Business Context and Reporting Period
Reading International, Inc. filed its Form 10-K for the fiscal year ended December 31, 2015, with financial statements prepared under U.S. GAAP. The company operates two segments: cinema exhibition and real estate, across the United States, Australia, and New Zealand. At year-end, it operated or managed 58 cinemas with 476 screens, including joint ventures and managed locations.
The company’s cinema strategy emphasizes premium seating, upgraded food and beverage offerings, specialty cinemas, and selective new development. Its real estate strategy includes entertainment-themed centers, retail and commercial properties, live theaters, land holdings, and redevelopment projects.
Financial Performance and Position
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue | $257.3 million | $254.7 million | +1% |
| Operating income | $23.2 million | $22.2 million | +4% |
| Net income attributable to RDI | $22.8 million | $25.7 million | -11% |
| Basic diluted EPS | $0.98 / $0.97 | $1.10 / $1.08 | Declined |
| Operating cash flow | $28.6 million | $28.3 million | +1% |
| EBITDA | $49.6 million | $40.4 million | +23% |
| Total debt | $130.9 million | $164.0 million | -20% |
| Cash and equivalents | $19.7 million | $50.2 million | -61% |
| Stockholders’ equity | $137.2 million | $132.3 million | +4% |
| Working capital | $(38.5) million | $(15.1) million | Deficit widened |
Consolidated operating margin was approximately 9.0%, compared with 8.7% in 2014. Cinema revenue increased 2% to $242.3 million and cinema operating income increased 15% to $31.6 million. Real estate revenue decreased 11% to $21.6 million on a segment basis, while real estate operating income decreased 28% to $6.8 million. Consolidated real estate revenue was $15.0 million after intersegment eliminations.
Cinema revenue benefited from higher U.S. average ticket prices and higher attendance and concession sales in local currencies in Australia and New Zealand. Reported international results were reduced by the weaker Australian and New Zealand dollars. Approximately 65% of cinema revenue came from admissions, 29% from concessions, and 6% from advertising and other sources.
Cash flow from operations of $28.6 million was largely offset by $29.7 million of investing cash use and $28.0 million of financing cash use. Capital expenditures and acquisitions totaled $53.1 million, including the $24.3 million acquisition of the Cannon Park City Centre and Discount Centre in Queensland, Australia. Financing cash use included $24.7 million of debt repayment and $3.1 million of Class A share repurchases.
Material Changes Versus the Prior Comparable Period
- Net income attributable to RDI declined $2.9 million, primarily because 2014 included a $9.8 million income tax benefit from reversing a U.S. deferred-tax valuation allowance, whereas 2015 included $4.9 million of tax expense.
- Operating performance improved in cinema exhibition, with operating income rising $4.2 million, while real estate operating income fell $2.7 million.
- Net gain on asset sales increased to $11.0 million, principally from the Moonee Ponds property, a Los Angeles condominium, and Lake Taupo assets.
- Debt declined by $33.1 million, but cash declined by $30.5 million because excess cash was used for debt reduction, acquisitions, capital improvements, and share repurchases.
- Foreign currency translation reduced comprehensive income by approximately $16.5 million and reduced reported international revenue and asset values.
- The company opened an eight-screen cinema at LynnMall in Auckland, renovated the Harbourtown and Carmel Mountain cinemas, and added its first IMAX auditorium.
- In the fourth quarter, revenue was $66.1 million, net income attributable to RDI was $3.3 million, and diluted EPS was $0.14, compared with fourth-quarter 2014 revenue of $61.7 million, attributable net income of $17.2 million, and diluted EPS of $0.72. The prior-year quarter benefited from significant tax-related income.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management did not provide numerical revenue or earnings guidance. Its stated priorities are to upgrade existing cinemas, expand premium food and beverage offerings, develop selected cinemas, advance the Union Square and Cinemas 1, 2, 3 redevelopment projects, and expand the Newmarket, Auburn, and Courtenay Central properties.
- Union Square redevelopment received a key New York variance approval in March 2016; construction was expected to be completed in the second quarter of 2018, subject to remaining approvals.
- The company expected to refinance the $15.0 million Cinemas 1, 2, 3 term loan before its July 1, 2016 maturity. It reported $59.9 million of unused corporate credit capacity, plus additional unused property-level capacity.
- Contractual obligations totaled approximately $411.1 million, including $130.9 million of debt principal, $248.4 million of lease obligations, $23.98 million of estimated debt interest, and $7.8 million of pension obligations.
- Major risks include competition from larger cinema chains and streaming alternatives, access to attractive film product, foreign currency exposure, real estate development and entitlement risk, lease commitments, refinancing needs, labor and regulatory costs, earthquakes, environmental liabilities, and cybersecurity threats.
- The Cotter family estate and trust controlled or was deemed to control a substantial majority of voting power. Ongoing trust and derivative litigation created uncertainty regarding corporate control and management.
- Legal matters included derivative litigation seeking, among other relief, reinstatement of former CEO James J. Cotter, Jr.; related employment arbitration with claimed damages of at least $1.0 million; and the STOMP arbitration. The STOMP arbitrator upheld Liberty’s license agreement and awarded Liberty reasonable attorneys’ fees, with the final amount pending.
- The company recorded a fourth-quarter out-of-period tax adjustment that reduced 2015 income tax expense by $514,000. Management stated that it was not material to current or prior reported financial statements.
- Grant Thornton issued an unqualified opinion on the consolidated financial statements but an adverse opinion on internal control over financial reporting because of a material weakness in income-tax accounting and reporting. Management also concluded that disclosure controls were ineffective as of year-end and planned additional personnel, technology, and outside tax advisory resources.
- The company repurchased 240,102 Class A shares for $3.1 million during 2015 and had approximately $2.8 million remaining under its repurchase authorization. No cash dividends had been declared.
Most Important Facts for an Investor to Verify
- Whether the company successfully refinanced the $15.0 million Cinemas 1, 2, 3 loan and maintained sufficient liquidity after year-end.
- Progress, total funding requirements, leasing status, and expected returns for the Union Square, Cinemas 1, 2, 3, Newmarket, Auburn, and Courtenay Central developments.
- The underlying operating trends in attendance, average ticket price, concession spending, and film rental costs, excluding foreign exchange effects.
- The extent to which currency movements continue to affect Australian and New Zealand revenue, earnings, asset values, and debt service.
- Resolution and financial exposure from Cotter family control disputes, derivative litigation, employment arbitration, and related-party transactions.
- Remediation of the material weakness in income-tax controls and whether future tax adjustments or valuation allowance changes could materially affect earnings.
- The company’s ability to manage approximately $248.4 million of remaining lease payments alongside debt maturities and development spending.
- The economic substance and comparability of management’s non-GAAP EBITDA measure, which increased to $49.6 million in 2015.