IMAX Corporation 10-Q Summary: Period Ended June 30, 1999
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 1999, and the six-month period ended on that date. IMAX Corporation designs, manufactures, and distributes large-format motion picture systems and films. The company operates globally, with significant revenue derived from theater system sales/leases, film distribution, and other services. As of July 30, 1999, there were 29,628,888 shares of common stock outstanding.
Key Financial Metrics
| Metric (in thousands USD) | Q2 1999 | Q2 1998 | 6 Months 1999 | 6 Months 1998 |
|---|---|---|---|---|
| Total Revenue | $34,258 | $43,320 | $71,001 | $79,690 |
| Gross Margin | $15,714 | $24,699 | $32,244 | $45,743 |
| Gross Margin % | 46% | 57% | 45% | 57% |
| Net Earnings | $2,196 | $6,161 | $4,209 | $10,360 |
| Diluted EPS | $0.07 | $0.20 | $0.14 | $0.34 |
| Cash & Equivalents | $135,405 (as of June 30, 1999) | |||
| Operating Cash Flow (6mo) | $(2,461) used | |||
| Total Debt | $300,000 ($200M Senior Notes + $100M Convertible Notes) |
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 21% in Q2 1999 and 11% for the six-month period compared to 1998. This was primarily driven by a 39% drop in Systems revenue (Q2) due to fewer theater system deliveries (4 systems in Q2 1999 vs. 8 in Q2 1998).
- Film Revenue Growth: Film revenue increased 51% in Q2 and 36% for the six months, driven by the strong performance of the film T-REX: Back to the Cretaceous.
- Margin Compression: Gross margin percentage dropped from 57% to 46% (Q2) due to the lower proportion of high-margin systems revenue in the mix.
- Interest Expense: Interest expense increased significantly (57% in Q2) due to the $200 million Senior Notes issued in December 1998.
- Cash Flow: Operating activities used $2.5 million in cash for the six months ended June 30, 1999, compared to providing $7.0 million in the prior year period. This was due to increased inventory ($8.1 million) and timing of payments.
Guidance, Outlook, and Risks
- Sales Backlog: The sales backlog grew 19% year-over-year to $209.7 million, representing 87 theater systems. Management expects this backlog to fluctuate based on new signings and deliveries.
- Liquidity: The company maintains strong liquidity with $135.4 million in cash and $43.6 million in marketable securities. Management believes existing cash and working capital facilities are sufficient for foreseeable needs.
- Year 2000 (Y2K) Readiness: The company has upgraded financial software and certified projection/sound systems as Y2K ready. Testing of automation subsystems in 26 theaters is expected to complete in Q3 1999. Costs are not expected to be material.
- Legal Contingencies:
- Compagnie France Film: Plaintiffs appealed a 1998 court dismissal of a breach of contract claim. Management believes the ultimate loss, if any, will not be material.
- Cinema Technologies Inc. & Iwerks: Litigation regarding trade secrets and antitrust claims was settled in 1999. Management believes settlements will not materially impact financial results.
- Market Risks: The company faces foreign exchange risk (USD revenues vs. CAD costs) and interest rate risk, mitigated by forward contracts and an interest rate swap.
Investor Verification Checklist
- Verify the timing of future theater system deliveries to confirm if the current revenue decline is temporary or indicative of a longer-term trend.
- Monitor the outcome of the Compagnie France Film appeal to ensure no material liability arises.
- Assess the impact of the $200 million Senior Notes on future interest expense and net earnings.
- Review the completion of Y2K testing for the 26 theater automation subsystems scheduled for Q3 1999.
- Track the conversion of the $100 million Convertible Subordinated Notes, which are convertible at $21.406 per share.