Business Context and Reporting Period
Reading International, Inc. filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2016. The company operates multiplex cinemas in the United States, Australia, and New Zealand, and owns and develops retail, commercial, and live-theater real estate.
At September 30, 2016, the company owned and operated 53 cinemas with 432 screens, had interests in three additional cinemas with 29 screens, and managed one cinema with four screens. Results are reported through cinema exhibition and real estate segments.
Financial Performance and Position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $71.3 million | $57.8 million | $203.0 million | $191.2 million |
| Operating income | $6.6 million | $3.1 million | $17.4 million | $18.8 million |
| Income before taxes | $5.2 million | $0.8 million | $13.3 million | $24.0 million |
| Net income | $3.9 million | $0.3 million | $9.1 million | $19.4 million |
| Net income attributable to common stockholders | $3.9 million | $0.4 million | $9.1 million | $19.5 million |
| Diluted EPS | $0.16 | $0.02 | $0.38 | $0.83 |
| Net cash from operating activities | Not provided for quarter | Not provided for quarter | $14.5 million | $21.4 million |
- Revenue mix: Cinema revenue was $67.8 million in Q3 and $192.6 million for the nine months; real estate revenue was $3.5 million and $10.4 million, respectively.
- Margins: Consolidated operating margin was approximately 9.3% in Q3 versus 5.4% in the prior-year quarter, and approximately 8.6% for the nine months versus 9.9%. Cinema segment operating margin improved to approximately 14.3% in Q3 and 13.8% for the nine months.
- Segment performance: Q3 cinema operating income increased 101% to $9.7 million; nine-month cinema operating income increased 12% to $26.5 million. Q3 real estate operating income increased 22% to $1.8 million, while nine-month real estate operating income declined 2% to $5.8 million.
- Cash and assets: Cash and cash equivalents were $10.0 million at September 30, 2016, down from $19.7 million at December 31, 2015. Total assets were $401.5 million, compared with $373.3 million at year-end 2015.
- Debt: Net current debt was $8.3 million, net long-term debt was $106.8 million, and subordinated debt was $27.3 million, for total reported debt of approximately $142.4 million. Available corporate credit capacity was $55.7 million, plus $13.1 million of unused New Zealand construction capacity.
- Equity: Total stockholders’ equity increased to $156.2 million from $137.2 million, including a $9.4 million increase in accumulated other comprehensive income, primarily from foreign currency translation.
Cash Flow, Capital Allocation, and Liquidity
- Operating cash flow declined 32% to $14.5 million for the nine months, primarily due to lower operating cash generation and working-capital changes.
- Investing activities used $35.5 million, including $35.7 million of property and equipment additions, compared with $8.7 million of investing cash inflow in the prior-year period. The prior year benefited from approximately $21.9 million of property-sale proceeds.
- Financing activities provided $10.9 million, reflecting $52.4 million of new borrowings partially offset by $40.8 million of debt repayments.
- Net cash decreased $9.7 million during the nine months, compared with an $11.8 million increase in the prior-year period.
- The company completed a $20.0 million refinancing of the Cinema 1,2,3 mortgage, using proceeds in part to repay the prior $15.0 million Santander loan. It was also pursuing mortgage financing for its new headquarters and construction financing for Union Square.
Material Changes Versus the Prior Comparable Period
- Q3 revenue increased 23%, driven by higher cinema attendance, increased ticket and concession revenue, the LynnMall opening in New Zealand, the Carmel Mountain reopening, and favorable foreign exchange effects.
- Nine-month revenue increased 6%, but net income attributable to common stockholders declined 54% because the prior-year period included $11.0 million of gains on asset sales, compared with $0.4 million in 2016.
- General and administrative expense increased 55% in Q3 and 38% for the nine months. The increases reflected prior-year bonus-accrual reversals, higher legal costs, additional 2015 audit expenses, executive-related costs, and higher equity-based compensation.
- Net interest expense decreased 18% in Q3 and 14% for the nine months, principally because of lower Australian borrowing costs.
- The Cannon Park acquisition increased Australian real estate revenue and assets. The company also purchased a $11.2 million headquarters building in Culver City, California.
- Operating property increased to $227.9 million from $210.3 million, and investment and development property increased to $37.5 million from $23.0 million.
Outlook, Risks, Contingencies, and Unusual Items
- Operating outlook: Management plans to continue cinema renovations, premium formats, recliner seating, enhanced food and beverage offerings, and selective portfolio expansion or disposition. No formal earnings or revenue guidance is provided.
- Development pipeline: Union Square redevelopment in Manhattan was progressing, with construction financing of approximately $57.5 million being pursued and completion anticipated in the second quarter of 2018. Newmarket, Australia construction had commenced, with a projected opening in the fourth quarter of 2017. The Courtenay Central supermarket project in New Zealand was delayed by tenant design changes and was expected to be completed during 2018.
- Burwood proceeds: The buyer of the Burwood, Australia property expected to prepay approximately $16.7 million during the fourth quarter of 2016. The remaining contractual balance was approximately $44.9 million, due December 31, 2017, subject to mandatory prepayment provisions.
- Legal matters: The company received a $2.3 million award of attorney fees and costs in the STOMP arbitration; $325,000 was paid in September 2016 and the balance is payable through June 2019. Derivative litigation remained pending, and the company’s $10.0 million directors’ and officers’ insurance limits had been exhausted, so future defense costs will be expensed.
- Controls: A material weakness in income-tax accounting controls identified in 2015 remained under remediation. The company hired a Director of Tax and retained a Big Four accounting firm, with full implementation anticipated by year-end 2016.
- Market risks: The company has significant Australian and New Zealand assets and does not hedge foreign currency exposure. A 10% currency movement would affect Australian and New Zealand asset values by approximately $13.7 million and $4.4 million, respectively, and quarterly net income by approximately $1.1 million and $263,000. A 1% change in short-term interest rates would affect quarterly interest expense by approximately $193,000.
- Other unusual items: The company intended to use the remaining $2.8 million under its share repurchase authorization before year-end, subject to share prices and cash needs. The Board also rejected a $17.00-per-share indication of interest to acquire the company.
Investor Verification Priorities
- Verify the sustainability of improved cinema attendance, margins, and cash generation after the 2016 film slate and new-theater ramp-up effects.
- Reconcile the substantial decline in nine-month earnings and operating cash flow with the company’s ongoing development and capital-spending program.
- Review debt maturities, covenant compliance, refinancing plans, and the availability of construction financing for Union Square and other projects.
- Confirm timing and collectability of the expected Burwood prepayment and the remaining 2017 property-sale receivable.
- Monitor remediation of the income-tax accounting material weakness and the effect of uninsured derivative-litigation defense costs.
- Assess foreign-exchange sensitivity, particularly because the company does not hedge material Australian and New Zealand asset exposure.
- Evaluate execution risk, cost escalation, tenant commitments, and permitting for Union Square, Newmarket, and Courtenay Central developments.