Reading International, Inc. — FY2017 Form 10-K Summary
Business context and reporting period
Reading International, Inc. reported results for the fiscal year ended December 31, 2017. The company operates 59 cinemas with 477 screens and owns, develops, or leases entertainment and real estate assets in the United States, Australia, and New Zealand. Its two reportable segments are Cinema Exhibition and Real Estate.
The company’s strategy combines relatively recurring cinema cash flows with capital-intensive real estate development. Major projects included the 44 Union Square redevelopment in New York, expansions at Newmarket and Auburn in Australia, and the redesign of Courtenay Central in Wellington following the 2016 earthquake.
Key financial metrics
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Revenue | $279.7 million | $270.5 million | +3.4% |
| Operating income | $20.6 million | $20.3 million | +1.2% |
| Net income attributable to RDI | $31.0 million | $9.4 million | +229.7% |
| Basic/diluted EPS | $1.35/$1.33 | $0.40/$0.40 | Significant increase |
| Operating margin | 7.4% | 7.5% | Modestly lower |
| EBITDA | $57.5 million | $35.9 million | +60.1% |
| Cash flow from operations | $23.9 million | $30.2 million | -21.0% |
| Capital expenditures, including acquisitions | $76.7 million | $49.2 million | +56.1% |
| Cash and cash equivalents | $13.7 million | $19.0 million | -$5.3 million |
| Gross debt | $134.5 million | $148.5 million | -$14.0 million |
| Stockholders’ equity | $181.2 million | $146.6 million | +23.7% |
FY2017 net margin was approximately 11.1%, compared with 3.5% in FY2016. The reported improvement was substantially influenced by non-recurring or unusual items rather than underlying operating growth.
Segment performance and material changes
- Cinema Exhibition: Revenue increased 3% to $263.5 million, supported by higher Australian admissions, improved food and beverage sales, and favorable foreign exchange. Segment operating income declined 7% to $33.0 million, and the segment margin decreased to approximately 12.5% from 13.8%.
- Real Estate: Segment revenue increased 14% to $23.8 million, while segment operating income increased 16% to $8.0 million. Growth reflected higher Newmarket rental income, business-interruption recoveries, and $1.8 million of fees recovered in connection with the STOMP settlement.
- Geographic mix: Consolidated gross revenue by jurisdiction was approximately $143.8 million in the United States, $106.2 million in Australia, and $29.7 million in New Zealand. Australia benefited from higher attendance and favorable currency translation; New Zealand was affected by the temporary Courtenay Central closure.
- Operating costs: Cinema cost of services and products rose 4% to $215.0 million, or approximately 82% of cinema revenue, versus 80% in 2016. Occupancy, labor, concession, and new-cinema costs increased.
- Cash generation and investment: Operating cash flow declined because of working-capital changes, while capital spending increased materially for Union Square, Newmarket, cinema upgrades, and Courtenay Central demolition and redevelopment.
- Capital return: The company repurchased 409,723 Class A shares for $6.5 million at an average price of $15.92, leaving approximately $18.5 million under its $25.0 million authorization.
Profit quality and unusual items
- Net income included a $9.2 million casualty gain related to insurance proceeds for the Wellington earthquake-damaged parking structure.
- The company recorded approximately $1.5 million of business-interruption insurance recovery in segment revenue.
- Net gain on asset sales was $9.4 million, principally from the final settlement of the Burwood, Australia land sale.
- The company recorded approximately $13.0 million of provisional income-tax expense related to the 2017 U.S. Tax Cuts and Jobs Act, including deferred-tax remeasurement and the mandatory repatriation tax. The company stated that the accounting was not yet finalized and could be adjusted in 2018.
- Fourth-quarter 2017 revenue was $71.8 million, net income attributable to RDI shareholders was $7.4 million, and diluted EPS was $0.32. Fourth-quarter results included approximately $2.5 million of net tax benefits from non-recurring tax items.
- A $544,000 out-of-period occupancy-cost adjustment was recorded in the fourth quarter; management concluded it was not material to current or prior periods.
Debt, liquidity, and commitments
At December 31, 2017, gross debt was $134.5 million, or $130.5 million net of deferred financing costs. The debt-to-equity ratio was 0.74, compared with 1.01 in 2016. Scheduled principal repayments were approximately $8.1 million in 2018 and $89.2 million in 2019, creating meaningful near-term refinancing and repayment requirements.
Cash and cash equivalents totaled $13.7 million. The company reported approximately $75.0 million of available and unrestricted corporate credit capacity, plus approximately $49.5 million of remaining Union Square construction financing and $12.8 million of New Zealand construction capacity. Working capital was negative $47.0 million and the current ratio was 0.42.
Future minimum operating lease payments totaled approximately $330.8 million, including $31.6 million due in 2018 and $31.6 million due in 2019. The company expects the adoption of the new lease accounting standard in 2019 to add material right-of-use assets and lease liabilities to the balance sheet.
Guidance, outlook, management commentary, and risks
- No formal numerical revenue, earnings, or cash-flow guidance was provided. Management emphasized sustainable, opportunistic growth rather than expansion at any cost.
- Management expects cinema growth primarily from premium seating, expanded food and beverage offerings, specialty cinemas, selective new construction, and refurbishment of existing locations.
- 44 Union Square construction was more than 50% complete, with tenant fit-out anticipated to begin in the third quarter of 2018, subject to acceptable leasing.
- Courtenay Central was reopened in March 2017, but the supermarket expansion and replacement parking configuration remained under review after the earthquake.
- Key operating risks include dependence on attractive film releases, competition from much larger exhibitors, streaming and in-home entertainment, rising labor and occupancy costs, and the need for continued capital investment.
- Real estate risks include construction delays, tenant demand, financing availability, interest rates, environmental matters, property illiquidity, and earthquake exposure in California and New Zealand.
- The company does not materially hedge foreign-currency exposure. A 10% currency movement was estimated to affect Australian and New Zealand asset values by approximately $12.4 million and $4.9 million, respectively, and annual net income by approximately $2.2 million and $883,000.
- Corporate control remains a significant risk. The Cotter Estate and Cotter Trust collectively held approximately 66.9% of Class B voting stock, and Ellen and Margaret Cotter were reported to control approximately 71.9% including their personal holdings. Litigation and trust proceedings could result in a change of control, increased costs, or management distraction.
- Outstanding litigation included Cotter-related derivative and employment matters. The company stated that current claims were not reasonably likely to have a material adverse effect, but future periods could be materially affected by litigation outcomes. The company incurred approximately $4.0 million of out-of-pocket Cotter-related defense costs in 2017 after its $10 million directors’ and officers’ insurance coverage was exhausted.
Important facts for investors to verify
- How much of FY2017 earnings and EBITDA is sustainable after excluding the earthquake insurance gain, Burwood asset-sale gain, STOMP recovery, and tax-related items.
- The status, cost-to-complete, financing, leasing, and expected returns of the 44 Union Square redevelopment.
- Repayment or refinancing plans for the approximately $89.2 million of scheduled 2019 principal payments and the June 2018 Minetta and Orpheum loan maturity.
- Actual attendance, ticket pricing, food and beverage margins, and occupancy-cost trends in the U.S. cinema operations.
- The final accounting impact of the Tax Cuts and Jobs Act and the recoverability of the company’s $24.9 million net deferred-tax asset.
- Potential changes in voting control arising from the Cotter trust litigation and any temporary trustee or sale process.
- The balance-sheet impact of adopting lease accounting requirements in 2019, given approximately $330.8 million of disclosed future operating lease payments.
- Progress and revised economics of Courtenay Central, including insurance recoveries, replacement parking, supermarket development, and tenant leasing.
- The filing’s clean audit opinion and management’s conclusion that internal control over financial reporting was effective as of December 31, 2017.