IMAX Corporation — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Financial amounts are in U.S. dollars; figures below are rounded to millions unless stated otherwise. The interim financial statements are unaudited.
Business context and reporting period
IMAX earns revenue from digital film remastering and distribution (DMR), theater-system sales and leases, maintenance, and contingent rentals under joint revenue-sharing arrangements. At quarter-end, its network included 1,694 theater systems in 87 countries and territories. IMAX indirectly owned 71.41% of IMAX China.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $74.0m | $51.0m | $134.0m | $89.7m |
| Gross margin | $44.0m (59.5%) | $25.6m (50.3%) | $75.8m (56.6%) | $42.9m (47.8%) |
| Operating loss | $0.1m | $3.0m | $8.1m | $13.8m |
| Net loss attributable to common shareholders | $2.9m ($0.05/share) | $9.2m ($0.16/share) | $16.5m ($0.28/share) | $24.1m ($0.41/share) |
| Operating cash flow | Not presented separately | Not presented separately | $(5.3)m | $(17.0)m |
Q2 adjusted net income, a non-GAAP measure, was $3.9m ($0.07/share), compared with an adjusted loss of $7.0m ($0.12/share). For the first half, adjusted net loss was $4.3m ($0.07/share), versus $21.8m ($0.37/share). Excluding the $6.9m net non-cash Russia-related credit-loss provision, management reported first-half adjusted net income of $2.6m ($0.04/share). These non-GAAP measures exclude specified items, including share-based compensation, and should be considered alongside GAAP results.
First-half cash flows were $(18.0)m from investing activities and $(57.5)m from financing activities. Cash and cash equivalents fell $79.6m from year-end 2021 to $110.1m at June 30, 2022. The decline included $51.2m of share repurchases, $8.7m invested in joint-revenue-sharing equipment, and $4.7m invested in the film Mozart from Space.
Debt included $230.0m face value of 0.500% convertible notes due April 2026, carried at $224.4m net of discounts and issuance costs. There were no borrowings under the $300m revolving credit facility at quarter-end; the facility matures in March 2027 and includes a maximum senior secured net leverage covenant of 3.25:1.00. IMAX also reported available Chinese revolving facilities of about $28.3m and $29.8m. Management expected available cash and operating cash flows to fund anticipated operating needs and capital requirements for the following 12 months.
Material changes versus the prior comparable period
- Revenue rose 45% in Q2 and 49% in the first half; gross margin increased 72% and 77%, respectively. Stronger film box office and theater reopenings drove improvement, while fewer theater-system installations weighed on results.
- IMAX film gross box office was $247.7m in Q2, up 128%, and $420.9m in the first half, up 92%. Q2 included $89.1m from Top Gun: Maverick.
- First-half maintenance revenue rose 47%, and maintenance gross margin rose 71%, compared with the prior year, as theaters reopened.
- SG&A increased 29% in Q2 and 25% in the first half, reflecting higher business activity, staffing, marketing and facilities costs. Comparisons were also affected by unfavorable foreign exchange and Canada Emergency Wage Subsidy benefits received in 2021.
- First-half installations were 23 systems, versus 28 a year earlier; signings were 20, versus 14. Backlog was 492 systems, compared with 514 a year earlier.
- IMAX repurchased 3.08m common shares for $49.3m in the first half. Outstanding shares were 56.1m at June 30, compared with 58.7m at December 31, 2021.
Outlook, risks, contingencies and unusual items
- Management cited a strong slate of theatrical releases scheduled for the second half of 2022 and 2023, improving box office trends, and the return of exclusive theatrical windows. This is commentary, not quantified earnings guidance. Film release timing and performance remain uncertain.
- Approximately 90% of Greater China theaters were open at varying capacities at June 30, up from 52% at March 31. COVID-related restrictions and closures in China had constrained results; future outbreaks could again disrupt theater operations, attendance, film releases and collections.
- IMAX suspended operations in Russia and Belarus in March 2022. The network included 54 theaters in Russia, nine in Ukraine and one in Belarus. The company reserved against substantially all Russian receivables, placed exhibitors in the affected countries on nonaccrual for maintenance revenue and finance income, and reported a $25.6m fixed contracted backlog value for 22 systems in Russia, Ukraine and Belarus. Sanctions, conflict and collection uncertainty may cause further adverse effects.
- The company recorded a full $4.5m impairment of its investment in Mozart from Space, based on projected box office results and distribution costs. It also recorded $10.4m of additional deferred-tax valuation allowance in the first half, limiting tax benefits from losses.
- Potential contingencies include enforcement in India of an arbitration award against E-City; IMAX calculated the award at $24.8m, including interest, as of June 30, 2022. Enforcement remains pending and the filing gives no assurance of outcome. Management said it believes provisions for legal matters are adequate.
- Other material risks include theater-partner creditworthiness, converting backlog into installations and revenue, foreign exchange exposure, China-related operating and cash-repatriation constraints, and dependence on film performance. Management disclosed no off-balance-sheet arrangements expected to have a material effect.
Important facts for investors to verify
- Whether box office growth and the announced film slate translate into sustained revenue and cash generation, particularly if Chinese theater restrictions recur.
- Recoverability of theater-operator receivables and the Russia-related reserves, including the impact of the suspended operations and nonaccrual status.
- Backlog conversion, installation pace, and the fixed contracted value and ultimate collectability of the Russia, Ukraine and Belarus backlog.
- Liquidity and covenant headroom under the amended credit agreement, alongside cash use for equipment investment and share repurchases.
- Assumptions supporting the $4.5m film impairment, deferred-tax valuation allowance, and the pending E-City award enforcement.