Reading International, Inc. — Q1 2018 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2018, compared with March 31, 2017. Reading operates 59 multiplex cinemas with 477 screens and real estate, retail, commercial and live-theater assets in the United States, Australia and New Zealand. The company reports Cinema Exhibition and Real Estate segments.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $75.8 million | $69.5 million | +9% |
| Operating income | $5.6 million | $5.5 million | +2% |
| Income before taxes | $4.2 million | $4.7 million | -11% |
| Net income attributable to RDI | $3.0 million | $3.0 million | +1% |
| Basic and diluted EPS | $0.13 | $0.13 | Flat |
| Cash flow from operations | $2.5 million | $0.3 million | Improved |
| Capital expenditures and property additions | $23.2 million | $8.5 million | +173% |
- Cinema revenue increased 9% to $72.3 million; cinema segment operating income increased 13% to $10.3 million.
- Real estate revenue increased 32% to $6.0 million; real estate segment operating income increased 26% to $1.6 million.
- Consolidated operating margin was approximately 7.4%, versus 8.0% in the prior-year quarter. Net margin attributable to RDI was approximately 4.0%, versus 4.4%.
- Cash and cash equivalents declined to $8.7 million from $13.7 million at December 31, 2017. Working capital was negative $40.5 million and the current ratio was 0.39.
- Total borrowings, net of deferred financing costs, were $146.4 million, up from $130.5 million at year-end; gross debt was $150.2 million. Debt-to-equity was 0.82 versus 0.74.
- The company reported $64.0 million of unused and unrestricted credit capacity, plus $48.3 million of unused Union Square development capacity and $13.0 million of New Zealand construction capacity.
Material changes versus the prior comparable period
- Revenue growth was led by the reopening of Courtenay Central in New Zealand, higher U.S. and Australian average ticket prices, higher food-and-beverage spend, and favorable foreign exchange. New Zealand cinema revenue increased 41%.
- U.S. cinema revenue rose 5% despite a 2% attendance decline; Australia increased 7% despite a 2% attendance decline. Management cited higher pricing and per-patron spending.
- Operating income benefited from segment growth but was constrained by a 30% increase in non-segment general and administrative expense, primarily higher litigation-related costs and compensation.
- Other income declined to an expense of $82,000 from $821,000 of income, because the prior-year period included an $825,000 foreign-exchange gain that did not recur.
- Income tax expense declined to $1.2 million from $1.7 million, and the effective tax rate decreased to 27.3% from 35.9%, principally due to the U.S. Tax Cuts and Jobs Act and foreign tax credits.
- The company adopted ASC 606 on January 1, 2018 using the modified retrospective method. The filing indicates a $194,000 increase to opening retained earnings and a $189,000 increase to reported Q1 net income versus the amounts that would have been reported without adoption.
- Investing cash use increased substantially because of Union Square redevelopment, cinema refurbishment and other property additions. Financing cash inflow of $16.2 million primarily reflected new borrowings of approximately $26.0 million, partly offset by $9.7 million of repayments.
Guidance, outlook, commentary and risks
- The filing provides no quantitative earnings or revenue guidance. Management expects to continue cinema upgrades, premium seating and food-and-beverage initiatives, new cinema development, and real estate redevelopment.
- The Union Square redevelopment had total investment of approximately $37.5 million at March 31, 2018, against a projected total investment of $74.5 million. Management anticipated tenant fit-out to begin in the fourth quarter of 2018.
- The Minetta and Orpheum Theatres loan, with approximately $7.5 million outstanding, was due June 1, 2018; renewal negotiations were ongoing. The company also expected to refinance or renew other facilities maturing in 2019, with no assurance of favorable or timely refinancing.
- Operating leases, primarily for cinemas, represented significant future commitments. Total disclosed contractual obligations were $526.2 million, including $340.5 million of lease obligations and $25.6 million of estimated debt interest.
- Litigation costs were $1.4 million in Q1 2018 versus $645,000 in Q1 2017, and the company’s $10 million directors-and-officers insurance policy covering part of the Cotter derivative litigation had been exhausted. The company stated that current proceedings were not reasonably likely to have a material adverse effect, but outcomes could materially affect a particular period.
- The Cotter-related litigation and trust proceedings could affect governance and potentially voting control. A California court ruled in March 2018 that the Cotter Living Trust would control a substantial voting block and ordered a process concerning a potential trustee ad litem; appellate proceedings stayed trial-court activity as of April 12, 2018. No trustee ad litem had been appointed as of the filing.
- Foreign exchange remains a risk. A 10% currency movement was estimated to change Australian and New Zealand asset values by approximately $12.6 million and $4.4 million, respectively, and quarterly net income by approximately $432,000 and $32,000.
- On April 11, 2018, after quarter-end, the company purchased an adjacent Auburn, Australia property for approximately $3.5 million.
- On April 13, 2018, the board appointed a special litigation committee to review the Cotter derivative litigation and determine whether continued prosecution was in the company’s best interests.
- Management reported effective disclosure controls as of March 31, 2018 and no material changes in risk factors from the 2017 Form 10-K.
Most important facts for investors to verify
- Near-term refinancing of the Minetta and Orpheum loan and renewal or replacement of debt facilities maturing in 2019.
- Available unrestricted liquidity after the quarter-end cash decline and the company’s ability to fund substantial Union Square and other capital commitments.
- Actual construction costs, leasing progress, financing draws and completion timing for the Union Square redevelopment.
- Cash impact and legal exposure from the Cotter derivative litigation, employment arbitration and trust-related proceedings.
- Sustainability of cinema revenue growth given attendance declines in the United States and Australia and dependence on film availability.
- Effects of foreign exchange movements, the pending lease-accounting adoption in 2019, and finalization of provisional Tax Cuts and Jobs Act accounting.