IMAX Corporation — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Amounts are U.S. dollars; financial statement figures are presented in millions unless otherwise noted.
Business context
IMAX designs and manufactures theater systems and earns revenue from system sales and leases, theater maintenance, revenue-sharing theaters, film production and digital remastering (DMR), film distribution, and post-production. At quarter-end, its network comprised 663 theaters in 52 countries, up from 560 theaters in 46 countries a year earlier.
Financial performance and liquidity
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $70.2 | $57.2 | $125.8 | $102.4 |
| Gross margin | $38.8 (55.3%) | $26.3 (46.0%) | $65.7 (52.2%) | $46.9 (45.9%) |
| Operating income | $15.6 | $4.4 | $20.1 | $4.0 |
| Net income | $11.1 | $1.8 | $13.7 | $0.8 |
| Diluted EPS | $0.16 | $0.03 | $0.20 | $0.01 |
| Operating cash flow | Not separately stated | Not separately stated | $19.8 | $(10.4) |
Q2 revenue rose 22.7%; six-month revenue rose 22.9%. Growth was led by film production/DMR and joint revenue-sharing arrangements, partly offset by lower theater-system sales. Q2 net income included a $3.0 million deferred tax provision; six-month net income included $3.7 million of deferred tax provision. Management’s non-GAAP adjusted net income was $14.1 million ($0.21 diluted) for Q2 and $18.1 million ($0.27 diluted) for the six months, excluding specified items including deferred tax provisions and share-based compensation; the six-month 2011 comparison also excluded a $2.1 million arbitration charge.
At June 30, cash was $23.6 million, total assets $425.5 million, and shareholders’ equity $219.2 million. Bank debt was $55.0 million, substantially unchanged from year-end. The company reported $50.0 million of asset-based borrowing availability and $5.0 million remaining under the revolving term loan. It reported covenant compliance and a funded-debt-to-EBITDA ratio of 0.63:1, against a maximum of 2:1. Six-month investing cash outflow was $19.4 million, including $13.0 million invested in revenue-sharing theater equipment and $4.2 million in intangible assets. Capital expenditures, including revenue-sharing equipment, film assets, property and intangibles, were $30.2 million.
Material changes and operating trends
- Q2 joint revenue-sharing revenue increased 86.8% to $15.6 million; 274 such theaters were operating, versus 204 a year earlier. Six-month segment revenue rose to $27.3 million from $12.4 million.
- Film production and DMR revenue rose 58.9% in Q2 and 70.6% for the six months. IMAX DMR box office was $173.5 million in Q2 and $295.2 million for the six months, up 61.0% and 73.5%, respectively, year over year.
- IMAX systems revenue declined 11.8% in Q2 and 21.1% for the six months, chiefly reflecting fewer recognized sales and digital upgrades. Six-month sales and sales-type lease revenue fell 25.2%.
- SG&A increased 4.4% in Q2 and $3.1 million for the six months, mainly due to staffing, compensation, and brand marketing; higher costs were partly offset by lower legal/professional and stock-based compensation costs.
- Backlog at June 30 was 280 systems valued at $209.5 million, compared with 294 systems and $196.5 million a year earlier. The company estimated about 74 backlog systems, excluding digital upgrades, would be installed in the second half of 2012 and cautioned that installations can slip.
Outlook, risks, contingencies and unusual items
- Management expected operating cash flow, existing cash and available credit to fund operations and strategic initiatives for the next 12 months. The filing gives no specific revenue or earnings guidance. Cash flow remains dependent on theater signings, installations, film performance and collections.
- Management planned to continue expanding internationally, particularly in Greater China, India, Western Europe and Latin America. It cited 131 Greater China theaters in backlog and expected a similar number of DMR releases in 2012 as in 2011.
- IMAX was developing a laser-based digital projection system with Barco using Kodak technology, with planned introduction in the second half of 2013. Timing, development, adoption and execution remain uncertain.
- Wanda had agreed to acquire AMC, then among IMAX’s largest customers; the transaction was expected to close in September 2012. Together, Wanda and AMC represented 16.7% of theater systems in backlog at quarter-end. Their combination could increase customer concentration and bargaining leverage.
- The U.S. securities class action settlement received final court approval in June 2012 for a $12.0 million fund to be funded by insurers and PwC. It remained conditional on a related Canadian court order excluding non-opting-out U.S. class members. A Canadian securities class action seeks $210.0 million; the company disputes the allegations.
- The company reported an unfunded $19.1 million SERP obligation, primarily relating to the CEO, and a possible $19.7 million 2014 payment under stated assumptions; the CEO had not said he intended to retire then. Other notable exposures include $4.7 million of unrecognized tax benefits and foreign-exchange risk.
- Management identified risks including film performance, competition, technology changes, backlog conversion, international operations, foreign currency, customer concentration, and legal matters. The company reported no material off-balance-sheet arrangements.
Most important facts for investors to verify
- Whether strong film and revenue-sharing growth persists, and how it offsets lower theater-system sales and the timing of system installations.
- Backlog conversion, cancellations or slippage, and whether planned 2012 installations and signings are achieved.
- Cash generation after continued investment in revenue-sharing equipment, films and technology, and continued compliance with credit-facility covenants.
- Completion and terms of the Wanda–AMC acquisition, resulting customer concentration, and any effects on IMAX business or contract economics.
- Progress, cost and launch timing for the laser projection system, alongside DMR film slate and box-office performance.
- Final resolution of the Canadian class action settlement condition and potential outcomes of the remaining litigation and tax exposures.