Business Context and Reporting Period
Reading International, Inc. filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2017. The company operates 58 cinemas with 469 screens across the United States, Australia, and New Zealand, and owns or develops retail, commercial, and live-theater real estate.
Reporting currency is U.S. dollars; amounts below are in thousands except per-share data. The company reports two segments: cinema exhibition and real estate.
Financial Performance and Position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $72,413 | $66,918 | $141,867 | $131,707 |
| Operating income | $7,760 | $6,088 | $13,291 | $10,782 |
| Income before taxes | $24,898 | $4,585 | $29,644 | $8,043 |
| Net income | $19,052 | $2,922 | $22,095 | $5,149 |
| Net income attributable to RDI shareholders | $19,032 | $2,970 | $22,063 | $5,199 |
| Diluted EPS | $0.81 | $0.13 | $0.94 | $0.22 |
- Cinema revenue increased 6% in Q2 and 7% for the first half. Cinema segment operating income increased 7% in Q2 to $9,788 and 12% for the first half to $18,879.
- Real estate revenue increased 30% in Q2 to $6,933 and 8% for the first half to $11,431. Real estate segment operating income increased 38% in Q2 to $2,756 but declined 1% for the first half to $4,051.
- Consolidated operating margin was approximately 10.7% in Q2 2017 versus 9.1% in Q2 2016, and approximately 9.4% for the first half versus 8.2% in the prior-year period.
- Cash flow from operations was $5,988 for the first six months, down from $8,468. Capital expenditures and property additions were $24,824, compared with $24,489 in the prior-year period.
- Investing activities generated $6,836, primarily from $18,415 of insurance recoveries and $16,606 of asset-sale proceeds, partially offset by $24,824 of property additions and $3,160 of demolition costs.
- Financing activities used $18,720, including $38,255 of debt repayments, $22,869 of new borrowings, and $3,400 of Class A share repurchases.
- Cash and cash equivalents declined to $13,075 at June 30, 2017 from $19,017 at December 31, 2016.
- Total borrowings were $130,596 net of deferred financing costs, compared with $143,614 at year-end 2016. Current debt increased to $8,058 from $567, while long-term debt declined to $95,091 from $115,707.
- Total stockholders’ equity increased to $174,340 from $146,615, and the reported debt-to-equity ratio declined to 0.77 from 1.01.
- Working capital was negative $6,566 and the current ratio was 0.89 at June 30, 2017. Management reported $74,841 of unrestricted borrowing capacity, plus $49,500 remaining under Union Square construction financing and approximately $13,200 of New Zealand construction capacity.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by Australia, where cinema revenue increased 13% in Q2 and 16% for the first half, reflecting higher attendance and favorable currency translation. U.S. cinema revenue was broadly flat in Q2 and increased 4% for the first half. New Zealand cinema revenue increased 7% in Q2 but declined 2% for the first half because of the temporary Courtenay Central closure.
- The increase in reported earnings was dominated by nonrecurring or unusual items. Q2 included a $9,417 gain on the sale of the Burwood landholding and a $9,217 gain on insurance recoveries related to earthquake damage in New Zealand.
- Management estimated the after-tax effect of the Burwood sale at $6,697, or $0.29 per share, and the after-tax effect of insurance recoveries at $8,362, or $0.36 per share, in Q2. For the first half, the respective effects were $6,401 and $8,362.
- Foreign currency translation increased accumulated other comprehensive income by $8,401 in the first half. A $820 foreign-exchange gain on certain intercompany advances was also recognized in earnings.
- Legal expenses related to the Cotter derivative litigation, employment arbitration, and related matters were $387 in Q2 and approximately $1,000 for the first half. The company’s $10 million directors’ and officers’ insurance policy used for defense costs has been exhausted.
- Shares outstanding declined following repurchases of 210,949 Class A shares for $3,400 at an average price of $16.02. $21,620 remained available under the $25 million repurchase authorization at June 30.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management’s three-year strategy emphasizes new cinema development, upgrades to existing cinemas, enhanced food and beverage offerings, premium seating and presentation, and redevelopment of real estate assets.
- Two Australian cinemas are expected to begin operations in 2019, and the board approved one additional leasehold cinema in Australia and one in New Zealand, expected to open during 2019 and 2020.
- Union Square redevelopment in New York is underway, with approximately $8,900 of first-half capital expenditures and anticipated retail fit-out by or before the end of the third quarter of 2018.
- Newmarket expansion in Brisbane is expected to open in the fourth quarter of 2017. The company spent $7,500 during the first half and estimated $19,100 remained to complete the project before year-end.
- The Burwood transaction generated a remaining receivable of $28,100, expected to be settled by December 2017. The company recognized the full transaction gain after receiving an additional $16,500 payment.
- The company received a final $20 million insurance settlement in May 2017, reaching the $25 million policy limit for the Courtenay Central earthquake loss. The site was reopened in March 2017, while redesign and redevelopment work continues.
- STOMP continues to perform at the Orpheum Theatre. The company was awarded $2,300 in legal fees and costs and had received $1,100 through June 30, plus $427 in July; final payment is due by June 2019 under the payment agreement.
- Material risks include film slate and attendance volatility, competition from streaming and other entertainment, cinema lease and operating costs, construction delays and financing needs, foreign exchange exposure, earthquakes and other property damage, litigation, and potential changes in control.
- A California court proceeding involving the Cotter Living Trust could result in a court-directed sale of Class B voting stock and a potential change in control. The board appointed a Special Independent Committee on August 7, 2017 to oversee related litigation and potential change-of-control matters.
- The company expects to adopt the revenue recognition standard in 2018 and the lease standard in 2019. Management expects the lease standard could result in material recognition of right-of-use assets and lease liabilities because many cinemas operate under leases.
- Management stated that disclosure controls were effective as of June 30, 2017 and that no material changes occurred in internal control over financial reporting during the quarter.
Most Important Facts for Investors to Verify
- Separate recurring operating performance from the $9.4 million Burwood gain and $9.2 million insurance recovery gain that drove much of the earnings increase.
- Confirm collection of the remaining $28.1 million Burwood receivable and monitor the expected December 2017 settlement.
- Assess liquidity given $13.1 million of cash, negative working capital of $6.6 million, upcoming debt maturities, lease obligations, and ongoing redevelopment spending.
- Review progress, remaining funding needs, leasing, and completion timing for Union Square and Newmarket projects.
- Monitor the Cotter litigation, employment arbitration, exhausted D&O insurance coverage, and the potential court-directed sale of Class B voting stock.
- Evaluate the sustainability of cinema growth, particularly Australia’s performance, New Zealand’s recovery after the earthquake disruption, and the impact of future film releases.
- Consider foreign currency sensitivity: management estimated that a 10% currency movement would change quarterly net income by approximately $1.5 million for Australian assets and $0.7 million for New Zealand assets.