Business Context and Reporting Period
Reading International, Inc. filed this Form 10-K for the fiscal year ended December 31, 2013. The company operates two segments: Cinema Exhibition and Real Estate across the United States, Australia, and New Zealand. It operated or managed 56 cinemas, representing 467 screens, and owned or leased entertainment, retail, commercial, live-theater, and development properties. The filing received an unqualified audit opinion, and management and the auditor concluded that internal control over financial reporting was effective.
Key Financial Metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Revenue | $258.2 million | $254.4 million | Up 1.5% |
| Operating income | $20.9 million | $19.1 million | Up 9.5% |
| Net income attributable to shareholders | $9.0 million | $(0.9) million | Improved by $10.0 million |
| Diluted EPS | $0.38 | $(0.04) | Returned to profitability |
| EBITDA | $39.2 million | $36.8 million | Up 6.6% |
| Cash flow from operations | $25.2 million | $25.5 million | Down $0.3 million |
| Capital expenditures and acquisitions | $20.1 million | $13.7 million | Up $6.4 million |
| Total debt | $168.5 million | $196.6 million | Down $28.1 million |
| Cash and cash equivalents | $37.7 million | $38.5 million | Down $0.8 million |
| Working capital | $(71.8) million | $(21.4) million | Deficit increased |
| Stockholders’ equity | $121.7 million | $131.0 million | Down $9.2 million |
Reported operating margin was approximately 8.1%, net margin was approximately 3.5%, and EBITDA margin was approximately 15.2%. Cinema revenue was $239.4 million and real estate revenue was $18.8 million. Segment operating income was $24.5 million for Cinema Exhibition and $11.0 million for Real Estate, before non-segment expenses and intersegment eliminations.
Material Changes Versus the Prior Comparable Period
- U.S. cinema revenue increased 8.5%, driven by approximately 440,000 additional admissions, a 2.6% increase in average ticket price, and stronger film product.
- Australian cinema revenue declined 7.8%, primarily because of a 5.1% reduction in average ticket price, competitive pricing, and a 6.5% decline in the average Australian dollar exchange rate.
- New Zealand cinema revenue increased 13.4%, principally from approximately 121,000 additional admissions and improved performance at a previously earthquake-damaged multiplex.
- Total cinema segment operating income increased from $22.9 million to $24.5 million, while the segment operating margin improved from approximately 9.8% to 10.3%.
- Real estate segment revenue decreased 2.9%, mainly because the Wellington Courtenay Central parking structure was closed after a July 2013 earthquake. Segment operating income nevertheless increased 15.7% to $11.0 million because of lower expenses and the absence of the $1.5 million impairment recorded in 2012.
- Net interest expense fell by approximately $6.4 million, reflecting lower debt balances, lower borrowing costs, and favorable changes in the fair value of interest-rate swaps.
- The company acquired the previously managed Plano, Texas cinema and recorded a $1.4 million gain on the acquisition and settlement.
- The company entered into an agreement to sell its 3.3-acre Moonee Ponds properties for AUS$23.0 million, scheduled to close April 16, 2015. The property was classified as land held for sale.
- Comprehensive income attributable to Reading shareholders was a loss of $10.8 million, largely because of a $19.3 million adverse foreign-currency translation adjustment and pension-related items, despite positive net income.
Cash Flow, Debt, Liquidity, and Obligations
- Operating cash flow of $25.2 million substantially funded $20.1 million of property enhancements, but investing activities used $6.1 million and financing activities used $17.8 million.
- Debt declined to $168.5 million, including $75.5 million of scheduled principal maturities in 2014 and $33.0 million in 2015. Approximately $79.8 million of debt was denominated in Australian and New Zealand dollars.
- Significant 2014 refinancing requirements included the $56.7 million Australian NAB term loan maturing June 30, 2014 and the $15.0 million Cinemas 1, 2, 3 term loan maturing June 27, 2014. Management was negotiating renewals or extensions but stated that no assurance could be given.
- Available undrawn borrowing capacity was approximately $9.9 million in New Zealand, $4.5 million in Australia, and $5.0 million in the United States.
- Contractual obligations totaled approximately $405.9 million, including $140.5 million of scheduled debt principal, $197.9 million of operating lease payments, $25.2 million of estimated debt interest, $8.5 million of pension payments, and $5.8 million of tax settlement obligations.
- The company had a $8.3 million remaining federal tax settlement obligation at year-end, including $3.5 million classified as current. Potential additional state tax exposure was estimated at approximately $1.4 million plus interest and possible penalties, although no California deficiency had been asserted.
- Burwood environmental remediation and site preparation costs were estimated at $15.2 million, of which $7.4 million had been incurred by year-end.
- The company had no declared common-stock dividend and stated that it had no current plans to declare one.
Guidance, Outlook, Commentary, and Risks
Management does not view cinema exhibition as a high-growth business and expects growth primarily from upgrading existing cinemas, developing specialty cinemas, selective acquisitions, and expanded food and beverage offerings. The company intends to focus on redevelopment of existing assets, including New York properties and the Angelika Film Center chain, while selectively developing projects and pursuing assets with established cash flow.
- Management expected to begin operating the upgraded New Zealand cinema in the third quarter of 2014.
- A new Angelika-style cinema in Washington, D.C.’s Union Market district was anticipated to open in mid-2016.
- The company was pursuing development at Courtenay Central, New Zealand, and planning an additional cinema at its Newmarket property in Brisbane.
- Principal risks include competition from substantially larger cinema chains, limited access to attractive film product, in-home entertainment, discretionary consumer spending, real estate development and leasing risk, refinancing risk, foreign-currency fluctuations, interest-rate exposure, earthquakes, environmental liabilities, and dependence on key personnel.
- Approximately $15.8 million of cash was described as unrestricted by loan covenants, although the filing provides differing geographic cash breakdowns in separate sections.
- James J. Cotter controlled approximately 70.4% of the voting power through Class B stock. The company is a controlled company and has elected exemptions from certain NASDAQ independence and committee requirements.
- Related-party matters include the Village East lease and purchase option involving an entity managed by Mr. Cotter, live-theater management fees paid to an entity owned by a director’s family member, and Mr. Cotter’s 50% interest in the Coachella land venture.
- The company had completed digital projection conversion across its U.S., Australian, and New Zealand cinemas, with anticipated recovery of a substantial portion of the cost through virtual print fees.
Important Facts for Investors to Verify
- Confirm successful refinancing or extension of the Australian NAB term loan and the Cinemas 1, 2, 3 term loan, both due in 2014.
- Assess whether operating cash flow and available borrowing capacity are sufficient to cover debt maturities, lease commitments, taxes, capital expenditures, and development spending.
- Monitor foreign-exchange exposure, particularly the effect of Australian and New Zealand currency movements on reported assets, earnings, and debt repayments.
- Evaluate the company’s ability to maintain film access and attendance against larger exhibitors and in-home entertainment alternatives.
- Track progress, costs, and approvals for Burwood, Courtenay Central, Manukau, Newmarket, Angelika, and other development projects.
- Verify the timing and proceeds of the Moonee Ponds sale scheduled for April 16, 2015.
- Review earthquake insurance recoveries and repair costs related to the Wellington parking structure and remaining Christchurch claims.
- Consider the substantial operating lease burden, negative working capital, related-party arrangements, controlled-company governance, and the absence of a common-stock dividend.