The Marcus Corporation — Fiscal 2014 First-Quarter Form 10-Q
Business context and reporting period
The filing covers the 13 weeks ended August 29, 2013, the first quarter of fiscal 2014. Marcus operates primarily through its Theatres and Hotels/Resorts segments. Results are compared with the 13 weeks ended August 30, 2012. The interim financial statements are unaudited and include normal recurring adjustments.
Financial performance and key metrics
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Total revenue | $129.0 million | $117.9 million | 9.4% |
| Operating income | $24.3 million | $20.5 million | 19.0% |
| Operating margin | 18.9% | 17.3% | Up approximately 1.6 percentage points |
| Net earnings attributable to Marcus | $13.4 million | $10.7 million | 25.8% |
| Diluted EPS — Common Stock | $0.50 | $0.37 | Up $0.13 |
| Interest expense | $2.4 million | $2.1 million | Up 15.4% |
| Net cash provided by operating activities | $21.7 million | $15.1 million | Up $6.6 million |
| Capital expenditures | $8.7 million | $5.3 million | Up $3.4 million |
Theatres generated revenue of $69.1 million, up 10.8%, and operating income of $16.9 million, up 27.4%; the segment margin increased to 24.5% from 21.3%. Comparable theatre attendance increased 7.9%, average ticket price increased 2.2%, and average concession revenue per person increased 5.6%.
Hotels and Resorts generated revenue of $59.8 million, up 7.9%, and operating income of $10.9 million, up 6.5%. The segment margin declined to 18.2% from 18.5%. Company-owned hotel occupancy increased to 86.0% from 84.9%, ADR increased 3.1% to $155.39, and RevPAR increased 4.5% to $133.68.
At August 29, 2013, cash and cash equivalents were $12.2 million, restricted cash was $6.9 million, and total assets were $749.3 million. Total debt, including current maturities and excluding capital lease obligations, was approximately $234.9 million; capital lease obligations totaled approximately $31.7 million. The debt-to-capitalization ratio was 0.42, compared with 0.44 at fiscal 2013 year-end. Management reported approximately $175 million of unused credit lines.
Net cash used in investing activities was $7.9 million. Net cash used in financing activities was $11.8 million, including $72.4 million of principal payments, $64.5 million of new debt proceeds, $2.2 million of dividends, and $1.1 million of distributions to noncontrolling interests. Cash increased from $10.2 million at May 30, 2013 to $12.2 million at August 29, 2013.
Material changes versus the prior comparable period
- Revenue, operating income, and net earnings attributable to Marcus increased, primarily because of a stronger movie slate, higher theatre attendance, improved hotel occupancy, and higher room rates.
- Interest expense increased by approximately $0.3 million because of higher borrowings related to the Cornhusker acquisition, prior financing activity, and increased debt levels.
- The company issued $50 million of 4.02% unsecured senior notes due August 2025 and used the proceeds primarily to reduce borrowings under its revolving credit facility and for general corporate purposes.
- Income tax expense increased to $9.0 million from $7.7 million, while the adjusted effective tax rate declined to 40.2% from 41.9%. The prior-year rate was affected by a proposed state tax audit adjustment that was subsequently successfully challenged.
- A $585,000 net loss attributable to noncontrolling interests primarily reflected a true-up of a prior-year allocation.
- Capital spending increased, including theatre renovations and premium-screen projects and the continuing renovation of The Cornhusker hotel.
Guidance, outlook, risks, contingencies, and unusual items
- Management maintained its fiscal 2014 capital expenditure estimate of $60 million to $90 million, including potential joint-venture investments but excluding significant unidentified acquisitions.
- Management expected approximately $175 million of available credit capacity and operating cash flows to support liquidity needs through the remainder of fiscal 2014.
- A $21.1 million mortgage on a downtown Chicago hotel matures in June 2014; management expected to refinance it during fiscal 2014.
- Management expected theatre results in the second quarter to be slightly above the prior year initially, but noted difficult comparisons because the prior-year second quarter was a record period.
- Management expected continued improvement in hotel operating results, although margin expansion remains constrained by lower ADRs, online travel agency mix, smaller and shorter group meetings, and higher occupancy-related costs.
- The company continued renovations at The Cornhusker and planned additional theatre premium seating and Ultra Screen projects.
- The proposed Corners of Brookfield mixed-use development remained subject to government infrastructure support, equity-partner negotiations, lease commitments, and financing requirements. If approved as planned, construction could begin in spring 2014 and opening could occur in fall 2015.
- Key risks include film availability and audience appeal, competition, economic and weather conditions, hotel supply and occupancy, consumer travel and entertainment spending, capital requirements, and potential effects from security incidents.
- The company had a lease guarantee with a maximum potential obligation of approximately $119,000 as of August 29, 2013, expiring in November 2013.
- The company stated that no material changes occurred in market-risk exposures or previously reported risk factors. Management concluded that disclosure controls were effective and that there were no significant changes in internal control over financial reporting.
Most important facts for investors to verify
- Whether the stronger film slate and theatre attendance trends continue after the seasonally strong first quarter.
- Whether hotel ADR continues to recover and offsets occupancy-related operating costs and competitive pressure in Milwaukee.
- The refinancing and eventual repayment terms for the $21.1 million Chicago hotel mortgage due in June 2014.
- Actual fiscal 2014 capital spending versus the $60 million to $90 million estimate and its effect on leverage and cash flow.
- The effect of the new 4.02% senior notes on future interest expense, particularly management’s estimate of approximately $300,000 of additional quarterly interest expense versus prior-year quarters.
- Progress, financing, and commitments related to The Corners of Brookfield development.
- The performance and remaining renovation costs of The Cornhusker, including the effect of its operating losses on hotel segment results.