IMAX Corporation 10-Q Summary: Period Ended June 30, 2009
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2009, for IMAX Corporation, a leading entertainment technology company specializing in large-format motion picture presentations. The Company designs, manufactures, and sells IMAX theater systems, provides film production and digital re-mastering (DMR) services, and operates joint revenue sharing arrangements with exhibitors. As of June 30, 2009, the global IMAX theater network consisted of 394 operating theaters (273 commercial, 121 institutional) across 44 countries, an increase from 302 theaters in the prior year.
Key Financial Metrics
| Metric (in thousands USD) | Three Months Ended June 30, 2009 | Six Months Ended June 30, 2009 |
|---|---|---|
| Total Revenues | $40,992 | $74,714 |
| Gross Margin | $20,653 (50.4%) | $34,783 (46.6%) |
| Net Income (Loss) | $2,561 | $(80) |
| Operating Cash Flow | N/A | $2,006 |
| Cash and Cash Equivalents | $49,000 | $49,000 |
| Total Debt (Senior Notes + Bank Indebtedness) | $135,662 | $135,662 |
Note: Senior Notes outstanding were $115.662 million and Bank Indebtedness was $20.0 million as of June 30, 2009.
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 93.6% for the quarter and 67.2% for the six-month period compared to the same periods in 2008. This growth was driven primarily by a 1,550% increase in Joint Revenue Sharing Arrangements revenue and a 388% increase in Film Production and IMAX DMR revenue.
- Profitability Turnaround: The Company reported a net income of $2.6 million for the quarter, a significant improvement from a net loss of $12.2 million in the second quarter of 2008. For the six months ended June 30, 2009, the Company reported a negligible net loss of $80,000, compared to a $22.5 million loss in the prior year.
- Debt Reduction: The Company repurchased $44.3 million of its 9.625% Senior Notes in June 2009 and an additional $6.0 million in July 2009, reducing the principal amount of Senior Notes from $160.0 million to $115.7 million.
- Capital Raise: In June 2009, the Company completed a public offering of 11.27 million common shares, generating net proceeds of approximately $76.3 million.
Guidance, Outlook, and Risks
Outlook: Management anticipates higher revenues for the second half of 2009 compared to the prior year, driven by the installation of approximately 40 additional theater systems from the backlog and a strong slate of IMAX DMR films, including Harry Potter and the Half-Blood Prince, Cloudy With a Chance of Meatballs, and Avatar. The commercial theater network is expected to grow by 30% to 35% by year-end.
Liquidity and Refinancing: While the Company believes current cash and credit facility availability are sufficient for operations, significant debt maturities remain. The remaining Senior Notes ($115.7 million) and the Credit Facility ($20.0 million drawn) mature in December 2010 and October 2010, respectively. There is no assurance that the Company can refinance this indebtedness on satisfactory terms.
Risks and Contingencies:
- Legal Proceedings: The Company is subject to ongoing SEC and Ontario Securities Commission inquiries regarding prior revenue recognition practices. Additionally, there are active class action lawsuits in the U.S. and Canada alleging securities fraud, and arbitration proceedings regarding film production agreements.
- Pension Obligations: The Company has an unfunded defined benefit pension plan (SERP) with a projected benefit obligation of $27.4 million. Approximately $15.3 million is due in August 2010, creating a potential liquidity challenge if refinancing is not secured.
- Economic Conditions: Continued volatility in credit markets and potential decreases in consumer discretionary spending could impact box office performance and the Company's ability to refinance debt.
Key Facts for Investor Verification
- Refinancing Capability: Verify the Company's ability to refinance $115.7 million in Senior Notes and $20.0 million in credit facility debt maturing in late 2010 amidst volatile credit markets.
- Pension Liability: Confirm the status of the $15.3 million SERP payment due in August 2010 and any agreements with executives regarding potential deferment.
- Legal Exposure: Monitor the status of the SEC/OSC inquiries and the consolidated class action lawsuits, as adverse outcomes could result in material fines or damages.
- Backlog Conversion: Assess the actual installation rate of the 171 theater systems in the sales backlog, as delays could impact revenue recognition timing.
- Joint Revenue Sharing Performance: Evaluate the box office performance of upcoming IMAX DMR films, as this segment now represents a significant portion of revenue and is highly dependent on film success.