The Marcus Corporation: Q2 2018 Form 10-Q Summary
Business context and reporting period
The Marcus Corporation operates movie theatres and hotels and resorts. The filing covers the 13 weeks ended June 28, 2018, and the first 26 weeks of fiscal 2018, compared with the periods ended June 29, 2017. Fiscal 2018 is a 52-week year ending December 27, 2018.
Financial performance and key metrics
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Total revenues | $193.3 million | $160.1 million | $361.5 million | $325.6 million |
| Operating income | $29.1 million | $19.2 million | $46.1 million | $37.6 million |
| Operating margin | 15.1% | 12.0% | 12.8% | 11.6% |
| Net earnings attributable to Marcus | $18.6 million | $10.1 million | $28.4 million | $19.6 million |
| Diluted EPS, Common Stock | $0.65 | $0.36 | $1.00 | $0.69 |
| Net cash from operating activities | Not separately provided | Not separately provided | $55.4 million | $26.6 million |
- Q2 revenue increased 20.7%, operating income increased 51.8%, and net earnings attributable to Marcus increased 83.9%. First-half revenue increased 11.0%, operating income increased 22.6%, and net earnings increased 45.3%.
- The theatre segment generated Q2 revenue of $125.5 million and operating income of $27.9 million, compared with $94.4 million and $18.0 million, respectively, in the prior-year quarter. Theatre operating margin rose to 22.2% from 19.1%.
- Theatre attendance increased 23.2% in Q2 and 7.9% in the first half. Average ticket price increased 8.4% in Q2 and 6.0% in the first half; average concession revenue per person increased 7.9% and 7.4%, respectively.
- Hotels and resorts revenue increased 3.2% in Q2 and 3.3% in the first half. Segment operating income increased 9.3% in Q2 and 18.1% in the first half. Comparable company-owned hotel RevPAR declined 0.3% in Q2 and 1.2% in the first half.
- Interest expense increased to $3.5 million in Q2 and $6.8 million in the first half, primarily because of higher average interest rates on variable-rate debt.
- The effective income tax rate declined to 25.0% in Q2 and 25.3% in the first half from 37.0% and 37.3%, respectively, primarily because of the federal tax rate reduction under the Tax Cuts and Jobs Act.
Cash flow, debt, liquidity, and capital allocation
- First-half operating cash flow was $55.4 million, up from $26.6 million, driven by higher earnings, depreciation and amortization, and favorable timing of income-tax collections and payments.
- Capital expenditures were $32.2 million, down from $55.1 million. Approximately $27.0 million was invested in theatres and $5.2 million in hotels and resorts.
- Cash, cash equivalents, and restricted cash totaled $18.5 million at June 28, 2018, compared with $15.9 million at June 29, 2017. Cash and cash equivalents alone were $13.3 million at June 28, 2018, versus $16.2 million at December 28, 2017.
- Long-term debt was $275.3 million and current maturities were $10.1 million at June 28, 2018. Capital lease obligations totaled $32.0 million, including current and long-term portions.
- The debt-to-capitalization ratio, excluding capital lease obligations, was 0.38 at June 28, 2018, compared with 0.40 at December 28, 2017. Management reported approximately $95 million of unused credit lines and expects available cash sources to support fiscal 2018 operating liquidity.
- First-half financing activities used $24.2 million, including a $5.0 million net reduction in revolving-credit borrowings, $11.5 million of long-term debt principal payments, and $8.2 million of dividends.
- The regular quarterly dividend was increased 20.0% beginning in March 2018. Approximately 2.8 million shares remained available for repurchase under prior authorizations at June 28, 2018.
Material changes versus the prior comparable period
- Results benefited from a stronger film slate, including major releases such as Avengers: Infinity War and Incredibles 2, two theatres opened in 2017, higher ticket prices, expanded premium formats, and increased food and beverage offerings.
- The hotels and resorts comparison benefited from the absence of prior-year preopening expenses and start-up losses associated with the SafeHouse Chicago restaurant.
- Corporate operating losses increased because of higher legal expense, pension and 401(k) expense, incentive compensation, and charitable foundation accruals.
- Effective January 1, 2018, the Company adopted the new revenue recognition standard using the modified retrospective method. The adoption reduced retained earnings by approximately $2.6 million and primarily changed the treatment of loyalty programs and internet ticket fees. Gross presentation of certain cost reimbursements increased reported revenue and expense without affecting operating income or net earnings.
- The Company entered into two interest-rate swaps on March 1, 2018 covering $50 million of floating-rate debt, with fixed rates of 2.559% and 2.687%. The swaps qualified as cash-flow hedges and had a fair-value asset of $119,000 at quarter-end.
Guidance, outlook, management commentary, and risks
- Management maintained its fiscal 2018 capital expenditure estimate of $65 million to $80 million, including potential joint-venture investments but excluding significant unidentified acquisitions.
- Management expected the fiscal 2018 effective tax rate for remaining quarters to remain approximately 25% to 27%, excluding changes in unrecognized tax benefits or tax rates.
- Management stated that third-quarter film product had produced admission revenue above the comparable prior-year period through the filing date, but warned that late August and September are historically slower and that comparisons to the prior-year release of It may be difficult.
- Management expected modestly favorable lodging trends to continue and noted that group bookings for the remaining fiscal 2018 period and fiscal 2019 were ahead of the comparable prior-year pace.
- Risks include the quantity and appeal of film releases, changes in theatrical release windows, economic conditions, hotel supply and competition, weather, capital-intensive renovations, execution of strategic initiatives and acquisitions, interest-rate increases, availability of financing, and potential disruption or reputational damage from incidents at public venues.
- Planned renovations at the InterContinental Milwaukee and Hilton Madison may temporarily affect results during fiscal 2018 and early fiscal 2019. The Company also noted that hotel monetization and growth opportunities depend on market conditions and attractive transaction opportunities.
- The Company reported no material change in market-risk exposures or risk factors from its 2017 Form 10-K, and stated that disclosure controls and procedures were effective.
Important facts for investors to verify
- Confirm the sustainability of theatre attendance and pricing gains after the unusually strong 2018 film slate and as comparisons become more difficult.
- Monitor variable-rate debt exposure, interest expense, revolving-credit availability, and the effectiveness of the $50 million interest-rate swaps.
- Reconcile reported revenue trends for the impact of the new revenue recognition standard and gross presentation of cost reimbursements, which do not fully represent underlying operating growth.
- Assess hotel RevPAR, occupancy, group bookings, renovation disruption, competitive supply, and the performance of new management contracts.
- Track execution of the $65 million to $80 million capital expenditure plan, cash generation, debt reduction, dividends, and share repurchases.
- Review the potential effects of film availability, release-window changes, economic conditions, weather, venue-safety events, and any future hotel or theatre acquisitions or dispositions.