IMAX Corporation — Q3 2014 Form 10-Q
Business context and reporting period. Unaudited results cover the three and nine months ended September 30, 2014; amounts are U.S. dollars. IMAX operates a global premium cinema technology and content business. Its network reached 880 theater systems in 60 countries, compared with 785 systems in 55 countries a year earlier. The filing describes seven reportable segments spanning theater systems, maintenance, joint revenue sharing, film production and DMR, distribution, post-production, and other activities.
Key financial metrics
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $60.7 million | $51.5 million | $188.1 million | $182.9 million |
| Gross margin | $35.4 million; 58.3% | $27.5 million; 53.3% | $109.6 million; 58.3% | $97.3 million; 53.2% |
| Operating income | $6.9 million | $3.1 million | $27.3 million | $25.2 million |
| Net income attributable to common shareholders | $4.9 million | $1.6 million | $18.7 million | $16.3 million |
| Diluted EPS | $0.07 | $0.02 | $0.27 | $0.24 |
Cash flow and liquidity: Nine-month operating cash flow was $71.9 million, investing cash use was $45.1 million, and financing cash inflow was $37.4 million. Cash ended September at $93.7 million, versus $29.5 million at year-end 2013. The company had no borrowings against its $200 million revolving credit facility and reported $200 million available; it said it was compliant with facility requirements. Financing receivables were $103.6 million and accounts receivable was $59.7 million. Total liabilities were $172.7 million. No quarterly cash-flow statement is presented.
Material changes versus comparable periods
- Q3 revenue rose 17.9%, while nine-month revenue increased 2.8%. Higher Q3 joint revenue-sharing and film revenue contributed to growth.
- Gross margin improved in both periods. Nine-month film-segment gross margin rose to $46.9 million from $34.5 million, while IMAX systems revenue fell to $44.3 million from $50.8 million, mainly reflecting fewer sales and sales-type lease installations and prior-year deferred upgrade revenue.
- Joint revenue-sharing revenue grew to $15.2 million for Q3 and $45.5 million for nine months. There were 422 operating systems in these arrangements, up from 351 a year earlier.
- Nine-month operating cash flow more than doubled year over year. The company cites working-capital movements, including higher deferred revenue and collections, as factors.
- Q3 selling, general and administrative expense increased to $23.5 million from $19.8 million; nine-month expense increased to $68.3 million from $61.5 million. Higher staff and share-based compensation costs and foreign-exchange losses contributed.
Outlook, commentary, risks, and unusual items
- Management estimated 2014 theater installations would be similar to 2013, while cautioning that timing may shift due to theater construction and other factors outside its control. Backlog was 439 systems, with a stated value of $295.4 million; approximately 86% was scheduled for international markets. Backlog conversion is not assured.
- Management planned to begin rolling out its next-generation laser projection system by the end of 2014 and expected elevated R&D spending to continue. There were 69 laser configurations in backlog. The company also expected approximately 34 IMAX DMR releases in 2014 and a similar number in 2015; film performance remains an important revenue driver.
- Greater China is a major growth market. Investors purchased 20% of IMAX China for $80 million in two installments: $40 million was received in April 2014 and the second $40 million was due in February 2015. IMAX China remains consolidated. The filing notes potential investor redemption rights, including alternatives involving company shares that could dilute common shareholders.
- The company expected cash from operations, existing cash, and available credit to fund operations and strategic initiatives for the next 12 months. It planned continued investment in joint revenue-sharing systems, film commitments, and the Playa Vista headquarters project. On October 6, 2014, after quarter-end, a construction loan of up to $25.7 million was agreed for the approximately $50 million project; the company provided payment and completion guarantees.
- Unusual items included a $0.7 million impairment of an available-for-sale investment during the nine months, a $0.6 million release of a New York tax valuation allowance, and $11.3 million of nine-month share-based compensation. Management’s non-GAAP adjusted net income was $28.3 million for nine months, versus GAAP common-shareholder net income of $18.7 million.
- Risks include dependence on film performance and major customers, theater backlog conversion, competition and technology execution, foreign exchange, and expansion and regulation in China. The company reported a Shanghai customs audit whose potential impact it could not assess. It also described ongoing litigation, including a Canadian securities class action seeking $210 million and proceedings involving E-City; collection of judgments and outcomes remain uncertain. A favorable Ontario judgment against Tsui awarded damages and other amounts, but collection was not established in the filing.
- The company approved a $150 million share-repurchase program through June 2017 and repurchased 85,405 shares for $2.4 million in Q3. It was assessing the impact of the new revenue-recognition standard, effective for public-company reporting periods beginning after December 15, 2016.
Important facts for investors to verify
- Whether the February 2015 IMAX China payment closes, and how the investors’ redemption and potential share-settlement rights may affect dilution.
- Backlog installation and revenue conversion, especially the concentration in international markets and Greater China.
- Film box-office trends, including the decline in nine-month box office per screen despite higher aggregate box office.
- Collection quality and aging of financing receivables, including the $2.5 million on nonaccrual status and associated allowances.
- Actual funding needs and guarantees for Playa Vista, joint revenue-sharing deployments, and compliance with credit-facility covenants.
- Developments in the China customs audit, material litigation, and the recoverability of legal judgments and investments.