(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Special Note Regarding Forward-Looking Statements
Certain matters discussed in this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") and elsewhere in this Form 10-Q are "forward-looking statements" intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements may generally be identified as such because the context of such statements include words such as we "believe," "anticipate," "expect" or words of similar import. Similarly, statements that describe our future plans, objectives or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties which may cause results to differ materially from those expected, including, but not limited to, the following: (1) the adverse effects of the COVID-19 pandemic on our theatre and hotels and resorts businesses, results of operations, liquidity, cash flows, financial condition, access to credit markets and ability to service our existing and future indebtedness; (2) the duration of the COVID-19 pandemic and related government restrictions and social distancing requirements and the level of customer demand following the relaxation of such requirements; (3) the availability, in terms of both quantity and audience appeal, of motion pictures for our theatre division (particularly following the COVID-19 pandemic, during which the production of new movie content temporarily ceased and release dates for motion pictures have been postponed), as well as other industry dynamics such as the maintenance of a suitable window between the date such motion pictures are released in theatres and the date they are released to other distribution channels; (4) the effects of adverse economic conditions in our markets, including but not limited to, those caused by the COVID-19 pandemic; (5) the effects of adverse economic conditions, including but not limited to, those caused by the COVID-19 pandemic, on our ability to obtain financing on reasonable and acceptable terms, if at all; (6) the effects on our occupancy and room rates caused by the COVID-19 pandemic and the effects on our occupancy and room rates of the relative industry supply of available rooms at comparable lodging facilities in our markets once hotels and resorts have more fully reopened; (7) the effects of competitive conditions in our markets; (8) our ability to achieve expected benefits and performance from our strategic initiatives and acquisitions; (9) the effects of increasing depreciation expenses, reduced operating profits during major property renovations, impairment losses, and preopening and start-up costs due to the capital intensive nature of our business; (10) the effects of weather conditions, particularly during the winter in the Midwest and in our other markets; (11) our ability to identify properties to acquire, develop and/or manage and the continuing availability of funds for such development; (12) the adverse impact on business and consumer spending on travel, leisure and entertainment resulting from terrorist attacks in the United States, other incidents of violence in public venues such as hotels and movie theatres or epidemics (such as the COVID-19 pandemic); and (13) a disruption in our business and reputational and economic risks associated with civil securities claims brought by shareholders. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, including developments related to the COVID-19 pandemic, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. Our forward-looking statements are based upon our assumptions, which are based upon currently available information, including assumptions about our ability to manage difficulties associated with or related to the COVID-19 pandemic; the assumption that our theatre closures, hotel closures and restaurant closures are not expected to be permanent or to re-occur; the continued availability of our workforce; and the temporary and long-term effects of the COVID-19 pandemic on our business. Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are made only as of the date of this Form 10-Q and we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.
RESULTS OF OPERATIONS
We report our consolidated and individual segment results of operations on a 52- or 53-week fiscal year ending on the last Thursday in December. Fiscal 2021 is a 52-week year beginning on January 1, 2021 and ending on December 30, 2021. Fiscal 2020 was a 53-week year that began on December 27, 2019 and ended on December 31, 2020.
We divide our fiscal year into three 13-week quarters and a final quarter consisting of 13 or 14 weeks. The first quarter of fiscal 2021 consisted of the 13-week period beginning on January 1, 2021 and ended on April 1, 2021. The first quarter of fiscal 2020 consisted of the 13-week period beginning December 27, 2019 and ended on March 26, 2020. Our primary operations are reported in the following two business segments: movie theatres and hotels and resorts.
For discussion regarding the impact of COVID-19 and related economic conditions on the Company's results for the year ended December 31, 2020, see "Part II-Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2020 Annual Report. For further discussion regarding the impacts of COVID-19 and related economic conditions on the Company's results for the quarter ended April 1, 2021 and potential future impacts, see immediately below, and also refer to the discussion of the Company's operational risks and financial risks found in "Part I-Item 1A-Risk Factors" in the Company's 2020 Annual Report.
Impact of the COVID-19 Pandemic
The COVID-19 pandemic has had an unprecedented impact on the world and both of our business segments. The situation continues to be volatile and the social and economic effects are widespread. As an operator of movie theatres, hotels and resorts, restaurants and bars, each of which consists of spaces where customers and guests gather in close proximity, our businesses are significantly impacted by protective actions that federal, state and local governments have taken to control the spread of the pandemic, and our customers' reactions or responses to such actions. These actions have included, among other things, declaring national and state emergencies, encouraging social distancing, restricting freedom of movement and congregation, mandating non-essential business closures, issuing curfews, limiting business capacity, mandating mask-wearing and issuing shelter-in-place, quarantine and stay-at-home orders.
We began the first quarter of fiscal 2021 with approximately 52% of our theatres open. As state and local restrictions were eased in several of our markets and several new films were released by movie studios, we gradually reopened theatres during the quarter and ended the fiscal 2021 first quarter with approximately 74% of our theatres open. The majority of our reopened theatres continued to operate with reduced operating days (Fridays, Saturdays, Sundays and Tuesdays) and reduced operating hours during the fiscal 2021 first quarter. All of our reopened theatres operated at significantly reduced attendance levels compared to prior pre-COVID-19 pandemic years due to customer concerns related to the COVID-19 pandemic and a reduction in the number of new films released during the first quarter of fiscal 2021. As of the date of this report, we had reopened several additional theatres, bringing our number of open theatres to approximately 89% of our total theatres. We also have recently increased the number of operating days and operating hours at many of our reopened theatres. We currently expect to open the majority of our remaining closed theatres and return the majority of our theatres to standard operating days and hours by the end of May 2021 as more anticipated new films are released and demand returns.
We began the first quarter of fiscal 2021 with all eight of our company-owned hotels and all but one of our managed hotels open. Our two SafeHouse(R) restaurants and bars remain temporarily closed, but the majority of our restaurants and bars in our hotels and resorts are open, operating under applicable state and local restrictions and guidelines, and in some cases reduced operating hours. The majority of our hotels and restaurants are generating significantly reduced revenues as compared to prior years.
Maintaining and protecting a strong balance sheet has always been a core philosophy of The Marcus Corporation during our 85-year history, and, despite the COVID-19 pandemic, our financial position remains strong. As of April 1, 2021, we had a cash balance of approximately $6 million, $207 million of availability under our $225 million revolving credit facility, and our debt-to-capitalization ratio was 0.41. With this significant liquidity, combined with the expected receipt of income tax refunds and proceeds from the sale of surplus real estate (discussed below), we believe we are positioned to meet our obligations as they come due and continue to sustain our operations throughout fiscal 2021 and into fiscal 2022, even if our properties continue to generate significantly reduced revenues throughout fiscal 2021. We will continue to work to preserve cash and ensure sufficient liquidity to endure the impacts of the global pandemic, even if prolonged.
Early in our first quarter of fiscal 2021, we received the remaining $5.9 million of requested tax refunds from our fiscal 2019 tax return. During the first quarter of fiscal 2021, we filed income tax refund claims of $24.2 million related to our fiscal 2020 tax return, with the primary benefit derived from net operating loss carrybacks to prior years. Additional income tax loss carryforwards are expected to be generated during fiscal 2021 that will benefit future years.
During the fourth quarter of fiscal 2020, a number of states elected to provide grants to certain businesses most impacted by the COVID-19 pandemic, utilizing funds received by the applicable state under provisions of the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the "CARES Act"). We received $4.9 million of these prior year grants in January 2021. Early in fiscal 2021, we were awarded and received an additional $1.3 million in theatre grants from another state, further contributing to our strong liquidity position as of April 1, 2021.
We also continue to pursue sales of surplus real estate and other non-core real estate to further enhance our liquidity. During the first quarter of fiscal 2021, we sold an equity interest in a joint venture, generating total proceeds of approximately $4.2 million. As of April 1, 2021, we had letters of intent or contracts to sell several pieces of real estate with a total carrying value of $8.7 million and we believe we may receive total sales proceeds from real estate sales during the next 12-18 months totaling approximately $10-$40 million, depending upon demand for the real estate in question.
We remain optimistic that the theatre industry will rebound and benefit from pent-up social demand as a greater percentage of the population is vaccinated, home sheltering subsides and people seek togetherness with a return to normalcy. A return to "normalcy" may span multiple months driven by staggered theatre openings, reduced operating days and hours, lingering social distancing requirements, the progress of the vaccination rollout in each state and a gradual ramp-up of consumer comfort with public gatherings. We are very encouraged by the recent performance of Godzilla vs. Kong, Mortal Kombat and Demon Slayer, the best performing films since the pandemic began last year. The continued lessening of state and local restrictions in key markets such as New York and Los Angeles is also a very positive sign. As described further below in the Theatres section of this MD&A, a significant number of films originally scheduled to be released through March 2021 have been delayed until later in fiscal 2021 or fiscal 2022, further increasing the quality and quantity of films expected to be available during those future time periods.
As expected, the primary customer for hotels during the first quarter of fiscal 2021 has continued to come from the "drive-to leisure" market. Demand from this customer segment exceeded our expectations during the fiscal 2021 first quarter. Most organizations implemented travel bans at the onset of the pandemic and are currently only allowing essential travel, which will likely limit business travel in the near term. As of the date of this report, our group room revenue bookings for fiscal 2021 - commonly referred to in the hotels and resorts industry as "group pace" - is running significantly behind where we would historically be at this same time in prior years, but we are beginning to experience increased booking activity for later in fiscal 2021 and particularly for fiscal 2022 and beyond. Banquet and catering revenue pace for fiscal 2021 is also running behind where we would typically be at this same time in prior years, but not as much as group room revenues, due in part to increases in wedding bookings. The future economic environment will also have a significant impact on the pace of our return to "normal" hotel operations.
We cannot assure that the impact of the COVID-19 pandemic will not continue to have a material adverse effect on both our theatre and hotels and resorts businesses, results of operations, cash flows, financial condition, access to credit markets and ability to service our existing and future indebtedness.
Overall Results The following table sets forth revenues, operating loss, other income (expense), net loss and net loss per diluted common share for the first quarter of fiscal 2021 and fiscal 2020 (in millions, except for per share and variance percentage data): First Quarter Variance F2021 F2020 Amt. Pct. Revenues $ 50.8 $ 159.5 $ (108.7) (68.2) % Operating loss (35.7) (22.2) (13.5) (60.6) % Other income (expense) (3.2) (3.9) 0.7 16.6 % Net loss attributable to noncontrolling interests - (0.1) 0.1 100.0 % Net loss attributable to The Marcus Corp. (28.1) (19.4) (8.7) (45.4) % Net loss per common share - diluted $ (0.93) $ (0.64) $ (0.29) (45.3) %
Revenues decreased and operating loss, net loss attributable to The Marcus Corporation and net loss per diluted common share increased during the first quarter of fiscal 2021 compared to the first quarter of fiscal 2020 due to decreased revenues from both our theatre division and hotels and resorts division as a result of the continuing impact of the COVID-19 pandemic. Our theatre division benefited from a nonrecurring government grant during the fiscal 2021 first quarter and both of our operating divisions were negatively impacted by nonrecurring expenses during the fiscal 2020 first quarter. Operating losses from our corporate items, which include amounts not allocable to the business segments, increased slightly during the first quarter of fiscal 2021 compared to the first quarter of fiscal 2020 due primarily to increased non-cash long-term incentive compensation expenses. Net loss attributable to The Marcus Corporation during the first quarter of fiscal 2021 was negatively impacted by increased interest expense compared to the first quarter of fiscal 2020 and benefited from a gain on disposition of property, equipment and other assets during the first quarter of fiscal 2021.
Our operating loss during the first quarter of fiscal 2021 was favorably impacted by a state government grant of approximately $1.3 million, or approximately $0.03 per diluted common share. Our operating loss during the first quarter of fiscal 2020 was negatively impacted by nonrecurring expenses totaling approximately $5.5 million, or approximately $0.13 per diluted common share, related to expenses incurred (primarily payroll continuation payments to employees temporarily laid off) due to the closing of all of our movie theatres and the majority of our hotels and resorts during the last two weeks of such quarter. In addition, impairment charges related to intangible assets and several theatre locations negatively impacted our fiscal 2020 first quarter operating income by approximately $8.7 million, or approximately $0.21 per diluted common share.
We recognized investment income of $40,000 during the first quarter of fiscal 2021 compared to an investment loss of $695,000 during the first quarter of fiscal 2020. The investment loss during the fiscal 2020 first quarter was due to decreases in the value of marketable securities resulting from significant market declines arising from the COVID-19 pandemic and its impact on the U.S. economy.
Our interest expense totaled $4.8 million for the first quarter of fiscal 2021 compared to $2.5 million for the first quarter of fiscal 2020, an increase of approximately $2.3 million, or 92.5%. The increase in interest expense during the first quarter of fiscal 2021 was due in part to increased borrowings and an increase in our average interest rate. In addition, interest expense increased during the first quarter of fiscal 2021 due to the fact that we incurred approximately $623,000 in noncash amortization of debt issuance costs, compared to approximately $49,000 of such costs during the first quarter of fiscal 2020. On January 1, 2021, we elected to early adopt ASU No. 2020-06 (described in Note 1 of the condensed notes to our consolidated financial statements included in this report above), which resulted in the elimination of noncash discount on convertible notes beginning with the first quarter of fiscal 2021. Changes in our borrowing levels due to variations in our operating results, capital expenditures, acquisition opportunities (or the lack thereof) and asset sale proceeds, among other items, may impact, either favorably or unfavorably, our actual reported interest expense in future periods, as may changes in short-term interest rates.
We did not have any significant variations in other expenses or equity losses from unconsolidated joint ventures during the first quarter of fiscal 2021 compared to the first quarter of fiscal 2020. We reported a net gain on disposition of property, equipment and other assets of approximately $2.2 million during the first quarter of fiscal 2021, compared to net losses on disposition of property, equipment and other assets of $12,000 during the first quarter of fiscal 2020. The net gain on disposition of property, equipment and other assets during the first quarter of fiscal 2021 was due primarily to the sale of an equity investment in a joint venture. The timing of periodic sales and disposals of our property, equipment and other assets varies from quarter to quarter, resulting in variations in our reported gains or losses on disposition of property, equipment and other assets. We anticipate the potential for additional disposition gains or losses from periodic sales of property, equipment and other assets during fiscal 2021 and beyond.
We reported income tax benefits of $10.8 million and $6.6 million, respectively, during the first quarters of fiscal 2021 and fiscal 2020. Our fiscal 2021 first quarter effective income tax rate was 27.7%, compared to our fiscal 2020 first quarter effective income tax rate of 25.3%. Our effective income tax rate during the first quarter of fiscal 2021 benefitted from nonrecurring adjustments specific to the first quarter. We anticipate that our effective income tax rate for the remaining quarters of fiscal 2021 may be in the 24-26% range, excluding any potential changes in federal or state income tax rates or other one-time tax benefits. Our actual fiscal 2021 effective income tax rate may be different from our estimated quarterly rates depending upon actual facts and circumstances.
The operating results of one majority-owned hotel, The Skirvin Hilton, are included in the hotels and resorts division revenue and operating income during the first quarters of fiscal 2021 and fiscal 2020, and the after-tax net earnings or loss attributable to noncontrolling interests is deducted from or added to net earnings on the consolidated statements of earnings. We reported a net loss attributable to noncontrolling interests of $148,000 during the first quarter of fiscal 2020. As a result of the noncontrolling interest balance reaching zero during fiscal 2020, we do not expect to report additional net losses attributable to noncontrolling interests in future periods until the hotel returns to profitability.
Theatres The following table sets forth revenues, operating loss and operating margin for our theatre division for the first quarter of fiscal 2021 and fiscal 2020 (in millions, except for variance percentage and operating margin): First Quarter Variance F2021 F2020 Amt. Pct. Revenues $ 22.6 $ 109.2 $ (86.6) (79.3) % Operating loss (25.6) (7.1) (18.5) (262.0) % Operating margin (% of revenues) (113.6) % (6.5) %
Our theatre division revenues decreased and operating loss increased significantly during the first quarter of fiscal 2021 compared to the first quarter of fiscal 2020 due entirely to decreased attendance. We began the first quarter of fiscal 2021 with approximately 52% of our theatres open. As state and local restrictions were eased in several of our markets and several new films were released by movie studios, we gradually reopened theatres during the quarter and ended the fiscal 2021 first quarter with approximately 74% of our theatres open. All of our reopened theatres operated at significantly reduced attendance levels compared to prior years due to customer concerns related to the COVID-19 pandemic and a reduction in the number of new films released during the quarter. A nonrecurring state government grant of approximately $1.3 million favorably impacted our theatre division operating loss during the first quarter of fiscal 2021.
Our theatres were open for all but nine days during the first quarter of fiscal 2020 (we closed all of our theatres on March 17, 2020 in response to the COVID-19 pandemic). In addition to the impact of reduced attendance due to the theatre closings, our theatre division operating loss during the first quarter of fiscal 2020 was negatively impacted by nonrecurring expenses totaling approximately $2.8 million related to expenses incurred (primarily payroll continuation payments to employees temporarily laid off) due to the closing of all of our movie theatres during such quarter. Impairment charges related to intangible assets and several theatre locations also negatively impacted our theatre division fiscal 2020 first quarter operating loss by approximately $8.7 million.
The following table provides a further breakdown of the components of revenues for the theatre division for the first quarter of fiscal 2021 and fiscal 2020 (in millions, except for variance percentage):
First Quarter Variance F2021 F2020 Amt. Pct. Admission revenues $ 10.7 $ 55.4 $ (44.7) (80.7) % Concession revenues 9.9 45.9 (36.0) (78.4) % Other revenues 1.9 7.7 (5.8) (75.1) % 22.5 109.0 (86.5) (79.3) % Cost reimbursements 0.1 0.2 (0.1) (76.5) % Total revenues $ 22.6 $ 109.2 $ (86.6) (79.3) %
According to data received from Comscore (a national box office reporting service for the theatre industry) and compiled by us to evaluate our fiscal 2021 first quarter results, United States box office receipts decreased 89.7% during our fiscal 2021 first quarter, indicating that our decrease in admission revenues during the first quarter of fiscal 2021 of 80.7% outperformed the industry by 9.0 percentage points. Based upon this metric, we believe we were the top performing theatre circuit during the first quarter of fiscal 2021 compared to the top 10 circuits in the U.S. Additional data received and compiled by us from Comscore indicates our admission revenues during the first quarter of fiscal 2021 represented approximately 4.8% of the total admission revenues in the U.S. during the period (commonly referred to as market share in our industry). This represents an approximately 55% increase over our reported market share of approximately 3.1% during the first quarter of fiscal 2019, prior to the pandemic. Closed theatres in other markets in the U.S. contributed to our outperformance in both of these metrics and we expect our outperformance to lessen in future periods as more theatres open. Our goal is to continue our past pattern of outperforming the industry, but with the majority of our renovations now completed, our ability to do so in any given quarter will likely be partially dependent upon film mix, weather and the competitive landscape in our markets.
Sales attributable to our Marcus Private Cinema ("MPC") program have exceeded expectations, partially offsetting reduced traditional attendance and contributing to our industry outperformance during the first quarter of fiscal 2021. Under this program, a guest may purchase an entire auditorium for up to 20 of his or her friends and family for a fixed charge, ranging from $99 to $179 (depending upon the film and number of weeks it has been in theatres). During the last 11 weeks of the fiscal 2021 first quarter, we averaged over 1,500 MPC events per week, accounting for approximately 21% of our admission revenues during those weeks.
Total theatre attendance decreased 81.4% during the first quarter of fiscal 2021 compared to the first quarter of fiscal 2020, resulting in decreases in both admission revenues and concession revenues. A significant decrease in the number of new films, the lack of awareness of theatres being open (due in part to limited new film advertising), ongoing state and local capacity restrictions and customer concerns regarding visiting indoor businesses all contributed to the reductions in attendance during the first quarter of fiscal 2021. As described above, attendance from MPC events (estimated to average 13 guests per event) partially offset the reduction in traditional movie going attendance.
Our highest grossing films during the fiscal 2021 first quarter included Raya and the Last Dragon, Tom and Jerry, The Croods: A New Age, Wonder Woman 1984 and The Little Things. We believe our theatre circuit outperformed its typical market share on four of our top five films during the first quarter of fiscal 2021. Due to less films being released during the first quarter of fiscal 2021, the film slate during such quarter was weighted more towards our top movies compared to the prior year, as evidenced by the fact that our top five films during our fiscal 2021 first quarter accounted for 59% of our total box office results, compared to 47% for the top five films during the first quarter of fiscal 2020, both expressed as a percentage of the total admission revenues for the period. In prior years, an increased reliance on fewer films during a given quarter has had the effect of slightly increasing our film rental costs during the period, as generally the better a particular film performs, the greater the . . .
May 11, 2021
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