IMAX Corporation — Q3 2011 Form 10-Q
Business context and reporting period. This unaudited U.S. GAAP filing covers the three and nine months ended September 30, 2011; amounts below are U.S. dollars. IMAX designs and sells or leases theater systems, deploys systems under revenue-sharing arrangements, and earns revenue from maintenance and film services. Its network included 583 theaters in 48 countries, up from 470 theaters in 45 countries a year earlier.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $67.5 million | $51.1 million | $169.9 million | $179.5 million |
| Gross profit / margin | $36.4 million / 54.0% | $25.9 million / 50.8% | $83.4 million / 49.1% | $101.3 million / 56.4% |
| Operating income | $14.4 million | $8.2 million | $18.4 million | $49.8 million |
| Net income | $8.4 million | $6.7 million | $9.2 million | $46.6 million |
| Diluted EPS | $0.12 | $0.10 | $0.14 | $0.70 |
| Operating cash flow | Not presented by quarter | $(6.4) million | $53.7 million |
Third-quarter revenue rose 32.2%, with higher IMAX systems, film, and revenue-sharing revenue. For the nine months, revenue fell 5.3% and gross margin declined, largely reflecting the prior-year contribution from Avatar and weaker film box office in 2011. Q3 revenue-sharing revenue rose 54.1% to $10.0 million; nine-month revenue-sharing revenue fell to $22.4 million from $33.9 million. Nine-month film-segment revenue declined to $56.8 million from $71.1 million.
Management’s non-GAAP adjusted net income was $11.0 million, or $0.16 per diluted share, in Q3 versus $9.8 million, or $0.15, a year earlier. For nine months, adjusted net income was $18.1 million, or $0.27 per diluted share, versus $53.5 million, or $0.81. These measures exclude specified items and are not substitutes for GAAP results.
Balance sheet, cash flow, and financing
- Cash was $18.8 million at September 30, down from $30.4 million at year-end 2010. Total assets were $374.4 million; shareholders’ equity was $181.3 million.
- Bank debt increased to $39.6 million from $17.5 million. The amended senior secured facility has a $110 million maximum capacity and matures October 31, 2015. The company reported $54.8 million available under the facility, including $34.4 million current asset-based capacity and $20.4 million revolving-term capacity.
- The company was in compliance with facility covenants. Funded debt/EBITDA was 0.55:1 against a maximum of 2:1; minimum availability and cash-plus-availability requirements were also met.
- Nine-month investing cash outflow was $32.4 million, including $22.4 million invested in revenue-sharing equipment. Capital expenditures, including revenue-sharing equipment and film assets, were $35.7 million versus $18.1 million in the prior-year period. Financing activities provided $27.4 million.
- Operating cash flow was negative, with a $48.2 million use of cash from changes in operating assets and liabilities. Accrued-liability payments included $23.7 million of variable stock-based compensation. Management stated existing cash, operating cash flow, and available borrowing were expected to fund operations and strategic initiatives for the next 12 months.
Material changes and unusual items
- Q3 net income included a $4.6 million deferred-tax provision and a $2.0 million recovery of variable share-based compensation. Nine-month results included a $5.7 million deferred-tax provision, $1.2 million variable share-based compensation expense, and a $2.1 million arbitration-award provision.
- Foreign-exchange losses were $4.1 million in Q3 and $3.5 million for nine months, compared with gains in the respective 2010 periods. Management estimated a potential Q4 gain of approximately $3.4 million if then-current currency levels persisted; this was an estimate, not guidance assurance.
- Net cash used in operations contrasted with $53.7 million provided in the first nine months of 2010. Financing receivables, inventories, and other working-capital movements, along with compensation payments, affected cash generation.
- Sales backlog was $203.9 million across 295 systems, versus $203.1 million across 257 systems a year earlier. Backlog conversion depends on installations and customer acceptance; the filing cautions that installations may slip.
Outlook, management commentary, and risks
Management expected 2011 revenue to be consistent with 2010, while acknowledging weaker 2011 film box office than the prior-year Avatar-driven period. It estimated that 49–59 backlog systems, excluding digital upgrades, would be installed in Q4 2011. The company reported 183 system signings in the first nine months and expected continued network expansion, including through joint revenue-sharing arrangements. It had contracts for 25 DMR films for 2011 and identified six further releases scheduled for the remainder of the year.
Management highlighted that increasing revenue-sharing exposure also increases reliance on film performance. Other stated risks include failure to convert backlog into revenue, theater installation delays, customer credit and collection risk, competition, foreign-exchange exposure, and uncertainty in international markets and new business initiatives. The filing reports ongoing U.S. and Canadian securities class actions for which potential loss could not be estimated, and an appealed arbitration award for which $2.1 million was accrued. Other proceedings, including the E-City award enforcement matter and Sanborn litigation, remained pending. Management said there had been no material changes to the risk factors in the 2010 Form 10-K.
Subsequent to quarter-end, IMAX announced exclusive license rights to certain Kodak digital-cinema intellectual property. This is a post-period development, not a Q3 operating result.
Most important facts for investors to verify
- Whether the stated 2011 revenue outlook and Q4 installation estimate were achieved, and how much backlog converted into recognized revenue.
- Film slate performance and the revenue-sharing business’s dependence on box-office receipts.
- Cash generation, working-capital movements, ongoing investment in revenue-sharing systems, and liquidity under the credit facility.
- Foreign-exchange exposure and the assumptions behind the estimated Q4 currency gain.
- Resolution and potential financial impact of the arbitration and securities litigation matters, and the recoverability of deferred tax assets.