Reading International, Inc. — Q1 2020 Form 10-Q Summary
Business context and reporting period
Reading International operates 60 cinemas with 498 screens in the United States, Australia and New Zealand, and owns or manages retail, commercial and live-theatre real estate. The filing covers the three months ended March 31, 2020, and was filed on June 25, 2020 after a COVID-19-related delay.
All U.S. cinemas and live theatres were temporarily closed between March 15 and March 17, 2020. Australian and New Zealand cinemas were closed on March 22 and March 23, respectively. These closures, social-distancing measures and weaker consumer activity materially affected first-quarter results.
Financial performance and liquidity
| U.S. dollars in thousands, except per-share data | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $49,228 | $61,492 | (20%) |
| Cinema revenue | $46,310 | $57,927 | (20%) |
| Real estate revenue | $2,918 | $3,565 | (18%) |
| Operating income (loss) | $(7,039) | $(1,360) | Unfavorable |
| Net income (loss) | $(5,955) | $(2,141) | Unfavorable |
| Net loss attributable to common shareholders | $(5,875) | $(2,125) | Unfavorable |
| Basic and diluted loss per share | $(0.27) | $(0.09) | Unfavorable |
| Net cash used in operating activities | $(8,672) | $(3,842) | Unfavorable |
| Capital expenditures and property additions | $9,804 | $11,476 | (15%) |
| Net cash provided by financing activities | $60,905 | $15,918 | Favorable |
Operating margin declined to approximately (14.3%) from (2.2%), while net margin declined to approximately (12.1%) from (3.5%). Cinema segment operating income fell to a $2.7 million loss from $2.6 million of income. Real estate segment operating income declined to $0.2 million from $1.2 million.
At March 31, 2020, cash and cash equivalents were $54.9 million, compared with $12.1 million at December 31, 2019. The increase primarily reflected $84.6 million of new borrowings, partially offset by $22.7 million of debt repayments, $9.8 million of investing outflows and $8.7 million of operating cash outflows.
Total borrowings were $263.0 million gross, or $260.4 million net of deferred financing costs, compared with $209.2 million gross at December 31, 2019. Total book equity was $117.4 million, producing a debt-to-equity ratio of 2.24x versus 1.50x at year-end. Negative working capital was $163.7 million and the current ratio was 0.30.
Material changes versus the prior comparable period
- U.S. cinema revenue decreased 27%, Australia decreased 9% and New Zealand decreased 24%, primarily because of COVID-19-related attendance declines and closures.
- Cinema attendance declined 32% in the United States, 14% in Australia and 25% in New Zealand. Higher spending per patron and average ticket prices only partially offset lower attendance.
- Cinema operating expense declined 12%, but increased to 95% of cinema revenue from 87% because many occupancy and other costs were fixed.
- Real estate revenue declined 15% on lower live-theatre activity, tenant trading restrictions and unfavorable foreign exchange movements. Real estate operating income fell 84%.
- Foreign currency translation losses of $15.7 million reduced comprehensive income and accumulated other comprehensive income, which moved to a $10.3 million deficit from a $5.6 million balance at December 31, 2019.
- The Company adopted new goodwill impairment and expected-credit-loss guidance in 2020 without a material impact. Prior-period sales-tax errors were corrected, reducing reported Q1 2019 revenue by $59,000 and net income by $44,000.
- The Company repurchased 75,157 Class A shares for $0.7 million during the quarter. Management stated that repurchases would receive lower priority because of liquidity needs.
Guidance, outlook, risks and unusual items
- Management did not provide formal quantitative financial guidance. It expected phased reopening of New Zealand cinemas beginning May 27, Australian cinemas beginning June 10, and U.S. cinemas during July 2020, subject to government approvals, film availability and operating conditions.
- By June 21, 2020, 17 Australian cinemas had reopened; New Zealand cinemas had reopened except Courtenay Central, which remained closed because of seismic concerns. Attendance was described as light because significant new film releases had not resumed.
- Management expects materially lower revenue and negative operating income while cinemas and theatres remain closed, with continued risks after reopening from lower attendance, social distancing, consumer caution, unemployment and delayed film releases.
- The Company breached certain Bank of America and National Australia Bank covenants as of March 31, 2020. Subsequent waivers were obtained, including a Bank of America waiver for the first quarter and NAB waivers for the second and third quarters. The Company stated that future waivers are uncertain, and the related debt was classified as current.
- Management drew down available borrowing facilities, negotiated rent abatements and deferrals, reduced employee hours, deferred non-essential capital expenditures and pursued government wage subsidies and other support. It also considered selling non-core real estate or using unencumbered property as collateral.
- COVID-19 was treated as an impairment indicator, but management reported no impairment of long-lived assets or goodwill as of March 31, 2020. The conclusions depend on uncertain forecasts and could change materially.
- The CARES Act generated a $3.0 million income-tax benefit, primarily from carrying back the 2019 net operating loss.
- Material commitments include approximately $296.8 million of operating lease payments, $231.9 million of debt principal, $31.1 million of subordinated debt, and a $5.9 million Village East Cinema purchase obligation scheduled for 2021.
- Pending or ongoing litigation includes the Cotter Jr. derivative appeal and California employment-related class, PAGA and individual claims. The Company has not established reserves for the employment matters and cannot predict their outcomes.
Most important facts for investors to verify
- Whether cinema attendance and revenue recover sufficiently after reopening, particularly in the United States.
- Whether the Company can maintain compliance with debt covenants and obtain additional lender waivers when required.
- The timing and terms of debt maturities, refinancing, asset sales or collateralized financing, given the $163.7 million working-capital deficit.
- The sustainability of the $54.9 million cash balance while operating cash flow remains negative and cinemas operate below pre-COVID-19 levels.
- Potential impairment charges if COVID-19 recovery assumptions, property values or goodwill fair values deteriorate.
- The effect of tenant rent abatements, deferrals and defaults on real estate cash flow.
- The timing and leasing progress of the 44 Union Square redevelopment and the $5.9 million Village East Cinema obligation.
- The outcome and potential cost of the Cotter litigation, employment claims and other contingencies.
- Foreign exchange exposure in Australia and New Zealand, including the $15.7 million first-quarter translation loss.