Apple and GT

Apple sapphire supplier files for Chapter 11

The move by GT Advanced Technologies has nothing to do with sapphire-less iPhone 6 Plus, argues analyst

GT Advanced Technologies, the company that Apple struck a $578 million deal with last year for ultra-hard sapphire material, filed for Chapter 11 today in a federal court.

The move came less than a month after Apple revealed that it wasn't using sapphire to cover the displays of its newest iPhones.

But Ben Bajarin, an analyst with Creative Strategies, didn't believe today's bankruptcy filing was tied to the iPhone. Bajarin, who based his take on recent conversations with materials experts and Apple suppliers, said that sapphire wasn't ready for use as a glass substitute in the sizes demanded by the newest iPhones.

"I don't think that sapphire was planned [for the iPhone], and for quite a while," Bajarin said in an interview today. "Eventually it's a goal, but it's just not there yet."

Today, GT's chief executive stressed that his company is not shutting its doors. "GT has a strong and fundamentally sound underlying business," said Tom Gutierrez, CEO and president, in a statement Monday. "Today's filing does not mean we are going out of business; rather, it provides us with the opportunity to continue to execute our business plan on a stronger footing, maintain operations of our diversified business, and improve our balance sheet."

According to the documents GT filed with the U.S. Bankruptcy Court of the District of New Hampshire, the firm had approximately $85 million in cash on hand at the end of September, down from $331 million as of June 28 and far under the August projection of $400 million in cash it expected to have at the end of this year.

As of June 28, the company had assets of about $1.5 billion and liabilities of around $1.3 billion.

GT's Apple connection drove the news of its bankruptcy today: The company operates an Apple-owned Arizona facility where it intends to produce large quantities of sapphire, which Apple plans to use in some lines of its Apple Watch, the wearable slated to debut in 2015.

In November 2013, GT announced a $578 million, five-year deal to provide sapphire to Apple, with the money to go toward the purchase and installation of the equipment necessary to produce the material. GT is to reimburse Apple over a five-year stretch, beginning in 2015.

At the time, the news of the deal triggered a wave of speculation that Apple would use the sapphire as touch display covers for its iPhone, particularly the anticipated larger-screen model, which had been rumored for months. While that didn't come to pass -- according to tear-down experts, both the iPhone 6 and 6 Plus used Corning's Gorilla Glass 3 instead -- the mid- and top-tier Apple Watch lines are to use sapphire as their face-covering crystals.

In August, GT said that Apple had already paid $439 million of the $578 million, and expected that the final payment of $139 million would be made on time by Apple at the end of this month.

But the company had also hinted that things were not going smoothly.

In August, Gutierrez characterized the ramp-up of production at the Arizona factory as "one really massive undertaking." And GT postponed what it had cryptically called "a business update" conference call from the week of Sept. 29 to the week of Oct. 6, or today.

In August, GT also said that it would not provide Apple with sapphire material until 2015.

The Apple deal was an exclusive, and limited GT's ability to sell sapphire for certain applications to other customers. GT has said that sapphire production was to account for about 80% of its revenue.

"The way the deal was structured was that Apple basically loaned GT money so that GT could invest in the infrastructure to produce sapphire glass," said Bajarin.

While that is not unusual for Apple -- it regularly invests in suppliers' factories in China and Taiwan -- Bajarin thought there was more to the GT deal than the run-of-the-mill.

There are multiple sapphire suppliers, Bajarin said, but if GT had been, as he suspected, in dire straits for quite some time -- the company posted losses in the last four quarters -- Apple may have come to its rescue. "Apple may have known that, but rather than let them die, which would have made one less potential supplier, it gave them a float loan to keep them alive," said Bajarin. "If GT goes under, that would have left Apple with fewer suppliers, who then may have been able to dictate production and prices."

And Apple hates nothing less than being tied to a single supplier, as moves, like the shift from Samsung for some production of its in-house-designed "A" series of systems-on-a-chip (SoC), have shown.

Bajarin didn't see GT's bankruptcy as a wrench in Apple's smartwatch plans: The quantity of sapphire necessary for the Apple Watch and also for the cover of the Touch ID scanner, is relatively small. And if worse came to worst, he would not be surprised if Apple acquired GT.

"[Sapphire] factories, including GT's, are still going, production is up and running, so there's no real issue there," said Bajarin. "What's more curious about GT is in the long run. If it's not sustainable, and Apple wants to keep them around because it decides that sapphire is the future, I can see Apple saying, 'If things at GT go south, let's just go buy it. We'll have the manufacturing and production we need.'"

GT's court-appointed claims agent, Kurtzman Carson Consultants, has not yet set a date for the required creditors meeting.

Copyright © 2014 IDG Communications, Inc.

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