Reading International, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Reading International operates multiplex cinemas and real estate assets in the United States, Australia, and New Zealand. At September 30, 2019, it operated 58 cinemas with 480 screens, including interests in joint ventures, and maintained cinema exhibition and real estate reporting segments. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2019, compared with the corresponding 2018 periods.
The Company adopted ASC 842 lease accounting on January 1, 2019 using the modified retrospective method. The adoption materially increased reported assets and liabilities but did not materially affect the income statement or cash flow statement; 2018 balance sheet information was not restated.
Financial Performance and Position
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Total revenue | $70.5 million | $74.3 million | $208.1 million | $234.4 million |
| Operating income | $2.9 million | $4.5 million | $7.4 million | $18.8 million |
| Net income | $0.9 million | $1.3 million | $1.1 million | $9.5 million |
| Net income attributable to RDI shareholders | $0.9 million | $1.3 million | $1.2 million | $9.4 million |
| Diluted EPS | $0.04 | $0.06 | $0.05 | $0.41 |
| Operating cash flow | Not separately provided | Not separately provided | $10.8 million | $19.1 million |
- Revenue declined 5% in the quarter and 11% for the first nine months. Cinema revenue decreased 6% and 12%, respectively; real estate revenue decreased 4% and 9%.
- Operating margin was approximately 4.1% in Q3 2019 versus 6.1% in Q3 2018, and approximately 3.6% for the first nine months versus 8.0% in the prior-year period.
- Net margin was approximately 1.2% in Q3 2019 versus 1.7% in Q3 2018, and approximately 0.5% for the first nine months versus 4.1% in 2018.
- Cinema segment operating income declined 27% in Q3 to $6.0 million and 42% for the nine months to $17.9 million. Real estate segment operating income increased 18% in Q3 to $1.5 million but declined 19% for the nine months to $4.0 million.
- Cash and cash equivalents were $8.7 million at September 30, 2019, down from $13.1 million at December 31, 2018. Current assets were $25.1 million against current liabilities of $101.2 million, producing a current ratio of 0.25.
- Net cash used in investing activities was $33.1 million, principally for operating and investment property additions, including the Union Square redevelopment. Financing activities provided $18.3 million, including $58.7 million of borrowings, offset by $31.7 million of repayments and $7.8 million of share repurchases.
- Total borrowings, net of deferred financing costs, were $192.3 million, up from $162.7 million at year-end 2018. Gross debt-to-equity was approximately 1.19 versus 0.93 at December 31, 2018.
- ASC 842 resulted in $217.0 million of operating lease right-of-use assets and $230.3 million of operating lease liabilities at September 30, 2019. Additional operating lease commitments not yet commenced were approximately $36.0 million.
Material Changes Versus the Prior Comparable Period
- The weaker worldwide film slate and lower attendance were the principal drivers of lower cinema revenue and profitability. For the nine months, U.S. attendance fell 16%, Australia attendance fell 7%, and New Zealand attendance fell 32%.
- New Zealand performance was adversely affected by the January 2019 closure of the Courtenay Central cinema and related portions of the real estate center because of seismic concerns. A three-screen, 440-seat pop-up cinema opened in Lower Hutt in June 2019.
- Three New York City cinemas closed in the second and third quarters after lease expirations, and the Company was unable to obtain commercially reasonable extensions or replacement leases.
- Foreign currency translation adversely affected reported results. The Australian and New Zealand dollars weakened against the U.S. dollar, producing a $7.4 million unfavorable foreign currency translation adjustment in other comprehensive income for the nine months.
- General and administrative expense declined 7% in Q3 and 15% for the nine months, primarily due to lower legal expenses, consulting fees, and compensation costs. Interest expense increased 7% in Q3 and 15% for the nine months as average debt balances increased.
- The Company acquired a four-screen cinema in Devonport, Tasmania, for approximately $1.4 million and exercised an option to acquire the Village East Cinema ground lease and improvements for $5.9 million, with closing anticipated around May 31, 2020.
- The Company repurchased 856,563 Class A shares during the first nine months for approximately $11.3 million, including 407,000 shares purchased in September through a $3.5 million purchase-money promissory note. Approximately $4.9 million remained available under the repurchase authorization at September 30.
Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide quantitative earnings or revenue guidance. Management expects to continue cinema upgrades, premium seating and food-and-beverage initiatives, new cinema development, the 44 Union Square redevelopment, planning for Courtenay Central, and infrastructure planning for the Manukau property. Management anticipates upgrading or beginning upgrades at nine cinemas and has lease agreements for five additional Australian cinemas totaling 31 screens expected to open during 2019–2021.
- 44 Union Square was topped out in July 2019; management expected to file for a core-and-shell temporary certificate of occupancy in December 2019 and reported final negotiations for a long-term lease covering approximately 90% of net rentable area.
- Near-term liquidity and refinancing are key considerations. The filing identifies the need to renew, extend, or refinance loans maturing in 2019 and 2020. Certain facilities were extended after quarter-end, including Bank of America facilities extended on November 5, 2019 to October 1, 2020.
- Contractual obligations totaled approximately $540.7 million, including $167.2 million of debt, $302.9 million of operating lease payments, $27.9 million of subordinated debt, $31.3 million of estimated debt interest, $5.3 million of pension liabilities, and the $5.9 million Village East purchase option.
- The Company is exposed to cinema attendance and film-slate volatility, competition from home and mobile entertainment, fixed occupancy costs, construction and development risks, seismic risks, foreign currency fluctuations, interest-rate risk, labor costs, taxation, environmental claims, and litigation.
- Two California employment matters involve wage-and-hour, discrimination, retaliation, and Private Attorneys General Act allegations. The matters are in early stages, damages have not been specified, no reserve has been recorded, and management believes potential liability is not material, although outcomes cannot be predicted.
- In the Cotter Jr. derivative litigation, summary judgment and a $1.55 million cost judgment favored the Company, but appeals remain pending. The Company incurred approximately $782,000 of related expense during the first nine months of 2019, and insurance coverage for directors’ and officers’ defense costs had been exhausted.
- No goodwill or indefinite-lived intangible asset impairment was recorded for the nine months. The next annual impairment evaluation was scheduled for the fourth quarter of 2019.
- A 1% change in short-term interest rates was estimated to affect quarterly interest expense by approximately $270,000. A 10% currency movement was estimated to change Australian and New Zealand asset values by approximately $7.6 million and $4.1 million, respectively.
Most Important Facts for Investors to Verify
- Liquidity relative to near-term debt maturities, particularly 2019–2020 maturities, available borrowing capacity, and subsequent facility extensions.
- Attendance, average ticket price, and spend-per-patron trends by country, especially the recovery prospects for New Zealand and the impact of the Courtenay Central closure.
- Progress, financing, leasing, cost, and occupancy milestones for the 44 Union Square redevelopment.
- The effect of ASC 842 lease liabilities and approximately $36.0 million of additional leases not yet commenced on leverage and future cash commitments.
- Foreign exchange sensitivity and the Company’s decision not to hedge most Australian and New Zealand currency exposure.
- Potential costs and outcomes of the Cotter Jr. appeals and California employment litigation.
- Whether continued share repurchases are appropriate given declining cash balances, negative working capital of approximately $76.1 million, and higher debt.