IMAX Corporation — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing also provides unaudited fourth-quarter results. Financial amounts are in U.S. dollars unless noted.
Business context
IMAX earns revenue from theater-system sales and leases, joint revenue-sharing arrangements, theater maintenance, and film remastering, production, distribution and post-production. At year-end, 934 theater systems operated in 62 countries, up from 837 in 57 countries. International markets generated about 60% of revenue; Greater China was the second-largest and fastest-growing market.
Financial results and liquidity
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Revenue | $290.5 million | $287.9 million |
| Gross profit / margin | $173.4 million / 59.7% | $164.6 million / 57.2% |
| Operating income | $57.9 million | $65.1 million |
| Net income | $42.2 million | $44.1 million |
| Net income attributable to common shareholders | $39.7 million | $44.1 million |
| GAAP diluted EPS attributable to common shareholders | $0.56 | $0.64 |
| Operating cash flow | $86.6 million | $55.0 million |
Revenue rose 0.9% year over year and gross margin improved, while operating income and common-shareholder net income declined. Management’s non-GAAP adjusted net income attributable to common shareholders was $52.5 million, or $0.75 per diluted share, versus $55.7 million, or $0.81, in 2013; these measures exclude stock-based compensation and related tax effects.
Year-end cash was $106.5 million, compared with $29.5 million a year earlier. Cash used in investing activities was $61.9 million, including $40.1 million of property, plant and equipment purchases and $16.8 million invested in joint-revenue-sharing equipment. Capital expenditures, as defined by the company, were $79.1 million. Total indebtedness was $4.7 million, drawn under the Playa Vista construction loan; the separate $200 million revolving credit facility was undrawn. The company reported compliance with its credit covenants.
At year-end, assets were $621.5 million, liabilities $194.8 million, and shareholders’ equity $382.8 million. Financing receivables were $105.7 million; trade receivables were $76.1 million.
Fourth-quarter results and changes
Q4 2014 revenue was $102.5 million, versus $105.1 million in Q4 2013. Gross profit was $63.7 million (62.2% margin), compared with $67.3 million (64.1%). Income from continuing operations was $22.5 million, versus $27.9 million; net income attributable to common shareholders was $21.0 million, or $0.30 per basic and diluted share, versus $27.8 million, or $0.41 diluted, in Q4 2013. The filing does not provide a clear Q4 cash-flow figure.
Annual film-segment gross margin increased to $68.2 million from $58.8 million, supported by network growth and lower DMR production and print costs. Joint-revenue-sharing revenue grew 6.7% to $68.4 million, while IMAX systems revenue declined 6.8% to $85.1 million. Operating expenses included higher SG&A and research and development. The company recorded a $3.2 million investment impairment and $0.3 million of asset impairment in 2014.
Outlook, management commentary and risks
- Management expected to install a similar number of new theater systems in 2015 as in 2014, excluding digital upgrades, and anticipated a similar number of DMR film releases to 2014. Installations may be delayed for reasons outside IMAX’s control.
- Management expected 2015 capital expenditures to be at a similar level to 2014, principally for joint-revenue-sharing theater deployment and the Playa Vista headquarters project. It believed operating cash flow, cash and available credit would fund operations and planned initiatives for the next 12 months, subject to execution and film performance.
- The laser projection system began rollout at year-end; one system was operational and 71 were in backlog. Further R&D was planned. Home-theater initiatives with TCL and WASU were expected to launch in select markets in 2015.
- Theater backlog comprised 397 systems, valued at $269.1 million, versus 407 systems and $229.9 million a year earlier. About 85.6% of backlog systems were scheduled for international markets; Greater China represented 217 systems.
- Wanda and AMC, under common ownership, accounted for 14.5% of 2014 revenue and 25.8% of theater backlog. Their combined share of revenue was expected to rise as backlog systems opened.
- Key risks include dependence on exhibitors and successful film releases; converting backlog into installations and cash; China regulatory, currency and operating risks; customer concentration and receivables collection; foreign-exchange exposure; competition and technology execution; and the ongoing ERP implementation. Kodak was the sole supplier of analog film.
- Contingencies include a Canadian securities class action seeking $210 million, a U.S. credit-card receipt class action whose dismissal motion was denied in January 2015, and a Chinese customs audit whose potential impact could not be assessed. IMAX also reported a favorable Ontario judgment against parties accused of misusing trade secrets; collection and related proceedings remained relevant. Management said other matters were not expected to materially affect results, but outcomes were not assured.
Important facts for investors to verify
- Reconcile diluted EPS disclosures: the audited statements report $0.56 for common shareholders, while the MD&A narrative cites $0.59 for diluted EPS.
- Review the quality and timing of backlog conversion, especially in Greater China, and the exposure to Wanda/AMC.
- Assess whether operating cash flow can sustain joint-revenue-sharing investment, film funding and the Playa Vista project while maintaining liquidity.
- Track laser-system adoption, 2015 installation and film-release performance, and the economics of home-entertainment initiatives.
- Monitor the Canadian class action, U.S. receipt litigation, customs audit, customer receivable quality and the redemption or potential dilution terms associated with IMAX China’s minority investors.