MARCUS CORP quarterly report, Q1 FY2012

The Marcus Corporation: Form 10-Q Summary

Business context and reporting period

The filing covers the 13 weeks ended August 25, 2011, the first quarter of fiscal 2012. The comparable period was the 13 weeks ended August 26, 2010. Marcus operates primarily through its Theatres and Hotels/Resorts segments. Fiscal 2012 contains 53 weeks, compared with 52 weeks in fiscal 2011. The financial statements are unaudited.

Financial performance and position

Metric	Q1 FY2012	Q1 FY2011	Change
Total revenue	$123.9 million	$114.0 million	+8.7%
Operating income	$23.3 million	$19.4 million	+20.2%
Operating margin	18.8%	17.0%	+180 basis points
Net earnings	$12.5 million	$10.0 million	+24.5%
Diluted EPS, Common Stock	$0.42	$0.34	+$0.08
Net cash from operating activities	$27.2 million	$23.5 million	+$3.7 million
Capital expenditures	$3.7 million	$2.2 million	+$1.5 million

Theatres revenue was $69.9 million, up 8.0%, and operating income was $16.9 million, up 16.1%. The theatre operating margin increased to 24.2% from 22.5%.
Hotels/Resorts revenue was $53.9 million, up 9.8%, and operating income was $9.3 million, up 25.3%. The segment margin increased to 17.2% from 15.1%.
Theatre attendance increased 2.3%, average ticket price increased 1.0%, and average concession revenue per person increased 11.7%.
Company-owned hotel occupancy increased to 84.2% from 81.6%; average daily rate increased to $146.50 from $137.76; and RevPAR increased to $123.40 from $112.36.
Interest expense declined 11.6% to $2.4 million, primarily because of reduced borrowings.
The effective income tax rate was 40.3%, compared with 40.2% in the prior-year quarter.
Cash and cash equivalents were $6.8 million at August 25, 2011, including $5.5 million of restricted cash. Cash available for cash-flow purposes under the statement of cash flows was $1.3 million.
Total debt, including current maturities and notes payable, was approximately $196.1 million at quarter-end. The debt-capitalization ratio was 0.36, compared with 0.39 at May 26, 2011.
The company reported approximately $130 million of unused credit lines at quarter-end.
Shareholders’ equity was $346.6 million at August 25, 2011, compared with $339.5 million at May 26, 2011.

Material changes versus the prior comparable period

Revenue growth reflected stronger movie attendance and concessions, higher hotel occupancy and room rates, and improved results in both operating segments.
Operating leverage and lower interest expense drove net earnings growth faster than revenue growth.
Operating cash flow improved by $3.7 million, while investing cash use increased because of higher capital expenditures.
Financing activities used $24.9 million of cash, including $34.2 million of debt principal payments, $3.7 million of treasury-stock purchases, and $2.5 million of dividends, partly offset by $15.0 million of new borrowings.
The company repurchased 442,237 common shares for approximately $3.8 million during the quarter; approximately 1.4 million shares remained authorized for repurchase.
The company’s treasury stock balance increased, with 1.83 million common shares held in treasury at August 25, 2011 versus 1.45 million at May 26, 2011.

Guidance, outlook, risks, contingencies, and unusual items

Management expected full-year fiscal 2012 capital expenditures, including potential joint-venture investments but excluding significant acquisitions, to be approximately $50 million to $90 million. The estimate included approximately $20 million for the proposed Corners of Brookfield mixed-use development, whose timing and scope remained uncertain.
Management expected interest expense for the remaining fiscal 2012 quarters to remain broadly comparable with the prior year, assuming no significant increase in short-term rates or unplanned borrowing.
Management anticipated that tax settlements could reduce unrecognized tax benefits by up to $2.5 million, with approximately $0.4 million potentially benefiting the fiscal 2012 effective tax rate. The expected full-year tax rate was described as close to the historical 38% to 40% range, subject to facts and tax-law changes.
The theatre division completed deployment of new digital projection systems on approximately 630 screens at 47 company-owned locations by the end of September 2011. Approximately $0.6 million of accelerated depreciation was recognized in the quarter, with approximately $0.8 million expected in the second quarter.
Management described the theatre outlook as dependent on the quality and timing of film releases, studio marketing, and the duration of theatrical release windows. Second-quarter box office performance had been slightly below the prior-year period at the time of filing, although concession revenue per person was expected to remain favorable.
Management expressed cautious optimism regarding Hotels/Resorts, citing improved bookings and favorable revenue trends, but noted sensitivity to economic conditions, employment, political uncertainty, short booking windows, and room-rate pressures.
The company recorded a $1.145 million liability related to an adverse judgment involving architectural services for the Platinum Hotel & Spa condominium units. The company was appealing, and the potential ultimate loss was estimated at $0 to $1.8 million.
Subsidiaries faced additional preliminary lawsuits related to the Platinum Hotel & Spa development. The company considered them without merit but could not estimate potential losses.
The company guaranteed approximately $1.019 million of remaining lease obligations for a former limited-service lodging division space if the replacement tenant defaults.
The filing stated that no material change had occurred in market-risk exposures or previously disclosed risk factors. Management reported effective disclosure controls and no significant changes in internal control over financial reporting.

Important facts for investors to verify

Reconcile the reported $6.8 million balance-sheet cash amount with the $1.3 million cash-flow statement ending balance and the $5.5 million restricted-cash balance.
Review the maturity schedule and terms of approximately $196.1 million of total debt, particularly given management’s expectation that borrowings may rise during slower operating months.
Monitor execution, costs, and financing arrangements for the digital cinema deployment and the planned $50 million to $90 million fiscal-year capital program.
Track resolution of the Platinum Hotel & Spa architectural-services judgment and other related litigation.
Assess whether hotel occupancy gains can translate into sustained average daily rate and margin improvement, and whether theatre performance can be maintained outside the strong summer movie season.
Evaluate the effect of film-release quality, theatrical distribution windows, consumer spending, weather, competition, and economic conditions on future results.