Universal Display Corporation — Q2 2016 Form 10-Q Summary
Business Context and Reporting Period
Universal Display develops, licenses and commercializes OLED technologies and materials for display and lighting applications. Revenue is generated primarily from OLED material sales and intellectual-property licensing. This unaudited filing covers the three and six months ended June 30, 2016, compared with the corresponding 2015 periods.
Key Financial Metrics
| Metric | Q2 2016 | Q2 2015 | Six Months 2016 | Six Months 2015 |
|---|---|---|---|---|
| Total revenue | $64.4 million | $58.1 million | $94.1 million | $89.3 million |
| Operating income (loss) | $34.0 million | $(4.8) million | $36.7 million | $(3.1) million |
| Net income (loss) | $21.8 million | $(11.8) million | $23.8 million | $(10.5) million |
| Diluted EPS | $0.46 | $(0.25) | $0.51 | $(0.23) |
| Operating margin | 52.8% | (8.2)% | 39.0% | (3.4)% |
| Net margin | 33.9% | (20.3)% | 25.2% | (11.7)% |
- Q2 revenue comprised $42.0 million of royalty and license fees, $22.3 million of material sales and $59,000 of technology development and support revenue.
- Six-month material sales declined 9% to $46.6 million, primarily because host-material sales fell 92% to $598,000. Phosphorescent emitter sales increased 6% to $46.0 million.
- Royalty and license revenue increased 25% in Q2 and 24% for the six-month period, including $37.5 million recognized from the Samsung Display patent and license agreement during the six months, versus $30.0 million in the prior-year period.
- Research and development expense increased to $11.0 million in Q2 and $21.4 million for the six months. SG&A increased to $7.7 million and $14.3 million, respectively.
- Income tax expense was $11.0 million in Q2 and $12.0 million for the six months; the effective tax rates were 33.6% and 33.5%, respectively.
- Cash provided by operating activities was $36.2 million for the six months, compared with $75.2 million in 2015.
- Cash and cash equivalents were $69.9 million and short-term investments were $246.3 million at June 30, 2016, for total immediately available cash and short-term investments of $316.2 million, down from $395.5 million at December 31, 2015.
- Working capital was $338.6 million at June 30, 2016, compared with $413.2 million at year-end 2015.
- The balance sheet reports total liabilities of $86.1 million, including $58.4 million of deferred revenue and a $24.3 million retirement-plan liability. No separate debt balance is disclosed; interest expense was $15,000 for the six months.
Material Changes Versus the Prior Comparable Period
- Profitability improved substantially because the prior-year periods included a $33.0 million inventory write-down related primarily to declining host-material demand. Excluding that charge, 2015 adjusted net income was $19.4 million in Q2 and $20.7 million for the six months, versus reported 2016 net income of $21.8 million and $23.8 million.
- Reported Q2 operating income increased by $38.8 million year over year; six-month operating income increased by $39.7 million.
- Revenue growth was driven by higher Samsung-related license fees, while material revenue declined because customers’ newer products did not use the company’s host materials.
- On June 28, 2016, the company acquired BASF OLED intellectual property, including more than 500 issued and pending patents, for approximately $95.8 million plus $261,000 of acquisition costs. The assets are being amortized over 10 years.
- Acquired technology increased to $162.5 million at June 30, 2016 from $72.0 million at December 31, 2015. Six-month investing cash outflow was $59.4 million, including $96.0 million for intangible assets.
- Following quarter-end, the company acquired Adesis for approximately $33.0 million in cash; the transaction closed July 11, 2016.
Outlook, Commentary, Risks and Unusual Items
- Management expects existing host-material sales to remain minimal and notes that host materials are more competitive and have less favorable margins than phosphorescent emitter materials.
- Management expects quarterly and annual results to fluctuate based on material sales timing and volume, receipt of license fees and royalties, research and development and patent costs, 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, but additional funding could be required for research, commercialization, patent activities and working capital. Future financing may not be available on acceptable terms.
- Revenue is highly concentrated: one customer represented 76% of Q2 revenue and 64% of six-month revenue; a second customer represented 18% and 29%, respectively. Approximately 99% of revenue originated outside North America, although revenue is primarily denominated in U.S. dollars.
- The company depends substantially on one chemical-material supplier and had $6.2 million of inventory purchase commitments at June 30, 2016.
- Several patent oppositions and invalidation proceedings remain pending in Europe and Japan, including matters involving fundamental phosphorescent OLED technologies. Management does not currently expect any individual proceeding to be material, but outcomes are uncertain and legal costs may be significant.
- The filing reports no material changes to previously disclosed risk factors, no off-balance-sheet arrangements, and effective disclosure controls as of June 30, 2016.
Important Facts for Investors to Verify
- Whether Samsung and other major customers sustain license-fee payments and meet material-purchase commitments, given the high customer concentration.
- Whether phosphorescent emitter growth offsets the continuing decline in host-material sales.
- The commercial and financial contribution of the BASF intellectual-property acquisition and the subsequent Adesis acquisition.
- The sustainability of reported margins after excluding the unusual 2015 inventory write-down and considering higher amortization of acquired technology.
- The effect of pending patent challenges, particularly those involving core phosphorescent OLED claims.
- Future cash requirements for acquisitions, research and development, patent enforcement, and inventory commitments.