IMAX Corporation — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012; unaudited, U.S. GAAP, amounts in U.S. dollars. IMAX designs and manufactures theater systems and earns revenue from system sales and leases, maintenance, revenue-sharing theaters, and film production, remastering, distribution and post-production. Its network comprised 689 theaters in 52 countries, versus 583 in 48 countries a year earlier.
Financial performance
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $80.7m (2011: $67.5m; +19.6%) | $206.5m (2011: $169.9m; +21.6%) |
| Gross margin | $44.8m; 55.4% of revenue (2011: $36.4m; 54.0%) | $110.4m; 53.5% of revenue (2011: $83.4m; 49.1%) |
| Operating income | $22.5m (2011: $14.4m) | $42.6m (2011: $18.4m) |
| Net income | $15.0m (2011: $8.4m); diluted EPS $0.22 (2011: $0.12) | $28.7m (2011: $9.2m); diluted EPS $0.42 (2011: $0.14) |
| Operating cash flow | Not separately presented for the quarter | $53.9m provided (2011: $6.4m used) |
| Investing and financing cash flow | Not separately presented for the quarter | Investing: $23.2m used; financing: $19.3m used |
Cash and equivalents were $29.5m at September 30, versus $18.1m at December 31, 2011. Bank debt was $30.0m, down from $55.1m. The company reported $50.0m of available asset-based borrowing capacity and $30.0m of remaining revolving-term capacity; the credit facility matures October 2015. It was in compliance with covenants, including a funded-debt-to-EBITDA ratio of 0.30:1 against a maximum of 2:1. Total assets were $427.0m and shareholders’ equity $238.6m.
Material changes and operating drivers
- Growth was led by film production/IMAX DMR and joint revenue-sharing theaters. For the first nine months, film production and DMR revenue rose to $58.8m from $38.3m, while joint revenue-sharing revenue rose to $40.5m from $22.4m. IMAX systems revenue declined to $59.1m from $63.4m.
- IMAX DMR box office for the first nine months increased 46.6% to $468.4m; average box office per screen rose to $892,800 from $856,900. In Q3, box office per screen was lower year over year ($311,700 versus $355,500), despite higher total DMR box office.
- Q3 SG&A was broadly flat at $19.3m. Nine-month SG&A increased to $58.7m from $55.8m, reflecting higher staffing, marketing and share-based compensation, partly offset by foreign-exchange gains and lower legal and other corporate costs.
- Revenue backlog was $202.5m for 285 minimum contracted theaters, versus $203.9m for 295 theaters a year earlier. Nine-month signings totaled 104 systems and $61.3m, down from 183 systems and $75.5m.
- Operating cash flow improved substantially from the prior-year period, partly reflecting a smaller working-capital outflow. Investment included $15.2m for joint revenue-sharing equipment and $5.0m for intangible assets; total capital expenditures, including film assets and joint revenue-sharing equipment, were $36.3m.
Outlook, commentary and risks
- Management estimated approximately 110 new system installations in 2012, excluding digital upgrades, implying about 46 in Q4. Installations may slip between periods; the estimate includes expected signings and installations within the same period.
- Management expected cash, operating cash flow and available credit to fund operations and strategic initiatives for the next 12 months, while noting this depends on signings, installations, film performance and collections.
- The company targeted introduction of its next-generation laser projection system in the second half of 2013, developed with Barco using Kodak technology. R&D spending rose to $7.6m for nine months from $6.0m.
- Management expected a similar number of IMAX DMR releases in 2013 as in 2012 and 2011, and highlighted international expansion, particularly Greater China, India, Latin America and Western Europe. Greater China had 111 operating theaters and 123 in backlog.
- Wanda’s parent, Dalian Wanda Group, acquired AMC in Q3, making the combined Wanda/AMC group IMAX’s largest customer. The two largest customers together represented 16.5% of nine-month revenue.
- Key exposures include foreign-exchange movements, reliance on theater and film-industry customers, conversion of backlog to installations and revenue, film performance, competition and technology execution. The filing specifically identifies implementation of a new ERP system as a risk to operations, financial reporting and internal controls.
- Legal matters include a proposed $12m U.S. securities class-action settlement funded by insurers and PwC, with final resolution contingent on an order in the Canadian action. The Canadian securities class action seeks $210m; the company says it will defend the matter. Management cautions that adverse developments in litigation could materially affect results, cash flows or financial position.
Unusual items and contingencies
- Share-based compensation expense was $2.8m in Q3 and $10.3m for nine months, compared with $0.5m and $9.0m, respectively. Management’s non-GAAP adjusted net income was $17.9m for Q3 and $38.8m for nine months; these measures exclude share compensation and, for the prior-year nine-month comparison, the arbitration award and related tax effects.
- The prior-year nine-month results included a $2.1m arbitration provision relating to the discontinued Ridefilm business; the matter was settled in January 2012.
- The company recorded a $0.2m impairment of an available-for-sale investment in the first nine months of 2012. It also recognized inventory write-downs and equipment costs, including $1.6m for equipment enabling certain theaters to show films in digital or analog formats.
- An unfunded executive pension obligation was $19.2m. The filing’s contractual-obligations table anticipates a $19.7m payment in 2014 under current assumptions; the CEO had not indicated an intention to retire at the end of his current employment term.
Important facts for investors to verify
- Whether the 2012 installation estimate and $202.5m backlog convert to timely installations, recognized revenue and cash collections.
- Whether DMR box-office growth is sustained and Q3’s lower per-screen box office affects film-related revenue and margins.
- Customer concentration and the commercial relationship following Wanda’s acquisition of AMC.
- Credit quality and collection trends in financing receivables, including past-due and nonaccrual balances.
- Progress, cost and timing of the laser projector and ERP implementations, and the ERP project’s implications for financial reporting controls.
- Resolution of the Canadian securities class action, the status of the U.S. settlement condition, and timing and funding assumptions for the executive pension obligation.