The Marcus Corporation: Q2 2016 Form 10-Q Summary
Business context and reporting period
The Marcus Corporation operates movie theatres and hotels/resorts. The second quarter of fiscal 2016 covered the 13 weeks ended June 30, 2016; the first half covered 26 weeks. Comparisons are primarily to fiscal 2015C, which reflects the company’s fiscal-year change and ended June 25, 2015 for the comparable quarter and first half.
Financial performance and metrics
| Metric | Q2 2016 | Q2 2015C | First half 2016 | First half 2015C |
|---|---|---|---|---|
| Revenue | $135.0 million | $137.8 million | $260.4 million | $256.5 million |
| Operating income | $18.3 million | $17.6 million | $29.6 million | $25.2 million |
| Net earnings attributable to Marcus | $9.3 million | $9.0 million | $14.8 million | $12.3 million |
| Diluted EPS, Common Stock | $0.34 | $0.32 | $0.53 | $0.44 |
| Operating cash flow | Not separately provided | Not separately provided | $28.9 million | $31.7 million |
- Second-quarter revenue declined 2.0%, while operating income increased 3.6% and diluted Common Stock EPS increased 6.3%.
- First-half revenue increased 1.5%, operating income increased 17.3%, and diluted Common Stock EPS increased 20.5%.
- The first-half effective tax rate was 39.2%, compared with 38.6% in the prior comparable period. Management expects the full-year rate to remain near its historical 39%–40% range, absent changes in tax matters or rates.
- At June 30, 2016, cash and cash equivalents were $8.3 million, restricted cash was $6.8 million, total assets were $816.0 million, and total equity was $371.8 million.
- Capital expenditures were $41.8 million in the first half, including approximately $35.7 million for theatres and $6.1 million for hotels and resorts.
Segment results and material changes
- Theatres: Second-quarter revenue decreased 4.2% to $76.4 million and operating income decreased 10.2% to $15.6 million; margin declined to 20.4% from 21.8%. First-half revenue increased 2.9% to $156.9 million and operating income increased 2.8% to $33.4 million; margin was unchanged at 21.3%.
- Comparable theatre attendance declined 6.9% in the quarter and 2.4% in the first half, primarily because of a weaker film slate and calendar differences. Higher ticket prices and concession spending per patron substantially offset lower attendance.
- Hotels and resorts: Second-quarter revenue increased 1.1% to $58.4 million and operating income increased to $7.0 million from $2.4 million. First-half revenue declined 0.5% to $103.3 million, while operating income improved to $4.5 million from a $1.1 million loss.
- Comparable company-owned hotel RevPAR increased 6.9% in the quarter and 5.9% in the first half. Occupancy and average daily rate also improved. Prior-year results included a $2.6 million hotel impairment charge and disruption from the AC Hotel Chicago renovation, which benefited current-year comparisons.
- Corporate operating losses increased because the prior-year periods included approximately $1.4 million of reimbursement related to The Corners of Brookfield and because of timing differences in shareholder and director costs.
Cash flow, debt and liquidity
- Operating cash flow was $28.9 million, down from $31.7 million, primarily because of unfavorable payment timing for accrued compensation and other accrued liabilities.
- Investing cash use was $29.9 million versus $45.9 million, helped by an $11.3 million decrease in restricted cash, lower capital spending, and proceeds from the sale of a joint-venture interest.
- Financing activities provided $2.7 million. The company paid $51.6 million of debt principal, including repayment of a $37.2 million term loan, and paid $6.0 million of dividends.
- On June 16, 2016, the company entered into a new five-year, $225 million revolving credit agreement maturing June 16, 2021. Borrowings outstanding under the facility were $95.2 million at June 30, 2016, with an effective interest rate of approximately 1.58%.
- Management reported approximately $130 million of unused credit lines and stated that liquidity should support operations through the remainder of fiscal 2016. The company was in compliance with all debt covenants; the reported covenant debt-to-capitalization ratio was 0.37 versus a maximum of 0.55, and fixed-charge coverage was 6.8 versus a minimum of 3.0.
- The company repurchased approximately 291,000 shares for approximately $5.4 million during the first half. Approximately 2.9 million shares remained available under repurchase authorizations at June 30, 2016.
Guidance, outlook, risks and unusual items
- Fiscal 2016 capital expenditures, including potential joint-venture investments but excluding significant unidentified acquisitions, remained estimated at $75 million to $95 million. Management noted that project timing could cause spending to fall below the high end.
- Management reported that third-quarter film product had produced box-office results above the comparable prior period through the filing date, but cautioned that late August and September are seasonally weaker and that the 2016 Olympics could reduce movie attendance.
- Planned and ongoing investments include theatre renovations, recliner seating, premium-format screens, dining outlets, a purchased 16-screen Illinois theatre, a new theatre in Shakopee, Minnesota, and a planned stand-alone in-theatre dining location in Wisconsin.
- Key risks include film availability and audience appeal, changes to theatrical release windows, economic conditions, hotel supply and demand, competition, weather, renovation and impairment costs, acquisition and development execution, interest-rate exposure, and reduced consumer spending following terrorism or other public-venue violence.
- The company’s interest-rate swap was undesignated on June 16, 2016. A $96,000 after-tax amount was reclassified into interest expense, and a $17,000 fair-value change was recorded in interest expense. Management does not expect a material earnings effect over the next 12 months.
- Subsequent to quarter-end, the company received $4.1 million from certain Marcus family trusts as reimbursement of split-dollar life-insurance premiums; the amount had been classified as a receivable at June 30, 2016.
- No material changes to previously disclosed risk factors or market-risk exposures were reported, and management concluded that disclosure controls were effective.
Important facts for investors to verify
- Reconcile the new credit agreement, outstanding borrowings, available capacity, covenant calculations, and the filing’s differing debt-to-capitalization references.
- Assess the sustainability of hotel profit improvement given the favorable comparison against the prior-year impairment and renovation disruptions.
- Monitor theatre attendance, film release quality, release-window changes, and the contribution from pricing, premium screens, recliner seating, and concessions.
- Track capital expenditure execution, theatre acquisitions and openings, renovation spending, and the company’s ability to remain within the $75 million–$95 million estimate.
- Review the split-dollar life-insurance receivable, related family-trust arrangements, and the timing and collectability of the $4.1 million reimbursement.