Reading International, Inc. — Q1 2012 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 company reported unaudited results for the three months ended March 31, 2012, compared with the three months ended March 31, 2011. At March 31, 2012, it operated 51 cinemas with 429 screens, held interests in three additional cinemas with 29 screens, and managed two cinemas with nine screens.
Financial Performance and Position
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenue | $62.7 million | $54.2 million | +15.5% |
| Cinema revenue | $57.4 million | $49.5 million | +16.0% |
| Real estate revenue | $5.3 million | $4.8 million | +10.1% |
| Operating income | $4.9 million | $2.0 million | +$2.9 million |
| Operating margin | 7.8% | 3.6% | +4.2 percentage points |
| Net loss | $0.1 million | $2.2 million | Improved by $2.1 million |
| Net loss attributable to common shareholders | $0.2 million | $2.5 million | Improved by $2.2 million |
| Loss per share | $0.01 | $0.11 | Improved |
| Cash flow from operations | $2.2 million | $0.5 million | +$1.8 million |
Cinema segment operating income increased to $5.7 million from $2.8 million, while real estate segment operating income increased to $2.9 million from $2.6 million. Cinema attendance increased by approximately 544,000 admissions, including a 518,000-admission increase in the United States. Cinema operating expense declined to 84.0% of gross revenue from 87.2%, benefiting from higher attendance and fixed rent leverage.
Cash and cash equivalents were $29.1 million at March 31, 2012, compared with $31.6 million at December 31, 2011. Total assets were $431.5 million and total stockholders’ equity was $131.9 million. Cash declined by $2.5 million during the quarter after $3.5 million of investing cash use and $1.7 million of financing cash use, partly offset by $2.2 million of operating cash flow and $0.5 million of foreign exchange effects.
Debt included $170.5 million of notes payable, $9.0 million of related-party debt, and $27.9 million of subordinated debt. Total notes payable, including current and long-term portions, were approximately $207.5 million. The $15.0 million Cinemas 1, 2, 3 term loan was classified as current because it matured on July 1, 2012.
Material Changes Versus the Prior Comparable Period
- Revenue increased $8.4 million, primarily because of stronger film product and higher U.S. attendance, with additional benefit from stronger Australian and New Zealand currencies.
- Operating income more than doubled, reflecting revenue growth and improved cinema expense leverage.
- Net loss attributable to common shareholders narrowed from $2.5 million to $0.2 million despite income tax expense increasing from $0.6 million to $1.6 million.
- Operating cash flow improved to $2.2 million from $0.5 million.
- The company acquired a 202-acre Coachella, California property for $5.5 million, zoned for up to 843 residential units. Chairman and controlling shareholder James J. Cotter funded half of the purchase price and received a 50% interest after Conflicts Committee approval.
- The company sold three Taringa-area properties in Brisbane for $1.9 million and sold approximately $3.0 million of marketable securities.
- The New Zealand credit facility was renewed for three years, with total availability reduced by $4.1 million to $32.8 million and the facility margin increased to 2.0%.
- Foreign currency translation increased accumulated other comprehensive income by approximately $4.0 million during the quarter.
Guidance, Outlook, Risks, and Unusual Items
Management did not provide formal quantitative earnings guidance. Its stated strategy is to expand selectively in cinema exhibition, continue developing or monetizing existing real estate assets, and pursue opportunistic acquisitions. Real estate development remains constrained because current economic conditions may not support the pre-construction leasing commitments required for new construction.
Management believes available borrowing capacity and the $29.1 million cash balance are sufficient for anticipated short-term working capital needs over the next twelve months. The company intends to refinance the $15.0 million Cinemas 1, 2, 3 loan or use bridge financing while pursuing a potential property sale. It also must pay approximately $290,000 per month, or $3.5 million annually, under an IRS tax settlement.
Key risks include dependence on the quality and popularity of film releases, competition from other entertainment formats, real estate development and leasing conditions, foreign currency movements, variable interest rates, access to financing, tax audits and uncertain tax positions, litigation, environmental obligations, and the ability to monetize or refinance assets. The company does not hedge its Australian and New Zealand currency exposure and has no material changes to previously disclosed risk factors.
Unusual or judgment-sensitive items include a $1.6 million tax provision, a $331,000 reduction in interest expense from interest-rate swap valuation changes, the $5.5 million Coachella acquisition, a $1.8 million purchase of a note receivable currently in default, and an estimated $2.1 million of unrecognized tax benefits. Management expects the reserve for uncertain tax positions to increase by approximately $0.9 million to $1.8 million within the next twelve months.
Important Facts for Investors to Verify
- Refinancing or disposition plans for the $15.0 million Cinemas 1, 2, 3 term loan due July 1, 2012.
- Actual availability and covenant requirements under the company’s credit facilities, particularly the renewed New Zealand facility.
- Sustainability of improved cinema attendance, margins, and operating cash flow after the stronger first-quarter film slate.
- Valuation, development prospects, and related-party governance of the Coachella property.
- Resolution and cash requirements associated with IRS obligations and other uncertain tax positions.
- Exposure to Australian and New Zealand currency movements and variable interest rates, including the $4.4 million interest-rate swap liability.
- Potential outcomes of litigation, environmental matters, and the defaulted $1.8 million note receivable.