IMAX Corporation — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. All financial amounts below are U.S. dollars; amounts are rounded to millions unless otherwise indicated. Comparisons are with 2018, except balance-sheet comparisons, which are with December 31, 2018.
Business context
IMAX earns revenue principally from film remastering and box-office participation, theater-system sales and leases, joint revenue-sharing arrangements, and theater maintenance. At quarter-end, 1,568 theater systems operated in 81 countries, versus 1,443 systems in 79 countries a year earlier. Greater China generated 31.6% of nine-month revenue.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $86.4 | $82.1 | $271.4 | $265.4 |
| Gross margin | $47.1 (54.5%) | $42.2 (51.4%) | $151.8 (55.9%) | $153.3 (57.7%) |
| Operating income | $14.4 | $9.6 | $52.5 | $41.4 |
| Net income | $10.9 | $7.5 | $37.2 | $29.8 |
| Net income attributable to common shareholders | $9.0 | $5.0 | $28.7 | $21.2 |
| Common-share diluted EPS | $0.15 | $0.08 | $0.47 | $0.33 |
| Cash provided by operating activities | Not separately presented for Q3 | $67.3 | $68.1 |
Q3 revenue growth reflected stronger network-business results, partly offset by lower theater-business revenue. Network revenue rose 17.8% to $43.2 million, while theater-business revenue fell 7.4% to $37.7 million. For the nine-month period, network revenue increased 7.9% to $153.8 million, but theater-business revenue declined 3.4% to $102.9 million. Nine-month gross margin dollars decreased despite higher revenue.
Net income attributable to common shareholders was $9.0 million in Q3 and $28.7 million year to date. The filing’s MD&A also reports total net income per diluted share of $0.18 for Q3 and $0.61 for the nine-month period; these differ from common-share EPS because of non-controlling interests.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $102.5 million, down from $141.6 million at December 31, 2018. Total assets were $870.0 million and shareholders’ equity was $612.6 million.
- Credit Facility borrowings were $20.0 million, with $280.0 million available under the $300.0 million revolving facility, which matures in 2023. Reported bank indebtedness was $18.1 million net of deferred financing charges. The company reported compliance with covenants and a Senior Secured Net Leverage Ratio of 0.00:1 at quarter-end.
- Cash provided by operations was $67.3 million. Investing activities used $53.7 million, including $31.1 million for joint-revenue-sharing equipment and $15.2 million for Maoyan equity securities. Financing activities used $53.4 million; cash declined $39.0 million over the nine months.
- Financing receivables were $121.3 million net. The company held $84.2 million of cash outside North America, including $63.5 million in China; it estimated potential withholding tax of $10.2 million if funds were repatriated to Canada without prior provision.
Material changes and unusual items
- Q3 operating income and common-share net income increased year over year. Network-business revenue benefited from film performance and growth in joint-revenue-sharing theaters; Q3 DMR gross box office increased 19.1% to $246.1 million.
- Nine-month theater-business gross margin fell to $47.0 million from $56.7 million, principally reflecting fewer sales and sales-type-lease installations and the mix of installations. Gross margin as a share of revenue also declined year over year for the nine-month period.
- Q3 SG&A rose to $29.5 million from $26.7 million, including higher staff costs and foreign-exchange losses. Nine-month R&D fell to $3.7 million from $11.5 million; management expected R&D expense to continue decreasing in 2019 as the initial IMAX with Laser rollout had occurred in the prior year.
- The company invested $15.2 million in Maoyan in February 2019 and recorded a $2.5 million fair-value loss through September 30.
- There was no 2019 legal arbitration award expense; the comparable 2018 nine-month period included a $7.5 million charge. Nine-month 2019 restructuring and exit costs were $0.9 million versus $1.2 million in 2018.
- Adoption of lease accounting on January 1, 2019 added approximately $17.4 million net to recognized lease assets and liabilities, without a material earnings or cash-flow effect. Prior-year figures were not restated.
Outlook, risks and contingencies
- Management expected to install approximately 185 to 190 theater systems in 2019, including approximately 135 IMAX with Laser systems by year-end. Installations depend in part on construction schedules and other factors outside the company’s control.
- Backlog was 607 systems, with a stated value of $363.3 million; it included an estimate of variable consideration and is not guaranteed to convert to revenue. Greater China represented 286 backlog theaters.
- Management expected sufficient capital and liquidity for normal operations over the next 12 months, while noting that cash generation depends on film performance, signings, installations, and collections. The company planned continued investment in joint-revenue-sharing systems and films and retained discretion to repurchase shares.
- Key disclosed risks include international and China exposure, foreign-exchange movements, film and box-office performance, competition, theater-backlog conversion, exhibitor and studio industry conditions, and technology execution.
- In the Giencourt dispute, a magistrate recommended dismissal of the company’s petition to vacate an arbitration award; the company objected and a final district-judge decision was pending. The company said it could not determine amounts potentially owed or payment timing. The E-City award enforcement matter in India also remained pending.
- Other sensitivities include financing-receivable credit risk and foreign-currency exposure. The company disclosed $5.9 million of financing receivables more than 90 days past due, before related allowances; its risk disclosures also describe currency and regulatory constraints on funds held in China.
Important facts for investors to verify
- Whether the 2019 theater-installation target and IMAX with Laser rollout were achieved, and how much backlog converted to revenue and cash.
- Film-slate and box-office results, particularly in Greater China, and the effect of film marketing costs on network margins.
- Collections, delinquency trends, and allowance adequacy for accounts and financing receivables.
- Updates on the Giencourt and E-City proceedings, including any resulting liability, settlement, or cash payment.
- Maoyan investment valuation, foreign-currency exposure, and availability or repatriation of cash held in China.
- Reconciliation of GAAP results to management’s adjusted, non-GAAP measures; those measures exclude specified costs and are not substitutes for GAAP results.