IMAX Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Financial statements are unaudited and prepared under U.S. GAAP. Amounts below are U.S. dollars unless stated otherwise.
Business context
IMAX develops and supplies premium cinema systems and related services, including theater system sales and leases, joint revenue-sharing arrangements (JRSAs), maintenance, and film remastering and distribution. At quarter-end, 1,066 theater systems operated in 68 countries, compared with 943 systems in 63 countries a year earlier. Greater China represented 312 operating theaters and 227 systems in backlog.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Revenue | $92.1 million | $62.2 million; up 48.1% |
| Gross margin | $52.2 million; 56.6% of revenue | $36.0 million; 57.8% |
| Operating income | $16.3 million | $2.7 million |
| Net income | $12.2 million | $1.5 million |
| Net income attributable to common shareholders | $9.5 million; reported EPS $0.14 | $0.4 million; reported EPS rounded to $0.00 |
| Operating cash flow | $5.0 million | $6.1 million |
| Cash and cash equivalents | $259.8 million at March 31 | $317.4 million at December 31, 2015 |
| Debt | $29.2 million Playa Vista loan; $200 million revolving facility undrawn | Playa Vista loan was $29.7 million at December 31, 2015 |
Gross margin excluding the impact of digital upgrades was 63.4%, versus 58.6% a year earlier, according to management. Adjusted net income, a non-GAAP measure excluding stock-based compensation and related tax effects, was $18.3 million, or $0.26 per diluted share, versus $6.1 million, or $0.09.
Cash used in investing activities was $9.3 million; financing activities used $53.2 million, including $44.6 million for share repurchases. Capital expenditures and investments in film assets totaled $13.3 million, compared with $31.1 million in Q1 2015. The company reported $91.9 million in accounts receivable and $119.6 million in financing receivables. Its revolving facility matures March 2020; management reported covenant compliance and a 0.19:1 maximum total leverage ratio.
Material changes versus Q1 2015
- Film production and IMAX DMR revenue rose to $29.8 million from $17.7 million. Gross box office from IMAX DMR films increased 64.2% to $272.0 million, despite fewer films exhibited: 17 versus 22.
- JRSA revenue rose 47.4% to $23.4 million, reflecting stronger film performance and a larger operating network: 534 theaters versus 457.
- IMAX systems revenue increased to $26.3 million from $15.5 million, with more sales and sales-type lease installations and nine digital upgrades recognized, compared with one upgrade in the prior-year quarter. Management noted upgrades generally have lower margins than full installations.
- Revenue growth exceeded gross-margin percentage growth; total gross margin percentage declined to 56.6% from 57.8%, partly reflecting the mix of lower-margin upgrades.
- SG&A increased to $31.6 million from $28.4 million, including stock-based compensation of $8.5 million versus $5.6 million. Excluding stock-based compensation, SG&A was $23.0 million versus $22.8 million.
- Common shares outstanding fell to 68.3 million from 69.7 million at year-end, primarily reflecting repurchases. The company bought back 1.45 million shares for $44.6 million during the quarter.
Outlook, commentary, risks and unusual items
- Management estimated 135–140 new theater system installations in 2016, excluding upgrades, and expected a similar number of IMAX DMR film releases to 2015’s 44. Installations may be delayed for reasons outside the company’s control; no specific earnings guidance was provided in the supplied filing text.
- Sales backlog was 388 systems, with a stated dollar value of $291.3 million, versus 403 systems and $279.8 million a year earlier. The dollar value does not represent all expected future JRSA revenue and backlog conversion is subject to installation and customer execution.
- International markets accounted for 58.7% of operating systems. Greater China generated nearly 27% of Q1 revenue and represented 58.5% of current theater backlog. The largest customer accounted for 16.0% of revenue.
- Cash declined by $57.7 million during the quarter, with substantial use for share repurchases and other investment. Management said cash, operating cash flow and available borrowing were expected to fund operations and strategic initiatives for the next 12 months, while cautioning that cash generation depends on theater signings, installations and film performance.
- Key stated risks include film performance, converting backlog to revenue, competition and technology changes, international and China-related risks, customer concentration, and the ability to execute new initiatives. IMAX China implemented a new ERP system in Q1; management reported material changes to internal controls during the transition and expected control evolution to continue during 2016. Disclosure controls and procedures were assessed as effective.
- Legal matters include the Giencourt arbitration, where the claimant sought up to approximately $10.4 million and IMAX asserted a counterclaim for lost profits exceeding $24 million; the final hearing was scheduled for October 2016. The company also could not assess the potential impact of a Chinese customs audit. A U.S. credit-card receipt class action was settled for $0.4 million; the Canadian securities class action was also settled, with the settlement funded by insurers.
- Share repurchase capacity was increased by $50 million to an aggregate $200 million on April 20, 2016, after quarter-end. The filing also describes an April 1, 2016 Ontario Securities Commission exemption allowing repurchases of up to 10% of shares in a 12-month period, subject to conditions.
Important facts for investors to verify
- Reconcile EPS figures: the financial statements report common-shareholder income of $9.5 million and basic and diluted EPS of $0.14; MD&A also gives net income of $12.2 million and cites $0.18 basic and $0.17 diluted EPS. These figures use different income attribution bases; confirm the intended comparison.
- Track backlog conversion, installation timing, and actual 2016 installations, particularly the large Greater China exposure.
- Assess whether film slate performance and the expanded JRSA network sustain revenue and margins, including the economics of system upgrades.
- Monitor cash use, share repurchases, operating cash conversion, and financing-receivable collections and aging.
- Follow the Giencourt arbitration, Chinese customs audit, and ERP-related internal-control transition.