IMAX Corporation — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also reports unaudited fourth-quarter results. Amounts are U.S. dollars unless noted.
Business context
IMAX designs and supplies premium theater systems, earns recurring revenue through theater maintenance and joint revenue-sharing arrangements, and converts films to the IMAX format (DMR). At year-end, 837 theater systems operated in 57 countries, up from 731 in 53 countries. International markets generated about 53% of revenue; Greater China was the second-largest and fastest-growing market.
Key financial metrics
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $287.9 million | $282.8 million |
| Gross margin | $164.6 million; 57.2% of revenue | $153.2 million; 54.2% |
| Income from operations | $65.1 million | $58.9 million |
| Net income | $44.1 million; diluted EPS $0.64 | $41.3 million; diluted EPS $0.61 |
| Operating cash flow | $55.0 million | $73.6 million |
| Cash and cash equivalents at year-end | $29.5 million | $21.3 million |
| Debt drawn at year-end | $0 | $11.0 million |
Adjusted net income, a non-GAAP measure excluding stock-based compensation and related tax effects, was $55.7 million ($0.81 diluted share), versus $54.3 million ($0.80) in 2012. Stock-based compensation was $11.9 million. The company reported a $2.2 million pre-tax gain from reducing Canadian postretirement benefits.
Net cash used in investing activities was $42.3 million, including $22.8 million for joint revenue-sharing theater equipment, $13.0 million for property and equipment, and $4.0 million invested in new ventures. The company reported capital expenditures of $59.2 million under its broader measure, which includes joint revenue-sharing equipment and other specified investments.
The amended credit facility provides up to $200 million, matures in February 2018, and was undrawn at year-end; the company reported full availability and compliance with its covenants. Total assets were $481.1 million and shareholders’ equity was $319.6 million. Financing receivables totaled $107.1 million, while accounts receivable was $73.1 million.
Material changes versus prior period
- Annual revenue increased 1.8% and net income increased 6.7%; gross margin rose by 3.0 percentage points.
- Joint revenue-sharing revenue rose 11.5% to $64.1 million as operating theaters under these arrangements grew to 382 from 316. Film production and DMR revenue increased to $83.5 million from $78.1 million; DMR gross box office grew 17.1% to $726.6 million.
- IMAX systems revenue declined 5.2% to $91.4 million, while theater maintenance revenue increased 11.7% to $32.0 million. Film distribution and post-production revenue together declined.
- Operating cash flow decreased to $55.0 million, with growth in accounts and financing receivables contributing to working-capital use. The company ended the year debt-free after repaying its $11 million year-end 2012 borrowing.
- Backlog increased to 407 systems valued at $229.9 million, from 276 systems and $199.8 million. Approximately 86.5% of systems in backlog were scheduled for international markets; 239 were scheduled for Greater China.
- Fourth-quarter revenue was $105.1 million and net income was $27.8 million, compared with $77.4 million and $12.9 million, respectively, in fourth-quarter 2012. Fourth-quarter gross margin was $67.3 million, or approximately 64.1% of revenue, versus $42.4 million, or approximately 54.8%.
Outlook, commentary, and risks
- Management expected to install a similar number of new theater systems in 2014 as in 2013, excluding digital upgrades, while cautioning that installation timing can slip. It expected a similar number of DMR releases as in 2013; 14 2014 titles had been announced at filing time.
- IMAX planned to begin rolling out its next-generation laser projection system by the end of 2014. Research and development expense rose to $14.8 million from $11.4 million, and management expected a high level of R&D to continue in 2014.
- Management expected higher 2014 capital expenditures, including continued investment in joint revenue-sharing theaters and purchase and construction of a Playa Vista-area facility, partly financed through a construction loan. Management stated that cash, operating cash flow, and available borrowing were expected to fund operations and strategic initiatives for the next 12 months.
- The company and TCL planned to launch a premium home theater system in China and select other markets in 2015; IMAX also invested in PRIMA Cinema and began marketing its IMAX Private Theatre. These initiatives carry execution, market-acceptance, partner, and investment risks.
- Key exposures include dependence on successful third-party films and exhibitor investment; customer concentration (Wanda and AMC together represented 13.9% of 2013 revenue and about 31% of backlog); China regulatory and operating risks; foreign-exchange exposure; competition and technology change; and the risk that signed backlog will be delayed or not convert to revenue. Kodak was the sole supplier of analog film.
- Legal matters include a Canadian securities class action seeking $210 million, trade-secret litigation in Canada, China, and the United States, and a Chinese customs audit whose potential impact the company said it could not assess. The filing does not provide a clear quantified estimate of potential exposure for these matters.
Important facts for investors to verify
- Whether backlog installations convert on schedule, particularly the China-heavy international backlog, and whether the $229.9 million backlog value translates into expected revenue and cash receipts.
- Whether film slate performance sustains DMR box office and joint revenue-sharing returns, given the growing share of revenue linked to box-office results.
- Actual laser-system rollout timing, costs, customer uptake, and performance versus management’s expectations.
- Cash conversion and receivables quality: operating cash flow fell year over year, while financing receivables increased to $107.1 million; review aging, allowances, and customer payment performance.
- Progress and potential outcomes of the Canadian securities litigation, China customs audit, and trade-secret cases, along with any resulting financial or operational effects.
- Execution, funding, and returns on the planned facility construction and new home-entertainment initiatives.