Reading International, Inc. — 2013 Q1 Form 10-Q Summary
Business Context and Reporting Period
Reading International, Inc. operates multiplex cinemas and owns, develops, and manages commercial, retail, and live-theater real estate in the United States, Australia, and New Zealand. The filing covers the three months ended March 31, 2013, compared with the three months ended March 31, 2012. The financial statements are unaudited and prepared under U.S. GAAP.
At March 31, 2013, the company operated 51 cinemas with 433 screens, held interests in three additional cinemas with 29 screens, and managed two cinemas with nine screens.
Key Financial Metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $59.6 million | $62.4 million | Down 4.6% |
| Operating income | $2.5 million | $4.8 million | Down 47.5% |
| Operating margin | 4.3% | 7.7% | Down 3.4 percentage points |
| Net loss | $0.7 million | $0.1 million | Loss increased |
| Net loss attributable to common shareholders | $0.7 million | $0.2 million | Loss increased |
| Loss per diluted share | $0.03 | $0.01 | Higher loss |
| Cash flow from operating activities | $(0.5) million | $2.2 million | Down $2.7 million |
| Cash flow from investing activities | $10.0 million | $(3.5) million | Improved $13.5 million |
| Cash flow from financing activities | $2.4 million | $(1.7) million | Improved $4.1 million |
Cinema revenue was $54.8 million, down from $57.4 million. Real estate revenue was $4.8 million, down from $5.0 million. Segment operating income was $6.1 million, compared with $8.5 million.
Cash and cash equivalents increased to $50.8 million from $38.5 million at December 31, 2012. Total assets were $427.4 million and total liabilities were $297.7 million at March 31, 2013. Reported debt included approximately $201.3 million of notes payable, including $9.0 million owed to a related party, plus $27.9 million of subordinated debt.
Material Changes Versus the Prior Comparable Period
- Cinema revenue declined 4.6%, principally because U.S. and Australian admissions decreased by approximately 299,000, which management attributed to weaker film product. New Zealand admissions increased by approximately 50,000.
- Cinema segment operating income fell 41.8% to $3.3 million. Cinema operating expense declined only 0.6%, causing operating expense as a percentage of cinema revenue to rise from 84.0% to 87.5%.
- Real estate segment revenue declined 2.9% and segment operating income declined 1.8%, primarily reflecting lower live-theater rental revenue.
- Net interest expense declined by approximately $1.1 million, aided by changes in interest-rate swap valuations and lower interest costs on trust preferred securities.
- Income tax expense declined by $0.7 million, primarily due to changes in the estimated realizability of deferred tax assets in Australia.
- Operating cash flow turned negative, while investing cash flow benefited from $8.0 million of time-deposit proceeds, $1.8 million of note-receivable proceeds, and a $1.7 million release of restricted cash.
- Q1 2012 included $77,000 of income from discontinued operations; Q1 2013 included none.
Liquidity, Debt, Outlook, and Risks
Management stated that available borrowing capacity and cash and cash equivalents were sufficient to meet anticipated short-term working-capital requirements for the next twelve months. However, liquidity remains dependent on operating cash generation, refinancing availability, and potential asset monetizations.
The $6.4 million Liberty Theater Term Loan was scheduled to mature on April 1, 2013 and was classified as current at quarter-end. The company borrowed $5.0 million under its Bank of America revolver on March 25, 2013. On April 1, 2013, it used $2.3 million of those proceeds to partially repay the Liberty loan and obtained a forbearance extension to June 1, 2013 for a $20,000 payment. Management intended to refinance the remaining balance.
Contractual obligations included $164.4 million of total debt, $9.0 million of related-party notes, $27.9 million of subordinated debt, $8.4 million of tax-settlement obligations, $7.1 million of pension obligations, and $206.3 million of lease obligations. The company also expects to spend approximately $8.0 million in Australia and $2.0 million in New Zealand on digital projection equipment during 2013.
The company provided no formal earnings or revenue guidance. Management plans to expand or selectively acquire cinema assets, dispose of underperforming or nonstrategic assets, advance entitlements on real estate holdings, and pursue development opportunities when leasing and financing conditions are acceptable. A proposed Courtenay Central shopping-center expansion in New Zealand contemplated a 20-year supermarket lease with projected initial annual rent of approximately $1.4 million, subject to approvals and other conditions.
- Major operating risks include film availability and quality, attendance trends, competition from other entertainment formats, labor and occupancy costs, and digitalization costs.
- Real estate risks include approvals, construction costs, tenant demand, financing availability, environmental matters, and property valuations.
- The company has significant Australian- and New Zealand-dollar exposure and does not hedge currency risk. A 10% currency movement would affect the reported value of Australian and New Zealand assets and modestly affect quarterly earnings based on the company’s sensitivity analysis.
- Interest-rate swaps had a reported fair value liability of $5.1 million at March 31, 2013. The company remains exposed to changes in rates on variable-rate borrowings.
- The company had $22.8 million of accrued income-tax liabilities and approximately $2.2 million of gross unrecognized tax benefits. Management estimated that the uncertain-tax-position reserve could increase by $0.9 million to $1.8 million within the next twelve months.
- Management reported no material changes in litigation exposure or risk factors from the 2012 Form 10-K and stated that existing litigation was not reasonably expected to have a material adverse effect, while noting outcomes could affect any particular period.
Important Facts for Investors to Verify
- Whether the Liberty Theater Term Loan was successfully refinanced before or after the June 1, 2013 forbearance deadline.
- Whether operating cash flow recovered from the Q1 2013 use of $0.5 million and whether cash balances were sustained without additional borrowing or asset sales.
- The effect of film quality, admissions, concession trends, and fixed occupancy costs on cinema margins.
- The funding and timing of the approximately $10 million planned Australia and New Zealand digital-projection spending.
- Compliance with debt covenants, scheduled maturities, related-party debt repayment requirements, and the company’s ability to refinance obligations due in 2013–2015.
- Developments in the Courtenay Central expansion, including approvals, construction costs, tenant commitments, and expected rent.
- Changes in foreign exchange rates, interest rates, tax reserves, deferred-tax-asset valuation allowances, and litigation or environmental contingencies.