The Marcus Corporation: Fiscal 2012 Form 10-K Summary
Reporting period: Fiscal year ended May 31, 2012. Fiscal 2012 contained 53 weeks, compared with 52 weeks in fiscal 2011; the fourth quarter contained 14 weeks. The filing is therefore not a 2011 Q4 filing, although it provides fourth-quarter comparisons for fiscal 2012 and fiscal 2011.
Business context
Marcus operates two principal segments: movie theatres and hotels and resorts. At fiscal year-end, the theatre segment included 56 locations and 694 screens, while the lodging segment owned or operated eight hotels and resorts and managed 10 additional properties, representing approximately 4,700 rooms. The company employed approximately 6,200 people.
Key financial metrics
| Metric | Fiscal 2012 | Fiscal 2011 | Change |
|---|---|---|---|
| Revenue | $413.9 million | $377.0 million | +9.8% |
| Operating income | $46.5 million | $33.5 million | +38.9% |
| Operating margin | 11.2% | 8.9% | +230 bps |
| Net earnings | $22.7 million | $13.6 million | +67.7% |
| Diluted EPS, Common Stock | $0.78 | $0.46 | +69.6% |
| Net margin | 5.5% | 3.6% | +190 bps |
| Cash flow from operations | $69.0 million | $61.5 million | +12.2% |
| Capital expenditures and acquisitions | $38.0 million | $25.2 million | +51.0% |
| Total debt, excluding digital cinema capital lease | $204.2 million | $215.2 million | -$11.0 million |
The extra fiscal week contributed approximately $7.6 million of revenue, $2.1 million of operating income and $1.1 million of net earnings, or $0.04 per diluted share.
Fourth-quarter results
| Metric | Fiscal 2012 Q4 | Fiscal 2011 Q4 |
|---|---|---|
| Revenue | $107.8 million | $92.3 million |
| Operating income | $12.8 million | $8.6 million |
| Net earnings | $6.7 million | $3.5 million |
| Diluted EPS | $0.23 | $0.12 |
Segment performance and material changes
- Theatres: Revenue increased 9.9% to $227.9 million and operating income increased 26.2% to $47.1 million. The operating margin improved to 20.7% from 18.0%. Attendance increased 5.6%, comparable attendance increased 2.3% excluding the extra week, average ticket price rose 1.5%, and average concession sales per person rose 9.7%.
- The theatre improvement reflected a stronger film slate, including The Avengers and The Hunger Games, higher concession sales, additional theatres and the extra week. The top 15 films accounted for 37% of box office receipts versus 34% in fiscal 2011, indicating increased film concentration.
- The company completed deployment of digital projection systems across most first-run screens. The related capital lease obligation was $35.7 million at year-end, although management expects distributor virtual print fees to substantially offset the obligation and does not expect material shortfall payments.
- Hotels and resorts: Revenue increased 9.7% to $185.2 million and operating income increased 88.2% to $12.7 million. Operating margin improved to 6.9% from 4.0%.
- Company-owned hotel occupancy rose to 72.7% from 69.8%, ADR increased to $136.60 from $129.86, and RevPAR increased 9.5% to $99.32. RevPAR returned approximately to fiscal 2008 levels, but ADR remained below the fiscal 2008 level of $147.22.
- Corporate operating losses increased to $13.3 million from $10.6 million, primarily because of lower non-operating rental revenue, MCS Capital development expenses, proposed Brookfield retail development expenses and higher compensation costs.
- Platinum Hotel & Spa litigation remained an unusual expense item. A previously accrued architectural-services matter was settled for $955,000, and another related lawsuit was subsequently settled for $295,000. Additional Platinum-related cases remained unresolved and the company could not estimate potential losses.
Liquidity, debt and capital resources
- Cash and cash equivalents were $6.0 million, with $6.4 million of restricted cash. The company reported $104 million of unused credit availability at year-end.
- Current liabilities were $171.3 million, including $97.9 million of current debt maturities. The reported current ratio was 0.20; including debt expected to be refinanced, management indicated an adjusted fiscal 2012 current ratio of approximately 0.39.
- The $204.2 million debt balance excluded the $35.7 million digital cinema capital lease obligation. Debt capitalization was 37%, compared with 39% in the prior year.
- Debt due in fiscal 2013 included $71.0 million under the revolving credit agreement and a $15.1 million mortgage. Management expected to refinance or extend these obligations. The revolving facility matured in April 2013 and was expected to be renewed on terms not yet determined.
- The company was in compliance with its debt covenants, reporting a defined debt-to-capitalization ratio of 0.42 versus a 0.55 limit and fixed-charge coverage of 5.2 versus a 3.0 minimum.
- Fiscal 2012 operating cash flow of $69.0 million exceeded capital expenditures, share repurchases and dividends. The company repurchased approximately 1.1 million common shares for $11.4 million and paid approximately $9.7 million in dividends.
Guidance, outlook and risks
- Management estimated fiscal 2013 capital expenditures of approximately $65 million to $95 million, excluding unidentified acquisitions. Planned spending included approximately $15 million to $30 million for theatres and up to approximately $50 million to $60 million for hotels and resorts.
- The company expected increased fiscal 2013 interest expense because of higher planned capital expenditures and anticipated slightly higher debt levels.
- Management expected its fiscal 2013 effective tax rate to remain near 38% to 40%, excluding changes in tax benefits or tax rates.
- Planned initiatives included additional Ultra Screens, theatre food-and-beverage concepts, renovations, hotel management and acquisition opportunities, and development of The Corners of Brookfield mixed-use project. The Brookfield project could exceed $150 million in total cost and might require up to $5 million of company spending during fiscal 2013.
- Early fiscal 2013 summer box office revenue was slightly lower than the prior year, partly because the comparable period lacked the prior year’s Memorial Day holiday weekend. Management cited positive performances from several films, including The Dark Knight Rises, Madagascar 3, Brave and The Amazing Spider-Man.
- Primary risks include dependence on the quantity and appeal of films, shortened theatrical release windows, piracy and alternative entertainment, intense competition, economic weakness, hotel room oversupply, seasonality, adverse weather, terrorism or other disruptive events, capital-intensive operations, refinancing risk, joint-venture risk and the execution and financing of the Brookfield development.
Investor verification points
- Verify the effect of the 53rd week on fiscal 2012 growth, particularly the estimated $1.1 million net earnings contribution.
- Review refinancing and renewal of the $71.0 million revolving facility and the $15.1 million mortgage due in fiscal 2013.
- Assess liquidity using total debt, current maturities, the digital cinema capital lease obligation and the company’s $104 million of unused credit capacity.
- Monitor whether hotel ADR can continue recovering toward pre-recession levels and whether new Milwaukee room supply pressures occupancy, rates and RevPAR.
- Evaluate the funding, joint-venture structure, governmental support, leasing commitments and construction risk associated with The Corners of Brookfield.
- Track unresolved Platinum litigation and any potential financial exposure not quantified in the filing.
- Reconcile reported consolidated operating performance with the effect of higher corporate costs, planned capital spending and expected increases in interest expense.
Audit and controls: Deloitte & Touche issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls as of May 31, 2012.