Reading International, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Reading International operates 59 multiplex cinemas with 478 screens in the United States, Australia, and New Zealand, and owns, develops, leases, or licenses retail, commercial, and live-theater real estate. The unaudited filing covers the quarter and nine months ended September 30, 2018, with comparisons to the corresponding 2017 periods.
Key Financial Metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Total revenue | $74.3 million | $66.1 million | $234.4 million | $208.0 million |
| Operating income | $4.5 million | $3.7 million | $18.8 million | $17.0 million |
| Net income | $1.3 million | $1.5 million | $9.5 million | $23.6 million |
| Net income attributable to common shareholders | $1.3 million | $1.6 million | $9.4 million | $23.7 million |
| Basic EPS | $0.06 | $0.07 | $0.41 | $1.02 |
| Net cash from operating activities | — | — | $19.1 million | $8.8 million |
Q3 operating margin was approximately 6.1% and net margin was approximately 1.7%. Nine-month operating margin was approximately 8.0% and net margin was approximately 4.0%.
- Cinema revenue increased 14% to $70.7 million in Q3 and to $223.1 million for the nine months. Cinema segment operating income increased 22% to $8.2 million in Q3 and 21% to $31.0 million for the nine months.
- Real estate revenue decreased 5% to $5.8 million in Q3 but increased 4% to $18.2 million for the nine months. Real estate segment operating income decreased 20% to $1.3 million in Q3 and 14% to $4.9 million for the nine months.
- Cash and cash equivalents were $15.7 million at September 30, 2018, compared with $13.7 million at December 31, 2017.
- Total borrowings, net of deferred financing costs, were $164.0 million, compared with $130.5 million at year-end 2017. The debt-to-equity ratio increased to 0.93 from 0.74.
- Total current assets were $29.6 million versus current liabilities of $54.3 million, resulting in working capital of negative $24.6 million and a current ratio of 0.55.
- Capital expenditures and property additions were $50.1 million during the first nine months, primarily for real estate development and cinema refurbishment.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by strong U.S. cinema performance, including higher attendance, average ticket prices, and spending per patron, as well as cinema upgrades and the Spotlight dine-in concept.
- U.S. cinema revenue increased 24% in Q3 and 20% for the nine months. Q3 U.S. attendance increased 19% and average ticket price increased 9%.
- Operating income improved despite higher film rental, food and beverage, occupancy, depreciation, and administrative costs.
- Nine-month net income declined 60% because 2017 included a $9.4 million gain on asset sales and a $9.2 million gain on insurance recoveries. These nonrecurring gains were not repeated in 2018.
- Foreign currency translation reduced accumulated other comprehensive income by $12.3 million during the first nine months, primarily reflecting weakness in the Australian and New Zealand dollars against the U.S. dollar.
- The company adopted ASC 606 on January 1, 2018 using the modified retrospective method. The cumulative increase to opening retained earnings was $194,000, and management expects the ongoing effect on net income and operating cash flow to be immaterial.
- The company corrected previously issued comparative periods for immaterial straight-line rent accounting errors. The correction increased 2017 nine-month revenue and net income by $83,000 and $58,000, respectively.
Outlook, Liquidity, Risks, and Unusual Items
- No quantitative earnings or revenue guidance was provided. Management expects continued cinema upgrades, development of three approved Australian cinema projects between 2019 and 2021, and completion of the 44 Union Square redevelopment with tenant fit-out expected to begin in the first quarter of 2019.
- Management reported $57.5 million of unrestricted unused borrowing capacity and additional restricted capacity for Union Square and New Zealand construction projects. It believes operating cash flow and loan renewals will provide sufficient liquidity for the upcoming year.
- Debt maturities and refinancing are significant risks. Corporate facilities in the United States, Australia, and New Zealand mature during 2019, and the company stated that there is no assurance that renewals or replacements will be timely or on favorable terms.
- On October 11, 2018, the company obtained a waiver eliminating financial covenants related to its Trust Preferred Securities through the term-loan maturity, in exchange for payments totaling $1.6 million.
- The Minetta and Orpheum loan was increased from $7.5 million to $8.0 million and extended to November 1, 2023 after the reporting date.
- Legal matters include the appeal of summary judgment in the Cotter derivative litigation, an employment arbitration involving claimed damages exceeding $1 million, and litigation regarding a potentially controlling block of Class B voting stock. A Nevada court awarded the company a costs judgment estimated to exceed $1.5 million, although the final order had not been issued.
- The company faces exposure to film availability and distributor terms, competition from other entertainment formats, construction and development risks, foreign exchange volatility, interest-rate changes, environmental and legacy railroad claims, tax uncertainties, and potential changes in control associated with Cotter family voting stock.
- The company expects material balance-sheet recognition of right-of-use assets and lease liabilities when it adopts the new lease accounting standard on January 1, 2019, because most operating cinemas are leased.
- At September 30, 2018, the company had no material derivative positions and generally relies on natural foreign-currency hedges rather than currency derivatives.
Most Important Facts for Investors to Verify
- Whether 2019 debt maturities can be refinanced or renewed on acceptable terms, including the status of the Westpac, NAB, U.S., and other facilities.
- Completion schedule, remaining funding needs, leasing progress, and returns for the Union Square redevelopment and other major capital projects.
- Whether strong U.S. cinema trends persist and offset foreign exchange pressure and the more mature performance of Australia and New Zealand operations.
- The ultimate outcome and cash impact of the Cotter employment arbitration, derivative litigation appeal, voting-trust proceedings, and related legal costs.
- The effect of ASC 842 lease adoption on reported assets, liabilities, leverage, and covenant calculations.
- The company’s ability to fund $50.1 million of year-to-date capital investment while maintaining liquidity and managing negative working capital.
- Completion of the company’s accounting for the Tax Cuts and Jobs Act and any resulting changes to tax expense or deferred tax assets.