Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
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The Company is exposed to market risk from foreign currency exchange rates and interest rates, which could affect operating results, financial position and cash flows. Market risk is the potential change in an instrument’s value caused by, for example, fluctuations in interest and currency exchange rates. The Company’s primary market risk exposure is the risk of unfavorable movements in exchange rates between the U.S. Dollar, the Canadian Dollar, and Chinese Renminbi (“RMB”). The Company does not use financial instruments for trading or other speculative purposes.
Foreign Exchange Rate Risk
A majority of the Company’s revenue is denominated in U.S. Dollars while a significant portion of its costs and expenses is denominated in Canadian Dollars. A portion of the Company’s net U.S. Dollar cash flows is converted to Canadian Dollars to fund Canadian Dollar expenses through the spot market. In addition, IMAX films generate box office in 90 different countries, and therefore unfavorable exchange rates between applicable local currencies and the U.S. Dollar could have an impact on the GBO generated by the Company’s exhibitor customers and its revenues. For example, the impact of changes in foreign currency valuations versus the U.S. Dollar led to a decrease in IMAX GBO of approximately $14 million in 2024 as compared to the prior year’s currency rates, and approximately $87 million as compared to those in 2019. The Company has incoming cash flows from its revenue generating IMAX network and ongoing operating expenses in China through its majority-owned subsidiary IMAX Shanghai. In Japan, the Company has ongoing Yen-denominated operating expenses related to its Japanese operations. Net RMB and Japanese Yen cash flows are converted to U.S. Dollars through the spot market. The Company also has cash receipts under leases denominated in RMB, Japanese Yen, British Pound Sterling, Euros and Canadian Dollars.
The Company manages its exposure to foreign exchange rate risks through its regular operating and financing activities and, when appropriate, through the use of derivative financial instruments. These derivative financial instruments are utilized to hedge economic exposures as well as reduce earnings and cash flow volatility resulting from shifts in market rates.
Certain of the Company’s PRC subsidiaries held approximately RMB 341.1 million or $47.5 million in cash and cash equivalents as of December 31, 2024 (December 31, 2023 — RMB 213.0 million or $30.0 million) and are required to transact locally in RMB. Foreign currency exchange transactions, including the remittance of any funds into and out of the PRC, are subject to controls and require the approval of the China State Administration of Foreign Exchange to complete. Any developments relating to the Chinese economy and any actions taken by the Chinese government are beyond the control of the Company; however, the Company monitors and manages its capital and liquidity requirements to ensure compliance with local regulatory and policy requirements. (Refer to “Risk Factors – The Company faces risks in connection with its significant presence in China and the continued expansion of its business there”).
For the year ended December 31, 2024, the Company recorded a foreign exchange net loss of $1.2 million as compared to a foreign exchange net loss of $0.7 million in 2023, associated with the translation of foreign currency denominated monetary assets and liabilities.
The Company has entered into a series of foreign currency forward contracts to manage the risks associated with the volatility of foreign currencies. These foreign currency forward contracts met the criteria required for hedge accounting under the Derivatives and Hedging Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) at inception, and continue to meet hedge effectiveness tests as of December 31, 2024, with settlement dates throughout 2025 and 2026. Foreign currency derivatives are recognized and measured on the Consolidated Balance Sheets at fair value. Changes in the fair value (i.e., gains or losses) are recognized in the Consolidated Statements of Operations except for derivatives designated and qualifying as foreign currency cash flow hedging instruments. The Company currently has cash flow hedging instruments associated with Selling, General and Administrative Expenses. For foreign currency cash flow hedging instruments related to Selling, General and Administrative Expenses, the effective portion of the gain or loss in a hedge of a forecasted transaction is reported within Accumulated Other Comprehensive Loss and reclassified to the Consolidated Statements of Operations when the forecasted transaction occurs. Any ineffective portion is recognized immediately in the Consolidated Statements of Operations.
The notional value of foreign currency cash flow hedging instruments that qualify for hedge accounting as of December 31, 2024 was $48.4 million (December 31, 2023 — $40.6 million). A loss of $3.5 million was recorded to Other Comprehensive Income (Loss) with respect to the change in fair value of these contracts in 2024 (2023 — gain of $0.6 million; 2022 — loss of $1.3 million). A loss of $0.6 million was reclassified from Accumulated Other Comprehensive Loss to Selling, General and Administrative Expenses in 2024 (2023 — loss of $0.9 million; 2022 — loss of $0.6 million), primarily due to more fluctuations of the Canadian Dollar against the U.S. Dollar through most of 2024 compared to 2023, when the Canadian Dollar weakened against the U.S. Dollar. In 2024, there were no gains or losses resulting from a change in the classification of certain forward contracts no longer meeting the requirements for hedge accounting were reclassified from Accumulated Other Comprehensive Loss to Selling, General and Administrative Expenses (2023 — $nil). The notional value of forward contracts that do not qualify for hedge accounting as of December 31, 2024 was $nil (December 31, 2023 — $nil).
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For all derivative instruments, the Company is subject to counterparty credit risk to the extent that the counterparty may not meet its obligations to the Company. To manage this risk, the Company enters into derivative transactions only with major financial institutions.
As of December 31, 2024, the Company’s Financing Receivables and working capital items denominated in Canadian Dollars, RMB, Japanese Yen, Euros and other foreign currencies translated into U.S. Dollars was $156.2 million. Assuming a 10% appreciation or depreciation in foreign currency exchange rates from the quoted foreign currency exchange rates as of December 31, 2024, the potential change in the fair value of foreign currency-denominated financing receivables and working capital items would have been $15.6 million, which would be mostly revalued through Shareholders’ Equity. A significant portion of the Company’s Selling, General, and Administrative Expenses is denominated in Canadian Dollars. Assuming a 1% change appreciation or depreciation in foreign currency exchange rates as of December 31, 2024, the potential change in the amount of Selling, General, and Administrative Expenses would be $0.3 million.
Interest Rate Risk Management
The Company’s earnings may also be affected by changes in interest rates and the resulting impact of those changes on its interest income from cash, and its interest expense from variable-rate borrowings.
For the year ended December 31, 2024 the Company had drawn down $37.0 million on its Credit Facility (December 31, 2023 — $24.0 million), $nil on its HSBC China Facility (December 31, 2023 — $nil) and $nil on its Bank of China Facility (December 31, 2023 — $nil), which are all subject to variable effective interest rates.
The Company’s variable rate debt instruments were $37.0 million as of December 31, 2024, or 54% greater than $24.0 million as of December 31 2023. Variable rate debt instruments represented 8% and 5% of its total liabilities as of December 31, 2024 and 2023, respectively. If the interest rates available to the Company increased by 10%, the Company’s interest expense would increase by $0.3 million and interest income from cash would increase by $0.3 million. These amounts are determined by considering the impact of the hypothetical interest rates on the Company’s variable rate debt and cash balances as of December 31, 2024.
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