During the three months ended March 30, 2013 and March 31, 2012, the Company paid $15,581 and $1,306 for estimated taxes, respectively.
GT Advanced Technologies Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) Continued
(In thousands, except per share data)
14. Commitments and Contingencies
Purchase Commitments
The Companys commitments to purchase raw materials, research and development and other services from various suppliers and vendors are estimated to be $136,574 and $214,611 as of March 30, 2013 and December 31, 2012, respectively. The majority of these commitments as of March 30, 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 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 March 30, 2013, as these purchase orders have not been terminated at March 30, 2013. The gross amount of remaining purchases under these purchase orders was $16,165 as of March 30, 2013, and the Company may negotiate with the vendors to determine the amount payable upon termination of these purchase orders.
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 Companys financial position, results of operations or cash flows.
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 Companys 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 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 (as described below)) 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 further described below) with a final maturity date of January 31, 2016.
On various dates between June 15, 2012 and June 25, 2012, the Company, the U.S. Borrower and the Hong Kong Borrower requested and received approval for increases in the 2012 Term Facility for the U.S. Borrower in an aggregate amount equal to $70,000 (the Incremental Term Loans) pursuant to the 2012 Credit Agreement.
GT Advanced Technologies Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) Continued
(In thousands, except per share data)
As a result of the Incremental Term Loans, the aggregate term loan under the 2012 Credit Agreement was increased from $75,000 to $145,000, all of which was borrowed by the U.S. Borrower. The Company pre-paid $40,000 of the 2012 Term Facility pursuant to the 2013 Amendment (as described below) which payment did not reduce the amortization of the Term Loan.
All of the material terms and conditions related to the Incremental Term Loans were identical to the terms and conditions that apply to the 2012 Term Facility, including the final maturity date of January 30, 2016 and the interest rate. The Incremental Term Loans amortize over the same period, and in proportional amounts, as the 2012 Term Facility, commencing with the first amortization payment under both term facilities in June 2012.
The 2012 Credit Facilities are available in the form of base rate loans based on Bank of Americas prime rate plus a margin of 3.50% or Eurodollar rate loans based on LIBOR plus a margin of 4.50% (which reflects increases pursuant to the 2013 Amendment). The 2012 Term Facility amortizes in equal quarterly amounts which in the aggregate equal 5% of the original principal amount of the 2012 Term Facility in each of years 1 and 2 of the loan and 10% of the original principal amount of the 2012 Term Facility (as such amount was increased pursuant to the Incremental Team Loans) in each of years 3 and year 4 of the loan, with the balance payable on January 31, 2016. The 2012 Credit Facilities are subject to mandatory prepayment in the event that the Company has excess cash flow or receives cash proceeds from any asset sale, casualty event or issuance of indebtedness not otherwise permitted under the 2012 Credit Agreement during any fiscal year, subject to certain thresholds and other exceptions. The 2012 Credit Facilities also requires the Company to comply with certain covenants, including financial ratio covenants (as described further below and as modified pursuant to the 2013 Amendment). Proceeds of the 2012 Term Facility and 2012 Revolving Credit Facility are available for use by the Company and certain of its subsidiaries for general corporate purposes; however, the use of the 2012 Revolving Facility is restricted to use in connection with letters of credit. The full amount of the 2012 Term Facility was drawn by the U.S. Borrower on January 31, 2012 and no amounts have been drawn on the 2012 Revolving Credit Facility as of such date. The Company will use the 2012 Revolving Credit Facility in connection with the issuance of letters of credit up to the aggregate principal amount of the 2012 Revolving Credit Facility or for other purposes as permitted under the 2012 Revolving Credit Facility and the 2013 Amendment.
On September 24, 2012, the lenders authorized the Company to issue the Notes (described below) and to enter into the convertible note hedge and warrant transactions pursuant to an amendment (the 2012 Amendment) to the 2012 Credit Agreement. In addition, the 2012 Amendment imposes a minimum liquidity test that must be met in order to make a cash payment to the holders of Notes in connection with any conversion event in respect of the Notes. In order to make such a payment, the Company must have a combined minimum of $150,000 in unrestricted cash and cash equivalents and availability under the 2012 Revolving Credit Facility. The 2012 Amendment is described more fully in Note 10, Long Term Debt and Revolving Credit Facility, included in the Transition Report.
The Company may, at its option, prepay borrowings under the 2012 Credit Agreement (in whole or in part), at anytime without penalty subject to conditions set forth in the 2012 Credit Facility. The Company is required to make certain mandatory prepayments as fully described in Note 10, Long Term Debt and Revolving Credit Facility, included in the Transition Report.
The 2012 Credit Agreement imposes certain financial covenants on the Company and its subsidiaries regarding ratio of consolidated adjusted earnings-before-interest-taxes-depreciation and amortization (EBITDA) (as defined in the 2012 Credit Agreement) levels to consolidated interest changes and maximum leverage ratio (as defined in the Credit Agreement). These covenants were waived through June 2014 pursuant to the 2013 Amendment.
The 2012 Credit Agreement requires that the Company and its subsidiaries comply with covenants relating to customary matters (in addition to the financial covenants described above), including with respect to incurring indebtedness and liens, using the proceeds received under the 2012 Credit Agreement, transactions with affiliates, making investments and acquisitions, effecting mergers and asset sales, prepaying indebtedness, and restrictions on the Companys ability to pay dividends to shareholders (as the covenants were modified by the 2013 Amendment).
The 2012 Credit Agreement includes events of default relating to customary matters, including, among other things, nonpayment of principal, interest or other amounts; violation of covenants; inaccuracies in the representations and warranties in any material respect; cross default and cross acceleration with respect to indebtedness in an aggregate principal amount of $10,000 or more; bankruptcy or similar proceedings or events; judgments involving liability of $10,000 or more that are not paid; ERISA events; actual or asserted invalidity of guarantees or security documents; and change of control. Events of default can trigger, among other things, acceleration of payment of all outstanding principal and interest under the 2012 Credit Agreement.
GT Advanced Technologies Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) Continued
(In thousands, except per share data)
On February 27, 2013, the Company (and the U.S. Borrower and Hong Kong Borrower), Bank of America N.A. and certain Lenders agreed to amend certain provisions of the 2012 Credit Agreement (the 2013 Amendment) . The 2013 Amendment waives the application of the maximum leverage ratio and interest coverage ratio though June 2014 (the waiver period). Through this action the Company avoids the possibility of a breach to these covenants. In addition, the 2013 Amendment provides that (i) the Company pay down the 2012 Term Facility by $40,000 (leaving a balance of $100,000 principal amount of the 2012 Term Facility), (ii) the interest rate payable on the loan is increased by 1.5% (which increase drops to 0.75% after the waiver period), (iii) the U.S. Revolving Credit Facility be eliminated and the Hong Kong Revolving Credit Facility was reduced to $125,000 (and providing that such amounts available under the Hong Kong Revolving Credit Facility may only be used for letters of credit during the waiver period), (iv) the Company comply with new covenants during the waiver period to maintain at all times minimum levels of liquidity (as defined in the 2013 Amendment), and quarterly cumulative minimum amounts of Consolidated Adjusted Earnings Before Interest, Tax, Depreciation and Amortization, (as defined in the 2013 Amendment), (v) certain other covenants are revised, including with respect to restrictions on the incurrence of certain additional debt, making certain investments, affiliate transactions and further restrictions on the payment of dividends and making certain stock repurchases (all as described in the 2013 Amendment), (vi) we pay certain fees to the Lenders and (vii) that certain subsidiaries of the Hong Kong Borrower will provide guarantees and collateral to support the Hong Kong Revolving Facility.
The borrowings under the 2012 Credit Facility are secured by a lien on substantially all tangible and intangible property of the Company and certain of its subsidiaries (including the U.S. Borrower).
Additional information regarding the 2012 Credit Agreement, 2012 Amendment and 2013 Amendment (including the assets that secure the Companys obligations) are contained in Note 10, Long Term Debt and Revolving Credit Facility, as included in the Transition Report.
Interest expense related to 2012 Term Facility and 2012 Revolving Credit Facility was $2,975 for the three-month period ended March 30, 2013 and $729 for the three-month period ended March 31, 2012, which includes amortization of debt fees related to both facilities, as well as the associated commitment fees. The weighted average interest rate for the three-month period ended March 30, 2013 was 3.59%. There was no interest capitalized on construction-in-process contracts for the three-months ended March 30, 2013. The balance of deferred financing costs at March 30, 2013 was $4,377 and is included in other assets on the consolidated balance sheet.
The Company uses amounts available under the Hong Kong Revolving Credit Facility in connection with standby letters of credit related to customer deposits. As of March 30, 2013, the Company had $23,666 of outstanding letters of credit pursuant to the Hong Kong Revolving Credit Facility resulting in $101,335 of available credit under the Hong Kong Revolving Credit Facility. The Credit Agreement allows the Company to cash collateralize letters of credit up to an amount of $35,000 to the extent that outstanding standby letters of credit exceed the amount of our Hong Kong Revolving Credit Facility. The U.S. Revolving Credit Facility is no longer available.
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 Notes). The net proceeds from the issuance of the Notes were approximately $212,592, after deducting fees paid to the initial purchasers and other offering costs. The 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 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 Notes will mature on October 1, 2017, unless earlier repurchased or converted in accordance with their terms prior to such date. The 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 Notes (28.5 million shares) (which represents an initial effective conversion price of the Notes of $7.71 per share), subject to adjustment as described in the Indenture.
The effective interest rate on the liability component of the Notes was 10.7% as of March 30, 2013. Interest expense incurred in connection with the Notes consisted of the following:
GT Advanced Technologies Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) Continued
(In thousands, except per share data)
|
|
Three Months Ended |
| |
|
|
March 30, 2013 |
| |
Contractual coupon rate of interest |
|
$ |
1,669 |
|
Discount amortization |
|
2,828 |
| |
Interest expense - Convertible Notes |
|
$ |
4,497 |
|
The carrying value of our Notes consisted of the following:
|
|
March 30, 2013 |
| |
Principal balance |
|
$ |
220,000 |
|
Discount, net of accumulated amortization of $5,160 |
|
(59,956 |
) | |
Carrying amount |
|
$ |
160,044 |
|
The Company will be required to repay the following principal amounts under the 2012 Term Facility, Incremental Term Loans and Notes:
|
|
Principal |
| |
Fiscal Year Ending |
|
Payments |
| |
2013 (remaining 9 months) |
|
$ |
7,250 |
|
2014 |
|
12,688 |
| |
2015 |
|
14,500 |
| |
2016 |
|
65,125 |
| |
2017 |
|
220,000 |
| |
Total |
|
$ |
319,563 |
|
Additional information regarding the Notes, and regarding certain warrants (the Warrants) and convertible note hedge transactions (issued and entered into, as applicable, in connection with the issuance of the Notes) is contained in Note 10, Long Term Debt and Revolving Credit Facility, to the Transition Report.
16. Share-Based Compensation
The Company recorded $4,423 and $4,170 of expense related to share-based compensation during the three months ended March 30, 2013 and March 31, 2012, respectively. Share-based compensation cost capitalized as part of inventory was not material for all periods presented.
During the three months ended March 30, 2013, no option awards were granted to executives or employees of the Company.
During the three months ended March 30, 2013, the Company granted time-based restricted stock units to certain executives, employees and directors of the Company for 2,649 shares of the Companys common stock. Time-based restricted stock units provide for the holder to receive shares of the Companys 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 these time-based restricted stock units, which was based on the fair value of the Companys common stock on the date of grant, was $8,432 or $3.18 per share on a weighted average basis.
During the three months ended March 30, 2013, the Company granted certain executives 890 market-based restricted stock units which are earned based upon the achievement of certain stock price thresholds (and, if these price thresholds are satisfied, vest upon meeting certain continued service requirements). The total fair value of these market-based restricted stock units was determined through the use of a Monte Carlo simulation model, which utilizes multiple input variables that determine the probability of satisfying the market condition requirements applicable to each award; these inputs include the expected volatility factor, risk free interest rate, expected term (in years) and expected dividend yield. The total fair value of these restricted stock units was $2,688, or $3.02 per share on a weighted average basis.
GT Advanced Technologies Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) Continued
(In thousands, except per share data)
As of March 30, 2013, the Company had unamortized share-based compensation expense related to stock options, time-based restricted stock unit awards and market-based restricted stock unit awards of approximately $31,965 after estimated forfeitures. The remaining unamortized share-based compensation expense related to stock options, time-based restricted stock unit awards and market-based restricted stock unit awards will be recognized over an estimated weighted average remaining requisite service period of 2.26 years.
17. Stockholders Equity
The following table presents the changes in stockholders equity for the three months ended March 30, 2013:
|
|
Common Stock |
|
Additional |
|
Retained |
|
Accumulated Other |
|
Total |
| |||||||
|
|
Shares |
|
Par Value |
|
Capital |
|
Earnings |
|
(Loss) |
|
Equity |
| |||||
Balance as of January 1, 2013 |
|
119,293 |
|
$ |
1,193 |
|
$ |
183,565 |
|
$ |
56,687 |
|
$ |
806 |
|
$ |
242,251 |
|
Net loss |
|
|
|
|
|
|
|
(18,681 |
) |
|
|
(18,681 |
) | |||||
Other comprehensive income |
|
|
|
|
|
|
|
|
|
1 |
|
1 |
| |||||
Option exercises and vesting of restricted stock units |
|
143 |
|
1 |
|
42 |
|
|
|
|
|
43 |
| |||||
Share-based compensation expense |
|
|
|
|
|
4,384 |
|
|
|
|
|
4,384 |
| |||||
Excess tax deficiency from share-based award activity |
|
|
|
|
|
(329 |
) |
|
|
|
|
(329 |
) | |||||
Minimum tax withholding payments for employee share-based awards |
|
(39 |
) |
|
|
(121 |
) |
|
|
|
|
(121 |
) | |||||
Balance as of March 30, 2013 |
|
119,397 |
|
$ |
1,194 |
|
$ |
187,541 |
|
$ |
38,006 |
|
$ |
807 |
|
$ |
227,548 |
|
18. Accumulated Other Comprehensive Income
The following table summarizes the changes in accumulated balances of other comprehensive income for the three months ended March 30, 2013:
|
|
Unrealized Gains and Losses on Cash |
|
Foreign Currency Items |
|
Total |
| |||
|
|
|
|
|
|
|
| |||
Beginning balance |
|
$ |
(537 |
) |
$ |
1,343 |
|
$ |
806 |
|
Other comprehensive income (loss) before reclassifications |
|
(29 |
) |
30 |
|
1 |
| |||
Amounts reclassified from accumulated other comprehensive income |
|
|
|
|
|
|
| |||
Ending balance |
|
$ |
(566 |
) |
$ |
1,373 |
|
$ |
807 |
|
GT Advanced Technologies Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) Continued
(In thousands, except per share data)
19. Earnings Per Share
Basic earnings (loss) per share is computed by dividing the Companys earnings (loss) by only the weighted average number of common shares outstanding during the period. For a period in which the Company reports net income, diluted earnings per share is computed by dividing the Companys earnings by the weighted average number of common shares and, when dilutive, the weighted average number of potential common shares outstanding during the period, as determined using the treasury stock method. Potential common shares consist of common stock issuable upon the exercise of outstanding stock options, the Notes, the Warrants, and the vesting of restricted stock units.
The following table sets forth the computation of the weighted average shares used in computing basic and diluted earnings per share:
|
|
Three Months Ended |
| ||
|
|
March 30, |
|
March 31, |
|
Weighted average common sharesbasic |
|
119,348 |
|
119,407 |
|
Dilutive common stock options and restricted stock unit awards (1) (2) (3) |
|
|
|
1,331 |
|
Weighted average common and common equivalent sharesdiluted |
|
119,348 |
|
120,738 |
|
(1) Holders of the Notes may convert the Notes into shares of the Companys common stock, at the applicable conversion rate, subject to certain conditions. Since it is the Companys stated intent to settle the principal amount of the Notes in cash, the Company has used the treasury stock method for determining the potential dilution in the diluted earnings per share computation. Since the average price of the Companys common stock was less than the effective conversion price for such Notes during the reporting periods, the Notes were not dilutive for such periods.
(2) Upon exercise of outstanding Warrants (issued in connection with the issuance of the Notes), holders of the Warrants may acquire up to 28,500 shares of the Companys common stock at an exercise price of $9.9328. If the market price per share of the Companys common stock for the period exceeds the established strike price, the Warrants will have a dilutive effect on its diluted net income per share using the treasury-stock-type method. Since the average price of the Companys common stock was less than the strike price of the warrants for the reporting periods, such warrants were also not dilutive.
(3) As the Company was in a loss position for the three months ended March 30, 2013, certain shares have not been included in the calculation of earnings per share, as their impact would be anti-dilutive. The total number of shares excluded from the calculation of earnings per share because they would be anti-dilutive was 12,356 and 2,191 for the three months ended March 30, 2013 and March 31, 2012.
20. Segment and Geographical Information
Segment Information
The Company reports its results in three segments: the PV business, the polysilicon business and the sapphire business. The Company evaluates performance and allocates resources based on revenues and gross margin of each segment. The Company defines segment gross margin as the cost of goods sold associated with segment revenues. Operating expenses are reviewed and evaluated at the consolidated level and are not allocated to the respective operating segments for purposes of allocating resources or evaluating performance of the business segment.
The PV business manufactures and sells directional solidification, or DSS, crystallization furnaces and ancillary equipment used to cast crystalline silicon ingots by melting and cooling polysilicon in a precisely controlled process. These ingots are used to make photovoltaic wafers which are, in turn, used to make solar cells. The PV business is also developing other technologies, including the HiCz equipment tool.
GT Advanced Technologies Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) Continued
(In thousands, except per share data)
The polysilicon business manufactures and sells Silicon Deposition Reactors (SDR) and related equipment used to produce polysilicon, the key raw material used in silicon-based solar wafers and cells, while also providing engineering services and related equipment. In addition, the polysilicon business sells hydrochlorination technology and equipment that is utilized to convert silicon tetrachloride into trichlorosilane (TCS), which is used as seed material in the manufacture of high purity silicon.
The sapphire business manufactures and sells advanced sapphire crystal growth systems, as well as sapphire materials used in LED applications, and sapphire components used in other specialty markets.
Financial information for the Companys reportable segments is as follows:
|
|
Three Months Ended |
| ||||
|
|
March 30, 2013 |
|
March 31, 2012 |
| ||
|
|
|
|
|
| ||
Revenue: |
|
|
|
|
| ||
PV |
|
$ |
4,364 |
|
$ |
31,375 |
|
Polysilicon |
|
37,956 |
|
153,944 |
| ||
Sapphire |
|
15,456 |
|
168,571 |
| ||
Total revenue |
|
$ |
57,776 |
|
$ |
353,890 |
|
Gross Margin: |
|
|
|
|
| ||
PV |
|
$ |
(1,303 |
) |
$ |
16,637 |
|
Polysilicon |
|
13,137 |
|
65,482 |
| ||
Sapphire |
|
1,781 |
|
70,209 |
| ||
Total gross margin |
|
$ |
13,615 |
|
$ |
152,328 |
|
Research and development |
|
16,441 |
|
15,248 |
| ||
Sales and marketing |
|
3,286 |
|
2,707 |
| ||
General and administrative |
|
14,563 |
|
15,170 |
| ||
Contingent consideration expense |
|
336 |
|
527 |
| ||
Restructuring charges |
|
2,858 |
|
|
| ||
Amortization of intangible assets |
|
2,455 |
|
2,546 |
| ||
(Loss) income from operations |
|
(26,324 |
) |
116,130 |
| ||
Interest income |
|
94 |
|
17 |
| ||
Interest expense |
|
(7,480 |
) |
(799 |
) | ||
Other, net |
|
190 |
|
(52 |
) | ||
(Loss) income before taxes |
|
$ |
(33,520 |
) |
$ |
115,296 |
|
Geographic Information
The following table presents revenue by geographic region, which is based on the destination of the shipments:
GT Advanced Technologies Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) Continued
(In thousands, except per share data)
|
|
Three Months Ended |
| ||||
|
|
March 30, |
|
March 31, |
| ||
China |
|
$ |
18,738 |
|
$ |
216,855 |
|
Korea |
|
34,942 |
|
89,833 |
| ||
Other Asia |
|
840 |
|
41,707 |
| ||
Europe |
|
462 |
|
694 |
| ||
United States |
|
2,776 |
|
2,923 |
| ||
Other |
|
18 |
|
1,878 |
| ||
Total |
|
$ |
57,776 |
|
$ |
353,890 |
|
A summary of long-lived assets by geographical region is as follows:
|
|
March 30, 2013 (1) |
|
December 31, 2012 (1) |
| ||
|
|
|
|
|
| ||
United States |
|
$ |
147,210 |
|
$ |
150,738 |
|
Luxembourg |
|
61,252 |
|
63,024 |
| ||
China |
|
810 |
|
1,382 |
| ||
Taiwan |
|
106 |
|
121 |
| ||
Hong Kong |
|
1,118 |
|
1,252 |
| ||
Total |
|
$ |
210,496 |
|
$ |
216,517 |
|
(1) Long-lived assets at March 30, 2013 and December 31, 2012, include intangible assets and goodwill of $136,082 and $138,537, respectively, all located in the United States, with the exception of $1,711 and $61,313 of goodwill and intangibles, respectively, at March 30, 2013 and December 31, 2012, which are located in Luxembourg.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statements Concerning Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are identified by the use of words such as, but not limited to, anticipate, believe, continue, could, estimate, prospects, forecasts, expect, intend, may, will, plan, target, and similar expressions or variations intended to identify forward-looking statements and include statements about our expectations of future periods with respect to, among other things:
· the polysilicon, photovoltaic (PV) and sapphire (including LED) industries continue to face significant challenges;
· structural changes in the PV industry, the Company believes, will require that any recovery in the PV market will be driven by changes in technology and that demand for existing multicrystalline products (DSS) will be very limited;
· future sales of DSS will be limited;
· Company expects to be in compliance with the covenants under its credit facility with Bank of America N.A. and other lenders;
· Company has sufficient cash to fund operations for the next twelve months (even if Company was required to re-pay all amounts due under its Credit Facility with Bank of America N.A.);
· the Hyperion ion implanter tool is intended to have broad application in the production of engineered substrates for power semiconductors, uses within the sapphire and LED industries and thin wafers for solar applications;
· the Company expects to pursue the development of thin sapphire laminates for use in applications such as cover and touch screen device;
· goodwill created by the acquisition of the assets related to the Hyperion ion implanter tool is expected to be deductible for tax purposes;
· estimated future amortization expense;
· amount of accumulated gain included in comprehensive income that is expected to be reclassified into earnings;
· Company expects to terminate purchase commitments for DSS inventory components in fiscal 2013 and beyond and will negotiate with vendors to determine the amount payable upon termination;
· Resolution of routine legal proceedings will not have a material effect on the Companys financial position, results of operations or cash flows;
· material amounts not expected to be paid by Company under indemnification provisions;
· the information identified under the heading Factors Affecting the Results of Our Operations;
· Company does not expect to enter into any contracts, in any of the segments, for meaningful revenue or bookings until the second half of 2013;
· the HiCz equipment offering will be commercially available during 2014;
· there will be limited sales of new DSS systems to PV manufacturers and, to the extent Company make sales, the prices for which we sell DSS equipment will be significantly below those historically charged to customers;
· Company expects to have no meaningful sales or revenue from the PV segment in 2013;
· Company expects to continue to invest in new research and development projects and attempt to expand certain existing product bases and introduce new products;
· The majority of Company projected income is forecasted to come from the sapphire segment which is taxed primarily in lower tax jurisdictions. Due to this jurisdictional mix of income/loss, Company is projecting a taxable loss in the US, a higher tax jurisdiction while lower tax jurisdictions, namely Hong Kong, is projecting taxable income;
· Company requires minimal capital expenditures to meet production demands;
· Company believes existing cash, including cash received under the term facility with Bank of America N.A. (and certain other lenders), 3.0% convertible notes, customer deposits and amounts available under revolving credit facility with Bank of America N.A. (and certain other lenders) will be sufficient to satisfy working capital requirements, commitments for capital expenditures, and other cash requirements for the foreseeable future, including at least the next twelve months;
· Company does not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our investment portfolio;
· Companys future bookings may be even less than in prior periods;
· Company expects that customers may make requests to modify contracts in the future;
· the global solar PV industry will not experience growth in 2013;
· limited investment for additional generation PV capital equipment is expected in 2013 and beyond;
· Company intends to discontinue any significant additional investments in our DSS product line;
· Company will attempt to sell any DSS furnaces in inventory, but expect that demand for these will be limited;
· Demand for Company equipment will continue to remain limited for the short-term amongst Chinese customer base;
· Final trade rulings will negatively impact equipment customers in China and elsewhere;
· If the E.U. imposes duties in connection with this investigation, it could harm our business since many of our Chinese customers sell into the E.U.;
· Company expects that the challenging market environment it faced will continue in 2013 and much of the Companys business for calendar year 2013 is expected to result from filling orders in backlog and do not expect any meaningful revenue from new contracts until second half of 2013;
· Company expects that success in the PV market will depend on success in commercializing the HiCz equipment offering;
· likelihood of customers going to other equipment suppliers is increasing;
· the Company expects to make acquisitions of businesses or technologies that will result in the diversification of our business (but intends to continue principally as an equipment supplier) and the impact of such diversification;
· Company expects that dependence on a limited number of customers will continue;
· increasing governmental budgetary pressures will likely result in reduced, or the elimination of, government subsidies and economic incentives for on-grid solar electricity applications;
· Company expects a further reduction in demand and decreased average selling prices for our DSS multicrystalline furnace, if it is able to sell any additional DSS furnaces at all;
· HiCz offering will target improved ingot efficiencies and lower costs compared to that of multicrystalline silicon materials;
· Company expects to recognize revenue from customers in Europe and Asia in the future;
· anticipated decrease, and subsequent elimination of, governmental incentives for renewable energy usage (and the reasons therefore), including solar energy and PV installations, and that the loss of these incentives may hamper the growth of the solar industry (and reduce demand for PV equipment);
· Company may enter into business combinations or purchases;
· Company may in the future enter into, arrangements in which we invest in another business without owning all of the voting control of the entity or without the ability to control the decision-making of the entity or may enter into joint development or similar arrangements for the development of technology or sale of products;
· Company expects a large percentage of future revenue will continue to be derived from sales to customers outside the U.S.;
· Company expects certain of the holders of its securities may enter into hedging and similar arrangements;
· Company expects quarterly results will continue to fluctuate;
· Company does not anticipate paying dividends in the foreseeable future;
· the Company does not expect to sell any HiCz material in the future;
· trade friction will continue to have a negative impact on the PV industry and exacerbates the declining demand that the industry has experienced for PV products;
· the recovery of the solar industry, will be driven by next-generation technology adoption that is aimed at producing lower cost, higher efficiency monocrystalline wafers and cells;
· Hyperion ion implanter tool could reduce cost of PV manufacturing;
· all information regarding future product releases (including HiCz, Hyperion ion implanted, silicon carbide equipment and the performance metrics of those tools);
· Company expects to pursue the development of thin sapphire laminates for use in applications such as cover and touch screen devices;
· Company expects that most customers will substantially perform on their contractual obligations (but expects that some customers will not);
· expected use of cash and capital expenditure in the future;
· positioned to successfully compete for future market expansions in polysilicon;
· timing of delivery of our equipment products; and
· oversupply or decreased demand in the end-markets served by our equipment customers will have an adverse impact on our business (and may require we sell equipment at prices below our historical price).
These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, factors discussed in Part II, Item 1A Risk Factors and included elsewhere in this Quarterly Report on Form 10-Q.
Forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q (or other date as specified in this Quarterly Report on Form 10-Q) or, as of the date given if provided in another filing with the SEC. We undertake no obligation, and disclaim any obligation, to publicly update or review any forward-looking statements to reflect events or circumstances after the date of such statements.
Company Overview
GT Advanced Technologies Inc., through its subsidiaries (referred to collectively as we, us and our) is a diversified technology company with innovative crystal growth equipment and solutions for the global solar, LED and electronics industries. Our products are designed to accelerate the adoption of new advanced materials that improve performance and lower the cost of manufacturing.
We operate through three business segments: our polysilicon business, our photovoltaic, or PV, business and our sapphire business.
Polysilicon Business
Our polysilicon business manufactures and sells silicon deposition reactors, or SDR, used to react gases at high temperatures to produce polysilicon, the key raw material used in silicon-based solar wafers and cells, while also offering engineering services and related equipment. In addition, the polysilicon business sells hydrochlorination technology and equipment which is utilized to convert silicon tetrachloride into trichlorosilane (TCS), which is used as seed material in the manufacture of high purity silicon. Hydrochlorination technology is designed to improve the efficiency and lowers the costs of polysilicon production.
Photovoltaic Business
Our PV business manufactures and sells directional solidification, or DSS, crystallization furnaces and ancillary equipment used to cast crystalline silicon ingots by melting and cooling polysilicon in a precisely controlled process. These ingots are used to make photovoltaic wafers which are, in turn, used to make solar cells.
Our PV segment is also developing an equipment offering based on the continuously-fed Czochralski (HiCzTM) growth technology, which is targeted at generating more efficient solar cells than those cells generated using multicrystalline silicon materials.
Sapphire Business
Our sapphire business manufactures and sells sapphire material and equipment. Our sapphire material is manufactured using our advanced sapphire crystal growth furnace, or ASF system. In addition to selling ASF systems, we intend to continue production and sale of sapphire materials in selected specialty markets on a limited scale.
Recent Developments
Amendment to the 2012 Credit Agreement
On January 31, 2012, we, our U.S. operating subsidiary and our Hong Kong subsidiary 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 and the lenders from time to time party thereto. The 2012 Credit Agreement consisted of a term loan facility provided to our US operating subsidiary in an aggregate principal amount of $75 million (which was increased to $145 million pursuant to joinder agreements entered into in June 2012), a revolving credit facility available to our U.S. operating subsidiary in an aggregate principal amount of $25 million with a final maturity date of January 31, 2016 and a revolving credit facility available to our Hong Kong subsidiary in an aggregate principal amount of $150 million with a final maturity date of January 31, 2016. The 2012 Credit Agreement contains several covenants that we are required to comply with, among these are a financial covenant that we not (i) exceed a maximum leverage ratio (as defined in the 2012 Credit Agreement) of 2.0 at the end of any period of four consecutive fiscal quarters (as calculated in the 2012 Credit Agreement, as amended in June 2012) and (ii) fall below the minimum interest coverage ratio (as defined in the 2012 Credit Agreement) of 3.5 at the end of any period of four consecutive fiscal quarters (as calculated in the 2012 Credit Agreement).
On February 27, 2013, the Company (our U.S. operating subsidiary and our Hong Kong subsidiary), Bank of America N.A. and certain lenders agreed to amend certain provisions of the 2012 Credit Agreement, which we refer to as the 2013 Amendment. The amendment approved on February 27, 2013 waives the application of the leverage and interest coverage ratios though June 2014 (the waiver period). Through this action we avoid the possibility of a breach of these covenants. In addition, the 2013 Amendment provides that (i) we pay down the term facility by $40 million (leaving a balance of $100 million for the term facility), (ii) the interest rate payable on the loan is increased by 1.5% (which increase will be revised to 0.75% after the waiver period), (iii) the revolving credit facility for our US operating subsidiary be eliminated and the revolving credit facility available to our Hong Kong subsidiary was reduced to $125 million (and providing that such amounts may only be used for letters of credit during the waiver period), (iv) we comply with new covenants during the waiver period to maintain at all times minimum levels of liquidity (as defined in the 2013 Amendment), and quarterly cumulative minimum amounts of Consolidated Adjusted Earnings Before Interest, Tax, Depreciation and Amortization (as defined in the 2013 Amendment), (v) certain other covenants are revised, including with respect to restrictions on the incurrence of certain additional debt, making certain investments affiliate transactions and further restrictions on the payment of dividends and stock repurchases (as described in the 2013 Amendment), (vi) we pay certain fees to the Lenders and (vii) that certain subsidiaries of the Hong Kong subsidiary provide guarantees and collateral to support the Hong Kong Revolving Credit Facility. In addition, the undrawn fee payable on the undrawn portion of the revolving commitment increases from 0.50% to 0.75%.
Hazelwood Facility Idling
On January 10, 2013, we announced our plan to cease operations at our Hazelwood, Missouri facility (Hazelwood facility). The idling of the Hazelwood facility is part of our effort to reduce costs and optimize research and development activities and the idling of the facility was completed by March 30, 2013. In connection with this action, we terminated the employment of most of the Hazelwood facility employees at various dates in the first quarter of 2013. We 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 quarter ended December 31, 2012. In connection with the idling of the Hazelwood facility, we recorded $29.8 million of restructuring and asset impairment expense during the quarter ended December 31, 2012 to the PV segment, comprised of approximately $0.5 million of severance and related benefits and $29.3 million 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 March 30, 2013, the Company recorded $1.9 million of additional charges related to the Hazelwood facilitys lease exit costs and $0.6 million of other contract termination costs related to this facility.
Inventory and Long Lived Asset Impairment Charges
Due to the challenges faced in our industries, during the three months ended December 31, 2012, the Company incurred charges of $60.2 million to record PV inventory at its net realizable value, wrote down PV goodwill by $57.0 million and recorded impairment charges of $29.3 million related to certain long-lived, intangible and other assets located at our HiCZ Hazelwood facility.
At March 30, 2013, our PV segment had $4.4 million of goodwill and $59.5 million of finite-lived intangible assets. If the PV market were to continue to deteriorate or our PV products, including our HiCZ tool, were to not generate significant sales in the future, we could be required to take further charges and they may be material.
At March 30, 2013 our sapphire segment had approximately $43.7 million of goodwill and $16.2 million of finite-lived intangible assets. If our other business segments, polysilicon and sapphire, were to face the same conditions as our PV segment, we may be required to take significant impairment charges for these segments as well.
Factors Affecting the Results of Our Operations
The following are some of the factors, trends and events that we expect will affect our future results of operations:
Demand for our polysilicon and PV products and services are driven by end-user demand for solar power and demand for our sapphire products are driven by end-user demand for sapphire material, including LED-quality material. In each of our three business segments, the end-user demand for the output of our equipment has either declined substantially or
supply has surpassed demand. In order to decrease inventories, we believe that companies selling polysilicon, solar cells and wafers and sapphire material, including some of our customers, have had to sell at prices that provide little or no margin. In certain cases, customers have been unable to decrease inventories and/or remain profitable. We expect that these circumstances will continue through calendar year 2013. As a result, much of our business for 2013 will result from filling orders in our backlog and we do not expect that our backlog will increase during the same period. We do not expect to enter into any contracts, in any of our segments, for meaningful revenue or bookings until the second half of 2013. In addition, due to the length of the downturn impacting the solar and sapphire industries, the continued financial health and viability of certain of our customers is uncertain.
The current limited demand for our products or the excess capacity in the end markets our customers serve is exacerbated by trade tensions between China and the U.S. Most recently, in October 2012, the U.S. Commerce Department issued a final ruling and levied anti-dumping duties on billions of dollars of solar panels and cells from China (and set countervailing duties as well). This final ruling will negatively impact our equipment customers in China. This follows a May 2012 Department of Commerce announcement of a preliminary determination that China had violated fair trade policies by dumping into the U.S. certain solar products at prices that were intended to advantage Chinese manufacturers. The Chinese government responded by saying these actions were deliberately provoking trade friction between the two nations. In July 2012, the Chinese Ministry of Commerce opened investigations on imports of solar-grade polysilicon from the U.S. and South Korea which may result in trade duties on polysilicon imports from the U.S. and South Korean polysilicon manufacturers. In addition, the European Union, or E.U., has commenced an investigation into whether Chinese solar equipment manufacturers have dumped equipment into the E.U. in violation of trade regulations. If the E.U. imposes duties in connection with this investigation, it could harm our business since many of our Chinese customers sell into the E.U. While this risk may be mitigated to some extent if manufacturing of solar wafers and cells shifted from China to Europe (or locations in other parts of the globe) as there may be increased demand in Europe for polysilicon and PV equipment that cannot be satisfied from China at comparable prices, the E.U. may not allow Chinese companies to avoid the duties by transferring manufacturing operations to Europe. In response to the E.U. investigation, in November 2012, the Chinese Ministry of Commerce announced that it was commencing a trade investigation into European exports of solar-grade polysilicon. Retaliatory tariffs and trade tensions with China and the U.S. and Europe (as well as South Korea, where some of our equipment customers are located) is causing uncertainty in the industry and is having a material adverse impact on our business since we sell into China and our equipment customers sell end products into Europe and the U.S. In particular, we believe that certain of our customers are delaying any purchasing or expansion plans until these various trade matters are resolved and we do not expect such resolution to take place during 2013.
Many of our polysilicon, PV and sapphire equipment customers are facing liquidity challenges due to the current state of the market. In addition, changes in the capital markets have resulted in a more stringent lending environment for solar and sapphire companies which in turn has caused decreased spending within the industries we serve as customers try to preserve their liquidity. We believe the negative impact of a more stringent lending environment has resulted in decreased demand for all of our products. The commercial lending environment has not stabilized and if the availability of capital or credit for solar and sapphire companies remains constrained (including in China) or if capital or credit were to become even more limited, we expect that our results of operations, would continue to be negatively impacted.
We believe that the recent economic downturn that has impacted the PV industry is not merely a cyclical downturn, but is the result of more structural shifts in the industry. We expect that any growth in the industry will be driven by technological changes that bring greater efficiencies and cost-savings. Due to this structural change, we intend to discontinue any significant future investments in our DSS product line. We do have DSS furnaces in inventory and will attempt to sell these during 2013. We may not be able to generate a material amount of revenue from these sales, and expect that the average selling prices for this equipment will be well below our historical averages. Customers may request that we renegotiate terms of existing contracts to obtain lower prices or request that (in lieu of the equipment they ordered) they receive newer technology that we have developed, and such negotiations may result in reduced prices and reduction in the number of units to be delivered and a change in other terms, which may have an impact on our results of operations and our reported order backlog. As margins are dropping in the solar wafer and cell industry, PV companies may require these types of changes to their production equipment contracts in order to continue to maintain operations. We do not expect to release our next PV product offering, the HiCz puller, until 2014 and therefore the very limited revenue from DSS sales will be our only source of PV revenue in 2013, and perhaps beyond.
The sovereign debt crisis in Europe has led to economic instability, depreciation of the euro, fiscal austerity, reduction in government support for certain programs (including solar incentives) and slowing growth in the entire region. While we have very limited sales to customers in Europe, a portion of the end-users of solar power and sapphire materials are located in Europe, and as a result, our equipment customers have been negatively impacted by the instability in European economies. We expect that this crisis will cause further decrease in demand for our polysilicon, sapphire and PV equipment offerings. In addition, there is increasing evidence that this economic instability is impacting other regions as well, including China, and may be directly impacting our equipment customers.
There is an excess of polysilicon manufacturing capacity and the market price for polysilicon has significantly declined. As a result, we expect that there will be a greater focus on reducing production costs among polysilicon manufacturers, putting substantial pressure on our customers to lower the cost of equipment they purchase from us or to delay or cancel their purchases of polysilicon production equipment. These factors may also produce consolidation in the industry. We believe we are well positioned to capture a portion of the future demand for polysilicon equipment among the more limited number of manufacturers by delivering equipment with higher throughput and lower power consumption, leading to greater efficiencies and lower manufacturing costs. However, the timing of any future purchases is uncertain and it may be a significant amount of time before we see the benefits of any purchases of equipment, if at all.
Due to structural changes in the PV industry mentioned above, and the limited demand for PV cells, modules and wafers, most of our PV customers have lowered capacity utilization rates and delayed or terminated expansion projects as they respond to weaker end market demand. We expect that the market demand for multicrystalline PV products will remain very limited (particularly as a result of improvements in monocrystalline growth technologies).
Demand for PV on-grid applications (and, in turn, our PV equipment) has historically been dependent in part on the availability and size of government subsidies and incentives. As governments face limited revenues and spending constraints, they are reducing or eliminating support for certain programs. We believe that governments are moving more aggressively to reduce all forms of governmental assistance to the solar industry and we expect that governmental subsidies, feed-in tariffs and similar supports will be eliminated in their entirety in the near future.
The price for sapphire material has recently experienced significant decreases. We expect that current decreased prices will continue. Consequently, we anticipate that demand for our ASF systems will also remain lower than in previous quarters. Further, customers have requested, and expect that they will continue to request, delivery of ASF systems be delayed until the price of sapphire recovers which has delayed the timing of which amounts attributable to ASF systems roll-off of backlog and into revenue and the timing on which we enter into new contracts to sell ASF systems. Additionally, we may receive requests to cancel deliveries, which would reduce our reported backlog.
One of the expected drivers of demand for sapphire was expected to be, in large part, the increased use of sapphire materials in general illumination. To this point, that broad adoption of LED in lighting is slower than expected. As a result, the future demand for ASF systems attributable to this market are not expected to increase markedly in the immediate future. The use of sapphire in industrial applications and consumer electronics has been adopted to a limited extent, and could lead to new market opportunities for the ASF system. While the use of sapphire in these applications is still in the very early stages, it represents a potential market and may result in increased demand for sapphire manufacturing equipment.
We have made investments in developing new technology, such as our HiCz puller, silicon carbide furnace and Hyperion ion implanter. During the fiscal year ending December 31, 2013, we do not expect to recognize any revenue from these investments.
In addition, our results of operations are affected by a number of other factors including the availability and market price of polysilicon, alumina material, graphite and certain process consumables, availability of raw materials, foreign exchange rates, interest rates, commodity prices (including molybdenum, steel and graphite prices) and macroeconomic factors, including the availability of capital that may be needed by our customers, as well as political, regulatory and legal conditions in the international markets in which we conduct business, including countries such as China, Taiwan and Korea.
Order Backlog
Our order backlog primarily consists of amounts due under written contractual commitments and signed purchase orders for PV, polysilicon and sapphire equipment not yet shipped to customers, deferred revenue (which represents amounts for equipment that has been shipped to customers but not yet recognized as revenue) and short-term contracts or sales orders for sapphire materials. Substantially all of the contracts in our order backlog for PV, polysilicon and sapphire equipment require the customer to either post a standby letter of credit in our favor and/or make advance payment prior to shipment of equipment.
From the date of a written commitment, we generally would expect to deliver PV and sapphire equipment products over a period ranging from three to nine months and polysilicon products over a period ranging from twelve to eighteen months, however, in certain cases revenue may be recognized over longer periods. Although most of our orders require non-refundable deposits, our order backlog as of any particular date should not be relied upon as indicative of our revenues for any future period.
If a customer fails to perform its outstanding contractual obligations on a timely basis, and such failure continues after notice of breach and a cure period, we may terminate the contract. Our contracts generally do not contain cancellation provisions and in the event of a customer breach, the customer may be liable for cash damages resulting from the material breach of the terms of the agreement. During the three months ended March 30, 2013, we have identified certain contracts in our order backlog that have not been terminated or modified, however, we expect that certain customers will not fulfill their obligations under these respective contracts. As a result, during the three months ended March 30, 2013, we modified or removed contracts from our reported order backlog resulting in a $356.5 million reduction (almost 100% of the reduction was attributable to four contracts that have not been terminated or modified, but we have removed amounts from our reported backlog). During the nine-month period ended December 31, 2012, we terminated, modified or removed contracts resulting in a $220.5 million reduction in our order backlog (81% of the reduction was attributable to six contracts). During the three months ended March 30, 2013, we did not record any revenue from terminated contracts and during the nine-month period ended December 31, 2012, we recorded revenues of $8.5 million from terminated contracts.
Although we have a reasonable expectation that most of our customers will substantially perform on their contractual obligations, we attempt to monitor those contracts that we believe to be at risk. Due to recent industry market conditions, we have removed certain amounts from our reported backlog that are attributable to contracts that we do not believe our customers will fulfill.
We conduct negotiations with certain customers who have requested that we extend their delivery schedules or make other contract modifications, or who have not provided letters of credit or made payments in accordance with the terms of their contracts. We monitor the effect, if any, that these negotiations may have on our future revenue recognition. If we cannot come to an agreement with these customers, our order backlog could be reduced. Other customers with contracts in our order backlog that are not currently under negotiation may approach us with similar requests in the future, or may fail to provide letters of credit or to make payments when due. If we cannot come to an agreement with these customers, our order backlog could be further reduced. If we do come to an agreement with customers extending delivery schedules, the timing of expected revenue recognition could be pushed into later periods than we had anticipated.
The table below sets forth our order backlog as of March 30, 2013 and December 31, 2012:
|
|
March 30, 2013 |
|
December 31, 2012 |
| ||||||
Product Category |
|
Amount |
|
% of Backlog |
|
Amount |
|
% of Backlog |
| ||
|
|
(dollars in millions) |
| ||||||||
Photovoltaic business |
|
$ |
8 |
|
1 |
% |
$ |
4 |
|
1 |
% |
Polysilicon business |
|
491 |
|
58 |
% |
529 |
|
42 |
% | ||
Sapphire business |
|
352 |
|
41 |
% |
716 |
|
57 |
% | ||
Total |
|
$ |
851 |
|
100 |
% |
$ |
1,249 |
|
100 |
% |
Our order backlog totaled $851.0 million as of March 30, 2013. Our order backlog attributable to our PV, polysilicon and sapphire businesses as of March 30, 2013, included deferred revenue of $146.2 million, of which $2.8 million related to our PV business, $138.3 million related to our polysilicon business and $5.1 million related to our sapphire
business. Cash received in deposits related to our order backlog where deliveries have not yet occurred was $142.9 million as of March 30, 2013.
As of March 30, 2013, our order backlog consisted of contracts with 11 PV customers, contracts with 15 polysilicon customers, and contracts with 63 sapphire customers. Our order backlog as of March 30, 2013, included $261.3 million, $144.6 million, $110.3 million and $105.6 million attributed to four different customers, each of which individually represents 31%, 17%, 13% and 12%, respectively, of our order backlog.
Results of Operations
The following tables set forth the results of operations as a percentage of revenue for the three months ended March 30, 2013 and March 31, 2012:
|
|
Three Months Ended |
| ||
|
|
March 30, 2013 |
|
March 31, 2012 |
|
Statements of Operations Data:* |
|
|
|
|
|
Revenue |
|
100 |
% |
100 |
% |
Cost of revenue |
|
76 |
|
57 |
|
Gross profit |
|
24 |
|
43 |
|
Research and development |
|
28 |
|
4 |
|
Selling and marketing |
|
6 |
|
1 |
|
General and administrative |
|
25 |
|
4 |
|
Contingent consideration expense |
|
1 |
|
|
|
Restructuring charges |
|
5 |
|
|
|
Amortization of intangible assets |
|
4 |
|
1 |
|
(Loss) income from operations |
|
(45 |
) |
33 |
|
Interest expense |
|
(13 |
) |
|
|
(Loss) income before income taxes |
|
(58 |
) |
33 |
|
(Benefit) provision for income taxes |
|
(26 |
) |
10 |
|
Net (loss) income |
|
(32 |
)% |
23 |
% |
* Percentages subject to rounding.
Three Months Ended March 30, 2013 compared to Three Months Ended March 31, 2012
Revenue. The following table sets forth total revenue for the three months ended March 30, 2013 and March 31, 2012:
|
|
Three Months Ended |
| |||||||||
Business Category |
|
March 30, 2013 |
|
March 31, 2012 |
|
Change |
|
% |
| |||
|
|
(dollars in thousands) |
| |||||||||
Photovoltaic business |
|
$ |
4,364 |
|
$ |
31,375 |
|
$ |
(27,011 |
) |
(86 |
)% |
Polysilicon business |
|
37,956 |
|
153,944 |
|
(115,988 |
) |
(75 |
)% | |||
Sapphire business |
|
15,456 |
|
168,571 |
|
(153,115 |
) |
(91 |
)% | |||
Total revenue |
|
$ |
57,776 |
|
$ |
353,890 |
|
$ |
(296,114 |
) |
(84 |
)% |
Revenue from our PV business decreased 86% to $4.4 million for the three months ended March 30, 2013, as compared to $31.4 million for the three months ended March 31, 2012. The decrease for the three months ended March 30, 2013 is primarily due to (i) decreased demand for our DSS products, which led to fewer orders, (ii) fewer shipments of our DSS products to solar manufacturers, and (iii) lower average selling prices as compared to the corresponding period in the preceding year. This trend of decreased demand for DSS products began in fiscal year 2012 and, we believe, is the result of the current excess capacity of solar wafers and cells.
Revenue from our polysilicon business decreased 75% to $38.0 million for the three months ended March 30, 2013, as compared to $153.9 million for the three months ended March 31, 2012. This decrease for three months ended March 30, 2013 was driven primarily by revenue recognized related to three customer contracts in the prior year quarter that did not recur in the March 30, 2013 quarter. For the three months ended March 30, 2013 polysilicon revenue was recognized primarily related to the shipment of equipment related to one customer. Polysilicon revenue may fluctuate significantly from period to period due to the timing of shipments and the length of time it takes to complete our obligations under the contracts. As a result of this variability, our polysilicon business tends to have a higher level of deferred revenue than our other business segments. Approximately 95% and 93% of our deferred revenue balances at March 30, 2013 and December 31, 2012, respectively, relate to our polysilicon business.
Included in prior year polysilicon revenue are certain polysilicon contracts that required us to recognize revenue ratably over the contract period. Revenue recognition from these contracts commenced when all other elements had been delivered and other contract criteria have been met. These rights expired on December 31, 2012 and all revenue under these contracts was recognized by this date. During the three months ended March 31, 2012, we recognized revenue on a ratable basis from these contracts of $52.9 million.
Our sapphire business revenue during the three months ended March 30, 2013 is attributable to the sale of sapphire equipment and material used mostly, we believe, in sapphire-based LED applications and other specialty markets. Revenue from our sapphire business was $15.5 million for the three months ended March 30, 2013, as compared to $168.6 million for the three months ended March 31, 2012. The decrease in revenue for our sapphire business is primarily related to the reduction in the number of ASF systems shipped and accepted as compared to the prior period.
A substantial percentage of our revenue results from sales to a small number of customers. Two of our customers accounted for 79% of our revenue for the three months ended March 30, 2013 and three customers accounted for 59% of our revenue for the three months ended March 31, 2012. No other customer accounted for more than 10% of our revenue during the respective periods:
Gross Profit and Gross Margins. The following tables set forth gross profit and gross margin for the three months ended March 30, 2013 and March 31, 2012.
|
|
Three Months Ended |
| |||||||||
|
|
March 30, 2013 |
|
March 31, 2012 |
|
Change |
|
% |
| |||
|
|
(dollars in thousands) |
| |||||||||
Gross profit |
|
|
|
|
|
|
|
|
| |||
Photovoltaic business |
|
$ |
(1,303 |
) |
$ |
16,637 |
|
$ |
(17,940 |
) |
|
|
Polysilicon business |
|
13,137 |
|
65,482 |
|
(52,345 |
) |
|
| |||
Sapphire business |
|
1,781 |
|
70,209 |
|
(68,428 |
) |
|
| |||
Total |
|
$ |
13,615 |
|
$ |
152,328 |
|
$ |
(138,713 |
) |
(91 |
)% |
|
|
Three Months Ended |
| ||
|
|
March 30, |
|
March 31, |
|
Gross margins |
|
|
|
|
|
Photovoltaic business |
|
(30 |
)% |
53 |
% |
Polysilicon business |
|
35 |
% |
43 |
% |
Sapphire business |
|
12 |
% |
42 |
% |
Overall |
|
24 |
% |
43 |
% |
Overall gross profit as a percentage of revenue, or gross margin, decreased to 24% for the three months ended March 30, 2013, from 43% for the three months ended March 31, 2012.
Our gross margins in our PV, polysilicon and sapphire businesses tend to vary depending on the volume, pricing and timing of revenue recognition.
Our PV gross margin for the three months ended March 30, 2013 was (30%), as compared to 53% for the three months ended March 31, 2012. The decrease for the three months ended March 30, 2013 was due primarily to a decrease in the average selling price and number of DSS units shipped as compared to the three months ended March 31, 2012.
Our polysilicon gross margin for the three months ended March 30, 2013 was 35%, as compared to 43% for the three months ended March 31, 2012. The decrease in polysilicon gross margins for the three months ended March 30, 2013 was primarily due to us not recognizing revenue on certain payments which are contingent upon performance metrics being achieved. Such performance payments would be recognized in a future period, if the performance metrics are achieved, with no corresponding equipment costs. As compared to the three months ended March 31, 2012, polysilicon margins in that period contained revenues associated with such performance payments on the vast majority of contracts recognized in that period.
Our sapphire gross margin for the three months ended March 30, 2013 was 12%, as compared to 42% for the three months ended March 31, 2012. The decrease in gross margin for the sapphire business during the three months ended March 30, 2013 is related to both the reduction in the number of ASF systems recognized and additional warranty charges incurred when compared to the prior year period. During the three months ended March 31, 2012, we recorded significant revenues in connection with the sale of our sapphire equipment when compared to revenue for the three months ended March 30, 2013. Margins on the sale of our sapphire equipment are higher than our margins on sapphire materials and therefore the consolidated margin is lower in periods where a fewer number of ASF systems are recognized as revenue.
Operating Expenses. The following table sets forth total operating expenses for the three months ended March 30, 2013 and March 31, 2012:
|
|
Three Months Ended |
| |||||||||
|
|
March 30, 2013 |
|
March 31, 2012 |
|
Change |
|
% Change |
| |||
|
|
(dollars in thousands) |
| |||||||||
Operating expenses |
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
| |||
Research and development |
|
$ |
16,441 |
|
$ |
15,248 |
|
$ |
1,193 |
|
8 |
% |
|
|
|
|
|
|
|
|
|
| |||
Selling and marketing |
|
3,286 |
|
2,707 |
|
579 |
|
21 |
% | |||
|
|
|
|
|
|
|
|
|
| |||
General and administrative |
|
14,563 |
|
15,170 |
|
(607 |
) |
(4 |
)% | |||
|
|
|
|
|
|
|
|
|
| |||
Contingent consideration expense |
|
336 |
|
527 |
|
(191 |
) |
(36 |
)% | |||
|
|
|
|
|
|
|
|
|
| |||
Restructuring charges |
|
2,858 |
|
|
|
2,858 |
|
|
% | |||
|
|
|
|
|
|
|
|
|
| |||
Amortization of intangible assets |
|
2,455 |
|
2,546 |
|
(91 |
) |
(4 |
)% | |||
Total |
|
$ |
39,939 |
|
$ |
36,198 |
|
$ |
3,741 |
|
10 |
% |
Operating expenses increased 10% to $39.9 million for the three months ended March 30, 2013, as compared to $36.2 million for the three months ended March 31, 2012.
Research and development expenses consist primarily of payroll and related costs, including stock-based compensation expense, for research and development personnel who design, develop, test and deploy our PV, polysilicon and sapphire equipment, materials and services. We expect to continue to invest in new product development and attempt to expand certain of our existing product bases in each of our segments, as well as continue efforts to introduce new products. Research and development expenses increased by 8% to $16.4 million for the three months ended March 30, 2013, as compared to $15.2 million for the three months ended March 31, 2012. The increase for the three months ended March 30, 2013, as compared to the three months ended March 31, 2012 primarily related to: an increase in employee compensation of $2.4 million, an increase of $1.5 million in IT related expenses, an increase in outside service related costs of $0.5 million, an increase in depreciation of $0.4 million and an increase in facilities expenses of $0.2 million; this increase was offset partially by a decrease in other research and development expenses of $3.7 million, primarily as a result of decreased usage of non-production materials and consumables.
Selling and marketing expenses consist primarily of payroll and related costs, stock-based compensation expense and commissions for personnel engaged in marketing, sales and support functions, as well as advertising and promotional expenses. Selling and marketing expenses increased 21% to $3.3 million for the three months ended March 30, 2013, as compared to $2.7 million for the three months ended March 31, 2012. The increase in sales and marketing expenses for the three months ended March 30, 2013 were driven by an increase in employee compensation of $0.1 million, principally a result of increased internal sales commissions in our polysilicon business. Sales commissions are accrued based on operational factors such as deposits, shipments and final acceptances received from customers rather than when revenue is recognized and thus may vary from quarter to quarter. In addition, the increase in sales and marketing expenses for the three months ended March 30, 2013 was also attributable to increases in outside services of $0.1 million and an increase in travel and entertainment expenses of $0.1 million, incurred in connection with increased expenses for trade shows.
General and administrative expenses consist primarily of the following components: payroll, stock-based compensation expense and other related costs, including expenses for executive, finance, business applications, human resources and other administrative personnel; and fees for professional services. The decrease in general and administrative expenses of 4% to $14.6 million in the three months ended March 30, 2013, as compared to $15.2 million for the three months ended March 31, 2012, was primarily driven by an $0.7 million decrease in facility related expenses; a $0.6 million decrease in outside services expense; and a decrease in other general and administrative expense of $1.2 million. These decreases for the three months ended March 30, 2013 were offset, in part, by an increase of $1.0 million in payroll and payroll related costs, primarily driven by bonus compensation; and an increase in depreciation expense of $0.7 million.
Contingent Consideration Expense. Contingent consideration expense consists of the accretion of our contingent consideration liabilities to their respective fair values. Contingent consideration expense decreased 36% to $0.3 million for the three months ended March 30, 2013, as compared to $0.5 million for the three months ended March 31, 2012. During the three months ended March 30, 2013, we recognized expense solely associated with the acquisition of certain select assets and technology related to the Hyperion(TM) ion implanter tool.
Restructuring Charges. Total restructuring and asset impairment charges for the three months ended March 31, 2013 were $2.9 million, including $1.9 million in additional lease exit costs and $0.6 million of other contract termination costs relating to the Hazelwood facility. In addition, the Company recorded $0.4 million of severance and related benefits. There were no comparable amounts in the prior year quarter.
Amortization Expense. Amortization of intangible assets consists of the amortization of intangible assets obtained in business or technology acquisitions. Amortization expense attributed to intangible assets remained consistent at $2.5 million for both the three months ended March 30, 2013, and the three months ended March 31, 2012. The balance within amortization expense is driven by the amortization of identified intangible assets related to our acquisitions of both Confluence Solar and Crystal Systems.
Interest Expense. Interest expense includes interest paid on our debt obligations as well as amortization of deferred financing costs. Interest expense increased to $7.5 million for the three months ended March 30, 2013, as compared to $0.8 million for the three months ended March 31, 2012. The increase is due to i) higher interest rate on our 2012 Credit Facility with Bank of America N.A (and certain other lenders) which was increased pursuant to the 2013 Amendment; ii) an increase in amortization of deferred financing fees and iii) the amortization of the 3.00% Senior Convertible Notes due 2017 discount. The increase in amortization of deferred financing costs is due to the amortization of deferred financing fees paid in connection with our 3.00% Senior Convertible Notes due 2017 and in connection with the 2013 Amendment, for which we accelerated recognition on a portion of the deferred financing costs.
Provision (benefit) for Income Taxes. Our effective tax rate is based on our expectation of annual earnings from operations in the U.S. and other tax jurisdictions.
Our world-wide effective tax rate was 44.3% (benefit) for the three-month period ended March 30, 2013 and 31.4% provision for the three-month period ended March 31, 2012. The effective tax rate for the three months ended March 30, 2013, was impacted by a favorable provision to prior tax return adjustments as well as the reinstatement of the Federal Research and Development credit.
Changes in the mix of income before income taxes between the U.S. and foreign jurisdictions also impacted our effective tax rates. The majority of our projected income is forecasted to come from the sapphire segment which is taxed primarily in lower tax jurisdictions. Due to this jurisdictional mix of income/loss, we are projecting a taxable loss in the US, a higher tax jurisdiction while lower tax jurisdictions, namely Hong Kong, is projecting taxable income.
We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. We are subject to examination by federal, state, and foreign tax authorities. Our U.S. tax returns have settled for fiscal years through March 31, 2008. We are under examination by the Internal Revenue Service, or IRS, for our fiscal years ending March 28, 2009 and April 3, 2010. In addition, the statute of limitations is open for all state and foreign jurisdictions.
Liquidity and Capital Resources
Overview
We fund our operations generally through cash generated from operations, proceeds from credit facilities and proceeds from exercises of stock awards.
Our cash and cash equivalents balance decreased by $97.9 million during the three months ended March 30, 2013, from $418.1 million as of December 31, 2012 to $320.2 million as of March 30, 2013. On March 30, 2013, we held $260.7 million of cash and cash equivalents in the United States by our U.S. subsidiaries and we held $59.5 million outside the U.S. held by our foreign subsidiaries. The decrease was principally attributable to the $40.0 million pre-payment on the outstanding term loan under our Credit Agreement entered into in January 2012 with Bank of America N.A. and certain other lenders, net loss of $18.7 million, payments of $1.6 million for the purchase of property, plant and equipment and the remainder of the amount was principally attributable to cash utilized in connection with working capital purchases.
We manage our cash inflows through the use of customer deposits, milestone billings and debt financings intended to allow us in turn to meet our cash outflow requirements, which primarily consist of vendor payments and prepayments for contract related costs (raw material and components costs) as well as payroll and overhead costs as we perform on our customer contracts. The following discussion of the changes in our cash balance refers to the various sections of our Condensed Consolidated Statements of Cash Flows, which appears in Item 1 of this Quarterly Report on Form 10-Q.
Historically, our principal uses of cash are for raw materials and components, wages, salaries and investment activities, such as the purchase of property, plant and equipment, business acquisitions, repurchases of our common stock and payments on outstanding debt. We outsource a significant portion of our equipment manufacturing and therefore we require minimal capital expenditures to meet our production demands.
The following table summarizes our primary cash flows in the periods presented:
|
|
Three Months Ended |
| ||||
|
|
March 30, |
|
March 31, |
| ||
|
|
(dollars in thousands) |
| ||||
Cash provided by (used in): |
|
|
|
|
| ||
Operating activities |
|
$ |
(53,964 |
) |
$ |
86,351 |
|
Investing activities |
|
(1,585 |
) |
(13,937 |
) | ||
Financing activities |
|
(42,343 |
) |
71,680 |
| ||
Effect of foreign exchange rates on cash |
|
23 |
|
(69 |
) | ||
Net (decrease) increase in cash and cash equivalents |
|
$ |
(97,869 |
) |
$ |
144,025 |
|
Cash Flows from Operating Activities
For the three months ended March 30, 2013, our cash used in operations was $54.0 million. Our cash used in operations was driven primarily by a net loss of $18.7 million, a decrease in customer deposits of $38.2 million, an increase in inventories of $20.8 million, an increase in deferred costs of $17.6 million, a deferred income tax benefit of $16.5 million and a decrease in income taxes payable of $14.1 million. These amounts were offset by a decrease in vendor advances of $24.5 million, an increase in deferred revenue of $24.2 million, an increase in accounts payable and accrued expenses of $4.8 million, share-based compensation expense of $4.4 million and depreciation expense of $4.1 million.
For the three months ended March 31, 2012, our cash provided by operations was $86.4 million. Our cash flow from operations was driven primarily by a decrease in deferred cost of $128.7 million, a decrease in restricted cash of $96.2 million, net income of $79.1 million, an increase in accrued income taxes of $36.1 million and an increase in customer deposits of $26.2 million. These items were partially offset by a decrease in deferred revenue of $234.9 million, a decrease in accounts payable and accrued expenses of $36.3 million and an increase in accounts receivable of $14.9 million.
Cash Flows from Investing Activities
For the three months ended March 30, 2013, our cash used in investing activities was $1.6 million, comprised primarily of capital expenditures for the period.
For the three months ended March 31, 2012, our cash used in investing activities was $13.9 million. This is comprised primarily of capital expenditures for the period of approximately $14.1 million. These capital expenditures were primarily used for expanding our sapphire business and improving our business information systems.
Cash Flows from Financing Activities
For the three months ended March 30, 2013, cash used in financing activities was $42.3 million, driven primarily by a $40.0 million pre-payment of the term loan component of our Credit Agreement, entered into in January 2012, with Bank of America N.A. and certain other lenders, and $2.3 million of financing costs on the outstanding term loan of such Credit Agreement.
For the three months ended March 31, 2012, cash provided by financing activities was $71.7 million, driven primarily by additional borrowings of $75.0 million made under 2012 Credit Agreement. These cash inflows were offset by payments of deferred financing costs of $3.5 million in connection there with.
We believe that our existing cash, including cash received under the term facility with Bank of America N.A. (and certain other lenders), 3.0% convertible notes, customer deposits and amounts available under our revolving credit facility with Bank of America N.A. (and certain other lenders) will be sufficient to satisfy working capital requirements, commitments for capital expenditures, and other cash requirements for the foreseeable future, including at least the next twelve months. We, however, consistently review strategic opportunities in an effort to find opportunities to improve our products, technologies, operations, overall business and increase shareholder value, these opportunities may include business acquisitions, technology licenses, dividends to shareholders, accelerated prepayments of outstanding indebtedness, share buybacks and joint ventures. If we were to engage in any of the foregoing, it could require that we utilize a significant amount of our available cash to fund additional operations (such as research and development) and, as a result, we may be required to increase our outstanding indebtedness or raise additional capital in through the sale of equity, which may not be available on favorable terms, or at all.
Long Term Debt
Bank of America Credit Agreement
On January 31, 2012, we, our U.S. operating subsidiary (the U.S. Borrower) and our 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 (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 $75.0 million 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 $25.0 million with a final maturity date of January 31, 2016 (pursuant to the 2013 Amendment (described below), the U.S. Revolving Credit Facility is no longer available) and a revolving credit facility (the Hong Kong Revolving Facility; together with the U.S. Revolving Credit Facility, the 2012 Revolving Credit Facility; together with the Term Facility, the 2012 Credit Facilities) available to the Hong Kong Borrower in an aggregate principal amount of $150.0 million with a final maturity date of January 31, 2016 (which amount was reduced to $125 million pursuant to the 2013 Amendment). The 2012 Credit Facilities are available in the form of base rate loans based on Bank of Americas prime rate plus a margin of 2.00% or Eurodollar rate loans based on LIBOR plus a margin of 3.00% (which rates were increased pursuant to the 2013 Amendment). On various dates between June 15, 2012 and June 25, 2012, the Company, the U.S. Borrower and the Hong Kong Borrower requested and received approval for increases in the 2012 Term Facility for the U.S. Borrower in an aggregate amount equal to $70,000 (the Incremental Term Loans) pursuant to the 2012 Credit Agreement.
On February 27, 2013, the Company (our U.S. and Hong Kong operating subsidiaries), Bank of America N.A. and certain lenders agreed to amend certain provisions of the 2012 Credit Agreement (the 2013 Amendment). The 2013 Amendment waives the application of the leverage and interest coverage financial ratio covenants though June 2014 (the waiver period). Through this action we avoid the possibility of a breach to these covenants. In addition, the 2013 Amendment provides that (i) we pay down the term facility by $40.0 million (leaving a balance of $100.0 million for the term facility), (ii) the interest rate payable on the loan is increased by 1.5% (which increase drops to 0.75% after the waiver period), (iii) the revolving credit facility for our US operating subsidiary be eliminated and reduces the revolving credit facility available to our Hong Kong subsidiary to $125.0 million (and providing that such amounts may only be used for letters of credit during the waiver period), (iv) the Company comply with new covenants during the waiver period to maintain at all times minimum levels of liquidity (as defined in the 2013 Amendment), and quarterly cumulative minimum amounts of Consolidated Adjusted Earnings Before
Interest, Tax, Depreciation and Amortization (as defined in the 2013 Amendment), (v) certain other covenants are revised, including with respect to restrictions on the incurrence of certain additional debt, making certain investment, affiliate transactions and further restrictions on the payment of dividends and stock repurchases (as described in the 2013 Amendment), (vi) we pay certain fees to the Lenders and (vii) that certain subsidiaries of the Hong Kong subsidiary will provide guarantees and collateral to support the Hong Kong Revolving Credit Facility. In addition, the undrawn fee payable on the undrawn portion of the revolving commitments increases from 0.50% to 0.75%.
As of March 30, 2013, we had approximately $23.7 million of outstanding letters of credit pursuant to the 2012 Revolving Facilities resulting in approximately $101.3 million of available credit after giving affect to the 2013 Amendment. As of March 30, 2013, there was $99.6 million outstanding under the 2012 Term Facility. As of March 30, 2013, we were in compliance with the covenants contained in the 2012 Credit Agreement. For additional information on the 2012 Credit Agreement, see Note 15 to our condensed consolidated financial statements in Item 1 Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.
3.00% Convertible Senior Notes due 2017
On September 28, 2012, we issued $220.0 million aggregate principal amount of 3.00% Convertible Senior Notes due 2017 (the Notes).The net proceeds from the issuance of the Notes were approximately $212.6 million, after deducting fees paid to the initial purchasers and other offering costs. The Notes are senior unsecured obligations, which pay interest in cash semi-annually at a rate of 3.00% per annum. The Notes are governed by an Indenture dated September 28, 2012 with U.S. Bank National Association, as trustee. The Notes are not redeemable by us.
Convertible Note Hedge Transactions and Warrant Transactions
In connection with the issuance of the Notes, we entered into separate convertible note hedge transactions and warrant transactions with certain counterparties. For additional information on the Notes, the convertible note hedge transactions and warrant transactions, see Note 10 to the notes to our consolidated financial statements in Item 8 Financial Statements and Supplementary Data included in our Transition Report on Form 10-K filed for the nine-month period ended December 31, 2012.
Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
Standby Letters of Credit
As of March 30, 2013, we had $23.7 million of standby letters of credit outstanding against the 2012 Revolving Credit Facility, which represented performance guarantees issued against customer deposits. These standby letters of credit are scheduled to expire within the next twelve months and have not been included in the condensed consolidated financial statements included herein.
Contractual Obligations and Commercial Commitments
There have been no material changes to our Contractual Obligations and Commercial Commitments table in Part II, Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations of our Transition Report on Form 10-K for the nine month ended December 31, 2012, other than:
i) As of March 30, 2013, purchase commitments under agreements totaled $137.7 million, substantially all of which are due within twelve months. As of March 30, 2013, prepayments under certain of these purchase commitments amounted to $28.9 million.
We expect to terminate purchase commitments 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 date of termination. No amount has been accrued as of March 30, 2013, as these purchase orders have not been terminated at March 30, 2013. The gross amount of remaining purchases under these purchase orders was $16.2 million as of March 30, 2013, and we may negotiate with the vendors to determine the amount payable upon termination of these purchase orders.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
Effective January 1, 2013, we 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 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Critical Accounting Policies and Estimates
For the three months ended March 30, 2013, there were no significant changes to our critical accounting policies and estimates included in our Transition Report on Form 10-K for the nine-month period ended December 31, 2012, as filed with the SEC on March 1, 2013.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Investment Risks
We maintain an investment portfolio which, at March 30, 2013, consisted of $200.1 million of money market mutual funds. At any time a rise in market interest rates could have an adverse impact on the fair value of our investment portfolio. Conversely, declines in market interest rates could have a material impact on the interest earnings of our investment portfolio. We do not currently hedge these interest rate exposures. We place our investments with high quality issuers and have investment policies limiting, among other things, the amount of credit exposure to any one issuer. We seek to limit default risk by purchasing only investment grade securities. Based on investment positions as of March 30, 2013, a hypothetical movement of plus or minus 50 basis points based on current market interest rates would not have a material impact to the value of our investment portfolio or the income earned in an annual period. We also have the ability to hold our investments until maturity, and therefore do not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our investment portfolio.
We may elect to invest a significant amount of our cash in fixed income portfolios. As with most fixed income portfolios, the ones that we have invested in from time to time, or may elect to invest in, include overnight money market funds, government securities, certificates of deposit, commercial paper of companies and other highly-liquid securities that are believed to be low-risk. Certain money market funds in which we have invested, however, could hold positions in securities issued by both sovereign states and banks located in jurisdictions experiencing macroeconomic instability, some of which may not currently be considered low-risk. Certain sovereign states and banks located in these jurisdictions, have experienced severe disruptions lately, in part, from the belief that they may be unable to repay their debt, and the value of the securities issued by these institutions have experienced volatility. While we do not believe that we have any direct exposure to the riskiest securities, for example, we do not directly hold any securities issued by the governments of Greece, Spain, Portugal, France and Ireland, the funds that we may invest in may hold these securities. In addition, these money market funds could hold Euros or Euro-based securities. To the extent that volatility was to have a significant impact on the Euro, a portion of any cash held in money market accounts could lose its value. Further, if the financial upheavals were to spread to other sovereign states, such as the United Kingdom, our cash could also be at risk due to the fact that the funds in which we have placed our cash do invest directly in the securities issued by the sovereign states, corporations and banks in these jurisdictions.
Foreign Currency Risk
Although our reporting currency is the U.S. dollar and substantially all of our existing sales contracts are denominated in U.S. dollars, we incur costs denominated in other currencies. In addition, although we maintain our cash balances primarily in the U.S. dollar, from time to time, we maintain cash balances in currencies other than the U.S. dollar. As a result, we are subject to currency risk.
Our primary foreign currency exposure relates to fluctuations in foreign currency exchange rates, primarily the Euro for certain inventory purchases from vendors located in Europe. Fluctuations in exchange rates could affect our gross and net profit margins and could result in foreign exchange and operating losses or gains due to such volatility. Changes in the customers delivery schedules can affect related payments to our vendors which could cause fluctuations in the cash flows and when we expect to make payments when these cash flows are realized or settled.
Exchange rates between a number of currencies and U.S. dollars have fluctuated significantly over the last few years and future exchange rate fluctuations may occur.
We enter into forward foreign currency exchange contracts that qualify as cash flow hedges to hedge portions of certain of our anticipated foreign currency denominated inventory purchases. These contracts typically expire within 12 months. Consistent with the nature of the economic hedges provided by these forward foreign currency exchange contracts, increases or decreases in their fair values would be effectively offset by corresponding decreases or increases in the U.S. dollar value of our future foreign currency denominated inventory purchases (i.e., hedged items). The information provided below relates only to the hedging instruments and does not represent the corresponding changes in the underlying hedged items.
As of March 30, 2013, we had forward foreign currency exchange contracts with notional amounts of 1.9 million, all of which expire within twelve months. As of March 30, 2013, the fair value and carrying amount of our forward foreign currency exchange contracts was a net asset of less than $0.01 million.
Relative to our foreign currency exposures existing at March 30, 2013, a 10% appreciation (depreciation) of the Euro against the U.S. dollar would result in an increase (decrease) in the fair value of these derivative instruments of approximately $0.2 million.
Interest Rate Risk
Bank of America Credit Agreement
On January 31, 2012, we, our U.S. operating subsidiary and our Hong Kong subsidiary entered into the 2012 Credit Agreement, with Bank of America, N.A., as administrative agent, Swing Line Lender and L/C Issuer and the lenders from time to time party thereto, which was subsequently amended. For additional information on the 2012 Credit Agreement, see Note 15 to notes to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
As of March 30, 2013, there was $101.3 million available for borrowing under the Hong Kong Revolving Facility. In connection with the amendment to the 2012 Credit Agreement, the U.S. Revolving Credit Facility was reduced to zero and no amounts will be available thereunder.
If the LIBOR rate increases/decreases by 100 basis points from that in effect at March 30, 2013, our annual interest expense would correspondingly increase/decrease by approximately $1.0 million.
3.00% Convertible Senior Notes due 2017
On September 28, 2012, we issued $220 million aggregate principal amount of our 3.00% Convertible Senior Notes due 2017, or the Notes. The Notes were issued under the indenture with U.S. Bank National Association, as trustee, dated September 28, 2012. For additional information on the Notes, see Note 10 Long Term Debt and Revolving Credit Facility to the notes to our consolidated financial statements in Item 8 Financial Statements and Supplementary Data included in our Transition Report on Form 10-K filed for the nine-month period ended December 31, 2012.
The interest rate on the Notes is fixed at 3.0% per annum. The fair market value of the Notes is subject to interest rate risk and market risk due to the convertible feature of the Notes. Generally, the fair market value of fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise. The fair market value of the Notes will also increase as the market price of our stock increases and decrease as the market price falls. The interest and market value changes affect the fair market value of the Notes but do not impact our financial position, cash flows or results of operations.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 30, 2013. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SECs rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the companys management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 30, 2013, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal controls over financial reporting during the three months ended March 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We are subject to various routine legal proceedings and claims incidental to our business, which our management believes will not have material effect on our financial position, results of operations or cash flows.
Our business, operating results and cash flows can be impacted by a number of factors, any one of which could cause our actual results to vary materially from recent results or from our anticipated future results. You should carefully consider the risks described below and the other information in this Quarterly Report on Form 10-Q. These are the risks and uncertainties we believe are most important for our business as of the date of this Quarterly Report on Form 10-Q. Additional risks and uncertainties not presently known to us, which we currently deem immaterial or which are similar to those faced by other companies in our industry or business in general, may also impair our business operations. If any of the following risks or uncertainties actually occurs, our business, financial condition and operating results would likely suffer. In that event, the market price of our common stock could decline and an investor in our common stock could lose all or part of their investment.
Risks Related to Our Business Generally
We expect that oversupply of, or limited demand for, polysilicon, solar panels and sapphire material, including LED quality material, may have an adverse impact on our business and, unless such oversupplies are reduced or demand increases in the near future due to development of new technologies or otherwise, the negative impact on our business could last for an extended period.
We principally sell equipment that is utilized in the manufacture of polysilicon (which is a key component to making solar wafers and cells), silicon ingots (which are, through various cutting and finishing processes, used to make solar cells, modules and wafers) and sapphire boules (which are, through various cutting and finishing processes, used to make, among other things, LED wafers). Each of the polysilicon, solar wafer, modules and cell and LED wafer markets are currently experiencing significant oversupply and/or significant decreased demand. For example, our PV business experienced a 86% decrease in revenue for the three months ended March 30, 2013 as compared to the same period in the prior year. The consequence of this oversupply and decreased demand is that those who sell into these markets (many of whom are customers for our equipment) are either required to sell at very low prices (sometimes selling at a loss) or are
unable to sell at all. Many customers are experiencing large increases in their inventories. As a consequence of these conditions, demand for all of our equipment, particularly our polysilicon reactors, DSS furnaces and ASF units, has dropped significantly in the past few quarters. During the nine-month period ended December 31, 2012, we recorded net negative bookings for our PV, polysilicon and sapphire equipment in an aggregate amount of $151.0 million. Given the markets we serve, our future bookings may be even less in twelve months ended December 31, 2013. This has had an adverse impact on our business and will continue to have such an effect, including requiring that we sell products at prices below what we usually charge or resulting in the absence of any meaningful new sales.
In addition, certain customers have requested that we delay delivery of equipment or reduce the number of equipment units they are required to purchase under existing contracts (and we expect that we may receive similar requests in the future). If the existing inventories of polysilicon, solar, modules cells/wafers and LED/sapphire materials are not reduced in the near future or demand increases, as a result of new solar or sapphire technologies that increase demand for end-products incorporating polysilicon, solar cells or sapphire material or due to other reasons, we expect that our business and results of operations will be significantly and materially impacted.
Our Photovoltaic business has historically depended upon the Directional Solidification System (DSS) furnace for its revenue and we expect that there will be very limited, if any, revenue attributable to DSS sales in the future. Additionally, we do not expect to commercially launch our next photovoltaic tool until 2014.
The global solar industry has continued to experience a significant downturn that has negatively impacted the growth of the industry and the profitability of PV producers and the companies who supply the equipment and materials used in the production of PV products such as wafers, cells and modules. The principal product line of our PV business has been the DSS family of casting furnaces that are used to produce multicrystalline ingots and MonoCast ingots.
Because of the high level of PV manufacturing overcapacity, we expect very limited investment in additional generation capital equipment for 2013 and beyond. As such, we intend to discontinue any significant additional investments in our DSS product line. We will endeavor to sell any DSS furnaces that we have in our inventory, but expect that demand for these will be limited. Our next generation PV equipment offering, our HiCz tool, is still under development and is projected to be commercially available in 2014. Therefore, we expect to have no meaningful sales or revenue from our PV segment in 2013. If our HiCz tool does not gain market acceptance in 2014, our PV business segment could experience prolonged periods without contributing any meaningful revenue to the business. In addition, with the idling of our facility in Hazelwood, Missouri earlier in 2013, we will no longer sell HiCz material generated by our HiCz tools and, while the revenue from the sale of this material was minimal, we no longer expect to have this as a source of revenue in the future.
Impairment charges negatively impacted our financial results for the transition period ended December 31, 2012, and additional charges, of comparable or greater magnitude, may be required in the future as a result of the prolonged downturn in the markets we serve.
We assess our goodwill and other intangible assets and our long-lived assets for impairment when required by U.S. generally accepted accounting principles. These accounting principles require that we record an impairment charge if circumstances indicate that the asset carrying values exceed their estimated fair values. The estimated fair value of these assets is impacted by general economic conditions in the markets we serve. Deterioration in general economic conditions may result in, among other things: declining revenue which can lead to excess capacity and declining operating cash flow; reductions in managements estimates for future revenue and operating cash flow growth. All of these factors negatively impacted our PV business during the quarter ended December 31, 2012 and, as a result, we recorded a goodwill impairment charge of $57.0 million, an intangible asset charge of $0.5 million, asset impairments of $29.3 million, inventory write downs of $60.2 million and vendor advance impairments of $8.4 million. At March 30, 2013, our PV segment had $4.4 million of goodwill and $59.5 million of finite-lived intangible assets. If the PV market were to continue to deteriorate or our PV products, including our HiCzTM tool, were to not generate significant sales in the future, we could be required to take further charges and they may be material.
At March 30, 2013 our sapphire segment had approximately $43.7 million of goodwill and $16.2 million of finite-lived intangible assets. If our other business segments, polysilicon and sapphire, were to face the same conditions as our PV segment, we may be required to take significant impairment charges for these segments as well. Any future impairment charges may have a material adverse impact on our business and results of operations. In addition, we may be unable to adequately and timely realign our cost structure with softening demand, which would also negatively impact our results.
China has recently experienced decreased growth rates and certain of the solar and sapphire manufacturers in China, and in Asia generally, have been unwilling or unable to continue to invest in capital equipment purchases.
The rate of growth of the Chinese economy has experienced some decreases recently. Since Chinese companies, including solar and LED producers, ship their products to Europe, the decreased growth experienced in China is due, in part we believe, to the economic situation in Europe. The negative impact of this reduced rate of growth is compounded by the fact that the solar industry, including solar and wafer, module and cell manufacturers and polysilicon manufacturers, are confronting markets that are either experiencing decreased demand or are generating more capacity than the industry requires. These market conditions are making it difficult for these companies to generate adequate returns and many such companies are not making any capital investments in their operations, which results in much lower demand for our equipment products. For several years, Chinese solar manufacturers relied on, we believe, easily available credit and companies were increasing rates of investment. These companies utilized these financial resources to build up their manufacturing capacity. We believe that Chinese companies have incurred some of the highest levels of debt in the solar industry. Now, however, lenders to Chinese solar companies, in particular, are no longer extending credit on favorable terms, or at all. Some of this debt is maturing and certain of these companies are unlikely to be able to make payments when due. In certain cases, local Chinese governments have had to extend credit to solar manufacturers. As a result, we expect that the demand for our products will continue to remain limited for the short-term amongst our Chinese customer base (which are among our largest customers). Also, it may be the case that customers with orders in our backlog are unable to accept delivery of our equipment or may re-negotiate terms, including requests for reduced prices, delayed delivery and decreases in the number of units shipped. Any of the foregoing would have a negative impact on our business and results of operations. These circumstances are making competition among equipment suppliers to sell to a limited number of purchasers very competitive. As competition increases, it may be the case that our competitors engage in business practices that we will not engage in (or are legally prohibited from engaging in) in order to gain business, including providing incentives or benefits that would be prohibited under the U.S. Foreign Corrupt Practices Act.
Ongoing trade disputes with China may adversely impact the businesses of our Chinese customers, which could harm our business and our stock price.
Trade tensions between China and the U.S. have escalated. Most recently, in October 2012, the U.S. Commerce Department issued a final ruling and levied anti-dumping duties on billions of dollars of solar panels and cells from China (and set countervailing duties). This final ruling will negatively impact our equipment customers in China. This follows a May 2012 Department of Commerce announcement of a preliminary determination that China had violated fair trade policies by dumping into the U.S. certain solar products at prices that were intended to advantage Chinese manufacturers. The Chinese government responded by saying these actions were deliberately provoking trade friction between the two nations. In addition, Congress has considered legislation targeting Chinas currency practices, which would, among other things, impose trade sanctions against Chinese companies that ship finished goods into the U.S. at artificially low prices caused by Chinese currency manipulation. The Chinese government has indicated that passage of this legislation or similar actions could lead to retaliatory tariffs. In July 2012, the Chinese Ministry of Commerce opened investigations on imports of solar-grade polysilicon from the U.S. and South Korea that may result in trade duties on polysilicon imports from the U.S. and South Korean polysilicon manufacturers. In addition, the European Union has commenced an investigation into whether Chinese solar equipment manufacturers have dumped equipment into the E.U. in violation of trade regulations. If the E.U. imposes duties in connection with this investigation, it could harm our business since many of our Chinese customers sell into the E.U. While this risk may be mitigated to some extent if manufacturing of solar wafers and cells shifted from China to Europe (or locations in other parts of the globe) as there may be increased demand in Europe for polysilicon and PV equipment that cannot be satisfied from China at comparable prices, the E.U. may not allow Chinese companies to avoid the duties by transferring manufacturing operations to Europe. In response to the E.U. investigation, in November 2012, the Chinese Ministry of Commerce announced that it was commencing a trade investigation into European exports of solar-grade polysilicon. Retaliatory tariffs and trade tensions with China and the U.S. and Europe (as well as South Korea, where some of our equipment customers are located) is causing uncertainty in the industry and is having a material adverse impact on our business since we sell into China and our equipment customers sell end products into Europe and the U.S. Our business and results of operations would be negatively affected if further anti-dumping or other duties were imposed or a trade war was to occur with China (or if the duties already imposed are not removed). In addition, we expect that any further announcements about or imposition of duties by the U.S. government or E.U. on solar cells imported from China or relating to duties imposed on polysilicon manufacturers by the Chinese government could negatively impact our stock price and may have a material adverse effect on our business and results of operations.
Our credit arrangement contains covenants that impose significant restrictions on us, and if we are unable to comply with financial or other covenants we may be required to pay all or a portion of the indebtedness prior to maturity which could have a significant and adverse impact on our business.
On January 31, 2012, we entered into a credit agreement, or Credit Agreement, with Bank of America, N.A. and certain other lenders, which was subsequently amended in June 2012 to, among other things, increase the amounts borrowed under the term facility component of the Credit Agreement. The Credit Agreement was amended (the 2013 Amendment) on February 27, 2013 and provided, among other things, that we agree to pre-pay $40 million of the term loan. The Credit Agreement contains covenants and conditions that restrict our ability to incur certain additional debt, pay dividends and make distributions, enter into specified transactions with affiliates, acquire businesses, among others, and resulted in liens being placed on certain of our properties and assets. The terms of the Credit Agreement also impose financial covenants on us and our subsidiaries relating to our leverage ratio and interest coverage ratio.
For the three month period ended March 30, 2013, we incurred a loss from operations of $26.3 million, a net loss of $18.7 million, and used $54.0 million in cash for operating activities. We expect that the challenges facing the polysilicon, photovoltaic and sapphire industries will continue through calendar year 2013. As a result, much of our business for calendar year 2013 is expected to result from filling orders in backlog and we do not expect any meaningful revenue from new contracts until the second half of 2013. As a result of the forgoing conditions, we anticipate that we would not be able to maintain compliance with the minimum interest coverage ratio and maximum leverage ratio (in our 2012 Credit Agreement with Bank of America N.A. and the other lenders) as of March 31, 2013 (or for the remainder of 2013). In order to avoid a potential breach of the minimum interest coverage ratio and maximum leverage ratio, the 2013 Amendment provided that these covenants were waived through June 2014 and new covenants were put in place that require that, through the period ending June 2014, we maintain at all times minimum levels of liquidity (as defined in the 2013 Amendment), and quarterly cumulative minimum amounts of Consolidated Adjusted Earnings Before Interest, Tax, Depreciation and Amortization (as defined in the
2013 Amendment). In the event that we are unable to achieve our operating forecasts we may be unable to comply with these new covenants and we may be required to pay all outstanding amounts due under the 2012 Credit Agreement.
If our cash and cash equivalents were to decrease (as a result of a breach of the financial covenants imposed pursuant to the 2013 Amendment, investing in the business without generating material amounts of equipment sales, or other cash expenditures related to the business), we may, in the future, be in breach of the financial covenants and the amounts outstanding under the Credit Facility would be immediately due and payable.
The foregoing restrictions in the Credit Agreement (including in the 2013 Amendment) may limit our ability to operate our business and our failure to comply with any of these covenants could result in the acceleration of our outstanding indebtedness under the Credit Agreement. In addition, if we were to default on our 3.0% Convertible Senior Notes due 2017 and the payment of such notes was accelerated, the amount under the Credit Agreement would also accelerate, and vice versa. If such acceleration occurs, we would be required to repay our indebtedness, and we may not have the ability to do so or we may not be able to refinance our indebtedness, which would prevent us from investing in our business in an effort to grow our operations. Even if new financing is made available to us, it may not be available on acceptable or reasonable terms. An acceleration of all or a significant portion of our indebtedness could impair our ability to operate as a going concern.
Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt.
Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including our 3.0% Convertible Senior Notes due 2017 and our Credit Agreement depends on our future performance and available cash, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures (particularly if there were to be a default under either or both the 2012 Credit Agreement and the 3.0% Senior Convertible Notes due 2017 that would accelerate the payments due thereunder). If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.
If our customers delay or cancel equipment purchases, we may be required to modify or cancel contractual arrangements with our suppliers which may result in the loss of deposits or pre-paid advances, which losses have been significant in the past.
As a result of our customer delays or contract terminations, we reschedule or cancel, from time to time, purchase orders with our vendors to procure materials and, in certain cases, we are required to forfeit deposits and/or reimburse the vendor for costs incurred to the date of termination plus predetermined profits. We have recorded significant losses resulting from rescheduled and/or canceled commitments to our vendors as a result of customer delays, contract modifications and terminations. For example, in the three months ended December 31, 2012, we recorded losses of $8.4 million due to the expectation that we will not take inventory for which we had previously made down payments to our vendors. In addition, we expect to terminate purchase commitments for DSS inventory components in fiscal 2013 and beyond. The gross amount outstanding under the purchase orders was $16.2 million at March 30, 2013 and we will negotiate with our vendors to determine the amount payable upon termination. Certain of the vendors from whom we purchased materials have been unable to deliver the ordered components because economic conditions had an adverse impact on their ability to operate their businesses and we were unable to recover advances paid to those vendors for components that were not delivered and, in some cases, these lost advances were significant amounts. In cases where we are not able to cancel or modify vendor purchase orders due to customer delays or terminations, our purchase commitments may exceed our order backlog requirements and we may be unable to redeploy the undelivered equipment. In addition, we expect that we may be required to pay advances to vendors in the future without being able to recover that advance if the vendor is placed in bankruptcy, becomes insolvent or otherwise experiences financial distress.
Delays in deliveries, or cancellations of orders, for products of all of our segments could cause us to have inventories in excess of our short-term needs and may delay our ability to recognize, or prevent us from recognizing, revenue on contracts in our order backlog. Alternatively, we may be required to sell products below our historical selling prices, which was the case for certain recent DSS equipment sales. We have recently experienced significant increases in the amount
of inventory that we hold in order to meet certain anticipated demands for our products including our DSS equipment and ASF systems. Contract breaches or cancellation of orders may require us to reschedule and/or cancel additional commitments to vendors in the future, and such orders may not be fulfilled due to customer cancellations or defaults and require that we write-down any inventory purchased that we are unable to deploy or require that we sell products at prices that are below our historical prices, which would also have a negative impact on our gross margins.
Current or future credit and financial market conditions could materially and adversely affect our business and results of operations in several ways.
Financial markets in the United States, Europe and Asia experienced extreme disruption in recent years, including, among other things, extreme volatility in security prices, tightened liquidity and credit availability, rating downgrades of certain investments and declining valuations of others and increased bankruptcy filings by companies in a number of industries (including several companies in the solar industry). These economic developments adversely affect businesses such as ours in a number of ways. The tightening of credit in financial markets for solar companies and sapphire companies has resulted in reduced funding worldwide, including China (where many of our customers are located), and a higher level of uncertainty for solar cell, wafer and module manufacturers and manufacturers incorporating sapphire material into their products. As a result, some of our customers have been delayed in securing, or prevented from securing, funding adequate to honor their existing contracts with us or to enter into new contracts to purchase our products. We believe a reduction in the availability of funding for new manufacturing facilities and facility expansions in the solar and sapphire industries, or reduction in demand for solar panels or sapphire material, could cause a decrease in orders for our products.
We currently require most of our equipment customers to prepay a portion of the purchase price of their orders and to provide letters of credit prior to shipping equipment. We use these customer deposits to prepay our suppliers in order to reduce the need to borrow to cover our cash needs for working capital. This practice may not be sustainable if the recent market disruptions continue or grow worse. Some of our customers who have become financially distressed have failed to provide letters of credit or make payments in accordance with the terms of their existing contracts. If customers fail to post letters of credit or make payments, and we do not agree to revised contract terms, it could have a significant impact on our business, results of operations and financial condition. The impact of these disruptions are increasingly being felt in China, and by certain of our customers which are located in China and other countries in Asia, and accounts in part for the decline in our total revenue and order backlog in the three months period ended March 30, 2013 as compared to the same period in the prior year.
We may experience further revenue and backlog reductions in the future similar to or greater than those reductions we experienced in quarter ended March 30, 2013. Credit and financial market conditions may similarly affect our suppliers. We may lose advances we make to our suppliers in the event they become insolvent because our advances are not secured or backed by letters of credit. The inability of our suppliers to obtain credit to finance development or manufacture our products could result in delivery delays or prevent us from delivering our products to our customers.
Amounts included in our order backlog may not result in actual revenue or translate into profits.
Our order backlog is primarily based on signed purchase orders or other written contractual commitments. We cannot guarantee that our order backlog will result in actual revenue in the originally anticipated period, or at all. During the three-month period ended March 30, 2013, we identified certain contracts in our order backlog that have not been terminated or modified, however, we expect that certain customers will not fulfill their obligations under these respective contacts. As a result, we removed contracts from our reported order backlog resulting in a $356.5 million reduction. Almost 100 percent of the reduction was attributable to four contracts that have not been terminated or modified, but we have removed amounts from our reported backlog. In addition, the contracts included in our order backlog may not generate margins equal to our historical operating margins. Our customers may experience project delays or default on the terms of their contracts with us as a result of external market factors and economic or other factors beyond our or their control. If a customer fails to perform its contractual obligations and we do not reasonably expect such customer to perform its obligations, we may terminate the contract, which would result in a decrease in our reported order backlog. In addition, our backlog is at risk to varying degrees to the extent customers request that we extend the delivery schedules and make other modifications under their contracts in our order backlog. Any contract modifications that we negotiate could likely include an extension of delivery dates, and could result in lower pricing or in a reduction in the number of units deliverable under the contract, thereby reducing our order backlog and not resulting in lesser (or no) revenue recognized from such contracts. Our order backlog includes contracts with customers to whom we have sent notices of breach for failure to provide letters of credit or to make payments when due. If we cannot come to an agreement with these customers, it could result in a further reduction of our order backlog. Other customers with contracts, however, may approach us with requests for delays in the future, or may fail to make payments when due, which could further reduce our order backlog. If our order backlog fails to result in revenue in a timely manner, or at all, we could experience a reduction in revenue, profitability and liquidity.
We face competition in each of our business segments, and if our competitors are able to manufacture products that employ newer technologies or are otherwise more widely used than our products, and if we are unable to modify our products to adapt to such future changes, we may be unable to attract or retain customers.
The PV energy and sapphire industries are both highly competitive and continually evolving as participants strive to increase their market share and new entrants strive to capture market share. In addition, the PV energy industry (which includes polysilicon and solar wafer, module and cell manufacturers) also has to compete with the larger conventional electric power industry. The PV and sapphire industries are also rapidly evolving and are highly competitive. Particularly with respect to the solar cell industry, new technologies are leading to rapid improvements in cell efficiencies and performance. Technological advances are, we believe, also resulting in lower manufacturing costs for these products. These developments may render existing products and/or product manufacturing equipment sold by our PV and sapphire businesses obsolete. We will therefore need to keep pace with technological advances in these industries in order to compete effectively in the future, which may require significant expenditures on research and development or investments in acquisition of other businesses and technologies. For example, our success in the sapphire market depends on our ability to expand into new applications that are based on continued advancement in the design and manufacture of sapphire and LEDs (including sapphire and non-sapphire- based LEDs) and lighting technology by others, as well as the continued demand for sapphire in the LED market (while we believe sapphire is currently one of the preferred substrate materials for certain LED applications, which is the market we believe many of our ASF customers sell into, the use of silicon substrates and substrates incorporating other materials in LED applications is currently developing). Our success in the PV market will depend on our success in commercializing our monocrystallization, or HiCz, technology offering. Our failure to further refine our technologies and/or develop and introduce new solar power and sapphire products could cause our products to become uncompetitive or obsolete, which could adversely affect demand for our products, and our financial condition, results of operations, business and/or prospects. Many of our competitors, in each of our business segments, have, and future competitors may also have, substantially greater financial, technical, manufacturing and other resources than we do. These
resources may provide our competitors with an advantage because they can realize economies of scale, synergies and purchase certain raw materials, commodities and key components at lower prices. Current and potential competitors of ours may also have greater brand name recognition, more established distribution networks and larger customer bases, and may be able to devote more resources to the research, development, promotion and sale of their products or to respond more quickly to evolving industry standards and changes in market conditions. In addition, given the ability of other parties to access our equipment, we also face low-cost competitors who may be able to offer similar products at very competitive prices.
We may not be able to maintain our current share of the market in our respective business segments as competitive intensity increases and particularly as our customers are targeted by local low-cost competitors in China and other countries. In addition, these overall markets are shrinking as demand drops and/or capacity increases. We believe that certain PV customers have already begun purchasing our competitors equipment and installing them in their facilities. Our efforts to capitalize on technological developments in the markets in which we operate, such as the HiCz tool (which is in development), may not result in increased market share and require that we make substantial capital investments without any corresponding increase in revenues. In addition, customers may place orders to supply equipment for new facilities or future expansions with our competitors, and we believe the likelihood that our customers and others will go to competitors has increased over time. Our failure to adapt to changing market conditions and to compete successfully with existing or new competitors and/or new technological developments may have a material adverse effect on our financial condition, results of operations, business and/or prospects.
In relation to our polysilicon business, we are not the only provider of polysilicon production equipment to the market based on a Siemens-type CVD reactor design. Although we believe our SDR reactor to be re-designed and distinct from the competing products offered by our competitors, there can be no assurance that our SDR reactor will compete successfully with their products which would have a material adverse effect on our financial condition, results of operations, business and or prospects. In addition, alternative technologies for producing polysilicon exist and, to the extent that they become more widely available, the demand for our SDR reactor may also be adversely effected. Furthermore, we believe that companies that currently produce polysilicon for their own internal use and consumption compete indirectly with our polysilicon business, as any increase in the supply of polysilicon may have an adverse effect of the demand for our SDR reactor.
We intend to pursue business and technology acquisition and investment opportunities in the future as part of our business plan to grow and diversify our business and we expect that one or more of these acquisitions or investments will expand our product offerings into markets we have not previously served.
Our business plan is focused on growing and diversifying our product and technology offerings. Acquiring Crystal Systems, a sapphire manufacturer, was part of this business plan to extend our offerings beyond polysilicon and PV markets. We expect that achieving these goals of growth and diversification will include the acquisition of businesses and technologies from third parties or investments in third parties (that may lead to future acquisitions or rights to technology) and expect that in the future we will continue to engage in negotiations for such acquisitions, investments or joint venture arrangements. In order to achieve our objective of diversifying our business to technologies outside of polysilicon, photovoltaic and sapphire (or into new products within the polysilicon, photovoltaic and sapphire industries), we expect that some of these acquisitions will be in markets or industries that may be unrelated to those markets we currently serve or new products for markets we do serve. We are, however, an equipment company and we currently expect that future acquisitions will continue to be for the purpose of accessing technologies that will enable us to provide equipment to our customers. This business diversification plan involves risks. Our stock may be valued differently depending on what markets we serve in the future. Diversification may also require significant time and resource commitments from our senior management, which will limit the amount of time these individuals will have available to devote to our existing operations. This diversification may also involve the complexities in managing an employee base that is already located in several different locations and in effectively deploying, operating and utilizing our internal systems, including those related to financial reporting, and other systems we depend on.
We may also have very little experience in dealing with these new markets and products. Any failure or any inability to effectively manage and integrate the growth and diversification could have a material adverse effect on our business, financial condition and results of operations. In addition, and amounts that we invest may not generate any returns for us and we could lose the entire amount of the investment.
Finally, we may not be successful in acquiring any new businesses or technologies or products, despite our efforts to do so, and there can be no certainty that we will acquire any other companies or products or technologies that allow us to diversify. If we do not close acquisitions in accordance with our business plan or make successful investments, we may not be able to diversify
revenue and our performance will be tied directly to the PV and sapphire markets, and if one or both experience difficulties, our business, financial condition and results of operations would be negatively impacted.
We currently depend on a small number of customers in any given fiscal period for a substantial part of our sales and revenue.
In each fiscal period, we depend on a small number of customers for a substantial part of our sales and revenue. For example, in the three months ended March 30, 2013, two customers accounted for 79% of our revenue and in the nine months ended December 31, 2012, three customers accounted for 68% of our revenue. In addition, as of March 30, 2013, we had a $851.0 million order backlog of which $516.2 million was attributable to three customers. The failure of our major customers to make any payments, the loss of existing orders or lack of new orders in the future, or a change in the product acceptance schedule by such customers could significantly reduce our revenues and have a material adverse effect on our financial condition, results of operations, business and/or prospects. While we have sought to diversify our business and customer base, we anticipate that our dependence on a limited number of customers will continue for the foreseeable future. There is a risk that existing customers will elect not to do business with us in the future, particularly as we face increased competition in each of our business segments, and/or that these customers will experience financial difficulties. Furthermore, due to the cost of our products, our customers are often dependent on the equity capital markets and debt markets to finance their purchases. As a result of on-going turmoil in the capital and debt markets, these customers could experience financial difficulties and become unable to fulfill their contracts with us. There is also a risk that these customers will attempt to impose new or additional requirements on us that reduce the gross margins that we are able to generate through sales to such customers. If we do not develop relationships with new customers, we may not be able to increase, or even maintain, our revenue, and our financial condition, results of operations, business and/or prospects may be materially adversely affected.
General economic conditions may have an adverse impact on demand for our products and result in charges for excess or obsolete inventory.
Purchasing our products requires significant capital expenditures, and demand for such products is affected by general economic conditions. A downturn in the global construction market has reduced demand for solar panels in new residential and commercial buildings, which in turn reduces demand for our products that are used in the manufacture of PV wafers, cells and modules and polysilicon for the solar power industry (including our DSS units and SDR reactors). In addition, a downturn or lack of growth in the sapphire material market, and the sapphire-based LED and general illumination markets in particular, have resulted in reduced demand for our sapphire material and our ASF systems. Uncertainties about economic conditions, negative financial news, potential defaults by or rating downgrades of debt issued by governmental entities and corporate entities, tighter credit markets and declines in asset values have, in the recent past, caused our customers to postpone or cancel making purchases of capital equipment and materials. We believe that increasing governmental budgetary pressures will likely result in reduced, or the elimination of, government subsidies and economic incentives for on-grid solar electricity applications. A prolonged downturn in the global economy, combined with decreased governmental incentives for solar power usage, would have a material adverse effect on our business in a number of ways, including decreased demand for our products, which would result in lower sales, reduced backlog and contract terminations.
Uncertainty about future economic conditions makes it challenging for us to: forecast demand for our products and our operating results, make business decisions and identify the risks that may affect our business. For example, our inventory balances have increased substantially recently and, during the three-month period ended December 31, 2012, we determined that we were unable deploy certain of our PV inventory and had to take a significant impairment charge. If our remaining PV inventory, or the inventory we have built up for polysilicon or sapphire equipment, cannot be sold or utilized in our operations and becomes excess or obsolete, we could be required to take another write down or multiple write downs and the amount or amounts may be material. If we are not able to timely and appropriately adapt to changes resulting from the difficult macroeconomic environment, including by maintaining appropriate inventory levels, our business, results of operations and financial condition may be materially and adversely affected.
Our success depends on the sale of a limited number of products.
A significant portion of our operating profits has historically been derived from sales of DSS units, SDR reactors, STC converters, hydrochlorination equipment and ASF units, which sales accounted for 91% of our revenue for the three months ended March 30, 2013. There can be no assurance that sales of this equipment will increase beyond, or be maintained at, past levels or that any sales of sapphire materials (or any other future product offering) will offset any decrease in sales of
DSS furnaces, ASF systems or SDR reactors (or result in any revenue). Additionally, we have already experienced decreased demand for all of our equipment products, and specifically sales of our STC converters and DSS furnaces are substantially lower than in prior periods due to changes in technology and decreased demand, and further changes in technology will also, we expect, result in a further reduction in demand and decreased average selling prices for our DSS multicrystalline furnace, if we are able to sell any of these DSS furnaces at all. Due to these circumstances, we intend to discontinue any significant additional investments in our DSS product line and will only be selling furnaces that we have in inventory. Factors affecting the level of future sales of our products include factors beyond our control, including, but not limited to, demand for solar products and sapphire material (including sapphire-based LED material and sapphire use in general illumination and in mobile devices), development and/or use of alternatives to sapphire in LED applications (including in general illumination) and competing product offerings by other equipment manufacturers. We may be unable to diversify our product offerings and thereby increase or maintain our revenue and/or maintain our profits in the event of a decline in ASF systems and SDR reactors sales and to off-set the discontinuation of our DSS product line.
If sales of our PV, polysilicon or sapphire products continue to decline for any reason, our financial condition, results of operations, business and/or prospects could be materially adversely affected.
We depend on a limited number of third party suppliers.
We use certain component parts supplied by either a single or a small number of third party suppliers in our polysilicon, PV and sapphire equipment products and ancillary equipment, and certain of these components are critical to the manufacture and operation of certain of our products. For example, we use specialist manufacturers to provide vessels and power supplies which are essential to the manufacture and operation of our polysilicon products. In addition, certain of our products consist entirely of parts and components supplied by third party suppliers, and in these instances filling orders depends entirely upon parties over which we exercise little or no control, and if these contractors were unable to supply, or refused to supply, the parts and components, we would be unable to complete orders which would have a negative impact on our reputation and our business.
Our sapphire materials business as well as the customers for our ASF units, also depend on suppliers of raw materials and components that are utilized during the manufacturing process. For example, the supply of qualified meltstock and crucibles used to grow sapphire materials is limited and we expect demand will increase as we sell more ASF units, and as a result, there may be an insufficient availability of these items for our sapphire materials business and sapphire research and development as currently operated or available for the purchasers of our ASF systems, which would prevent us from growing our sapphire equipment business. Similar shortages may arise if and when we commercialize a HiCz equipment offering. Further, our agreements with raw material and equipment component suppliers are typically short term in nature, which leaves us vulnerable to the risk that our suppliers may change the terms on which they have previously supplied products to us or cease supplying products to us at any time and for any reason.
There is no guarantee that we will maintain relationships with our existing suppliers or develop new relationships with other suppliers. We are also dependent on our suppliers to maintain the quality of the components and equipment we use and if the the quality were to be below our standards, our equipments offerings may not function as designed. We may be unable to identify replacement or additional suppliers or qualify their products in a timely manner and on commercially reasonable terms, or at all. Component parts supplied by new suppliers may also be less suited to our products than the component parts supplied by our existing suppliers. Certain of the component parts used in our products have been developed, made or adapted specifically for us. Such parts are not generally available from other vendors and could be difficult or impossible to obtain elsewhere. As a result, there may be a significant time lag in securing an alternative source of supply. In addition, the inability of our suppliers to support our demand could be indicative of a marketwide scarcity of the materials, which could result in even longer interruptions in our ability to supply our products.
We utilize raw materials in manufacturing our equipment and sapphire materials and the prices for these materials fluctuate significantly and any increases in price or decrease in availability will harm our business.
In the ordinary course of business, we are exposed to market risk from fluctuations in the price of raw materials and commodities necessary in the manufacture of our products, such as graphite, steel, copper, helium and molybdenum. We experience similar commodity risks in connection with the consumable materials utilized in our products, and in certain cases, there is very limited access to these commodities. The increase in the price of these commodities, due to further limitations of availability or to greater demand, will make our products less attractive and will harm our sapphire material and
equipment businesses. If we bring more entrants into the photovoltaic, polysilicon and sapphire markets, these commodity risks increase. Any significant increase in these prices would increase our expenses, decrease demand for our products and hurt our profitability (or prevent us from being profitable). In addition, demand for our products will be negatively impacted if the prices of raw materials that are used to create polysilicon, PV materials and sapphire were to increase.
Our failure to obtain sufficient raw materials, commodities, component parts for our equipment and/or third party equipment that meet our requirements in a timely manner and on commercially reasonable terms could interrupt or impair our ability to assemble our products, and may adversely impact our goal of expanding our business, as well as result in a loss of market share. Further, such failure may prevent us from delivering our products as required by the terms of our contracts with our customers, and may harm our reputation and result in breach of contract and other claims being brought against us by our customers. Any changes to our current supply arrangements, whether to the terms of supply from existing suppliers or a change in our suppliers, may also increase our costs in a material amount.
The prices for polysilicon and sapphire material, as well as silicon ingots, have, in the past, dropped as a result of either increased supply or decreased demand, and, at the same time, the prices for the inputs to create this output has either remained consistent or increased, which has resulted in decreased margins for polysilicon and sapphire and PV manufacturers, and if these circumstances were to continue or dampen the demand for our PV, polysilicon and sapphire equipment business would be negatively impacted.
The prices for polysilicon, sapphire and PV materials have decreased due, in part, to either excess supply or decreasing demand for these materials. At certain times, these price drops were accompanied by an increase in the costs (or the costs have remained stable) for the consumable materials that are used in our equipment to make polysilicon, sapphire boules and PV ingots and wafers. These two factors, operating in tandem, result in decreased margins for the manufacturers selling polysilicon, sapphire boules and PV ingots and wafers, and, depending on circumstances, could result in negative margins. If this situation were to persist, we would expect that the demand for our polysilicon reactors, ASF units and our PV equipment would drop and may hamper the adoption of any new technologies we introduce (including our proposed HiCz equipment offering, which is still currently in development). The on-going global economic uncertainty and tightened credit markets may exacerbate these circumstances.
We may face product liability claims and/or claims in relation to third party equipment.
It is possible that our products could result in property damage and/or personal injury (or death), whether due to product malfunctions, defects, improper use or installation or other causes. We cannot predict whether or not product liability claims will be brought against us or the effect of any resulting negative publicity on our business, which may include loss of existing customers, failure to attract new customers and a decline in sales. The successful assertion of product liability claims against us could result in potentially significant monetary damages being payable by us, and we may not have adequate resources to satisfy any judgment against us. Furthermore, it may be difficult or impossible to determine whether any damage or injury was due to product malfunction, operator error, failure of the product to be operated and maintained in accordance with our specifications or the failure of the facility in which our products are used to comply with the facility specifications provided to our customers or other factors beyond our control. For example, one of our significant customers experienced chamber leakage involving a number of DSS units in its facilities which we believe was the result of their facility failing to conform to specifications. We nonetheless agreed to replace certain chambers at our cost. Other customers may experience similar issues in the future as a result of product defects, facilities not complying with specifications or other reasons. To date, we have not received any product liability or other claims with respect to these or any other accidents.
In addition, we have provided third party equipment in connection with our product sales (or incorporated third party components into our equipment offerings). There can be no guarantee that such third party equipment will function in accordance with our intended or specified purpose or that the customers personnel, in particular those who are inexperienced in the use of the specialized equipment sold by us, will be able to correctly install and operate it, which may result in the return of products and/or claims by the customer against us. In the event of a claim against us due to third party equipment, we may be unable to recover all or any of our loss from the third party equipment or component provider. The bringing of any product liability claims against us, whether ultimately successful or not, could have a material adverse effect on our financial condition, results of operations, business and/or prospects.
Our future success depends on our management team and on our ability to attract and retain key technical employees and to integrate new employees into our management team successfully.
We are dependent on the services of our management team and our technical personnel. Although certain members of our management team are subject to agreements with us, any and all of them may choose to terminate their employment with us on thirty or fewer days notice. The loss of any member of the management team could have a material adverse effect on our financial condition, results of operations, business and/or prospects. There is a risk that we will not be able to retain or replace these or other key employees. Integrating new employees into our management team could prove disruptive to our daily operations, require a disproportionate amount of resources and management attention and ultimately prove unsuccessful. In addition, we are implementing our succession planning measures for our management and key staff or skilled employees. However, if we fail to successfully implement these succession plans for management and key staff when necessary, our operating results would likely be harmed.
We also depend on our technical personnel to grow our business. Recruiting and retaining capable personnel, particularly those with expertise in the polysilicon, PV and the sapphire industry, is vital to our success. There is substantial competition for qualified technical personnel, and qualified personnel are currently, and for the foreseeable future are likely to remain, a limited resource. Locating candidates with the appropriate qualifications can be costly, time-consuming and difficult. There can be no assurance that we will be able to attract new, or retain existing, technical personnel. We may need to provide higher compensation or increased training to our personnel. If we are unable to attract and retain qualified personnel, or are required to change the terms on which our personnel are employed, our financial condition, results of operations, business and/or prospects may be materially adversely affected.
New technologies we deploy may not gain market acceptance which could result in decreased cash resources and harm our results of operations.
We have expended significant financial resources and technical expertise in developing new products and services that we expect will improve our product portfolio and result in increased revenues. These investments, however, may not result in increased revenues and may require that we incur expenses that result in decreasing our cash balances. For example, we have already spent approximately $60 million (and may spend additional amounts in contingent payments and additional significant capital spending) in connection with our acquisition of Confluence Solar, which we ultimately expect will result in a PV equipment offering, or HiCz, that is to be designed to produce high efficiency monocrystalline solar ingots, and which is expected to lower PV production costs. In addition, we have purchased certain select assets and intellectual property from a third party related to the Hyperion ion implant technology and have invested significant amounts in our internal research and development efforts for other technologies, including silicon carbide growth technologies. Our HiCz offering will target improved ingot efficiencies compared to that of multicrystalline silicon materials.
The HiCz, Hyperion ion implantation and silicon carbide development efforts, which are among the new product offerings were are in the process of developing, require that we expend significant cash and time resources. If we are not successful in commercializing one or more of these new product lines, we would lose the significant investments we made in our internal development efforts and in the acquisitions we have made. In addition, certain of these proposed products, such as the Hyperion ion implantation tool, may take years to bring to market and we may be unable to timely generate revenue from these projects, if we are able to generate any revenue at all.
We also have no experience in manufacturing and selling HiCz equipment, the Hyperion ion implantation equipment and silicon carbide manufacturing equipment, and we may be unable to commercialize these products or ensure they gain wide-spread market acceptance. We may also have issues with installing these products in customer facilities or in training customers to properly operate this equipment, which would likely prevent us from recognizing revenue on sales of this equipment. If we are unable to bring any of these products to market and generate substantial sales, we may be unable to recover any or all of the investments we have made in them. Given the pace of technological advancements in the PV equipment industry, it is possible that monocrystalline production may not gain meaningful market share as other companies develop products that generate solar cells offering even higher efficiency. Alternatively, there are competing monocrystalline production techniques that may result in a more efficient solar wafer and/or equipment that can make comparable quality silicon at equipment prices below what we charge or at which our equipment makes ingots. We face similar challenges and competition with respect to any ion implantation, silicon carbide or other equipment product we may bring to market. Any of the foregoing would have a significant and negative impact on our business and results of operation.
We may be unable to protect our intellectual property adequately and may be required to initiate litigation to enforce our intellectual property rights.
Our ability to compete effectively against our competitors in the PV, polysilicon and sapphire markets will depend, in part, on our ability to protect our current and future proprietary technologies, product designs, product uses and manufacturing processes under relevant intellectual property laws including, but not limited, to laws relating to patents and trade secrets. We own various patents and patent applications in the United States and other countries relating to our products, product uses and manufacturing processes. To the extent that we rely on patent protection, our patents may provide only limited protection for our technology and may not be sufficient to provide competitive advantages to us. For example, competitors could develop similar or more advantageous technologies or design around our patents or otherwise employ alternative products, equipment or processes that may successfully compete with our products and technology. In addition, patents are of limited duration. Any issued patents may also be challenged, invalidated or declared unenforceable. If our patents are challenged, invalidated or declared unenforceable, other companies will be better able to develop products that compete with ours, which could adversely affect our competitive business position, business prospects and financial condition. Further, we may not have, or be unable to obtain, effective patent protection in all of our key sales territories. Our patent applications may not result in issued patents and, even if they do result in issued patents, the patents may not include rights of the scope that we seek. The patent position of technology-oriented companies, including ours, is uncertain and involves complex legal and factual considerations. Accordingly, we do not know what degree of protection we will obtain from our proprietary rights or the breadth of the claims allowed in patents issued to us or to others. Further, given the costs of obtaining patent protection, we may choose not to protect certain innovations that later turn out to be important to our business.
Third parties may infringe, misappropriate or otherwise violate our proprietary technologies, product designs, manufacturing processes and our intellectual property rights therein, which could have a material adverse effect on our financial condition, results of operations, business and/or prospects. For example, we have filed a lawsuit in the Hillsborough County Superior Court (Southern District) in New Hampshire against Advanced Renewable Energy Company, LLC (ARC), Kedar Gupta, its Chief Executive Officer and Chandra Khattak, an ARC employee, for the misappropriation of trade secrets relating to sapphire crystallization processes and equipment. Because the laws and enforcement mechanisms of various countries that we seek protection in may not allow us to adequately protect our intellectual property rights, the strength of our intellectual property rights will vary from country to country. Litigation to prevent, or seek compensation for such infringement, misappropriation or other violation, such as the ARC lawsuit described above, may be costly and may divert management attention and other resources away from our business without any guarantee of success.
Further, we conduct significant amounts of business in China, yet enforcement of Chinese intellectual property related laws (including trade secrets) has historically been weak, primarily because of ambiguities in Chinese laws and difficulties in enforcement. Accordingly, the intellectual property rights and confidentiality protections available to us in China may not be as effective as in the United States or other countries.
We also rely upon proprietary manufacturing expertise, continuing technological innovation and other know-how or trade secrets to develop and maintain our competitive position. While we generally enter into confidentiality and non-disclosure agreements with our employees and third parties to protect our intellectual property, such confidentiality and non-disclosure agreements could be breached and are limited, in some instances, in duration and may not provide meaningful protection for the trade secrets or proprietary manufacturing expertise that we hold. We have had in the past and may continue to have certain of our employees terminate their employment with us to work for one of our customers or competitors. Adequate or timely remedies may not be available in the event of misappropriation, unauthorized use or disclosure of our manufacturing expertise, technological innovations and trade secrets. In addition, others may obtain knowledge of our manufacturing expertise, technological innovations and trade secrets through independent development or other legal means and, in such cases, we may not be able to assert any trade secret rights against such a party.
We may face claims in relation to the infringement or misappropriation of third-party intellectual property rights.
We may be subject to claims that our products, processes or product uses infringe the intellectual property rights of others. These claims, even if meritless, could be expensive and time consuming to defend. In addition, if we are not successful in our defense of such claims, we could be subject to injunctions and/or damages, or be required to enter into licensing arrangements requiring royalty payments and/or use restrictions. In some instances, licensing arrangements may not be available to us or, if available, may not be available on acceptable terms.
Due to the competitive nature of the industries in which we participate, we may face potential claims by third parties of infringement, misappropriation or other violation of such third parties intellectual property rights. From time to time we have received and may in the future receive notices or inquiries from other companies suggesting that we may be infringing their patents or misappropriating their intellectual property rights. Such notices or inquiries may, among other things, threaten litigation against us. Furthermore, the issuance of a patent to us does not guarantee that we have the right to practice the patented invention. Third parties may have blocking patents that could be used to prevent us from marketing our own patented product and practicing our own patented technology. In addition, third parties could allege that our products and processes make use of their unpatented proprietary manufacturing expertise and/or trade secrets, whether in breach of confidentiality and non-disclosure agreements or otherwise. If an action for infringement, misappropriation, or other violation of third party rights were successfully brought against us, we may be required to cease our activities on an interim or permanent basis and could be ordered to pay compensation, which could have a material adverse effect on our financial condition, results of operations, business and/or prospects. Additionally, if we are found to have willfully infringed certain intellectual property rights of another party, we may be subject to treble damages and/or be required to pay the other partys attorneys fees. Alternatively, we may need to seek to obtain a license of the third partys intellectual property rights or trade secrets, which may not be available, whether on reasonable terms or at all, and such technology may be licensed to other parties thereby limiting any competitive advantage to us. In addition, any litigation required to defend such claims brought by third parties may be costly and may divert management attention and other resources away from our business, without any guarantee of success. Moreover, we may also not have adequate resources to devote to our business in the event of a successful claim against us.
From time to time, we hire personnel who have obligations to preserve the secrecy of confidential information and/or trade secrets of their former employers. Some former employers monitor compliance with these obligations. While we have policies and procedures in place that are intended to guard against the risk of breach by our employees of confidentiality obligations to their former employers, there can be no assurance that a former employer of one or more of our employees will not allege a breach and seek compensation for alleged damages. If such a former employer were to successfully bring such a claim, our know-how and/or skills base could be restricted and our ability to produce certain products and/or to continue certain business activities could be affected, to the detriment of our financial condition, results of operations, business and/or prospects.
The international nature of our business subjects us to a number of risks, including unfavorable political, regulatory, labor and tax conditions in foreign countries.
A substantial majority of our marketing and distribution takes place outside the United States, primarily in China, and substantially all of our sales are to customers outside the United States. We also have contracts with customers in Europe and expect to recognize revenue from sales to customers in Asia and Europe in the future. In addition, we have transitioned our global operations center to Hong Kong, further increasing our exposure to the risks of operating in Asia. As a result, we are subject to the legal, political, social and regulatory requirements and economic conditions of many jurisdictions other than the United States. Risks inherent to maintaining international operations, include, but are not limited to, the following:
· trade disputes between the United States and countries where we deliver our products to our customers, as well as trade disputes between countries in which our customers manufacture and those countries in which our customers sell end-products, including their sales of solar wafers, cells and modules, and sapphire materials produced with our furnaces or reactors, which could result in government or trade organization actions that have the effect of increasing the price for our and our customers products which would have a corresponding decrease in the demand for our products;
· withholding taxes or other taxes on our foreign income, and tariffs or other restrictions on foreign trade and investment, including currency exchange controls imposed by or in other countries;
· the inability to obtain, maintain or enforce intellectual property rights in other jurisdictions, at a reasonable cost or at all;
· difficulty with staffing and managing widespread and growing international operations;
· complying with regulatory and legal requirements in the jurisdictions in which we operate and sell products;
· effectively operating and maintaining our internal controls and financial reporting processes across multiple countries;
· trade barriers such as export requirements, tariffs, taxes and other restrictions and expenses, which could increase the prices of our products and make our product offering less competitive in some countries; and
· establishing ourselves and becoming tax resident in foreign jurisdictions.
Our business in foreign markets requires us to respond to rapid changes in market conditions in these countries. Our overall success as a global business depends, in part, on our ability to succeed under differing legal, regulatory, economic, social and political conditions. There can be no assurance that we will be able to develop, implement and maintain policies and strategies that will be effective in each location where we do business. As a result of any of the foregoing factors, our financial condition, results of operations, business and/or prospects could be materially adversely affected.
We are a global corporation with significant operations in Asia, and challenges by various tax authorities to our global operations could, if successful, increase our effective tax rate and adversely affect our earnings.
We are a Delaware corporation that operates through various subsidiaries in a number of countries throughout the world, including in Asia. We established our global operations center in Hong Kong and have significant operations in Asia. Our income taxes are based upon the applicable tax laws, treaties, and regulations in the many countries in which we operate and earn income as well as upon our operating structures in these countries. While we believe that we carefully analyze and account for the tax risks and uncertainties under the applicable rules, multiple tax authorities could contend that a greater portion of our and our subsidiaries income should be subject to income or other tax in their respective jurisdictions. If successful, these challenges could result in an increase to our effective tax rate. In addition, if we continue to generate revenue in higher tax jurisdictions, as was the case during the nine-month period ended December 31, 2012, our effective tax rate may continue to increase.
We continue to monitor the impact of various international tax proposals and interpretations of the tax laws and treaties in the countries where we operate, including those in the United States, China, Hong Kong, and other countries. If enacted, certain changes in tax laws, treaties, regulations, or their interpretation could result in a higher tax rate on our earnings, which could result in a significant negative impact on our earnings and cash flow from operations.
Compliance with the legal systems of the countries in which we offer and sell our products could increase our cost of doing business.
We offer and sell our products internationally, including in some emerging markets. As a result, we are and/or may become subject to the laws, regulations and legal systems of the various jurisdictions in which we carry on business and/or in which our customers or suppliers are located. Among the laws and regulations applicable to our business are health and safety and environmental regulations, which vary from country to country and from time to time. We must therefore design our products and ensure their manufacture so as to comply with all applicable standards. Compliance with legal and regulatory requirements, including compliance with any change in existing legal and regulatory requirements, may cause us to incur material costs and may be difficult, impractical or impossible. In addition, Chinas legal system, where we do a significant amount of business, is rapidly evolving and, as a result, the interpretation and enforcement of many laws (including intellectual property laws), regulations and rules are not always uniform and legal proceedings in China often involve uncertainties and legal protections afforded are uncertain and may be limited. In addition, any litigation brought by or against us in China may be protracted and may result in substantial costs and diversion of resources and management attention and the anticipated outcome would be highly uncertain.
Accordingly, foreign laws and regulations which are applicable to us may have a material adverse effect on our financial condition, results of operations, business and/or prospects. As a result of the procedural requirements or laws of the foreign jurisdictions in which we carry on business and/or in which our customers or suppliers are located, we may experience difficulty in enforcing supplier or customer agreements or certain provisions thereof, including, for example, the limitations on the product warranty we typically include in our equipment sales contracts. In some jurisdictions, enforcement of our rights may not be commercially practical in light of the duration, cost and unpredictability of such jurisdictions legal system. Any inability by us to enforce, or any difficulties experienced by us in enforcing, our contractual rights in foreign jurisdictions may have a material adverse effect on our financial condition, results of operations, business and/or prospects.
We are subject to export restrictions and laws affecting trade and investments, and the future sale of our products may be further limited or prohibited in the future by a government agency or authority.
As a global company headquartered in the United States, our products and services are subject to U.S. laws and regulations that may limit and/or restrict the export (and re-export from other countries) of some of our products, services and related product and technical information. We are also subject to the export and import laws of those foreign jurisdictions to which we sell or from which we re-export our products. Compliance with these laws and regulations could significantly limit our operations and our sales in the future and failure to comply could result in a range of penalties, including restrictions on exports of all of our products for a specified time period, or forever, and severe monetary penalties. In certain circumstances, these restrictions may affect our ability to interact with our foreign subsidiaries and otherwise limit our trade with third parties (including vendors and customers) operating inside and outside the U.S. In addition, as we introduce new products, we may need to obtain licenses or approvals from the US and other governments to ship them into foreign countries. Failure to receive the appropriate approvals may mean that our development efforts (and expenses related to such development) may not result in any revenue, particularly as most of our customers are located in foreign jurisdictions. This would have a material and adverse impact on our business and our development efforts.
In addition, certain customers of our sapphire materials business operate in the defense sector or are subcontractors of companies in the defense industry, and our products may be incorporated in, among other things, missiles, military aircraft and aerospace systems. In addition, Crystal Systems has received funding from the U.S. government in connection with certain research work for certain U.S. government agencies. Certain work performed pursuant to certain of these contracts is not commercially available, but we may make it available commercially in the future. The State Department, the Commerce Department or other government agencies may, however, determine that our sapphire material or other products, including our ASF systems, PV furnaces and/or polysilicon reactors, are important to the military potential of the U.S. If so, we may be subject to more stringent export licensing requirements or prohibited from selling certain of our sapphire materials (for certain applications or end uses), ASF systems, PV furnaces and/or polysilicon reactors to any customer outside the U.S. or to customers in certain jurisdictions. The U.S. government has, and will likely continue to, vigorously enforce these laws in light of continuing security concerns. If the export or sale of any of our current or future products outside the U.S. are limited or restricted by the U.S. government or any foreign government, our operations and results of operations would be negatively impacted.
We face particular political, market, commercial, jurisdictional and legal risks associated with our business in China.
We have had significant sales in China, accounting for 32% of our revenue in the three month period ended March 30, 2013 and 23% of our revenue in the nine month period ended December 31, 2012. Further, we have significant facilities and operations in China. Accordingly, our financial condition, results of operations, business and/or prospects could be materially adversely affected by economic, political and legal conditions or developments in China.
In November 2012, China selected a new leadership group to run the government of the country. In China, the government has significant impact on what industries will receive financial and government assistance. At this point, the new governments economic priorities are unclear, but it may be the case that they will not be supportive of alternative energy industries, such as solar manufacturing, or of sapphire manufacturing. The Chinese government is able to exercise such control through its direct control over capital investments or changes in tax regulations that may be applicable to us. In addition, a substantial portion of the productive assets in China remain government owned. The Chinese government also exercises significant control over Chinese economic growth through the allocation of resources, controlling payment of foreign currency denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. If the solar and/or sapphire industries are not a priority, our customers will likely have a difficult time expanding their operations and may have difficulty continuing their operations (particularly if direct and indirect financial support for our customers is reduced or eliminated). This would have a negative impact on all of our business segments and, we expect, our results of operations.
Any factors that result in slower (or decreased) growth in China could result in decreased capital expenditures by polysilicon, solar and sapphire product manufacturers, which in turn could reduce demand for our products. Additionally, China has historically adopted laws, regulations and policies which impose additional restrictions on the ability of foreign companies to conduct business in China or otherwise place them at a competitive disadvantage in relation to domestic companies. Any adverse change in economic conditions or government policies in China could have a material adverse effect on our overall growth and therefore have an adverse effect on our financial condition, results of operations, business or prospects.
We have expanded our presence in China, including in the areas of customer service, certain manufacturing services, administrative functions, sales and research and development. As we adopt a greater presence in China, we are increasingly exposed to the economic, political and legal conditions and developments in China, which could further exacerbate these risks, including the risk that we may not be able to obtain adequate legal protection in connection with any technological developments resulting from our research and development conducted in China.
We have entered into business combinations and acquisitions that may be difficult to integrate, disrupt our business, expose us to litigation or unknown liabilities, dilute stockholder value and divert management attention.
We may enter into business combinations or purchases. For example, we acquired certain assets and intellectual property related to Hyperion ion implantation in 2012, Confluence Solar in 2011 and Crystal Systems in 2010. Acquisitions and combinations are accompanied by a number of risks, including the difficulty of integrating the operations and personnel of the acquired company, disruption of our ongoing business, distraction of management, expenses related to the acquisition and potential unknown liabilities and claims associated with acquired businesses. We may be subject to (i) liability for activities of the acquired company prior to the acquisition, including environmental and tax and other known and unknown liabilities and (ii) litigation or other claims in connection with the acquired company, including claims brought by terminated employees, customers, former stockholders or other third parties.
In addition, there may, in particular, be risks and uncertainties in connection with the intellectual property rights and ownership of technology of an acquired company, including (i) the nature, extent and value of the intellectual property and technology assets of an acquired company (or of the acquired assets), (ii) the rights that an acquired company (or company selling assets) has to utilize intellectual property and technology that it claims to have developed or to have licensed, and (iii) actions by third parties against the acquired company (or company selling assets) for intellectual property and technology infringement and the extent of the potential loss relating thereto. Third parties may also be more likely to assert claims against the acquired company (or company selling assets), including claims for breach of intellectual property rights, once the company has been acquired by us.
Any inability to integrate completed acquisitions or combinations in an efficient and timely manner or the inability to properly assess and utilize the intellectual property and technology portfolio without infringing the rights of a third party could have an adverse impact on our results of operations. In addition, we may not be able to recognize any expected synergies or benefits in connection with a future acquisition, combination or asset purchase or we may be unable to effectively implement the business plan for the acquired company or assets, which would prevent us from achieving our financial and business goals for the business.
If we are not successful in completing acquisitions or combinations that we may pursue in the future, we may incur substantial expenses and devote significant management time and resources without a successful result. In addition, future acquisitions could require use of substantial portions of our available cash or result in the incurrence of debt or dilutive issuances of securities. If we were to incur additional debt in the future in connection with an acquisition, or otherwise, it may contain covenants restricting our future activities, may incur significant interest rates or penalties for breach and we may be unable to generate sufficient cash to pay the principal or interest. Also, any issuance of equity securities may be dilutive. Acquisitions and combinations also frequently require the acquiring company to recognize significant amounts of intangible assets, such as goodwill, patents and trademarks and customer lists, in an acquisition, which amounts may be subject to a future impairment if we are unable to successfully implement the operating strategy for the acquired company or acquired assets.
We may, in the future, make investments in third party businesses or enter into joint development or similar agreements with third parties and these may require significant expenses and may not result in any technological or financial benefits.
We have entered into, and we may in the future enter into, arrangements in which we invest in another business without owning all of the voting control of the entity or without the ability to control the decision-making of the entity or we may enter into joint development or similar arrangements for the development of technology or sale of products. Investments of this nature can require a significant commitment of our time, attention, cash and financial resources and technology sharing. If we do not have a controlling stake in these companies, it is likely that such entities may make their own business decisions that may not always align with our interests. In addition, some of the entities that we invest in, or enter into development projects with, will very likely have the right to manufacture or distribute their own products or certain products of our competitors. If we are unable to provide an appropriate mix of incentives to the companies that we invest in or in
which we enter joint venture or similar arrangements, these other parties, through a combination of pricing and marketing and advertising support or otherwise, may take actions that, while maximizing their own short-term profits, may be detrimental to us or our brands, or they may devote more of their energy and resources to business opportunities or products other than those that generate a return for us. Such actions could, in the long run, have an adverse effect on our financial results. In addition, these types of investments may not ultimately generate the returns that we expect when we entered into the arrangements, which could result in a decrease in our cash holdings and loss of our entire investment.
Our ability to supply a sufficient number of products to meet demand could be severely hampered by natural disasters or other catastrophes.
Currently, a portion of our operations are located in Asia and we increased our presence in Asia by opening our global operations center in Hong Kong. Additionally, a significant portion of our revenue is generated from customers that install our equipment in Asia and many of our suppliers are also located in Asia. These areas are subject to natural disasters such as earthquakes and floods. A significant catastrophic event such as earthquakes, floods, war, acts of terrorism or global threats, including, but not limited to, the outbreak of epidemic disease, could disrupt our operations and impair distribution of our products, damage inventory or facilities, interrupt critical functions, cause our suppliers to be unable to meet our demand for parts and equipment, reduce demand for our products, prevent our customers from honoring their contractual obligations to us or otherwise affect our business negatively. To the extent that such disruptions or uncertainties result in delays or our inability to fill orders, causes cancellations of customer orders, or results in our inability to manufacture or ship of our products, our business, operating results and financial condition could be materially and adversely affected.
We may be subject to concentration of credit risk related to our cash equivalents and short-term investments.
We may be exposed to losses in the event of nonperformance by the financial counterparties to our cash equivalent investments and short term investments. This risk may be heightened as a result of the financial crisis and volatility in the markets. We attempt to manage the concentration risk by making investments that comply with our investment policy. Currently, our cash equivalents are invested in cash deposit accounts and money market mutual funds at our financial institutions. Although we do not currently believe the principal amounts of these investments are subject to any material risk of loss, the recent volatility in the financial markets is likely to significantly impact the investment income we receive from these investments. In general, increases of credit risk related to our cash equivalents and short-term investments could have a material adverse effect on our financial condition, results of operations, business and/or prospects.
Our level of indebtedness may limit our financial flexibility.
As of March 30, 2013 our total consolidated indebtedness was approximately $320 million (which amount includes the portion of our 3.0% convertible notes due 2017 allocated to equity of $65 million) and our unrestricted cash was approximately $320 million. Our level of indebtedness affects our operations in several ways, including the following:
· a portion of our cash flows from operating activities must be used to service our indebtedness and is not available for other purposes;
· we may be at a competitive disadvantage as compared to similar companies that have less debt;
· the covenants contained in the agreements governing our outstanding indebtedness and future indebtedness may limit our ability to borrow additional funds, pay dividends and make certain investments and may also affect our flexibility in planning for, and reacting to, changes in the economy and in our industry;
· additional financing in the future for working capital, capital expenditures, acquisitions, general corporate or other purposes may have higher costs and more restrictive covenants, or may not be available to us; and
· a lowering of the credit ratings of our debt may negatively affect the cost, terms, conditions and availability of future financing, and lower ratings will increase the interest rate we pay on any future corporate bank credit facility.
Many of these factors are beyond our control. Factors that will affect our ability to raise cash through an offering of our capital stock or a refinancing of our debt include financial market conditions, the value of our assets and our performance
at the time we need capital. In addition, our failure to comply with the financial and other covenants relating to our indebtedness could result in a default under that indebtedness and acceleration of amounts due, which could adversely affect our business, financial condition and results of operations.
We may face significant warranty claims.
All of our equipment and materials are sold with certain warranties. The warranty is typically provided on a repair or replace basis, and is not limited to products or parts manufactured by us. As a result, we bear the risk of warranty claims on all products we supply, including equipment and component parts manufactured by third parties. There can be no assurance that we will be successful in claiming under any warranty or indemnity provided to us by our suppliers or vendors in the event of a successful warranty claim against us by a customer or that any recovery from such vendor or supplier would be adequate. There is a risk that warranty claims made against us will exceed our warranty reserve and could have a material adverse effect on our financial condition, results of operations, business and/or prospects.
Exchange rate fluctuations may make our products less attractive to non-U.S. customers and otherwise have a negative impact on our operating results.
Our reporting currency is the U.S. dollar and almost all of our equipment contracts are denominated in U.S. dollars. However, greater than 95% of our revenue was generated from sales to customers located outside the United States in the quarter ended March 30, 2013, and greater than 98% in the nine-month period ended December 31, 2012 and the fiscal year ended March 31, 2012, and we expect that a large percentage of our future revenue will continue to be derived from sales to customers located outside the United States. Changes in exchange rates between foreign currencies and the U.S. dollar could make our products less attractive to non-U.S. customers and therefore decrease our sales and gross margins. In addition, we incur costs in the local currency of the countries outside the United States in which we operate and as a result are subject to currency translation risk. Exchange rates between a number of foreign currencies and the U.S. dollar have fluctuated significantly over the last few years and future exchange rate fluctuations may occur. Our largest foreign currency exposure is the Euro. In an attempt to mitigate foreign currency fluctuations, we have entered into, from time to time, forward foreign exchange contracts to hedge portions of equipment purchases from vendors located primarily in Europe. Our hedging activities may not be successful in reducing our exposure to foreign exchange rate fluctuations, for example, in the nine months ended December 31, 2012 we were required to take a charge of $0.9 million as a result of certain forward foreign exchange contracts no longer qualifying as cash flow hedges, which may occur again if we delay, cancel or otherwise modify the terms of the equipment purchases that affect the forecasted cash flow transaction being hedged. Future exchange rate fluctuations may have a material adverse effect on our financial condition, results of operations, business and/or prospects.
We have been subject to securities class action lawsuits. Potential similar or related litigation could result in substantial damages and may divert managements time and attention from our business.
In 2008, the Company, its directors and certain affiliates were defendants in class action suits that alleged certain violations under various sections of the Securities Act of 1933, in connection with our initial public offering. In March 2011, these class actions were settled and we were required to pay $10.5 million into a settlement fund. Of this amount, we contributed $1.0 million and our liability insurers contributed the remaining $9.5 million. Our contribution represented the contractual indemnification obligation to the underwriters.
As a publicly traded company, we may be subject to additional lawsuits relating to violations of the securities laws. Any such litigation would be expensive, time consuming to defend and, if we were unsuccessful in defending such claims, could result in the payments of significant sums. We do maintain insurance, but the coverage may not be sufficient and may not be available in all instances.
If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, our stockholders could lose confidence in our financial reporting, which could harm our business and the trading price of our common stock.
We have complied with Section 404 of the Sarbanes-Oxley Act of 2002 by assessing, strengthening and testing our system of internal controls. Even though we concluded our system of internal controls was effective as of December 31, 2012, we need to continue to maintain our processes and systems and adapt them to changes as our business evolves and we acquire new business and technologies. This continuous process of maintaining and adapting our internal controls and complying with Section 404 is expensive and time-consuming, and requires significant management attention. We cannot be
certain that our internal control measures will continue to provide adequate control over our financial processes and reporting and ensure compliance with Section 404. Furthermore, as our business changes and if we expand through acquisitions of other companies or make significant investments in other companies, our internal controls may become more complex and we will require significantly more resources to ensure our internal controls remain effective. In addition, if we reduce a portion of our workforce, as we have done recently, our ability to adequately maintain our internal controls may be adversely impacted. Failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. If we or our independent registered public accounting firm identify material weaknesses, the disclosure of that fact, even if quickly remediated, could reduce the markets confidence in our financial statements and harm our stock price.
Interpretations of existing accounting standards or the application of new standards could affect our revenue recognition and other accounting policies, which could have an adverse effect on the way we report our operating results.
Generally accepted accounting principles in the United States are subject to interpretations by the Financial Accounting Standards Board, or FASB, the American Institute of Certified Public Accountants, the SEC and various other organizations formed to promulgate and interpret accounting principles. A change in these accounting principles or their interpretations could affect the reporting of transactions that were completed before the announcement of a change in principles or interpretations. In October 2009, the FASB issued authoritative guidance that provides amendments to the revenue recognition criteria for separating consideration in multiple-deliverable revenue arrangements. This guidance prescribes a methodology for determining the fair value, or best estimated selling price, of deliverables on an individual element basis, including elements for which objective reliable evidence of fair value previously did not exist. As noted in Note 2 to our financial statements included in our most recently filed Transition Report on Form 10-K, under the current revenue guidance, for arrangements containing products considered to be established, the majority of our revenue is recognized upon delivery of the product. For arrangements containing products considered to be new, or containing customer acceptance provisions that are deemed more than perfunctory, revenue is recorded upon customer acceptance.
If we make incorrect estimates or judgments in applying our revenue recognition policies, for example, if we incorrectly classify a product as established when it should have been new, it may impact the timing of recognizing that revenue and may result in failing to meet guidance provided by us or require that we restate our prior financial statements. Additional errors in applying estimates or judgments in accounting policies may also adversely impact our operating results and may, in certain cases, require us to restate prior financial statements.
If we are unable to adopt and implement adequate data security procedures, we could lose valuable proprietary information, third parties may be able to access information about the operations of our equipment at customer sites and employee data, any of the foregoing may harm our reputation and our results of operations.
While we have implemented data security measures, a third party may still gain unauthorized access to our servers, laptops or employee mobile devices. We store our important proprietary information on our servers, including equipment specifications, and our employees may access this data remotely. This information is also shared via e-mail and we rely on industry standard encryption tools for transmitting data (which has been attacked in the past). If a competitor were able to access this information, we would lose the competitive advantages we believe we have and we could also lose the benefits that are or could be realized from our research and development efforts. Access to this information may be the result of a third-party by-passing our security measures, third-party encryption tools not providing adequate protection or inadvertent error by an employee that results in this information being accessed by unauthorized users.
Some of our servers containing our proprietary and confidential product and customer information are located in foreign jurisdictions, such as China and Hong Kong, and the governments in these jurisdictions may be able to access, review, retain and use the information contained on these servers without any legal recourse on our part or the right to compensation.
In a very limited number of cases, we are able to monitor the operations of our equipment in our customers facilities. If a third party were able to access this information, they would be able to view important data about the operations of our equipment and use this customer information to their benefit. In addition, it is very likely that our reputation would be harmed among our customers and they could prevent our remote access in the future or even cease purchasing equipment from us.
Finally, we also store financial reporting information and employee data on our computer systems. If our financial information were tampered with, the results we report may not be accurate and/or we may be required to re-state previous released financial results and investors could lose confidence in our reported financial results. If our employee information were accessed, our employees may lose confidence in our operations, we may confront challenges attracting new employees and may face government penalties if we were found to have taken inadequate measures to protect employee information.
We could be adversely affected by violations of applicable anti-corruption laws or violations of our internal policies designed to ensure ethical business practices.
We operate in a number of countries throughout the world, including in countries that do not have as strong a commitment to anti-corruption and ethical behavior that is required by U.S. laws or by corporate policies. We are subject to the risk that we, our U.S. employees or our employees located in other jurisdictions or any third parties that we engage to do work on our behalf in foreign countries may take action determined to be in violation of anti-corruption laws in any jurisdiction in which we conduct business, including the U.S. Foreign Corrupt Practices Act of 1977 (or the FCPA). In addition, we operate in certain countries in which the government may take an ownership stake in an enterprise and such government ownership may not be readily apparent (thereby increasing potential FCPA violations). Any violation of the FCPA or any similar anti-corruption law or regulation could result in substantial fines, sanctions, civil and/or criminal penalties and curtailment of operations in certain jurisdictions and might adversely affect our business, results of operations or financial condition. In addition, we have internal ethics policies that we require our employees to comply with in order to ensure that our business is conducted in a manner that our management deems appropriate. If these anti-corruption laws or internal policies were to be violated, our reputation and operations could also be substantially harmed. Further, detecting, investigating, and resolving actual or alleged violations is expensive and can consume significant time and attention of our senior management.
Risks Relating to Our Polysilicon Business
The market for polysilicon has been cyclical, resulting in periods of insufficient or excess production capacity and could result in variation in demand for our products.
The market for polysilicon has been cyclical. In the recent past, polysilicon supply had increased due principally to expansion by existing manufacturers. This factor, among others, resulted in increased supply and declining prices in polysilicon. An excess in production capacity for polysilicon has, and in the future may, adversely affect demand for our SDR reactors. There can be no certainty that the increased demand during the periods of expansion in polysilicon manufacturing capacity will persist for an extended period of time, or at all. A lack of demand for our SDR reactors could have a material adverse effect on our financial condition, results of operations, business and/or prospects. Conversely, if there are shortages of polysilicon in the future, the PV industry may be unable to continue to grow and/or may decline, and, as a result, demand for our PV products may decrease or may be eliminated.
We license and do not own certain components of the technology underlying our SDR reactor and STC converter products.
Certain components of the technology underlying our SDR reactor and STC converter products are not owned by us, but are licensed under a ninety-nine year license agreement that could be terminated in the event of a material breach by us of such agreement that remains uncured for more than thirty days, or upon our bankruptcy or insolvency. To the extent such components are deemed to be incorporated into our current or future products, any termination of our rights to use such technology could have a material adverse effect on our ability to offer our polysilicon products and therefore on our financial condition, results of operations, business and/or prospects if we were unable to secure these rights in a different manner or from an alternative arrangement.
Risks Relating to Our Photovoltaic Business
We intend to discontinue investment in our DSS product line and, as a result, do not expect our PV segment to contribute any material revenues to our business until the HiCz equipment offering, which is still under development, is released.
Our principal product line of our PV business has been the DSS family of casting furnaces that are used to produce multicrystalline ingots and MonoCast ingots. Because of the high level of PV manufacturing overcapacity, we expect very limited investment in additional current generation capital equipment for 2013 and beyond. As such, we intend to discontinue
any significant investment in our DSS product line. We will endeavor to sell any DSS furnaces that we have in our inventory, but expect that demand for these will be limited. Our next generation PV equipment offering, our HiCz tool, is still under development and is projected to be commercially available in 2014. Until the HiCz equipment tool is released and gains commercial acceptance, we do not expect our PV business segment to make any meaningful to our overall revenues. Since the HiCz equipment offering is still under development, however, the timing of a commercial release and the revenue from sales of the tool, if any, are uncertain. If there is a delay in the release of the HiCz tool or it does not gain acceptance among PV manufacturers, our PV segment and our overall business will me materially and adversely effected.
Government subsidies and economic incentives for on-grid solar electricity applications could be reduced or eliminated.
Demand for PV equipment, including on-grid applications, has historically been dependent in part on the availability and size of government subsidies and economic incentives. Currently, the cost of solar electricity exceeds the retail price of electricity in most major markets in the world. As a result, federal, state and local governmental bodies in many countries, most notably Germany, Italy, Spain, South Korea, Japan, China and the United States, have provided subsidies in the form of feed-in tariffs, rebates, tax write-offs and other incentives to end-users, distributors, systems integrators and/or manufacturers of PV products to promote the use of solar energy in on-grid applications and to reduce dependency on other forms of energy. Many of these government incentives have expired or are due to expire in time, phase out over time, cease upon exhaustion of the allocated funding and/or are subject to cancellation or non-renewal by the applicable authority. The reduction, expiration or elimination of relevant government subsidies or other economic incentives may result in the diminished competitiveness of solar energy relative to conventional and other renewable sources of energy, and adversely affect demand for PV equipment (and polysilicon equipment) or result in increased price competition, all of which could cause our sales and revenue to decline and have a material adverse effect on our financial condition, results of operations, business and/or prospects. Further, any government subsidies and economic incentives could be reduced or eliminated altogether at any time and for any reason. We believe that government subsidies and incentives will be eliminated in the near future. Also, relevant statutes or regulations may be found to be anti-competitive, unconstitutional or may be amended or discontinued for other reasons. Some government subsidies and incentives have been subject to challenge in courts in certain foreign jurisdictions. New proceedings challenging minimum price regulations or other government incentives in other countries in which we conduct our business or in which our customers conduct business, may be initiated, and if successful, could cause a decrease in demand for our products.
Existing regulations and policies and changes to these regulations and policies may present technical, regulatory and economic barriers to the purchase and use of photovoltaic products.
The market for electricity generation products is heavily influenced by government regulations and policies concerning the electric utility industry, as well as policies promulgated by electric utilities. These regulations and policies often relate to electricity pricing and technical interconnection of user-owned electricity generation. In the United States and in a number of other countries, these regulations and policies are currently being modified and may be modified again in the future. These regulations and policies could deter end-user purchases of PV products (and polysilicon products) and investment in the research and development of PV technology. For example, without a mandated regulatory exception for PV systems, utility customers are often charged interconnection or standby fees for putting distributed power generation on the electric utility grid. These fees could increase the cost to end-users of PV systems and make such systems less attractive to potential customers, which may have a material adverse effect on demand for our polysilicon and PV products and our financial condition, results of operations, business and/or prospects.
The photovoltaic industry may not be able to compete successfully with conventional power generation or other sources of renewable energy.
Although the PV industry has experienced advances in recent years, it still comprises a relatively small component of the total power generation market and competes with other sources of renewable energy, as well as conventional power generation. Many factors may affect the viability of widespread adoption of PV technology and thus demand for solar wafer manufacturing equipment, including the following:
· cost-effectiveness of solar energy compared to conventional power generation and other renewable energy sources;
· performance and reliability of solar modules compared to conventional power generation and other renewable energy sources and products;
· availability and size of government subsidies and incentives to support the development of the solar energy industry;
· success of other renewable energy generation technologies such as hydroelectric, wind, geothermal and biomass; and
· fluctuations in economic and market conditions that affect the viability of conventional power generation and other renewable energy sources, such as increases or decreases in the prices of oil, natural gas and other fossil fuels.
As a result of any of the foregoing factors, our financial condition, results of operations, business and/or prospects could be materially adversely affected.
Risks Relating to Our Sapphire Business
If our sapphire equipment and material do not achieve market acceptance, prospects for our sapphire business would be limited.
The customers to whom we sell ASF systems are, we believe, manufacturing for the LED industry and other industrial markets. Potential customers for sapphire equipment and sapphire-based LED materials manufactured with the ASF system may be reluctant to adopt these offerings as an alternative to existing sapphire materials and lighting technology or sapphire manufacturing processes. In addition, many of the customers who purchase our equipment, we believe, will utilize the material for LED lighting. However, LED lighting is currently more expensive than traditional lighting and if the price does not decrease in the near future, our customers may not have a market in the near term for the material they produce with our ASF systems, which would reduce the demand for our ASF systems.
In addition, potential customers may have substantial investments and know-how related to their existing sapphire, LED and lighting technologies, and may perceive risks relating to the complexity, reliability, quality, usefulness and cost-effectiveness of our sapphire equipment and sapphire material products compared to alternative products and technologies available in the market or that are currently under development. For example, companies are developing general lighting technologies that utilize silicon- based material (in lieu of sapphire) and assert that the production costs are significantly lower than the costs to produce sapphire-based lighting materials. If acceptance of sapphire material and sapphire-based LEDs, particularly in general illumination, do not increase significantly, opportunities to increase the sapphire equipment portion of our business and revenues would be limited.
In addition, the price of sapphire-based LED material has recently experienced a marked drop due, in part, to the readily available supply of such material. If the price of LED material, which is driven, in large part due to the supply that is generally available, drops, we would expect that our materials and equipment business would be negatively impacted.
Any of the foregoing factors could have an adverse impact on the growth of the sapphire portion of our business. Historically, the sapphire industry has experienced volatility in product demand and pricing. Changes in average selling prices of sapphire material as a result of competitive pricing pressures, availability of material, increased sales discounts and new product introductions by competitors could have an adverse impact on our results of operations.
Our efforts to expand the use of sapphire into other applications may not be successful and may not produce revenue in the future.
We have recently undertaken efforts to broaden the use of sapphire to applications beyond LED. For example, sapphire has qualities that we believe may make it suitable for use in industrial applications and consumer electronics (including mobile devices). These efforts, however, are only in the early stages, with only one customer, we believe, purchasing ASF systems in order to supply sapphire for use in mobile consumer devices. Our efforts to gain market acceptance for the use of sapphire in these other markets may not be successful. If so, we may expend financial resources and management time without generating a meaningful amount of revenue. In addition, our stock price may be adversely impacted if investors expect that the industrial or mobile device market represents a significant opportunity and sapphire (or sapphire from the ASF system) does not meet their expectation.
Crystal growth using the ASF system requires a consistent supply of power and any interruption in the supply of power may result in sapphire material that has reduced or no sales value.
The process for growing sapphire boules using the ASF system technology requires that the system be supplied with a consistent supply of power during the cycle required to grow a boule. If there are certain types of power interruptions, which we have experienced at our Salem and Merrimack facilities, even for a brief period of time, the sapphire boule being generated by that system will be of inferior quality and we would likely be unable to sell that sapphire material to a customer. Such power interruptions at our facilities also delay and impair our research and development efforts with respect to sapphire material and ASF systems. In addition, if customers of our ASF system do not have consistent power supplies, our system would not gain market acceptance because it will not create boules of the quality that may be expected by our customers and we would likely not meet the required contractual criteria necessary to receive the final installment payment.
Production and sale of sapphire growth systems for producing materials for the LED and other industries is a new industry and we have limited operating history, which makes it difficult to evaluate the business prospects for this business segment.
Because of our limited operating history in the sapphire industry it is difficult to evaluate our business and prospects. While we have gained contractual acceptances on our ASF systems, our sapphire equipment business, however, presents the difficulties frequently encountered by those businesses that are in the early stage of development, coupled with the risks and uncertainties encountered in new and evolving markets such as the market for sapphire growth technology. We may not be able to successfully address these challenges. If we fail to do so, we may incur losses and our business would be negatively impacted.
While we have commissioned ASF systems at customer sites, our customers generally lack experience in operating the ASF systems. Our sapphire furnaces require a skilled and trained employee base to properly operate and efficiently maintain the systems. While we offer training in connection with the sale of ASF systems, at certain customer sites, we have discovered that those customers have not yet hired the personnel or instituted the operations procedures necessary to properly run the ASF system they purchased. As a result of these factors, we believe that certain ASF systems have generated sapphire material that is not salable. Additionally, even in those cases where the sapphire boule was to specification, the boule has not always been properly oriented by the customer and some or all of the value of the sapphire boule was lost as it was sliced and cored. If our customers do not have the manufacturing expertise to operate the ASF systems, they may be delayed in ramping up their operations and sapphire manufacturing operations, we may not recognize revenue from the sale of these systems (or such recognition may be delayed) and the ASF systems may not gain wider market acceptance, all of which would harm our reputation and the results of our sapphire business segment.
Risks Relating to Our Common Stock
Future sales of our common stock, or the perception in the public markets that these sales may occur, could depress our stock price.
Future sales of substantial amounts of our common stock in the public market or the perception that these sales could occur, could adversely affect the price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. In addition, future equity financings could also result in dilution to our stockholders and new securities could have rights, preferences and privileges that are senior to those of our common shares.
Our certificate of incorporation currently authorizes us to issue up to 500 million shares of common stock, and as of March 30, 2013, we had approximately 119 million shares of common stock outstanding. All of these shares are freely tradable, in the public market under a registration statement or an exemption under the securities laws. Moreover, as of March 30, 2013, 12.4 million shares of our common stock were issuable upon the exercise of outstanding vested and unvested options and upon vesting of outstanding restricted stock units.
Our certificate of incorporation and by-laws contain provisions that could discourage another company from acquiring us and may prevent attempts by our stockholders to replace or remove our current management.
As a result of our stock price, it is possible that companies in our industries or certain other investors may consider making a friendly or hostile attempt to gain control of a majority (or all) of our common stock. Some provisions of our certificate of incorporation and by-laws may have the effect of delaying, discouraging or preventing a merger or acquisition
that our stockholders may consider favorable, including transactions in which stockholders may receive a premium for their shares. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace or remove our board of directors. These provisions include:
· the removal of directors only by the affirmative vote of the holders of two-thirds of the shares of our capital stock entitled to vote;
· any vacancy on our board of directors, however occurring, including a vacancy resulting from an enlargement of the board, may only be filled by vote of the directors then in office;
· inability of stockholders to call special meetings of stockholders or take action by written consent;
· advance notice requirements for board nominations and proposing matters to be acted on by stockholders at stockholder meetings; and
· authorization of the issuance of blank check preferred stock without the need for action by stockholders.
We are a technology-oriented company and, as such, we expect that the price of our common stock may fluctuate substantially.
We operate in industries where there are rapid changes in technologies and product offerings. Broad market, industry and economic factors may adversely affect the market price of our common stock, regardless of our actual operating performance. Factors that could cause fluctuations in our stock price may include, among other things:
· actual or anticipated variations in quarterly operating results;
· changes in market prices for our products or for raw materials;
· changes in our financial guidance or estimates made by us or by any securities analysts who may cover our stock or our failure to meet the estimates made by securities analysts;
· changes in the market valuations of other companies operating in our industry;
· announcements by us or our competitors of significant acquisitions, strategic partnerships, divestitures or significant contracts;
· changes in governmental policies with respect to energy;
· additions or departures of key personnel; and
· sales of our common stock, including sales of our common stock by our directors and officers or by our larger stockholders.
Announcements of contract awards or bankruptcies of solar-related companies could have a significant impact on our stock price.
It is common for equipment manufacturers in the business segments in which we operate to enter into contracts for the sale and delivery of substantial amounts of equipment, involving highly competitive bidding situations. Public announcements of contract awards often cause a reaction in the stock market and affect, sometimes significantly, the trading price of the stock of the manufacturer that received a contract award. It could also have a negative effect on the trading price of stock of competitors that did not receive such contract. This reaction may be unrelated to the historical results of operations or financial condition of the affected companies or, in the case of unsuccessful competitors, any guidance they may have provided with respect to their future financial results. An announcement that a competitor of ours was awarded a significant customer contract could have a material adverse effect on the trading price of our stock.
In addition, there have been several recent announcements that companies offering solar power related services and materials have filed or will file for bankruptcy. For example, Solyndra filed for bankruptcy in August 2011. Such announcements, and future similar announcements, will likely have a negative effect on the trading price of our stock. This will likely be the case even if such companies do not utilize the output for the equipment we sell.
Our quarterly operating results have fluctuated significantly in the past and we expect that our quarterly results will continue to fluctuate significantly in the future.
Our quarterly operating results have fluctuated significantly in the past and we expect that our quarterly results will continue to fluctuate significantly in the future. Future quarterly fluctuations may result from a number of factors, including:
· the size of new contracts and when we are able to recognize the related revenue, especially with respect to our polysilicon products;
· requests for delays in deliveries by our customers;
· delays in customer acceptances of our products;
· delays in deliveries from our vendors;
· our rate of progress in the fulfillment of our obligations under our contracts;
· the degree of market acceptance of our products and service offerings;
· the mix of products and services sold;
· budgeting cycles of our customers;
· product lifecycles;
· changes in demand for our products and services;
· the level and timing of expenses for product development and sales, general and administrative expenses;
· competition by existing and emerging competitors, including in the PV, polysilicon and sapphire industry;
· announcements by our competitors or customers of the awarding of a significant contract;
· termination of or removal of contracts in our reported order backlog;
· our success in developing and selling new products and services, controlling costs, attracting and retaining qualified personnel;
· changes in government subsidies and economic incentives for on-grid solar electricity applications;
· announcements regarding litigation or claims against us or others in the PV, polysilicon or sapphire industries;
· changes in export licensing or export restrictions with respect to our products;
· changes in our strategy;
· negative announcements regarding solar and sapphire industry participants, such as the bankruptcies of Evergreen Solar and Solyndra, as well as government investigations of Solyndra operations;
· foreign exchange fluctuations; and
· general economic conditions.
Based on these factors, we believe our future operating results will vary significantly from quarter-to-quarter and year-to-year. As a result, quarter-to-quarter and year-to-year comparisons of operating results are not necessarily meaningful nor do they indicate what our future performance will be.
Hedging activity and sales of our common stock related to the Mandatorily Exchangeable Notes issued by UBS AG, our 3.00% Convertible Notes, the Convertible Note Hedge and Warrants entered into in connection with the 3.00% Convertible Notes and/or the expectation of distribution of our common stock at maturity of the Exchangeable Notes, 3.00% Convertible Notes or the Exercise of the Warrants could depress our stock price.
During September 2010, UBS AG sold its Mandatorily Exchangeable Notes due 2013, or the exchangeable notes, pursuant to which UBS AG will deliver to holders of the exchangeable notes at maturity up to 17.5 million shares of our common stock or the value of such shares in cash, or a combination of cash and shares, based on a formula linked to the price of our common stock. In connection with the issuance by UBS AG of its exchangeable notes, GT Solar Holdings, LLC (a former significant shareholder of the Company) sold an aggregate of 14.0 million shares of our common stock to UBS Securities LLC, an affiliate of UBS AG. We understand that UBS AG and one or more of its affiliates have entered into and/or are expected to enter into hedging arrangements related to UBS AGs obligations under the exchangeable notes. This hedging activity will likely involve trading in our common stock or in other instruments, such as options or swaps, based upon our common stock, and may include sales of common stock acquired by an affiliate of UBS AG upon early exchange of exchangeable notes.
In September 2012, we issued $220 million aggregate principal amount of 3.00% Convertible Senior Notes due 2017. Upon conversion of these Notes, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. The Notes may be converted, under certain conditions specified in the Indenture entered into in connection with the issuance of the Notes, based on an initial conversion rate of 129.7185 shares of common stock per $1,000 principal amount of Notes (which represents an initial effective conversion price of the Notes of $7.71 per share), subject to adjustment as described in the Indenture. It is likely that the some or all of the holders of the Notes will enter into hedging arrangements that involves trading in our common stock or in other instruments, such as options or swaps, based upon our common stock.
In connection with issuing the Notes, we entered into convertible note hedge transactions with certain option counterparties. The convertible note hedge transactions are expected to reduce the potential dilution and/or offset any cash payments we are required to make in excess of the principal amount upon conversion of the Notes. We also entered into warrant transactions with the option counterparties. We believe that the option counterparties or their affiliates entered into various derivative transactions with respect to our common stock concurrently with or shortly after the pricing of the Notes. The option counterparties or their affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of the Notes (and are likely to do so during any observation period related to a conversion of Notes). This activity could also cause or avoid an increase or a decrease in the market price of our common stock. In addition, if any such convertible note hedge and warrant transaction is exercised or unwound early or any such warrant transaction is unwound early, such action could adversely affect the value of our common stock.
All of the foregoing hedging activity could affect our stock price, including by depressing it. Also, the price of our common stock could be depressed by possible sales of our common stock by investors who view the Exchangeable Notes or Notes as a more attractive means of equity participation in us and by hedging or arbitrage trading activity that we expect to occur involving our common stock by investors in the Exchangeable Notes and the Notes. Our stock price could become more volatile and could be depressed by investors anticipation of the potential distribution into the market of substantial additional amounts of our common stock at the maturity of the Exchangeable Notes and the Notes or at the time of exercise of the warrants.
We currently do not intend to pay dividends on our common stock and as a result, the only opportunity to achieve a return on an investment in our common stock is if the price appreciates.
We currently do not expect to declare or pay dividends on our common stock in the foreseeable future. In addition, our credit agreement with Bank of America, N.A., which we entered into in January 2012, restricts our right to declare or make any dividends, subject to certain exceptions. As a result, the only opportunity to achieve a return on an investment in
our common stock will be if the market price of our common stock appreciates and the shares are sold at a profit. We cannot assure our investors that the market price for our common stock will ever exceed the price that was paid.
Our actual operating results may differ significantly from our guidance.
From time to time, we release guidance in our quarterly or annual earnings releases, quarterly or annual earnings conference call or otherwise, regarding our future performance that represent our managements estimates as of the date of release. This guidance, which includes forward-looking statements, is based on projections prepared by our management. These projections are not prepared with a view toward compliance with published guidelines of the American Institute of Certified Public Accountants, and neither our registered public accountants nor any other independent expert or outside party compiles or examines the projections and, accordingly, no such person expresses any opinion or any other form of assurance with respect thereto.
Projections are based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and are based upon specific assumptions with respect to future business decisions, some of which will change. We generally state possible outcomes as high and low ranges which are intended to provide a sensitivity analysis as variables are changed but are not intended to represent that actual results could not fall outside of the suggested ranges. The principal reason that we release guidance is to provide a basis for our management to discuss our business outlook with analysts and investors. We do not accept any responsibility for any projections or reports published by any such persons. Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions of the guidance furnished by us will not materialize or will vary significantly from actual results. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date of release. Actual results will vary from our guidance and the variations may be material. In light of the foregoing, investors are urged not to rely upon, or otherwise consider, our guidance in making an investment decision in respect of our common stock.
Any failure to successfully implement our operating strategy or the occurrence of any of the events or circumstances set forth in our Risk Factors in this Form 10-Q could result in the actual operating results being different from our guidance, and such differences may be adverse and material.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Stock Repurchases.
The following table sets forth information in connection with purchases made by, or on behalf of, us or any affiliated purchaser, of shares of our common stock during the three months ended March 30, 2013:
|
|
|
|
|
|
|
|
(d) |
| ||
|
|
(a) |
|
(b) |
|
(c) |
|
Maximum Number |
| ||
Month #1 (January 1, 2013 through February 2, 2013) |
|
17,229 |
|
$ |
3.26 |
|
|
|
|
| |
Month #2 (February 3, 2013 through March 2, 2013) |
|
20,321 |
|
$ |
2.91 |
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|
|
|
| |
Month #3 (March 3, 2013 through March 30, 2013) |
|
1,897 |
|
$ |
2.72 |
|
|
|
$ |
25,000,000 |
|
We did not repurchase any of our common stock on the open market as part of a stock repurchase program during the three months ended March 30, 2013; however, our employees surrendered, and we subsequently retired, 39,447 shares of our common stock to satisfy the tax withholding obligations on the vesting of restricted stock unit awards issued under our 2008 Equity Incentive Plan and 2011 Equity Incentive Plan.
On November 16, 2011, our board of directors authorized a $100 million share repurchase plan. Of this amount, we repurchased $75 million during the fiscal year ended March 31, 2012. Under this repurchase plan, we may purchase up to an additional $25 million of our common stock, however the covenants under our credit-facility prohibit any repurchase. Pursuant to the February 2013 amendment to the 2012 Credit Agreement with Bank of America N.A. and other lenders, we have agreed we will not purchase such common stock under the repurchase plan.
Our credit facility imposes restrictions on our ability, and the ability of our subsidiaries, to pay cash dividends, subject to certain limited exceptions.
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
Not applicable.
None
Exhibits are incorporated by reference or are filed with this report as indicated below (numbered in accordance with Item 601 of Regulation S-K).
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Incorporated by Reference |
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Exhibit |
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Description of Document |
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Form |
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Date |
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Exhibit # |
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Filed |
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31.1 |
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Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Rule 13a-14(a)/15d-14(a), by Chief Executive Officer. |
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X |
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31.2 |
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Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Rule 13a-14(a)/15d-14(a), by Chief Financial Officer. |
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X |
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32 |
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Executive Officer and Chief Financial Officer. |
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X |
101.SCH |
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XBRL Taxonomy Extension Schema Document* |
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X |
101.CAL |
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XBRL Taxonomy Extension Calculation Linkbase Document* |
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101.DEF |
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XBRL Taxonomy Extension Definition Linkbase Document* |
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X |
101.LAB |
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XBRL Taxonomy Extension Label Linkbase Document* |
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X |
101.PRE |
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XBRL Taxonomy Extension Presentation Linkbase Document* |
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X |
* Pursuant to applicable securities laws and regulations, we are deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and are not subject to liability under any anti-fraud provisions of the federal securities laws as long as we have made a good faith attempt to comply with the submission requirements and promptly amend the interactive data files after becoming aware that the interactive data files fail to comply with the submission requirements. Users of this data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
GT ADVANCED TECHNOLOGIES INC. | |
|
|
Thomas Gutierrez |
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| |
|
By: |
/s/ Thomas Gutierrez |
Date: May 9, 2013 |
|
President and Chief Executive Officer |
|
|
Richard J. Gaynor |
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|
|
By: |
/s/ Richard J. Gaynor |
Date: May 9, 2013 |
|
Vice President and Chief Financial Officer |
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Thomas Gutierrez, certify that:
1. I have reviewed this transition report on Form 10-Q of GT Advanced Technologies Inc.;
2. Based on my knowledge, this report does not contain any untrue statements of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in his report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in the report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: May 9, 2013 |
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|
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/s/ THOMAS GUTIERREZ |
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|
|
Thomas Gutierrez |
|
President and Chief Executive Officer |
|
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Richard J. Gaynor, certify that:
1. I have reviewed this transition report on Form 10-Q of GT Advanced Technologies Inc.;
2. Based on my knowledge, this report does not contain any untrue statements of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in his report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in the report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: May 9, 2013 |
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/s/ RICHARD J. GAYNOR |
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|
Richard J. Gaynor |
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Vice President and Chief Financial Officer |
|
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of GT Advanced Technologies Inc. (the Company) on Form 10-Q for the three months ended March 30, 2013, as filed with the Securities and Exchange Commission on the date hereof (the Report), each of the undersigned officers of the Company, certify pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to their knowledge:
1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as amended; and
2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: May 9, 2013 |
|
|
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/s/ THOMAS GUTIERREZ |
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Thomas Gutierrez |
|
President and Chief Executive Officer |
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(Principal Executive Officer) |
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|
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Date: May 9, 2013 |
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|
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/s/ RICHARD J. GAYNOR |
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Richard J. Gaynor |
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Vice President and Chief Financial Officer |
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(Principal Financial Officer) |
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Long-Term Debt and Convertible Notes (Tables)
|
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mar. 30, 2013
|
|||||||||||||||||||||||||||||||||||||||||
Long-Term Debt and Convertible Notes | |||||||||||||||||||||||||||||||||||||||||
Schedule of interest expense |
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||||||||||||||||||||||||||||||||||||||||
Schedule of carrying value of the notes |
|
||||||||||||||||||||||||||||||||||||||||
Schedule of repayment of principal amounts under the Term Facility |
|
Inventories (Details) (USD $)
In Thousands, unless otherwise specified |
Mar. 30, 2013
|
Dec. 31, 2012
|
---|---|---|
Inventories | ||
Raw materials | $ 104,533 | $ 97,957 |
Work-in-process | 6,250 | 5,100 |
Finished goods | 39,959 | 30,229 |
Inventories | $ 150,742 | $ 133,286 |
Other Assets (Details) (USD $)
In Thousands, unless otherwise specified |
Mar. 30, 2013
|
Dec. 31, 2012
|
---|---|---|
Other Assets | ||
Inventory | $ 36,724 | $ 33,834 |
Vendor advances | 19,000 | 20,664 |
Deferred financing fees | 9,251 | 8,787 |
Deferred income taxes | 12,766 | 15,424 |
Other | 9,457 | 8,211 |
Total other assets | $ 87,198 | $ 86,920 |
Derivative and Hedging Activities (Tables)
|
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mar. 30, 2013
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivative and Hedging Activities | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of balance sheet locations and fair value of the Company's forward foreign currency exchange contracts |
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of effect of the Company's forward foreign currency exchange contracts designated as hedging instruments on the condensed consolidated statement of operations |
|
Accumulated Other Comprehensive Income
|
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mar. 30, 2013
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accumulated Other Comprehensive Income | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accumulated Other Comprehensive Income | 18. Accumulated Other Comprehensive Income
The following table summarizes the changes in accumulated balances of other comprehensive income for the three months ended March 30, 2013:
|
Customer Concentrations (Details) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended | 3 Months Ended | 12 Months Ended | 3 Months Ended | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mar. 30, 2013
|
Mar. 31, 2012
|
Dec. 31, 2012
|
Mar. 30, 2013
Photovoltaic Business
|
Mar. 31, 2012
Photovoltaic Business
|
Mar. 30, 2013
Polysilicon Business
|
Mar. 31, 2012
Polysilicon Business
|
Mar. 30, 2013
Sapphire Business
|
Mar. 31, 2012
Sapphire Business
|
Mar. 31, 2012
Revenue
Customer concentration
Photovoltaic Business
Customer #1
|
Mar. 30, 2013
Revenue
Customer concentration
Polysilicon Business
Customer #3
|
Mar. 31, 2013
Revenue
Customer concentration
Polysilicon Business
Customer #4
|
Mar. 31, 2012
Revenue
Customer concentration
Polysilicon Business
Customer #4
|
Mar. 31, 2012
Revenue
Customer concentration
Polysilicon Business
Customer #5
|
Mar. 30, 2013
Revenue
Customer concentration
Sapphire Business
|
Mar. 30, 2013
Revenue
Customer concentration
Sapphire Business
Customer #9
|
Mar. 31, 2012
Revenue
Customer concentration
Sapphire Business
Customer #9
|
Mar. 30, 2013
Accounts Receivable
Credit concentration
Photovoltaic Business
Customer #1
|
Dec. 31, 2012
Accounts Receivable
Credit concentration
Photovoltaic Business
Customer #2
|
Dec. 31, 2012
Accounts Receivable
Credit concentration
Polysilicon Business
Customer #6
|
Dec. 31, 2012
Accounts Receivable
Credit concentration
Polysilicon Business
Customer #7
|
Mar. 30, 2013
Accounts Receivable
Credit concentration
Polysilicon Business
Customer #8
|
Mar. 30, 2013
Accounts Receivable
Credit concentration
Sapphire Business
Customer #9
|
|
Customer Concentrations | |||||||||||||||||||||||
Revenue | $ 57,776 | $ 353,890 | $ 4,364 | $ 31,375 | $ 37,956 | $ 153,944 | $ 15,456 | $ 168,571 | $ 34,915 | $ 52,994 | $ 82,316 | $ 10,462 | $ 40,169 | ||||||||||
Accounts receivable, net | 20,389 | 23,829 | 2,592 | 2,478 | 3,248 | 9,085 | 2,484 | 7,722 | |||||||||||||||
% of Total | 60.00% | 15.00% | 23.00% | 18.00% | 11.00% | 13.00% | 10.00% | 14.00% | 38.00% | 12.00% | 38.00% | ||||||||||||
Total accounts receivable secured by letters of credit | 13,131 | 16,557 | |||||||||||||||||||||
Total accounts receivable secured by letters of credit (as a percent) | 64.00% | 69.00% | |||||||||||||||||||||
Revenue from customer excluded from table | 86,766 | ||||||||||||||||||||||
Percentage of total revenue from customer | 24.00% | 9.00% | |||||||||||||||||||||
Total revenue from customer | $ 33,772 |
Earnings Per Share (Tables)
|
3 Months Ended | ||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mar. 30, 2013
|
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Earnings Per Share | |||||||||||||||||||||||||||||||
Schedule of computation of the weighted average shares used in computing basic and diluted earnings per share |
(1) Holders of the Notes may convert the Notes into shares of the Company’s common stock, at the applicable conversion rate, subject to certain conditions. Since it is the Company’s stated intent to settle the principal amount of the Notes in cash, the Company has used the treasury stock method for determining the potential dilution in the diluted earnings per share computation. Since the average price of the Company’s common stock was less than the effective conversion price for such Notes during the reporting periods, the Notes were not dilutive for such periods.
(2) Upon exercise of outstanding Warrants (issued in connection with the issuance of the Notes), holders of the Warrants may acquire up to 28,500 shares of the Company’s common stock at an exercise price of $9.9328. If the market price per share of the Company’s common stock for the period exceeds the established strike price, the Warrants will have a dilutive effect on its diluted net income per share using the treasury-stock-type method. Since the average price of the Company’s common stock was less than the strike price of the warrants for the reporting periods, such warrants were also not dilutive.
(3) As the Company was in a loss position for the three months ended March 30, 2013, certain shares have not been included in the calculation of earnings per share, as their impact would be anti-dilutive. The total number of shares excluded from the calculation of earnings per share because they would be anti-dilutive was 12,356 and 2,191 for the three months ended March 30, 2013 and March 31, 2012. |
Restructuring Charges and Asset Impairments (Tables)
|
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mar. 30, 2013
|
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Restructuring Charges and Asset Impairments | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of restructuring charges and remaining accrued expenses |
|
Derivative and Hedging Activities (Details 2) (Instruments designated as hedging instruments, Forward foreign currency exchange contracts, USD $)
In Thousands, unless otherwise specified |
Mar. 30, 2013
|
Dec. 31, 2012
|
---|---|---|
Instruments designated as hedging instruments | Forward foreign currency exchange contracts
|
||
Derivative and Hedging Activities | ||
Assets | $ 4 | $ 230 |
Fair Value Measurements (Details) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mar. 30, 2013
item
|
Mar. 30, 2013
Total Carrying Value
|
Dec. 31, 2012
Total Carrying Value
|
Mar. 30, 2013
Recurring basis
Level 1
|
Dec. 31, 2012
Recurring basis
Level 1
|
Mar. 30, 2013
Recurring basis
Level 2
|
Dec. 31, 2012
Recurring basis
Level 2
|
Mar. 30, 2013
Recurring basis
Level 2
3.00% Senior Convertible Notes
|
Dec. 31, 2012
Recurring basis
Level 2
3.00% Senior Convertible Notes
|
Mar. 30, 2013
Recurring basis
Level 3
|
Dec. 31, 2012
Recurring basis
Level 3
|
Mar. 30, 2013
Recurring basis
Fair Value
|
Dec. 31, 2012
Recurring basis
Fair Value
|
Mar. 30, 2013
Recurring basis
Fair Value
3.00% Senior Convertible Notes
|
Dec. 31, 2012
Recurring basis
Fair Value
3.00% Senior Convertible Notes
|
Mar. 30, 2013
Recurring basis
Total Carrying Value
|
Dec. 31, 2012
Recurring basis
Total Carrying Value
|
Mar. 30, 2013
Recurring basis
Total Carrying Value
3.00% Senior Convertible Notes
|
Dec. 31, 2012
Recurring basis
Total Carrying Value
3.00% Senior Convertible Notes
|
|
Fair Value Measurements | |||||||||||||||||||
Asset transfers between levels | $ 0 | ||||||||||||||||||
Liability transfers between levels | 0 | ||||||||||||||||||
Assets: | |||||||||||||||||||
Money market mutual funds | 200,087 | 200,041 | 200,087 | 200,041 | |||||||||||||||
Forward foreign exchange contracts | 4 | 230 | 4 | 230 | |||||||||||||||
Liabilities: | |||||||||||||||||||
Contingent consideration | 10,651 | 10,315 | 10,651 | 10,315 | |||||||||||||||
Long-term debt obligations | $ 99,862 | $ 139,563 | $ 166,734 | $ 157,300 | $ 99,862 | $ 139,563 | $ 166,734 | $ 157,300 | $ 99,563 | $ 139,563 | $ 160,044 | $ 157,440 | |||||||
Number of changes in the valuation techniques used to measure the fair value of forward foreign exchange contracts | 0 |
Significant Accounting Policies
|
3 Months Ended |
---|---|
Mar. 30, 2013
|
|
Significant Accounting Policies | |
Significant Accounting Policies | 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 for the nine-month period ended December 31, 2012, filed with the SEC on March 1, 2013. There were no significant changes to the significant accounting policies during the three months ended March 30, 2013.
|
Share-Based Compensation (Details) (USD $)
In Thousands, except Per Share data, unless otherwise specified |
3 Months Ended | |
---|---|---|
Mar. 30, 2013
|
Mar. 31, 2012
|
|
Share-Based Compensation | ||
Stock-based compensation expense | $ 4,423 | $ 4,170 |
Unamortized share-based compensation expense | 31,965 | |
Weighted average remaining requisite service period | 2 years 3 months 4 days | |
Restricted Stock Units
|
||
Share-Based Compensation | ||
Granted (in shares) | 2,649 | |
Total fair value of awards granted | 8,432 | |
Granted (in dollars per share) | $ 3.18 | |
Market-based restricted stock units
|
||
Share-Based Compensation | ||
Granted (in shares) | 890 | |
Total fair value of awards granted | $ 2,688 | |
Granted (in dollars per share) | $ 3.02 | |
Stock options
|
||
Share-Based Compensation | ||
Awards granted (in shares) | 0 |