by Matt Margolis

Apple submitted two applications to the Foreign Trade Zone (FTZ) No. 221 for approval.  Apple’s application for Sub Zone designation at the Apple/GT facility was submitted to the FTZ office on December 17th, 2013 and Apple’s application for “Interim” Production Notification Application was submitted to the FTZ office on December 30th, 2013.  The Interim Production Notification Application indicated that Apple had an aggressive go-live timeline of February 2014.  The Apple/GT facility was granted a temporary C-of-O (Certificate of Occupancy) to commence with occupancy and production of Quick Start 140 area on January 10th, 2014.  Quick start 140 was located in Module 1 of the Mesa facility and contained 140 “tools,” which are also know as sapphire growth furnaces.

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Apple’s application for Sub Zone 221 designation was submitted to the FTZ office on December 17th, 2013. The Apple/GT facility was formally granted Sub Zone approval on March 19th, 2014.  The Sub Zone approval was the final step required before Apple and GT could begin in earnest to manufacture intermediate components for consumer electronics for exports as indicated in their original Sub Zone application.

Apple Inc./GT Advanced Technologies Inc., Mesa, AZ, 221A, approved 3/19/2014 (S-5-2014)

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Another interesting fact to point out is the Master Development and SOW agreement between Apple and GTAT is that the agreement requires any additional furnace purchases, would be negotiated in good faith prior to the second Milestone Payment made under the Prepayment Agreement.  GT reported during their Q4 2013 conference call on February 24th, 2014 that they had received the second Milestone Payment from Apple.  The receipt of the second Milestone Payment from Apple signals that the furnaces that were required to be purchased and deployed as part of this agreement were all ordered on or before February 24th, 2014.

According to Port Authority records, sapphire growth furnace deliveries began heading to Mesa, AZ on December 2nd, 2013 and the last known delivery was recorded on March 10th, 2014.  I have tracked 1,265 furnace deliveries that have passed through Port Authority.  Additionally, any and all domestic furnaces that did not pass through Port Authority (i.e. truck) would not be caught in my sapphire furnace fishing net.

I have assumed GT deployed $251m of PPE ($180m) and Inventory ($71m), which would account for 837 additional furnaces inside Mesa giving me a total confirmed/estimated of 2,102 furnaces.  The book cost that GT assigned to each furnace that was deployed and taken out of inventory could be substantially lower than $300,000 per furnace.  If, GTAT’s price per furnace is actually $30,000 lower than my estimate it would add almost 100 furnaces to my estimate, conversely a $30,000 increase would decrease my estimate by 100 furnaces.

Based on my correspondence with a sapphire industry expert, GT had previously touted their ability to ramp up 500 furnaces per month at ASF equipment customer locations.  However, GT has already informed investors that they dedicated a vast majority of their ASF capacity to the Mesa, AZ sapphire effort, which would likely drive their drive GT’s maximum furnace ramp north of 500 furnaces per month.  Based on the furnace delivery dates and GT’s touted ability to ramp up efforts and focus on Mesa I’m becoming hard pressed NOT to believe that the Apple’s Mesa Sapphire plant WAS  likely operating at or near full capacity just days after the receiving the official unlimited go-live approval from the FTZ on March 19th, 2014.

 Tracked Furnace Deliveries and Estimated GTAT Furnace Deliveries

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My Estimated # of Furnaces Purchased/Deployed in Mesa, AZ

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Apple’s purchase of additional Furnaces and Similar Furnaces will be made under the terms of Apple’s Master Equipment Purchase Agreement (the “MEPA”).  Apple and GTAT will negotiate in good faith to execute the MEPA as soon as possible following the Effective Date, but in any event prior to the second Milestone Payment made under the Prepayment Agreement. Prepayment Agreement

 

We have dedicated the vast majority of our current ASF capacity to support this multi-year commitment.  This has limited our ability to take additional ASF business in the near term and has restricted our ability to ship backlog on short notice (GTAT Q3 2013 Prepared Remarks)

 

GTAT 2012 Presentation on their Sapphire Equipment

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Apple’s Entire “Interim” Production Notification Application is Below

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Full Disclosure: I am long GTAT and have no plans to buy or sell any holdings

 

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by Matt Margolis

GT Advanced Technologies reported their Q4 2013 financials on 2/24/14.  During the call GT indicated that they spent $50 million of capital in Q4 2013 and they deployed over $180 million of PP&E mostly in Arizona.   They also indicated that they planned on spending $500-600 million in capital expenditures in 2014.  Apple’s  prepayment amount of $578 million was to fund the purchase of furnaces, I am now assuming that $50m of the $578m was spent in 2013 and the remaining $528m will be spent over the 1H of 2014.

However, GT’s latest filing Form DEF 4A filed on 4/22/14, right in the middle of GT’s compensation program details indicated that GT, “re-directed its sapphire equipment inventory and supply chain capacity to preparing for its expanded sapphire material operations”. GT’s supply chain capacity re-direct likely indicates that GT shifted their current sapphire production equipment from other clients to Apple and began growing sapphire boules for Apple beginning in Q4 2013, from their production facility in Salem, MA.  I know for certain GT was looking to hire sapphire growth employees for second and third shift in Salem during Q4 2013 as evidenced by various job postings.  This recent filing might provide the most significant proof yet, that GTAT began growing sapphire for Apple during Q4, 2013.

NEOs did not receive a bonus payment under the 162( m) Incentive Plan. During the latter part of Fiscal 2013, as the Company re-directed its sapphire equipment inventory and supply chain capacity to preparing for its expanded sapphire material operations, it became apparent that the metrics forthe 162(m) Incentive Plan payout, established early in Fiscal 2013, would not be met.

According to GT’s Q4 2013 Investor Financial Summary GT’s inventory in Q4 dropped $71m, from $160m to $89m, which most likely represents the amount of  sapphire growth furnaces that were re-directed from GT’s inventory to the Mesa, AZ sapphire plant during Q4 2013.

Sapphire Inventory

I had previously estimated the number of ASF furnaces likely to land inside the Mesa, AZ facility at 2,300 furnaces.  Based on the sapphire equipment inventory re-direct indicating in the filing and my understanding of the language in the $578 million prepayment agreement I am upping my ASF furnace estimate to 2,800 to 3,000 from 2,300.

 

ASF Furnaces

 

 

My previous ASF Furnace Estimate/Assumption from March is Below

GT announced that they had deployed $180m of PPE (majority to Apple). Import records indicate that GT HK’s worldwide operations shipped furnaces from HK to Mesa, AZ.  GT management also stated, that they would spend $500-600m in capital  expenditures, with most of the heavy lifting occurring over the first half of the year.   Assuming GT is spending $500m of capital expenditures and $180m that is being deployed from existing PPE this would allow them to purchase approximately 2,300 furnaces to grow sapphire boules.

 

Full Disclosure: I am long GTAT and have no plans to buy or sell any holdings

by Matt Margolis

 

Highpoint Engineering was brought in to begin planning the project approximately 2 weeks before the April 1, 2014 Merrimack Planning Board presentation.  It is likely, based on the dates above that GTAT was presented with a sapphire materials opportunity sometime in early March that will ultimately result in GT’s strategic decision to shift their R&D facility to a sapphire growth, product creation and shipping operations.

GT’s Merrimack construction plans include building construction and interior work that will displace the administrative services functions.  The expansion includes a 23,000 per floor additional that is 2 floors and measures 65 feet by 350 feet long.

GT’s exterior infrastructure improvements include installing up to 6 transformers and up to 1 to 2 cooling towers.  Currently the site has 1 inert “Argon” tank and the plan is to add 2 inert gas tanks, one consisting of Helium and one consisting of Nitrogen.  The additional inert gas tanks will measure approximately 8 to 10 feet in diameter by 15 to 18 feet in height.  The facility will include backup generators and UPS systems, since GT can ill afford a nanosecond of power disruption while growing sapphire boules.

The facility will accommodate 307 parking spaces up from 221 spaces currently at the location.  The number of parking spaces were noted as adequate because the operation will include “swing shift” employees (24/7) operations.  The internal shift from R&D to Manufacturing has already begun within the existing facility.  The lead engineer from Highpoint Engineering has indicated that there has been a significant uptick in truck traffic over the last few weeks (3/17 /14 to 4/1/14) to move equipment and prep the building for manufacturing.  The equipment operation is lessening and t he manufacturing process is increasing to grow boules, create a product and ship it out.  The facility is expected to have 2 loading docks for shipping and receiving.

Merrimack Site Plan Image (The expansion of plant is the yellow sliver)

Merrimack site plan 1

 

Merrimack site plan 2

Merrimack site plan 3

 

Full Disclosure: I am long GTAT and have no plans to buy or sell any holdings

 

According to GTAT’s latest SEC filing on 4/22/14, GT has received the 3rd prepayment from Apple, which leaves just one prepayment remaining. The final prepayment from Apple is expected to be received based on the agreed upon date in the prepayment agreement, which is not currently available to the public.

The Company and Apple entered into a Master Development and Supply Agreement and related Statement of Work (or the “MDSA”), pursuant to which we will supply sapphire material to Apple. In connection with this supply arrangement, we also entered into a Prepayment Agreement with Apple pursuant to which we will receive $578 million (the “Prepayment Amount”), in four separate installments, as payment in advance for the purchase of sapphire goods, of which $225 million was received in Fiscal 2013 and the second and third installment were received in 2014.

The expanded sapphire material operations are expected to generate a more stable revenue stream than the capital equipment business. This factor is expected to be beneficial to the long-term prospects and long-term value of the Company.

In order to prepare to meet the sapphire material supply obligations under the MDSA, management made a strategic decision to allocate much of its sapphire and other resources to the establishment of our expanded sapphire material operations. These decisions had a negative impact on the financial results for Fiscal 2013 as short-term revenue opportunities from equipment sales for the second-half of Fiscal 2013 had to be delayed in order to prepare to meet the sapphire material obligations to Apple. The Company’s Board of Directors supported this strategic decision of management and believes it will result in a more sustainable and value generating company.

The details available regarding the timing of prepayments between GTAT and Apple are below:

2. Prepayment.

(a) Subject to Sections 2(c) and (d) below, and provided that, at the time for each payment (i) no Trigger Event (as defined below) has occurred and (ii) there are no ongoing disputes under the Facility Lease Agreement which have a material impact on the use of the manufacturing facility to be located in Mesa, AZ that Apple is purchasing and developing (the “Mesa Facility”) for its intended purpose, Apple will make the Prepayment by remitting funds to an account designated by GTAT as follows (the “Milestone Payments”):

· $[***] within [***] Business Days after execution of all of the Transaction Documents;
· $[***] by close of business on [***];

[***] Portions of this exhibit have been redacted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission

· $[***] by close of business on [***];
· $[***] by close of business on [***].

(b) The Prepayment proceeds shall be used exclusively to [***].

Merrimack Expansion, Renovation and Shift from R&D to Manufacturing

GTAT was granted approval on April 1, 2014 by the Merrimack Planning Board.  The memorandum dated March 27, 2014 sheds significant light on GTAT’s sense of urgency and dramatic shift in plans to respond to customer behavior, specifically global manufacturing partners.  GTAT will be constructing a 46,000 square foot building expansion and 117,532 square foot renovation of the existing facility located in Merrimack, NH at 243 and 247 Daniel Webster Highway.  The project is targeting an “aggressive” completion target of Fall 2014 based on the correspondence between Merrimack’s Community Development Director and the Planning Board Chairman.  The current Merrimack facility measures 117,532 square feet, the approved expansion would bring the facility to 163,532, which represents a 39% increase in the size of the facility.  The memo also details GT’s plans to shift the facility from an R&D and test facility to a manufacturing facility.  The memo cites “recent contacts at  global manufacturing partners are driving the need to grow their current facility.”

  • Recent contacts at global manufacturing partners are driving the need to grow their current facility
  • The existing facility will be renovated to support the company’s manufacturing processes rather than the research and testing operation currently in use.
  • The company would be making a significant investment in replacing their outdated and obsolete equipment and installing additional equipment to support their manufacturing use.
  • The applicant is requesting the waiver to allow the plan to be recorded in the fall, following boundary survey and completion of an as built plan

Merlin Interconnect Technology

GT’s Technology briefing held on March 14 introduced several new products that will have a significant impact on GT’s top and bottom line that are expected to come online by early 2015.  Some of the new products that are expected to grow significantly over next several years, include GT’s Merlin Advanced Metallization and Interconnect Technology along with their Hyperion 4.  The presentation on 3/14 indicated that Merlin was expected to be “ramp ready for solar scale volumes in CQ4, 2014.”  GT’s CEO Tom Guiterrez also indicated during the conference that if Merlin’s adoption rate approached 20% of the potential market than GT would likely look to bring the manufacturing of the product in-house.

According to GT’s presentation a 20% adoption rate of Merlin would be worth approximately $1B in annual revenue by 2018.

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Hyperion 4

GT’s presentation on 3/14 also indicated that Hyperion 4 is “now ready for commercialization” and that they were expecting orders for the  Hyperion Accelerator in 2014.  As of 5 weeks ago, GT was already working closely with a variety of Hyperion 4 interested parties across several target markets.  In the Power Electronics space they were working with a device manufacturer.  In LEDs they were engaged with lead customers and in the Consumer Electronics & Industrial Applications GT is focused on low-cost sapphire lamina.  In the Solar and Semiconductor space GT was already reviewing samples with a lead customer in Asia.  Lastly, in the Military and Medical market GT was working towards receiving a PO in 2014.  The Merrimack expansion and renovation of the current facility could be related to a significant order of Hyperion 4 tools that need to be delivered in 2015.

 

Hyperion 2

 

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Obscure Analyst Takeaway

GTAT’s expansion plans refer to “recent contacts at global manufacturing partners are driving the need to grow their current facility”.   The shift of converting an R&D and test facility into a manufacturing operation with a targeted completion date in just 6 months is a signal of a major deal or a number of significant deals in the works from one or several of GT’s global manufacturing partners.  Due to the timing and sense of urgency of the submitted expansion and renovation plan, I currently do not believe the facility expansion and conversion of the facility from R&D to manufacturing was included within the relative magnitude of GT’s 2015 or 2016 market opportunity slides that were presented on March 14.   Any recurring revenue will be generated from GT’s newest manufacturing facility located in Merrimack, NH beginning in 1H2015 is likely to be incremental to the current Wall Street 2015 and 2016 revenue and EPS projections. I’m modeling an additional $0.13 EPS contribution for every $100 million of sales that will be generated from this new manufacturing facility beginning 2015, assuming a 35% margin and 148 million shares outstanding. 

 

Full Disclosure: I am long GTAT and have no plans to buy or sell any holdings

by Matt Margolis

A memorandum dated March 27, 2014 from Merrimack’s Community Development Director, Timothy J Thompson addressed to Robert Best, Chairman of the Merrimack Planning Board provides details of GTAT’s imminent expansion and renovation plans at their Merrimack facility.  The memorandum seeks acceptance and consideration of Final Approval of an application for site plan review to construct a 46,000 square foot building expansion as well as renovate the existing 117,532 facility located at 243 and 247 Daniel Webster Highway.  The plans were reviewed by Merrimack’s planning board on April 1, 2014 and were unanimously approved 7-0-0, officially granting GTAT approval to construct a 46,000 square foot building expansion and 117,532 square foot renovation of the existing facility.  The project is targeting an “aggressive” completion target of Fall 2014 based on the correspondence between Merrimack’s Community Development Director and the Planning Board Chairman.  The current Merrimack facility measures 117,532 square feet, the approved expansion would bring the facility to 163,532, which represents a 39% increase in the size of the facility.  The memo also details GT’s plans to shift the facility from an R&D and test facility to a manufacturing facility.  The memo cites “recent contacts at  global manufacturing partners are driving the need to grow their current facility.”  Key takeaways from the memorandum are below:

  • Recent contacts at global manufacturing partners are driving the need to grow their current facility
  • The existing facility will be renovated to support the company’s manufacturing processes rather than the research and testing operation currently in use.
  • The company would be making a significant investment in replacing their outdated and obsolete equipment and installing additional equipment to support their manufacturing use.
  • The applicant is requesting the waiver to allow the plan to be recorded in the fall, following boundary survey and completion of an as built plan
  • Expansion will add 46,000 new square feet on top of 117,352 square feet of existing space

According to GTAT’s website the current Merrimack facility houses GT’s ASF furnace and LED business along with R&D and pilot production functions for a number of new technologies and other advanced materials.

Our ASF furnace and LED business is located in Merrimack. Our Merrimack facility is also the location of our  research and development and pilot production functions for a number of new technologies including Silicon Carbide and other advanced materials.

Details of the expansion and renovation memorandum of GT’s Merrimack facility are below:

Link to the memorandum dated March 27, 2014 and Merrimack Planning board’s approval of the expansion and renovation plans dated April 1, 2014.

Below are some key excerpts from the memorandum in text and image form.

GTAT has grown considerably from their start in Merrimack, and the recent contacts with global manufacturing partners are driving the need to grow their current facility to reflect the change to their operations from R&D focus to a more manufacturing focus.

GTAT is now seeking to expand the facility further by adding a 46,000 square foot addition.   The new addition will house primarily administrative office and administrative functions of the company, while the existing facility will be renovated  to support the company’s manufacturing processes rather than the research and testing operation currently in use.  In doing so, the company would be making a significant investment in replacing their outdated and obsolete equipment and installing additional equipment to support their manufacturing use.

GTAT is exploring several options on how to handle this shift, and among their current considerations is to expand on their facility here in Merrimack (other options are also being considered by the company).  The project has a very aggressive time schedule to meet the demands of the company, and the application before you has been prepared within the last several weeks, whereas a similar type of application would typically take months for the design engineer to prepare a submission for site plan approval

The applicant is requesting the waiver to allow the plan to be recorded in the fall, following boundary survey and completion of an as built plan

 

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Full Disclosure: I am long GTAT and have no plans to buy or sell any holdings

 

 

The latest rumor circulating out of Taiwan via Commercial Times is that Apple’s slim designed battery requirements are not being met and the 5.5″ iPhone 6 release may be pushed into 2015. It was previously reported that there was difficulty producing the 5.5″ touch panel displays and that the displays would like be delayed a few months.

At this point I’m chalking this up as another rumor that may or may not be accurate. At one point various speculation was made that the 5.5″ handset would be released first and now rumors are pushing the release into 2015. I would have expected Apple to clear the battery thickness requirement during early beta testing and product design requirements. Stay tuned on this one as this story may update again.

by Matt Margolis

Based on my review of the Mesa sapphire plant building permits it seems likely the sapphire manufacturing plant is active within modules 1 through  module 4.  Tool platforms (platforms that hold ASF sapphire growth furnaces) have been installed within the first 4 modules and each of first 4 modules (areas) appear to have been equipped with fire alarms and FS/TS monitoring at each Tool platform.  I’m taking an educated guess that FS/TS is referencing flat screen (FS) and touch screen (TS) monitors on each Tool platforms, which would seem to make a lot of sense.  Module 1 and Module 2 are known to be 12,500 square feet, Module 3 square footage is unavailable and Module 4 measures 162,483 square feet, which is large enough to hold well over 1,500 ASF growth furnaces.

Mesa Module 4 Building Permit Image 162,483 square feet

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The most recent building permit issued on 4/17/14 indicates that a request to work on the “central utility plant” to work on heat exchangers, cooling towers and installation of additional fan coil units. The images below that were taken on 4/10/14 indicate the exterior construction on the cooling towers and electrical station appear complete.

The 4/17/14 building permit description indicates that Apple is requesting additional work inside the uninterruptible power systems (UPS) and battery rooms (yes plural).  For any of us who have not been inside a battery, this room within a manufacturing plant houses battery backup for uninterruptible power systems (UPS) and is critical to provide power if any outages were to occur. If Mesa loses power the UPS would kick in and deliver the necessary power to the ASF sapphire growth furnaces.   Also, an additional request was also made to add exhaust fans with spark proof motors and H2 sensors in the battery rooms.
Mesa Cooling Towers from 4/10/14

April 10 West Water Towers

Mesa Electrical Statio  from 4/10/14

April 10 West Electrical Station

Sample Battery Room image from bsn and is not directly related to the Mesa plant in any way!

battery room sample

Fan Coil Unit Sample image and is not directly related to the Mesa plant in any way!

Fan Coil Unit Example

 

ADDENDA TO PACKAGE A02K – DRB016. REF BLD2014-00440. WORK IN CENTRAL UTILITY PLANT INCLUDING HEAT EXCHANGERS, COOLING TOWERS, AND ASSOCIATED PIPING AND ELECTRICAL FOR ADDITIONAL FAN COIL UNITS, I AND C POINTS FOR THE CENTRAL PLANT AND NEW EXHAUST FANS FOR THE UPS AND BATTERY ROOMS. LIGHTING FOR N AND S E-HOUSE AND PUMP HOUSE ALSO INCLUDED.

 

ADDENDA TO PACKAGE A04E – DRB042. INCLUDES EXHAUST FANS WITH SPARK-PROOF MOTORS AND H2 SENSORS IN BATTERY ROOMS.

 

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Fabrication Area with Centrifuge Platforms

Another interesting item is the fact that the Mesa facility includes a fabrication area that has been outfitted with centrifuge platforms.  Centrifuges are usually used to separate liquids but other forms of centrifuges include analytical centrifuges, which can study just about anything including proteins and sediment.

ADDENDA TO BLD2013-05895, A04D DRB018, FABRICATION AREA BASE BUILD. INCLUDES CONSTRUCTION OF CENTRIFUGE PLATFORMS AND BUILD OUT OF FABRICATION OFFICE AND CONFERENCE, COPY, AND BREAK ROOMS.

 

Sample Centrifuge Image from (Huada) and is not directly related to the Mesa plant in any way!

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Product Recycle Room 4,752 square feet

The Mesa facility is equipped with a 4,752 square foot product recycle room.  A permit was issued on 3/4/14 to install a Pneu-Lectric double interlocked preaction system (these are fancy words for a very expensive integrated alarm/sprinkler system).  If you are bored you can read about an existing Pneu-Lectric model here.

REF BLD2014-00161 & BLD2014-00263. Double interlock pre-action system to cover 4752 s.f. approx PRODUCT RECYCLE ROOM within building.

 

 

 

 

The firm is citing higher memory prices and margin improvement. The upgrade seems to follow on the heels of SanDisk earnings beat and margin improvement forecast on Thursday. The analyst also expects DRAM pricing to remain firm and sees limited industry capacity additions in 2014.

On April 1, 2014 I dug into Micron’s hidden value and initiated coverage of the shares with a $61 target. Drexel Hamilton became the first Wall Street firm to put a price target on Micron that can be seen from my rear view mirror. My in-depth review can be found here.

by Matt Margolis

CNET reported that Nike announced on Friday that they would cease all production of the Nike FuelBand.  Nike had a team of 70 people enlisted to focus on the FuelBand product with their Digital Sports division, however the announcement indicated that several of those people would be out of a job. 

Last August, 9to5Mac reported that Nike FuelBand developer and fitness expert Jay Blahnik left Nike and joined Apple to likely work on their iWatch.  Just 8 months later we learn that Nike is bowing out of the wearable fitness market to concentrate on software. 

Tim Cook has been on the Nike board for 9 years and because of the close relationship between Cook and Nike it seems likely that Apple’s upcoming iWatch may have already claimed its first victim. What is more interesting is the timing of Nike’s decision to drop the project, is this another signal that Apple is close to introducing their health monitoring conscience iWatch to the world very soon?