IMAX Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Unaudited U.S. GAAP consolidated results; comparisons are with Q1 2013 unless noted. IMAX operates a global theater-system, maintenance and film business. Its network totaled 840 systems in 57 countries, versus 738 systems in 53 countries a year earlier.
Financial results and liquidity
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $48.2 million | $49.7 million |
| Gross margin | $26.4 million; 54.8% of revenue | $26.2 million; 52.7% of revenue |
| Income from operations | $0.8 million | $4.7 million |
| Net income | $0.6 million; $0.01 per diluted share | $2.9 million; $0.04 per diluted share |
| Adjusted net income (non-GAAP) | $3.3 million; $0.05 per diluted share | $5.6 million; $0.08 per diluted share |
| Cash from operating activities | $13.9 million | $(1.0) million |
| Cash used in investing activities | $(13.7) million | $(12.8) million |
At March 31, cash was $29.7 million, total assets $478.2 million, total liabilities $155.5 million and shareholders’ equity $322.8 million. Financing receivables were $103.8 million. The company had no borrowings under its $200 million secured credit facility, all of which remained available; it reported compliance with facility covenants. The facility matures in February 2018. Cash and operating cash flow were broadly offset by investment spending in the quarter, including $7.9 million for property, plant and equipment and $5.5 million for joint-revenue-sharing equipment.
Changes versus the prior period
- Revenue declined 3.0%, principally because equipment sales and sales-type lease revenue fell: the company recognized three full new systems, versus six in Q1 2013. Equipment and product sales revenue was $6.4 million versus $10.7 million.
- Service revenue rose to $28.9 million from $26.7 million; rental revenue increased to $10.8 million from $10.0 million. Film-segment revenue grew 10.5% to $19.9 million.
- Gross margin dollars were slightly higher and gross margin percentage improved, but operating income fell. Q1 2013 included a $2.2 million gain from reducing Canadian postretirement benefits; Q1 2014 also had higher SG&A, including a $0.7 million foreign-exchange loss and $0.3 million of receivable provisions.
- Net income included $3.2 million of stock-based compensation, compared with $2.8 million. The company’s non-GAAP adjusted net income excludes stock-based compensation and related tax effects.
- Operating cash flow improved from a use of cash to a source of cash, with working-capital movements including lower accounts and financing receivables and increased deferred revenue. Investing outflows remained substantial.
Outlook, commentary and risks
- Management expected a similar number of IMAX DMR film releases in 2014 as in 2013, and anticipated installing a similar number of new theater systems, excluding digital upgrades, as in 2013. Installations may shift between periods and depend partly on customer construction schedules.
- The company planned to begin rolling out its next-generation laser projection system by the end of 2014. Research and development spending was expected to remain high during 2014; 64 laser systems were in backlog at quarter-end.
- Backlog was 431 systems valued at $261.8 million, versus 283 systems and $209.1 million a year earlier. Approximately 88% of systems in backlog were scheduled for international markets; Greater China accounted for 240 systems. Backlog is subject to installation, acceptance and customer execution risks.
- Management said cash from operations, existing cash and available credit were expected to fund operations and strategic initiatives for the next 12 months. Planned uses included joint-revenue-sharing deployments and construction of a new Los Angeles-area office; capital expenditures were expected to be higher in 2014, partly due to the facility.
- On April 8, 2014, after quarter-end, investors agreed to acquire 20% of IMAX China for $80 million in two installments. The first was received on that date; the second was due February 2015. IMAX China remained consolidated. The filing notes potential redemption rights and uncertainty that the second installment will be completed.
- Key risks include film performance, theater-system signings and backlog conversion, customer concentration (the largest customer generated 16.2% of Q1 revenue), credit and collection risk, foreign-exchange exposure, competition and technology execution. The filing also highlights regulatory, political, intellectual-property and customs-audit risks in China and geopolitical uncertainty affecting Russia and the CIS.
- Legal matters include ongoing securities and trade-secret disputes and efforts to collect an arbitration award against E-City; management stated that provisions were considered adequate but noted adverse outcomes could materially affect results, cash flows or financial position. The Shanghai customs audit’s potential impact could not be assessed.
Important facts to verify
- Whether system installations, particularly sales and sales-type leases, recover from the Q1 decline and convert the $261.8 million backlog into revenue and cash.
- Whether film slate performance and box-office results support film revenue growth and the 2014 release outlook.
- Collection quality of financing receivables: $2.3 million was classified as suspended/nonaccrual before allowances, and the allowance for financed sales receivables rose to $0.5 million.
- Completion of the $40 million second installment for the IMAX China investment, and the financial and governance implications of the 20% interest and related investor rights.
- Execution, timing, costs and commercial acceptance of the laser projector rollout and Playa Vista office construction.
- Developments in the E-City collection proceedings, Canadian securities class action, trade-secret litigation and Shanghai customs audit.