Reading International, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results for the three and six months ended June 30, 2013, compared with the corresponding 2012 periods. Reading operates 51 cinemas with 433 screens and has interests in additional cinemas, together with real estate and live-theater assets, in the United States, Australia, and New Zealand. The reportable segments are cinema exhibition and real estate.
Key financial metrics
| U.S. dollars in thousands, except per-share data | Three months 2013 | Three months 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Operating revenue | $69,642 | $62,947 | $129,209 | $125,378 |
| Operating income | $7,766 | $5,657 | $10,302 | $10,487 |
| Operating margin | 11.2% | 9.0% | 8.0% | 8.4% |
| Net income attributable to common shareholders | $4,135 | $239 | $3,468 | $(3) |
| Net margin attributable to common shareholders | 5.9% | 0.4% | 2.7% | — |
| Diluted EPS | $0.18 | $0.01 | $0.15 | $0.00 |
| Cash provided by operating activities | — | — | $9,488 | $8,240 |
Cinema revenue was $64.7 million in the second quarter and $119.4 million for the first six months. Real estate revenue was $5.0 million and $9.8 million, respectively. At June 30, 2013, cash and cash equivalents were $42.4 million, total assets were $387.0 million, and total stockholders’ equity was $116.7 million.
Total notes payable were $174.7 million, including $79.4 million classified as current, and subordinated debt was $27.9 million. Current liabilities totaled $134.3 million versus $70.6 million of current assets. The company also reported $193.9 million of lease obligations, $7.5 million of tax-settlement obligations, and $7.1 million of unfunded pension liabilities in its contractual-obligations table.
Material changes versus the prior comparable period
- Second-quarter revenue increased 10.6%, led by an 11.5% increase in cinema revenue. Cinema admissions increased in the United States and Australia, and New Zealand benefited from a previously earthquake-damaged multiplex reopening.
- Second-quarter cinema segment operating income increased 35.9% to $8.3 million, while real estate segment operating income declined 2.9% to $2.9 million.
- For the six months, revenue increased 3.1%, but operating income declined 1.8% and total segment operating income declined 1.7%, primarily because of weaker Australian cinema results and higher operating costs.
- Net income attributable to common shareholders improved substantially because net interest expense fell by approximately $3.0 million in the quarter and $4.1 million year to date. The improvement included favorable changes in the fair value of interest-rate swaps.
- Operating cash flow increased $1.2 million year over year. Investing activities provided $8.3 million in 2013 compared with $13.5 million of cash used in 2012, primarily reflecting proceeds from time deposits and a note receivable.
- Financing activities used $11.3 million, including $22.1 million of debt repayments, partially offset by $12.5 million of new borrowings. The company repaid its $9.0 million related-party note and refinanced its Liberty Theaters debt with a $7.5 million loan secured by the Minetta Lane and Orpheum theaters.
- Accumulated other comprehensive income declined by $18.5 million, principally because of foreign-currency translation losses. Comprehensive loss attributable to Reading shareholders was $15.0 million for the six months despite positive net income.
- A 3.3-acre Australian Moonee Ponds property, carried at $11.3 million, was reclassified to assets held for sale.
Guidance, outlook, commentary, and risks
No formal earnings guidance was provided. Management intends to continue evaluating cinema expansion and underperforming-asset dispositions, pursue selected real estate development and entitlement activities, and monetize assets when financially appropriate. Management expects to fund approximately $8.6 million of Australian and $2.5 million of New Zealand digital projection equipment purchases with cash during the third quarter of 2013.
- The Australian NAB Corporate Term Loan of $62.3 million and the U.S. Cinema 1, 2, 3 Term Loan of $15.0 million mature in June 2014. The company was negotiating extensions or replacement financing but stated that there was no assurance of success.
- Management believed cash and available borrowing capacity were sufficient for anticipated short-term working-capital requirements for the next twelve months, but the concentration of near-term debt maturities is a significant liquidity risk.
- The company has significant Australian and New Zealand exposure, does not hedge its foreign-currency exposure, and reported a $18.9 million year-to-date foreign-currency translation loss. A 10% currency movement was estimated to affect Australian and New Zealand assets by approximately $12.8 million and $3.5 million, respectively.
- A 1% change in short-term interest rates was estimated to change quarterly interest expense by approximately $162,000 after considering swaps and caps.
- The company remains exposed to film availability and popularity, competition from other entertainment formats, concession demand, real estate leasing and development conditions, financing availability, tax audits, litigation, environmental matters, and labor costs.
- On July 21, 2013, an earthquake damaged and temporarily closed the company’s Wellington parking structure. Repair costs had not been quantified; management believed insurance covered the damage and business interruption, subject to deductibles.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. No material changes to previously disclosed risk factors or litigation exposure were reported.
Important facts for investors to verify
- Progress and final terms of refinancing or extending the $77.3 million of debt maturing in June 2014.
- Actual cash requirements and funding for the planned Australian and New Zealand digital projection purchases.
- Operating performance of the Australian cinema circuit and the sustainability of the quarter’s revenue and margin improvement.
- Timing and proceeds from the planned sale of the Moonee Ponds property.
- Insurance coverage, deductibles, repair costs, and business interruption impacts related to the Wellington earthquake.
- Foreign-currency translation effects, interest-rate swap valuations, and the potential impact of future currency or interest-rate movements.
- Resolution and timing of the company’s $2.3 million of unrecognized tax benefits and continuing $22.2 million of accrued income-tax liabilities.