Case Study: The Tragedy of GT Advanced Technologies



The Story.


Take a trip backwards with me towards November 2013. GT Advanced, had just announced Its partnership with Apple. Apple, would prepay GT $578 million in four installments to help fund the Arizona facility's capital expenditure requirements, and GT, would begin paying Apple, back over five years starting in 2015. “A significant milestone in GT's long-term diversification strategy." Said GT CEO Tom Gutierrez of the magnitude of the deal.


Investors had begun to flock to the overnight success of GT Advanced. The company had inked a deal with Apple, that many thought would signify that Apple, was going to use sapphire glass in its Iphone 6 launch.


Everything had been going well on the surface, The company had began work on its new plant funded by prepayments by Apple, and GT, had announced their projected earnings for 2014 to be in the range of 600 - 800 million range. From November 2013 to September 2014 the price of the stock had more than doubled. Investors had all of their networth's into GT Advanced, and where right to do so. In their eyes GT,was a once in a lifetime investment and it was their ticket to never having to worry about money again.


All was well until, September 9, 2014,when the phrase “Ion-strengthened glass” was uttered at the big unveiling of the Iphone 6.


“What did that mean exactly?” one investor said. Another said “'Ion-strengthened glass' almost sounds like a hedge to allow them to announce the phone to the public before there is a finalization of supply.”  One more said “ This hurt today, no question. And we are at risk of dropping another 20%”


Investors in GT, began to call apple’s Customer Service. “I called 1800-MY-APPLE half an hour ago and the rep tried looking it up and said "Huh, it doesn't say." and suggested I call back later.” Said an investor of GT.


In a matter of hours the stock dropped over 20%. In less than a month's time on October, 6 2014, GT advanced, was forced to file bankruptcy.


Investors across the country were devastated. “I have just lost all of my retirement and all of my son's savings. My son has special needs and I have failed him in the biggest way” said one investor. “I am dead meat. All my money is in GTAT, and on my stocks I was doing margin.” said another investor.” I'm not coping well at all. I'm watching 25 years of savings going down the drain. I was stupid enough to have my entire retirement fund invested in this. All I can hope for is to eventually break even if it should ever get back to $5. This was like a punch right in the gut.” Said another. “Its so painful...huge losses..all my savings are gone..It was purely management's irresponsibility that made all of us lose money here..I have two little kids and when I see their face this morning, I can't stop crying...very pathetic…” said another poor investor.


How could a company go from hundreds of millions of dollars at the last quarterly filing, a good probability of making a lot of money in the future, and management reinforcing earnings recap only a few weeks prior?


Red Flags.


“On October 31, 2013, GTAT Corporation ("GTAT"), a wholly owned subsidiary of GT Advanced Technologies Inc, and Apple ("Apple") entered into a Master Development and Supply Agreement and related Statement of Work (the "MDSA"), pursuant to which GTAT will supply sapphire material exclusively to Apple for consumer electronics. GTAT has granted Apple certain intellectual property rights in connection with its sapphire growth technologies.


On October 31, 2013, GTAT also entered into a Prepayment Agreement with Apple pursuant to which GTAT will receive approximately $578 million (the "Prepayment Amount"), in four separate installments, as payment in advance for the purchase of sapphire goods. GTAT is required to repay this amount ratably over a five year period ending in January 2020, either as a credit against Apple purchases of sapphire goods under the MDSA or as a direct cash payment. GTAT's obligation to repay the Prepayment Amount may be accelerated under certain circumstances. GTAT's obligations under the Prepayment Agreement are secured by certain of its assets. While the MDSA specifies GTAT's minimum and maximum supply commitments, there are no minimum purchase requirements under the terms of the MDSA.”


Based on the quote above we can see just how one sided the deal with Apple, really was. First, Appl,e has the exclusive rights to sapphire material for consumer electronics. ( phones watches etc) Second, for the last payment to be paid certain obligations had to be fulfilled.If GT, couldn’t meet the demands of the contract Apple, wouldn’t have to pay GT, the last payment, nor did they have to buy sapphire from GT.


The reason the GT, signed such a slighted deal in the first place was because they needed the cash.  In 2012, GT, entered into an agreement with Bank of America. GT, would have to maintain certain liquidity ratios of adjusted EBITDA to interest charges. In February 2013, the company changed this deal, dropping the agreements for a limited period of time. GT negotiated the changes because it didn't think it could comply for much longer with the agreements related to its interest ratios.


Just like a Investor who has fallen on hard times, GT, sought out to refinance its debt to another creditor but no banks were biting. So GT, did what any person trying to avoid bankruptcy would do - They sought out alternative funding in the form of signing over its fate to the hands of the loan shark known as Apple.


GT’s stock road high because it was receiving the prepayments from Apple and the deal in many’s eyes was a sign that Apple, was moving away from Gorilla Glass despite being based on nothing more than speculation -  as Apple, themselves never outright said they were switching the cover glass.


Takeaways.


It's easy to sit in my chair 2 ½ years removed and say that there were warning signs and that if I had my own hopes and money tied into the success or failure of GT Advanced, I would have sold back before the September 9, Apple event, and long before bankruptcy announcing on October 6 or as one investor called in “ Black Monday.”


But, I follow a strict investment philosophy that would have blocked me from ever investing in GT, in the first place.  

*I only invest in companies that have a history of solid earnings ( GT’s income came from irregular corporate events)

*You can't fake cash - dividends paid ( and increased) regularly are a requirement. ( GT did not pay regular dividends)

*Return on equality can't be lower than 20% but without being gamed by adding debt ( GT had a ROE that looked great at 80% until you realized debt to equity ratio  was the reason for its high ROE. ) 


In short I am looking for businesses with a history of growing its operations, and growing its shareholders net worth. GT, was a speculative play that if you got out before the September 9 announcement you would have made a nice profit. The losses started mounting when people mistakenly thought GT, was a buy and forget it type investment. When you are playing the speculation game, you have to understand when to get out. Yes, you may lose out on some profits, but I’d rather lock in my profits ahead of time, vs waiting to see if the price is going up.


The reality is most of you reading this should not be picking your own stocks. You do not have the temperament for it. Putting all of your eggs into one business is and will always be a foolish choice. I do believe in some level of concentration in terms of number of investments at a given time, however any more than 20% of your investable cash in any one investment is a no no. Lastly if you can not afford to lose it do not invest it. Save 35-60% of your income, invest in indexes, and you will retire rich.

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