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. As of March 31, 2017, the company operated or held interests in 58 cinema locations with 469 screens, including 54 owned or operated cinemas, three joint-venture cinemas, and one managed cinema. The filing covers the three months ended March 31, 2017, compared with the three months ended March 31, 2016. The financial statements are unaudited and prepared under U.S. GAAP for interim reporting.
Financial Performance and Position
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $69.5 million | $64.8 million | Up 7% |
| Operating income | $5.5 million | $4.7 million | Up 18% |
| Income before taxes | $4.7 million | $3.5 million | Up 37% |
| Net income | $3.0 million | $2.2 million | Up 37% |
| Net income attributable to common shareholders | $3.0 million | $2.2 million | Up 36% |
| Basic EPS | $0.13 | $0.10 | Up $0.03 |
| Diluted EPS | $0.13 | $0.09 | Up $0.04 |
| Operating cash flow | $0.3 million | $4.4 million | Down $4.1 million |
| Capital expenditures and property additions | $8.5 million | $4.2 million | Up $4.3 million |
Consolidated operating margin was approximately 8.0%, compared with 7.2% in the prior-year quarter. Net margin attributable to common shareholders was approximately 4.4%, compared with 3.4%. Cinema segment revenue increased 9% to $66.6 million and segment operating income increased 18% to $9.1 million. Real estate revenue declined 14% to $4.5 million and segment operating income declined 38% to $1.3 million.
- U.S. cinema revenue increased 6% to $36.2 million, primarily from higher attendance, the October 2016 opening of the Olino theater in Hawaii, and higher average ticket prices.
- Australia cinema revenue increased 19% to $25.0 million, supported by higher attendance, a stronger film slate, and favorable currency translation.
- New Zealand cinema revenue decreased 14% to $5.4 million because of the temporary closure of the Courtenay Central cinema following the November 2016 earthquake.
- Real estate performance was adversely affected by the closure of the Courtenay Central entertainment center and demolition of its adjacent parking building.
Cash Flow, Debt, and Liquidity
Cash and cash equivalents declined from $19.0 million at December 31, 2016 to $11.0 million at March 31, 2017. Operating cash flow was only $0.3 million, while investing activities used $10.9 million, including $8.5 million for property and cinema additions and $2.5 million for Courtenay Central parking-building demolition. Financing activities provided $2.5 million, reflecting $16.1 million of borrowings, $12.9 million of debt repayments, and $0.7 million of share repurchases.
Gross debt was $153.4 million at March 31, 2017, including $125.5 million of notes payable and $27.9 million of subordinated debt. Net debt, after deferred financing costs, was approximately $148.8 million. Total stockholders’ equity was $155.0 million, producing a reported debt-to-equity ratio of 0.99. Working capital was $19.4 million and the current ratio was 1.34.
The company reported approximately $53.5 million of unused and unrestricted borrowing capacity, plus $49.5 million of remaining Union Square construction financing and approximately $12.6 million of unused New Zealand construction capacity. The Union Square financing facility totals $57.5 million, of which $8.0 million had been advanced at quarter-end.
Material Changes Versus the Prior Comparable Period
- Revenue, operating income, pretax income, net income, and EPS all increased, led by stronger U.S. and Australian cinema results.
- Real estate revenue and operating income declined substantially because of the New Zealand earthquake-related closure.
- Operating cash flow fell sharply because of working-capital outflows, including payments for litigation costs and film-rental obligations accrued in 2016.
- Capital spending increased materially due to Union Square, Newmarket, cinema improvements, and Courtenay Central demolition.
- Other income included an $825,000 foreign-currency gain related to certain intercompany advances. The prior-year period included a $393,000 gain on the sale of a New Zealand property, which did not recur.
- Accumulated other comprehensive income increased by $5.9 million, principally from foreign-currency translation gains.
- The company repurchased 41,899 Class A shares for $671,000 under a newly authorized $25.0 million repurchase program, leaving approximately $24.3 million available.
Guidance, Outlook, Commentary, Risks, and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management’s stated strategy is to develop new cinemas, upgrade existing locations with premium seating and enhanced food and beverage offerings, and redevelop selected real estate assets. A new eight-screen Brisbane cinema is expected to open in 2019, and the company has approved additional cinema developments in Australia and New Zealand expected to commence operations in 2019 and 2020. Union Square redevelopment construction is underway, with retail fit-out anticipated by the end of the second quarter of 2018.
- Earthquake and insurance recovery: Courtenay Central reopened on March 29, 2017. In April 2017, the insurer indicated that a final $20.0 million settlement could be received during the second quarter, bringing total recovery for the event to approximately $25.0 million. Timing and final receipt remain subject to the claims process.
- Litigation: Cotter-related derivative litigation and employment arbitration remain active. First-quarter legal costs for the derivative litigation and employment arbitration totaled $645,000, and the company’s $10 million directors’ and officers’ insurance policy had been exhausted. Management states that current proceedings are not reasonably likely to have a material adverse effect, but acknowledges that outcomes could materially affect a particular reporting period.
- Contingencies: The company guaranteed its proportionate share of approximately $1.1 million of unconsolidated joint-venture debt and accrued approximately $350,000 for the guarantee.
- Foreign currency: Approximately 43% of assets were denominated in Australian dollars and 18% in New Zealand dollars. Management does not currently hedge foreign-currency exposure. A 10% currency movement was estimated to affect Australian and New Zealand assets by approximately $13.3 million and $3.8 million, respectively.
- Interest rate exposure: A 1% change in short-term interest rates was estimated to change quarterly interest expense by approximately $216,000. Interest-rate swaps and caps covered approximately $63.9 million of notional exposure.
- Accounting developments: The company adopted ASU 2016-09 for share-based compensation on January 1, 2017. It expects the future lease standard to result in material recognition of right-of-use assets and lease liabilities because many cinemas operate under leases.
- Other commitments: Total disclosed contractual obligations were approximately $558.8 million, including $361.1 million of lease obligations and $27.7 million of estimated debt interest.
Most Important Facts for Investors to Verify
- Confirm receipt and accounting treatment of the anticipated $20.0 million final insurance settlement for Courtenay Central.
- Monitor the timing, cost, financing, leasing progress, and completion of the Union Square redevelopment and other planned cinema projects.
- Assess whether low operating cash flow relative to capital spending is temporary or indicative of a continuing liquidity pressure.
- Review debt maturities, facility renewals, covenant compliance, and the planned renewal of the Westpac New Zealand credit facility.
- Track Cotter-related litigation, arbitration costs, potential damages, and the effect of exhausted directors’ and officers’ insurance coverage.
- Evaluate the sensitivity of earnings, equity, and asset values to Australian and New Zealand currency movements.
- Consider the impact of the Courtenay Central disruption, changing film releases, competition, consumer spending, construction execution, and future lease accounting on reported results.