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 that can be manufactured on both flexible and rigid substrates, making them highly suitable for use in full-color displays and as lighting products. OLED displays are capturing a growing share of the display market, especially in the mobile phone, television, wearable, tablet, notebook and personal computer, augmented reality (AR), virtual reality (VR) and automotive markets. The Company believes this is because OLEDs offer potential advantages over competing display technologies with respect to power efficiency, contrast ratio, viewing angle, video response time, form factor and manufacturing cost. The Company also believes that OLED lighting products have the potential to replace many existing light sources in the future because of their high-power efficiency, excellent color rendering index, low operating temperature and novel form factor. The Company’s technology leadership, intellectual property position, and the Company’s 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 any new materials to product manufacturers of products for display applications, such as mobile phones, televisions, wearables, tablets, portable media devices, notebook computers, personal computers and automotive applications, and specialty and general lighting products; and (2) further develop and license the Company’s proprietary OLED technologies to those manufacturers. The Company has established a significant portfolio of proprietary OLED technologies and materials, primarily through internal research and development efforts and acquisitions of patents and patent applications, as well as maintaining long-standing, and establishing new relationships with world-class universities, research institutions and strategic manufacturing partnerships. The Company currently owns, exclusively licenses or has the sole right to sublicense more than 5,000 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 technologies and materials for possible use in commercial OLED display and lighting products.
In the opinion of management, the accompanying unaudited Consolidated Financial Statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company’s financial position as of June 30, 2021 and results of operations for the three and six months ended June 30, 2021 and 2020, and cash flows for the six months ended June 30, 2021 and 2020. 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, 2020. 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.
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., 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.
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 consist of raw materials, work-in-process and finished goods, including inventory consigned to customers, and are stated at the lower of cost, determined on a first-in, first-out basis, or 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.
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.
The Company accounts for minority equity investments in companies that are not accounted for under the equity method as equity securities without readily determinable fair values. The fair value of these securities is based on original cost less impairments, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. Under this method, the share of income or loss of such companies is not included in the Consolidated Statements of Income. The carrying value of these investments is included in investments on the Consolidated Balance Sheets.
The Company’s policy is to recognize an impairment in the value of its minority equity investments when clear evidence of an impairment exists. Factors considered in the assessment include a significant adverse change in the regulatory, economic, or technological environment, the completion of new equity financing that may indicate a decrease in value, the failure to complete new equity financing arrangements after seeking to raise additional funds, or the commencement of proceedings under which the assets of the business may be placed in receivership or liquidated to satisfy the claims of debt and equity stakeholders.
The Company is a lessee in operating leases primarily incurred to facilitate the expansion of manufacturing, research and development, and selling, general and administrative activities. At contract inception, the Company determines if an arrangement is or contains a lease, and if so recognizes a right-of-use asset and lease liability at the lease commencement date. For operating leases, the lease liability is measured at the present value of the unpaid lease payments at the lease commencement date, whereas for finance leases, the lease liability is initially measured at the present value of the unpaid lease payments and subsequently measured at amortized cost using the interest method. Operating lease right-of-use assets are included in other assets on the Consolidated Balance Sheets. The short-term portion of operating lease liabilities is included in other current liabilities on the Consolidated Balance Sheets and the long-term portion is included in other liabilities on the Consolidated Balance Sheets. As of June 30, 2021, the Company had no leases that qualified as financing arrangements.
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, are accounted for as a single performance obligation. Accordingly, total contract consideration is estimated and recognized over the contract term based on material units sold at the estimated per unit fee over the life of the contract. Total contract consideration is allocated to material sales and royalty and licensing fees on the Consolidated Statements of Income based on contract pricing.
Various estimates are relied upon to recognize revenue. The Company estimates total material units to be purchased by its customers over the contract term based on historical trends, industry estimates and its forecast process. Management uses the expected value method to estimate the material per unit fee. Additionally, management estimates the total sales-based royalties based on the estimated net sales revenue of its customers over the contract term.
Contract research services revenue is revenue earned by Adesis by providing chemical materials synthesis research, development and commercialization for non-OLED applications on a contractual basis. These services range from intermediates for structure-activity relationship studies, reference agents and building blocks for combinatorial synthesis, re-synthesis of key intermediates, specialty organic chemistry needs, and selective toll manufacturing. These services are provided to third-party pharmaceutical and life sciences firms and other technology firms at fixed costs or on an annual contract basis. Revenue is recognized as services are performed with billing schedules and payment terms negotiated on a contract-by-contract basis. Payments received in excess of revenue recognized are recorded as deferred revenue. In other cases, services may be provided and revenue is recognized before the customer is invoiced. In these cases, revenue recognized will exceed amounts billed and the difference, representing amounts which are currently unbillable to the customer pursuant to contractual terms, is recorded as an unbilled receivable.
Technology development and support revenue is revenue earned from development and technology evaluation agreements and commercialization assistance fees, along with, to a minimal extent, government contracts. Relating to the Company’s government contracts, the Company may receive reimbursements by government entities for all or a portion of the research and development costs the Company incurs. Revenues are recognized as services are performed, proportionally as research and development costs are incurred, or as defined milestones are achieved. Technology development and support revenue is included in contract research services on the Consolidated Statements of Income.
In 2018, the Company entered into a commercial patent license agreement with Samsung Display Co., Ltd. (SDC). This agreement, which covers the manufacture and sale of specified OLED display materials, was effective as of January 1, 2018 and lasts through the end of 2022 with an additional two-year extension option. Under this agreement, the Company is being paid a license fee, payable in quarterly installments over the agreement term of five years. The agreement conveys to SDC the non-exclusive right to use certain of the Company's intellectual property assets for a limited period of time that is less than the estimated life of the assets.
At the same time the Company entered into the current commercial license agreement with SDC, the Company also entered into a new supplemental material purchase agreement with SDC. Under the supplemental material purchase agreement, SDC agrees to purchase from the Company a minimum amount of phosphorescent emitter materials for use in the manufacture of licensed products. This minimum commitment is subject to SDC’s requirements for phosphorescent emitter materials and the Company’s ability to meet these requirements over the term of the supplemental agreement.
In 2015, the Company entered into an OLED patent license agreement and an OLED commercial supply agreement with LG Display Co., Ltd. (LG Display) which were effective as of January 1, 2015 and superseded the existing 2007 commercial supply agreement between the parties. The terms of the agreements were set to expire by the end of 2022. The patent license agreement
In 2021, the Company entered into amendments of the OLED patent license agreement and the OLED commercial supply agreement with LG Display, which were effective as of January 1, 2021. The amended agreements included a term extension and are set to expire by the end of 2025.
In 2016, the Company entered into long-term, multi-year OLED patent license and material purchase agreements with Tianma Micro-electronics Co., Ltd. (Tianma). Under the license agreement, the Company has granted Tianma non-exclusive license rights under various patents owned or controlled by the Company to manufacture and sell OLED display products. The license agreement calls for license fees and running royalties on licensed products. Additionally, the Company supplies phosphorescent OLED materials to Tianma for use in its licensed products. On July 21, 2021, the Tianma patent license and material purchase agreements expired. The parties are currently working to complete long-term extensions to both agreements.
In 2017, the Company entered into long-term, multi-year agreements with BOE Technology Group Co., Ltd. (BOE). Under these agreements, the Company has granted BOE non-exclusive license rights under various patents owned or controlled by the Company to manufacture and sell OLED display products. The Company supplies phosphorescent OLED materials to BOE for use in its licensed products.
In 2018, the Company entered into long-term, multi-year OLED patent license and material purchase agreements with Visionox Technology, Inc. (Visionox). Under the license agreement, the Company granted certain of Visionox’s affiliates a non-exclusive license rights under various patents owned or controlled by the Company to manufacture and sell OLED display products. The license agreement calls for license fees and running royalties on licensed products. Additionally, the Company supplies phosphorescent OLED materials to Visionox for use in its licensed products. On April 22, 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 consists of labor and material costs associated with the production of materials processed at the Company's manufacturing partners and at the Company's internal manufacturing processing facility. The Company’s portion of cost of sales also includes depreciation of manufacturing equipment, as well as manufacturing overhead costs and inventory adjustments for excess and obsolete inventory.
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 costs primarily relate to technology acquired from BASF and Fujifilm. These acquisitions were completed in the years ended December 31, 2016 and 2012, respectively. Acquisition costs are being amortized over a period of 10 years for both the BASF and Fujifilm patents.
Other intangible assets primarily relate to the Adesis acquisition and are being amortized over a period of 10 to 15 years. See Note 7 for further discussion.
Translation of Foreign Currency Financial Statements and Foreign Currency Transactions
The Company’s reporting currency is the U.S. dollar. The functional currency for the UDC Ireland subsidiary is also the U.S. dollar and the functional currency for the OMM subsidiary and each of the Company's Asia-Pacific foreign subsidiaries is its local currency. The Company translates the amounts included in the Consolidated Statements of Income from OMM and its Asia-Pacific foreign subsidiaries into U.S. dollars at weighted-average exchange rates, which the Company believes are representative of the actual exchange rates on the dates of the transactions. The Company's foreign subsidiaries' assets and liabilities are translated into U.S. dollars from the local currency at the actual exchange rates as of the end of each reporting date, and the Company records the resulting foreign exchange translation adjustments in the Consolidated Balance Sheets as a component of accumulated other comprehensive loss. The overall effect of the translation of foreign currency and foreign currency transactions to date has been insignificant.
Income taxes 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.
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.
The Company’s portfolio of fixed income securities consists of term bank certificates of deposit, U.S. Government bonds, corporate bonds and convertible notes. The Company considers all highly liquid debt instruments purchased with an original maturity (maturity at the purchase date) of three months or less to be cash equivalents. The Company classifies its remaining debt security investments as available-for-sale. These debt securities are carried at fair market value, with unrealized gains and losses reported in shareholders’ equity. Gains or losses on securities sold are based on the specific identification method.
The Company’s portfolio of minority investments and convertible notes consist of investments in privately held early-stage companies primarily motivated to gain early access to new technology and are passive in nature in that the Company does not obtain representation on the board of directors of the companies in which it invests. Minority investments and convertible notes are included in investments on the Consolidated Balance Sheets. As of June 30, 2021, the Company had two minority investments with a total carrying value of $8.0 million accounted for as equity securities without readily determinable fair values. As of June 30, 2021, the Company had one convertible note investment with a fair value of $500,000 accounted for as an available-for-sale debt security with a level 3 fair value measurement.
|
4.
|
FAIR VALUE MEASUREMENTS:
|
The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of June 30, 2021 (in thousands):
|
|
|
|
|
|
|
Fair Value Measurements, Using
|
|
|
|
|
Total Carrying Value
as of June 30,
2021
|
|
|
Quoted Prices in
Active Markets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant Unobservable
Inputs
(Level 3)
|
|
|
Cash equivalents
|
|
$
|
375,575
|
|
|
$
|
375,575
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Short-term investments
|
|
|
190,540
|
|
|
|
190,540
|
|
|
|
—
|
|
|
|
—
|
|
|
Convertible notes
|
|
|
500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
500
|
|
The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of December 31, 2020 (in thousands):
|
|
|
|
|
|
|
Fair Value Measurements, Using
|
|
|
|
|
Total Carrying Value
as of December 31,
2020
|
|
|
Quoted Prices in
Active Markets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant Unobservable
Inputs
(Level 3)
|
|
|
Cash equivalents
|
|
$
|
466,233
|
|
|
$
|
466,233
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Short-term investments
|
|
|
99,996
|
|
|
|
99,996
|
|
|
|
—
|
|
|
|
—
|
|
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on management’s own assumptions used to measure assets and liabilities at fair value. A financial asset’s or liability’s classification is determined based on the lowest level input that is significant to the fair value measurement.
Changes in fair value of the debt investments are recorded as unrealized gains and losses in accumulated other comprehensive loss on the Consolidated Balance Sheets and any credit losses on debt investments are recorded as an allowance for credit losses with an offset recognized in other income, net on the Consolidated Statements of Income. There were no credit losses on debt investments as of June 30, 2021 or December 31, 2020.
Inventory consisted of the following (in thousands):
|
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
|
Raw materials
|
|
$
|
62,011
|
|
|
$
|
46,843
|
|
|
Work-in-process
|
|
|
8,052
|
|
|
|
9,904
|
|
|
Finished goods
|
|
|
34,590
|
|
|
|
34,844
|
|
|
Inventory
|
|
$
|
104,653
|
|
|
$
|
91,591
|
|
The Company recorded an increase in inventory reserve of $450,000 and none for the three months ended June 30, 2021 and 2020, respectively, and $1.1 million and $611,000 for the six months ended June 30, 2021 and 2020, respectively, due to excess inventory levels in certain products.
13
|
6.
|
PROPERTY AND EQUIPMENT:
|
|
|
Property and equipment, net consist of the following (in thousands):
|
|
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
|
Land
|
|
$
|
2,642
|
|
|
$
|
2,642
|
|
|
Building and improvements
|
|
|
71,359
|
|
|
|
53,568
|
|
|
Office and lab equipment
|
|
|
96,927
|
|
|
|
85,881
|
|
|
Furniture, fixtures and computer related assets
|
|
|
12,676
|
|
|
|
8,921
|
|
|
Construction-in-progress
|
|
|
11,304
|
|
|
|
23,594
|
|
|
|
|
|
194,908
|
|
|
|
174,606
|
|
|
Less: Accumulated depreciation
|
|
|
(81,721
|
)
|
|
|
(72,493
|
)
|
|
Property and equipment, net
|
|
$
|
113,187
|
|
|
$
|
102,113
|
|
Depreciation expense was $4.9 million and $3.8 million for the three months ended June 30, 2021 and 2020, respectively, and $9.2 million and $7.3 million for the six months ended June 30, 2021 and 2020, respectively.
|
7.
|
GOODWILL AND INTANGIBLE ASSETS:
|
The Company monitors the recoverability of goodwill annually or whenever events or changes in circumstances indicate the carrying value may not be recoverable. Purchased intangible assets subject to amortization consist of acquired technology and other intangible assets that include trade names, customer relationships and developed intellectual property (IP) processes.
Acquired Technology
Acquired technology consists of acquired license rights for patents and know-how obtained from PD-LD, Inc., Motorola, BASF SE (BASF) and Fujifilm. These intangible assets consist of the following (in thousands):
|
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
|
PD-LD, Inc.
|
|
$
|
1,481
|
|
|
$
|
1,481
|
|
|
Motorola
|
|
|
15,909
|
|
|
|
15,909
|
|
|
BASF
|
|
|
95,989
|
|
|
|
95,989
|
|
|
Fujifilm
|
|
|
109,462
|
|
|
|
109,462
|
|
|
Other
|
|
|
462
|
|
|
|
462
|
|
|
|
|
|
223,303
|
|
|
|
223,303
|
|
|
Less: Accumulated amortization
|
|
|
(163,343
|
)
|
|
|
(153,050
|
)
|
|
Acquired technology, net
|
|
$
|
59,960
|
|
|
$
|
70,253
|
|
Amortization expense related to acquired technology was $5.1 million for both three-month periods ended June 30, 2021 and 2020, and $10.3 million for both six-month periods ended June 30, 2021. Amortization expense is included in amortization of acquired technology and other intangible assets expense line item on the Consolidated Statements of Income and is expected to be $10.4 million for the six months ending December 31, 2021, $15.8 million in the year ending December 31, 2022, $9.7 million in the year ending December 31, 2023, $9.6 million in the years ending December 31, 2024 and 2025 and $4.9 million in total thereafter.
Fujifilm Patent Acquisition
On July 23, 2012, the Company entered into a Patent Sale Agreement with Fujifilm. Under the agreement, Fujifilm sold more than 1,200 OLED-related patents and patent applications in exchange for a cash payment of $105.0 million, plus costs incurred in connection with the purchase. The agreement contains customary representations and warranties and covenants, including respective covenants not to sue by both parties thereto. The agreement permitted the Company to assign all of its rights and obligations under the agreement to its affiliates, and the Company assigned, prior to the consummation of the transactions contemplated by the agreement, its rights and obligations to UDC Ireland, a wholly-owned subsidiary of the Company formed under the laws of the Republic of Ireland. The transactions contemplated by the agreement were consummated on July 26, 2012. The Company recorded the $105.0 million plus $4.5 million of purchase costs as acquired technology, which is being amortized over a period of 10 years.
14
BASF Patent Acquisition
On June 28, 2016, UDC Ireland entered into and consummated an IP Transfer Agreement with BASF. Under the IP Transfer Agreement, BASF sold to UDC Ireland all of its rights, title and interest to certain of its owned and co-owned intellectual property rights relating to the composition of, development, manufacture and use of OLED materials, including OLED lighting and display stack technology, as well as certain tangible assets. The intellectual property includes knowhow and more than 500 issued and pending patents in the area of phosphorescent materials and technologies. These assets were acquired in exchange for a cash payment of €86.8 million ($95.8 million). In addition, UDC Ireland also took on certain rights and obligations under three joint research and development agreements to which BASF was a party. The IP Transfer Agreement also contains customary representations, warranties and covenants of the parties. UDC Ireland recorded the payment of €86.8 million ($95.8 million) and acquisition costs incurred of $217,000 as acquired technology, which is being amortized over a period of 10 years.
Other Intangible Assets
As a result of the Adesis acquisition in June 2016, the Company recorded $16.8 million of other intangible assets, including $10.5 million assigned to customer relationships with a weighted average life of 11.5 years, $4.8 million of internally developed IP, processes and recipes with a weighted average life of 15 years, and $1.5 million assigned to trade name and trademarks with a weighted average life of 10 years.
At June 30, 2021, these other intangible assets consist of the following (in thousands):
|
|
|
June 30, 2021
|
|
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
|
Customer relationships
|
|
$
|
10,520
|
|
|
$
|
(4,512
|
)
|
|
$
|
6,008
|
|
|
Developed IP, processes and recipes
|
|
|
4,820
|
|
|
|
(1,587
|
)
|
|
|
3,233
|
|
|
Trade name/Trademarks
|
|
|
1,500
|
|
|
|
(743
|
)
|
|
|
757
|
|
|
Other
|
|
|
394
|
|
|
|
(6
|
)
|
|
|
388
|
|
|
Total identifiable other intangible assets
|
|
$
|
17,234
|
|
|
$
|
(6,848
|
)
|
|
$
|
10,386
|
|
Amortization expense related to other intangible assets was $351,000 and $345,000 for the three months ended June 30, 2021 and 2020, respectively, and $693,000 and $690,000 for the six months ended June 30, 2021 and 2020, respectively. Amortization expense is included in amortization of acquired technology and other intangible assets expense line item on the Consolidated Statements of Income and is expected to be $712,000 for the six months ending December 31, 2021, $1.4 million for each of the next four fiscal years (2022 – 2025) and $4.1 million in total thereafter.
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, 2021, the Company did not have any finance leases and had one operating lease that had not yet commenced, related to expansion of the Adesis research facilities in Wilmington, Delaware.
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,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Operating lease cost
|
|
$
|
757
|
|
|
$
|
535
|
|
|
$
|
1,372
|
|
|
$
|
1,072
|
|
|
Non-cash activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations
|
|
$
|
5,351
|
|
|
$
|
—
|
|
|
$
|
10,071
|
|
|
$
|
—
|
|
15
The following table presents the Company’s operating right-of-use assets and liabilities (in thousands):
|
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
|
Right-of-use assets
|
|
$
|
16,633
|
|
|
$
|
8,750
|
|
|
Short-term lease liabilities
|
|
|
2,004
|
|
|
|
1,871
|
|
|
Long-term lease liabilities
|
|
|
14,629
|
|
|
|
6,879
|
|
The following table presents weighted average assumptions used to compute the Company’s right-of-use assets and lease liabilities:
|
|
|
June 30, 2021
|
|
|
Weighted average remaining lease term (in years)
|
|
|
7.7
|
|
|
Weighted average discount rate
|
|
|
3.3
|
%
|
As of June 30, 2021, current operating leases had remaining terms between three months and ten years with options to extend the lease terms.
Undiscounted future minimum lease payments as of June 30, 2021, 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
|
|
|
2021 (1)
|
|
$
|
1,128
|
|
|
2022
|
|
|
2,578
|
|
|
2023
|
|
|
2,460
|
|
|
2024
|
|
|
2,306
|
|
|
2025
|
|
|
2,121
|
|
|
Thereafter
|
|
|
8,146
|
|
|
Total lease payments
|
|
|
18,739
|
|
|
Less: Imputed interest
|
|
|
(2,106
|
)
|
|
Present value of lease payments
|
|
$
|
16,633
|
|
|
(1)
|
Scheduled maturities of lease liabilities represent the period from July 1, 2021 to December 31, 2021.
|
|
9.
|
RESEARCH AND LICENSE AGREEMENTS WITH PRINCETON UNIVERSITY, UNIVERSITY OF SOUTHERN CALIFORNIA AND THE UNIVERSITY OF MICHIGAN:
|
The Company has long-standing relationships with Princeton University (Princeton) and the University of Southern California (USC), dating back to 1994, for the conduct of research relating to the Company’s OLED and other organic thin-film technologies and materials. This research had been performed at Princeton under the direction of Professor Stephen R. Forrest and at USC under the direction of Professor Mark E. Thompson.
Under an Amended License Agreement entered into in 1997 by the Company, Princeton and USC (as amended, the 1997 Amended License Agreement), Princeton and USC 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 Princeton and USC for the Company. Under the 1997 Amended License Agreement, the Company pays Princeton royalties of 3% of the net sales price for licensed products it sells or 3% of the revenues the Company receives from its sublicensees for their sale of licensed products. The Company recorded royalty expense in connection with this agreement of $149,000 and $1.6 million for the three months ended June 30, 2021 and 2020, respectively, and $261,000 and $4.9 million for the six months ended June 30, 2021 and 2020, respectively. The decline in the royalty expense was primarily due to the expiration of patents relating to the licensed products, as specified in the Amended License Agreement.
In 2006, Professor Forrest transferred from Princeton to the University of Michigan (Michigan) and the Company amended the 1997 Amended License Agreement to include Michigan as a party to that agreement. Also in connection with the transfer, the Company entered into a sponsored research agreement with USC under which the Company continues to fund organic electronics research being conducted by Professors Forrest and Thompson (the 2006 Research Agreement). Work by Professor Forrest is being funded through a subcontract between USC and Michigan. The 2006 Research Agreement extends through April 2023 with an option to further extend for an additional two years.
16
The Company makes payments under the 2006 Research Agreement to USC on a quarterly basis as actual expenses are incurred. As of June 30, 2021, the Company was obligated to pay USC up to $4.9 million for work to be performed during the remaining extended term. The Company recorded research and development expense in connection with work performed under the 2006 Research Agreement of $394,000 and $304,000 for the three months ended June 30, 2021 and 2020, respectively, and $679,000 and $581,000 for the six months ended June 30, 2021 and 2020, respectively.
|
10.
|
EQUITY AND CASH COMPENSATION UNDER THE PPG AGREEMENTS:
|
On September 22, 2011, the Company entered into an Amended and Restated OLED Materials Supply and Service Agreement with PPG Industries, Inc. (PPG) (the New OLED Materials Agreement), which replaced the original OLED Materials Agreement with PPG effective as of October 1, 2011. The term of the New OLED Materials Agreement ran through December 31, 2015 and shall be automatically renewed for additional one-year terms, unless terminated by the Company by providing prior notice of one year or terminated by PPG by providing prior notice of two years. The agreement was automatically renewed through December 31, 2021. The New OLED Materials Agreement contains provisions that are substantially similar to those of the original OLED Materials Agreement. Under the New OLED Materials Agreement, PPG continues to assist the Company in developing its proprietary OLED materials and supplying the Company with those materials for evaluation purposes and for resale to its customers.
Under the New OLED Materials Agreement, the Company compensates PPG on a cost-plus basis for the services provided during each calendar quarter. The Company is required to pay for some of these services in all cash. Up to 50% of the remaining services are payable, at the Company’s sole discretion, in cash or shares of the Company’s common stock, with the balance payable in cash. The actual number of shares of common stock issuable to PPG is determined based on the average closing price for the Company’s common stock during a specified number of days prior to the end of each calendar half-year period ending on March 31 and September 30. If, however, this average closing price is less than $20.00, the Company is required to compensate PPG in cash. No shares were issued for services to PPG for the three or six months ended June 30, 2021 or 2020.
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.
On February 23, 2021, the Company entered into an amendment to the New OLED Materials Agreement specifying operation and maintenance services that will be provided by PPG affiliate, PPG SCM Ireland Limited, to OMM, at the new manufacturing site in Shannon, Ireland, currently being leased by OMM for the production of OLED materials. Facility improvements and regulatory approvals are expected to be completed in the next 12 months and operations are scheduled to commence by mid-year 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 $738,000 and $836,000 for the three months ended June 30, 2021 and 2020, respectively, and $2.2 million and $1.3 million for the six months ended June 30, 2021 and 2020, respectively, in relation to the cash portion of the reimbursement of expenses and work performed by PPG, excluding amounts paid for commercial chemicals.
|
11.
|
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, 2021, the Company had issued 200,000 shares of preferred stock, all of which were outstanding.
17
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, 2021, the Company had issued 49,054,059 shares of common stock, of which 47,688,411 were outstanding. During the three and six months ended June 30, 2021 and 2020, the Company repurchased no shares of common stock.
Scientific Advisory Board Awards
During the six months ended June 30, 2021 and 2020, the Company granted a total of 1,400 and 1,926 shares, respectively, of fully vested common stock to non-employee members of the Scientific Advisory Board for services performed in 2020 and 2019, respectively. The fair value of shares issued to members of the Scientific Advisory Board was $300,000 for both six-month periods.
Dividends
During the three months ended June 30, 2021, the Company declared and paid cash dividends of $0.20 per share, or $9.5 million, and during the six months ended June 30, 2021, the Company declared and paid cash dividends of $0.40 per share, or $19.0 million, on the Company’s outstanding common stock.
On August 3, 2021, the Company’s Board of Directors declared a third quarter dividend of $0.20 per share to be paid on September 30, 2021 to all shareholders of record of the Company’s common stock as of the close of business on September 16, 2021. All future dividends will be subject to the approval of the Company’s Board of Directors.
|
12.
|
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, 2020, net of tax
|
|
$
|
91
|
|
|
$
|
(36,075
|
)
|
|
$
|
(35
|
)
|
|
$
|
(36,019
|
)
|
|
|
|
Other comprehensive loss
before reclassification
|
|
|
(32
|
)
|
|
|
—
|
|
|
|
(69
|
)
|
|
|
(101
|
)
|
|
|
|
Reclassification to net income (1)
|
|
|
—
|
|
|
|
2,348
|
|
|
|
—
|
|
|
|
2,348
|
|
|
Selling, general and administrative,
research and development and
cost of sales
|
|
Change during period
|
|
|
(32
|
)
|
|
|
2,348
|
|
|
|
(69
|
)
|
|
|
2,247
|
|
|
|
|
Balance June 30, 2021, net of tax
|
|
$
|
59
|
|
|
$
|
(33,727
|
)
|
|
$
|
(104
|
)
|
|
$
|
(33,772
|
)
|
|
|
18
|
|
|
Unrealized Gain (Loss) on
Available-for-Sale
Securities
|
|
|
Net Unrealized Gain (Loss) on
Retirement Plan (2)
|
|
|
Change in Cumulative
Foreign Currency
Translation Adjustment
|
|
|
Total
|
|
|
Affected Line Items in the
Consolidated Statements of
Income
|
|
Balance December 31, 2019, net of tax
|
|
$
|
191
|
|
|
$
|
(17,167
|
)
|
|
$
|
(21
|
)
|
|
$
|
(16,997
|
)
|
|
|
|
Other comprehensive gain
before reclassification
|
|
|
968
|
|
|
|
—
|
|
|
|
(30
|
)
|
|
|
938
|
|
|
|
|
Reclassification to net income (1)
|
|
|
—
|
|
|
|
1,278
|
|
|
|
—
|
|
|
|
1,278
|
|
|
Selling, general and administrative,
research and development and
cost of sales
|
|
Change during period
|
|
|
968
|
|
|
|
1,278
|
|
|
|
(30
|
)
|
|
|
2,216
|
|
|
|
|
Balance June 30, 2020, net of tax
|
|
$
|
1,159
|
|
|
$
|
(15,889
|
)
|
|
$
|
(51
|
)
|
|
$
|
(14,781
|
)
|
|
|
|
(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 $2.3 million and $1.3 million for the six months ended June 30, 2021 and 2020.
|
|
(2)
|
Refer to Note 14: Supplemental Executive Retirement Plan.
|
|
13.
|
STOCK-BASED COMPENSATION:
|
Equity Compensation Plan
The Equity Compensation Plan provides for the granting of incentive and nonqualified stock options, shares of common stock, stock appreciation rights and performance units to employees, directors and consultants of the Company. Stock options are exercisable over periods determined by the Company’s Human Capital Committee, but for no longer than 10 years from the grant date. Through June 30, 2021, the Company’s shareholders have approved increases in the number of shares reserved for issuance under the Equity Compensation Plan to 10,500,000, and have extended the term of the plan through 2024. As of June 30, 2021, there were 1,828,424 shares that remained available to be granted under the Equity Compensation Plan.
Restricted Stock Awards and Units
The Company has issued restricted stock awards and units to employees and non-employees with vesting terms of one to six 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, 2021, the Company granted 100,929 shares of restricted stock awards and restricted stock units to employees and non-employees, which had a total fair value of $22.9 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, 2021 and 2020, 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 $4.1 million and $3.8 million, respectively, research and development expense of $1.3 million and $1.1 million, respectively, and cost of sales of $711,000 and $492,000, respectively. For the six months ended June 30, 2021 and 2020, the Company recorded, as compensation charges related to all restricted stock awards and units granted to employees and non-employees, selling, general and administrative expense of $7.7 million and $7.1 million, respectively, research and development expense of $2.5 million and $2.0 million, respectively, and cost of sales of $1.3 million and $892,000, respectively.
In connection with the vesting of restricted stock awards and units during the three months ended June 30, 2021 and 2020, 14,660 and 54,332 shares, respectively, with aggregate fair values of $3.4 million and $7.4 million, respectively, were withheld in satisfaction of tax withholding obligations and are reflected as a financing activity within the Consolidated Statements of Cash Flows. For the six months ended June 30, 2021 and 2020, 60,827 and 78,806 shares, respectively, with aggregate fair values of $12.1 million and $11.3 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, 2021 and 2020, 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 $76,000 and $156,000, respectively. For the six months ended June 30, 2021 and 2020, 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
19
reporting period, research and development expense of $112,000 for both six-month periods.
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, 2021 and 2020, 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 $297,000 and $299,000, respectively. For the six months ended June 30, 2021 and 2020, 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 $591,000 and $596,000, respectively. In connection with the vesting of the restricted stock, the Company issued to non-employee members of the Board of Directors 2,706 and 3,228 shares, respectively, during the six months ended June 30, 2021 and 2020.
Performance Unit Awards
Each performance unit award is subject to both a performance-vesting requirement (either performance-based or market-based) and a service-vesting requirement. The performance-based vesting requirement is tied to the Company's cumulative revenue growth compared to the cumulative revenue growth of companies comprising the Nasdaq Electronics Components Index, as measured over a specific performance period. The market-based vesting requirement is tied to the Company's total shareholder return relative to the total shareholder return of companies comprising the Nasdaq Electronics Components Index, as measured over a specific performance period. The maximum number of performance units that may vest based on performance is two times the shares granted. Further, if the Company's total shareholder return is negative, the performance units may not vest at all.
During the six months ended June 30, 2021, the Company granted 69,586 performance units, of which 34,791 units are subject to performance-based vesting requirements and 34,795 units are subject to market-based vesting requirements, and which will vest over the terms described below. The grant date fair value of the performance unit awards granted was $15.8 million for the six months ended June 30, 2021, as determined by the Company’s common stock on date of grant for the units with performance-based vesting and a Monte-Carlo simulation for the units with market-based vesting.
For the three months ended June 30, 2021 and 2020, the Company recorded selling, general and administrative expense of $2.2 million and $1.1 million, respectively, research and development expense of $596,000 and $301,000, respectively, and cost of sales of $366,000 and $183,000, respectively, related to performance units. For the six months ended June 30, 2021 and 2020, the Company recorded selling, general and administrative expense of $2.0 million and $1.9 million, respectively, research and development expense of $539,000 and $503,000, respectively, and cost of sales of $332,000 and $296,000, respectively, related to performance units.
In connection with the vesting of performance units during the six months ended June 30, 2021 and 2020, 3,881 and 12,877 shares, respectively, with an aggregate fair value of $875,000 and $1.9 million, respectively, were withheld in satisfaction of tax withholding obligations and are reflected as a financing activity within the Consolidated Statements of Cash Flows.
Employee Stock Purchase Plan
On April 7, 2009, the Board of Directors of the Company adopted an Employee Stock Purchase Plan (ESPP). The ESPP was approved by the Company’s shareholders and became effective on June 25, 2009. The Company has reserved 1,000,000 shares of common stock for issuance under the ESPP. Unless terminated by the Board of Directors, the ESPP will expire when all reserved shares have been issued.
Eligible employees may elect to contribute to the ESPP through payroll deductions during consecutive three-month purchase periods, the first of which began on July 1, 2009. Each employee who elects to participate will be deemed to have been granted an option to purchase shares of the Company’s common stock on the first day of the purchase period. Unless the employee opts out during the purchase period, the option will automatically be exercised on the last day of the period, which is the purchase date, based on the employee’s accumulated contributions to the ESPP. The purchase price will equal 85% of the lesser of the closing price per share of common stock on the first day of the period or the last business day of the period.
Employees may allocate up to 10% of their base compensation to purchase shares of common stock under the ESPP; however, each employee may purchase no more than 12,500 shares on a given purchase date, and no employee may purchase more than $25,000 of common stock under the ESPP during a given calendar year.
20
During the six months ended June 30, 2021 and 2020, the Company issued 4,105 and 5,467 shares, respectively, of its common stock under the ESPP, resulting in proceeds of $787,000 and $590,000, respectively.
For the three months ended June 30, 2021 and 2020, the Company recorded charges of $35,000 and $37,000, respectively, to selling, general and administrative expense, $58,000 and $44,000, respectively, to research and development expense, and $36,000 and $37,000, 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, 2021 and 2020, the Company recorded charges of $58,000 and $59,000, respectively, to selling, general and administrative expense, $95,000 and $72,000, respectively, to research and development expense, and $60,000 and $56,000, respectively to cost of sales related to the ESPP equal to the amount of the discount and the value of the look-back feature.
|
14.
|
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN:
|
On March 18, 2010, the Human Capital Committee and the Board of Directors of the Company approved and adopted the Universal Display Corporation Supplemental Executive Retirement Plan (SERP). The SERP is currently unfunded and includes salary and bonus as part of the plan. The purpose of the SERP is to provide certain of the Company’s key employees with supplemental pension benefits following a cessation of their employment and to encourage their continued employment with the Company. As of June 30, 2021, there were seven participants in the SERP.
The Company records amounts relating to the SERP based on calculations that incorporate various actuarial and other assumptions, including discount rates, rate of compensation increases, retirement dates and life expectancies. The net periodic costs are recognized as employees render the services necessary to earn the SERP benefits.
The components of net periodic pension cost were as follows (in thousands):
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Service cost
|
|
$
|
429
|
|
|
$
|
273
|
|
|
$
|
857
|
|
|
$
|
546
|
|
|
Interest cost
|
|
|
292
|
|
|
|
321
|
|
|
|
583
|
|
|
|
642
|
|
|
Amortization of prior service cost
|
|
|
274
|
|
|
|
274
|
|
|
|
549
|
|
|
|
549
|
|
|
Amortization of loss
|
|
|
1,234
|
|
|
|
546
|
|
|
|
2,468
|
|
|
|
1,091
|
|
|
Total net periodic benefit cost
|
|
$
|
2,229
|
|
|
$
|
1,414
|
|
|
$
|
4,457
|
|
|
$
|
2,828
|
|
|
15.
|
COMMITMENTS AND CONTINGENCIES:
|
Commitments
Under the 2006 Research Agreement with USC, the Company is obligated to make certain payments to USC based on work performed by USC under that agreement, and by Michigan under its subcontractor agreement with USC. See Note 9 for further explanation.
Under the terms of the 1997 Amended License Agreement, the Company is required to make minimum royalty payments to Princeton. See Note 9 for further explanation.
The Company has agreements with six executive officers and 12 senior level employees which provide for certain cash and other benefits upon termination of employment of the officer or employee in connection with a change in control of the Company. If a covered person’s employment is terminated in connection with the change in control, the person is entitled to a lump-sum cash payment equal to two times (in the case of the executive officers) or either one or two times (in the case of the senior level employees) the sum of the average annual base salary and bonus of the person and immediate vesting of all stock options and other equity awards that may be outstanding at the date of the change in control, among other items.
In order to manage manufacturing lead times and help ensure adequate material supply, the Company entered into the New OLED Materials Agreement (see Note 10) 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, 2021 and December 31, 2020, the Company had purchase commitments for inventory of $24.6 million and $13.7 million, respectively.
21
Patent Related Challenges and Oppositions
Each major jurisdiction in the world that issues patents provides both third parties and applicants an opportunity to seek a further review of an issued patent. The process for requesting and considering such reviews is specific to the jurisdiction that issued the patent in question, and generally does not provide for claims of monetary damages or a review of specific claims of infringement. The conclusions made by the reviewing administrative bodies tend to be appealable and generally are limited in scope and applicability to the specific claims and jurisdiction in question.
The Company believes that opposition proceedings are frequently commenced in the ordinary course of business by third parties who may believe that one or more claims in a patent do not comply with the technical or legal requirements of the specific jurisdiction in which the patent was issued. The Company views these proceedings as reflective of its goal of obtaining the broadest legally permissible patent coverage permitted in each jurisdiction. Once a proceeding is initiated, as a general matter, the issued patent continues to be presumed valid until the jurisdiction’s applicable administrative body issues a final non-appealable decision. Depending on the jurisdiction, the outcome of these proceedings could include affirmation, denial or modification of some or all of the originally issued claims. The Company believes that as OLED technology becomes more established and its patent portfolio increases in size, so will the number of these proceedings.
Below is a summary of an active proceeding that has been commenced against an issued patent that is exclusively licensed to the Company. The Company does not believe that the confirmation, loss or modification of the Company’s rights in any individual claim or set of claims that are the subject of the following legal proceeding would have a material impact on the Company’s material sales or licensing business or on the Company’s Consolidated Financial Statements, including its Consolidated Statements of Income, as a whole. However, as noted within the description, the following proceeding involves an issued patent that relates to the Company’s fundamental phosphorescent OLED technologies and the Company intends to vigorously defend against claims that, in the Company’s opinion, seek to restrict or reduce the scope of the originally issued claim, which may require the expenditure of significant amounts of the Company’s resources. In certain circumstances, when permitted, the Company may also utilize a proceeding to request modification of the claims to better distinguish the patented invention from any newly identified prior art and/or improve the claim scope of the patent relative to commercially important categories of the invention.
Opposition to European Patent No. 1390962
On November 16, 2011, Osram AG and BASF SE each filed a Notice of Opposition to European Patent No. 1390962 (the EP '962 patent), which relates to the Company’s white phosphorescent OLED technology. The EP '962 patent, which was issued on February 16, 2011, is a European counterpart patent to U.S. patents 7,009,338 and 7,285,907. They are exclusively licensed to the Company by Princeton, and the Company is required to pay all legal costs and fees associated with this proceeding.
The European Patent Office (EPO) combined the oppositions into a single opposition proceeding, and a hearing on this matter was held in December 2015, wherein the EPO Opposition Division revoked the patent claims for alleged insufficiencies under European Patent Convention Article 83. The Company believes the EPO's decision is erroneous and appealed the decision. Subsequent to the filing of the appeal, BASF withdrew its opposition to the patent. On appeal, the Appeals Division withdrew the lower Opposition Division’s rejections with respect to a portion of the original subject matter and remanded the matter to the lower Opposition Division for further consideration. The patent, as originally granted, is deemed valid during the pendency of the opposition process.
At this time, based on its current knowledge, the Company believes that the patent being challenged should be declared valid and that a significant portion of the Company's claims should be upheld. However, the Company cannot make any assurances of this result.
In addition to the above proceeding and now concluded proceedings which have been referenced in prior filings, from time to time, the Company may have other proceedings that are pending which relate to patents the Company acquired as part of the Fujifilm or BASF OLED patent acquisitions or which relate to technologies that are not currently widely used in the marketplace.
|
16.
|
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
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
June 30, 2021
|
|
|
A
|
|
51%
|
|
|
28%
|
|
|
43%
|
|
|
36%
|
|
|
$
|
15,619
|
|
|
B
|
|
26%
|
|
|
34%
|
|
|
24%
|
|
|
28%
|
|
|
$
|
38,101
|
|
|
C
|
|
15%
|
|
|
13%
|
|
|
18%
|
|
|
19%
|
|
|
$
|
5,955
|
|
22
Revenues from outside of North America represented approximately 97% and 93% of consolidated revenue for the three months ended June 30, 2021 and 2020, respectively, and approximately 97% and 96% for the six months ended June 30, 2021 and 2020, respectively. Revenues by geographic area are as follows (in thousands):
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
Country
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
South Korea
|
|
$
|
86,324
|
|
|
$
|
31,062
|
|
|
$
|
154,299
|
|
|
$
|
100,487
|
|
|
China
|
|
|
36,308
|
|
|
|
20,508
|
|
|
|
96,812
|
|
|
|
58,342
|
|
|
Japan
|
|
|
2,001
|
|
|
|
2,197
|
|
|
|
3,316
|
|
|
|
3,984
|
|
|
Other non-U.S. locations
|
|
|
895
|
|
|
|
315
|
|
|
|
1,720
|
|
|
|
812
|
|
|
Total non-U.S. locations
|
|
|
125,528
|
|
|
|
54,082
|
|
|
|
256,147
|
|
|
|
163,625
|
|
|
United States
|
|
|
4,132
|
|
|
|
3,886
|
|
|
|
7,513
|
|
|
|
6,620
|
|
|
Total revenue
|
|
$
|
129,660
|
|
|
$
|
57,968
|
|
|
$
|
263,660
|
|
|
$
|
170,245
|
|
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, 2021
|
|
|
December 31, 2020
|
|
|
United States
|
|
$
|
104,692
|
|
|
$
|
93,230
|
|
|
Other
|
|
|
8,495
|
|
|
|
8,883
|
|
|
Total long-lived assets
|
|
$
|
113,187
|
|
|
$
|
102,113
|
|
Substantially all chemical materials were purchased from one supplier. See Note 10.
The Company is subject to income taxes in both the United States and foreign jurisdictions. The effective income tax rate was an expense of 19.2% and a benefit of 222.1% for the three months ended June 30, 2021 and 2020, respectively, and an expense of 19.1% and 17.3% for the six months ended June 30, 2021 and 2020, respectively. The Company recorded an income tax expense of $9.7 million and a benefit of $562,000 for the three months ended June 30, 2021 and 2020, respectively, and an expense of $21.7 million and $8.1 million for the six months ended June 30, 2021 and 2020, respectively.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent on the Company's ability to generate future taxable income to obtain benefit from the reversal of temporary differences, net operating loss carryforwards and tax credits. As part of its assessment, management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies. At this time there is no evidence to release the valuation allowance that has historically been recorded for the New Jersey research and development credit.
On December 27, 2018 the Korean Supreme Court, citing prior cases, held that the applicable law and interpretation of the Korea-U.S. Tax Treaty were clear that only royalties paid with respect to Korean registered patents are Korean source income and subject to Korean withholding tax. Based on this decision, the Company has decided that it will litigate the Korean withholding taxes paid or withheld on the 2018, 2019, 2020 and 2021 royalty payments and has engaged a leading Korean law firm which has advised that there is a more-likely-than-not chance of success. As a result, as of June 30, 2021 and December 31, 2020, the Company has recorded a long-term asset of $46.6 million and $40.1 million, respectively, representing the allocation of withholding to non-Korean patents and a long-term liability of $39.2 million and $32.7 million, respectively, for estimated amounts due to the U.S. Federal government based on the amendment of U.S. tax returns for lower withholding amounts.
With respect to the Korean withholding for the years 2011 through 2017, the Company has decided to continue the U.S.-Korean Mutual Agreement Procedure which was accepted by the Korean National Tax Service (KNTS) on September 15, 2017. The Company believes that it is more-likely-than-not that a favorable settlement will be reached resulting in a reduction of the Korean withholding taxes previously withheld since 2011. A long-term asset of $36.9 million for estimated refunds due from the Korean government, a long-term payable of $16.2 million for estimated amounts due to the U.S. Federal government based on amendment of prior year U.S. tax returns for the lower withholding amounts, and a reduction of deferred tax assets for foreign tax credits and research and development credits of $20.7 million has been recorded on the June 30, 2021 and December 31, 2020 Consolidated Balance Sheets for this matter.
23
On October 30, 2018, the KNTS concluded a tax audit with LG Display that included the licensing and royalty payments made to UDC Ireland during the years 2015 through 2017. The KNTS questioned whether UDC Ireland was the beneficial owner of these payments and assessed UDC Ireland a charge of $13.2 million for withholding and interest for the three-year period. UDC Ireland has engaged a leading Korean law firm which believes it is more-likely-than-not that UDC Ireland has beneficial ownership of the underlying intellectual property. Based on this authority, UDC Ireland has paid the assessment which is recorded as a long-term asset as of June 30, 2021 and December 31, 2020. In September 2020, the Korean District Court ruled entirely in the favor of UDC Ireland on the beneficial ownership issue. However, the KNTS has decided to appeal the ruling to the Korean High Court.
The Company’s federal income tax returns for the years 2017 to 2020 are open and subject to examination. The State of New Jersey is currently auditing the 2014 to 2017 tax returns of UDC, Inc. The 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.
Effective on January 1, 2018, 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 the three months ended June 30, 2021 and 2020, the Company recorded 97% and 94% of its revenue from OLED related sales, respectively, and 3% and 6% from the providing of services through Adesis, respectively. For the six months ended June 30, 2021 and 2020, the Company recorded 97% and 96% of its revenue from OLED related sales, respectively, and 3% and 4% from the providing of services through Adesis, respectively.
Contract Balances
The following table provides information about assets and liabilities associated with our contracts from customers (in thousands):
|
|
|
As of June 30, 2021
|
|
|
Accounts receivable
|
|
$
|
99,629
|
|
|
Short-term unbilled receivables
|
|
|
29,357
|
|
|
Long-term unbilled receivables
|
|
|
100
|
|
|
Short-term deferred revenue
|
|
|
122,978
|
|
|
Long-term deferred revenue
|
|
|
46,174
|
|
Short-term and long-term unbilled receivables are classified as other current assets and other assets, respectively, on the Consolidated Balance Sheets. The deferred revenue balance at June 30, 2021 will be recognized as materials are shipped to customers over the remaining contract periods. As of June 30, 2021, the Company had $27.2 million of backlog associated with committed purchase orders from its customers for phosphorescent emitter material. These orders are anticipated to be fulfilled within the next 90 days.
Significant changes in the unbilled receivables and deferred liabilities balances for the six months ended June 30, 2021 and 2020, are as follows (in thousands):
|
|
|
Six Months Ended June 30, 2021
|
|
|
|
|
Unbilled Receivables
|
|
|
Deferred Revenue
|
|
|
Balance at December 31, 2020
|
|
$
|
10,429
|
|
|
$
|
(162,301
|
)
|
|
Revenue recognized that was previously included in deferred revenue
|
|
|
—
|
|
|
|
81,458
|
|
|
Increases due to cash received
|
|
|
—
|
|
|
|
(92,816
|
)
|
|
Cumulative catch-up adjustment arising from changes in estimates of
transaction price
|
|
|
—
|
|
|
|
4,507
|
|
|
Unbilled receivables recognized
|
|
|
25,028
|
|
|
|
—
|
|
|
Transferred to receivables from unbilled receivables
|
|
|
(6,000
|
)
|
|
|
—
|
|
|
Net change
|
|
|
19,028
|
|
|
|
(6,851
|
)
|
|
Balance at June 30, 2021
|
|
$
|
29,457
|
|
|
$
|
(169,152
|
)
|
24
|
|
|
Six Months Ended June 30, 2020
|
|
|
|
|
Unbilled Receivables
|
|
|
Deferred Revenue
|
|
|
Balance at December 31, 2019
|
|
$
|
1,362
|
|
|
$
|
(144,862
|
)
|
|
Revenue recognized that was previously included in deferred revenue
|
|
|
—
|
|
|
|
48,249
|
|
|
Increases due to cash received
|
|
|
—
|
|
|
|
(75,683
|
)
|
|
Cumulative catch-up adjustment arising from changes in estimates of
transaction price
|
|
|
—
|
|
|
|
829
|
|
|
Unbilled receivables recognized
|
|
|
9,566
|
|
|
|
—
|
|
|
Net change
|
|
|
9,566
|
|
|
|
(26,605
|
)
|
|
Balance at June 30, 2020
|
|
$
|
10,928
|
|
|
$
|
(171,467
|
)
|
|
19.
|
NET INCOME PER COMMON SHARE:
|
The Company computes earnings per share in accordance with ASC Topic 260, Earnings per Share, which requires earnings per share (EPS) for each class of stock to be calculated using the two-class method. The two-class method is an allocation of income between the holders of common stock and the Company's participating security holders. Under the two-class method, income for the reporting period is allocated between common shareholders and other security holders based on their respective participation rights in undistributed income. Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and, therefore, are included in computing earnings per share pursuant to the two-class method.
Basic net income per common share is computed by dividing net income allocated to common shareholders by the weighted-average number of shares of common stock outstanding for the period excluding unvested restricted stock units and performance units. Net income allocated to the holders of the Company's unvested restricted stock awards is calculated based on the shareholders proportionate share of weighted average shares of common stock outstanding on an if-converted basis.
For purposes of determining diluted net income per common share, basic net income per share is further adjusted to include the effect of potential dilutive common shares outstanding, including stock options, restricted stock units and performance units, and the impact of shares to be issued under the Employee Stock Purchase Plan.
The following table is a reconciliation of net income and the shares used in calculating basic and diluted net income per common share for the three and six months ended June 30, 2021 and 2020 (in thousands, except share and per share data):
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
40,541
|
|
|
$
|
815
|
|
|
$
|
92,228
|
|
|
$
|
38,970
|
|
|
Adjustment for Basic EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings allocated to unvested shareholders
|
|
|
(247
|
)
|
|
|
(6
|
)
|
|
|
(602
|
)
|
|
|
(318
|
)
|
|
Adjusted net income
|
|
$
|
40,294
|
|
|
$
|
809
|
|
|
$
|
91,626
|
|
|
$
|
38,652
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – Basic
|
|
|
47,299,627
|
|
|
|
47,227,294
|
|
|
|
47,284,773
|
|
|
|
47,160,163
|
|
|
Effect of dilutive shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock equivalents arising from stock options and ESPP
|
|
|
204
|
|
|
|
483
|
|
|
|
369
|
|
|
|
924
|
|
|
Restricted stock awards and units and performance units
|
|
|
57,033
|
|
|
|
16,214
|
|
|
|
62,454
|
|
|
|
29,418
|
|
|
Weighted average common shares outstanding – Diluted
|
|
|
47,356,864
|
|
|
|
47,243,991
|
|
|
|
47,347,596
|
|
|
|
47,190,505
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.85
|
|
|
$
|
0.02
|
|
|
$
|
1.94
|
|
|
$
|
0.82
|
|
|
Diluted
|
|
$
|
0.85
|
|
|
$
|
0.02
|
|
|
$
|
1.94
|
|
|
$
|
0.82
|
|
For the three months ended June 30, 2021 and 2020, the combined effects of unvested restricted stock awards, restricted stock units, performance unit awards and stock options of none and 52,933, respectively, were excluded from the calculation of diluted EPS as their impact would have been antidilutive. For the six months ended June 30, 2021 and 2020, the combined effects of unvested stock awards, restricted stock units, performance unit awards and stock options of none and 30,785, respectively, were excluded from the calculation of diluted EPS as their impact would have been antidilutive.
25