Universal Display Corporation — Q1 2019 Form 10-Q Summary
Business context and reporting period
Universal Display Corporation develops, licenses and commercializes organic light-emitting diode (OLED) technologies and materials for display and lighting applications. Revenue is derived primarily from OLED material sales, intellectual-property licensing and royalties, contract research services, and technology development support. The filing covers the unaudited quarter ended March 31, 2019, with comparison to the quarter ended March 31, 2018.
Approximately 97% of revenue was generated outside North America, principally in South Korea and China. Three customers represented 83% of quarterly revenue, creating material customer concentration.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $87.8 million | $43.6 million | +$44.2 million, approximately +101% |
| Gross profit | $72.0 million | $36.1 million | +$35.8 million |
| Gross margin | 82.0% | 82.9% | Down approximately 0.9 percentage points |
| Operating income | $34.4 million | $4.5 million | +$29.8 million |
| Operating margin | 39.1% | 10.4% | Up approximately 28.7 percentage points |
| Net income | $31.5 million | $6.0 million | +$25.5 million |
| Effective tax rate | 16.0% expense | 3.8% benefit | Material change |
| Diluted EPS | $0.66 | $0.13 | +$0.53 |
| Cash flow from operations | $34.1 million | $38.8 million | Down $4.8 million |
Revenue growth reflected stronger OLED display material demand compared with weakness in the mobile display market in the prior-year quarter. OLED-related revenue represented 97% of total revenue versus 94% in Q1 2018. Research and development expense increased to $15.8 million from $12.4 million, while selling, general and administrative expense rose to $12.0 million from $10.8 million. Royalty and license expense more than doubled to $2.5 million, primarily because of higher qualifying material sales. A $224,000 excess-inventory charge was recorded.
At March 31, 2019, cash and cash equivalents were $225.0 million and short-term investments were $301.5 million, totaling $526.6 million, compared with $515.3 million at December 31, 2018. Working capital was $520.6 million. The balance sheet does not disclose borrowings or traditional debt; total liabilities were $252.0 million, including deferred revenue, retirement-plan liabilities and lease liabilities.
Operating cash flow was supported by a $33.1 million increase in deferred revenue but was reduced by a $9.0 million increase in accounts receivable and a $12.1 million reduction in accounts payable and accrued expenses. Investing activities used $9.1 million, including $13.3 million of property and equipment purchases. Financing activities used $10.9 million, including $4.7 million of dividends, $5.8 million of employee-tax withholding payments and $649,000 of share repurchases.
Material changes versus the prior comparable period
- Revenue approximately doubled, driven by higher OLED material sales and stronger display-market demand.
- Operating income increased substantially despite higher research, administrative and royalty expenses.
- Gross margin declined modestly because cost of sales increased faster than revenue.
- Net income benefited from operating leverage and $2.8 million of net interest income, but the prior-year tax benefit changed to a $6.0 million tax expense.
- Operating cash flow declined despite higher earnings, primarily because of working-capital timing and the prior-year benefit from a large accounts-receivable collection.
- Property and equipment increased to $80.6 million from $69.7 million, including the purchase of adjacent Ewing, New Jersey property for approximately $8.2 million and planned operational expansion.
- The company adopted ASC 842 on January 1, 2019, recognizing approximately $8.3 million of operating lease right-of-use assets and lease liabilities.
- The company formed UDC Ventures LLC in March 2019 to assist in funding potentially synergistic companies and technologies.
Guidance, outlook, risks and unusual items
Management did not provide specific quantitative revenue or earnings guidance in the filing. Management expects quarterly results to fluctuate based on the timing, cost and volume of material sales; license and royalty receipts; research, development and patent expenditures; and new business relationships.
Management stated that available cash, cash equivalents and short-term investments are expected to satisfy obligations for at least the next twelve months. Additional financing could nevertheless be required for OLED research, commercialization, patent activities, working capital and other purposes, and future financing may not be available on acceptable terms.
- Customer concentration is significant: three customers accounted for 40%, 30% and 13% of Q1 2019 revenue, respectively.
- Substantially all chemical materials were purchased from one supplier. Inventory purchase commitments were $17.6 million at March 31, 2019.
- Revenue recognition depends on estimates of customer material purchases, per-unit fees and sales-based royalties. Deferred revenue was $127.9 million, including $86.3 million current and $41.6 million long term.
- As of March 31, 2019, backlog for committed phosphorescent emitter material orders was $7.1 million, expected to be fulfilled within 90 days.
- The company is involved in patent opposition proceedings, including a proceeding concerning European Patent No. 1390962 and a resolved appeal involving European Patent No. 1933395. Management believes no individual proceeding is expected to be material, but outcomes involving core phosphorescent OLED technology remain uncertain.
- Tax matters involving Korean withholding taxes include disputed amounts, recorded receivables and payables, and potential refunds. Management’s estimates may change upon settlement.
- The company had operating lease liabilities of $8.0 million at March 31, 2019 and an unfunded supplemental executive retirement-plan liability of $44.7 million.
- Management reported no material changes to previously disclosed risk factors, no off-balance-sheet arrangements and effective disclosure controls as of March 31, 2019.
Most important facts for investors to verify
- Whether the Q1 revenue surge is sustainable or reflects customer and shipment timing, particularly given the concentration in three customers and Asia-Pacific markets.
- Future OLED material demand, customer production levels and the effect of license and royalty agreements expiring or subject to extension through approximately 2022.
- The assumptions underlying ASC 606 revenue estimates, deferred revenue recognition and the $7.1 million committed-material backlog.
- The status and potential financial impact of Korean withholding-tax disputes and related refund claims.
- Patent opposition outcomes and their potential effect on the company’s phosphorescent OLED intellectual-property rights.
- Capital expenditures, expansion spending, inventory commitments and the company’s ability to maintain high gross margins while increasing research and development investment.
- Whether the company’s large cash and investment portfolio continues to provide sufficient liquidity without external financing.