IMAX Corporation 10-Q Summary: Period Ended June 30, 2006
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2006, and the six-month period ended June 30, 2006, for IMAX Corporation. The Company designs, manufactures, and leases giant screen theater systems, produces and distributes large format films, and operates theaters. As of June 30, 2006, there were 274 IMAX theaters operating in 38 countries. The Company is currently exploring strategic alternatives, including a potential sale or merger.
Key Financial Metrics
| Metric | Q2 2006 | Q2 2005 | 6M 2006 | 6M 2005 |
|---|---|---|---|---|
| Revenue | $41.4M | $30.9M | $61.8M | $62.2M |
| Gross Margin | $17.9M (43.1%) | $15.9M (51.4%) | $23.9M (38.6%) | $32.0M (51.4%) |
| Operating Earnings | $7.9M | $5.4M | $2.1M | $10.3M |
| Net Earnings (Loss) | $3.5M | $1.1M | $(2.3M) | $2.3M |
| Cash & Equivalents | $21.6M (as of June 30, 2006) | |||
| Short-term Investments | $8.4M (as of June 30, 2006) | |||
| Senior Notes Due 2010 | $160.0M Outstanding | |||
| Credit Facility | $40.0M Available ($9.8M used for letters of credit) |
Material Changes vs. Prior Period
- Revenue Mix: Q2 2006 revenue increased 34.1% year-over-year, driven by a 17.9% increase in Systems revenue and a 130% increase in Film revenue. However, the six-month revenue decreased 1.0% due to a significant drop in Systems revenue (down 21.4%) caused by the absence of $11.0M in settlement revenues (consensual lease buyouts) recognized in the first half of 2005.
- Profitability: Gross margin percentage declined from 51.4% in Q2 2005 to 43.1% in Q2 2006, and from 51.4% to 38.6% for the six-month period. This was primarily due to the lack of high-margin settlement revenues in 2006 and subsidies provided for theater upgrades for "Superman Returns."
- Discontinued Operations: The Company recognized $2.3M in income from discontinued operations in the first half of 2006 related to the settlement of loans from the sale of Digital Projection International (DPI). This offset a loss from continuing operations, resulting in a net loss for the six-month period.
- Accounting Changes: The Company adopted FAS 123R (Share-Based Payment) on January 1, 2006, resulting in the recognition of stock-based compensation expense ($0.5M in Q2, $0.8M in 6M) which was previously not recognized under the intrinsic value method.
Guidance, Outlook, and Risks
- Outlook: Management anticipates lower film revenues for the remainder of 2006 due to the disappointing performance of "V for Vendetta," "Poseidon," and "The Ant Bully." There is also a risk that some theater system installations scheduled for Q4 2006 may slip into 2007.
- Strategic Alternatives: The Company incurred $0.8M in costs related to seeking strategic alternatives, including a potential sale. A Special Committee was formed to review these terms.
- Internal Controls: Management identified a material weakness in internal controls over financial reporting related to the analysis and recording of complex film accounting transactions, resulting in a $0.8M adjustment to Q2 2006 results. Remediation is underway.
- Legal Proceedings: Significant contingencies include an arbitration with Electronic Media Limited (EML) where the Company won on liability but damages are yet to be determined (seeking ~$21.5M total). Other matters include insolvency proceedings against German customers (Big Screen, Siewert) and an ongoing arbitration with Robots of Mars, Inc.
- SEC Inquiry: The Company is responding to an informal inquiry from the SEC regarding the timing of revenue recognition for theater systems, specifically the application of multiple element arrangement accounting.
Investor Verification Checklist
- Revenue Recognition: Verify the Company's response to the SEC inquiry regarding multiple element arrangement accounting and the timing of revenue recognition for theater systems.
- Settlement Revenue: Confirm the sustainability of Systems revenue without the one-time settlement revenues (lease buyouts) that boosted 2005 results.
- Internal Controls: Monitor the progress of remediation efforts for the material weakness in film accounting controls.
- Legal Outcomes: Track the final damages award in the EML arbitration and the resolution of the 3DMG arbitration which is staying the In-Three settlement.
- Strategic Alternatives: Assess the status of the Special Committee's review of potential sales or mergers.
- Deferred Tax Assets: Review the valuation allowance on deferred tax assets ($37.5M) given the Company's recent losses and potential future profitability uncertainties.