Item 2.
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Managements Discussion and Analysis of Financial Condition and Results of Operations
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OVERVIEW
IMAX Corporation, together with
its consolidated subsidiaries (the Company), is one of the worlds leading entertainment technology companies, specializing in motion picture technologies and presentations. The Company refers to all theaters using the IMAX theater
system as IMAX theaters. IMAX offers a unique
end-to-end
cinematic solution combining proprietary software, theater architecture and equipment to create the
highest-quality, most immersive motion picture experience for which the IMAX
®
brand has become known globally. Top filmmakers and studios utilize IMAX theaters to connect with audiences in
innovative ways, and, as a result, IMAXs network is among the most important and successful theatrical distribution platforms for major event films around the world. There were 1,302 IMAX theater systems (1,203 commercial multiplexes, 13
commercial destinations, 86 institutional) operating in 75 countries as of September 30, 2017. This compares to 1,145 theater systems (1,037 commercial multiplexes, 16 commercial destinations, 92 institutional) operating in 74
countries as of September 30, 2016.
The Companys core business consists of:
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the Digital
Re-Mastering
(DMR) of films into the IMAX format for exhibition in the IMAX theater network in exchange for a certain percentage of contingent box office
receipts from both studios and exhibitors; and
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the provision of IMAX premium theater systems (IMAX theater systems) to exhibitor customers through sales, long-term leases or joint revenue sharing arrangements.
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IMAX theater systems are based on proprietary and patented technology developed over the course of the Companys
50-year
history and combine:
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the ability to exhibit content that has undergone IMAX DMR conversion, which results in higher image and sound fidelity than conventional cinema experiences;
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advanced, high-resolution projectors with specialized equipment and automated theater control systems, which generate significantly more contrast and brightness than conventional theater systems;
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large screens and proprietary theater geometry, which result in a substantially larger field of view so that the screen extends to the edge of a viewers peripheral vision and creates more realistic images;
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sound system components, which deliver more expansive sound imagery and pinpointed origination of sound to any specific spot in an IMAX theater; and
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specialized theater acoustics, which result in a four-fold reduction in background noise.
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Together these components cause audiences in IMAX theaters to feel as if they are a part of the
on-screen
action, creating a more intense, immersive and exciting experience than in a traditional theater.
As a result of the immersiveness and superior image and sound quality of
The
IMAX
Experience,
the Companys exhibitor
customers typically charge a premium for IMAX DMR films over films exhibited in their other auditoriums. The premium pricing, combined with the higher attendance levels associated with IMAX DMR films, generates incremental box office for the
Companys exhibitor customers and for the movie studios releasing their films to the IMAX theater network. The incremental box office generated by IMAX DMR films has helped establish IMAX as a key premium distribution and marketing
platform for Hollywood blockbuster films. Driven by the advent of digital technology that reduced the IMAX DMR conversion time and with the strengthening of the Companys relationships with the major studios, the number of IMAX DMR films
released to the theater network per year has increased significantly in recent years. The Company released 51 IMAX DMR films in 2016 and expects to release a similar number of IMAX DMR films in 2017.
As one of the worlds leaders in entertainment technology, the Company strives to remain at the forefront of advancements in cinema
technology. To that end, the Company introduced its next-generation laser-based digital projection system at the end of 2014. The laser projection solution is the first IMAX digital projection system capable of illuminating the largest screens in
its network. As at September 30, 2017, 46 laser-based digital systems were operational. The Company is in the process of developing a commercial laser-based digital projection system designed for IMAX theaters in multiplexes. The Company
believes that the IMAX laser-based projectors present greater brightness and clarity, higher contrast, a wider color gamut and deeper blacks, and consume less power and last longer than existing digital technology.
48
NEW BUSINESS INITIATIVES
The Company is exploring new lines of business outside of its core business, with a focus on investments in original content, alternative
location-based entertainment experiences, as well as premium IMAX home entertainment technologies and services.
Original Content
In 2016, the Company announced an agreement with Marvel Television Inc. (Marvel) and Disney|ABC Television Group to
co-produce
and premiere theatrically the new television series
Marvels Inhumans
in IMAX theaters. The first two episodes of the series ran worldwide in IMAX theaters for two weeks in
September 2017 and subsequently the series premiered on the ABC network in the U.S. and across other networks internationally. As part of the investment, the Company shares in the economics across the venture, including in both the theatrical and
television platforms. This agreement marks the first time a live-action television series has debuted in this manner, and the first time the Company has an economic interest in a television property.
The Company has also created two film funds to help finance the production of original content. In 2015, the Company announced the creation of
the IMAX China Film Fund (the China Film Fund) with its subsidiary IMAX China Holding Inc. (IMAX China), its partner CMC and several other large investors to help fund Mandarin language commercial films. The China Film Fund,
which is expected initially to be capitalized with over $100.0 million, will target productions that can leverage the Companys brand, relationships, technology and release windows in China. The China Film Fund is expected to
co-finance
approximately 15 Mandarin-language tent-pole films over three years, and will target contributions of between $3.0 million and $7.0 million per film. The China Film Fund will operate under an
IMAX
China-CMC
controlled greenlight committee.
In addition, the Companys IMAX Original
Film Fund (the Original Film Fund) was established in 2014 to
co-finance
a portfolio of 10 original large format films. The Original Film Fund, which is intended to be capitalized with up to
$50.0 million, will finance an ongoing supply of original films that the Company believes will be more exciting and compelling than traditional documentaries. The initial investment in the Film Fund was committed to by a third party in the
amount of $25.0 million, with the possibility of contributing additional funds. The Company agreed to contribute $9.0 million to the Original Film Fund over five years starting in 2014 and sees the Original Film Fund as a self-perpetuating
vehicle designed to generate a continuous flow of high-quality documentary content. As at September 30, 2017, the Original Film Fund has invested $13.4 million toward the development of original films.
Virtual Reality
In 2016, the Company
announced it would be piloting a comprehensive virtual reality (VR) strategy to develop a premium, location-based VR offering that will deliver immersive, multi-dimensional experiences, including entertainment content and games, to
branded VR centers (IMAX VR Centers). Pilot IMAX VR Centers are expected to be located in both stand-alone venues as well as multiplexes, malls and other commercial destinations, and will be retrofitted with proprietary VR pods that
permit interactive, moveable VR experiences. The Companys VR initiative is premised on a unique combination of premium content, proprietary design and
best-in-class
technology.
In January 2017, the Company
launched its flagship pilot IMAX VR Center in Los Angeles. In May 2017, the Company opened a second pilot IMAX VR Center at the AMC Kips Bay theater in New York City and in October 2017, a third pilot IMAX VR Center opened at the JinYi Shanghai
theater in Greater China. The Company has signed agreements for additional pilot IMAX VR Centers, including in Canada, the United States, Thailand and the United Kingdom, and expects a total of seven pilot IMAX VR Centers to be open before the end
of 2017. The Company plans to use these pilot locations to test several factors including the overall customer experience, pricing models, throughput, types of content featured and differences in geographic areas. If successful, the Companys
intent is to roll out IMAX VR Centers globally.
In November 2016, the Company announced the creation of a virtual reality fund (the
VR Fund) among the Company, its subsidiary IMAX China and other strategic investors. The VR Fund will help finance the creation of an estimated
25-30
interactive VR content experiences over the
next three years for use across all VR platforms, including in the pilot IMAX VR Centers. The VR Fund will target premium productions with its Hollywood studio and filmmaker partners, as well as gaming publishers and other leading content
developers. To further supplement these content experiences, the Company and Warner Bros. Home Entertainment have announced a new VR
co-financing
and production agreement to develop and release premium,
interactive VR experiences based on some of Warner Bros. Pictures most highly anticipated upcoming blockbuster films, including
Justice League
,
49
and the experiences will receive an exclusive release window in pilot IMAX VR Centers before being made available to other VR platforms. In addition, the Company has partnered with Google to
design and develop a cinema-grade IMAX VR camera.
Through its pilot VR initiative, the Company sees a unique opportunity to combine
premium equipment, more robust computing power, and specially designed spaces to create a highly differentiated, destination-based VR experience that will draw consumers out of their homes, similar to the strategy it has successfully employed in the
cinema space.
IMAX Home Entertainment Technologies and Services
With respect to IMAX home entertainment, the Company has announced home theater initiatives, including a joint venture with TCL Multimedia
Technology Holding Limited (TCL) to design, develop, manufacture and sell a premium home theater system. Since 2013, the joint venture has signed agreements with end users for the sale of more than 170 premium home theater systems, and
has signed agreements with distributors for the sale of more than 470 home theater systems. Beyond its premium home theater, the Company has also developed other components of broader home entertainment platform designed to allow consumers to
experience elements of
The
IMAX
Experience
®
in their homes.
SOURCES OF REVENUE
The primary revenue sources for the Company can be categorized into four main groups: network business, theater business, new business
and other.
The network business includes variable revenues that are primarily derived from film studios and exhibitors. Under the
Companys DMR arrangements, the Company provides DMR services to studios in exchange for a percentage of contingent box office receipts. Under joint revenue sharing arrangements, the Company provides IMAX theater systems to exhibitors and also
receives a percentage of contingent box office receipts. In addition, certain of the Companys sales and sales-type leases require customers to make contingent rent payments that are tied to box office performance, and this contingent rent is
included in the network business.
The theater business includes fixed revenues that are primarily derived from theater exhibitors through
either a sale or sales-type lease arrangement for IMAX theater systems. Sales and sales-type lease arrangements typically require fixed upfront and annual minimum payments. The theater business side also includes fixed revenues that are required
under the Companys hybrid theater systems from the joint revenue sharing arrangements segment. In addition, theater exhibitors also pay for associated maintenance, extended warranty services and the provision of aftermarket parts of its system
components, and these revenues are included in the theater business.
New business includes revenue in connection with the Companys
original content and VR initiatives, IMAX Home Entertainment and other business initiatives that are in the development and/or
start-up
phase.
The Company also derives a small portion of other revenues from the film studios for provision of film production services, operation of its
owned and operated theaters and camera rentals.
The Company believes that separating the fixed price revenues from the variable sources
of revenue, as well as isolating its
non-core
new business initiatives, provides greater transparency into the Companys performance.
Network Business: Digital
Re-Mastering
(IMAX DMR) and Joint Revenue Sharing Arrangements
Digital
Re-Mastering
(IMAX DMR)
The Company has developed a proprietary technology, known as IMAX DMR, to digitally
re-master
Hollywood
films into IMAX digital cinema package format or
15/70-format
film for exhibition in IMAX theaters at a modest cost that is incurred by the Company. IMAX DMR digitally enhances the image resolution of motion
picture films for projection on IMAX screens while maintaining or enhancing the visual clarity and sound quality to levels for which
The
IMAX
Experience
is known. In a typical IMAX DMR film arrangement, the Company receives a
percentage, which in recent years has averaged approximately 12.5%, of net box office receipts, defined as gross box office receipts less applicable sales taxes, of any commercial films released outside of Greater China in return for converting them
to the IMAX DMR format and distributing them through the IMAX theater network. Within Greater China, the Company receives a lower percentage of box office receipts for certain films.
IMAX films also benefit from enhancements made by individual filmmakers exclusively for the IMAX release, and filmmakers and studios have sought IMAX-specific
enhancements in recent years to generate interest in and excitement for their films. Such
50
enhancements include shooting select scenes with IMAX cameras to increase the audiences immersion in the film and taking advantage of the unique dimensions of the IMAX screen by projecting
the film in a larger aspect ratio. Recent films that have incorporated IMAX enhancements include
Dunkirk: The
IMAX
Experience
, released in July 2017;
Blade Runner 2049: The
IMAX
Experience
, released in October 2017; and
Thor: Ragnarok:
An
IMAX
Experience
, to be released in November 2017. In addition, Marvels
Avengers: Infinity War
and the
Untitled Avenger Sequel
will be shot in their entireties using IMAX cameras.
The original soundtrack of a film to be released to the IMAX theater network is
re-mastered
for the
IMAX digital sound systems in connection with the IMAX DMR release. Unlike the soundtracks played in conventional theaters, IMAX
re-mastered
soundtracks are uncompressed and full fidelity. IMAX sound systems
use proprietary loudspeaker systems and proprietary surround sound configurations that ensure every theater seat is in an optimal listening position.
The Company believes that the growth in international box office remains an important driver of future growth for the Company. During the nine
months ended September 30, 2017, 65.6% of the Companys gross box office from IMAX DMR films was generated in international markets, as compared to 62.8% in the nine months ended September 30, 2016. To support continued growth in
international markets, the Company has sought to bolster its international film strategy, supplementing the Companys film slate of Hollywood DMR titles with appealing local IMAX DMR releases in select markets. During 2016, 11 local
language IMAX DMR films, including eight in China, two in Russia and one in Japan were released to the IMAX theater network. During the nine months ended September 30, 2017, 14 local language IMAX DMR films including ten in China, one in
Russia, two in Japan and one in India were released to the IMAX theater network. The Company expects to announce additional local language IMAX DMR films to be released to the IMAX theater network in the remainder of 2017 and beyond.
In addition to the 46 IMAX DMR films released to the IMAX theater network during the nine months ended September 30, 2017, 11 additional
IMAX DMR films have been announced so far to be released in the remainder of 2017:
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Blade Runner 2049: The
IMAX
Experience
(Warner Bros. Pictures, October 2017);
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Salyut-7:
The
IMAX
Experience
(Nashe Kino, October 2017, Russia only);
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Bad Genius
:
The
IMAX
Experience
(Hengye Pictures, October 2017, China only);
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Geostorm: The
IMAX
Experience
(Warner Bros. Pictures, October 2017);
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Only The Brave:
The
IMAX
Experience
(Sony Pictures, October 2017);
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Jigsaw: The
IMAX
Experience
(Lionsgate, October 2017);
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Coco: The
IMAX
Experience
(Pixar Animation Studios, October 2017);
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Thor: Ragnarök: The
IMAX
Experience
(Walt Disney Studios, November 2017);
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Justice League: The
IMAX
Experience
(Warner Bros. Pictures, November 2017);
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Full Metal Alchemist:
The
IMAX
Experience
(Warner Bros. Pictures, December 2017, Japan only); and
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Star Wars: The Last Jedi: The
IMAX
Experience
(Walt Disney Studios, December 2017).
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In addition, in conjunction with Marvel and Disney|ABC Television Group, the Company
co-produced
and
exclusively premiered theatrically the new television series
Marvels Inhumans
in IMAX theaters.
To date, the
Company has announced the following 21 titles to be released in 2018 to the IMAX theater network:
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Maze Runner: The Death Cure: The
IMAX
Experience
(20
th
Century Fox, January 2018);
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God Particle:
The
IMAX
Experience
(Paramount Pictures, February 2018);
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Black Panther: The
IMAX
Experience
(Walt Disney Studios, February 2018);
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Alpha: The
IMAX
Experience
(Sony Pictures, March 2018);
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A Wrinkle In Time: The
IMAX
Experience
(Walt Disney Studios, March 2018);
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Tomb Raider: The
IMAX
Experience
(Warner Bros. Pictures, March 2018);
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Pacific Rim Uprising:
The
IMAX
Experience
(Warner Bros. Pictures, March 2018);
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Ready Player One: The
IMAX
Experience
(Warner Bros. Pictures, March 2018);
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New Mutants: The
IMAX
Experience
(20
th
Century Fox, April 2018);
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Rampage: The
IMAX
Experience
(Warner Bros. Pictures, April 2018);
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Avengers: Infinity War: The
IMAX
Experience
(Walt Disney Studios, May 2018);
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Solo: A Star Wars Story: The
IMAX
Experience
(Walt Disney Studios, May 2018);
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The Incredibles 2: The
IMAX
Experience
(Walt Disney Studios, June 2018);
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Jurassic World: Fallen Kingdom: The
IMAX
Experience
(Universal Pictures, June 2018);
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Ant-Man
and The Wasp: The
IMAX
Experience
(Walt Disney Studios, July 2018);
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Alita: Battle Angel: The
IMAX
Experience
(20
th
Century Fox, July 2018);
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Mission Impossible 6: The
IMAX
Experience
(Paramount Pictures, July 2018);
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The Predator: The
IMAX
Experience
(20
th
Century Fox, August 2018);
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Robin Hood: The
IMAX
Experience
(Lionsgate, September 2018);
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Fantastic Beasts and Where to Find Them 2: The
IMAX
Experience
(Warner Bros. Pictures, November 2018); and
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Aquaman: The
IMAX
Experience
(Warner Bros. Pictures, December 2018).
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The
Company remains in active negotiations with all of the major Hollywood studios for additional films to fill out its short and long-term film slate, and anticipates that the number of IMAX DMR films to be released to the IMAX theater network in 2017
will be similar to the 51 IMAX DMR films released to the IMAX theater network in 2016.
Joint Revenue Sharing Arrangements Contingent Rent
The Company provides IMAX theater systems to certain of its exhibitor customers under joint revenue sharing arrangements
(JRSA). The Company has two basic types of joint revenue sharing arrangements: traditional and hybrid.
Under a traditional
joint revenue sharing arrangement, the Company provides an IMAX theater system to a customer in return for a portion of the customers IMAX box office receipts and, in some cases, concession revenues, rather than requiring the customer to pay a
fixed upfront payment or annual minimum payments, as would be required under a sales or sales-type lease arrangement. Payments, which are based on box office receipts, are required throughout the term of the arrangement and are due either monthly or
quarterly. Certain maintenance and extended warranty services are provided to the customer for a separate fixed annual fee. The Company retains title to the theater system equipment components, and the equipment is returned to the Company at the
conclusion of the arrangement.
Under a hybrid joint revenue sharing arrangement, by contrast, the customer is responsible for making
upfront payments prior to the delivery and installation of the IMAX theater system in an amount that is typically half of what the Company would receive from a straight sale transaction. As with a traditional joint revenue sharing arrangement, the
customer also pays the Company a portion of the customers IMAX box office receipts over the term of the arrangement, although the percentage of box office receipts owing to the Company is typically half that of a traditional joint revenue
sharing arrangement. The fixed revenues under a hybrid joint revenue sharing arrangement are reported in the Companys theater business operations, while the contingent box office receipts are included in the Companys network business
operations.
Under the majority of joint revenue sharing arrangements (both traditional and hybrid), the initial
non-cancellable
term of IMAX theater systems is 10 years or longer, and is renewable by the customer for one to two additional terms of between three to five years. The Company has the right to remove the equipment
for
non-payment
or other defaults by the customer. The contracts are
non-cancellable
by the customer unless the Company fails to perform its obligations.
The introduction of joint revenue sharing arrangements has been an important factor in the expansion of the Companys commercial theater
network. Joint revenue sharing arrangements allow commercial theater exhibitors to install IMAX theater systems without the significant initial capital investment required in a sale or sales-type lease arrangement. Joint revenue sharing
arrangements drive recurring cash flows and earnings for the Company, as customers under joint revenue sharing arrangements pay the Company a portion of their ongoing box office. The Company funds its joint revenue sharing arrangements through
cash flows from operations. As at September 30, 2017, the Company had 702 theaters in operation under joint revenue sharing arrangements, a 18.6% increase as compared to the 592 joint revenue sharing arrangements open as at
September 30, 2016. The Company also had contracts in backlog for an additional 375 theaters under joint revenue sharing arrangements as at September 30, 2017.
The revenue earned from customers under the Companys joint revenue sharing arrangements can vary from quarter to quarter and year to
year based on a number of factors including film performance, the mix of theater system configurations, the timing of installation of these theater systems, the nature of the arrangement, the location, size and management of the theater and other
factors specific to individual arrangements.
IMAX Systems Contingent Rent
The Companys sales and sales type lease arrangements include contingent rent in excess of fixed minimum ongoing payments. This contingent
rent, which is included in the Companys network business operations, is recognized after the fixed minimum amount per annum is exceeded as driven by box office performance. Contingent payments in excess of fixed minimum ongoing payments of
sales or sales type lease arrangements are recognized as revenue when reported by theater operators, provided collectibility is reasonably
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assured. In addition, contingent rent includes amounts realized for changes in rent and maintenance payments which are indexed to a local consumer price index.
Theater Business: IMAX Systems, Theater System Maintenance and Fixed Fees from Joint Revenue Sharing Arrangements
IMAX Systems
The Company also provides
IMAX theater systems to customers on a sales or long-term lease basis, typically with an initial
10-year
term. These agreements typically require the payment of initial fees and ongoing fees (which can include
a fixed minimum amount per annum and contingent fees in excess of the minimum payments), as well as maintenance and extended warranty fees. The initial fees vary depending on the system configuration and location of the theater. Initial fees are
paid to the Company in installments between the time of system signing and the time of system installation, which is when the total of these fees, in addition to the present value of future annual minimum payments, are recognized as revenue. Ongoing
fees are paid over the term of the contract, commencing after the theater system has been installed, and is a fixed minimum amount per annum. Finance income is derived over the term of a financed sale or sales-type lease arrangement as the unearned
income on that financed sale or sales-type lease is earned. Certain maintenance and extended warranty services are provided to the customer for a separate fixed annual fee.
Under the Companys sales agreements, title to the theater system equipment components passes to the customer. In certain instances,
however, the Company retains title or a security interest in the equipment until the customer has made all payments required under the agreement. Under the terms of a sales-type lease agreement, title to the theater system equipment components
remains with the Company. The Company has the right to remove the equipment for
non-payment
or other defaults by the customer.
The revenue earned from customers under the Companys theater system sales or lease agreements varies from quarter to quarter and year to
year based on a number of factors, including the number and mix of theater system configurations sold or leased, the timing of installation of the theater systems, the nature of the arrangement and other factors specific to individual contracts.
Joint Revenue Sharing Arrangements Fixed Fees
As discussed in joint revenue sharing arrangements above, under a hybrid joint revenue sharing arrangement the customer is responsible for
making upfront payments prior to the delivery and installation of the IMAX theater system in an amount that is typically half of what the Company would receive from a straight sale transaction. These fixed upfront payments are included in the
Companys theater business operations.
Theater System Maintenance
For all IMAX theaters, theater owners or operators are also responsible for paying the Company an annual maintenance and extended warranty fee.
Under these arrangements, the Company provides proactive and emergency maintenance services to every theater in its network to ensure that each presentation is up to the highest IMAX quality standard. Annual maintenance fees are paid throughout the
duration of the term of the theater agreements.
Other Theater Revenues
Additionally, the Company generates revenues from the sale of after-market parts and 3D glasses.
Revenue from theater business arrangements is recognized at a different time from when cash is collected. See Critical Accounting
Policies in Item 1 of the Companys Form
10-K
for the year ended December 31, 2016 (the 2016 Form
10-K)
for further discussion on the
Companys revenue recognition policies.
New Business
The Companys new businesses include its original content and VR initiatives, IMAX Home Entertainment, and other new business initiatives
that are in the development and/or
start-up
phase. If successful, the Companys intent is to continue its focus on developing these areas of new business.
53
Other
The Company is also a distributor of large-format films, primarily for its institutional theater partners. The Company generally distributes
films which it produces or for which it has acquired distribution rights from independent producers. The Company receives either a percentage of the theater box office receipts or a fixed amount as a distribution fee.
The Company also provides film post-production and quality control services for large-format films (whether produced internally or
externally), and digital post-production services.
The Company derives a small portion of its revenues from other sources. As at
September 30, 2017, the Company had two owned and operated IMAX theaters (December 31, 2016 two owned and operated theaters). In addition, the Company has a commercial arrangement with one theater resulting in the sharing of profits
and losses and provides management services to three other theaters. The Company also rents its proprietary 2D and 3D large-format film and digital cameras to third party production companies. The Company maintains cameras and other film equipment
and also offers production advice and technical assistance to both documentary and Hollywood filmmakers.
IMAX Theater Network
The following table outlines the breakdown of the IMAX theater network by type and geographic location as at September 30:
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2017 - Theater Network Base
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2016 - Theater Network Base
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Commercial
Multiplex
|
|
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Commercial
Destination
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|
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Institutional
|
|
|
Total
|
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Commercial
Multiplex
|
|
|
Commercial
Destination
|
|
|
Institutional
|
|
|
Total
|
|
United States
|
|
|
358
|
|
|
|
4
|
|
|
|
35
|
|
|
|
397
|
|
|
|
348
|
|
|
|
5
|
|
|
|
41
|
|
|
|
394
|
|
Canada
|
|
|
37
|
|
|
|
2
|
|
|
|
7
|
|
|
|
46
|
|
|
|
37
|
|
|
|
2
|
|
|
|
7
|
|
|
|
46
|
|
Greater China
(1)
|
|
|
482
|
|
|
|
|
|
|
|
17
|
|
|
|
499
|
|
|
|
354
|
|
|
|
|
|
|
|
17
|
|
|
|
371
|
|
Asia (excluding Greater China)
|
|
|
96
|
|
|
|
2
|
|
|
|
3
|
|
|
|
101
|
|
|
|
88
|
|
|
|
2
|
|
|
|
4
|
|
|
|
94
|
|
Western Europe
|
|
|
79
|
|
|
|
4
|
|
|
|
10
|
|
|
|
93
|
|
|
|
73
|
|
|
|
6
|
|
|
|
10
|
|
|
|
89
|
|
Russia & the CIS
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
57
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
Latin America
(2)
|
|
|
41
|
|
|
|
|
|
|
|
12
|
|
|
|
53
|
|
|
|
38
|
|
|
|
|
|
|
|
11
|
|
|
|
49
|
|
Rest of the World
|
|
|
53
|
|
|
|
1
|
|
|
|
2
|
|
|
|
56
|
|
|
|
49
|
|
|
|
1
|
|
|
|
2
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,203
|
|
|
|
13
|
|
|
|
86
|
|
|
|
1,302
|
|
|
|
1,037
|
|
|
|
16
|
|
|
|
92
|
|
|
|
1,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Greater China includes China, Hong Kong, Taiwan and Macau.
|
(2)
|
Latin America includes South America, Central America and Mexico.
|
As of September 30,
2017, 34.0% of IMAX systems in operation were located in the United States and Canada compared to 38.4% as at September 30, 2016.
To
minimize the Companys credit risk, the Company retains title to the underlying theater systems under lease arrangements, performs initial and ongoing credit evaluations of its customers and makes ongoing provisions for its estimates of
potentially uncollectible amounts.
The Company currently believes that over time its commercial multiplex theater network could grow to
approximately 2,855 IMAX theaters worldwide from 1,203 commercial multiplex IMAX theaters operating as September 30, 2017. The Company believes that the majority of its future growth will come from international markets. As at
September 30, 2017, 66.0% of IMAX theater systems in operation were located within international markets (defined as all countries other than the United States and Canada), up from 61.6% as at September 30, 2016. Revenues and gross box
office derived from outside the United States and Canada continue to exceed revenues and gross box office from the United States and Canada. Risks associated with the Companys international business are outlined in Risk Factors
The Company conducts business internationally, which exposes it to uncertainties and risks that could negatively affect its operations, sales and future growth prospects in Item 1A of the Companys 2016 Form
10-K.
Greater China continues to be the Companys second-largest and fastest-growing market,
measured by revenues. The Companys Greater China operations have accounted for an increasingly significant portion of its overall revenues, with nearly 35% of overall revenues generated from the Companys China operations in the nine
months ended September 30, 2017. As at September 30, 2017, the
54
Company had 499 theaters operating in Greater China with an additional 350 theaters in backlog that are scheduled to be installed in Greater China by 2022. The Companys backlog in Greater
China represents 64.2% of the Companys current backlog. The Company continues to invest in joint revenue sharing arrangements with select partners to ensure ongoing revenue in this key market. The Companys largest single
international partnership is in China with Wanda Cinema Line Corporation (Wanda), which has a total commitment to the Company of 360 theater systems in Greater China (of which 345 theater systems are under the parties joint revenue
sharing arrangement). The Company continues to invest in joint revenue sharing arrangements with select partners to ensure ongoing revenue in this key market. See Risk Factors The Company faces risks in connection with the continued
expansion of its business in China in Item 1A of the Companys 2016 Form
10-K.
The
following table outlines the breakdown of the Commercial Multiplex theater network by arrangement type and geographic location as at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
|
IMAX Commercial Multiplex Theater Network
|
|
|
|
Traditional
JRSA
|
|
|
Hybrid JRSA
|
|
|
Total JRSA
|
|
|
Sale / Sales-
type lease
|
|
|
Total
|
|
Domestic Total (United States & Canada)
|
|
|
268
|
|
|
|
6
|
|
|
|
274
|
|
|
|
121
|
|
|
|
395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater China
|
|
|
235
|
|
|
|
74
|
|
|
|
309
|
|
|
|
173
|
|
|
|
482
|
|
Asia (excluding Greater China)
|
|
|
35
|
|
|
|
21
|
|
|
|
56
|
|
|
|
40
|
|
|
|
96
|
|
Western Europe
|
|
|
23
|
|
|
|
24
|
|
|
|
47
|
|
|
|
32
|
|
|
|
79
|
|
Russia & the CIS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
|
|
|
|
57
|
|
Latin America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
|
|
|
|
41
|
|
Rest of the World
|
|
|
14
|
|
|
|
2
|
|
|
|
16
|
|
|
|
37
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International Total
|
|
|
307
|
|
|
|
121
|
|
|
|
428
|
|
|
|
380
|
|
|
|
808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide Total
|
|
|
575
|
|
|
|
127
|
|
|
|
702
|
|
|
|
501
|
|
|
|
1,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
IMAX Commercial Multiplex Theater Network
|
|
|
|
Traditional
JRSA
|
|
|
Hybrid JRSA
|
|
|
Total JRSA
|
|
|
Sale / Sales-
type lease
|
|
|
Total
|
|
Domestic Total (United States & Canada)
|
|
|
260
|
|
|
|
4
|
|
|
|
264
|
|
|
|
121
|
|
|
|
385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater China
|
|
|
163
|
|
|
|
58
|
|
|
|
221
|
|
|
|
133
|
|
|
|
354
|
|
Asia (excluding Greater China)
|
|
|
33
|
|
|
|
17
|
|
|
|
50
|
|
|
|
38
|
|
|
|
88
|
|
Western Europe
|
|
|
18
|
|
|
|
24
|
|
|
|
42
|
|
|
|
31
|
|
|
|
73
|
|
Russia & the CIS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
50
|
|
Latin America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
|
|
|
|
38
|
|
Rest of the World
|
|
|
13
|
|
|
|
2
|
|
|
|
15
|
|
|
|
34
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International Total
|
|
|
227
|
|
|
|
101
|
|
|
|
328
|
|
|
|
324
|
|
|
|
652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide Total
|
|
|
487
|
|
|
|
105
|
|
|
|
592
|
|
|
|
445
|
|
|
|
1,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at September 30, 2017, 274 (September 30, 2016 264) of the 702
(September 30, 2016 592) theaters under joint revenue sharing arrangements in operation, or 39.0% (September 30, 2016 44.6%), were located in the United States and Canada, with the remaining 428 (September 30,
2016 328) or 61.0% (September 30, 2016 55.4%) of arrangements being located in international markets. The Company continues to seek to expand its network of theaters under joint revenue sharing arrangements, particularly
in select international markets.
55
Sales Backlog
The Companys current sales backlog is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
|
|
|
|
Fixed
|
|
|
|
|
|
Fixed
|
|
|
|
|
|
|
Contractual
|
|
|
|
|
|
Contractual
|
|
|
|
Number of
|
|
|
Dollar Value
|
|
|
Number of
|
|
|
Dollar Value
|
|
|
|
Systems
|
|
|
(in thousands)
|
|
|
Systems
|
|
|
(in thousands)
|
|
Sales and sales-type lease arrangements
|
|
|
170
|
|
|
$
|
214,737
|
|
|
|
158
|
|
|
$
|
197,730
|
|
Joint revenue sharing arrangements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hybrid arrangements
|
|
|
130
|
|
|
|
69,552
|
(1)
|
|
|
103
|
|
|
|
55,006
|
(1)
|
Traditional arrangements
|
|
|
245
|
|
|
|
9,096
|
(2)
|
|
|
286
|
|
|
|
450
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
545
|
(3)
|
|
$
|
293,385
|
|
|
|
547
|
(4)
|
|
$
|
253,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Reflects contractual upfront payments. Future contingent payments are not reflected as these are based on negotiated shares of box office results.
|
(2)
|
No fixed upfront or annual minimum payments. Future contingent payments are not reflected as these are based on negotiated shares of box office results.
|
(3)
|
Includes 25 laser-based digital theater system configurations, including three upgrades. The Company continues to develop and roll out its laser-based digital projection system. See Research and Development
in Item 2 of this Part I for additional information.
|
(4)
|
Includes 20 laser-based digital theater system configurations, including five upgrades.
|
The
number of theater systems in the backlog reflects the minimum number of commitments under signed contracts. The dollar value fluctuates depending on the number of new theater system arrangements signed from year to year, which adds to backlog, and
the installation and acceptance of theater systems and the settlement of contracts, both of which reduce backlog. Sales backlog typically represents the fixed contracted revenue under signed theater system sale and lease agreements that the Company
believes will be recognized as revenue upon installation and acceptance of the associated theater. Sales backlog includes initial fees along with the estimated present value of contractual ongoing fees due over the term; however, it excludes amounts
allocated to maintenance and extended warranty revenues as well as fees (contingent rent) in excess of contractual ongoing fees that may be received in the future. The value of sales backlog does not include revenue from theaters in which the
Company has an equity interest, operating leases, letters of intent or long-term conditional theater commitments. The value of theaters under joint revenue sharing arrangements is excluded from the dollar value of sales backlog, although certain
theater systems under joint revenue sharing arrangements provide for contracted upfront payments and therefore carry a backlog value based on those payments. The Company believes that the contractual obligations for theater system installations that
are listed in sales backlog are valid and binding commitments.
From time to time, in the normal course of its business, the Company will
have customers who are unable to proceed with a theater system installation for a variety of reasons, including the inability to obtain certain consents, approvals or financing. Once the determination is made that the customer will not proceed with
installation, the agreement with the customer is terminated or amended. If the agreement is terminated, once the Company and the customer are released from all their future obligations under the agreement, all or a portion of the initial rents or
fees that the customer previously made to the Company are recognized as revenue.
56
The following table outlines the breakdown of the total backlog by arrangement type and
geographic location as at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
|
IMAX Theater Backlog
|
|
|
|
Traditional
JRSA
|
|
|
Hybrid JRSA
|
|
|
JRSA
|
|
|
Sale / Lease
|
|
|
Total
|
|
Domestic Total (United States & Canada)
|
|
|
40
|
|
|
|
3
|
|
|
|
43
|
|
|
|
13
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater China
|
|
|
159
|
|
|
|
108
|
|
|
|
267
|
|
|
|
83
|
|
|
|
350
|
|
Asia (excluding Greater China)
|
|
|
4
|
|
|
|
13
|
|
|
|
17
|
|
|
|
19
|
|
|
|
36
|
|
Western Europe
|
|
|
38
|
|
|
|
4
|
|
|
|
42
|
|
|
|
7
|
|
|
|
49
|
|
Russia & the CIS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Latin America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
13
|
|
Rest of the World
|
|
|
4
|
|
|
|
2
|
|
|
|
6
|
|
|
|
35
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International Total
|
|
|
205
|
|
|
|
127
|
|
|
|
332
|
|
|
|
157
|
|
|
|
489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide Total
|
|
|
245
|
|
|
|
130
|
|
|
|
375
|
|
|
|
170
|
|
|
|
545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
IMAX Theater Backlog
|
|
|
|
Traditional
JRSA
|
|
|
Hybrid JRSA
|
|
|
JRSA
|
|
|
Sale / Lease
|
|
|
Total
|
|
Domestic Total (United States & Canada)
|
|
|
41
|
|
|
|
3
|
|
|
|
44
|
|
|
|
11
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater China
|
|
|
231
|
|
|
|
84
|
|
|
|
315
|
|
|
|
66
|
|
|
|
381
|
|
Asia (excluding Greater China)
|
|
|
5
|
|
|
|
11
|
|
|
|
16
|
|
|
|
21
|
|
|
|
37
|
|
Western Europe
|
|
|
4
|
|
|
|
5
|
|
|
|
9
|
|
|
|
7
|
|
|
|
16
|
|
Russia & the CIS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
|
|
|
|
22
|
|
Latin America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
16
|
|
Rest of the World
|
|
|
5
|
|
|
|
|
|
|
|
5
|
|
|
|
15
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International Total
|
|
|
245
|
|
|
|
100
|
|
|
|
345
|
|
|
|
147
|
|
|
|
492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide Total
|
|
|
286
|
|
|
|
103
|
|
|
|
389
|
|
|
|
158
|
|
|
|
547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximately 89.7% of IMAX theater system arrangements in backlog as at September 30, 2017 are scheduled
to be installed in international markets (September 30, 2016 89.9%).
57
The following reflects the Companys signings and installations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Theater System Signings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Full new sales and sales-type lease arrangements
|
|
|
17
|
|
|
|
5
|
|
|
|
67
|
|
|
|
52
|
|
New traditional joint revenue sharing arrangements
|
|
|
|
|
|
|
155
|
|
|
|
31
|
|
|
|
230
|
|
New hybrid joint revenue sharing arrangements
|
|
|
|
|
|
|
1
|
|
|
|
49
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total new theaters
|
|
|
17
|
|
|
|
161
|
|
|
|
147
|
|
|
|
290
|
|
Upgrades of IMAX theater systems
|
|
|
|
|
|
|
1
|
|
|
|
4
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total theater signings
|
|
|
17
|
|
|
|
162
|
|
|
|
151
|
|
|
|
293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Theater System Installations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Full new sales and sales-type lease arrangements
|
|
|
19
|
|
|
|
15
|
|
|
|
36
|
|
|
|
33
|
|
New traditional joint revenue sharing arrangements
|
|
|
25
|
|
|
|
24
|
|
|
|
51
|
|
|
|
42
|
|
New hybrid joint revenue sharing arrangements
|
|
|
5
|
|
|
|
9
|
|
|
|
9
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total new theaters
|
|
|
49
|
|
|
|
48
|
|
|
|
96
|
|
|
|
96
|
|
Upgrades of IMAX theater systems
|
|
|
2
|
(1)
|
|
|
2
|
(1)
|
|
|
4
|
(2)
|
|
|
13
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total theater installations
|
|
|
51
|
|
|
|
50
|
|
|
|
100
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes one installation of an upgrade to a laser-based digital system under a traditional joint revenue sharing arrangement and one under a sale arrangement (2016 two laser-based digital systems under sales and
sales-type lease arrangements).
|
(2)
|
Includes three installations of upgrade to laser-based digital systems under sales and sales-type lease arrangements and one under a traditional joint revenue sharing arrangement (2016 11 laser-based digital
systems and two xenon-based digital system under sales and sales-type lease arrangements).
|
The Company anticipates that it
will install approximately 160 to 165 new theater systems (excluding upgrades) in 2017. The Companys installation estimates include scheduled systems from backlog, as well as the Companys estimate of installations from arrangements that
will sign and install in the same calendar year. The Company cautions, however, that theater system installations may slip from period to period over the course of the Companys business, usually for reasons beyond its control.
58
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company prepares its condensed consolidated financial statements in accordance with United States Generally Accepted Accounting Principles
(U.S. GAAP).
The preparation of these condensed consolidated financial statements requires management to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, management evaluates its estimates, including those related to selling prices associated with the individual elements in multiple element
arrangements; residual values of leased theater systems; economic lives of leased assets; allowances for potential uncollectibility of accounts receivable, financing receivables and net investment in leases; write-downs for inventory obsolescence;
ultimate revenues for film assets; impairment provisions for film assets, long-lived assets and goodwill; depreciable lives of property, plant and equipment; useful lives of intangible assets; pension plan and post retirement assumptions; accruals
for exit costs, restructuring activities and contingencies including tax contingencies; valuation allowances for deferred income tax assets; and, estimates of the fair value and expected exercise dates of stock-based payment awards. Management bases
its estimates on historical experience, future expectations and other assumptions that are believed to be reasonable at the date of the condensed consolidated financial statements. Actual results may differ from these estimates due to uncertainty
involved in measuring, at a specific point in time, events which are continuous in nature, and differences may be material. The Companys significant accounting policies are discussed in Item 7 of the Companys 2016
Form 10-K.
Impact of Recently Issued Accounting Pronouncements
Please see note 2 to the condensed consolidated financial statements in Item 1 for information regarding the Companys recent changes in
accounting policies and the impact of all recently issued accounting pronouncements impacting the Company.
59
NON-GAAP
FINANCIAL MEASURES
In this report, the Company presents certain data which are not recognized under U.S. GAAP and are considered
non-GAAP
financial measures under U.S. Securities and Exchange Commission rules. Specifically, the Company presents the following
non-GAAP
financial measures
as supplemental measures of its performance:
|
|
|
Adjusted net income per diluted share;
|
|
|
|
Adjusted net income attributable to common shareholders;
|
|
|
|
Adjusted net income attributable to common shareholders per diluted share; and
|
|
|
|
EBITDA and adjusted EBITDA.
|
The Company presents adjusted net income and adjusted net income
per diluted share, which excludes stock-based compensation and
non-recurring
exit costs, restructuring charges and associated impairments, because it believes that they are important supplemental measures of
the Companys comparable controllable operating performance. Although stock-based compensation is an important aspect of the Companys employee and executive compensation packages, it is mostly a
non-cash
expense and is excluded from certain internal business performance measures, and the Company wants to ensure that its investors fully understand the impact of its stock-based compensation (net of any
related tax impact) and
non-recurring
charges on net income.
In addition, the Company presents
adjusted net income attributable to common shareholders and adjusted net income attributable to common shareholders per diluted share because it believes that they are important supplemental measures of its comparable financial results. Without the
presentation of these adjusted presentation measure the Company believes it could potentially distort the analysis of trends in business performance and it wants to ensure that its investors fully understand the impact of net income attributable to
non-controlling
interests and its stock-based compensation and
non-recurring
exit costs, restructuring charges and associated impairments (net of any related tax impact) in
determining net income attributable to common shareholders.
Management uses these measures for internal reporting and forecasting
purposes in order to review operating performance on a comparable basis from period to period. However, these
non-GAAP
measures may not be comparable to similarly titled amounts reported by other companies.
The Companys
non-GAAP
measures should be considered in addition to, and not as a substitute for, or superior to, net income and net income attributable to common shareholders and other measures of
financial performance reported in accordance with U.S. GAAP.
The Company is required to maintain a minimum level of EBITDA,
as such term is defined in the Companys credit agreement (and which is referred to herein as Adjusted EBITDA, as the credit agreement includes additional adjustments beyond interest, taxes, depreciation and amortization). EBITDA
and Adjusted EBITDA (each as defined below) are used by management to evaluate, assess and benchmark the Companys operational results, and the Company believes that EBITDA and Adjusted EBITDA are relevant and useful information widely used by
analysts, investors and other interested parties in the Companys industry. Accordingly, the Company is disclosing this information to permit a more comprehensive analysis of its operating performance and to provide additional information with
respect to the Companys ability to comply with its credit agreement requirements. However, EBITDA and Adjusted EBITDA are
non-GAAP
measures and should not be construed as substitutes for net income,
operating income or other operating performance measures that are determined in accordance with U.S. GAAP. In addition, EBITDA and Adjusted EBITDA might not be comparable to similarly titled measures used by other companies.
EBITDA is defined as net income with adjustments for depreciation and amortization, interest income
(expense)-net,
and income tax provision (benefit). Adjusted EBITDA used by the Company is defined as EBITDA plus adjustments for loss from equity accounted investments, stock and other
non-cash
compensation, exit costs, restructuring charges and associated impairments and adjusted EBITDA attributable to
non-controlling
interests.
60
RESULTS OF OPERATIONS
Important factors that the Companys Chief Executive Officer (CEO) Richard L. Gelfond uses in assessing the Companys
business and prospects include:
|
|
|
the signing, installation and financial performance of theater system arrangements (particularly its joint revenue sharing arrangements and new laser-based projection systems);
|
|
|
|
film performance and the securing of new film projects (particularly IMAX DMR films);
|
|
|
|
revenue and gross margins from the Companys segments;
|
|
|
|
earnings from operations as adjusted for unusual items that the Company views as
non-recurring;
|
|
|
|
the success of new business initiatives (including new content and VR initiatives);
|
|
|
|
short- and long-term cash flow projections;
|
|
|
|
the continuing ability to invest in and improve the Companys technology to enhance its differentiation of presentation versus other cinematic experiences; and
|
|
|
|
the overall execution, reliability and consumer acceptance of
The
IMAX
Experience
.
|
Management, including the Companys CEO, who is the Companys Chief Operating Decision Maker (CODM) (as defined in the
Segment Reporting Topic of the FASB ASC), assesses segment performance based on segment revenues, gross margins and film performance. Selling, general and administrative expenses, research and development costs, amortization of intangibles,
receivables provisions (recoveries), write-downs net of recoveries, interest income, interest expense and tax (provision) recovery are not allocated to the segments. As identified in note 14 to the accompanying condensed consolidated financial
statements in Item 1, the Company has identified new business as an additional reportable segment in the first quarter of 2017. The Company now has the following eight reportable segments: IMAX DMR; joint revenue sharing arrangements; IMAX
systems; theater system maintenance; other; new business; film distribution; and film post-production. The Company is presenting the following information at a disaggregated level to provide more relevant information to readers, as permitted by the
standard:
|
|
|
The IMAX DMR segment consists of variable revenues from studios for the conversion of films into the IMAX DMR format generated by the box office results from the exhibition of those films in the IMAX theater network.
|
|
|
|
Joint revenue sharing arrangements contingent rent, consists of variable rent revenues from box office exhibited in IMAX theaters in exchange for the provision of IMAX theater projection system equipment to
exhibitors. This excludes fixed hybrid revenues and upfront installation costs from the Companys hybrid joint revenue sharing arrangements.
|
|
|
|
IMAX systems contingent rent; consists of variable payments in excess of certain fixed minimum ongoing payments, under arrangements in the IMAX systems segment, which are recognized when reported by theater
operators, provided collectibility is reasonably assured.
|
|
|
|
The IMAX systems segment consists of the design, manufacture and installation of IMAX theater projection system equipment under sales or sales-type lease arrangements for fixed upfront and ongoing consideration,
including ongoing fees and finance income.
|
|
|
|
Joint revenue sharing arrangements fixed fee, consists of fixed hybrid revenues and upfront installation costs from the joint revenue sharing arrangement segment.
|
|
|
|
The theater system maintenance segment consists of the provision of IMAX theater projection system equipment maintenance services to the IMAX theater network and the associated costs of those services.
|
|
|
|
Other theater includes after-market sales of IMAX theater projection system parts and 3D glasses from the other segment.
|
|
|
|
The new business segment consists of content licensing and distribution fees associated with the Companys original content investments, VR initiatives, IMAX Home Entertainment, and other new business initiatives
that are in the development and/or
start-up
phase.
|
|
|
|
The film distribution segment consists of revenues and costs associated with the distribution of documentary films for which the Company has distribution rights.
|
|
|
|
The film post-production segment consists of the provision of film post-production, and their associated costs.
|
|
|
|
The other segment consists of certain IMAX theaters that the Company owns and operates, camera rentals and other miscellaneous items.
|
The Companys Managements Discussion and Analysis (MD&A) of Financial Condition and Results of Operations has been
organized by the Company into four primary groups Network Business, Theater Business, New Business and Other. Each of the
61
Companys reportable segments, as identified above, has been classified into one of these broader groups for purposes of MD&A discussion. The Company believes that this approach is
consistent with how the CODM reviews the financial performance of the business and makes strategic decisions regarding resource allocation and investments to meet long-term business goals. Management believes that a discussion and analysis based on
these groups is significantly more relevant and useful to readers, as the Companys condensed consolidated statements of operations captions combine results from several segments. Certain of the prior periods figures have been
reclassified to conform to the current periods presentation.
62
Three Months Ended September 30, 2017 versus Three Months Ended September 30, 2016
The Company reported net income of $2.9 million, or $0.04 per basic and diluted share, for the third quarter of 2017 as compared to net
income of $4.4 million, or $0.07 per basic and diluted share for the third quarter of 2016. Net income for the third quarter of 2017 includes a $5.7 million charge, or $0.09 per diluted share (2016 $7.7 million
or $0.11 per diluted share), for stock-based compensation and a $3.4 million charge, or $0.05 per diluted share, for exit costs, restructuring charges and associated impairments. Adjusted net income, which consists of net income excluding
the impact of stock-based compensation, exit costs, restructuring charges and associated impairments and the related tax impact, was $9.2 million, or $0.14 per diluted share, for the third quarter of 2017 as compared to adjusted net income of
$9.9 million, or $0.15 per diluted share, for the third quarter of 2016. The Company reported a net loss attributable to common shareholders of $0.9 million, or a $0.01 loss per basic and diluted share for the third quarter of 2017 (2016
$2.5 million net income or $0.04 per basic and diluted share). Adjusted net income attributable to common shareholders, which consists of net income attributable to common shareholders excluding the impact of stock-based compensation,
exit costs, restructuring charges and associated impairments and the related tax impact, was $5.2 million, or $0.08 per diluted share, for the third quarter of 2017 as compared to adjusted net income attributable to common shareholders of
$7.9 million, or $0.12 per diluted share, for the third quarter of 2016. A reconciliation of net income and net income attributable to common shareholders, the most directly comparable U.S. GAAP measure, to adjusted net income, adjusted net
income per diluted share, adjusted net income attributable to common shareholders and adjusted net income attributable to common shareholders per diluted share is presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
(In thousands of U.S. dollars, except per share amounts)
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
|
Net Income
|
|
|
Diluted EPS
|
|
|
Net Income
|
|
|
Diluted EPS
|
|
Reported net income
|
|
$
|
2,898
|
|
|
$
|
0.04
|
|
|
$
|
4,384
|
|
|
$
|
0.07
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
5,739
|
|
|
|
0.09
|
|
|
|
7,742
|
|
|
|
0.11
|
|
Exit costs, restructuring charges and associated impairments
|
|
|
3,437
|
|
|
|
0.05
|
|
|
|
|
|
|
|
|
|
Tax impact on items listed above
|
|
|
(2,855
|
)
|
|
|
(0.04
|
)
|
|
|
(2,210
|
)
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income
|
|
|
9,219
|
|
|
|
0.14
|
|
|
|
9,916
|
|
|
|
0.15
|
|
Net income attributable to
non-controlling
interests
(1)
|
|
|
(3,748
|
)
|
|
|
(0.06
|
)
|
|
|
(1,859
|
)
|
|
|
(0.03
|
)
|
Stock-based compensation (net of tax of $0.1 million and less than $0.1 million,
respectively)
(1)
|
|
|
(263
|
)
|
|
|
|
|
|
|
(128
|
)
|
|
|
|
|
Exit costs, restructuring charges and associated impairments (net of tax of less than $0.1
million)
(1)
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income attributable to common shareholders
|
|
$
|
5,197
|
|
|
$
|
0.08
|
|
|
$
|
7,929
|
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding
|
|
|
|
|
|
|
64,803
|
|
|
|
|
|
|
|
67,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Reflects amounts attributable to
non-controlling
interests.
|
63
The following table sets forth the breakdown of revenue and gross margin by nature for the three
months ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands of U.S. dollars)
|
|
Revenue
|
|
|
Gross Margin
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Network business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IMAX DMR
|
|
$
|
25,971
|
|
|
$
|
21,549
|
|
|
$
|
18,114
|
|
|
$
|
12,448
|
|
Joint revenue sharing arrangements contingent rent
|
|
|
15,572
|
|
|
|
14,181
|
|
|
|
9,351
|
|
|
|
9,340
|
|
IMAX systems contingent rent
|
|
|
1,094
|
|
|
|
779
|
|
|
|
1,094
|
|
|
|
779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,637
|
|
|
|
36,509
|
|
|
|
28,559
|
|
|
|
22,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Theater business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IMAX systems
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and sales-type leases
(1)
|
|
|
25,111
|
|
|
|
21,804
|
|
|
|
15,246
|
|
|
|
12,936
|
|
Ongoing fees and finance income
(2)
|
|
|
2,646
|
|
|
|
3,104
|
|
|
|
2,522
|
|
|
|
3,028
|
|
Joint revenue sharing arrangements fixed fees
|
|
|
2,658
|
|
|
|
5,517
|
|
|
|
624
|
|
|
|
1,640
|
|
Theater system maintenance
|
|
|
11,511
|
|
|
|
10,293
|
|
|
|
4,624
|
|
|
|
3,398
|
|
Other theater
|
|
|
1,586
|
|
|
|
2,445
|
|
|
|
247
|
|
|
|
314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,512
|
|
|
|
43,163
|
|
|
|
23,263
|
|
|
|
21,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New business
|
|
|
8,917
|
|
|
|
515
|
|
|
|
(11,912
|
)
|
|
|
(284
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Film distribution and post-production
|
|
|
2,698
|
|
|
|
4,419
|
|
|
|
402
|
|
|
|
1,261
|
|
Other
|
|
|
1,036
|
|
|
|
1,944
|
|
|
|
(444
|
)
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,734
|
|
|
|
6,363
|
|
|
|
(42
|
)
|
|
|
1,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
98,800
|
|
|
$
|
86,550
|
|
|
$
|
39,868
|
|
|
$
|
44,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes initial payments and the present value of fixed minimum payments from equipment, sales and sales-type lease transactions.
|
(2)
|
Includes rental income from operating leases and finance income.
|
Revenues and Gross
Margin
The Companys revenues for the third quarter of 2017 increased 14.2% to $98.8 million from $86.6 million in
third quarter of 2016, largely due to the performance of its network business and new business groups. The gross margin across all segments in the third quarter of 2017 was $39.9 million, or 40.4% of total revenue, compared to
$44.9 million, or 51.9% of total revenue in the third quarter of 2016. Impairment charges included in gross margin in the third quarter of 2017 were $12.3 million, of which $11.1 million related to new business initiatives, or 12.5%
of total revenue, compared to $1.0 million, of which $nil related to new business initiatives, or 1.2% of total revenue in the third quarter of 2016.
Network Business
Revenue from the Companys network business increased 16.8% to $42.6 million in the third quarter of 2017 from $36.5 million in
the third quarter of 2016. The Companys network business revenue is driven by box office performance, and specifically the impact of its performance on
per-screen
averages. The performance of the
Companys segments within its network business is also impacted by the timing of a release to the IMAX theater network and customer reaction to the film, among other factors that may be outside of the Companys direct control, including
fluctuations in the value of foreign currencies versus the U.S. dollar and potential currency devaluations. The distribution window for the release of films in theaters has been compressing and may continue to change in the future. A
further reduction in timing between film releases could adversely affect box office performance and consequently future revenues and gross margin.
IMAX DMR revenues increased by 20.5% to $26.0 million in the third quarter of 2017 from $21.5 million in the third quarter of 2016,
which reflects stronger box office performance than the comparative period and continued growth in the IMAX theater network. IMAX DMR gross margins were stronger at $18.1 million in the third quarter of 2017 as compared to $12.4 million in
the third quarter of 2016.
64
Gross box office generated by IMAX DMR films increased by 17.4% to $218.8 million in the
third quarter of 2017 from $186.3 million in the third quarter of 2016. Gross box office
per-screen
for the third quarter of 2017 averaged $181,122, in comparison to $184,700 in the third quarter of 2016
as the increase in gross box office did not increase at the same growth rate as the IMAX theater network. In the third quarter of 2017, gross box office was generated primarily by the exhibition of 24 films (17 new and 7 carryovers), as compared to
29 films (21 new and 8 carryovers) exhibited in the third quarter of 2016.
Contingent revenues from joint revenue sharing arrangements
increased to $15.6 million in the third quarter of 2017 from $14.2 million in the third quarter of 2016, largely due to continued network growth. The Company ended the third quarter of 2017 with 702 theaters operating under joint revenue
sharing arrangements, as compared to 592 theaters at the end of the third quarter of 2016, an increase of 18.6%. Gross box office generated by the joint revenue sharing arrangements was 14.9% higher at $116.7 million in the third quarter of
2017 from $101.6 million in the third quarter of 2016.
The gross margin from joint revenue sharing arrangements increased slightly
to $9.4 million in the third quarter of 2017 from $9.3 million in the third quarter of 2016. Included in the calculation of gross margin for the third quarter of 2017 were certain advertising, marketing and commission costs primarily
associated with new theater launches of $1.4 million, as compared to $0.9 million during the third quarter of 2016.
Contingent
rent revenue from IMAX systems increased to $1.1 million in the third quarter of 2017 from $0.8 million in the third quarter of 2016. Contingent rent revenue consists of variable payments received in excess of the fixed minimum ongoing
payments which are primarily driven by box office performance reported by theater operators. The increase in revenue is primarily due to an increase in the IMAX theater networks ability to meet minimum rent requirements as the
per-screen
gross box office levels increased slightly in comparison to the prior year period.
Theater Business
Theater Business revenue increased 0.8% to $43.5 million in the third quarter of 2017 as compared to $43.2 million in
third quarter of 2016.
In the third quarter of 2017, the Company installed 25 theater systems under sales or sales-type lease
arrangements, which includes five theater systems under hybrid joint revenue sharing arrangements, versus 26 theater systems, which includes nine theater systems under hybrid joint revenue sharing arrangements, in the third quarter of 2016.
Revenue from sales and sales-type leases was $25.1 million in the third quarter of 2017, as compared to $21.8 million in the third
quarter of 2016. The Company recognized revenue on 19 full, new theater systems which qualified as either sales or sales-type leases in the third quarter of 2017, with a total value of $23.7 million, versus 15 full, new theater
systems in the third quarter of 2016 with a total value of $19.0 million. Average revenue per full, new theater system under a sales and sales-type lease arrangement was $1.2 million for the three months ended September 30, 2017, as
compared to $1.3 million in the three months ended September 30, 2016. The average revenue per full, new theater system varies depending upon the number of theater system commitments with a single respective exhibitor, an exhibitors
location or other various factors.
The Company recognized revenue from five full, new theater systems under hybrid joint revenue sharing
arrangements in the third quarter of 2017, with a total value of $2.6 million, versus nine full, new theater systems in the third quarter of 2016 with a total value of $5.5 million.
The Company recognized revenue from one theater system upgrade in the third quarter of 2017, with a total value of $1.3 million, versus
two full, new theater systems in the third quarter of 2016, with a total value of $2.6 million. Average revenue per theater system upgrade was $1.3 million for the third quarter of 2017 and 2016, respectively.
The installation of theater systems in newly-built theaters or multiplexes, which make up a large portion of the Companys theater system
backlog, depends primarily on the timing of the construction of those projects, which is not under the Companys control. The breakdown in mix of sales and sales-type lease and joint revenue sharing arrangement (see discussion below)
installations by theater system configuration is outlined in the table below:
65
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
New IMAX digital theater systems - installed and recognized
|
|
|
|
|
|
|
|
|
Sales and sales-types lease arrangements
|
|
|
19
|
|
|
|
15
|
|
Joint revenue sharing arrangements
|
|
|
30
|
(1)
|
|
|
33
|
(1)
|
|
|
|
|
|
|
|
|
|
Total new theater systems
|
|
|
49
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
IMAX digital theater system upgrades - installed and recognized
|
|
|
|
|
|
|
|
|
Sales and sales-types lease arrangements
|
|
|
1
|
|
|
|
2
|
|
Joint revenue sharing arrangements
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total upgraded theater systems
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Total theater systems installed
|
|
|
51
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes five hybrids and 25 traditional theater systems under joint revenue sharing arrangements (2016 nine hybrids and 24 traditional theater systems under joint revenue sharing arrangements).
|
Theater business margin from full, new theater systems, excluding theater systems under hybrid arrangements, was 68.2% in
the third quarter of 2017, which was lower than the 68.8% experienced in the third quarter of 2016. Gross margin varies depending upon the number of theater system commitments with a single respective exhibitor, an exhibitors location and
other various factors.
Gross margin from the installation and recognition of hybrid joint revenue sharing arrangements was
$0.6 million in the third quarter of 2017, as compared to $1.6 million in the third quarter of 2016, as four fewer systems were recognized in the current period.
Theater system maintenance revenue increased 11.8% to $11.5 million in the third quarter of 2017 from $10.3 million in the third
quarter of 2016. Theater system maintenance gross margin was $4.6 million in the third quarter of 2017 versus $3.4 million in the third quarter of 2016. Maintenance revenue continues to grow as the number of theaters in the IMAX theater
network grows. Maintenance margins vary depending on the mix of theater system configurations in the theater network, volume-pricing related to larger relationships and the timing and the date(s) of installation and/or service.
Ongoing fees and finance income was $2.6 million in the third quarter of 2017 compared to $3.1 million in the third quarter of 2016.
Gross margin for ongoing fees and finance income decreased to $2.5 million in the third quarter of 2017 from $3.0 million in the third quarter of 2016.
Other theater revenue decreased to $1.6 million in the third quarter of 2017 as compared to $2.4 million in the third quarter of
2016. Other theater revenue primarily includes revenue generated from the Companys after-market sales of projection system parts and 3D glasses. The gross margin recognized from other theater revenue was $0.2 million in the third quarter
of 2017 as compared to $0.3 million in the third quarter of 2016.
New Business
Revenue earned from the Companys new business initiatives was $8.9 million and the new business segment experienced a loss of
$11.9 million in the third quarter of 2017, respectively, as compared to revenue of $0.5 million and a loss of $0.3 million in the third quarter of 2016, respectively.
The performance of the new business segment in the third quarter of 2017, was mostly driven by the premiere of the new television series
Marvel
s Inhumans
. Episodic revenue, costs and gross margin recognized in the period were $8.7 million, $19.8 million and a loss of $11.1 million, respectively.
The Company is evaluating its new business initiatives separately from its core business as the nature of its activities is separate and
distinct from its ongoing operations. The Company recognized a loss before tax from its new business initiatives for the third quarter of 2017 of $14.5 million, which includes amortization of $1.6 million, impairment charges of
$11.1 million and an equity loss of $0.3 million, as compared to net loss of $2.5 million, which includes amortization of $0.2 million and an equity loss of $0.7 million, in the
66
prior year comparative period. Negative EBITDA from the Companys new business initiatives was $1.5 million in the third quarter of 2017, as compared to $1.6 million in the third
quarter of 2016.
Other
Film
distribution and post-production revenues decreased 38.9% to $2.7 million in the third quarter of 2017 from $4.4 million in the third quarter of 2016, primarily due to a decrease in film distribution revenue from IMAX original films. Film
distribution and post-production gross margin was $0.4 million in the third quarter of 2017 as compared to $1.3 million in the third quarter of 2016, as the Company has accelerated depreciation on its IMAX original films to reflect an
update in ultimate expectations. The Company reviews the carrying value of certain documentary film assets, on an
on-going
basis, as a result of lower than expected revenue being generated during the
respective period and revises expectations for future revenues based on the latest information available.
Other revenue decreased to
$1.0 million in the third quarter of 2017, as compared to $1.9 million in the third quarter of 2016. Other revenue primarily includes revenue generated from the Companys theater operations and camera rental business. The lower level
of revenue is primarily the result of a decrease in camera revenues in the third quarter of 2017, as compared to the prior year comparative period.
The gross margin recognized from other revenue was a loss of $0.4 million in the third quarter of 2017 as compared to a margin of less
than $0.1 million in the third quarter of 2016, largely due to the lower camera revenue earned in the current period versus the comparative period.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased to $25.5 million in the third quarter of 2017, as compared to $30.7 million in
the third quarter of 2016. Selling, general and administrative expenses excluding the impact of stock-based compensation were $20.3 million in the third quarter of 2017, as compared to $22.9 million in the third quarter of 2016. The
following reflects the significant items impacting selling, general and administrative expenses as compared to the prior year comparative period:
|
|
|
a $2.5 million decrease in the Companys stock-based compensation;
|
|
|
|
a $1.8 million decrease in staff costs, including salaries and benefit;
|
|
|
|
a $0.7 million decrease due to a change in foreign exchange rates. During the third quarter ended September 30, 2017, the Company recorded a foreign exchange gain of $0.5 million for net foreign exchange
gains/losses related to the translation of foreign currency denominated monetary assets and liabilities as compared to a loss of $0.2 million recorded in 2016; and
|
|
|
|
a $0.2 million net decrease in other general corporate expenditures including consulting and professional fees.
|
Research and Development Expenses
Research and development expenses were comparable at $4.6 million in the third quarter of 2017 and $4.5 million in the third quarter
of 2016 and are primarily attributable to the continued development of the Companys new commercial laser-based digital projection system and other new business initiatives which commenced in 2017, including the Google camera and VR.
The Company intends for additional research and development to continue throughout 2017 as the Company supports further development of the
commercial laser-based projection system and its new business initiatives, including VR and the previously-announced cinema-grade VR camera to be developed in partnership with Google.
The Company also intends to continue research and development in other areas considered important to the Companys continued commercial
success, including further improving the reliability of its projectors, developing and manufacturing more IMAX cameras, enhancing the Companys 2D and 3D image quality, expanding the applicability of the Companys digital technology,
developing IMAX theater systems capabilities in both home and live entertainment, improvements to the DMR process and the ability to deliver DMR releases digitally to its theater network, without the requirement for hard drives.
67
Receivable Provisions, Net of Recoveries
Receivable provisions, net of recoveries for accounts receivable and financing receivables amounted to a net provision of $1.0 million in
the third quarter of 2017 as compared to a net provision of $0.3 million in the third quarter of 2016, primarily resulting from the deterioration in the financial condition of certain theater exhibitors and studios.
The Companys accounts receivables and financing receivables are subject to credit risk, as a result of geographical location, exchange
rate fluctuations, and other factors. These receivables are concentrated with the leading theater exhibitors and studios in the film entertainment industry. To minimize the Companys credit risk, the Company retains title to underlying theater
systems leased, performs initial and ongoing credit evaluations of its customers and makes ongoing provisions for its estimate of potentially uncollectible amounts. Accordingly, the Company believes it has adequately protected itself against
exposures relating to receivables and contractual commitments.
Interest Income and Expense
Interest income was $0.3 million in the third quarter of 2017, as compared to $0.4 million in the third quarter of 2016.
Interest expense was $0.5 million in the third quarter of 2017 and 2016 respectively. Included in interest expense is the amortization of
deferred finance costs in the amount of $0.1 million in the third quarter of 2017 and 2016, respectively. The Companys policy is to defer and amortize all the costs relating to debt financing which are paid directly to the debt provider,
over the life of the debt instrument.
Exit costs, restructuring charges and associated impairments
Exit costs, restructuring charges and associated impairments were $3.4 million in the third quarter of 2017 which is comprised of costs
incurred to exit an existing operating lease, employee severance costs, costs of consolidating facilities and contract termination costs. The Company did not recognize any impairments in the three months ended September 30, 2017. No such
charges were incurred in the prior year comparative period.
Income Taxes
The Companys effective tax rate differs from the statutory tax rate and varies from year to year primarily as a result of numerous
permanent differences, investment and other tax credits, the provision for income taxes at different rates in foreign and other provincial jurisdictions, enacted statutory tax rate increases or reductions in the year, changes due to foreign
exchange, changes in the Companys valuation allowance based on the Companys recoverability assessments of deferred tax assets, and favorable or unfavorable resolution of various tax examinations.
As at September 30, 2017, the Company had a gross deferred income tax asset of $33.6 million, against which the Company is carrying
a $0.2 million valuation allowance. For the three months ended September 30, 2017, the Company recorded an income tax provision of $1.0 million, which included a provision of $0.2 million related to its provision for uncertain
tax positions. In addition, included in the provision for income taxes was a $0.2 million provision for tax shortfalls related to stock-based compensation costs recognized in the period, offset by a less than $0.1 million recovery related
to other items.
The Companys Chinese subsidiary has made inquiries of the Chinese State Administration of Taxation regarding the
potential deductibility of certain stock based compensation for stock options issued by the Chinese subsidiarys parent company, IMAX China Holding, Inc. In addition, Chinese regulatory authorities responsible for capital and exchange
controls will need to review and approve the proposed transactions before they can be completed. There may be a requirement for future investment of funds into China in order to secure the deduction. Should the Company proceed, any such future
investment would come from existing capital invested in the IMAX China group of companies being redeployed amongst the IMAX China group of companies, including the Chinese subsidiary. The Company is unable to reliably estimate the magnitude of the
related tax benefits at this time.
Equity-Accounted Investments
The Company accounts for investments in new business ventures using the guidance of the FASB ASC 323. As at September 30, 2017, the equity
method of accounting is being utilized for an investment with a carrying value of $nil (December 31, 2016 $nil). The Companys accumulated losses in excess of its equity investment were $0.7 million as at September 30, 2017.
For the three months ended September 30, 2017, gross revenues, cost of revenue and net loss for these investments were $0.2 million, $1.0 million and $0.8
68
million, respectively (2016 $nil, $1.6 million and $1.5 million, respectively). The Company recorded its proportionate share of the net loss which amounted to $0.3 million
third quarter of 2017, compared to $0.7 million experienced in the third quarter of 2016.
Non-Controlling
Interests
The Companys condensed consolidated financial statements include the
non-controlling
interest in
the net income of IMAX China resulting from the IMAX China Investment and the IMAX China IPO as well as the impact of a
non-controlling
interest in its subsidiary created for the Original Film Fund activity.
For the three months ended September 30, 2017, the net income attributable to
non-controlling
interests of the Companys subsidiaries was $3.7 million (2016 $1.9 million).
69
Nine Months Ended September 30, 2017 versus Nine Months Ended September 30, 2016
The Company reported net income of $3.8 million, or $0.06 per basic and diluted share, for the nine months ended September 30, 2017
as compared to net income of $27.2 million, or $0.40 per basic and diluted share for the nine months ended September 30, 2016. Net income for the nine months ended September 30, 2017 includes a $17.8 million charge, or
$0.27 per diluted share (2016 $22.5 million or $0.32 per diluted share), for stock-based compensation and a $13.7 million charge, or $0.20 per diluted share for exit costs, restructuring charges and associated
impairments. Adjusted net income, which consists of net income excluding the impact of stock-based compensation, exit costs, restructuring charges and associated impairments and the related tax impact, was $25.7 million, or $0.38 per diluted
share, for the nine months ended September 30, 2017 as compared to adjusted net income of $43.3 million, or $0.63 per diluted share, for the nine months ended September 30, 2016. The Company reported a net loss attributable to common
shareholders of $2.5 million, or a loss of $0.04 per basic and diluted share for the nine months ended September 30, 2017 (2016 net income of $19.8 million, or $0.29 per basic and diluted share). Adjusted net income
attributable to common shareholders, which consists of net income attributable to common shareholders excluding the impact of stock-based compensation, exit costs, restructuring charges and associated impairments and the related tax impact, was
$18.7 million, or $0.28 per diluted share, for the nine months ended September 30, 2017 as compared to adjusted net income attributable to common shareholders of $35.5 million, or $0.52 per diluted share, for the nine months ended
September 30, 2016. A reconciliation of net income and net income attributable to common shareholders, the most directly comparable U.S. GAAP measure, to adjusted net income, adjusted net income per diluted share, adjusted net income
attributable to common shareholders and adjusted net income attributable to common shareholders per diluted share is presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
(In thousands of U.S. dollars, except per share amounts)
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
|
Net Income
|
|
|
Diluted EPS
|
|
|
Net Income
|
|
|
Diluted EPS
|
|
Reported net income
|
|
$
|
3,820
|
|
|
$
|
0.06
|
|
|
$
|
27,244
|
|
|
$
|
0.40
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
17,796
|
|
|
|
0.27
|
|
|
|
22,485
|
|
|
|
0.32
|
|
Exit costs, restructuring charges and associated impairments
|
|
|
13,695
|
|
|
|
0.20
|
|
|
|
|
|
|
|
|
|
Tax impact on items listed above
|
|
|
(9,578
|
)
|
|
|
(0.15
|
)
|
|
|
(6,394
|
)
|
|
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income
|
|
|
25,733
|
|
|
|
0.38
|
|
|
|
43,335
|
|
|
|
0.63
|
|
Net income attributable to
non-controlling
interests
(1)
|
|
|
(6,307
|
)
|
|
|
(0.10
|
)
|
|
|
(7,401
|
)
|
|
|
(0.11
|
)
|
Stock-based compensation (net of tax of $0.2 million and $0.1 million, respectively)
(1)
|
|
|
(544
|
)
|
|
|
|
|
|
|
(421
|
)
|
|
|
|
|
Exit costs, restructuring charges and associated impairments (net of tax of less than $0.1
million)
(1)
|
|
|
(179
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income attributable to common shareholders
|
|
$
|
18,703
|
|
|
$
|
0.28
|
|
|
$
|
35,513
|
|
|
$
|
0.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding
|
|
|
|
|
|
|
65,834
|
|
|
|
|
|
|
|
68,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Reflects amounts attributable to
non-controlling
interests.
|
70
The following table sets forth the breakdown of revenue and gross margin by nature for the nine
months ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands of U.S. dollars)
|
|
Revenue
|
|
|
Gross Margin
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Network Business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IMAX DMR
|
|
$
|
77,136
|
|
|
$
|
78,767
|
|
|
$
|
52,578
|
|
|
$
|
52,398
|
|
Joint revenue sharing arrangements - contingent rent
|
|
|
49,702
|
|
|
|
54,994
|
|
|
|
33,271
|
|
|
|
41,620
|
|
IMAX systems - contingent rent
|
|
|
2,573
|
|
|
|
3,178
|
|
|
|
2,573
|
|
|
|
3,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129,411
|
|
|
|
136,939
|
|
|
|
88,422
|
|
|
|
97,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Theater Business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IMAX systems
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and sales-type leases
(1)
|
|
|
48,178
|
|
|
|
58,522
|
|
|
|
28,190
|
|
|
|
26,795
|
|
Ongoing fees and finance income
(2)
|
|
|
7,844
|
|
|
|
8,808
|
|
|
|
7,582
|
|
|
|
8,279
|
|
Joint revenue sharing arrangements fixed fees
|
|
|
4,536
|
|
|
|
11,946
|
|
|
|
887
|
|
|
|
3,096
|
|
Theater system maintenance
|
|
|
33,459
|
|
|
|
30,031
|
|
|
|
13,306
|
|
|
|
10,207
|
|
Other theater
|
|
|
5,449
|
|
|
|
7,789
|
|
|
|
1,082
|
|
|
|
993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99,466
|
|
|
|
117,096
|
|
|
|
51,047
|
|
|
|
49,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Business
|
|
|
11,508
|
|
|
|
601
|
|
|
|
(13,432
|
)
|
|
|
(861
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Film distribution and post-production
|
|
|
11,369
|
|
|
|
9,781
|
|
|
|
(262
|
)
|
|
|
2,030
|
|
Other
|
|
|
3,460
|
|
|
|
6,004
|
|
|
|
(677
|
)
|
|
|
(383
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,829
|
|
|
|
15,785
|
|
|
|
(939
|
)
|
|
|
1,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
255,214
|
|
|
$
|
270,421
|
|
|
$
|
125,098
|
|
|
$
|
147,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes initial payments and the present value of fixed minimum payments from equipment, sales and sales-type lease transactions.
|
(2)
|
Includes rental income from operating leases and finance income.
|
Revenues and Gross
Margin
The Companys revenues for the nine months ended September 30, 2017 decreased by 5.6% to $255.2 million from
$270.4 million for the nine months ended September 30, 2016, primarily due to a decrease in revenues from the Companys network business and theater business groups. The gross margin across all segments in the nine months ended
September 30, 2017 was $125.1 million, or 49.0% of total revenue, compared to $147.4 million, or 54.5% of total revenue in the nine months ended September 30, 2016. Impairment charges included in gross margin for the nine months
ended September 30, 2017 were $17.5 million, of which $11.1 million related to new business initiatives, or 6.9% of total revenue, compared to $1.5 million, of which $nil related to new business initiatives, or 0.6% of total revenue
in the nine months ended September 30, 2016.
Network Business
Network business revenue decreased by 5.5% to $129.4 million in the nine months ended September 30, 2017 from $136.9 million in
the nine months ended September 30, 2016. The Companys network business revenue is driven by gross box office performance, which was lower in the nine months ended September 30, 2017 as compared to the nine months ended
September 30, 2016 as discussed below.
The Companys network business performance is also impacted by the timing of a release
to the IMAX theater network and customer reaction to the film, among other factors that may be outside of the Companys direct control, including fluctuations in the value of
71
foreign currencies versus the U.S. dollar and potential currency devaluations. The distribution window for the release of films in theater has been compressing and may continue to change in
the future. A further reduction in timing between film releases could adversely affect box office performance and consequently future revenues and gross margin.
IMAX DMR revenues decreased 2.1% to $77.1 million in the nine months ended September 30, 2017 from $78.8 million in the nine
months ended September 30, 2016, due to weaker gross box office performance leading to lower
per-screen
averages. The gross margin from the IMAX DMR segment was $52.6 million and $52.4 million
in the nine months ended September 30, 2017 and 2016, respectively.
Gross box office generated by IMAX DMR films decreased 2.7% to
$699.8 million in the nine months ended September 30, 2017 from $719.1 million in the nine months ended September 30, 2016. Gross box office
per-screen
for the nine months ended
September 30, 2017 averaged $590,262, in comparison to $732,600 in the third quarter of 2016. In the nine months ended September 30, 2017, gross box office was generated primarily by the exhibition of 46 films (40 new and 6 carryovers), as
compared to 48 films (42 new and 6 carryovers) exhibited in the nine months ended September 30, 2016.
The 9.6% decrease in revenues
from joint revenue sharing arrangements was largely due to lower
per-screen
averages versus the prior year comparative period, offset slightly by continued network growth. Revenues from joint revenue sharing
arrangements decreased to $49.7 million in the nine months ended September 30, 2017 from $55.0 million in the nine months ended September 30, 2016. The Company ended the current period with 702 theaters operating under joint
revenue sharing arrangements, as compared to 592 theaters at the end of the nine months ended September 30, 2016, an increase of 18.6%. Gross box office generated by the joint revenue sharing arrangements was 1.2% lower at $376.2 million
in the nine months ended September 30, 2017 from $380.6 million in the nine months ended September 30, 2016.
The gross
margin from joint revenue sharing arrangements decreased by 20.0% to $33.3 million in the nine months ended September 30, 2017 from $41.6 million in the nine months ended September 30, 2016. Included in the calculation of gross
margin for the nine months ended September 30, 2017 were certain advertising, marketing and commission costs primarily associated with new theater launches of $2.5 million, as compared to $1.9 million during the nine months ended
September 30, 2016.
Contingent rent revenue from IMAX systems decreased to $2.6 million in the nine months ended
September 30, 2017 from $3.2 million in the nine months ended September 30, 2016. Contingent rent revenue consists of variable payments received in excess of the fixed minimum ongoing payments which are primarily driven by gross box
office performance reported by theater operators. The decrease in revenue is primarily due to a decrease in gross box office performance in the nine months ended September 30, 2017 versus the prior year comparative period.
Theater Business
Theater business revenue decreased 15.1% to $99.5 million in the nine months ended September 30, 2017 as compared to
$117.1 million in nine months ended September 30, 2016.
The decrease in theater business revenue is primarily due to 19 fewer
theater system installations in the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016, for a total of $16.9 million. The Company installed 48 theater systems under sales and sales-type
lease arrangements, which includes nine theater systems under hybrid joint revenue sharing arrangements, in the nine months ended September 30, 2017 versus 67 theater systems, which includes 21 theater systems under hybrid joint revenue sharing
arrangements, in the nine months ended September 30, 2016.
Revenue from sales and sales-type leases was $48.2 million in the
nine months ended September 30, 2017, as compared to $58.5 million in the nine months ended September 30, 2016. The Company recognized revenue on 36 full, new theater systems which qualified as either sales or sales-type leases
in the nine months ended September 30, 2017, with a total value of $43.9 million, versus 33 theater systems in the nine months ended September 30, 2016 with a total value of $41.2 million. Average revenue per full, new
theater system under a sales and sales-type lease arrangement was $1.2 million for the nine months ended September 30, 2017, as compared to $1.2 million in the nine months ended September 30, 2016. The average revenue per full,
new theater system under a sales and sales-type lease arrangement varies depending upon the number of theater system commitments with a single respective exhibitor, an exhibitors location or other various factors.
The Company recognized revenue from nine full, new theater systems under hybrid joint revenue sharing arrangements in the nine months ended
September 30, 2017, with a total value of $4.5 million, versus 21 full, new theater systems in the nine months ended September 30, 2016 with a total value of $11.9 million.
72
The Company recognized revenue from three theater system upgrades in the nine months ended
September 30, 2017, with a total value of $4.0 million, versus 13 full, new theater systems in the nine months ended September 30, 2016 with a total value of $16.2 million. Average revenue per theater system upgrade was
$1.3 million for the nine months ended September 30, 2017, as compared to $1.2 million in the nine months ended September 30, 2016.
The installation of theater systems in newly-built theaters or multiplexes, which make up a large portion of the Companys theater system
backlog, depends primarily on the timing of the construction of those projects, which is not under the Companys control. The breakdown in mix of sales and sales-type lease and joint revenue sharing arrangement (see discussion below)
installations by theater system configuration is outlined in the table below:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
New IMAX xenon-based digital theater systems - installed and recognized
|
|
|
36
|
|
|
|
33
|
|
Sales and sales-types lease arrangements
|
|
|
|
|
|
|
|
|
Joint revenue sharing arrangements
|
|
|
60
|
(1)
|
|
|
63
|
(1)
|
|
|
|
|
|
|
|
|
|
Total new theater systems
|
|
|
96
|
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
IMAX xenon-based digital theater system upgrades - installed and recognized
|
|
|
3
|
|
|
|
13
|
|
Sales and sales-types lease arrangements
|
|
|
|
|
|
|
|
|
Joint revenue sharing arrangements
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total upgraded theater systems
|
|
|
4
|
(2)
|
|
|
13
|
(2)
|
|
|
|
|
|
|
|
|
|
Total theater systems installed
|
|
|
100
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes nine hybrids and 51 traditional theater systems under joint revenue sharing arrangements (2016 21 hybrids and 42 traditional joint revenue sharing arrangements).
|
(2)
|
Includes three laser-based digital system under sales and sales-types lease arrangements and one laser-based digital system configuration under traditional joint revenue sharing arrangement (2016 11 laser-based
digital system configuration upgrades and two xenon-based digital system under sales and sales-types lease arrangements).
|
Theater business margin from full, new sales and sales-type lease systems was 68.5% in the nine months ended September 30, 2017 which was
higher than the 64.5% experienced in the nine months ended September 30, 2016. Gross margin from theater system upgrades was $0.3 million in the nine months ended September 30, 2017, as compared to $1.7 million in the nine months
ended September 30, 2016, primarily due to three theater system upgrades in the nine months ended September 30, 2017, as compared to 13 upgrades in the nine months ended September 30, 2016. In addition, the Company recorded a charge
of $0.2 million upon the upgrade of a xenon-based digital system under an operating lease arrangement to a laser-based digital system under a sales arrangement in the nine months ended September 30, 2016, for components which were not used
in the upgrade and cannot be used for future installations. No such charge was recorded in the nine months ended September 30, 2017. Gross margin varies depending upon the number of theater system commitments with a single respective exhibitor,
an exhibitors location and other various factors.
Gross margin from the installation and recognition of theater systems under
hybrid joint revenue sharing arrangements was $0.9 million in the nine months ended September 30, 2017, as compared to $3.1 million in the nine months ended September 30, 2016, which is a direct result of the number of theater
systems recognized in each respective period.
Theater system maintenance revenue increased 11.4% to $33.5 million in the nine months
ended September 30, 2017 from $30.0 million in the nine months ended September 30, 2016. Theater system maintenance gross margin was $13.3 million in the nine months ended September 30, 2017 versus $10.2 million in the
nine months ended September 30, 2016. Maintenance revenue continues to grow as the number of theaters in the IMAX theater network grows. Maintenance margins vary depending on the mix of theater system configurations in the theater network,
volume-pricing related to larger relationships and the timing and the date(s) of installation and/or service.
73
Ongoing fees and finance income was $7.8 million in the nine months ended September 30,
2017 compared to $8.8 million in the nine months ended September 30, 2016. Gross margin for ongoing rent and finance income decreased to $7.6 million in the nine months ended September 30, 2017 from $8.3 million in the nine
months ended September 30, 2016.
Other theater revenue decreased to $5.4 million in the nine months ended September 30,
2017 as compared to $7.8 million in the nine months ended September 30, 2016. Other theater revenue primarily includes revenue generated from the Companys after-market sales of projection system parts and 3D glasses. The gross margin
recognized from other theater revenue was $1.1 million in the nine months ended September 30, 2017 as compared to $1.0 million in the nine months ended September 30, 2016.
New Business
Revenue earned from the Companys new business initiatives was $11.5 million in the nine months ended September 30, 2017, as
compared to $0.6 million in the nine months ended September 30, 2016. New business revenue was primarily generated from the release of the
co-produced
new television series
Marvels
Inhumans
in September 2017 and contractual payments relating to progress on the development of an IMAX VR camera in the first half of 2017.
The gross margin recognized from the new business segment was a loss of $13.4 million in the nine months ended September 30, 2017 as
compared to a loss of $0.9 million in the nine months ended September 30, 2016, primarily due to the
Marvels Inhumans
introductory performance coupled with the launch of the Companys first pilot IMAX VR
Center in Los Angeles, the opening of the AMC Kips Bay VR location and the performance of the Companys other new business initiatives, as compared to the prior year comparative period.
The performance of the new business segment, in the nine months ended September 30, 2017, was mostly driven by the premiere of the new
television series
Marvels Inhumans
. Episodic revenue, cost of revenue and gross margin recognized in the period were $8.7 million, $20.6 million and a loss of $11.9 million, respectively.
The Company is evaluating its new business initiatives separately from its core business as the nature of its activities is separate and
distinct from its ongoing operations. The Company recognized a net loss before tax from its new business initiatives for the nine months ended September 30, 2017 of $24.5 million, which includes amortization of $2.5 million, exit
costs, restructuring charges and associated impairments of $3.4 million, impairment charges of $11.1 million and an equity loss of $0.8 million, as compared to net loss of $8.0 million, which includes amortization of
$0.4 million and an equity loss of $2.5 million, in the prior year comparative period. Negative EBITDA from the Companys new business initiatives was $6.7 million and $5.1 million in the nine months ended September 30,
2017 and 2016, respectively.
Other
Film distribution and post-production revenues was $11.4 million in the nine months ended September 30, 2017, as compared to
$9.8 million in the nine months ended September 30, 2016, primarily due to an increase in post-production revenue from third party business. The film distribution and post-production segments experienced a gross loss of $0.3 million
in the nine months ended September 30, 2017 as compared to a margin of $2.0 million in the nine months ended September 30, 2016 primarily due to a charge against film assets. The Company reviewed the carrying value of certain
documentary film assets as a result of lower than expected revenue being generated during the period and revised expectations for future revenues based on the latest information available. An impairment of $4.6 million was recorded based on the
carrying value of these documentary films as compared to the related estimated future box office and revenues that would ultimately be generated by these films. No similar charge was recorded in the nine months ended September 30, 2016.
Other revenue decreased to $3.5 million in the nine months ended September 30, 2017, as compared to $6.0 million in the nine
months ended September 30, 2016. Other revenue primarily includes revenue generated from the Companys theater operations and camera rental business. The decrease in revenue is primarily the result of two IMAX owned and operational
theaters in the nine months ended September 30, 2017, as compared to three such theaters in the prior year comparative period.
The
gross margin recognized from other revenue was a loss of $0.7 million in the nine months ended September 30, 2017, as compared to loss of $0.4 million in the nine months ended September 30, 2016.
74
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased to $85.1 million in the nine months ended September 30, 2017, as compared to
$92.7 million in the nine months ended September 30, 2016. Selling, general and administrative expenses excluding the impact of stock-based compensation were $68.9 million in the nine months ended September 30, 2017, as compared
to $70.2 million in the nine months ended September 30, 2016. The following reflects the significant items impacting selling, general and administrative expenses as compared to the prior year comparative period:
|
|
|
a $6.3 million decrease in the Companys stock-based compensation;
|
|
|
|
a $0.8 million decrease due to a change in foreign exchange rates. During the nine months ended September 30, 2017, the Company recorded a foreign exchange gain of $0.7 million for net foreign exchange
gains/losses related to the translation of foreign currency denominated monetary assets and liabilities as compared to a loss of $0.1 million recorded in 2016; and
|
|
|
|
a $1.3 million net decrease in other general corporate expenditures including consulting and professional fees.
|
These decreases were offset by a $0.8 million increase in staff costs, including salaries and benefits.
Research and Development
Research and development expenses increased to $14.6 million in the nine months ended September 30, 2017 compared to
$11.6 million in the third quarter of 2016 and are primarily attributable to the continued development of the Companys new commercial laser-based digital projection system and other new business initiatives which commenced in 2016,
including the Google camera and VR.
The Company intends for additional research and development to continue throughout 2017 as the
Company supports further development of the commercial laser-based projection system and its new business initiatives, including VR and the previously-announced cinema-grade VR camera to be developed in partnership with Google.
The Company also intends to continue research and development in other areas considered important to the Companys continued commercial
success, including further improving the reliability of its projectors, developing and manufacturing more IMAX cameras, enhancing the Companys 2D and 3D image quality, expanding the applicability of the Companys digital technology,
developing IMAX theater systems capabilities in both home and live entertainment, improvements to the DMR process and the ability to deliver DMR releases digitally to its theater network, without the requirement for hard drives.
Asset impairments
During the nine months ended September 30, 2017, the Company identified and wrote off $1.2 million related to a certain loan that is
no longer considered collectible. No such charge was recognized in the prior year comparative period.
Receivable Provisions, Net of
Recoveries
Receivable provisions, net of recoveries for accounts receivable and financing receivables amounted to a net provision
of $2.1 million in the nine months ended September 30, 2017 as compared to a net provision of $0.6 million in the nine months ended September 30, 2016, primarily resulting from the deterioration in the financial condition of
certain theater exhibitors and studios.
The Companys accounts receivables and financing receivables are subject to credit risk, as
a result of geographical location, exchange rate fluctuations, and other factors. These receivables are concentrated with the leading theater exhibitors and studios in the film entertainment industry. To minimize the Companys credit risk, the
Company retains title to underlying theater systems leased, performs initial and ongoing credit evaluations of its customers and makes ongoing provisions for its estimate of potentially uncollectible amounts. Accordingly, the Company believes it has
adequately protected itself against exposures relating to receivables and contractual commitments.
75
Interest Income and Expense
Interest income was $0.8 million in the nine months ended September 30, 2017, as compared to $1.2 million in the nine months
ended September 30, 2016.
Interest expense was $1.4 million in the nine months ended September 30, 2017, as compared to
$1.3 million in the nine months ended September 30, 2016. Included in interest expense is the amortization of deferred finance costs in the amount of $0.4 million in the nine months ended September 30, 2017 as compared to
$0.4 million in the nine months ended September 30, 2016. The Companys policy is to defer and amortize all the costs relating to debt financing which are paid directly to the debt provider, over the life of the debt instrument.
Exit costs, restructuring charges and associated impairments
Exit costs, restructuring charges and associated impairments were $13.7 million in the nine months ended September 30, 2017. Exit
costs are the costs incurred to exit an operating lease. Restructuring charges comprised of employee severance costs, costs of consolidating facilities and contract termination costs of $7.4 million. Associated impairments related to the exit
activities were $5.6 million in the nine months ended September 30, 2017. No such charges were incurred in the nine months ended September 30, 2016.
Income Taxes
The
Companys effective tax rate differs from the statutory tax rate and varies from year to year primarily as a result of numerous permanent differences, investment and other tax credits, the provision for income taxes at different rates in
foreign and other provincial jurisdictions, enacted statutory tax rate increases or reductions in the year, changes due to foreign exchange, changes in the Companys valuation allowance based on the Companys recoverability assessments of
deferred tax assets, and favorable or unfavorable resolution of various tax examinations.
As at September 30, 2017, the Company had
a gross deferred income tax asset of $33.6 million, against which the Company is carrying a $0.2 million valuation allowance. For the nine months ended September 30, 2017, the Company recorded an income tax provision of
$0.9 million, which included a provision of $0.2 million related to its provision for uncertain tax positions. In addition, included in the provision of income taxes was a $0.4 million recovery for windfall tax benefits, and a tax
benefit of $0.8 million related to other items.
The Companys Chinese subsidiary has made inquiries of the Chinese State
Administration of Taxation regarding the potential deductibility of certain stock based compensation for stock options issued by the Chinese subsidiarys parent company, IMAX China Holding, Inc. In addition, Chinese regulatory authorities
responsible for capital and exchange controls will need to review and approve the proposed transactions before they can be completed. There may be a requirement for future investment of funds into China in order to secure the deduction. Should the
Company proceed, any such future investment would come from existing capital invested in the IMAX China group of companies being redeployed amongst the IMAX China group of companies, including the Chinese subsidiary. The Company is unable to
reliably estimate the magnitude of the related tax benefits at this time.
Equity-Accounted Investments
The Company accounts for investments in new business ventures using the guidance of the FASB ASC 323. As at September 30, 2017, the equity
method of accounting is being utilized for an investment with a carrying value of $nil (December 31, 2016 $nil). The Companys accumulated losses in excess of its equity investment were $0.7 million as at September 30, 2017.
For the nine months ended September 30, 2017, gross revenues, cost of revenue and net loss for the Companys investments were $0.7 million, $2.8 million and $2.3 million, respectively (2016 $0.3 million,
$6.0 million and $5.6 million, respectively). The Company recorded its proportionate share of the net loss which amounted to $0.8 million nine months ended September 30, 2017, compared to $2.5 million experienced in the nine
months ended September 30, 2016.
Non-Controlling
Interests
The Companys condensed consolidated financial statements include the
non-controlling
interest in
the net income of IMAX China resulting from the IMAX China Investment and the IMAX China IPO as well as the impact of a
non-controlling
interest in its subsidiary created for the Original Film Fund activity.
For the nine months ended September 30, 2017, the net income attributable to
non-controlling
interests of the Companys subsidiaries were $6.3 million (2016 $7.4 million).
76
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains a senior secured credit facility (the Credit Facility) with a maximum borrowing capacity of
$200.0 million and a scheduled maturity of March 3, 2020. The Credit Facility is collateralized by a first priority security interest in substantially all of the present and future assets of the Company and the Guarantors. Certain of the
Companys subsidiaries serve as guarantors (the Guarantors) of the Companys obligations under the Credit Facility.
The terms of the Credit Facility are set forth in the Fourth Amended and Restated Credit Agreement (the Credit Agreement), dated
March 3, 2015, among the Company, the Guarantors, the lenders named therein, Wells Fargo Bank, National Association (Wells Fargo), as agent and issuing lender (Wells Fargo, together with the lenders named therein, the
Lenders) and Wells Fargo Securities, LLC, as Sole Lead Arranger and Sole Bookrunner and in various collateral and security documents entered into by the Company and the Guarantors. Each of the Guarantors has also entered into a guarantee
in respect of the Companys obligations under the Credit Facility. On February 22, 2016, the Company amended the terms of the Credit Agreement to increase the general restricted payment basket thereunder (which covers, among other things,
the repurchase of shares) from $150.0 million to $350.0 million in the aggregate after the amendment date.
Total amounts drawn
and available under the Credit Facility at September 30, 2017 were $nil and $200.0 million, respectively (December 31, 2016 $nil and $200.0 million, respectively).
Under the Credit Facility, the effective interest rate for the nine months ended September 30, 2017 was nil, as no amounts were
outstanding during the period (2016 nil).
The Credit Facility provides that the Company is required at all times to satisfy a
Minimum Liquidity Test (as defined in the Credit Agreement) of at least $50.0 million. The Company is also required to maintain minimum EBITDA (as defined in the Credit Agreement) of $100.0 million. The Company is also required to maintain
a Maximum Total Leverage Ratio (as defined in the Credit Agreement) of 2.0:1.0, which requirement decreases to 1.75:1.0 on December 31, 2017. The Company was in compliance with all of these requirements at September 30, 2017. The Maximum
Total Leverage Ratio was 0.22:1 as at September 30, 2017, where Total Debt (as defined in the Credit Agreement) is the sum of all obligations evidenced by notes, bonds, debentures or similar instruments and was $26.2 million. EBITDA
is calculated as follows:
Adjusted EBITDA per Credit Facility:
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Three Months Ended
|
|
|
Twelve Months Ended
|
|
|
|
September 30, 2017
|
|
|
September 30, 2017
(1)
|
|
(In thousands of U.S. Dollars)
|
|
|
|
|
|
|
Net income
|
|
$
|
2,898
|
|
|
$
|
15,896
|
|
Add (subtract):
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
1,009
|
|
|
|
7,462
|
|
Interest expense, net of interest income
|
|
|
275
|
|
|
|
864
|
|
Depreciation and amortization, including film asset amortization
|
|
|
14,252
|
|
|
|
51,521
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
18,434
|
|
|
$
|
75,743
|
|
Exit costs, restructuring charges and associated impairments
|
|
|
3,437
|
|
|
|
13,695
|
|
Stock and other
non-cash
compensation
|
|
|
6,419
|
|
|
|
27,606
|
|
Write-downs, net of recoveries including asset impairments and receivable provisions
|
|
|
12,465
|
|
|
|
23,104
|
|
Loss from equity accounted investments
|
|
|
318
|
|
|
|
687
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA before
non-controlling
interests
|
|
$
|
41,073
|
|
|
$
|
140,835
|
|
Adjusted EBITDA attributable to
non-controlling
interests
(2)
|
|
|
(6,511
|
)
|
|
|
(21,624
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
34,562
|
|
|
$
|
119,211
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Ratio of total debt calculated using twelve months ended Adjusted EBITDA
|
(2)
|
The Adjusted EBITDA calculation specified for purposes of the minimum Adjusted EBITDA covenant excludes the reduction in Adjusted EBITDA from the Companys
non-controlling
interests.
|
77
Playa Vista Financing
IMAX PV Development Inc., a Delaware corporation (PV Borrower) and wholly-owned subsidiary of the Company, entered into a loan
agreement with Wells Fargo. The loan (the Playa Vista Loan) was used to principally fund the costs of development and construction of the new West Coast headquarters of the Company, located in the Playa Vista neighborhood of Los Angeles,
California (the Playa Vista Project).
In connection with the Playa Vista project, the Playa Vista Loan was fully drawn at
$30.0 million and bears interest at a variable rate per annum equal to 2.0% above the
30-day
LIBOR rate. PV Borrower is required to make monthly payments of combined principal and interest over a
10-year
term with a lump sum payment at the end of year 10. The Playa Vista Loan is being amortized over 15 years. The Playa Vista Loan will be fully due and payable on October 19, 2025 (the Maturity
Date) and may be prepaid at any time without premium, but with all accrued interest and other applicable payments.
The Playa Vista
Loan is secured by a deed of trust from PV Borrower in favor of Wells Fargo and other documents evidencing and securing the loan (the Loan Documents), granting a first lien on and security interest in the Playa Vista property and the
Playa Vista Project, including all improvements to be constructed thereon. The Loan Documents include absolute and unconditional payment and completion guarantees provided by the Company, including an environmental indemnity, to Wells Fargo for the
performance by PV Borrower of all the terms and provisions of the Playa Vista Loan.
Total amount drawn under the Playa Vista Loan as at
September 30, 2017 was $26.2 million (December 31, 2016 $27.7 million). Under the Playa Vista Loan, the effective interest rate for the three and nine months ended September 30, 2017 was 3.26% and 3.06%, respectively (2016
2.51% and 2.46%, respectively).
Letters of Credit and Other Commitments
As at September 30, 2017, the Company did not have any letters of credit and advance payment guarantees outstanding (December 31,
2016 $nil), under the Credit Facility.
The Company also has a $10.0 million facility for advance payment guarantees and
letters of credit through the Bank of Montreal for use solely in conjunction with guarantees fully insured by Export Development Canada (the Bank of Montreal Facility). The Bank of Montreal Facility is unsecured and includes typical
affirmative and negative covenants, including delivery of annual consolidated financial statements within 120 days of the end of the fiscal year. The Bank of Montreal Facility is subject to periodic annual reviews. The Company did not have any
letters of credit and advance payment guarantees outstanding as at September 30, 2017 (December 31, 2016 $0.1 million) under the Bank of Montreal Facility.
78
Cash and Cash Equivalents
As at September 30, 2017, the Companys principal sources of liquidity included cash and cash equivalents of $157.7 million, the
Credit Facility, anticipated collection from trade accounts receivable of $102.5 million including receivables from theaters under joint revenue sharing arrangements and DMR agreements with studios, anticipated collection from financing
receivables due in the next 12 months of $31.9 million and payments expected in the next 12 months on existing backlog deals. As at September 30, 2017, the Company did not have any amount drawn on the Credit Facility (remaining
availability of $200.0 million), and the Company had $26.2 million drawn on the Playa Vista Loan. There were no letters of credit and advance payment guarantees outstanding under either the Credit Facility or the Bank of Montreal Facility. Cash
held outside of North America as at September 30, 2017 was $117.3 million (December 31, 2016 $117.4 million), of which $39.3 million was held in the Peoples Republic of China (PRC) (December 31, 2016
$31.5 million). The Companys intent is to permanently reinvest these amounts outside of Canada and the Company does not currently anticipate that it will need funds generated from foreign operations to fund North American operations. In the
event funds from foreign operations are needed to fund operations in North America and if withholding taxes have not already been previously provided, the Company would be required to accrue and pay these additional withholding tax amounts on
repatriation of funds from China to Canada. The Company currently estimates this amount to be $6.3 million.
During the nine months
ended September 30, 2017, the Company used cash of $47.1 million. The Company used cash of $57.3 million to fund capital expenditures, to build equipment for use in joint revenue sharing arrangements, to purchase other intangible
assets, to invest in new business ventures such as its VR initiatives and to purchase property, plant and equipment. These uses of cash were partially offset by cash provided by operating activities. Based on managements current operating plan
for 2017, the Company expects to continue to use cash to deploy additional theater systems under joint revenue sharing arrangements, to fund DMR agreements with studios, to invest in new business ventures and to make additional share repurchases.
Cash flows from joint revenue sharing arrangements are derived from the theater
box-office
and concession revenues and the Company invested directly in the roll out of 60 new theater systems under joint
revenue sharing arrangements during the nine months ended September 30, 2017, of which 51 new theater systems were capitalized by the Company.
The Company completed its previously announced $200.0 million share repurchase program in the second quarter of 2017 by repurchasing
1,736,150 common shares at an average price of $26.57 per share. The retired shares were repurchased for $46.1 million.
In June 2017,
the Company announced a number of actions aimed at increasing Company value, including the approval by the Companys Board of Directors of a new share repurchase program which authorizes the repurchase of up to $200.0 million of its
common shares by June 30, 2020. The repurchases may be made either in the open market or through private transactions, subject to market conditions, applicable legal requirements and other relevant factors. The Company has no obligation to
repurchase shares and the share repurchase program may be suspended or discontinued by the Company at any time. There were no repurchases of shares under the new share repurchase program during the third quarter.
In addition, the Company has implemented a cost reduction plan with the goal to create annualized cost savings aimed at increasing
profitability, operating leverage and free cash flow. The more streamlined cost structure will enable the Company to scale its business with increased efficiency and facilitate operating leverage during both strong and weak periods of gross box
office. For more details see notes 13 and note 18 to the accompanying condensed consolidated financial statements in Item 1.
The
Companys operating cash flow will be adversely affected if managements projections of future signings for theater systems and film performance, theater installations and film productions are not realized. The Company forecasts its
short-term liquidity requirements on a quarterly and annual basis. Since the Companys future cash flows are based on estimates and there may be factors that are outside of the Companys control (see Risk Factors in
Item 1A in the Companys 2016
Form 10-K),
there is no guarantee that the Company will continue to be able to fund its operations through cash flows from operations. Under the terms of the
Companys typical sale and sales-type lease agreement, the Company receives substantial cash payments before the Company completes the performance of its obligations. Similarly, the Company receives cash payments for some of its film
productions in advance of related cash expenditures. Based on the Companys cash flow from operations and facilities, it expects to have sufficient capital and liquidity to fund its operations in the normal course for the next 12 months.
Operating Activities
The
Companys net cash provided by operating activities is affected by a number of factors, including the proceeds associated with new signings of theater system lease and sale agreements in the year, costs associated with contributing systems
under joint revenue sharing arrangements, the
box-office
performance of films distributed by the Company and/or released to IMAX theaters, increases or
79
decreases in the Companys operating expenses, including research and development and new business initiatives, and the level of cash collections received from its customers.
Cash provided by operating activities amounted to $63.4 million for the nine months ended September 30, 2017. Changes in other
non-cash
operating assets as compared to December 31, 2016 include:
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an increase of $8.6 million in accounts receivable resulting from amounts billed in the period offset by cash receipts;
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an increase of $1.3 million in financing receivables primarily due to ongoing minimum rent payments received offset by installation and recognition of IMAX theater systems under sales or sales-type lease
arrangements;
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a decrease of $4.5 million in inventories as the amounts relieved from inventory for systems recognized and service parts used exceeded the
build-up
of inventory for future
IMAX theater system installations under sales or sales-type lease arrangements;
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an increase of $3.6 million in prepaid expenses due to timing; and
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an increase of $0.3 million in other assets which reflects a change in insurance recoveries.
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Changes in other operating liabilities as compared to December 31, 2016 include: an increase in deferred revenue of $30.4 million
related to backlog payments received in the current period, offset by amounts relieved from deferred revenue related to theater system installations; a decrease in accounts payable of $1.8 million; and a decrease of $8.1 million in accrued
liabilities primarily due to a decrease in income taxes payable and bonus payable as the prior year accruals were paid in the current period.
Investing Activities
Capital expenditures, including the Companys investment in joint revenue sharing equipment, purchase of property, plant and equipment,
other intangible assets and investments in film assets were $86.5 million for the nine months ended September 30, 2017 as compared to $52.7 million for the nine months ended September 30, 2016. The Company expects its investment
in capital expenditures to remain fairly consistent as the nature of these cash outlays in particular, joint revenue sharing arrangements and film assets, exist to strengthen operational performances.
Net cash used in investing activities amounted to $57.3 million in nine months ended September 30, 2017, which includes purchases of
$16.4 million in property, plant and equipment, an investment in joint revenue sharing equipment of $35.5 million, an investment in new business ventures of $1.5 million and an investment in other intangible assets of
$3.9 million, primarily related to expanding the functionality of the Companys enterprise resource planning system.
Financing Activities
Net
cash used in financing activities in the nine months ended September 30, 2017 amounted to $53.2 million as compared to net cash used in financing activities of $106.3 million in the nine months ended September 30, 2016. In the
nine months ended September 30, 2017, the Company paid $46.1 million for the repurchase of common shares under the Companys share repurchase program and $19.8 million to purchase treasury stock for the settlement of restricted
share units and options. In addition, the Company also made repayments of $1.5 million under the Playa Vista Loan. These cash outlays were offset by $14.4 million received from the issuance of common shares resulting from stock option
exercises and a $0.2 million of taxes withheld and paid on vested employee stock awards.
80
CONTRACTUAL OBLIGATIONS
Payments to be made by the Company under contractual obligations as of September 30, 2017 are as follows:
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Payments Due by Period
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(In thousands of U.S. Dollars)
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Total
Obligation
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1 year
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> 1 - 3 years
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> 3 - 5 years
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Thereafter
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Purchase obligations
(1)
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$
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30,123
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$
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23,003
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$
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5,920
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$
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1,200
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$
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Pension obligations
(2)
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21,115
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21,115
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Operating lease obligations
(3)
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26,129
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2,181
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8,848
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2,904
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12,196
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Playa Vista Loan
(4)
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26,167
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500
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4,000
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4,000
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17,667
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Postretirement benefits obligations
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5,453
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586
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1,639
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978
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2,250
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Other financial commitments
(5)
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15,073
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12,400
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2,673
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$
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124,060
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$
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38,670
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$
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23,080
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$
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30,197
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$
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32,113
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(1)
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The Companys total payments to be made under binding commitments with suppliers and outstanding payments to be made for supplies ordered but yet to be invoiced.
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(2)
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The SERP assumptions are that Mr. Gelfond will receive a lump sum payment six months after retirement at the end of the current term of his employment agreement (December 31, 2019), although Mr. Gelfond has
not informed the Company that he intends to retire at that time.
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(3)
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The Companys total minimum annual rental payments to be made under operating leases, mostly consisting of rent at the Companys property in New York and at the various owned and operated theaters.
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(4)
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The Playa Vista Loan is fully due and payable on October 19, 2025. The Company is required to make monthly payments of combined principal and interest.
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(5)
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Other financial commitments include the Companys total minimum commitment toward the development, production, post-production and marketing, related to certain film and new content initiatives.
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Pension and Postretirement Obligations
The Company has an unfunded defined benefit pension plan, the SERP, covering Mr. Gelfond. As at September 30, 2017, the Company had
an unfunded and accrued projected benefit obligation of approximately $19.9 million (December 31, 2016 $19.6 million) in respect of the SERP.
Pursuant to an employment agreement dated November 8, 2016, the term of Mr. Gelfonds employment was extended through
December 31, 2019, although Mr. Gelfond has not informed the Company that he intends to retire at that time. Under the terms of the arrangement, no compensation earned beginning in 2011 is to be included in calculating his entitlement
under the SERP.
The Company has a postretirement plan to provide health and welfare benefits to Canadian employees meeting certain
eligibility requirements. As at September 30, 2017, the Company had an unfunded benefit obligation of $2.3 million (December 31, 2016 $1.7 million).
In July 2000, the Company agreed to maintain health benefits for Messrs. Gelfond and Bradley J. Wechsler, the Companys former
Co-CEO
and current Chairman of its Board of Directors, upon retirement. As at September 30, 2017, the Company had an unfunded benefit obligation of $0.7 million (December 31, 2016
$0.6 million).
In September 2016, the Company entered into a new employment agreement with Greg Foster, CEO of IMAX Entertainment
and Senior Executive Vice President of the Company, which provides for an employment term from July 2, 2016 through July 2, 2019. Under the agreement, the Company agreed to create a deferred compensation retirement plan (the
Retirement Plan) covering Mr. Foster, and to make a total contribution of $3.2 million over the three-year employment term. The Retirement Plan is subject to a vesting schedule based on continued employment with the Company,
such that 25% will vest July 2019; 50% will vest July 2022; 75% will vest July 2025; and Mr. Foster will be 100% vested in July 2027. As at September 30, 2017, the Company had an unfunded benefit obligation recorded of $0.8 million
(December 31, 2016 $0.5 million).
81
OFF-BALANCE
SHEET ARRANGEMENTS
There are currently no
off-balance
sheet arrangements that have or are reasonably likely to have a
current or future material effect on the Companys financial condition.