IMAX Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; comparisons are with the periods ended June 30, 2018. All dollar amounts are U.S. dollars. Financial statements are unaudited.
Business context
IMAX earns revenue from film remastering and box-office participation, theater-system sales and leases, joint revenue-sharing arrangements, and theater maintenance. At quarter-end, 1,541 theater systems operated in 81 countries, up from 1,410 in 79 countries a year earlier. Greater China represented about 32% of first-half revenue.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $104.8M | $98.3M | $185.0M | $183.3M |
| Gross margin | $59.6M (56.8%) | $60.4M (61.4%) | $104.7M (56.6%) | $111.1M (60.6%) |
| Operating income | $24.1M | $14.7M | $38.0M | $31.8M |
| Net income | $13.8M | $10.3M | $26.3M | $22.3M |
| Net income attributable to common shareholders | $11.4M | $7.6M | $19.7M | $16.1M |
| GAAP EPS attributable to common shareholders | $0.19 | $0.12 | $0.32 | $0.25 |
| Operating cash flow | Not separately provided | Not separately provided | $48.5M | $46.7M |
For Q2, revenue rose 6.6%, but gross margin dollars fell 1.4% and gross margin percentage declined 4.6 percentage points. First-half revenue increased 0.9%, while gross margin declined 5.8%. First-half adjusted net income, a non-GAAP measure, was $38.1M versus $38.8M; adjusted net income attributable to common shareholders was $30.5M versus $32.4M.
Cash and cash equivalents were $106.5M at June 30, down from $141.6M at year-end 2018. Total assets were $875.9M and shareholders’ equity was $604.1M. Credit-facility borrowings were $25.0M, with $275.0M available under the $300.0M facility; the facility matures in 2023. The company reported compliance with its leverage covenant. Financing receivables were $121.6M, including $6.2M past due 90 days or more before allowances.
First-half investing cash outflow was $42.7M, including $22.2M for joint-revenue-sharing theater equipment and $15.2M for Maoyan shares. Financing cash outflow was $41.3M. Cash declined by $35.1M during the half.
Material changes and operating drivers
- Q2 network-business revenue increased 6.3% to $64.7M; theater-business revenue increased 13.2% to $34.9M. The new-business segment fell to $0.5M from $3.1M, reflecting the closure of VR locations and prior-year VR-related revenue.
- Q2 IMAX DMR revenue increased 8.7% to $39.3M, supported by Avengers: Endgame. DMR marketing expense rose to $9.5M from $6.5M, pressuring segment margin.
- First-half theater-business gross margin fell to $28.6M from $36.5M, attributed to the mix of systems installed and higher sustained engineering costs tied to the IMAX with Laser rollout and support.
- Research and development expense declined to $1.2M in Q2 from $3.9M, and to $2.4M for the first half from $7.5M. Management expected R&D expense to continue declining in 2019 following the initial laser-system rollout.
Outlook, risks and unusual items
- Management anticipated installing approximately 185–190 theater systems in 2019, including about 45 laser upgrades, and expected approximately 135 IMAX with Laser systems to be installed by year-end. Installation timing can shift for reasons outside the company’s control.
- Backlog totaled 612 systems with a stated dollar value of $352.8M. Backlog conversion depends on installation, customer acceptance, construction schedules, financing and other factors; it is not guaranteed revenue.
- Management expected available cash and facilities to be sufficient for normal-course operations for the next 12 months. Cash use was expected to continue for joint-revenue-sharing deployments, DMR agreements and potentially share repurchases.
- The Maoyan investment generated a $4.5M Q2 fair-value loss ($2.1M for the first half); future fair-value changes may fluctuate with its share price.
- Material legal matters include enforcement of an older ICC award against E-City, still pending in India, and the company’s pending petition to vacate a Giencourt arbitration award. The company said it could not determine amounts potentially payable or timing under the Giencourt award.
- Risks highlighted include film performance and box-office variability, theater-signing and backlog conversion, China and other international-market exposure, foreign-exchange movements, customer credit and exhibitor-industry concentration, competition, and technology changes. One customer represented 20.0% of Q2 revenue.
- IMAX adopted ASC 842 lease accounting on January 1, 2019, recording approximately $17.4M of net lease assets and liabilities; management said adoption did not materially affect earnings or cash flows. The company also recorded $0.9M of first-half restructuring and exit charges, and no Q2 charge.
Important facts for investors to verify
- Whether the 612-system backlog, particularly the 301 systems in Greater China, converts to installations and revenue on schedule.
- Whether theater-system mix, laser rollout and sustained engineering costs allow margins to recover from first-half declines.
- Film slate performance, DMR marketing commitments and box-office trends, including exposure to major releases and China.
- Collection quality of financing receivables, including the $6.2M past due 90 days or more before allowances, and the implications of customer concentration.
- Potential cash-flow effects of planned theater investments, share repurchases, foreign-currency restrictions on China-held cash, and the unresolved E-City and Giencourt proceedings.
- Reconcile per-share disclosures when comparing periods: the financial statements report EPS attributable to common shareholders of $0.19 for Q2 and $0.32 for the first half; MD&A also cites $0.22 and $0.43, respectively, for net income on a different numerator basis.