Reading International, Inc. — Q1 2015 Form 10-Q
Business context and reporting period
Reading International operates multiplex cinemas and commercial, retail, and live-theater real estate in the United States, Australia, and New Zealand. The filing covers the three months ended March 31, 2015, compared with the three months ended March 31, 2014. At quarter-end, the company owned and operated 54 cinemas with 443 screens, plus interests in three unconsolidated cinemas and management of one additional cinema.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $60.6 million | $58.1 million | +4.4% |
| Operating income | $5.2 million | $2.6 million | +102.8% |
| Operating margin | 8.6% | 4.4% | +4.2 percentage points |
| Net income attributable to common shareholders | $3.1 million | $(0.2) million | Improved |
| Diluted EPS | $0.13 | $(0.01) | Improved |
| Cash flow from operations | $0.7 million | $(1.1) million | Improved by $1.8 million |
| Capital expenditures | $2.6 million | $0.6 million | Increase |
| Cash and cash equivalents at March 31 | $39.8 million | $33.6 million | Prior-year comparison |
Cinema revenue rose 6.5% to $56.9 million, while real estate revenue declined 17.9% to approximately $5.4 million. Cinema segment operating income increased 58.9% to $6.3 million; real estate segment operating income decreased 8.9% to approximately $2.3 million.
Net income benefited from a $2.7 million increase in other income, principally associated with the $3.0 million sale of the Doheny condominium. Income tax expense increased to $2.5 million from $1.6 million. Interest expense increased to $2.8 million from $2.4 million.
Total debt was approximately $151.4 million, including $123.5 million of notes payable and $27.9 million of subordinated debt. Current notes payable totaled $28.9 million. Total liabilities were $247.1 million, and stockholders’ equity was $124.0 million.
Cash decreased by $10.5 million during the quarter, ending at $39.8 million. Financing cash outflows included $7.8 million of debt repayments and $1.8 million of share repurchases. Management stated that cash, operating cash flow, and available borrowing capacity should meet anticipated short-term working-capital requirements for the next twelve months.
Material changes versus the prior comparable period
- Cinema revenue increased because of stronger attendance and revenue in all three geographic markets. Australia attendance increased 28.4% in local-currency terms, and New Zealand benefited partly from the Dunedin cinema opened in September 2014.
- Cinema segment operating margin improved to 11.1% from 7.5%, reflecting revenue growth and expense management despite higher film-rental costs.
- Real estate revenue declined because of lower live-theater revenue and foreign-exchange translation, while lower operating costs partly offset the revenue decline.
- General and administrative expense decreased by approximately $0.5 million, primarily because of lower executive pension costs and foreign-exchange effects.
- Accumulated other comprehensive income declined by approximately $9.8 million, principally from foreign-currency translation losses. Comprehensive loss attributable to Reading was $6.7 million despite positive net income.
- The company repurchased $1.8 million of Class A common stock during the quarter. Approximately $4.1 million remained available under the $10.0 million authorization.
Guidance, outlook, risks, contingencies, and unusual items
The filing provides no formal earnings or revenue guidance. Management plans to expand or reposition selected cinemas, including a luxury Angelika conversion of the Carmel Mountain theater expected to open in the second half of 2015. Real estate priorities include asset sales, development of existing properties, redevelopment of Union Square and Cinemas 1, 2, 3 in Manhattan, and securing land-use entitlements.
Two debt facilities required near-term refinancing or extension. The $21.0 million New Zealand corporate facility was extended to July 30, 2015, and the $6.4 million Union Square Theatre term loan was extended to June 1, 2015. Management expected these facilities to be extended or replaced but provided no assurance. The company also had a remaining tax-settlement obligation of approximately $2.0 million at March 31, 2015, payable at approximately $290,000 per month.
Subsequent events included receipt of $17.5 million from the April 2015 sale of the Moonee Ponds property and April sales of two Lake Taupo parcels for $2.5 million, with part of the proceeds due in 2016. Liberty Theaters received a purported termination notice from the producers of STOMP and filed an action seeking to prevent relocation pending arbitration.
Key risks include dependence on film content and attendance, competition from other entertainment formats, real-estate development and entitlement risk, foreign-currency exposure, interest-rate risk, access to financing, tax audits and uncertain tax positions, environmental and legacy railroad liabilities, and litigation. The company does not hedge its Australian and New Zealand currency exposure. A 10% currency movement was estimated to affect quarterly net income by approximately $223,000 for Australian-dollar exposure and $26,000 for New Zealand-dollar exposure.
Management reported effective disclosure controls as of March 31, 2015, with no material changes in internal control over financial reporting. No material changes to previously disclosed risk factors were reported.
Most important facts for investors to verify
- Whether the New Zealand and Union Square debt facilities were successfully refinanced or extended before their revised maturities.
- The timing and collectability of proceeds from the Moonee Ponds, Lake Taupo, and Burwood property transactions.
- Whether cinema attendance and margins remain strong after the favorable first-quarter film slate and despite foreign-exchange pressure.
- The financial and operational outcome of the STOMP dispute and any effect on the Orpheum Theatre.
- The impact of further Australian- and New Zealand-dollar movements on reported assets, equity, revenue, and earnings.
- The company’s ability to fund capital expenditures, debt service, tax-settlement payments, lease obligations, and planned real-estate development from operating cash flow and asset sales.
- Future developments in uncertain tax positions, including the estimated potential increase in reserves of $0.1 million to $1.0 million over the next twelve months.