IMAX Corporation — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Amounts are in U.S. dollars; financial statement amounts below are in millions unless otherwise noted.
Business context and reporting period
IMAX develops and supplies premium theater systems and earns revenue from film digital re-mastering (DMR), theater equipment sales and leases, joint revenue-sharing arrangements, maintenance, and newer initiatives including original content and virtual reality (VR). At quarter-end, 1,257 theater systems operated in 75 countries, up from 1,215 at December 31, 2016. The company reorganized its segment reporting in 2017, including new business as a reportable segment.
Key financial metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $87.8 | $91.7 | $156.4 | $183.9 |
| Gross margin | $49.5 (56.4%) | $50.3 (54.8%) | $85.2 (54.5%) | $102.5 (55.7%) |
| Income from operations | $2.0 | $12.8 | $1.7 | $31.7 |
| Net income | $1.8 | $8.9 | $0.9 | $22.9 |
| Net income (loss) attributable to common shareholders | $(1.7) | $6.0 | $(1.6) | $17.3 |
| Basic and diluted EPS attributable to common shareholders | $(0.03) | $0.09 | $(0.02) | $0.25 |
| Operating cash flow | Not presented for quarter | $37.2 | $36.1 |
Management’s non-GAAP adjusted net income attributable to common shareholders was $9.6 million, or $0.15 per diluted share, in Q2, versus $12.3 million, or $0.18, a year earlier. For the six months, it was $13.5 million, or $0.20 per diluted share, versus $27.6 million, or $0.40. These measures exclude stock compensation, restructuring and associated impairments, and related tax effects.
Cash and cash equivalents were $158.2 million at June 30, down from $204.8 million at year-end. Total assets were $840.4 million and total liabilities were $258.0 million. Bank indebtedness was $26.3 million, comprising the Playa Vista loan; the $200 million revolving credit facility was undrawn and fully available. The company reported $37.2 million of operating cash flow, $31.4 million used in investing activities and $52.4 million used in financing activities for the six months. Financing outflows included $46.1 million of share repurchases.
Material changes versus the prior comparable period
- Revenue fell 4.3% in Q2 and 14.9% for the six-month period. Six-month results were pressured by weaker film box office and fewer theater installations.
- Six-month network-business revenue declined 13.6% to $86.8 million; DMR revenue declined 10.6% to $51.2 million. IMAX DMR gross box office fell 9.7% to $481.0 million, and per-screen box office was lower.
- Six-month theater-business revenue declined 24.3% to $56.0 million. IMAX installed 49 systems in the period versus 59 a year earlier; sales and sales-type lease revenue declined to $23.1 million from $36.7 million.
- Maintenance revenue increased 11.2% to $21.9 million for the six months, while new-business revenue rose to $2.6 million from less than $0.1 million, alongside increased new-business losses and investment.
- Operating income and common-shareholder earnings fell sharply. The quarter included $10.3 million of restructuring charges and associated impairments; no comparable charge was recorded in 2016.
Outlook, management commentary, risks and unusual items
- Management expected to install approximately 160 new theater systems in 2017, excluding upgrades, and expected a similar number of DMR film releases to 2016’s 51. Installations may be delayed, often for reasons outside the company’s control.
- Theater-system backlog increased to 580 systems from 498 at year-end, with a stated fixed contractual dollar value of $300.6 million. Approximately 90% of systems in backlog were scheduled for international markets; Greater China represented 381 systems.
- A June 2017 cost-reduction plan included approximately 100 job reductions, about 14% of the global workforce, exits from certain non-core initiatives and facility consolidation. Restructuring charges were $4.7 million and related asset impairments were $5.6 million; management expected another $3.2 million of restructuring charges in the rest of 2017 and savings to begin in Q3. The company cautioned that expected savings may not be realized.
- Q2 asset charges included a $1.2 million write-off of a loan deemed uncollectible. A $4.6 million impairment of documentary film assets was recorded in the six-month period after lower-than-expected revenue and revised future revenue estimates.
- Management expected sufficient capital and liquidity for normal operations over the next 12 months, while noting that cash flow depends on theater signings and installations, film performance, production spending and customer collections. The company authorized a new $200 million share-repurchase program through June 30, 2020; none had been used by quarter-end.
- Risks include box-office volatility, dependence on successful film releases, theater-backlog conversion, customer and exhibitor credit, competition, foreign exchange and international operations. The largest customer contributed 15.1% of Q2 revenue. Cash held outside North America was $126.1 million, including $38.1 million in China; repatriating funds from China could entail estimated withholding tax of $5.8 million.
- Contingencies include a Chinese customs matter involving approximately $0.1 million of underpaid duties; the company accrued $0.3 million for possible fines, while the ultimate penalty remained uncertain. In the Giencourt arbitration, the panel found a purported settlement binding; IMAX disputed the award and was evaluating its response. The 3DMG arbitration hearing was ongoing. The filing states outcomes may be uncertain and adverse outcomes could affect results, cash flows or financial position.
- The company was in compliance with credit-facility requirements. Its reported leverage ratio was 0.24:1; the agreement required minimum liquidity of $50 million and minimum EBITDA of $100 million. The filing reports trailing-twelve-month covenant Adjusted EBITDA of $109.2 million after amounts attributable to non-controlling interests.
Important facts for investors to verify
- Whether box-office performance and per-screen averages recover, and how those trends affect DMR and joint revenue-sharing revenue.
- Whether the company converts the 580-system backlog into installations and recognizes the related revenue on schedule, particularly in Greater China.
- Whether the workforce and other cost-reduction measures deliver the expected savings, and whether implementation costs exceed estimates.
- How the Chinese customs review and the Giencourt and 3DMG proceedings resolve, including any unrecorded or additional financial exposure.
- Whether cash generation supports continued theater-system investment and the new repurchase authorization, given the decline in cash during the first half.
- The performance and funding needs of VR, original-content and other new-business initiatives, which generated operating losses.