What were some of the pitfalls that befell GTAT?
The key to making the transaction profitable for both sides was the production of a sufficient number of 262kg boules of sapphire crystal meeting the specifications required by Apple.
Most sapphire manufacturers using non-GTAT furnaces produce boules of less than 100kg in size.
Unfortunately, the production of 262kg boules of sapphire could not be accomplished within the time frames the parties had agreed, and was more expensive than anticipated.
GTAT’s fabrication costs of the sapphire material grown in the Mesa Facility and Salem Facility furnaces were higher than envisioned, largely because the majority of the fabrication equipment (in contrast to “growth equipment,” i.e., the furnaces) selected for sapphire material could not economically produce a product that Apple would accept.
GTAT did not select the fabrication equipment. GTAT was unable to negotiate changes to the pricing regime set forth in the Apple Agreements, and, therefore, GTAT was selling sapphire material at a substantial loss. GTAT’s losses would have increased substantially in 2015 when the price for finished sapphire material was scheduled to decrease under the agreements with Apple.
GTAT had no direct contact with suppliers of cutting and polishing equipment to specify and in some cases develop such tools.
Over time, a majority of the selected fabrication tools had to be replaced with alternative tools, resulting in additional capital investment and operating costs to GTAT and months of lost time in production.
The fabrication cost was approximately 30% higher than planned, requiring nearly 350 additional employees and significantly higher consumption of diamond wire and other wear items than originally planned. GTAT was required to absorb these additional costs.
At the closing of the Apple transaction, GTAT also took on substantial new debt. Specifically, on or about October 30, 2013—the day before the agreements with Apple were signed—GTAT terminated its revolving credit agreement with Bank of America and paid off all outstanding debt owed to Bank of America at that time. This was necessary to permit Apple to take a lien on all of the assets of both GTAT Corp. and GT Equipment.
A specialized facility is required to house over 2,000 sapphire furnaces and the related fabrication equipment. In addition, due to the nature of sapphire growth, a stable and uninterrupted power infrastructure and supply of process cooling and emergency cooling water is required.
Apple selected the Mesa Facility and negotiated all power and construction contracts to design and build out the facility with third parties. GTAT had no direct communications with the Apple subcontractors that were building out the Mesa Facility.
The first phase of the Mesa Facility was not operational until December 2013—which was only 6 months before GTAT was expected to be operating at full capacity in order to meet its “Minimum Supply Commitments” (as defined in the SOW). The parties had originally anticipated that a facility for the sapphire growth and fabrication project would be ready much earlier in 2013.
Additional unplanned delays continued to surface, because the Mesa Facility required a significant amount of reconstruction, including reconstruction of floors roughly the size of multiple football fields. The build-out of the Mesa Facility, delays in available power, and power interruptions, further delayed the ramp-up of sapphire growth and fabrication by approximately three months.
After much discussion, it was determined that implementing power back-up for the furnaces was too expensive and, therefore, non-essential.
That decision was not made by GTAT. On at least three occasions power interruptions occurred.
Why did GTAT file for bankruptcy?
When GTAT initially entered into negotiations to sell sapphire furnaces to Apple, it had no sense that, having borrowed hundreds of millions of dollars to pay for the components of more than 2,036 sapphire furnaces, it would end up being unable to meet its cost and production targets for reasons that it believes were beyond its control as well as unforeseen difficulties in scaling its technology to 262kg boules to meet evolving product specifications.
If the pricing set forth in the Apple Agreements could not be renegotiated, GTAT would never realize a profit.
GTAT reluctantly commenced these chapter 11 cases to preserve the value of its business by separating itself from the business relationship with Apple.
The total cost incurred by GTAT pursuant to the project with Apple has so far amounted to approximately $900 million.
Why did GTAT settle with Apple?
GTAT is well aware, and the Court and the parties in interest should expect, that Apple would vigorously dispute any attribution of responsibility to Apple for the failure of the sapphire growth and fabrication project or for GTAT’s chapter 11 filing.
Based on my own discussions with Apple executives (or on recent press statements by Apple), I would expect Apple to forcefully contend, among other things, that (a) the failure of the sapphire project was due to GTAT’s inability to manufacture sapphire in accordance with the terms of the agreements between the parties, (b) GTAT was free to walk away from the bargaining table at any time in 2013 and yet knowingly entered into the transaction after extensive negotiations because of the enormous growth opportunity that doing business with Apple represented, (c) Apple accepted substantial risks by entering into the transaction, (d) any specifications GTAT failed to meet were mutually agreed to, (e) Apple did not wrongfully control or interfere with GTAT’s operations, (f) Apple collaborated with GTAT in good faith, and (g) Apple was not aware of the losses (or the magnitude of the losses) being incurred by GTAT in connection with the transaction. Given that Apple and GTAT have reached a settlement, it serves no purpose for me to go through these issues in detail at this stage.
Rather than litigate with Apple, which could be harmful to the Debtors’ efforts to reorganize, the Debtors entered into the Settlement Agreement, which, in their business judgment, provides significant benefits to their estates and is in the best interests of their estates and stakeholders.