Universal Display Corporation — 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 smartphones, tablets, televisions, and solid-state lighting. Revenue is generated from OLED material sales, intellectual-property licensing and royalties, and technology development and support. This unaudited Form 10-Q covers the three and nine months ended September 30, 2013, compared with the corresponding 2012 periods.
Financial Performance and Position
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Total revenue | $32.8 million, versus $12.5 million | $97.2 million, versus $55.1 million |
| Operating income | $4.2 million, versus operating loss of $6.1 million | $18.8 million, versus $5.3 million |
| Net income | $5.5 million, versus net loss of $5.5 million | $16.2 million, versus $4.3 million |
| Diluted EPS | $0.12, versus $(0.12) | $0.35, versus $0.09 |
| Operating margin | Approximately 12.9%, versus negative 48.5% | Approximately 19.4%, versus 9.6% |
| Net margin | Approximately 16.9%, versus negative 43.7% | Approximately 16.6%, versus 7.8% |
- Material sales were $30.3 million in the third quarter and $70.2 million year to date, compared with $11.0 million and $34.4 million, respectively, in 2012.
- Royalty and license fees were $1.5 million in the third quarter and $24.0 million year to date, compared with $0.4 million and $16.3 million, respectively. The nine-month amount included $20.0 million of payments recognized under the Samsung Display Co. patent license agreement.
- Technology development and support revenue was $1.1 million in the third quarter and $3.0 million year to date, down from $4.5 million year to date in 2012.
- Cost of material sales increased to $9.8 million in the third quarter and $21.2 million year to date, reflecting higher commercial material volumes and changes in product mix.
- Research and development expense was $7.9 million in the quarter and $24.1 million year to date. Selling, general and administrative expense was $6.4 million and $17.9 million, respectively.
- Patent costs and acquired-technology amortization were $3.9 million in the quarter and $13.0 million year to date, including increased amortization from technology acquired from Fujifilm in 2012.
- Cash provided by operating activities was $22.6 million for the first nine months, versus $7.2 million in 2012. Investing activities used $34.1 million, and financing activities used $7.3 million.
- At September 30, 2013, cash and cash equivalents were $67.1 million, short-term investments were $181.2 million, and total cash, cash equivalents, and short-term investments were $248.3 million.
- Working capital was $258.9 million, compared with $245.2 million at December 31, 2012. The filing does not disclose material borrowings or senior debt; total liabilities were $34.6 million.
- Total assets were $400.0 million and shareholders’ equity was $365.4 million at September 30, 2013. The accumulated deficit was $188.0 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by expanded commercial OLED material adoption, particularly by Samsung Display, with commercial material sales increasing by approximately $42.5 million during the first nine months.
- Commercial green emitter sales increased substantially, while red emitter sales declined in the year-to-date period because of lower average pricing and reduced volume. Host material sales also increased, but management described that business as more competitive and its long-term prospects as uncertain.
- Operating profitability improved despite higher material costs, patent expenses, selling and administrative costs, research costs, and royalties.
- The company repurchased approximately $5.5 million of common stock during the first nine months under a $50 million authorization. Approximately $39.3 million remained available under the program at September 30, 2013.
- The company extended its sponsored research agreement with USC through April 30, 2017 and was obligated to pay up to $8.2 million for work actually performed during the remaining term.
- Accounts receivable increased to $17.8 million from $8.7 million at December 31, 2012, while inventory declined to $7.9 million from $11.0 million.
Outlook, Risks, Contingencies, and Unusual Items
- No specific revenue or earnings guidance was provided. Management expects quarterly and annual results to fluctuate based on material shipment timing and volumes, receipt of license and royalty payments, research and development and patent expenditures, and new business relationships.
- The Samsung Display license agreement runs through December 31, 2017. License installments are recognized when due and payable, causing quarterly revenue volatility. The related supplemental material agreement includes increasing minimum purchase amounts, subject to Samsung Display’s requirements and the company’s ability to satisfy them.
- Two customers accounted for 81% of third-quarter revenue and 83% of nine-month revenue. Customer A represented 59% of nine-month revenue and Customer B represented 24%. Foreign customers generated 99% of third-quarter and nine-month revenue, primarily in South Korea and Japan.
- All chemical materials were purchased from one supplier, creating supplier-concentration risk.
- The company maintained a full valuation allowance against significantly all net deferred tax assets. Management stated that a future release could be material and could occur if sustained profitability is demonstrated, potentially including the fourth quarter of 2013.
- The company held $4.3 million of convertible promissory notes classified as Level 3 investments. These investments are illiquid and subject to impairment risk, although no impairment was recorded as of September 30, 2013.
- Multiple European and Japanese patent oppositions and invalidation proceedings remain pending. Management believes its positions are likely to be upheld but provides no assurance. The company expects to incur potentially significant legal costs defending its intellectual property.
- The European Patent Office narrowed claims in the EP ’395 patent proceeding; the company expected to appeal. In Japan, the Intellectual Property High Court reversed the prior invalidation of broad claims in the JP ’024 patent and remanded the matter for further consideration.
- Management expects existing cash, cash equivalents, and short-term investments to fund obligations for at least the next 12 months, but stated that additional financing may be required for research, commercialization, patent activities, and working capital.
- There were no material changes to previously disclosed risk factors, no off-balance-sheet arrangements, and no reported defaults upon senior securities.
Important Facts for Investors to Verify
- Whether the sharp increase in commercial material sales, particularly to Samsung Display, is sustainable and how customer product changes may affect future volumes.
- The timing and amount of future Samsung Display license payments and the effect of semiannual recognition on quarterly results.
- Material and operating margins as commercial material costs become fully reflected in cost of sales.
- Customer concentration, single-source chemical supply exposure, and the company’s ability to diversify revenue and suppliers.
- The status and ultimate outcomes of pending patent challenges, including possible effects on licensing rights, legal costs, and competitive protection.
- Whether sustained profitability supports a reduction of the deferred tax asset valuation allowance and produces a material future tax benefit.
- The realizability and liquidity of the company’s convertible-note investments and the adequacy of cash resources for long-term research, commercialization, and patent obligations.