Business Context and Reporting Period
Company: LG.Philips LCD Co., Ltd. (Foreign Private Issuer)
Filing Type: Form 6-K (Submission of Audit Report and Financial Statements)
Reporting Period: Fiscal Year Ended December 31, 2005 (compared to 2004)
Audit Date: January 20, 2006 (Report received February 14, 2006)
Auditor: Samil PricewaterhouseCoopers (Unqualified Opinion)
The company manufactures and sells Thin Film Transistor Liquid Crystal Display (TFT-LCD) products. It operates as a joint venture between LG Electronics Inc. (37.9% ownership) and Koninklijke Philips Electronics N.V. (32.9% ownership). The financial statements are prepared in accordance with Korean GAAP.
Key Financial Metrics (Consolidated)
| Item (KRW Millions) | FY 2005 | FY 2004 |
|---|---|---|
| Revenues | 10,075,580 | 8,328,170 |
| Operating Income | 469,697 | 1,728,356 |
| Net Income | 517,012 | 1,655,445 |
| Total Assets | 13,674,082 | 10,357,302 |
| Total Liabilities | 5,998,485 | 4,584,660 |
| Shareholders' Equity | 7,675,597 | 5,772,642 |
| Cash & Equivalents | 1,579,452 | 1,361,239 |
| Operating Cash Flow | 2,108,416 | 2,726,134 |
| Investing Cash Flow | (4,197,874) | (3,892,757) |
| Financing Cash Flow | 2,307,671 | 2,023,916 |
Margins (2005 vs 2004):
- Gross Margin: 9.7% (down from 24.4%)
- Operating Margin: 4.7% (down from 20.8%)
- Net Margin: 5.1% (down from 19.9%)
Material Changes vs. Prior Period
- Profitability Decline: Despite a 21% increase in revenue, Net Income fell by 69% (from KRW 1.66 trillion to KRW 0.52 trillion). Operating Income dropped by 73%.
- Margin Compression: Gross profit margins contracted significantly, indicating intense price competition or increased cost of sales relative to revenue.
- Capital Expenditures: Cash used in investing activities increased to KRW 4.2 trillion, driven by heavy acquisition of property, plant, and equipment (KRW 4.17 trillion) to fund new TFT-LCD fabrication plants.
- Equity Raise: The company raised significant capital through the issuance of American Depositary Shares (ADSs) in July 2005, generating approximately US$1.39 billion in gross proceeds.
- Debt Structure: Total liabilities increased by 31%. The company issued US$475 million in zero-coupon convertible bonds in April 2005.
Outlook, Risks, and Contingencies
- Use of Proceeds: Management intends to use proceeds from the 2005 equity offering to fund capital expenditures for new LCD facilities in Korea.
- Legal Proceedings: The company is involved in multiple patent infringement lawsuits globally (US, UK) involving Chunghwa Picture Tubes, Tatung Company, and ViewSonic Corp. While the company lost a first-instance case in the UK in November 2005, management does not expect a material adverse effect on financial condition.
- Foreign Exchange Risk: The company utilizes forward contracts and cross-currency swaps to hedge against currency fluctuations. Significant unrealized gains and losses on these derivatives were recorded in 2005.
- Related Party Transactions: Significant sales and purchases occur with LG Group affiliates and Philips, representing a material portion of total transactions.
Investor Verification Checklist
- Margin Sustainability: Verify the drivers behind the sharp decline in gross and operating margins (e.g., panel price wars, yield rates, raw material costs).
- Capital Intensity: Assess the return on the massive capital expenditures (KRW 4.2 trillion) and the timeline for new fabrication plants to become operational.
- Debt Service: Review the maturity schedule of the new convertible bonds and foreign currency debentures to ensure liquidity coverage.
- Legal Exposure: Monitor the status of the UK patent appeal and ongoing US litigation for potential injunctions or damages.
- Related Party Dependence: Evaluate the pricing and terms of transactions with LG Electronics and Philips to ensure arm's length dealings.