The Marcus Corporation 2014 Form 10-K Summary
Business context and reporting period
The filing is an annual report for the fiscal year ended May 29, 2014. Fiscal 2014 and fiscal 2013 each comprised 52 weeks; fiscal 2012 comprised 53 weeks. The company operates two primary segments: movie theatres and hotels and resorts.
- Theatres: 55 locations and 685 screens across seven states, plus a family entertainment center.
- Hotels and resorts: approximately 5,139 owned or managed rooms, including nine wholly owned or majority-owned and operated properties and 10 managed properties.
- The company had approximately 6,900 employees at fiscal year-end.
Financial performance and position
| Metric | Fiscal 2014 | Fiscal 2013 | Change |
|---|---|---|---|
| Revenue | $447.9 million | $412.8 million | +8.5% |
| Operating income | $48.4 million | $38.2 million | +26.6% |
| Net earnings attributable to Marcus | $25.0 million | $17.5 million | +42.8% |
| Diluted earnings per common share | $0.92 | $0.63 | +46.0% |
| Net cash from operating activities | $66.4 million | $63.2 million | +5.1% |
| Capital expenditures | $56.7 million | $22.6 million | +150.4% |
| Long-term debt | $233.6 million | $231.6 million | +0.9% |
| Total debt, including current maturities | $240.6 million | $242.8 million | -0.9% |
| Total assets | $768.9 million | $746.7 million | +3.0% |
Consolidated operating margin was approximately 10.8%, compared with approximately 9.3% in fiscal 2013. The effective income tax rate, adjusted for noncontrolling interests, was 40.2%, compared with 39.3%.
- Theatre revenue rose 10.8% to $243.2 million, and operating income rose 13.6% to $46.5 million. Theatre operating margin increased to 19.1% from 18.6%.
- Total theatre attendance increased 13.9%, while comparable-theatre attendance increased approximately 14.5%. Box office revenue increased 8.6% and concession revenue increased 14.9%.
- Average ticket price declined 4.8%, primarily because of the company-wide $5 Tuesday promotion. Average concession sales per person increased 0.7%.
- Hotels and resorts revenue increased 5.9% to $204.1 million, and operating income increased 48.6% to $15.8 million. Segment operating margin increased to 7.8% from 5.5%.
- Comparable company-owned hotel occupancy increased to 74.3% from 73.6%, ADR increased to $142.61 from $139.48, and RevPAR increased to $106.02 from $102.67.
- Cash and cash equivalents were $6.8 million, with an additional $8.0 million of restricted cash. The company reported $141 million of unused revolving credit availability at year-end.
- The current ratio was 0.36 and the debt-to-capitalization ratio was 0.42. The company was in compliance with its debt covenants, including a defined debt-to-capitalization ratio of 0.40 and fixed-charge coverage ratio of 5.5 under its revolving credit agreement.
Material changes versus the prior comparable period
- Results improved in both operating segments, supported by a stronger movie slate, higher theatre attendance, premium theatre amenities, higher hotel occupancy and ADR, and improved food and beverage revenue.
- Fiscal 2014 benefited from the absence of approximately $1.3 million of theatre impairment charges recorded in fiscal 2013 and approximately $3.3 million of pre-tax legal settlement costs related to the Las Vegas property recorded in fiscal 2013.
- Net earnings attributable to Marcus also benefited from a $4.1 million loss attributable to noncontrolling interests in fiscal 2014, primarily related to a settlement involving The Skirvin Hilton. Management estimated that approximately $3.6 million before tax of this allocation related directly to the settlement and increased fiscal 2014 earnings per share by approximately $0.08.
- Interest expense increased 8.1% to $10.1 million, reflecting higher borrowings, including $50 million of 4.02% senior notes issued in fiscal 2014.
- Investing cash use increased substantially because capital expenditures rose to $56.7 million, including approximately $38.0 million for theatres and $18.5 million for hotels and resorts.
- Financing cash use declined to $12.1 million from $36.5 million, primarily because fiscal 2013 included a $26.4 million special dividend and substantially higher share repurchases.
- The regular quarterly common-stock dividend increased 11.8% in the fourth quarter to $0.095 per share. Fiscal 2014 regular dividends totaled $9.2 million.
Guidance, outlook, commentary and risks
- Management expected fiscal 2015 capital expenditures of approximately $70 million to $90 million, excluding unidentified acquisitions. Theatre spending was expected at approximately $45 million to $60 million and hotels and resorts spending at approximately $25 million to $30 million.
- The Palace at Sun Prairie, a new 12-screen theatre featuring DreamLounger seating, Ultra Screen DLX auditoriums and expanded dining concepts, was expected to open in February 2015.
- Management was evaluating three to five additional DreamLounger theatres, up to four additional Ultra Screen DLX auditoriums, additional Take Five Lounges and Zaffiro’s Express outlets during fiscal 2015.
- The Four Points by Sheraton Chicago Downtown/Magnificent Mile was expected to convert to an AC Hotel by Marriott, beginning in November 2014 and targeted for completion in spring 2015.
- Management expected fiscal 2015 interest expense to be broadly similar to fiscal 2014, with higher anticipated capital expenditures offset by a lower average interest rate. The fiscal 2015 effective tax rate was expected to remain near 39% to 40%.
- Early fiscal 2015 theatre results were affected by a weaker summer film slate, although management stated that Marcus continued to outperform the industry and cited positive results from DreamLounger locations and the $5 Tuesday promotion.
- The proposed Brookfield, Wisconsin mixed-use retail development could exceed $150 million in total cost. If milestones were met, the company expected to contribute land to a joint venture and potentially recognize development profit in fiscal 2015; if milestones were not met, pre-development costs could be written off.
- Key risks include dependence on the quantity and appeal of films, shortened theatrical release windows, piracy and alternative entertainment, intense competition, adverse weather, economic weakness, hotel room oversupply, pressure from online travel intermediaries, capital intensity, impairment charges, financing availability, joint-venture risks, construction and development risks, cybersecurity, pension obligations and changes in consumer travel and leisure spending.
- Contractual obligations totaled approximately $450.8 million, including $240.6 million of long-term debt, $123.0 million of operating leases, $28.8 million of pension obligations and $14.1 million of construction commitments.
Important facts for investors to verify
- Confirm the effect of the $5 Tuesday and $5 Student Thursday promotions on attendance, ticket pricing, concession spending and long-term margins.
- Evaluate whether premium seating, dining concepts and the Sun Prairie theatre generate returns sufficient to justify the planned capital spending.
- Monitor hotel ADR, RevPAR and margins, particularly in Milwaukee and Oklahoma City, where new room supply was increasing.
- Review debt maturities, variable-rate exposure and covenant headroom, including the $76.3 million of scheduled debt maturities in fiscal 2018.
- Determine whether the Brookfield development proceeds on schedule or results in a write-off of pre-development costs.
- Separate recurring operating performance from unusual items, including the Skirvin settlement, prior-year legal costs and impairment charges.
- Assess the company’s ability to fund $70 million to $90 million of fiscal 2015 capital expenditures while maintaining dividends, repurchases and covenant compliance.