IMAX Corporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited results are compared with the corresponding 2019 periods. IMAX operates a global premium cinema technology network; results depend on theater-system installations, film releases and box-office receipts.
Financial performance and liquidity
| Metric (US$ millions, except per-share data) | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | 37.3 | 86.4 | 81.0 | 271.4 |
| Gross margin | 3.8 | 47.1 | 1.2 | 151.8 |
| Operating income (loss) | (27.4) | 14.4 | (107.3) | 52.5 |
| Net income (loss) attributable to common shareholders | (47.2) | 9.0 | (122.5) | 28.7 |
| Basic and diluted EPS | $(0.80) | $0.15 | $(2.06) | $0.47 |
| Cash from (used in) operating activities | Not separately provided for the quarter | (30.8) | 67.3 |
- Revenue and gross margin fell 57% and 92%, respectively, in Q3, and 70% and 99% for the nine months. Gross margin was nearly eliminated as box-office-based revenue collapsed while theater-system and operating costs continued.
- At September 30, cash and equivalents were $305.2 million, versus $109.5 million at December 31, 2019. The increase largely reflects the full $280 million draw on the revolving credit facility, not operating cash generation.
- Credit-facility borrowings were $300.0 million; bank indebtedness on the balance sheet was $298.0 million after debt issuance costs and including the small working-capital-facility balance. The facility matures June 2023. Total liabilities were $532.4 million, compared with $246.0 million at year-end 2019.
- Management forecast average monthly cash change of approximately break-even in Q4 2020 and Q1 2021, improved from cash usage averaging $7.8 million per month in Q2 and Q3. It expected available capital and liquidity to fund normal-course operations for the next 12 months, based on current cash and forecasts.
Material changes and drivers
- COVID-19 theater closures, capacity limits, delayed film releases and reduced attendance sharply reduced IMAX DMR and joint-revenue-sharing receipts. Q3 DMR gross box office was $70.2 million, down 72%; nine-month DMR box office was $168.1 million, down 81%.
- About 85% of the commercial multiplex network had reopened during Q3: 97% in Greater China, 73% in the U.S. and Canada, and 78% in Rest of World. Attendance in parts of Asia approached pre-pandemic levels, while sales outside Asia remained substantially below normal. Some chains closed again or cut hours; New York City and Los Angeles theaters remained closed.
- Nine-month theater-system installations were 38, versus 91 in 2019; signings were 54, versus 126. Backlog was 545 systems, down from 607 a year earlier, with approximately $333.8 million in disclosed fixed/estimated backlog value versus $363.3 million. Backlog conversion remains exposed to installation delays, customer financing and cancellations.
- Credit-loss expense was $15.6 million for the nine months, versus $2.0 million. Film-asset impairments were approximately $10.2 million, principally on documentary and alternative-content titles; film assets were $7.5 million at period-end. Inventories rose $10.0 million from year-end, largely because manufacturing, shipment and installation were delayed.
- SG&A declined 7% for the nine months, partly reflecting cost controls and $4.5 million of Canadian wage subsidy benefits; $0.7 million of U.S. CARES Act support was also recognized. The company reduced hours, furloughed staff and cut nonessential spending. In October, it furloughed approximately 150 employees for at least two months.
Outlook, risks and unusual items
- The credit agreement amendment suspended the senior secured net leverage covenant through Q1 2021, with specified 2019-quarter EBITDA substitutions for later testing. It added a $75 million minimum monthly liquidity covenant and restricted certain payments, investments, dispositions, liens and debt. IMAX reported compliance at September 30 and expected compliance for the next 12 months; covenant relief does not remove refinancing or liquidity risk.
- A $23.7 million deferred-tax-asset valuation allowance was recorded in Q3 because future taxable income in certain jurisdictions could not be reliably forecast. It may be reversed if uncertainty abates and sufficient taxable income can be forecast. Separately, IMAX recorded an $18.7 million deferred tax liability for withholding taxes associated with foreign earnings no longer considered indefinitely reinvested.
- Management reported no goodwill or joint-revenue-sharing theater-equipment impairment at September 30, but stated that prolonged weak conditions could lead to future impairment charges. Credit-loss estimates, deferred tax asset recoverability and variable-consideration receivables are also sensitive to uncertain recovery assumptions.
- Management cautioned that theater reopenings, attendance recovery, film-release timing, exhibitor solvency and collections, installation delays, consumer spending and foreign exchange could materially affect results and liquidity. Wage subsidies and cost savings may not be available or realized as anticipated.
- Contingencies include ongoing enforcement of an arbitration award against E-City and a disputed Giencourt settlement award. IMAX said it had adequate provisions for Giencourt but could not determine the ultimate amount or timing; outcomes remain uncertain.
- Non-GAAP adjusted net loss attributable to common shareholders was $44.6 million in Q3 and $99.4 million for the nine months. These measures exclude selected items and should be considered alongside GAAP results, not as substitutes.
Most important facts for investors to verify
- Whether theaters and film releases recover sufficiently to restore box-office-linked revenue, especially outside Asia.
- Whether exhibitor partners remain solvent and pay receivables, and whether credit-loss provisions or customer relief terms need to increase.
- Actual cash burn versus the break-even forecast, compliance with the amended $75 million minimum-liquidity covenant, and the company’s ability to manage $300 million of facility borrowings.
- Conversion of the 545-system backlog into installations and revenue, given the sharp fall in signings and installations.
- Potential future tax valuation-allowance reversals or additions, asset impairments, and the outcomes and financial exposure of the E-City and Giencourt proceedings.