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10-Q: MARCUS CORP

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(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

General

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.

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We divide our fiscal year into three 13-week quarters and a final quarter consisting of 13 or 14 weeks. The third quarter of fiscal 2021 consisted of the 13-week period beginning on July 2, 2021 and ended on September 30, 2021. The third quarter of fiscal 2020 consisted of the 13-week period beginning June 26, 2020 and ended on September 24, 2020. The first three quarters of fiscal 2021 consisted of the 39-week period beginning on January 1, 2021 and ended on September 30, 2021. The first three quarters of fiscal 2020 consisted of the 39-week period beginning December 27, 2019 and ended on September 24, 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 our 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 our 2020 Annual Report. For further discussion regarding the impacts of COVID-19 and related economic conditions on our results for the first three quarters of fiscal 2021 and potential future impacts, see immediately below, and also refer to the discussion of our operational risks and financial risks found in "Part II-Item 1A-Risk Factors" below, and "Part I-Item 1A-Risk Factors" in our 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 fiscal 2021 with approximately 52% of our theatres open. As state and local governments eased restrictions in several of our markets and movie studios released several new films, we gradually reopened theatres during fiscal 2021.

We began fiscal 2021 with all eight of our company-owned hotels and all but one of our managed hotels open. The majority of our restaurants and bars in our hotels and resorts were open during the first three quarters of fiscal 2021, 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 reduced revenues as compared to prior pre-COVID-19 pandemic years, although hotel occupancy has been increasing throughout the fiscal 2021 year. We reopened one of our two SafeHouse(R) restaurants and bars in June 2021.

Maintaining and protecting a strong balance sheet has always been a core philosophy of The Marcus Corporation during our 86-year history, and, despite the COVID-19 pandemic, our financial position remains strong. As of September 30, 2021, we had a cash balance of approximately $9 million, $188 million of availability under our $225 million revolving credit facility, and our debt-to-capitalization ratio (including short-term borrowings) was 0.40. With our strong liquidity position, combined with the expected receipt of additional state grants, 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 fiscal 2022, even if our properties continue to generate reduced revenues during these periods. We will continue to work to preserve cash and maintain strong liquidity to endure the impacts of the global pandemic, even if it continues for a prolonged period of time.

Early in the third quarter of fiscal 2021, in conjunction with an amendment to our revolving credit agreement (described in detail in the Liquidity section below), we paid down a portion of our term loan facility using borrowings from our revolving credit facility, reducing the balance of our short-term borrowings from approximately $83.5 million to $50.0 million. In conjunction with the amendment, we extended the maturity date of the term loan facility to September 22, 2022.

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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. We received approximately $1.8 million of this refund in July 2021. Significant delays in processing refunds by the Internal Revenue Service have delayed receipt of our remaining expected income tax refund. We anticipate receiving the remaining refund during the fourth quarter of fiscal 2021. We expect to generate additional income tax loss carryforwards during fiscal 2021 that will benefit future years.

During the fourth quarter of fiscal 2020 and continuing into fiscal 2021, 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") or subsequent federal relief programs. We received $4.9 million of these prior year grants in January 2021. We were awarded and received an additional $1.3 million in theatre grants during the first quarter of fiscal 2021 and were awarded and received an additional $1.9 million in hotel grants during the third quarter of fiscal 2021, further contributing to our strong liquidity position as of September 30, 2021. We have recently applied for additional state grants totaling approximately $4.6 million for theatres in two states that, if approved, would benefit our fiscal 2021fourth quarter.

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 net proceeds of approximately $4.2 million. During the third quarter of fiscal 2021, we sold several land parcels, generating additional net proceeds of approximately $4.8 million. As of September 30, 2021, we had letters of intent or contracts to sell several pieces of real estate with a total carrying value of $12.8 million, a significant portion of which we currently anticipate closing during the fiscal 2021 fourth quarter. We believe we may receive total sales proceeds from real estate sales during the next 12-15 months totaling approximately $15-30 million, depending upon demand for the real estate in question.

We remain optimistic that the theatre industry is in the process of rebounding and will continue to benefit from pent-up social demand now that a greater percentage of the population is vaccinated, the majority of state and local restrictions have been lifted, and people seek togetherness with a return to normalcy. We still expect a return to "normalcy" to span multiple months driven by a continued increase in vaccinations and a gradual ramp-up of consumer comfort with public gatherings. The increase of the Delta variant of the disease has resulted in changing government guidance on indoor mask wearing in some communities, which has impacted consumer comfort in the near term. We expect that the approval of vaccines for children ages 5-11 may cause parents to feel more comfortable to visit a movie theatre, which would bolster the market for films aimed at children and families, a genre in which we have historically performed very well. We are very encouraged by the recent performance of multiple films released in September and October, including Shang-Chi and the Legend of the Ten Rings, a Marvel film released by Disney exclusively in movie theatres. Following up on the success of Shang-Chi and the Legend of the Ten Rings, Disney recently announced that all of its remaining films for 2021 would receive an exclusive theatrical window. Total theatre division revenues, expressed as a percentage of fiscal 2019 revenues, have increased in fiscal 2021 to date, including an increase from 16% in January 2021 to 48% in June 2021, 55% in July 2021, 63% in August 2021 and 60% in September 2021. Our relative performance compared to 2019 has improved further early in the fourth quarter of fiscal 2021. As described further below in the Theatres section, a significant number of films originally scheduled to be released during fiscal 2020 and the first half of fiscal 2021 were delayed until later in fiscal 2021 or fiscal 2022, further increasing the quality and quantity of films that we expect to be available during those future time periods.

As we expected, the primary customer for hotels during the first three quarters of fiscal 2021 continued to come from the "drive-to leisure" market. Demand from this customer segment has exceeded our expectations. Most organizations implemented travel bans at the onset of the pandemic, only allowing essential travel. It is likely that business travel will continue to be limited in the near term, although we are beginning to experience some increases in travel from this customer segment. Total hotel division revenues, expressed as a percentage of fiscal 2019 revenues, have also increased throughout fiscal 2021 to date, including an increase from 49% in January 2021 to 71% in June 2021, 90% in July 2021, 85% in August 2021 and 97% in September 2021, with the most recent improvement coinciding with busy summer leisure travel and several demand-generating events in certain key markets. As of the date of this report, our group room revenue bookings for fiscal 2022 - commonly referred to in the hotels and resorts industry as "group pace" - is running approximately 20% behind where we were at the same time in fiscal 2019 (pre-pandemic), but that is an improvement from earlier in the fiscal year and we have experienced increased booking activity in recent months for fiscal 2022 and beyond. Banquet and catering revenue pace for fiscal 2022 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.

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Both of our operating divisions are experiencing challenges related to a labor shortage that has arisen as the country emerges from the pandemic. Difficulties in hiring new associates after significantly reducing staffing during the height of the COVID-19 pandemic may impact our ability to service our increasing customer counts in both theatres and hotels and may also increase labor costs in future periods.

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 income (loss), other income
        (expense), net earnings (loss) and net earnings (loss) per diluted common share
        for the third quarter and first three quarters of fiscal 2021 and fiscal 2020
        (in millions, except for per share and variance percentage data):
                                                       Third Quarter                          First Three Quarters
                                                                      Variance                                    Variance
                                           F2021      F2020       Amt.      Pct.      F2021        F2020       Amt.     Pct.
        Revenues                          $ 145.9    $   33.6    $ 112.3    334.2 %  $  289.2    $   201.0    $ 88.2    43.9 %
        Operating income (loss)               6.3      (48.0)       54.3    113.1 %    (55.5)      (123.2)      67.7    55.0 %
        Other income (expense)              (4.4)       (6.0)        1.6     26.8 %    (13.2)       (13.6)       0.4     3.0 %
        Net earnings (loss)
        attributable to The Marcus
        Corp.                             $   1.8    $ (39.4)    $  41.2    104.5 %  $ (49.7)    $  (85.8)    $ 36.1    42.0 %
        Net earnings (loss) per common
        share - diluted:                  $  0.06    $ (1.30)    $  1.36    104.6 %  $ (1.66)    $  (2.84)    $ 1.18    41.5 %
        


Revenues increased and operating income (loss), net earnings (loss) attributable to The Marcus Corporation and net earnings (loss) per diluted common share improved significantly during the third quarter and first three quarters of fiscal 2021 compared to the third quarter and first three quarters of fiscal 2020. Increased revenues from both our theatre division and hotels and resorts division contributed to the improvement during the fiscal 2021 periods compared to the fiscal 2020 periods, during which the majority of our theatres and hotels were closed for large portions of the second and third quarters due to the impact of the COVID-19 pandemic. Our theatres and hotels were operating fairly normally during the first two and one-half months of fiscal 2020 until the onset of the pandemic in mid-March. Net loss attributable to The Marcus Corporation and net loss per diluted common share during the first three quarters of fiscal 2020 were favorably impacted by a favorable income tax benefit described below.

Our operating income (loss) during the third quarter and first three quarters of fiscal 2021 was favorably impacted by state government grants of approximately $2.0 million and $3.3 million, respectively, or approximately $0.05 and $0.08 per diluted common share, respectively. Our operating loss during the first three quarters of fiscal 2021 was negatively impacted by impairment charges of approximately $3.7 million, or approximately $0.09 per diluted common share, primarily related to surplus real estate that we intend to sell. Our operating performance during the third quarter of fiscal 2020 was negatively impacted by nonrecurring expenses totaling approximately $1.6 million, or approximately $0.04 per diluted common share, including payments to and on behalf of laid off employees. Nonrecurring expenses during the fiscal 2020 third quarter also included extensive cleaning costs, supply purchases and employee training, among other items, related to the reopening of selected theatre and hotel properties and implementing new operating protocols. In addition, impairment charges related to several theatre locations negatively impacted our fiscal 2020 third quarter operating income by approximately $765,000, or approximately $0.02 per diluted common share. Our operating performance during the first three quarters of fiscal 2020 was negatively impacted by nonrecurring expenses totaling approximately $10.1 million, or approximately $0.23 per diluted common share, related to the expenses in the third quarter described above and 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 the first quarter. In addition, impairment charges related to intangible assets and several theatre locations negatively impacted our fiscal 2020 first three quarters operating loss by approximately $9.5 million, or approximately $0.22 per diluted common share.

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Operating losses from our corporate items, which include amounts not allocable to the business segments, increased during the fiscal 2021 periods compared to the fiscal 2020 periods due primarily to increased non-cash long-term incentive compensation expenses and the fact that we reduced salaries and bonus accruals during fiscal 2020 to preserve liquidity at the onset of the pandemic. Net earnings (loss) attributable to The Marcus Corporation during the fiscal 2021 periods was negatively impacted by increased interest expense compared to the fiscal 2020 periods, partially offset by gains on disposition of property, equipment and other assets during the fiscal 2021 periods.

Our interest expense totaled $4.6 million for the third quarter of fiscal 2021 compared to $4.1 million for the third quarter of fiscal 2020, an increase of approximately $500,000, or 11.3%. Our interest expense totaled approximately $14.4 million for the first three quarters of fiscal 2021 compared to approximately $10.2 million for the first three quarters of fiscal 2020, an increase of approximately $4.2 million, or 41.0%. The increase in interest expense during the fiscal 2021 periods was due in part to increased borrowings and an increase in our average interest rate. In addition, interest expense increased during the third quarter and first three quarters of fiscal 2021 due to the fact that we incurred approximately $540,000 and $1.8 million, respectively, in noncash amortization of debt issuance costs, compared to approximately $510,000 and $666,000 of such costs during the third quarter and first three quarters 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), 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 investment income or other expenses during the third quarter and first three quarters of fiscal 2021 compared to the third quarter and first three quarters of fiscal 2020. We reported net gains on disposition of property, equipment and other assets of $868,000 and $2.9 million, respectively, during the third quarter and first three quarters of fiscal 2021, compared to small net losses on disposition of property, equipment and other assets during the fiscal 2020 periods. The net gain on disposition of property, equipment and other assets during the third quarter of fiscal 2021 was due primarily to the sale of surplus land. The net gain on disposition of property, equipment and other assets during the first three quarters of fiscal 2021 included 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 additional disposition gains or losses from periodic sales of property, equipment and other assets during the fourth quarter of fiscal 2021 and beyond.

Equity losses from unconsolidated joint ventures during the third quarter and first three quarters of fiscal 2020 included an other-than-temporary impairment loss of approximately $811,000 in which we determined that the fair value of our equity method investment in a hotel joint venture was less than its carrying value as of September 24, 2020.

We reported income tax expense for the third quarter of fiscal 2021 of $150,000 and an income tax benefit for the first three quarters of fiscal 2021 of $18.9 million, compared to an income tax benefit of $14.5 million and $51.0 million, respectively, during the third quarter and first three quarters of fiscal 2020. The larger income tax benefit during the fiscal 2020 periods was primarily the result of the significant losses before income taxes incurred as a result of the closing of the majority of our properties in March 2020 and the subsequent reduction in our operating performance due to the COVID-19 pandemic. Our fiscal 2020 income tax benefit was also favorably impacted by an adjustment of approximately $17.4 million, or approximately $0.56 per diluted common share, resulting from several accounting method changes and the March 27, 2020 signing of the CARES Act. One of the provisions of the CARES Act allowed our 2019 and 2020 taxable losses to be carried back to prior fiscal years during which the federal income tax rate was 35% compared to the current statutory federal income tax rate of 21%. Our fiscal 2021 first three quarters effective income tax rate was 27.6%. Our fiscal 2020 first three quarters effective income tax rate was 37.3% and benefitted from the $17.6 million adjustment described above. Excluding this favorable adjustment to income tax benefit, our effective income tax rate during the first three quarters of fiscal 2020 was 24.5%. We anticipate that our effective income tax rate for the remaining quarter 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 fiscal 2021 and fiscal 2020 periods, 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 $23,000 during the first three quarters 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.

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Nov 08, 2021

COMTEX_396534633/2041/2021-11-08T17:36:18

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