IMAX Corporation — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited results are compared with the corresponding 2021 periods. Amounts are in U.S. dollars unless stated otherwise.
Business context
IMAX supplies theater systems and related services, remasters and distributes films, and earns revenue from theater box office through joint revenue-sharing arrangements. At quarter-end, its network comprised 1,703 systems in 87 countries and territories. The company indirectly owned 71.41% of IMAX China.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $68.8m | $56.6m | $202.8m | $146.3m |
| Gross margin | $31.7m (46.1%) | $27.5m (48.6%) | $107.5m (53.0%) | $70.4m (48.1%) |
| Operating loss | $(4.2)m | $(0.9)m | $(12.4)m | $(14.7)m |
| Net loss | $(7.8)m | $(6.3)m | $(24.0)m | $(23.0)m |
| Net loss attributable to common shareholders | $(9.0)m | $(8.4)m | $(25.4)m | $(32.4)m |
| Basic and diluted loss per share | $(0.16) | $(0.14) | $(0.44) | $(0.55) |
Q3 revenue rose 22%, primarily on stronger film box office and theater-network revenue, while gross margin dollars grew 15%. Nine-month revenue rose 39% and gross margin dollars 53%. Revenue from IMAX DMR was $67.1m for the nine months, up from $39.4m; IMAX Maintenance revenue was $43.6m, up from $33.2m. The nine-month film distribution and post-production category recorded a $3.5m gross margin loss, versus $1.0m of positive gross margin a year earlier, mainly reflecting live-event and documentary costs.
- Cash flow: Nine-month operating cash flow was $0.5m, versus $(19.6)m in 2021. Investing activities used $40.4m; financing activities used $64.6m. Cash declined $102.6m during the period.
- Liquidity: Cash and cash equivalents were $87.2m at September 30, down from $189.7m at December 31, 2021. Management said it expected sufficient capital and liquidity for anticipated operating needs and capital requirements over the next 12 months.
- Debt: The balance sheet reported $224.8m of net convertible notes, $2.7m of net revolving-facility borrowings and $1.8m for the acquired SSIMWAVE loan. The $230m notes bear 0.5% interest and mature in April 2026. IMAX reported $300m of available capacity under its principal credit facility and additional available capacity of $26.4m at Bank of China and $23.8m at HSBC China. The principal facility has a maximum senior secured net leverage covenant of 3.25:1.00; its $75m minimum-liquidity covenant was no longer in effect after termination of a designated period.
- Other balance-sheet metrics: Total assets were $800.2m and total shareholders’ equity was $337.2m. Financing receivables, net, were $122.6m, including a $10.959m allowance against financed sales receivables.
Material changes and notable items
- Gross box office for films released to IMAX theaters was $598.1m for the first nine months, up 66% from $360.7m. Q3 box office was $177.1m, up 25%. Management reported a 5% domestic box-office market share despite IMAX representing 1% of domestic screens.
- Operating cash flow improved from an outflow to near breakeven, but cash fell substantially, including because of share repurchases. IMAX repurchased $55.4m of its shares and IMAX China repurchased $3.0m in the first nine months. IMAX’s share-repurchase authority was increased to $400m, with $220.1m remaining at quarter-end.
- IMAX acquired SSIMWAVE on September 22 for approximately $23.1m in cash, shares and contingent consideration. Its results were not material in the reported period; purchase-price allocation remained preliminary and included $22.7m of goodwill.
- Nine-month credit-loss expense was $8.1m, versus a $4.9m reversal in 2021, largely reflecting reserves against Russian receivables. Management also recorded a $4.5m full impairment of its investment in the film Mozart from Space.
- Q3 selling, general and administrative expense increased 16% to $32.9m; the company cited higher activity-related costs, lower COVID-19 government relief benefits, $1.0m of SSIMWAVE acquisition fees and unfavorable foreign exchange. Nine-month R&D expense declined 36% to $3.7m.
Outlook, risks and contingencies
- Management pointed to the return of exclusive theatrical windows and a strong announced film slate through 2023, while cautioning that release dates may change. It expected to continue investing cash in theater systems under joint revenue-sharing arrangements. IMAX had 176 theaters configured for live events and expected 250 by year-end 2022.
- COVID-related restrictions continued to affect Greater China: approximately 92% of its IMAX theaters were open at some capacity at September 30, while the quarterly average was 82%. Further closures, capacity restrictions, film delays and changes in moviegoing remain risks.
- IMAX suspended operations in Russia and Belarus in March 2022. It had 54 theaters in Russia, nine in Ukraine and one in Belarus; backlog included 20 theaters across those countries with $22.9m in fixed contracted value. The company placed relevant exhibitors on nonaccrual status and recorded provisions against substantially all Russian receivables.
- Cineworld, parent of Regal, entered Chapter 11 proceedings. IMAX disclosed an $11.4m unsecured claim and said it had not recorded an additional expected-credit-loss provision and did not expect a material network impact, while noting the outcome was uncertain.
- Other exposures include foreign-exchange movements, theater-operator credit risk, China market and regulatory conditions, and the possibility that backlog will not convert to installations, revenue or cash flow. The filing reports no off-balance-sheet arrangements expected to have a material effect. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether China theater operations, film releases and box-office trends recover sufficiently to sustain revenue and cash generation.
- Cash use, credit availability and compliance with the 3.25:1.00 leverage covenant, particularly after repurchases and planned joint-revenue-sharing investments.
- Recoverability of Russia-related receivables and the status of the $22.9m contracted backlog in Russia, Ukraine and Belarus.
- Collection prospects for IMAX’s $11.4m unsecured Cineworld claim and any effect of the Chapter 11 proceeding on Regal theaters.
- Whether the 489-system backlog converts to installations and revenue; the filing reports 40 installations in the first nine months versus 45 in 2021.
- Final SSIMWAVE purchase-price allocation, integration progress and achievement of earn-out milestones.