IMAX Corporation — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2016. Amounts are U.S. dollars; financial statement amounts are rounded to millions unless noted.
Business context
IMAX develops and supplies premium theater systems and provides maintenance, film remastering (IMAX DMR), distribution, and post-production services. At quarter-end, 1,145 systems operated in 74 countries, up from 1,008 systems in 66 countries a year earlier. Greater China represented nearly 31% of revenue for the first nine months and 381 of the 547 systems in backlog.
Financial results and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $86.6M | $85.1M | $270.4M | $254.5M |
| Gross profit / margin | $44.9M / 51.9% | $42.4M / 49.8% | $147.4M / 54.5% | $147.4M / 57.9% |
| Operating income | $7.7M | $13.7M | $39.5M | $52.8M |
| Net income | $4.4M | $10.5M | $27.2M | $38.4M |
| Net income attributable to common shareholders | $2.5M | $8.6M | $19.8M | $33.4M |
| Basic and diluted EPS attributable to common shareholders | $0.04 | $0.12 | $0.29 | $0.47 basic; $0.46 diluted |
| Operating cash flow | Not separately provided | Not separately provided | $45.3M | $42.0M |
- Revenue rose 1.7% in Q3 and 6.3% year to date. Q3 gross margin improved, while the nine-month margin declined; excluding digital upgrades, nine-month margin was 57.3%, versus 60.4%.
- Cash and equivalents were $218.1M at September 30, down from $317.4M at December 31, 2015. Operating activities provided $45.3M; investing used $38.5M and financing used $106.3M.
- Debt included $28.2M outstanding on the Playa Vista loan. The $200M revolving credit facility was undrawn and fully available. The company reported compliance with covenants and a 0.21:1 maximum total leverage ratio against a 2.25:1 limit.
- Working capital and key balances included accounts receivable of $89.2M, financing receivables of $118.9M, inventories of $51.0M, and deferred revenue of $97.2M.
Material changes versus the prior period
- Q3 operating income fell despite higher revenue, reflecting increased SG&A, research and development, and asset impairment charges. Stock-based compensation was $7.7M for the quarter and $22.5M for the nine months, compared with $4.3M and $14.9M, respectively, in 2015.
- Nine-month net income attributable to common shareholders fell to $19.8M from $33.4M. Management’s non-GAAP adjusted net income attributable to common shareholders was $7.9M in Q3 ($0.12 per diluted share), versus $12.0M ($0.17); year to date it was $35.5M ($0.52), versus $45.7M ($0.63).
- Q3 film revenue increased, but IMAX DMR gross box office per screen declined to $184,700 from $220,500. Year-to-date DMR box office grew 3.1%, while box office per screen declined to $732,600 from $829,000.
- The company repurchased 3.29M shares for $100.4M in the first nine months. Common shares outstanding were approximately 66.8M at September 30, compared with 69.7M at year-end 2015.
Outlook, commentary, risks and unusual items
- Management expected to install 155 new theater systems in 2016 and anticipated a similar number of DMR film releases in 2016 and 2017. Installations may be delayed by factors outside the company’s control.
- Backlog totaled 547 systems, with a stated dollar value of $253.2M; the company cautioned that backlog conversion depends on installation and acceptance and is not assured. Approximately 89.9% of systems in backlog were scheduled for international markets.
- Management said existing cash, operating cash flows, and available borrowing capacity should fund operations and strategic initiatives for the next 12 months, while noting liquidity could be affected if theater signings, installations, or film performance fall short of projections.
- Growth initiatives included laser projection, virtual-reality pilot sites and a cinema-grade VR camera partnership with Google, original-film financing, and home theater products. R&D expense rose to $11.6M for the nine months. Only 33 laser systems were operational and 20 were in backlog at quarter-end.
- Unusual charges included a $1.0M documentary film asset impairment and $0.8M of property and equipment charges year to date. A China customs audit proposal resulted in a $1.6M accrual; an additional $1.8M VAT amount was treated as recoverable through future tax credits.
- Legal matters included a Giencourt arbitration in which the claimant sought up to approximately $10.4M and IMAX counterclaimed for more than $24M; the company disputed an alleged settlement. In the 3DMG arbitration, the company said it could not determine a damages range. The filing also describes ongoing E-City award enforcement proceedings.
- Key risks include China exposure, dependence on theater agreements and film performance, customer concentration, competition and technology shifts, foreign-exchange exposure, and converting backlog into revenue. The company reported effective disclosure controls; China’s new ERP system changed internal controls, with transition expected to continue through 2016.
Important facts for investors to verify
- Whether the 155-system installation target and backlog convert to recognized revenue on schedule, particularly in Greater China.
- Whether operating profitability and margins recover as higher stock compensation, R&D, and film-related costs continue.
- Whether DMR box-office per screen stabilizes and the announced film slate performs as expected.
- Cash use, share repurchases, and available liquidity relative to joint revenue-sharing investment needs and debt covenants.
- Developments and potential financial exposure from the China customs audit and the disclosed legal proceedings.