GT Advanced Technologies Inc fka GTAT

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GT Advanced Technologies: Can Current Shareholders Walk Away With Any Value?

Should I Sell My Shares Of GTAT Or Wait For Thursday’s Bankruptcy Hearing?

The risk of GT Advanced Technologies' (NASDAQ:GTAT) shares ending up worthless is very, very high. I have reviewed several recent chapter 11 bankruptcy filings. In only 10% of them did existing shareholders receive equity after the company emerged from bankruptcy. In some cases that took as few as two months, and in other cases it took years. Usually the bankruptcy gives the company a smaller balance sheet, but it also wipes out existing shareholders and issues new equity shares.

In other words, the odds do not favor appreciation in GT shares. Total loss is more likely.

In order for shareholders to walk away with any value at the end of the day, GTAT has to sell assets in order to raise cash so it can pay off creditors. It also has to retain enough assets to return to profitability.

The bankruptcy hearing starts at 10 AM ET on Thursday October 9th. If GTAT declares that it does not intend to preserve any equity for shareholders, this is a clear message that the shares will be worthless. The window to sell shares for more than $1 may abruptly close on Thursday morning during the court hearing.

I am still holding 60% of my investment. If share price crosses $2 before the hearing begins, I will sell half of my holdings. If not, I plan to hold my remaining shares in hopes that Apple (NASDAQ:AAPL) will be a "white knight" and return some value to GTAT.

GTAT's Sapphire Materials Business Is The Only Business Worth Selling

The quickest and most attractive way to raise cash, improve GTAT's balance sheet and return to profitability is to sell the sapphire materials business to Apple. The sapphire business is worth only as much as the assets on the books, however. In order to change that, GTAT needs to prove to Apple that they can hit the quality and yield metrics that were required to receive the final prepayment. If GTAT successfully ramps up the Mesa plant, Apple may feel compelled to give GTAT's sapphire materials business and current GTAT shareholders a premium cash investment.

Apple does not traditionally operate manufacturing facilities or supply its own components or materials, however. GTAT has already gone through the growing pains of hiring and training hundreds of new sapphire growth and fabrication employees since the beginning of 2014. GTAT already lost $45m in inventory associated with the ramp in Q2. It probably lost even more in Q3, resulting in Monday's bankruptcy filing. GTAT burned through $83m per month over the past three months. It still failed to hit the metrics required to receive the final prepayment, which might have allowed it to stave off bankruptcy.

Looking back at turnover in personnel, heated discussions between management, and unconfirmed reports of good sapphire boules being recycled, it is evident that GTAT bit off more than it could chew. It appears management may have tried to cover up operational issues that emerged after September 9th. While it may be the case that Apple initiated remedial action against GTAT in accordance with the terms of the prepayment plan, it is also quite possible that GTAT placed the call to Apple at the end of Q3 after it picked up the pieces and realized its financial position was significantly worse than expected. Regardless who initiated it, a review of GTAT's financials clearly revealed a default against the terms of the prepayment agreement, and the call was made to file chapter 11 bankruptcy last week. We will find out as early as Thursday morning exactly what happened inside Mesa that led to GTAT's current liquidity crisis.

During the two weeks preceding the bankruptcy announcement I received not one but two confirmations from separate sources that the Mesa facility was ramping and/or producing volumes of sapphire. I have no information related to the number of furnaces running or the quality of boules being produced by the facility.

GTAT may be operating under chapter 11 bankruptcy protection, but I believe the company is still trying to receive the final prepayment from Apple. At this point, however, the final prepayment is not enough to save GTAT from bankruptcy.

The only way GTAT can come out of bankruptcy quickly without a major restructuring plan and preserve current shareholders is to successfully ramp the Mesa facility and persuade Apple either to invest in or divest itself of GTAT.
GTAT's sapphire materials operations has approximately $700m of assets comprised mostly of ASF growth furnaces and fabrication equipment. I estimate inventory of $150m as of September 29th, up from $100m as of June 2014. In addition approximately 700 employees are still working at Mesa.

Sapphire materials operational liabilities are approximately $585m. This includes repayment of Apple's $440m prepayment and $145m owed to trade partners.

The annual payroll expense for the 700 employees is approximately $45m. This is included in COGS and reflected in the gross margins. At full capacity, the Mesa plant is capable of producing $1B+ revenue with mature margins of 25% less corporate taxes of 35%, resulting in a positive cash flow of $163m per year.

If Apple chooses to invest in GTAT, I believe it must write a check for over $1B to acquire GTAT's equipment and inventory and pay off GTAT's suppliers. This is the only hope for current shareholders. A minimum investment of $1B from Apple would leave GTAT with approximately $385m in cash less the bankruptcy costs, which is not far off from the $400m cash balance the company once expected to have at the end of the year.

Even if GTAT does ramp up the plant, Apple does not typically produce or operate component-manufacturing facilities. This is a major issue. Apple would need to subcontract out the sapphire growth and fabrication process to a third party. Can its relationship with GTAT be repaired to the point that Apple would entrust GTAT to continue running the facility? There are other possibilities for Apple, but they may entail even more risk.

The second major obstacle is that GTAT has been trying to perfect the sapphire growth process since January 2014 without any luck. Although GTAT is ramping up the plant, I'm very unconvinced that it has a handle on the situation.

GTAT's Remaining Lines Of Business: Solar, Hyperion And Merlin

Outside of Apple materials, GTAT has four significant assets that can generate revenue right now: Solar, Hyperion, Merlin and ASF equipment. I believe these assets can add tremendous value over time, but with little demand or no history of sales or POs, the company could shed these assets/IP only at a deep discount. The cash raised would probably not be adequate, and GTAT would have no meaningful assets left with which to run a business.

GTAT's Solar Business

GTAT's most consistent business line has always been its equipment business, which today includes traditional solar and Hyperion. Although GTAT has a 60%-70% share of the solar equipment market, a general solar capital recovery is not expected to begin until 2H 2015. I believe GTAT's solar business can generate more than $500m a year by 2016. With no expectations of large orders for 6 months, however, it is unlikely anyone will offer a very high price for these assets.

GTAT's Hyperion and Merlin Businesses

GTAT's Hyperion product has yet to arrive in the marketplace. Without a PO, acquirers are likely to value Hyperion at a small fraction of its potential worth. GTAT also owns IP for its Merlin technology. Like Hyperion, Merlin has tremendous potential, but GTAT has yet to announce any sales. Merlin also is likely to be valued at pennies on the dollar. GTAT also holds over 70 patents, but these are not worth enough to fix the company's cash position.

GTAT's ASF Furnaces

The agreement with Apple significantly impacts the potential value of GTAT's ASF equipment business. This business represents $333m of GTAT's backlog, but the overall market that the company serves is limited. The probable impact of the sale of the Apple materials business on the ASF equipment business is unknown. At this moment I am hesitant to assign any substantial value to GTAT's ASF equipment business due to the uncertainty surrounding Apple's exclusivity clause.

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