Universal Display Corporation — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2018. The unaudited filing covers Universal Display Corporation, a developer, licensor and supplier of OLED technologies and materials, including its Adesis contract research subsidiary.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $56.1 million | $102.5 million | $99.7 million | $158.1 million |
| Gross margin | $44.5 million; 79.3% | $91.2 million; 89.0% | $80.6 million; 80.9% | $133.8 million; 84.6% |
| Operating income | $10.9 million; 19.4% | $60.5 million; 59.0% | $15.4 million; 15.5% | $72.6 million; 45.9% |
| Net income | $10.8 million | $47.2 million | $16.8 million | $57.6 million |
| Diluted EPS | $0.23 | $0.99 | $0.35 | $1.21 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $50.0 million | $56.6 million |
As of June 30, 2018, cash and cash equivalents were $103.8 million and short-term investments were $353.7 million, for total cash and investments of $457.4 million, compared with $435.1 million at December 31, 2017. Working capital was $467.0 million. The filing does not report outstanding borrowings or debt; no debt balance appears on the consolidated balance sheet.
Total assets were $833.2 million and total shareholders’ equity was $650.7 million. Inventory increased to $56.0 million from $36.3 million at year-end 2017, while deferred revenue increased to $97.6 million, including $69.2 million current and $28.3 million non-current.
Six-month investing cash outflow was $62.3 million, including $13.4 million of capital expenditures and net investment purchases of approximately $48.9 million. Financing cash outflow was $16.7 million, including $5.7 million of dividends, $11.0 million of employee tax withholding payments and $0.5 million of share repurchases.
Material changes versus the prior comparable period
- Q2 revenue declined 45.2% year over year; six-month revenue declined 36.9%. Management attributed the decline to lower material sales, near-term weakness in the mobile OLED display segment, the timing of Samsung Display license-fee payments and the adoption of ASC Topic 606.
- ASC 606 reduced reported Q2 and six-month 2018 revenue by $17.5 million and $42.1 million, respectively, versus the prior revenue-recognition standard. Excluding the accounting change, reported six-month 2018 revenue would have been $141.8 million.
- Q2 2017 included a $45.0 million semiannual Samsung Display license-fee payment. Under the new agreement, payments are made quarterly, and license revenue is recognized based principally on material units sold over the contract term.
- Material and OLED-related sales represented 93% of Q2 revenue and 94% of six-month revenue, versus 98% in each comparable 2017 period. Adesis and other contract research services increased to 7% and 6%, respectively.
- Operating expenses increased 9.5% in Q2 and 6.5% for the six-month period. Research and development and selling, general and administrative expenses increased, while royalty and license expense declined with lower qualifying material sales.
- The company adopted ASC 606 using the modified retrospective method, reducing opening retained earnings by $17.9 million net of tax and increasing deferred revenue by $21.3 million.
- Revenue concentration remained significant: three customers accounted for 84% of Q2 revenue and 83% of six-month revenue. South Korea represented approximately 75% of Q2 revenue and 73% of six-month revenue.
Guidance, outlook, risks and unusual items
Management did not provide specific numerical revenue or earnings guidance in the filing. It stated that, despite near-term mobile-display weakness, it believes the overall OLED display market will continue to grow as expected. Management expects existing cash, cash equivalents and short-term investments to meet obligations for at least the next twelve months.
- Commercial agreements with Samsung Display, LG Display, Tianma, BOE and newly added Visionox provide multi-year licensing and material-supply relationships, generally extending through 2022 or beyond. Revenue remains dependent on customers’ OLED production, material requirements and product sales.
- As of June 30, 2018, backlog for committed phosphorescent emitter material orders was $15.4 million, expected to be fulfilled within 90 days.
- The company had $21.3 million of firm, noncancelable inventory purchase commitments, compared with $14.2 million at December 31, 2017. Inventory growth and forecast accuracy are important because lower customer demand could require additional write-downs.
- A Korean tax matter resulted in recognition of a $37.5 million long-term receivable for estimated refunds, an $18.3 million long-term payable to the U.S. federal government and a $19.2 million reduction in deferred tax assets. Management believes a favorable settlement is more likely than not, but the estimates may change pending resolution.
- Active European patent oppositions involve OLED technology, including fundamental phosphorescent OLED patents. Management expects to defend its rights but cannot assure a favorable outcome.
- The company is dependent on substantially one supplier for chemical materials and has significant customer concentration. It also faces variability in license fees, royalties, material volumes, research spending and patent costs.
- Management reported no material changes to previously disclosed risk factors, no off-balance-sheet arrangements and effective disclosure controls as of June 30, 2018.
Most important facts for investors to verify
- Separate the effect of ASC 606 from underlying changes in OLED material demand and customer production when assessing revenue trends.
- Monitor Samsung Display, LG Display and other major customers’ OLED shipment levels, license economics, material purchases and concentration.
- Evaluate whether the increase in inventory and deferred revenue is consistent with future demand and expected contract fulfillment.
- Track the Korean tax refund and related U.S. tax payable, including settlement timing and changes in estimates.
- Review the status and potential commercial importance of the European patent oppositions and other patent challenges.
- Confirm cash generation after capital expenditures, dividends, employee-tax withholding payments and investment activity.