IMAX Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Amounts are U.S. dollars; financial statement amounts are in millions unless otherwise noted. Comparisons are with Q1 2011 unless stated otherwise.
Business context and reporting period
IMAX designs and manufactures theater systems and earns revenue from system sales and leases, maintenance, joint revenue-sharing arrangements, and film production, digital re-mastering (DMR), distribution, and post-production. Its network included 643 theaters in 52 countries at quarter-end, versus 528 theaters in 46 countries a year earlier.
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Revenue | $55.6 | $45.2; up 23.1% |
| Gross profit / margin | $26.9 / 48.3% | $20.6 / 45.7% |
| Operating income (loss) | $4.5 | $(0.5) |
| Income (loss) before tax | $4.0 | $(0.9) |
| Net income (loss) | $2.6; $0.04 per diluted share | $(1.0); $(0.02) per share |
| Operating cash flow | $10.4 | $(9.6) |
| Cash and cash equivalents | $21.6 at March 31 | $18.1 at December 31, 2011 |
| Bank debt | $55.0 | $55.1 at December 31, 2011 |
Adjusted net income, a non-GAAP measure, was $4.0 million ($0.06 per diluted share), versus $2.5 million ($0.04) a year ago. The company excludes variable share-based compensation and deferred tax effects in both periods, and an arbitration provision in 2011. Interest expense was $0.5 million; the income tax provision was $1.0 million.
Investing cash outflow was $10.4 million, including $7.1 million invested in joint revenue-sharing equipment and $2.6 million for intangible assets. Reported capital expenditures, including film assets and joint revenue-sharing equipment, were $14.0 million, compared with $6.5 million a year ago. Financing cash flow was $3.4 million, primarily from stock-option exercises.
At quarter-end, total assets were $414.1 million, total liabilities $211.8 million, and shareholders’ equity $202.4 million. Financing receivables were $87.5 million, including $2.1 million of allowances. The credit facility had $55.0 million drawn and $50.0 million available on its asset-based revolving portion; the company reported compliance with covenants and a funded-debt-to-EBITDA ratio of 0.73:1.
Material changes and operating drivers
- Film production and DMR revenue rose to $13.8 million from $7.3 million; DMR box office increased 95.3% to $121.7 million. Joint revenue-sharing revenue rose to $11.7 million from $4.0 million, reflecting network growth and film performance.
- IMAX systems revenue fell to $15.7 million from $22.3 million, primarily because fewer full theater systems and upgrades qualified for revenue recognition. Theater-system maintenance revenue increased to $6.8 million from $5.8 million.
- New-theater signings totaled 23 systems worth $24.5 million, versus 99 systems and $26.9 million a year earlier; the prior-year count included a 75-theater Wanda joint revenue-sharing agreement. Backlog was 261 systems valued at $207.2 million, versus 283 systems and $191.0 million a year earlier.
- SG&A increased to $19.1 million from $16.9 million, largely due to higher staffing and compensation costs, partly offset by foreign-exchange gains. R&D increased to $2.6 million from $1.9 million, principally reflecting digital projection development.
Outlook, risks, contingencies, and unusual items
- Outlook: No specific overall revenue or earnings guidance was provided. Management expected approximately 84 backlog systems, excluding upgrades, to be installed in the remaining nine months of 2012, while cautioning that installation timing is unpredictable. It expected a similar number of DMR releases in 2012 as in 2011 and planned to introduce a laser-based projection system in the second half of 2013.
- Management stated that operating cash flow, existing cash, and available credit were expected to fund operations and strategic initiatives for the next 12 months. It cautioned that cash generation depends on theater signings, installations, film production, and film performance.
- The company is developing laser projection technology with Barco using licensed Kodak technology, and planned consumer-brand marketing investment and further international expansion, including in China, India, Latin America, and Western Europe.
- The $2.1 million 2011 arbitration award provision related to the former Ridefilm business was not repeated in Q1 2012; the dispute was settled in January 2012. A separate E-City arbitration award of $11.3 million plus interest remains subject to enforcement efforts; the filing does not establish that the award has been collected.
- A proposed $12.0 million U.S. securities class-action settlement, funded by insurance carriers and PwC, remained subject to final court approval. A Canadian securities class action seeks $210 million; the company said potential loss exposure could not be estimated and intends to defend it.
- The company had an unfunded $19.1 million executive pension obligation and disclosed a $19.676 million expected benefit payment in 2014 under current assumptions. Other risks include theater backlog conversion and installation delays, film performance, customer credit and collections, foreign exchange, competition, technology execution, and international operations. Management reported no material change to the risk factors in its 2011 Form 10-K.
Important facts for investors to verify
- Whether the $207.2 million theater backlog converts to installations and recognized revenue on the expected schedule, including the projected 2012 installations.
- Whether joint revenue-sharing and film/DMR growth persists, given the quarter’s strong box-office contribution and higher equipment investment.
- Collections and credit quality of financing receivables, especially the $3.6 million classified as transactions suspended and the associated allowance assumptions.
- Available borrowing capacity, covenant compliance, and the ability to service the $55.0 million facility balance, which is scheduled to mature in 2015.
- Final approval and funding of the U.S. securities settlement, progress collecting the E-City award, and developments in the Canadian securities litigation.
- Execution, cost, and timing of the laser projection program and the expected 2013 introduction.