IMAX Corporation — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; filed February 23, 2012. Amounts are U.S. dollars. The filing also reports unaudited fourth-quarter results.
Business context
IMAX designs and supplies premium theater systems through sales, leases and revenue-sharing arrangements, and earns revenue from theater maintenance, film remastering and distribution, post-production and related activities. Its network reached 634 theaters in 50 countries, up from 518 in 46 countries; 517 theaters were commercial. Digital systems accounted for 443 theaters and 97.7% of backlog. International markets represented about 46% of FY2011 revenue, and 84% of systems in backlog were scheduled for international installation.
Key financial metrics
| Metric | FY2011 | FY2010 |
|---|---|---|
| Revenue | $236.6 million | $248.6 million |
| Gross margin | $113.2 million; 47.9% | $137.7 million; 55.4% |
| Operating income | $28.5 million | $51.0 million |
| Net income | $15.5 million; diluted EPS $0.23 | $100.8 million; diluted EPS $1.51 |
| Adjusted net income, company-defined non-GAAP | $27.3 million; diluted EPS $0.40 | $67.8 million; diluted EPS $1.02 |
| Cash from operating activities | $6.2 million | $58.5 million |
| Cash and cash equivalents at year-end | $18.1 million | $30.4 million |
| Total indebtedness at year-end | $55.1 million | $17.5 million |
FY2011 investing cash outflow was $63.5 million and financing cash inflow was $45.1 million. Capital expenditures, including revenue-sharing equipment, were $73.3 million. Year-end total assets were $406.2 million, shareholders’ equity $192.9 million and deferred revenue $74.5 million. The $110 million secured credit facility had $52.0 million of availability; IMAX reported compliance with its covenants. The funded-debt-to-EBITDA ratio was 0.82:1.
For Q4 2011, revenue was $66.7 million, gross margin $29.8 million and net income $6.3 million. Q4 2010 revenue was $69.2 million, gross margin $36.4 million and net income $54.2 million.
Material changes versus prior period
- Revenue declined 4.8% year over year, while gross margin fell 17.7%. IMAX systems revenue rose 22.6% to $93.2 million, but film-segment revenue fell 15.9% to $74.9 million and joint revenue-sharing revenue fell 26.3% to $30.8 million.
- Management attributed much of the declines in film and revenue-sharing results to weaker film box office compared with 2010, particularly the exceptional performance of Avatar. IMAX DMR gross box office declined to $417.2 million from $545.9 million; average gross box office per screen was $1.07 million versus $1.82 million.
- Net income fell sharply from 2010, which included a $54.8 million non-cash tax benefit from releasing a deferred-tax valuation allowance. FY2011 also included a $9.4 million income-tax provision, variable share-based compensation and a $2.1 million arbitration provision. The company-defined adjusted net income was lower than 2010 as well.
- Operating cash flow decreased to $6.2 million, with working-capital uses including increased financing and trade receivables and payments of variable stock compensation. Cash used in investing rose to $63.5 million, including $33.3 million for revenue-sharing theater equipment and $22.2 million for intangible assets.
- Network expansion continued: 137 systems were installed, and revenue-sharing theaters in operation increased 50.3% to 257. Backlog increased to 263 systems valued at $197.7 million, from 224 systems and $179.2 million; the filing did not provide a comparable 2010 dollar value for revenue-sharing backlog.
- Debt rose by $37.6 million net. The June 2011 amended facility extended maturity to October 2015 and increased maximum borrowing capacity from $75 million to $110 million.
Outlook, commentary, risks and unusual items
- Management expected to install about 100 backlog systems in 2012, excluding digital upgrades, while cautioning that installation timing can slip. It expected a similar number of DMR film releases in 2012 as in 2011; 16 titles had been contracted at filing time.
- IMAX planned continued international expansion, particularly in Greater China, India, Latin America and Western Europe, and expected further investment in revenue-sharing installations. It said operating cash, existing cash and available credit should fund operations and strategic initiatives for the next 12 months, subject to its projections being achieved.
- The company planned to develop a laser-based projection system for intended introduction in 2013, following Kodak intellectual-property licensing and a February 2012 co-development agreement with Barco. The filing notes technology-development and commercial-execution uncertainty.
- Key risks include reliance on third-party film availability and box-office results; exhibitor demand, creditworthiness and backlog conversion; competition from digital 3D and other entertainment; international, currency and China-specific regulatory risks; and the possibility that technology investments or new ventures will not succeed. Revenue and cash flow may vary significantly between quarters.
- Revenue-sharing expansion increases IMAX’s direct exposure to film performance. Financing receivables were $86.7 million, including $6.0 million on nonaccrual status before related allowances; net receivables were $86.7 million overall. The filing also records $1.6 million of receivable provisions for 2011.
- The company recorded a $2.1 million provision for a former-subsidiary arbitration award; the parties reached a confidential settlement in January 2012. A proposed $12 million U.S. securities-class-action settlement, funded by insurers and PwC, remained subject to final court approval. A Canadian securities class action sought unspecified damages, and the filing said the potential exposure could not be estimated clearly.
- Other unusual context: 2010 earnings included a large non-cash tax benefit; FY2011 includes a $1.8 million equity-method loss related to a new business investment. Management reported effective disclosure controls and internal control over financial reporting; the auditor issued an unqualified opinion.
Important facts for investors to verify
- Whether theater backlog converts to installations and cash on schedule, especially in international markets, and whether contract changes or cancellations affect reported backlog.
- Film slate performance and box-office trends, including the revenue and margin contribution from revenue-sharing theaters.
- Cash conversion, capital spending and the funding required for further theater deployments; confirm available borrowing capacity and covenant headroom.
- Collection quality and aging of financing receivables, including the status of nonaccrual accounts and associated allowances.
- Final approval and financial effect, if any, of the U.S. class-action settlement, and progress and potential exposure in the Canadian action and other proceedings.
- Execution, cost and timing of the planned laser projection system, and the commercial value and recoverability of newly acquired intellectual property.
- Tax-asset realizability and the extent to which future reported earnings depend on tax estimates; compare GAAP results with management’s non-GAAP adjustments.