Reading International, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results for the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods. Reading operates multiplex cinemas and commercial, retail, and live-theater real estate in the United States, Australia, and New Zealand. At September 30, 2011, it owned and operated 52 cinemas with 433 screens, held interests in three joint-venture cinemas with 29 screens, and managed two cinemas with nine screens.
Key financial metrics
| U.S. dollars in thousands, except per-share data | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Total operating revenue | $66,684 | $60,589 | $187,909 | $175,609 |
| Operating income | $7,075 | $5,564 | $16,305 | $12,232 |
| Net income attributable to common shareholders | $37 | $1,242 | $14,990 | $(12,120) |
| Basic and diluted EPS | $0.00 | $0.05 | $0.65 | $(0.53) |
| Cash flow from operations | Not separately provided | Not separately provided | $17,081 | $15,481 |
- Q3 revenue increased 10.1%; nine-month revenue increased 7.0%.
- Operating margin was approximately 10.6% in Q3 2011 versus 9.2% in Q3 2010, and 8.7% for the first nine months versus 7.0% in the prior-year period.
- Cinema revenue increased 11.9% in Q3 and 7.4% for the nine months. Cinema segment operating income increased 34.9% in Q3 to $7.9 million and 8.8% for the nine months to $19.4 million.
- Real estate segment operating income declined 14.7% in Q3 to $2.7 million, but increased 50.7% for the nine months to $7.8 million, principally because the 2010 period included a $2.2 million Taringa impairment charge.
- Interest expense increased to $7.7 million in Q3 and $17.9 million for the nine months, compared with $4.0 million and $11.8 million, respectively. Interest-rate-swap fair-value changes increased interest expense by $2.9 million in Q3 and $4.6 million year to date.
- The nine-month tax benefit was $13.2 million, primarily from reversing approximately $13.8 million of the valuation allowance on Australian deferred tax assets. The 2010 period included a $13.7 million tax expense.
Cash, debt, and liquidity
- Cash and cash equivalents were $26.8 million at September 30, 2011, down from $34.6 million at December 31, 2010. Marketable securities were $2.7 million and restricted cash was $2.3 million.
- Operating cash flow of $17.1 million was offset by $2.8 million of investing cash use and $21.1 million of financing cash use, resulting in a $7.8 million decrease in cash.
- Total notes payable and subordinated debt were $234.7 million, including $169.9 million of notes payable, $9.0 million owed to a related party, and $27.9 million of subordinated debt; total liabilities were $297.6 million.
- The Australian credit facility was refinanced in June 2011 with a National Australia Bank facility maturing June 2014. The outstanding Australian term loan was $86.0 million at September 30, 2011, and is supported by a five-year interest-rate swap fixing the rate at 5.50%.
- The New Zealand credit facility balance was $21.5 million and matures March 31, 2012. Management was negotiating renewal, creating a near-term refinancing requirement.
- Of the $26.8 million of cash, approximately $8.1 million was unrestricted by subsidiary or lender covenants. Australian cash transfers outside the country were limited to $3.9 million annually, which had already been transferred for 2011.
Material changes versus the prior comparable period
- Revenue and operating income improved, driven primarily by Australian cinema performance, favorable Australian and New Zealand currency translation into U.S. dollars, higher ticket prices in Australia, and increased attendance in the United States and Australia.
- New Zealand cinema revenue declined because of lower attendance and the closure of the Christchurch cinema following the February 2011 earthquake.
- Nine-month common-shareholder results improved from a $12.1 million loss to $15.0 million of income, but the improvement was substantially driven by the $13.2 million tax benefit, the absence of the prior-year $2.2 million impairment charge, and a $1.7 million gain on the sale of the Elsternwick cinema.
- Foreign currency translation produced a $18.2 million comprehensive-loss impact in Q3 and a $6.8 million impact for the nine months, compared with gains in the 2010 periods.
- The company acquired the 17-screen CalOaks Cinema in Murrieta, California, on August 25, 2011, for approximately $4.3 million, including $3.9 million of cash.
- Burwood, a 50.6-acre development site, was reclassified from assets held for sale to property held for development because no firm buyer commitment was obtained within twelve months. The carrying value was approximately $55.9 million; management reported no impairment based on its valuation assessment.
Guidance, outlook, commentary, risks, and unusual items
- Management expects cinema operations to remain the principal source of cash flow and intends to pursue selected cinema acquisitions, development, and upgrades. An eight-screen Angelika cinema in Merrifield, Virginia, was expected to open in late 2012.
- The Christchurch cinema was planned to reopen November 17, 2011, subject to earthquake and lost-profits insurance recovery. The separate three-screen joint-venture cinema was expected to remain closed and its lease termination had been initiated.
- Management continued to evaluate sales or monetization of the Lake Taupo, Taringa, and Burwood real estate assets and remained cautious on new development because economic conditions did not support required pre-leasing commitments.
- On October 26, 2011, the IRS agreed to a payment arrangement allowing Craig Corporation to repay its tax settlement debt over approximately five years through monthly payments of $290,000. A potential California state tax obligation of approximately $1.4 million plus interest and penalties remained uncertain.
- The company had an unfunded pension liability of $4.7 million, an interest-rate-swap liability of $4.3 million, and contractual obligations totaling approximately $448.5 million, including debt, leases, estimated interest, pension obligations, and related-party or subordinated debt.
- Key risks include film availability and popularity, consumer spending, competition and technological change, real estate development and leasing conditions, refinancing access, foreign exchange volatility, variable interest rates, tax audits, litigation, environmental matters, and earthquake-related insurance recovery.
- The filing states that management considered disclosure controls effective as of September 30, 2011 and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the New Zealand credit facility was renewed or refinanced before its March 31, 2012 maturity.
- The timing and amount of earthquake insurance and lost-profits recoveries, and the actual reopening status of the Christchurch cinema.
- The sustainability of earnings excluding the $13.2 million tax benefit, the Elsternwick sale gain, and other unusual items.
- Progress toward monetizing Burwood, Taringa, and Lake Taupo and the adequacy of related property valuations.
- Compliance with Australian and other debt covenants, restrictions on cash transfers, and the company’s availability of unrestricted liquidity.
- Exposure to Australian and New Zealand currency movements, including the absence of currency hedging and the material comprehensive-income effects reported in 2011.