Universal Display Corporation — 2021 Q2 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 primarily from OLED material sales, royalty and license fees, and contract research services through Adesis. The filing covers the unaudited three and six months ended June 30, 2021, compared with the corresponding 2020 periods.
The company reported approximately 97% of revenue from outside North America and serves a concentrated customer base, with three customers representing 92% of second-quarter revenue and 85% of six-month revenue. A new manufacturing facility in Shannon, Ireland is expected to approximately double production capacity and is scheduled to become operational by mid-2022.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $129.7 million | $58.0 million | $263.7 million | $170.2 million |
| Material sales | $77.4 million | $31.9 million | $157.2 million | $98.5 million |
| Royalty and license fees | $48.2 million | $22.4 million | $99.1 million | $65.5 million |
| Gross margin | $101.7 million | $45.3 million | $212.4 million | $135.1 million |
| Gross margin percentage | 78% | 78% | 81% | 79% |
| Operating income | $49.9 million | $(1.2) million | $113.5 million | $43.3 million |
| Net income | $40.5 million | $0.8 million | $92.2 million | $39.0 million |
| Diluted EPS | $0.85 | $0.02 | $1.94 | $0.82 |
| Operating cash flow | Not separately reported | Not separately reported | $59.1 million | $32.0 million |
Second-quarter revenue increased 124% year over year, while six-month revenue increased 55%. Material sales increased 143% in the quarter and 60% year to date; material unit volumes increased 145% and 56%, respectively. Royalty and license fees increased 115% in the quarter and 51% year to date, reflecting stronger customer OLED product sales and material volumes.
Six-month operating income increased $70.1 million, and net income increased $53.3 million. The six-month effective tax rate was 19.1%, compared with 17.3% in the prior-year period. Operating expenses increased 8% to $51.8 million in the quarter and 8% to $98.9 million for the six months, primarily due to higher employee compensation, research and development, and operating costs. Royalty and license expense declined substantially because of lower royalties under the Princeton, USC and Michigan arrangement following patent expirations.
At June 30, 2021, cash and cash equivalents were $542.9 million and short-term investments were $190.5 million, totaling $733.5 million, compared with $730.0 million at December 31, 2020. Working capital was $830.3 million. The filing discloses no borrowings or traditional debt; liabilities included $16.6 million of operating lease liabilities on a present-value basis and a $80.0 million retirement plan benefit liability. Management expects available liquidity to meet obligations for at least the next 12 months.
Six-month investing cash outflows were $115.0 million, including net purchases of investments and $20.7 million of property and equipment purchases. Financing cash outflows were $31.2 million, including $19.0 million of dividends. Cash and cash equivalents declined $87.1 million during the six months, partly because funds were shifted into short-term investments.
Material changes versus the prior comparable period
- Revenue growth reflected recovery from COVID-19-related weakness in the 2020 second quarter and stronger demand for OLED products using Universal Display emitter materials.
- Green emitter sales increased to $57.8 million in Q2 from $24.2 million, while red emitter sales increased to $19.5 million from $7.5 million.
- Six-month gross margin improved to 81% from 79%; quarterly gross margin remained approximately 78%.
- Research and development expense increased 16% for the quarter and 16% for the six months; selling, general and administrative expense increased 25% and 16%, respectively.
- Inventory increased to $104.7 million from $91.6 million at year-end, including a $1.1 million year-to-date increase in inventory reserves.
- Deferred revenue increased to $169.2 million, including $123.0 million current and $46.2 million long term. The company recognized $81.5 million of revenue previously included in deferred revenue during the six months.
- The company extended its Visionox relationship through new five-year material supply and license agreements. Amendments with LG Display extended those agreements through 2025.
- The Tianma patent license and material purchase agreements expired on July 21, 2021; the parties were negotiating long-term extensions at the filing date.
Guidance, outlook, risks and unusual items
The filing does not provide quantitative revenue or earnings guidance. Management expects quarterly results to fluctuate based on material sales timing and volume, license and royalty receipts, research and development and patent spending, and new business relationships.
- Management stated that COVID-19 could continue to adversely affect revenue, net income and cash flows through at least the second half of 2021. Risks include weaker consumer demand, retail disruption, supply-chain and logistics interruptions, reduced productivity, economic deterioration and trade restrictions.
- Revenue and receivables are highly concentrated among a small number of customers, and substantially all chemical materials are purchased from one supplier. Inventory and firm purchase commitments may require additional write-downs if demand is below forecast.
- The company had $24.6 million of inventory purchase commitments at June 30, 2021 and $27.2 million of committed phosphorescent emitter material backlog expected to be fulfilled within 90 days.
- Tax matters in Korea and the United States involve significant recorded assets and liabilities. Korean withholding-tax-related assets totaled approximately $83.5 million, with related U.S. federal liabilities of approximately $55.4 million, subject to litigation, mutual-agreement procedures and future settlements.
- An opposition proceeding remains pending against European Patent No. 1390962, covering white phosphorescent OLED technology. Management believes the patent should be upheld but cannot assure the outcome and expects to incur legal costs.
- The company’s principal accounting estimates involve revenue recognition and deferred revenue, inventory recoverability, income taxes, intangible assets, stock compensation and retirement benefits.
- The board declared a third-quarter dividend of $0.20 per share on August 3, 2021. Future dividends remain subject to board approval.
Important facts for investors to verify
- Whether the Tianma agreements were renewed after their July 21, 2021 expiration and the potential effect on future material and royalty revenue.
- The sustainability of the sharp year-over-year recovery in OLED demand and whether COVID-19, consumer demand or supply-chain disruptions affect the second half of 2021.
- Customer concentration, particularly the exposure represented by the three largest customers and the company’s concentration in South Korea and China.
- Progress, capital spending and timing for the Shannon, Ireland manufacturing facility, including the targeted mid-2022 operational date.
- The resolution and cash-tax consequences of the Korean withholding-tax disputes and related U.S. tax-return amendments.
- Inventory levels, reserves and purchase commitments relative to customer forecasts and product lifecycles.
- The outcome of the European patent opposition and the continuing cost of maintaining and defending the company’s intellectual-property portfolio.