IMAX Corporation — Q1 2011 Form 10-Q
Business context and reporting period: Unaudited results for the three months ended March 31, 2011, compared with Q1 2010. IMAX designs and supplies theater systems, participates in theater revenue-sharing arrangements, and earns revenue from theater maintenance and film-related services. At quarter-end, its network had 528 theaters in 46 countries, versus 438 in 47 countries a year earlier. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 2011 / March 31, 2011 | Comparable period / December 31, 2010 |
|---|---|---|
| Revenue | $45.2 million | $72.8 million in Q1 2010 |
| Gross margin | $20.6 million; 45.7% of revenue | $48.3 million; 66.4% in Q1 2010 |
| Operating income (loss) | $(0.5) million | $27.4 million in Q1 2010 |
| Net income (loss) | $(1.0) million; $(0.02) per diluted share | $26.6 million; $0.40 per diluted share in Q1 2010 |
| Cash from operations | $(9.6) million | $11.1 million in Q1 2010 |
| Cash and cash equivalents | $17.4 million | $30.4 million at December 31, 2010 |
| Bank debt | $17.5 million term loan; no revolving borrowings | $17.5 million at December 31, 2010 |
| Total assets / liabilities / equity | $336.6 million / $174.7 million / $161.9 million | $349.1 million / $190.6 million / $158.5 million at December 31, 2010 |
Capital expenditures, including joint revenue-sharing equipment and film assets, were $6.2 million. The company reported $35.2 million of current revolving borrowing capacity, $40.2 million of Excess Availability and $57.5 million of Cash and Excess Availability; it was in compliance with its credit covenants. The filing says cash, operating cash flow and available borrowing were expected to fund operations and planned initiatives for the next 12 months.
Material changes versus Q1 2010
- Revenue fell 38%, and gross margin declined substantially, chiefly because Q1 2010 benefited from the exceptional performance of Avatar. IMAX DMR gross box office was $62.1 million versus $232.2 million.
- Film revenue declined to $11.5 million from $29.3 million; joint revenue-sharing revenue fell to $4.0 million from $18.9 million. Theater operations revenue decreased to $1.0 million from $5.9 million.
- IMAX systems revenue rose to $22.3 million from $11.0 million, primarily reflecting more full-system installations. Theater maintenance revenue increased to $5.8 million from $5.0 million.
- SG&A decreased to $16.9 million from $19.5 million, largely due to lower share-based compensation, partly offset by increased staffing and professional costs. Research and development increased to $1.9 million from $1.2 million.
- Operating cash flow changed from $11.1 million provided to $9.6 million used. Management attributed the quarter’s working-capital outflow in part to accrued-liability payments, including $10.7 million for variable stock-based compensation.
Outlook, risks and unusual items
- Management continued to expect higher 2011 revenue than in 2010, citing theater-network growth and the remaining film slate. It estimated that approximately 94–104 theater systems, excluding digital upgrades, would be installed during the rest of 2011; installation timing can slip unpredictably.
- Q1 signings totaled 101 systems, versus 41 a year earlier. Sales and sales-type lease backlog was 158 systems valued at $191.0 million; revenue-sharing backlog was 125 systems and had no assigned backlog value. Backlog is not assured revenue and depends on installation, acceptance and contract performance.
- Management noted 15 additional DMR films were expected in the remainder of 2011. Film delays or weaker-than-expected performance could affect revenue, particularly as the company expands revenue-sharing theaters and becomes more exposed to film results.
- Reported results included a $2.1 million provision for an arbitration award and a $0.3 million income-tax recovery. Management stated that net income excluding variable share-based compensation, the arbitration charge and the tax benefit would have been $2.5 million, compared with $35.3 million on the same stated basis in Q1 2010.
- Material legal and regulatory matters include securities class actions in the United States and Canada and ongoing SEC and Ontario Securities Commission inquiries concerning historical theater-system revenue recognition. The company could not estimate loss exposure for the class actions or predict inquiry outcomes. It accrued $2.1 million for the Robots of Mars arbitration award and intends to challenge it.
- After quarter-end, on April 27, 2011, lenders committed to a proposed secured facility of up to $110 million, intended to extend maturity to October 31, 2015 and lower stated interest margins. Definitive documents were anticipated by the end of Q2 2011; completion was not yet reported in this filing.
- Other risks include foreign-exchange exposure, credit and collection risk on financing receivables, customer and film concentration, and the company’s ability to convert backlog into installations and cash. Management expected to become a cash taxpayer in late 2012 or 2013.
Most important facts for investors to verify
- Whether the proposed $110 million credit facility was finalized, and its final terms and availability.
- Actual theater installations and backlog conversion against the 94–104 remaining-2011 estimate, including any slippage or cancellations.
- Performance and release timing of the 2011 film slate, and the resulting revenue-sharing and DMR receipts.
- Cash burn, collections and financing-receivable quality; $5.675 million of financing receivables were classified as suspended transactions, with related allowances.
- Developments in the arbitration, securities litigation and SEC/OSC inquiries, including any material changes in potential exposure.
- Reported results versus management’s adjusted comparison, including the treatment and cash impact of share-based compensation and the arbitration provision.