Reading International, Inc. — 2016 Q1 Form 10-Q Summary
Business context and reporting period
Reading International, Inc. operates multiplex cinemas and retail, commercial, and live-theater real estate in the United States, Australia, and New Zealand. The filing covers the three months ended March 31, 2016, compared with the three months ended March 31, 2015. At March 31, 2016, the company owned and operated 53 cinemas with 428 screens, held interests in three additional cinemas with 29 screens, and managed one cinema with four screens.
Financial performance and key metrics
| U.S. dollars in thousands, except per-share data | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $64,789 | $60,585 | 7% |
| Cinema revenue | $61,315 | $56,899 | 8% |
| Real estate revenue | $3,474 | $3,686 | (6%) |
| Operating income | $4,692 | $5,233 | (10%) |
| Operating margin | 7.2% | 8.6% | Down 1.4 pts |
| Net income | $2,224 | $3,102 | (28%) |
| Net income attributable to RDI stockholders | $2,226 | $3,118 | (29%) |
| Basic EPS | $0.10 | $0.13 | (29%) |
| Diluted EPS | $0.09 | $0.13 | (31%) |
| Cash flow from operating activities | $4,418 | $732 | +$3,686 |
| Capital expenditures and property additions | $4,184 | $2,614 | +$1,570 |
| Cash and cash equivalents at period-end | $16,330 | $39,752 | Q1 2015 comparative |
Cinema segment operating income increased 21% to $7.7 million, with a 14% increase in U.S. cinema revenue and a 16% increase in New Zealand cinema revenue. Real estate segment operating income declined 9% to $2.1 million. Consolidated operating margin was approximately 7.2%, while net margin attributable to common stockholders was approximately 3.4%.
Total debt, net of deferred financing costs, was $127.6 million at March 31, 2016, compared with $129.1 million at December 31, 2015. Gross debt was $129.2 million, including $27.9 million of subordinated debt. Current debt was $14.9 million and long-term debt was $85.5 million, excluding subordinated debt. The company reported $64.5 million of unused corporate credit capacity, plus $6.0 million of unused capacity for the Cinema 1, 2, 3 facility and $10.4 million of New Zealand construction funding.
Cash decreased by $3.4 million during the quarter to $16.3 million. Operating cash flow of $4.4 million was more than offset by $3.2 million of investing cash outflows and $4.7 million of financing cash outflows. Financing outflows primarily reflected $6.8 million of debt repayments, partly offset by $2.3 million of new borrowings.
Material changes versus the prior comparable period
- Revenue increased $4.2 million, driven primarily by higher cinema attendance, admission pricing, concessions, the reopened Carmel Mountain theater, and the LynnMall cinema opening.
- Cinema operating income increased $1.4 million, while real estate operating income declined $0.2 million.
- General and administrative expense increased approximately $1.7 million, primarily because of higher legal and audit costs and expenses related to changes in executive status.
- Interest expense declined $0.7 million, mainly following renegotiation of an Australian loan facility.
- Net gain on asset sales fell to $0.4 million from $2.8 million in Q1 2015, when the company sold the Doheny condominium and recognized a $2.8 million gain.
- The effective tax rate declined to 33.9% from 44.9%.
- Foreign-currency translation produced a $6.3 million comprehensive-income gain, compared with a $9.9 million loss in Q1 2015. This gain increased accumulated other comprehensive income to $18.1 million.
- The company surrendered its unprofitable Gaslamp Cinema in San Diego on January 31, 2016 and paid a negotiated $1.0 million termination fee.
- On December 23, 2015, the company acquired the Cannon Park City Centre and Cannon Park Discount Centre in Queensland for $24.3 million. The properties contributed approximately $0.7 million of Q1 2016 real estate revenue; the purchase-price allocation remained preliminary.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide formal numerical earnings or revenue guidance. Management plans to continue improving and selectively expanding the cinema portfolio, pursue premium formats and food-and-beverage offerings, develop existing real estate assets, and monetize non-core or underperforming assets where appropriate.
- Union Square redevelopment in Manhattan received a key zoning variance approval; demolition and preconstruction work began, with construction expected to be completed in the second quarter of 2018, subject to remaining approvals and execution.
- The company expects construction of an eight-screen cinema and retail project at Newmarket in Brisbane to begin in the third quarter of 2016, with a projected opening in the fourth quarter of 2017.
- Construction of a supermarket and retail expansion at Courtenay Central in Wellington was expected to begin in the third quarter of 2016, with occupancy targeted for the fourth quarter of 2017.
- On April 11, 2016, the company purchased a Culver City office building for $11.2 million. It expects potential annual headquarters occupancy savings of approximately $350,000 after relocation and leasing excess space. A mortgage was being pursued.
- The $15.0 million Cinema 1, 2, 3 term loan matured July 1, 2016. A non-binding refinancing agreement was signed in April 2016, and management expected replacement financing by the end of the second quarter.
- The company received a $2.3 million final arbitration award for attorney fees and costs in the STOMP dispute and was pursuing collection. Collection timing and ultimate recovery were not established in the filing.
- Derivative litigation relating to voting rights over 1,023,888 Class B shares was active ahead of the June 2, 2016 annual meeting.
- Management identified a material weakness in certain income-tax controls in 2015 and expected remediation during 2016, supported by additional tax personnel and an external accounting firm.
- Key ongoing risks include dependence on film product and attendance, competition from alternative entertainment and streaming, foreign-currency fluctuations, interest-rate exposure, real estate development and entitlement risks, debt refinancing, litigation, environmental liabilities, and possible impairment of long-lived assets, goodwill, and intangible assets.
Management reported that a 10% currency-rate fluctuation would change Australian and New Zealand asset values by approximately $14.0 million and $3.8 million, respectively, and quarterly net income by approximately $268,000 and $68,000. A 1% change in short-term interest rates would have changed quarterly interest expense by approximately $179,000.
Important facts for investors to verify
- Whether the July 2016 Cinema 1, 2, 3 term loan was successfully refinanced on acceptable terms.
- The final purchase-price allocation and any resulting measurement-period adjustments for the Cannon Park acquisition.
- Progress, funding requirements, approvals, leasing, and projected returns for the Union Square, Newmarket, and Courtenay Central developments.
- Cash collection and accounting treatment of the $2.3 million STOMP arbitration award.
- Resolution and potential effects of the derivative litigation involving the Cotter Estate and Cotter Trust shares.
- Remediation and testing of the identified income-tax control weakness.
- Liquidity after the $11.2 million headquarters acquisition, planned capital projects, debt maturities, and operating lease commitments.
- Exposure to Australian and New Zealand currencies, interest-rate movements, film slate performance, and potential asset impairments.