IMAX Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Unaudited consolidated financial statements prepared under U.S. GAAP. IMAX operates a global premium cinema technology and content business; its network comprised 1,226 theater systems in 75 countries at quarter-end, compared with 1,066 systems in 68 countries a year earlier.
Financial performance and liquidity
- Revenue: $68.7 million, down 25.5% from $92.1 million. Network business revenue declined to $39.3 million from $52.3 million; theater business revenue declined to $23.2 million from $35.1 million. New-business revenue was $1.3 million, versus none reported in Q1 2016.
- Profit and margins: Gross margin was $35.8 million, or 52.1% of revenue, versus $52.2 million, or 56.6%. Operating loss was $0.3 million versus operating income of $18.9 million. Consolidated net loss was $0.9 million versus net income of $14.0 million. Net income attributable to common shareholders was $75,000, or approximately $0.00 per share, versus $11.3 million, or $0.16 per share. Adjusted net income, a non-GAAP measure, was $3.0 million, or $0.05 per diluted share, versus $18.0 million, or $0.26.
- Cash flow: Operating activities used $0.6 million, versus providing $5.0 million. Investing activities used $14.2 million, while financing activities provided $0.5 million. Cash declined $14.3 million during the quarter to $190.5 million.
- Debt and liquidity: Bank indebtedness was $26.8 million, primarily the $27.2 million gross Playa Vista loan, which carries a variable rate and matures in 2025. The $200 million revolving credit facility was undrawn; the company reported covenant compliance and a 0.25:1 maximum total leverage ratio. Cash was $190.5 million and total shareholders’ equity was $621.8 million.
- Other measures: Financing receivables totaled $120.5 million. The company recorded $5.3 million of share-based compensation and $4.0 million in total write-downs, including a $3.4 million impairment of documentary film assets.
Material changes versus Q1 2016
- Lower film box office was the principal pressure on network revenue: IMAX DMR gross box office fell 22.0% to $212.1 million, and joint-revenue-sharing box office fell 19.6% to $115.8 million. Network revenue declined despite growth in operating joint-revenue-sharing theaters, from 534 to 649.
- Theater revenue was affected by fewer upgrade installations: one laser upgrade was installed, compared with nine laser and xenon upgrades in Q1 2016. Maintenance revenue rose 12.4% to $11.0 million.
- Film distribution and post-production gross margin shifted to a $2.7 million loss from a $0.6 million profit, principally due to the documentary-film impairment.
- Cash and cash equivalents were down from $259.8 million at March 31, 2016; the year-over-year comparison also reflects $44.6 million of share repurchases in Q1 2016, versus none in Q1 2017.
Outlook, commentary, risks and unusual items
- Management expected a similar number of IMAX DMR film releases in 2017 as in 2016 (51 films) and anticipated approximately 160 new theater system installations in 2017, excluding upgrades. Installations may be delayed, and film performance and signings affect results and cash flows. The filing does not provide formal earnings guidance.
- Management expected continued investment in joint-revenue-sharing systems, film agreements, research and development, new businesses and share repurchases. The existing repurchase program had $46.3 million remaining and was scheduled to expire June 30, 2017; no shares were repurchased in the quarter.
- New initiatives include VR centers and content, original film production, home entertainment, and the planned theatrical premiere of the first two episodes of “Marvel’s Inhumans.” These activities remain developmental; new-business initiatives generated a $2.6 million net loss in the quarter.
- Early adoption of ASU 2016-16 produced a retrospective $8.3 million increase in accumulated deficit, a $14.8 million decrease in other assets, a $7.9 million increase in deferred taxes, and a $1.4 million increase in accrued liabilities.
- Key exposures include film and theater performance, conversion of backlog into installations and revenue, international and currency risks, China operations, and customer concentration. The largest customer represented 17.2% of quarterly revenue; Greater China generated nearly 27% of revenue and represented 67.9% of theater backlog.
- Legal matters include the Giencourt arbitration, where the panel found a binding settlement but IMAX disputes that finding and could not determine potential payment amounts; a 3DMG arbitration with a scheduled July 2017 hearing and no estimable damages range; and a China customs matter involving approximately $0.1 million of potential additional duties under review. IMAX reported paying $2.95 million of duties and taxes related to a separate customs determination in January 2017.
- The company expects sufficient capital and liquidity for normal operations over the next 12 months, but cautions that cash generation depends on projected signings, installations, film performance and collections. It also reported an unfunded CEO pension obligation of $19.7 million; a $21.1 million payment is projected for 2020 under current assumptions, although the CEO has not stated an intention to retire then.
Investor verification priorities
- Confirm the trajectory of DMR and joint-revenue-sharing box office, and whether the 2017 film slate supports a recovery in network revenue and margins.
- Track theater signings, installation timing, backlog conversion, and the assumptions behind the approximately 160-installation outlook.
- Review cash use, joint-revenue-sharing investment requirements, and the terms and covenant headroom of the credit facility and Playa Vista loan.
- Assess the documentary-film impairment and future content-investment exposure, including performance of VR and other new initiatives.
- Monitor China revenue and backlog concentration, customer exposure, and resolution of the Giencourt and customs matters, including any resulting cash or earnings impact.