The Marcus Corporation — Q1 2020 Form 10-Q Summary
Business context and reporting period
The filing covers the 13 weeks ended March 26, 2020, compared with the 13 weeks ended March 28, 2019. The company operates movie theatres and hotels/resorts. Fiscal 2020 is a 53-week year. The filing was delayed because of COVID-19-related operational and reporting challenges and was filed May 12, 2020.
COVID-19 materially disrupted both segments. All theatres closed March 17, 2020; five of eight company-owned hotels closed March 24, and the remaining three closed April 8, 2020. The company stated it was generating no meaningful theatre or hotel revenue after the closures, aside from limited theatre online and curbside sales.
Financial performance and key metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $159.5 million | $170.0 million | Down 6.2% |
| Operating income (loss) | $(22.2) million | $5.0 million | Down $27.2 million |
| Net earnings (loss) attributable to Marcus | $(19.4) million | $1.9 million | Down $21.3 million |
| Diluted earnings (loss) per common share | $(0.64) | $0.06 | Down $0.70 |
| Cash flow from operations | $(16.6) million | $8.0 million | Down $24.6 million |
| Capital expenditures | $10.0 million | $13.7 million | Down $3.7 million |
The operating loss included $8.7 million of impairment charges and approximately $5.5 million of nonrecurring closure-related expenses, primarily payroll continuation payments. The company recorded a $6.6 million income tax benefit versus $13,000 of tax expense in the prior-year quarter. The effective tax rate, adjusted for noncontrolling interests, was 25.3% versus 0.7%.
- Theatres: Revenue was $109.2 million, down 4.9%. Operating loss was $7.1 million versus $12.6 million of operating income; operating margin declined to negative 6.5% from positive 11.0%. Comparable attendance declined 19.5%, while average ticket price increased 6.0% and average concession revenue per person increased 7.4% excluding Movie Tavern.
- Hotels and resorts: Revenue was $50.2 million, down 8.9%. Operating loss was $10.9 million versus $3.2 million; operating margin declined to negative 21.6% from negative 5.7%. Comparable occupancy declined to 55.6% from 64.6%, and RevPAR declined 14.5% to $71.84.
- Liquidity: Cash and cash equivalents were $126.5 million at March 26, 2020, compared with $20.9 million at December 26, 2019. Cash, cash equivalents and restricted cash totaled $131.3 million. The increase primarily reflected net borrowings under the revolving credit facility.
- Debt: Total debt, net of issuance costs, was $355.2 million at March 26, 2020 versus $216.3 million at year-end 2019. The debt-to-capitalization ratio, excluding lease obligations, increased to 37% from 26%.
- Balance sheet: Total assets were $1.44 billion and total equity was $598.4 million at March 26, 2020. Operating lease obligations totaled $253.4 million, including current maturities.
Material changes versus the prior comparable period
- COVID-19 closures caused significant late-quarter declines in attendance, occupancy, revenue and operating cash flow.
- The company moved from profitability to a substantial operating and net loss.
- Impairment charges included $6.5 million for certain theatre asset groups and $2.2 million for the Movie Tavern trade name. Goodwill was tested and was not impaired as of March 26, 2020.
- Net financing cash inflow increased to $132.4 million from $29.4 million, reflecting $188.0 million of revolving-facility borrowings and $49.0 million of repayments.
- Capital spending fell, and nonessential operating and capital expenditures were suspended. The company also temporarily laid off most hourly theatre and hotel associates, reduced salaries and eliminated board cash compensation.
- Quarterly dividend payments were suspended for the remainder of 2020 under subsequent debt amendments.
Guidance, outlook, risks and unusual items
Management stated that reopening timing was uncertain and that reopening would likely involve social-distancing capacity limits, reduced operating hours and a gradual recovery in customer demand. It expected the film slate in the second half of 2020 and 2021 to improve, but identified film availability, release windows, streaming alternatives and consumer acceptance of public gatherings as significant uncertainties.
On April 29, 2020, the company amended its credit agreement and obtained a $90.8 million 364-day term loan, primarily to repay revolving borrowings and support liquidity. The amendments suspended certain fixed-charge coverage testing until 2021, added minimum EBITDA and liquidity covenants, restricted dividends and share repurchases, capped capital expenditures, and required substantially all personal and certain real property assets to secure the credit facilities and senior notes.
Required minimum consolidated liquidity is $102 million at June 25, 2020, declining to $67 million at September 24, 2020, then increasing to $103.5 million at July 1, 2021. Required EBITDA thresholds also become progressively more demanding, reaching $42 million for the four quarters ending July 1, 2021. The company stated it expected sufficient liquidity to meet obligations and comply with covenants for at least 12 months from issuance of the financial statements, but warned that prolonged closures or a slower recovery could impair covenant compliance and debt service capacity.
Management reduced expected fiscal 2020 capital expenditures from $65–$85 million to approximately $20–$30 million. It preliminarily estimated a $15–$25 million fiscal 2020 income tax refund related to CARES Act provisions, with potentially significant additional refunds in fiscal 2021 from net operating loss carrybacks. These estimates were subject to legislative, administrative and operational uncertainty.
Other notable items include a build-to-suit theatre project placed on hold, ongoing lease negotiations with landlords, interest-rate swap liabilities of $2.2 million, and a $0.7 million investment loss caused by market declines.
Important facts for investors to verify
- Actual reopening dates, capacity restrictions and post-reopening demand for theatres, hotels, restaurants and bars.
- Compliance with the amended EBITDA, liquidity, capital expenditure and other debt covenants.
- Cash burn, borrowing levels, interest expense and the availability of additional financing if closures or weak demand persist.
- Whether the estimated CARES Act tax refunds are realized and when cash is received.
- Potential additional impairment charges for goodwill, long-lived assets, trade names and other property if forecasts or market conditions worsen.
- The status and economic terms of landlord lease concessions and other negotiated payment deferrals.
- Whether film release schedules, theatrical release windows and competition from streaming services affect the pace of theatre recovery.
- The restoration of dividends and capital projects, which remain restricted under the amended financing arrangements.