Universal Display Corporation — 2011 Q2 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; filed August 8, 2011. Financial statements are unaudited. Universal Display develops, licenses and commercializes OLED technologies and materials for displays and solid-state lighting.
Financial performance and liquidity
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $11.3 million | $8.4 million | $20.9 million | $12.7 million |
| Commercial revenue | $5.3 million | $2.0 million | $10.0 million | $3.8 million |
| Developmental revenue | $6.0 million | $6.5 million | $10.8 million | $8.9 million |
| Operating loss | $(1.1) million | $(1.9) million | $(3.8) million | $(6.1) million |
| Net income (loss) | $3.3 million | $(4.4) million | $(8.6) million | $(7.4) million |
| Net income (loss) per share | $0.07 basic; $(0.03) diluted | $(0.12) | $(0.20) basic and diluted | $(0.20) |
| Operating cash flow | Not separately provided | Not separately provided | $1.8 million | $(2.8) million |
Q2 revenue increased 33% year over year, while the operating margin improved to approximately negative 9.5% from negative 22.6%. Q2 net income and the approximately 29% net margin were substantially affected by a $4.5 million non-cash gain from revaluing the stock warrant liability. For the six-month period, revenue increased approximately 64%, but the company remained unprofitable; the operating margin was approximately negative 18% and the net margin approximately negative 41%.
At June 30, 2011, cash and cash equivalents were $65.2 million and short-term investments were $261.2 million, for total cash and investments of $326.4 million, compared with $73.2 million at December 31, 2010. The company had no debt reported in the filing. Total liabilities were $29.2 million, including a $4.6 million stock warrant liability and a $7.5 million retirement plan benefit liability. Working capital was $317.5 million.
Material changes versus the prior comparable period
- Commercial revenue increased by $3.3 million in Q2 and $6.2 million for the first six months, driven by higher commercial chemical, royalty and license revenue.
- Developmental revenue declined in Q2 because the prior-year period included recognition of a non-refundable $2.1 million customer payment; six-month developmental revenue nevertheless increased because of higher development chemical and contract research revenue.
- Research and development expense rose to $5.6 million in Q2 and $12.1 million for the six months, reflecting increased personnel, PPG Industries costs and expanded development activity, partly offset by lower amortization.
- Selling, general and administrative expense increased to $4.5 million in Q2 and $8.4 million for the six months, partly due to stock compensation, executive costs and establishing subsidiaries in Hong Kong, Korea and Japan.
- Patent costs increased to $1.9 million in Q2 and $3.5 million for the six months because of increased defense, prosecution and maintenance activity.
- The company completed a March 2011 public offering of 5.75 million shares at $46 per share, generating net proceeds of $249.7 million. Shares outstanding increased to approximately 45.6 million at June 30, 2011.
- The company purchased Motorola OLED patents for $439,644, ending related royalty obligations and beginning seven-and-a-half-year amortization.
Cash flow, outlook and key risks
Operating cash flow was positive for the first six months, primarily because of working-capital timing and non-cash items. Investing cash outflows of $210.4 million largely reflected purchases of short-term investments, while financing inflows of $253.4 million were driven by the equity offering. Management stated that available cash, cash equivalents and short-term investments should be sufficient to meet obligations for at least the next 12 months, although additional financing may eventually be required for research, commercialization, patent activities and working capital.
- The Samsung Mobile Display patent license was extended in three-month increments through September 30, 2011, while the company negotiated a new arrangement. Royalty payments were subject to a 16.5% Korean withholding tax beginning after the prior exemption expired in May 2010.
- Two major non-government customers accounted for 46% and 16% of six-month revenue, and their agreements were scheduled to expire within twelve months. Customer A represented 47% of Q2 revenue.
- Foreign revenue represented 87% of Q2 revenue and 83% of six-month revenue; South Korea was the largest geographic market.
- All chemical materials were purchased from one supplier, creating supplier concentration risk.
- The company faced numerous patent oppositions and invalidation proceedings in Europe, Japan and Korea, as well as a U.S. patent interference. The company believed significant claims would be upheld in several proceedings but could not assure favorable outcomes. Patent defense costs are borne by the company under its Princeton license arrangements.
- Results may fluctuate significantly based on the timing of license fees, royalties, development agreements, material sales, research expenditures and new business relationships.
- The stock warrant liability was remeasured through earnings and could cause substantial non-cash gains or losses based on the company’s share price and volatility. The related warrants were expected to expire or be exercised by August 2011.
Most important facts for investors to verify
- Whether the Samsung Mobile Display license was renewed or replaced after the September 30, 2011 extension and the resulting effect on royalty revenue.
- Revenue sustainability after the prior-year $2.1 million deferred-revenue release and the expiration of major customer agreements.
- Commercial adoption of OLED materials and technologies relative to continuing research, patent and commercialization expenses.
- Outcomes of the pending patent oppositions, invalidation trials and U.S. interference, including potential effects on licensing rights and royalty economics.
- Subsequent treatment of the $4.6 million warrant liability and the effect of warrant exercises or expirations on reported earnings and share dilution.
- Whether the company continued to generate positive operating cash flow without relying on equity financing or investment maturities.