Business Context and Reporting Period
Universal Display Corporation develops, licenses and commercializes OLED technologies and materials for display and lighting applications. Revenue is primarily generated from OLED material sales, royalty and license fees, and contract research services through Adesis. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods.
Approximately 97% of revenue was generated outside North America, and approximately 97% of revenue was OLED-related. The three largest customers represented 84% of third-quarter revenue and 85% of nine-month revenue.
Financial Performance and Key Metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Total revenue | $143.6 million | $117.1 million | $407.3 million | $287.3 million |
| Material sales | $75.6 million | $68.7 million | $232.9 million | $167.2 million |
| Royalty and license fees | $63.9 million | $44.6 million | $163.0 million | $110.0 million |
| Contract research services | $4.1 million | $3.8 million | $11.4 million | $10.1 million |
| Gross margin dollars | $112.1 million | $93.7 million | $324.5 million | $228.8 million |
| Gross margin percentage | 78% | 80% | 80% | 80% |
| Operating income | $57.7 million | $48.4 million | $171.2 million | $91.7 million |
| Net income | $46.1 million | $40.5 million | $138.3 million | $79.5 million |
| Diluted EPS | $0.97 | $0.85 | $2.90 | $1.67 |
Q3 operating margin was approximately 40%, compared with 41% in the prior-year quarter; nine-month operating margin was approximately 42%, compared with 32% in the prior-year period. Q3 net margin was approximately 32%, compared with 35% in Q3 2020; nine-month net margin was approximately 34%, compared with 28% in the prior-year period.
- Q3 revenue increased 23%, led by a 44% increase in royalty and license fees and a 10% increase in material sales. Material unit volume increased 20%.
- Nine-month revenue increased 42%; material sales increased 39% and material unit volume increased 41%, reflecting recovery from COVID-19-related weakness in 2020 and stronger OLED demand.
- Q3 gross margin percentage declined primarily because of higher costs associated with introducing new red and green emitters.
- Research and development expense increased 22% in Q3 and 18% for the nine-month period, driven by employee-related costs, OVJP development, contract research and PPG activity.
- Q3 selling, general and administrative expense increased 54%, primarily due to higher compensation, Shannon, Ireland facility pre-production costs and increased depreciation.
- Royalty and license expense declined to $0.3 million in Q3 and $0.5 million for nine months, from $3.3 million and $8.2 million, respectively, primarily due to expiration of patents covered by the Princeton, USC and Michigan license arrangement.
Cash Flow, Liquidity and Capital Structure
- Cash and cash equivalents were $535.2 million at September 30, 2021, compared with $630.0 million at December 31, 2020.
- Short-term investments increased to $253.8 million from $100.0 million, resulting in total cash and short-term investments of $788.9 million versus $730.0 million at year-end 2020.
- Working capital was $874.9 million at September 30, 2021, compared with $759.6 million at December 31, 2020.
- Operating cash flow was $134.3 million for the first nine months, compared with $75.8 million in 2020. The increase was supported by net income and a $160.0 million increase in deferred revenue, partially offset by increased inventory, other assets and receivables.
- Investing cash flow was negative $187.0 million, including net investment purchases of approximately $157.1 million and $29.5 million of property and equipment purchases.
- Financing cash flow was negative $42.2 million, including $28.4 million of dividends and $14.9 million of employee stock-compensation withholding taxes.
- The filing does not disclose outstanding borrowings or senior debt. Total liabilities were $392.3 million, including $166.9 million of deferred revenue, $80.7 million of retirement plan benefit liability and $31.6 million of operating lease liabilities.
- Management expects available cash, cash equivalents and short-term investments to satisfy obligations for at least the next 12 months, while noting that additional funding could be required for research, commercialization, patent activities or working capital.
Material Changes, Outlook and Risks
- The Company established a manufacturing site in Shannon, Ireland, expected to double production capacity and diversify manufacturing. Facility improvements and regulatory approvals were expected to be completed within the next 12 months, with operations anticipated by mid-2022.
- In 2021, the Company extended its LG Display agreements through 2025, extended its Tianma agreements for an additional multi-year term, and entered into new five-year Visionox Hefei material supply and license agreements.
- Deferred revenue was $166.9 million at September 30, 2021, and was expected to be recognized as materials are shipped over the remaining contract periods. Backlog under committed phosphorescent emitter purchase orders was $11.8 million, anticipated to be fulfilled within 90 days.
- No formal revenue or earnings guidance is provided in the filing. Management expects quarterly results to fluctuate based on material shipment timing and volume, license and royalty receipts, research and development and patent expenditures, and new business relationships.
- COVID-19 continued to affect operations and could adversely affect fourth-quarter 2021 revenue, earnings and cash flow through supply-chain disruption, logistics constraints, reduced consumer demand, retail closures, labor limitations and trade restrictions. The Company had not experienced a significant inability to fulfill commercial material shipments as of the filing.
- Revenue recognition depends on estimates of customer material volumes, per-unit fees and royalty consideration. A nine-month 2021 cumulative catch-up adjustment increased deferred revenue recognition by $9.9 million, partly due to changes in a customer’s expected emitter purchases and improved royalty forecasts.
- The Company depends substantially on a small number of customers and one supplier provides substantially all chemical materials. Inventory reserves increased by $2.1 million during the first nine months due to excess inventory in certain products.
- An opposition proceeding remains pending against European Patent No. 1390962, covering white phosphorescent OLED technology. Management believes significant claims should be upheld but cannot assure the outcome.
- The Company is pursuing Korean withholding-tax refunds and related U.S. tax adjustments. A Korean tax matter involving beneficial ownership of royalty payments has been decided in the Company’s favor by lower courts but remains subject to appeal to the Korean Supreme Court.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter. No material changes to previously disclosed risk factors were reported.
Investor Verification Priorities
- Verify the sustainability of customer OLED demand, material volumes and royalty-bearing product sales, particularly given customer concentration.
- Reconcile revenue recognized from deferred revenue and cumulative catch-up adjustments with future shipment volumes and royalty estimates.
- Monitor Q4 2021 COVID-19, supply-chain and logistics effects and the timing, cost and production ramp of the Shannon manufacturing facility.
- Assess the effect of new emitter introductions on gross margin and inventory reserves.
- Review the status and potential financial impact of the European patent opposition and Korean withholding-tax proceedings.
- Confirm future capital requirements, including manufacturing expansion, research and development, patent expenditures, dividends and any potential financing needs.