IMAX Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Amounts are in U.S. dollars. IMAX operates a global premium-theater network and earns revenue from film remastering and box office participation, theater systems and maintenance, and other activities. Its network comprised 1,514 theaters in 81 countries, versus 1,382 theaters in 77 countries a year earlier.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Revenue | $80.2 million | $85.0 million; down 5.6% |
| Gross profit / margin | $45.1 million / 56.3% | $50.7 million / 59.6% |
| Operating income | $14.0 million | $17.1 million |
| Net income, consolidated | $12.5 million; $0.20 per diluted share | $12.1 million; $0.19 per diluted share |
| Net income attributable to common shareholders | $8.3 million; $0.13 per diluted share | $8.5 million; $0.13 per diluted share |
| Adjusted net income attributable to common shareholders (non-GAAP) | $10.8 million; $0.18 per diluted share | $13.4 million; $0.21 per diluted share |
| Cash from operating activities | $(0.7) million | $15.5 million provided |
| Cash and cash equivalents | $123.1 million | $141.6 million at Dec. 31, 2018 |
| Credit facility borrowings | $60.0 million drawn; $240.0 million available | $40.0 million drawn at Dec. 31, 2018 |
Consolidated net income per diluted share differs from the $0.13 reported for common shareholders because $4.2 million of net income was attributable to non-controlling interests. Cash declined $18.5 million during the quarter. Investing activities used $27.6 million, including $15.2 million for Maoyan equity securities and $9.7 million for joint-revenue-sharing equipment; financing activities provided $9.6 million.
At March 31, total assets were $893.2 million, total liabilities $285.6 million, and shareholders’ equity $601.2 million. Bank indebtedness on the balance sheet was $57.9 million net of deferred financing charges. The company reported $125.9 million of net financing receivables. Its credit agreement leverage ratio was 0.00:1 under the agreement’s definition, and the company reported compliance with its covenant.
Changes versus the prior comparable period
- Revenue fell mainly because of theater-business installation mix. Theater-business revenue decreased 13.3% to $30.3 million; theater-business gross margin fell to $13.2 million from $20.5 million, reflecting fewer sales and sales-type lease installations, arrangement mix, and higher sustained engineering costs.
- Network-business revenue rose 2.1% to $45.8 million. IMAX DMR revenue increased 3.3% to $28.0 million, while joint-revenue-sharing contingent rent was broadly flat at $17.9 million. IMAX DMR box office increased 3.8% to $256.3 million.
- Research and development expense decreased to $1.1 million from $3.6 million, primarily due to lower spending on the laser projection system. SG&A was $27.6 million versus $28.0 million.
- Adjusted net income attributable to common shareholders declined to $10.8 million from $13.4 million, despite slightly higher consolidated GAAP net income.
- Operating cash flow moved from $15.5 million provided to $0.7 million used, largely reflecting changes in operating assets and liabilities.
Outlook, commentary, risks and unusual items
- Management expected to install approximately 185–190 theater systems in 2019, including about 45 IMAX with Laser upgrades. The filing cautions that installation timing can change, often for reasons outside IMAX’s control. The backlog was 571 systems, with a stated value of $309.5 million; backlog conversion depends on installation, customer acceptance, and other factors.
- Management expected R&D expense to continue decreasing in 2019 following the initial IMAX with Laser rollout, while continuing development in other technology areas. It expected sufficient liquidity for normal-course operations over the next 12 months, while noting that cash generation depends on signings, film performance, installations, collections, and other factors.
- The company recognized a $2.5 million fair-value gain on its Maoyan investment, which increased reported net income; the gain is market-price dependent. Adjusted net income excludes this gain and other specified items and is a non-GAAP measure.
- IMAX adopted the new lease standard on January 1, 2019, recording approximately $17.5 million of net lease assets and liabilities. Adoption did not materially affect earnings or cash flows; prior-year comparatives were not restated.
- Restructuring and exit charges were $0.9 million, including employee costs and lease-exit costs. The company said it did not expect additional restructuring charges during the remainder of 2019. IMAX had closed its remaining VR locations and decided to dissolve the VR Fund.
- Risks cited include film and box-office performance, conversion of backlog into revenue, exhibitor and studio conditions, competition and technology change, international and China exposure, currency fluctuations, and cybersecurity and data privacy. Cash held outside North America was $102.7 million, including $53.5 million in China; repatriation from China could involve estimated withholding taxes of $9.2 million.
- Legal matters include enforcement in India of an arbitration award in IMAX’s favor against E-City and a pending petition to vacate an arbitration award involving Giencourt. The company could not determine amounts or timing potentially owed under the Giencourt award. Separately, a Shanghai customs-related fine of approximately $85,000 was paid and proceedings concluded in March 2019.
- Foreign-exchange forward contracts had a $43.9 million notional value; approximately $0.9 million of net losses was expected to be reclassified to earnings within 12 months. IMAX also cited foreign-exchange and variable-rate debt exposure.
Important facts for investors to verify
- Whether the planned 2019 installations and the $309.5 million backlog convert to revenue on schedule, particularly in Greater China and under joint revenue-sharing arrangements.
- Whether lower theater-system sales revenue and gross margin recover as installation mix and IMAX with Laser rollout evolve.
- Whether operating cash flow improves and whether investment in joint-revenue-sharing equipment and other initiatives remains within available liquidity.
- The recurring earnings impact of the Maoyan investment’s fair-value movements, and the distinction between GAAP and company-defined non-GAAP results.
- Developments in the Giencourt and E-City matters, customer financing-receivable quality, China-related currency and repatriation constraints, and the company’s credit-facility covenant position.