Business Context and Reporting Period
The Marcus Corporation operates movie theatres and hotels/resorts. This Form 10-Q covers the 13 and 26 weeks ended November 24, 2011, representing the second quarter and first half of fiscal 2012. Fiscal 2012 is a 53-week year, compared with 52 weeks in fiscal 2011. Interim financial statements are unaudited.
Key Financial Metrics
| Metric | 13 Weeks Ended Nov. 24, 2011 | 13 Weeks Ended Nov. 25, 2010 | 26 Weeks Ended Nov. 24, 2011 | 26 Weeks Ended Nov. 25, 2010 |
|---|---|---|---|---|
| Revenue | $90.1 million | $86.7 million | $214.0 million | $200.7 million |
| Operating income | $6.3 million | $5.4 million | $29.6 million | $24.8 million |
| Net earnings | $2.8 million | $2.1 million | $15.3 million | $12.1 million |
| Diluted EPS, Common Stock | $0.10 | $0.07 | $0.52 | $0.41 |
| Operating margin | Approximately 7.0% | Approximately 6.2% | Approximately 13.8% | Approximately 12.4% |
- First-half net cash provided by operating activities was $35.5 million, compared with $34.5 million in the prior-year period.
- First-half investing cash outflow was $15.0 million, including $17.4 million of capital expenditures and acquisitions, partly offset by $3.9 million of proceeds from digital projection system disposals.
- First-half financing cash outflow was $18.6 million. The company issued $52.0 million of notes payable and long-term debt and made $61.4 million of principal payments.
- Cash and cash equivalents were $11.2 million at November 24, 2011, including $5.8 million of restricted cash. The cash-flow statement reported $5.5 million at period-end because restricted cash is excluded from that statement.
- Unused credit lines were approximately $117 million at quarter-end. Management believed operating cash generation and available credit were adequate for fiscal 2012 operating liquidity.
- Debt capitalization was 0.37 at November 24, 2011, compared with 0.39 at fiscal year-end. Reported obligations included $205.6 million of current and long-term debt, plus a $38.4 million capital lease obligation related to digital cinema systems.
- Dividends paid during the first half were $4.9 million. Common Stock and Class B Common Stock dividends declared were $0.170 and $0.155 per share, respectively.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue increased 3.8%, operating income increased 15.8%, and net earnings increased 35.5%. First-half revenue increased 6.6%, operating income increased 19.2%, and net earnings increased 26.4%.
- Hotels and resorts drove the improvement. Second-quarter revenue increased 9.4% and operating income increased 57.7%; first-half revenue increased 9.6% and operating income increased 35.1%.
- Hotel second-quarter occupancy increased to 77.1% from 74.4%, average daily rate increased to $140.99 from $133.44, and RevPAR increased to $108.66 from $99.33.
- Theatre second-quarter revenue declined 2.0% and operating income declined 8.2%, primarily because of lower attendance and a weaker film slate. First-half theatre revenue increased 4.1% and operating income increased 9.8%, supported by stronger first-quarter attendance and higher concession spending per patron.
- Comparable theatre attendance declined 6.5% in the second quarter and 1.1% in the first half. Average concession revenue per person increased 12.0% in the quarter and 12.1% in the first half.
- Interest expense declined to $2.3 million in the quarter and $4.7 million in the first half, versus $2.6 million and $5.2 million, respectively, due primarily to lower borrowings.
- The company recorded approximately $800,000 of accelerated depreciation in the quarter and $1.4 million in the first half for replaced 35MM film projection systems.
- The company repurchased approximately 561,000 shares for approximately $4.9 million during the first half; approximately 1.3 million shares remained available under repurchase authorizations.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected a fiscal 2012 effective tax rate generally in the historical 38% to 40% range. A settlement of prior-year IRS issues reduced unrecognized tax benefits by $2.3 million and favorably affected tax expense by approximately $400,000 through reversal of penalties.
- Management revised its estimated fiscal 2012 capital expenditures to approximately $45 million to $75 million, excluding significant acquisitions, from the previously indicated $50 million to $90 million range.
- The company entered a 10-year digital cinema master licensing agreement covering 618 screens. It recognized a $38.4 million capital lease obligation and expects at least $3.3 million of reduction over the next 12 months as distributors pay virtual print fees. Management does not expect booking shortfall payments based on historical booking patterns, although the maximum potential annual shortfall is approximately $5.9 million.
- Management described the hotel outlook as cautiously optimistic, citing stronger booking pace and group business, but noted seasonality, short booking windows, economic fragility, and uncertainty in employment and political conditions.
- Early fiscal third-quarter theatre performance was described as broadly similar to the prior year, although the Saturday timing of Christmas Eve and New Year’s Eve slightly reduced potential holiday box-office receipts.
- The proposed Corners of Brookfield mixed-use development could require approximately $20 million of capital spending. Timing remains dependent on government support, construction estimates, tenant commitments, and market conditions.
- The company faces an appealed architectural-services judgment related to the Platinum Hotel & Spa condominium development. The potential loss is estimated at $0 to $1.8 million; $1.145 million has been accrued. Other related lawsuits remain in preliminary stages and cannot yet be estimated.
- The company guaranteed approximately $910,000 of potential future lease payments for a former limited-service lodging division site if the replacement tenant defaults.
- Key operating risks include film availability and popularity, release-window changes, weather, competition, economic conditions affecting travel and entertainment, hotel supply and pricing, capital requirements, and acquisition opportunities.
Important Facts for Investors to Verify
- Reconcile reported cash of $11.2 million with $5.5 million of cash-flow-statement cash after considering $5.8 million of restricted cash.
- Assess the economic substance and potential cash exposure of the $38.4 million digital cinema capital lease and its virtual print fee booking commitments.
- Monitor theatre attendance and film slate performance against the company’s reliance on higher concession spending per patron.
- Verify whether hotel occupancy and ADR improvements continue, particularly as the division enters its seasonally weaker third quarter.
- Review debt maturities, revolving-credit availability, and expected seasonal increases in borrowing and interest expense.
- Track the IRS tax settlement, the Platinum Hotel & Spa litigation, and the potential $910,000 lease guarantee.
- Confirm the timing, financing, tenant commitments, and government support for the proposed Corners of Brookfield development.