IMAX Corporation — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Unaudited results are presented under U.S. GAAP; 2012 comparative results were revised for previously omitted Canadian employee postretirement benefits. Unless stated otherwise, amounts are U.S. dollars.
Business context and performance
IMAX designs, sells, leases and maintains theater systems, and earns film revenue principally from production services and digital remastering (DMR). At quarter-end, 767 systems operated in 54 countries, up from 663 in 52 countries a year earlier. The network included 336 theaters under joint revenue-sharing arrangements (JRSA), versus 274 a year earlier.
Key financial metrics
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $82.3m | $70.2m | $132.2m | $125.8m |
| Gross margin | $43.6m; 52.9% | $38.8m; 55.3% | $69.6m; 52.7% | $65.7m; 52.2% |
| Operating income | $17.4m | $15.5m | $21.9m | $19.9m |
| Net income | $11.8m | $11.0m | $14.7m | $13.5m |
| Diluted GAAP EPS | $0.17 | $0.16 | $0.21 | $0.20 |
| Operating cash flow | Not separately stated for the quarter | $8.0m | $19.8m |
Q2 revenue rose 17.2% and net income rose 7.1% year over year. First-half revenue increased 5.1% and net income increased 8.4%. Management’s non-GAAP adjusted net income was $15.0m, or $0.22 per diluted share, in Q2, compared with $14.7m and $0.22 in Q2 2012. For the first half, adjusted net income was $20.5m, or $0.30 per diluted share, versus $20.8m and $0.31. These measures exclude stock-based compensation and related tax effects and are not GAAP measures.
- Revenue mix: Q2 growth reflected higher JRSA and film revenue. Q2 film production and DMR revenue increased to $26.0m from $19.7m; JRSA revenue rose to $18.3m from $15.6m. First-half production and DMR revenue reached $40.3m, up from $33.6m.
- Film performance: Q2 IMAX DMR gross box office was $219.7m, up 26.6%; first-half box office was $348.8m, up 18.1%. First-half gross box office per screen declined to $568,900 from $591,100.
- Margins and expenses: Q2 gross margin percentage fell to 52.9% from 55.3%, despite higher gross margin dollars. First-half gross margin percentage improved to 52.7% from 52.2%. Q2 SG&A increased to $22.1m from $20.4m; first-half SG&A was essentially flat at $39.6m. R&D rose to $7.3m from $5.1m for the first half, principally due to laser projector development.
- Cash, liquidity and debt: Cash was $20.8m at June 30, compared with $21.3m at year-end 2012. Bank borrowings were $18.0m, up from $11.0m; the amended $200m facility had $182m available. The company reported $8.0m of first-half operating cash flow, $17.6m used in investing and $8.9m provided by financing. Capital expenditures, using the company’s stated broader definition, were $28.6m versus $30.2m in first-half 2012.
- Balance sheet: Total assets were $453.8m and shareholders’ equity $277.1m. Financing receivables were $100.1m, up from $94.2m at year-end; accounts receivable increased to $62.7m from $42.0m.
Material changes, outlook and management commentary
- Theater-system backlog totaled 284 systems, with stated dollar value of $220.3m, versus 280 systems and $209.5m a year earlier. Management expected to install approximately 110–125 new systems in 2013, excluding digital upgrades; installations can slip between periods.
- Management expected a similar number of IMAX DMR film releases in 2013 to the 35 released in 2012. Seventeen further DMR films were scheduled for the second half of 2013.
- The company planned to begin rolling out its next-generation laser projection system in the second half of 2014. It expected elevated R&D spending to continue through 2013.
- Management said existing cash, operating cash flow and facility availability should fund operations and strategic initiatives for the next 12 months. It cautioned that cash generation depends on theater signings and installations, film performance and collections. ERP implementation delayed some first-quarter invoicing and collections; management said progress had been made and expected most of the effect to be resolved during the rest of 2013.
- The February 2013 credit facility amendment increased maximum capacity from $110m to $200m and extended maturity to February 2018. The company reported compliance with its covenants at quarter-end. Its reported debt-to-EBITDA ratio was 0.17:1; covenant thresholds become more restrictive over time.
- An unusual first-quarter item was a $2.2m pretax gain from amending the Canadian employee postretirement plan, reducing the related liability by $2.6m. The plan obligation stood at $2.0m at June 30, down from $4.6m at year-end.
- The company identified customer and industry concentration, film performance, international expansion and China, competition, technology execution, Kodak-related analog-film supply, backlog conversion, foreign exchange, and ERP implementation among its risks. The two largest customers represented 23.4% of Q2 revenue and 21.2% of first-half revenue.
Contingencies and other notable matters
- A Canadian securities class action seeks $210m in compensatory and punitive damages; the company disputes the allegations. A U.S. securities class action settlement for $12m, funded by insurers and PwC, received final approval, but remained conditioned on completion of proceedings in the Canadian action, including appeals.
- IMAX continued efforts to collect an arbitration award against E-City and affiliates; a New York collection action was contested. The company also brought trade-secret litigation against GDC and continued related proceedings against a former employee in Canada and China. Outcomes and potential impacts were not determinable from the filing.
- IMAX China received notice of a customs audit in March 2013. The audit was at an early stage and the company could not assess its potential impact.
- The company said disclosure controls were adequate and effective. The new ERP system materially changed internal financial-reporting controls, which were still being adapted; management expected the transition to be completed in 2013.
Important facts for investors to verify
- Whether the $220.3m theater-system backlog converts to installations and revenue on schedule, and whether the 2013 installation estimate is achieved.
- Whether film slate performance sustains DMR box-office growth, particularly given lower first-half box office per screen.
- Cash conversion and receivable collections: first-half operating cash flow fell to $8.0m from $19.8m, while accounts receivable rose substantially; review the filing’s aging and credit-quality disclosures.
- Progress on ERP control changes and resolution of invoicing and collection delays.
- Laser-projector development costs, launch timing and customer adoption; also monitor whether covenant requirements remain satisfied as thresholds tighten.
- Developments in the Canadian class action, E-City collection efforts, trade-secret cases and China customs audit, including any material change in exposure.
- The effect of customer concentration and international/China exposure on revenue, collections and growth.