LCD display manufacturer LG.Philips LCD (NYSE:LPL) posted third-quarter results last night, though management probably would have preferred to power the screen down this time. Costs related to a new manufacturing plant combined with falling end-product prices led to a whole lot of red ink, despite increased demand.
The company, an independently run and traded joint venture between LG Electronics and KoninklijkePhilips (NYSE:PHG), is planning to offset some of the expense of the new plant by sharing 20% of its capacity with Toshiba. It has also slowed down production a bit -- in order to reduce its bulging inventories -- and the upcoming holiday quarter is expected to power a full recovery to positive full-year earnings.
It's awfully hard to turn a profit when your cost of goods sold exceeds revenues, and that's how bad things are at LG.Philips right now. Management is taking the situation seriously and doing what it can to tighten up operations. "We are now at a crucial inflection point," says CFO Ron Wirahadiraksa. "Without additional measures relating to product mix, cost, and productivity, we will not be able to deliver value to our shareholders."
On the plus side, operating cash flow remains positive on the back of large depreciation items, though the company is spending more than that on capital expenses to build the business for future needs. The LCD market is tough enough that Sony (NYSE:SNE) has decided to withdraw from it, and competition from plasma screens and projection TVs with Texas Instruments' (NYSE:TXN) digital light processor (DLP) systems only adds to the pricing pressure.
The future will be tougher still, with new technologies expected to enter the market in the coming days. Examples include organic light-emitting diode (OLED) screens powered by technology from Eastman Kodak (NYSE:EK), Universal Display (NASDAQ:PANL), and others, as well as carbon nanotube-based field emission displays (FED) from the likes of Samsung. The way to survive in the LCD business appears to be cutting costs and improving manufacturing efficiency. LG.Philips seems to be on the ball, but it's a risky place to invest your hard-earned dollars today.
Further Foolishness:
- Fellow Fool Rich Smith saw the loss coming.
- Not even the World Cup could pull the earnings above water.
- Universal Display is moving and shaking, though.
Universal Display is a Motley Fool Rule Breakers recommendation. Try a 30-day free trial to see the display technology of the future.
Fool contributor Anders Bylund is a Universal Display shareholder, but he holds no other position in any of the companies discussed here. You can check out Anders' holdings if you like. Foolish disclosure always looks sharp.
