Business Context and Reporting Period
Company: LG.Philips LCD Co., Ltd. (LG Display)
Filing Type: Form 6-K (Semiannual Report)
Reporting Period: January 1, 2007 to June 30, 2007
Business Overview: The company is a global leader in the manufacture of Thin Film Transistor Liquid Crystal Display (TFT-LCD) panels for notebook computers, desktop monitors, and televisions. As of June 30, 2007, it operated seven fabrication facilities in Korea and six module facilities in Korea, China, and Poland. The industry is characterized by high cyclicality, capital intensity, and declining average selling prices due to technological advancements and capacity expansion.
Key Financial Metrics (H1 2007)
Note: Figures below are presented on a Non-Consolidated Korean GAAP basis unless otherwise specified. All amounts in millions of Korean Won (KRW) unless noted.
| Metric | H1 2007 | H1 2006 |
|---|---|---|
| Sales Revenue | 5,873,586 | 4,504,035 |
| Operating Income (Loss) | (98,613) | (409,923) |
| Net Income (Loss) | 59,888 | (274,002) |
| Earnings Per Share (Won) | 167 | (766) |
| Total Assets | 13,267,331 | 12,815,847 |
| Total Liabilities | 6,281,411 | 5,926,171 |
| Shareholders' Equity | 6,985,920 | 6,889,676 |
| Cash and Cash Equivalents | 1,141,428 | 788,066 |
| Net Cash from Operating Activities | 552,041 | 380,599 |
| Net Cash Used in Investing Activities | (955,479) | (1,759,991) |
Consolidated Basis (Korean GAAP): Sales were KRW 6,077 billion with a consolidated operating loss of KRW 58 billion and net income of KRW 60 billion.
Material Changes vs. Prior Period
- Revenue Growth: Sales increased by 30.4% (non-consolidated) and approximately 27% (consolidated) compared to H1 2006, driven by higher shipment volumes despite declining average selling prices.
- Profitability Turnaround: The company returned to profitability, recording a net income of KRW 60 billion in H1 2007 compared to a net loss of KRW 274 billion in H1 2006. The operating loss narrowed significantly from KRW 410 billion to KRW 99 billion (non-consolidated).
- Price Trends: The average selling price of TFT-LCD panels declined from $1,953 per square meter in Q1 2006 to $1,274 in Q2 2007, reflecting industry-wide pricing pressure.
- Debt Structure: In April 2007, the company issued US$550 million in zero-coupon convertible bonds. Total long-term debt increased due to new borrowings and the issuance of these bonds.
- Working Capital: Inventories increased to KRW 795 billion (non-consolidated) from KRW 735 billion in the prior year-end, while trade receivables rose significantly to KRW 1.6 trillion.
Guidance, Outlook, and Risks
Management Commentary & Outlook:
- Capacity Expansion: The P7 fabrication facility in Paju is expected to reach a capacity of 130,000 input sheets per month in Q3 2007. The company is reviewing investments for next-generation facilities.
- Strategic Alliances: Formed alliances with Toshiba (19.9% equity in Poland subsidiary) and Kodak to secure customers and expand technology partnerships.
- Investment Plan: Expected investment for 2007 is approximately KRW 1,015 billion, primarily for capacity expansion. Future investments for 2008-2009 are not projected due to industry cyclicality.
Risks and Contingencies:
- Antitrust Investigations: The company is under investigation by fair trade authorities in Korea, Japan, the US, and other markets regarding possible anti-competitive activities. It is also named as a defendant in federal class actions in the US alleging antitrust violations and securities law violations.
- Patent Litigation: Involved in multiple patent infringement lawsuits globally, including cases against Chunghwa Picture Tubes (where the company secured verdicts for damages) and ongoing disputes with Chi Mei Optoelectronics and AU Optronics.
- Market Cyclicality: The industry faces periodic volatility due to supply/demand imbalances and capacity surges, leading to sharp declines in selling prices and gross margins.
- Customer Concentration: A substantial portion of sales is attributable to a limited group of end-brand customers; loss of these customers would materially impact sales.
Investor Verification Checklist
- Antitrust Exposure: Verify the status and potential financial impact of ongoing antitrust investigations and class action lawsuits in the US, Korea, and Japan.
- Convertible Bond Terms: Review the conversion prices and maturity dates of the US$475 million (2005) and US$550 million (2007) convertible bonds to assess potential dilution.
- Inventory Valuation: Assess the adequacy of inventory valuation allowances given the rapid decline in average selling prices and the high inventory levels (KRW 795 billion).
- Related Party Transactions: Examine the volume of sales to and purchases from LG Electronics and Philips Electronics, which represent significant related party transactions.
- Foreign Exchange Hedging: Review the effectiveness of foreign currency forward contracts and swaps in mitigating the impact of exchange rate fluctuations on operating margins.