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Apple Sapphire Supplier GT Struggled Behind the Scenes

GT Advanced Technologies failed to hit technical milestones.

GT Advanced Technologies

As recently as August, GT Advanced Technologies’ chief executive assured investors that its Arizona sapphire facility was “nearly complete” and poised to begin producing the scratch-resistant display surface for what were believed to be Apple’s upcoming devices.

GT Chief Executive Tom Gutierrez acknowledged some startup challenges and escalating costs associated with its new venture, which had attracted a sizable investment from one of the world’s biggest technology companies. But GT said it expected to hit the targets necessary to receive a $139 million payment from Apple.

“We remain very positive about our sapphire materials business,” Gutierrez told investors during the company’s second-quarter earnings call on Aug. 5.

The reality, as revealed in bankruptcy documents and interviews, was quite a different picture from the one projected by the happy talk just a few weeks before.

GT had failed to meet technical milestones necessary to receive the fourth installment in a total of $578 million worth of advance payments from Apple, according to people familiar with the matter. Apple underwrote the costs of setting up the Arizona facility, which it owns.

The iPhone maker had been working with GT to help the company solve technical problems and achieve these milestones, when the New Hampshire firm filed for protection from its creditors Monday, and sought to reorganize its finances under Chapter 11 of the bankruptcy code.

The filing caught Apple by surprise.

“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,” Apple spokesman Chris Gaither said.

Even as Gutierrez sought to reassure investors this past summer, signs of trouble were evident in the company’s financial results. GT had depleted $176 million of cash from its balance sheet from March to June, and reported a loss of $22.3 million in the quarter.

Chief Financial Officer Raja Bal told investors that setting up the sapphire production process in Arizona had proven to be more costly than the company anticipated.

Production inefficiencies and inventory loss cost GT $45 million in its second quarter — the company forecast another $45 million in ramp-up costs for the remainder of the year, Bal said.

Under questioning from Wall Street investors, Gutierrez seemed to hint at the possibility of not receiving the final installment payment from Apple.

“When you reached a milestone, you get paid,” Gutierrez said. “I feel very confident, based on the progress that we are making, that we will achieve the milestone in that time frame, but as I indicated, with the projection of having close to $400 million in the bank at the end of the year, it’s not a world-ending event if it slides.”

A footnote in the company’s financial disclosure notes that, despite signed purchase orders or other written contractual agreements, GT could not guarantee that the company’s arrangement with Apple “will result in actual revenue in the originally anticipated period — or at all.”

A spokesman for GT Advanced Technologies declined to comment.

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