With a billion-dollar backlog, GT Solar expands its production overseas

With a $2.3 billion backlog and nearly half a billion in cash in the bank, the new GT Advanced Technologies Inc. (GT Solar International until August 8), is facing a bright future. But whether workers in Merrimack will fully bask in this glow is an open question, as the company expands its production in Hong Kong to take advantage of higher profit margins and a lower tax rate.The producer of furnaces that produce the material for solar and LED equipment reported Wednesday a net income of $52 million (41 cents a share) for the first quarter in fiscal 2012 ending July 2. And GT Solar reiterated its guidance for 2012: $1 to $1.2 billion in revenue, and earnings per share ranging from $1.255 to $1.85, though much of that will come in the fourth quarter, with a bit of a downturn in the second quarter: perhaps the reason the stock dipped in morning trading to as low as $12.37 a share. This, in spite of the fact that the first quarter saw about $231 million in revenue, 71 percent more than $135.2 million earned in the same quarter of the previous year.Currently almost all but $8.6 million of that revenue is coming from its older solar business. The rest is revenue recognized from making sapphires, used to make LED, the cool lights that have become a hot investment. GT acquired that line when it acquired Crystal Systems in Salem, Mass. at the end of July 2010 for about $50 million.That deal is expected to pay for itself in the future. Of the $1.3 billion of new orders in the first quarter, more than half – $777 million – can be attributed to sapphire equipment and materials.As for the company’s $2.3 billion backlog – the highest yet by the company – a cool $952 million could be attributed to sapphire.But it mainly uses that Salem facility as a showcase to sell materials. It is Merrimack that makes the furnaces, which ship overseas, primarily to China. That’s why the company has expanded its U.S. headcount last quarter to 658 workers, but that is only 25 more than the last quarter.That’s because the U.S. workforce mainly concentrates on making and perfecting new generation equipment, explained CEO Tom Gutierrez in a Thursday morning conference call. The older furnaces that make solar equipment and material “are no longer made here. The parts are made in Hong Kong and assembled on-site.” And as sapphire furnaces are perfected, “We will no longer make them here. It helps margins to build the furnaces at the customer site.”It also helps the company’s tax rate, which they expect to fall to 31 percent this year and below 30 percent in the future. “As we continue the success of moving the base of operations to Hong Kong, we will continue to increase the level of income in lower tax jurisdictions,” explained CFO Rick Gaynor.The good news, however, is that GT always seems to be working on the next generation of furnaces. Gutierrez said that’s how it has been able to actually benefit from the drop in the price of materials. The Chinese firms who want greater market shares are hungering for more efficient furnaces that would enable them to capture market share as more established producers (Gutierrez refers to them as incumbents) have trouble making a profit at that price. That’s one reason GT has “sold out” during the first quarter.It’s also why, he said, GT has tripled its R&D budget, to come up with furnaces that it could sell at the same price as the old ones, figuring most firms will replace the 3,100 solar furnaces out there to remain competitive. The company’s new furnaces, he said, would be a “game changer” that would “drive the industry.”That competition, he said, has caused some incumbents to question the quality of sapphire crystals produced by the company’s furnaces because of their pink hue. Gutierrez said that this tint is simply more noticeable than the shades of other crystals, and it isn’t any less efficient or “pure” and that GT customers were satisfied with the result. Still, he felt he needed to address the issue at the conference call.Meanwhile, GT has to figure out what to do with the $473 million in cash it is sitting on, mainly from customer’s deposits. It might acquire companies that produce consumables used in producing LED and solar products or even end use companies that sell LED products to industries and consumers. Or it could use it to buy back stock or give out some dividends to the shareholders.”We are generating a lot of cash,” said Gutierrez. “We are either going to put it to use or return it to the shareholders.”GT will be trading in the NASDAQ exchange under the SOLR ticker symbol until Monday, when it will trade as GTAT. Its website will also change to gtat.com. –BOB SANDERS/NEW HAMPSHIRE BUSINESS REVIEW