IMAX Corporation — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Financial figures are in U.S. dollars; amounts below are in millions unless otherwise noted.
Business context and reporting period
IMAX operates a global premium-theater network and earns revenue from film remastering and box-office participation, theater-system sales and leases, joint revenue-sharing arrangements, and maintenance. It had 1,443 theater systems operating in 79 countries at quarter-end, up from 1,302 in 75 countries a year earlier. Greater China represented about 31% of nine-month revenue.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $82.1 | $98.8 | $265.4 | $255.2 |
| Gross profit / margin | $42.2 / 51.4% | $39.9 / 40.4% | $153.3 / 57.7% | $125.1 / 49.0% |
| Operating income | $9.5 | $4.5 | $41.1 | $6.2 |
| Net income | $7.5 | $2.9 | $29.8 | $3.8 |
| Net income (loss) attributable to common shareholders | $5.0 | $(0.9) | $21.2 | $(2.5) |
| Basic and diluted EPS attributable to common shareholders | $0.08 | $(0.01) | $0.33 | $(0.04) |
| Operating cash flow | Not stated for the quarter | $68.1 | $63.4 |
Q3 revenue fell 16.9%, while nine-month revenue rose 4.0%. Q3 gross margin improved despite lower sales, in part because the prior-year quarter included $12.3 million of impairment charges, including $11.1 million related to new business initiatives. Nine-month growth reflected stronger network and theater-business revenue; the comparable 2017 period included $8.7 million from the Marvel’s Inhumans initiative.
Cash and cash equivalents were $133.6 million at September 30, 2018, down from $158.7 million at year-end 2017. Operating cash flow was $68.1 million; net investing cash outflow was $33.3 million, including $22.7 million invested in joint-revenue-sharing equipment. Net financing cash outflow was $60.0 million, including $46.5 million of share repurchases. Cash decreased $25.1 million during the nine months.
The new revolving credit facility provides $300 million of capacity, with $20 million drawn and $280 million available at quarter-end. The facility matures in 2023; the company reported compliance with its leverage covenant. Balance-sheet bank indebtedness was $17.6 million after deferred financing charges; the gross credit-facility draw was $20 million. Financing receivables were $126.3 million. Total liabilities were $252.1 million and total shareholders’ equity was $613.5 million.
Material changes versus the prior comparable period
- Q3 IMAX DMR revenue declined to $22.4 million from $26.0 million, and network-business revenue fell 13.9%; management cited lower box office, including comparison with the 2017 performance of Dunkirk.
- For the first nine months, IMAX DMR revenue increased 11.0% to $85.6 million, and network-business revenue rose 10.1% to $142.5 million. IMAX DMR box office increased 13.7% to $795.4 million.
- Nine-month theater-business revenue grew 7.1% to $106.5 million, supported by maintenance revenue, up 12.0% to $37.5 million.
- ASC Topic 606 adoption increased opening retained earnings by $27.2 million, net of tax. It increased reported revenue by $1.4 million and common-shareholder net income by $1.0 million for the nine months. The standard also changed classification and timing for certain theater-system arrangements; reported prior-year amounts were not restated.
- The company recorded a $7.5 million charge for an arbitration award in 2018. Nine-month restructuring and related charges were $1.2 million versus $13.7 million in 2017.
Guidance, outlook, commentary, risks and unusual items
- Management expected approximately 155 new theater-system installations in 2018, excluding upgrades, and a similar number of IMAX DMR film releases to 2017’s 60. Installations may be delayed for reasons outside the company’s control.
- Management expected R&D expense to decline in 2019 following the initial rollout of IMAX with Laser. The backlog was 635 systems, including 189 sales or sales-type leases; its stated dollar value was $318.6 million. Backlog conversion and timing remain uncertain.
- IMAX announced laser-system arrangements with Cineworld, AMC, Pathé and Wanying. These plans involve multi-year installation schedules and depend on execution and customer commitments.
- The company said it did not intend to open additional pilot IMAX VR centers and had closed its Shanghai and New York locations. It also said it did not expect meaningful direct investment in original content going forward.
- An arbitration panel awarded Three-Dimensional Media Group $8.8 million, including approximately $1.8 million in pre-award interest. IMAX recorded a $7.5 million charge; motions to modify or correct the award and for fees remained pending, and the outcome was uncertain.
- Other disclosed legal exposures include an unresolved India enforcement effort relating to an award in IMAX’s favor, a disputed Giencourt settlement award, and a China customs matter. The company had accrued approximately $0.3 million for potential China fines; actual penalties were unknown.
- Risks highlighted include film and box-office performance, converting backlog into revenue, customer and exhibitor conditions, China operations and regulation, foreign-exchange movements, competition, technology change, cybersecurity, intellectual property, and realizing restructuring savings. Management stated that available liquidity and expected cash flows should fund normal operations for the next 12 months; this depends on forecasts and operating performance.
Most important facts for investors to verify
- Whether theater-system backlog converts to installations and revenue as scheduled, particularly the 2018 installation target and laser-upgrade commitments.
- Whether box-office performance and film releases sustain network revenue, especially in Greater China and under revenue-sharing arrangements.
- The cash-flow impact of joint-revenue-sharing investments, share repurchases, and the $20 million credit-facility draw; also confirm covenant headroom and availability.
- The ultimate amount and timing of the Three-Dimensional Media Group award and the outcomes of the other disclosed legal and China customs matters.
- How ASC 606 estimates of future variable consideration affect recognized revenue, and whether those estimates require later adjustment.
- Credit quality and collections on financing receivables, including $5.5 million aged 90 days or more and $990,000 on nonaccrual status at quarter-end.