InterDigital, Inc. — 2013 Form 10-K
Business and reporting period: Annual report for the fiscal year ended December 31, 2013, filed February 24, 2014. InterDigital develops wireless technologies and primarily monetizes its portfolio of more than 20,500 patents and patent applications through licensing. Figures below are in U.S. dollars.
Key financial results
| Metric | 2013 | 2012 |
|---|---|---|
| Revenue | $325.4 million | $663.1 million |
| Operating income | $84.8 million | $419.0 million |
| Net income attributable to InterDigital | $38.2 million | $271.8 million |
| Diluted EPS | $0.92 | $6.26 |
| Cash provided by operating activities | $218.2 million | $177.6 million |
| Cash and short-term investments at year-end | $698.5 million | $577.3 million |
| Working capital at year-end | $731.1 million | $641.4 million |
| Long-term debt carrying value | $208.8 million | $200.4 million |
Operating margin was approximately 26.1% and net income attributable margin approximately 11.7% in 2013. The company reported no gross-profit figure in the provided filing text. Fourth-quarter 2013 revenue was $99.7 million and net income attributable to common shareholders was $14.5 million, or $0.35 diluted EPS.
Changes and notable items
- Total revenue fell 51% year over year, principally because 2012 included $384.0 million from patent sales, with no comparable patent sale in 2013. Patent licensing royalties declined 4% to $264.2 million; fixed-fee amortized royalties decreased, partly offset by higher per-unit royalties and past royalties.
- 2013 revenue included $73.8 million of past patent royalties, including $71.4 million attributed to Apple products manufactured by Pegatron, and $53.3 million of past technology-solutions revenue recognized after an Intel arbitration award. Technology-solutions revenue totaled $61.2 million.
- Operating expenses were $240.6 million, roughly flat year over year. Patent enforcement costs rose; development expense declined to $63.3 million. The company recorded a $21.7 million impairment of its Pantech investment, partly offset in other income by $11.8 million of interest related to arbitration awards. The effective tax rate was approximately 42%.
- Operating cash flow improved despite lower reported net income. Cash receipts from licensing and technology-solutions agreements were $441.0 million. Deferred revenue ended at $304.0 million, primarily representing prepaid and fixed-fee royalties; the company said these balances do not create material obligations but prepayments reduce future cash receipts as royalties are applied.
Outlook, risks and contingencies
- Management said available cash, investments and expected operating cash flow should fund operations, capital needs, debt obligations, dividends and the existing repurchase program for the next 12 months. No specific revenue or earnings guidance was provided. The company expected to continue its regular $0.10 quarterly dividend, subject to board review.
- The $230 million principal amount of 2.50% senior convertible notes matures in March 2016. The balance-sheet carrying value was $208.8 million; contractual interest payments and principal obligations are disclosed in the filing.
- Revenue is concentrated: Pegatron, Intel Mobile Communications and Sony represented approximately 30%, 18% and 12% of 2013 revenue. The company also noted dependence on licensee sales, royalty reporting, renewals, and successful negotiations with reluctant prospective licensees.
- Apple’s fixed-fee license covering specified products expires at the end of June 2014; the filing says Apple would be unlicensed for covered products after expiration unless a new arrangement is reached.
- InterDigital and Huawei agreed to resolve their global licensing dispute through binding arbitration, expected to conclude in 2014 or early 2015. Separate Chinese court rulings affirmed a FRAND rate cap of 0.019% of Huawei product sales and a 20 million RMB award against InterDigital; InterDigital intended to seek further review. China’s NDRC had opened an antitrust investigation into licensing practices, and InterDigital had proposed commitments that could support suspension of the investigation.
- In a separate USITC proceeding involving Nokia, Huawei and ZTE, the Commission’s December 2013 determination found no Section 337 violation; InterDigital appealed. Other patent litigation and remand proceedings remained active. The filing identifies regulatory scrutiny of standard-essential patents, adverse court or arbitration outcomes, patent validity challenges, royalty-rate pressure, and enforcement costs as significant risks.
Most important facts for investors to verify
- Whether recurring licensing royalties and new license agreements can sustain revenue as fixed-fee licenses expire and past-due arbitration revenue does not recur.
- Progress and outcome of the Huawei arbitration, Chinese appeals and NDRC investigation, and the remaining U.S. patent proceedings.
- Renewal or replacement of the Apple agreement before its June 2014 expiration, and continued collection from major customers.
- Cash generation and liquidity after accounting for prepaid royalties, the 2016 note maturity, litigation spending, dividends and share repurchases.
- The assumptions supporting patent valuations, deferred revenue recognition, tax assets and the Pantech impairment. The auditor issued an unqualified opinion and reported effective internal control over financial reporting.