Business Context and Reporting Period
Company: LG Display Co., Ltd. (formerly LG.Philips LCD Co., Ltd.)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2008
Business Overview: A leading global manufacturer of Thin Film Transistor Liquid Crystal Display (TFT-LCD) panels for televisions, notebook computers, desktop monitors, and other applications. The company operates nine fabrication facilities in Korea and module facilities in Korea, China, and Poland. In 2008, the company changed its name to reflect the reduction of Philips Electronics' ownership and its expansion into OLED and flexible display technologies.
Key Financial Metrics (Year Ended Dec 31, 2008)
| Metric | Amount (KRW Billions) | Amount (USD Millions) |
|---|---|---|
| Sales (Revenue) | 16,274.1 | 12,895.5 |
| Cost of Sales | 13,609.1 | 10,783.8 |
| Gross Profit | 2,665.0 | 2,111.7 |
| Operating Income | 1,234.3 | 978.1 |
| Net Income | 905.4 | 717.4 |
| EBITDA | 3,521.0 | 2,790.0 |
| Capital Expenditures | 2,748.6 | 2,178.0 |
| Net Cash from Operating Activities | 4,525.5 | 3,586.0 |
| Total Assets | 17,512.1 | 13,876.4 |
| Total Liabilities | 8,461.3 | 6,704.7 |
| Stockholders' Equity | 9,050.8 | 7,171.8 |
Note: USD amounts are translated at the rate of KRW 1,262.0 = USD 1.00 (Dec 31, 2008).
Material Changes vs. Prior Period (2007)
- Revenue Growth: Sales increased 13.4% to KRW 16.27 trillion, driven by higher unit sales of large-size panels for televisions and notebook computers, despite a decrease in average selling prices.
- Profitability Decline: Net income decreased 32.6% to KRW 905.4 billion. This was primarily due to a one-time antitrust fine of KRW 534.8 billion (USD 423.8 million) paid to the U.S. Department of Justice and a net foreign exchange loss of KRW 242.7 billion.
- Margin Compression: Operating margin decreased from 10.3% in 2007 to 7.6% in 2008. Gross margin improved slightly from 15.9% to 16.4% due to cost reduction efforts.
- Balance Sheet: Total assets increased 26.5% due to capital expenditures for new fabrication facilities (P8 and P6E). Short-term borrowings increased significantly to KRW 601.1 billion from KRW 4.7 billion in 2007.
- Inventory Build-up: Inventories increased 38.0% to KRW 1.14 trillion, attributed to a slowdown in the global economy and increased production output.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- 2009 Capital Expenditures: The company expects total capital expenditures on a delivery basis to be approximately KRW 2.5 trillion in 2009, with cash outflows of approximately KRW 4.0 trillion. This funds the build-out of P6E, P8, and a new LTPS TFT-LCD facility in Paju.
- Market Conditions: Management anticipates continued declines in average selling prices due to industry capacity expansion. However, they expect consumer demand for large-size panels to increase.
- Dividends: A cash dividend of KRW 178.9 billion was declared for 2008 shareholders (paid April 2009).
Key Risks and Contingencies
- Antitrust Litigation: While the U.S. criminal fine was settled, the company faces ongoing civil class-action lawsuits in the U.S. and Canada regarding antitrust violations. Management has not accrued a provision for these as losses are not deemed probable or estimable.
- Customer Concentration: The top ten end-brand customers accounted for 76.5% of sales in 2008. LG Electronics alone accounted for 21.2% of sales.
- Price Erosion: The industry faces steady declines in average selling prices. If prices decrease faster than the company can reduce costs, margins will be adversely impacted.
- Exchange Rate Volatility: Significant depreciation of the Korean Won against the U.S. dollar in 2008 resulted in substantial foreign exchange losses on debt and hedging activities.
- Tax Exemption Expiry: The company lost its eligibility for income tax exemptions under Korean foreign direct investment laws after 2008, which may negatively affect future results.
Investor Verification Checklist
- Antitrust Exposure: Verify the status and potential financial impact of pending civil class-action lawsuits in the U.S. and Canada beyond the settled criminal fine.
- Inventory Valuation: Assess the risk of inventory write-downs given the 38% increase in inventory levels and the cyclical downturn in the global economy.
- Capital Allocation: Confirm the funding sources for the projected KRW 4.0 trillion cash outflow for capital expenditures in 2009, particularly given the tight credit markets.
- Customer Dependency: Monitor the financial health and order volumes of top customers, specifically LG Electronics and Philips Electronics, which represent a significant portion of revenue.
- Foreign Exchange Hedging: Review the effectiveness of hedging strategies given the volatility between the Korean Won, U.S. Dollar, and Japanese Yen.