Universal Display Corporation — Q2 2020 Form 10-Q Summary
Business Context and Reporting Period
Universal Display develops and commercializes OLED technologies and phosphorescent materials, licenses related intellectual property, and provides contract research services through Adesis. The unaudited report covers the three and six months ended June 30, 2020, compared with the same periods in 2019. The company formed OVJP Corporation in June 2020 to advance commercialization of its Organic Vapor Jet Printing technology.
Financial Performance and Position
| Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 |
|---|---|---|---|---|
| Revenue | $58.0 million | $118.2 million | $170.2 million | $205.9 million |
| Gross margin | $45.3 million; 78% | $94.1 million; 80% | $135.1 million; 79% | $166.0 million; 81% |
| Operating income (loss) | $(1.2) million | $48.7 million | $43.3 million | $83.0 million |
| Net income | $0.8 million | $43.4 million | $39.0 million | $74.9 million |
| Diluted EPS | $0.02 | $0.92 | $0.82 | $1.58 |
| Operating cash flow | Not separately reported for the quarter | Not separately reported for the quarter | $32.0 million | $83.9 million |
- OLED material sales represented 94% of Q2 revenue and 96% of six-month revenue; Adesis and other services comprised the remainder.
- Research and development expense increased to $21.4 million in Q2 and $40.9 million for the six-month period. Six-month selling, general and administrative expense was $31.6 million.
- Cash and cash equivalents were $133.6 million and short-term investments were $510.5 million at June 30, 2020, totaling approximately $644.0 million.
- Working capital was $667.5 million, compared with $630.9 million at December 31, 2019.
- The filing does not report funded debt. Total liabilities were $321.3 million, including $171.5 million of deferred revenue and $7.5 million of operating lease liabilities.
- Total shareholders’ equity was $839.8 million, compared with $811.4 million at year-end 2019.
- Capital expenditures were $11.8 million in the first six months, and cash dividends paid were $14.2 million. The quarterly common dividend increased to $0.15 per share from $0.10 in the comparable 2019 quarter.
Material Changes Versus the Prior Comparable Period
- Q2 revenue declined $60.2 million, or approximately 51%, primarily due to weaker customer demand for OLED emitters during the COVID-19 pandemic, prior-quarter advance purchases, and customer inventory-management actions related to trade tensions.
- Six-month revenue declined $35.7 million, or approximately 17%. The company attributed the decrease primarily to pandemic-related demand weakness.
- Q2 operating results shifted from $48.7 million of operating income to a $1.2 million operating loss. Six-month operating income declined 48%.
- Gross margin percentage decreased by two percentage points in both the quarter and six-month period. The 2019 periods included larger excess-inventory reserves: $3.9 million in Q2 and $4.2 million for six months, versus none in Q2 2020 and $0.6 million for six months 2020.
- Research and development expense rose 18% for the quarter and 18% for the six-month period, primarily from higher employee compensation and increased contract research activity.
- Operating cash flow fell $51.8 million year over year, reflecting lower earnings and working-capital effects, although deferred revenue provided $75.7 million of operating cash.
- At March 15, 2020, the company recognized previously constrained revenue from a 2019 emitter shipment after the customer’s right of return expired without being exercised. The amount was not separately quantified in the filing.
Guidance, Outlook, Risks, and Unusual Items
- No formal numerical revenue or earnings guidance is provided. Management expects COVID-19 to adversely affect revenue, net income, and cash flow at least through the balance of 2020, but states that the duration and severity cannot be estimated reliably.
- Management reported that the pandemic had not materially impaired its ability to fulfill commercial-material shipments as of the filing date, but testing, manufacturing, logistics, and supply-chain capacity remain uncertain.
- Key COVID-19 risks include weaker consumer demand for customers’ OLED products, retail closures, supply-chain disruption, work-from-home productivity effects, economic slowdown, and changing trade restrictions.
- Revenue is highly concentrated geographically and by customer: approximately 93% of Q2 revenue came from outside North America, while four customers accounted for 85% of Q2 revenue and 91% of six-month revenue based on the disclosed percentages.
- The company relies substantially on one supplier for chemical materials and had $25.7 million of inventory purchase commitments at June 30, 2020.
- The company expects sufficient cash, cash equivalents, and short-term investments to meet obligations for at least the next 12 months, subject to COVID-19 developments. It has no reported off-balance-sheet arrangements.
- Tax matters include ongoing Korean withholding-tax litigation and related estimated refund assets and U.S. tax liabilities. The ultimate outcomes and amounts may change.
- An opposition remains pending before the European Patent Office concerning the EP ’962 patent covering white phosphorescent OLED technology. Management expects significant claims to be upheld but provides no assurance.
Most Important Facts for Investors to Verify
- Whether OLED customer demand and shipment volumes recover after the pandemic-related Q2 decline and customer inventory adjustments.
- The sustainability and timing of revenue recognized from deferred revenue, including the $171.5 million deferred-revenue balance at June 30, 2020.
- Customer concentration, particularly exposure to the four largest customers and to South Korea and China.
- Inventory growth to $84.5 million and the adequacy of reserves for excess or obsolete materials.
- The outcome and cash-flow implications of the Korean tax disputes and the European patent opposition.
- Whether operating cash flow remains sufficient to fund research and development, capital spending, dividends, and contractual commitments if revenue remains depressed.
- The company’s ability to commercialize OVJP technology and maintain its intellectual-property position without materially increasing costs or execution risk.