Business Context and Reporting Period
Company: LG.Philips LCD Co., Ltd. (LPL)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: First Quarter ended March 31, 2005
Business Overview: LPL is a leading manufacturer of Thin Film Transistor Liquid Crystal Display (TFT-LCD) panels for notebook PCs, monitors, and TVs. The company operates six fabrication facilities in Gumi, Korea, and three module facilities in Korea and China. It is currently constructing a 7th generation fab (P7) in Paju, Korea, with mass production targeted for the first half of 2006.
Accounting Basis: The primary financial data presented in the text is on a non-consolidated basis in accordance with Korean GAAP. Consolidated U.S. GAAP figures are provided in the attachments.
Key Financial Metrics (Q1 2005)
Note: Figures below are in millions of Korean Won (KRW) unless otherwise stated. Data is primarily Non-Consolidated Korean GAAP.
| Metric | Q1 2005 | Q1 2004 |
|---|---|---|
| Sales Revenue | 1,770,308 | 2,116,318 |
| Operating Income (Loss) | (162,397) | 691,560 |
| Net Income (Loss) | (78,830) | 627,925 |
| Earnings Per Share (Loss) | (242) Won | 2,165 Won |
| Total Assets | 10,383,570 | 9,598,693 |
| Total Liabilities | 4,699,795 | 3,826,051 |
| Shareholders' Equity | 5,683,775 | 5,772,642 |
| Cash and Cash Equivalents | 1,283,757 | 445,955 |
| Net Cash from Operating Activities | (60,053) | 655,433 |
| Net Cash Used in Investing Activities | (426,100) | (717,734) |
| Net Cash from Financing Activities | 494,921 | 59,038 |
Consolidated U.S. GAAP Highlights (Q1 2005):
- Sales: 2,064,046 million KRW
- Net Loss: (94,509) million KRW
- Operating Loss: (125,506) million KRW
Material Changes vs. Prior Period
- Revenue Decline: Sales decreased by approximately 16% year-over-year (Non-consolidated) due to a significant drop in average selling prices (ASP) for TFT-LCD panels, which fell to $2,236 per unit in Q1 2005 from $3,090 in 2004.
- Profitability Reversal: The company swung from a net profit of 627.9 billion KRW in Q1 2004 to a net loss of 78.8 billion KRW in Q1 2005. Operating income turned negative, reflecting a gross loss of 87.8 billion KRW.
- Cost of Sales: Cost of sales exceeded revenue in Q1 2005 (1,858 billion KRW vs. 1,770 billion KRW), driven by high fixed costs and raw material price increases (e.g., Glass prices rose to 85,840 Won from 76,080 Won in 2004).
- Cash Flow: Operating cash flow turned negative (-60 billion KRW) compared to a strong positive inflow in the prior year, primarily due to the net loss and changes in working capital (increase in receivables).
- Capital Expenditures: Investing cash outflows decreased to 426 billion KRW from 718 billion KRW in the prior year, though the company continues heavy investment in the P7 fab.
Guidance, Outlook, and Risks
Outlook and Investment Plans:
- P7 Fab Construction: The company is constructing a 7th generation fab (P7) in Paju. Mass production is expected in the first half of 2006 with an initial capacity of 45,000 sheets/month. Total estimated cost for a 90,000 sheet capacity is approximately 5.3 trillion KRW.
- 2005 Investment: Expected investment for 2005 is approximately 4,580 billion KRW, subject to market conditions.
Management Commentary & Risks:
- Industry Cyclicality: The TFT-LCD industry is highly cyclical and capital-intensive. The company notes that average selling prices are expected to continue declining due to technology advances and cost reductions.
- Supply/Demand Imbalance: Intense competition and synchronized capacity expansion by manufacturers can lead to surges in supply, exerting downward pressure on prices and margins.
- Customer Concentration: A substantial portion of sales is attributable to a limited group of end-brand customers. Loss of these customers would materially reduce sales.
- Raw Materials: Shortages of raw materials (e.g., glass, back-lights) may arise temporarily due to rapid industry capacity expansion.
Subsequent Events (Post-March 31, 2005):
- Stock Options: Granted 450,000 stock appreciation rights (SARs) to directors and executives on April 7, 2005.
- Convertible Bonds: On April 19 and April 28, 2005, the company issued overseas convertible bonds with an aggregate face value of US$475 million, maturing in 2010 with a zero coupon rate.
Key Facts for Investor Verification
- Accounting Basis Discrepancy: Verify the difference between Non-Consolidated Korean GAAP (primary text) and Consolidated U.S. GAAP (attachments). The U.S. GAAP net loss (94.5 billion KRW) is higher than the Korean GAAP net loss (78.8 billion KRW).
- Price Erosion: Confirm the sustainability of the 27% drop in average selling price per panel ($3,090 to $2,236) and its impact on future gross margins.
- Debt Structure: Review the composition of long-term debt, which includes significant foreign currency debentures (US$565 million) and loans (US$183 million), exposing the company to exchange rate risks.
- Capital Intensity: Assess the company's ability to fund the remaining ~4.9 trillion KRW required for the P7 fab completion given the current operating loss and negative operating cash flow.
- Legal Contingencies: Monitor ongoing patent litigation with Chunghwa Picture Tubes and Tatung, which involves claims of infringement and antitrust violations in the U.S. and U.K.