READING INTERNATIONAL INC annual report, FY2014

Reading International, Inc. 2014 Form 10-K Summary

Business context and reporting period

Reading International, Inc. filed an annual report for the fiscal year ended December 31, 2014. The company operates two segments: Cinema Exhibition and Real Estate, across the United States, Australia, and New Zealand. It operated 58 cinemas representing 476 screens, including consolidated, unconsolidated, and managed locations, and held entertainment, commercial, development, and live-theater real estate.

The company describes cinema as a mature, cash-generating business and real estate development as a comparatively cash-consuming activity. Its strategy emphasizes enhancing existing cinemas, developing specialty and premium-format locations, redeveloping selected real estate, and selectively acquiring assets with established cash flows.

Key financial metrics

U.S. dollars in millions, except per-share data	2014	2013	Change
Revenue	$254.7	$258.2	Down $3.5, or 1.3%
Operating income	$22.2	$20.9	Up $1.2, or 5.9%
Net income attributable to RDI shareholders	$25.7	$9.0	Up $16.7
Diluted earnings per share	$1.08	$0.38	Up $0.70
EBITDA	$40.4	$39.2	Up $1.2, or 3.0%
Cash provided by operating activities	$28.3	$25.2	Up $3.2
Capital expenditures, including acquisitions	$14.9	$20.1	Down $5.2
Total debt	$164.0	$168.5	Down $4.4
Cash and cash equivalents	$50.2	$37.7	Up $12.6
Stockholders’ equity	$132.3	$121.7	Up $10.6

Revenue declined modestly, while operating income improved. EBITDA margin was approximately 15.9% in 2014 versus 15.2% in 2013. Operating margin was approximately 8.7% versus 8.1% in the prior year. The reported net income increase was materially affected by a $9.8 million income tax benefit, primarily from reversing the U.S. deferred tax valuation allowance.

Segment performance and material changes

Cinema Exhibition: Revenue was $237.9 million, down 0.7% from 2013. Segment operating income increased 11.4% to $27.3 million, with the segment margin improving to approximately 11.5% from 10.3%.
United States cinemas: Revenue decreased slightly, including lower admissions revenue and attendance, partly offset by higher concession and café revenue. Operating costs increased, particularly labor, insurance, and utilities.
Australia: Revenue declined 3.2% in U.S. dollars, substantially reflecting the weaker Australian dollar. Local-currency box office was broadly stable, while cost reductions and lower film-rental percentages supported improved operating performance.
New Zealand: Revenue increased 9.1%, helped by the opening of the Dunedin cinema and higher attendance. The Courtenay Central parking structure, damaged by an earthquake, reopened in November 2014.
Real Estate: Revenue declined 8.0% to $24.3 million and segment operating income declined 13.5% to $9.5 million. Results were affected by currency movements, the temporary Courtenay Central parking disruption, and higher Australian real estate administrative costs.
Development and dispositions: The company contracted to sell its 50.6-acre Burwood property in Australia for approximately $54.6 million, received $5.9 million at closing, and expects the balance in 2017. Because the balance had not been received, the transaction was not recognized as a sale under U.S. GAAP. The 3.3-acre Moonee Ponds properties were held for sale with an expected closing in April 2015.
Capital allocation: The company spent $14.9 million on property enhancements, repaid $7.1 million of borrowings, and repurchased 432,252 Class A shares for $4.1 million.

Cash flow, debt, liquidity, and commitments

Operating cash flow was $28.3 million, compared with $25.2 million in 2013.
Investing cash flow used $9.9 million, principally for property enhancements, partially offset by $5.4 million of Burwood sale-deposit proceeds.
Financing cash flow used $3.3 million, including debt repayments and the Class A share repurchase.
Working capital deficit improved substantially to $8.8 million from $71.8 million at December 31, 2013.
Cash totaled $50.2 million, but approximately $26.2 million was unrestricted by regional debt covenants. Cash was held primarily in the United States, Australia, and New Zealand.
Reported unused liquidity included approximately $25.3 million on the Bank of America revolver, $9.4 million on the New Zealand facility, $6.0 million on the Sovereign air-rights line, and $5.0 million on the Bank of America line of credit.
Debt maturities included $38.1 million in 2015, $16.6 million in 2016, $9.1 million in 2018, and $70.6 million in 2019. The New Zealand credit facility, with a balance of approximately $21.8 million, matured March 31, 2015 and was expected to be refinanced. The $6.5 million Union Square Theatre loan matured May 1, 2015 and also required refinancing.
Minimum operating lease payments totaled $192.2 million, including $33.8 million due in 2015. Lease commitments are significant because most cinemas operate in leased facilities.

Guidance, outlook, commentary, and risks

Management did not provide formal numerical earnings or revenue guidance. It expects cinema operations to generate relatively consistent cash flow but views the industry as mature, with growth dependent on premium seating, expanded food and beverage offerings, specialty cinemas, and selective acquisitions. Management intends to continue redeveloping New York properties and expanding or upgrading Angelika and other premium cinema concepts.

Major risks include competition from substantially larger cinema chains, possible difficulty obtaining popular films, changing theatrical release windows, in-home entertainment, and evolving cinema technology.
Real estate risks include construction costs, entitlement delays, leasing and refinancing risk, tenant demand, property illiquidity, environmental matters, and market-value fluctuations.
Foreign exchange exposure is material because Australian and New Zealand operations represent a substantial portion of assets and revenue. Management generally relies on natural hedges rather than comprehensive currency hedging.
A 10% currency movement was estimated to change Australian and New Zealand assets by approximately $10.3 million and $4.0 million, respectively, and annual net income by approximately $750,000 and $165,000, respectively.
A 1% change in short-term interest rates was estimated to affect 2014 interest expense by approximately $647,000.
The Cotter Estate beneficially owned approximately 70.4% of the Class B voting stock. Pending family and trust litigation created uncertainty over who controlled certain voting shares and could determine board elections and other stockholder matters.
The company is a controlled company and has elected to use certain NASDAQ exemptions relating to board independence and nomination and compensation processes.
Grant Thornton issued an unqualified opinion on the consolidated financial statements but an adverse opinion on internal control over financial reporting. A material weakness related to income-tax controls remained outstanding at year-end after an omitted $1.4 million tax effect was identified in prior-period reporting.
The company recorded a $9.8 million tax benefit from reversing the U.S. valuation allowance. Future realization of deferred tax assets depends on generating sufficient taxable income.
The company had a $5.3 million remaining federal tax obligation under a settled IRS audit matter, potential state tax exposure of approximately $1.4 million plus interest, and $9.2 million of gross unrecognized tax benefits at year-end.
The company recorded a $7.5 million liability for a supplemental executive retirement obligation following the death of former Chairman and CEO James J. Cotter, Sr.; the underlying guaranteed payment obligation was approximately $10.2 million before discounting.

Most important facts for investors to verify

Whether the New Zealand credit facility and Union Square Theatre loan were refinanced on acceptable terms after their 2015 maturities.
Whether operating cash flow remains sufficient to fund debt service, capital spending, lease obligations, and real estate development.
The sustainability of earnings excluding the $9.8 million deferred-tax valuation allowance reversal and other unusual items.
Progress and cash realization from the Burwood and Moonee Ponds property transactions, including the timing and collectability of deferred Burwood consideration.
Remediation of the material weakness in income-tax controls and whether any restatements or additional control deficiencies arise.
The effect of currency movements, interest rates, film availability, attendance trends, and competition on cinema margins.
The status and potential consequences of the Cotter family trust and estate disputes, including voting control and related-party governance matters.
The company’s ability to manage $192.2 million of future operating lease commitments and scheduled debt maturities.
Potential exposure from tax, environmental, asbestos, earthquake, and other contingent claims, including the unresolved potential state-tax liability.