The Marcus Corporation 2020 Q3 10-Q Summary
Business context and reporting period
The Marcus Corporation operates movie theatres and hotels/resorts. The filing covers the 13 weeks and 39 weeks ended September 24, 2020, compared with the periods ended September 26, 2019. Fiscal 2020 is a 53-week year. Results were materially affected by COVID-19 closures, capacity restrictions, reduced film releases, and depressed travel demand.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | First 39 weeks 2020 | First 39 weeks 2019 |
|---|---|---|---|---|
| Total revenue | $33.6 million | $211.5 million | $201.0 million | $614.0 million |
| Operating income (loss) | $(48.0) million | $22.4 million | $(123.2) million | $54.8 million |
| Net income (loss) attributable to Marcus | $(39.4) million | $14.3 million | $(85.8) million | $34.2 million |
| Diluted EPS, Common Stock | $(1.30) | $0.46 | $(2.84) | $1.10 |
| Operating margin | (142.8%) | 10.6% | (61.3%) | 8.9% |
| Net cash from operating activities | Not separately reported | Not separately reported | $(80.6) million | $86.0 million |
| Capital expenditures | Not separately reported | Not separately reported | $18.7 million | $50.1 million |
Theatre revenue declined 94.6% in the quarter and 71.4% for the first 39 weeks. Hotels/resorts revenue declined 64.9% and 58.8%, respectively. Theatre attendance fell 95.6% in the quarter and 72.8% year to date. Comparable hotel occupancy was 36.6% in the quarter versus 83.0% in the prior year; comparable RevPAR was $59.66 versus $142.84.
Income tax benefits were $14.5 million in the quarter and $51.0 million year to date, primarily reflecting losses and CARES Act provisions permitting tax-loss carrybacks. The filing states that the first 39 weeks benefited by approximately $17.4 million from accounting method changes and CARES Act-related tax treatment.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $8.2 million; restricted cash was $8.5 million, for total cash, cash equivalents and restricted cash of $16.8 million.
- The company reported $210 million of availability under its $225 million revolving credit facility.
- Short-term borrowings were $89.9 million. Long-term debt was $199.4 million, including $76.7 million of convertible senior notes, $100.0 million of senior notes, and $3.1 million of PPP loans. Total debt excluding lease obligations was approximately $302.2 million based on the balance sheet classifications.
- Debt-to-capitalization increased to 36% from 26% at December 26, 2019; net debt-to-capitalization was 35%.
- On September 22, 2020, the company issued $100.05 million of 5.00% convertible senior notes due 2025. Net proceeds after offering costs and capped-call transactions were approximately $78.6 million.
- The company received approximately $13.5 million of PPP loans; $10.3 million was used for qualifying expenses and $3.1 million remained expected to be repaid at quarter-end. Management believes the qualifying amount will be forgiven.
- Cash dividends were suspended under amended debt agreements. Fiscal year-to-date dividends paid were $5.1 million versus $14.5 million in the prior-year period.
- Net cash used in operating activities was $80.6 million, compared with $86.0 million of cash provided in the prior-year period. Financing activities provided $83.5 million, compared with $9.2 million used in the prior year.
Material changes versus the prior comparable period
- All theatres closed March 17, 2020. Approximately 80% had reopened by August 28, but several were subsequently reclosed because of film-release delays; approximately 66% were open as of the report date.
- Seven of eight company-owned hotels and most managed hotels had reopened by the report date, but occupancy, group bookings and business travel remained substantially below prior-year levels.
- Operating losses included approximately $1.6 million of third-quarter nonrecurring expenses and $765,000 of impairment charges. First-nine-month nonrecurring expenses were approximately $10.1 million, and impairment charges were approximately $9.5 million.
- Goodwill was tested for impairment in response to COVID-19-related triggering events and was not impaired. The theatre reporting unit’s estimated fair value exceeded carrying value by approximately 17% at September 24, 2020, leaving sensitivity to further deterioration.
- Management reduced operating and capital spending, furloughed employees, reduced executive compensation, negotiated lease deferrals, and paused nonessential projects. Fiscal 2020 capital expenditures were revised to an expected $20 million to $25 million, versus the prior $65 million to $85 million expectation.
- The company filed approximately $37.4 million of tax refund claims during the third quarter and received $31.5 million early in the fourth quarter. Management also estimated a potential additional fiscal 2021 refund of approximately $21 million, subject to the 2020 tax return and applicable rules.
Outlook, management commentary and risks
Management expects theatres to significantly underperform in the fiscal 2020 fourth quarter and fiscal 2021 first quarter, improve in fiscal 2021 second quarter while remaining materially below the prior year, and begin returning closer to normal in the second half of fiscal 2021. Management does not expect hotel occupancy to return to pre-COVID-19 levels during the remainder of fiscal 2020 or fiscal 2021.
Liquidity is expected to be sufficient for at least 12 months from the financial statement issuance date, but covenant compliance depends on reopening and recovery assumptions. The amended credit agreement includes minimum liquidity requirements, EBITDA thresholds beginning in 2021, capital expenditure limits, restrictions on dividends and share repurchases, and secured collateral and subsidiary guarantees. Failure to meet covenants could result in defaults, accelerated repayment demands, or loss of access to financing.
Principal risks include renewed closures or capacity restrictions, weak consumer attendance and travel demand, delayed or insufficient film releases, shorter theatrical windows and alternative distribution channels, lease and supplier obligations, impairment of long-lived assets or goodwill, higher interest expense, PPP forgiveness uncertainty, and the company’s ability to refinance or service debt. The company also identified risks related to hotel group-booking cancellations, economic conditions, competition, cyber incidents, labor matters and potential shareholder litigation.
Facts investors should verify
- Current theatre and hotel reopening levels, capacity restrictions, attendance, occupancy and RevPAR trends.
- Actual cash flow generation and liquidity after receipt of the $31.5 million tax refund, including remaining revolver availability.
- Compliance with minimum liquidity, EBITDA, debt-to-capitalization and other amended debt covenants.
- Timing and amount of required debt repayments, including the $90.8 million Term Loan A maturity in September 2021 and senior-note maturities.
- Whether PPP loans are forgiven as expected and whether the potential additional tax refund is realized.
- Film-release schedules, theatrical-window changes and their effect on theatre openings and attendance.
- Potential additional impairment charges if operating recovery or forecast cash flows weaken.
- Restoration of dividends and share repurchases, which remain restricted while the Term Loan A and amended covenant conditions remain outstanding.