Apple Surprised by GT's Bankruptcy Filing, Considering Next Steps

[gavroche]

Why do you people keep talking about a "loan"?

Apple did not give GT a loan. The reports are for a pre-payment for the building of a GT factory which was to be used for Apple's exclusive needs for 5 years.

Apple withheld the final payment of the agreed upon amount, which is what likely triggered GT's Chapter 11 filing.

A pre-payment IS a loan. Apple would not owe a dime before services are rendered or product is delivered. If the supplier can't get up to capacity with capital, it can request that the buyer pre-pays.... gives them some of the money BEFORE it is earned and owed. This is a loan. It shows up on the books as a liability, right there with other debts, until the moment it becomes earned revenue. If, for whatever reason, the deal falls through and Apple does not end up getting anything from GT, then GT earned no money, and owes the money back. On the LOAN.

may be an illustration will help you. If i am in need of money to pay some bills, i can go to my employer and ask for an advance on future money i will earn by working. The employer, if he is nice to me, can say yes and advance me some money. I have not earned any of that money yet. If i quit the job the next day.... would you say i do not owe that employer the money that he loaned me? Sparcing words, and calling it a pre-payment does not change what it is.

 

[IJ Reilly]

They don't even have to - Apple's loan is secured against the furnaces. They already own the building the furnaces are in, and they could hire the people back easily if GT went under.

If they wanted to acquire GT, they could have done it last year. They don't want to acquire their suppliers - they just want exclusivity agreements that prevent their competitors getting to them, favourable prices, enormous capacity and ridiculous quality control.

Being an Apple supplier isn't easy. They do squeeze you.

Apparently Apple could just take possession but this could be complicated by the bankruptcy filing. The court now has control over GT's assets, which are bound to be intermingled with Apple's. The court is probably not going to allow Apple to simply take over operations, unless this is the best way to satisfy credit obligations.

 

[cjmillsnun]

Yes, even including GTA's own CEO who was reportedly selling off millions of $$ in shares since the summer. (Doesnt seem that he had much faith in being able to deliver.)

That was my thinking. He knew enough to cash out whilst he could.

 

[gavroche]

That was my thinking. He knew enough to cash out whilst he could.

I hope, for his sake, he was careful about selling. Selling a ton of stock the day before iPhone announcement seems very suspicious on its face. I've read that many executives try to remove risk of being accused of insider trading by doing two things: (1) Remove themselves from the decision of what/when/how much to sell.... try to give general guidance to their financial planners, who make these decisions.... and (2) If they wish to sell out large positions, they set up rigid, fixed schedules of when to sell (for example, sell 5% of their holdings every 15 days, like clockwork). This lessens the chance of being accused of selling based on knowledge of a major stock event about to happen.

 

[cjmillsnun]

Is the proof not in the pudding? Apple loaned them money, and they signed an Exclusive deal to produce sapphire only for apple.

That doesn't mean that they were going to use them for iPhone/iPad screens.

There's the watch and TouchID

 

[El Hikaru]

GT just should have its work done on time.
Selling stock and filing bankruptcy. These are 21st century US attitude not from 20th century.
Empire State Building was built just over 1 year. It is all about willingness to complete.

 

[cjmillsnun]

GT just should have its work done on time.
Selling stock and filing bankruptcy. These are 21st century US attitude not from 20th century.
Empire State Building was built just over 1 year. It is all about willingness to complete.

The empire state company almost went bankrupt.

 

[macUser2007]

A pre-payment IS a loan....

Nope.

GT built a factory for Apple's exclusive use based on a contract.

The pre-payment is part of this contract.

Most custom-housing builders operate under similar agreements.

Of course, I don't know the details of the agreement, but you do not even understand the principle, by the sound of it.

The Reuters report was just one of many which pointed out that there are pitfalls to agreeing to deal with Apple, and that a few glass manufacturers walked out of the negotiations.

The GT Chapter 11 filing will probably make others be more cautious dealing with Apple in the future.

 

[springsup]

Apparently Apple could just take possession but this could be complicated by the bankruptcy filing. The court now has control over GT's assets, which are bound to be intermingled with Apple's. The court is probably not going to allow Apple to simply take over operations, unless this is the best way to satisfy credit obligations.

No they couldn't. It's just chapter 11; it's not a liquidation proceeding. GT is going to explain tomorrow why it needs some protection while it restructures its business. It's a temporary thing.

 

[gavroche]

Nope.

GT built a factory for Apple's exclusive use based on a contract.

The pre-payment is part of this contract.

Most custom-housing builders operate under similar agreements.

Of course, I don't know the details of the agreement, but you do not even understand the principle, by the sound of it.

The Reuters report was just one of many which pointed out that there are pitfalls to agreeing to deal with Apple, and that a few glass manufacturers walked out of the negotiations.

The GT Chapter 11 filing will probably make others be more cautious dealing with Apple in the future.

If Apple was giving that money in exchange for part ownership of these factories, you would be correct. They were not. GT was retaining full ownership of them. They just needed money from Apple in order to build them. The nature of the agreement, and exclusivity of the use of these factories for a single customer, etc... changes nothing of that. Apple loaned GT money against future earnings that GT would have against Apple. That you do not wish to believe this changes nothing. I challenge you to quote me to an accounting source that would tell you to account for a payment from a customer for services not yet rendered as anything other than a debt/liability. Not possible. And please do not tell me that i do not understand the principle. I have a Finance degree, from one of the top business programs in the country. I've taken many accounting courses. I understand quite well how to account for such transactions on the balance sheet.

 

[macUser2007]

If Apple was giving that money in exchange for part ownership of these factories, you would be correct. They were not. GT was retaining full ownership of them. They just needed money from Apple in order to build them....

Nope. You simply do not have an understanding of these kinds of agreements.

Here is more from the Reuters article, which hopefully will help explain:

"Apple's arrangement to help finance GT Advanced's new factory is not unusual. In 2011, Apple invested around $1 billion in an LCD factory operated by Japan's Sharp Corp (6753.T) to make panels for the iPhone 4. Sales of the phone were slower than predicted, and Sharp was forced to temporarily halt production.

"Having an exclusive factory for one customer means you don't have the same reassurance as producing parts in response to demand," said a person familiar with Sharp's plans.

...
Several analysts said Apple probably made a decision that burned its supplier.

...
Industry executives and analysts said GT's bankruptcy should serve as a warning to other companies.

"You swallow the Apple order, but it may not taste sweet," said a person whose company supplies Apple."

 

[gavroche]

Nope. You simply do not have an understanding of these kinds of agreements.

Here is more from the Reuters article, which hopefully will help explain:

Well, the information you quote changes nothing at all about my point. It has nothing to do with how such "investments" are accounted for on the balance sheet. Whether you are assuming part ownership, or not.... absolutely impacts how you account for things. Absolutely. If you think that it does not, well, i don't know what to tell you.
Anyhow, let agree to disagree.. and move on our separate ways. We will never agree. Oh well. Not important that we agree.

 

[springsup]

Nope. You simply do not have an understanding of these kinds of agreements.

Here is more from the Reuters article, which hopefully will help explain:

It doesn't even matter. If Apple is preventing GT selling their inventory, the bankruptcy judge will strike it as unfair.

Besides, Apple doesn't have a minimum purchase agreement for that sapphire. They are under no obligation to buy any of it, ever. Does that mean GT can't use the factory that they've bought or the employees they pay for?

 

[UpperQuadrant]

A pre-payment IS a loan. Apple would not owe a dime before services are rendered or product is delivered. If the supplier can't get up to capacity with capital, it can request that the buyer pre-pays.... gives them some of the money BEFORE it is earned and owed. This is a loan. It shows up on the books as a liability, right there with other debts, until the moment it becomes earned revenue. If, for whatever reason, the deal falls through and Apple does not end up getting anything from GT, then GT earned no money, and owes the money back. On the LOAN.

may be an illustration will help you. If i am in need of money to pay some bills, i can go to my employer and ask for an advance on future money i will earn by working. The employer, if he is nice to me, can say yes and advance me some money. I have not earned any of that money yet. If i quit the job the next day.... would you say i do not owe that employer the money that he loaned me? Sparcing words, and calling it a pre-payment does not change what it is.

A prepayment for future component shipments is NOT a loan. A loan is where the loan is paid back, with interest typically in the form of CASH. this was simply a deal where GTAT pre sold the components for a 5 year period and Apple prepaid to guarantee component shipments and GTAT needed the cash up front to build the plants and equipment, etc. so they can meet demand from Apple in the way of COMPONENTS, NOT CASH.

the purpose of this deal was for GTAT to supply sapphire crystals to Apple, not for Apple to make a profit based on interest on a loan. Apple isn't a bank from that standpoint, not to say they can't do it, it's just not their business practice. What Apple's business practice is to design, sell and support computing devices and they contract out with various component suppliers, etc. In order for Apple to meet production demands, they need to establish a guaranteed component supply which is why they enter these types of deals. They did the same thing with Samsung, TSMC and many others. It's a way for Apple to have guaranteed shipments from a quality supplier and they have to have dedicated plants fabricating the parts specifically FOR Apple.

Does GTAT sell sapphire crystals to others? It wouldn't surprise me, but Apple gets what they are building for Apple out of the specific plants that were built to do so, but GTAT had other mfg facilities before that and I'm sure they sell smaller quantities to other customers. I don't think that Apple is GTAT's ONLY customer, it's just their biggest. Apple has an exclusive arrange for crystals produced in these factories is what I think this deal implies.

 

[macUser2007]

A prepayment for future component shipments is NOT a loan. A loan is where the loan is paid back, with interest typically in the form of CASH. this was simply a deal where GTAT pre sold the components for a 5 year period and Apple prepaid to guarantee component shipments and GTAT needed the cash up front to build the plants and equipment, etc. so they can meet demand from Apple in the way of COMPONENTS, NOT CASH....

Yep.

It doesn't even matter. If Apple is preventing GT selling their inventory, the bankruptcy judge will strike it as unfair.

Besides, Apple doesn't have a minimum purchase agreement for that sapphire. They are under no obligation to buy any of it, ever. Does that mean GT can't use the factory that they've bought or the employees they pay for?

You have no understanding of these contracts whatsoever.

 

[gavroche]

A prepayment for future component shipments is NOT a loan. A loan is where the loan is paid back, with interest typically in the form of CASH.

You guys are thinking of terms such as "loans" in the general, simplified sense that most people deal with them.

Please consult this simplified explanation: http://accounting-simplified.com/prepaid-expense.html

If apple pre-pays an expense, it is recorded as an asset on their books. GT records it as a liability on their books. If you think this is wrong, kindly point me to a source that you think shows otherwise. You are stuck in the mindset that GT hopes to not have to repay this amount, that they will earn it... therefore you don't want to think of it as a loan. But it is most definitely a liability. If they do not deliver the product as planned.... they will have to REPAY this amount. Identically as a loan.

Tell you what.... google pre-paid expenses, read the links you pull up. Find me one that says you account for a pre-paid expense as anything other than a liability to the recipient.

 

[Jazper]

Way too early, and far too little information, for people to be making such insinuations about it. First, contrary to what some people are commenting, Apple didn't withhold a payment of any amount the owed to them. They decided to withhold a LOAN payment. I.E. to not loan them any additional money. None of us is in position to know the reasoning of this decision.

Agreed, but will be interesting to see if Apple does end up buying them.

 

[please22]

Why do you people keep talking about a "loan"?

Apple did not give GT a loan. The reports are for a pre-payment for the building of a GT factory which was to be used for Apple's exclusive needs for 5 years.

Apple withheld the final payment of the agreed upon amount, which is what likely triggered GT's Chapter 11 filing.

I will concede, a loan might not be the correct technical term. If I knew the technical level of everyone on the forums, we might as well get to brass tacks then.

"the Company will have recurring revenue under its arrangement with Apple; the Company believes the strategic nature of the agreement with Apple and the benefits associated with building a recurring revenue stream are important to its continued diversification; the Company will reimburse Apple for the prepayment over five years."

So yes, it arranged as a prepayment. However to the layman, when you give someone money in advance and they repay you over a time, its usually a loan. It easy to understand and it get the point across.

Source http://investor.gtat.com/releasedetail.cfm?ReleaseID=804195

 

[macUser2007]

...If they do not deliver the product as planned.... they will have to REPAY this amount. Identically as a loan....

This is not the agreement. Apple does not have to use any of the GT production from the new factory and if Apple decides not to use the production, GT cannot sell any of the production to anyone else but Apple, as the agreement is that GT built the plant for Apple's exclusive use.

If Apple decided not to use the production, for the next five years GT will have to keep the plant idle, but maintain it, maintain an available supply chain and keep the workforce trained and available, in order to meet any of Apple's demands from this particular plant, as per the agreement.

 

[gavroche]

I will concede, a loan might not be the correct technical term. However, it doesn't diminish that Apple was expecting something significant from the arrangement.

You are right... it is more accurately referred to as a liability. When GT received the money, they had to report it as a Liability on the books. If you pull their financials, that is where it is reported. But we are talking about the same thing essentially... because if GT does not meet their obligations under the agreement and earn that pre-paid money, it is money that owes to Apple, and would have to repay.

My hunch is that Apple wanted to purchase GT from the get go..... as opposed to just infusing them with a lot of capital. They like to have better control over it all. But it seems that GT preferred to remain independent. And yes, i will agree with the others that Apple's terms that it pushed/forced on them were probably pretty demanding and difficult.

 

[please22]

You are right... it is more accurately referred to as a liability. When GT received the money, they had to report it as a Liability on the books. If you pull their financials, that is where it is reported. But we are talking about the same thing essentially... because if GT does not meet their obligations under the agreement and earn that pre-paid money, it is money that owes to Apple, and would have to repay.

My hunch is that Apple wanted to purchase GT from the get go..... as opposed to just infusing them with a lot of capital. They like to have better control over it all. But it seems that GT preferred to remain independent. And yes, i will agree with the others that Apple's terms that it pushed/forced on them were probably pretty demanding and difficult.

Please see the update I posted above. The document helps if you want a bit more info. Cheers

 

[gavroche]

This is not the agreement. Apple does not have to use any of the GT production from the new factory and if Apple decides not to use the production, GT cannot sell any of the production to anyone else but Apple, as the agreement is that GT built the plant for Apple's exclusive use.

If Apple decided not to use the production, for the next five years GT will have to keep the plant idle, but maintain it, maintain an available supply chain and keep the workforce trained and available, in order to meet any of Apple's demands from this particular plant, as per the agreement.

We really are not far apart in what we are saying you know. I do not disagree with you about what you are saying in re the agreement. I am only saying that Apple gave GT a lot of money. Their are only three ways for Apple to record this transaction: As the purchase of an asset, as an expense, or as a pre-paid expense (asset). They did not receive any form of ownership (tangible asset) in exchange for that money. Therefore, it is recorded as a pre-paid expense (as GT has not earned that money yet). This shows up on their books as an Asset... and for GT it is reported as a Liability.
But everything else you are saying is correct. It would have been a foolish agreement for GT to enter into... if they were so dependent on Apple to purchase product that they could not sell to anyone else.
But we really have no idea what they were manufacturing already, or preparing to. We have had only speculation at this point.

 

[nofunsir]

Quality vs Quantity vs One More Thing...

GTAT was under pressure to produce blocks of sapphire, nothing more, which is what they do. I doubt they would've underestimated quantity given the exacting nature of the science involved in producing synthetic sapphire.

I suspect Apple rejected the supply - even if it was of acceptable quantity levels - simply because some significant portion of the supply, which for all other intents and purposes would be considered "good" sapphire, was in a state that it couldn't be post-processed to curve without becoming too brittle. Or that the sapphire produced required some extra or unforeseen complex steps that the next contractor down the line hired to shape the sapphire would have to undergo, causing shaping to take longer, and therefore miss the oh-so-important rumor release date.

This to me says more about Apple's nature of demanding solutions vs understanding. A more conservative Apple of the past would have waited for the 6s to implement this substantial design change with so much risk involved. Nonetheless, Apple covered its butt, is absolving itself of responsibility by playing dumb, and even had the gall to tout a fancy new resolve to work with American-grown companies. Do we know where the ion glass came from? We saw similar results with the cutting-edge components required of the made-in-usa mac pro. Apple is just so used to pushing over Chinese companies, and making up for it by saying they are sorry that these Chinese companies (who mostly just have to deal with logistical supply problems that can be solved by throwing more hours and bodies at it) are causing ethical labor problems.

The contract with GTAT probably has some very skillfully crafted and well-worded paragraphs along the lines of "GTAT shall produce the requested quantity of product of acceptable and usable, yadda yadda quality" which apple used to interpret the fact that the next contractor, hired to curve the edges of the saphire, misrepresented what it would take to shape the

If this is the case, it boils down to Apple playing favorites with their contractors, rightly or wrongly.

 

[gavroche]

Please see the update I posted above. The document helps if you want a bit more info. Cheers

My ability to think is diminishing. I really need some lunch (i swear I must be diabetic)...

 

[JAT]

Maybe the poster works or used to work for a newspaper or a news agency, hence the "to" instead of the "may": it sells better!

Reminds me...
On the radio last night there was an interview of one the local newspaper boys by the radio host because of some local celebrity crap he had reported with MANY errors in the report. (football player with troubles in his charity) The radio host desperately wanted to rip on the local celebrity, but was forced to keep asking the paper guy why they had screwed up their story so bad, compared to a national story that had far more accurate reporting.

Sounded like radio guy was having a mental hernia not being able to go after the celeb, instead. (who deserves some bad press, but not bad reporting) Thought he was going to stroke out.