UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2016
OR
|
o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________ to ___________
Commission File Number 1-12031
UNIVERSAL DISPLAY CORPORATION
(Exact name of registrant as specified in its charter)
|
Pennsylvania |
|
23-2372688 |
|
(State or other jurisdiction of incorporation or organization) |
|
(I.R.S. Employer Identification No.) |
|
|
|
|
|
375 Phillips Boulevard, Ewing, New Jersey |
|
08618 |
|
(Address of principal executive offices) |
|
(Zip Code) |
Registrant’s telephone number, including area code: (609) 671-0980
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
|
Large accelerated filer |
x |
|
Accelerated filer |
o |
|
Non-accelerated filer |
o |
(Do not check if a smaller reporting company) |
Smaller reporting company |
o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of August 2, 2016, the registrant had outstanding 46,956,623 shares of common stock.
PART I – FINANCIAL INFORMATION
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARIES
(UNAUDITED)
(in thousands, except share and per share data)
|
|
|
June 30, 2016 |
|
|
December 31, 2015 |
|
||
|
ASSETS |
|
|
|
|
|
|
|
|
|
CURRENT ASSETS: |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
69,930 |
|
|
$ |
97,513 |
|
|
Short-term investments |
|
|
246,281 |
|
|
|
297,981 |
|
|
Accounts receivable |
|
|
17,984 |
|
|
|
24,729 |
|
|
Inventory |
|
|
16,467 |
|
|
|
12,748 |
|
|
Deferred income taxes |
|
|
10,097 |
|
|
|
12,326 |
|
|
Other current assets |
|
|
5,561 |
|
|
|
2,387 |
|
|
Total current assets |
|
|
366,320 |
|
|
|
447,684 |
|
|
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $29,736 and $27,897 |
|
|
22,610 |
|
|
|
22,407 |
|
|
ACQUIRED TECHNOLOGY, net of accumulated amortization of $60,416 and $54,837 |
|
|
162,469 |
|
|
|
72,015 |
|
|
INVESTMENTS |
|
|
15,767 |
|
|
|
2,187 |
|
|
DEFERRED INCOME TAXES |
|
|
12,293 |
|
|
|
14,945 |
|
|
OTHER ASSETS |
|
|
543 |
|
|
|
174 |
|
|
TOTAL ASSETS |
|
$ |
580,002 |
|
|
$ |
559,412 |
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
6,368 |
|
|
$ |
6,849 |
|
|
Accrued expenses |
|
|
10,701 |
|
|
|
17,387 |
|
|
Deferred revenue |
|
|
10,232 |
|
|
|
10,107 |
|
|
Other current liabilities |
|
|
423 |
|
|
|
167 |
|
|
Total current liabilities |
|
|
27,724 |
|
|
|
34,510 |
|
|
DEFERRED REVENUE |
|
|
34,066 |
|
|
|
35,543 |
|
|
RETIREMENT PLAN BENEFIT LIABILITY |
|
|
24,292 |
|
|
|
22,594 |
|
|
Total liabilities |
|
|
86,082 |
|
|
|
92,647 |
|
|
COMMITMENTS AND CONTINGENCIES (Note 13) |
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY: |
|
|
|
|
|
|
|
|
|
Preferred Stock, par value $0.01 per share, 5,000,000 shares authorized, 200,000 shares of Series A Nonconvertible Preferred Stock issued and outstanding (liquidation value of $7.50 per share or $1,500) |
|
|
2 |
|
|
|
2 |
|
|
Common Stock, par value $0.01 per share, 100,000,000 shares authorized, 48,302,603 and 48,132,223 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively |
|
|
483 |
|
|
|
482 |
|
|
Additional paid-in capital |
|
|
593,170 |
|
|
|
589,885 |
|
|
Accumulated deficit |
|
|
(49,876 |
) |
|
|
(73,627 |
) |
|
Accumulated other comprehensive loss |
|
|
(9,701 |
) |
|
|
(9,819 |
) |
|
Treasury stock, at cost (1,357,863 shares at June 30, 2016 and December 31, 2015) |
|
|
(40,158 |
) |
|
|
(40,158 |
) |
|
Total shareholders’ equity |
|
|
493,920 |
|
|
|
466,765 |
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
$ |
580,002 |
|
|
$ |
559,412 |
|
The accompanying notes are an integral part of these consolidated financial statements.
1
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except share and per share data)
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
|
2016 |
|
|
2015 |
|
|
2016 |
|
|
2015 |
|
||||
|
REVENUE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Material sales |
|
$ |
22,315 |
|
|
$ |
24,324 |
|
|
$ |
46,619 |
|
|
$ |
51,142 |
|
|
Royalty and license fees |
|
|
42,018 |
|
|
|
33,733 |
|
|
|
47,360 |
|
|
|
38,108 |
|
|
Technology development and support revenue |
|
|
59 |
|
|
|
35 |
|
|
|
116 |
|
|
|
65 |
|
|
Total revenue |
|
|
64,392 |
|
|
|
58,092 |
|
|
|
94,095 |
|
|
|
89,315 |
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of material sales |
|
|
5,684 |
|
|
|
39,086 |
|
|
|
10,736 |
|
|
|
47,667 |
|
|
Research and development |
|
|
10,969 |
|
|
|
10,647 |
|
|
|
21,445 |
|
|
|
20,566 |
|
|
Selling, general and administrative |
|
|
7,688 |
|
|
|
6,983 |
|
|
|
14,264 |
|
|
|
13,245 |
|
|
Patent costs and amortization of acquired technology |
|
|
4,060 |
|
|
|
4,462 |
|
|
|
8,154 |
|
|
|
8,429 |
|
|
Royalty and license expense |
|
|
1,966 |
|
|
|
1,673 |
|
|
|
2,841 |
|
|
|
2,458 |
|
|
Total operating expenses |
|
|
30,367 |
|
|
|
62,851 |
|
|
|
57,440 |
|
|
|
92,365 |
|
|
Operating income (loss) |
|
|
34,025 |
|
|
|
(4,759 |
) |
|
|
36,655 |
|
|
|
(3,050 |
) |
|
INTEREST INCOME |
|
|
661 |
|
|
|
188 |
|
|
|
993 |
|
|
|
361 |
|
|
INTEREST EXPENSE |
|
|
(8 |
) |
|
|
(12 |
) |
|
|
(15 |
) |
|
|
(24 |
) |
|
OTHER (EXPENSE) INCOME |
|
|
(1,829 |
) |
|
|
278 |
|
|
|
(1,914 |
) |
|
|
340 |
|
|
INCOME (LOSS) BEFORE INCOME TAXES |
|
|
32,849 |
|
|
|
(4,305 |
) |
|
|
35,719 |
|
|
|
(2,373 |
) |
|
INCOME TAX EXPENSE |
|
|
(11,047 |
) |
|
|
(7,466 |
) |
|
|
(11,968 |
) |
|
|
(8,084 |
) |
|
NET INCOME (LOSS) |
|
$ |
21,802 |
|
|
$ |
(11,771 |
) |
|
$ |
23,751 |
|
|
$ |
(10,457 |
) |
|
NET INCOME (LOSS) PER COMMON SHARE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC |
|
$ |
0.46 |
|
|
$ |
(0.25 |
) |
|
$ |
0.51 |
|
|
$ |
(0.23 |
) |
|
DILUTED |
|
$ |
0.46 |
|
|
$ |
(0.25 |
) |
|
$ |
0.51 |
|
|
$ |
(0.23 |
) |
|
WEIGHTED AVERAGE SHARES USED IN COMPUTING NET INCOME (LOSS) PER COMMON SHARE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC |
|
|
46,927,543 |
|
|
|
46,388,218 |
|
|
|
46,862,199 |
|
|
|
45,840,599 |
|
|
DILUTED |
|
|
47,041,854 |
|
|
|
46,388,218 |
|
|
|
46,985,374 |
|
|
|
45,840,599 |
|
The accompanying notes are an integral part of these consolidated financial statements.
2
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(in thousands)
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
|
2016 |
|
|
2015 |
|
|
2016 |
|
|
2015 |
|
||||
|
NET INCOME (LOSS) |
|
$ |
21,802 |
|
|
$ |
(11,771 |
) |
|
$ |
23,751 |
|
|
$ |
(10,457 |
) |
|
OTHER COMPREHENSIVE INCOME, NET OF TAX: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on available-for-sale securities, net of tax of $37, $11, $47 and $4, respectively |
|
|
67 |
|
|
|
19 |
|
|
|
(84 |
) |
|
|
4 |
|
|
Employee benefit plan: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial gain (loss), net of tax of $271, none, $200, and none, respectively |
|
479 |
|
|
|
- |
|
|
|
(353 |
) |
|
|
- |
|
|
|
Amortization of prior service cost and actuarial loss for retirement plan included in net periodic pension costs, net of tax of $142, $157, $302 and $258, respectively |
|
|
254 |
|
|
|
279 |
|
|
|
535 |
|
|
|
420 |
|
|
Net change for employee benefit plan |
|
|
733 |
|
|
|
279 |
|
|
|
182 |
|
|
|
420 |
|
|
Change in cumulative foreign currency translation adjustment |
|
|
20 |
|
|
|
- |
|
|
|
20 |
|
|
|
- |
|
|
TOTAL OTHER COMPREHENSIVE INCOME |
|
|
820 |
|
|
|
298 |
|
|
|
118 |
|
|
|
424 |
|
|
COMPREHENSIVE INCOME (LOSS) |
|
$ |
22,622 |
|
|
$ |
(11,473 |
) |
|
$ |
23,869 |
|
|
$ |
(10,033 |
) |
The accompanying notes are an integral part of these consolidated financial statements.
3
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(UNAUDITED)
(in thousands, except for share data)
|
|
|
Series A Nonconvertible |
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Accumulated Other |
|
|
|
|
|
|
|
|
|
|
Total |
|
||||||||
|
|
|
Preferred Stock |
|
|
Common Stock |
|
|
Paid-in |
|
|
Accumulated |
|
|
Comprehensive |
|
|
Treasury Stock |
|
|
Shareholders’ |
|
|||||||||||||||||||
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Loss |
|
|
Shares |
|
|
Amount |
|
|
Equity |
|
||||||||||
|
BALANCE, DECEMBER 31, 2015 |
|
|
200,000 |
|
|
$ |
2 |
|
|
|
48,132,223 |
|
|
$ |
482 |
|
|
$ |
589,885 |
|
|
$ |
(73,627 |
) |
|
$ |
(9,819 |
) |
|
|
1,357,863 |
|
|
$ |
(40,158 |
) |
|
$ |
466,765 |
|
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
23,751 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
23,751 |
|
|
Other comprehensive income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
118 |
|
|
|
— |
|
|
|
— |
|
|
|
118 |
|
|
Exercise of common stock options |
|
|
— |
|
|
|
— |
|
|
|
12,500 |
|
|
|
— |
|
|
|
182 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
182 |
|
|
Issuance of common stock to employees |
|
|
— |
|
|
|
— |
|
|
|
216,389 |
|
|
|
2 |
|
|
|
6,441 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6,443 |
|
|
Shares withheld for employee taxes |
|
|
|
|
|
|
|
|
|
|
(90,886 |
) |
|
|
(1 |
) |
|
|
(4,793 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,794 |
) |
|
Issuance of common stock to Board of Directors and Scientific Advisory Board |
|
|
— |
|
|
|
— |
|
|
|
28,046 |
|
|
|
— |
|
|
|
1,191 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,191 |
|
|
Issuance of common stock to employees under an ESPP |
|
|
— |
|
|
|
— |
|
|
|
4,331 |
|
|
|
— |
|
|
|
264 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
264 |
|
|
BALANCE, JUNE 30, 2016 |
|
|
200,000 |
|
|
$ |
2 |
|
|
|
48,302,603 |
|
|
$ |
483 |
|
|
$ |
593,170 |
|
|
$ |
(49,876 |
) |
|
$ |
(9,701 |
) |
|
|
1,357,863 |
|
|
$ |
(40,158 |
) |
|
$ |
493,920 |
|
The accompanying notes are an integral part of these consolidated financial statements.
4
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
|
|
|
Six Months Ended June 30, |
|
|||||
|
|
|
2016 |
|
|
2015 |
|
||
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
23,751 |
|
|
$ |
(10,457 |
) |
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
Amortization of deferred revenue |
|
|
(3,601 |
) |
|
|
(4,893 |
) |
|
Depreciation |
|
|
1,839 |
|
|
|
1,439 |
|
|
Amortization of intangibles |
|
|
5,579 |
|
|
|
5,500 |
|
|
Inventory write-down |
|
|
— |
|
|
|
33,000 |
|
|
Amortization of premium and discount on investments, net |
|
|
(801 |
) |
|
|
(285 |
) |
|
Stock-based compensation to employees |
|
|
5,401 |
|
|
|
4,039 |
|
|
Stock-based compensation to Board of Directors and Scientific Advisory Board |
|
|
891 |
|
|
|
659 |
|
|
Deferred income tax benefit |
|
|
4,826 |
|
|
|
3,984 |
|
|
Retirement plan benefit expense |
|
|
1,982 |
|
|
|
1,512 |
|
|
Decrease (increase) in assets: |
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
6,745 |
|
|
|
4,697 |
|
|
Inventory |
|
|
(3,719 |
) |
|
|
(12,860 |
) |
|
Other current assets |
|
|
(3,174 |
) |
|
|
(417 |
) |
|
Other assets |
|
|
(369 |
) |
|
|
80 |
|
|
Increase (decrease) in liabilities: |
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
|
(5,625 |
) |
|
|
826 |
|
|
Other current liabilities |
|
|
256 |
|
|
|
(58 |
) |
|
Deferred revenue |
|
|
2,250 |
|
|
|
48,412 |
|
|
Net cash provided by operating activities |
|
|
36,231 |
|
|
|
75,178 |
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(2,162 |
) |
|
|
(3,146 |
) |
|
Purchase of intangibles |
|
|
(96,033 |
) |
|
|
— |
|
|
Purchases of investments |
|
|
(325,226 |
) |
|
|
(267,520 |
) |
|
Proceeds from sale of investments |
|
|
364,017 |
|
|
|
263,058 |
|
|
Net cash used in investing activities |
|
|
(59,404 |
) |
|
|
(7,608 |
) |
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock |
|
|
202 |
|
|
|
171 |
|
|
Proceeds from the exercise of common stock options |
|
|
182 |
|
|
|
1,372 |
|
|
Payment of withholding taxes related to stock-based compensation to employees |
|
|
(4,794 |
) |
|
|
(5,280 |
) |
|
Net cash used in financing activities |
|
|
(4,410 |
) |
|
|
(3,737 |
) |
|
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
|
|
(27,583 |
) |
|
|
63,833 |
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
|
|
97,513 |
|
|
|
45,418 |
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD |
|
$ |
69,930 |
|
|
$ |
109,251 |
|
|
The following non-cash activities occurred: |
|
|
|
|
|
|
|
|
|
Unrealized loss on available-for-sale securities |
|
$ |
131 |
|
|
$ |
8 |
|
|
Common stock issued to Board of Directors and Scientific Advisory Board that was earned and accrued for in a previous period |
|
|
300 |
|
|
|
300 |
|
|
Common stock issued to employees that was earned and accrued for in a previous period |
|
|
1,105 |
|
|
|
967 |
|
|
Net change in accounts payable and accrued expenses related to purchases of property and equipment |
|
|
(120 |
) |
|
|
(725 |
) |
The accompanying notes are an integral part of these consolidated financial statements.
5
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
1. |
BUSINESS: |
Universal Display Corporation (the Company) is a leader in the research, development and commercialization of organic light emitting diode (OLED) technologies and materials. OLEDs are thin, lightweight and power-efficient solid-state devices that emit light, making them highly suitable for use in full-color displays and as lighting products. OLED displays are capturing a growing share of the display market. The Company believes this is because OLEDs offer potential advantages over competing display technologies with respect to power efficiency, contrast ratio, viewing angle, video response time, form factor and manufacturing cost. The Company also believes that OLED lighting products have the potential to replace many existing light sources in the future because of their high power efficiency, excellent color rendering index, low operating temperature and novel form factor. The Company's technology leadership and intellectual property position should enable it to share in the revenues from OLED displays and lighting products as they enter mainstream consumer and other markets.
The Company's primary business strategy is to (1) further develop and license its proprietary OLED technologies to manufacturers of products for display applications, such as mobile phones, televisions, tablets, wearables, portable media devices, notebook computers, personal computers, and automotive interiors, and specialty and general lighting products; and (2) develop new OLED materials and sell existing and any new materials to those product manufacturers. The Company has established a significant portfolio of proprietary OLED technologies and materials, primarily through internal research and development efforts and acquisitions of patents and patent applications, as well as maintaining its relationships with world-class partners such as Princeton University (Princeton), the University of Southern California (USC), the University of Michigan (Michigan) and PPG Industries, Inc. (PPG Industries). The Company currently owns, exclusively licenses or has the sole right to sublicense more than 4,100 patents issued and pending worldwide.
The Company sells its proprietary OLED materials to customers for evaluation and use in commercial OLED products. The Company also enters into agreements with manufacturers of OLED display and lighting products under which it grants them licenses to practice under its patents and to use the Company's proprietary know-how. At the same time, the Company works with these and other companies who are evaluating the Company's OLED technologies and materials for possible use in commercial OLED display and lighting products.
|
2. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: |
Interim Financial Information
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company’s financial position as of June 30, 2016 and results of operations for the three and six months ended June 30, 2016 and 2015, and cash flows for the six months ended June 30, 2016 and 2015. While management believes that the disclosures presented are adequate to make the information not misleading, these unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto in the Company’s latest year-end financial statements, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. The results of the Company’s operations for any interim period are not necessarily indicative of the results of operations for any other interim period or for the full year.
Principles of Consolidation
The consolidated financial statements include the accounts of Universal Display Corporation and its wholly owned subsidiaries, UDC, Inc., UDC Ireland Limited, Universal Display Corporation Hong Kong, Limited, Universal Display Corporation Korea, Y.H., and Universal Display Corporation Japan GK. All intercompany transactions and accounts have been eliminated.
Management’s Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The estimates made are principally in the areas of revenue recognition for license agreements, the useful life of acquired
6
technology, the use and recoverability of inventories, income taxes including realization of deferred tax assets, stock-based compensation and retirement benefit plan liabilities. Actual results could differ from those estimates.
Inventories
Inventories consist of raw materials, work-in-process and finished goods, including inventory consigned to customers, and are stated at the lower of cost, determined on a first-in, first-out basis, or market. Inventory valuation and firm committed purchase order assessments are performed on a quarterly basis and those items that are identified to be obsolete or in excess of forecasted usage are written down to their estimated realizable value. Estimates of realizable value are based upon management’s analyses and assumptions, including, but not limited to, forecasted sales levels by product, expected product lifecycle, product development plans and future demand requirements. A 12-month rolling forecast based on factors, including, but not limited to, production cycles, anticipated product orders, marketing forecasts, backlog, and shipment activities is used in the inventory analysis. If market conditions are less favorable than forecasts or actual demand from customers is lower than estimates, additional inventory write-downs may be required. If demand is higher than expected, inventories that had previously been written down may be sold.
Certain of the Company’s customers have assumed the responsibility for maintaining the Company's inventory at their location based on the customers' demand forecast. Notwithstanding the fact that the Company builds and ships the inventory, the customer does not purchase the consigned inventory until the inventory is drawn or pulled by the customer to be used in the manufacture of the customer’s product. Though the consigned inventory may be at the customer’s physical location, it remains inventory owned by the Company until the inventory is drawn or pulled, which is the time at which the sale takes place.
Fair Value of Financial Instruments
The carrying values of accounts receivable, other current assets, and accounts payable approximate fair value in the accompanying financial statements due to the short-term nature of those instruments. The Company’s other financial instruments, which include cash equivalents and investments, are carried at fair value.
Revenue Recognition and Deferred Revenue
Material sales relate to the Company’s sale of its OLED materials for incorporation into its customers’ commercial OLED products or for their OLED development and evaluation activities. Material sales are recognized at the time title passes, which is typically at the time of shipment or at the time of delivery, depending upon the contractual agreement between the parties.
The Company receives license and royalty payments under certain commercial, development and technology evaluation agreements, some of which are non-refundable. These payments may include royalty and license fees made pursuant to license agreements and certain commercial supply agreements. Amounts received are deferred and classified as either current or non-current deferred revenue based upon current contractual remaining terms; however, based upon on-going relationships with customers, as well as future agreement extensions and other factors, amounts classified as current as of June 30, 2016 may not be recognized as revenue over the next twelve months. For arrangements with extended payment terms where the fee is not fixed and determinable, the Company recognizes revenue when the payment is due and payable. Royalty revenue and license fees included as part of commercial supply agreements are recognized when earned and the amount is fixed and determinable. If the Company used different estimates for the useful life of the licensed technology, or if fees are fixed and determinable, reported revenue during the relevant period would differ.
Technology development and support revenue is revenue earned from government contracts, development and technology evaluation agreements and commercialization assistance fees, which includes reimbursements by government entities for all or a portion of the research and development costs the Company incurs in relation to its government contracts. Revenues are recognized proportionally as research and development costs are incurred, or as defined milestones are achieved.
Currently, the Company's most significant commercial license agreement, which runs through the end of 2017, is with Samsung Display Co., Ltd. (SDC) and covers the manufacture and sale of specified OLED display products. Under this agreement, the Company is being paid a license fee, payable in semi-annual installments over the agreement term of 6.4 years. The installments, which are due in the second and fourth quarter of each year, increase on an annual basis over the term of the agreement. The agreement conveys to SDC the non-exclusive right to use certain of the Company's intellectual property assets for a limited period of time that is less than the estimated life of the assets. Ratable recognition of revenue is impacted by the agreement's extended increasing payment terms in light of the Company's limited history with similar agreements. As a result, revenue is recognized at the lesser of the proportional performance approach (ratable) and the amount of due and payable fees from SDC. Given the increasing contractual payment schedule, license fees under the agreement are recognized as revenue when they become due and payable, which is currently scheduled to be in the second and fourth quarter of each year.
7
In 2015, the Company entered into an OLED patent license agreement and an OLED commercial supply agreement with LG Display Co., Ltd. (LG Display) which were effective as of January 1, 2015 and superseded the 2007 commercial supply agreement between the parties. The new agreements have a term that is set to expire by the end of 2022. The patent license agreement provides LG Display a non-exclusive, royalty bearing portfolio license to make and sell OLED displays under the Company's patent portfolio. The patent license calls for license fees, prepaid royalties and running royalties on licensed products. The prepaid royalty amount is included in deferred revenue and a portion of this amount can be credited against total royalties due over the life of the contract. The agreements include customary provisions relating to warranties, indemnities, confidentiality, assignability and business terms. The agreements provide for certain other minimum obligations relating to the volume of material sales anticipated over the term of the agreements, as well as minimum royalty revenue to be generated under the patent license agreement. The Company expects to generate revenue under these agreements that are predominantly tied to LG Display’s sales of OLED licensed products. The OLED commercial supply agreement provides for the sale of materials for use by LG Display, which may include phosphorescent dopants and host materials.
The Company records taxes billed to customers and remitted to various governmental entities on a gross basis in both revenues and cost of material sales in the consolidated statements of operations. The amounts of these pass through taxes reflected in revenues and cost of material sales were $13,000 and $69,000 for the three and six months ended June 30, 2016, respectively, and $240,000 and $850,000 for the three and six months ended June 30, 2015, respectively.
Cost of Material Sales
Cost of material sales consists of labor and material costs associated with the production of materials processed at the Company's manufacturing partners and at the Company's internal manufacturing processing facility. The Company’s portion of cost of material sales also includes depreciation of manufacturing equipment, as well as, manufacturing overhead costs and inventory adjustments for excess and obsolete inventory.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued a new revenue recognition standard entitled Revenue from Contracts with Customers. The objective of the standard is to establish the principles that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows from a contract with a customer. The standard is effective for annual reporting periods beginning after December 15, 2017. Earlier adoption as of the original date is optional; however, the Company will adopt the standard beginning January 1, 2018. The standard allows for either “full retrospective” adoption, meaning the standard is applied to all periods presented, or “modified retrospective” adoption, meaning the standard is applied only to the most current period presented in the financial statements. The Company is currently assessing which method it will choose for adoption, and is evaluating the impact of the adoption of this new accounting standard on its consolidated results of operations and financial position.
In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, which requires an entity that uses the first-in first-out method for inventory to report inventory cost at the lower of cost or net realizable value versus the current measurement principle of lower of cost or market. The ASU requires prospective adoption for inventory measurements for fiscal years beginning after December 15, 2016. Early adoption is permitted. The Company is evaluating the effect that ASU 2015-11 may have on its consolidated financial statements and related disclosures.
In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which requires the classification of all deferred tax assets and liabilities as noncurrent. The standard is effective for annual reporting periods beginning after December 15, 2016. The standard allows for either "prospective" adoption, meaning the standard is applied to the most current period presented in the financial statements or "full retrospective” adoption, meaning the standard is applied to all periods presented. Earlier adoption is permitted. The Company is evaluating the effect that ASU 2015-17 may have on its consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Accounting. The objective of the standard is to simplify the accounting and related disclosures associated with employee share-based accounting. The standard is effective for annual reporting periods beginning after December 15, 2016. The ASU requires prospective adoption, meaning the standard is applied to the most current period presented in the financial statements. Earlier adoption is permitted. The Company is evaluating the effect that ASU 2016-09 may have on its consolidated financial statements and related disclosures.
8
The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. The Company classifies its remaining investments as available-for-sale. These securities are carried at fair market value, with unrealized gains and losses reported in shareholders’ equity. Gains or losses on securities sold are based on the specific identification method. Investments as of June 30, 2016 and December 31, 2015 consisted of the following (in thousands):
|
|
|
Amortized |
|
|
Unrealized |
|
|
Aggregate Fair |
|
|||||||
|
Investment Classification |
|
Cost |
|
|
Gains |
|
|
(Losses) |
|
|
Market Value |
|
||||
|
June 30, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit |
|
$ |
10,626 |
|
|
$ |
9 |
|
|
$ |
(2 |
) |
|
$ |
10,633 |
|
|
Corporate bonds |
|
|
234,222 |
|
|
|
12 |
|
|
|
(53 |
) |
|
|
234,181 |
|
|
U.S. Government bonds |
|
|
17,498 |
|
|
|
— |
|
|
|
(262 |
) |
|
|
17,236 |
|
|
|
|
$ |
262,346 |
|
|
$ |
21 |
|
|
$ |
(317 |
) |
|
$ |
262,050 |
|
|
December 31, 2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit |
|
$ |
11,532 |
|
|
$ |
3 |
|
|
$ |
(14 |
) |
|
$ |
11,521 |
|
|
Corporate bonds |
|
|
233,848 |
|
|
|
— |
|
|
|
(139 |
) |
|
|
233,709 |
|
|
U.S. Government bonds |
|
|
54,953 |
|
|
|
1 |
|
|
|
(16 |
) |
|
|
54,938 |
|
|
|
|
$ |
300,333 |
|
|
$ |
4 |
|
|
$ |
(169 |
) |
|
$ |
300,168 |
|
|
4. |
INVENTORY: |
Inventory consisted of the following (in thousands):
|
|
|
June 30, 2016 |
|
|
December 31, 2015 |
|
||
|
Raw materials |
|
$ |
6,538 |
|
|
$ |
6,539 |
|
|
Work-in-process |
|
|
1,776 |
|
|
|
1,064 |
|
|
Finished goods |
|
|
8,153 |
|
|
|
5,145 |
|
|
Inventory |
|
$ |
16,467 |
|
|
$ |
12,748 |
|
|
5. |
FAIR VALUE MEASUREMENTS: |
The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of June 30, 2016 (in thousands):
|
|
|
|
|
|
|
Fair Value Measurements, Using |
|
|||||||||
|
|
|
Total carrying value as of June 30, 2016 |
|
|
Quoted prices in active markets (Level 1) |
|
|
Significant other observable inputs (Level 2) |
|
|
Significant unobservable inputs (Level 3) |
|
||||
|
Cash equivalents |
|
$ |
22,376 |
|
|
$ |
22,376 |
|
|
$ |
— |
|
|
$ |
— |
|
|
Short-term investments |
|
|
246,281 |
|
|
|
246,281 |
|
|
|
— |
|
|
|
— |
|
|
Long-term investments |
|
|
15,767 |
|
|
|
15,767 |
|
|
|
— |
|
|
|
— |
|
The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of December 31, 2015 (in thousands):
|
|
|
|
|
|
|
Fair Value Measurements, Using |
|
|||||||||
|
|
|
Total carrying value as of December 31, 2015 |
|
|
Quoted prices in active markets (Level 1) |
|
|
Significant other observable inputs (Level 2) |
|
|
Significant unobservable inputs (Level 3) |
|
||||
|
Cash equivalents |
|
$ |
34,980 |
|
|
$ |
34,980 |
|
|
$ |
— |
|
|
$ |
— |
|
|
Short-term investments |
|
|
297,981 |
|
|
|
297,981 |
|
|
|
— |
|
|
|
— |
|
|
Long-term investments |
|
|
2,187 |
|
|
|
2,187 |
|
|
|
— |
|
|
|
— |
|
9
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on management’s own assumptions used to measure assets and liabilities at fair value. A financial asset's or liability’s classification is determined based on the lowest level input that is significant to the fair value measurement.
Changes in fair value of the investments are recorded as unrealized gains and losses in other comprehensive income. If a decline in fair value of an investment is deemed to be other than temporary, the cost of the Company’s investment will be written down by the amount of the other-than-temporary impairment with a resulting charge to net income. There were no other-than-temporary impairments of investments as of June 30, 2016 or December 31, 2015.
|
6. |
RESEARCH AND LICENSE AGREEMENTS WITH PRINCETON UNIVERSITY, UNIVERSITY OF SOUTHERN CALIFORNIA AND THE UNIVERSITY OF MICHIGAN: |
The Company funded OLED technology research at Princeton University and, on a subcontractor basis, at the University of Southern California for 10 years under a Research Agreement executed with Princeton University in August 1997 (the 1997 Research Agreement). The principal investigator conducting work under the 1997 Research Agreement transferred to the University of Michigan in January 2006. Following this transfer, the 1997 Research Agreement was allowed to expire on July 31, 2007.
As a result of the transfer, the Company entered into a new Sponsored Research Agreement with the University of Southern California to sponsor OLED technology research and, on a subcontractor basis, with the University of Michigan. This new Sponsored Research Agreement (as amended, the 2006 Research Agreement) was effective as of May 1, 2006 and had an original term of three years. On May 1, 2009, the Company amended the 2006 Research Agreement to extend the term of the agreement for an additional four years. The 2006 Research Agreement superseded the 1997 Research Agreement with respect to all work being performed at the University of Southern California and the University of Michigan. Payments under the 2006 Research Agreement were made to the University of Southern California on a quarterly basis as actual expenses were incurred. The Company incurred a total of $5.0 million in research and development expense for work performed under the 2006 Research Agreement during the extended term, which ended on April 30, 2013.
Effective June 1, 2013, the Company amended the 2006 Research Agreement again to extend the term of the agreement for an additional four years. As of June 30, 2016, the Company was obligated to pay the University of Southern California up to $2.1 million for work to be actually performed during the remaining extended term, which expires April 30, 2017. From June 1, 2013 through June 30, 2016, the Company incurred $3.5 million in research and development expense for work performed under the 2006 Research Agreement.
On October 9, 1997, the Company, Princeton University and the University of Southern California entered into an Amended License Agreement (as amended, the 1997 Amended License Agreement) under which Princeton University and the University of Southern California granted the Company worldwide, exclusive license rights, with rights to sublicense, to make, have made, use, lease and/or sell products and to practice processes based on patent applications and issued patents arising out of work performed by Princeton University and the University of Southern California under the 1997 Research Agreement. Under this 1997 Amended License Agreement, the Company is required to pay Princeton University royalties for licensed products sold by the Company or its sublicensees. For licensed products sold by the Company, the Company is required to pay Princeton University 3% of the net sales price of these products. For licensed products sold by the Company’s sublicensees, the Company is required to pay Princeton 3% of the revenues received by the Company from these sublicensees. These royalty rates are subject to renegotiation for products not reasonably conceivable as arising out of the 1997 Research Agreement if Princeton University reasonably determines that the royalty rates payable with respect to these products are not fair and competitive.
The Company is obligated, under the 1997 Amended License Agreement, to pay to Princeton University minimum annual royalties. The minimum royalty payment is $100,000 per year. The Company recorded royalty expense in connection with this agreement of $2.0 million and $1.7 million for the three months ended June 30, 2016 and 2015, respectively, and $2.8 million and $2.4 million for the six months ended June 30, 2016 and 2015, respectively.
The Company also is required, under the 1997 Amended License Agreement, to use commercially reasonable efforts to bring the licensed OLED technology to market. However, this requirement is deemed satisfied if the Company invests a minimum of $800,000 per year in research, development, commercialization or patenting efforts respecting the patent rights licensed to the Company.
10
In connection with entering into the 2006 Research Agreement, the Company amended the 1997 Amended License Agreement to include the University of Michigan as a party to that agreement effective as of January 1, 2006. Under this amendment, Princeton University, the University of Southern California and the University of Michigan have granted the Company a worldwide exclusive license, with rights to sublicense, to make, have made, use, lease and/or sell products and to practice processes based on patent applications and issued patents arising out of work performed under the 2006 Research Agreement. The financial terms of the 1997 Amended License Agreement were not impacted by this amendment.
|
7. |
ACQUIRED TECHNOLOGY: |
Acquired technology consists of acquired license rights for patents and know-how obtained from PD-LD, Inc., Motorola, BASF SE (BASF) and Fujifilm. These intangible assets consist of the following (in thousands):
|
|
|
June 30, 2016 |
|
|
|
PD-LD, Inc. |
|
$ |
1,481 |
|
|
Motorola |
|
|
15,909 |
|
|
BASF |
|
|
96,033 |
|
|
Fujifilm |
|
|
109,462 |
|
|
|
|
|
222,885 |
|
|
Less: Accumulated amortization |
|
|
(60,416 |
) |
|
Acquired technology, net |
|
$ |
162,469 |
|
Amortization expense related to acquired technology was $2.8 million and $2.7 million for the three months ended June 30, 2016 and 2015, respectively, and $5.6 million and $5.5 million for the six months ended June 30, 2016 and 2015, respectively. Amortization expense is included in the patent costs and amortization of acquired technology expense line item on the Consolidated Statements of Operations and is expected to be $15.9 million in 2016 and $20.6 million for each of the five subsequent fiscal years.
Motorola Patent Acquisition
In 2000, the Company entered into a royalty-bearing license agreement with Motorola whereby Motorola granted the Company perpetual license rights to what are now 74 issued U.S. patents relating to Motorola’s OLED technologies, together with foreign counterparts in various countries. These patents will all expire in the U.S. by 2018.
On March 9, 2011, the Company purchased these patents from Motorola, including all existing and future claims and causes of action for any infringement of the patents, pursuant to a Patent Purchase Agreement. The Patent Purchase Agreement effectively terminated the Company’s license agreement with Motorola, including any obligation to make royalty payments to Motorola. The technology acquired from Motorola is being amortized over a period of 7.5 years.
Fujifilm Patent Acquisition
On July 23, 2012, the Company entered into a Patent Sale Agreement with Fujifilm. Under the agreement, Fujifilm sold more than 1,200 OLED-related patents and patent applications in exchange for a cash payment of $105.0 million, plus costs incurred in connection with the purchase. The agreement contains customary representations and warranties and covenants, including respective covenants not to sue by both parties thereto. The agreement permitted the Company to assign all of its rights and obligations under the agreement to its affiliates, and the Company assigned, prior to the consummation of the transactions contemplated by the agreement, its rights and obligations to UDC Ireland Limited (UDC Ireland), a wholly-owned subsidiary of the Company formed under the laws of the Republic of Ireland. The transactions contemplated by the agreement were consummated on July 26, 2012. The Company recorded the $105.0 million plus $4.5 million of purchase costs as acquired technology, which is being amortized over a period of 10 years.
BASF Patent Acquisition
On June 28, 2016, UDC Ireland entered into and consummated an IP Transfer Agreement with BASF. Under the IP Transfer Agreement, BASF sold to UDC Ireland all of its rights, title and interest to certain of its owned and co-owned intellectual property rights relating to the composition of, development, manufacture and use of OLED materials, including OLED lighting and display stack technology, as well as, certain tangible assets. The intellectual property includes knowhow and more than 500 issued and pending patents in the area of phosphorescent materials and technologies. These assets were acquired in exchange for a cash payment of €86.8 million ($95.8 million). In addition, UDC Ireland also took on certain rights and obligations under three joint research and development agreements to which BASF was a party. The IP Transfer Agreement also contains customary representations, warranties
11
and covenants of the parties. UDC Ireland recorded the payment of €86.8 million ($95.8 million) and acquisition costs incurred of $261,000 as acquired technology which is being amortized over a period of 10 years.
|
8. |
EQUITY AND CASH COMPENSATION UNDER THE PPG AGREEMENTS: |
On September 22, 2011, the Company entered into an Amended and Restated OLED Materials Supply and Service Agreement with PPG Industries (the New OLED Materials Agreement), which replaced the original OLED Materials Agreement with PPG Industries effective as of October 1, 2011. The term of the New OLED Materials Agreement ran through December 31, 2015 and shall be automatically renewed for additional one year terms, unless terminated by the Company by providing prior notice of one year or terminated by PPG by providing prior notice of two years. The agreement was automatically renewed through December 31, 2017. The New OLED Materials Agreement contains provisions that are substantially similar to those of the original OLED Materials Agreement. Under the New OLED Materials Agreement, PPG Industries continues to assist the Company in developing its proprietary OLED materials and supplying the Company with those materials for evaluation purposes and for resale to its customers.
Under the New OLED Materials Agreement, the Company compensates PPG Industries on a cost-plus basis for the services provided during each calendar quarter. The Company is required to pay for some of these services in all cash. Up to 50% of the remaining services are payable, at the Company’s sole discretion, in cash or shares of the Company’s common stock, with the balance payable in cash. The actual number of shares of common stock issuable to PPG Industries is determined based on the average closing price for the Company’s common stock during a specified number of days prior to the end of each calendar half-year period ending on March 31 and September 30. If, however, this average closing price is less than $20.00, the Company is required to compensate PPG Industries in cash. No shares were issued for services to PPG for the three or six months ended June 30, 2016 or 2015.
The Company is also to reimburse PPG Industries for raw materials used for research and development. The Company records the purchases of these raw materials as a current asset until such materials are used for research and development efforts.
The Company recorded research and development expense of $1.0 million and $1.5 million for the three months ended June 30, 2016 and 2015, respectively, and $1.9 million and $3.0 million for the six months ended June 30, 2016 and 2015, respectively, in relation to the cash portion of the reimbursement of expenses and work performed by PPG Industries, excluding amounts paid for commercial chemicals.
|
9. |
SHAREHOLDERS’ EQUITY: |
Common and Preferred Stock
The Company is authorized to issue 100 million shares of $0.01 par value common stock and 5 million shares of $0.01 par value preferred stock. Each share of the Company’s common stock entitles the holder to one vote on all matters to be voted upon by the shareholders. As of June 30, 2016, the Company had issued 48,302,603 shares of common stock and 200,000 shares of preferred stock.
Scientific Advisory Board and Employee Awards
During the first quarters of 2016 and 2015, the Company granted a total of 27,967 and 35,205 shares, respectively, of fully vested common stock to employees and non-employee members of the Scientific Advisory Board for services performed in 2015 and 2014, respectively. The fair value of the shares issued was $1.1 million and $967,000, respectively, for shares issued to employees and $300,000 for both quarters for shares issued to members of the Scientific Advisory Board, which amounts were accrued at December 31, 2015 and 2014, respectively. In connection with the issuance of these grants, 8,106 and 9,565 shares, with fair values of $410,000 and $346,000, were withheld in satisfaction of employee tax withholding obligations in 2016 and 2015, respectively.
12
Amounts related to the changes in accumulated other comprehensive loss were as follows (in thousands):
|
|
|
Unrealized gain (loss) on available-for-sale-securities |
|
|
Net unrealized gain (loss) on retirement plan (2) |
|
|
Change in cumulative foreign currency translation adjustment |
|
|
Total |
|
|
Affected line items in the consolidated statements of operations |
||||
|
Balance December 31, 2015, net of tax |
|
$ |
(111 |
) |
|
$ |
(9,708 |
) |
|
$ |
— |
|
|
$ |
(9,819 |
) |
|
|
|
Other comprehensive gain (loss) before reclassification |
|
|
(84 |
) |
|
|
— |
|
|
|
20 |
|
|
|
(64 |
) |
|
|
|
Actuarial gain (loss) |
|
|
— |
|
|
|
(353 |
) |
|
|
— |
|
|
|
||||