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Business

Sharp returns to black but isn't out of the woods yet

TOKYO -- Sharp was profitable on a net and operating basis in fiscal 2013 for the first time in three years by focusing on small and midsize LCDs, but the cash-strapped Japanese company still needs to walk a tightrope to truly get back on its feet.

Sharp President Kozo Takahashi announces fiscal 2013 earnings.

     "We've made a good start toward rehabilitation," President Kozo Takahashi said at the company's earnings announcement on Monday, looking relieved. The electronics manufacturer projects net profit of 30 billion yen ($291 million) for the current year through March 2015, up about 160% from a year earlier.

     Just a year ago, Sharp reported a net loss of 545.3 billion yen for fiscal 2012 due to a slump in LCD and other operations. The management team made visits to companies around the world, including Samsung and Qualcomm, to seek financial assistance.

     Sharp's LCD business helped the company post an operating profit of 108.5 billion yen last fiscal year on high operating rates at plants making small and midsize panels for smartphones and other devices. In fiscal 2012, Sharp removed the Sakai plant in Osaka Prefecture, a drag on earnings, from its consolidated results. Sharp's LCD business turned around from a loss of 138.9 billion yen in fiscal 2012 to a profit of 41.5 billion yen last fiscal year.

Failure to win Apple order

The LCD business was not the only bright spot for Sharp. Key segments, including televisions and mobile phones, all swung around to the black thanks to cost cuts and efforts to stop the bleeding. This fiscal year, Sharp is taking the offensive on LCDs.

     Sharp sales personnel are making the rounds of more than 10 smartphone makers in China to promote energy-efficient IGZO (indium-gallium-zinc oxide) panels. The company aims to more than double monthly Chinese sales to the equivalent of 2.5 million 5-inch panels by finding clients other than such big players as ZTE and Xiaomi.

     Steering the LCD business, which got Sharp into trouble in the first place, is no easy matter. Smaller panels do not require the huge investment that large panels do, but the risks are basically the same. Plant operating rates depend on orders. And churning out too many can cause inventories to balloon and prices to fall.

     Apple is expected to release the new version of its iPhone, which will be available in two screen sizes, as early as this September. Sharp is believed to have snagged orders for 4.7-inch panels but not for 5.5-inch panels. If shipments to Apple are weaker than expected, profitability will worsen at Sharp's Kameyama No. 1 plant in Mie Prefecture, which specializes in panels for the U.S. company.

Weak finances

Since low prices are the strength of Chinese smartphone makers, selling panels to those companies can be a double-edged sword. Large orders will boost plant operating rates but can also push down prices.

     Sharp's Achilles' heel is its weak finances. Its capital ratio temporarily improved from 6% to 13% thanks to a capital increase last autumn, but the figure fell back to the single digits at the end of March due to losses for covering unfunded pension liabilities and other factors.

     Sharp's main lenders have been understanding, but that could change depending on earnings. Sharp Executive Vice President Tetsuo Onishi said that no capital increases are planned for this fiscal year. The company could face a crisis again if it fails to win orders in China or the market loses steam.

     A next-generation display that Sharp is developing with Qualcomm holds promise. Sharp plans to set up a production line as early as this autumn, but the new product is not expected to contribute to earnings until fiscal 2016 or later, according to a company official. And the use of its panels in such new fields as robots and medicine will also take a while. So Sharp has no choice but to rely on small and midsize LCDs for the time being.

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