Universal Display Corporation 10-Q Summary
Business Context and Reporting Period
Universal Display Corporation researches, develops and commercializes OLED technologies, phosphorescent materials, intellectual property licenses and related services for display and lighting applications. The company also provides non-OLED contract research services through Adesis and is developing Organic Vapor Jet Printing technology through OVJP Corporation.
This unaudited Form 10-Q covers the quarter and six months ended June 30, 2022, compared with the corresponding 2021 periods. The company reported 47,229,055 common shares outstanding as of August 2, 2022.
The company completed facility improvements and began operations at its new Shannon, Ireland manufacturing site in June 2022. The site is expected to diversify manufacturing and approximately double production capacity.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenue | $136.6 million, up 5% | $287.0 million, up 9% |
| Material sales | $71.9 million, down 7% | $158.6 million, up 1% |
| Royalty and license fees | $60.3 million, up 25% | $120.1 million, up 21% |
| Contract research services | $4.4 million, up 10% | $8.4 million, up 15% |
| Gross margin | $109.3 million; 80% of revenue | $226.6 million; 79% of revenue |
| Operating income | $53.3 million, up 7% | $115.6 million, up 2% |
| Net income | $41.5 million, up 2% | $91.5 million, down 1% |
| Diluted EPS | $0.87, versus $0.85 | $1.92, versus $1.94 |
Six-month operating expenses increased 12% to $111.1 million, primarily due to higher research and development spending, employee-related compensation, Shannon facility pre-production costs, OVJP development, contract research and PPG development activity. Six-month research and development expense increased to $54.7 million from $47.4 million, while selling, general and administrative expense increased to $40.9 million from $36.6 million.
The six-month effective tax rate increased to 22.1% from 19.1%; quarterly tax rates were 24.5% and 19.2%, respectively. The company attributed the higher rate primarily to nondeductible employee compensation and U.S. international tax provisions.
Cash Flow, Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $213.9 million at June 30, 2022, compared with $312.0 million at December 31, 2021.
- Short-term investments were $439.4 million and long-term investments were $181.1 million, producing total cash, short-term and long-term investment holdings of approximately $834.5 million.
- Operating cash flow was $86.1 million for the six months, compared with $59.1 million in 2021.
- Investing cash flow was negative $147.7 million, including $126.4 million of net investment purchases and $21.3 million of property and equipment purchases.
- Financing cash flow was negative $36.5 million, primarily reflecting $28.5 million of dividends and $8.8 million of employee tax withholding payments.
- Working capital increased to $776.9 million from $738.0 million at year-end 2021.
- Total assets were $1.499 billion and total liabilities were $334.1 million. Shareholders’ equity was $1.165 billion.
- The filing does not disclose funded debt or borrowings. Liabilities include $28.5 million of operating lease liabilities, a $68.2 million retirement plan benefit liability, and tax-related liabilities.
Management expects existing cash, cash equivalents and short-term investments to satisfy obligations for at least the next 12 months, subject to assumptions regarding operations, research and development, patent expenditures and the continuing effects of COVID-19. Management notes that additional financing could be required in the future, but availability and terms are uncertain.
Material Changes Versus the Prior Comparable Period
- Quarterly material sales declined because of weaker near-term demand for OLED products amid deterioration in the global market economy. Unit material volume decreased 8% for the quarter but increased 4% for the six-month period.
- Royalty and license revenue increased substantially because lower forecast customer volumes increased the estimated average contract fee per gram under ASC 606.
- The company recorded an $8.8 million quarterly and $10.7 million six-month cumulative catch-up adjustment to royalty and license revenue, primarily due to reduced anticipated customer demand over remaining contract lives.
- Quarterly gross margin improved to 80% from 78%, while the six-month gross margin declined to 79% from 81% because of higher manufacturing and per-unit material costs.
- Inventory increased to $165.6 million from $134.2 million, including raw materials of $92.0 million and finished goods of $57.1 million. The company recorded a $0.6 million quarterly inventory reserve increase and a $0.7 million six-month increase.
- Interest income increased materially because of higher investment balances and bond yields.
- The company declared and paid $0.60 per common share in dividends during the first six months, compared with $0.40 per share in the prior-year period. On August 2, 2022, the board declared an additional $0.30 per share dividend payable September 30, 2022.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal revenue or earnings guidance. Management expects quarterly and annual results to fluctuate based on OLED material sales volume and timing, license and royalty receipts, research and development and patent spending, and new business relationships.
- Management expects COVID-19-related effects to continue adversely affecting revenue, net income and cash flow through at least the end of the third quarter of 2022. Risks include reduced consumer demand, retail disruptions, supply-chain and logistics issues, productivity constraints and trade restrictions.
- Three customers represented 39%, 30% and 14% of second-quarter revenue, respectively. International revenue represented approximately 97% of revenue, with South Korea and China the largest geographic markets.
- Substantially all chemical materials were purchased from one supplier. Inventory purchase commitments were $40.4 million at June 30, 2022.
- The Samsung Display license agreement runs through the end of 2022 and includes a two-year extension option. The amended LG Display agreements expire by the end of 2025.
- The company had $23.9 million of committed phosphorescent emitter material backlog expected to be fulfilled within 90 days.
- A European patent subject to opposition proceedings has expired. Management does not expect the proceeding or expiration to materially affect the business or financial statements.
- The company has material Korean and U.S. tax matters involving potential refunds and corresponding U.S. tax liabilities. Recorded long-term tax assets and liabilities were $96.7 million and $54.3 million, respectively, at June 30, 2022. Outcomes remain subject to tax authority and court processes.
- The company had no off-balance-sheet arrangements and no material changes to previously disclosed risk factors.
Most Important Facts for Investors to Verify
- Whether the royalty and license revenue increases, including the $10.7 million six-month catch-up adjustment, are sustainable or primarily reflect revised customer-volume estimates.
- Trends in OLED customer demand, material volumes, inventory levels and the effect of global economic weakness on Samsung Display, LG Display, Chinese customers and other major accounts.
- Progress, utilization and costs associated with the Shannon, Ireland manufacturing facility.
- Resolution and cash timing of the Korean withholding-tax refund and related U.S. tax obligations.
- Customer concentration, reliance on a single chemical-material supplier and the $40.4 million inventory purchase commitment.
- The status and commercial funding requirements of OVJP and other research and development programs.
- The continuation of dividends and the company’s liquidity after investment purchases, capital expenditures and potential COVID-19-related disruptions.