The Marcus Corporation — Fiscal 2016 Form 10-K Summary
Business context and reporting period
The company operates two principal segments: movie theatres and hotels and resorts. Fiscal 2016 was a 52-week year ended December 29, 2016. Comparisons primarily use the unaudited 53-week period ended December 31, 2015 because the company changed its fiscal year-end from May to December.
- Theatre operations comprised 68 locations and 885 screens across eight states at year-end, including the December 2016 acquisition of the 14-location, 197-screen Wehrenberg circuit.
- Hotels and resorts included approximately 4,992 owned or managed rooms across 18 owned, majority-owned, or managed properties and other facilities.
- The company had approximately 7,900 employees and reported effective internal control over financial reporting; Deloitte issued unqualified audit opinions.
Financial performance and key metrics
| Metric | Fiscal 2016 | Comparable fiscal 2015C | Change |
|---|---|---|---|
| Revenue | $543.9 million | $531.7 million | +2.3% |
| Operating income | $70.0 million | $61.0 million | +14.6% |
| Net earnings attributable to Marcus | $37.9 million | $30.8 million | +23.1% |
| Diluted EPS | $1.36 | $1.10 | +23.6% |
| Net cash from operating activities | $82.7 million | $89.5 million | -7.6% |
- Consolidated operating margin was approximately 12.9%, versus approximately 11.5% in fiscal 2015C.
- Theatre revenue was $328.2 million, up 7.0%, and theatre operating income was $71.8 million, up 14.1%; the segment margin increased to 21.9% from 20.5%.
- Hotels and resorts revenue was $215.2 million, down 4.1%, while operating income increased 12.0% to $14.6 million; the segment margin improved to 6.8% from 5.8%.
- Comparable company-owned hotel occupancy was 73.9%, ADR was $147.67, and RevPAR was $109.16, increases of 0.8 percentage points, 1.9%, and 3.0%, respectively.
- Cash and cash equivalents were $3.2 million, with restricted cash of $5.5 million. Total assets were $911.3 million and shareholders’ equity attributable to Marcus was $390.1 million.
- Total long-term debt was $283.4 million, including $140.0 million outstanding under the revolving credit facility. The debt-to-capitalization ratio was 0.42, compared with 0.38 at the prior comparable year-end.
- The company reported $82 million of unused credit lines at year-end and was in compliance with its debt covenants. The revolving facility had a $225 million commitment and matures in June 2021.
- Cash capital expenditures were $83.6 million; total capital expenditures and acquisitions were $147.4 million, including approximately $63.8 million related to Wehrenberg.
- The company paid $12.0 million in regular dividends and repurchased approximately 334,000 shares for $6.4 million during fiscal 2016.
Material changes versus the prior comparable period
- The Wehrenberg acquisition closed December 16, 2016 for approximately $65 million. It added 197 screens and a retail center, increased the company’s screen count by approximately 29%, and contributed two weeks of revenue. Acquisition-related expenses of approximately $2.0 million caused a fiscal 2016 operating loss from the acquired theatres.
- Comparable theatre attendance increased approximately 4.3%, average ticket price increased 3.9%, and comparable concession sales per patron increased 3.2%, excluding Wehrenberg and the extra prior-year week.
- Theatre performance benefited from a stronger film slate, premium recliner and large-format offerings, pricing actions, food and beverage expansion, the $5 Tuesday promotion, and loyalty-program activity. A one-time $3.3 million advertising incentive payment benefited fourth-quarter results.
- Hotel revenue declined largely because fiscal 2015C included an additional operating week, included the previously sold Hotel Phillips, and benefited from stronger holiday food and beverage timing. Hotel profitability improved because of cost controls, higher comparable RevPAR, and the absence of a prior-year $2.6 million impairment charge.
- Fiscal 2016 included no impairment charge, compared with a $2.9 million charge in fiscal 2015 related to one hotel and several theatre locations.
- Operating cash flow declined despite higher earnings because of the timing of income-tax, non-income-tax, and accrued-liability payments.
Outlook, management commentary, risks, contingencies, and unusual items
- Management projected fiscal 2017 capital expenditures of approximately $100 million to $120 million, excluding unidentified acquisitions. Planned spending included approximately $80 million to $95 million for theatres and $20 million to $25 million for hotels and resorts.
- Planned theatre projects included new locations in Shakopee, Minnesota and Greendale, Wisconsin; additional DreamLounger conversions; premium large-format screens; and expansion of Take Five, Zaffiro’s Express, Reel Sizzle, and Big Screen Bistro concepts.
- Management expected fiscal 2017 interest expense to increase approximately $1.5 million to $2.0 million, assuming no other changes in borrowings, because of the Wehrenberg-related debt increase and the February 2017 issuance of $50 million of 4.32% senior notes due 2027.
- Management expected the fiscal 2017 effective tax rate to remain near 38% to 40%. It also expected higher average ticket prices, increased concession sales per patron, continued hotel improvement, the opening of Grand Geneva villas and the Omaha Marriott hotel, and continued industry outperformance, although none of these expectations was guaranteed.
- Key risks include film availability and audience appeal, shorter theatrical release windows, piracy and alternative entertainment, intense competition, hotel room oversupply, economic and travel conditions, weather, terrorism or other public-venue incidents, cyberattacks, labor and minimum-wage costs, regulatory compliance, capital intensity, impairment charges, acquisition integration, joint-venture risks, and access to financing.
- Contractual obligations totaled approximately $518.8 million, including $283.4 million of long-term debt, $127.7 million of operating leases, $36.3 million of capital leases, $32.5 million of pension obligations, and $15.1 million of construction commitments.
- A digital cinema licensing arrangement created a potential capital-lease shortfall obligation of approximately $6.2 million annually, but management considered the likelihood of payments remote based on historical booking patterns.
- The company had no material legal proceedings reported and no debt or lease guarantee obligations at year-end.
Most important facts for investors to verify
- Reconcile fiscal 2016 results with the 53-week fiscal 2015C comparison and separately assess the estimated $14.3 million revenue and $4.8 million operating-income benefit from the prior-year extra week.
- Review the final purchase-price allocation, integration progress, acquired theatre performance, and expected accretion from Wehrenberg.
- Assess liquidity after the acquisition, the $50 million post-year-end note issuance, scheduled debt maturities, projected capital spending, and covenant headroom.
- Determine how much fiscal 2016 profitability depended on the one-time $3.3 million advertising payment and the absence of prior-year impairment charges.
- Monitor comparable theatre attendance, ticket pricing, concession spending, film release windows, and the concentration of box-office revenue in major films.
- Evaluate hotel group-booking pace, room supply, RevPAR trends, renovation disruption, and the potential effect of property sales or new development.