IMAX Corporation — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; the filing also provides unaudited fourth-quarter results. Unless stated otherwise, amounts are in U.S. dollars.
Business context
IMAX designs and supplies premium theater systems and earns revenue from system sales and leases, theater maintenance, revenue-sharing arrangements, and film remastering and distribution. At year-end, 1,215 theater systems operated in 75 countries, up from 1,061 in 67 countries. Greater China generated approximately 31% of revenue; 87.8% of system backlog was scheduled for international markets.
Financial performance
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $377.3 million | $373.8 million |
| Gross profit / margin | $202.7 million / 53.7% | $219.3 million / 58.7% |
| Operating income | $58.2 million | $87.8 million |
| Net income | $39.3 million | $64.6 million |
| Net income attributable to common shareholders | $28.8 million | $55.8 million |
| Diluted EPS attributable to common shareholders | $0.42 | $0.78 |
| Cash from operations | $77.9 million | $84.2 million |
| Cash and cash equivalents at year-end | $204.8 million | $317.4 million |
Revenue rose about 1%, while gross profit fell about 8% and operating income fell about 34%. Management attributed weaker margins mainly to softer film box office, particularly in China, and lower joint-revenue-sharing and film results. IMAX DMR gross box office declined 2.1% to $965.6 million; box office per screen averaged $963,800 versus $1,155,800 in 2015.
Quarter four revenue was $106.9 million versus $119.3 million in Q4 2015. Gross profit was $55.3 million versus $71.9 million, and net income was $12.1 million versus $26.2 million.
Liquidity, debt and capital allocation
- Operating cash flow was $77.9 million; investing cash outflow was $64.9 million and financing cash outflow was $125.8 million. Cash declined $112.7 million during the year.
- Year-end bank indebtedness was $27.3 million, principally the Playa Vista property loan. The $200 million senior secured revolving facility was undrawn; the company reported compliance with its covenants.
- IMAX repurchased 3.85 million shares for $116.5 million in 2016. The repurchase authorization had $46.3 million remaining and was scheduled to expire June 30, 2017.
- Net income included $30.5 million of stock-based compensation. Management’s non-GAAP adjusted net income was $61.1 million, or $0.90 per diluted share; these measures exclude stock-based compensation and related tax effects.
Changes, outlook and material matters
- Theater signings increased to 319 from 138, and installations rose to 182 from 154. Year-end backlog reached 498 systems, up from 372, although its stated fixed contractual dollar value declined to $227.7 million from $270.9 million. Much of traditional revenue-sharing backlog has no fixed upfront or minimum value.
- For 2017, management estimated 150–155 new system installations, excluding upgrades, and expected a DMR film slate similar in size to 2016. Installation timing may slip.
- Management continued developing commercial laser projection; it reported lower-than-expected margins on laser installations. R&D expense rose to $16.3 million from $12.7 million.
- New initiatives included location-based virtual reality, film funds, home entertainment, and the planned 2017 IMAX theatrical premiere of the first two episodes of “Marvel’s Inhumans.” The VR centers and other initiatives were exploratory and carried execution and investment risks.
- Wanda and AMC, under common ownership, represented approximately 13.5% of revenue and 39.8% of backlog; together the two largest customers represented 17.0% of revenue. Greater China concentration, film performance, foreign exchange, customer dependence, competition, and backlog conversion are key risks.
- China customs authorities assessed $2.95 million of duties and taxes, paid in January 2017; a separate approximately $0.1 million freight-and-insurance underpayment remained under review. In February 2017, an arbitration panel ruled that IMAX had reached a binding settlement with Giencourt; IMAX disputed that ruling and said it could not estimate any payment or timing.
- Other unusual items included a $3.0 million film-asset charge and a $2.95 million China customs payment. The auditor reported that the financial statements were fairly presented and internal control over financial reporting was effective.
Important facts for investors to verify
- Whether box-office and film-slate performance, especially in China, recover and support revenue-sharing returns.
- How much of the 498-system backlog converts to installations, revenue and cash, and whether the 2017 installation estimate is achieved.
- Customer, revenue and backlog concentration in Wanda/AMC and Greater China, including regulatory, currency and cash-repatriation exposure.
- Laser-system economics and the cost, funding and commercial prospects of VR, content and home-entertainment initiatives.
- Final outcomes and financial effects of the Giencourt arbitration, the remaining customs inquiry, and other disclosed legal and tax contingencies.
- Cash use, including joint-revenue-sharing investment, share repurchases, and the distinction between GAAP earnings and management’s adjusted measures.