Reading International, Inc. — 2018 Second-Quarter Form 10-Q
Business Context and Reporting Period
Unaudited results cover the quarter and six months ended June 30, 2018, compared with the corresponding 2017 periods. Reading operates 59 cinemas with 477 screens across the United States, Australia, and New Zealand, together with retail, commercial, development, and live-theater real estate assets.
The company adopted ASC 606 on January 1, 2018 using the modified retrospective method. Management expects the ongoing effect on net income and operating cash flow to be immaterial, although reported comparative revenue was not restated.
Financial Performance and Position
| Metric | Quarter Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenue | $84.2 million, up 16% | $160.0 million, up 13% |
| Cinema revenue | $80.2 million, up 19% | $152.4 million, up 14% |
| Real estate revenue | $6.4 million, down 8% | $12.3 million, up 8% |
| Operating income | $8.6 million | $14.2 million |
| Net income | $5.1 million | $8.2 million |
| Net income attributable to RDI shareholders | $5.0 million; diluted EPS $0.22 | $8.0 million; diluted EPS $0.35 |
| Operating cash flow | Not separately provided | $13.3 million, versus $6.0 million |
Revenue growth was led by the U.S. cinema business. Second-quarter U.S. cinema revenue increased 33%, supported by a 22% attendance increase, an 11% increase in average ticket price, and a 5% increase in spend per patron. U.S. cinema operating income increased 195% to $4.7 million for the quarter. Total cinema operating income increased 28% to $12.5 million for the quarter and 21% to $22.8 million for the six months.
Consolidated operating margin was approximately 10.2% for the quarter and 8.9% for the six months. Net margin attributable to RDI shareholders was approximately 5.9% and 5.0%, respectively. Cinema segment operating margin was approximately 15.6% for the quarter and 14.9% for the six months.
Real estate segment operating income declined 31% to $1.9 million in the quarter and 12% to $3.5 million for the six months. The quarter was affected by the absence of 2017 business-interruption proceeds related to the Wellington earthquake and the prior-year STOMP arbitration settlement payment.
At June 30, 2018, cash and cash equivalents were $12.7 million, compared with $13.7 million at December 31, 2017. Total assets were $435.7 million and total equity was $181.2 million. Working capital was a deficit of $36.2 million, with a current ratio of 0.46.
Gross debt was $161.8 million, including $10.7 million current debt, $123.4 million long-term debt net of financing costs and $27.6 million of subordinated debt. Debt-to-equity was 0.89, compared with 0.74 at year-end 2017. The company reported $59.2 million of unrestricted unused borrowing capacity, plus $37.6 million available for Union Square development and $12.2 million available for New Zealand construction funding.
Material Changes Versus the Prior Comparable Period
- Net income attributable to RDI shareholders fell 74% in the quarter and 64% for the six months, primarily because the 2017 periods included a $9.4 million gain on asset sales and a $9.2 million insurance-recovery gain.
- Operating performance improved despite lower reported earnings: total segment operating income increased 15% for both the quarter and six months.
- Operating cash flow increased $7.3 million to $13.3 million for the six months.
- Investing cash flow changed from $6.8 million provided in 2017 to $43.0 million used in 2018, principally because of development, acquisition, and cinema-refurbishment spending. Capital expenditures and property additions were $41.2 million.
- Financing activities provided $29.2 million, reflecting $51.3 million of new borrowings partly offset by $21.8 million of repayments.
- Accumulated other comprehensive income declined by $8.7 million, largely from foreign-currency translation losses.
- Non-segment general and administrative expense increased 23% in the quarter and 26% for the six months, primarily because of higher litigation costs, compensation, and headcount-related expenses.
Guidance, Outlook, Risks, and Unusual Items
No quantitative earnings or revenue guidance was provided. Management plans continued cinema upgrades, premium amenities, real estate redevelopment, and three approved Australian cinema projects expected to come online in 2019 or 2020. The Union Square redevelopment is expected to be ready for tenant fit-out in the first quarter of 2019.
- The Minetta and Orpheum Theatres loan, with approximately $7.5 million outstanding, was due November 1, 2018; the company was negotiating renewal. Management was also negotiating renewals or replacements for other facilities maturing in 2019 and stated that favorable or timely refinancing cannot be assured.
- The company has substantial operating lease commitments, principally for cinemas. Total disclosed contractual obligations were approximately $520.3 million, including $319.3 million of lease obligations and $27.7 million of estimated debt interest.
- The Nevada derivative litigation claims against all named directors were dismissed with prejudice on summary judgment in June 2018, although appeals were expected. Employment arbitration with James J. Cotter, Jr. remained in discovery, with a hearing anticipated in October 2018.
- California trust litigation could affect the ownership or sale of a potentially controlling block of Class B voting stock. The California Court of Appeals had stayed proceedings concerning appointment of a trustee ad litem to solicit offers for the shares.
- Litigation costs were $2.6 million for the first six months, compared with $1.2 million in 2017. The company expects derivative-litigation defense costs to decline but anticipates further costs for appeals and related proceedings.
- Foreign exchange remains material: approximately 38% of assets were denominated in Australian dollars and 15% in New Zealand dollars. Management does not currently plan to hedge this exposure. A 10% currency movement was estimated to affect Australian and New Zealand asset values by approximately $12.6 million and $4.1 million, respectively.
- A 1% change in short-term interest rates was estimated to change quarterly interest expense by approximately $175,000.
- The company adopted ASC 606 and expects material recognition of right-of-use assets and lease liabilities when ASC 842 becomes effective in 2019 because most operating cinemas are leased.
- The company repurchased 23,638 Class A shares for $397,000 during 2018 and had $18.1 million remaining under its $25 million authorization at June 30, 2018.
Most Important Facts for Investors to Verify
- Whether cinema revenue and attendance momentum, particularly in the U.S., continues after the strong second quarter.
- The refinancing status and final terms of the November 2018 and 2019 debt maturities.
- Union Square construction progress, remaining funding needs, tenant commitments, and project returns.
- The eventual impact of ASC 842 lease capitalization on assets, liabilities, leverage, and covenant compliance.
- The outcome and cost of Cotter-related appeals, employment arbitration, and trust proceedings, including any potential change in voting control.
- Foreign-exchange effects on reported earnings, equity, and asset values in Australia and New Zealand.
- Whether operating cash flow can sustainably fund the company’s development and refurbishment program without continued debt increases.