Apple, Inc. Didn't Force GT Advanced Into Bankruptcy
GT Advanced Technology's shocking bankruptcy filing earlier this week took the market by storm. From Street analysts to institutional investors, no one saw it coming. Not even Apple .
"GT's surprising decision"
According to a fresh Reuters report this morning, Apple has now officially commented publicly for the first time regarding its sapphire partner's state of affairs. Apple spokesman Chris Gaither is quoted as saying, "We are focused on preserving jobs in Arizona following GT's surprising decision and we will continue to work with state and local officials as we consider our next steps."
In the wake of the announcement, there had been some speculation that perhaps Apple forced the company into bankruptcy by withholding the fourth and final $139 million prepayment that GT was set to receive if it hit specific operational targets.
Just because Apple could doesn't mean it should
For instance, Gilford Securities analyst Nimal Vallipuram considered the possibility that Apple asked GT to repay what it owed after GT failed to meet performance targets. Vallipuram didn't necessarily think this was the case, but acknowledged that it could have been.
Indeed, the Prepayment Agreement indicates that Apple has a right to "demand repayment of the entire Prepayment Balance, in which event, GTAT shall immediately repay such balance" in the occurrence of a "Trigger Event" (defined in detail in the link above). Demanding full repayment of the $439 million that Apple had spotted GT thus far would certainly have forced GT into bankruptcy.
But forcing partners into bankruptcy certainly isn't good for business, particularly as Apple still plans on using sapphire in the upcoming Apple Watch, even if the iPhone 6 and 6 Plus aren't donned with the material (beyond the camera lens and Touch ID sensor). Besides, it's not as if Apple has some dire need of cash that it would need to demand repayment. It has plenty.
Who's going to foot the bill?
The Arizona project was simply too massive of an undertaking, and GT's finances hung in the balance. For the first half of 2014, GT's inventory ballooned from $39.1 million to $132.6 million. Accounts payable skyrocketed from $77.3 million to $184.6 million. By June, GT had already incurred $524 million in capital expenditures related to the facility, and it needed that last prepayment.
For all intents and purposes, Apple's prepayments were secured debt. Apple would have a vested interest in negotiating new terms if GT needed to, but it has no control over GT's other creditors. GT hasn't provided much detail on the bankruptcy decision, but it was possibly the cumulative financial pressure from its non-Apple creditors, and operational obligations like payroll, that forced its sapphire hand.
GT's first bankruptcy court hearing takes place tomorrow, so investors will get a chance to learn more official details on what happened.
As Apple considers its "next steps," it seems unlikely that GT's financial predicament will threaten the Apple Watch. Since Apple's first wearable only needs smaller ingots of sapphire, there are more potential suppliers. The sapphire performance requirements for a smartwatch are also less stringent, because smartwatches aren't prone to dropping. On top of that, GT did say that it would continue to operate in bankruptcy as it attempts to get its finances in order.
Apple seemingly still has plans for sapphire beyond the Apple Watch though, and those plans could be threatened by GT's bankruptcy. Effectively pre-ordering $578 million of sapphire material over five years is far more than the company would need just for Apple Watch. What will Apple do next?
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The article Apple, Inc. Didn't Force GT Advanced Into Bankruptcy originally appeared on Fool.com.Evan Niu, CFA owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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