Reading International, Inc. 2019 Form 10-K Summary
Business context and reporting period
Reading International, Inc. operates cinema exhibition and real estate businesses in the United States, Australia, and New Zealand. The filing covers the fiscal year ended December 31, 2019, with fourth-quarter information also disclosed. At year-end, the Company operated or held interests in 60 cinemas with 498 screens and owned or managed retail, commercial, live-theatre, and development properties.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $276.8 million | $308.9 million | Down 10% |
| Operating income | $9.1 million | $23.6 million | Down 61% |
| Net income attributable to RDI | $(26.4) million | $14.0 million | Shifted to loss |
| Basic loss per share | $(1.17) | $0.61 | Declined |
| EBITDA | $33.1 million | $46.4 million | Down 29% |
| Cash flow from operations | $24.6 million | $32.6 million | Down 25% |
| Capital expenditures, including acquisitions | $47.7 million | $56.8 million | Down 16% |
| Cash and cash equivalents | $12.1 million | $13.1 million | Down $1.0 million |
| Total debt, gross | $209.2 million | $167.0 million | Up 25% |
| Stockholders’ equity | $139.6 million | $180.0 million | Down 22% |
| Working capital | $(84.1) million | $(56.0) million | Deficit increased |
Reported EBITDA and EBIT are non-GAAP measures. The Company reported a 6.33 debt-to-EBITDA ratio and a 1.50 debt-to-equity ratio at December 31, 2019.
Revenue, segment performance, and margins
- Cinema exhibition: Revenue was $262.2 million, down 11%, and segment operating income was $23.3 million, down 40%. The segment margin declined to approximately 9% from 13%.
- Real estate: Segment revenue was $21.9 million, down 10%, and segment operating income was $5.1 million, down 20%. The segment margin was approximately 23%.
- U.S. cinema revenue declined 9%, primarily due to a 14% attendance decline, partly offset by an 11% increase in food and beverage spend per patron and a 2% increase in average ticket price.
- Australian cinema revenue declined 8%, reflecting a 9% attendance decline and unfavorable currency translation.
- New Zealand cinema revenue declined 30%, principally because of the continuing closure of most of Courtenay Central due to seismic concerns.
- Approximately 63% of cinema revenue came from admissions, 30% from food and beverage, and 7% from advertising and other revenue.
- Operating expenses declined more slowly than revenue, causing cinema operating expense to rise to 83% of revenue from 80% in 2018.
Cash flow, debt, and liquidity
- Operating cash flow of $24.6 million funded only part of $51.9 million of investing cash use. Investing outflows included $45.7 million of property and capital expenditures and $7.9 million for business acquisitions.
- Financing activities provided $26.0 million, primarily from borrowings, partially offset by $11.2 million of Class A share repurchases.
- The Company reported approximately $60.0 million of unused and unrestricted corporate credit capacity and $14.0 million of unused restricted capacity for development projects at year-end.
- Debt principal maturities disclosed at year-end totaled $37.4 million in 2020 and $115.0 million in 2023, with total future principal payments of $209.2 million. Subsequent events disclosed extensions or refinancing of several facilities.
- Operating lease liabilities were $243.5 million after adoption of ASC 842, substantially increasing reported assets and liabilities without materially affecting 2019 operating results or cash flow.
Material changes versus the prior comparable period
- Revenue and operating income declined sharply because of a weaker film slate, lower attendance, theater closures, lease expirations, seismic-related disruption in Wellington, and unfavorable Australian and New Zealand currency movements.
- Net income attributable to RDI decreased by $40.5 million. A major contributor was a $28.8 million income tax expense, including a $27.2 million increase in the valuation allowance against U.S. and certain foreign deferred tax assets.
- Interest expense increased 16% to $7.9 million as borrowings rose to fund Australian cinema acquisitions and the Burwood development.
- The Company acquired a four-screen Devonport cinema for approximately $1.4 million and a ten-screen State Cinema in Hobart for approximately $6.2 million, both in Tasmania.
- Reading opened a six-screen Burwood cinema in Melbourne and a three-screen Lower Hutt pop-up cinema in New Zealand.
- The 44 Union Square redevelopment in Manhattan substantially completed construction and entered the lease-up phase. Investment and development properties increased to $114.0 million from $86.8 million.
- During 2019, the Company repurchased 1,158,601 Class A shares at an average price of $12.52. The total repurchase program authorization was increased to $26.0 million in March 2020.
- The Company corrected previously issued financial information for immaterial sales-tax errors, reducing 2018 revenue by $455,000 and 2017 revenue by $323,000.
Guidance, outlook, risks, contingencies, and unusual items
- Management did not provide quantified financial guidance. It expected to continue upgrading cinemas, expanding food and beverage offerings, developing specialty theaters, and pursuing selected cinema and real estate opportunities.
- At filing, management identified COVID-19 as a significant emerging risk. Potential effects included cinema, live-theatre, and retail closures, delayed film releases, lower attendance, tenant defaults, rent reductions, and materially reduced liquidity. The Company stated that it could not quantify the effect on future financial statements.
- Management anticipated four additional Australian theaters totaling 25 screens by the end of 2022, subject to development and lease execution risks.
- Courtenay Central remained largely closed because of seismic concerns, and the Company was evaluating redevelopment into an entertainment-oriented urban center.
- The Company faces competition from substantially larger cinema chains, streaming and mobile entertainment, shortened theatrical release windows, labor-cost inflation, foreign exchange volatility, interest-rate exposure, earthquakes, cybersecurity threats, and real estate development and leasing risks.
- The Company disclosed ongoing disputes concerning the Cotter family’s control of the Class B voting stock. Potential future sale or restructuring of the controlling block could create management distraction, litigation, financing uncertainty, or a change in control.
- Cotter-related derivative litigation resulted in summary judgment for the Company and a $1.55 million cost judgment against James J. Cotter, Jr.; appeals remained pending. The Company incurred approximately $925,000 of related legal fees in 2019, and directors’ and officers’ liability insurance had been exhausted.
- California wage-and-hour, discrimination, and PAGA matters were in early stages, with no reserve recorded because the Company could not predict the outcome or loss range.
- The Company had an unresolved insurance dispute seeking an additional NZ$5.0 million related to earthquake damage at Courtenay Central; no assurance was given regarding recovery.
- Grant Thornton issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal controls were effective as of December 31, 2019.
Most important facts for investors to verify
- Whether COVID-19 closures, delayed film releases, attendance declines, and tenant relief materially affected 2020 revenue, cash flow, covenant compliance, and liquidity.
- The Company’s ability to refinance or repay near-term debt and fund substantial lease, debt, development, and capital expenditure obligations.
- Cash generation and attendance trends by country, particularly the performance of the U.S. cinema circuit and the reopening or redevelopment of Courtenay Central.
- The collectability and timing of deferred tax assets after the $33.9 million valuation allowance, including the potential for future tax benefits or additional charges.
- Lease-adjusted leverage, fixed occupancy costs, and the economic impact of the $243.5 million operating lease liability.
- Progress, leasing, financing, and returns from the 44 Union Square redevelopment and other development properties.
- Current status and potential financial impact of Cotter control disputes, related litigation, employment claims, and the earthquake insurance claim.
- Whether planned cinema additions and refurbishments remain economically justified given streaming competition, capital requirements, and changing consumer behavior.