Reading International, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the quarter and nine months ended September 30, 2015. Reading operates 54 cinemas with 443 screens and manages or holds interests in additional cinemas, alongside real estate and live-theater assets in the United States, Australia, and New Zealand.
Financial highlights
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Total revenue | $57.8 million | $65.0 million | $191.2 million | $193.0 million |
| Operating income | $3.1 million | $6.2 million | $18.8 million | $17.3 million |
| Net income | $0.3 million | $3.9 million | $19.4 million | $8.5 million |
| Net income attributable to common stockholders | $0.4 million | $3.9 million | $19.5 million | $8.5 million |
| Diluted EPS | $0.02 | $0.17 | $0.83 | $0.36 |
| Net cash provided by operating activities | Not provided for quarter | Not provided for quarter | $21.4 million | $14.8 million |
- Approximate operating margin was 5.4% in Q3 versus 9.5% in the prior-year quarter; nine-month operating margin was 9.9% versus 8.9%.
- Approximate net margin was 0.6% in Q3 versus 6.1%; nine-month net margin was 10.2% versus 4.4%.
- Cash and cash equivalents were $62.1 million at September 30, 2015, compared with $50.2 million at December 31, 2014. Approximately $46.8 million was held by Australian subsidiaries and $9.3 million by New Zealand subsidiaries.
- Total debt was $145.7 million, consisting of $117.8 million of notes payable and $27.9 million of subordinated debt. The filing reports $41.7 million of unused corporate credit capacity, plus $6.0 million of unused Cinema 1, 2, 3 capacity and $9.6 million of New Zealand construction funding capacity.
- Net cash provided by investing activities was $8.7 million, including $21.9 million of property-sale proceeds, partially offset by $14.4 million of capital expenditures and property enhancements.
- Cash used in financing activities was $10.6 million, including $7.3 million of debt repayments and $3.1 million of Class A share repurchases.
Material changes versus the prior comparable period
- Q3 revenue declined 11%, primarily because of weaker Australian and New Zealand currencies and lower cinema revenue. Nine-month revenue was broadly stable, down 1%.
- Q3 cinema operating income fell 32% to $4.8 million, while nine-month cinema operating income rose 11% to $23.7 million. Australia and New Zealand reported higher attendance during the nine-month period, but currency translation reduced reported revenue.
- Q3 real estate operating income fell 38% to $1.4 million; nine-month real estate operating income fell 17% to $6.0 million.
- Nine-month net income benefited substantially from an $11.0 million gain on the sale of the Moonee Ponds, Australia property. The comparable prior-year gain was $25,000.
- Foreign currency translation losses were $13.7 million in Q3 and $27.8 million for the nine months, producing comprehensive losses attributable to Reading of $13.4 million and $8.2 million, respectively.
- Interest expense increased in Q3 by $0.8 million, partly due to less favorable derivative revaluations, while nine-month net interest expense declined 7% because of lower debt, currency effects, and higher interest income.
- Total assets declined to $364.4 million from $401.6 million at December 31, 2014, while total liabilities declined to $243.2 million from $269.3 million.
Guidance, outlook, risks, contingencies, and unusual items
- No formal quantitative earnings or revenue guidance was provided. Management intends to expand and renovate cinemas, improve food and beverage offerings, pursue premium formats, develop selected real estate assets, and monetize non-core properties where appropriate.
- The Union Square redevelopment in Manhattan is intended to begin pre-construction in the first quarter of 2016, subject to approvals. A new eight-screen New Zealand cinema was scheduled to open in the fourth quarter of 2015, and the Newmarket, Australia cinema development was expected to begin construction in the second quarter of 2016.
- The Company expects to refinance the $15.0 million Cinema 1, 2, 3 term loan before its July 1, 2016 maturity.
- Reading agreed to terminate the unprofitable Gaslamp cinema lease on or after January 15, 2016, subject to a $1.0 million early termination fee.
- An unconditional contract to acquire property adjacent to the Newmarket shopping center requires approximately $4.6 million to $4.7 million at closing on November 30, 2015; the remaining obligation was not recorded as a liability at September 30, 2015.
- Contractual obligations totaled approximately $352.2 million, including debt, taxes, pension obligations, leases, and estimated interest. Lease obligations represented approximately $170.5 million.
- Material legal matters include derivative litigation and related arbitration involving the termination of former CEO James J. Cotter, Jr., as well as arbitration involving the Stomp theater license. Management believes the claims lack merit, but acknowledges that outcomes could affect a particular reporting period.
- A 2014 material weakness related to income-tax controls remained under remediation; management expected updated controls to be fully implemented during the fourth quarter of 2015. No material change in internal control over financial reporting occurred during Q3.
- Key risks include foreign currency exposure, floating-rate debt, cinema attendance and film availability, competition from alternative entertainment, real estate development and entitlement risks, litigation, tax contingencies, environmental claims, and access to capital.
Important facts for investors to verify
- Verify the sustainability of nine-month earnings excluding the $11.0 million property-sale gain and the effect of foreign exchange translation.
- Assess refinancing plans and liquidity before the July 2016 Cinema 1, 2, 3 term-loan maturity and the November 2015 Newmarket property payment.
- Review the status, potential cost, and insurance coverage of the Cotter-related litigation and Stomp arbitration.
- Monitor the remediation of the income-tax control material weakness and the $11.5 million accrued income-tax liabilities.
- Evaluate whether cinema renovations, premium formats, pricing, and food and beverage initiatives improve attendance and margins sufficiently to offset currency and operating-cost pressures.