Reading International, Inc. — Form 10-Q Summary
Business context and reporting period
Reading operates cinema exhibition and real estate businesses in the United States, Australia, and New Zealand. As of June 30, 2015, it operated 54 cinemas with 443 screens, held interests in three additional cinemas with 29 screens, and managed one cinema with four screens. This report covers the quarter and six months ended June 30, 2015, compared with the corresponding 2014 periods.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $72.8 million | $69.9 million | $133.4 million | $128.0 million |
| Operating income | $10.5 million | $8.5 million | $15.7 million | $11.1 million |
| Net income | $16.0 million | $4.8 million | $19.1 million | $4.5 million |
| Net income attributable to common stockholders | $16.0 million | $4.8 million | $19.1 million | $4.5 million |
| Diluted EPS | $0.68 | $0.20 | $0.81 | $0.19 |
| Net cash provided by operating activities | Not presented | Not presented | $17.3 million | $9.2 million |
Total revenue increased 4.1% in the quarter and 4.2% for the first half. Operating margin increased to approximately 14.4% from 12.2% in the quarter and to 11.8% from 8.7% for the first half. Net income benefited materially from an $8.2 million quarterly and $11.0 million year-to-date gain on asset sales, principally the Moonee Ponds property sale.
- Cinema revenue rose 4.7% in Q2 and 5.5% year-to-date. Cinema segment operating income increased 23.4% in Q2 to $12.6 million; first-half segment operating income was $18.9 million versus $14.2 million.
- Real estate revenue declined 4.2% in Q2 and 11.5% year-to-date, primarily from foreign-exchange effects and asset disposals. Real estate segment operating income was $2.2 million in Q2 and $4.5 million year-to-date.
- Cash and cash equivalents were $69.6 million at June 30, 2015, compared with $50.2 million at December 31, 2014. Management stated that cash and operating cash flows were sufficient for anticipated short-term working-capital needs for the next twelve months.
- Total notes payable were $123.1 million, consisting of $1.5 million current and $121.6 million long-term debt. Subordinated debt was $27.9 million, bringing reported notes and subordinated debt to approximately $151.1 million.
- Cash provided by investing activities was $14.7 million, including $21.9 million of property-sale proceeds, partly offset by $8.4 million of capital expenditures. Financing activities used $9.3 million, including $6.2 million of debt repayments and $3.8 million of share repurchases.
- Total assets were $386.2 million and total stockholders’ equity was $134.7 million at June 30, 2015.
Material changes versus the prior comparable period
- U.S. cinema revenue increased 5.0% in Q2, while Australia and New Zealand cinema revenue increased 4.0% and 5.9%, respectively, after currency translation. Management attributed growth primarily to higher attendance, average ticket prices, and concession revenue.
- Cinema operating expense as a percentage of revenue improved to 76.7% in Q2 from 78.4% and to 79.3% for the first half from 81.6%, reflecting expense management and operating leverage.
- Net interest expense declined by approximately $1.2 million in Q2 and $1.0 million year-to-date, helped by lower rates and favorable derivative mark-to-market effects.
- The company recognized an approximately $8.0 million gain on the Moonee Ponds sale when the outstanding proceeds were received in April 2015. It also sold the Doheny Condo for $3.0 million and completed one tranche of the Lake Taupo sale.
- The Australian and New Zealand dollars weakened significantly against the U.S. dollar. Foreign-currency translation reduced other comprehensive income by $14.0 million in the first half, and cumulative unrealized foreign-currency translation gains declined to approximately $17.0 million from $31.1 million at year-end 2014.
- The company repurchased $7.0 million of common stock under its $10.0 million authorization, leaving $3.0 million available at June 30, 2015.
- On June 12, 2015, James J. Cotter, Jr. was terminated as President and Chief Executive Officer. Ellen M. Cotter was appointed interim CEO, and the company began a search for a permanent CEO.
Guidance, outlook, risks, contingencies, and unusual items
The filing does not provide formal earnings or revenue guidance. Management plans to expand and reposition selected cinemas, develop existing real estate assets, monetize non-strategic properties when appropriate, and pursue additional cinema and real estate opportunities.
- The Carmel Mountain theater is being refurbished and repositioned as an Angelika Film Center and Café, with work expected to begin in the second half of 2015.
- Management intends to surrender the unprofitable Gaslamp cinema lease on or after January 15, 2016, subject to a $1.0 million early-termination fee.
- Planned projects include redevelopment of the Union Square and Cinemas 1, 2, 3 properties in Manhattan, a $27.0 million Newmarket, Australia cinema and retail project, and an $11.5 million Courtenay Central supermarket project in Wellington, New Zealand.
- The company has an unconditional commitment to acquire adjoining Newmarket property for $5.8 million, with approximately $5.2 million due November 30, 2015; the remaining balance was not recorded as a liability at quarter-end.
- Foreign-currency exposure remains significant. Management does not hedge its Australian and New Zealand currency exposure. A 10% currency movement was estimated to change Australian and New Zealand assets by $12.9 million and $3.5 million, respectively, and quarterly net income by approximately $1.25 million and $75,000.
- A 1% change in short-term interest rates was estimated to change quarterly interest expense by approximately $155,000 after considering derivatives. Interest-rate swaps and caps had a net reported liability of approximately $1.7 million.
- The company accrued a $500,000 insurance deductible for defense costs related to litigation initiated by its former CEO. A separate alleged derivative action was reported in August 2015; the company stated that it considers the allegations without merit and intends to defend them.
- Tax liabilities totaled $12.8 million, including $3.5 million related to an IRS settlement involving Craig Corporation. Unrecognized tax benefits were approximately $2.7 million, and management estimated that reserves could increase by $100,000 to $1.0 million within the next twelve months.
- Contractual obligations totaled $372.5 million, including $123.1 million of notes payable, $27.9 million of subordinated debt, $182.9 million of lease obligations, $7.7 million of pension liability, and $29.6 million of estimated debt interest.
Important facts for investors to verify
- Separate recurring operating performance from the $8.2 million quarterly and $11.0 million year-to-date asset-sale gains.
- Verify cinema attendance, average ticket pricing, concession trends, and the sustainability of the improved cinema operating margins.
- Assess liquidity after the $5.2 million Newmarket acquisition payment, planned development spending, lease obligations, debt maturities, and share repurchases.
- Review the impact of continued Australian and New Zealand currency weakness on translated revenue, assets, equity, and earnings.
- Monitor the CEO transition, former-CEO litigation, derivative lawsuits, related legal costs, and the $500,000 insurance deductible.
- Evaluate tax contingencies, the permanent-reinvestment assertion for Australian earnings, and the potential for additional tax reserves.
- Confirm permitting, financing, construction costs, timing, and expected returns for the Union Square, Cinemas 1, 2, 3, Newmarket, and Courtenay Central projects.