READING INTERNATIONAL INC annual report, FY2016

Reading International, Inc. — 2016 Form 10-K Summary

Business Context and Reporting Period

Reading International, Inc. filed its Form 10-K for the fiscal year ended December 31, 2016, including fourth-quarter results. The company operates two segments: cinema exhibition and real estate development, ownership, and rental. Operations span the United States, Australia, and New Zealand. At year-end, Reading operated or managed 58 cinemas with 469 screens and had approximately 2,793 employees.

Financial Performance and Position

Metric	2016	2015	Change
Total revenue	$270.5 million	$257.9 million	5% increase
Operating income	$20.3 million	$23.7 million	14% decrease
Net income attributable to RDI	$9.4 million	$23.1 million	59% decrease
Basic EPS	$0.40	$0.99	60% decrease
Cash flow from operations	$30.2 million	$28.6 million	6% increase
Capital expenditures, including acquisitions	$49.2 million	$53.1 million	7% decrease
Total assets	$405.8 million	$372.2 million	9% increase
Gross debt	$148.5 million	$130.9 million	13% increase
Stockholders’ equity	$146.6 million	$139.0 million	5% increase

Cinema revenue increased 6% to $256.9 million, led by higher admissions, food and beverage sales, new or refurbished cinemas, and the opening of the Olino cinema in Hawaii. Cinema segment operating income increased 11% to $35.5 million. Admission revenue represented 64% of cinema revenue, food and beverage revenue 29%, and advertising and other revenue 7%.

Real estate segment revenue decreased 3% to $20.9 million, while segment operating income increased 2% to $6.9 million. The segment benefited from the Cannon Park acquisition and lower litigation costs, but was affected by the Union Square closure, the Wellington earthquake, and the sale of certain properties.

Net income was substantially below 2015 because 2015 included approximately $11.0 million of property-sale gains, while 2016 included higher corporate general and administrative expenses and a $1.4 million casualty loss related to the Wellington earthquake. General and administrative expense increased 46% to $21.7 million, principally because of legal costs, audit and tax work, executive-related expenses, and equity compensation.

Liquidity, Debt, and Cash Flow

Cash and cash equivalents were $19.0 million at December 31, 2016, compared with $19.7 million at year-end 2015.
Unrestricted borrowing capacity was $55.6 million, with additional restricted construction capacity for Union Square and New Zealand projects.
Working capital was positive at $6.7 million, compared with a $35.6 million deficit in 2015.
The debt-to-equity ratio was 1.01, compared with 0.94 in 2015; reported debt-to-EBITDA was 4.14.
Operating cash flow of $30.2 million was more than offset by $42.9 million of investing cash outflows, primarily capital expenditures.
Debt maturities included approximately $16.5 million in 2018 and $95.8 million in 2019, based on scheduled principal payments at year-end.
The company expects to receive approximately $42.3 million by the end of 2017 from the deferred sale of its Burwood, Australia property, subject to applicable prepayment provisions.

Material Changes Versus the Prior Comparable Period

Revenue increased 5%, but operating income declined 14% and net income attributable to RDI declined 59%.
Cinema operating performance improved, with revenue up 6% and operating income up 11%.
Real estate revenue declined 3%, while real estate operating income increased modestly.
Corporate general and administrative expense increased by $6.8 million, largely due to legal and tax-related costs.
Gross debt increased by $17.6 million, while operating cash flow improved by $1.6 million.
Investing cash outflows increased to $42.9 million from $29.7 million in 2015, reflecting continued development and property investment.
The company completed or arranged several financings, including a $20.0 million Cinema 1,2,3 refinancing, an $8.4 million headquarters mortgage, and $57.5 million of Union Square construction financing, of which $8.0 million had been advanced by year-end.
Reading adopted retrospective accounting for gift-card breakage income. The change increased 2016 revenue by $618,000 and net income by $385,000; comparative periods were restated.

Guidance, Outlook, Risks, and Unusual Items

Management’s three-year strategy, approved on March 2, 2017, emphasizes developing new cinemas, upgrading existing cinemas and food and beverage offerings, and redeveloping real estate assets, including Union Square, Cinemas 1,2,3, and entertainment-themed centers in Australia and New Zealand. No quantitative earnings or revenue guidance was provided.

Union Square redevelopment is expected to create approximately 73,322 square feet of retail and office space, with completion anticipated in the second quarter of 2018. Estimated total project cost was $71.9 million.
Construction of an eight-screen cinema and related retail and parking improvements at Newmarket in Brisbane commenced in 2016, with projected opening in the fourth quarter of 2017.
The November 2016 Wellington earthquake damaged the Courtenay Central parking structure, which was written down by $9.9 million and is scheduled for demolition. The company recorded a $1.4 million casualty loss, a $5.9 million demolition liability, and a $9.5 million insurance recoverable asset after receiving a $5.0 million advance.
Operating lease commitments totaled $242.4 million, including $31.3 million due in 2017.
Legal matters include the Cotter family control and trust disputes, derivative litigation, employment arbitration involving former CEO James J. Cotter, Jr., and related governance uncertainty. The company reported $14.9 million of costs associated with derivative litigation and the employment arbitration, including $12.8 million incurred in 2016; directors and officers insurance limits had been exhausted.
The company faces competition from larger cinema chains, alternative in-home entertainment, film-access and distribution risks, labor-cost inflation, foreign-currency exposure, interest-rate risk, real estate development risk, earthquakes, environmental claims, and refinancing requirements.
The Cotter Estate and Cotter Trust collectively held approximately 66.9% of Class B voting stock at year-end, while the filing states that Ellen and Margaret Cotter had voting power over approximately 71.9%. A court-ordered sale of trust shares could result in a change of control.
The company does not hedge its Australian and New Zealand currency exposure. A 10% currency movement was estimated to affect Australian and New Zealand asset values by approximately $12.5 million and $3.9 million, respectively.

Important Facts for Investors to Verify

Reconcile the reported 2016 net income decline with the absence of 2015 property-sale gains, higher legal expenses, and the Wellington casualty loss.
Review debt maturities, covenant requirements, interest-rate sensitivity, and the company’s ability to refinance obligations due primarily in 2018 and 2019.
Assess the availability and timing of the $42.3 million Burwood receivable and the related buyer prepayment provisions.
Evaluate insurance coverage, deductibles, timing, and collectability for the Wellington earthquake recoverable asset and business-interruption claims.
Monitor Union Square and Newmarket construction costs, financing availability, leasing progress, and completion schedules.
Review the Cotter trust litigation, derivative action, employment arbitration, potential additional legal costs, and possible effects on corporate control.
Consider the sustainability of cinema revenue growth given film availability, competition, shortened release windows, premium amenities, and consumer adoption of streaming alternatives.
Verify the impact of the retrospective gift-card breakage accounting change and the $611,000 fourth-quarter out-of-period tax adjustment.
Note that the company has never declared a cash dividend and that its March 2017 authorization for a new $25.0 million Class A share repurchase program occurred after the reporting date.