Reading International, Inc. — Fiscal 2018 Form 10-K Summary
Business context and reporting period
Reading International, Inc. operates cinema exhibition and real estate businesses in the United States, Australia, and New Zealand. At December 31, 2018, it operated or managed 59 cinemas with 478 screens, five entertainment-themed real estate centers, three live theaters, and other development properties. The filing covers the fiscal year ended December 31, 2018; fourth-quarter information is included in the annual filing.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $309.4 million | $279.9 million | +11% |
| Operating income | $24.1 million | $20.7 million | +16% |
| Net income attributable to RDI | $14.4 million | $31.1 million | -54% |
| Basic EPS | $0.62 | $1.35 | -54% |
| Operating cash flow | $32.6 million | $23.9 million | +37% |
| Capital expenditures, including acquisitions | $56.8 million | $76.7 million | -26% |
| Total debt, gross | $167.0 million | $134.5 million | +24% |
| Cash and cash equivalents | $13.1 million | $13.7 million | -4% |
| Stockholders’ equity | $180.5 million | $181.6 million | -1% |
Reported operating margin was approximately 7.8%, compared with 7.4% in 2017. Net margin attributable to RDI was approximately 4.6%, compared with 11.1% in 2017. EBITDA, a non-GAAP measure, was $46.9 million versus $57.6 million in 2017, and the reported debt-to-EBITDA ratio increased to 3.56 from 2.33.
- Cinema revenue increased 12% to $294.2 million, and cinema segment operating income increased 19% to $39.3 million. U.S. cinema revenue rose 17%, Australia rose 6%, and New Zealand rose 8%.
- Cinema revenue mix was approximately 64% admissions, 29% food and beverage, and 7% advertising and other revenue.
- Real estate segment revenue increased 1% to $24.2 million, while segment operating income declined 21% to $6.4 million. The filing’s consolidated income statement reports $15.2 million of third-party real estate revenue; the difference reflects inter-segment revenue.
- Fourth-quarter revenue was $75.0 million, compared with $71.8 million in the fourth quarter of 2017. Fourth-quarter net income attributable to RDI was $5.0 million, compared with $7.4 million.
- Investing cash outflow was $64.9 million, principally reflecting $63.5 million of property, development, and equipment additions. Financing cash inflow was $33.2 million, including $90.9 million of borrowing proceeds, partially offset by $54.4 million of debt repayments and $2.3 million of share repurchases.
- Working capital was negative $55.3 million, and the current ratio was 0.35. Management states that negative working capital is typical for its cinema model because customer receipts precede payment of related liabilities.
- Unrestricted unused corporate borrowing capacity was approximately $55.6 million, in addition to $30.3 million of unused Union Square construction financing capacity.
Material changes versus the prior comparable period
- Profitability declined despite higher operating results because 2017 included a $9.2 million Courtenay Central earthquake insurance gain and a $9.4 million gain on the sale of the Burwood property. These items did not recur in 2018.
- Cinema performance improved substantially as attendance increased in all three countries, including a 9% increase in U.S. attendance, an 8% increase in U.S. average ticket price, and a 5% increase in U.S. spend per patron.
- Real estate operating income declined because 2017 included non-recurring legal-fee recoveries related to the STOMP arbitration settlement; higher depreciation and operating costs also affected 2018.
- Interest expense increased 10% to $6.8 million, primarily because average debt increased to fund capital projects.
- Foreign currency translation reduced comprehensive income by approximately $14.9 million, principally due to weakening Australian and New Zealand currencies against the U.S. dollar.
- Investment and development properties increased to $86.8 million from $61.3 million, primarily reflecting continued Union Square redevelopment and other development spending.
- The Company adopted ASC 606 on January 1, 2018. The cumulative adjustment increased opening retained earnings by $194,000, and management characterized the ongoing effect as immaterial to net income and operating cash flow.
- The Company corrected previously identified immaterial straight-line rent errors in prior-period financial information; the filing states that the corrections were not material to prior annual or interim periods.
Guidance, outlook, risks, contingencies, and unusual items
Management did not provide numerical earnings or revenue guidance. Its stated strategy is to enhance existing cinemas, expand premium seating and food-and-beverage offerings, develop selected new cinemas, complete the 44 Union Square redevelopment, expand Australian entertainment-themed centers, and reassess Courtenay Central and other development properties.
- Union Square was expected to be ready for tenant improvement work before the end of the second quarter of 2019, with exclusive lease negotiations covering approximately 90% of net rentable area. Completion and leasing remain subject to execution and other uncertainties.
- In January 2019, the Company acquired a four-screen cinema in Devonport, Tasmania, increasing its cinema count to 60. It also had four additional Australian lease agreements covering 25 planned screens, anticipated to open during 2019–2021.
- In January 2019, the Company temporarily closed the Courtenay Central cinema and certain retail areas because of seismic concerns while it reevaluated redevelopment plans.
- Debt refinancing and maturity risk are significant. Approximately $30.4 million of principal was scheduled for 2019 and $44.0 million for 2020 at year-end 2018. Subsequent to year-end, the Bank of America credit facility was extended to May 2020, and the Australian NAB facility was amended and extended to December 2023.
- The Company estimates that a 1% increase in short-term interest rates would increase annual interest expense by approximately $1.4 million.
- The Company has substantial operating lease commitments of approximately $215.6 million, including $30.9 million due in 2019. Adoption of ASC 842 on January 1, 2019 was expected to add approximately $250 million of right-of-use assets and lease liabilities to the balance sheet, without a material income-statement effect.
- The Cotter family retains effective voting control. The filing states that Ellen and Margaret Cotter controlled approximately 71.9% of the voting power, creating potential control, governance, litigation, and change-of-control risks.
- Ongoing litigation involving James J. Cotter, Jr. includes appeals of summary judgment and a $1.55 million cost judgment. The Company incurred approximately $3.5 million of out-of-pocket defense costs in 2018 after applicable directors-and-officers insurance was exhausted.
- The Company is pursuing a claim for an additional NZ$5.0 million related to Courtenay Central earthquake damage; the outcome is uncertain and no assurance of recovery is provided.
- Other principal risks include film availability and distributor concentration, streaming competition, labor and occupancy costs, real estate development and leasing risk, earthquakes and other natural disasters, foreign currency exposure, tax audits, environmental and legacy railroad liabilities, cybersecurity, and refinancing risk.
Investor verification checklist
- Verify the reconciliation between consolidated real estate revenue of $15.2 million and segment real estate revenue of $24.2 million, including inter-segment amounts.
- Review the 2019 debt maturities, covenant compliance, refinancing terms, and the subsequent NAB and Bank of America amendments.
- Assess the effect of ASC 842 on reported leverage, liquidity, and covenant calculations beginning in 2019.
- Evaluate the economics, remaining financing needs, leasing status, and completion risk of the 44 Union Square redevelopment.
- Monitor Courtenay Central seismic assessments, closures, redevelopment costs, and the unresolved insurance claim.
- Separate recurring operating performance from the non-recurring 2017 earthquake insurance gain, Burwood sale gain, and STOMP-related recoveries.
- Review the Cotter family control structure, related-party transactions, litigation appeals, and potential change-of-control implications.
- Confirm foreign exchange sensitivity, variable-rate debt exposure, and the Company’s decision not to broadly hedge Australian and New Zealand currency exposure.