LPL

Business Context and Reporting Period

This Form 6-K filing by LG.Philips LCD Co., Ltd. (now LG Display) reports the submission of the independent auditor's report and consolidated financial statements for the fiscal year ended December 31, 2006. The filing date is February 20, 2007. The company operates as a joint venture between LG Electronics Inc. (37.9% ownership) and Koninklijke Philips Electronics N.V. (32.9% ownership), focusing on the manufacturing and sale of Thin Film Transistor Liquid Crystal Display (TFT-LCD) products.

Key Financial Metrics (Consolidated)

Note: All figures are in millions of Korean Won (KRW) based on Korean GAAP.

Material Changes vs. Prior Period

• Profitability Reversal: The company swung from a net profit of KRW 517 billion in 2005 to a net loss of KRW 769 billion in 2006. Operating income similarly dropped from a profit of KRW 470 billion to a loss of KRW 879 billion.
• Revenue Growth: Despite the loss, revenues increased by approximately 5.4% year-over-year, driven by higher sales volumes.
• Gross Margin Collapse: The company recorded a gross loss of KRW 308 billion in 2006, compared to a gross profit of KRW 981 billion in 2005. Cost of sales exceeded revenues for the first time.
• Inventory Build-up: Inventories increased significantly from KRW 691 billion to KRW 1.05 trillion, with a valuation loss of KRW 133 billion recorded against inventory.
• Capital Expenditures: Cash used for the acquisition of property, plant, and equipment decreased to KRW 3.08 trillion from KRW 4.17 trillion in the prior year, though still representing a massive outflow.
• Debt Levels: Total liabilities increased by KRW 600 billion, driven by an increase in long-term debts and debentures.

Outlook, Risks, and Contingencies

• Market Conditions: Management attributed the operating loss to unusual low production volumes and a difficult market environment, resulting in significant inventory valuation losses and ramp-up costs (KRW 18 billion).
• Legal Proceedings (Patents): The company is involved in multiple patent infringement lawsuits. Notably, it secured verdicts in its favor against Chunghwa Picture Tubes in California and Delaware, awarding damages totaling over US$100 million. However, it lost an appeal in the UK regarding a case against Tatung and ViewSonic.
• Antitrust Investigations: The company is under investigation by fair trade and antitrust authorities in Korea, Japan, the US, and other markets regarding alleged anti-competitive activities in the LCD industry. It is also named as a defendant in federal class actions in the US. Management states these matters are in early stages and intends to defend vigorously.
• Subsequent Events: In February 2007, a new federal class action was filed in the US alleging violations of the Securities Exchange Act. Additionally, Anvik Corporation filed a patent infringement case regarding photo-masking equipment.
• Foreign Exchange: The company utilizes forward contracts, swaps, and options to hedge currency risks. Significant unrealized gains and losses on these derivatives were recorded in 2006.

Investor Verification Checklist

• Inventory Valuation: Verify the assumptions used for the KRW 133 billion inventory valuation loss and the recoverability of the KRW 1.05 trillion inventory balance.
• Antitrust Exposure: Monitor the status of ongoing antitrust investigations and class actions, as potential fines or settlements could be material.
• Patent Litigation Outcomes: Track the final resolution of pending patent cases, particularly the impact of the UK loss and the collection of damages from US verdicts.
• Cash Flow Sustainability: Assess the company's ability to fund continued capital expenditures (KRW 3+ trillion annually) given the negative operating cash flow contribution from core operations (before depreciation adjustments).
• Debt Maturities: Review the schedule of long-term debt maturities, particularly the KRW 564 billion due within one year, to ensure refinancing capabilities.