LG Display Co., Ltd. — FY2017 Form 20-F
Business context and reporting period. Filed April 27, 2018, this is an annual report for the fiscal year ended December 31, 2017, not a standalone Q4 filing. LG Display manufactures TFT-LCD and OLED panels for televisions, computers, mobile devices and other applications. Financial statements are consolidated and prepared under IFRS as issued by the IASB; amounts below are in Korean won (W), unless stated otherwise.
Key financial metrics
| Metric | FY2017 | FY2016 | Change or context |
|---|---|---|---|
| Revenue | W27,790 billion | W26,504 billion | Up 4.9% |
| Gross profit / gross margin | W5,366 billion / 19.3% | W3,750 billion / 14.1% | Gross profit up 43.1% |
| Profit before tax | W2,333 billion | W1,316 billion | Up 77.3% |
| Net profit / net margin | W1,937 billion / 7.0% | W932 billion / 3.5% | Profit up 107.8%; effective tax rate fell to 17.0% from 29.2% |
| Basic and diluted EPS | W5,038 | W2,534 | Up approximately 99%; EPS in the filing is in won |
| EBITDA | W5,579 billion | W4,410 billion | Non-IFRS measure as defined by the company |
| Operating cash flow | W6,764 billion | W3,641 billion | Up 85.8% |
| Capital expenditures, cash basis | W6,592 billion | W3,736 billion | Cash flow from investing activities was negative W6,481 billion |
| Cash and current bank deposits | W3,361 billion | W2,722 billion | Cash and equivalents alone were W2,603 billion |
| Current assets / current liabilities | W10,474 billion / W8,979 billion | W10,484 billion / W7,058 billion | Working capital W1,495 billion; current ratio approximately 1.17 |
| Borrowings and bonds | W5,603 billion | W4,779 billion | Net borrowings to equity ratio 15%; total liabilities to equity rose to 95% from 85% |
Material changes versus the prior comparable period
- Revenue recovered from the 2016 decline, principally as television panel revenue rose 15.6% to W11,718 billion and desktop monitor revenue rose 8.9% to W4,393 billion. Television panels increased to 42.2% of revenue.
- Revenue declined in notebook panels (5.9%), tablets (12.1%) and mobile and other applications (2.7%). Total panel units sold fell 12.8%, from 330.7 million to 288.5 million; the overall average selling price per panel rose 20.2% to W96,162.
- Gross margin improved as higher-end, differentiated products lifted selling prices faster than per-panel costs, alongside manufacturing cost reductions. Cost of sales fell 1.4% despite higher revenue.
- Selling and administrative expenses rose 29.6% to W1,691 billion, including increased OLED marketing and warranty expense. Warranty expense rose to W251 billion from W167 billion.
- Operating cash flow increased substantially, but capital spending also rose sharply. Cash and current bank deposits increased by W638 billion year over year; current liabilities increased by W1,920 billion and working capital fell by W1,931 billion.
Outlook, management commentary, risks and unusual items
- Investment outlook: Management expected 2018 cash-basis capital expenditures to exceed 2017, funding OLED capacity expansion in Paju and Guangzhou and the P10 facility. Plans included a W7.8 trillion investment in next-generation large- and plastic-OLED lines in Paju, and an approximately W1.8 trillion investment for a 70% interest in a Guangzhou OLED joint venture. Projects and timing remain subject to market conditions and reassessment.
- Capacity and technology: Plastic OLED production began on the E5 line in August 2017; mass production on E6 was expected in the second half of 2018. The Guangzhou large-sized OLED line was expected to begin production in the second half of 2019. Execution, yields, demand and funding are material uncertainties.
- Industry exposure: Management identifies panel-industry cyclicality, new capacity, pricing pressure, competition and declining prices as major risks. 2017 benefited from higher demand and prices for large panels; the filing does not establish that this improvement will persist.
- Customer and product concentration: The top ten end-brand customers represented 81% of sales in 2017. LG Electronics accounted for 23.4% of sales. Television panels represented 42.2% of revenue, while growth in OLED and other differentiated products must offset weakening demand in some mature categories.
- Foreign exchange and other non-operating items: 94.7% of sales were denominated in U.S. dollars. The company recorded W220 billion of net foreign-currency loss in other income and expenses in 2017, partly offset by W211 billion of foreign-currency gain in finance income. These exposures can make earnings and cash flows volatile.
- Unusual items: Other income and expenses included W81 billion of gain on equipment disposals, mainly following closure of the P4 facility. Finance costs included W42 billion of losses on disposal of equity-accounted investments, including interests in New Optics and Narenanotech. The effective tax rate fell partly because deferred tax estimates improved and tax-rate changes were recognized.
- Contingencies: The filing describes continuing antitrust-related claims, including UK proceedings; a settlement in principle with Argos was reached in December 2017. Management states outcomes and related costs may differ from estimates. The reported litigation and claims provision was W43 million at year-end 2017, while other proceedings could still result in cash outflows.
- Other risks: Risks include product defects and rising warranty claims, dependence on suppliers and key customers, high capital requirements, debt covenants, foreign-exchange fluctuations, labor relations, environmental and safety compliance, and geopolitical and economic conditions in Korea. Management said it believed working capital was sufficient for current requirements and reported compliance with debt covenants at year-end.
- Dividend: A W500-per-share dividend, totaling approximately W179 billion, was declared in March 2018 for 2017 and paid in April 2018.
Most important facts for investors to verify
- Confirm current OLED project budgets, milestones, funding sources, production yields and customer demand, particularly given planned 2018 capital expenditure above 2017’s W6.6 trillion.
- Track panel prices, capacity additions and product mix; determine whether the 2017 television-panel pricing and gross-margin improvement is sustainable.
- Assess the effects of the sharp decline in panel unit volume and revenue from notebook, tablet, and mobile and other applications.
- Review liquidity and refinancing needs: year-end current liabilities were W9.0 trillion, current working capital was W1.5 trillion, and W1.45 trillion of current financial liabilities was due within one year.
- Monitor U.S.-dollar and yen exposure, customer concentration, related-party transactions, and the status and potential costs of remaining legal claims.
- Reconcile reported measures carefully: IFRS statements do not present operating profit as a separate line; the filing cites K-IFRS operating profit of W2.462 trillion for 2017, versus W1.311 trillion in 2016. These figures use a different accounting basis.