Reading International, Inc. — Form 10-Q Summary
Business context and reporting period
Reading International, Inc. operates cinema exhibition and real estate businesses in the United States, Australia, and New Zealand. The company operated 53 cinemas with 432 screens, held interests in three additional cinemas with 29 screens, and managed one cinema with four screens as of June 30, 2016. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2016, compared with the corresponding 2015 periods.
Financial performance and key metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $66.9 million | $72.8 million | $131.7 million | $133.4 million |
| Operating income | $6.1 million | $10.5 million | $10.8 million | $15.7 million |
| Net income | $2.9 million | $16.0 million | $5.1 million | $19.1 million |
| Net income attributable to common stockholders | $3.0 million | $16.0 million | $5.2 million | $19.1 million |
| Diluted EPS | $0.13 | $0.68 | $0.22 | $0.81 |
| Cash flow from operations | Not separately provided | Not separately provided | $8.5 million | $17.3 million |
Q2 operating margin was approximately 9.1%, compared with 14.4% in the prior-year quarter. Six-month operating margin was approximately 8.2%, compared with 11.8%. Net margin was approximately 4.4% in Q2 and 3.9% for the six-month period.
- Cinema revenue declined 8% in Q2 to $63.4 million and 1% for the six months to $124.8 million. Real estate revenue declined 4% in Q2 to $5.3 million and 3% for the six months to $10.6 million.
- Cinema segment operating income decreased 27% in Q2 to $9.1 million and 11% for the six months to $16.8 million. Real estate segment operating income decreased 10% in Q2 to $2.0 million and 9% for the six months to $4.1 million.
- U.S. cinema revenue increased 4% for the six months, while Australia declined 11% and New Zealand increased 14%. New Zealand benefited from the LynnMall cinema opened in November 2015 and strong local film performance.
- Cash and cash equivalents were $9.6 million at June 30, 2016, down from $19.7 million at December 31, 2015 and $69.6 million at June 30, 2015.
- Total debt, including subordinated debt and net of deferred financing costs, was approximately $136.2 million at June 30, 2016, compared with $129.1 million at December 31, 2015. Debt consisted of $22.9 million current debt, $86.1 million long-term debt, and $27.2 million subordinated debt.
- The company reported $55.5 million of unused corporate credit capacity and $10.4 million of unused New Zealand construction financing capacity.
- Capital expenditures and property additions were $24.5 million during the first six months, versus $8.4 million in the prior-year period. Net cash used in investing activities was $23.3 million, compared with $14.7 million provided in 2015.
Material changes versus the prior comparable period
- Profitability fell sharply because Q2 2015 included an $8.2 million gain on asset sales; the first six months of 2015 included $11.0 million of gains, versus $0.4 million in 2016.
- Management attributed the Q2 cinema decline primarily to a weaker major-studio film slate, lower U.S. and Australian attendance, and unfavorable Australian and New Zealand currency movements.
- General and administrative expense increased 17% in Q2 and 31% for the six months, driven by higher legal, audit, executive-status, public relations, and consulting costs. The company said certain audit and executive-status costs were not expected to recur.
- Interest expense decreased 8% in Q2 and 21% for the six months because of lower average interest rates and lower average borrowings, partly offset by U.S. borrowings used to acquire the new headquarters building.
- The company acquired the Cannon Park entertainment centers in Australia in December 2015 and purchased a $11.2 million headquarters building in Culver City, California in April 2016. Cannon Park contributed approximately $1.4 million of additional real estate revenue for the six months.
- Operating cash flow declined 51%, while cash declined $10.1 million during the first six months. The principal uses were property additions, development spending, and debt activity.
Guidance, outlook, commentary, risks, and unusual items
- No formal earnings or revenue guidance was provided. Management expects to continue cinema renovations, premium-format and recliner-seat investments, expanded food and beverage offerings, cinema development, and real estate redevelopment.
- Management expected refinancing of the $15.0 million Cinema 1, 2, 3 term loan before its October 1, 2016 maturity. It also expected third-quarter 2016 financing for the new headquarters and the Union Square redevelopment, although no assurance was given.
- Union Square redevelopment in Manhattan was progressing, with construction anticipated to be completed in the second quarter of 2018. The company was also pursuing development of its Cinemas 1, 2, 3 property, Newmarket in Brisbane, and Courtenay Central in Wellington.
- The company received a $2.3 million arbitration award for attorney fees and costs in the STOMP matter and was negotiating payment terms while seeking to keep the show at the Orpheum Theatre.
- Derivative litigation remained subject to court proceedings. Certain stockholder plaintiffs announced a settlement requiring court approval, while James J. Cotter Jr. sought permission to file an amended complaint. The company intended to oppose that motion.
- In June 2016, the board rejected an unsolicited, non-binding indication of interest to acquire all outstanding shares at $17 per share, stating that shareholders would be better served by the standalone business plan.
- Material risks include dependence on the quality and popularity of film releases, competition from in-home and digital entertainment, construction and redevelopment execution, financing availability, foreign currency exposure, interest rates, tax matters, litigation, environmental obligations, and earthquake risk.
- A material weakness in income-tax accounting controls identified in 2015 remained under remediation. The company hired a senior tax professional and retained a Big Four accounting firm to review tax accounting.
- A 10% currency movement was estimated to change Australian and New Zealand assets by approximately $13.3 million and $4.1 million, respectively, and quarterly net income by approximately $579,000 and $178,000, respectively. A 1% change in short-term interest rates was estimated to affect quarterly interest expense by approximately $178,000.
Important facts for investors to verify
- Confirm that the planned refinancing and other third-quarter 2016 financings were completed on acceptable terms and before applicable maturities.
- Monitor cash availability, capital spending, development commitments, and the company’s ability to fund projects with operating cash flow and borrowing capacity.
- Assess whether cinema attendance and film content improved after the weak Q2 2016 film slate, particularly in Australia and the United States.
- Evaluate foreign exchange effects on Australian and New Zealand revenue, assets, earnings, and accumulated other comprehensive income.
- Track the STOMP arbitration award collection, derivative litigation settlement approval, and any additional claims or costs.
- Review remediation of the income-tax accounting material weakness and the effect of pending accounting standards, especially leases and revenue recognition.
- Assess the timing, budget, leasing progress, and financing of Union Square, Cinemas 1, 2, 3, Newmarket, and Courtenay Central redevelopment projects.