UNIVERSAL DISPLAY CORP \PA\ - Quarter Report: 2023 June (Form 10-Q)

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, 2023


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

For the transition period from ____________ to ___________

Commission File Number 1-12031

UNIVERSAL DISPLAY CORPORATION

(Exact name of registrant as specified in its charter)


Pennsylvania		23-2372688
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

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, 2023, the registrant had outstanding 47,346,414 shares of common stock.

TABLE OF CONTENTS


PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets – June 30, 2023 and December 31, 2022		1
Consolidated Statements of Income – Three and six months ended June 30, 2023 and 2022		2
Consolidated Statements of Comprehensive Income – Three and six months ended June 30, 2023 and 2022		3
Consolidated Statements of Shareholders’ Equity – Three and six months ended June 30, 2023 and 2022		4
Consolidated Statements of Cash Flows – Six months ended June 30, 2023 and 2022		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		33
Item 4. Controls and Procedures		34

PART II – OTHER INFORMATION

Item 1. Legal Proceedings		34
Item 1A. Risk Factors		34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		34
Item 3. Defaults Upon Senior Securities		34
Item 4. Mine Safety Disclosures		34
Item 5. Other Information		35
Item 6. Exhibits		35

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, 2023			December 31, 2022
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	93,470		$	93,430
Short-term investments		465,679			484,345
Accounts receivable		109,390			92,664
Inventory		175,855			183,220
Other current assets		33,753			45,791
Total current assets		878,147			899,450
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $130,099 and $117,118		157,566			143,445
ACQUIRED TECHNOLOGY, net of accumulated amortization of $178,459 and $189,671		98,216			38,382
OTHER INTANGIBLE ASSETS, net of accumulated amortization of $9,696 and $8,989		7,592			8,247
GOODWILL		15,535			15,535
INVESTMENTS		211,361			259,861
DEFERRED INCOME TAXES		70,364			58,161
OTHER ASSETS		102,074			109,739
TOTAL ASSETS	$	1,540,855		$	1,532,820
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	7,330		$	9,519
Accrued expenses		35,072			51,002
Deferred revenue		29,732			45,599
Other current liabilities		8,598			29,577
Total current liabilities		80,732			135,697
DEFERRED REVENUE		18,410			18,279
RETIREMENT PLAN BENEFIT LIABILITY		60,707			59,790
OTHER LIABILITIES		42,240			43,685
Total liabilities		202,089			257,451
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, 48,706,932 and 49,136,030 shares issued, and 47,341,284 and 47,770,382 shares outstanding, at June 30, 2023 and December 31, 2022, respectively		487			491
Additional paid-in capital		686,501			681,335
Retained earnings		709,372			653,277
Accumulated other comprehensive loss		(16,312	)		(18,452	)
Treasury stock, at cost (1,365,648 shares at June 30, 2023 and December 31, 2022)		(41,284	)		(41,284	)
Total shareholders’ equity		1,338,766			1,275,369
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,540,855		$	1,532,820

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

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,
	2023			2022			2023			2022
REVENUE:
Material sales	$	77,107		$	71,869		$	147,297		$	158,560
Royalty and license fees		64,399			60,278			119,609			120,080
Contract research services		5,059			4,414			10,126			8,391
Total revenue		146,565			136,561			277,032			287,031
COST OF SALES		32,139			27,239			65,109			60,402
Gross margin		114,426			109,322			211,923			226,629
OPERATING EXPENSES:
Research and development		32,318			28,197			63,741			54,742
Selling, general and administrative		17,077			19,869			32,473			40,931
Amortization of acquired technology and other intangible assets		3,994			5,502			6,885			11,000
Patent costs		2,229			2,259			4,484			4,057
Royalty and license expense		169			181			333			335
Total operating expenses		55,787			56,008			107,916			111,065
OPERATING INCOME		58,639			53,314			104,007			115,564
Interest income, net		6,198			1,583			13,165			1,874
Other (loss) income, net		(784	)		89			(1,487	)		55
Interest and other income, net		5,414			1,672			11,678			1,929
INCOME BEFORE INCOME TAXES		64,053			54,986			115,685			117,493
INCOME TAX EXPENSE		(14,375	)		(13,484	)		(26,168	)		(26,021	)
NET INCOME	$	49,678		$	41,502		$	89,517		$	91,472
NET INCOME PER COMMON SHARE:
BASIC	$	1.04		$	0.87		$	1.87		$	1.92
DILUTED	$	1.04		$	0.87		$	1.87		$	1.92
WEIGHTED AVERAGE SHARES USED IN COMPUTING NET INCOME PER COMMON SHARE:
BASIC		47,572,971			47,393,830			47,548,404			47,381,864
DILUTED		47,618,115			47,457,892			47,593,657			47,451,354
CASH DIVIDENDS DECLARED PER COMMON SHARE	$	0.35		$	0.30		$	0.70		$	0.60

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

UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(in thousands)


	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023		2022
NET INCOME	$	49,678		$	41,502		$	89,517	$	91,472
OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX:
Unrealized (loss) gain on available-for-sale securities, net of tax of $296, $450, ($438) and $1,547, respectively		(1,059	)		(1,616	)		1,568		(5,551	)
Amortization of prior service cost and actuarial loss for retirement plan included in net periodic pension costs, net of tax of ($71), ($142), ($142) and ($285), respectively		253			509			506		1,018
Change in cumulative foreign currency translation adjustment		(29	)		(176	)		66		(410	)
TOTAL OTHER COMPREHENSIVE (LOSS) INCOME		(835	)		(1,283	)		2,140		(4,943	)
COMPREHENSIVE INCOME	$	48,843		$	40,219		$	91,657	$	86,529

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

UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(UNAUDITED)

(in thousands, except for share data)


	Three Months Ended June 30, 2023
	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, 2023		200,000	$	2		48,697,467		$	487		$	679,390		$	676,347		$	(15,477	)		1,365,648	$	(41,284	)	$	1,299,465
Net income		—		—		—			—			—			49,678			—			—		—			49,678
Other comprehensive loss		—		—		—			—			—			—			(835	)		—		—			(835	)
Cash dividend		—		—		—			—			—			(16,653	)		—			—		—			(16,653	)
Issuance of common stock to employees		—		—		4,072			—			6,355			—			—			—		—			6,355
Shares withheld for employee taxes		—		—		(1,611	)		—			(248	)		—			—			—		—			(248	)
Issuance of common stock to Board of Directors and Scientific Advisory Board		—		—		3,304			—			418			—			—			—		—			418
Issuance of common stock to employees under an ESPP		—		—		3,700			—			586			—			—			—		—			586
BALANCE, JUNE 30, 2023		200,000	$	2		48,706,932		$	487		$	686,501		$	709,372		$	(16,312	)		1,365,648	$	(41,284	)	$	1,338,766

	Six Months Ended June 30, 2023
	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, 2022		200,000	$	2		49,136,030		$	491		$	681,335		$	653,277		$	(18,452	)		1,365,648	$	(41,284	)	$	1,275,369
Net income		—		—		—			—			—			89,517			—			—		—			89,517
Other comprehensive income		—		—		—			—			—			—			2,140			—		—			2,140
Cash dividend		—		—		—			—			—			(33,422	)		—			—		—			(33,422	)
Issuance of common stock to employees		—		—		130,918			1			10,208			—			—			—		—			10,209
Shares withheld for employee taxes		—		—		(53,314	)		—			(7,429	)		—			—			—		—			(7,429	)
Cancellation of restricted stock awards		—		—		(526,241	)		(5	)		5			—			—			—		—			—
Issuance of common stock to Board of Directors and Scientific Advisory Board		—		—		10,200			—			1,141			—			—			—		—			1,141
Issuance of common stock to employees under an ESPP		—		—		9,339			—			1,241			—			—			—		—			1,241
BALANCE, JUNE 30, 2023		200,000	$	2		48,706,932		$	487		$	686,501		$	709,372		$	(16,312	)		1,365,648	$	(41,284	)	$	1,338,766

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

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.

UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)


	Six Months Ended June 30,
	2023			2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	89,517		$	91,472
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		13,207			11,529
Amortization of intangibles		6,885			11,000
Amortization of premium and discount on investments, net		(6,845	)		(1,027	)
Stock-based compensation to employees		10,479			14,282
Stock-based compensation to Board of Directors and Scientific Advisory Board		841			774
Deferred income tax benefit		(12,782	)		(2,282	)
Retirement plan expense, net of benefit payments		1,397			2,718
Decrease (increase) in assets:
Accounts receivable		(16,726	)		32,706
Inventory		7,365			(31,475	)
Other current assets		12,038			(17,296	)
Other assets		7,665			7,522
Increase (decrease) in liabilities:
Accounts payable and accrued expenses		(17,651	)		(7,126	)
Other current liabilities		(20,811	)		(3,343	)
Deferred revenue		(15,736	)		(27,954	)
Other liabilities		(1,445	)		4,630
Net cash provided by operating activities		57,398			86,130
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(27,274	)		(21,336	)
Purchases of intangibles		(66,063	)		(12	)
Purchases of investments		(115,048	)		(287,919	)
Proceeds from sale and maturity of investments		190,907			161,530
Net cash used in investing activities		(17,478	)		(147,737	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock		971			847
Payment of withholding taxes related to stock-based compensation to employees		(7,429	)		(8,844	)
Cash dividends paid		(33,422	)		(28,493	)
Net cash used in financing activities		(39,880	)		(36,490	)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		40			(98,097	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		93,430			311,993
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	93,470		$	213,896
Supplemental disclosures:
Unrealized gain (loss) on available-for-sale securities	$	1,848		$	(7,095	)
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		(54	)		611
Cash paid for income tax		59,849			25,949

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

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, monitor, 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, monitors, 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 6,000 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, 2023 and results of operations for the three and six months ended June 30, 2023 and 2022, and cash flows for the six months ended June 30, 2023 and 2022. 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, 2022. 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.

Reclassification of Prior Year Presentation

Certain prior year adjustments to reconcile net income to net cash provided by operating activities have been reclassified on the Consolidated Statements of Cash Flows to conform to the current year presentation. These adjustments have been consolidated into their respective operating assets and liabilities accounts, specifically, inventory, other current assets, other assets and deferred revenue.

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 in 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. The impairment in the value of minority equity investments is included in the other (loss) income, net line item on the Consolidated Statements of Income.

Leases

The Company is a lessee in operating leases primarily incurred to facilitate 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, 2023, 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.

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 sales-based portion of royalty revenue 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 predetermined rates on a 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. Technology development and support revenue is included in contract research services on the Consolidated Statements of Income.

On December 2, 2022, the Company entered into a commercial patent license agreement with Samsung Display Co., Ltd. (SDC), replacing a previous license agreement that had been in place since 2018. This agreement, which covers the manufacture and sale of specified OLED display materials, was effective as of January 1, 2023 and lasts through the end of 2027 with an additional two-year extension option for SDC. Under this agreement, the Company is being paid a license fee, which includes quarterly and annual payments 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 patent license agreement with SDC, the Company also entered into a new supplemental material purchase agreement with SDC, which lasts for the same term as the license agreement and is subject to the same extension option. This new material purchase agreement replaced a previous purchase agreement that had been in place since 2018. Under the supplemental material purchase agreement, SDC agrees to purchase red and green phosphorescent emitter materials from the Company for use in the manufacture of licensed products. This amount purchased 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. The terms of these agreements were extended by a January 1, 2021 amendment through the end of 2025. 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 OLED commercial supply agreement provides for the sale of materials for use by LG Display, which may include phosphorescent emitters and host materials. The agreements provide for certain other minimum obligations relating to the volume of material sales anticipated over the lives of the agreements as well as minimum royalty revenue.

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 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 facilities of the Company's manufacturing partner, PPG Industries, Inc. (PPG) and at the Company's internal facilities. 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 Merck KGaA, Darmstadt, Germany (Merck KGaA), BASF SE (BASF) and Fujifilm Corporation (Fujifilm). The Merck KGaA acquisition was completed on April 28, 2023. The BASF and Fujifilm 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 the Merck KGaA and BASF patents. The Fujifilm acquired technology was fully amortized over a period of 10 years that ended in July 2022.

Amortization of Other Intangible Assets

Other intangible assets from the Adesis acquisition 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 respective 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 OMM subsidiary and each of the Company's other Asia-Pacific 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

In June 2022, the FASB issued 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. ASU 2022-03 becomes effective January 1, 2024, and the Company is evaluating the potential impact of this standard on its investments.

3. CASH, CASH EQUIVALENTS AND INVESTMENTS:

The Company’s portfolio of marketable fixed income securities consists of U.S. Government bonds and corporate bonds. 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, 2023
Cash accounts in banking institutions	$	90,112	$	—	$	—	$	90,112
Money market accounts		3,358		—		—		3,358
	$	93,470	$	—	$	—	$	93,470
December 31, 2022
Cash accounts in banking institutions	$	86,268	$	—	$	—	$	86,268
Money market accounts		7,162		—		—		7,162
	$	93,430	$	—	$	—	$	93,430

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, 2023
Corporate bonds	$	102,295	$	2	$	(151	)	$	102,146
U.S. Government bonds		367,479		—		(3,946	)		363,533
	$	469,774	$	2	$	(4,097	)	$	465,679
December 31, 2022
Corporate bonds		150,698		—		(910	)		149,788
U.S. Government bonds		339,472		32		(4,947	)		334,557
	$	490,170	$	32	$	(5,857	)	$	484,345

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, 2023
Corporate bonds	$	275			$	(85	)	$	190
U.S. Government bonds		198,982		3		(1,860	)		197,125
	$	199,257	$	3	$	(1,945	)	$	197,315
December 31, 2022
Corporate bonds	$	2,479	$	—	$	(28	)	$	2,451
U.S. Government bonds	$	247,464	$	52	$	(2,152	)	$	245,364
	$	249,943	$	52	$	(2,180	)	$	247,815

Long-term Minority Investments

The Company’s portfolio of minority investments consists of investments in privately held early-stage companies primarily motivated for the Company 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 are included in investments on the Consolidated Balance Sheets. As of June 30, 2023, the Company had minority investments in five entities with a total carrying value of $14.0 million accounted for as equity securities without readily determinable fair values, as compared to four minority investments with a total carrying value of $12.0 million as of December 31, 2022.

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, 2023 (in thousands):


			Fair Value Measurements, Using
	Total Carrying Value as of June 30, 2023		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash equivalents	$	3,358	$	3,358	$	—	$	—
Short-term Corporate bonds investments		102,146		102,146		—		—
Short-term U.S. Government bonds investments		363,533		363,533		—		—
Long-term Corporate bonds investments		190		190		—		—
Long-term U.S. Government bonds investments		197,125		197,125		—		—

The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of December 31, 2022 (in thousands):


			Fair Value Measurements, Using
	Total Carrying Value as of December 31, 2022		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash equivalents	$	7,162	$	7,162	$	—	$	—
Short-term Corporate bonds investments		149,788		149,788		—		—
Short-term U.S. Government bonds investments		334,557		334,557		—		—
Long-term Corporate bonds investments		2,451		2,451		—		—
Long-term U.S. Government bonds investments		245,364		245,364		—		—

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 (loss) income, net on the Consolidated Statements of Income. There were no credit losses on debt investments as of June 30, 2023 or December 31, 2022.

5. INVENTORY:

Inventory consisted of the following (in thousands):


	June 30, 2023		December 31, 2022
Raw materials	$	119,248	$	115,448
Work-in-process		6,152		7,626
Finished goods		50,455		60,146
Inventory	$	175,855	$	183,220

The Company recorded an increase in inventory reserve of $781,000 and $604,000 for the three months ended June 30, 2023 and 2022, respectively, and $4.1 million and $688,000 for the six months ended June 30, 2023 and 2022, respectively, due to excess inventory levels in certain products.

6. PROPERTY AND EQUIPMENT:

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


	June 30, 2023			December 31, 2022
Land	$	5,379		$	2,642
Building and improvements		110,314			99,586
Office and lab equipment		137,744			129,697
Furniture, fixtures and computer related assets		18,609			18,071
Construction-in-progress		15,619			10,567
		287,665			260,563
Less: Accumulated depreciation		(130,099	)		(117,118	)
Property and equipment, net	$	157,566		$	143,445

Depreciation expense was $6.7 million and $5.9 million for the three months ended June 30, 2023 and 2022, respectively, and $13.2 million and $11.5 million for the six months ended June 30, 2023 and 2022, 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 primarily consists of acquired license rights for patents and know-how obtained from Merck KGaA, BASF and Fujifilm. These intangible assets consist of the following (in thousands):


	June 30, 2023 (1)			December 31, 2022
PD-LD, Inc.	$	—		$	1,481
Motorola		—			15,909
Merck KGaA		66,012			—
BASF		95,989			95,989
Fujifilm		109,462			109,462
Other		5,212			5,212
		276,675			228,053
Less: Accumulated amortization		(178,459	)		(189,671	)
Acquired technology, net	$	98,216		$	38,382

(1)

During the six months ended June 30, 2023, the gross value and accumulated amortization associated with the PD-LD, Inc. and Motorola patent portfolios have been removed from the table as the underlying patents have reached the end of their useful lives.

Amortization expense related to acquired technology was $3.6 million and $5.1 million for the three months ended June 30, 2023 and 2022, respectively, and $6.2 million and $10.3 million for the six months ended June 30, 2023 and 2022. Amortization expense is included in the amortization of acquired technology and other intangible assets expense line item on the Consolidated Statements of Income and is expected to be $8.3 million for the six months ending December 31, 2023, $16.7 million in each of the years ending December 31, 2024 and 2025, $11.9 million in the year ending December 31, 2026, $7.1 million in the year ending December 31, 2027 and $37.5 million in total thereafter.

Merck KGaA Patent Acquisition

On April 28, 2023, UDC Ireland entered into a Patent Sale and License Agreement with Merck KGaA. Under this agreement, Merck KGaA sold to UDC Ireland all of its rights, title and interest to over 550 of its owned and licensed OLED-related patents and patent applications in exchange for a cash payment of $66.0 million. The Patent Sale and License Agreement contains customary representations, warranties and covenants of the parties. UDC Ireland recorded the payment of $66.0 million as acquired technology, which is being amortized over a period of 10 years.

BASF Patent Acquisition

On June 28, 2016, UDC Ireland entered into and consummated an IP Transfer Agreement with BASF. Under the IP Transfer Agreement, BASF sold to UDC Ireland all of its rights, title and interest to certain of its owned and co-owned intellectual property rights relating to the composition, 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 to internally developed IP, processes and recipes with a weighted average life of 15 years, and $1.5 million to trade name and trademarks with a weighted average life of 10 years.

At June 30, 2023, these other intangible assets consist of the following (in thousands):


	June 30, 2023
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Customer relationships	$	10,520	$	(6,340	)	$	4,180
Developed IP, processes and recipes		4,820		(2,228	)		2,592
Trade name/Trademarks		1,500		(1,042	)		458
Other		448		(86	)		362
Total identifiable other intangible assets	$	17,288	$	(9,696	)	$	7,592

Amortization expense related to other intangible assets was $355,000 for both three-month periods ended June 30, 2023 and 2022, and $707,000 and $708,000 for the six months ended June 30, 2023 and 2022, respectively. Amortization expense is included in the amortization of acquired technology and other intangible assets expense line item on the Consolidated Statements of Income and is expected to be $719,000 for the six months ending December 31, 2023, $1.4 million for each of the next three fiscal years (2024 - 2026), $1.3 million for the year ending December 31, 2027 and $1.4 million in total thereafter.

8. OTHER ASSETS:

Other assets consist of the following (in thousands):


	June 30, 2023		December 31, 2022
Long-term taxes receivable	$	59,055	$	63,915
Right-of-use assets		29,486		31,486
Long-term contract assets		10,961		11,651
Other long-term assets		2,572		2,687
Other assets	$	102,074	$	109,739

See Notes 9 and 20 for further explanation on right-of-use assets and long-term 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, 2023, the Company did not have any finance leases and had one additional operating lease that has 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):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Operating lease cost	$	1,223	$	1,073	$	2,444	$	2,171
Non-cash activity:
Right-of-use assets obtained in exchange for lease obligations	$	—	$	—	$	—	$	—

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


	June 30, 2023		December 31, 2022
Right-of-use assets	$	29,486	$	31,486
Short-term lease liabilities		3,760		3,737
Long-term lease liabilities		27,195		29,039

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


	June 30, 2023
Weighted average remaining lease term (in years)		7.3
Weighted average discount rate		3.4	%

As of June 30, 2023, current operating leases had remaining terms between five months and eight years with options to extend the lease terms.

Undiscounted future minimum lease payments as of June 30, 2023, 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
2023 (1)	$	2,301
2024		4,555
2025		4,599
2026		4,688
2027		4,779
Thereafter		13,583
Total lease payments		34,505
Less: Imputed interest		(3,550	)
Present value of lease payments	$	30,955

(1)

Scheduled maturities of lease liabilities represent the period from July 1, 2023 to December 31, 2023.

10. ACCRUED EXPENSES:

Accrued expenses consist of the following (in thousands):


	June 30, 2023		December 31, 2022
Compensation	$	18,958	$	31,751
PPG Industries, Inc. agreement		8,142		9,864
Consulting		845		910
Professional fees		833		906
Research and development agreements		419		662
Royalties		333		877
Other		5,542		6,032
Accrued expenses	$	35,072	$	51,002

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).

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 $139,000 and $181,000 for the three months ended June 30, 2023 and 2022, respectively, and $298,000 and $335,000 for the six months ended June 30, 2023 and 2022, 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, 2023, the Company was obligated to pay USC up to $2.7 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 $133,000 and $256,000 for the three months ended June 30, 2023 and 2022, respectively, and $416,000 and $451,000 for the six months ended June 30, 2023 and 2022, respectively.

12. OTHER LIABILITIES:

Other liabilities consist of the following (in thousands):


	June 30, 2023		December 31, 2022
Long-term lease liabilities	$	27,195	$	29,039
Long-term taxes payable		14,991		14,592
Other long-term liabilities		54		54
Other liabilities	$	42,240	$	43,685

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 AGREEMENT:

On September 22, 2011, the Company entered into an Amended and Restated OLED Materials Supply and Service Agreement with PPG (the New OLED Materials Agreement), which, effective as of October 1, 2011, replaced the original OLED Materials Agreement with PPG. 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 have been issued for services rendered by PPG since the inception of the contract.

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 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 commenced 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 $2.6 million and $796,000 for the three months ended June 30, 2023 and 2022, respectively, and $4.6 million and $2.3 million for the six months ended June 30, 2023 and 2022, respectively, in relation to the cash portion of the reimbursement of expenses and work performed by PPG, excluding amounts paid for commercial chemicals.

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, 2023, 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, 2023, the Company had issued 48,706,932 shares of common stock, of which 47,341,284 were outstanding. During the three and six months ended June 30, 2023 and 2022, the Company repurchased no shares of common stock.

Dividends

During the three months ended June 30, 2023, the Company declared and paid cash dividends of $0.35 per common share, or $16.7 million, and during the six months ended June 30, 2023, the Company declared and paid cash dividends of $0.70 per common share, or $33.4 million, on the Company’s outstanding common stock.

On August 1, 2023, the Company’s Board of Directors declared a third quarter dividend of $0.35 per share to be paid on September 29, 2023 to all shareholders of record of the Company’s common stock as of the close of business on September 15, 2023. 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, 2022, net of tax	$	(7,887	)	$	(10,011	)	$	(554	)	$	(18,452	)
Other comprehensive gain before reclassification		1,568			—			66			1,634
Reclassification to net income (1)		—			506			—			506		Selling, general and administrative, research and development and cost of sales
Change during period		1,568			506			66			2,140
Balance June 30, 2023, net of tax	$	(6,319	)	$	(9,505	)	$	(488	)	$	(16,312	)


	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	)

(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 $506,000 and $1.0 million for the six months ended June 30, 2023 and 2022, respectively.

(2)

Refer to Note 17: Retirement Plan Benefit Liability.

16. STOCK-BASED COMPENSATION:

Equity Compensation Plan

On June 15, 2023, the shareholders of the Company voted to approve the Universal Display Corporation 2023 Equity Compensation Plan (the “Equity Compensation Plan”), which replaced the Universal Display Corporation 2014 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. The total number of shares that may be subject to awards under the Equity Compensation Plan is equal to the shares that were available for issuance and not subject to an award under the 2014 Equity Compensation Plan at the time it was replaced by the Equity Compensation Plan, subject to adjustment with respect to shares underlying any outstanding award granted under the Equity Compensation Plan or the 2014 Equity Compensation Plan that may expire, or be terminated, surrendered or forfeited for any reason, without issuance of such shares. As of June 30, 2023, there were 1,521,419 shares that remained available to be granted under the Equity Compensation Plan. The Equity Compensation Plan will terminate on June 15, 2033.

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, 2023, the Company granted 108,706 shares of restricted stock awards and restricted stock units to employees and non-employees, which had a total fair value of $16.1 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, 2023 and 2022, 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 $2.4 million and $3.4 million, respectively, research and development expense of $1.4 million and $1.6 million, respectively, and cost of sales of $451,000 and $567,000, respectively. For the six months ended June 30, 2023 and 2022, 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 $5.4 million and $7.4 million, respectively, research and development expense of $2.9 million and $3.1 million, respectively, and cost of sales of $981,000 and $1.1 million, respectively.

In connection with the vesting of restricted stock awards and units during the three months ended June 30, 2023 and 2022, 1,611 and 1,616 shares, respectively, with aggregate fair values of $217,000 and $210,000, 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, 2023 and 2022, 47,964 and 51,400 shares, respectively, with aggregate fair values of $6.6 million and $8.0 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, 2023 and 2022, 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 $60,000 and $31,000, respectively. Such compensation charges to research and development expense were $127,000 and $151,000, respectively, for the six months ended June 30, 2023 and 2022.

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, 2023 and 2022, 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 $359,000 and $313,000, respectively. Such compensation charges to selling, general and administrative expense were $714,000 and $622,000, respectively, for the six months ended June 30, 2023 and 2022. In connection with the vesting of the restricted stock, the Company issued to non-employee members of the Board of Directors 3,304 and 2,196 shares, respectively, during the three months ended June 30, 2023 and 2022.

Performance Unit Awards

Each performance unit award is subject to either a performance-based or market-based vesting requirement. The performance-based vesting requirement is tied to the Company's achievement of specified financial metrics such as earnings before interest, taxes, depreciation and amortization (EBITDA), cash flow, and/or gross margin, 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 performance falls below certain thresholds, the performance units will not vest at all.

During the six months ended June 30, 2023, the Company granted 84,448 performance units, of which 42,222 units are subject to performance-based vesting requirements based on three-year cumulative adjusted EBITDA, 21,113 units are subject to performance-based vesting requirements based on three-year cumulative gross margin and 21,113 units are subject to market-based, TSR vesting requirements. The grant date fair value of the performance unit awards granted was $12.6 million for the six months ended June 30, 2023, 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, 2023 and 2022, the Company recorded selling, general and administrative expense of $1.1 million and $1.7 million, respectively, research and development expense of $607,000 and $413,000, respectively, and cost of sales expense of $376,000 and $256,000, respectively, related to the performance units. For the six months ended June 30, 2023 and 2022, the Company recorded selling, general and administrative expense of $251,000 and $1.8 million, respectively, research and development expense of $376,000 and $385,000, respectively, and cost of sales expense of $233,000 and $237,000, respectively, related to the performance units.

In connection with the vesting of performance units during the six months ended June 30, 2023 and 2022, 5,350 and 5,082 shares, respectively, with an aggregate fair value of $775,000 and $826,000, 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.

During the six months ended June 30, 2023 and 2022, the Company issued 9,339 and 8,042 shares, respectively, of its common stock under the ESPP, resulting in proceeds of $971,000 and $847,000, respectively.

For the three months ended June 30, 2023 and 2022, the Company recorded charges of $30,000 and $60,000, respectively, to selling, general and administrative expense, $54,000 and $113,000, respectively, to research and development expense, and $34,000 and $66,000, 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, 2023 and 2022 the Company recorded charges of $70,000 and $85,000, respectively, to selling, general and administrative expense, $125,000 and $164,000, respectively, to research and development expense, and $75,000 and $95,000, respectively, to cost of sales related to the ESPP equal to the amount of the discount and the value of the look-back feature.

Scientific Advisory Board Awards

During the six months ended June 30, 2023 and 2022, the Company granted a total of 2,366 and 2,024 shares, respectively, of fully vested common stock to non-employee members of the Scientific Advisory Board for services performed in 2022 and 2021, respectively. The fair value of shares issued to members of the Scientific Advisory Board was $300,000 for both six-month periods.

17. RETIREMENT PLAN BENEFIT LIABILITY:

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, 2023, there were eight participants in the SERP. In December 2022, one of the participants retired and monthly SERP benefit payments commenced in January 2023. The total SERP benefit payments for the six months ended June 30, 2023 were $1.2 million.

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,
	2023		2022		2023		2022
Service cost	$	237	$	362	$	475	$	723
Interest cost		725		346		1,449		692
Amortization of prior service cost		204		279		408		559
Amortization of loss		120		372		240		744
Total net periodic benefit cost	$	1,286	$	1,359	$	2,572	$	2,718

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 five 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, 2023 and December 31, 2022, the Company had purchase commitments for inventory of $27.6 million and $31.9 million, respectively.

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.

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	2023	2022	2023	2022	June 30, 2023
A	36%	39%	33%	39%	$	10,776
B	22%	30%	24%	29%	$	35,184
C	14%	6%	11%	4%	$	21,104
D	13%	14%	17%	15%	$	22,518

Revenues from outside of North America represented approximately 98% and 97% for the three months ended June 30, 2023 and 2022, respectively, and 97% for both six-month periods ended June 30, 2023 and 2022. Revenues by geographic area are as follows (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
Country	2023		2022		2023		2022
South Korea	$	82,029	$	79,096	$	148,089	$	168,783
China		57,520		51,180		114,947		106,580
Japan		1,509		1,392		3,156		2,445
Other non-U.S. locations		1,978		715		3,315		1,015
Total non-U.S. locations		143,036		132,383		269,507		278,823
United States		3,529		4,178		7,525		8,208
Total revenue	$	146,565	$	136,561	$	277,032	$	287,031

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, 2023		December 31, 2022
United States	$	117,196	$	117,255
Ireland		25,894		20,270
Other		14,476		5,920
Total long-lived assets	$	157,566	$	143,445

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 22.4% and 24.5% for the three months ended June 30, 2023 and 2022, respectively and 22.6% and 22.1% for the six months ended June 30, 2023 and 2022, respectively. The discrepancy between the statutory tax rate and the effective tax rate is primarily due to nondeductible employee compensation, U.S. international tax (GILTI and Subpart F) and non-creditable Chinese withholding tax, partially offset by the benefit of income taxed in foreign jurisdictions. The Company recorded an income tax expense of $14.4 million and $13.5 million for the three months ended June 30, 2023 and 2022, respectively, and $26.2 million and $26.0 million for the six months ended June 30, 2023 and 2022.

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 not sufficient evidence to release the valuation allowance that has been recorded for the New Jersey research and development credit and unrealized loss on investments, and no indicators against the realizability of the remaining net deferred tax asset.

The U.S.-Korean Mutual Agreement Procedure (MAP) for the years ended December 31, 2010 to December 31, 2017 was closed in September 2022, resulting in a refund of the Korean withholding taxes previously withheld. In July 2023, the Company amended its U.S. federal tax returns to reflect the refund and to redetermine the foreign tax credit amount. In November 2022, the Company prepaid $18.8 million to the IRS under Rev. Proc. 2005-18 to offset the tax payable amount.

On December 27, 2018, regarding the withholding taxes for the years 2018 to 2022, the Korean Supreme Court, citing prior cases, held that only royalties paid with respect to Korean registered patents are considered 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 for the years ended December 31, 2018 to December 31, 2022. Based on the Korean Supreme Court decision, a tax refund request on behalf of the Company was filed with the Korean National Tax Service (KNTS) for the entire period from January 1, 2018 to December 31, 2022. The Company received a formal rejection from the KNTS and has filed a petition to the Korean Tax Tribunal to reverse the decision of the tax office. The Company has been advised by a prominent Korean law firm that there is a more-likely-than-not chance of success. As a result, the Company has recorded a long-term asset of $59.1 million and $60.9 million as of June 30, 2023 and December 31, 2022, respectively. The Company also recorded foreign exchange loss of $803,000 during the three months ended June 30, 2023 and $1.8 million during the six months ended June 30, 2023 due to the fluctuation of the Korean Won to the U.S. Dollar and resulting remeasurement of this Won-denominated receivable.

The Company will also amend U.S. federal tax returns for the 2018 to 2020 years when the anticipated refund from KNTS is received to offset the additional tax liability and to redetermine the research and development credit utilization. In November 2022, the Company prepaid $16.0 million to the IRS under Rev. Proc. 2005-18 that relates to the anticipated tax payable. The Company has recorded a long-term liability of $15.0 million and $14.6 million as of June 30, 2023 and December 31, 2022, respectively, for the estimated amounts due to the U.S. federal government based on the amendment of the Company's U.S. tax returns indicating that lower withholding amounts were required.

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 the three months ended June 30, 2023 and 2022, the Company recorded 97% of its revenue from OLED related sales and 3% from the providing of services through Adesis. For the six months ended June 30, 2023 and 2022, the Company recorded 96% and 97%, respectively, of its revenue from OLED related sales and 4% and 3%, respectively, from the providing of services through Adesis.

Contract Balances

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


	As of June 30, 2023
Accounts receivable	$	109,390
Short-term unbilled receivables		13,263
Short-term contract assets		2,585
Long-term unbilled receivables		232
Long-term contract assets		10,729
Short-term deferred revenue		29,732
Long-term deferred revenue		18,410

Short-term and long-term unbilled receivables and contract assets are classified as other current assets and other assets, respectively, on the Consolidated Balance Sheets. The deferred revenue balance as of June 30, 2023 will be recognized as materials are shipped to customers over the remaining contract periods. As of June 30, 2023, 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 assets and liabilities balances associated with the Company's contracts from customers for the six months ended June 30, 2023 and 2022 are as follows (in thousands):


	Six Months Ended June 30, 2023
	Assets			Liabilities
Balance at December 31, 2022	$	38,457		$	(63,878	)
Revenue recognized that was previously included in deferred revenue, net		—			100,242
Increases due to cash received		—			(91,111	)
Cumulative catch-up adjustment arising from changes in estimates of transaction price, net		—			6,605
Unbilled receivables recorded, net		9,404			—
Contract assets recorded, net		(1,069	)		—
Transferred to receivables from unbilled receivables		(19,983	)		—
Net change		(11,648	)		15,736
Balance at June 30, 2023	$	26,809		$	(48,142	)


	Six Months Ended June 30, 2022
	Assets		Liabilities
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	)

The cumulative catch-up adjustment arising from changes in estimates of transaction price, net was $6.6 million for the six months ended June 30, 2023 as compared to $10.7 million for the six months ended June 30, 2022. These adjustments resulted from an increase in the average price per gram that was primarily due to the decrease in anticipated demand by several of the Company's customers over the remaining lives of their contracts, resulting from changes in global macroeconomic factors.

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 restricted stock units, performance units and the impact of shares to be issued under the Company's 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, 2023 and 2022 (in thousands, except share and per share data):


	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
Numerator:
Net income	$	49,678		$	41,502		$	89,517		$	91,472
Adjustment for Basic EPS:
Earnings allocated to unvested shareholders		(250	)		(235	)		(465	)		(557	)
Adjusted net income	$	49,428		$	41,267		$	89,052		$	90,915
Denominator:
Weighted average common shares outstanding – Basic		47,572,971			47,393,830			47,548,404			47,381,864
Effect of dilutive shares:
Common stock equivalents arising from ESPP		325			894			1,265			1,085
Restricted stock awards and units and performance units		44,819			63,168			43,988			68,405
Weighted average common shares outstanding – Diluted		47,618,115			47,457,892			47,593,657			47,451,354
Net income per common share:
Basic	$	1.04		$	0.87		$	1.87		$	1.92
Diluted	$	1.04		$	0.87		$	1.87		$	1.92

For the three months ended June 30, 2023 and 2022, the combined effects of unvested restricted stock awards, restricted stock units and performance unit awards of 75,251 and 173,707, respectively, were excluded from the calculation of diluted EPS as their impact would have been antidilutive. For the six months ended June 30, 2023 and 2022, the combined effects of unvested restricted stock awards, restricted stock units and performance unit awards of 31,578 and 57,508, respectively, were excluded from the calculation of diluted EPS as their impact would have been antidilutive.

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, 2022, 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, monitors, 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.

On December 2, 2022, we entered into a commercial patent license agreement with Samsung Display Co., Ltd. (SDC), replacing a previous license agreement that had been in place since 2018. This agreement, which covers the manufacture and sale of specified OLED display materials, was effective as of January 1, 2023 and lasts through the end of 2027 with an additional two-year extension option for SDC. Under this agreement, we are being paid a license fee, which includes quarterly and annual payments 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.

At the same time that we entered into the current commercial patent license agreement with SDC, we also entered into a material purchase agreement with SDC, which lasts for the same term as the license agreement and is subject to the same extension option. This new material purchase agreement replaced a previous purchase agreement that had been in place since 2018. Under the material purchase agreement, SDC agrees to purchase from us a minimum amount of red and green 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 terms of these agreements were extended by a January 1, 2021 amendment through the end of 2025. 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 OLED commercial supply agreement provides for the sales of materials for use by LG Display, which may include phosphorescent emitters and host materials. 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.

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 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), which has operations in New Castle and Wilmington, 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, 2023, Adesis employed a team of 137 research scientists, chemists, engineers and laboratory technicians. Prior to our acquisition of Adesis, 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, 2023, OVJP Corp employed a team of 26 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 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 manufacturing site in Shannon, Ireland and an agreement between UDC Ireland Limited and PPG for the production of our OLED materials. We currently lease the Shannon site and have a contractual option to purchase the facility. When fully operational, the new facility is expected to double our production capacity and allow for the diversification of our manufacturing base for phosphorescent emitters. The first phase of facility improvements has been completed and operations commenced in June 2022.

We also generate technology development and support revenue earned from development and technology evaluation agreements and commercialization assistance fees.

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.

RESULTS OF OPERATIONS

Comparison of the Three Months Ended June 30, 2023 and 2022


	Three Months Ended June 30,
	2023			2022			Increase (Decrease)
REVENUE:
Material sales	$	77,107		$	71,869		$	5,238
Royalty and license fees		64,399			60,278			4,121
Contract research services		5,059			4,414			645
Total revenue		146,565			136,561			10,004
COST OF SALES		32,139			27,239			4,900
Gross margin		114,426			109,322			5,104
OPERATING EXPENSES:
Research and development		32,318			28,197			4,121
Selling, general and administrative		17,077			19,869			(2,792	)
Amortization of acquired technology and other intangible assets		3,994			5,502			(1,508	)
Patent costs		2,229			2,259			(30	)
Royalty and license expense		169			181			(12	)
Total operating expenses		55,787			56,008			(221	)
OPERATING INCOME		58,639			53,314			5,325
Interest income, net		6,198			1,583			4,615
Other (loss) income, net		(784	)		89			(873	)
Interest and other income, net		5,414			1,672			3,742
INCOME BEFORE INCOME TAXES		64,053			54,986			9,067
INCOME TAX EXPENSE		(14,375	)		(13,484	)		(891	)
NET INCOME	$	49,678		$	41,502		$	8,176

Revenue

Our total material sales were $77.1 million for the three months ended June 30, 2023, as compared to $71.9 million for the three months ended June 30, 2022, an increase of 7% with a commensurate increase in unit material volume of 9%. The increase in material sales was due to strengthened demand for OLED products utilizing our emitter material.

•

Green emitter sales for the three months ended June 30, 2023, which include our yellow-green emitters, were $57.9 million as compared to $54.5 million for the three months ended June 30, 2022, with unit material volumes increasing by 7%.

•

Red emitter sales for the three months ended June 30, 2023 were $16.7 million as compared to $17.3 million for the three months ended June 30, 2022, with unit material volumes increasing by 8%.

Revenue from royalty and license fees was $64.4 million for the three months ended June 30, 2023 as compared to $60.3 million for the three months ended June 30, 2022, an increase of 7%. The increase in royalty and license fees was primarily the result of higher unit material volume.

The cumulative catch-up adjustment arising from changes in estimates of transaction price, net for three months ended June 30, 2023 was $922,000 compared to $8.8 million for the three months ended June 30, 2022. These adjustments were 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.

Contract research services revenue was $5.1 million for the three months ended June 30, 2023 as compared to $4.4 million for the three months ended June 30, 2022, 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 three months ended June 30, 2023 increased by $4.9 million as compared to the three months ended June 30, 2022, primarily due to an increase in the level of material sales, an increase in manufacturing costs, underutilization of the manufacturing facility in Shannon, Ireland and higher per unit material costs. The underutilization charges related to the Shannon facility were $3.9 million for the three months ended June 30, 2023. Shannon facility costs began to be recorded as cost of sales in June 2022 when the facility was first used for production activities. Shannon facility costs prior to June 2022 were recorded in selling, general and administrative expenses. We anticipate that the Shannon facility will continue to be underutilized in the near-term as we have begun to bring this additional capacity online in preparation for anticipated growth in the years ahead. Included in the cost of sales for the three months ended June 30, 2023 and 2022 was an increase in inventory reserve of $781,000 and $604,000, respectively, due to excess inventory levels in certain products. As a result of the increase in revenue from material sales and royalty and license fees offset by Shannon costs, gross margin for the three months ended June 30, 2023 increased by $5.1 million as compared to the three months ended June 30, 2022, with gross margin as a percentage of revenue decreasing to 78% from 80%.

Research and development

Research and development expenses increased to $32.3 million for the three months ended June 30, 2023, as compared to $28.2 million for the three months ended June 30, 2022. The increase in research and development expenses was primarily due to higher operating costs, including increased contract research costs and those costs associated with PPG development activity, and employee-related compensation expenses.

Selling, general and administrative

Selling, general and administrative expenses decreased to $17.1 million for the three months ended June 30, 2023, as compared to $19.9 million for the three months ended June 30, 2022. The decrease in selling, general and administrative expenses was primarily due to lower stock-based compensation expenses as a result of current assumptions of future vesting for performance-based awards and a decrease in pre-production costs associated with the Shannon facility. The Shannon facility became operational during June 2022 and the costs associated with this facility have since been included in cost of sales.

Amortization of acquired technology and other intangible assets

Amortization of acquired technology and other intangible assets was $4.0 million for the three months ended June 30, 2023, as compared to $5.5 million for the three months ended June 30, 2022. The decrease was due to the Fujifilm patents becoming fully amortized during July 2022, partially offset by the commencement of amortization expense associated with the Merck KGaA, Darmstadt, Germany (Merck KGaA) patent acquisition that was completed on April 28, 2023.

Patent costs

Patent costs decreased to $2.2 million for the three months ended June 30, 2023, as compared to $2.3 million for the three months ended June 30, 2022.

Royalty and license expense

Royalty and license expense decreased to $169,000 for the three months ended June 30, 2023, as compared to $181,000 for the three months ended June 30, 2022.

Interest and other income, net

Interest income, net was $6.2 million for the three months ended June 30, 2023, as compared to $1.6 million for the three months ended June 30, 2022. The increase in interest income, net was primarily due to an increase in bond yields on available-for-sale investments held during the three months ended June 30, 2023 compared to the three months ended June 30, 2022 as well as higher available-for-sale investment balances. Other (loss) income, net primarily consisted of net exchange gains and losses on foreign currency transactions and rental income. We recorded other loss, net of $784,000 for the three months ended June 30, 2023 as compared to other income, net of $89,000 for the three months ended June 30, 2022.

Income tax expense

We are subject to income taxes in the United States and foreign jurisdictions. The effective income tax rate was an expense of 22.4% and 24.5% for the three months ended June 30, 2023 and 2022, respectively, and we recorded income tax expense of $14.4 million and $13.5 million, respectively, for those periods.

Comparison of the Six Months Ended June 30, 2023 and 2022


	Six Months Ended June 30,
	2023			2022			Increase (Decrease)
REVENUE:
Material sales	$	147,297		$	158,560		$	(11,263	)
Royalty and license fees		119,609			120,080			(471	)
Contract research services		10,126			8,391			1,735
Total revenue		277,032			287,031			(9,999	)
COST OF SALES		65,109			60,402			4,707
Gross margin		211,923			226,629			(14,706	)
OPERATING EXPENSES:
Research and development		63,741			54,742			8,999
Selling, general and administrative		32,473			40,931			(8,458	)
Amortization of acquired technology and other intangible assets		6,885			11,000			(4,115	)
Patent costs		4,484			4,057			427
Royalty and license expense		333			335			(2	)
Total operating expenses		107,916			111,065			(3,149	)
OPERATING INCOME		104,007			115,564			(11,557	)
Interest income, net		13,165			1,874			11,291
Other (loss) income, net		(1,487	)		55			(1,542	)
Interest and other income, net		11,678			1,929			9,749
INCOME BEFORE INCOME TAXES		115,685			117,493			(1,808	)
INCOME TAX EXPENSE		(26,168	)		(26,021	)		(147	)
NET INCOME	$	89,517		$	91,472		$	(1,955	)

Revenue

Our total material sales were $147.3 million for the six months ended June 30, 2023, as compared to $158.6 million for the six months ended June 30, 2022, a decrease of 7% with a commensurate decrease in unit material volume of 6%. The decline in material sales was primarily due to reduced demand for our emitter material during the first quarter of 2023. This weakness resulted from the continuation of unfavorable macroeconomic conditions that have negatively impacted the OLED display market segment. We believe the decline is temporary and that the duration is dependent upon the timing of the recovery of the global market conditions, which continues to be uncertain.

•

Green emitter sales for the six months ended June 30, 2023, which include our yellow-green emitters, were $111.6 million as compared to $120.9 million for the six months ended June 30, 2022, with unit material volumes decreasing by 7%.

•

Red emitter sales for the six months ended June 30, 2023 were $32.8 million as compared to $37.4 million for the six months ended June 30, 2022, with unit material volumes decreasing by 5%.

Revenue from royalty and license fees was $119.6 million for the six months ended June 30, 2023 as compared to $120.1 million for the six months ended June 30, 2022.

The cumulative catch-up adjustment arising from changes in estimates of transaction price, net was $6.6 million for the six months ended June 30, 2023 as compared to $10.7 million for the six months ended June 30, 2022. These adjustments resulted from an increase in the average price per gram that was primarily due to the decrease in anticipated demand by several of our customers over the remaining lives of their contracts.

Contract research services revenue was $10.1 million for the six months ended June 30, 2023 as compared to $8.4 million for the six months ended June 30, 2022, an increase of 21%. 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, 2023 increased by $4.7 million as compared to the six months ended June 30, 2022, primarily due to underutilization of the manufacturing facility in Shannon, Ireland and higher per unit material costs offset by a decrease in the level of material sales. The underutilization charges related to the Shannon facility were $8.6 million for the six months ended June 30, 2023. Shannon facility costs began to be recorded as cost of sales in June 2022 when the facility was first used for production activities. Shannon facility costs prior to June 2022 were recorded in selling, general and administrative expenses. We anticipate that the Shannon facility will continue to be underutilized in the near-term as we have begun to bring this additional capacity online in preparation for anticipated growth in the years ahead. Included in the cost of sales for the six months ended June 30, 2023 and 2022 was an increase in inventory reserve of $4.1 million and $688,000, respectively, due to excess inventory levels in certain products. As a result of the decrease in revenue from material sales as well as the Shannon costs and inventory reserve, gross margin for the six months ended June 30, 2023 decreased by $14.7 million as compared to the six months ended June 30, 2022, with gross margin as a percentage of revenue decreasing to 76% from 79%.

Research and development

Research and development expenses increased to $63.7 million for the six months ended June 30, 2023, as compared to $54.7 million for the six months ended June 30, 2022. The increase in research and development expenses was primarily due to higher operating costs, including increased contract research costs and those costs associated with PPG development activity, and employee-related compensation expenses.

Selling, general and administrative

Selling, general and administrative expenses decreased to $32.5 million for the six months ended June 30, 2023, as compared to $40.9 million for the six months ended June 30, 2022. The decrease in selling, general and administrative expenses was primarily due to lower stock-based compensation expenses as a result of current assumptions of future vesting for performance-based awards and a decrease in pre-production costs associated with the Shannon facility. The Shannon facility became operational during June 2022 and the costs associated with this facility have since been included in cost of sales.

Amortization of acquired technology and other intangible assets

Amortization of acquired technology and other intangible assets was $6.9 million for the six months ended June 30, 2023 as compared to $11.0 million for the six months ended June 30, 2022. The decrease was due to the Fujifilm patents becoming fully amortized during July 2022 offset by the commencement of amortization expense associated with the Merck KGaA patent acquisition that was completed on April 28, 2023.

Patent costs

Patent costs increased to $4.5 million for the six months ended June 30, 2023, as compared to $4.1 million for the six months ended June 30, 2022. The results in the current year reflected higher internal prosecution related costs.

Royalty and license expense

Royalty and license expense decreased to $333,000 for the six months ended June 30, 2023, as compared to $335,000 for the six months ended June 30, 2022.

Interest and other income, net

Interest income, net was $13.2 million for the six months ended June 30, 2023, as compared to $1.9 million for the six months ended June 30, 2022. The increase in interest income, net was primarily due to an increase in bond yields on available-for-sale investments held during the six months ended June 30, 2023 compared to the six months ended June 30, 2022 as well as higher available-for-sale investment balances. Other (loss) income, net primarily consisted of net exchange gains and losses on foreign currency transactions and rental income. We recorded other loss, net of $1.5 million for the six months ended June 30, 2023 as compared to other income, net of $55,000 for the six months ended June 30, 2022.

Income tax expense

We are subject to income taxes in the United States and foreign jurisdictions. The effective income tax rate was an expense of 22.6% and 22.1% for the six months ended June 30, 2023, respectively, and we recorded income tax expense of $26.2 million and $26.0 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, 2023, we had cash and cash equivalents of $93.5 million, short-term investments of $465.7 million, and long-term corporate bonds and U.S. Government bonds investments of $197.3 million for a total of $756.5 million. This compares to cash and cash equivalents of $93.4 million, short-term investments of $484.3 million, and long-term U.S. Government bonds investments of $247.9 million for a total of $825.6 million as of December 31, 2022.

Cash provided by operating activities for the six months ended June 30, 2023 was $57.4 million resulting from $89.5 million of net income and $13.2 million from non-cash items including depreciation, stock-based compensation and deferred income taxes, partially offset by $45.3 million reduction due to changes in our operating assets and liabilities. Changes in our operating assets and liabilities related to a decrease in other liabilities of $22.3 million, a decrease in accounts payable and accrued expenses of $17.7 million, an increase in accounts receivable of $16.7 million and a decrease in deferred revenue of $15.7 million, partially offset by a decrease in other assets of $19.7 million and a decrease in inventory of $7.4 million.

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 used in investing activities was $17.5 million for the six months ended June 30, 2023, as compared to $147.7 million for the six months ended June 30, 2022. The decrease was due to the timing of maturities and purchases of investments resulting in net sales and maturities of $75.8 million for the six months ended June 30, 2023, as compared to net purchases of $126.4 million for the six months ended June 30, 2022, partially offset by an increase in purchases of property, plant and equipment and intangibles of $72.0 million. The increase in property, plant and equipment and intangibles during the six months ended June 30, 2023 was primarily due to the Merck KGaA patent acquisition.

Cash used in financing activities was $39.9 million for the six months ended June 30, 2023, as compared to $36.5 million for the six months ended June 30, 2022. The increase was due to an increase in the cash payment of dividends in the current year of $4.9 million, partially offset by a decrease in the payment of withholding taxes related to stock-based compensation to employees of $1.4 million and an increase in the proceeds from issuance of common stock of $124,000.

Working capital was $797.4 million as of June 30, 2023, as compared to $763.8 million as of December 31, 2022. The increase was primarily due to a decrease in other current liabilities, an increase in accounts receivable and decreases in accrued expenses and deferred revenue, partially offset by a decrease in short-term investments.

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 twelve months.

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, 2022, for additional discussion of our critical accounting policies.

Contractual Obligations

Refer to our Annual Report on Form 10-K for the year ended December 31, 2022, for a discussion of our contractual obligations.

Off-Balance Sheet Arrangements

As of June 30, 2023, 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. 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, 2023. 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, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Patent Related Challenges and Oppositions

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 our 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. We believe that as OLED technology becomes more established and our patent portfolio increases in size, so will the number of these proceedings.

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, 2022.

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.

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

10.1		Universal Display Corporation 2023 Equity Compensation Plan (filed as Annex A to the Company’s Definitive Proxy Statement for the 2023 Annual Meeting filed with the Securities and Exchange Commission on April 20, 2023 and incorporated herein by reference).

10.2		Amendment to Amended and Restated Change in Control Agreement, dated May 31, 2023, between the Registrant and Brian Millard (filed as exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 1, 2023 and incorporated herein by reference).

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 Brian Millard, 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 Brian Millard, 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, 2023 formatted in Inline XBRL (included in Item 101.INS)

Explanation of footnotes to listing of exhibits:


*		Filed herewith.
**		Furnished herewith.

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 3, 2023		By: /s/ Brian Millard
		Brian Millard
		Vice President, Chief Financial Officer and Treasurer