When the sapphire maker reported on August 5, there were no glaring indications that a bankruptcy filing was on the horizon. How much did management actually know?
So much for guidance
One possible sign that GT's prospects were deteriorating was the fact that it reduced the high-end of 2014 revenue guidance by $100 million, from $800 million to $700 million. But guidance changes are quite common, in general, so it's not as if shareholders could have taken this data point and extrapolated it to the point of bankruptcy.
There were a few comments in the conference call about the sapphire segment. For example, here's CFO Raja Bal discussing the guidance change:
Moving on to guidance for the year. We are tightening revenue to the lower end of our previous range, and now expect $600 million to $700 million, reflecting our current view of volumes associated with the Arizona project, as well as our expectations for Sapphire equipment shipments for the second half.
We continue to expect more than 80% of the year's revenue to come from our Sapphire segment. While we anticipate significant contribution from both the equipment and materials businesses, the mix of equipment will now be higher than originally anticipated. The mix shift is expected to have a favorable impact on gross margins.
Bal notes that the company's expectations changed, and was forecasting a higher proportion of equipment sales compared to material sales at the time. He also said that 2014 guidance would be "heavily weighted" in the fourth quarter.
CEO Tom Gutierrez then reiterated the guidance that GT would end the year with approximately $400 million of cash on the balance sheet, adding that management did not believe it would need to raise capital from public markets.
So much for "not a world-ending event"
GT failed to achieve the "operational targets" necessary to receive the final prepayment from Apple (NASDAQ:AAPL). Gutierrez seemed rather confident at the time that the company would be able to hit these goals. Without specifying too much, he did add a little bit of context regarding the nature of these targets:
UBS analyst Steven Chin: Thanks for the update. I have a couple of questions on the final prepayment that is expected in October. The first is, even though the final prepayment is not expected until October, can you still ship as much material to the customer even before this sign-off? Or do you still need to wait until the final prepayment is made and you get sign-off before you resume shipments? Just some clarity to start there?
GT CEO Tom Gutierrez: I think you're making a presumption that the milestone is of a nature that is a gate. The milestones are, as the word implies, they are progress based, based on the progress that we've made. And progress has admittedly been slow, due to some of these start-up challenges that we have faced. But there are metrics that were defined before we even started to populate the operations. Some of those metrics morphed over time as the project has gone on.
And they really are -- shouldn't be looked at as a gate. They are indicators of progress versus anything else. And they are under our control. These are things that we have to execute on.
Perhaps more interesting, the executive implied that the company would be fine even if it did not receive the final prepayment (emphasis added):
UBS analyst Steven Chin: Okay, and maybe a follow-on to that. If the final prepayment does not come through by that October time frame, is there an extension possible to that? Or is there -- and is there a scenario where you then might need to raise more cash, if you don't get that prepayment?
GT CEO Tom Gutierrez: I would say that these are milestone-based. And so when you reach the milestone, you get paid. They are not cliffs, per se. And so I feel very confident, based on the progress that we're making, that we will achieve the milestone in that timeframe. But as I indicated with a projection of having close to $400 million in the bank at the end of the year, it's not a world-ending event if it slides. Although, again, I don't anticipate that it will slide.
From a shareholder perspective, Chapter 11 is pretty close to a "world-ending event."
GT was experiencing some challenges getting the Arizona facility up and running. The company took a $45 million hit related to ramping up sapphire production, acknowledging production inefficiencies and inventory losses. That total was greater than expected, and Bal expected an additional $45 million in ramp-up costs in the third quarter.
Still, somehow GT managed to burn through a quarter of a billion dollars in three months, after failing to get the last Apple payment.
Actions speak louder than words
It's also worth noting that insiders have been unloading shares all year. That's not as insidious as it sounds, and certainly management knew how risky the Apple deal would be.
Gutierrez didn't sell any GT stock during 2013, but he did set up Rule 10b5-1 trading plans on December 16, 2013 and March 14, 2014 for "financial diversification." Rule 10b5-1 trading plans allow company insiders to schedule transactions ahead of time, while not in possession of material non-public information, in order to avoid the appearance of insider trading.
The fact that Gutierrez sold $160,000 worth of stock at $17.38 per share the day before the Apple event is actually just a coincidence, as he has no discretion over the timing of the transactions. He still had nearly 170,000 shares after the transaction, but has sold almost 700,000 shares this year worth more than $10 million.
CFO Raja Bal only joined the company this year, and received a grant of 45,000 restricted stock units in January -- which are not yet vested. He had no transactions to speak of. Other C-suite execs, such as Chief Administration Officer Ho Il Kim and COO Dan Squiller, had similar Rule 10b5-1 trading plans in place, also selling shares in early September.
Since these plans were likely set up well in advance, probably before GT knew how bad things had gotten, it doesn't appear that any laws were broken. What's more feasible is that management knew the risks involved with the Apple deal, knew public speculation was driving massive share gains, and wanted to take the opportunity to diversify their personal finances.
It's highly unlikely that management knew that far in advance that the writing was on the wall; but they knew it was possible that the Apple deal could go sideways.