Universal Display Corporation — 2021 Q1 Form 10-Q Summary
Business context and reporting period
Universal Display develops and commercializes OLED technologies, phosphorescent OLED materials and intellectual property for display and lighting applications. Revenue is primarily generated from OLED material sales, royalty and license fees, and contract research services. This unaudited Form 10-Q covers the three months ended March 31, 2021, compared with the three months ended March 31, 2020.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $134.0 million | $112.3 million | +19% |
| Material sales | $79.8 million | $66.6 million | +20% |
| Royalty and license fees | $50.9 million | $43.1 million | +18% |
| Contract research services | $3.3 million | $2.6 million | +26% |
| Gross margin | $110.7 million | $89.8 million | +23% |
| Gross margin percentage | 83% | 80% | +3 percentage points |
| Operating income | $63.6 million | $44.5 million | +43% |
| Net income | $51.7 million | $38.2 million | +35% |
| Diluted EPS | $1.08 | $0.80 | +$0.28 |
| Cash flow from operations | $29.5 million | $5.7 million | +$23.8 million |
Operating margin increased to approximately 47.4% from 39.6%, while net margin increased to approximately 38.6% from 34.0%. The effective tax rate was 18.9%, compared with 18.6% in the prior-year period.
- Material unit volume increased 13%; green emitter sales increased 15% to $60.5 million and red emitter sales increased 37% to $19.1 million.
- Research and development expense increased to $23.3 million from $19.5 million, primarily due to higher employee-related costs and increased contract research and PPG development activity.
- Selling, general and administrative expense increased to $16.4 million from $15.4 million.
- Royalty and license expense declined to $112,000 from $3.3 million, primarily because of lower royalties under the Princeton, USC and Michigan license arrangements following patent expirations.
- Interest income declined to $133,000 from $2.1 million because of lower investment yields.
At March 31, 2021, cash and cash equivalents were $726.3 million and short-term investments were $720,000, compared with total cash and short-term investments of approximately $730.0 million at December 31, 2020. Working capital was $793.0 million. The filing states that the company expects sufficient liquidity to meet obligations for at least the next 12 months.
Cash provided by investing activities was $85.5 million, primarily reflecting net investment maturities and sales. Capital expenditures were $9.9 million, principally related to Ewing, New Jersey facility improvements. Financing cash outflows were $18.8 million, including $9.5 million of dividends and $9.6 million of employee tax-withholding payments related to equity compensation.
The filing does not disclose outstanding borrowings or senior debt; reported liabilities primarily consist of deferred revenue, retirement plan obligations, operating lease liabilities and other operating liabilities. No off-balance-sheet arrangements were reported.
Material changes versus the prior comparable period
- Revenue growth reflected stronger OLED demand and improved customer sales, particularly in China; China revenue increased to $60.5 million from $37.8 million, while South Korea revenue declined to $68.0 million from $69.4 million.
- International customers accounted for approximately 97% of revenue, and four customers represented 91% of revenue in aggregate: 36%, 23%, 20% and 12%, respectively.
- Deferred revenue increased to $178.1 million from $162.3 million at December 31, 2020. Unbilled receivables increased to $24.9 million from $10.4 million.
- Inventory increased to $101.4 million from $91.6 million, including a $667,000 increase in the excess inventory reserve.
- Shareholders’ equity increased to $952.5 million from $912.7 million after net income, dividends and equity compensation activity.
- The company entered into amendments with LG Display effective January 1, 2021, extending the related OLED license and supply agreements through the end of 2025.
Guidance, outlook, risks and unusual items
- No quantitative revenue or earnings guidance was provided in the filing.
- The company expects its new Shannon, Ireland manufacturing facility, established with PPG, to double production capacity, diversify manufacturing, and begin operations in early 2022. Facility improvements and regulatory approvals were expected to be completed within the following 12 months.
- On April 22, 2021, after quarter-end, the company announced new five-year OLED material supply and license agreements with Visionox Hefei Technology Co. Ltd.
- Management continued to identify COVID-19 as a risk to customer demand, consumer spending, supply chains, logistics, productivity and operations, and expected adverse effects to continue at least through the first half of 2021.
- The company had $19.4 million of committed phosphorescent emitter material purchase orders expected to be fulfilled within 90 days and $18.9 million of firm inventory purchase commitments at March 31, 2021.
- The company was obligated to pay USC up to $6.6 million for research work during the remaining extended term of its research agreement.
- An opposition proceeding remains active against European Patent No. 1390962, relating to white phosphorescent OLED technology. The company believes significant claims should be upheld but cannot assure the outcome and expects to bear related legal costs.
- The company is pursuing potential refunds of Korean withholding taxes and is subject to related U.S. tax liabilities. It reported long-term tax assets and liabilities associated with these matters, and stated that estimates may change upon settlement. A Korean tax appeal concerning the beneficial ownership of royalty income also remains pending.
- Revenue recognition depends on estimates of customer material volumes, royalties and contract consideration. The filing also identifies inventory recoverability and income tax realizability as critical accounting areas.
Most important facts for investors to verify
- Whether OLED demand, material volumes and customer product sales sustain the Q1 growth rates, particularly in China and South Korea.
- The extent of customer concentration and the effect of changes in purchasing by the four largest customers.
- Progress, capital spending and regulatory approvals for the Shannon manufacturing facility and its expected early-2022 start.
- The outcome and financial implications of Korean withholding-tax matters and related U.S. tax positions.
- The outcome of the European patent opposition and any effect on the company’s phosphorescent OLED intellectual-property portfolio.
- COVID-19-related effects on supply chains, customer demand, logistics and manufacturing continuity.
- Conversion of deferred revenue and backlog into future material shipments and reported revenue.