GT Advanced Technologies: External Forecasts Suggest Restored Shareholder Value

| About: GT Advanced (GTATQ)
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Summary

The modified Apple deal, effectively, eliminates a negative working capital position for GT Advanced.

While GT Advanced remains a risky investment, this deal preserves their status as a “going concern."

The deal provides a lifeline and, perhaps, three years to rebuild and restore other sources of revenue.

As of mid-December, shareholder equity and book value probably approximates zero.

Any positive news is likely to result in an increase in the trading price for GT Advanced, and favorable execution and momentum will cause price per share increases to "stick."

Disclosure: The author is long GT Advanced (OTCPK: OTCPK:OTCPK:GTATQ). A position was initiated after the author read a Seeking Alpha article, at $0.295. An additional purchase was made prior to the official announcement of a "sweetened" settlement on December 17, 2014, at less than $0.41. No shares have been sold.

My Seeking Alpha article favored GT Advanced as a long-term hold. Another Seeking Alpha article suggested that a revival of the company's solar business could be achieved. They provided a link to bankruptcy court documents. Furthermore, an external forecast, dated December 19, 2014, suggests a minimum stock price of $0.75 per share in the next 12 months, and with significant upside:

This article further explores the feasibility of the survival of GT Advanced. Survival and growth for common shareholder equity appears to be feasible and the future may be bright.

A Conservative ASF Furnace Sales Forecast

Two of the three tables that follow were developed from Document #819, filed on December 17, 2014, with the Bankruptcy Court. They are labeled.

First, the Apple (NASDAQ: AAPL) payment plan, providing for interest at less than 4%, is provided. This is a favorable rate of interest, given the risk associated with GT Advanced.

Exhibit B-1, Page 236

Additional

Increment

Amount

Date

(Millions)

(Millions)

30-Jun-15

$391.5

31-Dec-15

$7.5

$399.0

30-Jun-16

$7.5

$406.5

31-Dec-16

$7.5

$414.0

30-Jun-17

$7.5

$421.5

31-Dec-17

$7.5

$429.0

In the next table, required payments to Apple are mapped to unit sales. The $101.5 million and $429.0 million measures in the lower right hand corner of the below table represent a "plug" to achieve the 31-Dec-17 amount of $429.0 million from the above table. In this case, it is assumed that Apple would receive proceeds from the next and final 344 units (i.e., ASF furnaces 1,501 through 1,844).

Exhibit B-2, Page 237

Total

Cumulative

ASF

Apple

Apple

Apple

Furnaces

Repayment

Repayment

Repayment

Sold

per Unit

(Millions)

(Millions)

0-500

$169,000

$84.5

$84.5

501-1,000

$224,000

$112.0

$196.5

1,001-1,500

$262,000

$131.0

$327.5

1,501-

$295,000

$101.5

$429.0

$429.0

Finally, the below projects the minimum sales price, and, for simplicity, assumes that aggregate proceeds to GT Advanced might be mapped to the 2015, 2016, and 2017 calendar years at $165.5 million, $138.0 million, and $119.0 million, respectively. This is intended to represent a conservative approach, where it is presumed that 500 units are sold, each year, for the first three years. Sales of all units in the three-year period would, of course, produce more favorable results for GT Advanced.

Less:

Equals:

Aggregate

Minimum

Apple

Net

Proceeds

Sales

Repayment

Proceeds

to GTATQ

Price

per Unit

to GTATQ

(Millions)

$500,000

$169,000

$331,000

$165.50

$500,000

$224,000

$276,000

$138.00

$500,000

$262,000

$238,000

$119.00

$500,000

$295,000

?

?

  • Would $165.5 million for 2015, $138.0 million for 2016, and $199.0 million for 2017, generated from ASF furnace sales, be sufficient to assist GT Advanced in restoring shareholder value? This assumes the sales of 500 ASF furnaces per calendar year.
  • Recall, these are minimum sales price measures for the ASF furnaces. From Reuters: "Despins told the court he anticipated each furnace would fetch at least (emphasis added) $500,000."
  • Operating expenses ran about $13 million for the five weeks ended November 1, 2014 (see Document #694 filed on December 3, 2014). Annualized, and if representative, that approximates $135 million per year.
  • At a sales price of $500,000 per unit, some have estimated that GT Advanced has a cost of about $300,000 per unit, for $200,000 per unit gross, if sold, or $100 million per year.
  • The monthly operating report (NASDAQ:MOR), for the period October 6 through November 1, 2014, can be found in Document #694, filed on December 3, 2014. Selected measures follow:

Working

Net

in millions

Capital

Assets

Cash

$75.2

Current Assets

$329.0

Current Liabilities

$485.7

($156.7)

Total Assets

$1,290.5

Total Liabilities

$1,281.5

$9.0

Stockholder's Equity

$9.0

Therefore, with about 138 million shares issued and outstanding, GT Advanced had about $0.07 book value per share on November 1, 2014. This measure was accompanied by a negative working capital position. However, working capital is, now, effectively positive, since current liabilities include $357.1 million owed to Apple, requiring a reclassification of the majority of this "current" measure to "noncurrent" or pay-as-you-go, as based on the modified agreement (see $391.5 million in the first table, above). This is the improved liquidity position that GT Advanced needed and Apple provided for in the modified agreement.

Formation of an Equity Committee?

It is possible that an equity committee may be formed. However, this is not necessary for the stock price to rise or for GT Advanced to emerge from Chapter 11 without eliminating common stock or equity, as is the case in a typical Chapter 11 reorganization. (If they wanted to eliminate equity, why not do it before the renegotiation with Apple?)

I am, now, even more convinced that GT Advanced management is committed to the preservation of common equity, and, in the absence of evidence to the contrary, I am considering taking a larger position in the very near-term (e.g., before calendar year-end).

What If They Can't?

If GT Advanced cannot sell 500 furnaces per year or sell the units for "at least" $500,000, expect an extended period of DIP financing and Chapter 11, with the possible elimination of common stockholder equity. This should become apparent in the next very few months (e.g., March 2015?). But I like the risk/reward for this stock, and, at a bit above $0.40 per share, a low probability of a 50% haircut seems worth a nibble, at a minimum, and before calendar year end and the conclusion of retail investor-driven tax loss selling.

Summary

The above measures are crude and I like to keep it simple, but they suggest, to me, that GT Advanced has at least three years (2015 through 2017) to restore shareholder value before being forced to wipe out common equity. I can understand their need for DIP financing and the decision to remain in Chapter 11, at least in the near-term. Accelerated sales will, of course, eliminate the need for DIP financing and facilitate an early exit from Chapter 11. I suspect that news of these sales will be made public in the next few months.

Should management decide to preserve and/or rebuild shareholder equity, I believe that this course of action could be successful and is doable. At this writing the stock is trading at about $0.40 per share. Given the additional 45 days of cash burn since November 1, 2014, and financial data filed with the bankruptcy court, GT Advanced probably has a book value at or about zero. I suspect that the market is sufficiently efficient to understand this, and is anticipating success.

Disclosure: The author is long GTATQ.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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