# Universal Display Corp \\pa\\: Form 10-Q for the period ended Jun 30, 2014

- Company: [Universal Display Corp \\pa\\](/companies/oled.md) (CIK 1005284)
- Form: 10-Q
- Filed: 2014-08-07
- Accepted by EDGAR: Aug 7, 2014, 16:02 ET
- Period: 2014-06-30
- Accession: 0001005284-14-000067
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1005284/000100528414000067/oled201410-q2.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1005284/000100528414000067/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2014-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2014-04-01 to 2014-06-30 | $64.1m | us-gaap:Revenues |
| Revenue | 6 months, 2014-01-01 to 2014-06-30 | $102.0m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2014-04-01 to 2014-06-30 | $12.0m | us-gaap:CostOfGoodsSold |
| Cost of revenue | 6 months, 2014-01-01 to 2014-06-30 | $21.8m | us-gaap:CostOfGoodsSold |
| Research and development | 3 months, 2014-04-01 to 2014-06-30 | $10.5m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2014-01-01 to 2014-06-30 | $20.7m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2014-04-01 to 2014-06-30 | $6.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2014-01-01 to 2014-06-30 | $13.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2014-04-01 to 2014-06-30 | $28.8m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2014-01-01 to 2014-06-30 | $35.5m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2014-04-01 to 2014-06-30 | $21.0k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2014-01-01 to 2014-06-30 | $37.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2014-04-01 to 2014-06-30 | $8.6m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2014-01-01 to 2014-06-30 | $11.4m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2014-04-01 to 2014-06-30 | $20.4m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2014-01-01 to 2014-06-30 | $24.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2014-04-01 to 2014-06-30 | $0.44 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2014-01-01 to 2014-06-30 | $0.52 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2014-04-01 to 2014-06-30 | $0.44 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2014-01-01 to 2014-06-30 | $0.53 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2014-04-01 to 2014-06-30 | 46,614,726 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2014-01-01 to 2014-06-30 | 46,632,982 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2014-01-01 to 2014-06-30 | $25.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2014-01-01 to 2014-06-30 | $3.0m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 6 months, 2014-01-01 to 2014-06-30 | $7.0m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2014-06-30 | $75.6m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2014-06-30 | $363.4m | us-gaap:AssetsCurrent |
| Total assets | at 2014-06-30 | $487.4m | us-gaap:Assets |
| Current liabilities | at 2014-06-30 | $25.7m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2014-06-30 | $39.0m | us-gaap:Liabilities |
| Shareholders' equity | at 2014-06-30 | $448.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 34,357 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, 2013, 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 and materials for use in displays for smartphones, tablets and televisions, as well as solid-state lighting applications. Since 1994, we have been exclusively engaged, and expect to continue to be primarily engaged, in funding and performing research and development activities relating to OLED technologies and materials, and commercializing these technologies and materials. We derive our revenue from the following:

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

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

We receive license and royalty payments under certain commercial, development and technology evaluation agreements, some of which are non-refundable upfront payments. These payments may include royalty and license fees made pursuant to license agreements and also license fees included as part of certain commercial supply agreements. For arrangements with extended payment terms where the fee is not fixed and determinable, we recognize revenue when the payment is due and payable. Royalty revenue and license fees included as part of commercial supply agreements are recognized when earned and the amount is fixed and determinable.

Currently, our most significant commercial license agreement, which runs through the end of 2017, is with SDC and covers the manufacture and sale of specified OLED display products. Under this agreement, we are being paid a license fee, payable in semi-annual installments over the agreement term of 6.4 years. The installments, which are due in the second and fourth quarter of each year, increase on an annual basis over the term of the agreement. The agreement conveys to SDC the non-exclusive right to use certain of our intellectual property assets for a limited period of time that is less than the estimated life of the assets. Ratable recognition of revenue is impacted by the agreement's extended increasing payment terms in light of our limited history with similar agreements. As a result, revenue is recognized at the lesser of the proportional performance approach (ratable) and the amount of due and payable fees from SDC. Given the increasing contractual payment schedule, license fees under the agreement are recognized as revenue when they become due and payable, which is currently scheduled to be in the second and fourth quarter of each year.

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 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 we incur in relation to our government contracts. Revenues are recognized proportionally as research and development costs are incurred, or as defined milestones are achieved.

While we have made significant progress over the past few years developing and commercializing our family of OLED technologies (including our PHOLED, TOLED, FOLED technologies) and materials, and have generated net income over the past three years, we incurred significant losses prior to this period resulting in an accumulated deficit of $105.7 million as of June 30, 2014.

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 June 30, 2014 Compared to Three Months Ended June 30, 2013

We had operating income of $28.8 million for the three months ended June 30, 2014, compared to operating income of $21.7 million for the three months ended June 30, 2013. The increase in operating income was primarily due to the following:

- an increase in revenue of $14.8 million, which includes increases in both material sales and royalty and license fees; offset by
- an increase in operating expenses of $7.7 million, which includes a $3.7 million increase in the cost of material sales, and a $3.2 million increase in research and development expenses, all of which are described in detail below.

We had net income of $20.4 million (or $0.44 per basic and diluted share) for the three months ended June 30, 2014, compared to net income of $15.4 million (or $0.34 per basic and $0.33 per diluted share) for the three months ended June 30, 2013. The increase in net income was primarily due to:

- the increase in operating income of $7.1 million; offset by
- an increase in income tax expense of $2.1 million.

### Revenue

The following table details our revenues for the three months ended June 30, 2014 and 2013 (in thousands):

| REVENUE: | Three Months Ended June 30, 2014 | 2013 | Increase (Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: |
| Material sales | $35,926 | $27,137 | $8,789 | 32% |
| Royalty and license fees | 28,064 | 21,201 | 6,863 | 32% |
| Technology development and support revenue | 137 | 1,021 | (884) | (87)% |
| Total revenue | $64,127 | $49,359 | $14,768 | 30% |

Total revenue for the three months ended June 30, 2014 increased by $14.8 million compared to the three months ended June 30, 2013. The increase in revenue was primarily the result of increased material sales and royalty and license fees.

### Material sales

The following table details our revenues derived from material sales for the three months ended June 30, 2014 and 2013 (in thousands):

| Material Sales: | Three Months Ended June 30, 2014 | 2013 | Increase $% |  |
| --- | ---: | ---: | ---: | ---: |
| Commercial material sales | $32,579 | $25,661 | $6,918 | 27% |
| Developmental material sales | 3,347 | 1,476 | 1,871 | 127% |
| Total material sales | $35,926 | $27,137 | $8,789 | 32% |

Commercial material sales for the three months ended June 30, 2014 increased by $6.9 million compared to the three months ended June 30, 2013, primarily reflecting increased commercial chemical sales resulting from the adoption of our technology and materials in the marketplace by display manufacturers. Commercial materials are materials that have been validated by us for use in commercial OLED products.

Developmental material sales for the three months ended June 30, 2014 increased by $1.9 million compared to the three months ended June 30, 2013, primarily reflecting increased developmental material sales of our OLED materials for our customers' evaluation, manufacture and development activities. The increase was offset by a change in sales mix from developmental to commercial. Developmental material sales are materials that have not yet been validated by us for use in commercial OLED products.

Material sales included sales of both phosphorescent emitter and host materials which were comprised of the following for the three months ended June 30, 2014 and 2013 (in thousands):

| Material Sales: | Three Months Ended June 30, 2014 | 2013 | Increase $% |  |
| --- | ---: | ---: | ---: | ---: |
| Phosphorescent emitter sales | $22,026 | $17,832 | $4,194 | 24% |
| Host material sales | 13,900 | 9,305 | 4,595 | 49% |
| Total material sales | $35,926 | $27,137 | $8,789 | 32% |

Phosphorescent emitter sales for the three months ended June 30, 2014 increased by $4.2 million compared to the three months ended June 30, 2013. The increase in our phosphorescent emitter sales was primarily due to an increase in commercial and developmental green phosphorescent emitter sales.

Host material sales for the three months ended June 30, 2014 increased by $4.6 million compared to the three months ended June 30, 2013. The increase in our host material sales was primarily due to the collection of pass through tax settlements of $3.0 million with a Japanese customer related to certain host sales in Japan as well as an increase in the number of grams sold. These increases were offset by a decrease in the average price per gram sold. 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.

### Royalty and license fees

Royalty and license fees were as follows for the three months ended June 30, 2014 and 2013 (in thousands):

|  | Three Months Ended June 30, 2014 | 2013 | Increase $% |  |
| --- | ---: | ---: | ---: | ---: |
| Royalty and license fees | $28,064 | $21,201 | $6,863 | 32% |

Royalty and license fees for the three months ended June 30, 2014 increased by $6.9 million compared to the three months ended June 30, 2013. The increase was mainly related to the receipt and therefore recognition of $25.0 million of royalty and license fee payments under our patent and license agreement with SDC, compared to $20.0 million in the prior period. The increase was also related to an increase in license fees attributable to material sales to certain customers, which increased during the three months ended June 30, 2014, as compared to the three months ended June 30, 2013.

### Technology development and support revenue

Technology development and support revenue were as follows for the three months ended June 30, 2014 and 2013 (in thousands):

|  | Three Months Ended June 30, 2014 | 2013 | (Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: |
| Technology development and support revenue | $137 | $1,021 | $(884) | (87)% |

Technology development and support revenue is revenue earned from U.S. government contracts and development and technology evaluation agreements and commercialization assistance fees.

Technology development and support revenue for the three months ended June 30, 2014 decreased by $0.9 million compared to the three months ended June 30, 2013. The decrease was primarily related to the smaller number of government contracts and due to the timing of revenue recognition for certain customers.

### Cost of material sales

Cost of commercial material sales were as follows for the three months ended June 30, 2014 and 2013 (in thousands):

|  | Three Months Ended June 30, 2014 | 2013 |
| --- | ---: | ---: |
| Commercial material sales | $32,579 | $25,661 |
| Cost of commercial material sales | 11,951 | 8,282 |
| % of commercial material sales | 37% | 32% |

Cost of commercial material sales for the three months ended June 30, 2014 increased by $3.7 million compared to the three months ended June 30, 2013. The increase in our cost of commercial material sales was primarily due to an increase in pass through tax settlements of $3,000,000.0 million that was owed to the Japanese tax authority related to certain host sales in Japan as well as an increase in commercial material sales. Without this pass through tax, cost of commercial material sales as a percent of commercial material sales would have been 30% and 32% for the three months ended June 30, 2014 and 2013, respectively. 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.

Cost of commercial 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 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.

### Research and development

We incurred research and development expenses of $10.5 million for the three months ended June 30, 2014, compared to $7.3 million for the three months ended June 30, 2013. The increase was primarily due to increased developmental costs of $2.7 million from PPG resulting from an increased use of raw materials for development activities.

### Selling, general and administrative

Selling, general and administrative expenses were $6.5 million for the three months ended June 30, 2014, compared to $6.3 million for the three months ended June 30, 2013.

### Patent costs and amortization of acquired technology

Patent costs and amortization of acquired technology increased to $4.7 million for the three months ended June 30, 2014, compared to $4.5 million for the three months ended June 30, 2013. The increase relates to the timing of expenses related to prosecution, maintenance and opposition of patents.

### Royalty and license expense

Royalty and license expense increased to $1.5 million for the three months ended June 30, 2014, compared to $1.2 million for the three months ended June 30, 2013. 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.

### Income taxes

We recorded income tax expense of $8.6 million and $6.5 million for the three months ended June 30, 2014 and 2013, respectively. See "Income Taxes" below for additional information.

### Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

We had operating income of $35.5 million for the six months ended June 30, 2014, compared to operating income of $14.6 million for the six months ended June 30, 2013. The increase in operating income was primarily due to the following:

- an increase in revenue of $37.6 million, which includes increases in both material sales and royalty and license fees; offset by
- an increase in operating expenses of $16.7 million, which primarily includes a $10.5 million increase in the cost of material sales, a $4.4 million increase in research and development expenses, and a $1.5 million increase in general and administrative expenses, all of which are described in detail below.

We had net income of $24.4 million (or $0.53 per basic and $0.52 per diluted share) for the six months ended June 30, 2014, compared to net income of $10.6 million (or $0.23 per basic and diluted share) for the six months ended June 30, 2013. The increase in net income was primarily due to:

- the increase in operating income of $20.9 million; offset by
- an increase in income tax expense of $7.1 million.

### Revenue

The following table details our revenues for the six months ended June 30, 2014 and 2013 (in thousands):

| REVENUE: | Six Months ended June 30, 2014 | 2013 | Increase (Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: |
| Material sales | $71,252 | $39,889 | $31,363 | 79% |
| Royalty and license fees | 29,843 | 22,500 | 7,343 | 33% |
| Technology development and support revenue | 870 | 1,946 | (1,076) | (55)% |
| Total revenue | $101,965 | $64,335 | $37,630 | 58% |

Total revenue for the six months ended June 30, 2014 increased by $37.6 million compared to the six months ended June 30, 2013. The increase in revenue was primarily the result of increased material sales and royalty and license fees.

### Material sales

The following table details our revenues derived from material sales for the six months ended June 30, 2014 and 2013 (in thousands):

| Material Sales: | Six Months ended June 30, 2014 | 2013 | Increase $% |  |
| --- | ---: | ---: | ---: | ---: |
| Commercial material sales | $66,076 | $36,165 | $29,911 | 83% |
| Developmental material sales | 5,176 | 3,724 | 1,452 | 39% |
| Total material sales | $71,252 | $39,889 | $31,363 | 79% |

Commercial material sales for the six months ended June 30, 2014 increased by $29.9 million compared to the six months ended June 30, 2013, primarily reflecting increased commercial chemical sales resulting from the adoption of our technology and materials in the marketplace by display manufacturers. Commercial materials are materials that have been validated by us for use in commercial OLED products.

Developmental material sales for the six months ended June 30, 2014 increased by $1.5 million compared to the six months ended June 30, 2013, primarily reflecting increased developmental material sales of our OLED materials for our customers' evaluation, manufacture and development activities. This increase was offset by a change in sales mix from developmental to commercial. Developmental material sales are materials that have not yet been validated by us for use in commercial OLED products.

Material sales included sales of both phosphorescent emitter and host materials which were comprised of the following for the six months ended June 30, 2014 and 2013 (in thousands):

| Material Sales: | Six Months ended June 30, 2014 | 2013 | Increase $% |  |
| --- | ---: | ---: | ---: | ---: |
| Phosphorescent emitter sales | $44,594 | $26,833 | $17,761 | 66% |
| Host material sales | 26,658 | 13,056 | 13,602 | 104% |
| Total material sales | $71,252 | $39,889 | $31,363 | 79% |

Phosphorescent emitter sales for the six months ended June 30, 2014 increased by $17.8 million compared to the six months ended June 30, 2013. The increase in our phosphorescent emitter sales was primarily due to an increase in commercial and developmental green phosphorescent emitter sales.

Host material sales for the six months ended June 30, 2014 increased by $13.6 million compared to the six months ended June 30, 2013. The increase in our host material sales was primarily due to an increase in the number of grams sold as well as the collection of pass through tax settlements of $3.0 million with a Japanese customer related to certain host sales in Japan. These increases were offset by a decrease in the average price per gram sold. 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.

### Royalty and license fees

Royalty and license fees were as follows for the six months ended June 30, 2014 and 2013 (in thousands):

|  | Six Months ended June 30, 2014 | 2013 | Increase $% |  |
| --- | ---: | ---: | ---: | ---: |
| Royalty and license fees | $29,843 | $22,500 | $7,343 | 33% |

Royalty and license fees for the six months ended June 30, 2014 increased by $7.3 million compared to the six months ended June 30, 2013. The increase was mainly related to the receipt and therefore recognition of $25.0 million of royalty and license fee payments under our patent and license agreement with SDC, compared to $20.0 million in the prior period. The increase was also related to an increase in license fees attributable to material sales to certain customers, which increased during the six months ended June 30, 2014, as compared to the six months ended June 30, 2013.

### Technology development and support revenue

Technology development and support revenue were as follows for the six months ended June 30, 2014 and 2013 (in thousands):

|  | Six Months ended June 30, 2014 | 2013 | (Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: |
| Technology development and support revenue | $870 | $1,946 | $(1,076) | (55)% |

Technology development and support revenue is revenue earned from U.S. government contracts and development and technology evaluation agreements and commercialization assistance fees.

Technology development and support revenue for the six months ended June 30, 2014 decreased by $1.1 million compared to the six months ended June 30, 2013. The decrease was primarily related to the smaller number of government contracts and due to the timing of revenue recognition for certain customers.

### Cost of material sales

Cost of commercial material sales were as follows for the six months ended June 30, 2014 and 2013 (in thousands):

|  | Six Months ended June 30, 2014 | 2013 |
| --- | ---: | ---: |
| Commercial material sales | $66,076 | $36,165 |
| Cost of commercial material sales | 21,848 | 11,374 |
| % of commercial material sales | 33% | 31% |

Cost of commercial material sales for the six months ended June 30, 2014 increased by $10.5 million compared to the six months ended June 30, 2013. The increase in our cost of commercial material sales was primarily due to an increase in commercial material sales as well as an increase in pass through tax settlements of $3,000,000.0 million that was owed to the Japanese tax authority related to certain host sales in Japan. Without this pass through tax, cost of commercial material sales as a percent of commercial material sales would have been 30% and 31% for the six months ended June 30, 2014 and 2013, respectively. 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.

Cost of commercial 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 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.

### Research and development

We incurred research and development expenses of $20.7 million for the six months ended June 30, 2014, compared to $16.3 million for the six months ended June 30, 2013. The increase was primarily due to increased developmental costs from PPG resulting from an increased use of raw materials for development activities.

### Selling, general and administrative

Selling, general and administrative expenses were $13.0 million for the six months ended June 30, 2014, compared to $11.5 million for the six months ended June 30, 2013. The increase was primarily due to increased legal and accounting costs as well as increased salaries and salary-related expenses associated with new and existing employees.

### Patent costs and amortization of acquired technology

Patent costs and amortization of acquired technology decreased to $8.7 million for the six months ended June 30, 2014, compared to $9.1 million for the six months ended June 30, 2013. The decrease relates to a decrease in patent costs mainly due to lower legal expenses.

### Royalty and license expense

Royalty and license expense increased to $2.3 million for the six months ended June 30, 2014, compared to $1.5 million for the six months ended June 30, 2013. 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.

### Income taxes

The effective income tax rate was 29.6% and 31.8% for the three and six months ended June 30, 2014, respectively. For the three and six months ended June 30, 2014, income tax expense of $8.6 million and $11.4 million, respectively, was recorded based on the Company's estimated annual effective tax rate for 2014 applied to the Company's income before income taxes. The effective income tax rate was 29.8% and 28.9% for the three and six months ended June 30, 2013, respectively. For the three and six months ended June 30, 2013, income tax expense of $6.5 million and $4.3 million, respectively, was recorded primarily related to foreign taxes on South Korean royalty and license fee income.

In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent on our ability to generate future taxable income to obtain benefit from the reversal of temporary differences, net operating loss carryforwards and tax credits. As part of our assessment, we consider the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies. During the year ended December 31, 2013, based on previous earnings history, a current evaluation of expected future taxable income and other evidence, we determined it is more likely than not that our federal and the majority of our state deferred tax assets will be realized. At this time there is no additional evidence to release the remaining valuation allowances that relates to UDC Ireland and the remaining portion of foreign tax credits. However, a portion of the New Jersey research and development credits were released to offset our projected current New Jersey income tax liability for 2014.

### Liquidity and Capital Resources

Our principle sources of liquidity are our cash and cash equivalents and our short-term investments. As of June 30, 2014, we had cash and cash equivalents of $75.6 million and short-term investments of $215.3 million, for a total of $290.9 million. This compares to cash and cash equivalents of $70.6 million and short-term investments of $202.0 million, for a total of $272.6 million, as of December 31, 2013. The increase in cash and cash equivalents of $5.0 million was primarily due to cash provided by operating activities offset by cash used in investing and financing activities.

Cash provided by operating activities was $25.0 million for the six months ended June 30, 2014, compared to $15.5 million for the six months ended June 30, 2013. The increase in cash provided by operating activities was primarily due to the following changes from the comparable prior period:

- an increase in net income of $21.4 million, excluding the impact of non-cash items; and
- the impact of the timing of deferred revenue arrangements of $2.3 million; primarily offset by
- the impact of the timing of net inventory purchases of $12.4 million.

Cash used in investing activities was $11.0 million for the six months ended June 30, 2014, compared to $12.8 million for the six months ended June 30, 2013. The decrease in cash used in investing activities was mainly due to the timing of maturities and purchases of investments resulting in net purchases of $8.1 million for the six months ended June 30, 2014, compared to net purchases of $10.2 million for the six months ended June 30, 2013.

Cash used in financing activities was $9.0 million for the six months ended June 30, 2014, compared to $8.0 million for the six months ended June 30, 2013. The increase in cash used in financing activities was primarily due to $7.0 million of repurchases of common stock during the six months ended June 30, 2014 compared to $5.5 million of repurchases of common stock in the six months ended June 30, 2013.

Working capital was $337.7 million as of June 30, 2014, compared to $303.8 million as of December 31, 2013. The increase in working capital was primarily due to the increase in cash, an increase in short-term investments, an increase in accounts receivable and an increase in inventory.

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

We believe that potential additional financing sources for us include long-term and short-term borrowings, 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 and Estimates

The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect our reported assets and liabilities, revenues and expenses, and other financial information. Actual results may differ significantly from our estimates under other assumptions and conditions.

We believe that our accounting policies related to revenue recognition and deferred revenue, the valuation of certain investments, the valuation and recoverability of acquired technology, stock-based compensation, income taxes and our Supplemental Executive Retirement Plan, are our “critical accounting policies” as contemplated by the SEC.

Refer to our Annual Report on Form 10-K for the year ended December 31, 2013, 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, 2013 for a discussion of our contractual obligations.

### Off-Balance Sheet Arrangements

As of June 30, 2014, we had no off-balance sheet arrangements in the nature of guarantee contracts, retained or contingent interests in assets transferred to unconsolidated entities (or similar arrangements serving as credit, liquidity or market risk support to unconsolidated entities for any such assets), or obligations (including contingent obligations) arising out of variable interests in unconsolidated entities providing financing, liquidity, market risk or credit risk support to us, or that engage in leasing, hedging or research and development services with us.

## Market risk

As filed, 1,021 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 “Fair Value Measurements” 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, 1,518 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 June 30, 2014. 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 quarter ended June 30, 2014 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, 2013.

Filed Aug 7, 2014.
Source: SEC EDGAR, the filing index for accession 0001005284-14-000067. Last ingested by Listed: Nov 5, 2026, 15:33 ET. No prices; not investment advice.