Universal Display Corporation — Q2 2012 Form 10-Q Summary
Business context and reporting period
Universal Display Corporation develops and commercializes organic light-emitting diode (OLED) technologies and materials, generating revenue from intellectual-property licensing, OLED material sales, and technology development and support. This unaudited Form 10-Q covers the three and six months ended June 30, 2012, compared with the corresponding 2011 periods.
Financial performance and liquidity
| Metric | Three months ended June 30, 2012 | Three months ended June 30, 2011 | Six months ended June 30, 2012 | Six months ended June 30, 2011 |
|---|---|---|---|---|
| Total revenue | $30.0 million | $11.3 million | $42.6 million | $20.9 million |
| Operating income (loss) | $12.9 million | $(1.1) million | $11.4 million | $(3.8) million |
| Net income (loss) | $11.0 million | $3.3 million | $9.7 million | $(8.6) million |
| Diluted EPS | $0.23 | $(0.03) | $0.21 | $(0.20) |
| Operating margin | 43.0% | (9.5%) | 26.7% | (18.3%) |
- Second-quarter revenue increased approximately 167%, driven primarily by $15.0 million of recognized royalty and license fees under the Samsung Display Co. (formerly Samsung Mobile Display) patent license agreement and higher OLED material sales.
- Six-month revenue increased approximately 104%. Material sales rose to $23.4 million from $11.2 million, while royalty and license fees increased to $15.9 million from $5.3 million. Technology development and support revenue declined to $3.4 million from $4.3 million.
- Research and development expense increased to $7.2 million in the quarter and $13.9 million year to date. Patent costs increased to $2.3 million in the quarter and $4.1 million year to date, reflecting ongoing patent prosecution and litigation defense.
- Net cash provided by operating activities was $9.2 million for the six months, compared with $1.8 million in 2011.
- Cash and cash equivalents were $159.6 million and short-term investments were $190.4 million at June 30, 2012, totaling approximately $350.0 million. Working capital was $351.2 million.
- The filing does not report outstanding debt; total liabilities were $33.0 million, including $20.9 million of current liabilities and an $8.5 million retirement-plan benefit liability.
- Cash flow from investing activities was $41.0 million provided, primarily reflecting investment maturities and sales. Financing activities used $2.4 million, including $3.5 million of tax-withholding payments related to stock-based compensation.
Material changes versus the prior comparable period
- Profitability improved substantially: the company moved from operating losses to operating income in both the quarter and year-to-date period.
- The 2011 comparisons included unusual non-cash stock-warrant fair-value items: a $4.5 million gain in second-quarter 2011 and a $4.4 million loss for the first six months of 2011. All remaining warrants were exercised in August 2011, so no stock-warrant liability remained at June 30, 2012.
- Material sales benefited from increased adoption of Universal Display technology and materials, particularly by Samsung Display. Phosphorescent emitter materials represented 85% of second-quarter material sales and 83% of year-to-date material sales.
- Revenue concentration increased in importance: the largest non-government customer represented 75% of second-quarter revenue and 65% of six-month revenue. South Korea accounted for $23.6 million, or approximately 79%, of second-quarter revenue.
- The company’s accumulated deficit declined to $204.1 million from $213.9 million at year-end 2011, reflecting year-to-date net income.
Guidance, outlook, risks, contingencies and unusual items
- No formal numerical revenue or earnings guidance is provided. Management expects quarterly results to fluctuate based on the timing of license fees and royalties, material sales, research and development spending, and new business relationships.
- Under the revised Samsung Display license agreement, fixed license-fee installments are recognized when due, generally in the second and fourth quarters. This timing may cause significant quarterly revenue variability.
- Management expects to have sufficient cash, cash equivalents and short-term investments to meet obligations for at least the next 12 months, based on its forecasts and assumptions.
- In July 2012, the company disclosed approximately $109.3 million of cash expenditures under various agreements. These included a $105 million purchase of approximately 1,255 OLED-related patents and applications from FUJIFILM, a $4 million convertible note investment in Plextronics, a three-year Plextronics development commitment of $1.0 million per year, and a $300,000 convertible note investment in another research and development company.
- Material risks include dependence on a small number of customers, particularly Samsung Display; uncertainty regarding the duration and volume of material sales; competition in host materials; reliance on a single chemical-material supplier; and exposure to patent challenges and enforcement costs.
- Numerous European, Japanese and Korean patent oppositions and invalidation proceedings remain pending. Certain Japanese decisions invalidated broad or all claims in specified patents, although the company is pursuing appeals. The company believes its positions have substantial merit but provides no assurance of favorable outcomes.
- The company maintains a full valuation allowance against its net deferred tax assets. Future release of the allowance could materially affect tax expense and reported results, but the timing and amount cannot be determined.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Timing, amount and sustainability of Samsung Display license-fee installments and related material-purchase commitments through 2017.
- Customer concentration and whether Samsung Display remains the primary driver of material sales and royalty revenue.
- Impact of the $105 million FUJIFILM patent acquisition and other July 2012 commitments on future cash balances, amortization and operating expenses.
- Status and potential commercial impact of pending patent oppositions and invalidation proceedings, especially in Japan, Korea and Europe.
- Whether recent profitability represents a sustainable operating trend or is substantially dependent on periodic license-fee recognition.
- Future realization of federal and state net operating loss carryforwards and any release of the related valuation allowance.