Universal Display Corporation — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2017; filed August 3, 2017. The unaudited statements cover Universal Display Corporation and subsidiaries. The company develops and commercializes OLED technologies, patents and materials, and provides contract research services.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $102.5 million | $64.4 million | $158.1 million | $94.1 million |
| Operating income | $60.5 million | $34.0 million | $72.6 million | $36.7 million |
| Net income | $47.2 million | $21.8 million | $57.6 million | $23.8 million |
| Diluted EPS | $0.99 | $0.46 | $1.21 | $0.51 |
| Operating cash flow | Not separately disclosed | Not separately disclosed | $56.6 million | $36.2 million |
- Revenue mix: Q2 material sales were $46.8 million, royalty and license fees were $53.7 million, and contract research services were $2.0 million. Six-month amounts were $93.5 million, $60.7 million, and $3.9 million, respectively.
- Margins: Q2 gross margin was approximately 89.0% versus 91.2% in the prior-year quarter; operating margin was approximately 59.0% versus 52.8%. Six-month gross margin was approximately 84.6% versus 88.6%, and operating margin was approximately 45.9% versus 39.0%.
- Cash and liquidity: At June 30, 2017, cash and cash equivalents were $109.4 million and short-term investments were $256.1 million, totaling $365.5 million. Working capital was $395.5 million. Management stated that available liquidity should meet obligations for at least the next twelve months.
- Debt: The filing does not report outstanding borrowings or debt. Total liabilities were $99.8 million, including a $31.2 million retirement plan benefit liability and $37.2 million of deferred revenue.
- Capital allocation: The company paid $2.8 million of common-stock dividends during the first six months and declared an additional $0.03-per-share third-quarter dividend payable September 30, 2017.
Material changes versus the prior comparable periods
- Q2 revenue increased 59%, while six-month revenue increased 68%. Material sales rose 110% in Q2 and 100% for the six-month period, driven by higher demand for red and green phosphorescent emitters and timing of developmental-material scale-up activity.
- Royalty and license fees increased 28% in both comparison periods. Q2 included $45.0 million of payments recognized under the Samsung Display patent license agreement, compared with $37.5 million in the prior-year quarter.
- Contract research revenue increased substantially because of the Adesis acquisition, which closed July 11, 2016.
- Net income growth benefited from higher operating income and lower other expense. The prior-year period included foreign-exchange losses associated with the BASF patent acquisition.
- Operating expenses increased, including higher amortization from the BASF patent portfolio and Adesis intangible assets, increased selling, general and administrative expense, patent costs, and royalty expense. Six-month research and development expense also increased due to higher third-party contract research activity.
- Six-month commercial-material gross margin declined to 76% from 81%, primarily because of unfavorable product mix and lower average selling prices per gram. Developmental-material gross margin improved to 77% from 32%, reflecting the timing and stage of emitter development.
- Cash provided by operations increased $20.4 million, but cash declined by $29.9 million during the six months because of net investment purchases, capital expenditures, dividends, and employee tax-withholding payments.
Outlook, commentary, risks and unusual items
- The Samsung Display commercial license agreement was scheduled to run through the end of 2017. The company stated that renewal was anticipated as of January 1, 2018; the filing does not provide the terms or certainty of any renewal.
- Revenue is highly concentrated: one customer represented 73% of Q2 revenue and 66% of six-month revenue; a second customer represented 17% and 23%, respectively. Approximately 98% of Q2 revenue and 97% of six-month revenue came from outside North America.
- Management expects quarterly results to fluctuate based on material shipment timing and volume, license-fee and royalty timing, research and development and patent expenditures, and new business relationships.
- The company relies substantially on one supplier for chemical materials and had $8.6 million of firm, noncancelable inventory purchase commitments at June 30, 2017.
- The company adopted ASU 2016-09 effective January 1, 2017, recording a $26.5 million cumulative tax benefit directly to retained earnings. The adoption also reduced the reported Q2 and six-month effective tax rates to 23.0% and 22.3%; without the change, management estimated rates of 24.2% and 24.8%.
- Active European patent opposition and appeal proceedings involve patents covering phosphorescent and white OLED technologies. Management does not expect any individual proceeding to have a material impact, but cannot assure favorable outcomes and expects related legal expenditures to continue.
- The company had no material changes to previously disclosed risk factors, no off-balance-sheet arrangements, and reported effective disclosure controls. It does not provide quantitative revenue or earnings guidance in this filing.
- The company had obligations of up to $7.1 million for research work under its extended USC agreement through April 30, 2020. The agreement with PPG was automatically renewed through December 31, 2017.
Investor verification items
- Verify the renewal, terms, and revenue implications of the Samsung Display license agreement after its scheduled year-end 2017 expiration.
- Assess customer concentration, particularly reliance on the largest customer and on OLED demand in South Korea and other Asian markets.
- Track commercial versus developmental material sales, product mix, average selling prices, and sustainability of material gross margins.
- Review the outcome and timing of European patent opposition appeals and any effect on licensing rights or enforcement costs.
- Reconcile liquidity against capital expenditures, inventory commitments, research obligations, potential acquisition-related consideration, and dividend payments.
- Separate recurring operating performance from the $26.5 million accounting-related tax benefit and other timing-sensitive royalty and license receipts.