READING INTERNATIONAL INC quarterly report, Q3 FY2014

Reading International, Inc. — Form 10-Q Summary

Business context and reporting period

Reading International, Inc. operates multiplex cinemas and commercial, retail, and live-theater real estate in the United States, Australia, and New Zealand. The filing covers the three and nine months ended September 30, 2014, compared with the corresponding 2013 periods. At September 30, 2014, the company owned and operated 52 cinemas with 434 screens, held interests in three joint-venture cinemas with 29 screens, and managed one cinema with four screens.

Financial performance and position

U.S. dollars in thousands, except per-share data	Q3 2014	Q3 2013	9M 2014	9M 2013
Total revenue	$65,031	$65,472	$193,006	$194,681
Operating income	$6,173	$5,826	$17,254	$16,128
Net income attributable to common shareholders	$3,939	$2,393	$8,481	$5,860
Diluted EPS	$0.17	$0.10	$0.36	$0.25
Cash flow from operating activities	Not separately provided	Not separately provided	$14,814	$16,246

Q3 operating margin was approximately 9.5%, versus 8.9% in the prior-year quarter. Nine-month operating margin was approximately 8.9%, versus 8.3%.
Q3 net margin attributable to common shareholders was approximately 6.1%, versus 3.7%. Nine-month net margin was approximately 4.4%, versus 3.0%.
Cinema revenue was $60.9 million in Q3 and $180.2 million for nine months, essentially flat year over year. Real estate revenue declined 2.0% in Q3 and 6.9% for nine months.
Cinema segment operating income was $7.1 million in Q3, approximately flat year over year, and $21.3 million for nine months, up 13.6%. Real estate segment operating income was $2.3 million in Q3, up modestly, but $7.2 million for nine months, down 10.9%.
Cash and cash equivalents were $40.6 million at September 30, 2014, compared with $37.7 million at December 31, 2013. Total assets were $377.7 million and total stockholders’ equity was $125.2 million.
Total notes payable were $131.7 million, subordinated debt was $27.9 million, and total liabilities were $252.5 million at September 30, 2014.
Cash flow from operations was $14.8 million. Investing activities used $3.0 million, including $8.7 million of capital expenditures, partially offset by a $5.4 million property-sale deposit. Financing activities used $7.8 million, including $6.6 million of debt repayments and $2.3 million of share repurchases.

Material changes versus the prior comparable period

Nine-month net income attributable to common shareholders increased 44.7% to $8.5 million, primarily because cinema operating expenses declined $4.0 million and cinema segment operating income improved.
Nine-month revenue declined 0.9%, reflecting lower real estate revenue and modestly lower cinema revenue. The U.S. cinema business weakened, while Australia and New Zealand generally performed better.
Interest expense declined by $1.5 million for the nine months, aided by favorable mark-to-market changes in interest-rate swaps. The filing states that swap valuation changes reduced interest expense by approximately $1.0 million in the 2014 nine-month period.
Other income increased by $1.4 million, primarily from insurance proceeds related to the Courtenay Central parking-structure business-interruption claim.
The company refinanced its Australian NAB facility through June 2019 and refinanced the Cinema 1, 2, 3 property loan with a two-year facility that includes a $6.0 million undrawn air-rights line.
Reading entered into agreements to sell the Moonee Ponds and Burwood properties. Burwood generated approximately $5.9 million of cash at closing, with the remaining purchase price scheduled for December 2017. Moonee Ponds is scheduled to close in April 2015.
Accumulated other comprehensive income declined by approximately $4.0 million during the nine months. Third-quarter comprehensive loss attributable to Reading was $10.6 million, primarily reflecting foreign-currency translation losses.

Guidance, outlook, risks, contingencies, and unusual items

Management expects to meet anticipated short-term working-capital requirements through $40.6 million of cash, operating cash flow, borrowing capacity, and the extension or replacement of maturing debt; no assurance is provided.
The $21.8 million New Zealand Corporate Credit Facility matures March 31, 2015, and the $6.5 million Union Square Theatre Term Loan matures May 1, 2015. Both were classified as current liabilities, and management expects extension or refinancing.
Craig Corporation, a subsidiary, is required to pay approximately $290,000 monthly under an IRS tax settlement. The remaining liability was approximately $3.8 million at September 30, 2014. Total accrued tax liabilities were $15.6 million, including $2.3 million of unrecognized tax benefits.
The company recorded an approximately $1.4 million out-of-period adjustment increasing a deferred tax asset and other comprehensive income. Management concluded the adjustment was not material to current or prior consolidated financial statements.
Management identified a material weakness in internal control over financial reporting after the omission of the $1.4 million foreign tax effect from prior financial statements. The company plans to engage external tax advisers; disclosure controls were therefore concluded to be ineffective as of the evaluation date.
The company has significant Australian and New Zealand exposure and does not hedge its currency exposure. A 10% currency movement would change Australian and New Zealand asset values by approximately $13.1 million and $3.9 million, respectively, and would affect quarterly net income by approximately $797,000 and $149,000.
Interest-rate swaps and a cap covered significant variable-rate borrowings. Management estimated that a 1% change in short-term rates would change quarterly interest expense by approximately $162,000.
The company reported no material changes in litigation exposure and no material off-balance-sheet arrangements. Risks include film availability and popularity, competition, consumer spending, real-estate development and entitlement risk, currency and interest-rate exposure, tax audits, environmental matters, and access to financing.
On August 7, 2014, James J. Cotter, Sr. resigned as chairman and CEO for health reasons. James J. Cotter, Jr. became CEO, Ellen Marie Cotter became chairwoman, and Margaret Cotter became vice chairwoman. The CFO agreed to defer retirement for three months while a successor was sought.

Most important facts for an investor to verify

Whether the New Zealand and Union Square debt maturities were extended or refinanced before their 2015 due dates.
The timing and cash proceeds of the Moonee Ponds and Burwood property transactions, including the substantial Burwood balance due in 2017.
Remediation of the material weakness in foreign-tax accounting and whether future filings contain additional corrections.
Sustainability of improved cinema margins, particularly given weaker U.S. cinema revenue and dependence on film performance.
Foreign-currency effects on reported assets, equity, comprehensive income, and cash flows.
Resolution and cash requirements associated with IRS, uncertain-tax-position, pension, environmental, and other legal contingencies.
The effect of management succession and family control on strategy, governance, and capital allocation, including the authorized $10.0 million share-repurchase program, of which $7.7 million remained available at quarter end.