# Universal Display Corp \\pa\\: Form 10-Q for the period ended Mar 31, 2016

- Company: [Universal Display Corp \\pa\\](/companies/oled.md) (CIK 1005284)
- Form: 10-Q
- Filed: 2016-05-05
- Accepted by EDGAR: May 5, 2016, 16:03 ET
- Period: 2016-03-31
- Accession: 0001005284-16-000202
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1005284/000100528416000202/oled201610-q1.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1005284/000100528416000202/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2016-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2016-01-01 to 2016-03-31 | $29.7m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2016-01-01 to 2016-03-31 | $5.1m | us-gaap:CostOfGoodsSold |
| Research and development | 3 months, 2016-01-01 to 2016-03-31 | $10.5m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2016-01-01 to 2016-03-31 | $6.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2016-01-01 to 2016-03-31 | $2.5m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2016-01-01 to 2016-03-31 | $8.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2016-01-01 to 2016-03-31 | $921.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2016-01-01 to 2016-03-31 | $1.9m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2016-01-01 to 2016-03-31 | $0.04 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2016-01-01 to 2016-03-31 | $0.04 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2016-01-01 to 2016-03-31 | 46,907,558 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2016-01-01 to 2016-03-31 | $210.0k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2016-01-01 to 2016-03-31 | $516.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2016-03-31 | $110.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2016-03-31 | $432.4m | us-gaap:AssetsCurrent |
| Total assets | at 2016-03-31 | $556.0m | us-gaap:Assets |
| Current liabilities | at 2016-03-31 | $25.1m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2016-03-31 | $85.2m | us-gaap:Liabilities |
| Shareholders' equity | at 2016-03-31 | $470.9m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 23,059 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 that 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, 2015, 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 wearables, mobile phones, televisions, tablets, portable media devices, laptop computers, personal computers, and automotive interiors, 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 advances. 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 or 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.

In 2015, we 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 materials sales anticipated over the life of the agreements as well as minimum royalty revenue to be generated under the patent license agreement. The Company expects to generate revenue under these agreements that are predominantly tied to LG Display's sales of OLED licensed products. The OLED commercial supply agreement provides for the sales of materials for use by LG Display, which may include phosphorescent dopants and host materials.

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 $71.7 million as of March 31, 2016.

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, 2016 Compared to Three Months Ended March 31, 2015

We had operating income of $2.5 million for the three months ended March 31, 2016, compared to operating income of $1.8 million for the three months ended March 31, 2015. The increase in operating income was primarily due to the following:

- a decrease in operating expenses of $2.3 million, which was mainly due to a $3.5 million decrease in the cost of material sales; offset by
- a decrease in revenue of $1.5 million.

We had net income of $1.9 million, or $0.04 per basic and diluted share, for the three months ended March 31, 2016, compared to net income of $1.3 million, or $0.03 per basic and diluted share, for the three months ended March 31, 2015. The increase in net income was primarily due to:

- the increase in operating income of approximately $0.8 million; offset by
- a increase in income tax expense of $0.3 million.

### Revenue

The following table details our revenues for the three months ended March 31, 2016 and 2015 (in thousands):

| REVENUE: | Three Months Ended March 31, 2016 | 2015 | (Decrease) Increase $% |  |
| --- | ---: | ---: | ---: | ---: |
| Material sales | $24,304 | $26,818 | $(2,514) | (9)% |
| Royalty and license fees | 5,342 | 4,375 | 967 | 22% |
| Technology development and support revenue | 57 | 30 | 27 | 90% |
| Total revenue | $29,703 | $31,223 | $(1,520) | (5)% |

Total revenue for the three months ended March 31, 2016 decreased by $1.5 million compared to the three months ended March 31, 2015. The decrease in revenue was primarily the result of decreased commercial chemical sales, mostly related to decreased sales of host materials, slightly offset by an increase in royalty and license fee revenue, as discussed below.

### Material sales

The following table details our revenues derived from material sales for the three months ended March 31, 2016 and 2015 (in thousands):

| Material sales: | Three Months Ended March 31, 2016 | 2015 | (Decrease) Increase $% |  |
| --- | ---: | ---: | ---: | ---: |
| Commercial material sales | $22,114 | $25,630 | $(3,516) | (14)% |
| Developmental material sales | 2,190 | 1,188 | 1,002 | 84% |
| Total material sales | $24,304 | $26,818 | $(2,514) | (9)% |

Commercial material sales for the three months ended March 31, 2016 decreased by $3.5 million compared to the three months ended March 31, 2015, primarily due to lower host sales.

Developmental material sales for the three months ended March 31, 2016 increased by $1.0 million compared to the three months ended March 31, 2015. The increase in our development material sales was primarily due to an increase in the number of grams sold.

Material sales included sales of both phosphorescent emitter and host materials which were comprised of the following for the three months ended March 31, 2016 and 2015 (in thousands):

| Material sales: | Three Months Ended March 31, 2016 | 2015 | Increase (Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: |
| Phosphorescent emitter sales | $23,864 | $21,411 | $2,453 | 11% |
| Host material sales | 440 | 5,407 | (4,967) | (92)% |
| Total material sales | $24,304 | $26,818 | $(2,514) | (9)% |

Phosphorescent emitter sales for the three months ended March 31, 2016 increased by $2.5 million compared to the three months ended March 31, 2015. The increase in our phosphorescent emitter sales was primarily due to an increase in the number of grams, partially offset by a decrease in the price per gram sold.

Host material sales for the three months ended March 31, 2016 decreased by $5.0 million compared to the three months ended March 31, 2015. As we have discussed in our previous filings, the decrease in our host material sales, which began in 2014. was primarily due to a decrease in the number of grams sold due to what we believe was a result of our customer's continuing to sell new products that do not include our host materials. Based on our current sales forecast, we anticipate that sales of existing host material will be minimal. 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.

### Royalty and license fees

Royalty and license fees were as follows for the three months ended March 31, 2016 and 2015 (in thousands):

|  | Three Months Ended March 31, 2016 | 2015 | Increase $% |  |
| --- | ---: | ---: | ---: | ---: |
| Royalty and license fees | $5,342 | $4,375 | $967 | 22% |

Royalty and license fees for the three months ended March 31, 2016 increased by $1.0 million compared to the three months ended March 31, 2015. The increase was due to an increase in royalties recognized from a major customer, which were not recognized in the same period in the prior year due to the fact that those royalties are recognized one quarter in arrears. The increase was also due to an increase in license fees attributable to material sales to certain customers, which increased during the three months ended March 31, 2016. This increase was partially offset by the fact that we did not recognize any milestone payments in the three months ended March 31, 2016 compared to the recognition of a $1.9 million milestone payment during the three months ended March 31, 2015.

Royalty and license fees for both the three months ended March 31, 2016 and 2015 do not include revenues from SDC. Our patent license agreement with SDC is payable to us in semi-annual installments due in the second and fourth quarters of each annual period.

### Cost of material sales

Cost of commercial material sales were as follows for the three months ended March 31, 2016 and 2015 (in thousands):

|  | Three Months Ended March 31, 2016 | 2015 |
| --- | ---: | ---: |
| Commercial material sales | $22,114 | $25,630 |
| Cost of commercial material sales | 4,992 | 8,521 |
| % of commercial material sales | 23% | 33% |

Cost of commercial material sales for the three months ended March 31, 2016 decreased by $3.5 million compared to the three months ended March 31, 2015, primarily due to the decrease in host material sales, which have less favorable margins than our emitter materials.

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.

### Research and development

Research and development expenses were $10.5 million for the three months ended March 31, 2016, compared to $9.9 million for the three months ended March 31, 2015. The increase was primarily due to increased salary and salary related expenses, including post-retirement benefits and stock-based compensation.

### Selling, general and administrative

Selling, general and administrative expenses were $6.7 million for the three months ended March 31, 2016, compared to $6.2 million for the three months ended March 31, 2015. The increase was primarily due to an increase in salary and salary related expenses, including post-retirement benefits and stock based compensation.

### Patent costs and amortization of acquired technology

Patent costs and amortization of acquired technology expenses were $4.1 million for the three months ended March 31, 2016, compared to $4.0 million for the three months ended March 31, 2015.

### Royalty and license expense

Royalty and license expenses were $0.9 million for the three months ended March 31, 2016, compared to $0.8 million for the three months ended March 31, 2015. See Note 6 in Notes to Consolidated Financial Statements for further discussion.

### Income taxes

The effective income tax rate was 32.1% and 32.0%, for the three months ended March 31, 2016 and 2015, respectively. For the three months ended March 31, 2016 and 2015, the Company recorded income tax expense of $921,000 and $618,000, respectively.

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. At this time there is no evidence to release the valuation allowances that relate to UDC Ireland, foreign tax credits and New Jersey research and development credits.

### Liquidity and Capital Resources

Our principle sources of liquidity are our cash and cash equivalents and our short-term investments. As of March 31, 2016, we had cash and cash equivalents of $110.1 million and short-term investments of $269.5 million, for a total of $379.6 million. This compares to cash and cash equivalents of $97.5 million and short-term investments of $298.0 million, for a total of $395.5 million, as of December 31, 2015. The increase in cash and cash equivalents of $12.6 million was primarily due to cash provided by investing activities related to proceeds received from the net sale of short-term investments.

Cash provided by operating activities was $0.2 million for the three months ended March 31, 2016, compared to cash provided by operating activities of $47.0 million for the three months ended March 31, 2015. The decrease in cash provided by operating activities was primarily due to the fact that the Company did not receive a large prepaid royalty and license fee from a customer in the three months ended March 31, 2016 compared to the receipt of $42 million from a customer for prepaid royalty and license fees in the three months ended March 31, 2015.

Cash provided by investing activities was $14.1 million for the three months ended March 31, 2016, compared to cash provided by investing activities of $37.0 million for the three months ended March 31, 2015. The decrease in cash provided by investing activities was mainly due to the timing of maturities and purchases of investments resulting in net sales of $14.6 million for the three months ended March 31, 2016, compared to net sales of $38.9 million for the three months ended March 31, 2015.

Cash used in financing activities was $1.8 million for the three months ended March 31, 2016, compared to $4.2 million for the three months ended March 31, 2015. The decrease in cash used in financing activities was primarily due to a decrease in the payment of withholding taxes related to employee stock based compensation of $3.0 million in the three months ended March 31, 2016 compared to the three months ended March 31, 2015.

Working capital was $407.2 million as of March 31, 2016, compared to $413.2 million as of December 31, 2015. The decrease in working capital is primarily due to the decrease in short term investments and accounts receivable, offset by an increase in cash and cash equivalents and a decrease in accrued expenses.

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 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, 2015, 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, 2015 for a discussion of our contractual obligations.

### Off-Balance Sheet Arrangements

As of March 31, 2016, 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 5 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, 1,520 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, 2016. 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 March 31, 2016 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, 2015.

Filed May 5, 2016.
Source: SEC EDGAR, the filing index for accession 0001005284-16-000202. Last ingested by Listed: Nov 5, 2026, 15:33 ET. No prices; not investment advice.