OLED 10-Q
Universal Display Corp \Pa\ (OLED)
M
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________ to ___________
Commission File Number
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
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Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer |
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Accelerated filer |
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Emerging growth company |
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Non-accelerated filer |
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Smaller reporting company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial account standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of August 5, 2020, the registrant had outstanding
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
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ITEM 1. |
FINANCIAL STATEMENTS |
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share and per share data)
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June 30, 2020 |
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December 31, 2019 |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
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$ |
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Short-term investments |
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Accounts receivable |
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Inventory |
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Other current assets |
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Total current assets |
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PROPERTY AND EQUIPMENT, net of accumulated depreciation of $ |
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ACQUIRED TECHNOLOGY, net of accumulated amortization of $ |
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OTHER INTANGIBLE ASSETS, net of accumulated amortization of $ |
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GOODWILL |
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INVESTMENTS |
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DEFERRED INCOME TAXES |
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OTHER ASSETS |
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TOTAL ASSETS |
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$ |
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$ |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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CURRENT LIABILITIES: |
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Accounts payable |
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$ |
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$ |
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Accrued expenses |
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Deferred revenue |
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Other current liabilities |
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Total current liabilities |
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DEFERRED REVENUE |
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RETIREMENT PLAN BENEFIT LIABILITY |
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OTHER LIABILITIES |
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Total liabilities |
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COMMITMENTS AND CONTINGENCIES (Note 15) |
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SHAREHOLDERS’ EQUITY: |
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Preferred Stock, par value $ shares of Series A Nonconvertible Preferred Stock issued and outstanding (liquidation value of $ |
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Common Stock, par value $ and June 30, 2020 and December 31, 2019, respectively |
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Additional paid-in capital |
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Retained earnings |
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Accumulated other comprehensive loss |
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Treasury stock, at cost ( |
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Total shareholders’ equity |
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TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
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$ |
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$ |
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The accompanying notes are an integral part of these Consolidated Financial Statements.
1
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except share and per share data)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2020 |
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2019 |
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2020 |
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2019 |
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REVENUE |
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$ |
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$ |
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$ |
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$ |
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COST OF SALES |
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Gross margin |
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OPERATING EXPENSES: |
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Research and development |
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Selling, general and administrative |
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Amortization of acquired technology and other intangible assets |
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Patent costs |
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Royalty and license expense |
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Total operating expenses |
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OPERATING (LOSS) INCOME |
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Interest income, net |
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Other income, net |
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Interest and other income, net |
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INCOME BEFORE INCOME TAXES |
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INCOME TAX BENEFIT (EXPENSE) |
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NET INCOME |
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$ |
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$ |
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$ |
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$ |
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NET INCOME PER COMMON SHARE: |
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BASIC |
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$ |
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$ |
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$ |
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$ |
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DILUTED |
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$ |
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$ |
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$ |
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$ |
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WEIGHTED AVERAGE SHARES USED IN COMPUTING NET INCOME PER COMMON SHARE: |
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BASIC |
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DILUTED |
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CASH DIVIDENDS DECLARED PER COMMON SHARE |
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$ |
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$ |
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$ |
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$ |
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The accompanying notes are an integral part of these Consolidated Financial Statements.
2
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(in thousands)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2020 |
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2019 |
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2020 |
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2019 |
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NET INCOME |
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$ |
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$ |
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$ |
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$ |
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OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX: |
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Unrealized (loss) gain on available-for-sale securities, net of tax of $ |
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Amortization of prior service cost and actuarial loss for retirement plan included in net periodic pension costs, net of tax of $ |
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Change in cumulative foreign currency translation adjustment |
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TOTAL OTHER COMPREHENSIVE (LOSS) INCOME |
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COMPREHENSIVE INCOME |
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$ |
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$ |
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$ |
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$ |
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The accompanying notes are an integral part of these Consolidated Financial Statements.
3
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(UNAUDITED)
(in thousands, except for share data)
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Three Months Ended June 30, 2020 |
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Series A Nonconvertible |
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Additional |
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Accumulated Other |
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Total |
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Preferred Stock |
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Common Stock |
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Paid-in |
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Retained |
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Comprehensive |
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Treasury Stock |
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Shareholders’ |
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Shares |
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Amount |
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Shares |
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Amount |
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Capital |
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Earnings |
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Loss |
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Shares |
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Amount |
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Equity |
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BALANCE, MARCH 31, 2020 |
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$ |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Other comprehensive loss |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
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— |
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— |
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( |
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Cash dividend |
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— |
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— |
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— |
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— |
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— |
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( |
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— |
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— |
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— |
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( |
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Issuance of common stock to employees |
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— |
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— |
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— |
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— |
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— |
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— |
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Shares withheld for employee taxes |
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— |
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— |
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( |
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— |
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( |
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— |
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— |
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— |
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— |
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( |
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Issuance of common stock to Board of Directors and Scientific Advisory Board |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Issuance of common stock to employees under an ESPP |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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BALANCE, JUNE 30, 2020 |
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$ |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
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Six Months Ended June 30, 2020 |
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Series A Nonconvertible |
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Additional |
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Accumulated Other |
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Total |
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Preferred Stock |
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Common Stock |
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Paid-in |
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Retained |
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Comprehensive |
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Treasury Stock |
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Shareholders’ |
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Shares |
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Amount |
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Shares |
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Amount |
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Capital |
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Earnings |
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Loss |
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Shares |
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Amount |
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Equity |
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BALANCE, DECEMBER 31, 2019 |
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$ |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Other comprehensive income |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Cash dividend |
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— |
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— |
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— |
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— |
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— |
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( |
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— |
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— |
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— |
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( |
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Issuance of common stock to employees |
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— |
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— |
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— |
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— |
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— |
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— |
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Shares withheld for employee taxes |
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— |
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— |
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( |
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— |
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( |
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— |
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— |
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— |
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— |
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( |
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Issuance of common stock to Board of Directors and Scientific Advisory Board |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Issuance of common stock to employees under an ESPP |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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BALANCE, JUNE 30, 2020 |
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$ |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
( |
) |
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$ |
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The accompanying notes are an integral part of these Consolidated Financial Statements.
4
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(UNAUDITED)
(in thousands, except for share data)
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Three Months Ended June 30, 2019 |
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Series A Nonconvertible |
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Additional |
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Accumulated Other |
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Total |
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Preferred Stock |
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Common Stock |
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Paid-in |
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Retained |
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Comprehensive |
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Treasury Stock |
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Shareholders’ |
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Shares |
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Amount |
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Shares |
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Amount |
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Capital |
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Earnings |
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Loss |
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Shares |
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Amount |
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Equity |
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BALANCE, MARCH 31, 2019 |
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$ |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Other comprehensive income |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Cash dividend |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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— |
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— |
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( |
) |
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Issuance of common stock to employees |
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— |
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— |
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— |
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— |
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— |
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— |
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Shares withheld for employee taxes |
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— |
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— |
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( |
) |
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( |
) |
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( |
) |
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— |
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— |
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— |
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— |
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( |
) |
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Issuance of common stock to Board of Directors and Scientific Advisory Board |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Issuance of common stock to employees under an ESPP |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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BALANCE, JUNE 30, 2019 |
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$ |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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Six Months Ended June 30, 2019 |
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Series A Nonconvertible |
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Additional |
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Accumulated Other |
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Total |
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Preferred Stock |
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Common Stock |
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Paid-in |
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Retained |
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Comprehensive |
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Treasury Stock |
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Shareholders’ |
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Shares |
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Amount |
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Shares |
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Amount |
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Capital |
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Earnings |
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Loss |
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Shares |
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Amount |
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Equity |
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BALANCE, DECEMBER 31, 2018 |
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$ |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
) |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Other comprehensive income |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Cash dividend |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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— |
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— |
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( |
) |
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Issuance of common stock to employees |
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— |
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— |
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— |
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— |
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— |
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— |
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Shares withheld for employee taxes |
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— |
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— |
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( |
) |
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( |
) |
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( |
) |
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— |
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— |
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— |
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— |
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( |
) |
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Common shares repurchased |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
) |
|
Issuance of common stock to Board of Directors and Scientific Advisory Board |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Issuance of common stock to employees under an ESPP |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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BALANCE, JUNE 30, 2019 |
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$ |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
) |
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$ |
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The accompanying notes are an integral part of these Consolidated Financial Statements.
5
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
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Six Months Ended June 30, |
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2020 |
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2019 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income |
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$ |
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$ |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Amortization of deferred revenue and recognition of unbilled receivables |
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( |
) |
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( |
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Depreciation |
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Amortization of intangibles |
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Change in excess inventory reserve |
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Amortization of premium and discount on investments, net |
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( |
) |
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( |
) |
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Stock-based compensation to employees |
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Stock-based compensation to Board of Directors and Scientific Advisory Board |
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Deferred income tax benefit |
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( |
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( |
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Retirement plan expense |
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Decrease (increase) in assets: |
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Accounts receivable |
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( |
) |
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( |
) |
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Inventory |
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( |
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Other current assets |
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( |
) |
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( |
) |
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Other assets |
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( |
) |
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( |
) |
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Increase (decrease) in liabilities: |
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Accounts payable and accrued expenses |
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( |
) |
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( |
) |
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Other current liabilities |
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( |
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Deferred revenue |
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Other liabilities |
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( |
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Net cash provided by operating activities |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Purchases of property and equipment |
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( |
) |
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( |
) |
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Purchases of intangibles |
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( |
) |
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( |
) |
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Purchases of investments |
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( |
) |
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( |
) |
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Proceeds from sale of investments |
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Net cash (used in) provided by investing activities |
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( |
) |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Proceeds from issuance of common stock |
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Repurchase of common stock |
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|
— |
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|
|
( |
) |
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Payment of withholding taxes related to stock-based compensation to employees |
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( |
) |
|
|
( |
) |
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Cash dividends paid |
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( |
) |
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( |
) |
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Net cash used in financing activities |
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( |
) |
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( |
) |
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INCREASE IN CASH AND CASH EQUIVALENTS |
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|
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|
|
|
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CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
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|
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|
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CASH AND CASH EQUIVALENTS, END OF PERIOD |
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$ |
|
|
|
$ |
|
|
|
The following non-cash activities occurred: |
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|
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Unrealized gain on available-for-sale securities |
|
$ |
|
|
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$ |
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|
Common stock issued to Board of Directors and Scientific Advisory Board that was earned and accrued for in a previous period |
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Net change in accounts payable and accrued expenses related to purchases of property and equipment |
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The accompanying notes are an integral part of these Consolidated Financial Statements.
6
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
1. |
BUSINESS: |
Universal Display Corporation and its subsidiaries (the Company) is a leader in the research, development and commercialization of organic light emitting diode (OLED) technologies and materials for use in display and solid-state lighting applications. OLEDs are thin, lightweight and power-efficient solid-state devices that emit light that can be manufactured on both flexible and rigid substrates, making them highly suitable for use in full-color displays and as lighting products. OLED displays are capturing a growing share of the display market, especially in the mobile phone, television, wearable, tablet, notebook and personal computer, augmented reality (AR), virtual reality (VR) and automotive markets. The Company believes this is because OLEDs offer potential advantages over competing display technologies with respect to power efficiency, contrast ratio, viewing angle, video response time, form factor and manufacturing cost. The Company also believes that OLED lighting products have the potential to replace many existing light sources in the future because of their high-power efficiency, excellent color rendering index, low operating temperature and novel form factor. The Company's technology leadership, intellectual property position, and the Company’s more than 20 years of experience working closely with leading OLED display manufacturers are some of the competitive advantages that should enable the Company to continue to share in the revenues from OLED displays and lighting products as they gain wider acceptance.
The Company’s primary business strategy is to (1) develop new OLED materials and sell existing and any new materials to product manufacturers of products for display applications, such as mobile phones, televisions, wearables, tablets, portable media devices, notebook computers, personal computers, and automotive applications, and specialty and general lighting products; and (2) further develop and license the Company’s proprietary OLED technologies to those manufacturers. The Company has established a significant portfolio of proprietary OLED technologies and materials, primarily through internal research and development efforts and acquisitions of patents and patent applications, as well as maintaining long-standing, and establishing new relationships with world-class universities, research institutions and strategic manufacturing partnerships. The Company currently owns, exclusively licenses or has the sole right to sublicense more than
The Company manufactures and sells its proprietary OLED materials to customers for evaluation and use in commercial OLED products. The Company also enters into agreements with manufacturers of OLED display and lighting products under which it grants them licenses to practice under the Company’s patents and to use the Company's proprietary know-how. At the same time, the Company works with these and other companies that are evaluating the Company's OLED technologies and materials for possible use in commercial OLED display and lighting products.
|
2. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: |
Interim Financial Information
In the opinion of management, the accompanying unaudited Consolidated Financial Statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company’s financial position as of June 30, 2020 and results of operations for the three and six months ended June 30, 2020 and 2019, and cash flows for the six months ended June 30, 2020 and 2019. While management believes that the disclosures presented are adequate to make the information not misleading, these unaudited Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the notes thereto in the Company’s latest year-end Consolidated Financial Statements, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. The results of the Company’s operations for any interim period are not necessarily indicative of the results of operations for any other interim period or for the full year.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of Universal Display Corporation and its wholly owned subsidiaries, UDC, Inc., UDC Ireland Limited (UDC Ireland), Universal Display Corporation Hong Kong, Limited, Universal Display Corporation Korea, Y.H., Universal Display Corporation Japan GK, Universal Display Corporation China, Ltd., Adesis, Inc. (Adesis), UDC Ventures LLC and OVJP Corporation (OVJP Corp). All intercompany transactions and accounts have been eliminated.
In June 2020, a wholly-owned subsidiary, OVJP Corp was formed as a Delaware corporation. Based out of California, OVJP Corp was founded to advance the commercialization of the Company’s proprietary Organic Vapor Jet Printing (OVJP) technology.
7
Management’s Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The estimates made are principally in the areas of revenue recognition including estimates of material unit sales and royalties, the useful life of acquired intangibles, lease liabilities, right-of-use assets, the use and recoverability of inventories, intangibles, investments and income taxes including realization of deferred tax assets, stock-based compensation and retirement benefit plan liabilities. Actual results could differ from those estimates.
Inventories
Inventories consist of raw materials, work-in-process and finished goods, including inventory consigned to customers, and are stated at the lower of cost, determined on a first-in, first-out basis, or net realizable value. Inventory valuation and firm committed purchase order assessments are performed on a quarterly basis and those items that are identified to be obsolete or in excess of forecasted usage are written down to their estimated realizable value. Estimates of realizable value are based upon management’s analyses and assumptions, including, but not limited to, forecasted sales levels by product, expected product lifecycle, product development plans and future demand requirements. A 12-month rolling forecast based on factors, including, but not limited to, production cycles, anticipated product orders, marketing forecasts, backlog, and shipment activities is used in the inventory analysis. If market conditions are less favorable than forecasts or actual demand from customers is lower than estimates, additional inventory write-downs may be required. If demand is higher than expected, inventories that had previously been written down may be sold.
Fair Value of Financial Instruments
The carrying values of accounts receivable, other current assets, and accounts payable approximate fair value in the accompanying Consolidated Financial Statements due to the short-term nature of those instruments. The Company’s other financial instruments, which include cash equivalents and investments, are carried at fair value.
Leases
The Company is a lessee in operating leases primarily incurred to facilitate the expansion of manufacturing, research and development, and selling, general and administrative activities. At contract inception, the Company determines if an arrangement is or contains a lease, and if so recognizes a right-of-use asset and lease liability at the lease commencement date. For operating leases, the lease liability is measured at the present value of the unpaid lease payments at the lease commencement date, whereas for finance leases, the lease liability is initially measured at the present value of the unpaid lease payments and subsequently measured at amortized cost using the interest method. Operating lease right-of-use assets are included in other assets on the Consolidated Balance Sheets. The current portion of operating lease liabilities is included in other current liabilities on the Consolidated Balance Sheets and the long-term portion is included in other liabilities on the Consolidated Balance Sheets. As of June 30, 2020, the Company had no leases that qualified as financing arrangements.
Key estimates and judgments include how the Company determines the discount rate used to discount the unpaid lease payments to present value and the lease term. The Company monitors for events or changes in circumstances that could potentially require recognizing an impairment loss.
Minority Equity Investments
The Company accounts for minority equity investments in companies that are not accounted for under the equity method as equity securities without readily determinable fair values. The fair value of these securities is based on original cost less impairments, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. Under this method, the share of income or loss of such companies is not included in the Consolidated Statements of Income. The carrying value of these investments is included in investments on the Consolidated Balance Sheets.
The Company’s policy is to recognize an impairment in the value of its minority equity investments when clear evidence of an impairment exists. Factors considered in the assessment include a significant adverse change in the regulatory, economic, or technological environment, the completion of new equity financing that may indicate a decrease in value, the failure to complete new equity financing arrangements after seeking to raise additional funds, or the commencement of proceedings under which the assets of the business may be placed in receivership or liquidated to satisfy the claims of debt and equity stakeholders.
8
Revenue Recognition and Deferred Revenue
Material sales relate to the Company’s sale of its OLED materials for incorporation into its customers’ commercial OLED products or for their OLED development and evaluation activities. Revenue associated with material sales is generally recognized at the time title passes, which is typically at the time of shipment or at the time of delivery, depending upon the contractual agreement between the parties. Revenue may be recognized after control of the material passes in the event the transaction price includes variable consideration. For example, a customer may be provided an extended opportunity to stock materials prior to use in mass production and given a general right of return not conditioned on breaches of warranties associated with the specific product. In such circumstances, revenue will be recognized at the earlier of the expiration of the customer’s general right of return or once it becomes unlikely that the customer will exercise its right of return.
The rights and benefits to the Company’s OLED technologies are conveyed to the customer through technology license agreements and material supply agreements. The Company believes that the licenses and materials sold under these combined agreements are not distinct from each other for financial reporting purposes and as such, are accounted for as a single performance obligation. Accordingly, total contract consideration, including material, license and royalty fees, is estimated and recognized over the contract term based on material units sold at the estimated per unit fee over the life of the contract.
Various estimates are relied upon to recognize revenue. The Company estimates total material units to be purchased by its customers over the contract term based on historical trends, industry estimates and its forecast process. Management uses the expected value method to estimate the material per unit fee. Additionally, management estimates the total sales-based royalties based on the estimated net sales revenue of its customers over the contract term.
Contract research services revenue is revenue earned by Adesis by providing chemical materials synthesis research, development and commercialization for non-OLED applications on a contractual basis. These services range from intermediates for structure-activity relationship studies, reference agents and building blocks for combinatorial synthesis, re-synthesis of key intermediates, specialty organic chemistry needs, and selective toll manufacturing. These services are provided to third-party pharmaceutical and life sciences firms and other technology firms at fixed costs or on an annual contract basis. Revenue is recognized as services are performed with billing schedules and payment terms negotiated on a contract-by-contract basis. Payments received in excess of revenue recognized are recorded as deferred revenue. In other cases, services may be provided and revenue is recognized before the customer is invoiced. In these cases, revenue recognized will exceed amounts billed and the difference, representing amounts which are currently unbillable to the customer pursuant to contractual terms, is recorded as an unbilled receivable.
Technology development and support revenue is revenue earned from development and technology evaluation agreements and commercialization assistance fees, along with, to a minimal extent, government contracts. Relating to the Company’s government contracts, the Company may receive reimbursements by government entities for all or a portion of the research and development costs the Company incurs. Revenues are recognized as services are performed, proportionally as research and development costs are incurred, or as defined milestones are achieved.
In 2018, the Company entered into a commercial license agreement with Samsung Display Co., Ltd. (SDC). This agreement, which covers the manufacture and sale of specified OLED display materials, was effective as of January 1, 2018 and lasts through the end of 2022 with an additional two-year extension option. Under this agreement, the Company is being paid a license fee, payable in quarterly installments over the agreement term of five years. The agreement conveys to SDC the non-exclusive right to use certain of the Company's intellectual property assets for a limited period of time that is less than the estimated life of the assets.
At the same time the Company entered into the current commercial license agreement with SDC, the Company also entered into a new supplemental material purchase agreement with SDC. Under the supplemental material purchase agreement, SDC agrees to purchase from the Company a minimum amount of phosphorescent emitter materials for use in the manufacture of licensed products. This minimum commitment is subject to SDC’s requirements for phosphorescent emitter materials and the Company’s ability to meet these requirements over the term of the supplemental agreement.
In 2015, the Company entered into an OLED patent license agreement and an OLED commercial supply agreement with LG Display Co., Ltd. (LG Display) which were effective as of January 1, 2015 and superseded the existing 2007 commercial supply agreement between the parties. The new agreements have a term that is set to expire by the end of 2022. The patent license agreement provides LG Display a non-exclusive, royalty bearing portfolio license to make and sell OLED displays under the Company's patent portfolio. The patent license calls for license fees, prepaid royalties and running royalties on licensed products. The agreements include customary provisions relating to warranties, indemnities, confidentiality, assignability and business terms. The agreements provide for certain other minimum obligations relating to the volume of material sales anticipated over the life of the agreements as well as minimum royalty revenue to be generated under the patent license agreement. The Company generates revenue under these
9
agreements that are predominantly tied to LG Display’s sales of OLED licensed products. The OLED commercial supply agreement provides for the sale of materials for use by LG Display, which may include phosphorescent emitters and host materials.
In 2016, the Company entered into long-term, multi-year OLED patent license and material purchase agreements with Tianma Micro-electronics Co., Ltd. (Tianma). Under the license agreement, the Company has granted Tianma non-exclusive license rights under various patents owned or controlled by the Company to manufacture and sell OLED display products. The license agreement calls for license fees and running royalties on licensed products. Additionally, the Company supplies phosphorescent OLED materials to Tianma for use in its licensed products.
In 2017, the Company entered into long-term, multi-year agreements with BOE Technology Group Co., Ltd. (BOE). Under these agreements, the Company has granted BOE non-exclusive license rights under various patents owned or controlled by the Company to manufacture and sell OLED display products. The Company supplies phosphorescent OLED materials to BOE for use in its licensed products.
In 2018, the Company entered into long-term, multi-year OLED patent license and material purchase agreements with Visionox Technology, Inc. (Visionox). Under the license agreement, the Company has granted Visionox non-exclusive license rights under various patents owned or controlled by the Company to manufacture and sell OLED display products. The license agreement calls for license fees and running royalties on licensed products. Additionally, the Company supplies phosphorescent OLED materials to Visionox for use in its licensed products.
In 2019, the Company entered into an evaluation and commercial supply relationship with Wuhan China Star Optoelectronics Semiconductor Display Technology Co., Ltd. (CSOT). In 2020, the Company entered into long-term, multi-year agreements with CSOT. Under these agreements, the Company has granted CSOT non-exclusive license rights under various patents owned or controlled by the Company to manufacture and sell OLED display products. The Company supplies phosphorescent OLED materials to CSOT for use in its licensed products.
All material sales transactions that are not variable consideration transactions are billed and due within 90 days and substantially all are transacted in U.S. dollars.
Cost of Sales
Cost of sales consists of labor and material costs associated with the production of materials processed at the Company's manufacturing partners and at the Company's internal manufacturing processing facility. The Company’s portion of cost of sales also includes depreciation of manufacturing equipment, as well as manufacturing overhead costs and inventory adjustments for excess and obsolete inventory.
Research and Development
Expenditures for research and development are charged to expense as incurred.
Patent Costs
Costs associated with patent applications, patent prosecution, patent defense and the maintenance of patents are charged to expense as incurred. Costs to successfully defend a challenge to a patent are capitalized to the extent of an evident increase in the value of the patent. Costs that relate to an unsuccessful outcome are charged to expense.
Amortization of Acquired Technology
Amortization of Other Intangible Assets
10
Translation of Foreign Currency Financial Statements and Foreign Currency Transactions
The Company's reporting currency is the U.S. dollar. The functional currency for the Company's Ireland subsidiary is also the U.S. dollar and the functional currency for each of the Company's Asia-Pacific foreign subsidiaries is its local currency. The Company translates the amounts included in the Consolidated Statements of Income from its Asia-Pacific foreign subsidiaries into U.S. dollars at weighted-average exchange rates, which the Company believes are representative of the actual exchange rates on the dates of the transactions. The Company's foreign subsidiaries' assets and liabilities are translated into U.S. dollars from the local currency at the actual exchange rates as of the end of each reporting date, and the Company records the resulting foreign exchange translation adjustments in the Consolidated Balance Sheets as a component of accumulated other comprehensive loss. The overall effect of the translation of foreign currency and foreign currency transactions to date has been insignificant.
Income Taxes
Share-Based Payment Awards
The Company recognizes in the Consolidated Statements of Income the grant-date fair value of equity-based awards such as shares issued under employee stock purchase plans, restricted stock awards, restricted stock units and performance unit awards issued to employees and directors.
The grant-date fair value of stock awards is based on the closing price of the stock on the date of grant. The fair value of share-based awards is recognized as compensation expense on a straight-line basis over the requisite service period, net of forfeitures. The Company issues new shares upon the respective grant, exercise or vesting of the share-based payment awards, as applicable.
Performance unit awards are subject to either a performance-based or market-based vesting requirement. For performance-based vesting, the grant-date fair value of the award, based on fair value of the Company's common stock, is recognized over the service period based on an assessment of the likelihood that the applicable performance goals will be achieved and compensation expense is periodically adjusted based on actual and expected performance. Compensation expense for performance unit awards with market-based vesting is calculated based on the estimated fair value as of the grant date utilizing a Monte Carlo simulation model and is recognized over the service period on a straight-line basis.
Recent Accounting Pronouncements
In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test of Goodwill Impairment, eliminating the requirement to calculate the implied fair value, essentially eliminating step two from the goodwill impairment test. The new standard requires goodwill impairment to be based upon the results of step one of the impairment test, which is defined as the excess of the carrying value of a reporting unit over its fair value. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standards update is effective prospectively for annual and interim goodwill impairment testing performed in fiscal years beginning after December 15, 2019. The adoption of ASU 2017-04, beginning on January 1, 2020, did not have a significant impact on the Consolidated Financial Statements and related disclosures.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments: Credit Losses (Topic 326), which requires measurement and recognition of expected losses for financial assets held. The new standard changes the impairment model for most financial instruments, including debt investments and trade receivables, from an incurred loss method to a new-forward looking approach, based on expected losses. The estimate of expected credit losses will require organizations to incorporate considerations of historical information, current conditions and reasonable and supportable forecasts. The standards update is effective prospectively for annual and interim periods in fiscal years beginning after December 15, 2019. The adoption of ASU 2016-13, beginning on January 1, 2020, did not have a significant impact on the Consolidated Financial Statements and related disclosures.
11
|
3. |
CASH, CASH EQUIVALENTS AND INVESTMENTS: |
The Company’s portfolio of fixed income securities consists of term bank certificates of deposit and U.S. Government bonds. The Company considers all highly liquid debt instruments purchased with an original maturity (maturity at the purchase date) of three months or less to be cash equivalents. The Company classifies its remaining debt security investments as available-for-sale. These debt securities are carried at fair market value, with unrealized gains and losses reported in shareholders’ equity. Gains or losses on securities sold are based on the specific identification method.
Cash and Cash Equivalents
|
The following table provides details regarding the Company’s portfolio of cash and cash equivalents (in thousands): |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Aggregate Fair |
|
|||||||
|
Cash and Cash Equivalents Classification |
|
Cost |
|
|
Gains |
|
|
(Losses) |
|
|
Market Value |
|
||||
|
June 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash accounts in banking institutions |
|
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
|
Money market accounts |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
|
December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash accounts in banking institutions |
|
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
|
Money market accounts |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
Short-term Investments
The following table provides details regarding the Company’s portfolio of short-term investments (in thousands):
|
|
|
Amortized |
|
|
Unrealized |
|
|
Aggregate Fair |
|
|||||||
|
Short-term Investments Classification |
|
Cost |
|
|
Gains |
|
|
(Losses) |
|
|
Market Value |
|
||||
|
June 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit |
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
U.S. Government bonds |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit |
|
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
|
U.S. Government bonds |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
Minority Investments
The Company’s portfolio of minority investments consists of investments in privately held early stage companies primarily motivated to gain early access to new technology and are passive in nature in that the Company does not obtain representation on the board of directors of the companies in which it invests. As of June 30, 2020, the Company had
|
4. |
FAIR VALUE MEASUREMENTS: |
The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of June 30, 2020 (in thousands):
|
|
|
|
|
|
|
Fair Value Measurements, Using |
|
|||||||||
|
|
|
Total Carrying Value as of June 30, 2020 |
|
|
Quoted Prices in Active Markets (Level 1) |
|
|
Significant Other Observable Inputs (Level 2) |
|
|
Significant Unobservable Inputs (Level 3) |
|
||||
|
Cash equivalents |
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
Short-term investments |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
12
The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of December 31, 2019 (in thousands):
|
|
|
|
|
|
|
Fair Value Measurements, Using |
|
|||||||||
|
|
|
Total Carrying Value as of December 31, 2019 |
|
|
Quoted Prices in Active Markets (Level 1) |
|
|
Significant Other Observable Inputs (Level 2) |
|
|
Significant Unobservable Inputs (Level 3) |
|
||||
|
Cash equivalents |
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
Short-term investments |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on management’s own assumptions used to measure assets and liabilities at fair value. A financial asset’s or liability’s classification is determined based on the lowest level input that is significant to the fair value measurement.
Changes in fair value of the debt investments are recorded as unrealized gains and losses in accumulated other comprehensive loss on the Consolidated Balance Sheets and any credit losses on debt investments are recorded as an allowance for credit losses with an offset recognized in other income, net on the Consolidated Statements of Income. There were
|
5. |
INVENTORY: |
Inventory consisted of the following (in thousands):
|
|
|
June 30, 2020 |
|
|
December 31, 2019 |
|
||
|
Raw materials |
|
$ |
|
|
|
$ |
|
|
|
Work-in-process |
|
|
|
|
|
|
|
|
|
Finished goods |
|
|
|
|
|
|
|
|
|
Inventory |
|
$ |
|
|
|
$ |
|
|
The Company recorded an increase in inventory reserve of
|
6. |
PROPERTY AND EQUIPMENT: |
|
|
|
|
|
June 30, 2020 |
|
|
December 31, 2019 |
|
||
|
Land |
|
$ |
|
|
|
$ |
|
|
|
Building and improvements |
|
|
|
|
|
|
|
|
|
Office and lab equipment |
|
|
|
|
|
|
|
|
|
Furniture, fixtures and computer related assets |
|
|
|
|
|
|
|
|
|
Construction-in-progress |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
|
Property and equipment, net |
|
$ |
|
|
|
$ |
|
|
Depreciation expense was $
|
7. |
GOODWILL AND INTANGIBLE ASSETS: |
The Company monitors the recoverability of goodwill annually or whenever events or changes in circumstances indicate the carrying value may not be recoverable. Purchased intangible assets subject to amortization consist primarily of acquired technology and other intangible assets that include trade names, customer relationships and developed IP processes.
13
Acquired Technology
Acquired technology consists of acquired license rights for patents and know-how obtained from PD-LD, Inc., Motorola, BASF SE (BASF) and Fujifilm.
|
|
|
June 30, 2020 |
|
|
December 31, 2019 |
|
||
|
PD-LD, Inc. |
|
$ |
|
|
|
$ |
|
|
|
Motorola |
|
|
|
|
|
|
|
|
|
BASF |
|
|
|
|
|
|
|
|
|
Fujifilm |
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Accumulated amortization |
|
|
( |
) |
|
|
( |
) |
|
Acquired technology, net |
|
$ |
|
|
|
$ |
|
|
Amortization expense related to acquired technology was $
Fujifilm Patent Acquisition
On July 23, 2012, the Company entered into a Patent Sale Agreement with Fujifilm. Under the agreement, Fujifilm sold more than
BASF Patent Acquisition
On June 28, 2016, UDC Ireland entered into and consummated an IP Transfer Agreement with BASF. Under the IP Transfer Agreement, BASF sold to UDC Ireland all of its rights, title and interest to certain of its owned and co-owned intellectual property rights relating to the composition of, development, manufacture and use of OLED materials, including OLED lighting and display stack technology, as well as certain tangible assets. The intellectual property includes knowhow and more than
14
Other Intangible Assets
As a result of the Adesis acquisition in June 2016, the Company recorded $
|
|
|
June 30, 2020 |
|
|||||||||
|
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net Carrying Amount |
|
|||
|
Customer relationships |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Developed IP, processes and recipes |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Trade name/Trademarks |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Total identifiable other intangible assets |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
Amortization expense related to other intangible assets was $
|
8. |
LEASES: |
The Company has entered into operating leases to facilitate the expansion of its manufacturing, research and development, and selling, general and administrative activities. For purposes of calculating operating lease liabilities, lease terms may be deemed to include options to extend or terminate the lease when those events are reasonably certain to occur. The interest rate implicit in lease contracts is typically not readily determinable and as such the Company uses the appropriate incremental borrowing rate based on information available at the lease commencement date in determining the present value of the lease payments.
The following table presents the Company’s operating lease cost and supplemental cash flow information related to the Company’s operating leases (in thousands):
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Operating lease cost |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Non-cash activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
As of June 30, 2020, current operating leases had remaining terms between
The following table presents weighted average assumptions used to compute the Company’s right-of-use assets and lease liabilities:
|
|
|
June 30, 2020 |
|
|
|
Weighted average remaining lease term (in years) |
|
|
|
|
|
Weighted average discount rate |
|
|
|
% |
15
Undiscounted future minimum lease payments as of June 30, 2020, by year and in the aggregate, having non-cancelable lease terms in excess of one year were as follows (in thousands):
|
|
|
Maturities of Operating Lease Liabilities |
|
|
|
2020 (1) |
|
$ |
|
|
|
2021 |
|
|
|
|
|
2022 |
|
|
|
|
|
2023 |
|
|
|
|
|
2024 |
|
|
|
|
|
Thereafter |
|
|
|
|
|
Total lease payments |
|
|
|
|
|
Less: Imputed interest |
|
|
( |
) |
|
Present value of lease payments |
|
$ |
|
|
|
(1) |
|
|
9. |
RESEARCH AND LICENSE AGREEMENTS WITH PRINCETON UNIVERSITY, UNIVERSITY OF SOUTHERN CALIFORNIA AND THE UNIVERSITY OF MICHIGAN: |
The Company has long-standing relationships with Princeton University (Princeton) and the University of Southern California (USC), dating back to 1994, for the conduct of research relating to the Company’s OLED and other organic thin-film technologies and materials. This research had been performed at Princeton under the direction of Professor Stephen R. Forrest and at USC under the direction of Professor Mark E. Thompson.
Under an Amended License Agreement entered into in 1997 by the Company, Princeton and USC (as amended, the 1997 Amended License Agreement), Princeton and USC granted the Company worldwide, exclusive license rights, with rights to sublicense, to make, have made, use, lease and/or sell products and to practice processes based on patent applications and issued patents arising out of research performed by Princeton and USC for the Company. Under the 1997 Amended License Agreement, the Company pays Princeton royalties of
In 2006, Professor Forrest transferred from Princeton to the University of Michigan (Michigan) and the Company amended the 1997 Amended License Agreement to include Michigan as a party to that agreement. Also in connection with the transfer, the Company entered into a sponsored research agreement with USC under which the Company continues to fund organic electronics research being conducted by Professors Forrest and Thompson (the 2006 Research Agreement). Work by Professor Forrest is being funded through a subcontract between USC and Michigan. The 2006 Research Agreement extends through with an option to further extend for an additional
The Company makes payments under the 2006 Research Agreement to USC on a quarterly basis as actual expenses are incurred. As of June 30, 2020, the Company was obligated to pay USC up to $
|
10. |
EQUITY AND CASH COMPENSATION UNDER THE PPG AGREEMENTS: |
On September 22, 2011, the Company entered into an Amended and Restated OLED Materials Supply and Service Agreement with PPG Industries, Inc. (PPG) (the New OLED Materials Agreement), which replaced the original OLED Materials Agreement with PPG effective as of October 1, 2011. The term of the New OLED Materials Agreement ran through December 31, 2015 and shall be automatically renewed for additional one-year terms, unless terminated by the Company by providing prior notice of one year or terminated by PPG by providing prior notice of two years. The agreement was automatically renewed through December 31, 2020. The New OLED Materials Agreement contains provisions that are substantially similar to those of the original OLED Materials Agreement. Under the New OLED Materials Agreement, PPG continues to assist the Company in developing its proprietary OLED materials and supplying the Company with those materials for evaluation purposes and for resale to its customers.
16
Under the New OLED Materials Agreement, the Company compensates PPG on a cost-plus basis for the services provided during each calendar quarter. The Company is required to pay for some of these services in all cash. Up to
The Company is also required to reimburse PPG for raw materials used for research and development. The Company records the purchases of these raw materials as a current asset until such materials are used for research and development efforts.
The Company recorded research and development expense of $
|
11. |
SHAREHOLDERS’ EQUITY: |
Preferred Stock
The Company’s Amended and Restated Articles of Incorporation authorize it to issue up to
In 1995, the Company issued
As of June 30, 2020, the Company had issued
Common Stock
The Company’s Amended and Restated Articles of Incorporation authorize it to issue up to
As of June 30, 2020, the Company had issued
Scientific Advisory Board Awards
During the six months ended June 30, 2020 and 2019, the Company granted a total of
Dividends
During the three months ended June 30, 2020, the Company declared and paid cash dividends of $
On August 4, 2020, the Company’s Board of Directors declared a third quarter dividend of $
17
|
12. |
ACCUMULATED OTHER COMPREHENSIVE LOSS: |
Amounts related to the changes in accumulated other comprehensive loss were as follows (in thousands):
|
|
|
Unrealized Gain (Loss) on Available-for-Sale Securities |
|
|
Net Unrealized Gain (Loss) on Retirement Plan (2) |
|
|
Change in Cumulative Foreign Currency Translation Adjustment |
|
|
Total |
|
|
Affected Line Items in the Consolidated Statements of Income |
||||
|
Balance December 31, 2019, net of tax |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
Other comprehensive gain before reclassification |
|
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
|
|
|
|
Reclassification to net income (1) |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Selling, general and administrative, research and development and cost of sales |
|
Change during period |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
Balance June 30, 2020, net of tax |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
Unrealized Gain (Loss) on Available-for-Sale Securities |
|
|
Net Unrealized Gain (Loss) on Retirement Plan (2) |
|
|
Change in Cumulative Foreign Currency Translation Adjustment |
|
|
Total |
|
|
Affected Line Items in the Consolidated Statements of Income |
||||
|
Balance December 31, 2018, net of tax |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
Other comprehensive gain before reclassification |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification to net income (1) |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Selling, general and administrative, research and development and cost of sales |
|
Change during period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2019, net of tax |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
(1) |
|
|
(2) |
|
|
13. |
STOCK-BASED COMPENSATION: |
Equity Compensation Plan
The Equity Compensation Plan provides for the granting of incentive and nonqualified stock options, shares of common stock, stock appreciation rights and performance units to employees, directors and consultants of the Company. Stock options are exercisable over periods determined by the Compensation Committee, but for no longer than
Restricted Stock Awards and Units
The Company has issued restricted stock awards and units to employees and non-employees with vesting terms of one to six years. The fair value is equal to the market price of the Company’s common stock on the date of grant for awards granted to employees and equal to the market price at the end of the reporting period for unvested non-employee awards or upon the date of vesting for vested non-employee awards. Expense for restricted stock awards and units is amortized ratably over the vesting period for the awards issued to employees and using a graded vesting method for the awards issued to non-employees.
18
During the six months ended June 30, 2020, the Company granted
For the three months ended June 30, 2020 and 2019, the Company recorded, as compensation charges related to all restricted stock awards and units granted to employees and non-employees, selling, general and administrative expense of $
In connection with the vesting of restricted stock awards and units during the three months ended June 30, 2020 and 2019,
For the three months ended June 30, 2020 and 2019, the Company recorded as compensation charges related to all restricted stock units granted to non-employee members of the Scientific Advisory Board, whose unvested shares are marked to market each reporting period, research and development expense of $
The Company has granted restricted stock units to non-employee members of the Board of Directors with quarterly vesting over a period of approximately
Performance Unit Awards
Each performance unit award is subject to both a performance-vesting requirement (either performance-based or market-based) and a service-vesting requirement. The performance-based vesting requirement is tied to the Company's cumulative revenue growth compared to the cumulative revenue growth of companies comprising the Nasdaq Electronics Components Index, as measured over a specific performance period. The market-based vesting requirement is tied to the Company's total shareholder return relative to the total shareholder return of companies comprising the Nasdaq Electronics Components Index, as measured over a specific performance period. The maximum number of performance units that may vest based on performance is two times the shares granted. Further, if the Company's total shareholder return is negative, the performance units may not vest at all.
During the six months ended June 30, 2020, the Company granted
For the three months ended June 30, 2020 and 2019, the Company recorded selling, general and administrative expense of $
19
In connection with the vesting of performance units during the six months ended June 30, 2020 and 2019,
Employee Stock Purchase Plan
On April 7, 2009, the Board of Directors of the Company adopted an Employee Stock Purchase Plan (ESPP). The ESPP was approved by the Company’s shareholders and became effective on June 25, 2009. The Company has reserved
Eligible employees may elect to contribute to the ESPP through payroll deductions during consecutive three-month purchase periods, the first of which began on July 1, 2009. Each employee who elects to participate will be deemed to have been granted an option to purchase shares of the Company’s common stock on the first day of the purchase period. Unless the employee opts out during the purchase period, the option will automatically be exercised on the last day of the period, which is the purchase date, based on the employee’s accumulated contributions to the ESPP. The purchase price will equal
Employees may allocate up to
During the six months ended June 30, 2020 and 2019, the Company issued
For the three months ended June 30, 2020 and 2019, the Company recorded charges of $
|
14. |
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN: |
On March 18, 2010, the Compensation Committee and the Board of Directors of the Company approved and adopted the Universal Display Corporation Supplemental Executive Retirement Plan (SERP). The SERP is currently unfunded and includes salary and bonus as part of the plan. The purpose of the SERP is to provide certain of the Company’s key employees with supplemental pension benefits following a cessation of their employment and to encourage their continued employment with the Company. As of June 30, 2020, there were
The Company records amounts relating to the SERP based on calculations that incorporate various actuarial and other assumptions, including discount rates, rate of compensation increases, retirement dates and life expectancies. The net periodic costs are recognized as employees render the services necessary to earn the SERP benefits.
The components of net periodic pension cost were as follows (in thousands):
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Service cost |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Interest cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net periodic benefit cost |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
20
|
15. |
COMMITMENTS AND CONTINGENCIES: |
Commitments
Under the 2006 Research Agreement with USC, the Company is obligated to make certain payments to USC based on work performed by USC under that agreement, and by Michigan under its subcontractor agreement with USC. See Note 9 for further explanation.
Under the terms of the 1997 Amended License Agreement, the Company is required to make minimum royalty payments to Princeton. See Note 9 for further explanation.
The Company has agreements with
In order to manage manufacturing lead times and help ensure adequate material supply, the Company entered into the New OLED Materials Agreement (see Note 10) that allows PPG to procure and produce inventory based upon criteria as defined by the Company. These purchase commitments consist of firm, noncancelable and unconditional commitments. In certain instances, this agreement allows the Company the option to reschedule and adjust the Company’s requirements based on its business needs prior to firm orders being placed. As of June 30, 2020 and December 31, 2019, the Company had purchase commitments for inventory of $
Patent Related Challenges and Oppositions
Each major jurisdiction in the world that issues patents provides both third parties and applicants an opportunity to seek a further review of an issued patent. The process for requesting and considering such reviews is specific to the jurisdiction that issued the patent in question, and generally does not provide for claims of monetary damages or a review of specific claims of infringement. The conclusions made by the reviewing administrative bodies tend to be appealable and generally are limited in scope and applicability to the specific claims and jurisdiction in question.
The Company believes that opposition proceedings are frequently commenced in the ordinary course of business by third parties who may believe that one or more claims in a patent do not comply with the technical or legal requirements of the specific jurisdiction in which the patent was issued. The Company views these proceedings as reflective of its goal of obtaining the broadest legally permissible patent coverage permitted in each jurisdiction. Once a proceeding is initiated, as a general matter, the issued patent continues to be presumed valid until the jurisdiction’s applicable administrative body issues a final non-appealable decision. Depending on the jurisdiction, the outcome of these proceedings could include affirmation, denial or modification of some or all of the originally issued claims. The Company believes that as OLED technology becomes more established and its patent portfolio increases in size, so will the number of these proceedings.
Below is a summary of an active proceeding that has been commenced against an issued patent that is exclusively licensed to the Company. The Company does not believe that the confirmation, loss or modification of the Company’s rights in any individual claim or set of claims that are the subject of the following legal proceeding would have a material impact on the Company’s materials sales or licensing business or on the Company’s Consolidated Financial Statements, including its Consolidated Statements of Income, as a whole. However, as noted within the description, the following proceeding involves an issued patent that relates to the Company’s fundamental phosphorescent OLED technologies and the Company intends to vigorously defend against claims that, in the Company’s opinion, seek to restrict or reduce the scope of the originally issued claim, which may require the expenditure of significant amounts of the Company’s resources. In certain circumstances, when permitted, the Company may also utilize a proceeding to request modification of the claims to better distinguish the patented invention from any newly identified prior art and/or improve the claim scope of the patent relative to commercially important categories of the invention.
Opposition to European Patent No. 1390962
On November 16, 2011, Osram AG and BASF SE each filed a Notice of Opposition to European Patent No. 1390962 (the EP '962 patent), which relates to the Company’s white phosphorescent OLED technology. The EP '962 patent, which was issued on February 16, 2011, is a European counterpart patent to U.S. patents 7,009,338 and 7,285,907. They are exclusively licensed to the Company by Princeton, and the Company is required to pay all legal costs and fees associated with this proceeding.
The European Patent Office (EPO) combined the oppositions into a single opposition proceeding, and a hearing on this matter was held in December 2015, wherein the EPO Opposition Division initially revoked the patent claims for alleged insufficiencies under
21
European Patent Convention Article 83. The Company believes the EPO's decision relating to the original claims is erroneous and has appealed the decision. Subsequent to the filing of the appeal, BASF withdrew its opposition to the patent. The EPO Opposition Appeals Division indicated that certain subject matter may overcome some of the lower Opposition Division’s rejections as a matter of law. Applicants submitted revised claims consistent with the potentially-allowable subject matter identified by the Appeals Division. Applicants expect the case to be remanded to the lower Opposition Division for further consideration and withdrawal of at least some of the lower Opposition Division’s rejections. The patent, as originally granted, is deemed valid during the pendency of the opposition process.
At this time, based on its current knowledge, the Company believes that the patent being challenged should be declared valid and that a significant portion of the Company's claims should be upheld. However, the Company cannot make any assurances of this result.
In addition to the above proceeding and now concluded proceedings which have been referenced in prior filings, from time to time, the Company may have other proceedings that are pending which relate to patents the Company acquired as part of the Fujifilm patent or BASF OLED patent acquisitions or which relate to technologies that are not currently widely used in the marketplace.
|
16. |
CONCENTRATION OF RISK: |
Revenues and accounts receivable from the Company's largest customers were as follows (in thousands):
|
|
|
% of Total Revenue for the Three Months Ended June 30, |
|
|
% of Total Revenue for the Six Months Ended June 30, |
|
|
Accounts Receivable as of |
|
|||||||
|
Customer |
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
|
June 30, 2020 |
|
|
|
A |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
B |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
C |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
D |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
Revenues from outside of North America represented approximately
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
Country |
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
South Korea |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
China |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Japan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-U.S. locations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-U.S. locations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The Company attributes revenue to different geographic areas on the basis of the location of the customer.
Long-lived assets (net), by geographic area are as follows (in thousands):
|
|
|
June 30, 2020 |
|
|
December 31, 2019 |
|
||
|
United States |
|
$ |
|
|
|
$ |
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Total long-lived assets |
|
$ |
|
|
|
$ |
|
|
Substantially all chemical materials were purchased from
|
17. |
INCOME TAXES: |
The Company is subject to income taxes in both the United States and foreign jurisdictions. The effective income tax rate was a benefit of
22
$
In assessing the realizability of deferred tax assets, management considers 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 the Company's 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 its assessment management considers 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 allowance that has historically been recorded related to the New Jersey research and development credit.
On December 27, 2018 the Korean Supreme Court, citing prior cases, held that the applicable law and interpretation of the Korea-U.S. Tax Treaty were clear that only royalties paid with respect to Korean registered patents are Korean source income and subject to Korean withholding tax. Based on this decision, the Company has decided to litigate the Korean withholding taxes paid or withheld on the 2018, 2019 and 2020 royalty payments and has engaged a leading Korean law firm which has advised that there is a more-likely-than-not chance of success. As a result, as of June 30, 2020 and December 31, 2019, the Company has recorded a long-term asset of $
With respect to the Korean withholding for the years 2011 through 2017, the Company has decided to continue the U.S.-Korean Mutual Agreement Procedure which was accepted by the Korean National Tax Service (KNTS) on September 15, 2017. The Company believes that it is more-likely-than-not that a favorable settlement will be reached resulting in a reduction of the Korean withholding taxes previously withheld since 2011. A long-term asset of $
On October 30, 2018, the KNTS concluded a tax audit with LG Display that included the licensing and royalty payments made to UDC Ireland during the years 2015 through 2017. The KNTS questioned whether UDC Ireland was the beneficial owner of these payments and assessed UDC Ireland a charge of $
The Company’s federal income tax returns for the years 2016 to 2019 are open and subject to examination. The State of New Jersey is currently auditing the 2014 and 2017 tax returns of UDC, Inc. The State and foreign tax returns are open for a period of generally three to
The above estimates may change in the future and ultimately upon settlement of these uncertain tax positions.
|
18. |
REVENUE RECOGNITION: |
Effective on January 1, 2018, the Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers (Topic 606). The standard establishes the principles that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows from a contract with a customer.
During the year ended December 31, 2019, the Company entered into a transaction with one of its customers for emitters involving elements of variable consideration. Due to the escalation in trade policy tension between the governments of China and the United States, the customer required a larger than normal shipment of emitters having a right to return them through March 15, 2020 in order to accommodate their uncertain production needs. Per Topic 606, the Company was constrained to recognizing revenue on this unique shipment to the extent that it was probable that a significant revenue reversal would not occur and deferred recognition of the remainder until after the inherent uncertainties of the transaction were resolved. These uncertainties included factors that were outside of the Company’s influence, including the customer’s production needs and complexities associated with the current international health and trade issues in China. On March 15, 2020, the inherent uncertainties of the transaction were resolved as the
23
customer did not exercise their right of return provision. This event resulted in the recognition of the previously constrained revenue during the six months ended June 30, 2020.
For the three months ended June 30, 2020 and 2019, the Company recorded
Contract Balances
The following table provides information about assets and liabilities associated with our contracts from customers (in thousands):
|
|
|
As of June 30, 2020 |
|
|
|
Accounts receivable |
|
$ |
|
|
|
Short-term unbilled receivables |
|
|
|
|
|
Long-term unbilled receivables |
|
|
|
|
|
Short-term deferred revenue |
|
|
|
|
|
Long-term deferred revenue |
|
|
|
|
Short-term and long-term unbilled receivables are classified as other current assets and other assets, respectively, on the Consolidated Balance Sheets. The deferred revenue balance at June 30, 2020 will be recognized as materials are shipped to customers over the remaining contract periods. The significant customer contracts (individually representing greater than 10% of revenue for the six months ended June 30, 2020) expire in
Significant changes in the unbilled receivables and deferred liabilities balances for the six months ended June 30, 2020 and 2019, are as follows (in thousands):
|
|
|
Six Months Ended June 30, 2020 |
|
|||||
|
|
|
Unbilled Receivables |
|
|
Deferred Revenue |
|
||
|
Balance at December 31, 2019 |
|
$ |
|
|
|
$ |
( |
) |
|
Revenue recognized that was previously included in deferred revenue |
|
|
— |
|
|
|
|
|
|
Increases due to cash received |
|
|
— |
|
|
|
( |
) |
|
Cumulative catch-up adjustment arising from changes in estimates of transaction price |
|
|
— |
|
|
|
|
|
|
Unbilled receivables recognized |
|
|
|
|
|
|
— |
|
|
Net change |
|
|
|
|
|
|
( |
) |
|
Balance at June 30, 2020 |
|
$ |
|
|
|
$ |
( |
) |
|
|
|
Six Months Ended June 30, 2019 |
|
|||||
|
|
|
Unbilled Receivables |
|
|
Deferred Revenue |
|
||
|
Balance at December 31, 2018 |
|
$ |
|
|
|
$ |
( |
) |
|
Revenue recognized that was previously included in deferred revenue |
|
|
— |
|
|
|
|
|
|
Increases due to cash received |
|
|
— |
|
|
|
( |
) |
|
Cumulative catch-up adjustment arising from changes in estimates of transaction price |
|
|
— |
|
|
|
|
|
|
Unbilled receivables recognized |
|
|
|
|
|
|
— |
|
|
Transferred to receivables from unbilled receivables |
|
|
( |
) |
|
|
— |
|
|
Net change |
|
|
|
|
|
|
( |
) |
|
Balance at June 30, 2019 |
|
$ |
|
|
|
$ |
( |
) |
24
|
19. |
NET INCOME PER COMMON SHARE: |
The Company computes earnings per share in accordance with ASC Topic 260, Earnings per Share, which requires earnings per share (EPS) for each class of stock to be calculated using the two-class method. The two-class method is an allocation of income between the holders of common stock and the Company's participating security holders. Under the two-class method, income for the reporting period is allocated between common shareholders and other security holders based on their respective participation rights in undistributed income. Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and, therefore, are included in computing earnings per share pursuant to the two-class method.
Basic net income per common share is computed by dividing net income allocated to common shareholders by the weighted-average number of shares of common stock outstanding for the period excluding unvested restricted stock units and performance units. Net income allocated to the holders of the Company's unvested restricted stock awards is calculated based on the shareholders proportionate share of weighted average shares of common stock outstanding on an if-converted basis.
For purposes of determining diluted net income per common share, basic net income per share is further adjusted to include the effect of potential dilutive common shares outstanding, including stock options, restricted stock units and performance units, and the impact of shares to be issued under the Employee Stock Purchase Plan.
The following table is a reconciliation of net income and the shares used in calculating basic and diluted net income per common share for the three and six months ended June 30, 2020 and 2019 (in thousands, except share and per share data):
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Adjustment for Basic EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings allocated to unvested shareholders |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Adjusted net income |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – Basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock equivalents arising from stock options and ESPP |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards and units and performance units |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Diluted |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
For the three months ended June 30, 2020 and 2019, the combined effects of unvested restricted stock awards, restricted stock units, performance unit awards and stock options of
25
|
ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited 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 sections entitled (Risk Factors) in our Annual Report on Form 10-K for the year ended December 31, 2019 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, as supplemented by disclosures 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 (OLED), technologies and materials for use in display applications, such as mobile phones, televisions, wearables, tablets, portable media devices, notebook computers, personal computers, and automotive applications, as well as specialty and general lighting products. Since 1994, we have been 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 primarily from the following:
|
|
• |
sales of OLED materials for evaluation, development and commercial manufacturing; |
|
|
• |
intellectual property and technology licensing; |
|
|
• |
technology development and support, including third-party collaboration efforts and providing support to third parties for commercialization of their OLED products; and |
|
|
• |
contract research services in the areas of chemical materials synthesis research, development and commercialization for non-OLED applications. |
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 generally recognized at the time control passes, which is typically at the time of shipment or at the time of delivery, 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. These payments are included in the estimate of total contract consideration by customer and recognized as revenue over the contract term based on material units sold at the estimated per unit fee over the life of the contract.
In 2018, we entered into a commercial license agreement with Samsung Display Co., Ltd. (SDC). This agreement, which covers the manufacture and sale of specified OLED display materials, was effective as of January 1, 2018 and lasts through the end of 2022 with an additional two-year extension option. Under this agreement, we are being paid a license fee, payable in quarterly installments
26
over the agreement term of five years. 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.
At the same time that we entered into the current commercial license agreement with SDC, we also entered into a material purchase agreement with SDC. Under the material purchase agreement, SDC agrees to purchase from us a minimum amount of phosphorescent emitter materials for use in the manufacture of licensed products. This minimum commitment is subject to SDC’s requirements for phosphorescent emitter materials and our ability to meet these requirements over the term of the supplemental 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. The 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 our patent portfolio. The patent license calls for license fees, prepaid royalties and running royalties on licensed products. The agreements include customary provisions relating to warranties, indemnities, confidentiality, assignability and business terms. The agreements provide for certain other minimum obligations relating to the volume of material sales anticipated over the life of the agreements as well as minimum royalty revenue to be generated under the patent license agreement. We 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 emitters and host materials.
In 2016, we entered into long-term, multi-year OLED patent license and material purchase agreements with Tianma Micro-electronics Co., Ltd. (Tianma). Under the license agreement, we have granted Tianma non-exclusive license rights under various patents owned or controlled by us to manufacture and sell OLED display products. The license agreement calls for license fees and running royalties on Tianma’s sales of licensed products. Additionally, we supply phosphorescent OLED materials to Tianma for use in its licensed products.
In 2017, we entered into long-term, multi-year agreements with BOE Technology Group Co., Ltd. (BOE). Under these agreements, we have granted BOE non-exclusive license rights under various patents owned or controlled by us to manufacture and sell OLED display products. We also supply phosphorescent OLED materials to BOE for use in its licensed products.
In 2018, we entered into long-term, multi-year OLED patent license and material purchase agreements with Visionox Technology, Inc. (Visionox). Under the license agreement, we have granted Visionox non-exclusive license rights under various patents owned or controlled by us to manufacture and sell OLED display products. The license agreement calls for license fees and running royalties on Visionox’s sales of licensed products. Additionally, we supply phosphorescent OLED materials to Visionox for use in its licensed products.
In 2019, we entered into an evaluation and commercial supply relationship with Wuhan China Star Optoelectronics Semiconductor Display Technology Co., Ltd. (CSOT). In 2020, we entered into long-term, multi-year agreements with CSOT. Under these agreements, we have granted CSOT non-exclusive license rights under various patents owned or controlled by us to manufacture and sell OLED display products. We also supply phosphorescent OLED materials to CSOT for use in its licensed products.
In 2016, we acquired Adesis, Inc. (Adesis) with operations in New Castle, Delaware. Adesis is a contract research organization (CRO) that provides support services to the OLED, pharma, biotech, catalysis and other industries. As of June 30, 2020, Adesis employed a team of 98 research scientists, chemists, engineers and laboratory technicians. Prior to our acquisition of Adesis in 2016, we utilized more than 50% of Adesis’ technology service and production output. We continue to utilize a significant portion of its technology research capacity for the benefit of our OLED technology development, and Adesis uses the remaining capacity to operate as a CRO in the above-mentioned industries by providing contract research services for non-OLED applications to those third-party customers. Contract research services revenue is earned by providing chemical materials synthesis research, development and commercialization for non-OLED applications on a contractual basis for those third-party customers.
In June 2020, a wholly-owned subsidiary, OVJP Corporation (OVJP Corp) was formed as a Delaware corporation. Based out of California, OVJP Corp was founded to advance the commercialization of our proprietary Organic Vapor Jet Printing (OVJP) technology. As a direct printing technique, OVJP technology has the potential to offer high deposition rates for large-area OLEDs. In addition, OVJP technology reduces OLED material waste associated with use of a shadow mask (i.e., the waste of material that deposits on the shadow mask itself when fabricating an OLED). By comparison to inkjet printing, an OVJP process does not use liquid solvents and therefore the OLED materials utilized are not limited by their viscosity or solvent solubility. OVJP also avoids generation of solvent wastes and eliminates the additional step of removing residual solvent from the OLED device. We believe the successful implementation of the OVJP technology has the potential to increase the addressable market for large-size OLED panels while also serving another potential growth market for our proprietary PHOLED materials and technologies.
27
We also generate technology development and support revenue earned from development and technology evaluation agreements and commercialization assistance fees, along with, to a minimal extent, government contracts. Relating to our government contracts, we may receive reimbursements by government entities for all or a portion of the research and development costs we incur. Revenues are recognized as services are performed, proportionally as research and development costs are incurred, or as defined milestones are achieved.
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. |
Further, we continue to monitor the impact of the novel coronavirus 2019 (COVID-19) on our business. Our global operations, and the global nature of our customer base and their respective customers, expose us to risks associated with public health crises, such as pandemics and epidemics. We believe the ongoing COVID-19 pandemic had a substantial impact on our operations and financial results for the three and six months ended June 30, 2020, and we expect the pandemic, as it evolves, to continue have an adverse impact on our results of operations in at least the near term, due in large part to the current disruption and uncertainties, potential continuing disruption of the global economy, uncertainties associated with consumer demand for finished OLED goods, and the potential resulting impact on our customers and their demand for our phosphorescent emitters.
At this time, the crisis has not had a significant impact on our ability to fulfill shipments of commercial materials as required by our customers. However, the sustainability of maintaining our testing and manufacturing operations at levels needed to meet fluctuating customer demand is uncertain and is dependent upon the rapidly evolving situations being encountered by our logistics and supply chain partners. In an effort to protect the health and safety of our employees, we have taken proactive measures to adopt social distancing policies at all of our locations, employing nurses to check everyone entering our buildings, working from home, reducing the number of people in our sites at any one time, and suspending employee travel.
While the ultimate health and economic impact of the COVID-19 pandemic is highly uncertain, we expect that our business operations and results of operations, including our revenues, net income and cash flows, will continue to be adversely impacted for at least the balance of 2020, including as a result of:
|
|
• |
temporary closure of electronics and other retail stores through which our customers sell the products for which they use our technology and materials; |
|
|
• |
consumer confidence and consumer spending habits, including spending for the products that our customers sell and negative trends in consumer purchasing patterns due to consumers’ disposable income, credit availability and debt levels; |
|
|
• |
possible disruption to the supply chain caused by distribution and other logistical issues, which may impact suppliers of our raw materials as well as our ability to ship our materials to customers on a timely basis; |
|
|
• |
decreased productivity due to travel ban, work-from-home policies or shelter-in-place orders; |
|
|
• |
a slowdown in the U.S. economy, and uncertain global economic outlook or a credit crisis; and |
|
|
• |
uncertain trade restrictions amongst jurisdictions seeking to manage their respective exposure to risks, including the COVID-19 pandemic. |
We are focused on navigating these recent challenges presented by COVID-19 through preserving our liquidity and managing our cash flow. We continue to actively monitor the COVID-19 situation and may take further actions altering our business operations that we determine are in the best interests of our employees, customers, partners, suppliers, and stakeholders, or as required by federal, state, or local authorities. It is not clear what the potential effects any such alterations or modifications may have on our business, including the effects on our customers, employees, and on our financial results for the remainder of the 2020 fiscal year.
28
RESULTS OF OPERATIONS
Comparison of the Three Months Ended June 30, 2020 and 2019
|
|
|
Three Months Ended June 30, |
|
|
|
|
||||||
|
|
|
2020 |
|
|
2019 |
|
|
Increase (Decrease) |
|
|||
|
REVENUE |
|
$ |
57,968 |
|
|
$ |
118,168 |
|
|
$ |
(60,200 |
) |
|
COST OF SALES |
|
|
12,643 |
|
|
|
24,072 |
|
|
|
(11,429 |
) |
|
Gross margin |
|
|
45,325 |
|
|
|
94,096 |
|
|
|
(48,771 |
) |
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
21,397 |
|
|
|
18,833 |
|
|
|
2,564 |
|
|
Selling, general and administrative |
|
|
16,147 |
|
|
|
15,939 |
|
|
|
208 |
|
|
Amortization of acquired technology and other intangible assets |
|
|
5,490 |
|
|
|
5,490 |
|
|
|
— |
|
|
Patent costs |
|
|
1,858 |
|
|
|
1,716 |
|
|
|
142 |
|
|
Royalty and license expense |
|
|
1,618 |
|
|
|
3,454 |
|
|
|
(1,836 |
) |
|
Total operating expenses |
|
|
46,510 |
|
|
|
45,432 |
|
|
|
1,078 |
|
|
OPERATING (LOSS) INCOME |
|
|
(1,185 |
) |
|
|
48,664 |
|
|
|
(49,849 |
) |
|
Interest income, net |
|
|
1,268 |
|
|
|
2,757 |
|
|
|
(1,489 |
) |
|
Other income, net |
|
|
170 |
|
|
|
405 |
|
|
|
(235 |
) |
|
Interest and other income, net |
|
|
1,438 |
|
|
|
3,162 |
|
|
|
(1,724 |
) |
|
INCOME BEFORE INCOME TAXES |
|
|
253 |
|
|
|
51,826 |
|
|
|
(51,573 |
) |
|
INCOME TAX BENEFIT (EXPENSE) |
|
|
562 |
|
|
|
(8,386 |
) |
|
|
8,948 |
|
|
NET INCOME |
|
$ |
815 |
|
|
$ |
43,440 |
|
|
$ |
(42,625 |
) |
Revenue
During the three months ended June 30, 2020, we recognized revenue of $58.0 million, a decrease of $60.2 million from $118.2 million in the three months ended June 30, 2019. We believe the decrease in revenue was mainly due to the weakened demand for emitter product from our customers as a result of the COVID-19 pandemic, as well as the advanced purchases that were fulfilled in the prior quarter in anticipation of potential supply disruptions from the pandemic and inventory management efforts by our customers to minimize effects of potentially heightened trade tensions between the governments of China and the United States. The full extent of the impact of the pandemic on our operational performance remains uncertain and will depend on many factors including the timing, extent and duration of the pandemic, the development and availability of effective treatments and vaccines, and the impact on the global economy and demand for OLED consumer products.
Revenue derived from OLED sales comprised 94% of total revenue for the three months ended June 30, 2020 as compared to 98% for the three months ended June 30, 2019. The remaining portion of our revenue was derived from contract research services. Revenue from contract research services consists of revenue earned by our subsidiary, Adesis, which provides support services to the pharma, biotech, catalysis and other industries on a contractual basis for those third-party customers.
Cost of sales
Cost of sales for the three months ended June 30, 2020 decreased by $11.4 million as compared to the three months ended June 30, 2019, primarily due to a decrease in the level of material sales. Included in the cost of sales for the three months ended June 30, 2020 and 2019, was an increase in inventory reserve of none and $3.9 million, respectively, due to excess inventory levels in certain products. As a result of the decrease in material sales, gross margin for the three months ended June 30, 2020 decreased by $48.8 million as compared to the three months ended June 30, 2019, with gross margin as a percentage of revenue decreasing to 78% from 80%.
Research and development
Research and development expenses increased to $21.4 million for the three months ended June 30, 2020, as compared to $18.8 million for the three months ended June 30, 2019. The increase in research and development expenses was primarily due to higher employee-related compensation expenses and operating costs, including increased contract research activity.
29
Selling, general and administrative
Selling, general and administrative expenses increased to $16.1 million for the three months ended June 30, 2020, as compared to $15.9 million for the three months ended June 30, 2019. The increase in selling, general and administrative expenses was primarily due to higher employee-related compensation expenses.
Amortization of acquired technology and other intangible assets
Amortization of acquired technology and other intangible assets was $5.5 million for both of the three-month periods ended June 30, 2020 and 2019.
Patent costs
Patent costs increased to $1.9 million for the three months ended June 30, 2020, as compared to $1.7 million for the three months ended June 30, 2019. The results in the current year quarter reflected higher internal patent prosecution related costs.
Royalty and license expense
Royalty and license expense decreased to $1.6 million for the three months ended June 30, 2020, as compared to $3.5 million for the three months ended June 30, 2019. The decrease was due to decreased royalties incurred under our amended license agreement with Princeton, USC and Michigan, resulting from a decrease in qualifying material sales. See Note 9 in Notes to the Consolidated Financial Statements for further discussion.
Interest and other income, net
Interest income, net was $1.3 million for the three months ended June 30, 2020, as compared to $2.8 million for the three months ended June 30, 2019. The decrease in interest income, net was primarily due to a decrease in bond yields on available-for-sale investments held in the current quarter over bond yields on available-for-sale investments held in the comparable period in 2019. Other income, net primarily consisted of net exchange gains and losses on foreign currency transactions and rental income. We recorded other income, net of $170,000 for the three months ended June 30, 2020 as compared to $405,000 for the three months ended June 30, 2019.
Income tax expense
We are subject to income taxes in both the United States and foreign jurisdictions. The effective income tax rate was a benefit of 222.1% and an expense 16.2% for the three months ended June 30, 2020 and 2019, respectively, and we recorded income tax benefit of $562,000 and $8.4 million, respectively, for those periods. The recorded amounts include deductions for employee share awards in excess of compensation costs (“windfalls”) under Accounting Standards Update (ASU) No. 2016-09. For the three months ended June 30, 2020, without the $1.1 million benefit of ASU No. 2016-09, the effective income tax rate and income tax expense would have been 215.8% and $546,000, respectively, and for the three months ended June 30, 2019, without the $1.4 million benefit of ASU No. 2016-09, the effective income tax rate and income tax expense would have been 18.9% and $9.8 million, respectively.
30
Comparison of the Six Months Ended June 30, 2020 and 2019
|
|
|
Six Months Ended June 30, |
|
|
|
|
||||||
|
|
|
2020 |
|
|
2019 |
|
|
Increase (Decrease) |
|
|||
|
REVENUE |
|
$ |
170,245 |
|
|
$ |
205,933 |
|
|
$ |
(35,688 |
) |
|
COST OF SALES |
|
|
35,102 |
|
|
|
39,886 |
|
|
|
(4,784 |
) |
|
Gross margin |
|
|
135,143 |
|
|
|
166,047 |
|
|
|
(30,904 |
) |
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
40,894 |
|
|
|
34,662 |
|
|
|
6,232 |
|
|
Selling, general and administrative |
|
|
31,550 |
|
|
|
27,908 |
|
|
|
3,642 |
|
|
Amortization of acquired technology and other intangible assets |
|
|
10,980 |
|
|
|
10,976 |
|
|
|
4 |
|
|
Patent costs |
|
|
3,496 |
|
|
|
3,486 |
|
|
|
10 |
|
|
Royalty and license expense |
|
|
4,902 |
|
|
|
5,991 |
|
|
|
(1,089 |
) |
|
Total operating expenses |
|
|
91,822 |
|
|
|
83,023 |
|
|
|
8,799 |
|
|
OPERATING INCOME |
|
|
43,321 |
|
|
|
83,024 |
|
|
|
(39,703 |
) |
|
Interest income, net |
|
|
3,415 |
|
|
|
5,588 |
|
|
|
(2,173 |
) |
|
Other income, net |
|
|
372 |
|
|
|
687 |
|
|
|
(315 |
) |
|
Interest and other income, net |
|
|
3,787 |
|
|
|
6,275 |
|
|
|
(2,488 |
) |
|
INCOME BEFORE INCOME TAXES |
|
|
47,108 |
|
|
|
89,299 |
|
|
|
(42,191 |
) |
|
INCOME TAX EXPENSE |
|
|
(8,138 |
) |
|
|
(14,385 |
) |
|
|
6,247 |
|
|
NET INCOME |
|
$ |
38,970 |
|
|
$ |
74,914 |
|
|
$ |
(35,944 |
) |
Revenue
During the six months ended June 30, 2020, we recognized revenue of $170.2 million, a decrease of $35.7 million from $205.9 million in the six months ended June 30, 2019. We believe the decrease in revenue was mainly due to the weakened demand for emitter product from our customers as a result of the COVID-19 pandemic. The full extent of the impact of the pandemic on our operational performance remains uncertain and will depend on many factors including the timing, extent and duration of the pandemic, the development and availability of effective treatments and vaccines, and the impact on the global economy and demand for OLED consumer products.
Revenue derived from OLED sales comprised 96% of total revenue for the six months ended June 30, 2020 as compared to 97% for the six months ended June 30, 2019. The remaining portion of our revenue was derived from contract research services. Revenue from contract research services consists of revenue earned by our subsidiary, Adesis, which provides support services to the pharma, biotech, catalysis and other industries on a contractual basis for those third-party customers.
Cost of sales
Cost of sales for the six months ended June 30, 2020 decreased by $4.8 million as compared to the six months ended June 30, 2019, primarily due to a decrease in the level of material sales. Included in the cost of sales for the six months ended June 30, 2020 and 2019, was an increase in inventory reserve of $611,000 and $4.2 million, respectively, due to excess inventory levels in certain products. As a result of the decrease in material sales, gross margin for the six months ended June 30, 2020 decreased by $30.9 million as compared to the six months ended June 30, 2019, with gross margin as a percentage of revenue decreasing to 79% from 81%.
Research and development
Research and development expenses increased to $40.9 million for the six months ended June 30, 2020, as compared to $34.7 million for the six months ended June 30, 2019. The increase in research and development expenses was primarily due to higher employee-related compensation expenses and operating costs, including increased contract research activity.
Selling, general and administrative
Selling, general and administrative expenses increased to $31.6 million for the six months ended June 30, 2020, as compared to $27.9 million for the six months ended June 30, 2019. The increase in selling, general and administrative expenses was primarily due to higher employee-related compensation expenses.
31
Amortization of acquired technology and other intangible assets
Amortization of acquired technology and other intangible assets was $11.0 million for both of the six-month periods ended June 30, 2020 and 2019.
Patent costs
Patent costs were $3.5 million for both of the six-month periods ended June 30, 2020 and 2019.
Royalty and license expense
Royalty and license expense decreased to $4.9 million for the six months ended June 30, 2020, as compared to $6.0 million for the six months ended June 30, 2019. The decrease was due to decreased royalties incurred under our amended license agreement with Princeton, USC and Michigan, resulting from a decrease in qualifying material sales. See Note 9 in Notes to the Consolidated Financial Statements for further discussion.
Interest and other income, net
Interest income, net was $3.4 million for the six months ended June 30, 2020, as compared to $5.6 million for the six months ended June 30, 2019. The decrease in interest income, net was primarily due to a decrease in bond yields on available-for-sale investments held in the current year over bond yields on available-for-sale investments held in the comparable period in 2019. Other income, net primarily consisted of net exchange gains and losses on foreign currency transactions and rental income. We recorded other income, net of $372,000 for the six months ended June 30, 2020 as compared to $687,000 for the six months ended June 30, 2019.
Income tax expense
We are subject to income taxes in both the United States and foreign jurisdictions. The effective income tax rate was an expense of 17.3% and 16.1% for the six months ended June 30, 2020 and 2019, respectively, and we recorded income tax expense of $8.1 million and $14.4 million, respectively, for those periods. The recorded amounts include deductions for employee share awards in excess of compensation costs (“windfalls”) under Accounting Standards Update (ASU) No. 2016-09. For the six months ended June 30, 2020, without the $1.6 million benefit of ASU No. 2016-09, the effective income tax rate and income tax expense would have been 20.6% and $9.7 million, respectively, and for the six months ended June 30, 2019, without the $2.8 million benefit of ASU No. 2016-09, the effective income tax rate and income tax expense would have been 19.3% and $17.2 million, respectively.
Liquidity and Capital Resources
Our principal sources of liquidity are our cash and cash equivalents and our short-term investments. As of June 30, 2020, we had cash and cash equivalents of $133.6 million and short-term investments of $510.4 million, for a total of $644.0 million. This compares to cash and cash equivalents of $131.6 million and short-term investments of $514.5, for a total of $646.1 million, as of December 31, 2019.
Cash provided by operating activities for the six months ended June 30, 2020 was $32.0 million resulting from $39.0 million of net income and $20.0 million due to changes in our operating assets and liabilities, partially offset by a $27.0 million reduction due to non-cash items including amortization of deferred revenue, amortization of intangibles and stock-based compensation. Changes in our operating assets and liabilities related to an increase in deferred revenue of $75.7 million and a decrease in other liabilities of $5.8 million, partially offset by an increase in inventory of $21.2 million, a decrease in accounts payable and accrued expenses of $20.4 million, an increase in other assets of $11.9 million and an increase in accounts receivable of $8.0 million.
Cash provided by operating activities for the six months ended June 30, 2019 was $83.9 million resulting from $74.9 million of net income and $45.4 million due to changes in our operating assets and liabilities, partially offset by a $36.4 million reduction due to non-cash items including amortization of deferred revenue, depreciation and amortization of intangibles. Changes in our operating assets and liabilities related to an increase in deferred revenue of $68.2 million, an increase in other liabilities of $6.1 million and a reduction of inventory of $5.7 million, partially offset by an increase in accounts receivable of $23.8 million, an increase in other assets of $8.7 million, and a reduction of accounts payable and accrued expenses of $2.1 million.
32
Cash used in investing activities was $3.3 million for the six months ended June 30, 2020, as compared to cash provided by investing activities of $53.5 million for the six months ended June 30, 2019. The decrease was due to the timing of maturities and purchases of investments resulting in net sales of $8.5 million for the six months ended June 30, 2020, as compared to $74.2 million for the six months ended June 30, 2019, partially offset by a decrease in purchases of intangibles and property, plant and equipment of $8.9 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019. The decrease in property, plant and equipment purchases during 2020 was primarily due to improvements to our Ewing facilities in New Jersey as part of our plan to expand operations during 2019.
Cash used in financing activities was $26.8 million for the six months ended June 30, 2020, as compared to $24.1 million for the six months ended June 30, 2019. The increase was due to an increase in the cash payment of dividends in the current year of $4.8 million, partially offset by a decrease in the payment of withholding taxes related to stock-based compensation to employees of $1.3 million, a decrease in the repurchase of common stock of $649,000 and an increase in proceeds from the issuance of common stock of $145,000.
Working capital was $667.5 million as of June 30, 2020, as compared to $630.9 million as of December 31, 2019. The increase was primarily due to an increase in inventory, an increase in other current assets and a decrease in accrued expenses, partially offset by an increase in deferred revenue.
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. However, the extent to which the COVID-19 pandemic and our precautionary measures in response thereto may impact our business and thus our liquidity will depend on future developments, which are highly uncertain and cannot be precisely estimated at this time.
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 Consolidated 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, inventories, and income taxes 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, 2019, 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, 2019 for a discussion of our contractual obligations.
Off-Balance Sheet Arrangements
As of June 30, 2020, 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.
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ITEM 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
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.
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ITEM 4. |
CONTROLS AND PROCEDURES |
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, 2020. 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, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
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ITEM 1. |
LEGAL PROCEEDINGS |
Patent Related Challenges and Oppositions
Each major jurisdiction in the world that issues patents provides both third parties and applicants an opportunity to seek a further review of an issued patent. The process for requesting and considering such reviews is specific to the jurisdiction that issued the patent in question, and generally does not provide for claims of monetary damages or a review of specific claims of infringement. The conclusions made by the reviewing administrative bodies tend to be appealable and generally are limited in scope and applicability to the specific claims and jurisdiction in question.
We believe that opposition proceedings are frequently commenced in the ordinary course of business by third parties who may believe that one or more claims in a patent do not comply with the technical or legal requirements of the specific jurisdiction in which the patent was issued. We view these proceedings as reflective of its goal of obtaining the broadest legally permissible patent coverage permitted in each jurisdiction. Once a proceeding is initiated, as a general matter, the issued patent continues to be presumed valid until the jurisdiction’s applicable administrative body issues a final non-appealable decision. Depending on the jurisdiction, the outcome of these proceedings could include affirmation, denial or modification of some or all of the originally issued claims. We believe that as OLED technology becomes more established and its patent portfolio increases in size, so will the number of these proceedings.
Below is a summary of an active proceeding that has been commenced against an issued patent that is exclusively licensed to us. We do not believe that the confirmation, loss or modification of our rights in any individual claim or set of claims that are the subject of the following legal proceeding would have a material impact on our materials sales or licensing business or on our Consolidated Financial Statements, including our Consolidated Statements of Income, as a whole. However, as noted within the description, the following proceeding involves an issued patent that relates to our fundamental phosphorescent OLED technologies and we intend to vigorously defend against claims that, in our opinion, seek to restrict or reduce the scope of the originally issued claim, which may require the expenditure of significant amounts of our resources. In certain circumstances, when permitted, we may also utilize a proceeding to request modification of the claims to better distinguish the patented invention from any newly identified prior art and/or improve the claim scope of the patent relative to commercially important categories of the invention.
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Opposition to European Patent No. 1390962
On November 16, 2011, Osram AG and BASF SE each filed a Notice of Opposition to European Patent No. 1390962 (the EP '962 patent), which relates to the Company’s white phosphorescent OLED technology. The EP '962 patent, which was issued on February 16, 2011, is a European counterpart patent to U.S. patents 7,009,338 and 7,285,907. They are exclusively licensed to us by Princeton, and we are required to pay all legal costs and fees associated with this proceeding.
The European Patent Office (EPO) combined the oppositions into a single opposition proceeding, and a hearing on this matter was held in December 2015, wherein the EPO Opposition Division initially revoked the patent claims for alleged insufficiencies under European Patent Convention Article 83. We believe the EPO's decision relating to the original claims is erroneous and have appealed the decision. Subsequent to the filing of the appeal, BASF withdrew its opposition to the patent. The EPO Opposition Appeals Division indicated that certain subject matter may overcome some of the lower Opposition Division’s rejections as a matter of law. Applicants submitted revised claims consistent with the potentially-allowable subject matter identified by the Appeals Division. Applicants expect the case to be remanded to the lower Opposition Division for further consideration and withdrawal of at least some of the lower Opposition Division’s rejections. The patent, as originally granted, is deemed valid during the pendency of the opposition process.
At this time, based on its current knowledge, we believe that the patent being challenged should be declared valid and that a significant portion of our claims should be upheld. However, we cannot make any assurances of this result.
In addition to the above proceeding and now concluded proceedings which have been referenced in prior filings, from time to time, we may have other proceedings that are pending which relate to patents we acquired as part of the Fujifilm patent or BASF OLED patent acquisitions or which relate to technologies that are not currently widely used in the marketplace.
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ITEM 1A. |
RISK FACTORS |
This section supplements and updates certain of the information found under Part I, Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2019 and Part II, Item 1A. “Risk Factors” of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 based on information currently known to us and recent developments since the filing of such Annual Report on Form 10-K and Quarterly Report on Form 10-Q. The matters discussed below should be read in conjunction with the risk factors set forth in such Annual Report on Form 10-K and Quarterly Report on Form 10-Q.
The COVID-19 pandemic has had, and we expect it to continue to have, a material adverse effect on our operations and business.
The COVID-19 pandemic has negatively impacted the global economy, disrupted consumer spending and global supply chains, and created significant volatility and disruption of financial markets. We expect the COVID-19 pandemic to continue to have an adverse impact on our business and financial performance. The extent of the impact of the COVID-19 pandemic on our business and financial performance, including our ability to execute our near-term and long-term business strategies and initiatives in the expected time frame, will depend on future developments, including the duration and severity of the pandemic, including any “second wave” of the pandemic that may commence later in 2020, which are uncertain and cannot be predicted.
As a result of the COVID-19 pandemic, and in response to government mandates or recommendations, as well as decisions we have made to protect the health and safety of our employees and communities, we have taken proactive measures to adopt social distancing policies at all of our locations, including working from home, reducing the number of people in our sites at any one time, and suspending employee travel. In the future, we may face closure requirements and other operational restrictions with respect to some or all of our physical locations for prolonged periods of time due to, among other factors, evolving and increasingly stringent governmental restrictions including public health directives, quarantine policies or social distancing measures. In addition, many of our customers may reduce their operations, as demand for their products becomes negatively affected, which would adversely impact our revenues from these customers. As a result, we would expect our financial results to be materially adversely impacted.
In addition, consumer spending generally may also be negatively impacted by general macroeconomic conditions and consumer confidence, including the impact of any recession, resulting from the COVID-19 pandemic. This may negatively impact sales for our customers and may also have an impact on their development of new products.
As a result of the COVID-19 pandemic, we have implemented a work from home policy for many of our corporate employees. This policy may negatively impact productivity and cause other disruptions to our business, and have material and adverse effects on our business, financial condition and results of operations.
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The extent of the impact of the COVID-19 pandemic on our business is highly uncertain and difficult to predict, as information is rapidly evolving with respect to the duration and severity of the pandemic. At this point, we cannot reasonably estimate the duration and severity of the COVID-19 pandemic, or its overall impact on our business, financial condition and results of operations.
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ITEM 2. |
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None.
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ITEM 3. |
DEFAULTS UPON SENIOR SECURITIES |
None.
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ITEM 4. |
MINE SAFETY DISCLOSURES |
Not applicable.
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ITEM 5. |
OTHER INFORMATION |
None.
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ITEM 6. |
EXHIBITS |
The following is a list of the exhibits filed as part of this report. Where so indicated by footnote, exhibits that were previously filed are incorporated by reference. For exhibits incorporated by reference, the location of the exhibit in the previous filing is indicated parenthetically, together with a reference to the filing indicated by footnote.
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Exhibit Number |
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Description |
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31.1* |
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31.2* |
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32.1** |
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32.2** |
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101.INS* |
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Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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101.SCH* |
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Inline XBRL Taxonomy Extension Schema Document |
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101.CAL* |
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Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF* |
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Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB* |
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Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE* |
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Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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104 |
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The cover page of this Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 formatted in Inline XBRL (included in Item 101.INS) |
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Explanation of footnotes to listing of exhibits:
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* |
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Filed herewith. |
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** |
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Furnished herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized:
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UNIVERSAL DISPLAY CORPORATION |
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Date: August 6, 2020 |
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By: /s/ Sidney D. Rosenblatt |
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Sidney D. Rosenblatt |
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Executive Vice President, Chief Financial Officer, |
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Treasurer and Secretary |
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