Business Context and Reporting Period
Reading International, Inc. operates 58 multiplex cinemas with 469 screens and owns, develops, leases, or licenses real estate and live-theater assets in the United States, Australia, and New Zealand. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2017, compared with the corresponding 2016 periods.
Financial Performance and Position
| Metric | Q3 2017 | Q3 2016 | Nine Months 2017 | Nine Months 2016 |
|---|---|---|---|---|
| Total revenue | $66.1 million | $71.3 million | $208.0 million | $203.0 million |
| Operating income | $3.6 million | $6.6 million | $16.9 million | $17.4 million |
| Net income | $1.5 million | $3.9 million | $23.6 million | $9.1 million |
| Net income attributable to RDI | $1.6 million | $3.9 million | $23.6 million | $9.1 million |
| Basic EPS | $0.07 | $0.17 | $1.02 | $0.39 |
| Operating margin | 5.5% | 9.3% | 8.1% | 8.6% |
| Net margin | 2.2% | 5.5% | 11.3% | 4.5% |
Cinema revenue was $62.1 million in the quarter, down 9%, while real-estate segment revenue was $6.0 million, up 12%. Nine-month cinema revenue increased 2% to $196.1 million, and real-estate revenue increased 9% to $17.5 million.
At September 30, 2017, total assets were $418.1 million, cash and cash equivalents were $8.9 million, and working capital was a deficit of $6.4 million. Total borrowings were $147.5 million net of deferred financing costs, comprising $8.1 million of current debt, $111.9 million of long-term debt, and $27.5 million of subordinated debt. Gross debt was $151.3 million, and the debt-to-equity ratio was 0.87.
Nine-month cash flow from operations was $8.8 million, compared with $14.5 million in 2016. Investing cash outflow was $13.2 million, including $44.5 million of property additions and capital expenditures, partly offset by $18.4 million of insurance recoveries and $16.6 million of asset-sale proceeds. Financing cash outflow was $5.4 million, including $6.5 million of share repurchases. Cash declined by $10.1 million from year-end 2016.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue declined 7%, primarily because of lower cinema attendance and weaker film product. Cinema segment operating income fell 31% to $6.7 million.
- Third-quarter cinema attendance declined across all three geographic markets: 12% in the United States, 14% in Australia, and 14% in New Zealand. Fixed occupancy costs caused cinema operating expense as a percentage of revenue to rise to 83% from 80%.
- Nine-month net income benefited from unusual items, including a $9.4 million gain on the Burwood, Australia land sale, a $9.2 million gain on Courtenay Central insurance recoveries, and a $0.9 million foreign-currency gain on intercompany advances.
- Nine-month segment operating income declined 4% to $31.2 million despite 2% revenue growth. Cinema operating income declined 4% and real-estate operating income declined 4%.
- Accumulated other comprehensive income increased to $22.4 million from $12.1 million, primarily due to foreign-currency translation gains.
- The company repurchased 403,156 Class A shares for $6.5 million at an average price of $15.92 per share, leaving approximately $18.6 million available under the authorized program.
Guidance, Outlook, Commentary, Risks, and Unusual Items
Management provided no quantitative earnings or revenue guidance. Its stated strategy is to expand and upgrade cinemas, improve food-and-beverage and premium offerings, and redevelop real-estate assets. Management expects new cinemas in Australia and New Zealand to open in approximately 2019 and 2020, subject to development execution.
- Union Square redevelopment in New York was described as on time and on budget, with retail fit-out anticipated in the third quarter of 2018. Total project investment was $28.1 million at September 30, 2017, with $49.5 million of construction financing capacity remaining.
- The Newmarket expansion in Brisbane was expected to open in December 2017; total investment reached $17.0 million, including $14.5 million during the first nine months.
- Courtenay Central in Wellington was affected by the 2016 earthquake, temporary closure, demolition, and redesign activity. Insurance proceeds reached the policy limit, but management stated that the settlement did not compensate for the delay in the development plan.
- The Minetta and Orpheum Theatres loan, with $7.5 million outstanding, was due within one year; the company was negotiating renewal. Management was also pursuing longer-term renewal of its Westpac facility.
- Liquidity depends on operating cash flow, asset monetizations, financing renewals, and available credit. Management reported $67.8 million of unused and unrestricted capacity, but cash was only $8.9 million and the current ratio was 0.89.
- The company faces litigation and arbitration involving former CEO James J. Cotter, Jr. The Cotter derivative action was expected to proceed to jury trial in the first quarter of 2018, and the employment arbitration remained in discovery. The $10 million directors-and-officers insurance policy used for defense costs had been exhausted.
- Trust litigation could result in a sale or transfer of Class B voting stock. The Cotter Trust and Estate were expected to control approximately 66.9% of Class B voting stock if the contemplated voting trust were funded, potentially allowing control over director appointments.
- Key operating risks include film slate and attendance volatility, competition from streaming and other entertainment, leased-cinema fixed costs, construction and tenant risks, foreign-currency exposure, interest-rate changes, litigation costs, and potential changes in control.
- The company expects the future lease accounting standard to create material right-of-use assets and lease liabilities because most operating cinemas use leased facilities. No material impact was expected from the other newly issued standards discussed.
Most Important Facts for Investors to Verify
- Whether cinema attendance and margins recover after the weak third-quarter film slate.
- The timing, cost, financing, and tenant commitments for Union Square, Newmarket, Courtenay Central, and other redevelopment projects.
- Renewal or refinancing of the Minetta and Orpheum loan and other facilities approaching maturity.
- Availability of cash and unrestricted borrowing capacity relative to capital expenditures, lease obligations, and debt service.
- Further legal costs and potential outcomes of the Cotter litigation, employment arbitration, and trust proceedings.
- The extent to which nine-month earnings were driven by nonrecurring Burwood, insurance, and foreign-currency gains rather than recurring operations.
- Foreign-currency sensitivity: management estimated that a 10% currency movement would change quarterly net income by approximately $1.8 million for Australian-dollar exposure and $716,000 for New Zealand-dollar exposure.