IMAX Corporation 10-Q Summary: Period Ended June 30, 2010
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2010, for IMAX Corporation, a leading provider of large-format motion picture technologies. The Company designs, manufactures, and sells IMAX theater systems, provides film production and digital re-mastering (IMAX DMR) services, and operates joint revenue sharing arrangements. As of June 30, 2010, the IMAX theater network consisted of 447 operating theaters in 47 countries, an increase from 394 theaters in the prior year.
Key Financial Metrics
| Metric (in thousands, except per share) | Six Months Ended June 30, 2010 | Six Months Ended June 30, 2009 |
|---|---|---|
| Total Revenues | $128,381 | $73,498 |
| Gross Margin | $75,339 (58.7%) | $34,890 (47.5%) |
| Net Income | $39,883 | $(80) |
| Diluted EPS | $0.60 | $0.00 |
| Cash and Cash Equivalents | $37,008 | $49,000 |
| Bank Indebtedness | $24,792 | $50,000 |
| Operating Cash Flow | $39,923 | $1,987 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 74.7% year-over-year, driven by a 108.9% increase in film segment revenues and a 201% increase in joint revenue sharing arrangement revenues. The expansion of the theater network and strong box office performance of IMAX DMR films (e.g., Avatar, Alice in Wonderland) were primary drivers.
- Profitability: The Company reported a net income of $39.9 million compared to a net loss of $0.1 million in the prior year. Gross margin percentage improved significantly from 47.5% to 58.7%.
- Debt Reduction: Bank indebtedness decreased by $25.2 million to $24.8 million as the Company repaid $15.0 million of its revolving credit facility and $10.2 million of its term loan. The Company had previously repurchased all outstanding Senior Notes in 2009.
- Stock-Based Compensation: Net income included a $3.8 million charge for variable share-based compensation (SARs and restricted shares) due to stock price increases, contrasting with a $3.7 million charge in the prior year. Excluding this, adjusted net income would have been $43.7 million.
Guidance, Outlook, and Risks
- Outlook: Management anticipates higher revenues for the full year 2010 compared to 2009. The Company expects to install approximately 49 to 63 additional theater systems (excluding digital upgrades) in the second half of 2010, growing the total network by approximately 19% year-over-year.
- Film Slate: The Company expects to release at least 7 additional IMAX DMR films in the remainder of 2010, including Inception, Resident Evil: Afterlife, and Harry Potter and the Deathly Hallows: Part I. Multi-picture deals with Warner Bros. and Disney were announced in Q2.
- Risks and Contingencies:
- Legal Proceedings: The Company is subject to ongoing informal inquiries by the SEC and OSC regarding revenue recognition practices from 2005. Several class action lawsuits (U.S. and Canada) and patent disputes (e.g., with Cinemark) remain pending, though management believes they have adequate provisions.
- Economic Conditions: Volatility in the global economy could impact discretionary consumer spending and box office results.
- Installation Slippage: Theater system installations are subject to delays, which could impact the timing of revenue recognition.
Investor Verification Checklist
- Verify the status and potential financial impact of the ongoing SEC and OSC inquiries regarding historical revenue recognition.
- Monitor the actual installation rate of the 187 theater systems currently in backlog against the management estimate of 49-63 installations for the remainder of 2010.
- Assess the box office performance of the upcoming 2010 film slate, particularly Inception and Harry Potter, as film revenues are highly dependent on title performance.
- Review the Company's ability to maintain liquidity covenants under its Credit Facility, specifically the funded debt to EBITDA ratio (currently 0.27:1) and minimum excess availability requirements.
- Track the impact of foreign exchange fluctuations, as a significant portion of costs are in Canadian dollars while revenues are primarily in U.S. dollars.