IMAX Corporation — 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017. The filing also provides unaudited fourth-quarter results. All amounts are U.S. dollars unless noted.
Business context
IMAX earns revenue from digitally re-mastering films for its theater network, selling or leasing theater systems, and placing systems with exhibitors under joint revenue-sharing arrangements. It also operates smaller initiatives in original content, virtual reality and home entertainment. At year-end, 1,370 systems operated in 75 countries, including 747 under joint revenue-sharing arrangements. Greater China accounted for about 33% of 2017 revenue.
Financial results and key metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $380.8 million | $377.3 million |
| Gross margin | $185.2 million; 48.7% | $202.7 million; 53.7% |
| Operating income | $30.9 million | $58.2 million |
| Net income | $12.5 million | $39.3 million |
| Net income attributable to common shareholders | $2.3 million; $0.04 per diluted share | $28.8 million; $0.42 per diluted share |
| Operating cash flow | $85.4 million | $77.9 million |
| Cash and cash equivalents at year-end | $158.7 million | $204.8 million |
| Bank indebtedness at year-end | $25.4 million | $27.3 million |
2017 investing cash outflow was $73.6 million, including $42.6 million invested in joint-revenue-sharing equipment. Financing cash outflow was $57.5 million, including $46.1 million of share repurchases. The $200 million revolving credit facility was undrawn, leaving $200 million available; the company also had $25.7 million outstanding on its Playa Vista loan. It reported compliance with its credit covenants.
Fourth quarter: Revenue was $125.6 million, gross margin $60.1 million, net income $8.7 million, and net income attributable to common shareholders $4.8 million ($0.08 per diluted share). In Q4 2016, those figures were $106.9 million, $55.3 million, $12.1 million and $8.9 million ($0.13 per diluted share), respectively.
Material changes versus prior period
- Annual revenue edged up 0.9%, but gross margin fell 8.6% and operating income declined 46.8% from 2016. The filing attributes margin pressure to higher impairments, lower joint-revenue-sharing take rates and increased depreciation.
- Net income included $16.2 million of restructuring, exit and related impairment charges and a $9.3 million provisional tax charge associated with U.S. tax reform. Film-asset impairments totaled $17.4 million, including an $11.7 million impairment related to the first season of Marvel’s Inhumans.
- Adjusted net income, a company-defined non-GAAP measure, was $51.5 million ($0.79 per diluted share), versus $61.1 million ($0.90) in 2016. Common-shareholder adjusted net income was $40.5 million ($0.62 per diluted share), versus $50.0 million ($0.73).
- The theater network grew from 1,215 to 1,370 systems, while the 499-system backlog was broadly flat versus 498. Fixed contractual backlog value increased to $281.3 million from $227.7 million; 90.2% of backlog systems were scheduled for international markets, and Greater China represented 61.9% of backlog.
- Cash declined by $46.0 million during 2017. Receivables provisions rose to $2.6 million from $1.0 million, which the filing links mainly to deterioration in the condition of certain exhibitors and studios.
Outlook, commentary, risks and contingencies
- Management expected to install approximately 145 new theater systems in 2018, excluding upgrades, and anticipated a similar number of IMAX DMR film releases to 2017’s 60. Installations may be delayed for reasons outside IMAX’s control.
- Management expected adequate liquidity for normal operations over the next 12 months, while anticipating continued cash use for joint-revenue-sharing systems, film agreements, new initiatives and share repurchases. A new authorization permits up to $200 million of repurchases through June 30, 2020; none were made under it in 2017.
- In June 2017, IMAX announced a cost-reduction plan that included eliminating about 100 full-time positions, roughly 14% of its full-time global workforce. It cautioned that projected savings may not be fully realized and expected a further $0.8 million of restructuring charges in 2018.
- Key exposures include reliance on film performance and exhibitor relationships, customer and studio consolidation, foreign exchange, international operations and China-specific regulation, backlog conversion, customer collections, technology competition, cybersecurity and the execution of new businesses. China generated about one-third of revenue and held 309 systems in backlog.
- China customs authorities reviewed historic import-duty underpayments. IMAX paid approximately $0.15 million toward the underpayment and accrued an estimated $0.3 million for likely fines; the ultimate penalty remains uncertain. The company also disclosed an arbitration with 3DMG and a disputed Giencourt award for which the company said it could not determine amounts or timing payable.
- The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. IMAX reported that its disclosure controls and internal controls were effective at year-end.
Important facts for investors to verify
- Whether the 2017 margin and earnings decline persists after excluding the company’s non-GAAP adjustments, and how recurring the adjustments are.
- Conversion, timing and economics of the 499-system backlog, particularly its concentration in Greater China and joint-revenue-sharing arrangements.
- Collections and credit quality across $130.5 million of trade receivables and $129.5 million of financing receivables, including past-due balances and customer exposures.
- Actual cash requirements for joint-revenue-sharing equipment, planned buybacks, restructuring and new initiatives, against the stated liquidity outlook.
- Final tax effects of U.S. tax reform and outcomes of the China customs inquiry and disclosed arbitrations.