Business context and reporting period
IMAX Corporation’s unaudited Form 10-Q covers the quarter and nine months ended September 30, 2013. IMAX earns revenue from theater-system sales and leases, joint revenue-sharing arrangements, theater maintenance, and film production, digital remastering, distribution and post-production. Its network comprised 785 systems in 55 countries, including 351 operating under joint revenue-sharing arrangements. All financial amounts below are U.S. dollars.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $51.7m | $80.7m | $183.9m | $206.5m |
| Gross margin | $27.3m (52.7%) | $44.8m (55.4%) | $96.9m (52.7%) | $110.4m (53.5%) |
| Operating income | $2.9m | $22.4m | $24.8m | $42.3m |
| Net income | $1.6m | $14.9m | $16.3m | $28.5m |
| Diluted EPS | $0.02 | $0.22 | $0.24 | $0.42 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $33.0m | $53.9m |
At September 30, cash was $26.0m, accounts receivable $44.3m, financing receivables $99.6m, total assets $447.5m and shareholders’ equity $284.5m. Bank debt was $5.0m, down from $11.0m at year-end 2012; the $200m secured facility had $195m available. Nine-month investing cash use was $26.8m and financing cash use was $1.5m. Capital expenditures, including film investment and joint-revenue-sharing equipment, totaled $41.1m.
Material changes versus the prior comparable period
- Q3 revenue fell 35.9%; nine-month revenue fell 10.9%. Q3 net income declined to $1.6m from $14.9m, while nine-month net income fell to $16.3m from $28.5m.
- Management attributed much of the Q3 decline to fewer sales and sales-type lease installations and weaker film results than the year-earlier quarter, which benefited from the exceptional performance of The Dark Knight Rises. Q3 IMAX DMR box office fell 23.5% to $132.5m; nine-month DMR box office increased 2.9% to $481.9m.
- For the first nine months, sales and sales-type lease revenue declined to $33.3m from $49.8m. Maintenance revenue grew to $23.8m from $20.9m, while joint revenue-sharing revenue eased to $39.7m from $40.5m despite growth in operating theaters.
- Research and development expense rose to $11.3m from $7.6m, primarily for development of a next-generation laser projection system. Nine-month operating cash flow declined to $33.0m from $53.9m.
- Comparative 2012 results were revised for previously unrecorded Canadian employee postretirement benefits. The revision reduced nine-month 2012 net income from $28.7m to $28.5m; reported comparisons here use the revised figures.
Guidance, outlook, commentary and risks
- IMAX expected 2013 installations of approximately 110–125 new theater systems, excluding digital upgrades, and said it anticipated landing at the low end. Installations can shift between periods, often due to construction timing outside the company’s control.
- At quarter-end, backlog included 356 systems: 162 sales or sale-type leases and 194 joint revenue-sharing systems. Its stated dollar value was $246.1m, but the filing notes that backlog conversion to revenue depends on installation and customer acceptance. About 83% of backlog systems were scheduled for international markets.
- Management expected a similar number of DMR film releases in 2014 to the 37 slated for 2013. Film performance, theater signings and installations, and the conversion of backlog were identified as important to future results and cash generation.
- Management said cash, operating cash flow and available credit were expected to fund operations and strategic initiatives for the next 12 months, while cautioning that cash generation depends on film performance, signings, installations and collections. ERP implementation delayed some invoicing and collections in Q1; management said substantial resolution was expected during the rest of 2013.
- The February 2013 credit-facility amendment increased capacity to $200m and extended maturity to February 2018. IMAX reported compliance with covenants at September 30, 2013. Covenant thresholds tighten over time; the facility is secured by substantially all company and guarantor assets and includes restrictions on debt, dividends and other actions.
- Unusual items included a $2.2m pretax gain from reducing Canadian employee postretirement benefits and recognition of revenue on 13 previously installed digital-upgrade systems after an upgrade right expired. The nine-month period also included $8.8m of share-based compensation expense.
- Contingencies include a Canadian securities class action seeking $210m, pending appeals affecting final conditions of a U.S. class-action settlement funded by insurers and PwC, trade-secret litigation in the U.S., Canada and China, and a customs audit of IMAX China whose potential impact could not be assessed. The company said it had adequate provisions but warned adverse developments could materially affect results, cash flows or financial position.
- Other material risks discussed include film and exhibition-market performance, international and China operations, competition and technology change, Kodak-related analog-film supply, ERP implementation, customer credit and collections, and foreign-exchange exposure. Management reported disclosure controls were adequate and effective; ERP-related changes to internal financial controls were ongoing, with transition expected to complete in Q4 2013.
Important facts for investors to verify
- Whether projected theater installations and the $246.1m stated backlog convert to accepted installations and revenue on schedule.
- Whether film slate performance supports recurring DMR and joint-revenue-sharing income, particularly given the unusually strong 2012 comparison.
- Collections and credit quality of financing receivables, including $3.5m of financing receivables more than 90 days past due and the $1.3m related allowance.
- Progress and financial-control effectiveness following ERP implementation, and whether delayed invoicing and collections were resolved as expected.
- Potential outcomes and financial exposure from the Canadian securities action, trade-secret cases and China customs audit.
- Future covenant compliance, liquidity needs for joint revenue-sharing investments, and the assumptions supporting deferred tax assets and pension obligations.