IMAX Corporation — 2018 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2018; the filing also provides unaudited fourth-quarter results. IMAX earns revenue primarily from digitally remastering films for its theater network and providing theater systems through sales, leases, and joint revenue-sharing arrangements. At year-end, its network comprised 1,505 theaters in 80 countries, including 1,409 commercial multiplex theaters. All amounts below are U.S. dollars.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $374.4 million | $380.8 million |
| Gross margin | $207.9 million; 55.5% | $185.2 million; 48.7% |
| Operating income | $45.2 million | $31.4 million |
| Net income | $33.6 million | $12.5 million |
| Net income attributable to common shareholders; diluted EPS | $22.8 million; $0.36 | $2.3 million; $0.04 |
| Adjusted net income, non-GAAP; adjusted diluted EPS | $70.2 million; $1.11 | $51.5 million; $0.79 |
| Cash provided by operating activities | $110.0 million | $85.4 million |
| Cash and cash equivalents, year-end | $141.6 million | $158.7 million |
| Bank indebtedness, year-end | $37.8 million | $25.4 million |
FY 2018 investing activities used $56.9 million of cash; the company separately reported $80.1 million of capital expenditures and investments, including film assets. It spent $71.5 million repurchasing its common shares and $6.1 million on IMAX China share repurchases. The company reported $260 million of unused capacity under its $300 million revolving credit facility, which matures in 2023. It was in compliance with its leverage covenant at year-end.
Fourth quarter: Revenue was $109.0 million versus $125.6 million in Q4 2017; gross margin was $54.6 million versus $60.1 million. Net income was $3.8 million versus $8.7 million, while net income attributable to common shareholders was $1.7 million versus $4.8 million; diluted EPS attributable to common shareholders was $0.03 versus $0.08.
Material changes versus the prior comparable period
- Annual revenue declined 1.7%, mainly because 2017 included revenue from the new-business initiative “Marvel’s Inhumans.” Theater-business revenue grew 8.7% to $168.4 million, while new-business revenue fell to $5.8 million from $24.5 million.
- Gross margin rose to 55.5% from 48.7%. Management attributed the improvement principally to the absence of significant 2017 film and new-business impairment charges; 2017 included $19.7 million of impairment charges in gross margin.
- IMAX DMR gross box office increased 5.7% to $1.032 billion. The network expanded to 1,505 theaters from 1,370, and the company released 70 new DMR films versus 60 in 2017.
- New theater-system signings increased to 234, including 112 upgrades, from 177 in 2017. The company installed 149 new theaters and 23 upgrades in 2018.
- ASC Topic 606 was adopted effective January 1, 2018. It increased opening retained earnings by $27.2 million, net of tax, and increased 2018 revenue by $1.5 million. The modified-retrospective adoption means certain current-year revenue classifications and comparisons with prior periods are not directly comparable.
Outlook, commentary, risks, and unusual items
- Management outlook: IMAX expected to install a similar number of new theater systems in 2019 as in 2018, release a similar number of DMR films, and install approximately 135 IMAX with Laser systems by year-end 2019. Management expected R&D expense to decline in 2019 following the initial laser-system rollout. These are expectations, not a full financial forecast; installations and film releases may be delayed.
- Geographic and customer concentration: Approximately 31% of 2018 revenue came from China operations. Greater China accounted for 272 systems in backlog, and Wanda represented 17.1% of revenue. The filing highlights regulatory, currency, cash-repatriation, film-release, and economic risks in China, as well as risks from customer and studio consolidation.
- Backlog and execution: Year-end backlog was 564 systems, with stated dollar value of $304.3 million. The value excludes most future contingent revenue-sharing payments and depends on installation and customer acceptance. Customers may delay, renegotiate, or fail to complete installations.
- Unusual items: 2018 results included an $11.7 million legal arbitration charge, $9.5 million of exit, restructuring and associated impairment charges, and $3.0 million of executive transition costs. The company also recorded $7.2 million of asset impairment and exit costs related to closing its remaining virtual-reality locations; it decided to dissolve the VR Fund in January 2019. Reported net income and adjusted net income differ materially; adjusted results are non-GAAP and exclude specified charges and other items.
- Contingencies: An arbitration award in favor of 3DMG resulted in the $11.7 million charge. A China customs matter remains pending, with the amount of possible penalties unclear; the company had accrued an estimate of $0.3 million. A separate Giencourt arbitration award is being challenged, and the company said it could not determine any amount payable or timing. The filing states other legal matters may also affect results if outcomes change.
- Accounting and currency: Revenue recognition involves estimates of future variable consideration and box-office performance. The company recorded a $1.7 million foreign-exchange loss in 2018 and uses foreign-currency forwards; changes in exchange rates may affect results and reported box office.
Important facts for investors to verify
- Reconcile reported earnings with non-GAAP adjusted earnings, including the treatment and recurrence risk of the arbitration, restructuring, executive-transition, and VR-related costs.
- Assess the quality and collectability of receivables: accounts receivable were $93.3 million, financing receivables were $127.4 million, and the allowance for doubtful accounts rose to $3.2 million.
- Track conversion of the 564-system backlog into installations and revenue, especially the Greater China commitments and laser upgrades; verify how ASC 606 estimates affect reported results and comparisons.
- Review China exposure, Wanda and other major-customer concentration, and the status and potential financial impact of the customs and unresolved arbitration matters.
- Evaluate cash use, share repurchases, and liquidity: cash declined by $17.1 million during 2018, while $40 million was drawn on the credit facility and $260 million remained available.