Apple, Others Surprised by Sapphire Partner GT's Bankruptcy Filing--update
3:45p ET October 8, 2014 (Dow Jones)
Apple, Others Surprised by Sapphire Partner GT's Bankruptcy Filing--update
By Daisuke Wakabayashi And Joseph Checkler
The abrupt bankruptcy filing by GT Advanced Technologies Inc. earlier this week stunned investors, creditors and partners including Apple Inc., which backed the materials maker for its massive bet on sapphire screen technology.
GT last week made a scheduled bond payment and promised a business update this week. Its shares remained unusually buoyant for a company on the verge of bankruptcy. As recently as August, executives said they expected to end the year with $400 million in the bank.
On Wednesday, Apple called the bankruptcy filing "a surprising decision." A person familiar with the matter said Apple had been working with GT to keep it solvent. In addition, Apple hadn't demanded repayment of loans as it could have, based on GT's weak cash position, people familiar with the matter said.
A hint of troubles at GT came last month, when Apple said it wouldn't use sapphire screens in its new iPhones, contrary to what many observers expected. Apple added to GT's financial pressures by not making a final $139 million prepayment loan because GT hadn't met the technical milestones laid out by the company, the people familiar with the matter said. GT had said earlier that it expected Apple to make that payment by the end of October.
But one of these people said that Apple was working with GT to overcome the technical hurdles so that GT could qualify for the final payment.
"To be clear, we did not see this coming," Pavel Molchanov, an analyst with Raymond James & Associates, wrote in a note Monday. "We don't think anyone else did either."
In its bankruptcy filing Monday, GT offered few details about why it was seeking protection from creditors. In a section of the filing titled "Events Leading To Chapter 11," typically the meatiest part of a filing, Chief Operating Officer Daniel W. Squiller said only that company was in the midst of a "severe liquidity crisis due to circumstances that will be more fully described" in subsequent hearings. GT also didn't mention Apple in that declaration, referring to a "series of transactions with a key customer."
Some answers may emerge at GT's first bankruptcy hearing Thursday before Judge Henry J. Boroff of U.S. Bankruptcy Court in Massachusetts. GT declined to comment.
In November 2013, Apple and GT announced a partnership to build the world's largest factory for synthetic sapphire. Apple bought a 1.4-million-square-foot Arizona facility--about the size of two dozen football fields--from a solar-panel producer for $113 million and leased it to GT, a leading maker of furnaces used to produce sapphire.
The deal launched GT into a new business. Until then, GT had focused on making furnaces to grow synthetic sapphire, not the sapphire itself.
Apple agreed to lend GT $578 million to outfit the factory with cutting-edge furnaces. GT agreed to start repaying Apple in 2015. Apple made the first three of its four prepayments totaling $439 million, even though GT didn't always meet the technical milestones for the plant, one of the people familiar with the situation said.
Apple considered sapphire a potential solution to a problem for iPhones and other smartphones: broken or scratched screens. The Mesa, Ariz., plant was expected to produce enough sapphire to meet the massive demand for iPhone screens, but the material performed poorly in testing.
Apple already uses sapphire from other manufacturers to cover the iPhone's camera lens and fingerprint reader. It also plans to use sapphire screens for two of its three smartwatches coming next year.
In August, GT Chief Executive Thomas Gutierrez told investors the company was confident it would meet the final milestone to receive a $139 million payment from Apple by the end of October.
Even if it didn't meet those targets, he said, it wouldn't be "a world-ending event," because the company expected to have close to $400 million in the bank at the end of 2014. He also said that GT didn't see a need to raise capital in the market.
In its filings, GT said it had about $85 million in cash as of Sept. 29, and is seeking debtor-in-possession financing. A provision of the loan agreement allowed Apple to demand repayment if GT's cash balance fell below $125 million; but Apple didn't exercise that provision, a person familiar with the matter said. GT said it expects to receive court authorization to conduct business as usual during the reorganization effort.
In a petition filed with U.S. Bankruptcy Court in New Hampshire, GT and its affiliates reported $1.5 billion in assets and roughly $1.3 billion in liabilities.
The filing was unusual in several ways, because it wasn't obvious that the company was on the brink. Typically, a company's share price plunges in the weeks before it files for Chapter 11, often trading so low that the stock gets delisted.
GT shares had fallen more than 35% since Apple said it wasn't using sapphire screens in the new iPhones, but they still traded around $11 before Nasdaq halted trading Monday. When trading reopened, the stock predictably plummeted below $1. Shares have recovered slightly, recently changing hands at $1.61.
GT, which has more than $400 million in convertible bonds outstanding, also made a scheduled payment to those bondholders last week, just days before filing for bankruptcy protection. Usually, when a company is on the brink of a bankruptcy filing, it negotiates an extension with investors or the payment isn't made at all.
Write to Daisuke Wakabayashi at Daisuke.Wakabayashi@wsj.com
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