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Summary

  • GTAT's Salem, MA sapphire facility measuring 50,000 square feet has been growing sapphire for Apple since Q4 2013.
  • Apple's Prepayment was used to fund the equipment qualification and retrofit of GT's Salem, MA sapphire facility and the build-out of GT's Mesa, AZ sapphire facility.
  • GT met the initial milestones set forth in the prepayment agreement including initial furnace installations as well as intended the production go-live date at the Mesa, AZ sapphire facility.

GT Advanced Technologies (GTAT) submitted an Amended 10-Q on June 17, 2014. The latest filing contained some new detailed information related to GT's relationship with Apple (NASDAQ:AAPL) that had been previously redacted and kept confidential. The new details that were made public for the first time include; intended target dates for GT to occupy and grow sapphire, additional clarity around some of the prepayment dates, additional information related to Apple's prepayment, which includes retrofitting and qualification of sapphire growing at GT's Salem, MA facility as well as the capital build-out of the Mesa, AZ sapphire facility and lastly GT's requirement to raise additional funds via debt or equity financing. The new details provided in the amended 10-Q also provide some context around several of my previous assumptions including, initial shipments, production "go-live" at the Mesa, AZ sapphire facility as well as my believe that GT has been growing sapphire inside since Q4 2013 inside the company's Salem, MA sapphire facility.

Key Confirmations and Call Outs from GT's Amended 10-Q:

  • GT Advanced Technologies and Apple intended for GT to begin occupying the Mesa, AZ facility by December 7, 2013 and begin installing equipment and furnaces by December 10, 2013. According to import records, the first ASF furnaces passed through Port Authority in Los Angeles on December 2, 2013. Furthermore, based on the Port Authority records the first batch of ASF furnaces were likely delivered to the Mesa, AZ facility in time to be installed on December 10, 2013.

Furnace Deliveries Tracked through Port Authority in Los Angeles

  • The intent was for GTAT to begin sapphire production in Mesa, AZ by January 6, 2014. According to my records GTAT was granted approval to "go-live" with 140 ASF furnaces and began producing sapphire on January 10, 2014.
  • GT's Salem, MA sapphire facility measuring 50,000 square feet is likely a dedicated Apple producing facility. The prepayment details indicate that GT's Salem, MA facility was retrofitted and qualified with sapphire growing facilities, what this means is GT's existing furnaces were upgraded to grow significantly larger sapphire boules (approximately 200 to 235 kg). GT confirmed during the Q1 2014 conference call that the Salem, MA facility had been transformed from an R&D facility into a sapphire manufacturing facility. Furthermore, this is a clear indication that GT's Salem, MA facility has been growing sapphire for since Q4 2013, which is consistent with my previous assumptions. GT's Salem, MA facility measures 50,000 square feet and is likely home to several hundred furnaces in addition to the 2,500 + furnaces that have been installed in the Mesa, AZ facility. GT's Salem sapphire facility may add up to 20 million sapphire screens on top of GT's annual capacity of 200 million plus annual units grown from inside the Mesa, AZ sapphire plant.
  • The prepayment details indicated that $95 million of the first $225 million received from Apple could be and was used for working capital purposes until GTAT completed debt or equity financing. The financing was completed in December 2013.

Highlights from GTAT's Amended 10-Q Occupying of Mesa Facility

(Note: *** is reflected when portions of the 10-Q have been omitted and filed separately with the commission pursuant to a request for confidential treatment)

Occupation of the Mesa, AZ Sapphire Plant and "Go-Live" Date

The parties intend that: (NYSE:A) GTAT will begin occupying the Mesa Facility by December 7, 2013, (NYSE:B) GTAT will begin installing Furnaces and other Equipment in the Mesa Facility by December 10, 2013 and (NYSE:C) that GTAT will grow the [***] sapphire boule at the Mesa Facility by January 6, 2014. Apple will otherwise provide GTAT access to the Mesa Facility as soon as practicable.

Prepayment Terms between GT and Apple

  • $225 million within 15 Business Days after execution of all of the Transaction Documents;
  • $111 million by close of business on December 30, 2013;
  • $103 million by close of business on February 28, 2014
  • $139 million by close of business on [***] 2014

The Prepayment proceeds shall be used exclusively to (I) fund the purchase of [***] sapphire growing furnaces (the " Mesa Furnaces ") and [***] (ii) retrofit and qualify the committed [***] sapphire growing furnaces currently located in GTAT's Salem, Massachusetts facility (the " Salem Furnaces " and, together with the Mesa Furnaces, the " Furnaces "), provided that the Prepayment used to retrofit and qualify the Salem Furnaces shall not to exceed [***] , and provided further that $95 million of the first Milestone Payment (the " Advance Tranche ") may be used by GTAT for working capital purposes until the earlier to occur of March 2, 2014 or GT Advanced Technologies Inc. issues convertible notes, or undertakes any debt or equity financing ("GT Financing") and loans the Advance Tranche to the SPE (as defined below). For the avoidance of doubt, the Prepayment shall not be used to fund the purchase or installation of the Salem Furnaces.

Conclusion: GT's Sapphire Operations appear to be on track and ready to deliver the goods to Apple

  • The prepayment funds received from Apple likely retrofitted and qualified several hundred ASF furnaces located in its 50,000 square foot Salem, MA facility. Additionally, GT has been growing sapphire for Apple since Q4 2013. The addition of GT's Salem sapphire growing facility may add 20m worth of sapphire screens on top of GT's annual sapphire growing capacity.
  • GT turned on 140 ASF furnaces at the Mesa, AZ facility on January 10, 2014, which aligns closely with the original "intended" date of January 6, 2013.
  • GT received and began installing ASF furnaces inside the Mesa, AZ facility by December 10, 2013 consistent with the "intended" start date.
  • The newly public details in GT's amended 10-Q confirm that GT's progress aligned closely with key milestones including initially occupying the plant, installing the first ASF furnace and production "go-live" at the Mesa, AZ sapphire facility

Disclosure: The author is long GTAT. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This report was distributed to paid PTT Research Forensics Newsletter subscribers before the market opened on June 17, 2014

Source: Second Apple Sapphire Plant Operations Emerges From GT Advanced Technologies' Amended 10-Q