IMAX Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Unaudited U.S. GAAP financial statements; amounts below are U.S. dollars. Comparative 2012 results were revised for previously unrecorded Canadian employee postretirement benefits.
Business context and operating performance
IMAX designs and supplies theater systems, provides maintenance and film services, and earns revenue from film distribution and joint revenue-sharing arrangements. At quarter-end, 738 theater systems were operating in 53 countries, up from 643 in 52 countries a year earlier.
| Metric | Q1 2013 | Q1 2012, revised | Change |
|---|---|---|---|
| Revenue | $49.9 million | $55.6 million | Down 10.3% |
| Gross margin | $26.0 million; 52.2% | $26.9 million; 48.3% | Margin up 3.9 percentage points |
| Operating income | $4.6 million | $4.4 million | Up |
| Net income | $2.9 million; $0.04 per diluted share | $2.5 million; $0.04 per diluted share | Up |
| Adjusted net income (non-GAAP) | $5.6 million; $0.08 per diluted share | $6.1 million; $0.09 per diluted share | Down |
| Cash from operating activities | Used $1.0 million | Provided $10.4 million | Declined |
| Cash and cash equivalents, quarter-end | $15.2 million | $21.6 million | Down |
Gross margin improved despite lower revenue, while adjusted net income declined. Revenue fell mainly because of lower IMAX systems and joint revenue-sharing revenue. Theater system maintenance revenue rose 13.8%; joint revenue-sharing revenue fell 19.8%, primarily attributed to weaker film performance. IMAX DMR box office increased 5.8% to $128.7 million, but average box office per screen declined to $212,900 from $247,600.
Balance sheet, debt and liquidity
- Total assets were $432.3 million and shareholders’ equity was $260.5 million at March 31, 2013.
- Bank indebtedness was $18.0 million, versus $11.0 million at year-end. The amended senior secured facility has a $200 million capacity, matures February 7, 2018, and had $182 million available. The company reported compliance with its covenants and a 0.17:1 debt-to-EBITDA ratio.
- Financing receivables were $96.2 million, net of allowances. The company reported $3.7 million of financing receivables on nonaccrual status, with a related $1.2 million allowance.
- Cash used in investing activities was $12.8 million, including $8.7 million invested in joint revenue-sharing equipment. Capital expenditures, including film assets and joint revenue-sharing equipment, were $16.7 million. Financing activities provided $7.6 million.
- Management said cash, operating cash flows and available facility borrowings were expected to fund operations and strategic initiatives for the next 12 months. Operating cash flow remains exposed to theater signings and installations, film performance and collections.
Material changes and unusual items
- Revenue decreased 10.3%; gross margin percentage increased to 52.2% from 48.3%. Film production and DMR revenue grew, while distribution and post-production revenue declined.
- Q1 included a $2.2 million pre-tax gain from reducing future Canadian employee postretirement benefits, lowering the related obligation by $2.6 million. This unusual item contributed to lower reported selling, general and administrative expense.
- Research and development expense increased to $3.6 million from $2.6 million, largely for the next-generation laser projection system. The company expected elevated R&D spending to continue through 2013.
- Operating cash flow was affected by a $10.7 million use of cash from changes in non-cash operating assets and liabilities, including increased receivables. The company said ERP implementation delayed certain invoicing and collections and expected the impact to be substantially resolved in Q2; it believed the unbilled amounts were collectible.
- The 2012 comparison was revised: Q1 2012 net income decreased from $2.6 million as originally reported to $2.5 million, reflecting recognition of Canadian postretirement benefits.
Outlook, risks and contingencies
- Management estimated 110–125 new theater system installations in 2013, excluding digital upgrades; installations can slip between periods. Q1 signings totaled 17 new theaters, plus 8 upgrades. Backlog was 283 systems, with stated dollar value of $209.1 million.
- The company expected a similar number of IMAX DMR film releases in 2013 as in 2012, with 19 additional DMR films scheduled for the rest of 2013. It planned to begin rolling out its laser projection system in the second half of 2014.
- Key disclosed risks include film performance, converting theater backlog into revenue, competition and technology change, international and China operations, customer credit and collections, Kodak-related analog film supply, and ERP implementation. The filing reported no material changes to the risk factors in the 2012 Form 10-K.
- A Canadian securities class action seeks $210 million in damages; the company said it considers the allegations meritless. The U.S. securities class action settlement requires a final Canadian court order excluding overlapping class members, with appeals still outstanding. IMAX China also received notice of a customs audit in March 2013; the potential impact was not yet assessable.
- The company reported adequate and effective disclosure controls. ERP implementation materially changed the nature and type of internal financial-reporting controls; the company was still adjusting controls and expected the transition to be completed in 2013.
Important facts for investors to verify
- Whether delayed ERP invoicing and collections were resolved as expected in Q2, and whether receivables and unbilled amounts were collected.
- Actual theater installations versus the 110–125 estimate, backlog conversion and any cancellations or delays.
- Film slate performance and joint revenue-sharing revenue, given the decline in box office per screen and Q1 joint revenue-sharing results.
- Progress, spending and timing for the laser projection system, including the planned second-half 2014 rollout.
- Developments in the Canadian class action and China customs audit, plus covenant compliance and liquidity under the secured facility.
- The effect of the $2.2 million benefit-plan curtailment gain and stock-based compensation on comparisons; adjusted net income is a non-GAAP measure.