Will This Sapphire Supplier’s Bankruptcy Help or Hurt the Apple Watch?

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Apple sapphire supplier GT Advanced Technologies on Monday announced that it is filing for Chapter 11 bankruptcy. The announcement follows a rough month for the sapphire manufacturer, which has seen its share price plunge after Apple revealed that the iPhone 6 and the iPhone 6 Plus were equipped with “ion strengthened” glass rather than sapphire. Despite the recent setbacks, GT Advanced Technologies President and CEO Tom Gutierrez remained upbeat about the company’s future.

“GT has a strong and fundamentally sound underlying business,” said Gutierrez. “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.”

The rumors that Apple’s new iPhone models would feature sapphire-covered screens began almost a year ago, when a regulatory filing that GT Advanced Technologies made with the Securities and Exchange Commission revealed that Apple had made a $578 million investment in the company through a “Master Development and Supply Agreement.”

The filing sparked speculation that Apple was planning on using sapphire for other uses besides as a protective covering for the iPhone’s camera lens and Touch ID fingerprint sensor. Sapphire is known to be a harder and more scratch-resistant material than the Corning Gorilla Glass that Apple currently uses for its mobile device screens, and there were hopes that the next generation of Apple devices would feature screens that were virtually unbreakable. Multiple media outlets and analysts predicted that Apple would implement sapphire screens in its new iPhone models, including The Wall Street Journal and PTT Research’s Matt Margolis.

While the sapphire iPhone rumors ultimately proved untrue, the California-based company did confirm that the upcoming Apple Watch models will have sapphire-covered screens, except for the models in the Sport collection that will use “strengthened Ion-X glass.” Apple is also apparently still using sapphire to protect the iPhone’s camera lens and Touch ID fingerprint sensor. So what does GT Advanced Technologies’ bankruptcy mean for supplies of the Apple Watch?

Source: Gtat.com

Although GT Advanced Technologies’ bankruptcy announcement immediately raised the specter of an Apple Watch sapphire supply constraint, it appears that the company’s ability to produce sapphire will remain unchanged for the time being. “GT expects the court will authorize the company to continue to conduct business as usual while it devotes renewed efforts to resolve its current issues and develops a reorganization plan,” the company said in a press release. Part of this reorganization will involve getting “debtor-in-possession financing” so the company can continue to pay employee salaries and “other obligations.”

One of these “other obligations” may involve the $578 million prepayment that Apple gave the company last year. According to GT Advanced Technologies’ 10-K report, the company is due to begin repaying Apple “ratably over a five year period beginning in January 2015, either as a credit against Apple purchases of sapphire material or as a direct cash payment to Apple.”

Interestingly, although GT Advanced Technologies is forbidden to produce sapphire for any entities other than Apple, Apple has no reciprocal obligation to order enough sapphire from the company to enable it to repay its debt. “Apple has no minimum purchase obligation and if Apple does not purchase sufficient quantities of sapphire material, our revenues will suffer and we may be unable to meet our obligations to repay advances that were provided to us,” said GT Advanced Technologies in its 10-K. According to a recent press release, GT Advanced Technologies has approximately $85 million cash, less than the $115 million-plus amount it will owe Apple in each of the next five years.

On the other hand, Apple doesn’t have to worry about recouping its investment. If GT Advanced Technologies cannot pay cash, the iPhone maker “will have the right to acquire control and possession of the ASF [Advanced Sapphire Furnaces] systems and/or our subsidiary (GT Advanced Equipment Holding LLC) that owns these systems.” In other words, Apple could soon become the proud owner of its own sapphire manufacturing plant, possibly at a cut-rate bankruptcy price.

While it remains to be seen exactly how GT Advanced Technologies’ bankruptcy action will play out, it seems that regardless of what happens, Apple will still get all the sapphire it needs, and may even benefit from the company’s misfortune. Either way, fans of the Apple Watch can relax, since it appears that a sapphire shortage is not imminent.

Follow Nathanael on Twitter @ArnoldEtan_WSCS

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