Apple’s withholding of $139 million payment led to GT Advanced bankruptcy filing

“Apple Inc. last year said it would invest $700 million to build the world’s biggest artificial-sapphire factory. On Monday, the company running that factory — GT Advanced Technologies Inc. – filed for bankruptcy protection,” Daisuke Wakabayashi reports for The Wall Street Journal. “The bankruptcy filing comes less than a month after Apple unveiled new iPhones with glass screens, rather than sapphire. Apple’s decision not to use sapphire followed tests in which the synthetic sapphire proved brittle, cracking when phones were dropped from various heights and angles, according to people familiar with the matter.”

“The final straw for GT appears to be Apple withholding a $139 million payment, according to people familiar with the matter. That was to be the last of four prepayments from Apple to GT totaling $578 million. In August, GT had said that it expected the last payment to arrive by the end of October—contingent on meeting certain operational targets at the plant in Mesa, Arizona,” Wakabayashi reports. “GT shares collapsed 93% Monday following the surprise bankruptcy filing, wiping out roughly $1.4 billion in market value.”

“Two of the three models of Apple’s new smartwatch will be covered by sapphire. A person familiar with Apple’s plans said GT’s bankruptcy won’t affect those plans,” Wakabayashi reports. “Eric Virey, a senior analyst at French research firm Yole Développement, said the size and scope of the Arizona plant suggests Apple had planned to use the sapphire screens for more than the watch. At full capacity, he estimated the plant would produce twice as much sapphire as the current output from nearly 100 manufacturers world-wide. ‘For me, there is absolutely no doubt that it was for the smartphone,’ he said.”

Read more in the full article here.

Related articles:
GT Advanced CEO sold 9,000 shares the day before Apple’s iPhone 6/Plus event – October 7, 2014
Law firms launch investigations into possible violations of federal securities laws by GT Advanced – October 7, 2014
Analyst: Apple may take possession of sapphire furnaces from GT Advanced – October 7, 2014
Apple to provide debtor in possession financing to GT Advanced? – October 7, 2014
Investors stunned over GT Advanced bankruptcy filing – October 7, 2014
GT Advanced files for chapter 11 bankruptcy court protection – October 6, 2014
Apple and GT Advanced rampup sapphire production in Mesa – August 11, 2014
GT Advanced expects sales of sapphire production tools to boost profit; shares surge – August 5, 2014
Apple and GT Advanced open second sapphire plant in Salem, Massachusetts – June 19, 2014
Apple patents method for embedding sapphire displays in LiquidMetal device chassis – May 27, 2014

36 Comments

  1. Interesting thing is how apple was able to shift to ion glass so fast and how did the supplier of it manage to deliver the massive quantities on such short notice?

    1. Apple would not put all it’s eggs in one basket and was probably continuing development of glass screens on several fronts. The press managed to pick up on sapphire and of course ran with this story while being unaware of an alternative strategy.

        1. Changing from Sapphire to ion glass wouldn’t be a trivial task so i rather suspect things were the other way around designed to use ion glass with the dual development of sapphire which could be slipped in as and when feasible. The watch on the other hand was always designed to use it I suspect as top end watches already do. Though even there it seems it is interchangeable with the ion glass as judged by the fact 1 of the 3 does use it.

    2. I doubt the accuracy of this report. Given the curved glass used, Apple would have been planning the materials for quite some time, particularly in order to line up sufficient supply to manufacture millions of iPhone 6/6 Plus units.

      What is more likely the case is the early batches of sapphire were brittle, perhaps due to some problem with the manufacturing process in the newly-equipped plant, and that GTAT missed required production deadlines, thus triggering the withheld payment. It is amazing how a financial incentive can motivate a company to fix a problem, and I have little doubt that GTAT is working very hard to correct whatever problem developed and get back on track so it can receive the payment.

    3. Short notice?

      We don’t know what REALLY goes on at Apple by looking through the deranged eyes of rumor mongers. For all we know, Apple broke from using Sapphire on iPhone 6 months ago or longer. The intervening time could have been spent making an effort to find a solution to the problem, with no solution found, thus the end of the contract with GT regarding the iPhone.

      I’d actually like to see the contract. The news we’re getting at this point is insufficient to understand everything that has occurred or why Apple withheld payment. This is just bouncing off the surface, a common event these days.

      1. Even months would be short notice on such a crutical component that has both a new complex shape and is a new material .
        I dont presume to know what exactly transpired .. But my guess would be that apple prepared tooling for both materials from the get go… Just in case ! Cost of being safe rather than sorry !
        Also i am not sure if apple has ended their contract with GT… Where did u read that? Also dont they own all the furnaces ..and the factory ?
        It may be that apple will get into the buisness of manufacturing sapphire directly …. .?

        1. I think you are right I think the watch gives the answer to this. Dual supply of both screen types was developed and the sapphire screens didn’t meet the required standards and thus all became orders for ion/Gorilla glass. The same process was there for the watch but with less critical criteria in terms of breakages, a later supply date and smaller form factor Apple progressed orders for this product all be it on 2 of the 3 watches. This is most like despite its other claims as much because it needed to give orders for the glass to make sure it had an alternative supply should the sapphire be problematical now or later and also the orders for sapphire was required to keep that facility remotely viable while I feel it likely the order just wasn’t enough to keep GT itself viable, thus its latest move into bankruptcy. It will be interested to see if the watch screens still go 2/1 Sapphire of more/most/all turn to glass. That decision will ultimately show if Apple remains committed to the material, feels it can develop it further or not.

        2. Language can be so dangerous! –By contract I mean that clearly Apple had an obligation to finish its payments to GT. But they withheld the last payment. That would indicate that they have a contract and that some part of it was NOT fulfilled somehow, allowing for the withholding. That’s not a cancelation. It would, if I’m guessing correctly (and I can only guess) that some part of the contract was not fulfilled.

          Beats me what Apple does next. But GT Advanced has made it clear that it’s still business as usual during this bankruptcy reorganization period. No manufacturing is affected.

    1. My guess is there was a problem with the batches, thus causing GTAT to miss the production deadline to receive the next payment.

      If it even is the real reason for Apple withholding the payment.

  2. should call it chapter 11 – not bankruptcy – different

    It does not make a lot of sense : “Apple’s decision not to use sapphire followed tests in which the synthetic sapphire proved brittle, cracking when phones were dropped from various heights and angles…”

    You mean they invested $700 million before testing? Perhaps you need a level of purity that they were not able to meet?

    I mean – they never ran tests before making the agreement? IMPOSSIBLE!

    1. No, Chapter 11 is a form of bankruptcy. Your creditors are stopped from pursuing collection until a reorganization plan is approved by the court. And if a plan cannot be approved, then usually you slide over into liquidation.

      I’m sure Apple did test sapphire extensively before investing, but sapphire has to be grown. And if something went wrong with the initial batches, it could be brittle. My guess is that the withheld payment was contingent on GTAT meeting certain production deadlines, and this one may have required a certain number of screens to be produced AND pass testing, which they apparently did not pass.

      1. Bizlaw –

        I do understand that Ch 11 is a form of bankruptcy and under the same legal category. Still, the word B itself carries the deeper connotation of shutting down the business that I think it should be avoided in cases were it is Ch 11 – “Restructuring” can be used.

        It is such a a loaded word.

        But thanks for the note.

    2. If true it’s possible that GTA, having produced satisfactory samples, had problems scaling up the process to production line levels. This is not an uncommon problem in high-volume manufacturing.

      =:~)

      1. Yes, but that wouldn’t be the reason Apple refused to fund. There’s something here that’s caused Apple to pull the plug. We’ll have to wait to find out, which I’m sure will be revealed in the bankruptcy process.

    3. Yes I suspect unless a sudden unexpected glitz was discovered more likely that the ability to produce enough of the required standard was the most likely problem. its not uncommon that when upscaling to full production capacity unexpected problems develop indeed to a degree it is very common. Only time will tell if that in this case that is surmountable.

  3. Wow. Huge jerk move by apple. $139 million is Apples coffee change. Why not pay it, keep them afloat, then work with them to increase yields? Something is missing in this story. Far too short sighted.

  4. The loan agreement was to be paid back in 5 years and contingent on sapphire be produced a certain levels which it was not. Thus apple will now take over ownership of all the hardware use to produce such glass. Looks like apple is now in the glass production game full on.

  5. Perhaps the CEO and a few “others” associated with the company tried to cash in early? Seems like there’s gonna be more to this story as time passes.

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