Reading International, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the three and six months ended June 30, 2014, with comparable periods in 2013. Reading operates cinema exhibition and real estate businesses in the United States, Australia, and New Zealand. At June 30, 2014, it owned and operated 52 cinemas with 434 screens, held interests in three additional cinemas with 29 screens, and managed one cinema with four screens.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $69.9 million | $128.0 million |
| Operating income | $8.5 million | $11.1 million |
| Net income attributable to common shareholders | $4.8 million | $4.5 million |
| Basic and diluted EPS | $0.20 | $0.19 |
| Operating margin | 12.2% | 8.7% |
| Operating cash flow | Not separately presented | $9.2 million |
Cinema revenue was $65.9 million in the quarter and $119.3 million year to date. Real estate revenue was $4.1 million and $8.7 million, respectively. Cinema segment operating income was $10.2 million in the quarter and $14.2 million year to date; real estate segment operating income was $2.3 million and $4.8 million, respectively.
Cash and cash equivalents were $42.6 million at June 30, 2014, compared with $37.7 million at December 31, 2013. Total debt, including notes payable and subordinated debt, was approximately $194.9 million, including $34.8 million classified as current. Total liabilities were $266.2 million and stockholders’ equity was $135.6 million. Six-month capital expenditures were $3.9 million.
Six-month cash flow included $2.8 million provided by investing activities, primarily a $6.4 million property-sale deposit, and $7.4 million used in financing activities, including $6.1 million of debt repayments and $1.8 million of share repurchases. The company reported no material off-balance-sheet arrangements.
Material changes versus the prior comparable period
- Quarterly revenue increased 0.4%, while six-month revenue decreased 1.0%.
- Quarterly operating income increased 9.4%; six-month operating income increased 7.6%.
- Quarterly net income attributable to common shareholders increased from $4.1 million to $4.8 million; six-month income increased from $3.5 million to $4.5 million.
- Cinema segment income increased 22.4% in the quarter and 22.0% for the six months, primarily from lower operating expenses and improved operating efficiencies, particularly in Australia.
- Real estate segment income decreased 21.6% in the quarter and 16.1% for the six months. The principal factor was the closure of the Courtney Central parking structure in New Zealand, which management estimates reduced annual New Zealand revenue by approximately $2.0 million. The Dunedin Hoyts lease termination also reduced revenue.
- General and administrative expense increased $0.5 million in the quarter and $0.9 million for the six months, primarily due to higher labor, pension, and other corporate costs.
- Foreign currency translation generated comprehensive income of $15.1 million for the six months, versus a comprehensive loss of $15.0 million in the prior-year period.
Guidance, outlook, risks, contingencies, and unusual items
- Management did not provide specific quantitative revenue or earnings guidance.
- The company plans to expand or reposition selected cinemas, including a Washington, D.C. Angelika-style cinema, the Dunedin cinema, and the Carmel Mountain theater.
- Reading refinanced its Australian NAB facility through June 2019 and refinanced the Cinema 1, 2 & 3 property loan with a two-year interest-only facility that includes an undrawn $6.0 million air-rights line of credit.
- The Union Square Theatre Term Loan of approximately $6.5 million matures in May 2015, and the New Zealand Corporate Credit Facility of approximately $24.5 million matures in March 2015. Management expects these loans to be extended or replaced, but provides no assurance.
- The company expects its cash balance, operating cash flow, and borrowing capacity to satisfy anticipated short-term working-capital requirements. It is also obligated to make tax-settlement payments of approximately $290,000 per month; the remaining liability was approximately $4.7 million at June 30, 2014.
- Property-sale arrangements include the Moonee Ponds property, scheduled to close in April 2015 for approximately $21.9 million, and the Burwood property, with a total purchase price of approximately $59.1 million and the remaining balance scheduled for 2017. The Burwood transaction was not yet recognized as a sale under U.S. GAAP.
- Foreign currency exposure is significant. The company does not hedge its Australian and New Zealand currency exposure and reported a cumulative unrealized foreign-currency translation gain of approximately $55.4 million at June 30, 2014.
- A 1% change in short-term interest rates was estimated to affect quarterly interest expense by approximately $169,000 after considering swaps and caps. Interest-rate derivatives had a net liability fair value of approximately $3.2 million.
- Unrecognized tax benefits were approximately $2.4 million, and management estimated that the reserve could increase by $0.5 million to $1.5 million during the following 12 months.
- On August 7, 2014, James J. Cotter, Sr. resigned as Chairman, Chief Executive Officer, and director for health reasons. James J. Cotter, Jr. became CEO, Ellen Marie Cotter became Chairman, and Margaret Cotter became Vice Chairman. The CFO retirement date was extended to December 1, 2014 while a successor is sought.
- Management reported effective disclosure controls as of June 30, 2014 and no material change in internal control over financial reporting. No material changes to previously disclosed risk factors or litigation exposure were reported.
Most important facts for an investor to verify
- Whether the March 2015 and May 2015 debt maturities are successfully refinanced or extended.
- The timing and collectability of the Burwood and Moonee Ponds property-sale proceeds and the related U.S. GAAP recognition treatment.
- The ongoing revenue impact of the Courtney Central parking closure and the Dunedin lease termination.
- The effect of Australian and New Zealand currency movements on earnings, cash generation, and reported equity.
- The level of recurring operating cash flow after capital expenditures, tax-settlement payments, debt service, and real estate development spending.
- The impact of the August 2014 senior-management transition and the retention or replacement of the CFO.
- The resolution and potential increase of uncertain tax positions, including the remaining Craig Corporation tax liability.