Sharp's Losses, Liabilities Highlight Foxconn Revival Task

  • Liabilities exceeded assets on parent and group basis
  • President Takahashi to step down after Foxconn takeover

Sharp Corp. posted a second straight annual loss and said liabilities exceeded its assets, highlighting the turnaround challenge facing new owner Foxconn Technology Group.

The net loss was 256 billion yen ($2.35 billion) in the year ended March, from a loss of 222.3 billion yen a year earlier, the Osaka-based company said Thursday. The result compares with the 161 billion yen loss expected by analysts.

Sharp’s struggle with deteriorating demand for its consumer electronics and displays has resulted in more than $12 billion in net losses over the past five years and raised doubts over its ability to survive as a going concern. Foxconn Chairman Terry Gou, who has built a fortune assembling devices for others including Apple Inc., spent four years chasing the Japanese company before winning control with a $3.5 billion deal in March. He is now facing the task of reviving a businesses ranging from household appliances and solar panels to components and office equipment.

“There is no quick turnaround for Sharp’s businesses and the tough times are likely to continue for a while,” Makoto Kikuchi, chief executive officer of Myojo Asset Management Co., said prior to the earnings announcement. “Additional restructuring is unavoidable, but they’ve been through this already and it’s far from guaranteed to improve earnings.”

No Forecast

Sharp didn’t give an outlook for the current fiscal year ending March 2017, saying it was difficult to calculate factors including synergies with Foxconn. The net loss may narrow to 18.6 billion yen, according to the average of nine analyst estimates compiled by Bloomberg.

Liabilities exceeded assets by 31.2 billion yen as of March 31, Sharp said. The company said it can avoid the risk of fund deficiency with continued support from Foxconn and expects the deal to close by the end of June.

“While we find ourselves with excessive debt, this strategic alliance will not only bring capital, but also a powerful business relationship that could bring stability,” President Kozo Takahashi said. “We are counting on considerable synergies.”

Takahashi will step down when the acquisition is completed and be replaced by Foxconn’s Tai Jeng Wu.

Foxconn Investment

The Japanese company built shiny factories to produce large-size flat panels used in TVs, only to see demand explode for smaller-screened smartphones and tablets. As LCD prices fell and the Japanese currency rose to post-World War II highs, Sharp faced competition on all sides, especially from Samsung Electronics Co. and other display makers.

Sharp’s display business reported a 129.1 billion yen operating loss last fiscal year as sales plunged 15 percent.

Sharp plans to use Foxconn’s money to pour 200 billion yen into the production of next-generation screens based on OLED, or organic light-emitting diode, technology, which has long promised more vivid images and less battery drain. Another 60 billion yen will be spent to improve yield and increase production of existing LCD operations.

That could help Sharp gain ground against the competition. The market for small and midsize screens is dominated by Samsung’s display unit, which had 23 percent of the market in 2015, according to market researcher IHS. Japan Display Inc. and LG Display Co. are the next biggest suppliers, followed by Sharp, at 10 percent.

Industry Slowdown

The Foxconn deal comes at a time when the smartphone supply chain is bracing for a a potential slide in sales, unfettered competition for market share and crumbling prices. Much of the gloom centers on China, the world’s biggest market, where the economy is slowing and the industry faces a massive shakeout.

Another question hangs over Sharp’s consumer electronics unit, which makes TVs, smartphones and washing machines. Foxconn doesn’t have a lot of experience selling gadgets directly to consumers, and will have to decide whether that’s a business it wants to be in.

Consumer electronics operations posted a 21.8 billion yen operating loss last year as sales dropped 18 percent. Still, Sharp is planning to spend 40 billion yen on the division, to add more Web connectivity to its range of products. The same amount of funding will go to Sharp’s most profitable business making office products such printers and projectors.

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