IMAX Corporation — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Financial statements are unaudited and presented in U.S. dollars. IMAX operates a global cinema technology and content business, earning revenue from theater systems, maintenance, revenue-sharing arrangements, and film services.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $107.2 million | $79.1 million | $169.4 million | $127.3 million |
| Gross margin | $69.0 million; 64.4% | $47.8 million; 60.4% | $105.0 million; 62.0% | $74.2 million; 58.3% |
| Operating income | $36.5 million | $19.6 million | $39.2 million | $20.4 million |
| Net income | $26.4 million | $13.8 million | $27.9 million | $14.4 million |
| Net income attributable to common shareholders | $24.4 million | $13.3 million | $24.7 million | $13.9 million |
| Diluted EPS attributable to common shareholders | $0.34 | $0.19 | $0.34 | $0.20 |
| Operating cash flow | Not separately presented for the quarter | $18.5 million | $35.3 million |
At June 30, cash and cash equivalents were $146.4 million, versus $106.5 million at year-end 2014. Financing receivables were $108.5 million and deferred revenue was $98.1 million. Bank indebtedness was $22.3 million, representing the Playa Vista construction loan; the separate $200 million revolving credit facility was undrawn. The company reported compliance with facility covenants. Total assets were $727.1 million and total liabilities $208.3 million.
Material changes and operating performance
- Q2 revenue rose 35.4% year over year; first-half revenue rose 33.0%. Management attributed growth mainly to theater systems, joint revenue sharing, and film production/DMR.
- Q2 film revenue benefited from IMAX DMR box office of $343.0 million, up 58.8%; first-half DMR box office was $507.7 million, up 43.3%. First-half films exhibited increased to 33 from 26.
- Joint revenue-sharing revenue grew 63.2% in Q2 and 57.1% in the first half. Operating theaters under these arrangements increased to 477 from 408 a year earlier.
- Theater network reached 976 systems in 65 countries, versus 868 systems in 59 countries a year earlier. Sales backlog was 391 systems valued at $279.7 million, compared with 419 systems and $272.2 million at June 2014; 87% of current backlog systems were scheduled for international markets.
- SG&A increased to $29.0 million in Q2 and $57.4 million in the first half, reflecting higher staffing, share-based compensation, foreign exchange and other corporate costs. First-half stock-based compensation was $10.7 million, versus $7.9 million.
- Operating cash flow fell to $18.5 million from $35.3 million, with working-capital outflows including increases in accounts receivable and inventory. Investing cash outflow was $49.5 million, including $25.7 million for the Playa Vista headquarters project. Capital expenditures, including joint-revenue-sharing equipment, film assets and intangibles, totaled $56.9 million.
Outlook, risks and contingencies
- Management expected to install approximately 120 new theater systems in 2015, excluding digital upgrades. The company expected a slightly higher number of DMR releases in 2015 than the 40 released in 2014; the MD&A also describes the anticipated slate as similar in size.
- Management believed existing cash, operating cash flow and available credit would fund operations and strategic initiatives for the next 12 months, while cautioning that weaker signings, installations or film performance could adversely affect cash flow.
- IMAX China had submitted an application for a proposed Hong Kong IPO. Timing and terms were undecided, and completion depended on market conditions and exchange approval. The China investment’s second $40 million installment was received in February 2015.
- The Playa Vista project was estimated to cost approximately $52 million. Its construction loan had $22.3 million drawn and $3.4 million available; absent conversion to permanent financing, the balance was due in April 2016. The company guaranteed payment and completion obligations.
- Principal business risks identified include film performance, theater agreement signings and backlog conversion, competition and technology change, international and China operations, customer concentration, and reliance on a sole analog-film supplier. The largest customer accounted for 17.3% of revenue in the reported period.
- Material legal matters include a Canadian securities class action seeking $210 million, a Giencourt arbitration seeking approximately $11.5 million (IMAX counterclaims for more than $24 million), and a putative FACTA class action against a subsidiary. The company stated it believed it had defenses; outcomes remain uncertain. A China customs audit’s potential impact was not assessable.
- Other notable items: a $0.35 million investment impairment in the first half; equity-accounted investment losses of $1.2 million; and an unfunded $19.5 million executive pension obligation. The filing reported no material off-balance-sheet arrangements.
Investor verification priorities
- Track backlog conversion, scheduled installations, cancellations and the 120-system 2015 installation outlook.
- Assess whether operating cash flow recovers as receivables and inventory build normalize, against planned theater and headquarters investment.
- Monitor DMR box-office performance, film slate results and the growing contribution from joint revenue-sharing theaters.
- Verify progress, approvals and final terms of the proposed IMAX China IPO, including related non-controlling-interest and redemption provisions.
- Review customer concentration, financing-receivable delinquency and the outcomes or developments in the disclosed litigation and customs audit.