IMAX Corporation 10-Q Summary: Quarter Ended March 31, 2009
Business Context and Reporting Period
This filing is a Quarterly Report (Form 10-Q) for IMAX Corporation for the three-month period ended March 31, 2009. IMAX is a leading entertainment technology company specializing in large-format digital and film-based theater systems, film production, and digital re-mastering (IMAX DMR). As of March 31, 2009, the company operated 371 IMAX theaters globally (250 commercial, 121 institutional) across 43 countries. The reporting period coincides with a significant leadership transition, with Richard L. Gelfond assuming the role of sole CEO effective April 1, 2009.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Total Revenue | $33.7 million | $23.5 million |
| Gross Margin | $14.1 million (41.9%) | $10.1 million (43.1%) |
| Operating Income | $2.0 million | ($5.6 million) loss |
| Net Loss | ($2.6 million) | ($10.3 million) |
| Loss Per Share (Diluted) | ($0.06) | ($0.25) |
| Cash and Equivalents | $18.7 million | $27.0 million (Dec 31, 2008) |
| Total Debt | $180.0 million | $180.0 million |
| Shareholders' Deficiency | ($98.5 million) | ($96.8 million) |
Debt Structure: The company carries $160.0 million in Senior Notes due December 2010 (9.625% interest) and has drawn $20.0 million on its revolving Credit Facility (maturing October 2010). Borrowing capacity under the Credit Facility was $11.6 million as of March 31, 2009.
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 43.4% year-over-year, driven primarily by a 100%+ increase in IMAX Systems revenue ($16.5M vs $8.2M) due to higher system installations (9 systems recognized in Q1 2009 vs 4 in Q1 2008).
- Profitability Improvement: The company returned to operating profitability ($2.0M income) compared to an operating loss of $5.6M in the prior year. Net loss narrowed significantly to $2.6M from $10.3M.
- Segment Performance:
- Joint Revenue Sharing: Revenue surged to $1.9M from $0.3M as the number of operating theaters in this model grew from 11 to 69.
- Film Segment: Production and IMAX DMR revenue rose 26.9% to $3.7M, while Post-production revenue fell 49.4% to $0.9M due to decreased third-party business.
- Expense Reduction: Selling, General, and Administrative (SG&A) expenses decreased $1.5M to $10.9M, aided by lower legal fees and staff costs, though partially offset by a $1.2M foreign exchange loss.
- Capital Expenditures: Investing cash outflows increased to $7.6M (from $1.9M), primarily due to a $7.0M investment in joint revenue sharing equipment.
Outlook, Risks, and Management Commentary
Guidance and Outlook: Management expects higher revenues in 2009 compared to 2008, anticipating the installation of approximately 65 additional theater systems from the current backlog of 190. The commercial theater network is projected to grow by approximately 40% in 2009. The company has announced a slate of six major IMAX DMR titles for the remainder of 2009, including Star Trek, Transformers: Revenge of the Fallen, and Avatar.
Liquidity and Refinancing Risk: The company faces significant liquidity challenges due to the maturity of its $160M Senior Notes and $20M Credit Facility in late 2010. Additionally, an unfunded defined benefit pension plan (SERP) requires an estimated $15.3M payment in August 2010. Management states that current cash and credit facilities are sufficient for the next 12 months but acknowledges that refinancing in the current volatile credit market is uncertain.
Risks and Contingencies:
- Legal Proceedings: The company is involved in multiple lawsuits, including class actions regarding revenue recognition practices (U.S. and Canada) and arbitration with 3DMG regarding patent infringement. A significant arbitration against EML resulted in a $11.3M award in IMAX's favor, which is being enforced.
- Regulatory Inquiries: Ongoing informal inquiries by the SEC and Ontario Securities Commission regarding revenue recognition timing in 2005 continue.
- Economic Sensitivity: Revenue is increasingly dependent on box-office performance due to the growth of joint revenue sharing arrangements, exposing the company to consumer spending declines during economic downturns.
Investor Verification Checklist
- Refinancing Capability: Verify the company's ability to refinance $180M in debt maturing in 2010 amidst tight credit markets.
- Pension Obligation: Confirm the status of the $15.3M SERP payment due in August 2010 and any potential deferment agreements with executives.
- Legal Exposure: Monitor the status of the SEC/OSC inquiries and the outcome of the class action lawsuits regarding revenue recognition.
- Backlog Conversion: Track the actual installation rate of the 190 systems in backlog against management's projection of 65 installations for the remainder of 2009.
- Cash Burn Rate: Assess the sustainability of the current cash burn rate ($1.9M operating cash outflow in Q1) given the heavy capital investment in joint revenue sharing systems.