Understanding GT Advanced Technology, Inc.'s Bankruptcy

Source: GT Advanced.

Investors have long known that being an Apple supplier cuts both ways. Having a relationship with the Mac maker can simultaneously be a boon and a curse. There's a long history of stocks that soar while in Apple's favor, only to be utterly crushed when things go the wrong way or when Apple begins to squeeze too hard. Just ask OmniVision in 2011 , or Cirrus Logic in 2013 , among many others.

With GT Advanced Technology 's surprise announcement on Monday that it is filing for Chapter 11 bankruptcy protection, the company becomes the latest textbook example of what can go wrong, underscoring the incredible risks associated with getting in bed with Apple.

Where it all began

Back in November, GT Advanced announced the deal with Apple alongside third-quarter earnings. Apple would prepay GT $578 million in four installments to help fund the Arizona facility's capital expenditure requirements, and GT would begin reimbursing Apple over five years starting in 2015.

Source: SEC filings. *Disclosed in press release without additional data on prepayment obligation.

Source: SEC filings.

*Disclosed in press release without additional data on prepayment obligation.

At the beginning of this year, management expected the company to end the year with $400 million to $500 million in cash. That's obviously not happening, and GT says it had $85 million in cash at the end of September.

The same should be true for sales. In August, GT guided 2014 revenue to a range of $600 million to $700 million, lowering the high end by $100 million. The company generated just $80.5 million in revenue for the first half of the year, meaning it still needs nearly $520 million in sales this year to hit the low end of its outlook. That's a tall order to fill.

A swing and a miss

After Apple's September event, analyst and vocal GT Advanced bull Matt Margolis issued a research report claiming that GT missed the iPhone 6 by mere " weeks ." GT was shipping quite a bit of the material to sapphire finishers in China, but yields were low and couldn't meet Apple's volume requirements.

The "acceptance" section of the MDSA specifies that any sapphire goods "that do not comply with the requirements of the applicable Specifications, Purchase Order or this Agreement may be rejected," and GT had to cover any costs associated with returning defective goods. It's unclear if the sapphire was considered "defective," as Margolis believes the problems were with the finishers and not GT itself.

The company was expecting to receive the fourth and final $139 million prepayment from Apple by the end of this month, but only if it met "certain operational targets" that aren't publicly specified. Whatever these targets were, it seems that GT missed them, and shareholders are the ones paying the ultimate price for it.

Lessons learned

There's been a lot of debate about the merit of sapphire in smartphones. The material is highly scratch-resistant, more so than Corning Gorilla Glass, but its brittleness makes it more susceptible to breaking. By the looks of it, it seems that GT was expecting to win the iPhone, and it guided 2014 revenue as such.

It's not a stretch to say that GT management was betting the company on the Apple deal. Not necessarily operationally, since the company will continue to operate in bankruptcy as it restructures, but financially, as its capital structure was becoming increasingly reliant on the Apple deal.

The company has now buckled under the weight of its financial obligations. With Apple prepaying nearly $600 million that can be repaid in the form of sapphire goods, it still seems that the Mac maker has broader plans for the material, but that could be a longer-term product pipeline. As GT's short-term sapphire prospects hit a wall, its balance sheet lacked the financial fortitude to weather the storm. So much for the diversification strategy.

The article Understanding GT Advanced Technology, Inc.'s Bankruptcy originally appeared on

Evan Niu, CFA , owns shares of Apple. The Motley Fool recommends Apple, Bank of America, and Corning and owns shares of Apple, Bank of America, Cirrus Logic, and Corning. Try any of our Foolish newsletter services free for 30 days . We Fools don't 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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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