oled-10q_20180630.htm

 

 

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, 2018

OR

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

For the transition period from ____________ to ___________

Commission File Number 1-12031

 

UNIVERSAL DISPLAY CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Pennsylvania

 

23-2372688

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

375 Phillips Boulevard, Ewing, New Jersey

 

08618

(Address of principal executive offices)

 

(Zip Code)

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      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. (Check one):

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

  (Do not check if a smaller reporting company)

Smaller reporting company

 

 

 

Emerging growth 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 6, 2018, the registrant had outstanding 47,094,066 shares of common stock.

 

 


 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

 

 

 

 

 

Item 1. Financial Statements (unaudited)

 

 

Consolidated Balance Sheets – June 30, 2018 and December 31, 2017

 

1

Consolidated Statements of Income – Three and six months ended June 30, 2018 and 2017

 

2

Consolidated Statements of Comprehensive Income – Three and six months ended June 30, 2018 and 2017

 

3

Consolidated Statement of Shareholders’ Equity – Six months ended June 30, 2018

 

4

Consolidated Statements of Cash Flows – Six months ended June 30, 2018 and 2017

 

5

Notes to Consolidated Financial Statements

 

6

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

 

26

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

32

Item 4. Controls and Procedures

 

33

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

Item 1. Legal Proceedings

 

33

Item 1A. Risk Factors

 

34

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

 

35

Item 3. Defaults Upon Senior Securities

 

35

Item 4. Mine Safety Disclosures

 

35

Item 5. Other Information

 

35

Item 6. Exhibits

 

36

 

 

 


 

 

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, 2018

 

 

December 31, 2017

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

103,777

 

 

$

132,840

 

Short-term investments

 

 

353,651

 

 

 

287,446

 

Accounts receivable

 

 

35,583

 

 

 

52,355

 

Inventory

 

 

56,043

 

 

 

36,265

 

Other current assets

 

 

20,311

 

 

 

10,276

 

Total current assets

 

 

569,365

 

 

 

519,182

 

PROPERTY AND EQUIPMENT, net of accumulated depreciation of $40,769

   and $36,368

 

 

62,348

 

 

 

56,450

 

ACQUIRED TECHNOLOGY, net of accumulated amortization of $101,611 and $91,312

 

 

121,230

 

 

 

131,529

 

OTHER INTANGIBLE ASSETS, net of accumulated amortization of $2,687 and $2,000

 

 

14,153

 

 

 

14,840

 

GOODWILL

 

 

15,535

 

 

 

15,535

 

INVESTMENTS

 

 

 

 

 

14,794

 

DEFERRED INCOME TAXES

 

 

10,534

 

 

 

27,022

 

OTHER ASSETS

 

 

40,084

 

 

 

604

 

TOTAL ASSETS

 

$

833,249

 

 

$

779,956

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Accounts payable

 

$

7,863

 

 

$

13,774

 

Accrued expenses

 

 

24,405

 

 

 

35,019

 

Deferred revenue

 

 

69,247

 

 

 

14,981

 

Other current liabilities

 

 

25

 

 

 

50

 

Total current liabilities

 

 

101,540

 

 

 

63,824

 

DEFERRED REVENUE

 

 

28,344

 

 

 

23,902

 

RETIREMENT PLAN BENEFIT LIABILITY

 

 

34,350

 

 

 

33,176

 

OTHER LIABILITIES

 

 

18,334

 

 

 

 

Total liabilities

 

 

182,568

 

 

 

120,902

 

COMMITMENTS AND CONTINGENCIES (Note 13)

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY:

 

 

 

 

 

 

 

 

Preferred Stock, par value $0.01 per share, 5,000,000 shares authorized, 200,000

   shares of Series A Nonconvertible Preferred Stock issued and outstanding

   (liquidation value of $7.50 per share or $1,500)

 

 

2

 

 

 

2

 

Common Stock, par value $0.01 per share, 200,000,000 shares authorized, 48,650,696

   and 48,476,034 shares issued, and 47,289,059 and 47,118,171 shares outstanding, at

   June 30, 2018 and December 31, 2017, respectively

 

 

487

 

 

 

485

 

Additional paid-in capital

 

 

608,932

 

 

 

611,063

 

Retained earnings

 

 

92,346

 

 

 

99,126

 

Accumulated other comprehensive loss

 

 

(10,451

)

 

 

(11,464

)

Treasury stock, at cost (1,361,637 and 1,357,863 shares at June 30, 2018

   and December 31, 2017, respectively)

 

 

(40,635

)

 

 

(40,158

)

Total shareholders’ equity

 

 

650,681

 

 

 

659,054

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

833,249

 

 

$

779,956

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

1


 

UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(in thousands, except share and per share data)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

REVENUE

 

$

56,149

 

 

$

102,513

 

 

$

99,721

 

 

$

158,079

 

COST OF SALES

 

 

11,635

 

 

 

11,310

 

 

 

19,093

 

 

 

24,297

 

Gross margin

 

 

44,514

 

 

 

91,203

 

 

 

80,628

 

 

 

133,782

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

12,949

 

 

 

10,685

 

 

 

25,306

 

 

 

22,503

 

Selling, general and administrative

 

 

11,562

 

 

 

9,839

 

 

 

22,353

 

 

 

19,916

 

Amortization of acquired technology and other intangible assets

 

 

5,495

 

 

 

5,495

 

 

 

10,986

 

 

 

10,987

 

Patent costs

 

 

2,029

 

 

 

1,674

 

 

 

3,754

 

 

 

3,221

 

Royalty and license expense

 

 

1,568

 

 

 

2,991

 

 

 

2,799

 

 

 

4,578

 

Total operating expenses

 

 

33,603

 

 

 

30,684

 

 

 

65,198

 

 

 

61,205

 

OPERATING INCOME

 

 

10,911

 

 

 

60,519

 

 

 

15,430

 

 

 

72,577

 

Interest income, net

 

 

1,766

 

 

 

796

 

 

 

3,037

 

 

 

1,467

 

Other (expense) income, net

 

 

(12

)

 

 

6

 

 

 

(59

)

 

 

(13

)

Interest and other (expense) income, net

 

 

1,754

 

 

 

802

 

 

 

2,978

 

 

 

1,454

 

INCOME BEFORE INCOME TAXES

 

 

12,665

 

 

 

61,321

 

 

 

18,408

 

 

 

74,031

 

INCOME TAX EXPENSE

 

 

(1,851

)

 

 

(14,134

)

 

 

(1,635

)

 

 

(16,479

)

NET INCOME

 

$

10,814

 

 

$

47,187

 

 

$

16,773

 

 

$

57,552

 

NET INCOME PER COMMON SHARE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BASIC

 

$

0.23

 

 

$

0.99

 

 

$

0.35

 

 

$

1.21

 

DILUTED

 

$

0.23

 

 

$

0.99

 

 

$

0.35

 

 

$

1.21

 

WEIGHTED AVERAGE SHARES USED IN COMPUTING NET

   INCOME PER COMMON SHARE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BASIC

 

 

46,868,999

 

 

 

46,742,746

 

 

 

46,826,314

 

 

 

46,702,376

 

DILUTED

 

 

46,901,098

 

 

 

46,810,238

 

 

 

46,873,109

 

 

 

46,781,120

 

CASH DIVIDENDS DECLARED PER COMMON SHARE

 

$

0.06

 

 

$

0.03

 

 

$

0.12

 

 

$

0.06

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

2


 

UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(in thousands)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

NET INCOME

 

$

10,814

 

 

$

47,187

 

 

$

16,773

 

 

$

57,552

 

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on available-for-sale securities, net

   of tax of $32, $58, $48 and $50, respectively

 

 

117

 

 

 

105

 

 

 

171

 

 

 

90

 

Employee benefit plan:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Actuarial loss, net of tax of none and

   none, respectively

 

 

 

 

 

(1,662

)

 

 

 

 

 

(1,662

)

Amortization of prior service cost and actuarial loss for

   retirement plan included in net periodic pension costs,

   net of tax of $117, $187, $234 and $350, respectively

 

 

422

 

 

 

343

 

 

 

844

 

 

 

642

 

Net change for employee benefit plan

 

 

422

 

 

 

(1,319

)

 

 

844

 

 

 

(1,020

)

Change in cumulative foreign currency translation

   adjustment

 

 

(22

)

 

 

(5

)

 

 

(2

)

 

 

25

 

TOTAL OTHER COMPREHENSIVE INCOME (LOSS)

 

 

517

 

 

 

(1,219

)

 

 

1,013

 

 

 

(905

)

COMPREHENSIVE INCOME

 

$

11,331

 

 

$

45,968

 

 

$

17,786

 

 

$

56,647

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

3


 

UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(UNAUDITED)

(in thousands, except for share data)

 

 

 

Series A

Nonconvertible

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Accumulated

Other

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Preferred Stock

 

 

Common Stock

 

 

Paid-in

 

 

Retained

 

 

Comprehensive

 

 

Treasury Stock

 

 

Shareholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

Shares

 

 

Amount

 

 

Equity

 

BALANCE,

DECEMBER 31, 2017

 

 

200,000

 

 

$

2

 

 

 

48,476,034

 

 

$

485

 

 

$

611,063

 

 

$

99,126

 

 

$

(11,464

)

 

 

1,357,863

 

 

$

(40,158

)

 

$

659,054

 

ASC Topic 606 Adoption

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(17,894

)

 

 

 

 

 

 

 

 

 

 

 

(17,894

)

ADJUSTED BALANCE,

JANUARY 1, 2018

 

 

200,000

 

 

 

2

 

 

 

48,476,034

 

 

 

485

 

 

 

611,063

 

 

 

81,232

 

 

 

(11,464

)

 

 

1,357,863

 

 

 

(40,158

)

 

 

641,160

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16,773

 

 

 

 

 

 

 

 

 

 

 

 

16,773

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,013

 

 

 

 

 

 

 

 

 

1,013

 

Cash dividend

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,659

)

 

 

 

 

 

 

 

 

 

 

 

(5,659

)

Issuance of common stock

to employees

 

 

 

 

 

 

 

 

250,979

 

 

 

3

 

 

 

6,032

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,035

 

Shares withheld for employee taxes

 

 

 

 

 

 

 

 

(101,581

)

 

 

(1

)

 

 

(11,030

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11,031

)

Common shares repurchased

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,774

 

 

 

(477

)

 

 

(477

)

Issuance of common stock to Board of Directors

and Scientific Advisory Board

 

 

 

 

 

 

 

 

19,732

 

 

 

 

 

 

2,303

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,303

 

Issuance of common stock to employees under an ESPP

 

 

 

 

 

 

 

 

5,532

 

 

 

 

 

 

564

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

564

 

BALANCE,

JUNE 30, 2018

 

 

200,000

 

 

$

2

 

 

 

48,650,696

 

 

$

487

 

 

$

608,932

 

 

$

92,346

 

 

$

(10,451

)

 

 

1,361,637

 

 

$

(40,635

)

 

$

650,681

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

4


 

UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

 

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income

 

$

16,773

 

 

$

57,552

 

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

 

 

 

 

 

 

 

 

Amortization of deferred revenue and recognition of unbilled receivables

 

 

(29,266

)

 

 

(4,873

)

Depreciation

 

 

4,422

 

 

 

2,398

 

Amortization of intangibles

 

 

10,986

 

 

 

10,987

 

Amortization of premium and discount on investments, net

 

 

(2,329

)

 

 

(1,260

)

Stock-based compensation to employees

 

 

6,163

 

 

 

5,404

 

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

 

 

2,003

 

 

 

1,328

 

Earnout liability recorded for Adesis acquisition

 

 

 

 

 

469

 

Deferred income tax expense

 

 

19,312

 

 

 

7,408

 

Retirement plan expense

 

 

2,252

 

 

 

2,088

 

Decrease (increase) in assets:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

16,772

 

 

 

(14,708

)

Inventory

 

 

(19,778

)

 

 

(7,123

)

Other current assets

 

 

(9,058

)

 

 

(799

)

Other assets

 

 

(37,909

)

 

 

(10

)

Increase (decrease) in liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

 

(13,123

)

 

 

(1,916

)

Other current liabilities

 

 

(25

)

 

 

(821

)

Deferred revenue

 

 

64,423

 

 

 

505

 

Other liabilities

 

 

18,334

 

 

 

 

Net cash provided by operating activities

 

 

49,952

 

 

 

56,629

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(13,420

)

 

 

(9,717

)

Purchases of investments

 

 

(260,711

)

 

 

(255,224

)

Proceeds from sale of investments

 

 

211,847

 

 

 

189,335

 

Net cash used in investing activities

 

 

(62,284

)

 

 

(75,606

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock

 

 

436

 

 

 

349

 

Repurchase of common stock

 

 

(477

)

 

 

 

Proceeds from the exercise of common stock options

 

 

 

 

 

30

 

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

 

 

(11,031

)

 

 

(8,501

)

Cash dividends paid

 

 

(5,659

)

 

 

(2,828

)

Net cash used in financing activities

 

 

(16,731

)

 

 

(10,950

)

DECREASE IN CASH AND CASH EQUIVALENTS

 

 

(29,063

)

 

 

(29,927

)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

 

132,840

 

 

 

139,365

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

103,777

 

 

$

109,438

 

The following non-cash activities occurred:

 

 

 

 

 

 

 

 

Unrealized gain on available-for-sale securities

 

$

219

 

 

$

140

 

Common stock issued to Board of Directors and Scientific Advisory Board that was

   earned and accrued for in a previous period

 

 

300

 

 

 

300

 

Common stock issued to employees that was earned and accrued for in a previous period

 

 

 

 

 

174

 

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

   and equipment

 

 

3,100

 

 

 

4,169

 

 

The accompanying notes are an integral part of these consolidated financial statements.

5


 

UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

 

 

1.

BUSINESS:

Universal Display Corporation (the Company) is a leader in the research, development and commercialization of organic light emitting diode (OLED) technologies and materials 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. The Company believes this is because OLEDs offer potential advantages over competing display technologies with respect to power efficiency, contrast ratio, viewing angle, video response time, form factor and manufacturing cost. The Company also believes that OLED lighting products have the potential to replace many existing light sources in the future because of their high power efficiency, excellent color rendering index, low operating temperature and novel form factor. The Company's technology leadership and intellectual property position should enable it to share in the revenues from OLED displays and lighting products as they enter mainstream consumer and other markets.

The Company's primary business strategy is to (1) further develop and license its proprietary OLED technologies to manufacturers of products for display applications, such as mobile phones, televisions, tablets, wearables, portable media devices, notebook computers, personal computers, and automotive interiors, and specialty and general lighting products; and (2) develop new OLED materials and sell existing and any new materials to those product manufacturers. The Company has established a significant portfolio of proprietary OLED technologies and materials, primarily through internal research and development efforts and acquisitions of patents and patent applications, as well as maintaining its relationships with world-class partners such as Princeton University (Princeton), the University of Southern California (USC), the University of Michigan (Michigan) and PPG Industries, Inc. (PPG Industries). The Company currently owns, exclusively licenses or has the sole right to sublicense more than 4,700 patents issued and pending worldwide.

The Company sells its proprietary OLED materials to customers for evaluation and use in commercial OLED products. The Company also enters into agreements with manufacturers of OLED display and lighting products under which it grants them licenses to practice under its patents and to use the Company's proprietary know-how. At the same time, the Company works with these and other companies who are evaluating the Company's OLED technologies and materials for possible use in commercial OLED display and lighting products.

 

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Interim Financial Information

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company’s financial position as of June 30, 2018 and results of operations for the three and six months ended June 30, 2018 and 2017, and cash flows for the six months ended June 30, 2018 and 2017. While management believes that the disclosures presented are adequate to make the information not misleading, these unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto in the Company’s latest year-end financial statements, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. The results of the Company’s operations for any interim period are not necessarily indicative of the results of operations for any other interim period or for the full year.

Principles of Consolidation

The consolidated financial statements include the accounts of Universal Display Corporation and its wholly owned subsidiaries, UDC, Inc., UDC Ireland Limited, Universal Display Corporation Hong Kong, Limited, Universal Display Corporation Korea, Y.H., Universal Display Corporation Japan GK, Universal Display Corporation China, Ltd. and Adesis, Inc. (Adesis). All intercompany transactions and accounts have been eliminated.

Management’s Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting

6


 

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, the use and recoverability of inventories, intangibles 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, 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.

Certain of the Company’s customers have assumed the responsibility for maintaining the Company's inventory at their location based on the customers’ demand forecast. Notwithstanding the fact that the Company builds and ships the inventory, the customer does not purchase the consigned inventory until the inventory is drawn or pulled by the customer to be used in the manufacture of the customer’s product. Though the consigned inventory may be at the customer’s physical location, it remains inventory owned by the Company until the inventory is drawn or pulled, which is the time at which the sale takes place.

Fair Value of Financial Instruments

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

Revenue Recognition and Deferred Revenue

Material sales relate to the Company’s sale of its OLED materials for incorporation into its customers’ commercial OLED products or for their OLED development and evaluation activities. Material sales are recognized at the time title passes, which is typically at the time of shipment or at the time of delivery, depending upon the contractual agreement between the parties.

The rights and benefits to the Company’s OLED technology are conveyed to the customer through technology license agreements and material supply agreements. These agreements are combined and 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 during the period at their estimated per unit fee. Total contract consideration includes fixed amounts designated in contracts with customers as license fees as well as estimates of material fees and royalties to be earned.

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 and related amounts to be charged. 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 through performing organic and organometallic synthetics research, development and commercialization 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 client 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 government contracts, development and technology evaluation agreements and commercialization assistance fees, which includes reimbursements by government entities for all or a portion of the research and development costs the Company incurs in relation to its government contracts. Revenues are recognized

7


 

proportionally as research and development costs are incurred, or as defined milestones are achieved, and are included in contract research services in the accompanying consolidated statements of income.

Currently, the Company's most significant commercial license agreement is 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 patent license agreement with SDC, the Company also entered into a new supplemental material purchase agreement with SDC. Under the current 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 new agreements have a term that is set to expire by the end of 2022. The patent license agreement provides LG Display a non-exclusive, royalty bearing portfolio license to make and sell OLED displays under the Company's patent portfolio. The patent license calls for license fees, prepaid royalties and running royalties on licensed products. The agreements include customary provisions relating to warranties, indemnities, confidentiality, assignability and business terms. The agreements provide for certain other minimum obligations relating to the volume of material sales anticipated over the life of the agreements as well as minimum royalty revenue to be generated under the patent license agreement. The Company expects to generate revenue under these agreements that are predominantly tied to LG Display’s sales of OLED licensed products. The OLED commercial supply agreement provides for the sale of materials for use by LG Display, which may include phosphorescent emitters and host materials.

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 expects to supply phosphorescent OLED materials to Tianma for use in its licensed products.

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 has also agreed to supply phosphorescent OLED materials to BOE.

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 has granted Visionox 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 expects to supply phosphorescent OLED materials to Visionox for use in its licensed products.

The Company records taxes billed to customers and remitted to various governmental entities on a gross basis in both revenues and cost of material sales in the consolidated statements of income. The amounts of these pass through taxes reflected in revenues and cost of material sales were $23,000 and $29,000 for the three and six months ended June 30, 2018, respectively, and $151,000 and $207,000 for the three and six months ended June 30, 2017, respectively.

All sales transactions are billed and due within 90 days and substantially all are transacted in U.S. dollars.

Cost of Sales

Cost of sales consists of labor and material costs associated with the production of materials processed at the Company's manufacturing partners and at the Company's internal manufacturing processing facility. The Company’s portion of cost of sales also includes depreciation of manufacturing equipment, as well as manufacturing overhead costs and inventory adjustments for excess and obsolete inventory.

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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 relate to technology acquired from BASF, Fujifilm and Motorola. These acquisitions were completed in the years ended December 31, 2016, 2012 and 2011, respectively. Acquisition costs are being amortized over a period of 10 years for the BASF and Fujifilm patents and 7.5 years for the Motorola patents.

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

Income Taxes

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

Share-Based Payment Awards

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

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

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

9


 

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

In May 2014, the Financial Accounting Standards Board (FASB) issued a new revenue recognition standard entitled Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers. The objective of the standard is to establish the principles that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows from a contract with a customer. The standard is effective for annual reporting periods beginning after December 15, 2017. The Company adopted the standard beginning January 1, 2018 using the “modified retrospective” approach, meaning the standard was applied only to the most current period presented in the financial statements, with a cumulative adjustment to retained earnings.

The new standard impacts how the Company recognizes revenue on its commercial license and material supply agreements with customers. In addition, the Company previously recognized royalty revenue one quarter in arrears based on sales information received from its customers typically received after disclosing that quarter’s results. Under ASC Topic 606, royalties to be earned over the contract term are estimated as part of total contract consideration and recognized as noted below. The estimates are updated on a quarterly basis.

The rights and benefits to the Company’s OLED technology are conveyed to the customer through technology license agreements and material supply agreements. These agreements are combined and 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 its estimated per unit fee.

Adoption of the new standard resulted in an increase in deferred revenue of $21.3 million offset by a reduction of retained earnings of $17.9 million, net of tax of $3.1 million, and unbilled receivables of $0.3 million as of January 1, 2018. The impact of the new standard to revenue for the three and six months ended June 30, 2018 was a decrease of $17.5 million and $42.1 million, respectively, from the amount that would have been recorded under the prior accounting standard. See Note 16 for further discussion.

In February 2016, the FASB issued ASU No. 2016-02, Leases, which addresses the classification and recognition of lease assets and liabilities formerly classified as operating leases under generally accepted accounting principles. The guidance will address certain aspects of recognition and measurement, and quantitative and qualitative aspects of presentation and disclosure. The guidance is effective for fiscal years beginning after December 31, 2018, including interim periods within those fiscal years. The Company is evaluating the effect that ASU 2016-02 may have on its consolidated financial statements and related disclosures.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The objective of the standard is to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The ASU provides additional clarification guidance on the classification of certain cash receipts and payments in the statement of cash flows. The new guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017, with early adoption permitted. Adoption of ASU 2016-15 did not have any impact on the Company’s consolidated financial statements and related disclosures.

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. ASU 2016-16 clarifies the accounting for the current and deferred income taxes for an intra-entity transfer of an asset other than inventory. ASU 2016-16 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. Adoption of ASU 2016-16, beginning January 1, 2018, did not have any impact on the Company’s consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test of Goodwill Impairment eliminating the requirement to calculate the implied fair value, essentially eliminating step two from the goodwill impairment test. The new standard requires goodwill impairment to be based upon the results of step one of the impairment test, which is defined as the excess of the carrying value of a reporting unit over its fair value. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standards update is effective prospectively for annual and interim goodwill impairment testing performed in fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is evaluating the effect that adoption of ASU 2017-04 may have on its consolidated financial statements and related disclosures.

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In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting, in accordance with Topic 718. The guidance is effective for annual periods beginning after December 15, 2017, with early adoption permitted, and requires a prospective application to awards modified on or after the adoption date. The Company has not historically made changes to the terms or conditions of shared-based payment awards and the adoption of ASU 2017-09, beginning January 1, 2018, did not have any impact on the consolidated financial statements and related disclosures.

 

3.

CASH, CASH EQUIVALENTS AND INVESTMENTS:

The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. The Company classifies its remaining investments as available-for-sale. These securities are carried at fair market value, with unrealized gains and losses reported in shareholders’ equity. Gains or losses on securities sold are based on the specific identification method. Investments as of June 30, 2018 and December 31, 2017 consisted of the following (in thousands):

 

 

 

Amortized

 

 

Unrealized

 

 

Aggregate Fair

 

Investment Classification

 

Cost

 

 

Gains

 

 

(Losses)

 

 

Market Value

 

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

1,250

 

 

$

 

 

$

(1

)

 

$

1,249

 

Corporate bonds

 

 

204,396

 

 

 

2

 

 

 

(63

)

 

 

204,335

 

U.S. Government securities

 

 

173,093

 

 

 

 

 

 

(110

)

 

 

172,983

 

 

 

$

378,739

 

 

$

2

 

 

$

(174

)

 

$

378,567

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

1,296

 

 

$

1

 

 

$

(1

)

 

$

1,296

 

Corporate bonds

 

 

104,626

 

 

 

 

 

 

(252

)

 

 

104,374

 

U.S. Government securities

 

 

214,641

 

 

 

 

 

 

(139

)

 

 

214,502

 

 

 

$

320,563

 

 

$

1

 

 

$

(392

)

 

$

320,172

 

As of June 30, 2018 and December 31, 2017, there was $24.9 million of government securities and $17.9 million of corporate bonds included in cash equivalents in the consolidated balance sheet, respectively.

 

 

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, 2018 (in thousands):

 

 

 

 

 

 

 

Fair Value Measurements, Using

 

 

 

Total carrying value

as of June 30,

2018

 

 

Quoted prices in

active markets

(Level 1)

 

 

Significant other

observable inputs

(Level 2)

 

 

Significant unobservable

inputs

(Level 3)

 

Cash equivalents

 

$

39,051

 

 

$

39,051

 

 

$

 

 

$

 

Short-term investments

 

 

353,651

 

 

 

353,651

 

 

 

 

 

 

 

Long-term investments

 

 

 

 

 

 

 

 

 

 

 

 

The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of December 31, 2017 (in thousands):

 

 

 

 

 

 

 

Fair Value Measurements, Using

 

 

 

Total carrying value

as of December 31,

2017

 

 

Quoted prices in

active markets

(Level 1)

 

 

Significant other

observable inputs

(Level 2)

 

 

Significant unobservable

inputs

(Level 3)

 

Cash equivalents

 

$

27,532

 

 

$

27,532

 

 

$

 

 

$

 

Short-term investments

 

 

287,446

 

 

 

287,446

 

 

 

 

 

 

 

Long-term investments

 

 

14,794

 

 

 

14,794

 

 

 

 

 

 

 

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.

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Changes in fair value of the investments are recorded as unrealized gains and losses in other comprehensive income. If a decline in fair value of an investment is deemed to be other than temporary, the cost of the Company’s investment will be written down by the amount of the other-than-temporary impairment with a resulting charge to net income. There were no other-than-temporary impairments of investments as of June 30, 2018 or December 31, 2017.

 

 

5.

INVENTORY:

Inventory consisted of the following (in thousands):

 

 

 

June 30, 2018

 

 

December 31, 2017

 

Raw materials

 

$

20,208

 

 

$

17,464

 

Work-in-process

 

 

5,203

 

 

 

2,977

 

Finished goods

 

 

30,632

 

 

 

15,824

 

Inventory

 

$

56,043