Reading International, Inc. — 2014 Q1 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2014, compared with the three months ended March 31, 2013. Reading operates 52 owned cinemas with 434 screens, interests in three additional joint-venture cinemas, and one managed cinema across the United States, Australia, and New Zealand. Its second segment owns and develops commercial, retail, and live-theater real estate.
Key financial metrics
| U.S. dollars in thousands, except per-share data | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $58,053 | $59,567 | (2.5%) |
| Operating income | $2,581 | $2,534 | +1.9% |
| Operating margin | 4.4% | 4.3% | Improved |
| Net loss | $(254) | $(672) | Improved $418 |
| Loss attributable to common shareholders | $(215) | $(668) | Improved $453 |
| Basic and diluted loss per share | $(0.01) | $(0.03) | Improved |
| Net cash used in operating activities | $(1,055) | $(450) | Higher use of $605 |
| Capital expenditures | $633 | $1,485 | Lower by $852 |
Cinema revenue was $53.4 million, down 2.5%, while real-estate revenue was $4.6 million, down 3.5%. Segment operating income increased to $6.5 million from $6.1 million. Cinema segment income rose 21.2% to $4.0 million, while real-estate segment income fell 10.3% to $2.5 million.
At March 31, 2014, cash and cash equivalents were $33.6 million, compared with $37.7 million at December 31, 2013. Total assets were $387.4 million and total stockholders’ equity was $129.2 million. Notes payable totaled $168.9 million, including $99.1 million classified as current, and subordinated debt was $27.9 million.
Cash decreased by $4.1 million during the quarter to $33.6 million. Investing activities used $0.6 million and financing activities used $1.0 million. The company paid $2.4 million of interest and $2.5 million of income taxes during the quarter.
Material changes versus the prior comparable period
- Total revenue declined $1.5 million, primarily because Australian cinema revenue decreased $3.1 million, partly offset by a $1.3 million increase in U.S. box-office revenue.
- Cinema operating expense decreased $2.2 million, and total cinema operating costs as a percentage of revenue improved to 85.6% from 87.5%.
- Real-estate revenue declined modestly, reflecting foreign-exchange effects, the closure of the Courtney Central parking structure, and the termination of the Hoyts lease at Dunedin. Higher live-theater rental income partially offset these declines.
- Net interest expense decreased to approximately $2.3 million from $2.7 million, reflecting lower debt balances, lower loan rates, and changes in the fair value of interest-rate swaps.
- Income-tax expense increased to $1.6 million from $0.9 million, primarily due to higher pretax income in the Australian operations.
- Comprehensive income attributable to Reading shareholders was $7.6 million, largely due to a $7.6 million foreign-currency translation gain; this did not represent operating earnings or cash generation.
Guidance, outlook, risks, contingencies, and unusual items
The filing does not provide quantitative earnings or revenue guidance. Management intends to expand and selectively acquire cinema assets, refurbish the Dunedin cinema for an expected third-quarter 2014 opening, pursue real-estate entitlements and development, and monetize assets where financially appropriate.
- Debt maturities create a significant near-term refinancing requirement: the $56.8 million Australian NAB term loan matured June 30, 2014, the $15.0 million U.S. Cinema 1, 2, 3 loan matured June 27, 2014, and the $24.3 million New Zealand facility matures March 31, 2015. Management was renegotiating or seeking replacement financing and stated that extensions or replacements were anticipated, but provided no assurance.
- Management expects $33.6 million of cash, operating cash flow, and borrowing capacity to cover anticipated short-term working-capital needs. This assessment depends materially on refinancing execution and continued operating performance.
- The company is obligated to pay approximately $290,000 monthly under its IRS tax settlement. Total accrued tax liabilities were $16.4 million at March 31, 2014, including $2.4 million of unrecognized tax benefits.
- Foreign-currency exposure is significant: approximately 51% of assets were denominated in Australian dollars and 22% in New Zealand dollars. The company does not hedge currency exposure; a 10% currency movement was estimated to affect quarterly net income by approximately $37,000 for Australian assets and $45,000 for New Zealand assets.
- A 1% change in short-term interest rates was estimated to change quarterly interest expense by approximately $168,000 after considering swaps and caps.
- Subsequent to quarter-end, Reading contracted to sell its 50.6-acre Burwood, Australia property for approximately A$65.0 million, with A$6.5 million payable at closing and the balance due December 31, 2017. The expected closing was on or before May 23, 2014.
- The filing reports no material changes in previously disclosed risk factors, no defaults upon senior securities, and no material off-balance-sheet arrangements. Management concluded that disclosure controls were effective at March 31, 2014.
Most important facts for investors to verify
- Whether the Australian, U.S., and New Zealand debt maturities were successfully extended, refinanced, or repaid, and on what terms.
- Whether the Burwood property sale closed and how proceeds were applied to debt, liquidity, or development activities.
- Cash generation and liquidity after the quarter, given negative operating cash flow and substantial scheduled debt, tax, lease, and pension obligations.
- The sustainability of improved U.S. cinema performance and whether Australian attendance and currency weakness continue to pressure consolidated results.
- Future tax payments, uncertain tax positions, and any changes to the company’s tax settlement liabilities.
- The effect of foreign-exchange movements, interest-rate changes, and refinancing costs on earnings and comprehensive income.