READING INTERNATIONAL INC quarterly report, Q1 FY2019

Reading International, Inc. — Form 10-Q Summary

Business Context and Reporting Period

Reading International, Inc. operates multiplex cinemas and real estate assets in the United States, Australia, and New Zealand. At March 31, 2019, it operated 60 cinemas with 484 screens and reported two segments: cinema exhibition and real estate. This filing covers the three months ended March 31, 2019, compared with the three months ended March 31, 2018. The interim financial statements are unaudited and results are not necessarily indicative of the full year.

Key Financial Metrics

Metric	Q1 2019	Q1 2018	Change
Total revenue	$61.6 million	$75.9 million	Down 19%
Operating income (loss)	$(1.3) million	$5.7 million	Down $7.0 million
Net income (loss)	$(2.1) million	$3.1 million	Down $5.2 million
Net income (loss) attributable to common shareholders	$(2.1) million	$3.1 million	Down $5.2 million
Basic and diluted EPS	$(0.09)	$0.13	Down $0.22
Net cash from operating activities	$(3.8) million	$2.5 million	Decrease of $6.3 million
Net cash used in investing activities	$(12.6) million	$(23.5) million	Improved by $10.9 million
Net cash from financing activities	$15.9 million	$16.2 million	Down 2%

Consolidated operating margin declined to approximately negative 2.1% from 7.5%. Cinema segment operating income fell 74% to $2.6 million, with a margin of approximately 4.6% versus 14.2% in the prior-year quarter. Real estate segment operating income declined 31% to $1.2 million, with a margin of approximately 21.3% versus 28.0%.

Cinema revenue declined 20% to $58.0 million. U.S. revenue fell 16% to $32.0 million, Australia declined 20% to $21.4 million, and New Zealand declined 40% to $4.5 million.
Real estate revenue declined 10% to $5.4 million, primarily because of the closure of most rentable space at Courtenay Central in New Zealand and foreign currency effects.
Interest expense increased 16% to $1.9 million.
The effective tax rate was 33.2%, compared with 27.3% in the prior-year quarter. The company reported a $1.0 million tax benefit because of the pretax loss.
Cash and cash equivalents were $12.6 million at March 31, 2019, compared with $13.1 million at December 31, 2018.

Debt, Liquidity, and Capital Resources

Total borrowings, net of deferred financing costs, were $180.0 million at March 31, 2019, compared with $162.7 million at December 31, 2018. Gross debt was approximately $184.1 million, including $40.1 million classified as current and $143.7 million as non-current, plus $331,000 of finance lease liabilities.
Total contractual borrowing facilities were $290.9 million, with approximately $107.1 million of unused capacity. Unrestricted resources, consisting of cash and unrestricted borrowing capacity, were $96.2 million.
The debt-to-equity ratio increased to 1.02 from 0.93 at year-end 2018. Working capital deficit increased to $77.2 million from $55.3 million; the current ratio was 0.28.
Financing cash inflows included $22.3 million of new borrowings, partially offset by $6.1 million of repayments. Borrowings principally funded the 44 Union Square redevelopment and capital improvements.
On March 5, 2019, the company extended its $55.0 million Bank of America credit facility to May 1, 2020 and anticipated refinancing it during the second quarter of 2019. The company also amended its Australian NAB facility, extending the maturity of the principal facility to December 31, 2023.
Capital expenditures and property additions were $11.5 million, and the company stated that cinema-related spending was expected to increase during the balance of 2019.

Material Changes Versus the Prior Comparable Period

The weak worldwide first-quarter film slate, lower attendance, the Courtenay Central closure, and unfavorable Australian and New Zealand currency movements drove the revenue and profit decline.
U.S. cinema attendance decreased 22%, partly offset by a 12% increase in spend per patron and a 4% increase in average ticket price. Australia attendance declined 15%, while New Zealand attendance declined 40%.
Cinema operating expense declined 12% in absolute dollars, but increased to 87% of cinema revenue from 79% because occupancy costs are largely fixed.
Real estate operating income declined primarily because of the Courtenay Central closure, partly offset by a 56% increase in U.S. live theater rental and ancillary revenue.
The company adopted ASC 842 leases on January 1, 2019 using the modified retrospective method. This added $229.3 million of operating lease right-of-use assets and $242.4 million of operating lease liabilities at March 31, 2019. Management stated that adoption materially affected the balance sheet but not the income statement or cash flow statement.
On January 30, 2019, the company acquired the tenant interest and operating assets of a four-screen cinema in Devonport, Tasmania, for approximately $1.4 million. The purchase price allocation remained preliminary and included $1.2 million of goodwill.
The company revised prior-period financial statements for immaterial straight-line rent errors. Q1 2018 revenue was increased by $50,000, and Q1 2018 net income was increased by $35,000.
The company extended its $25.0 million Class A share repurchase authorization through March 2, 2021. At March 31, 2019, $16.2 million remained available; only 566 shares were repurchased during the quarter.

Guidance, Outlook, Commentary, Risks, and Unusual Items

Management attributed the first-quarter weakness primarily to film availability rather than a decline in consumer interest in cinema. It cited the strong performance of Avengers: Endgame and several expected spring and summer releases as potential support for subsequent results, but provided no formal earnings or revenue guidance.
The company plans to upgrade or begin upgrading 11 cinemas in 2019 and has lease commitments for four new Australian cinemas totaling 25 screens expected to open during 2019–2021.
The 44 Union Square redevelopment was expected to reach tenant fit-out in the second quarter of 2019. Management reported leasing interest covering approximately 90% of net rentable area, subject to negotiations and no assurance of completion.
Courtenay Central cinema closed in January 2019 because of seismic concerns, and most of the related retail space was also closed. The company is evaluating redevelopment, including restoration or upgrading of the cinema component.
Operating lease commitments totaled $318.9 million, including $169.2 million due after 2023. Additional operating leases of approximately $26.0 million had not yet commenced as of March 31, 2019.
The company reported significant exposure to foreign currency movements. A 10% currency change was estimated to affect Australian and New Zealand asset values by approximately $9.9 million and $4.6 million, respectively, and quarterly net income by approximately $0.2 million and $(0.1) million, respectively.
A 1% change in short-term interest rates was estimated to change quarterly interest expense by approximately $239,000.
The Cotter Jr. derivative litigation remained subject to appeal. The company accrued approximately $387,000 during the quarter for appellate defense costs, after approximately $3.5 million of third-party defense costs in 2018. The company stated that existing litigation was not reasonably likely to have a material adverse effect, while acknowledging that particular periods could be materially affected.
An employment-related arbitration was resolved in March 2019. The company paid a $313,000 separation award, $443,000 of the claimant’s attorney fees and costs, and $14,250 of arbitration costs. The company’s prior reserve was reversed.
No goodwill or indefinite-lived intangible asset impairment was recorded during the quarter. The filing identifies film performance, competition, foreign exchange, interest rates, refinancing, construction execution, seismic and environmental matters, litigation, cybersecurity, and regulatory and tax changes as material risks.

Most Important Facts to Verify

Whether the post-quarter film slate, including Avengers: Endgame and subsequent releases, materially improves attendance, revenue, and operating leverage.
Progress and financing or refinancing status for the Bank of America facility and other debt maturing in 2019 and 2020.
Cash generation relative to capital expenditures, scheduled debt repayments, lease obligations, and the company’s substantial working capital deficit.
Development progress, leasing, costs, and completion timing for 44 Union Square and the Courtenay Central redevelopment.
Operating and financial effects of the Courtenay Central closure and any seismic or environmental liabilities.
Changes in Australian and New Zealand currencies and floating interest rates, including the impact on reported earnings and debt service.
Further developments in Cotter-related litigation and the potential for additional legal fees or awards.
The final purchase price allocation for the Devonport cinema acquisition and any resulting adjustments to goodwill or other assets.