Universal Display Corporation — Q1 2014 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 displays and lighting. The company sells OLED materials, licenses intellectual property and provides technology development and support services. This unaudited report covers the three months ended March 31, 2014, compared with the three months ended March 31, 2013.
Financial Performance and Position
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $37.8 million | $15.0 million | Up 153% |
| Material sales | $35.3 million | $12.8 million | Up 177% |
| Royalty and license fees | $1.8 million | $1.3 million | Up 37% |
| Technology development and support revenue | $0.7 million | $0.9 million | Down 21% |
| Operating income (loss) | $6.6 million | $(7.2) million | Improved $13.8 million |
| Net income (loss) | $4.0 million | $(4.8) million | Improved $8.8 million |
| Diluted EPS | $0.09 | $(0.10) | Improved $0.19 |
| Cash flow from operations | $(7.3) million | $(10.9) million | Improved $3.6 million |
Commercial material sales were $33.5 million, up 219%, reflecting increased adoption of the company’s OLED materials by display manufacturers. Phosphorescent emitter sales increased 149% to $22.6 million, while host material sales increased 245% to $12.7 million. Commercial material cost was $9.9 million, or approximately 29% of commercial material sales, implying a commercial material gross margin of approximately 71%. Based on total reported revenue and material cost sales, the overall gross margin was approximately 74%; operating margin was approximately 17.5% and net margin approximately 10.6%.
Research and development expense increased to $10.2 million from $8.9 million, primarily because of higher PPG-related development costs. Selling, general and administrative expense increased to $6.4 million from $5.2 million. Patent costs and acquired-technology amortization declined to $4.0 million from $4.6 million. Income tax expense was $2.8 million, compared with a $2.2 million tax benefit in the prior-year quarter; the reported 2014 effective tax rate was 41.1%.
At March 31, 2014, cash and cash equivalents were $35.9 million and short-term investments were $231.0 million, for total readily available cash and short-term investments of $266.9 million. Working capital was $318.0 million. Total liabilities were $33.0 million, and the filing does not identify outstanding borrowings or debt obligations. Total shareholders’ equity was $433.0 million. Accounts receivable increased to $24.5 million from $15.7 million, and inventory increased to $14.6 million from $10.6 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven overwhelmingly by commercial OLED material sales, particularly commercial green phosphorescent emitter sales and higher host-material volumes.
- Operating results shifted from a $7.2 million loss to $6.6 million of operating income, despite higher research, administrative and royalty expenses.
- Operating cash use declined, but working-capital investment increased because of higher receivables, inventory and other current assets.
- Investing cash use increased to $25.3 million, primarily from net purchases of short-term investments. Cash declined by $34.7 million during the quarter.
- No common-stock repurchases were made under the prior repurchase program; 48,758 shares were acquired through employee tax-withholding transactions at an average price of $34.43 per share.
- The company received $4.6 million related to repayment of its Plextronics convertible note, including principal, interest and fees, after Plextronics filed for Chapter 11 bankruptcy.
Guidance, Outlook, Risks and Unusual Items
The filing provides no specific revenue or earnings guidance. Management stated that it expects sufficient cash, cash equivalents and short-term investments to meet obligations for at least the next twelve months, based on internal forecasts and assumptions. Management also noted that future financing could be required for research, development, commercialization, patent activities and working capital, and that additional funding may not be available on commercially reasonable terms.
- Results may fluctuate materially based on the timing, volume and cost of OLED material sales; timing of license fees and royalties; research, development and patent expenditures; and new business relationships.
- Revenue is highly concentrated: three customers represented 35%, 33% and 25% of Q1 2014 revenue, respectively. Nearly all revenue came from outside North America, primarily South Korea and Japan.
- All chemical materials were purchased from one supplier, creating supplier-concentration risk.
- The company’s SDC license agreement runs through the end of 2017, with license payments scheduled in the second and fourth quarters; therefore, quarterly license revenue may be uneven.
- Several patent oppositions and invalidation proceedings remain pending in Europe and Japan. The company reported adverse or narrowed claims in certain proceedings but intends to appeal and believes significant claims are likely to be upheld; outcomes are not assured.
- The company has an obligation to fund up to $7.5 million of work under its USC research agreement through April 2017 and recorded $3.5 million of PPG-related research and development expense in the quarter.
- Host-material sales face greater competition and the company states that their long-term prospects are uncertain.
- The company reported no material changes to previously disclosed risk factors, no off-balance-sheet arrangements and effective disclosure controls as of March 31, 2014.
Investor Verification Checklist
- Verify whether the sharp increase in commercial material sales is sustained and how much depends on the three major customers.
- Track quarterly timing and amounts of SDC license payments, which are generally concentrated in the second and fourth quarters.
- Assess cash conversion, receivables and inventory growth because operating cash flow remained negative despite reported profitability.
- Review gross-margin trends, especially the effect of product mix, host-material pricing and material-production costs.
- Monitor the outcomes and economic implications of pending patent appeals and oppositions.
- Confirm the company’s ability to maintain liquidity while funding research, patent litigation and commercialization commitments.