Reading International, Inc. — FY2012 Form 10-K Summary
Business context and reporting period
The filing is the annual report for the fiscal year ended December 31, 2012, rather than a standalone quarterly filing. Reading operates two segments: Cinema Exhibition and Real Estate across the United States, Australia, and New Zealand. At year-end, the company reported 56 cinemas and 471 screens including wholly owned, consolidated, unconsolidated, and managed locations, approximately 24.0 million square feet of real estate, and total assets of $428.6 million.
Financial performance and position
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Revenue | $254.4 million | $245.0 million | 3.9% increase |
| Operating income | $19.1 million | $18.2 million | 5.2% increase |
| Operating margin | 7.5% | 7.4% | Approx. 10 bps increase |
| Net income attributable to shareholders | $(0.9) million | $10.0 million | Returned to loss |
| Basic EPS | $(0.04) | $0.44 | Decline |
| EBITDA | $36.8 million | $35.6 million | 3.3% increase |
| Cash provided by operations | $25.5 million | $24.3 million | 5.1% increase |
| Capital expenditures, including acquisitions | $13.7 million | $9.4 million | Increase |
| Total debt | $196.6 million | $209.6 million | $13.0 million decrease |
| Cash, cash equivalents and time deposits | $46.5 million | $31.6 million cash and equivalents | Increase |
| Working capital | $(21.4) million | $(12.8) million | Deficit widened |
| Stockholders’ equity | $131.0 million | $125.0 million | Increase |
Cinema revenue increased to $234.7 million from $225.8 million, and cinema segment operating income increased to $22.9 million from $21.6 million. U.S. cinema revenue rose 9.0%, primarily from the CalOaks acquisition and the new Angelika Mosaic cinema. Australian cinema revenue declined 3.0%, while New Zealand revenue increased 13.3% following the reopening of an earthquake-damaged multiplex.
Real estate revenue increased 2.6% to $27.3 million, but real estate segment operating income declined 13.2% to $9.5 million. Higher repairs, maintenance, insurance, legal expenses, and a $1.5 million impairment of the Coachella property reduced segment profitability.
Net loss attributable to shareholders was driven primarily by $4.9 million of income tax expense, $16.4 million of net interest expense, a $1.5 million impairment charge, and $0.4 million of losses from discontinued operations and the sale of discontinued operations. The 2011 result benefited from a $12.3 million income tax benefit, including a significant valuation-allowance adjustment.
Material changes versus the prior comparable period
- Revenue and operating income improved, but the company moved from $10.0 million of attributable net income in 2011 to a $0.9 million attributable net loss in 2012.
- Net interest expense declined by $4.6 million, partly because 2011 included a larger increase in the fair value of interest-rate swaps. Trust Preferred Securities also moved from a fixed 9.22% rate to three-month LIBOR plus 4.00% beginning May 1, 2012.
- Cash from operations increased to $25.5 million. Investing cash use was $6.1 million, while financing cash use was $12.7 million after $62.6 million of debt repayments and $47.0 million of new borrowings.
- The company opened an eight-screen Angelika cinema in the Washington, D.C. area and closed two four-screen cinemas. It substantially completed U.S. digital conversion and planned to complete Australian and New Zealand conversion in 2013.
- Reading sold its Indooroopilly property for $12.4 million and its Taringa properties for $1.9 million, using asset sales in part to release capital and reduce debt.
- Debt declined through refinancing and repayments, including replacement of the GE Capital term loan with a $30.0 million Bank of America revolver and renewal of the New Zealand credit facility.
Liquidity, debt and commitments
Management reported $46.5 million of worldwide cash, cash equivalents, and time deposits at December 31, 2012, but only approximately $7.5 million was unrestricted by loan covenants. Undrawn facilities included approximately $10.4 million under the Australian NAB revolver, $9.9 million under the New Zealand facility, and $3.0 million under the Bank of America line of credit.
Scheduled debt principal payments were $28.7 million in 2013, $86.4 million in 2014, $32.6 million in 2015, $3.0 million in 2016, and $18.0 million in 2017, with $27.9 million of subordinated debt due thereafter. Total contractual obligations, including debt, estimated interest, taxes, pensions, and leases, were $457.2 million. Operating lease commitments totaled $209.9 million, including the newly entered five-year digital projection equipment lease.
Management believed operating cash flow, borrowing capacity, and potential asset sales would be sufficient for anticipated needs, while acknowledging that future cash generation, refinancing, film access, economic conditions, and cost savings were uncertain.
Guidance, outlook, risks and unusual items
- Management described cinema as a mature business expected to produce relatively consistent cash flow. Growth priorities were cinema upgrades, specialty cinemas, selective acquisitions, and completion of digital conversion rather than broad conventional cinema expansion.
- Management intended to focus over time on real estate redevelopment, including projects at Cinemas 1, 2 & 3 and Union Square in Manhattan, Courtenay Central in Wellington, and selected Australian and New Zealand properties.
- Key risks include access to attractive films, competition from larger cinema chains and in-home entertainment, consumer discretionary spending, real estate values and leasing, development approvals, construction costs, environmental remediation, refinancing, interest rates, foreign exchange, and labor relations.
- The Coachella property was acquired for $5.5 million and written down by $1.5 million after an appraisal valued it at approximately $4.0 million. The property is 50% owned by Chairman and CEO James J. Cotter through a consolidated entity.
- The IRS tax settlement remained payable in installments of approximately $290,000 per month. The remaining federal tax obligation was $10.0 million at December 31, 2012, in addition to potential state tax exposure of approximately $1.4 million plus interest and penalties.
- Burwood, a former brickworks site, contains petroleum and asbestos contamination. Total remediation and site-preparation costs were estimated at $17.7 million, of which $8.6 million had been incurred by year-end.
- Related-party arrangements include leases with Sutton Hill Capital, management fees paid to an entity owned by a director’s daughter, the Village East put and call options, and the Cotter family’s interest in the Coachella property.
- The company had no common-stock dividend history and stated that it had no current plans to declare a dividend. The Class B voting stock was controlled by James J. Cotter, who held approximately 70.4% of the voting power.
Important facts for investors to verify
- Confirm the timing and terms of refinancing for the $28.7 million of 2013 scheduled debt maturities, including the Liberty Theater and Cinemas 1, 2 & 3 loans.
- Review covenant restrictions and the geographic availability of the company’s cash, particularly the limited unrestricted cash balance.
- Assess whether cinema operating improvements and digital-conversion investments are sufficient to offset film-access, pricing, attendance, and in-home entertainment pressures.
- Evaluate the realizability of the $50.6 million deferred tax asset balance, which was offset by a $37.9 million valuation allowance.
- Monitor the IRS installment obligation, potential state tax liability, uncertain tax positions, and related cash requirements.
- Reassess the carrying values and development prospects of Coachella, Burwood, Manukau, Moonee Ponds, Courtenay Central, and other held-for-development properties.
- Review related-party transactions, management arrangements, voting control, and the Village East put option exercisable beginning July 1, 2013.
- Consider that reported EBITDA is a non-GAAP measure and does not reflect interest, taxes, capital expenditures, lease commitments, debt service, or asset replacement needs.