Reading International, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the period ended June 30, 2019, filed August 9, 2019. Reading operates 60 cinemas with 483 screens across the United States, Australia, and New Zealand, and owns or develops retail, commercial, live-venue, and other real estate assets. The company reports cinema exhibition and real estate segments.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Revenue | $76.1 million, down 10% | $137.6 million, down 14% |
| Operating income | $5.8 million; 7.6% margin | $4.5 million; 3.3% margin |
| Net income | $2.4 million; 3.1% margin | $0.3 million; 0.2% margin |
| Net income attributable to RDI shareholders | $2.4 million; diluted EPS $0.10 | $0.3 million; diluted EPS $0.01 |
| Cash flow from operating activities | Not separately provided for the quarter | $3.1 million |
At June 30, 2019, cash and cash equivalents were $8.5 million, versus $13.1 million at December 31, 2018. Total assets were $672.8 million and total equity was $177.7 million. Current assets of $28.8 million were substantially below current liabilities of $109.1 million, resulting in a current ratio of 0.26 and working-capital deficit of $80.4 million.
Total borrowings, including subordinated debt and net of deferred financing costs, were $183.3 million, compared with $162.7 million at year-end 2018. Gross debt was $186.9 million, including $40.6 million classified as current. The debt-to-equity ratio was 1.05, compared with 0.93 at December 31, 2018. The company reported $101.96 million of unused borrowing facilities, of which $83.0 million was unrestricted.
Six-month investing cash outflows were $24.0 million, including $23.2 million for operating and investment properties and $1.4 million for the Devonport, Tasmania cinema acquisition. Financing cash inflows were $16.5 million, reflecting $34.7 million of borrowings, $14.9 million of repayments, and $2.6 million of share repurchases. Cash decreased by $4.6 million during the six months.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue declined $8.2 million, or 10%, and first-half revenue declined $22.5 million, or 14%.
- Cinema revenue decreased 10% in the quarter and 14% year to date. Cinema segment operating income fell 26% in the quarter and 48% for the first six months.
- Real estate revenue decreased 13% in the quarter and 12% year to date. Real estate segment operating income declined 31% in both periods.
- Management attributed weaker results primarily to a soft worldwide film slate, lower attendance, adverse Australian and New Zealand currency movements, and the temporary closure of most of the Courtenay Central property in Wellington because of seismic concerns.
- U.S. cinema attendance fell 13% in the quarter and 17% year to date; Australia attendance fell 5% and 10%, respectively; New Zealand attendance fell 34% and 36%, respectively. Higher U.S. spend per patron partially offset lower attendance.
- General and administrative expense decreased 18% in both the quarter and first six months, primarily because of lower legal expenses. Interest expense increased 23% in the quarter and 20% year to date.
- The company adopted ASC 842 lease accounting on January 1, 2019. Operating lease right-of-use assets of $224.9 million and operating lease liabilities of $238.3 million were recognized. Management stated that adoption materially affected the balance sheet but not the income statement or cash flow statement.
- Cash from operations declined 77% to $3.1 million for the first six months, although investing cash usage decreased from $43.0 million to $24.0 million.
Guidance, Outlook, Commentary, Risks, and Unusual Items
No formal quantitative earnings or revenue guidance was provided. Management plans to continue cinema refurbishments, expand premium seating and food-and-beverage offerings, develop new Australian cinemas, complete the 44 Union Square redevelopment in New York, assess Courtenay Central redevelopment, and pursue other real estate development opportunities. Capital spending on cinema activities was expected to increase during the remainder of 2019.
The 44 Union Square project topped out in July 2019, and management reported final negotiations for a long-term lease covering approximately 90% of net rentable area. The company anticipated refinancing its Bank of America credit line during the third quarter of 2019. Subsequent to quarter-end, the Bank of America credit facility and line of credit were extended to September 1, 2020.
Important risks include film slate and attendance volatility, competition from streaming and other entertainment options, fixed cinema occupancy costs, foreign currency exposure, interest-rate risk, construction and redevelopment execution, seismic risk in New Zealand, financing and refinancing requirements, litigation, environmental and legacy railroad liabilities, taxes, and cybersecurity. A 1% change in short-term interest rates was estimated to affect quarterly interest expense by approximately $255,000. The company does not currently plan to hedge Australian and New Zealand dollar exposure.
The Courtenay Central cinema and portions of the associated retail property remained closed because of seismic concerns; a three-screen temporary cinema opened in Lower Hutt in June 2019. The company acquired a four-screen Devonport, Tasmania cinema for approximately $1.4 million in January 2019.
The Cotter, Jr. derivative litigation remained on appeal, with a $1.55 million cost judgment in favor of the company. The company incurred approximately $547,000 of related defense costs during the first six months of 2019. A separate employment arbitration resulted in a $313,000 separation payment, approximately $443,000 of legal fees and costs, and $14,250 of arbitration costs paid in March 2019.
The company repurchased 196,955 Class A shares during the first six months for $2.6 million and had $13.5 million remaining under its repurchase authorization at June 30, 2019. Management stated that current litigation was not reasonably likely to have a material adverse effect, while acknowledging that outcomes could materially affect a particular reporting period.
Investor Verification Checklist
- Verify the sustainability of liquidity given $8.5 million of cash, a $80.4 million working-capital deficit, and $40.6 million of current debt.
- Review refinancing and maturity risk, particularly debt maturities in 2019 and 2020 and the status of the Bank of America facilities.
- Assess whether cinema attendance and the film slate recover, especially in the United States and New Zealand.
- Monitor Courtenay Central redevelopment plans, seismic remediation, temporary closure effects, and potential impairment exposure.
- Track 44 Union Square construction costs, financing advances, leasing progress, and completion timing.
- Separate operating performance from the significant balance-sheet effects of ASC 842 lease adoption.
- Evaluate foreign-exchange sensitivity for Australian and New Zealand operations and assets.
- Review the ultimate cost and resolution of the Cotter litigation and other legal, environmental, pension, and contingent obligations.