Reading International, Inc. — FY2011 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2011, with quarterly information including the fourth quarter. Reading operates internationally in two segments: Cinema Exhibition and Real Estate, across the United States, Australia, and New Zealand. At year-end, it operated or managed 57 cinemas and reported total assets of $430.8 million and stockholders’ equity of $125.0 million.
- 2011 revenue by geography: United States $112.0 million, Australia $111.6 million, and New Zealand $22.2 million.
- Approximately 57% of assets were in Australia, 26% in the United States, and 17% in New Zealand.
- The company’s strategy is to use relatively stable cinema cash flows to support cash-consuming real estate development and opportunistic acquisitions.
Financial performance and key metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Revenue | $245.8 million | $230.1 million | +6.8% |
| Operating income | $18.4 million | $13.2 million | +39.8% |
| Net income attributable to RDI shareholders | $10.0 million | $(12.7) million | Improved by $22.6 million |
| Basic EPS | $0.44 | $(0.56) | Improved by $1.00 |
| Diluted EPS | $0.43 | $(0.56) | Improved by $0.99 |
| Cash flow from operations | $24.3 million | $22.8 million | +$1.5 million |
| EBITDA | $35.6 million | $29.8 million | +19.5% |
| Total debt | $209.6 million | $228.8 million | $(19.2) million |
| Cash and cash equivalents | $31.6 million | $34.6 million | $(3.0) million |
| Working capital | $(25.5) million | $(57.6) million | Improved by $32.1 million |
Calculated consolidated margins were approximately 7.5% operating margin, 4.1% net margin attributable to shareholders, and 14.5% EBITDA margin. Debt-to-EBITDA improved to 5.88x from 7.67x.
- Cinema Exhibition revenue was $225.8 million, up 7.0%, and segment operating income was $21.6 million, up from $19.4 million.
- Real Estate revenue was $27.4 million, up 7.4%, and segment operating income was $11.1 million, up from $8.2 million.
- Australia drove much of the cinema improvement: revenue increased 20.5%, helped by a new cinema, higher ticket prices, favorable currency translation, and slightly higher admissions.
- New Zealand cinema revenue declined 17.6%, primarily because of weaker film product and a 463,000 decrease in admissions during the Rugby World Cup year.
- The company recorded a $12.3 million income tax benefit, primarily from reversing a valuation allowance on Australian deferred tax assets. This materially benefited 2011 earnings and is not necessarily indicative of recurring profitability.
Fourth-quarter results
| Metric | Q4 2011 | Q4 2010 |
|---|---|---|
| Revenue | $57.6 million | $54.3 million |
| Net income (loss) | $(4.8) million | $(0.4) million |
| Net income (loss) attributable to shareholders | $(5.0) million | $(0.5) million |
| Basic EPS | $(0.21) | $(0.03) |
| Diluted EPS | $(0.22) | $(0.03) |
Fourth-quarter revenue increased, but the company reported a larger loss than in the prior-year quarter. The filing text does not provide a single clear quarterly explanation for the year-over-year loss change.
Cash flow, debt, and liquidity
- Operating cash flow was $24.3 million. Investing activities used $3.8 million, including $3.9 million for the CalOaks 17-screen cinema acquisition and $5.5 million for property enhancements. Financing activities used $23.4 million.
- Cash was $31.6 million at year-end, but only approximately $6.4 million was unrestricted by subsidiary-level covenants. Cash included $16.5 million in Australia, $11.8 million in the United States, and $3.3 million in New Zealand.
- Available undrawn facilities included approximately $10.3 million under the Australian NAB revolver, $9.4 million under the renewed New Zealand facility, $5.0 million under the GE Capital revolving facility, and $0.5 million under a Bank of America line.
- Debt maturities included $29.6 million in 2012, $40.2 million in 2013, $69.2 million in 2014, and $42.7 million in 2015, excluding subordinated debt due thereafter.
- The $15.0 million Cinemas 1, 2 & 3 term loan matured July 1, 2012; management expected to refinance it or sell the property.
- The Australian facility was refinanced in June 2011 with a three-year NAB facility. In February 2012, the New Zealand facility was renewed for three years at a reduced commitment of $31.2 million.
- Minimum lease obligations totaled $202.2 million, and estimated interest on debt totaled $51.4 million over the contractual periods presented.
Material changes and unusual items
- Acquired the CalOaks Cinema in California for $4.2 million and sold the company’s 66.7% interest in the Elsternwick Classic cinema for $1.9 million, recognizing a $1.7 million gain in discontinued operations.
- Recorded a $2.9 million impairment of the Rialto Cinemas investment after earthquake-related closures in Christchurch.
- Recorded $369,000 of real estate impairment related to Taringa; the property was sold in February 2012 for $1.8 million.
- Received approximately $1.0 million of insurance proceeds related to the February 2011 Christchurch earthquake and expected a final nominal settlement payment in 2012.
- Real estate held for development increased to $91.7 million from $35.7 million, primarily because the $53.4 million Burwood property was reclassified from held for sale to held for development.
- Burwood, a former brickworks site, contains petroleum and asbestos contamination. Estimated remediation and site-preparation costs were $12.5 million, of which $8.5 million had been incurred by year-end.
- The company settled legacy IRS tax litigation. Remaining obligations under the installment agreement were approximately $13.5 million at December 31, 2011, payable through monthly installments of approximately $290,000 over about five years. Potential California state tax exposure remained unresolved.
- On January 10, 2012, the company acquired a 202-acre Coachella, California property for $5.5 million. Its controlling shareholder funded half the acquisition, later receiving a 50% interest in the acquiring entity.
- The company paid $747,000 to repurchase 172,300 Class A shares and has never paid a common-stock cash dividend.
Guidance, outlook, management commentary, and risks
- Management views cinema exhibition as mature rather than a major growth business and expects future asset growth to come primarily from real estate development and acquisitions of existing cinemas.
- The company planned to convert substantially all auditoriums to digital projection within 24 months. It had 3D projectors in 35 of 52 wholly owned or consolidated locations at year-end and expected approximately 47 by the end of 2012.
- Management intended to focus in 2012 on selling or monetizing selected properties, redeveloping the Union Square property, advancing Courtenay Central in Wellington, and evaluating the Burwood property.
- Key risks include access to attractive films, competition from larger exhibitors and home entertainment, real estate market weakness, refinancing risk, interest-rate and foreign-currency exposure, lease obligations, environmental remediation, and reliance on discretionary consumer spending.
- A 10% currency movement was estimated to change Australian and New Zealand asset values by approximately $13.8 million and $3.6 million, respectively, and annual net income by approximately $1.9 million and $410,000, respectively.
- A 1% change in short-term interest rates was estimated to affect 2011 interest expense by approximately $280,000.
- James J. Cotter controlled approximately 70.4% of the voting power, creating significant control and related-party transaction risks.
- Management reported effective disclosure controls and internal control over financial reporting. Grant Thornton issued unqualified opinions on the 2011 financial statements and internal controls.
Most important facts for investors to verify
- Whether the $12.3 million tax benefit and Australian valuation allowance reversal should be excluded when assessing normalized earnings.
- The refinancing, repayment, or sale outcome for the $15.0 million Cinemas 1, 2 & 3 loan and other near-term maturities.
- Actual unrestricted liquidity after subsidiary-level debt covenants and cash-transfer restrictions.
- Progress and total cost of Burwood environmental remediation and redevelopment.
- Performance of the New Zealand cinema portfolio following the 2011 attendance decline and Christchurch earthquake disruptions.
- Capital requirements and returns associated with the digital-conversion program and planned real estate developments.
- Terms, governance, and economic impact of related-party arrangements, including the Coachella acquisition, Village East lease, and Sutton Hill Capital financing.