oled-10q_20190331.htm

 

M

 

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 March 31, 2019

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

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

Large accelerated filer

Accelerated filer

Emerging growth company

Non-accelerated filer

Smaller reporting company

 

 

 

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

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

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

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, $0.01 par value

 

OLED

 

The NASDAQ Stock Market LLC

As of April 29, 2019, the registrant had outstanding 47,209,386 shares of common stock.


 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

 

 

 

 

 

Item 1. Financial Statements (unaudited)

 

 

Consolidated Balance Sheets – March 31, 2019 and December 31, 2018

 

1

Consolidated Statements of Income – Three months ended March 31, 2019 and 2018

 

2

Consolidated Statements of Comprehensive Income – Three months ended March 31, 2019 and 2018

 

3

Consolidated Statement of Shareholders’ Equity – Three months ended March 31, 2019 and 2018

 

4

Consolidated Statements of Cash Flows – Three months ended March 31, 2019 and 2018

 

5

Notes to Consolidated Financial Statements

 

6

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

 

25

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

30

Item 4. Controls and Procedures

 

30

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

Item 1. Legal Proceedings

 

30

Item 1A. Risk Factors

 

31

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

 

31

Item 3. Defaults Upon Senior Securities

 

32

Item 4. Mine Safety Disclosures

 

32

Item 5. Other Information

 

32

Item 6. Exhibits

 

32

 

 

 


 

 

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)

 

 

 

March 31, 2019

 

 

December 31, 2018

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

225,048

 

 

$

211,022

 

Short-term investments

 

 

301,549

 

 

 

304,323

 

Accounts receivable

 

 

52,124

 

 

 

43,129

 

Inventory

 

 

68,041

 

 

 

70,000

 

Other current assets

 

 

5,410

 

 

 

6,366

 

Total current assets

 

 

652,172

 

 

 

634,840

 

PROPERTY AND EQUIPMENT, net of accumulated depreciation of $47,701

   and $44,943

 

 

80,615

 

 

 

69,739

 

ACQUIRED TECHNOLOGY, net of accumulated amortization of $117,034 and $111,890

 

 

106,208

 

 

 

110,951

 

OTHER INTANGIBLE ASSETS, net of accumulated amortization of $3,726 and $3,384

 

 

13,114

 

 

 

13,456

 

GOODWILL

 

 

15,535

 

 

 

15,535

 

DEFERRED INCOME TAXES

 

 

24,781

 

 

 

24,377

 

OTHER ASSETS

 

 

75,765

 

 

 

64,526

 

TOTAL ASSETS

 

$

968,190

 

 

$

933,424

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Accounts payable

 

$

7,024

 

 

$

10,532

 

Accrued expenses

 

 

27,470

 

 

 

36,057

 

Deferred revenue

 

 

86,296

 

 

 

80,782

 

Other current liabilities

 

 

10,784

 

 

 

5,811

 

Total current liabilities

 

 

131,574

 

 

 

133,182

 

DEFERRED REVENUE

 

 

41,596

 

 

 

41,785

 

RETIREMENT PLAN BENEFIT LIABILITY

 

 

44,747

 

 

 

44,055

 

OTHER LIABILITIES

 

 

34,072

 

 

 

23,896

 

Total liabilities

 

 

251,989

 

 

 

242,918

 

COMMITMENTS AND CONTINGENCIES (Note 15)

 

 

 

 

 

 

 

 

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, 48,760,311

   and 48,681,524 shares issued, and 47,394,663 and 47,319,887 shares outstanding, at

   March 31, 2019 and December 31, 2018, respectively

 

 

488

 

 

 

487

 

Additional paid-in capital

 

 

616,206

 

 

 

617,334

 

Retained earnings

 

 

156,309

 

 

 

129,552

 

Accumulated other comprehensive loss

 

 

(15,520

)

 

 

(16,234

)

Treasury stock, at cost (1,365,648 and 1,361,637 shares at March 31, 2019

   and December 31, 2018, respectively)

 

 

(41,284

)

 

 

(40,635

)

Total shareholders’ equity

 

 

716,201

 

 

 

690,506

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

968,190

 

 

$

933,424

 

 

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 March 31,

 

 

 

2019

 

 

2018

 

REVENUE

 

$

87,765

 

 

$

43,572

 

COST OF SALES

 

 

15,814

 

 

 

7,458

 

Gross margin

 

 

71,951

 

 

 

36,114

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

Research and development

 

 

15,829

 

 

 

12,357

 

Selling, general and administrative

 

 

11,969

 

 

 

10,791

 

Amortization of acquired technology and other intangible assets

 

 

5,486

 

 

 

5,491

 

Patent costs

 

 

1,770

 

 

 

1,725

 

Royalty and license expense

 

 

2,537

 

 

 

1,231

 

Total operating expenses

 

 

37,591

 

 

 

31,595

 

OPERATING INCOME

 

 

34,360

 

 

 

4,519

 

Interest income, net

 

 

2,831

 

 

 

1,271

 

Other income (expense), net

 

 

282

 

 

 

(47

)

Interest and other income, net

 

 

3,113

 

 

 

1,224

 

INCOME BEFORE INCOME TAXES

 

 

37,473

 

 

 

5,743

 

INCOME TAX (EXPENSE) BENEFIT

 

 

(5,999

)

 

 

216

 

NET INCOME

 

$

31,474

 

 

$

5,959

 

NET INCOME PER COMMON SHARE:

 

 

 

 

 

 

 

 

BASIC

 

$

0.66

 

 

$

0.13

 

DILUTED

 

$

0.66

 

 

$

0.13

 

WEIGHTED AVERAGE SHARES USED IN COMPUTING NET

   INCOME PER COMMON SHARE:

 

 

 

 

 

 

 

 

BASIC

 

 

46,892,914

 

 

 

46,783,158

 

DILUTED

 

 

46,931,999

 

 

 

46,848,798

 

CASH DIVIDENDS DECLARED PER COMMON SHARE

 

$

0.10

 

 

$

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 March 31,

 

 

 

2019

 

 

2018

 

NET INCOME

 

$

31,474

 

 

$

5,959

 

OTHER COMPREHENSIVE INCOME, NET OF TAX:

 

 

 

 

 

 

 

 

Unrealized gain on available-for-sale securities, net

   of tax of $13 and $15

 

 

47

 

 

 

54

 

Amortization of prior service cost and actuarial loss for

   retirement plan included in net periodic pension costs,

   net of tax of $175 and $117, respectively

 

 

634

 

 

 

422

 

Change in cumulative foreign currency translation

   adjustment

 

 

33

 

 

 

20

 

TOTAL OTHER COMPREHENSIVE INCOME

 

 

714

 

 

 

496

 

COMPREHENSIVE INCOME

 

$

32,188

 

 

$

6,455

 

 

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, 2018

 

 

200,000

 

 

$

2

 

 

 

48,681,524

 

 

$

487

 

 

$

617,334

 

 

$

129,552

 

 

$

(16,234

)

 

 

1,361,637

 

 

$

(40,635

)

 

$

690,506

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31,474

 

 

 

 

 

 

 

 

 

 

 

 

31,474

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

714

 

 

 

 

 

 

 

 

 

714

 

Cash dividend

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,717

)

 

 

 

 

 

 

 

 

 

 

 

(4,717

)

Issuance of common stock

to employees

 

 

 

 

 

 

 

 

107,213

 

 

 

1

 

 

 

3,536

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,537

 

Shares withheld for employee taxes

 

 

 

 

 

 

 

 

(38,755

)

 

 

 

 

 

(5,757

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,757

)

Common shares repurchased

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,011

 

 

 

(649

)

 

 

(649

)

Issuance of common stock to Board of Directors

and Scientific Advisory Board

 

 

 

 

 

 

 

 

7,758

 

 

 

 

 

 

816

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

816

 

Issuance of common stock to employees under an ESPP

 

 

 

 

 

 

 

 

2,571

 

 

 

 

 

 

277

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

277

 

BALANCE,

MARCH 31, 2019

 

 

200,000

 

 

$

2

 

 

 

48,760,311

 

 

$

488

 

 

$

616,206

 

 

$

156,309

 

 

$

(15,520

)

 

 

1,365,648

 

 

$

(41,284

)

 

$

716,201

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,959

 

 

 

 

 

 

 

 

 

 

 

 

5,959

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

496

 

 

 

 

 

 

 

 

 

496

 

Cash dividend

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,831

)

 

 

 

 

 

 

 

 

 

 

 

(2,831

)

Issuance of common stock

to employees

 

 

 

 

 

 

 

 

130,911

 

 

 

1

 

 

 

2,723

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,724

 

Shares withheld for employee taxes

 

 

 

 

 

 

 

 

(48,707

)

 

 

 

 

 

(5,832

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,832

)

Common shares repurchased

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,774

 

 

 

(477

)

 

 

(477

)

Issuance of common stock to Board of Directors

and Scientific Advisory Board

 

 

 

 

 

 

 

 

13,482

 

 

 

 

 

 

1,197

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,197

 

Issuance of common stock to employees under an ESPP

 

 

 

 

 

 

 

 

2,345

 

 

 

 

 

 

253

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

253

 

BALANCE,

MARCH 31, 2018

 

 

200,000

 

 

$

2

 

 

 

48,574,065

 

 

$

486

 

 

$

609,404

 

 

$

84,360

 

 

$

(10,968

)

 

 

1,361,637

 

 

$

(40,635

)

 

$

642,649

 

 

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)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income

 

$

31,474

 

 

$

5,959

 

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

 

 

 

 

 

 

 

 

Amortization of deferred revenue and recognition of unbilled receivables

 

 

(26,976

)

 

 

(12,589

)

Depreciation

 

 

2,758

 

 

 

2,172

 

Amortization of intangibles

 

 

5,486

 

 

 

5,491

 

Change in excess inventory reserve

 

 

224

 

 

 

 

Amortization of premium and discount on investments, net

 

 

(1,741

)

 

 

(966

)

Stock-based compensation to employees

 

 

3,610

 

 

 

2,776

 

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

 

 

516

 

 

 

897

 

Deferred income tax (benefit) expense

 

 

(592

)

 

 

72

 

Retirement plan expense

 

 

1,501

 

 

 

1,126

 

Decrease (increase) in assets:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(8,995

)

 

 

29,587

 

Inventory

 

 

1,735

 

 

 

(17,373

)

Other current assets

 

 

177

 

 

 

(4,025

)

Other assets

 

 

(2,966

)

 

 

(177

)

Increase (decrease) in liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

 

(12,117

)

 

 

(4,441

)

Other current liabilities

 

 

3,744

 

 

 

(25

)

Deferred revenue

 

 

33,080

 

 

 

30,331

 

Other liabilities

 

 

3,132

 

 

 

 

Net cash provided by operating activities

 

 

34,050

 

 

 

38,815

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(13,283

)

 

 

(8,733

)

Purchases of intangibles

 

 

(401

)

 

 

 

Purchases of investments

 

 

(165,471

)

 

 

(123,375

)

Proceeds from sale of investments

 

 

170,050

 

 

 

146,546

 

Net cash (used in) provided by investing activities

 

 

(9,105

)

 

 

14,438

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock

 

 

204

 

 

 

201

 

Repurchase of common stock

 

 

(649

)

 

 

(477

)

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

 

 

(5,757

)

 

 

(5,832

)

Cash dividends paid

 

 

(4,717

)

 

 

(2,831

)

Net cash used in financing activities

 

 

(10,919

)

 

 

(8,939

)

INCREASE IN CASH AND CASH EQUIVALENTS

 

 

14,026

 

 

 

44,314

 

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

 

211,022

 

 

 

132,840

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

225,048

 

 

$

177,154

 

The following non-cash activities occurred:

 

 

 

 

 

 

 

 

Unrealized gain on available-for-sale securities

 

$

60

 

 

$

69

 

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

   earned and accrued for in a previous period

 

 

300

 

 

 

300

 

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

   and equipment

 

 

(351

)

 

 

4,583

 

 

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 applications, 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 5,000 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 March 31, 2019 and results of operations for the three months ended March 31, 2019 and 2018, and cash flows for the three months ended March 31, 2019 and 2018. 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, 2018. 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. Adesis, Inc. (Adesis) and UDC Ventures LLC. UDC Ventures LLC was formed on March 1, 2019 as a corporate venture capital entity that will assist in funding companies that are developing innovative products and technologies that may be synergistic to those of the Company. All intercompany transactions and accounts have been eliminated.

6


 

Management’s Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The estimates made are principally in the areas of revenue recognition including estimates of material unit sales and royalties, the useful life of acquired intangibles, the use and recoverability of inventories, intangibles, investments, lease liabilities, right-of use assets 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.

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.

Leases

The Company is a lessee in operating leases primarily incurred to facilitate the expansion of manufacturing and research and development facilities. As discussed in Note 8, effective January 1, 2019, the Company accounts for leases in accordance with ASC Topic 842, Leases. At contract inception, the Company determines if an arrangement is or contains a lease, and if so recognizes a right of use asset and a 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. The current portion of operating lease liabilities is included in other current liabilities and the long-term portion is included in non-current other liabilities. As of March 31, 2019, the Company had no leases that qualified as financing arrangements.

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

Minority Equity Investments

The cost method of accounting is used for investments in companies that do not have a readily determinable fair value in which the Company holds an interest of less than 20% and over which it does not have the ability to exercise significant influence.

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 this 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.

As of March 31, 2019, the Company had no minority equity investments.

7


 

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 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 government contracts, development and technology evaluation agreements and commercialization assistance fees, which includes reimbursements by government entities for all or a portion of the research and development costs the Company incurs in relation to its government contracts. Revenues are recognized proportionally as research and development costs are incurred, or as defined milestones are achieved, and are included in contract research services in the accompanying consolidated statements of income.

In 2018, the Company entered into a commercial 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 patent license agreement with SDC, the Company also entered into a 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 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 generates revenue under these agreements that are predominantly tied to LG Display’s sales of OLED licensed products. The OLED commercial supply agreement provides for the sale of materials for use by LG Display, which may include phosphorescent emitters and host materials.

In 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

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under various patents owned or controlled by the Company to manufacture and sell OLED display products. The license agreement calls for license fees and running royalties on licensed products. Additionally, the Company supplies phosphorescent OLED materials to Tianma for use in its licensed products.

In 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.

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 $38,000 and $6,000 for the three months ended March 31, 2019 and 2018, 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.

Research and Development

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

Patent Costs

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

Amortization of Acquired Technology

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

Amortization of Other Intangible Assets

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

Translation of Foreign Currency Financial Statements and Foreign Currency Transactions

The Company's reporting currency is the U.S. dollar. The functional currency for the 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.

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Income Taxes

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

Share-Based Payment Awards

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

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

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

Recent Accounting Pronouncements

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 addresses 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 adopted the standard beginning January 1, 2019 using the “modified retrospective” approach, meaning the standard was applied only to the most current period presented in the financial statements and have applied all practical expedients related to leases existing at the date of initial application including the exception for short-term leases. Adoption of the new standard resulted in an increase in operating lease right-of-use assets and operating lease liabilities of $8.3 million based on the present value of the future minimum rental payments for existing operating leases. The Company has no leases that qualify as financing arrangements. See Note 8 for additional information.

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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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 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. Investments as of March 31, 2019 and December 31, 2018 consisted of the following (in thousands):

 

 

 

Amortized

 

 

Unrealized

 

 

Aggregate Fair

 

Investment Classification

 

Cost

 

 

Gains

 

 

(Losses)

 

 

Market Value

 

March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

1,100

 

 

$

1

 

 

$

(1

)

 

$

1,100

 

U.S. Government bonds

 

 

437,132

 

 

 

21

 

 

 

(9

)

 

 

437,144

 

 

 

$

438,232

 

 

$

22

 

 

$

(10

)

 

$

438,244

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

500

 

 

$

 

 

$

(1

)

 

$

499

 

Corporate bonds

 

 

114,678

 

 

 

1

 

 

 

(19

)

 

 

114,660

 

U.S. Government bonds

 

 

317,984

 

 

 

14

 

 

 

(43

)

 

 

317,955

 

 

 

$

433,162

 

 

$

15

 

 

$

(63

)

 

$

433,114

 

As of March 31, 2019 and December 31, 2018, there was $136.7 million and $128.8 million of U.S. Government bonds included in cash equivalents on the consolidated balance sheets.

 

 

4.

FAIR VALUE MEASUREMENTS:

The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of March 31, 2019 (in thousands):

 

 

 

 

 

 

 

Fair Value Measurements, Using

 

 

 

Total carrying value

as of March 31,

2019

 

 

Quoted prices in

active markets

(Level 1)

 

 

Significant other

observable inputs

(Level 2)

 

 

Significant unobservable

inputs

(Level 3)

 

Cash equivalents

 

$

145,230

 

 

$