IMAX Corporation — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Unaudited financial statements are prepared under U.S. GAAP; amounts below are U.S. dollars.
Business context
IMAX designs, supplies and maintains theater systems and earns film revenues primarily from digital re-mastering (DMR), distribution and post-production. Its network had 868 operating theaters in 59 countries at June 30, 2014, versus 767 in 54 countries a year earlier. Greater China was its fastest-growing market. The company’s largest customer contributed 16.5% of Q2 revenue and 16.4% of first-half revenue, up from 14.3% in each comparable 2013 period.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $79.1 million | $81.7 million | $127.3 million | $131.4 million |
| Gross margin | $47.8 million (60.4%) | $43.6 million (53.4%) | $74.2 million (58.3%) | $69.8 million (53.1%) |
| Operating income | $19.6 million | $17.4 million | $20.4 million | $22.2 million |
| Net income attributable to common shareholders | $13.3 million | $11.8 million | $13.9 million | $14.7 million |
| Diluted EPS | $0.19 | $0.17 | $0.20 | $0.21 |
| Operating cash flow | — | $35.3 million | $8.0 million |
Q2 revenue declined 3.1% year over year, while common-shareholder net income increased. First-half revenue also fell 3.1%, and common-shareholder net income declined 5.4%. The first-half 2013 comparison included a $2.2 million postretirement-plan curtailment gain. Q2 gross margin improved mainly on stronger film-segment margins, including lower DMR production and print costs; Q2 film revenue and gross box office per screen were lower year over year. First-half IMAX systems revenue fell 20.3%, while joint-revenue-sharing revenue and film gross margin increased.
First-half investing cash outflow was $28.4 million, including $16.6 million for property, plant and equipment and $10.8 million for joint-revenue-sharing equipment. Financing cash inflow was $38.8 million, including proceeds from the IMAX China minority investment. Cash rose to $75.1 million from $29.5 million at year-end 2013. At June 30, total assets were $538.2 million, total liabilities $156.8 million, and financing receivables $104.9 million.
Liquidity, debt and capital commitments
No amounts were drawn on the $200 million senior secured credit facility at June 30, 2014; the facility matures in February 2018, and the company reported covenant compliance. It also had a $10 million Bank of Montreal facility, with $0.3 million of letters of credit and guarantees outstanding. The company said existing cash, operating cash flow and available borrowing capacity should fund operations and planned initiatives for the next 12 months, while cautioning that cash flow depends on signings, installations, film performance and other factors.
The company received the first $40 million installment for the sale of a 20% interest in IMAX China; a second $40 million installment was due in February 2015. Playa Vista office construction commitments were approximately $45–50 million, with $14.7 million capitalized to date; completion was expected in 2015, with a significant portion expected to be financed through a construction loan and term facility.
Outlook, commentary and notable items
- Management expected to install a similar number of new theater systems in 2014 as in 2013, excluding digital upgrades, and anticipated a similar number of DMR film releases. Installations may shift between periods, and backlog conversion is not assured.
- The laser projection system was planned for rollout beginning by the end of 2014. The company had 66 laser-system configurations in backlog and expected elevated R&D spending to continue through 2014.
- Sales backlog rose to 419 systems valued at $272.2 million, from 284 systems and $220.3 million a year earlier. Approximately 87% of the current system backlog was scheduled for international markets; backlog is not guaranteed revenue.
- The company established an IMAX Original Film Fund intended to finance up to 10 films, with up to $50 million in capitalization. A third party committed $25 million initially; IMAX expected to contribute $9 million over five years.
- A $0.65 million impairment charge was recorded on an available-for-sale investment; the investment’s carrying value was $0.7 million at period-end. Q2 receivable provisions were $0.3 million.
- Legal matters include a favorable Ontario judgment awarding IMAX $6.0 million in damages, $0.456 million in disgorged profits, punitive damages and costs in its trade-secret litigation; China-related actions remained ongoing. A New York court vacated a prior $15.5 million default judgment against E-City in July 2014, and IMAX intended to appeal or pursue recognition of the Canadian judgment. A Shanghai customs audit’s potential impact could not be assessed. The company stated that it had adequate provisions, but adverse outcomes in certain matters could materially affect results, cash flows or financial position.
- Risks highlighted include China’s regulatory and market environment, foreign exchange exposure, reliance on film performance and theater-system signings, customer concentration, competition, technology execution, and converting backlog into revenue. The company reported no material off-balance-sheet arrangements and said disclosure controls were effective.
Important facts for investors to verify
- Whether the second $40 million IMAX China payment was completed and how the investors’ redemption, put and call rights may affect future dilution or cash needs.
- Whether backlog converts to installations and revenue on schedule, particularly in Greater China, and whether customer concentration has increased further.
- Actual timing, cost and commercial performance of the laser rollout, and the scale of related R&D and capital spending.
- Film slate and box-office performance, given weaker Q2 box office per screen and the importance of DMR revenue.
- Collection trends in financing receivables, including the $5.3 million more-than-90-days-past-due balance and $3.1 million of nonaccrual receivables reported at June 30.
- Developments in the E-City proceedings, trade-secret litigation, Canadian securities class action and China customs audit, as well as the financing and cost of the Playa Vista project.