# Universal Display Corp \\pa\\: Form 10-Q for the period ended Mar 31, 2013

- Company: [Universal Display Corp \\pa\\](/companies/oled.md) (CIK 1005284)
- Form: 10-Q
- Filed: 2013-05-09
- Accepted by EDGAR: May 9, 2013, 20:07 ET
- Period: 2013-03-31
- Accession: 0001005284-13-000036
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1005284/000100528413000036/panl-10q2013313.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1005284/000100528413000036/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2013-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2013-01-01 to 2013-03-31 | $15.0m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2013-01-01 to 2013-03-31 | $3.1m | us-gaap:CostOfGoodsSold |
| Research and development | 3 months, 2013-01-01 to 2013-03-31 | $8.9m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2013-01-01 to 2013-03-31 | $5.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2013-01-01 to 2013-03-31 | −$7.2m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2013-01-01 to 2013-03-31 | $8.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2013-01-01 to 2013-03-31 | −$2.2m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2013-01-01 to 2013-03-31 | −$4.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2013-01-01 to 2013-03-31 | −$0.10 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2013-01-01 to 2013-03-31 | −$0.10 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2013-01-01 to 2013-03-31 | 45,823,414 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2013-01-01 to 2013-03-31 | −$10.9m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2013-01-01 to 2013-03-31 | $549.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 3 months, 2013-01-01 to 2013-03-31 | $5.5m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2013-03-31 | $45.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2013-03-31 | $248.1m | us-gaap:AssetsCurrent |
| Total assets | at 2013-03-31 | $367.9m | us-gaap:Assets |
| Current liabilities | at 2013-03-31 | $15.2m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2013-03-31 | $28.2m | us-gaap:Liabilities |
| Shareholders' equity | at 2013-03-31 | $339.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 22,906 characters.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes above.

### CAUTIONARY STATEMENT

### CONCERNING FORWARD-LOOKING STATEMENTS

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

As you read and consider this discussion and analysis, you should not place undue reliance on any forward-looking statements. You should understand that these statements involve substantial risk and uncertainty and are not guarantees of future performance or results. They depend on many factors that are discussed further in the section entitled (Risk Factors) in our Annual Report on Form 10-K for the year ended December 31, 2012, as supplemented by disclosures, if any, in Item 1A of Part II below. Changes or developments in any of these areas could affect our financial results or results of operations and could cause actual results to differ materially from those contemplated in the forward-looking statements.

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

### OVERVIEW

We are a leader in the research, development and commercialization of organic light emitting diode, or OLED, technologies for use in flat panel display, solid-state lighting and other applications. Since 1994, we have been exclusively engaged, and expect to continue to be exclusively engaged, in funding and performing research and development activities relating to OLED technologies and materials, and in attempting to commercialize these technologies and materials. We derive our revenue from the following:

- intellectual property and technology licensing;
- sales of OLED materials for evaluation, development and commercial manufacturing; and
- technology development and support, including government contract work and support provided to third parties for commercialization of their OLED products.

While we have made significant progress over the past few years developing and commercializing our family of OLED technologies (including our PHOLED, TOLED, FOLED) and materials, we have incurred significant losses since our inception, resulting in an accumulated deficit of $209.0 million as of March 31, 2013.

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

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

### RESULTS OF OPERATIONS

### Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012

We had an operating loss of $7.2 million for the three months ended March 31, 2013, compared to an operating loss of $1.6 million for the three months ended March 31, 2012. The increase in operating loss was due to the following:

- an increase in operating expenses of $8.0 million, which includes a $2.0 million increase in the cost of sales, a $2.3 million increase in research and development costs and a $2.7 million increase in patent costs and amortization of acquired technology, described in detail below, offset by
- an increase in revenue of $2.4 million which includes increases in both material sales and royalty and license fees.

We had a net loss of $4.8 million (or $0.10 per basic and diluted share) for the three months ended March 31, 2013, compared to a net loss of $1.2 million (or $0.03 per basic and diluted share) for the three months ended March 31, 2012.

Our revenues were $15.0 million for the three months ended March 31, 2013, compared to $12.6 million for the three months ended March 31, 2012. The increase in our overall revenue was primarily due to increases in both material sales and royalty and license fees, which included a $3.0 million increase in commercial material sales and an increase in royalty and license fees of $877,000, offset by a $781,000 decrease in development chemical sales.

Material sales increased to $12.8 million for the three months ended March 31, 2013, compared to $10.5 million for the same period in 2012. Material sales relate to the sale of our OLED materials for our customers' evaluation, manufacture and development activities, and for incorporation into their commercial OLED products. The increase in material sales resulted primarily from increased commercial chemical sales due to the overall expanded adoption of our technology and materials in the marketplace by display manufacturers, particularly from SDC.

Material sales included sales of both phosphorescent emitter and host materials. Phosphorescent emitter sales were 71% of our total material sales for the three months ended March 31, 2013, compared to 81% of our total material sales for the three months ended March 31, 2012. Host material sales were 29% of our total material sales for the three months ended March 31, 2013, compared to 19% of our total material sales for the three months ended March 31, 2012.

Phosphorescent emitter sales increased by approximately $519,000 due to an increase in commercial phosphorescent emitter sales, offset by a decrease in development phosphorescent emitter sales. Commercial green emitter sales increased by approximately $3.1 million due to expanded use of our green emitter in customer products. Commercial red emitter sales decreased by approximately $1.5 million mainly due to a decrease in the average price per gram of red emitter based on the cumulative volume of purchases, as well as a reduction in the number of grams sold, as we believe our customers utilized our materials more effectively.

Host material sales increased by $1.7 million, mainly related to the use of commercial host materials with our green emitter materials. We believe we can participate in the host materials business due to our long experience in developing emitter materials, which are used together with host materials in the emissive layer of an OLED. However, our customers are not required to purchase our host materials in order to utilize our phosphorescent emitter materials, and the host material sales business is more competitive than the phosphorescent emitter material sales business. Thus, our long-term prospects for host material sales are uncertain.

We cannot accurately predict how long our phosphorescent emitter material sales or host material sales to particular customers will continue, as our customers frequently update and alter their product offerings in response to market demands. Continued sales of our OLED materials to these customers will depend on several factors, including pricing, availability, continued technical improvement and competitive product offerings.

Royalty and license fees increased to $1.3 million for the three months ended March 31, 2013, compared to $422,000 for the three months ended March 31, 2012. The increase was mainly related to an increase in material sales to certain customers for which a portion of the total consideration is allocated to license fees.

In August 2011, we entered into a patent license agreement with SDC which replaced and superseded the then existing patent license agreement with SMD. This patent license agreement with SDC runs through December 31, 2017. Our current patent license agreement with SDC covers the manufacture and sale of specified OLED display products. Under the agreement, SDC has agreed to pay us a fixed license fee, payable in semi-annual installments over the agreement term. These installments, that are due in the second and fourth quarter of each annual period, increase on an annual basis over the term of the license agreement. The installment amounts replaced the quarterly royalty reporting structure in the prior patent license agreement. The installment amounts were determined through negotiation based on a number of factors, including, without limitation, estimates of SDC’s OLED business growth as a percentage of published OLED market forecasts, the use of red and green phosphorescent materials in SDC’s OLED display products, and appropriate royalty rates relating to SDC’s practice under the licensed patents. Based upon the extended payment arrangement, such amounts are not considered fixed and determinable for revenue recognition purposes until such time the installments become due and payable. As a result, license fees under our new agreement with SDC will be recognized as they become due and payable, which is currently scheduled to be in the second and fourth quarter of each year; therefore our quarterly license fees, will fluctuate accordingly, depending on the timing of such payments.

At the same time we entered into the current patent license agreement with SDC, we also entered into a new supplemental material purchase agreement with SDC. Under the current supplemental material purchase agreement, SDC agrees to purchase from us a minimum dollar amount of phosphorescent emitter materials for use in the manufacture of licensed products. This minimum purchase commitment is subject to SDC’s requirements for phosphorescent emitter materials and our ability to meet these requirements over the term of the supplemental agreement. The minimum purchase amounts increase on an annual basis over the term of the supplemental agreement. These amounts were determined through negotiation based on a number of factors, including, without limitation, estimates of SDC’s OLED business growth as a percentage of published OLED market forecasts and SDC’s projected minimum usage of red and green phosphorescent emitter materials over the term of the agreement.

Technology development and support revenue decreased to $925,000 for the three months ended March 31, 2013, compared to $1.7 million in technology development revenue for the same period in 2012 due to fewer outstanding contracts in the current period when compared to the prior period.

Cost of material sales increased to $3.1 million for the three months ended March 31, 2013, compared to $1.1 million for the three months ended March 31, 2012, partially due to the aforementioned increase in material sales. Cost of material sales includes the cost of producing materials that have been classified as commercial and shipping costs for such materials, but excludes the cost of producing certain materials, which cost has already been included in research and development expense. Commercial materials are materials that have been validated by us for use in commercial OLED products.

During the three months ended March 31, 2012, costs related to our green emitter material sales excluded costs that had been previously included in research and development expenses, however, during the three months ended March 31, 2013, costs related to our green emitter material sales included all costs to produce the material. In addition, there was an increase of approximately 30% to the cost of one of the main materials used in the production of our emitters during the three months ended March 31, 2013 when compared to the same period in 2012.

Depending on the amounts, timing and stage of materials being classified as commercial, we expect cost of materials sales to fluctuate from quarter to quarter. As a result of these timing issues, and due to increased sales of commercial materials, cost of material sales increased for the three months ended March 31, 2013, compared to the same period in 2012. For the three months ended March 31, 2013 and 2012, costs associated with $10.5 million and $7.5 million, respectively, of material sales relating to commercial materials were included in cost of material sales.

We incurred research and development expenses of $8.9 million for the three months ended March 31, 2013, compared to $6.7 million for the three months ended March 31, 2012. The overall increase was primarily due to:

- increased costs of $1.0 million incurred under our agreement with PPG Industries, which represented the cost of scaling up of a new red emitter material developed to commercial status, as well as to supply us with those materials for evaluation purposes;
- increased costs of $767,000 due to increased employee costs related to bonus compensation, as well as salaries and salary related expenses for new employees;
- increased costs of $432,000 associated with sponsored research and development contracts; and
- increased costs of $219,000 related to outsourced research and development efforts; offset by
- decreased subcontract costs of $262,000.

Selling, general and administrative expenses were $5.2 million for the three months ended March 31, 2013, compared to $4.3 million for the three months ended March 31, 2012. The increase in these costs was primarily due to increased costs associated with bonus and stock-based compensation for certain executive officers as well as increased salaries and salary-related expenses associated with new employees.

Patent costs and amortization of acquired technology increased to $4.6 million for the three months ended March 31, 2013, compared to $1.9 million for the three months ended March 31, 2012. The increase was mainly due to increased amortization costs of $2.7 million due to the amortization expense associated with technology acquired in July 2012 (see Note 6 in Notes to Consolidated Financial Statements for further discussion). In addition, we have increased our number of patents including those of the newly acquired technology and the increase reflects the additional maintenance costs of these new patents.

Royalty and license expense increased to $312,000 for the three months ended March 31, 2013, compared to $250,000 for the three months ended March 31, 2012. The increase was mainly due to increased royalties incurred under our amended license agreement with Princeton, USC, and Michigan, resulting from higher material sales and increased royalty and license fees. See Note 5 in Notes to Consolidated Financial Statements for further discussion.

Interest income decreased to $210,000 for the three months ended March 31, 2013, compared to $357,000 for the three months ended March 31, 2012. The decrease was mainly attributable to interest earned on lower average cash and investment balances as a result of the purchase of acquired technology in July 2012 (see Note 6 in Notes to Consolidated Financial Statements for further discussion).

### Provision for Income Tax

The effective income tax rate was 31.6% and 0.0% for the three months ended March 31, 2013 and 2012, respectively. For the three months ended March 31, 2013, a tax benefit of approximately $2.2 million was recorded based on the estimated annual effective income tax rate applied to our loss before income taxes. The loss recognized during the three months ended March 31, 2013, is expected to be offset by income during the remainder of 2013 therefore realizing the benefit. Our estimated effective tax rate is primarily related to foreign taxes on South Korean royalty and license fee income, as well as U.S. Alternative Minimum tax.

Based on previous earnings history, a current evaluation of expected future taxable income and other evidence, we determined it is not more likely than not that certain deferred tax assets will be realized. Therefore we have established a full valuation allowance for significantly all of our net deferred tax assets.

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income to obtain benefit from the reversal of temporary differences, net operating loss carryforwards and tax credits. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Our level of future profitability could cause us to conclude that all or a portion of our deferred tax assets will be realizable. We continue to assess our current and projected taxable income in the jurisdictions in which we operate on a quarterly basis and provided that we sustain actual profitability and can demonstrate sustained forecasted profitability and/or upon the implementation of certain tax planning strategies, we could release all or a portion of our deferred tax valuation allowance to reflect the realizability of our deferred tax assets and would begin to provide for income taxes at a rate equal to our combined federal, state and foreign effective rates, at that time.

Currently, a full valuation allowance continues to be established for significantly all our net deferred tax assets because we incurred substantial consolidated operating losses from inception through 2010, as well as continuing losses in certain jurisdictions, and based on the aforementioned factors, we have assessed that the net deferred tax assets did not meet the criteria for realization as of March 31, 2013.

At this time, the amount and timing of any future release of the deferred tax valuation allowance and resulting future effective tax rates cannot be determined, but could be material to both our financial position and results of operations and may occur in the near term if expected operating trends continue or we implement certain tax planning strategies.

### Liquidity and Capital Resources

As of March 31, 2013, we had cash and cash equivalents of $45.5 million and short-term investments of $175.3 million, for a total of $220.8 million. This compares to cash and cash equivalents of $85.9 million and short-term investments of $158.0 million, for a total of $243.9 million, as of December 31, 2012.

Cash used in operating activities was $10.9 million for the three months ended March 31, 2013, compared to cash used in operating activities of $2.0 million for the same period in 2012. The increase in cash used in operating activities was primarily due to the following:

- the timing of payments of accounts payable and accrued expenses of $4.9 million;
- the impact of the timing of receipts of accounts receivable of $3.9 million;
- an increase in pretax net loss of approximately $2.1 million, which excludes the impact of non-cash items;
- a decrease of $1.0 million in deferred revenue received; offset by
- the impact of the timing of inventory purchases of $3.7 million.

Cash used in investing activities was $21.4 million for the three months ended March 31, 2013, compared to cash provided by of $37.3 million for the same period in 2012. The increase in cash used in investing activities was mainly due to the timing of maturities of investments, offset by the timing of purchases of investments and equipment.

Cash used in financing activities was $8.1 million for the three months ended March 31, 2013, compared to cash used of $2.9 million for the same period in 2012. The increase in cash used in financing activities is primarily due to repurchases of common stock of $5.5 million, as well as a decrease in the proceeds from the exercise of stock options of $475,000. This was offset by a decrease in the payment of taxes related to stock-based employee compensation of $677,000.

Working capital was $232.9 million as of March 31, 2013, compared to $245.2 million as of December 31, 2012 mainly due to the increase in cash used in operating and financing activities and the reclassification of an investment from short-term investments to investments.

We anticipate, based on our internal forecasts and assumptions relating to our operations (including, among others, assumptions regarding our working capital requirements, the progress of our research and development efforts, the availability of sources of funding for our research and development work, and the timing and costs associated with the preparation, filing, prosecution, maintenance, defense and enforcement of our patents and patent applications), that we have sufficient cash, cash equivalents and short-term investments to meet our obligations for at least the next 12 months.

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

### Critical Accounting Policies

We have various share-based compensation awards under the Equity Compensation Plan, which include stock options, restricted stock awards, restricted stock units and performance-based units. On March 7 and 8, 2013, the Board, upon the recommendation of the Compensation Committee (“Committee”) of the Board, granted restricted stock units and performance units under the Equity Compensation Plan to its executive officers. See Note 10 in the Notes to Consolidated Financial Statements in Item 1. Financial Statements for further detail.

Refer to our Annual Report on Form 10-K for the year ended December 31, 2012, for additional discussion of our critical accounting policies.

### Contractual Obligations

Refer to our Annual Report on Form 10-K for the year ended December 31, 2012 for a discussion of our contractual obligations.

### Off-Balance Sheet Arrangements

Refer to our Annual Report on Form 10-K for the year ended December 31, 2012 for a discussion of off-balance sheet arrangements. As of March 31, 2013, we had no off-balance sheet arrangements.

## Market risk

As filed, 992 characters.

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

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

## Controls and procedures

As filed, 1,525 characters.

### Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2013. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as of the end of the period covered by this report, are effective to provide reasonable assurance that the information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure. However, a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

### Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the three months ended March 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 182 characters.

There have been no material changes to the risk factors previously discussed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012.

Filed May 9, 2013.
Source: SEC EDGAR, the filing index for accession 0001005284-13-000036. Last ingested by Listed: Nov 5, 2026, 15:33 ET. No prices; not investment advice.