The Marcus Corporation — Form 10-Q Summary
Business context and reporting period
The filing covers the unaudited 13 and 39 weeks ended February 28, 2013, representing the third quarter and first three quarters of fiscal 2013. Marcus operates primarily through its Theatres and Hotels/Resorts segments. Fiscal 2013 has 52 weeks, while fiscal 2012 had 53 weeks, making fourth-quarter comparisons less comparable.
Key financial metrics
| Metric | 13 weeks ended Feb. 28, 2013 | 13 weeks ended Feb. 23, 2012 | 39 weeks ended Feb. 28, 2013 | 39 weeks ended Feb. 23, 2012 |
|---|---|---|---|---|
| Revenue | $93.7 million | $92.1 million | $312.2 million | $306.1 million |
| Operating income (loss) | $(0.2) million | $4.1 million | $29.9 million | $33.7 million |
| Operating margin | Approximately (0.2)% | Approximately 4.4% | Approximately 9.6% | Approximately 11.0% |
| Net earnings attributable to Marcus | $(1.4) million | $0.7 million | $14.0 million | $16.0 million |
| Diluted EPS | $(0.05) | $0.03 | $0.50 | $0.55 |
| Net cash from operating activities | Not separately reported | Not separately reported | $42.3 million | $54.3 million |
Consolidated net earnings were $4.3 million for the quarter and $19.7 million for the first three quarters. These amounts included $5.7 million of earnings attributable to noncontrolling interests, primarily associated with majority-owned hotel entities.
- Theatres generated third-quarter revenue of $53.5 million, down 4.9%, and operating income of $9.0 million, down 24.2%. Theatre operating margin declined to 16.9% from 21.2%.
- Hotels/Resorts generated third-quarter revenue of $40.1 million, up 12.3%, but an operating loss of $5.9 million versus a $4.4 million loss, reflecting litigation settlement costs and seasonal losses at The Cornhusker.
- Comparable hotel occupancy increased to 60.3% from 55.7%, ADR increased to $124.01 from $121.24, and RevPAR increased to $74.72 from $67.49.
- At February 28, 2013, cash and cash equivalents were $8.6 million and restricted cash was $7.1 million. Total current assets were $36.1 million versus current liabilities of $85.3 million.
- Long-term debt was $238.6 million, current maturities of long-term debt were $14.7 million, and capital lease obligations totaled $33.9 million. The debt-capitalization ratio was 0.45 versus 0.37 at May 31, 2012.
- The company reported more than $119 million of unused credit lines at quarter-end and stated that available liquidity and operating cash flows were expected to support operations through the remainder of fiscal 2013.
Material changes versus the prior comparable period
- Revenue increased 1.7% for the quarter and 2.0% for the first three quarters, but operating income declined 105.5% and 11.1%, respectively.
- Marcus’s attributable net earnings declined 286.9% for the quarter and 12.5% for the first three quarters. The quarterly loss reflected weaker theatre results, litigation costs, impairment charges, and the seasonal hotel loss at The Cornhusker.
- Theatre attendance decreased 9.2% on a comparable basis in the quarter and 4.8% for the first three quarters. A weaker film slate was partly offset by higher ticket prices and concession spending per patron.
- Hotels/Resorts revenue benefited from improved comparable-property RevPAR and the October 2012 acquisition of a 73% interest in The Cornhusker Hotel and Office Plaza in Lincoln, Nebraska.
- Third-quarter and year-to-date results included approximately $1.4 million and $3.0 million, respectively, of pre-tax costs related to settlements of litigation concerning the Platinum Hotel & Spa in Las Vegas.
- Marcus recorded theatre impairment charges of $618,000 in the third quarter and approximately $1.0 million for the first three quarters, including a charge related to a theatre offered for sale and a prior-quarter charge related to a closed Milwaukee theatre.
- Operating cash flow decreased by approximately $12.0 million year over year, while capital expenditures declined to $14.6 million from $31.3 million.
- The company paid a $30.9 million special and accelerated dividend in December 2012 and repurchased approximately 1.8 million shares for approximately $20.4 million during the first three quarters.
Guidance, outlook, risks and unusual items
- Management revised expected fiscal 2013 capital expenditures to approximately $25 million to $35 million, excluding the approximately $30 million non-cash Cornhusker acquisition and any significant acquisitions.
- Management expected the fiscal 2013 fourth-quarter effective tax rate to be near its historical 40% average, subject to changes in tax contingencies and tax rates.
- The company expected to resume its regular quarterly dividend schedule beginning in August 2013.
- Fourth-quarter comparisons will be pressured by the absence of fiscal 2012’s 53rd week, which contributed approximately $7.6 million of revenue and $2.1 million of operating income to the prior-year fourth quarter.
- Management expected theatre results to remain dependent on the appeal and timing of movie releases, studio marketing, release windows, weather, competition and consumer spending. Early fiscal 2013 fourth-quarter box office performance was below the prior-year period.
- Hotel results remain exposed to economic conditions, travel demand, room supply and pricing pressure. Management specifically identified increasing hotel supply in the Milwaukee market as a risk.
- A $225 million five-year credit agreement replaced the prior $175 million facility. It includes a $50 million term loan and a $175 million revolving facility, maturing in January 2018, with interest generally at LIBOR plus 0.85% to 1.375%.
- Debt refinancing at the Skirvin Hilton resulted in $6.0 million of debt-extinguishment income. The income was allocated entirely to noncontrolling interests and therefore did not increase earnings attributable to Marcus.
- The company’s digital cinema licensing arrangement could require annual shortfall payments of up to approximately $6.2 million if distributor virtual print fees do not meet specified booking commitments; management did not expect shortfall payments based on historical booking patterns.
- A lease guarantee for a former office space had a maximum potential obligation of approximately $356,000 as of February 28, 2013.
- The company stated that no material changes had occurred in the risk factors disclosed in its fiscal 2012 Form 10-K. The filing also stated that disclosure controls and procedures were effective and that there were no significant changes in internal control over financial reporting.
Important facts for investors to verify
- Reconcile consolidated earnings with the substantially lower earnings attributable to Marcus because of noncontrolling interests.
- Assess whether theatre attendance and box office performance recover with the upcoming film slate and whether weaker attendance continues to pressure margins.
- Monitor hotel litigation costs, The Cornhusker’s renovation and seasonal performance, and the effect of new Milwaukee hotel supply on occupancy and ADR.
- Review leverage, maturities, interest-rate exposure, unused revolver capacity and compliance with the new credit agreement.
- Evaluate the sustainability of cash distributions and share repurchases following the $30.9 million special dividend and increased year-to-date repurchases.
- Confirm the timing and final cost of planned capital projects, including theatre renovations, the Cornhusker renovation and the proposed Corners of Brookfield development.