The Marcus Corporation — Fiscal 2013 Form 10-K Summary
Business context and reporting period
The filing is an annual report for the 52-week fiscal year ended May 30, 2013, rather than a standalone quarterly filing. Marcus operates two principal segments: movie theatres and hotels and resorts. At year-end, it operated 55 theatres with 685 screens and owned or managed approximately 5,400 hotel and resort rooms.
Fiscal 2012 contained 53 weeks, including an additional week that contributed approximately $7.6 million of revenue, $2.1 million of operating income and $1.1 million of net earnings. This affects year-over-year comparability.
Key financial metrics
| Metric | Fiscal 2013 | Fiscal 2012 | Change |
|---|---|---|---|
| Revenue | $412.8 million | $413.9 million | Down 0.3% |
| Operating income | $38.2 million | $46.5 million | Down 17.9% |
| Net earnings attributable to Marcus | $17.5 million | $22.7 million | Down 23.0% |
| Diluted EPS, Common Stock | $0.63 | $0.78 | Down $0.15 |
| Operating margin | 9.3% | 11.2% | Down approximately 190 bps |
| Cash flow from operations | $63.2 million | $69.0 million | Down 8.4% |
| Capital expenditures and acquisitions | $23.5 million | $38.0 million | Down $14.5 million |
| Total debt, excluding digital cinema capital lease | $242.8 million | $204.2 million | Up $38.6 million |
| Cash and cash equivalents | $10.2 million | $6.0 million | Up $4.1 million |
The company reported total assets of $746.7 million, shareholders’ equity attributable to Marcus of $306.7 million and a debt-to-capitalization ratio of 0.44, compared with 0.37 at the prior year-end. The current ratio was 0.40, including current maturities of long-term debt.
Liquidity included approximately $118 million of unused revolving credit capacity at year-end. The company was in compliance with its debt covenants, including a maximum consolidated debt-to-capitalization ratio of 0.55 and a minimum fixed-charge coverage ratio of 3.0; reported covenant measures were 0.42 and 4.9, respectively.
Segment performance and material changes
- Theatres: Revenue declined 3.7% to $219.5 million, operating income declined 13.1% to $40.9 million and operating margin decreased to 18.6% from 20.7%. Attendance declined 7.0%, primarily because of a weaker film slate and the prior year’s extra week. Average ticket price increased 1.9%, and average concession sales per person increased 5.7%, partially offsetting lower attendance.
- Hotels and resorts: Revenue increased 4.0% to $192.7 million, but operating income declined 16.1% to $10.7 million and operating margin fell to 5.5% from 6.9%. Comparable company-owned hotel occupancy increased to 73.6%, ADR rose to $139.48 and RevPAR rose to $102.67.
- The hotels segment was adversely affected by approximately $3.3 million of pre-tax legal and settlement costs related to the Platinum Hotel & Spa litigation, approximately $250,000 of impairment charges and initial losses from The Cornhusker, acquired in October 2012.
- Fiscal 2013 included approximately $1.5 million of impairment charges, principally related to budget-oriented theatres, a closed theatre and a closed hotel water park.
- The company acquired a 73% interest in The Cornhusker Hotel and Office Plaza in Lincoln, Nebraska. The property contributed approximately $5.9 million of revenue and a $1.1 million operating loss in fiscal 2013.
- The company refinanced debt associated with The Skirvin Hilton. Cancellation of approximately $9.8 million of related debt generated $6.0 million of extinguishment income, all allocated to noncontrolling interests and therefore not included in net earnings attributable to Marcus.
Cash flow, debt and shareholder returns
Operating cash flow of $63.2 million exceeded cash capital expenditures of $22.6 million, but financing uses were substantial. Financing activities used $36.5 million, including $24.6 million of share repurchases and $35.6 million of dividends paid. The company repurchased approximately 2.16 million common shares during fiscal 2013.
In December 2012, Marcus paid a special dividend of $1.00 per Common Stock share and $0.90909 per Class B share and accelerated two regular quarterly dividends. Total cash dividends paid during the year were approximately $35.6 million.
The company replaced its prior credit facility with a $225 million agreement consisting of a $175 million revolving facility and a $50 million term loan, maturing in January 2018. Contractual obligations totaled approximately $449.7 million, including $242.8 million of long-term debt, $128.0 million of operating leases, $26.4 million of pension obligations and $19.1 million of construction commitments.
Guidance, outlook and unusual items
- Management expected fiscal 2014 capital expenditures of approximately $60 million to $90 million, excluding unidentified acquisitions. Planned spending included approximately $30 million to $45 million for theatres and up to approximately $30 million to $45 million for hotels and resorts.
- Management expected fiscal 2014 interest expense to increase by approximately $1.0 million to $1.5 million, reflecting higher borrowings, capital expenditures and the expected issuance of new senior notes.
- On June 27, 2013, the company agreed to issue $50 million of 4.02% senior notes due August 14, 2025. Proceeds were expected to repay revolving borrowings and support general corporate purposes.
- Management reported stronger summer 2013 box office performance and expected favorable hotel revenue trends to continue, while noting pressure from new hotel supply in the Milwaukee market and continued weakness in group ADR relative to pre-recession levels.
- The proposed Corners of Brookfield mixed-use development could exceed $150 million and depended on securing leases, government support, financing and an equity partner. Construction could begin in early calendar 2014, but timing and feasibility remained uncertain.
Principal risks and contingencies
- Theatre results depend heavily on the quantity, quality and audience appeal of films, studio marketing and release windows. The top 15 films represented 38% of fiscal 2013 box office receipts.
- Shorter theatrical-to-home-video windows, piracy, alternative entertainment and competition may reduce attendance and pricing power.
- Hotels are exposed to economic conditions, business and group travel, weather, room oversupply, internet travel intermediaries and competitive pricing.
- Both segments are capital intensive and subject to renovation disruptions, higher depreciation, preopening losses and financing availability.
- The company had variable-rate debt of approximately $120.7 million before giving effect to its interest-rate swap, exposing earnings and cash flow to interest-rate changes.
- Approximately 11% of employees were covered by collective bargaining agreements, and 88% of those agreements were scheduled to expire within one year of fiscal year-end.
- Material Platinum-related litigation was settled and closed during fiscal 2013. Settlement costs totaled approximately $2.3 million in the Baroi matter and $98,000 in the Collins matter, in addition to other related costs.
Important facts for investors to verify
- Reconcile fiscal 2013 performance with fiscal 2012’s additional operating week before assessing growth or margin trends.
- Evaluate the sustainability of theatre attendance, concession spending and the early fiscal 2014 box office improvement.
- Assess whether The Cornhusker renovation and operating ramp-up can reverse its initial operating loss.
- Review debt maturities, the $50 million senior-note issuance, revolving-credit usage and covenant compliance.
- Monitor Milwaukee hotel room supply, ADR recovery and RevPAR relative to industry benchmarks.
- Confirm the funding, leasing, government support and joint-venture arrangements for the Corners of Brookfield project.
- Consider the effect of special dividends and share repurchases on leverage, liquidity and future per-share results.