The Marcus Corporation: Fiscal 2017 Form 10-K Summary
Business context and reporting period
The Marcus Corporation operates two principal segments: movie theatres and hotels and resorts. Fiscal 2017 was a 52-week year ended December 28, 2017; the comparable fiscal 2016 period ended December 29, 2016. The filing includes fourth-quarter results, but it is an annual Form 10-K rather than a standalone quarterly filing.
- Theatre operations included 69 locations and 895 screens across eight states, including the acquired Wehrenberg circuit.
- Hotels and resorts included approximately 4,841 rooms, comprising owned or majority-owned properties and third-party managed properties.
- The Wehrenberg acquisition added 14 theatres and 197 screens in December 2016 for approximately $65.0 million.
Financial performance and key metrics
| Metric | Fiscal 2017 | Fiscal 2016 | Change |
|---|---|---|---|
| Revenue | $622.7 million | $543.9 million | +14.5% |
| Operating income | $75.6 million | $70.0 million | +8.1% |
| Net earnings attributable to Marcus | $65.0 million | $37.9 million | +71.5% |
| Diluted EPS, Common Stock | $2.29 | $1.36 | +68.4% |
| Operating cash flow | $109.0 million | $82.7 million | +31.9% |
| Capital expenditures and acquisitions | $114.8 million | $147.4 million | Decrease |
| Long-term debt | $289.8 million | $271.3 million | Increase |
| Shareholders’ equity attributable to Marcus | $445.0 million | $390.1 million | Increase |
- Theatre revenue increased 22.3% to $401.3 million, while operating income increased 11.9% to $80.3 million. Theatre operating margin declined to 20.0% from 21.9%.
- Hotels and resorts revenue increased 2.6% to $220.9 million, but operating income declined 12.7% to $12.7 million. The reported margin declined to 5.8% from 6.8%; excluding SafeHouse Chicago start-up costs and certain management-business effects, management indicated comparable margins were approximately 5.3% in both years.
- Comparable theatre attendance declined 3.1%, while total attendance increased 19.1% primarily because of Wehrenberg and new theatres. Comparable box-office revenue declined 1.0%; average ticket price increased 2.6% and comparable concession revenue per patron increased 5.1%.
- Comparable company-owned hotel occupancy was 74.4%, ADR was $148.07, and RevPAR was $110.17, up 0.5 percentage points, 0.3%, and 0.9%, respectively.
- Cash and cash equivalents were $16.2 million at year-end, compared with $3.2 million a year earlier. Restricted cash was $4.5 million.
- Cash flow from operations exceeded capital expenditures by approximately $5.8 million before acquisitions and other investing activity.
Material changes versus the prior comparable period
- Fiscal 2017 benefited from a full year of Wehrenberg operations, three new theatres, expanded recliner seating, premium large-format screens, and expanded theatre food-and-beverage offerings.
- Theatre results were affected by a weaker film slate in the second and third quarters, renovation-related screen closures, higher depreciation, rent, and property taxes, and new-theatre preopening expenses.
- Fiscal 2017 included a $4.0 million net gain on dispositions, compared with an $844,000 net loss in fiscal 2016. The gain included approximately $4.9 million from the sale of the company’s 11% interest in The Westin Atlanta Perimeter North.
- Interest expense increased 31.9% to $12.1 million, primarily because of capital lease obligations assumed in the Wehrenberg acquisition and higher borrowings.
- Income tax expense fell to $3.6 million from $23.0 million because of a $21.2 million one-time deferred-tax benefit from the Tax Cuts and Jobs Act. Excluding that benefit, the estimated effective tax rate was 36.2% versus 37.8% in fiscal 2016.
- The company purchased the remaining noncontrolling interest in the Lincoln Marriott Cornhusker Hotel for approximately $410,000 and ceased management of, or sold interests in, certain hotel properties.
Debt, liquidity, outlook, and unusual items
- The company had a $225.0 million revolving credit facility maturing in June 2021, with $130.0 million outstanding and $91.0 million of availability at December 28, 2017. No commercial paper was outstanding.
- Fiscal 2017 included the issuance of $50.0 million of 4.32% senior notes due February 2027. Total contractual obligations were $541.3 million, including debt, operating and capital leases, pension obligations, interest on fixed-rate debt, and construction commitments.
- Debt-to-capitalization was 0.40 excluding capital lease obligations; the company reported compliance with all debt covenants. The revolving credit agreement limits the ratio to 0.55 and requires a minimum fixed-charge coverage ratio of 3.0; reported coverage was 5.9.
- Management expected fiscal 2018 capital expenditures of approximately $65 million to $80 million, excluding unidentified acquisitions. Planned theatre spending was approximately $50 million to $60 million and hotels and resorts spending approximately $15 million to $20 million.
- Management expected fiscal 2018 effective income tax rate of approximately 25% to 27%, excluding further changes in federal or state tax rates.
- Management expected modestly improved theatre performance from a projected stronger film slate, premium pricing, expanded recliner seating, and food-and-beverage initiatives. Early fiscal 2018 box-office results were helped by Black Panther and holdover films, although comparisons later in the quarter were expected to be difficult.
- Management expected continued hotel revenue trends, benefits from Grand Geneva villas and improving SafeHouse Chicago results, but cited increased room supply and planned renovations at the InterContinental Milwaukee and Hilton Madison as potential constraints.
- The company expected a one-time reduction of approximately $3.5 million to retained earnings in the first quarter of fiscal 2018 from adoption of the new revenue-recognition standard. The standard was not expected to materially affect net earnings or operating cash flow.
- Other significant risks include dependence on the quantity and appeal of films, shorter theatrical release windows, alternative entertainment and lodging channels, economic and weather conditions, competition, capital intensity, acquisition integration, interest-rate exposure, cybersecurity, labor costs, regulation, and potential impairment charges.
Most important facts for investors to verify
- Separate recurring earnings from the $21.2 million tax benefit, $4.0 million disposition gain, and other acquisition, preopening, and transaction-related items.
- Assess whether theatre attendance and margins improve after the weak 2017 film slate and renovation disruptions, particularly on a comparable-theatre basis.
- Monitor the return on the Wehrenberg acquisition and the company’s continuing recliner, premium-format, and dining investments.
- Reconcile debt maturities, capital lease obligations, interest-rate exposure, and the $65 million to $80 million fiscal 2018 capital-spending plan with operating cash flow.
- Evaluate hotel RevPAR, group-business bookings, room-supply growth, and the effect of planned property renovations.
- Confirm the actual fiscal 2018 tax rate and the final accounting impact of revenue recognition, lease, cash-flow, and pension-related accounting changes.
- Consider concentration risk: the top 15 films generated 41% of fiscal 2017 box-office receipts, and the company’s businesses remain sensitive to consumer spending, weather, film availability, and competition.