Universal Display Corporation — Form 10-Q Summary
Business context and reporting period
Universal Display Corporation develops, licenses, and commercializes OLED technologies and materials for display and lighting applications. Revenue is generated from OLED material sales, royalty and license fees, and technology development and support services. This report covers the three and nine months ended September 30, 2016, compared with the same periods in 2015.
The company completed the acquisition of Adesis, a 43-employee contract research organization, on July 11, 2016, and acquired BASF OLED intellectual property for approximately $95.8 million in June 2016.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Total revenue | $30.2 million | $39.4 million | $124.3 million | $128.7 million |
| Operating income (loss) | $(3.0) million | $8.4 million | $33.7 million | $5.3 million |
| Net income (loss) | $(1.5) million | $7.0 million | $22.3 million | $(3.4) million |
| Diluted EPS | $(0.03) | $0.15 | $0.47 | $(0.07) |
| Operating margin | (10)% | 21% | 27% | 4% |
| Cash flow from operations | Not separately provided | Not separately provided | $40.3 million | $80.6 million |
Q3 revenue declined 23%, driven primarily by a 31% decrease in material sales. Royalty and license fees were essentially flat at $5.2 million, while technology development and support revenue increased to $1.5 million from $67,000, primarily due to Adesis-related contract research activity.
For the first nine months, revenue declined 3%. Material sales fell 18%, including a 90% decline in host material sales, while royalty and license fees increased 21% to $52.6 million. The company recognized $37.5 million of royalty and license fee payments under its Samsung Display agreement, compared with $30.0 million in the prior-year period.
Q3 profitability was pressured by lower material sales and increased operating expenses. Patent costs and amortization increased to $7.4 million from $4.0 million, primarily because of the BASF and Adesis acquisitions. Nine-month operating income benefited substantially from the absence of the $33.0 million inventory write-down recorded in 2015. Excluding that write-down, 2015 adjusted operating income was $38.3 million and adjusted net income was $26.6 million, compared with reported 2016 operating income of $33.7 million and net income of $22.3 million.
At September 30, 2016, cash and cash equivalents were $54.4 million, short-term investments were $231.5 million, and long-term investments were $15.2 million. Total cash and investments were approximately $301.1 million, compared with $397.7 million at December 31, 2015. Working capital was $311.4 million versus $413.2 million at year-end 2015. The filing does not identify outstanding debt; reported interest expense was only $21,000 for the first nine months.
Material changes versus the prior comparable period
- Q3 revenue decreased $9.2 million, primarily from lower commercial material sales.
- Q3 commercial material sales declined 34%; phosphorescent emitter sales declined 27%, and host material sales declined 86%.
- Nine-month royalty and license revenue increased $9.2 million, partially offsetting the $15.2 million decline in material sales.
- Q3 operating expenses increased $2.2 million, including higher Adesis-related costs and amortization.
- Nine-month operating income improved because 2015 included a $33.0 million inventory write-down; underlying 2016 earnings were lower than 2015 adjusted results.
- Operating cash flow declined by $40.3 million, primarily because 2015 included $48.4 million of prepaid royalty and license fee receipts versus $3.3 million in 2016.
- Investing cash outflows included approximately $96.0 million for BASF intellectual property and $33.2 million for the Adesis acquisition.
Guidance, outlook, commentary, risks, and unusual items
Management expects existing host material sales to remain minimal because customers are not required to purchase the company’s host materials and the business is more competitive than phosphorescent emitter materials. Management also expects quarterly and annual results to fluctuate based on material sales volumes, the timing of license and royalty receipts, research and development and patent expenditures, and new business relationships.
Management believes available cash, cash equivalents, and short-term investments are sufficient to meet obligations for at least the next twelve months. The company may nevertheless require additional financing for research, development, commercialization, patent activities, working capital, or other purposes; availability and terms of future financing are not assured.
Key concentrations include three customers representing 88% of Q3 revenue and 95% of nine-month revenue. Approximately 95% of Q3 revenue and 98% of nine-month revenue came from outside North America, principally South Korea. Substantially all chemical materials were purchased from one supplier.
Active patent oppositions and challenges remain in Europe and Japan involving important phosphorescent OLED technologies. Management does not believe the individual proceedings are currently expected to have a material financial impact, but outcomes are uncertain and defense costs may be significant. The filing reports no material changes to previously disclosed risk factors, no off-balance-sheet arrangements, and effective disclosure controls.
The company had $5.7 million of firm inventory purchase commitments at September 30, 2016. It also had up to $2.4 million of contingent consideration obligations related to Adesis, with $1.5 million recorded at acquisition-date fair value.
Investor verification points
- Verify the sustainability and timing of Samsung and LG Display royalty, license, and material commitments, including the Samsung agreement’s stated expiration at the end of 2017.
- Assess whether the sharp decline in host material sales is structural and whether phosphorescent emitter volumes and pricing can offset it.
- Reconcile reported nine-month earnings with the prior-year $33.0 million inventory write-down and management’s non-GAAP adjustments.
- Monitor the cash impact and operating contribution of the BASF intellectual property acquisition and Adesis integration.
- Review customer concentration, supplier concentration, international exposure, and related collection or supply-chain risks.
- Track patent opposition and appeal outcomes, particularly those affecting the company’s core phosphorescent OLED portfolio.