IMAX Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited, U.S. GAAP. Amounts are in U.S. dollars.
Business context
IMAX develops and supplies theater systems, provides maintenance and film remastering/distribution services, and participates in joint revenue-sharing arrangements. Its network comprised 943 theater systems in 63 countries at quarter-end, including 820 commercial multiplexes. The company’s business remains exposed to theater installation timing and film performance.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $62.2 million | $48.2 million |
| Gross margin | $36.0 million; 57.8% | $26.4 million; 54.8% |
| Operating income | $2.7 million | $0.8 million |
| Income from continuing operations | $1.5 million | $0.2 million |
| Net income attributable to common shareholders | $0.4 million | $0.6 million |
| Cash from operating activities | $6.1 million | $13.9 million |
| Cash used in investing activities | $28.1 million | $13.7 million |
- Revenue rose 29.1%; gross margin increased 3.0 percentage points. Joint revenue-sharing revenue grew 46.2% to $15.9 million, and film-segment revenue rose 10.5% to $22.0 million. IMAX DMR gross box office increased 19.6% to $165.6 million.
- SG&A rose to $28.4 million from $21.3 million, including share-based compensation of $5.6 million versus $3.2 million. R&D increased to $4.5 million from $3.6 million, primarily for laser projection development.
- Operating cash flow declined, reflecting working-capital movements, including an $8.6 million inventory increase and a $22.4 million decrease in accrued liabilities. Capital expenditures, including joint-revenue-sharing equipment, property and equipment, intangibles, and film assets, were $31.1 million versus $15.6 million.
- Cash and cash equivalents were $140.3 million at March 31, up from $106.5 million at year-end. The quarter’s increase also reflected $38.0 million net proceeds from IMAX China share issuance, $11.4 million from option exercises, and additional construction borrowing.
- Total assets were $675.8 million and total liabilities $198.2 million. Financing receivables were $105.2 million; $2.3 million of financing receivables were classified as suspended transactions, net of allowances.
Material changes and capital structure
- On February 10, 2015, IMAX China completed the second $40.0 million tranche of an $80.0 million investment for a 20% interest; IMAX China remains consolidated. Q1 net income attributable to non-controlling interests was $1.1 million.
- The company amended its $200 million senior secured revolving credit facility in March, extending maturity to March 3, 2020 and revising covenants. Nothing was drawn on the revolver at quarter-end; $200 million remained available. The company reported compliance with covenants.
- Playa Vista construction-loan borrowings increased to $16.1 million from $4.7 million. The loan is variable-rate, secured by the project, and otherwise due April 2016 unless converted to permanent financing. The company reported total debt to covenant EBITDA of 0.14:1.
- Common shares outstanding were 69.6 million, versus 69.0 million at December 31, 2014. No shares were repurchased during the quarter under the $150 million repurchase authorization.
Outlook, risks and contingencies
- Management expected to install a similar number of new theater systems in 2015 as in 2014 and to release a similar number of DMR films as in 2014, when 40 were released. It also expected continued R&D investment in laser projection and stated the new home theater system with TCL was expected to launch in selected markets by year-end 2015.
- At quarter-end, 69 laser system configurations were in backlog and two laser-based systems were operational. Total theater-system backlog was 403 systems, with a stated dollar value of $279.8 million; approximately 86% was scheduled for international markets. Backlog conversion depends on installations, customer financing and other factors.
- Greater China accounted for 239 operating theaters and 219 theaters in backlog. The company identified China expansion, international operations, film performance, competition, technology change, customer concentration and converting backlog into revenue among its risks. Its largest customer represented 17.1% of quarterly revenue.
- Management believed cash, operating cash flow and available borrowing capacity would fund operations and strategic initiatives for the next 12 months, but cautioned that this depends on signing, installation and film-performance expectations.
- Notable exposures include a $1.6 million foreign-exchange loss in SG&A and $37.0 million notional value of foreign-exchange hedges, with a $4.2 million fair-value liability. The Playa Vista project was estimated to cost approximately $52 million; the company was funding costs beyond the loan.
- Legal matters include a Canadian securities class action seeking $210 million, a FACTA class action against a subsidiary that remained in discovery, and a customs audit in China whose impact the company could not assess. Management said it had adequate provisions for matters it considered probable and estimable; outcomes remain uncertain.
Investor verification priorities
- Reconcile the filing’s per-share disclosures: MD&A reports $0.02 per share for net income, while the statements show $0.391 million attributable to common shareholders and the EPS table presents a dash for continuing-operations EPS.
- Assess whether the $279.8 million backlog converts to installations and revenue on expected schedules, particularly the China concentration and joint revenue-sharing commitments.
- Review the cash-flow decline, inventory build, and elevated capital spending, including remaining Playa Vista construction costs and financing plans.
- Monitor credit quality of financing receivables, customer concentration, and covenant headroom as borrowing and investment needs evolve.
- Track the economics and execution of the laser rollout, 2015 film slate, China expansion, and planned home-theater launch.
- Review developments in the Canadian securities and FACTA cases and the China customs audit, as the filing does not quantify potential outcomes for all matters.