The Marcus Corporation — Form 10-Q Summary
Business context and reporting period
The Marcus Corporation operates movie theatres and hotels/resorts. This filing covers the 13 weeks and 39 weeks ended February 26, 2015, compared with the corresponding periods ended February 27, 2014. Fiscal 2015 is a 52-week year ending in May.
Financial performance and key metrics
| Metric | Q3 FY2015 | Q3 FY2014 | 9M FY2015 | 9M FY2014 |
|---|---|---|---|---|
| Revenue | $120.2 million | $109.8 million | $368.0 million | $339.5 million |
| Operating income | $7.3 million | $5.7 million | $41.6 million | $38.8 million |
| Operating margin | 6.1% | 5.2% | 11.3% | 11.4% |
| Net earnings attributable to Marcus | $3.1 million | $4.1 million | $20.7 million | $20.7 million |
| Diluted EPS, Common Stock | $0.11 | $0.15 | $0.75 | $0.77 |
| Operating cash flow | Not separately reported | Not separately reported | $56.0 million | $47.2 million |
- Revenue increased 9.4% in the quarter and 8.4% year to date, reaching record levels for both comparable periods.
- Interest expense declined 10.0% in the quarter to $2.3 million and 5.9% year to date to $7.1 million, primarily because of lower average interest rates.
- The effective income tax rate, adjusted for noncontrolling-interest losses, was 35.9% for the quarter and 38.7% year to date, versus 41.1% and 40.1%, respectively, in the prior year.
- Cash and cash equivalents were $6.3 million at February 26, 2015, compared with $6.8 million at May 29, 2014. Restricted cash was $9.3 million.
- Total debt, including current maturities and capital lease obligations, was approximately $266.7 million. The debt-to-capitalization ratio was 0.41, compared with 0.42 at fiscal year-end.
- The company reported approximately $136 million of unused credit lines at quarter-end and believes available liquidity and operating cash flows will support operations for the next 12 months.
- Capital expenditures were $47.1 million for the first nine months, compared with $33.1 million in the prior-year period. Management estimated full-year fiscal 2015 capital expenditures of approximately $70 million, subject to changing conditions.
Segment performance and material changes
- Theatres: Quarterly revenue increased 11.5% to $75.6 million and operating income increased 17.1% to $16.3 million. The operating margin improved to 21.6% from 20.6%. Nine-month revenue rose 9.6% to $201.3 million and operating income rose 13.3% to $41.0 million.
- Theatre performance benefited from higher attendance, recent investments in recliner seating and premium formats, the $5 Tuesday promotion, the Magical Movie Rewards loyalty program, and higher concession revenue per person. Comparable attendance increased 7.5% in the quarter and 12.8% year to date.
- Hotels and resorts: Quarterly revenue increased 5.9% to $44.4 million, but operating loss widened to $5.0 million from $4.4 million. Nine-month revenue increased 7.0% to $166.3 million, while operating income declined 13.4% to $11.8 million.
- Hotel results were pressured by higher depreciation and disruption from the conversion of the Chicago hotel to an AC Hotel by Marriott. Nine-month comparable RevPAR increased 4.6% to $106.82, supported by a 2.9-point increase in occupancy to 75.1% and a 0.5% increase in ADR to $142.25.
- Consolidated net earnings attributable to Marcus declined 24.1% in the quarter despite higher operating income, primarily because the prior-year period benefited from a $3.8 million loss allocated to noncontrolling interests related largely to a legal settlement. Nine-month attributable earnings were essentially unchanged year over year.
- A $316,000 pre-tax impairment charge was recorded for several closed theatres. The company also recognized $289,000 of losses on asset dispositions during the quarter and $790,000 year to date.
Outlook, commentary, risks and contingencies
- Management expected favorable theatre trends to continue, citing early fourth-quarter box office performance ahead of the prior year and a positive upcoming film slate. Theatre performance remains dependent on film availability, audience appeal, studio marketing and release windows.
- Management expected hotel operating income to remain below the prior-year level for another quarter because of Chicago hotel construction disruption, preopening expenses for the planned May reopening, and a difficult comparison at one hotel.
- Management reported improving group bookings and viewed the summer outlook as promising. It also noted that future hotel margins depend substantially on improving ADR.
- The company completed or continued investments in recliner seating, premium-format auditoriums, food-and-beverage concepts and a new 12-screen theatre in Sun Prairie, Wisconsin, scheduled to open April 30, 2015.
- The company entered a joint venture for The Corners of Brookfield mixed-use development and retained a 10% interest. It expected reimbursement of most previously incurred predevelopment costs and possible development profit, but timing and ultimate amounts remain contingent.
- The digital cinema licensing arrangement covering 642 screens could require shortfall payments of up to approximately $6.2 million per year if distributor virtual print fees do not meet contractual commitments; management did not expect shortfall payments based on historical booking patterns.
- Key risks include film-slate volatility, economic and consumer-spending conditions, competition, weather, hotel occupancy and room rates, renovation disruption, impairment charges, capital requirements, acquisition and development execution, and interest-rate exposure.
- No material change was reported in market risk exposures or previously disclosed risk factors. The company stated that disclosure controls were effective and that no material changes occurred in internal control over financial reporting.
Investor verification items
- Verify the effect of the Chicago hotel conversion, including construction disruption, preopening costs and post-reopening occupancy and ADR.
- Assess whether theatre attendance, concession spending per person and premium-format investments remain sustainable after the unusually strong comparable performance.
- Reconcile projected full-year capital expenditures of approximately $70 million with available liquidity, debt maturities and seasonal borrowing needs.
- Review debt terms, revolving-credit availability, interest-rate exposure and the $25 million interest-rate swap expiring in January 2018.
- Monitor potential impairment charges, asset dispositions, digital cinema lease commitments and any required virtual print fee shortfall payments.
- Evaluate the timing, economics and contingencies associated with The Corners of Brookfield joint venture and potential hotel monetizations.