Apple tried to help GT Advanced qualify for final $139M payment, report says
Prior to GT Advanced Technologies' bankruptcy filing earlier this week, Apple reportedly attempted to assist the firm in meeting certain technical milestones that would allow continued payment as part of a conditional $578 million deal.
Despite Apple's help, GT Advanced failed to meet required sapphire plant goals stipulated in its contract, which in turn led to Apple's withholding of a final $139 million loan payout, reports The Wall Street Journal.
According to sources familiar with the matter, GT received the first three of four payments from Apple -- totaling nearly $440 million -- even though the company missed contract goals.
Further, sources said Apple is not planning to exercise a contract provision that would allow the company to recoup its investment in GT. As part of the $578 million deal, GT was required to have a cash balance of at least $125 million, but the company on Monday revealed it had only $85 million as of Sept. 29.
Earlier today, Apple said it was surprised by GT's bankruptcy filing and is currently working with Arizona officials to preserve jobs created in the state as part of the huge sapphire operation.
Last November, Apple announced its partnership with GT Advanced, which ultimately led to the construction of the world's largest sapphire manufacturing plant in Mesa, Ariz.. The facility is supposedly tasked with providing Apple material for use in future products, which some analysts mistakenly assumed to be the recently released iPhone 6 and iPhone 6 Plus.
GT's Mesa plant has been steadily ramping up production over the past few months, possibly in preparation for the upcoming Apple Watch. Aside from protective covers for the iPhone's rear-facing camera and Touch ID fingerprint reader, Apple has yet to deploy sapphire on a large scale.
Despite Apple's help, GT Advanced failed to meet required sapphire plant goals stipulated in its contract, which in turn led to Apple's withholding of a final $139 million loan payout, reports The Wall Street Journal.
According to sources familiar with the matter, GT received the first three of four payments from Apple -- totaling nearly $440 million -- even though the company missed contract goals.
Further, sources said Apple is not planning to exercise a contract provision that would allow the company to recoup its investment in GT. As part of the $578 million deal, GT was required to have a cash balance of at least $125 million, but the company on Monday revealed it had only $85 million as of Sept. 29.
Earlier today, Apple said it was surprised by GT's bankruptcy filing and is currently working with Arizona officials to preserve jobs created in the state as part of the huge sapphire operation.
Last November, Apple announced its partnership with GT Advanced, which ultimately led to the construction of the world's largest sapphire manufacturing plant in Mesa, Ariz.. The facility is supposedly tasked with providing Apple material for use in future products, which some analysts mistakenly assumed to be the recently released iPhone 6 and iPhone 6 Plus.
GT's Mesa plant has been steadily ramping up production over the past few months, possibly in preparation for the upcoming Apple Watch. Aside from protective covers for the iPhone's rear-facing camera and Touch ID fingerprint reader, Apple has yet to deploy sapphire on a large scale.
Comments
I wonder whether Apple now wishes they'd paid a Chinese company to build that plant, instead of building it in Arizona, where GT Advanced Technologies has failed.
Who says they have failed? They are obviously still providing sapphire for Apple products. GT is a stand alone company, I'm wondering if this wasn't a knee-jerk reaction (by GT) to Apple withholding the final payment. Bankruptcy does not mean the company isn't still operating or viable. It will be interesting the see what further details will be released. I'd also guess that Apple would like to clamp down on any further negative press....albeit from a related party.
I wonder whether Apple now wishes they'd paid a Chinese company to build that plant, instead of building it in Arizona, where GT Advanced Technologies has failed.
China wouldn't help in this case. China excels in problems where you can throw cheap labor at it, like screwing together parts. Not like they're going to grow sapphire by hand.
I wonder whether Apple now wishes they'd paid a Chinese company to build that plant, instead of building it in Arizona, where GT Advanced Technologies has failed.
Maybe, maybe not.
Clearly, Apple knows who makes sapphire glass and they decided to partner with GT, so they must of had some reasons to do so.
We know it wasn't GT's capacity since they had to build a new factory, so it is likely that GT has some sort of technological advantage or knowledge about an upcoming process improvement that would make their product superior to the competition.
China's big advantage as mentioned above is its enormous manpower, which is helpful for manual labor of assembly of a large volume of units. This advantage isn't a factor if a particular process is highly automated or if only a small number of units are to be assembled. Presumably, sapphire glass production doesn't take a lot of people.
This is why Apple can afford to build Mac Pros here in the United States: the assembly line is highly automated and they don't make a lot of them. It doesn't take a lot of people to build them.
Uh, got proof of that? Otherwise your statement may be defamatory. Just a caution ...
The real question: is this a viable business as it is structured or simply a long term money pit.
Here are my thoughts on this bankruptcy filing. Also the simplest explanation that jibes with what we know so far:
GTAT failed to meet whatever metrics were required to trigger the fourth payment from Apple of $139 million, due here in October. GTAT was likely counting on that money to meet immediate and short-term financial obligations, could not find additional financing elsewhere, and recognized that the $85 million remaining in cash/cash equivalents was insufficient to see the company through. Therefore, the management decided to seek protection against their creditors while there was something left of the company and its cash position to protect.
If, and this is a big IF… the above turns out to be the whole of it, then the situation for the company may not be as bad as has been imagined and the size of the sell off may not have been warranted. That is, of course, if my scenario is the entire story; that the company had set its course going forward based upon having that last $139 million and had budgeted for that amount coming in and no more in the immediate term. This would suggest that just $139 million would be all that’s needed to get the company back on track, or an equivalent amount in deferral of its obligations, which presumably a bankruptcy court could grant. We’ll begin to learn the whole story tomorrow.
?The problem becomes severe only if the whole deal was predicated on delivery of volumes of sapphire that would represent iPhone screens made with the stuff. But this, if Apple’s [off the record] position that it was surprised by the bankruptcy filing is accurate, doesn't make sense. After all, Apple would know that canceling orders for such huge volumes of sapphire would crush the future revenue and earnings of a small company like GTAT, especially after that company committed to scaling up manufacturing at great expense to meet such volumes. And so if such orders existed and were canceled or deferred for an extended period (like, until next year's iPhone models), then Apple would not be so surprised. Ergo, Apple's surprise at the bankruptcy filing, if accurate, suggests that there never was an significant sapphire volume in this deal dedicated to the iPhone displays. Ergo, GTAT is potentially not in as much trouble as we've all led ourselves to believe. I bought in the after-hours session at $1.14. Just a couple hundred shares to pay tribute to my theory. Maybe it'll double or triple if its revealed to be a less significant situation that it might have been.
Pathetic by GTAT.
Their CEO/CFO are total crooks. They are trying to use Bankruptcy to re-negotiate terms with Apple. Hopefully the judges sees through this and does not allow this.
GTAT gave their shareholders a huge F-You. I've moved on. Just wished Cook could have seen that these GTAT executives were frauds and crooks.
What? you have it totally backwards. The sapphire project for iPhone 6 failed and Apple said, "sorry guys but we're going to F**K you." That's the downside of being an Apple supplier. Apple obviously got good terms in their contract.
And no I don't think Apple is a crook. I'm sure they negotiated the terms that let them do what they did. And that is why I own Apple stock and not GTAT stock.
Apple needs to come out looking like then good guys here,
How are they the bad guys? They set up a contract which GT agreed to but then GT failed to keep up their end of the bargain. Giving them that last payment would be like a parent telling a kid he can get a smart phone if he makes straight As and doesn't get into any trouble all semester and then when he gets suspended for fighting and makes a C in math class, giving him the phone anyway.
What? you have it totally backwards. The sapphire project for iPhone 6 failed and Apple said, "sorry guys but we're going to F**K you."
What sapphire project??? There is zero proof that Apple had any intentions for the material beyond the current uses. Any material engineer will tell you that sapphire is not viable as a screen material because it breaks on impact too easily at that size. Apple likely knew this when they started, before handing GT Advanced a penny.
the payments were based on delivery of ordered items and keeping a certain amount of cash in the bank. Where is that cash? Perhaps squandered by the company, which wouldn't be Apple's fault.
so how exactly, if GT squandered their cash and failed to meet quotas did Apple f**k them. sounds to me like they did it to themselves.
oh and there is also a rumor that the CEO used insider knowledge to buy Apple stock the day before the iPhone and Apple Watch were announced. Not a smooth move
?The problem becomes severe only if the whole deal was predicated on delivery of volumes of sapphire that would represent iPhone screens made with the stuff.
Here's the thing. IF Apple was thinking of using sapphire screens, and I'm not believing that to be true because some idiot site like Digitimes claims it, and failed to order the screens then that is NOT a fault against GT and therefore the payment wouldn't have been withheld.
And Apple would have known they were not going to use sapphire screens ages ago. Doesn't take months of testing or consulting with engineers to find out that sapphire is a shite material for such a use.
Well then why did Apple cut a $578M deal with GT?
If Apple only intended to use sapphire at current uses (camera lens covers on iPhones, etc.), they wouldn't have paid out a dime in advance nor set up alleged exclusivity restrictions since other companies already have the same access to the same sapphire glass.
Clearly, Apple saw something in GT that provoked them to offer over half a billion dollars of cash to some small-cap tech company with a lousy balance sheet. I'm a nobody and there isn't anyone waving cash in my face.
The most logical explanation is that GT told Apple that they had an upcoming product that would be differentiated vis-a-vis the competition and that GT failed to deliver on this promise in a timely manner concerning cost, performance characteristics, yield/QA, etc.
It's not like Apple gave me $600M to provide a bunch of sapphire iPhone screens. This is GT's business; making sapphire glass is what they are supposed to do.
The whole contract is about GTAT building a factory on Apple property with the loan from Apple. And you pay back the loan from the profit you make with supplying Apple in the long run. A classic business deal where you have knowledge and experience but lacking the funding to see the project through.
In every business where you give money to someone there are milestones and requirements involved. GTAT could not meet them all. So the last payment was not given to them.
Every startup operates in the same way. Even if they are promised a ton of cash they are getting it in multiple small payments as long as they can maintain the milestones and other requirements. Also you cannot do with the cash as you like. Same for GTAT.
And your main investor is not the only one giving you money. With the contract in the pocket you go to banks and other investors to get more credit to keep the company running until revenue comes in. You are deep in debt because of the promise to cash in big in the future. The banks already own your ass anyway. Curse of the small companies.
But what happens in the deal goes sour? Your creditors get cold feet and probably demand their money back right away, especially when your shares are tanking into penny stock territory. You don't have any security anymore. This is as bad as it gets for a small company.
Big money already sold short and bought puts way before the presentation of the Apple Watch, because the pipe-dream they planted in the press for months of sapphire covered iPhones is now clear to everyone. They knew it will not happen because it is not feasible (this is high school education, ppl.).
Then everyone else sold. Making them a big pile of cash with the options they bought months ago. When this happened they switched to calls. Now time to get the stock up again to cash in once more, small investors will do that for us by getting the shares back up, we help a little here to give them reasons to throw good money after bad one. Then the game is repeated with the next target. This should have made a decent hedge fund a big chunk of money. Analysts are always in on the game, that's their job to pump and dump stocks for you. And they even gave a four week warning that this is going to happen by downgrading GTAT (signal to others, as they are not allowed to talk to each other openly about internals, as this would be insider trading).
But back on topic.
So what do you do when you not get the round of funding as a small public company? You file for chapter 11 to protect yourself from ppl. with pitchforks screaming and demanding their money back. And the horde of greedy lawyers already checking if money can be made by a law suit. Well, Apple is rich, so we might take a shot at it.
With chapter 11 you can now negotiate, explain what happens and what needs to be done while still keep your company alive and trying to get back on track with the Apple contract. Without filing chapter 11 you would be gone within a week. You also get free PR as everyone who deals with Apple is in the spot light. So it would be bad for your creditors to let you fail. They are on the spot now. If it fails you can finger point at others.
Next GTAT negotiates with their creditors and of course with Apple as part of chapter 11. In addition politicians come in as well, especially as tax benefits were given to Apple if they invest in Arizona. With the PR they now see a chance to gather up votes for the next elections that are always around the corner. It's just tax money, you know jobs are saved, investment in Arizona being a high tech location. You know the drill.
So in the end it will work out. Credit lines beside Apple will be extended. This allows GTAT to meet the requirements of the contract with Apple and get the rest of the money from Apple. Of course GTAT has to pay a hefty price for it, they will make less profit as extending the credit line will cost them a lot.
So what does Apple's "we were surprised by the chapter 11 filing" actually means?
Apple doesn't want to be dragged into any law suits that will follow most chapter 11 filings. And they will follow for sure as Apple is involved and Apple is rich. So lawyers will try to go for Apple's money here if they can find any way to do so.
You can be sure that the strategy of chapter 11 was discussed with partners at Apple as a "theoretical" thing a long time ago, if not Apple didn't do its due diligence when dealing with a small company. But Apple was of course not notified of the filing before it happened. This would be a huge legal mistake and would drag Apple for sure into saw suits.
Apple basically says here: "We are not interested in cashing in and taking over the factory or demand equipment inside the factory as collateral, although we keep this option open if there is no other way. We want GTAT to produce sapphire for us. We are not in the supplier business. We want their know-how to work for us. And forget about suing us, our ass is covered. Now sort this out with GTAT so we can get back on track! It is not our responsible, we already gave a ton of money. It's your move now." Yeah, that's what the business speak of "We were surprising by the filing for chapter 11" means.
If chapter 11 should fail, Apple will take over the equipment inside the production plant (very likely collateral in the contract) and related employees. But they do not want to do this unless it is absolutely necessary. Apple is not in the business of producing parts. They design and create stuff and let other produce it for them.
This can play out in many ways depending on the actual details of the contract and GTATs financial obligations to others. We'll hear about it in the future, but probably not in the detail who guaranteed which sums to who behind the scenes.
Welcome to the world of small businesses meeting big business. This is how it goes. There is nothing new to be seen here at all.
If you ever found a venture capital funded start-up, you know what's ahead of you.
PS: The question of course remains if there is any foul play of the GTAT board involved delaying chapter 11. We'll see... But one thing is for sure, the GTAT CEO qualified himself for being on the watch list of head hunters for CEO positions at way bigger companies.
Let's step back a little ...
AFAICT, here are the known uses of sapphire on current (and announced) Apple products:
If you think about it, use cases 1 and 2 are quite similar -- a [relatively] scratch resistant camera lens cover (TouchID is capturing images of your fingerprints).
Admittedly, the Home Button gets a lot more touches than the camera lens, and is more likely subject to scratches. But scratches to either the camera lens or the Home Button would render the device inconvenient or unusable for two major capabilities -- leading to customer dissatisfaction and expensive replacement/repair.
It's almost a no-brainer to use thin, hard, scratch-resistant sapphire for these small areas of the iDevice surfaces.
AFAICT, Apple is getting the sapphire for 1 and 2 and likely 3 (and possibly 4) from other suppliers than GTAT.
It may or may not be true that Apple planned on GTAT to provide 5 (and maybe 4) for the Apple Watch. The display cover on the Apple watch makes sense because it is small and the focal [concentration] point of lots of touches (and potential scratches).
Somehow, when Apple started using sapphire for the specific 1 and 2 use cases -- the tech wags extrapolated that it made sense to use sapphire for the entire iPhone display surface ... But, does it make sense?
Sapphire is more expensive, heavier, supply-constrained and more shatter-prone than Gorilla Glass.
Why would Apple (or anybody in their right mind) gamble a massive rollout of iDevices (40 million in 2014) on such low odds / ROI?
As @charlituna says, there is no evidence that Apple plans (or has ever planned) to use sapphire as an iDevice display cover!
So, why the Apple GTAT arrangement?
We don't know ... but it certainly makes no sense that Apple planned to use it for any 2014 iDevice display covers.
Well said!
To continue the examination ... If not for [iDevice] Display Covers -- Why the GTAT arrangement -- what is Apple planning to do with all that thin, high-quality sapphire?
Sapphire is thin, clear and scratch-resistant (excellent for optics) -- and could be used for more advanced camera lenses -- of just wider use of existing TouchID and cameras for new produces ... MacBooks, Macs ...
But, while lots of individual parts -- that use of sapphire wouldn't come close to the [imagined] volume of sapphire for iDevice display covers ...
What then?
Aside from being optically clear and scratch resistant, sapphire has some other characteristics, among which are:
Where are those characteristics iimportant?
Why in the manufacture of semiconductors: RAM, SSD, APUs, GPUs, wireless radios - almost any chip in a mobile device ...
What silicon brings to the table is the ability to use thinner traces and place transistors closer together without leakage or overheating ... You get more bang on a smaller chip.
Instead of abandoning the traditional silicon used in semiconductor manufacturing, a process has been developed where a thin layer of silicon is deposited on a thin layer of an insulator material such as sapphire. This is called SoI (Silicon on Insulator) or SoS (Silicon on Sapphire).
http://www.wikiwand.com/en/Silicon_on_insulator
Sapphire is expensive (and apparently difficult to manufacture) ... So, to date, there has been limited success in its use.
But the potential is there if you can scale SoS use to hundreds of billions of chips used in hundreds of millions of iDevices.
If you do some surfing, you will find SoI and SoS references for a lot of companies going back to IBM in the last century -- Cell and Power processors ...
In fact most of the top semiconductor manufacturers have experimented with SoI/SoS at some time in the last 10
-15 years.
My first thought was that SoS made the most sense for the large volume of RAM used in mobile (and its associated power and heat issues). Apparently, none of the mfgrs have been successful using SoS for RAM.
Today, I took a different approach and surfed around for other uses of SoS/SoI.
I found a company called Peregrine Semiconductor -- who make RF (radio frequency) CMOS circuits:
http://www.wikiwand.com/en/Peregrine_Semiconductor
and this:
Peregrine was mainly suppling a company called Murata -- Then as it turns out, Peregrine was acquired by Murata:
http://www.strategyanalytics.com/default.aspx?mod=reportabstractviewer&a0=10019
So, what's the big deal, Anyway?
Surfing for Apple Murata yielded this article:
If you search, there are 29 references to Murata in this article -- about the LTE implementation on the iPad 3.
http://www.chipworks.com/en/technical-competitive-analysis/resources/blog/new-ipad-lte3g/
Waltz Me Around Again, Willie ...
Now, it gets even more interesting:
So, what does this all mean???
It seems odd that Apple is apparently moving its radio chips away form SoS to SoI -- because SoI is less expensive and "good enough" ...
At the same time Apple has contracted for large volumes of sapphire -- for use other than Display Covers ...
Here's my guess:
Apple wants to make the radio components (GPS, Cell, WiFi, BLE) themselves as part the AX SoC and later the S1 series Computer in a Package.
AIR, The radios are a major cost component (~$37 ?) of the iPhone 6 BOM -- with most of that going to competitor QualCom.
Apple could license the radio tech from QualCom and others -- then build a superior (faster, smaller, lower-power, etc.) than anything out there for the 2015 Devices and the Apple Watch.
It makes no sense to pay a premium for SoS support chips, in today's iDevices -- when the true limitation is the radio chips from other mfgrs.
But, if Apple can get the sapphire yields, It could build it's own radios using SoS and integrate them into 2015 mobile devices ... lotsa' advantages here...
That sounds like the kind of multi-year strategy for which Apple is famous!
You call this zero proof?
http://forums.appleinsider.com/t/180137/apple-granted-patent-for-embedding-sapphire-displays-in-liquidmetal-iphone-chassis
http://forums.appleinsider.com/t/161831/apple-reveals-sapphire-covered-iphone-display-vehicle-location-in-patent-filings