Tuesday, January 22, 2013

GT Advanced Technology ( Nasdaq - GTAT ) -- Backlog Vanishes

GT Advanced Technology appears on track to report poor Q4 results.  The company is the leading provider of capital equipment for the solar industry.  One set of machines produces polysilicon.  Another converts that into solar cells.  Assembly operations performed by other companies, primarily in the Far East, combine those cells into panels.  GT Advanced entered 2012 with a billion dollar backlog.  Oversupply conditions in the solar industry, brought about by sharply reduced government subsidies in Europe, caused incoming orders to dry up.  The company continued to recognize decent revenues earlier in the year from equipment that already had been delivered and was awaiting final customer acceptance.  New shipments took a nosedive.  And that trend is unlikely to reverse before late 2013.  Low revenues are likely to yield an operating loss in the December period.  A large inventory writedown is anticipated, as well.

A next generation technology is slated for introduction in mid-2013.  That will be a modular add-on unit with a selling price far below that of a complete system.  The new "mono-silicon" approach promises a significant improvement in solar cell performance at a comparable cost to "poly-silicon."  The Far East solar industry is in the midst of a consolidation, however, so few orders are expected right away.  Financing remains hard to obtain and profit margins still are under pressure.  Chinese government subsidies may cause the oversupply situation to persist by propping up weak participants as a vehicle to preserve jobs.  Orders for GT Advanced systems probably won't accelerate until the profit potential from its new machines improves.

The LED segment is under pressure, too.  GT Advanced encounters direct competition in that market.  LED lighting costs far more than conventional bulbs.  Consumer and commercial demand is rising, though.  The current lull in capital equipment orders is likely to end long before the solar industry rebounds.

Our estimates are below the company's official guidance.  GT Advanced predicts income of $.25-$.40 a share in 2013 on revenues of $500-$600 million.  Results could bounce back starting in 2014.  The company remains the only large volume producer of solar manufacturing systems.  Future results might be diluted 20% by a recent convertible bond issue ($7.71 a share).

( Click on Table to Enlarge )

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