IMAX Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Unaudited results are compared with the three months ended March 31, 2017. Amounts are in U.S. dollars.
Business context
IMAX operates a global premium cinema network, earning revenue from film digital re-mastering (DMR), theater-system sales and leases, joint revenue-sharing arrangements, and maintenance. At quarter-end, 1,382 theater systems operated in 77 countries, up from 1,226 in 75 countries a year earlier. Greater China generated about 33% of Q1 2018 revenue.
Key financial results
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $85.0 million | $68.7 million |
| Gross margin | $50.7 million; 59.6% of revenue | $35.8 million; 52.1% of revenue |
| Operating income (loss) | $17.0 million | $(0.3) million |
| Net income (loss), consolidated | $12.1 million | $(0.9) million |
| Net income attributable to common shareholders | $8.5 million; $0.13 per diluted share | $0.1 million; approximately $0.00 per diluted share |
| Adjusted net income, non-GAAP | $17.1 million; $0.27 per diluted share | $3.0 million; $0.05 per diluted share |
| Cash from operating activities | $15.5 million | $(0.6) million |
| Cash used in investing activities | $(12.0) million | $(14.2) million |
| Cash used in financing activities | $(16.6) million | $0.5 million provided |
Q1 2018 revenue rose 23.8% year over year. Network business revenue increased 14.2% to $44.9 million, while theater business revenue increased 50.6% to $35.0 million, principally reflecting more system installations. Operating cash flow improved, while cash and cash equivalents fell to $145.6 million from $158.7 million at year-end 2017, partly reflecting share repurchases and investment spending.
At March 31, 2018, total assets were $878.3 million, total liabilities $244.8 million, and total shareholders’ equity $628.1 million. Bank indebtedness was $24.9 million, consisting principally of the $25.2 million Playa Vista loan, net of deferred financing costs. No amounts were drawn under the $200 million revolving credit facility; the company reported full availability and compliance with its covenants. The reported maximum total leverage ratio was 0.17:1.
Material changes and accounting
- IMAX adopted ASC 606 on January 1, 2018 using the modified retrospective method. Adoption increased opening retained earnings by $27.6 million, net of tax, and increased Q1 reported revenue by $0.7 million. It also changed the timing and classification of some system-sale and hybrid-arrangement revenue; prior-year results were not restated.
- ASC 606 requires estimates of certain future variable consideration on system sales and hybrid sales. The company recognized estimates at system transfer of control rather than recognizing those amounts only as later reported by exhibitors. Management cautioned that estimation involves judgment and constraints intended to limit future revenue reversals.
- Gross margin improved alongside higher DMR box office and system installations. DMR gross box office rose 16.4% to $246.9 million; theater-system sales and sales-type lease installations recognized increased to 13 from five.
- SG&A decreased to $28.1 million from $30.9 million, which the company associated with cost-reduction efforts. Q1 included $0.7 million of restructuring charges; management expected a further $0.4 million during the remainder of 2018. The company reported a $3.4 million documentary-film asset impairment in Q1 2017 and none in Q1 2018.
Outlook, commentary, risks and contingencies
- Management anticipated approximately 155 new theater-system installations in 2018, excluding upgrades, and expected a similar number of DMR film releases to 2017’s 60. Installations can be delayed for reasons outside the company’s control.
- On April 24, 2018, after quarter-end, IMAX announced binding letters of intent with Cineworld for 55 IMAX with Laser systems and AMC for upgrades to 87 theaters. Installations were expected between 2018 and 2022; the filing describes this as a planned renewal and upgrade opportunity.
- Management expected sufficient capital and liquidity for normal operations over the next 12 months, while noting that cash flow depends on theater signings and installations, film performance, and collections. It expected continued cash use for joint revenue-sharing systems, DMR activities, and share repurchases.
- Key stated risks include film performance, conversion of backlog into revenue, exhibition-industry conditions and consolidation, competition and technology changes, foreign exchange, international and China-related operations, cybersecurity, and execution of restructuring savings. Cash held outside North America was $125.9 million, including $37.5 million in China; repatriating funds from China could result in estimated withholding tax of $7.8 million.
- Contingencies include the 3DMG arbitration, for which the company accrued the minimum of the loss range and said the ultimate outcome is uncertain; the Giencourt matter, where the company was challenging an award and could not estimate potential amounts or payment timing; and a China customs matter, for which a $0.3 million estimate of potential fines was recorded. The filing warns adverse outcomes could materially affect results, cash flows, or financial position.
Investor verification priorities
- Assess the durability of the revenue and margin improvement, including the film slate, DMR box office, and pace and economics of theater installations.
- Review ASC 606 estimates and the $27.6 million transition adjustment, particularly how variable consideration is estimated and whether future revisions or reversals arise.
- Track the 529-system backlog, including its concentration in Greater China, and the company’s ability to convert signed commitments into installations and cash receipts.
- Monitor receivable quality: financing receivables totaled $129.8 million; $3.8 million was aged 90 days or more, and $1.1 million of financed sales receivables was on nonaccrual status before a $0.9 million allowance.
- Verify the execution, final terms, timing, and economics of the announced Cineworld and AMC laser arrangements, as well as the 2018 installation outlook.
- Follow the identified legal and customs contingencies, China cash-repatriation exposure, and use of cash for repurchases and investment.
Note: The filing’s MD&A states consolidated net income per diluted share of $0.19 for Q1 2018, while the financial statements report $0.13 per share attributable to common shareholders. These figures use different income measures; investors should verify the relevant EPS basis when comparing results.