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UNIVERSAL DISPLAY CORP \PA\ - Quarter Report: 2022 June (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2022

OR

 

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

 

img33765458_0.jpg 

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.)

 

 

 

250 Phillips Boulevard, Ewing, New Jersey

 

08618

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code: (609) 671-0980

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, $0.01 par value

 

OLED

 

The Nasdaq Stock Market LLC

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 No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Emerging growth company

Non-accelerated filer

Smaller reporting company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial account standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

As of August 2, 2022, the registrant had outstanding 47,229,055 shares of common stock.

 


 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

 

 

 

 

 

Item 1. Financial Statements (unaudited)

 

 

Consolidated Balance Sheets – June 30, 2022 and December 31, 2021

 

1

Consolidated Statements of Income – Three and six months ended June 30, 2022 and 2021

 

2

Consolidated Statements of Comprehensive Income – Three and six months ended June 30, 2022 and 2021

 

3

Consolidated Statements of Shareholders’ Equity – Three and six months ended June 30, 2022 and 2021

 

4

Consolidated Statements of Cash Flows – Six months ended June 30, 2022 and 2021

 

6

Notes to Consolidated Financial Statements

 

7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

26

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

35

Item 4. Controls and Procedures

 

35

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

Item 1. Legal Proceedings

 

35

Item 1A. Risk Factors

 

36

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

36

Item 3. Defaults Upon Senior Securities

 

36

Item 4. Mine Safety Disclosures

 

36

Item 5. Other Information

 

36

Item 6. Exhibits

 

37

 

 

 

 

 


 

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands, except share and per share data)

 

 

 

June 30, 2022

 

 

December 31, 2021

 

ASSETS

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

Cash and cash equivalents

 

$

213,896

 

 

$

311,993

 

Short-term investments

 

 

439,449

 

 

 

351,194

 

Accounts receivable

 

 

74,933

 

 

 

107,639

 

Inventory

 

 

165,635

 

 

 

134,160

 

Other current assets

 

 

38,244

 

 

 

20,948

 

Total current assets

 

 

932,157

 

 

 

925,934

 

PROPERTY AND EQUIPMENT, net of accumulated depreciation of $103,881 and $92,461

 

 

138,028

 

 

 

128,832

 

ACQUIRED TECHNOLOGY, net of accumulated amortization of $183,928 and $173,635

 

 

39,375

 

 

 

49,668

 

OTHER INTANGIBLE ASSETS, net of accumulated amortization of $8,273 and $7,565

 

 

9,015

 

 

 

9,711

 

GOODWILL

 

 

15,535

 

 

 

15,535

 

INVESTMENTS

 

 

200,142

 

 

 

168,076

 

DEFERRED INCOME TAXES

 

 

36,998

 

 

 

33,453

 

OTHER ASSETS

 

 

128,188

 

 

 

135,710

 

TOTAL ASSETS

 

$

1,499,438

 

 

$

1,466,919

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

Accounts payable

 

$

14,048

 

 

$

14,955

 

Accrued expenses

 

 

38,757

 

 

 

45,474

 

Deferred revenue

 

 

99,106

 

 

 

120,864

 

Other current liabilities

 

 

3,302

 

 

 

6,645

 

Total current liabilities

 

 

155,213

 

 

 

187,938

 

DEFERRED REVENUE

 

 

30,021

 

 

 

36,217

 

RETIREMENT PLAN BENEFIT LIABILITY

 

 

68,188

 

 

 

66,773

 

OTHER LIABILITIES

 

 

80,707

 

 

 

76,077

 

Total liabilities

 

 

334,129

 

 

 

367,005

 

COMMITMENTS AND CONTINGENCIES (Note 18)

 

 

 

 

 

 

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, 200,000,000 shares authorized, 49,115,444
   and
49,065,924 shares issued, and 47,749,796 and 47,700,276 shares outstanding, at
   June 30, 2022 and December 31, 2021, respectively

 

 

491

 

 

 

491

 

Additional paid-in capital

 

 

666,087

 

 

 

658,728

 

Retained earnings

 

 

563,191

 

 

 

500,212

 

Accumulated other comprehensive loss

 

 

(23,178

)

 

 

(18,235

)

Treasury stock, at cost (1,365,648 shares at June 30, 2022 and December 31, 2021)

 

 

(41,284

)

 

 

(41,284

)

Total shareholders’ equity

 

 

1,165,309

 

 

 

1,099,914

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

1,499,438

 

 

$

1,466,919

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

1


 

UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(in thousands, except share and per share data)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

REVENUE:

 

 

 

 

 

 

 

 

 

 

 

 

Material sales

 

$

71,869

 

 

$

77,438

 

 

$

158,560

 

 

$

157,246

 

Royalty and license fees

 

 

60,278

 

 

 

48,212

 

 

 

120,080

 

 

 

99,098

 

Contract research services

 

 

4,414

 

 

 

4,010

 

 

 

8,391

 

 

 

7,316

 

Total revenue

 

 

136,561

 

 

 

129,660

 

 

 

287,031

 

 

 

263,660

 

COST OF SALES

 

 

27,239

 

 

 

27,969

 

 

 

60,402

 

 

 

51,267

 

Gross margin

 

 

109,322

 

 

 

101,691

 

 

 

226,629

 

 

 

212,393

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

28,197

 

 

 

24,101

 

 

 

54,742

 

 

 

47,406

 

Selling, general and administrative

 

 

19,869

 

 

 

20,239

 

 

 

40,931

 

 

 

36,643

 

Amortization of acquired technology and other intangible assets

 

 

5,502

 

 

 

5,497

 

 

 

11,000

 

 

 

10,985

 

Patent costs

 

 

2,259

 

 

 

1,809

 

 

 

4,057

 

 

 

3,644

 

Royalty and license expense

 

 

181

 

 

 

149

 

 

 

335

 

 

 

261

 

Total operating expenses

 

 

56,008

 

 

 

51,795

 

 

 

111,065

 

 

 

98,939

 

OPERATING INCOME

 

 

53,314

 

 

 

49,896

 

 

 

115,564

 

 

 

113,454

 

Interest income, net

 

 

1,583

 

 

 

75

 

 

 

1,874

 

 

 

208

 

Other income, net

 

 

89

 

 

 

221

 

 

 

55

 

 

 

280

 

Interest and other income, net

 

 

1,672

 

 

 

296

 

 

 

1,929

 

 

 

488

 

INCOME BEFORE INCOME TAXES

 

 

54,986

 

 

 

50,192

 

 

 

117,493

 

 

 

113,942

 

INCOME TAX EXPENSE

 

 

(13,484

)

 

 

(9,651

)

 

 

(26,021

)

 

 

(21,714

)

NET INCOME

 

$

41,502

 

 

$

40,541

 

 

$

91,472

 

 

$

92,228

 

NET INCOME PER COMMON SHARE:

 

 

 

 

 

 

 

 

 

 

 

 

BASIC

 

$

0.87

 

 

$

0.85

 

 

$

1.92

 

 

$

1.94

 

DILUTED

 

$

0.87

 

 

$

0.85

 

 

$

1.92

 

 

$

1.94

 

WEIGHTED AVERAGE SHARES USED IN COMPUTING NET
   INCOME PER COMMON SHARE:

 

 

 

 

 

 

 

 

 

 

 

 

BASIC

 

 

47,393,830

 

 

 

47,299,627

 

 

 

47,381,864

 

 

 

47,284,773

 

DILUTED

 

 

47,457,892

 

 

 

47,356,864

 

 

 

47,451,354

 

 

 

47,347,596

 

CASH DIVIDENDS DECLARED PER COMMON SHARE

 

$

0.30

 

 

$

0.20

 

 

$

0.60

 

 

$

0.40

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

2


 

UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(in thousands)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

NET INCOME

 

$

41,502

 

 

$

40,541

 

 

$

91,472

 

 

$

92,228

 

OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized (loss) gain on available-for-sale securities,
   net of tax of $
450, $7, $1,547 and $9, respectively

 

 

(1,616

)

 

 

26

 

 

 

(5,551

)

 

 

(32

)

Amortization of prior service cost and actuarial loss for
   retirement plan included in net periodic pension costs,
   net of tax of $
142, $334, $285 and $669, respectively

 

 

509

 

 

 

1,174

 

 

 

1,018

 

 

 

2,348

 

Change in cumulative foreign currency translation
   adjustment

 

 

(176

)

 

 

37

 

 

 

(410

)

 

 

(69

)

TOTAL OTHER COMPREHENSIVE (LOSS) INCOME

 

 

(1,283

)

 

 

1,237

 

 

 

(4,943

)

 

 

2,247

 

COMPREHENSIVE INCOME

 

$

40,219

 

 

$

41,778

 

 

$

86,529

 

 

$

94,475

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

3


 

UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(UNAUDITED)

(in thousands, except for share data)

 

 

 

Three Months Ended June 30, 2022

 

 

 

Series A
Nonconvertible

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Accumulated
Other

 

 

 

 

 

 

 

 

Total

 

 

 

Preferred Stock

 

 

Common Stock

 

 

Paid-in

 

 

Retained

 

 

Comprehensive

 

 

Treasury Stock

 

 

Shareholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

Shares

 

 

Amount

 

 

Equity

 

BALANCE,
MARCH 31, 2022

 

 

200,000

 

 

$

2

 

 

 

49,099,830

 

 

$

491

 

 

$

658,050

 

 

$

535,936

 

 

$

(21,895

)

 

 

1,365,648

 

 

$

(41,284

)

 

$

1,131,300

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

41,502

 

 

 

 

 

 

 

 

 

 

 

 

41,502

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,283

)

 

 

 

 

 

 

 

 

(1,283

)

Cash dividend

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(14,247

)

 

 

 

 

 

 

 

 

 

 

 

(14,247

)

Issuance of common stock
to employees

 

 

 

 

 

 

 

 

14,386

 

 

 

 

 

 

7,959

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,959

 

Shares withheld for employee taxes

 

 

 

 

 

 

 

 

(6,135

)

 

 

 

 

 

(948

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(948

)

Issuance of common stock to Board of Directors
and Scientific Advisory Board

 

 

 

 

 

 

 

 

2,196

 

 

 

 

 

 

344

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

344

 

Issuance of common stock to employees under an ESPP

 

 

 

 

 

 

 

 

5,167

 

 

 

 

 

 

682

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

682

 

BALANCE,
JUNE 30, 2022

 

 

200,000

 

 

$

2

 

 

 

49,115,444

 

 

$

491

 

 

$

666,087

 

 

$

563,191

 

 

$

(23,178

)

 

 

1,365,648

 

 

$

(41,284

)

 

$

1,165,309

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2022

 

 

 

Series A
Nonconvertible

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Accumulated
Other

 

 

 

 

 

 

 

 

Total

 

 

 

Preferred Stock

 

 

Common Stock

 

 

Paid-in

 

 

Retained

 

 

Comprehensive

 

 

Treasury Stock

 

 

Shareholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

Shares

 

 

Amount

 

 

Equity

 

BALANCE,
DECEMBER 31, 2021

 

 

200,000

 

 

$

2

 

 

 

49,065,924

 

 

$

491

 

 

$

658,728

 

 

$

500,212

 

 

$

(18,235

)

 

 

1,365,648

 

 

$

(41,284

)

 

$

1,099,914

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

91,472

 

 

 

 

 

 

 

 

 

 

 

 

91,472

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,943

)

 

 

 

 

 

 

 

 

(4,943

)

Cash dividend

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(28,493

)

 

 

 

 

 

 

 

 

 

 

 

(28,493

)

Issuance of common stock
to employees

 

 

 

 

 

 

 

 

62,134

 

 

 

 

 

 

13,938

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13,938

 

Shares withheld for employee taxes

 

 

 

 

 

 

 

 

(28,482

)

 

 

 

 

 

(8,844

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,844

)

Issuance of common stock to Board of Directors
and Scientific Advisory Board

 

 

 

 

 

 

 

 

7,826

 

 

 

 

 

 

1,074

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,074

 

Issuance of common stock to employees under an ESPP

 

 

 

 

 

 

 

 

8,042

 

 

 

 

 

 

1,191

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,191

 

BALANCE,
JUNE 30, 2022

 

 

200,000

 

 

$

2

 

 

 

49,115,444

 

 

$

491

 

 

$

666,087

 

 

$

563,191

 

 

$

(23,178

)

 

 

1,365,648

 

 

$

(41,284

)

 

$

1,165,309

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

 

4


 

UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(UNAUDITED)

(in thousands, except for share data)

 

 

 

Three Months Ended June 30, 2021

 

 

 

Series A
Nonconvertible

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Accumulated
Other

 

 

 

 

 

 

 

 

Total

 

 

 

Preferred Stock

 

 

Common Stock

 

 

Paid-in

 

 

Retained

 

 

Comprehensive

 

 

Treasury Stock

 

 

Shareholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

Shares

 

 

Amount

 

 

Equity

 

BALANCE,
MARCH 31, 2021

 

 

200,000

 

 

$

2

 

 

 

49,050,776

 

 

$

491

 

 

$

632,138

 

 

$

396,130

 

 

$

(35,009

)

 

 

1,365,648

 

 

$

(41,284

)

 

$

952,468

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

40,541

 

 

 

 

 

 

 

 

 

 

 

 

40,541

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,237

 

 

 

 

 

 

 

 

 

1,237

 

Cash dividend

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,483

)

 

 

 

 

 

 

 

 

 

 

 

(9,483

)

Issuance of common stock
to employees

 

 

 

 

 

 

 

 

4,267

 

 

 

 

 

 

9,296

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9,296

 

Shares withheld for employee taxes

 

 

 

 

 

 

 

 

(4,660

)

 

 

 

 

 

(3,384

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,384

)

Issuance of common stock to Board of Directors
and Scientific Advisory Board

 

 

 

 

 

 

 

 

1,353

 

 

 

 

 

 

374

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

374

 

Issuance of common stock to employees under an ESPP

 

 

 

 

 

 

 

 

2,323

 

 

 

 

 

 

567

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

567

 

BALANCE,
JUNE 30, 2021

 

 

200,000

 

 

$

2

 

 

 

49,054,059

 

 

$

491

 

 

$

638,991

 

 

$

427,188

 

 

$

(33,772

)

 

 

1,365,648

 

 

$

(41,284

)

 

$

991,616

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2021

 

 

 

Series A
Nonconvertible

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Accumulated
Other

 

 

 

 

 

 

 

 

Total

 

 

 

Preferred Stock

 

 

Common Stock

 

 

Paid-in

 

 

Retained

 

 

Comprehensive

 

 

Treasury Stock

 

 

Shareholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

Shares

 

 

Amount

 

 

Equity

 

BALANCE,
DECEMBER 31, 2020

 

 

200,000

 

 

$

2

 

 

 

49,013,476

 

 

$

490

 

 

$

635,595

 

 

$

353,930

 

 

$

(36,019

)

 

 

1,365,648

 

 

$

(41,284

)

 

$

912,714

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

92,228

 

 

 

 

 

 

 

 

 

 

 

 

92,228

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,247

 

 

 

 

 

 

 

 

 

2,247

 

Cash dividend

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(18,970

)

 

 

 

 

 

 

 

 

 

 

 

(18,970

)

Issuance of common stock
to employees

 

 

 

 

 

 

 

 

57,390

 

 

 

1

 

 

 

14,411

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14,412

 

Shares withheld for employee taxes

 

 

 

 

 

 

 

 

(26,708

)

 

 

 

 

 

(13,018

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13,018

)

Issuance of common stock to Board of Directors
and Scientific Advisory Board

 

 

 

 

 

 

 

 

5,796

 

 

 

 

 

 

1,004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,004

 

Issuance of common stock to employees under an ESPP

 

 

 

 

 

 

 

 

4,105

 

 

 

 

 

 

999

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

999

 

BALANCE,
JUNE 30, 2021

 

 

200,000

 

 

$

2

 

 

 

49,054,059

 

 

$

491

 

 

$

638,991

 

 

$

427,188

 

 

$

(33,772

)

 

 

1,365,648

 

 

$

(41,284

)

 

$

991,616

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

5


 

UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

 

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

Net income

 

$

91,472

 

 

$

92,228

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Amortization of deferred revenue and recognition of unbilled receivables, net

 

 

(125,196

)

 

 

(110,993

)

Depreciation

 

 

11,529

 

 

 

9,229

 

Amortization of intangibles

 

 

11,000

 

 

 

10,985

 

Change in excess inventory reserve

 

 

688

 

 

 

1,117

 

Amortization of premium and discount on investments, net

 

 

(1,027

)

 

 

(128

)

Stock-based compensation to employees

 

 

14,282

 

 

 

14,624

 

Stock-based compensation to Board of Directors and Scientific Advisory Board

 

 

774

 

 

 

704

 

Deferred income tax (benefit) expense

 

 

(2,282

)

 

 

1,458

 

Retirement plan expense

 

 

2,718

 

 

 

4,457

 

Decrease (increase) in assets:

 

 

 

 

 

 

Accounts receivable

 

 

32,706

 

 

 

(17,368

)

Inventory

 

 

(32,163

)

 

 

(14,179

)

Other current assets

 

 

(13,030

)

 

 

(5,712

)

Other assets

 

 

7,522

 

 

 

(15,005

)

Increase (decrease) in liabilities:

 

 

 

 

 

 

Accounts payable and accrued expenses

 

 

(7,126

)

 

 

(17,036

)

Other current liabilities

 

 

(3,343

)

 

 

(2,536

)

Deferred revenue

 

 

92,976

 

 

 

92,816

 

Other liabilities

 

 

4,630

 

 

 

14,455

 

Net cash provided by operating activities

 

 

86,130

 

 

 

59,116

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

Purchases of property and equipment

 

 

(21,336

)

 

 

(20,668

)

Purchases of intangibles

 

 

(12

)

 

 

(394

)

Purchases of investments

 

 

(287,919

)

 

 

(193,951

)

Proceeds from sale and maturity of investments

 

 

161,530

 

 

 

100,000

 

Net cash used in investing activities

 

 

(147,737

)

 

 

(115,013

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

Proceeds from issuance of common stock

 

 

847

 

 

 

787

 

Payment of withholding taxes related to stock-based compensation to employees

 

 

(8,844

)

 

 

(13,018

)

Cash dividends paid

 

 

(28,493

)

 

 

(18,970

)

Net cash used in financing activities

 

 

(36,490

)

 

 

(31,201

)

DECREASE IN CASH AND CASH EQUIVALENTS

 

 

(98,097

)

 

 

(87,098

)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

 

311,993

 

 

 

630,012

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

213,896

 

 

$

542,914

 

The following non-cash activities occurred:

 

 

 

 

 

 

Unrealized loss on available-for-sale securities

 

$

(7,095

)

 

$

(35

)

Common stock issued to Board of Directors and Scientific Advisory Board that was
   earned and accrued for in a previous period

 

 

300

 

 

 

300

 

Net change in accounts payable and accrued expenses related to purchases of property
   and equipment

 

 

611

 

 

 

366

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

6


 

UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. BUSINESS:

Universal Display Corporation and its subsidiaries (the Company) is a leader in the research, development and commercialization of organic light emitting diode (OLED) technologies and materials for use in display and solid-state lighting applications. OLEDs are thin, lightweight and power-efficient solid-state devices that emit light and can be manufactured on both flexible and rigid substrates, 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, especially in the mobile phone, television, wearable, tablet, notebook and personal computer, augmented reality (AR), virtual reality (VR) and automotive markets. 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, intellectual property position, and more than 20 years of experience working closely with leading OLED display manufacturers are some of the competitive advantages that should enable the Company to continue to share in the revenues from OLED displays and lighting products as they gain wider acceptance.

The Company’s primary business strategy is to (1) develop new OLED materials and sell existing and new materials to product manufacturers of products for display applications, such as mobile phones, televisions, wearables, tablets, portable media devices, notebook computers, personal computers and automotive applications, and specialty and general lighting products; and (2) further develop and either license or otherwise commercialize the Company’s proprietary OLED material, device design and manufacturing technologies to those 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 long-standing, and establishing new relationships with world-class universities, research institutions and strategic manufacturing partnerships. The Company currently owns, exclusively licenses or has the sole right to sublicense more than 5,500 patents issued and pending worldwide.

The Company manufactures and 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 the Company’s patents and to use the Company's proprietary know-how. At the same time, the Company works with these and other companies that are evaluating the Company's OLED material, device design and manufacturing technologies 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 have been prepared in accordance with the requirements of the Securities and Exchange Commission for interim financial reporting and contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company’s financial position as of June 30, 2022 and results of operations for the three and six months ended June 30, 2022 and 2021, and cash flows for the six months ended June 30, 2022 and 2021. 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 Consolidated Financial Statements, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. 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 (UDC Ireland), Universal Display Corporation Hong Kong, Limited, Universal Display Corporation Korea, Y.H. (UDC Korea), Universal Display Corporation Japan GK, Universal Display Corporation China, Ltd., Adesis, Inc. (Adesis), UDC Ventures LLC, OVJP Corporation (OVJP Corp) and OLED Material Manufacturing Limited (OMM). All intercompany transactions and accounts have been eliminated.

7


 

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 including estimates of material unit sales and royalties, the useful life of acquired intangibles, lease liabilities, right-of-use assets, the use and recoverability of inventories, intangibles, investments and 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, and are stated at the lower of cost, determined on a first-in, first-out basis, or net realizable value. 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.

Fair Value of Financial Instruments

The carrying values of accounts receivable, other current assets, accounts payable and other current liabilities approximate fair value in the accompanying Consolidated Financial Statements due to the short-term nature of those instruments. The Company’s other financial instruments, which include cash equivalents, investments, retirement plan benefit liability and other liabilities are carried at fair value.

Minority Equity Investments

The Company accounts for minority equity investments in companies that are not accounted for under the equity method as equity securities without readily determinable fair values. The fair value of these securities is based on original cost less impairments, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. Under this method, the share of income or loss of such companies is not included in the Consolidated Statements of Income. The carrying value of these investments is included in investments on the Consolidated Balance Sheets.

The Company’s policy is to recognize an impairment in the value of its minority equity investments when clear evidence of an impairment exists. Factors considered in the assessment include a significant adverse change in the regulatory, economic, or technological environment, the completion of new equity financing that may indicate a decrease in value, the failure to complete new equity financing arrangements after seeking to raise additional funds, or the commencement of proceedings under which the assets of the business may be placed in receivership or liquidated to satisfy the claims of debt and equity stakeholders.

Leases

The Company is a lessee in operating leases primarily incurred to facilitate the expansion of manufacturing, research and development, and selling, general and administrative activities. At contract inception, the Company determines if an arrangement is or contains a lease, and if so recognizes a right-of-use asset and lease liability at the lease commencement date. For operating leases, the lease liability is measured at the present value of the unpaid lease payments at the lease commencement date, whereas for finance leases, the lease liability is initially measured at the present value of the unpaid lease payments and subsequently measured at amortized cost using the interest method. Operating lease right-of-use assets are included in other assets on the Consolidated Balance Sheets. The short-term portion of operating lease liabilities is included in other current liabilities on the Consolidated Balance Sheets and the long-term portion is included in other liabilities on the Consolidated Balance Sheets. As of June 30, 2022, the Company had no leases that qualified as financing arrangements.

Key estimates and judgments include how the Company determines the discount rate used to discount the unpaid lease payments to present value and the lease term. The Company monitors for events or changes in circumstances that could potentially require recognizing an impairment loss.

8


 

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. Revenue associated with material sales is generally 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. Revenue may be recognized after control of the material passes in the event the transaction price includes variable consideration. For example, a customer may be provided an extended opportunity to stock materials prior to use in mass production and given a general right of return not conditioned on breaches of warranties associated with the specific product. In such circumstances, revenue will be recognized at the earlier of the expiration of the customer’s general right of return or once it becomes unlikely that the customer will exercise its right of return.

The rights and benefits to the Company’s OLED technologies are conveyed to the customer through technology license agreements and material supply agreements. The Company believes that the licenses and materials sold under these combined agreements are not distinct from each other for financial reporting purposes and as such, they are accounted for as a single performance obligation. Accordingly, total contract consideration is estimated and recognized over the contract term based on material units sold at the estimated per unit fee over the life of the contract. Total contract consideration is allocated to material sales and royalty and licensing fees on the Consolidated Statements of Income based on contract pricing.

Various estimates are relied upon to recognize revenue. The Company estimates total material units to be purchased by its customers over the contract term based on historical trends, industry estimates and its forecast process. Management uses the expected value method to estimate the material per unit fee. Additionally, management estimates the total sales-based royalties based on the estimated net sales revenue of its customers over the contract term.

Contract research services revenue is revenue earned by Adesis by providing chemical materials synthesis research, development and commercialization for non-OLED applications on a contractual basis. These services range from intermediates for structure-activity relationship studies, reference agents and building blocks for combinatorial synthesis, re-synthesis of key intermediates, specialty organic chemistry needs, and selective toll manufacturing. These services are provided to third-party pharmaceutical and life sciences firms and other technology firms at fixed costs or on an annual contract basis. Revenue is recognized as services are performed with billing schedules and payment terms negotiated on a contract-by-contract basis. Payments received in excess of revenue recognized are recorded as deferred revenue. In other cases, services may be provided and revenue is recognized before the customer is invoiced. In these cases, revenue recognized will exceed amounts billed and the difference, representing amounts which are currently unbillable to the customer pursuant to contractual terms, is recorded as an unbilled receivable.

Technology development and support revenue is revenue earned from development and technology evaluation agreements and commercialization assistance fees, along with, to a minimal extent, government contracts. Relating to the Company’s government contracts, the Company may receive reimbursements by government entities for all or a portion of the research and development costs the Company incurs. Revenues are recognized as services are performed, proportionally as research and development costs are incurred, or as defined milestones are achieved. Technology development and support revenue is included in contract research services on the Consolidated Statements of Income.

In 2018, the Company entered into a commercial patent license agreement with Samsung Display Co., Ltd. (SDC). This agreement, which covers the manufacture and sale of specified OLED display materials, was effective as of January 1, 2018 and lasts through the end of 2022 with an additional two-year extension option. Under this agreement, the Company is being paid a license fee, payable in quarterly installments over the agreement term of five years. 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.

At the same time the Company entered into the current commercial license agreement with SDC, the Company also entered into a new supplemental material purchase agreement with SDC. Under the supplemental material purchase agreement, SDC agrees to purchase from the Company a minimum amount of phosphorescent emitter materials for use in the manufacture of licensed products. This minimum commitment is subject to SDC’s requirements for phosphorescent emitter materials and the Company’s ability to meet these requirements over the term of the supplemental agreement.

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 existing 2007 commercial supply agreement between the parties. 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 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 life of the agreements as well as minimum royalty revenue to be generated under the patent license agreement. The

9


 

Company generates 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 emitters and host materials.

In 2021, the Company entered into amendments of the 2015 OLED patent license agreement and the 2015 OLED commercial supply agreement with LG Display, which amendments were effective as of January 1, 2021. The amended agreements included a term extension and are set to expire by the end of 2025.

In 2016, the Company entered into long-term, multi-year OLED patent license and material purchase agreements with Tianma Micro-electronics Co., Ltd. (Tianma). Under the license agreement, the Company has granted Tianma non-exclusive license rights under various patents owned or controlled by the Company to manufacture and sell OLED display products. The license agreement calls for license fees and running royalties on licensed products. Additionally, the Company supplies phosphorescent OLED materials to Tianma for use in its licensed products. In 2021, the parties extended the terms of both the patent license and material purchase agreements for an additional multi-year-term.

In 2017, the Company entered into long-term, multi-year agreements with BOE Technology Group Co., Ltd. (BOE). Under these agreements, the Company has granted BOE non-exclusive license rights under various patents owned or controlled by the Company to manufacture and sell OLED display products. The Company supplies phosphorescent OLED materials to BOE for use in its licensed products.

In 2018, the Company entered into long-term, multi-year OLED patent license and material purchase agreements with Visionox Technology, Inc. (Visionox). Under the license agreement, the Company granted certain of Visionox’s affiliates a non-exclusive license rights under various patents owned or controlled by the Company to manufacture and sell OLED display products. The license agreement calls for license fees and running royalties on licensed products. Additionally, the Company supplies phosphorescent OLED materials to Visionox for use in its licensed products. In 2021, the Company announced that it had extended the Visionox agreement by entering into new five-year OLED material supply and license agreements with a new affiliate of Visionox, Visionox Hefei Technology Co. Ltd.

In 2019, the Company entered into an evaluation and commercial supply relationship with Wuhan China Star Optoelectronics Semiconductor Display Technology Co., Ltd. (CSOT). In 2020, the Company entered into long-term, multi-year agreements with CSOT. Under these agreements, the Company has granted CSOT non-exclusive license rights under various patents owned or controlled by the Company to manufacture and sell OLED display products. The Company also supplies phosphorescent OLED materials to CSOT for use in its licensed products.

All material sales transactions that are not variable consideration transactions are billed and due within 90 days and substantially all are transacted in U.S. dollars.

Cost of Sales

Cost of 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 sales also includes depreciation of manufacturing equipment, as well as manufacturing overhead costs and inventory adjustments for excess and obsolete inventory.

Research and Development

Expenditures for research and development are charged to expense as incurred.

Patent Costs

Costs associated with patent applications, patent prosecution, patent defense and the maintenance of patents are charged to expense as incurred. Costs to successfully defend a challenge to a patent are capitalized to the extent of an evident increase in the value of the patent. Costs that relate to an unsuccessful outcome are charged to expense.

Amortization of Acquired Technology

Amortization costs primarily relate to technology acquired from BASF and Fujifilm. These acquisitions were completed in the years ended December 31, 2016 and 2012, respectively. Acquisition costs are being amortized over a period of 10 years for both the BASF and Fujifilm patents.

10


 

Amortization of Other Intangible Assets

Other intangible assets primarily relate to the Adesis acquisition and are being amortized over a period of 10 to 15 years. See Note 7 for further discussion.

Translation of Foreign Currency Financial Statements and Foreign Currency Transactions

The Company’s reporting currency is the U.S. dollar. The functional currency for the UDC Ireland and UDC Korea subsidiaries are also the U.S. dollar and the functional currency for the OMM subsidiary and each of the Company's other Asia-Pacific foreign subsidiaries is its local currency. The Company translates the amounts included in the Consolidated Statements of Income from OMM and its Asia-Pacific foreign subsidiaries into U.S. dollars at weighted-average exchange rates, which the Company believes are representative of the actual exchange rates on the dates of the transactions. The Company's foreign subsidiaries' assets and liabilities are translated into U.S. dollars from the local currency at the actual exchange rates as of the end of each reporting date, and the Company records the resulting foreign exchange translation adjustments in the Consolidated Balance Sheets as a component of accumulated other comprehensive loss. The overall effect of the translation of foreign currency and foreign currency transactions to date has been insignificant.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount of which the likelihood of realization is greater than 50%. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest and penalties, if any, related to unrecognized tax benefits as a component of tax expense.

Share-Based Payment Awards

The Company recognizes in the Consolidated Statements of Income the grant-date fair value of equity-based awards such as shares issued under employee stock purchase plans, restricted stock awards, restricted stock units and performance unit awards issued to employees and directors.

The grant-date fair value of stock awards is based on the closing price of the stock on the date of grant. The fair value of share-based awards is recognized as compensation expense on a straight-line basis over the requisite service period, net of forfeitures. The Company issues new shares upon the respective grant, exercise or vesting of the share-based payment awards, as applicable.

Performance unit awards are subject to either a performance-based or market-based vesting requirement. For performance-based vesting, the grant-date fair value of the award, based on fair value of the Company's common stock, is recognized over the service period based on an assessment of the likelihood that the applicable performance goals will be achieved and compensation expense is periodically adjusted based on actual and expected performance. Compensation expense for performance unit awards with market-based vesting is calculated based on the estimated fair value as of the grant date utilizing a Monte Carlo simulation model and is recognized over the service period on a straight-line basis.

Recent Accounting Pronouncements

Accounting Standards Issued But Not Yet Adopted

Fair Value of Equity Investments. In 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2022-03, "Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions." Under this standard, a contractual restriction on the sale of an equity security is not considered in measuring the security's fair value. The standard also requires certain disclosures for equity securities that are subject to contractual restrictions. The ASU becomes effective January 1, 2024, and the Company is evaluating the potential impact of this standard on its investments.

 

11


 

3. CASH, CASH EQUIVALENTS AND INVESTMENTS:

The Company’s portfolio of fixed income securities consists of term bank certificates of deposit, U.S. Government bonds, corporate bonds and convertible notes. The Company considers all highly liquid debt instruments purchased with an original maturity (maturity at the purchase date) of three months or less to be cash equivalents. The Company classifies its remaining debt security investments as available-for-sale. These debt 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.

Cash and Cash Equivalents

The following table provides details regarding the Company’s portfolio of cash and cash equivalents (in thousands):

 

 

 

Amortized

 

 

Unrealized

 

 

Aggregate Fair

 

Cash and Cash Equivalents Classification

 

Cost

 

 

Gains

 

 

(Losses)

 

 

Market Value

 

June 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

Cash accounts in banking institutions

 

$

174,235

 

 

$

 

 

$

 

 

$

174,235

 

Money market accounts

 

 

12,670

 

 

 

 

 

 

 

 

 

12,670

 

Corporate bonds

 

 

26,991

 

 

 

 

 

 

 

 

 

26,991

 

 

 

$

213,896

 

 

$

 

 

$

 

 

$

213,896

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

Cash accounts in banking institutions

 

$

256,878

 

 

$

 

 

$

 

 

$

256,878

 

Money market accounts

 

 

55,115

 

 

 

 

 

 

 

 

 

55,115

 

 

 

$

311,993

 

 

$

 

 

$

 

 

$

311,993

 

 

Short-term Investments

The following table provides details regarding the Company’s portfolio of short-term investments (in thousands):

 

 

 

Amortized

 

 

Unrealized

 

 

Aggregate Fair

 

Short-term Investments Classification

 

Cost

 

 

Gains

 

 

(Losses)

 

 

Market Value

 

June 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

257,133

 

 

$

 

 

$

(791

)

 

$

256,342

 

U.S. Government bonds

 

 

184,307

 

 

 

8

 

 

 

(1,208

)

 

 

183,107

 

 

 

$

441,440

 

 

$

8

 

 

$

(1,999

)

 

$

439,449

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

240

 

 

$

 

 

$

 

 

$

240

 

Corporate bonds

 

 

226,448

 

 

 

3

 

 

 

(97

)

 

 

226,354

 

U.S. Government bonds

 

 

124,611

 

 

 

 

 

 

(11

)

 

 

124,600

 

 

 

$

351,299

 

 

$

3

 

 

$

(108

)

 

$

351,194

 

 

Long-term Corporate Bonds and U.S. Government Bonds Investments

The following table provides details regarding the Company’s portfolio of long-term investments (in thousands):

 

 

 

Amortized

 

 

Unrealized

 

 

Aggregate Fair

 

Long-term Investments Classification

 

Cost

 

 

Gains

 

 

(Losses)

 

 

Market Value

 

June 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

1,768

 

 

$

 

 

$

(204

)

 

$

1,564

 

U.S. Government bonds

 

 

184,698

 

 

 

7

 

 

 

(5,135

)

 

 

179,570

 

 

 

$

186,466

 

 

$

7

 

 

$

(5,339

)

 

$

181,134

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government bonds

 

$

159,692

 

 

$

10

 

 

$

(134

)

 

$

159,568

 

 

 

$

159,692

 

 

$

10

 

 

$

(134

)

 

$

159,568

 

Long-term Minority Investments and Convertible Notes

The Company’s portfolio of minority investments and convertible notes consist of investments in privately held early-stage companies primarily motivated to gain early access to new technology and are passive in nature in that the Company typically does not seek to obtain representation on the boards of directors of the companies in which it invests. Minority investments and convertible notes

12


 

are included in investments on the Consolidated Balance Sheets. As of June 30, 2022, the Company had four minority investments with a total carrying value of $15.0 million accounted for as equity securities without readily determinable fair values. As of June 30, 2022, the Company had one convertible note investment with a fair value of $4.0 million accounted for as an available-for-sale debt security with a level 3 fair value measurement.

4. FAIR VALUE MEASUREMENTS:

The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of June 30, 2022 (in thousands):

 

 

 

 

 

 

Fair Value Measurements, Using

 

 

 

Total Carrying Value
as of June 30,
 2022

 

 

Quoted Prices in
Active Markets
(Level 1)

 

 

Significant Other
Observable Inputs
(Level 2)

 

 

Significant Unobservable
Inputs
(Level 3)

 

Cash equivalents

 

$

39,661

 

 

$

39,661

 

 

$

 

 

$

 

Short-term investments

 

 

439,449

 

 

 

439,449

 

 

 

 

 

 

 

Long-term U.S. Government bonds investments

 

 

179,570

 

 

 

179,570

 

 

 

 

 

 

 

Convertible notes

 

 

4,000

 

 

 

 

 

 

 

 

 

4,000

 

The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of December 31, 2021 (in thousands):

 

 

 

 

 

 

Fair Value Measurements, Using

 

 

 

Total Carrying Value
as of December 31,
 2021

 

 

Quoted Prices in
Active Markets
(Level 1)

 

 

Significant Other
Observable Inputs
(Level 2)

 

 

Significant Unobservable
Inputs
(Level 3)

 

Cash equivalents

 

$

55,115

 

 

$

55,115

 

 

$

 

 

$

 

Short-term investments

 

 

351,194

 

 

 

351,194

 

 

 

 

 

 

 

Long-term U.S. Government bonds investments

 

 

159,568

 

 

 

159,568

 

 

 

 

 

 

 

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 debt investments are recorded as unrealized gains and losses in accumulated other comprehensive loss on the Consolidated Balance Sheets and any credit losses on debt investments are recorded as an allowance for credit losses with an offset recognized in other income, net on the Consolidated Statements of Income. There were no credit losses on debt investments as of June 30, 2022 or December 31, 2021.

5. INVENTORY:

Inventory consisted of the following (in thousands):

 

 

 

June 30, 2022

 

 

December 31, 2021

 

Raw materials

 

$

92,032

 

 

$

75,227

 

Work-in-process

 

 

16,536

 

 

 

16,065

 

Finished goods

 

 

57,067

 

 

 

42,868

 

Inventory

 

$

165,635

 

 

$

134,160

 

The Company recorded an increase in inventory reserve of $604,000 and $450,000 for the three months ended June 30, 2022 and 2021, respectively, and $688,000 and $1.1 million for the six months ended June 30, 2022 and 2021, respectively, due to excess inventory levels in certain products.

13


 

6. PROPERTY AND EQUIPMENT:

Property and equipment, net consist of the following (in thousands):

 

 

 

June 30, 2022

 

 

December 31, 2021

 

Land

 

$

2,642

 

 

$

2,642

 

Building and improvements

 

 

83,475

 

 

 

76,600

 

Office and lab equipment

 

 

119,499

 

 

 

107,168

 

Furniture, fixtures and computer related assets

 

 

17,087

 

 

 

16,221

 

Construction-in-progress

 

 

19,206

 

 

 

18,662

 

 

 

 

241,909

 

 

 

221,293

 

Less: Accumulated depreciation

 

 

(103,881

)

 

 

(92,461

)

Property and equipment, net

 

$

138,028

 

 

$

128,832

 

Depreciation expense was $5.9 million and $4.9 million for the three months ended June 30, 2022 and 2021, respectively, and $11.5 million and $9.2 million for the six months ended June 30, 2022 and 2021, respectively.

7. GOODWILL AND INTANGIBLE ASSETS:

The Company monitors the recoverability of goodwill annually or whenever events or changes in circumstances indicate the carrying value may not be recoverable. Purchased intangible assets subject to amortization consist of acquired technology and other intangible assets that include trade names, customer relationships and developed intellectual property (IP) processes.

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, 2022

 

 

December 31, 2021

 

PD-LD, Inc.

 

$

1,481

 

 

$

1,481

 

Motorola

 

 

15,909

 

 

 

15,909

 

BASF

 

 

95,989

 

 

 

95,989

 

Fujifilm

 

 

109,462

 

 

 

109,462

 

Other

 

 

462

 

 

 

462

 

 

 

 

223,303

 

 

 

223,303

 

Less: Accumulated amortization

 

 

(183,928

)

 

 

(173,635

)

Acquired technology, net

 

$

39,375

 

 

$

49,668

 

Amortization expense related to acquired technology was $5.1 million for both three-month periods ended June 30, 2022 and 2021, and $10.3 million for both six-month periods ended June 30, 2022 and 2021. Amortization expense is included in amortization of acquired technology and other intangible assets expense line item on the Consolidated Statements of Income and is expected to be $5.5 million for the six months ending December 31, 2022, $9.7 million in the year ending December 31, 2023, $9.6 million in each of the years ending December 31, 2024 and 2025, $4.8 million in the year ending December 31, 2026 and $200,000 in total thereafter.

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, 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

14


 

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 and covenants of the parties. UDC Ireland recorded the payment of €86.8 million ($95.8 million) and acquisition costs incurred of $217,000 as acquired technology, which is being amortized over a period of 10 years.

Other Intangible Assets

As a result of the Adesis acquisition in June 2016, the Company recorded $16.8 million of other intangible assets, including $10.5 million assigned to customer relationships with a weighted average life of 11.5 years, $4.8 million of internally developed IP, processes and recipes with a weighted average life of 15 years, and $1.5 million assigned to trade name and trademarks with a weighted average life of 10 years.

At June 30, 2022, these other intangible assets consist of the following (in thousands):

 

 

 

June 30, 2022

 

 

 

Gross Carrying
Amount

 

 

Accumulated
Amortization

 

 

Net Carrying
Amount

 

Customer relationships

 

$

10,520

 

 

$

(5,426

)

 

$

5,094

 

Developed IP, processes and recipes

 

 

4,820

 

 

 

(1,908

)

 

 

2,912

 

Trade name/Trademarks

 

 

1,500

 

 

 

(893

)

 

 

607

 

Other

 

 

448

 

 

 

(46

)

 

 

402

 

Total identifiable other intangible assets

 

$

17,288

 

 

$

(8,273

)

 

$

9,015

 

 

Amortization expense related to other intangible assets was $355,000 and $351,000 for the three months ended June 30, 2022 and 2021, respectively, and $708,000 and $693,000 for the six months ended June 30, 2022 and 2021, respectively. Amortization expense is included in amortization of acquired technology and other intangible assets expense line item on the Consolidated Statements of Income and is expected to be $717,000 for the six months ending December 31, 2022, $1.4 million for each of the next four fiscal years (2023 - 2026) and $2.7 million in total thereafter.

8. OTHER ASSETS:

Other assets consist of the following (in thousands):

 

 

 

June 30, 2022

 

 

December 31, 2021

 

Long-term taxes receivable

 

$

96,701

 

 

$

103,260

 

Right-of-use assets

 

 

28,544

 

 

 

30,614

 

Other long-term assets

 

 

2,943

 

 

 

1,836

 

Other assets

 

$

128,188

 

 

$

135,710

 

See Notes 9 and 20 for further explanation on right-of-use assets and non-current taxes receivable, respectively.

9. LEASES:

The Company has entered into operating leases to facilitate the expansion of its manufacturing, research and development, and selling, general and administrative activities. For purposes of calculating operating lease liabilities, lease terms may be deemed to include options to extend or terminate the lease when those events are reasonably certain to occur. The interest rate implicit in lease contracts is typically not readily determinable and as such the Company uses the appropriate incremental borrowing rate based on information available at the lease commencement date in determining the present value of the lease payments. Current lease agreements do not contain any residual value guarantees or material restrictive covenants. As of June 30, 2022, the Company did not have any finance leases and one additional operating lease that had not yet commenced.

The following table presents the Company’s operating lease cost and supplemental cash flow information related to the Company’s operating leases (in thousands):

 

15


 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Operating lease cost

 

$

1,073

 

 

$

757

 

 

$

2,171

 

 

$

1,372

 

Non-cash activity:

 

 

 

 

 

 

 

 

 

 

 

 

Right-of-use assets obtained in exchange for lease obligations

 

$

 

 

$

5,351

 

 

$

 

 

$

10,071

 

The following table presents the Company’s operating right-of-use assets and liabilities (in thousands):

 

 

 

June 30, 2022

 

 

December 31, 2021

 

Right-of-use assets

 

$

28,544

 

 

$

30,614

 

Short-term lease liabilities

 

 

3,302

 

 

 

3,351

 

Long-term lease liabilities

 

 

25,242

 

 

 

27,263

 

 

The following table presents weighted average assumptions used to compute the Company’s right-of-use assets and lease liabilities:

 

 

 

June 30, 2022

 

Weighted average remaining lease term (in years)

 

 

8.1

 

Weighted average discount rate

 

 

2.8

%

 

As of June 30, 2022, current operating leases had remaining terms between two months and nine years with options to extend the lease terms.

Undiscounted future minimum lease payments as of June 30, 2022, by year and in the aggregate, having non-cancelable lease terms in excess of one year were as follows (in thousands):

 

 

 

Maturities of
Operating Lease Liabilities

 

2022 (1)

 

$

2,005

 

2023

 

 

3,985

 

2024

 

 

3,933

 

2025

 

 

3,974

 

2026

 

 

3,986

 

Thereafter

 

 

13,944

 

Total lease payments

 

 

31,827

 

Less: Imputed interest

 

 

(3,283

)

Present value of lease payments

 

$

28,544

 

 

(1)
Scheduled maturities of lease liabilities represent the period from July 1, 2022 to December 31, 2022.

10. ACCRUED EXPENSES:

Accrued expenses consist of the following (in thousands):

 

 

 

June 30, 2022

 

 

December 31, 2021

 

Compensation

 

$

19,423

 

 

$

27,686

 

PPG agreements

 

 

11,330

 

 

 

8,853

 

Research and development agreements

 

 

2,053

 

 

 

1,469

 

Consulting

 

 

1,802

 

 

 

1,314

 

Professional fees

 

 

828

 

 

 

1,000

 

Royalties

 

 

335

 

 

 

691

 

Other

 

 

2,986

 

 

 

4,461

 

Accrued expenses

 

$

38,757

 

 

$

45,474

 

 

11. RESEARCH AND LICENSE AGREEMENTS WITH ACADEMIC PARTNERS:

The Company has long-standing relationships with a number of academic institutions that undertake funded research projects, including Princeton University (Princeton) and the University of Southern California (USC).

16


 

Under the current license agreement among the Company, Princeton and USC, the universities have 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 research performed by the universities for the Company. The Company recorded royalty expense in connection with this agreement of $181,000 and $149,000 for the three months ended June 30, 2022 and 2021, respectively, and $335,000 and $261,000 for the six months ended June 30, 2022 and 2021, respectively.

The Company also makes payments under the current research agreement with USC on a quarterly basis as actual expenses are incurred. As of June 30, 2022, the Company was obligated to pay USC up to $2.4 million for work to be performed during the remaining term of the research agreement. The Company recorded research and development expense in connection with work performed under the agreement of $256,000 and $394,000 for the three months ended June 30, 2022 and 2021, respectively, and $451,000 and $679,000 for the six months ended June 30, 2022 and 2021, respectively.

12. OTHER LIABILITIES:

Other liabilities consist of the following (in thousands):

 

 

 

June 30, 2022

 

 

December 31, 2021

 

Long-term taxes payable

 

$

54,315

 

 

$

47,791

 

Long-term lease liabilities

 

 

25,242

 

 

 

27,263

 

Other long-term liabilities

 

 

1,150

 

 

 

1,023

 

Other liabilities

 

$

80,707

 

 

$

76,077

 

See Notes 9 and 20 for further explanation on long-term lease liabilities and long-term taxes payable, respectively.

13. 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, Inc. (PPG) (the New OLED Materials Agreement), which replaced the original OLED Materials Agreement with PPG, effective as of October 1, 2011. The term of the New OLED Materials Agreement, by amendment in February 2021, runs through December 31, 2024, and thereafter is 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 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 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 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 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 in cash. No shares were issued for services to PPG for the three or six months ended June 30, 2022 and 2021.

The Company is also required to reimburse PPG 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.

In February 2021, the Company entered into an amendment to the New OLED Materials Agreement extending the term of the agreement and specifying operation and maintenance services that will be provided by PPG affiliate, PPG SCM Ireland Limited, to UDC Ireland, at the Company’s new manufacturing site in Shannon, Ireland, currently being leased by UDC Ireland’s wholly-owned subsidiary, OMM, for the production of OLED materials. Facility improvements have been completed and operations started to commence in June 2022. As with the initial New OLED Materials Agreement, the Company will compensate PPG on a cost-plus basis for the services provided at the Shannon manufacturing facility.

The Company recorded research and development expense of $796,000 and $738,000 for the three months ended June 30, 2022 and 2021, respectively, and $2.3 million and $2.2 million for the six months ended June 30, 2022 and 2021, respectively, in relation to the cash portion of the reimbursement of expenses and work performed by PPG, excluding amounts paid for commercial chemicals.

 

17


 

14. SHAREHOLDERS’ EQUITY:

Preferred Stock

The Company’s Amended and Restated Articles of Incorporation authorize it to issue up to 5,000,000 shares of $0.01 par value preferred stock with designations, rights and preferences determined from time-to-time by the Company’s Board of Directors. Accordingly, the Company’s Board of Directors is empowered, without shareholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights superior to those of shareholders of the Company’s common stock.

In 1995, the Company issued 200,000 shares of Series A Nonconvertible Preferred Stock (Series A) to American Biomimetics Corporation (ABC) pursuant to a certain Technology Transfer Agreement between the Company and ABC. The Series A shares have a liquidation value of $7.50 per share. Series A shareholders, as a single class, have the right to elect two members of the Company’s Board of Directors. This right has never been exercised. Holders of the Series A shares are entitled to one vote per share on matters which shareholders are generally entitled to vote. The Series A shareholders are not entitled to any dividends.

As of June 30, 2022, the Company had issued 200,000 shares of preferred stock, all of which were outstanding.

Common Stock

The Company’s Amended and Restated Articles of Incorporation authorize it to issue up to 200,000,000 shares of $0.01 par value common 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, 2022, the Company had issued 49,115,444 shares of common stock, of which 47,749,796 were outstanding. During the three and six months ended June 30, 2022 and 2021, the Company repurchased no shares of common stock.

Scientific Advisory Board Awards

During the six months ended June 30, 2022 and 2021, the Company granted a total of 2,024 and 1,400 shares, respectively, of fully vested common stock to non-employee members of the Scientific Advisory Board for services performed in 2021 and 2020, respectively. The fair value of shares issued to members of the Scientific Advisory Board was $300,000 for both six-month periods.

Dividends

During the three months ended June 30, 2022, the Company declared and paid cash dividends of $0.30 per common share, or $14.2 million, and during the six months ended June 30, 2022, the Company declared and paid cash dividends of $0.60 per common share, or $28.5 million, on the Company’s outstanding common stock.

On August 2, 2022, the Company’s Board of Directors declared a second quarter dividend of $0.30 per share to be paid on September 30, 2022 to all shareholders of record of the Company’s common stock as of the close of business on September 16, 2022. All future dividends will be subject to the approval of the Company’s Board of Directors.

 

15. ACCUMULATED OTHER COMPREHENSIVE LOSS:

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
Income

Balance December 31, 2021, net of tax

 

$

(142

)

 

$

(18,019

)

 

$

(74

)

 

$

(18,235

)

 

 

Other comprehensive loss
   before reclassification

 

 

(5,551

)

 

 

 

 

 

(410

)

 

 

(5,961

)

 

 

Reclassification to net income (1)

 

 

 

 

 

1,018

 

 

 

 

 

 

1,018

 

 

Selling, general and administrative,
research and development and
cost of sales

Change during period

 

 

(5,551

)

 

 

1,018

 

 

 

(410

)

 

 

(4,943

)

 

 

Balance June 30, 2022, net of tax

 

$

(5,693

)

 

$

(17,001

)

 

$

(484

)

 

$

(23,178

)

 

 

 

18


 

 

 

 

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
Income

Balance December 31, 2020, net of tax

 

$

91

 

 

$

(36,075

)

 

$

(35

)

 

$

(36,019

)

 

 

Other comprehensive loss
   before reclassification

 

 

(32

)

 

 

 

 

 

(69

)

 

 

(101

)

 

 

Reclassification to net income (1)

 

 

 

 

 

2,348

 

 

 

 

 

 

2,348

 

 

Selling, general and administrative,
research and development and
cost of sales

Change during period

 

 

(32

)

 

 

2,348

 

 

 

(69

)

 

 

2,247

 

 

 

Balance June 30, 2021, net of tax

 

$

59

 

 

$

(33,727

)

 

$

(104

)

 

$

(33,772

)

 

 

 

(1)
The Company reclassified amortization of prior service cost and actuarial loss for its retirement plan from accumulated other comprehensive loss to net income of $1.0 million and $2.3 million for the six months ended June 30, 2022 and 2021, respectively.
(2)
Refer to Note 17: Supplemental Executive Retirement Plan.

 

16. STOCK-BASED COMPENSATION:

Equity Compensation Plan

The Equity Compensation Plan provides for the granting of incentive and nonqualified stock options, shares of common stock, stock appreciation rights and performance units to employees, directors and consultants of the Company. Stock options are exercisable over periods determined by the Company’s Human Capital Committee, but for no longer than 10 years from the grant date. Through June 30, 2022, the Company’s shareholders have approved increases in the number of shares reserved for issuance under the Equity Compensation Plan to 10,500,000, and have extended the term of the plan through 2024. As of June 30, 2022, there were 1,579,626 shares that remained available to be granted under the Equity Compensation Plan.

Restricted Stock Awards and Units

The Company has issued restricted stock awards and units to employees and non-employees with vesting terms of one to five years. The fair value is equal to the market price of the Company’s common stock on the date of grant for awards granted to employees and equal to the market price at the end of the reporting period for unvested non-employee awards or upon the date of vesting for vested non-employee awards. Expense for restricted stock awards and units is amortized ratably over the vesting period for the awards issued to employees and using a graded vesting method for the awards issued to non-employees.

During the six months ended June 30, 2022, the Company granted 100,741 shares of restricted stock awards and restricted stock units to employees and non-employees, which had a total fair value of $15.1 million on the respective dates of grant, and will vest over three to five years from the date of grant, provided that the grantee is still an employee of the Company or is still providing services to the Company on the applicable vesting date.

For the three months ended June 30, 2022 and 2021, the Company recorded, as compensation charges related to all restricted stock awards and units granted to employees and non-employees, selling, general and administrative expense of $3.4 million and $4.1 million, respectively, research and development expense of $1.6 million and $1.3 million, respectively, and cost of sales of $567,000 and $711,000, respectively. For the six months ended June 30, 2022 and 2021, the Company recorded, as compensation charges related to all restricted stock awards and units granted to employees and non-employees, selling, general and administrative expense of $7.4 million and $7.7 million, respectively, research and development expense of $3.1 million and $2.5 million, respectively, and cost of sales of $1.1 million and $1.3 million, respectively.

In connection with the vesting of restricted stock awards and units during the three months ended June 30, 2022 and 2021, 1,616 and 14,660 shares, respectively, with aggregate fair values of $210,000 and $3.4 million, respectively, were withheld in satisfaction of tax withholding obligations and are reflected as a financing activity within the Consolidated Statements of Cash Flows. In connection with the vesting of restricted stock awards and units during the six months ended June 30, 2022 and 2021, 51,400 and 60,827 shares, respectively, with aggregate fair values of $8.0 million and $12.1 million, respectively, were withheld in satisfaction of tax withholding obligations and are reflected as a financing activity within the Consolidated Statements of Cash Flows.

For the three months ended June 30, 2022 and 2021, the Company recorded as compensation charges related to all restricted stock units granted to non-employee members of the Scientific Advisory Board, whose unvested shares are marked to market each reporting period, research and development expense of $31,000 and $76,000, respectively. For the six months ended June 30, 2022 and 2021, the

19


 

Company recorded as compensation charges related to all restricted stock units granted to non-employee members of the Scientific Advisory Board, whose unvested shares are marked to market each reporting period, research and development expense of $151,000 and $112,000, respectively.

The Company has granted restricted stock units to non-employee members of the Board of Directors with quarterly vesting over a period of approximately one year. The fair value is equal to the market price of the Company's common stock on the date of grant. The restricted stock units are issued and expense is recognized ratably over the vesting period. For the three months ended June 30, 2022 and 2021, the Company recorded compensation charges for services performed, related to all restricted stock units granted to non-employee members of the Board of Directors, selling, general and administrative expense of $313,000 and $297,000, respectively. For the six months ended June 30, 2022 and 2021, the Company recorded compensation charges for services performed, related to all restricted stock units granted to non-employee members of the Board of Directors, selling, general and administrative expense of $622,000 and $591,000, respectively. In connection with the vesting of the restricted stock, the Company issued to non-employee members of the Board of Directors 2,196 and 2,706 shares, respectively, during the three months ended June 30, 2022 and 2021.

Performance Unit Awards

Each performance unit award is subject to both a performance-vesting requirement (either performance-based or market-based) and a service-vesting requirement. The performance-based vesting requirement is tied to EBITDA and cash flow achievement, as measured over a specific performance period. The market-based vesting requirement is tied to the Company's total shareholder return (TSR) relative to the TSR of companies comprising the Nasdaq Electronics Components Index, as measured over a three-year performance period. The maximum number of performance units that may vest based on performance is three times the shares granted. Further, if the Company's total shareholder return is negative, the performance units will not vest at all.

During the six months ended June 30, 2022, the Company granted 100,621 performance units, of which 50,309 units are subject to performance-based vesting requirements based on EBITDA, 25,156 units are subject to performance-based vesting requirements based on the Company's achievement of cash from operations, and 25,156 units are subject to market-based, TSR vesting requirements. The grant date fair value of the performance unit awards granted was $15.2 million for the six months ended June 30, 2022, as determined by the Company’s common stock on date of grant for the units with performance-based vesting and a Monte Carlo simulation model used for the units with market-based vesting.

For the three months ended June 30, 2022 and 2021, the Company recorded selling, general and administrative expense of $1.7 million and $2.2 million, respectively, research and development expense of $413,000 and $596,000, respectively, and cost of sales of $256,000 and $366,000, respectively, related to the performance units. For the six months ended June 30, 2022 and 2021, the Company recorded selling, general and administrative expense of $1.8 million and $2.0 million, respectively, research and development expense of $385,000 and $503,000, respectively, and cost of sales of $237,000 and $332,000, respectively, related to the performance units.

In connection with the vesting of performance units during the six months ended June 30, 2022 and 2021, 5,082 and 3,881 shares, respectively, with an aggregate fair value of $826,000 and $875,000, respectively, were withheld in satisfaction of tax withholding obligations and are reflected as a financing activity within the Consolidated Statements of Cash Flows.

Employee Stock Purchase Plan

On April 7, 2009, the Board of Directors of the Company adopted an Employee Stock Purchase Plan (ESPP). The ESPP was approved by the Company’s shareholders and became effective on June 25, 2009. The Company has reserved 1,000,000 shares of common stock for issuance under the ESPP. Unless terminated by the Board of Directors, the ESPP will expire when all reserved shares have been issued.

Eligible employees may elect to contribute to the ESPP through payroll deductions during consecutive three-month purchase periods, the first of which began on July 1, 2009. Each employee who elects to participate will be deemed to have been granted an option to purchase shares of the Company’s common stock on the first day of the purchase period. Unless the employee opts out during the purchase period, the option will automatically be exercised on the last day of the period, which is the purchase date, based on the employee’s accumulated contributions to the ESPP. The purchase price will equal 85% of the lesser of the closing price per share of common stock on the first day of the period or the last business day of the period.

Employees may allocate up to 10% of their base compensation to purchase shares of common stock under the ESPP; however, each employee may purchase no more than 12,500 shares on a given purchase date, and no employee may purchase more than $25,000 of common stock under the ESPP during a given calendar year.

20


 

During the six months ended June 30, 2022 and 2021, the Company issued 8,042 and 4,105 shares, respectively, of its common stock under the ESPP, resulting in proceeds of $847,000 and $787,000, respectively.

For the three months ended June 30, 2022 and 2021, the Company recorded charges of $60,000 and $35,000, respectively, to selling, general and administrative expense, $113,000 and $58,000, respectively, to research and development expense, and $66,000 and $36,000, respectively, to cost of sales related to the ESPP equal to the amount of the discount and the value of the look-back feature. For the six months ended June 30, 2022 and 2021, the Company recorded charges of $85,000 and $58,000, respectively, to selling, general and administrative expense, $164,000 and $95,000, respectively, to research and development expense, and $95,000 and $60,000, respectively, to cost of sales related to the ESPP equal to the amount of the discount and the value of the look-back feature.

 

17. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN:

On March 18, 2010, the Human Capital Committee and the Board of Directors of the Company approved and adopted the Universal Display Corporation Supplemental Executive Retirement Plan (SERP). The SERP is currently unfunded and includes salary and bonus as part of the plan. The purpose of the SERP is to provide certain of the Company’s key employees with supplemental pension benefits following a cessation of their employment and to encourage their continued employment with the Company. As of June 30, 2022, there were eight participants in the SERP.

The Company records amounts relating to the SERP based on calculations that incorporate various actuarial and other assumptions, including discount rates, rate of compensation increases, retirement dates and life expectancies. The net periodic costs are recognized as employees render the services necessary to earn the SERP benefits.

The components of net periodic pension cost were as follows (in thousands):

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Service cost

 

$

362

 

 

$

429

 

 

$

723

 

 

$

857

 

Interest cost

 

 

346

 

 

 

292

 

 

 

692

 

 

 

583

 

Amortization of prior service cost

 

 

279

 

 

 

274

 

 

 

559

 

 

 

549

 

Amortization of loss

 

 

372

 

 

 

1,234

 

 

 

744

 

 

 

2,468

 

Total net periodic benefit cost

 

$

1,359

 

 

$

2,229

 

 

$

2,718

 

 

$

4,457

 

 

 

18. COMMITMENTS AND CONTINGENCIES:

Commitments

Under the current research agreement with USC, the Company is obligated to make certain payments to USC based on work performed by it under that agreement, and by the University of Michigan (Michigan) under a subcontractor agreement that Michigan has with USC.

Under the terms of the current license agreement among the Company, Princeton and USC, the Company makes royalty payments to Princeton. See Note 11 for further explanation.

The Company has agreements with six executive officers and 12 senior level employees which provide for certain cash and other benefits upon termination of employment of the officer or employee in connection with a change in control of the Company. If a covered person’s employment is terminated in connection with the change in control, the person is entitled to a lump-sum cash payment equal to two times (in the case of the executive officers) or either one or two times (in the case of the senior level employees) the sum of the average annual base salary and bonus of the person and immediate vesting of all stock options and other equity awards that may be outstanding at the date of the change in control, among other items.

In order to manage manufacturing lead times and help ensure adequate material supply, the Company entered into the New OLED Materials Agreement (see Note 13) that allows PPG to procure and produce inventory based upon criteria as defined by the Company. These purchase commitments consist of firm, noncancelable and unconditional commitments. In certain instances, this agreement allows the Company the option to reschedule and adjust the Company’s requirements based on its business needs prior to firm orders being placed. As of June 30, 2022 and December 31, 2021, the Company had purchase commitments for inventory of $40.4 million and $25.7 million, respectively.

21


 

Patent Related Challenges and Oppositions

Each major jurisdiction in the world that issues patents provides both third parties and applicants an opportunity to seek a further review of an issued patent. The process for requesting and considering such reviews is specific to the jurisdiction that issued the patent in question, and generally does not provide for claims of monetary damages or a review of specific claims of infringement. The conclusions made by the reviewing administrative bodies tend to be appealable and generally are limited in scope and applicability to the specific claims and jurisdiction in question.

The Company believes that opposition proceedings are frequently commenced in the ordinary course of business by third parties who may believe that one or more claims in a patent do not comply with the technical or legal requirements of the specific jurisdiction in which the patent was issued. The Company views these proceedings as reflective of its goal of obtaining the broadest legally permissible patent coverage permitted in each jurisdiction. Once a proceeding is initiated, as a general matter, the issued patent continues to be presumed valid until the jurisdiction’s applicable administrative body issues a final non-appealable decision. Depending on the jurisdiction, the outcome of these proceedings could include affirmation, denial or modification of some or all of the originally issued claims. The Company believes that as OLED technology becomes more established and its patent portfolio increases in size, so will the number of these proceedings.

Below is a summary of an active proceeding that has been commenced against an issued patent that is exclusively licensed to the Company. The Company does not believe that the confirmation, loss or modification of the Company’s rights in any individual claim or set of claims that are the subject of the following legal proceeding would have a material impact on the Company’s material sales or licensing business or on the Company’s Consolidated Financial Statements, including its Consolidated Statements of Income, as a whole. In certain circumstances, when permitted, the Company may also utilize a proceeding to request modification of the claims to better distinguish the patented invention from any newly identified prior art and/or improve the claim scope of the patent relative to commercially important categories of the invention.

Opposition to European Patent No. 1390962

The European patent that is subject to the above opposition, which was described in prior filings, has now expired in accordance with its original term. Although the opposition proceedings on this patent may continue, the Company does not believe the expiration of the patent or the result of the proceedings will have any material impact on the Company’s material sales or licensing business or on the Company’s Consolidated Financial Statements, including its Consolidated Statements of Income, as a whole.

In addition to the above proceeding and now concluded proceedings which have been referenced in prior filings, from time to time, the Company may have other proceedings that are pending which relate to patents the Company acquired as part of the Fujifilm or BASF OLED patent acquisitions or which relate to technologies that are not currently widely used in the marketplace.

 

19. CONCENTRATION OF RISK:

Revenues and accounts receivable from the Company's largest customers were as follows (in thousands):

 

 

 

% of Total Revenue for the
Three Months Ended June 30,

 

% of Total Revenue for the
 Six Months Ended June 30,

 

Accounts Receivable as of

 

Customer

 

2022

 

2021

 

2022

 

2021

 

June 30, 2022

 

A

 

39%

 

51%

 

39%

 

43%

 

$

10,467

 

B

 

30%

 

26%

 

29%

 

24%

 

$

37,895

 

C

 

14%

 

15%

 

15%

 

18%

 

$

4,892

 

 

Revenues from outside of North America represented approximately 97% for both three-month and six-month periods ended June 30, 2022 and 2021. Revenues by geographic area are as follows (in thousands):

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

Country

 

2022

 

 

2021

 

 

2022

 

 

2021

 

South Korea

 

$

79,096

 

 

$

86,324

 

 

$

168,783

 

 

$

154,299

 

China

 

 

51,180

 

 

 

36,308

 

 

 

106,580

 

 

 

96,812

 

Japan

 

 

1,392

 

 

 

2,001

 

 

 

2,445

 

 

 

3,316

 

Other non-U.S. locations

 

 

715

 

 

 

895

 

 

 

1,015

 

 

 

1,720

 

Total non-U.S. locations

 

 

132,383

 

 

 

125,528

 

 

 

278,823

 

 

 

256,147

 

United States

 

 

4,178

 

 

 

4,132

 

 

 

8,208

 

 

 

7,513

 

Total revenue

 

$

136,561

 

 

$

129,660

 

 

$

287,031

 

 

$

263,660

 

 

22


 

The Company attributes revenue to different geographic areas on the basis of the location of the customer.

Long-lived assets (net), by geographic area are as follows (in thousands):

 

 

 

June 30, 2022

 

 

December 31, 2021

 

United States

 

$

117,017

 

 

$

115,004

 

Other

 

 

21,011

 

 

 

13,828

 

Total long-lived assets

 

$

138,028

 

 

$

128,832

 

Substantially all chemical materials were purchased from one supplier. See Note 13 for further explanation.

20. INCOME TAXES:

The Company is subject to income taxes in both the United States and foreign jurisdictions. The effective income tax rate was an expense of 24.5% and 19.2% for the three months ended June 30, 2022 and 2021, respectively, and 22.1% and 19.1% for the six months ended June 30, 2022 and 2021, respectively. The discrepancy between the statutory tax rate and the effective tax rate is primarily due to nondeductible employee compensation and U.S. international tax (GILTI and Subpart F) partially offset by the benefit of income taxed in foreign jurisdictions. The Company recorded an income tax expense of $13.5 million and $9.7 million for the three months ended June 30, 2022 and 2021, respectively, and $26.0 million and $21.7 million for the six months ended June 30, 2022 and 2021, respectively.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent on the Company's ability to generate future taxable income to obtain benefit from the reversal of temporary differences, net operating loss carryforwards and tax credits. As part of its assessment, management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies. At this time there is no evidence to release the valuation allowance that has historically been recorded for the New Jersey research and development credit.

On December 27, 2018 the Korean Supreme Court, citing prior cases, held that only royalties paid with respect to Korean registered patents are Korean source income and subject to Korean withholding tax under the applicable law and interpretation of the Korea-U.S. Tax Treaty. The Company has incurred Korean withholding tax of $14.9 million each year since the year ended December 31, 2018. Based on the Korean Supreme Court decision, in October 2021, a tax refund request on behalf of the Company was filed with the Korean National Tax Service (KNTS) for over-withheld taxes from 2018 to the second quarter of 2021. The Company has been advised by a prominent Korean law firm that there is a more-likely-than-not chance of success. The Company has also filed an administrative hearing request to the Korean Tax Tribunal in order to expedite the refund process. As of June 30, 2022 and December 31, 2021, the Company has recorded a long-term asset of $59.8 million and $53.2 million, respectively, representing the allocation of withholding to non-Korean patents. Also, as of June 30, 2022 and December 31, 2021, the Company has recorded a long-term liability of $38.1 million and $31.6 million, respectively, for estimated amounts due to the U.S. Federal government based on the amendment of U.S. tax returns for lower withholding amounts.

With respect to the Korean withholding for the years 2011 through 2017, the Company has decided to continue the U.S.-Korean Mutual Agreement Procedure (MAP) which was accepted by the KNTS on September 15, 2017. The Company believes that it is more-likely-than-not that a favorable settlement will be reached resulting in a reduction of the Korean withholding taxes previously withheld since 2011. As such, a long-term asset of $36.9 million for estimated refunds due from the Korean government, a long-term payable of $16.2 million for estimated amounts due to the U.S. Federal government based on amendment of prior year U.S. tax returns for the lower withholding amounts, and a reduction of deferred tax assets for foreign tax credits and research and development credits of $20.7 million has been recorded on the June 30, 2022 and December 31, 2021 Consolidated Balance Sheets for this matter. The Internal Revenue Service and the KNTS continue to deliberate the final outcome of the settlement.

On October 30, 2018, the KNTS concluded a tax audit with LG Display that included the licensing and royalty payments made to UDC Ireland during the years 2015 through 2017. The KNTS questioned whether UDC Ireland was the beneficial owner of these payments and assessed UDC Ireland a charge of $13.2 million for withholding and interest for the three-year period. UDC Ireland has engaged a prominent Korean law firm which believes it is more-likely-than-not that UDC Ireland has beneficial ownership of the underlying intellectual property. Based on this authority, UDC Ireland has paid the assessment which is recorded as a long-term asset as of December 31, 2021. In September 2020, the Korean District Court ruled entirely in the favor of UDC Ireland on the beneficial ownership issue and the ruling was affirmed by the Korean High Court in August 2021. The KNTS appealed the ruling to the Korean Supreme Court. On January 13, 2022, the Korean Supreme Court dismissed the appeal from the KNTS. UDC Ireland recovered the charge of $13.2 million for withholding plus interest for the three-year period during February 2022.

23


 

The Company’s federal income tax returns for the years 2018 to 2021 are open and subject to examination. The Company's state and foreign tax returns are open for a period of generally three to four years.

The above estimates may change in the future and upon settlement.

 

21. REVENUE RECOGNITION:

The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers (Topic 606). The standard establishes 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.

For both three-month and six-month periods ended June 30, 2022 and 2021, the Company recorded 97% of its revenue from OLED related sales and 3% from the providing of services through Adesis, respectively.

Contract Balances

The following table provides information about assets and liabilities associated with our contracts from customers (in thousands):

 

 

 

As of June 30, 2022

 

Accounts receivable

 

$

74,933

 

Short-term unbilled receivables

 

 

12,393

 

Long-term unbilled receivables

 

 

 

Short-term deferred revenue

 

 

99,106

 

Long-term deferred revenue

 

 

30,021

 

 

Short-term and long-term unbilled receivables are classified as other current assets and other assets, respectively, on the Consolidated Balance Sheets. The deferred revenue balance at June 30, 2022 will be recognized as materials are shipped to customers over the remaining contract periods. As of June 30, 2022, the Company had $23.9 million of backlog associated with committed purchase orders from its customers for phosphorescent emitter material. These orders are anticipated to be fulfilled within the next 90 days.

Significant changes in the unbilled receivables and deferred liabilities balances for the six months ended June 30, 2022 and 2021, are as follows (in thousands):

 

 

 

Six Months Ended June 30, 2022

 

 

 

Unbilled Receivables

 

 

Deferred Revenue

 

Balance at December 31, 2021

 

$

8,127

 

 

$

(157,081

)

Revenue recognized that was previously included in deferred revenue, net

 

 

 

 

 

110,258

 

Increases due to cash received

 

 

 

 

 

(92,976

)

Cumulative catch-up adjustment arising from changes in estimates of
   transaction price, net

 

 

 

 

 

10,672

 

Unbilled receivables recorded, net

 

 

4,266

 

 

 

 

Net change

 

 

4,266

 

 

 

27,954

 

Balance at June 30, 2022

 

$

12,393

 

 

$

(129,127

)

 

 

 

Six Months Ended June 30, 2021

 

 

 

Unbilled Receivables

 

 

Deferred Revenue

 

Balance at December 31, 2020

 

$

10,429

 

 

$

(162,301

)

Revenue recognized that was previously included in deferred revenue, net

 

 

 

 

 

81,458

 

Increases due to cash received

 

 

 

 

 

(92,816

)

Cumulative catch-up adjustment arising from changes in estimates of
   transaction price, net

 

 

 

 

 

4,507

 

Unbilled receivables recorded, net

 

 

25,028

 

 

 

 

Transferred to receivables from unbilled receivables

 

 

(6,000

)

 

 

 

Net change

 

 

19,028

 

 

 

(6,851

)

Balance at June 30, 2021

 

$

29,457

 

 

$

(169,152

)

 

The cumulative catch-up adjustment arising from changes in estimates of transaction price, net for the six months ended June 30, 2022 increased by $6.2 million as compared to the six months ended June 30, 2021. The increase in the cumulative catch-up adjustment

24


 

arising from changes in estimates of transaction price, net was primarily due to a decrease in anticipated customer demand over their remaining contract lives.

 

22. NET INCOME PER COMMON SHARE:

The Company computes earnings per share in accordance with ASC Topic 260, Earnings per Share, which requires earnings per share (EPS) for each class of stock to be calculated using the two-class method. The two-class method is an allocation of income between the holders of common stock and the Company's participating security holders. Under the two-class method, income for the reporting period is allocated between common shareholders and other security holders based on their respective participation rights in undistributed income. Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and, therefore, are included in computing earnings per share pursuant to the two-class method.

Basic net income per common share is computed by dividing net income allocated to common shareholders by the weighted-average number of shares of common stock outstanding for the period excluding unvested restricted stock units and performance units. Net income allocated to the holders of the Company's unvested restricted stock awards is calculated based on the shareholders proportionate share of weighted average shares of common stock outstanding on an if-converted basis.

For purposes of determining diluted net income per common share, basic net income per share is further adjusted to include the effect of potential dilutive common shares outstanding, including stock options, restricted stock units and performance units, and the impact of shares to be issued under the Employee Stock Purchase Plan.

The following table is a reconciliation of net income and the shares used in calculating basic and diluted net income per common share for the three and six months ended June 30, 2022 and 2021 (in thousands, except share and per share data):

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

41,502

 

 

$

40,541

 

 

$

91,472

 

 

$

92,228

 

Adjustment for Basic EPS:

 

 

 

 

 

 

 

 

 

 

 

 

Earnings allocated to unvested shareholders

 

 

(235

)

 

 

(247

)

 

 

(557

)

 

 

(602

)

Adjusted net income

 

$

41,267

 

 

$

40,294

 

 

$

90,915

 

 

$

91,626

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding – Basic

 

 

47,393,830

 

 

 

47,299,627

 

 

 

47,381,864

 

 

 

47,284,773

 

Effect of dilutive shares:

 

 

 

 

 

 

 

 

 

 

 

 

Common stock equivalents arising from stock options and ESPP

 

 

894

 

 

 

204

 

 

 

1,085

 

 

 

369

 

Restricted stock awards and units and performance units

 

 

63,168

 

 

 

57,033

 

 

 

68,405

 

 

 

62,454

 

Weighted average common shares outstanding – Diluted

 

 

47,457,892

 

 

 

47,356,864

 

 

 

47,451,354

 

 

 

47,347,596

 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.87

 

 

$

0.85

 

 

$

1.92

 

 

$

1.94

 

Diluted

 

$

0.87

 

 

$

0.85

 

 

$

1.92

 

 

$

1.94

 

For the three months ended June 30, 2022 and 2021, the combined effects of unvested restricted stock awards, restricted stock units, performance unit awards and stock options of 173,707 and none, respectively, were excluded from the calculation of diluted EPS as their impact would have been antidilutive. For the six months ended June 30, 2022 and 2021, the combined effects of unvested restricted stock awards, restricted stock units, performance unit awards and stock options of 57,058 and none, respectively, were excluded from the calculation of diluted EPS as their impact would have been antidilutive.

25


 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited Consolidated Financial Statements and related notes above.

CAUTIONARY STATEMENT

CONCERNING FORWARD-LOOKING STATEMENTS

This discussion and analysis contains some “forward-looking statements.” Forward-looking statements concern possible or assumed future results of operations, including descriptions of our business strategies and customer relationships. These statements often include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “seek,” “will,” “may” or similar expressions. These statements are based on assumptions that we have made in light of our experience in the industry, as well as our perceptions of historical trends, current conditions, expected future developments and other factors that we believe are appropriate in these circumstances.

As you read and consider this discussion and analysis, you should not place undue reliance on any forward-looking statements. You should understand that these statements involve substantial risk and uncertainty and are not guarantees of future performance or results. They depend on many factors that are discussed further in the sections entitled (Risk Factors) in our Annual Report on Form 10-K for the year ended December 31, 2021, as supplemented by disclosures in Item 1A of Part II below. Changes or developments in any of these areas could affect our financial results or results of operations and could cause actual results to differ materially from those contemplated in the forward-looking statements.

All forward-looking statements speak only as of the date of this report or the documents incorporated by reference, as the case may be. We do not undertake any duty to update any of these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.

OVERVIEW

We are a leader in the research, development and commercialization of organic light emitting diode (OLED), technologies and materials for use in display applications, such as mobile phones, televisions, wearables, tablets, portable media devices, notebook computers, personal computers and automotive applications, as well as specialty and general lighting products. Since 1994, we have been engaged and expect to continue to be primarily engaged, in funding and performing research and development activities relating to OLED technologies and materials, and commercializing these technologies and materials. We derive our revenue primarily from the following:

sales of OLED materials for evaluation, development and commercial manufacturing;
intellectual property and technology licensing;
technology development and support, including third-party collaboration efforts and providing support to third parties for commercialization of their OLED products; and
contract research services in the areas of chemical materials synthesis research, development and commercialization for non-OLED applications.

Material sales relate to our sale of OLED materials for incorporation into our customers’ commercial OLED products or for their OLED development and evaluation activities. Material sales are generally 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.

We receive license and royalty payments under certain commercial, development and technology evaluation agreements, some of which are non-refundable advances. These payments may include royalty and license fees made pursuant to license agreements and also license fees included as part of certain commercial supply agreements. These payments are included in the estimate of total contract consideration by customer and recognized as revenue over the contract term based on material units sold at the estimated per unit fee over the life of the contract.

In 2018, we entered into a commercial patent license agreement with Samsung Display Co., Ltd. (SDC). This agreement, which covers the manufacture and sale of specified OLED display materials, was effective as of January 1, 2018 and lasts through the end of 2022 with an additional two-year extension option. Under this agreement, we are being paid a license fee, payable in quarterly installments over the agreement term of five years. The agreement conveys to SDC the non-exclusive right to use certain of our intellectual property assets for a limited period of time that is less than the estimated life of the assets.

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At the same time that we entered into the current commercial license agreement with SDC, we also entered into a material purchase agreement with SDC. Under the material purchase agreement, SDC agrees to purchase from us a minimum amount of phosphorescent emitter materials for use in the manufacture of licensed products. This minimum commitment is subject to SDC’s requirements for phosphorescent emitter materials and our ability to meet these requirements over the term of the supplemental agreement.

In 2015, we 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. The patent license agreement provides LG Display a non-exclusive, royalty bearing portfolio license to make and sell OLED displays under our patent portfolio. The patent license calls for license fees, prepaid royalties and running royalties on licensed products. 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 life of the agreements as well as minimum royalty revenue to be generated under the patent license agreement. We 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 sales of materials for use by LG Display, which may include phosphorescent emitters and host materials.

In 2021, we entered into amendments of the 2015 OLED patent license agreement and the 2015 OLED commercial supply agreement with LG Display, which amendments were effective as of January 1, 2021. The amended agreements included a term extension and are set to expire by the end of 2025.

In 2016, we entered into long-term, multi-year OLED patent license and material purchase agreements with Tianma Micro-electronics Co., Ltd. (Tianma). Under the license agreement, we have granted Tianma non-exclusive license rights under various patents owned or controlled by us to manufacture and sell OLED display products. The license agreement calls for license fees and running royalties on Tianma’s sales of licensed products. Additionally, we supply phosphorescent OLED materials to Tianma for use in its licensed products. In 2021, we mutually agreed to extend the terms of both the patent license and material purchase agreements for an additional multi-year term.

In 2017, we entered into long-term, multi-year agreements with BOE Technology Group Co., Ltd. (BOE). Under these agreements, we have granted BOE non-exclusive license rights under various patents owned or controlled by us to manufacture and sell OLED display products. We also supply phosphorescent OLED materials to BOE for use in its licensed products.

In 2018, we entered into long-term, multi-year OLED patent license and material purchase agreements with Visionox Technology, Inc. (Visionox). Under the license agreement, we have granted certain of Visionox’s affiliates a non-exclusive license rights under various patents owned or controlled by us to manufacture and sell OLED display products. The license agreement calls for license fees and running royalties on licensed products. Additionally, we supply phosphorescent OLED materials to Visionox for use in its licensed products. In 2021, we announced an extension of the Visionox agreement by entering into new five-year OLED material supply and license agreements with a new affiliate of Visionox, Visionox Hefei Technology Co. Ltd.

In 2019, we entered into an evaluation and commercial supply relationship with Wuhan China Star Optoelectronics Semiconductor Display Technology Co., Ltd. (CSOT). In 2020, we entered into long-term, multi-year agreements with CSOT. Under these agreements, we have granted CSOT non-exclusive license rights under various patents owned or controlled by us to manufacture and sell OLED display products. We also supply phosphorescent OLED materials to CSOT for use in its licensed products.

In 2016, we acquired Adesis, Inc. (Adesis) with operations in New Castle, Delaware. Adesis is a contract research organization (CRO) that provides support services to the OLED, pharma, biotech, catalysis and other industries. As of June 30, 2022, Adesis employed a team of 121 research scientists, chemists, engineers and laboratory technicians. Prior to our acquisition of Adesis in 2016, we utilized more than 50% of Adesis’ technology service and production output. We continue to utilize a significant portion of its technology research capacity for the benefit of our OLED technology development, and Adesis uses the remaining capacity to operate as a CRO in the above-mentioned industries by providing contract research services for non-OLED applications to those third-party customers. Contract research services revenue is earned by providing chemical materials synthesis research, development and commercialization for non-OLED applications on a contractual basis for those third-party customers.

In June 2020, a wholly-owned subsidiary, OVJP Corporation (OVJP Corp), was formed as a Delaware corporation. Based in California, OVJP Corp was founded to advance the commercialization of our proprietary Organic Vapor Jet Printing (OVJP) technology. As of June 30, 2022, OVJP employed a team of 21 research, mechanical, electrical and software engineers and laboratory technicians. As a direct printing technique, OVJP technology has the potential to offer high deposition rates for large-area OLEDs. In addition, OVJP technology reduces OLED material waste associated with use of a shadow mask (i.e., the waste of material that deposits on the shadow mask itself when fabricating an OLED). By comparison to inkjet printing, an OVJP process does not use liquid solvents and therefore the OLED materials utilized are not limited by their viscosity or solvent solubility. OVJP also avoids generation of solvent wastes and eliminates the additional step of removing residual solvent from the OLED device. We believe the successful implementation of the

27


 

OVJP technology has the potential to increase the addressable market for large-size OLED panels while also serving another potential growth market for our proprietary PHOLED materials and technologies.

In February 2021, we announced the establishment of a new manufacturing site in Shannon, Ireland and an agreement between UDC Ireland Limited and PPG for the production of our OLED materials. The new facility is expected to double our production capacity and allow for the diversification of our manufacturing base for phosphorescent emitters. Facility improvements have been completed and operations started to commence in June 2022.

We also generate technology development and support revenue earned from development and technology evaluation agreements and commercialization assistance fees, along with, to a minimal extent, government contracts. Relating to our government contracts, we may receive reimbursements by government entities for all or a portion of the research and development costs we incur. Revenues are recognized as services are performed, proportionally as research and development costs are incurred, or as defined milestones are achieved.

We anticipate fluctuations in our annual and quarterly results of operations due to uncertainty regarding, among other factors:

the timing, cost and volume of sales of our OLED materials;
the timing of our receipt of license fees and royalties, as well as fees for future technology development and evaluation;
the timing and magnitude of expenditures we may incur in connection with our ongoing research and development and patent-related activities; and
the timing and financial consequences of our formation of new business relationships and alliances.

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Further, we continue to monitor the impact of COVID-19 on our business. Our global operations, and the global nature of our customer base and their respective customers, expose us to risks associated with public health crises, such as pandemics and epidemics. The ongoing COVID-19 pandemic had a substantial impact on our operations and financial results during the year ended December 31, 2020 and continued to have an impact during the year ended December 31, 2021 and the six months ended June 30, 2022. We expect that as the pandemic continues to evolve, it may potentially have a further adverse impact on the results of our operations due to uncertainties involving the continued disruption of the global economy, uncertainties associated with consumer demand for finished OLED goods, and the potential resulting impact on our customers and their demand for our phosphorescent emitters.

At this time, the crisis has not had a significant impact on our ability to fulfill shipments of commercial materials as required by our customers. However, the sustainability of maintaining our testing and manufacturing operations at levels needed to meet fluctuating customer demand is uncertain and is dependent upon the rapidly evolving situations being encountered by our logistics and supply chain partners. In an effort to protect the health and safety of our employees, we have taken proactive measures to adopt social distancing policies at all of our locations, employing nurses to check everyone entering our buildings, working from home, reducing the number of people in our sites at any one time, and suspending employee travel.

While the ultimate health and economic impact of the COVID-19 pandemic is highly uncertain, we expect that our business operations and results of operations, including our revenues, net income and cash flows, will continue to be adversely impacted through at least the end of the third quarter of 2022, including as a result of:

temporary closure of electronics and other retail stores through which our customers sell the products for which they use our technology and materials;
consumer confidence and consumer spending habits, including spending for the products that our customers sell and negative trends in consumer purchasing patterns due to consumers’ disposable income, credit availability and debt levels;
possible disruption to the supply chain caused by distribution and other logistical issues, which may impact suppliers of our raw materials as well as our ability to ship our materials to customers on a timely basis;
decreased productivity due to travel ban, work-from-home policies or shelter-in-place orders;
a slowdown in the U.S. economy, and uncertain global economic outlook or a credit crisis; and
uncertain trade restrictions amongst jurisdictions seeking to manage their respective exposure to risks, including the COVID-19 pandemic.

We are focused on navigating these recent challenges presented by COVID-19 through preserving our liquidity and managing our cash flow. We continue to actively monitor the COVID-19 situation and may take further actions altering our business operations that we determine are in the best interests of our employees, customers, partners, suppliers, and stakeholders, or as required by federal, state, or local authorities. It is not clear what the potential effects any such alterations or modifications may have on our business, including the effects on our customers, employees, and on our financial results for the remainder of the 2022 fiscal year.

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RESULTS OF OPERATIONS

Comparison of the Three Months Ended June 30, 2022 and 2021

 

 

 

Three Months Ended June 30,

 

 

 

 

 

 

2022

 

 

2021

 

 

Increase (Decrease)

 

REVENUE:

 

 

 

 

 

 

 

 

 

Material sales

 

$

71,869

 

 

$

77,438

 

 

$

(5,569

)

Royalty and license fees

 

 

60,278

 

 

 

48,212

 

 

 

12,066

 

Contract research services

 

 

4,414

 

 

 

4,010

 

 

 

404

 

Total revenue

 

 

136,561

 

 

 

129,660

 

 

 

6,901

 

COST OF SALES

 

 

27,239

 

 

 

27,969

 

 

 

(730

)

Gross margin

 

 

109,322

 

 

 

101,691

 

 

 

7,631

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

Research and development

 

 

28,197

 

 

 

24,101

 

 

 

4,096

 

Selling, general and administrative

 

 

19,869

 

 

 

20,239

 

 

 

(370

)

Amortization of acquired technology and other intangible assets

 

 

5,502

 

 

 

5,497

 

 

 

5

 

Patent costs

 

 

2,259

 

 

 

1,809

 

 

 

450

 

Royalty and license expense

 

 

181

 

 

 

149

 

 

 

32

 

Total operating expenses

 

 

56,008

 

 

 

51,795

 

 

 

4,213

 

OPERATING INCOME

 

 

53,314

 

 

 

49,896

 

 

 

3,418

 

Interest income, net

 

 

1,583

 

 

 

75

 

 

 

1,508

 

Other income, net

 

 

89

 

 

 

221

 

 

 

(132

)

Interest and other income, net

 

 

1,672

 

 

 

296

 

 

 

1,376

 

INCOME BEFORE INCOME TAXES

 

 

54,986

 

 

 

50,192

 

 

 

4,794

 

INCOME TAX EXPENSE

 

 

(13,484

)

 

 

(9,651

)

 

 

(3,833

)

NET INCOME

 

$

41,502

 

 

$

40,541

 

 

$

961

 

Revenue

Our total material sales were $71.9 million for the three months ended June 30, 2022, as compared to $77.4 million for the three months ended June 30, 2021, a decrease of 7% with a commensurate decrease in unit material volume of 8%. The decrease in material sales was primarily due to near-term weakness in demand for OLED products utilizing our emitter material as a result of the deterioration in the overall global market economy.

Green emitter sales for the three months ended June 30, 2022, which include our yellow-green emitters, were $54.5 million as compared to $57.8 million for the three months ended June 30, 2021, with unit material volumes decreasing by 6%.
Red emitter sales for the three months ended June 30, 2022 were $17.3 million as compared to $19.5 million for the three months ended June 30, 2021, with unit material volumes decreasing by 13%.

Revenue from royalty and license fees was $60.3 million for the three months ended June 30, 2022 as compared to $48.2 million for the three months ended June 30, 2021, an increase of 25%. This increase was primarily due to an increase in the average contract royalty and license fee per gram assessed to our customers as measured under ASC 606 as a result of a reduction in the forecasted sales volume anticipated over the remaining lives of their respective contracts.

The cumulative catch-up adjustment arising from changes in estimates of transaction price, net was $8.8 million for the three months ended June 30, 2022, primarily due to the decrease in anticipated customer demand over their remaining contract lives, resulting from the deterioration in the global market economy. At this time, much uncertainty exists as to the projected duration and intensity of this global market deterioration and the extent to which it will negatively impact our customer's near-term production requirements.

Contract research services revenue was $4.4 million for the three months ended June 30, 2022 as compared to $4.0 million for the three months ended June 30, 2021, an increase of 10%. Revenue from contract research services consists of revenue earned by our subsidiary, Adesis, which provides support services to the pharma, biotech, catalysis and other industries on a contractual basis for those third-party customers.

Cost of sales

30


 

Cost of sales for the three months ended June 30, 2022 decreased by $730,000 as compared to the three months ended June 30, 2021, primarily due to a decrease in the level of material sales, partially offset by increases in manufacturing costs and higher per unit material costs. Included in the cost of sales for the three months ended June 30, 2022 and 2021 was an increase in inventory reserve of $604,000 and $450,000, respectively, due to excess inventory levels in certain products. As a result of the increase in revenue from royalty and license fees, partially offset by a decrease in revenue from material sales, gross margin for the three months ended June 30, 2022 increased by $7.6 million as compared to the three months ended June 30, 2021, with gross margin as a percentage of revenue increasing to 80% from 78%.

Research and development

Research and development expenses increased to $28.2 million for the three months ended June 30, 2022, as compared to $24.1 million for the three months ended June 30, 2021. The increase in research and development expenses was primarily due to higher employee-related compensation expenses and operating costs, including those associated with OVJP technology development, increased contract research, and PPG development activity.

Selling, general and administrative

Selling, general and administrative expenses decreased to $19.9 million for the three months ended June 30, 2022, as compared to $20.2 million for the three months ended June 30, 2021. The decrease in selling, general and administrative expenses was primarily due to lower employee-related compensation expenses, partially offset by increased pre-production costs associated with the new manufacturing facility in Shannon, Ireland, as well as an increase in depreciation expense resulting from corporate expansion.

Amortization of acquired technology and other intangible assets

Amortization of acquired technology and other intangible assets was $5.5 million for both three-month periods ended June 30, 2022 and 2021.

Patent costs

Patent costs increased to $2.3 million for the three months ended June 30, 2022, as compared to $1.8 million for the three months ended June 30, 2021. The results in the current year reflected higher internal prosecution related costs.

Royalty and license expense

Royalty and license expense increased to $181,000 for the three months ended June 30, 2022, as compared to $149,000 for the three months ended June 30, 2021. The increase was due to increased royalties incurred under the 1997 Amended License Agreement, resulting from an increase in qualifying material sales. See Note 11 in Notes to the Consolidated Financial Statements for further discussion.

Interest and other income, net

Interest income, net was $1.6 million for the three months ended June 30, 2022, as compared to $75,000 for the three months ended June 30, 2021. The increase in interest income, net was primarily due to higher available-for-sale investment balances as well as an increase in bond yields on available-for-sale investments held during the three months ended June 30, 2022 compared to bond yields on available-for-sale investments held during the three months ended June 30, 2021. Other income, net primarily consisted of net exchange gains and losses on foreign currency transactions and rental income. We recorded other income, net of $89,000 for the three months ended June 30, 2022 as compared to $221,000 for the three months ended June 30, 2021.

Income tax expense

We are subject to income taxes in both the United States and foreign jurisdictions. The effective income tax rate was an expense of 24.5% and 19.2% for the three months ended June 30, 2022 and 2021, respectively, and we recorded income tax expense of $13.5 million and $9.7 million, respectively, for those periods.

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Comparison of the Six Months Ended June 30, 2022 and 2021

 

 

 

Six Months Ended June 30,

 

 

 

 

 

 

2022

 

 

2021

 

 

Increase (Decrease)

 

REVENUE:

 

 

 

 

 

 

 

 

 

Material sales

 

$

158,560

 

 

$

157,246

 

 

$

1,314

 

Royalty and license fees

 

 

120,080

 

 

 

99,098

 

 

 

20,982

 

Contract research services

 

 

8,391

 

 

 

7,316

 

 

 

1,075

 

Total revenue

 

 

287,031

 

 

 

263,660

 

 

 

23,371

 

COST OF SALES

 

 

60,402

 

 

 

51,267

 

 

 

9,135

 

Gross margin

 

 

226,629

 

 

 

212,393

 

 

 

14,236

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

Research and development

 

 

54,742

 

 

 

47,406

 

 

 

7,336

 

Selling, general and administrative

 

 

40,931

 

 

 

36,643

 

 

 

4,288

 

Amortization of acquired technology and other intangible assets

 

 

11,000

 

 

 

10,985

 

 

 

15

 

Patent costs

 

 

4,057

 

 

 

3,644

 

 

 

413

 

Royalty and license expense

 

 

335

 

 

 

261

 

 

 

74

 

Total operating expenses

 

 

111,065

 

 

 

98,939

 

 

 

12,126

 

OPERATING INCOME

 

 

115,564

 

 

 

113,454

 

 

 

2,110

 

Interest income, net

 

 

1,874

 

 

 

208

 

 

 

1,666

 

Other income, net

 

 

55

 

 

 

280

 

 

 

(225

)

Interest and other income, net

 

 

1,929

 

 

 

488

 

 

 

1,441

 

INCOME BEFORE INCOME TAXES

 

 

117,493

 

 

 

113,942

 

 

 

3,551

 

INCOME TAX EXPENSE

 

 

(26,021

)

 

 

(21,714

)

 

 

(4,307

)

NET INCOME

 

$

91,472

 

 

$

92,228

 

 

$

(756

)

Revenue

Our total material sales were $158.6 million for the six months ended June 30, 2022, as compared to $157.2 million for the six months ended June 30, 2021, an increase of 1% with a commensurate increase in unit material volume of 4%.

Green emitter sales for the six months ended June 30, 2022, which include our yellow-green emitters, were $120.9 million as compared to $118.4 million for the six months ended June 30, 2021, with unit material volumes increasing by 6%.
Red emitter sales for the six months ended June 30, 2022 were $37.4 million as compared to $38.6 million for the six months ended June 30, 2021, with unit material volumes decreasing by 3%.

Revenue from royalty and license fees was $120.1 million for the six months ended June 30, 2022 as compared to $99.1 million for the six months ended June 30, 2021, an increase of 21%. This increase was primarily due to an increase in the average contract royalty and license fee per gram assessed to our customers as measured under ASC 606 as a result of a reduction in the forecasted sales volume anticipated over the remaining lives of their respective contracts.

The cumulative catch-up adjustment arising from changes in estimates of transaction price, net was $10.7 million for the six months ended June 30, 2022, primarily due to the decrease in anticipated customer demand over their remaining contract lives, resulting from the deterioration in the global market economy. At this time, much uncertainty exists as to the projected duration and intensity of this global market deterioration and the extent to which it will negatively impact our customer's near-term production requirements.

Contract research services revenue was $8.4 million for the six months ended June 30, 2022 as compared to $7.3 million for the six months ended June 30, 2021, an increase of 15%. Revenue from contract research services consists of revenue earned by our subsidiary, Adesis, which provides support services to the pharma, biotech, catalysis and other industries on a contractual basis for those third-party customers.

Cost of sales

Cost of sales for the six months ended June 30, 2022 increased by $9.1 million as compared to the six months ended June 30, 2021, primarily due to increases in the level of material sales and manufacturing costs and higher per unit material costs. Included in the cost of sales for the six months ended June 30, 2022 and 2021 was an increase in inventory reserve of $688,000 and $1.1 million, respectively, due to excess inventory levels in certain products. As a result of the increase in revenue from royalty and license fees, gross

32


 

margin for the six months ended June 30, 2022 increased by $14.2 million as compared to the six months ended June 30, 2021, with gross margin as a percentage of revenue decreasing to 79% from 81%.

Research and development

Research and development expenses increased to $54.7 million for the six months ended June 30, 2022, as compared to $47.4 million for the six months ended June 30, 2021. The increase in research and development expenses was primarily due to higher employee-related compensation expenses and operating costs, including those associated with OVJP technology development, increased contract research, and PPG development activity.

Selling, general and administrative

Selling, general and administrative expenses increased to $40.9 million for the six months ended June 30, 2022, as compared to $36.6 million for the six months ended June 30, 2021. The increase in selling, general and administrative expenses was primarily due to higher employee-related compensation expenses, increased pre-production costs associated with the new manufacturing facility in Shannon, Ireland, as well as an increase in depreciation expense resulting from corporate expansion.

Amortization of acquired technology and other intangible assets

Amortization of acquired technology and other intangible assets was $11.0 million for both six-month periods ended June 30, 2022 and 2021.

Patent costs

Patent costs increased to $4.1 million for the six months ended June 30, 2022, as compared to $3.6 million for the six months ended June 30, 2021. The results in the current year reflected higher internal prosecution related costs.

Royalty and license expense

Royalty and license expense increased to $335,000 for the six months ended June 30, 2022, as compared to $261,000 for the six months ended June 30, 2021. The increase was due to increased royalties incurred under the 1997 Amended License Agreement, resulting from an increase in qualifying material sales. See Note 11 in Notes to the Consolidated Financial Statements for further discussion.

Interest and other income, net

Interest income, net was $1.9 million for the six months ended June 30, 2022, as compared to $208,000 for the six months ended June 30, 2021. The increase in interest income, net was primarily due to higher available-for-sale investment balances as well as an increase in bond yields on available-for-sale investments held during the six months ended June 30, 2022 compared to bond yields on available-for-sale investments held during the six months ended June 30, 2021. Other income, net primarily consisted of net exchange gains and losses on foreign currency transactions and rental income. We recorded other income, net of $55,000 for the six months ended June 30, 2022 as compared to $280,000 for the six months ended June 30, 2021.

Income tax expense

We are subject to income taxes in both the United States and foreign jurisdictions. The effective income tax rate was an expense of 22.1% and 19.1% for the six months ended June 30, 2022 and 2021, respectively, and we recorded income tax expense of $26.0 million and $21.7 million, respectively, for those periods.

Liquidity and Capital Resources

Our principal sources of liquidity are our cash and cash equivalents and short-term investments. As of June 30, 2022, we had cash and cash equivalents of $213.9 million, short-term investments of $439.5 million, and long-term corporate bonds and U.S. Government bonds investments of $181.1 million for a total of $834.5 million. This compares to cash and cash equivalents of $312.0 million, short-term investments of $351.2 million, and long-term U.S. Government bond investments of $159.6 million for a total of $822.8 million as of December 31, 2021.

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Cash provided by operating activities for the six months ended June 30, 2022 was $86.1 million resulting from $91.5 million of net income and $82.1 million due to changes in our operating assets and liabilities, partially offset by a $87.5 million reduction due to non-cash items including amortization of deferred revenue, stock-based compensation, depreciation and amortization of intangibles. Changes in our operating assets and liabilities related to an increase in deferred revenue of $93.0 million, a decrease in accounts receivable of $32.7 million and an increase in other liabilities of $1.3 million, partially offset by an increase in inventory of $32.2 million, a decrease in accounts payable and accrued expenses of $7.2 million and an increase in other assets of $5.5 million.

Cash provided by operating activities for the six months ended June 30, 2021 was $59.1 million resulting from $92.2 million of net income and $35.4 million due to changes in our operating assets and liabilities, partially offset by a $68.5 million reduction due to non-cash items including amortization of deferred revenue, amortization of intangibles and stock-based compensation. Changes in our operating assets and liabilities related to an increase in deferred revenue of $92.8 million and an increase in other liabilities of $11.9 million, partially offset by an increase in other assets of $20.7 million, an increase in accounts receivable of $17.4 million, a decrease in accounts payable and accrued expenses of $17.0 million and an increase in inventory of $14.2 million.

Cash used in investing activities was $147.7 million for the six months ended June 30, 2022, as compared to $115.0 million for the six months ended June 30, 2021. The increase was due to the timing of maturities and purchases of investments resulting in net purchases of $126.4 million for the six months ended June 30, 2022, as compared to $94.0 million for the six months ended June 30, 2021, and an increase in purchases of intangibles and property, plant and equipment of $286,000 for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021. The increase in property, plant and equipment purchases during the six months ended June 30, 2022 was primarily due to the new manufacturing facility in Shannon, Ireland and improvements to our facilities in Ewing, New Jersey.

Cash used in financing activities was $36.5 million for the six months ended June 30, 2022, as compared to $31.2 million for the six months ended June 30, 2021. The increase was due to an increase in the cash payment of dividends in the current year of $9.5 million, partially offset by a decrease in the payment of withholding taxes related to stock-based compensation to employees of $4.2 million and an increase in the proceeds from issuance of common stock of $60,000.

Working capital was $776.9 million as of June 30, 2022, as compared to $738.0 million as of December 31, 2021. The increase was primarily due to increases in short-term investments, inventory and other current assets, and a decrease in deferred revenue, partially offset by decreases in cash and cash equivalents and accounts receivable.

We anticipate, based on our internal forecasts and assumptions relating to our operations (including, among others, assumptions regarding our working capital requirements, the progress of our research and development efforts, the availability of sources of funding for our research and development work, and the timing and costs associated with the preparation, filing, prosecution, maintenance, defense and enforcement of our patents and patent applications), that we have sufficient cash, cash equivalents and short-term investments to meet our obligations for at least the next 12 months. However, the extent to which the COVID-19 pandemic and our precautionary measures in response thereto may impact our business and thus our liquidity will depend on future developments, which are highly uncertain and cannot be precisely estimated at this time.

We believe that potential additional financing sources for us include long-term and short-term borrowings and public and private sales of our equity and debt securities. It should be noted, however, that additional funding may be required in the future for research, development and commercialization of our OLED technologies and materials, to obtain, maintain and enforce patents respecting these technologies and materials, and for working capital and other purposes, the timing and amount of which are difficult to ascertain. There can be no assurance that additional funds will be available to us when needed, on commercially reasonable terms or at all, particularly in the current economic environment.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations is based on our Consolidated Financial Statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these Consolidated Financial Statements requires us to make estimates and judgments that affect our reported assets and liabilities, revenues and expenses, and other financial information. Actual results may differ significantly from our estimates under other assumptions and conditions.

We believe that our accounting policies related to revenue recognition and deferred revenue, inventories, and income taxes are our “critical accounting policies” as contemplated by the SEC.

Refer to our Annual Report on Form 10-K for the year ended December 31, 2021, for additional discussion of our critical accounting policies.

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Contractual Obligations

Refer to our Annual Report on Form 10-K for the year ended December 31, 2021 for a discussion of our contractual obligations.

Off-Balance Sheet Arrangements

As of June 30, 2022, we had no off-balance sheet arrangements in the nature of guarantee contracts, retained or contingent interests in assets transferred to unconsolidated entities (or similar arrangements serving as credit, liquidity or market risk support to unconsolidated entities for any such assets), or obligations (including contingent obligations) arising out of variable interests in unconsolidated entities providing financing, liquidity, market risk or credit risk support to us, or that engage in leasing, hedging or research and development services with us.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We do not utilize financial instruments for trading purposes and hold no derivative financial instruments, other financial instruments or derivative commodity instruments that could expose us to significant market risk other than our investments disclosed in “Fair Value Measurements” in Note 4 to the Consolidated Financial Statements included herein. We generally invest in investment grade financial instruments to reduce our exposure related to investments. Our primary market risk exposure with regard to such financial instruments is to changes in interest rates, which would impact interest income earned on investments. However, based upon the conservative nature of our investment portfolio and current experience, we do not believe a decrease in investment yields would have a material negative effect on our interest income.

Substantially all our revenue is derived from outside of North America. All revenue is primarily denominated in U.S. dollars and therefore we bear no significant foreign exchange risk.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2022. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as of the end of the period covered by this report, are effective to provide reasonable assurance that the information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure. However, a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II – OTHER INFORMATION

Patent Related Challenges and Oppositions

Each major jurisdiction in the world that issues patents provides both third parties and applicants an opportunity to seek a further review of an issued patent. The process for requesting and considering such reviews is specific to the jurisdiction that issued the patent in question, and generally does not provide for claims of monetary damages or a review of specific claims of infringement. The conclusions made by the reviewing administrative bodies tend to be appealable and generally are limited in scope and applicability to the specific claims and jurisdiction in question.

We believe that opposition proceedings are frequently commenced in the ordinary course of business by third parties who may believe that one or more claims in a patent do not comply with the technical or legal requirements of the specific jurisdiction in which the patent was issued. We view these proceedings as reflective of its goal of obtaining the broadest legally permissible patent coverage permitted in each jurisdiction. Once a proceeding is initiated, as a general matter, the issued patent continues to be presumed valid until

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the jurisdiction’s applicable administrative body issues a final non-appealable decision. Depending on the jurisdiction, the outcome of these proceedings could include affirmation, denial or modification of some or all of the originally issued claims. We believe that as OLED technology becomes more established and its patent portfolio increases in size, so will the number of these proceedings.

Below is a summary of an active proceeding that has been commenced against an issued patent that is exclusively licensed to us. We do not believe that the confirmation, loss or modification of our rights in any individual claim or set of claims that are the subject of the following legal proceeding would have a material impact on our material sales or licensing business or on our Consolidated Financial Statements, including our Consolidated Statements of Income, as a whole. In certain circumstances, when permitted, we may also utilize a proceeding to request modification of the claims to better distinguish the patented invention from any newly identified prior art and/or improve the claim scope of the patent relative to commercially important categories of the invention.

Opposition to European Patent No. 1390962

The European patent that is subject to the above opposition, which was described in prior filings, has expired in accordance with its original term. Although the opposition proceedings on this patent may continue, we do not believe the expiration of the patent or the result of the proceedings will have any material impact on our material sales or licensing business or on our Consolidated Financial Statements, including its Consolidated Statements of Income, as a whole.

In addition to the above proceeding and now concluded proceedings which have been referenced in prior filings, from time to time, we may have other proceedings that are pending which relate to patents we acquired as part of the Fujifilm or BASF OLED patent acquisitions or which relate to technologies that are not currently widely used in the marketplace.

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors previously discussed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

The following is a list of the exhibits filed as part of this report. Where so indicated by footnote, exhibits that were previously filed are incorporated by reference. For exhibits incorporated by reference, the location of the exhibit in the previous filing is indicated parenthetically, together with a reference to the filing indicated by footnote.

 

Exhibit

Number

 

Description

 

 

 

31.1*

 

Certifications of Steven V. Abramson, Chief Executive Officer, as required by Rule 13a-14(a) or Rule 15d-14(a)

 

 

 

31.2*

 

Certifications of Sidney D. Rosenblatt, Chief Financial Officer, as required by Rule 13a-14(a) or Rule 15d-14(a)

 

 

 

32.1**

 

Certifications of Steven V. Abramson, Chief Executive Officer, as required by Rule 13a-14(b) or Rule 15d-14(b), and by 18 U.S.C. Section 1350. (This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.)

 

 

 

32.2**

 

Certifications of Sidney D. Rosenblatt, Chief Financial Officer, as required by Rule 13a-14(b) or Rule 15d-14(b), and by 18 U.S.C. Section 1350. (This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.)

 

 

 

101.INS*

 

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

 

 

 

101.SCH*

 

Inline XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL*

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF*

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB*

 

Inline XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE*

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

104

 

The cover page of this Quarterly Report on Form 10-Q for the quarter ended June 30, 2022 formatted in Inline XBRL (included in Item 101.INS)

 

Explanation of footnotes to listing of exhibits:

 

*

 

Filed herewith.

**

 

Furnished herewith.

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized:

 

 

 

UNIVERSAL DISPLAY CORPORATION

 

 

 

 

 

Date: August 4, 2022

 

By: /s/ Sidney D. Rosenblatt

 

 

 

Sidney D. Rosenblatt

 

 

 

Executive Vice President, Chief Financial Officer,

 

 

 

Treasurer and Secretary

 

 

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