IMAX Corporation — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Financial statement amounts are in U.S. dollars; dollar figures below are in millions unless stated otherwise. IMAX operates a global premium theater network, earns revenue from film remastering and theater revenue-sharing, and sells, leases and maintains theater systems. At quarter-end, 1,410 systems were operating in 79 countries, versus 1,257 systems in 75 countries a year earlier.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $98.3 | $87.8 | $183.3 | $156.4 |
| Gross margin | $60.4 (61.4%) | $49.5 (56.4%) | $111.1 (60.6%) | $85.2 (54.5%) |
| Operating income | $14.6 | $2.0 | $31.6 | $1.7 |
| Net income | $10.3 | $1.8 | $22.3 | $0.9 |
| Net income (loss) attributable to common shareholders | $7.6 | $(1.7) | $16.1 | $(1.6) |
| Basic and diluted EPS attributable to common shareholders | $0.12 | $(0.03) | $0.25 | $(0.02) |
- Q2 revenue rose 12.1%; six-month revenue rose 17.2%. Network business led growth: Q2 network revenue increased 28.3% to $60.9 million, while theater business revenue declined 5.7% to $30.9 million. For the six-month period, network revenue rose 21.9% to $105.8 million and theater business revenue rose 17.6% to $65.8 million.
- Management attributed network growth to stronger film performance and network expansion. Q2 IMAX DMR box office increased 27.4% to $342.6 million; six-month DMR box office increased 22.4% to $588.8 million. Joint revenue-sharing theaters generated Q2 box office of $179.0 million, up 24.6%.
- Operating results included a $7.5 million legal arbitration charge in 2018. The comparable 2017 periods included $10.3 million of restructuring charges and associated impairments, versus $0.5 million in Q2 2018 and $1.2 million for the first half. Management’s non-GAAP adjusted net income was $21.7 million, or $0.34 per diluted share, in Q2 and $38.8 million, or $0.61 per diluted share, for the first half; these measures exclude specified items and are not U.S. GAAP results.
Cash flow, balance sheet and liquidity
- For the six months, operating cash flow was $46.7 million, compared with $37.2 million in 2017. Investing cash outflow was $18.8 million, versus $31.4 million; financing cash outflow was $54.0 million, versus $52.4 million. Cash declined $25.7 million to $133.0 million.
- At June 30, cash was $133.0 million, financing receivables were $125.8 million, and bank indebtedness was $24.4 million, representing the Playa Vista loan before its subsequent repayment. Total liabilities were reported at $257.5 million. The filing reports total assets of $869.5 million and total liabilities and shareholders’ equity of $864.5 million; these figures do not balance, a $5.0 million difference.
- IMAX amended its revolving credit facility on June 28, increasing capacity from $200 million to $300 million, with an uncommitted accordion feature allowing capacity of $440 million or more. The facility matures June 28, 2023; no amounts were drawn at quarter-end, and the company reported covenant compliance. After quarter-end, IMAX borrowed $30 million under the facility to repay the Playa Vista loan and support working capital. Its China subsidiary also obtained a subsequent unsecured revolving working-capital facility of up to RMB 200 million (approximately $30 million).
- IMAX repurchased 2.15 million shares for $46.5 million in the first half. It had $153.6 million remaining under its $200 million repurchase authorization at June 30. Cash held outside North America was $121.3 million, including $44.7 million in China; the company estimates potential withholding taxes of $8.2 million if China funds are repatriated to Canada.
Outlook, notable developments and risks
- Management expected approximately 155 new theater-system installations in 2018, excluding upgrades, and a DMR film slate similar in size to 2017’s 60 releases. Management cautioned that installations can be delayed, often for reasons outside the company’s control. Theater backlog totaled 635 systems, versus 580 a year earlier, with reported dollar value of $319.9 million; backlog conversion into installations and revenue is not assured.
- IMAX disclosed binding letters of intent with Cineworld/Regal for 55 laser systems and AMC for upgrades to 87 theaters, with installations expected from 2018 through 2022. A July 2018 agreement with Pathé covered 20 laser systems, expected to be installed from 2018 through 2023. These are forward-looking arrangements, and site selection and execution remain relevant uncertainties.
- Management expected research and development spending to continue in 2018 to support IMAX with Laser and other technology programs, and expected R&D expense to decline in 2019 following the initial laser rollout. IMAX said it had no current intention to open additional VR centers; it closed its Shanghai location on June 30 and one New York location on July 2. The company also said it did not expect meaningful direct investment in original content going forward.
- ASC Topic 606 was adopted January 1, 2018 using the modified retrospective method. Adoption increased opening retained earnings by $27.2 million, net of tax, and increased reported revenue by $0.5 million in Q2 and $1.2 million for the first half. It changed timing and classification of certain theater-system revenues, including estimates of variable consideration; 2017 comparatives were not restated, limiting direct comparability.
- A July 11, 2018 arbitration award found for 3DMG on certain claims and awarded $8.8 million, including approximately $1.8 million of pre-award interest. IMAX recorded a $7.5 million charge based on its expected final settlement; attorney fees and expenses remained unresolved. Other disclosed matters include an uncertain China customs penalty and a disputed arbitration settlement award sought by Giencourt, with IMAX unable to determine potential amounts or timing in the latter matter.
- Principal risks include film and box-office variability, dependence on exhibitors and studios, conversion of backlog, China operations and regulatory controls, foreign-exchange movements, customer credit and collection risk, competition and technology change, and uncertainty in litigation outcomes. Management stated that available cash and facilities were expected to be sufficient for normal-course liquidity needs for the next 12 months.
Key facts for investors to verify
- Reconcile the balance-sheet presentation: reported assets of $869.5 million versus reported liabilities and equity of $864.5 million.
- Review the original filing’s ASC 606 transition disclosures and assess how estimated variable consideration affects revenue timing and comparisons with 2017.
- Track the 3DMG arbitration’s final resolution, including any attorney-fee award, against the $7.5 million accrual and $8.8 million damages award.
- Monitor theater backlog conversion, installation timing, laser commitments and the relationship between signings and actual revenue and cash generation.
- Assess cash deployment and liquidity after the post-quarter $30 million borrowing, including share repurchases, China cash restrictions, and potential repatriation taxes.