IMAX Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Financial amounts are in U.S. dollars unless noted. IMAX operates a global premium cinema technology network and earns revenue from theater systems, box-office-linked remastering and revenue-sharing arrangements, maintenance, and film distribution. Results were severely affected by COVID-19 theater closures.
Financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $8.9 million | $104.8 million | $43.8 million | $185.0 million |
| Gross margin | $(7.7) million | $59.6 million | $(2.6) million | $104.7 million |
| Operating income (loss) | $(41.5) million | $24.1 million | $(79.9) million | $38.0 million |
| Net income (loss) attributable to common shareholders | $(26.0) million | $11.4 million | $(75.3) million | $19.7 million |
| Basic and diluted EPS | $(0.44) | $0.19 | $(1.26) | $0.32 |
| Operating cash flow | Not separately reported for the quarter | Not separately reported for the quarter | $(20.9) million | $48.5 million |
Q2 revenue fell 92% year over year; first-half revenue fell 76%. The filing attributes the steep declines to theater closures, postponed film releases, delayed installations, and suspended maintenance. In Q2, DMR revenue was $0.5 million versus $39.3 million a year earlier; joint revenue-sharing contingent rent was negative $0.1 million versus $25.5 million. First-half installations were 15 systems versus 52, while signings were 44 versus 96.
Liquidity, debt, and balance sheet
- At June 30, cash and cash equivalents were $319.0 million, up from $109.5 million at year-end 2019. The increase principally reflects drawing the remaining $280.0 million available under the revolving credit facility.
- Credit-facility borrowings were $300.0 million; total bank indebtedness, net of issuance costs and including a small working-capital borrowing, was $297.8 million. The facility matures June 2023 and is secured by substantially all assets of the company and guarantors.
- Operating cash outflow of $20.9 million and share repurchases of $36.6 million partly offset the borrowing-driven cash increase. Capital expenditures, including joint-revenue-sharing equipment, were $9.8 million.
- The June credit amendment suspended the senior secured net leverage covenant through Q1 2021, added a $75.0 million minimum-liquidity covenant tested monthly, and imposed additional restrictions on payments, investments, dispositions, liens, and debt. IMAX reported compliance at June 30 and expected compliance for at least the next year.
- Management said existing cash and expected operating cash flows should fund operations in the normal course for the next 12 months. This outlook is conditional on highly uncertain theater reopening, consumer demand, collections, and film-release timing.
Material changes, unusual items, and outlook
- Credit-loss expense rose to $11.7 million for the first half from $1.4 million in 2019, reflecting deterioration in theater- and studio-related receivables. Allowances also increased on financing receivables and variable consideration receivables.
- First-half write-downs totaled $6.8 million, including a $4.5 million impairment of documentary and alternative-content film assets and $1.2 million of other asset impairments. Management said film-asset recoverability assumes box-office recovery; further write-downs remain possible.
- IMAX recorded an $18.5 million deferred tax liability for withholding taxes expected if certain foreign earnings are repatriated; the estimate was reduced by $1.2 million in Q2. First-half income tax expense was $5.3 million despite the substantial pretax loss.
- COVID-19 relief benefits of approximately $3.2 million were recognized in Q2 as expense reductions. The company said it received about $2.2 million under Canada’s wage subsidy in July and expected about $1.0 million under the U.S. CARES Act.
- No goodwill impairment was recorded at June 30, but management warned prolonged weak business conditions could trigger impairment, particularly in IMAX Systems and joint revenue-sharing reporting units. Theater-system equipment recoverability tests also found no impairment at the test date.
- After quarter-end, about 40% of IMAX’s commercial multiplex network had begun reporting box-office results in July. Reopenings were gradual and subject to reduced capacity and safety measures. The filing provides no quantified earnings or revenue guidance.
- The company repurchased $36.6 million of its common shares in the first half, although none in Q2, and extended its $200 million repurchase program through June 30, 2021. It had $89.4 million of authorization remaining at June 30.
- Legal contingencies include a Giencourt arbitration award whose amount and payment timing IMAX said it could not determine; its appeal was dismissed in May 2020. The company said it had recorded what it believed to be adequate provisions. IMAX also continues efforts to enforce an earlier arbitration award against E-City and related parties.
Important facts for investors to verify
- The pace and breadth of theater reopenings, box-office recovery, film release schedules, and whether consumer movie-going returns to historical levels.
- Cash burn, collections from exhibitors and studios, compliance with the $75 million minimum-liquidity covenant, and the company’s ability to manage its $300 million facility borrowing.
- Changes in credit-loss allowances, overdue and nonaccrual receivables, and the financial condition or potential bankruptcy of exhibitor partners.
- Whether film assets, goodwill, deferred tax assets, or theater-system equipment require additional impairments or valuation allowances.
- The eventual cost and timing of the Giencourt matter and outcome of IMAX’s E-City enforcement efforts.
- Whether backlog converts to installations and revenue: backlog was 559 systems at June 30, 2020 versus 612 a year earlier, and installation delays or cancellations may affect future results.