IMAX Corporation — 10-Q summary
Business context and period. This unaudited U.S. GAAP filing covers the quarter and nine months ended September 30, 2015. IMAX develops and supplies premium theater systems and provides maintenance, film remastering, distribution, and related services. Its network comprised 1,008 theater systems in 66 countries, versus 880 in 60 countries a year earlier. Unless otherwise noted, amounts below are U.S. dollars.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $85.1m | $60.7m | $254.5m | $188.1m |
| Gross margin | $42.4m; 49.8% | $35.4m; 58.3% | $147.4m; 57.9% | $109.6m; 58.3% |
| Operating income | $13.7m | $6.9m | $52.8m | $27.3m |
| Net income | $10.5m | $5.3m | $38.4m | $19.7m |
| Net income attributable to common shareholders | $8.6m | $4.9m | $33.4m | $18.7m |
| Basic / diluted EPS attributable to common shareholders | $0.12 / $0.12 | $0.07 / $0.07 | $0.47 / $0.46 | $0.27 / $0.27 |
- Q3 revenue rose 40.1%; nine-month revenue increased 35.3%. Growth reflected higher system sales and joint revenue-sharing activity, as well as stronger film/DMR revenue over the nine-month period.
- Gross margin dollars increased, but Q3 margin percentage declined, partly because laser-system upgrades carried lower margins. Excluding those upgrades, management reported Q3 margin of 55.2% and nine-month margin of 60.4%.
- For the nine months, equipment and product sales revenue was $72.8m, services $115.7m, rentals $59.0m, and finance income $6.8m. Joint revenue-sharing revenue was $67.3m; film production and DMR revenue was $75.1m.
- Cash from operations was $41.8m, versus $71.9m in the prior-year period. Investing activities used $65.0m; financing activities provided $33.8m. Cash and equivalents increased to $117.4m from $106.5m at year-end 2014.
- Capital spending and related investments were significant: $38.4m for property and equipment and $21.0m for joint revenue-sharing equipment in the nine months. Broader capital expenditures, including film assets and other investments, were $75.1m.
- At September 30, cash was $117.4m and bank indebtedness was $22.3m, representing the Playa Vista construction loan. The separate $200m revolving credit facility was undrawn and available; the company reported compliance with its covenants.
Material changes and notable items
- System growth supported recurring revenue: 498 theaters were operating under joint revenue-sharing arrangements, up from 422 a year earlier. The total network expanded by 128 systems year over year, with Greater China accounting for substantial growth.
- Theater-system backlog was 384 systems valued at $276.6m, down from 439 systems and $295.4m a year earlier. About 87% of systems in backlog were scheduled for international markets; Greater China represented 218 systems.
- Q3 gross box office for IMAX DMR films was $189.8m, up 12.4%; nine-month gross box office was $697.5m, up 33.2%. Nine-month film gross margin benefited from stronger DMR performance, while distribution and post-production revenue fell year over year.
- SG&A rose to $25.0m in Q3 and $82.3m for the nine months. Nine-month share-based compensation was $14.9m, versus $11.3m. The company repurchased 1.0m shares for $34.3m during the nine months.
- After quarter-end, IMAX China completed its Hong Kong IPO on October 8. IMAX received approximately $103.7m net from selling shares; IMAX China received approximately $58.2m net from issuing shares. IMAX retained approximately 68.5% ownership and continued consolidating the subsidiary. A subsequent dividend paid $38.0m to IMAX and $9.5m to minority holders.
- The Playa Vista loan was converted to permanent financing on October 19; principal increased from $22.3m at quarter-end to $30.0m, with a 2025 maturity and monthly principal-and-interest payments.
Outlook, commentary, and risks
- Management expected to install approximately 130 new theater systems in 2015, excluding upgrades. It cautioned that installations can shift between periods, often for reasons outside its control.
- Management expected slightly more IMAX DMR films in 2015 than the 40 released in 2014 and anticipated a 2016 slate similar to the 44 films then scheduled for 2015. These expectations depend on film releases and studio agreements.
- Management said existing cash, operating cash flow, and available credit were expected to fund operations and strategic initiatives for the next 12 months. It cautioned that cash flow could be adversely affected if signings, installations, film performance, or productions fall short of projections.
- Key disclosed risks include theater-system backlog conversion, film performance, competition and technology change, international and China-related exposure, customer concentration, foreign exchange, and the ability to protect intellectual property. The largest customer accounted for 17.4% of nine-month revenue.
- Legal matters include a Canadian securities class action seeking $210m (the U.S. parallel action was settled; the Canadian class had been reduced), a Giencourt arbitration seeking up to approximately $18m with IMAX counterclaims exceeding $24m, and a China customs audit whose potential impact the company said it could not assess. The filing states that outcomes are uncertain.
- Unusual or noteworthy charges include $0.4m of investment impairment and $1.5m of assets written off for no longer meeting capitalization requirements during the nine months. Management also recorded a $5.5m deferred-tax-asset adjustment and an equal uncertain-tax-position provision directly in equity.
- The filing presents adjusted net income and adjusted EPS as non-GAAP measures; these exclude share-based compensation and related tax effects and should be considered alongside, not instead of, GAAP results.
Important facts for investors to verify
- Whether the 2015 installation outlook and the sizable international, particularly Greater China, backlog convert into installations and revenue on schedule.
- Whether revenue growth translates into durable margins, given the lower margins on laser upgrades and the changing mix of systems, films, and joint revenue-sharing theaters.
- Operating cash flow and investment needs: nine-month operating cash flow declined year over year while equipment, facilities, and joint revenue-sharing investments remained substantial.
- Post-quarter IMAX China IPO proceeds, continuing consolidation and 68.5% ownership, the dividend, and the subsequent Playa Vista loan increase and terms.
- Potential impact and timing of disclosed litigation and the China customs audit, as well as collection quality for financing receivables and customer concentration.
- Reconcile per-share figures before relying on them: the financial statements report common-shareholder EPS of $0.12 basic and diluted for Q3, while MD&A also describes EPS based on net income before non-controlling interests. The filing’s basis should be confirmed.