The Marcus Corporation: FY2018 Form 10-K Summary
Business context and reporting period
The filing covers the 52-week fiscal year ended December 27, 2018, including the 13-week fourth quarter ended December 27, 2018. Marcus operates two primary segments: movie theatres and hotels and resorts. At year-end, the theatre division operated 68 locations with 889 screens, while the hotels and resorts division owned or managed approximately 5,300 rooms across 21 properties.
Subsequent to year-end, on February 1, 2019, Marcus acquired Movie Tavern, consisting of 22 dine-in theatres and 208 screens. Including this acquisition and a new screen, the company operated 1,098 screens at 90 locations in 17 states.
Key financial metrics
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $707.1 million | $653.6 million | +8.2% |
| Operating income | $83.2 million | $77.3 million | +7.6% |
| Net earnings attributable to Marcus | $53.4 million | $65.0 million | -17.9% |
| Diluted EPS, Common Stock | $1.86 | $2.29 | -18.8% |
| Operating margin | 11.8% | 11.8% | Stable |
| Cash flow from operations | $137.4 million | $109.0 million | +26.0% |
| Capital expenditures | $58.7 million | $114.8 million | -48.9% |
| Long-term debt | $228.9 million | $289.8 million | -$60.9 million |
Fourth-quarter revenue was $175.0 million, operating income was $14.7 million, net earnings attributable to Marcus were $8.7 million, and diluted EPS was $0.30. Comparable fourth-quarter results were affected by the timing of Christmas and a strong prior-year film slate.
Year-end cash and cash equivalents were $17.1 million, with restricted cash of $4.8 million. The company had $141 million of unused revolving credit availability under a $225 million facility maturing in June 2021. The current ratio was 0.46, and debt-to-capitalization was 33%, compared with 40% in the prior year. The company was in compliance with its debt covenants.
Segment performance
| Segment | FY2018 Revenue | FY2018 Operating Income | Margin | Year-over-year change |
|---|---|---|---|---|
| Theatres | $446.8 million | $88.8 million | 19.9% | Revenue +10.8%; income +10.4% |
| Hotels and resorts | $259.9 million | $12.5 million | 4.8% | Revenue +4.1%; income -3.2% |
The theatre division represented 63.2% of consolidated revenue and 87.7% of consolidated operating income excluding corporate items. Theatre attendance increased 5.1%, average ticket price increased 3.2%, and average concession sales per person increased 6.4%. The division outperformed U.S. box office revenue growth by 1.8 percentage points.
Hotels and resorts reported comparable company-owned occupancy of 74.5%, ADR of $150.04, and RevPAR of $111.73. Revenue growth was supported by higher room, food and beverage, management fee and reimbursement revenue, but reported operating income was reduced by costs associated with the Saint Kate-The Arts Hotel conversion.
Material changes versus the prior comparable period
- Consolidated revenue and operating income increased, primarily due to stronger theatre attendance, pricing, concession spending, new theatres and improved theatre amenities.
- Net earnings and EPS declined because of higher income tax expense, higher interest expense, a loss on asset dispositions and lower equity earnings from unconsolidated joint ventures.
- FY2017 benefited from a one-time $21.2 million deferred-tax benefit related to the Tax Cuts and Jobs Act. Excluding the favorable tax adjustments, the effective tax rate was 22.7% in FY2018 versus 36.2% in FY2017.
- Interest expense increased to $13.1 million from $12.1 million, despite lower borrowings, primarily because of higher short-term interest rates.
- Hotels and resorts operating income included approximately $3.7 million of accelerated depreciation and $0.5 million of preopening costs related to the Saint Kate conversion. Excluding these items and the prior-year SafeHouse Chicago startup impact, FY2018 comparable segment operating income increased approximately 23.2%.
- Capital spending fell substantially after the elevated FY2017 investment cycle, while operating cash flow increased.
- The company adopted the new revenue recognition standard, resulting in a one-time after-tax reduction to retained earnings of approximately $2.6 million and higher reported revenue from gross presentation of internet ticket fees without a material effect on earnings or cash flow.
Guidance, outlook, commentary and risks
- Management expected FY2019 cash capital expenditures, including approximately $30 million of cash consideration for Movie Tavern, to be $105 million to $125 million. Planned theatre spending was approximately $50 million to $60 million, and hotels and resorts spending was approximately $25 million to $35 million.
- Management expected Movie Tavern to be accretive to earnings, EPS and cash flow during the first 12 months after closing. The acquisition was funded with $30 million of cash and 2.45 million shares of Common Stock, for an estimated purchase price of approximately $139 million.
- Management expected Movie Tavern to reduce the combined theatre operating margin because all acquired locations are leased, with expected annual rent of approximately $15 million to $16 million, and because dine-in operations have higher labor and food costs. Management nevertheless expected FY2019 theatre operating income to increase.
- Management anticipated approximately $1.0 million of additional Movie Tavern acquisition and preopening expenses in the first quarter of FY2019.
- The InterContinental Milwaukee closed in January 2019 for conversion to Saint Kate-The Arts Hotel, scheduled to reopen in June 2019. Management estimated nonrecurring preopening costs of approximately $1.2 million to $1.4 million in each of the first two FY2019 quarters.
- Early FY2019 comparable theatre admission revenue declined because of a weaker January and February film slate, severe Midwest weather and difficult comparisons with Black Panther and other prior-year holdovers. Management expected a stronger film slate in the second half of FY2019.
- Management expected FY2019 hotel group bookings and banquet and catering revenue pace to exceed the prior-year comparison, while noting increased room supply in Oklahoma City, Chicago and Milwaukee.
- Key risks include dependence on film quantity and audience appeal, shortening theatrical release windows, alternative entertainment and streaming channels, competition, adverse economic and weather conditions, hotel oversupply, acquisition integration, capital intensity, interest-rate exposure, labor costs, cyberattacks, food safety, regulation and potential securities litigation.
- The company adopted the new lease standard at the beginning of FY2019 and expected recognition of operating lease liabilities of approximately $75 million to $100 million on the balance sheet, without a material effect on earnings or cash flow.
Important facts for investors to verify
- Whether Movie Tavern achieves the projected first-year earnings, EPS and cash-flow accretion and integrates without disruption.
- The effect of Movie Tavern’s lease expense, higher labor and food costs, and lower operating margin on consolidated profitability.
- FY2019 theatre attendance, film mix, average ticket price, concession spending and the performance of renovated theatres.
- The financial and operating impact of the Saint Kate conversion, Hilton Madison renovation and other planned capital projects.
- Debt refinancing and repayment requirements, particularly the approximately $90.0 million of scheduled FY2021 long-term debt maturities and exposure to variable interest rates.
- The impact of lease accounting adoption on reported assets, liabilities and leverage metrics.
- Execution against the $105 million to $125 million FY2019 capital expenditure forecast and the resulting effect on liquidity.
- Management’s stated forward-looking expectations remain subject to significant film, lodging, economic, competitive, weather and integration risks.
The financial statements received an unqualified audit opinion, and management and the independent auditor concluded that internal control over financial reporting was effective as of December 27, 2018.