IMAX Corporation — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; unaudited, U.S. GAAP. Amounts are in U.S. dollars unless noted. IMAX operates a global premium theater network and earns revenue from film remastering and box office participation, theater systems and services, and developing businesses. Its network totaled 1,302 systems in 75 countries, up from 1,145 in 74 countries a year earlier.
Financial performance and liquidity
- Revenue: Q3 revenue rose 14.2% to $98.8 million from $86.6 million. Nine-month revenue fell 5.6% to $255.2 million from $270.4 million.
- Profitability: Q3 gross margin was $39.9 million (40.4% of revenue), versus $44.9 million (51.9%) a year earlier. Nine-month gross margin was $125.1 million (49.0%), down from $147.4 million (54.5%). Operating income was $4.5 million in Q3 and $6.2 million for nine months, compared with $7.7 million and $39.5 million, respectively, in 2016.
- Net income and EPS: Consolidated net income was $2.9 million in Q3 and $3.8 million for nine months, versus $4.4 million and $27.2 million in 2016. After income attributable to non-controlling interests, common shareholders had a Q3 loss of $0.9 million ($0.01 per share) and a nine-month loss of $2.5 million ($0.04 per share); comparable 2016 periods had common income of $2.5 million ($0.04 per share) and $19.8 million ($0.29 per share). Management’s non-GAAP adjusted net income attributable to common shareholders was $5.2 million ($0.08 per diluted share) in Q3 and $18.7 million ($0.28) for nine months, down from $7.9 million ($0.12) and $35.5 million ($0.52).
- Cash flow: Nine-month operating cash flow was $63.4 million, compared with $45.3 million in 2016. Investing used $57.3 million and financing used $53.2 million; cash declined $47.1 million to $157.7 million. Investing included $35.5 million for joint revenue-sharing equipment and $16.4 million for property and equipment. Financing included $46.1 million of share repurchases.
- Balance sheet and liquidity: Cash was $157.7 million; total assets were $846.7 million and total liabilities $254.6 million at September 30. Bank indebtedness was $25.8 million, representing the Playa Vista loan; $200 million remained undrawn under the revolving credit facility. The company reported compliance with covenants, including a 0.22:1 maximum leverage ratio against a 2.0:1 limit. Management said available liquidity and operating plans were expected to fund normal operations for the next 12 months.
- Other metrics: Financing receivables were $123.5 million, including $7.6 million past due by 90 days or more before allowances. Deferred revenue was $120.8 million, up from $90.3 million at year-end 2016. The company repurchased 1.74 million shares for $46.1 million in the first half and authorized a new $200 million repurchase program; no purchases under the new program occurred in Q3.
Material changes and management commentary
- Q3 network-business revenue increased 16.8% to $42.6 million, led by IMAX DMR revenue, which rose 20.5% to $26.0 million. Nine-month network revenue declined 5.5% to $129.4 million, reflecting weaker box office and lower per-screen averages; nine-month DMR box office fell 2.7% to $699.8 million.
- Nine-month theater-business revenue declined 15.1% to $99.5 million, principally reflecting fewer theater-system installations. The company installed 100 systems in the first nine months, versus 109 in 2016. Maintenance revenue increased 11.4% to $33.5 million.
- New-business revenue rose to $11.5 million for nine months, largely from the theatrical launch of “Marvel’s Inhumans” and VR-camera development payments, but the segment recorded a $13.4 million gross loss. The television project generated $8.7 million of revenue against $20.6 million of costs, including an $11.1 million impairment following lower-than-expected first-season revenue.
- Other significant write-downs included $4.6 million of documentary-film impairments and a $1.2 million write-off of a loan deemed uncollectible. Nine-month write-downs, net of recoveries, totaled $25.6 million, versus $2.9 million in 2016.
- In June 2017, IMAX announced a cost-reduction plan, including approximately 100 job eliminations (about 14% of its global workforce), exits from certain non-core activities, and facility and contract actions. Nine-month restructuring, exit and related impairment charges totaled $13.7 million; the company expected a further $0.9 million of restructuring charges in the rest of 2017. It cautioned that projected savings may not be achieved.
Outlook, risks and contingencies
- Management expected approximately 160–165 new theater-system installations in 2017, excluding upgrades, and a similar number of IMAX DMR film releases to 2016’s 51. Installation timing can slip, and performance depends on film slate, box office, customer demand and backlog conversion.
- IMAX identified China as a key growth market: Greater China represented nearly 35% of nine-month revenue and 64.2% of theater backlog. The largest customer accounted for 14.4% of nine-month revenue. The filing highlights exposure to China operations and regulation, foreign exchange, film performance, competition, and dependence on converting backlog into revenue.
- Legal matters include a Giencourt arbitration award finding a binding settlement; IMAX disputes enforceability and said it could not estimate potential payment or timing. The company is seeking to vacate the award. In the 3DMG arbitration, final briefings were due in December 2017 and a judgment was expected in Q1 2018; IMAX said any loss was not expected to materially affect its financial position, though the outcome was uncertain.
- A China customs review concerns approximately $0.1 million of underpaid duties, remitted in June 2017. IMAX accrued $0.3 million for likely fines, but the actual penalties remain uncertain. The filing also describes ongoing enforcement efforts relating to an $11.3 million ICC award against E-City and affiliates; collection outcomes are uncertain.
- The company had a $50.2 million minimum commitment for certain film and new-content initiatives, with $35.1 million spent by September 30. Foreign-currency risk is partly hedged: forward contracts had $35.1 million notional value, and $1.1 million of net gains was expected to be reclassified to earnings over the next 12 months. Cash held outside North America was $117.3 million; estimated withholding tax on repatriation from China to Canada was $6.3 million.
Most important facts for investors to verify
- Whether box-office trends and per-screen performance recover, and whether the 2017 installation and film-release expectations are met.
- How much of the $545-system backlog converts to installations and recognized revenue, particularly in Greater China, and the timing and terms of those commitments.
- Whether the cost-reduction plan delivers savings sufficient to offset recurring operating pressure, while separating one-time charges from ongoing costs.
- Whether “Inhumans,” VR and other new initiatives can improve economics after the $11.1 million episodic impairment and substantial new-business losses.
- Credit quality and collections on theater and studio receivables, including past-due balances and the increase in receivable provisions.
- Potential financial exposure and developments in the Giencourt, 3DMG and China customs matters, as well as E-City award enforcement.
- Cash use from joint revenue-sharing investments and buybacks, covenant headroom, and the company’s reliance on cash held outside North America.