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. The filing covers the three and nine months ended September 30, 2012, compared with the corresponding 2011 periods. At September 30, 2012, the company operated 52 cinemas with 437 screens, held interests in three additional joint-venture cinemas, and managed two cinemas.
Financial Performance and Position
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Total revenue | $63.9 million | $66.6 million | $189.3 million | $187.6 million |
| Operating income | $4.2 million | $7.0 million | $14.6 million | $16.2 million |
| Operating margin | 6.5% | 10.5% | 7.7% | 8.6% |
| Net income attributable to common shareholders | $0.4 million | $0.04 million | $0.4 million | $15.0 million |
| Basic earnings per share | $0.02 | $0.00 | $0.02 | $0.66 |
| Cash flow from operations | Not separately provided | Not separately provided | $12.5 million | $17.1 million |
Cinema revenue declined 4.2% in the quarter but increased 0.6% for the nine months. Real estate revenue increased 3.4% in the quarter and 7.1% for the nine months. Nine-month segment operating income was $17.0 million for cinema exhibition and $8.0 million for real estate, compared with $19.4 million and $7.7 million, respectively, in 2011.
At September 30, 2012, cash and cash equivalents were $22.5 million, and time deposits were $8.0 million, for total cash and time deposits of approximately $30.5 million. Total assets were $430.2 million and total stockholders’ equity was $134.1 million. Notes payable totaled $202.3 million, including $165.4 million of notes payable, $9.0 million of related-party debt, and $27.9 million of subordinated debt. Current liabilities were $68.8 million.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue decreased $2.6 million, primarily because of lower Australian cinema admissions and ticket prices. Cinema segment operating income fell 33.9% to $5.3 million.
- Nine-month revenue increased modestly, but cinema segment operating income declined 12.3% because of weaker Australian admissions, higher operating costs, and unfavorable operating leverage.
- Quarterly net income attributable to common shareholders increased to $363,000 from $37,000, helped by a $3.1 million reduction in net interest expense, including lower interest-rate-swap mark-to-market expense.
- Nine-month earnings declined sharply from $15.0 million to $361,000. The 2011 period benefited from a $13.8 million reversal of an Australian deferred-tax valuation allowance and a $1.7 million gain on a discontinued cinema operation.
- Operating cash flow declined $4.6 million year over year. Investing cash use increased to $15.1 million, including $8.0 million for time deposits, $5.5 million for Coachella land, $5.0 million for property enhancements, and $1.8 million for a note receivable.
- Debt repayments of $26.1 million exceeded new borrowings of $16.2 million during the nine months, resulting in $6.7 million of net financing cash use.
Guidance, Outlook, Risks, and Unusual Items
- No formal earnings guidance was provided. Management expects to continue selectively expanding cinema operations, discontinue underperforming locations, pursue real estate development and monetization opportunities, and convert its cinema assets to digital projection.
- The company opened an eight-screen art cinema in the Washington, D.C. area and planned to close its Kukui cinema in Hawaii in November 2012. It had already terminated operations at its Hastings, New Zealand cinema.
- Management expected to fund approximately $15.5 million of U.S. digital projection equipment through leasing. It estimated potential equipment costs of approximately $8.0 million for Australia and $2.0 million for New Zealand, with implementation expected to begin in the first quarter of 2013.
- The company recorded a $283,000 impairment charge related to its Indooroopilly property, which was under contract to be sold for $12.4 million and was expected to close by the end of November 2012.
- On October 31, 2012, the company replaced its GE Capital term loan with a Bank of America credit facility. The filing describes the facility as $30.0 million in Note 18 but as $35.0 million in the liquidity discussion; this inconsistency should be verified.
- Hurricane Sandy damaged several cinemas and theaters after quarter-end. Repair costs, lost business, and insurance recoveries were still being evaluated.
- A pending Australian personal-injury claim seeks more than $3.1 million, is uninsured because the prior insurer is bankrupt, and cannot yet be reliably estimated. Management does not believe the ultimate resolution will materially affect the financial statements.
- Liquidity requirements include refinancing the $6.5 million Liberty Theatre debt due April 1, 2013, scheduled tax settlement payments of approximately $290,000 per month, debt service, and digital-conversion spending. Management believed available borrowing capacity and cash and time deposits were sufficient for the next twelve months.
- Material risks include film availability and popularity, cinema competition and changing entertainment technology, foreign-currency exposure, variable interest rates, real estate development and entitlement risk, tax contingencies, litigation, and access to capital.
Most Important Facts for Investors to Verify
- Reconcile the reported Bank of America facility amount of $30.0 million versus $35.0 million.
- Assess refinancing plans and covenant compliance for debt maturing in 2013, particularly the Liberty Theatre and Cinemas 1, 2, 3 loans.
- Monitor Australian cinema attendance, ticket pricing, and segment margins, which drove the principal operating deterioration.
- Evaluate the timing and proceeds of the Indooroopilly sale and the status of the Lake Taupo property, whose prior sale agreement was terminated.
- Determine the financial impact of Hurricane Sandy, including repair costs, lost revenue, and insurance recoveries.
- Review deferred-tax assets, the $24.6 million of accrued income-tax liabilities, and the expected $0.9 million to $1.8 million increase in uncertain-tax-position reserves over the following twelve months.
- Consider foreign-currency sensitivity: management estimated that a 10% currency movement could change quarterly net income by approximately $133,000 for Australian assets and $46,000 for New Zealand assets.