IMAX Corporation — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context
IMAX designs and manufactures theater systems and earns revenue from system sales and leases, theater maintenance, revenue-sharing arrangements, and film production, remastering, distribution and related activities. At June 30, 2011, its network comprised 560 theaters in 46 countries, including 204 operating under joint revenue-sharing arrangements.
Financial performance and liquidity
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $57.2 | $55.6 | $102.4 | $128.4 |
| Gross margin | $26.3; 46.0% | $27.0; 48.6% | $46.9; 45.9% | $75.3; 58.7% |
| Operating income | $4.4 | $14.2 | $4.0 | $41.6 |
| Net income | $1.8 | $13.3 | $0.8 | $39.9 |
| Diluted EPS | $0.03 | $0.20 | $0.01 | $0.60 |
| Operating cash flow | Not presented quarterly | $(10.4) | $39.9 |
Q2 revenue increased 2.9% year over year, but first-half revenue fell 20.2%. As of June 30, cash and cash equivalents were $23.2, bank debt was $34.6, total assets were $372.1 and total liabilities were $201.3. Financing receivables were $79.6 and deferred revenue was $81.6.
The company amended its secured credit facility in June: capacity rose from $75 million to $110 million and maturity extended to October 2015. The facility had $34.6 million drawn, with stated borrowing capacity of $44.2 million under the asset-based portion and $25.4 million under the revolving term portion. The company reported compliance with its covenants, including funded debt to EBITDA of 0.51:1 against a maximum of 2:1. Cash and excess availability were reported at $72.4 million.
Changes versus comparable periods
- First-half gross margin declined to $46.9 million from $75.3 million. Management attributed much of the decline to weaker film box office and the absence of 2010’s exceptional Avatar performance.
- First-half film-segment revenue decreased 39.6%; joint revenue-sharing revenue fell to $12.4 million from $27.4 million. IMAX systems revenue increased 51.1% to $42.7 million, while maintenance revenue rose 18.4% to $11.9 million.
- Q2 SG&A rose to $19.5 million from $11.1 million, principally reflecting higher share-based compensation and employee costs. First-half SG&A was $36.3 million versus $30.7 million.
- First-half net income included a $2.1 million arbitration provision, $3.2 million of variable share-based compensation expense and a $1.1 million deferred-tax provision. Adjusted net income, a non-GAAP measure, was $7.1 million ($0.10 diluted EPS), versus $43.7 million ($0.66) a year earlier.
- Cash decreased by $7.2 million during the first half. Operating cash use of $10.4 million and investing cash use of $18.4 million were partly offset by $21.9 million of financing cash inflows. Capital expenditures, including joint revenue-sharing equipment and film assets, were $23.4 million, versus $10.9 million.
Outlook, commentary and risks
Management expected full-year 2011 revenue to be consistent with 2010, while noting that results to date had been hurt by weaker film box office and fewer event titles. The company signed 153 systems in the first half, compared with 98 in the prior-year period, and estimated that 64–74 systems, excluding upgrades, would be installed in the remainder of 2011. Management cautioned that installations can slip. It stated that cash, operating cash flow and available credit should fund operations and strategic initiatives for the next 12 months, while acknowledging that liquidity depends on signings, installations, film performance and collections.
Management highlighted continued expansion of revenue-sharing theaters and international markets, a larger planned 2011 DMR slate, and ongoing investment in digital projection and portable theater initiatives. Greater reliance on revenue-sharing arrangements increases exposure to film performance. Film release delays, theater installation timing, customer collections, foreign exchange and competition remain relevant business risks.
Contingencies include securities class actions in the U.S. and Canada, for which potential loss exposure was not estimable, and a Robots of Mars arbitration award totaling approximately $1.9 million plus interest and fees; IMAX accrued $2.1 million and intended to appeal. IMAX was pursuing collection and court recognition of an $11.3 million award against E-City. The SEC reported that it did not intend to recommend enforcement action against IMAX, and Ontario securities staff said they would not seek orders against the company.
Other items to note: $56.2 million of net deferred tax assets depended on management’s recoverability assessment; $6.3 million of financing receivables were classified as suspended transactions, with a related allowance of $2.5 million; and the unfunded executive pension obligation was $18.2 million. Management reported disclosure controls effective at period-end and no material quarterly change in internal control over financial reporting.
Investor verification priorities
- Reconcile first-half cash use and the working-capital outflow, including $23.7 million of variable stock-compensation payments and investment in revenue-sharing systems.
- Track film box-office performance, the 2011 release slate and the relationship between theater-network growth and recurring revenue-sharing returns.
- Check whether signed backlog converts to installations and revenue on schedule; backlog was 294 systems, with $196.5 million assigned to sales and sale-type leases and no assigned value for revenue-sharing systems.
- Monitor financing-receivable aging, suspended customer accounts and collection assumptions.
- Follow litigation outcomes, the $2.1 million arbitration accrual, deferred-tax-asset realization and compliance with credit-facility covenants.