IMAX Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Amounts are U.S. dollars. IMAX operates a global premium cinema technology network and earns revenue from theater systems, box-office-linked DMR and joint revenue-sharing arrangements, maintenance, and film services. The filing was signed April 30, 2020.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $34.9 million | $80.2 million |
| Gross margin | $5.1 million; 14.6% of revenue | $45.1 million; 56.3% |
| Operating income (loss) | $(38.4) million | $14.0 million |
| Net income (loss) attributable to common shareholders | $(49.4) million; $(0.82) per diluted share | $8.3 million; $0.13 per diluted share |
| Adjusted net income (loss) attributable to common shareholders (non-GAAP) | $(28.7) million; $(0.48) per share | $10.8 million; $0.18 per share |
| Operating cash flow | $6.0 million provided | $0.7 million used |
| Cash and cash equivalents, at period end | $352.3 million | $109.5 million at Dec. 31, 2019 |
| Bank indebtedness, at period end | $298.4 million net of issuance costs | $18.2 million |
Revenue fell 56.5% year over year and gross margin fell 88.7%. DMR revenue declined 62.0%; joint revenue-sharing contingent rent declined 66.9%; and maintenance revenue declined 43.1%. Theater-system installation delays also reduced system revenue: three new systems were installed and recognized, compared with ten in Q1 2019. The 13 DMR films exhibited generated gross box office of $95.3 million, down 62.8% from the prior-year quarter.
Q1 included a $10.2 million credit-loss provision, $1.2 million of asset impairments, $2.3 million of film-asset impairment/write-downs, and a $4.5 million unrealized loss on equity securities. Income tax expense was $15.5 million, including a $19.7 million deferred tax liability related to withholding taxes on certain historical foreign earnings no longer considered indefinitely reinvested.
Liquidity, debt, and capital
- IMAX drew the remaining $280.0 million available under its $300.0 million revolving credit facility in response to pandemic uncertainty. The facility matures June 28, 2023; the reported Q1 effective interest rate was 2.03%.
- Cash of $352.3 million includes the new borrowings. Management reported a 1.93:1 senior secured net leverage ratio at March 31, versus a maximum covenant ratio of 3.25:1. The company was compliant at quarter-end but warned prolonged disruption could threaten future compliance.
- Management said it expected available capital and liquidity to fund normal-course operations for the next 12 months, while noting cash needs could rise and operating cash flow is uncertain. A separate RMB 200 million (approximately $30 million) China working-capital facility was undrawn.
- Financing receivables were $121.1 million, down from $128.0 million at year-end; accounts receivable were $64.8 million. Cash held outside Canada was $89.5 million, including $67.8 million in China.
- Investing cash outflow was $2.7 million. Financing cash inflow was $239.2 million, principally reflecting the credit-facility draw, partly offset by $36.6 million of common-share repurchases. The company repurchased 2.48 million shares at an average $14.72; $89.4 million remained under the program.
Outlook, risks, and management commentary
- COVID-19 drove theater closures, film-release postponements, lower box office, delayed system installations, and suspended maintenance services. Mainland China’s approximately 700 IMAX theaters had been closed since late January and had not reopened by the report date; substantially all IMAX theaters elsewhere were also closed by mid-to-late March.
- Management expected significant revenue and earnings declines while a significant portion of the network remained closed. Recovery timing, consumer willingness to return to theaters, exhibitor solvency, delayed film releases, and installation timing were uncertain. No specific earnings or revenue guidance was provided.
- To preserve cash, IMAX said it was cutting non-essential costs, reducing employee hours, minimizing non-essential capital spending, and requiring senior-management approval for outgoing payments. It was pursuing possible wage subsidies, tax credits, and other relief, but the amount and timing were undetermined and support was not assured.
- Management’s quarter-end impairment tests found no goodwill impairment and no impairment of theater-system equipment supporting joint revenue-sharing arrangements. These estimates relied on revised budgets and long-term projections and could change materially as pandemic effects develop.
- Backlog totaled 533 theater systems, versus 571 a year earlier; its reported dollar value was $328.8 million, including $303.3 million for new systems and $25.6 million for upgrades. Management cautioned that backlog conversion depends on installation, acceptance, financing, and other factors.
- Key risks include additional credit losses, receivable collection delays or exhibitor bankruptcies, asset impairments, covenant pressure, foreign-exchange and China-related risks, and uncertain recovery in movie-going. The Giencourt arbitration award was under appeal; the company said the amount and timing of any potential payment were not determinable.
Most important facts for investors to verify
- Subsequent theater reopening pace, film-release schedules, attendance recovery, and the resulting effect on box-office-linked revenue and maintenance charges.
- Cash burn and collections from exhibitors, including aging and credit quality of accounts and financing receivables, and whether Q1 credit-loss estimates prove adequate.
- Credit-facility covenant calculations, lender flexibility, liquidity needs, and the extent to which reported cash is available across jurisdictions.
- Backlog conversion, cancellations or deferrals, and actual installations compared with the 533-system backlog.
- Potential future tax payments on repatriated foreign earnings, recoverability of deferred tax assets, and outcomes of material legal proceedings.
- Continued share repurchases and capital spending in light of the pandemic response and increased borrowing.