IMAX Corporation — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Figures are in U.S. dollars; financial amounts are shown in millions unless otherwise noted.
Business context
IMAX develops and supplies theater systems, maintenance, and film re-mastering and distribution services. Its network totaled 1,102 theater systems in 69 countries, up from 976 in 65 countries a year earlier. Greater China accounted for 335 operating theaters and 59.7% of system backlog. The company reported 31 operational laser projection systems and was expanding into premium home theater and location-based virtual reality.
Key financial metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $91.7 | $107.2 | $183.9 | $169.4 |
| Gross margin | $50.3 (54.8%) | $69.0 (64.4%) | $102.5 (55.7%) | $105.0 (62.0%) |
| Operating income | $15.5 | $36.5 | $31.7 | $39.2 |
| Consolidated net income | $10.7 | $26.4 | $22.9 | $27.9 |
| Net income attributable to common shareholders | $7.8 | $24.4 | $17.3 | $24.7 |
| Basic and diluted EPS attributable to common shareholders | $0.11 | $0.34 | $0.25 | $0.35 basic; $0.34 diluted |
Q2 revenue declined 14.4%, principally from weaker film box office and joint revenue-sharing results. First-half revenue rose 8.6%, supported by theater-system sales, while gross margin and earnings declined. First-half stock-based compensation was $14.7 million, versus $10.7 million in 2015. Management’s non-GAAP adjusted net income attributable to common shareholders was $12.1 million in Q2 and $27.6 million for the first half; these measures exclude stock-based compensation and related tax effects.
Q2 IMAX DMR gross box office fell 24.0% to $260.8 million; first-half DMR box office increased 4.9% to $532.8 million, but box office per screen declined. Q2 film-segment revenue fell 23.8% to $30.0 million. First-half film-segment revenue was $62.6 million, modestly above prior year, while film gross margin fell to $40.7 million from $42.4 million.
For the first half, operating cash flow was $36.1 million, investing cash outflow was $30.9 million, and financing cash outflow was $94.6 million. Cash declined by $89.4 million to $228.1 million, largely reflecting $85.7 million of share repurchases. Capital expenditures, including joint-revenue-sharing equipment, film assets, property and intangibles, totaled $41.8 million.
At June 30, cash was $228.1 million; the company had $200.0 million available and none drawn on its revolving credit facility. The Playa Vista loan balance was $28.7 million. The company reported a 0.21:1 maximum total leverage ratio, compliance with facility covenants, and $118.9 million in financing receivables. Current liabilities included $107.0 million in deferred revenue.
Material changes and operating developments
- Q2 revenue and gross margin contracted sharply year over year, despite the operating network growing and joint revenue-sharing theaters increasing 17.2% to 559.
- First-half equipment and product sales rose to $50.2 million from $39.7 million, but costs in that category increased to $33.4 million from $21.1 million. Eleven digital upgrades were installed under sales or sales-type leases in the first half; upgrades generally carry lower margins than full systems.
- Backlog was 442 systems, valued at $284.6 million, versus 391 systems and $279.7 million a year earlier. Greater China represented 264 backlog systems. Backlog is subject to installation timing and conversion into recognized revenue.
- The company repurchased 2.79 million shares for $85.7 million in the first half, reducing shares outstanding. The repurchase authorization was increased to $200 million in April 2016.
Outlook, risks, contingencies, and unusual items
- Management estimated 155 new theater-system installations for 2016 and expected a similar number of IMAX DMR film releases to 2015’s 44. Installations can be delayed, and film results depend on box office performance. No specific full-year revenue or earnings guidance is provided in the supplied filing text.
- Management said operating cash flow, existing cash, and the undrawn credit facility should fund operations and strategic initiatives for the next 12 months, while cautioning that liquidity could be affected if theater signings, installations, film performance, or production plans fall short.
- Key exposures include dependence on film performance, conversion of backlog, competition and technology changes, international and China risks, and the concentration of revenue and receivables among exhibitors and studios. The largest customer generated 15.0% of Q2 revenue and 15.3% of first-half revenue.
- Legal matters include Giencourt arbitration, where the claimant seeks up to approximately $10.4 million and IMAX counterclaims for more than $24 million; a 3DMG arbitration with an uncertain outcome; and a Chinese customs audit whose potential impact the company could not assess. The company stated it believes provisions are adequate, but adverse outcomes could affect results, cash flows, or financial position.
- IMAX China implemented a new ERP system in Q1. Management reported changes to internal financial controls during the transition, expected completion in 2016, and said disclosure controls were effective at June 30.
- The unfunded CEO pension obligation was $19.6 million. A $19.9 million payment in 2017 is shown under current plan assumptions if the CEO retires after his employment term ends in December 2016; the filing says he had not indicated an intention to retire and was discussing an extension.
- Early adoption of the stock-compensation accounting update produced balance-sheet reclassifications and a $2.7 million Q2 recovery in stock-based compensation expense. An investment impairment of $0.2 million was recorded in the first half.
Important facts for investors to verify
- Whether the planned 2016 theater installations and substantial international backlog convert to installations, cash receipts, and revenue on schedule.
- Whether box office and gross margins recover, especially in joint revenue sharing and film operations, and how the film slate performs.
- Customer and financing-receivable credit quality, including the $2.5 million of financing receivables classified as transactions suspended and associated allowances.
- Cash use and remaining share-repurchase capacity after the first-half buybacks, alongside planned investment in revenue-sharing systems and new initiatives.
- Developments in the Giencourt and 3DMG proceedings, the China customs audit, and the ERP-control transition.
- The CEO’s employment and pension arrangements, including whether the assumed 2017 pension payment becomes payable.