The Marcus Corporation — Fiscal 2016 Third-Quarter Form 10-Q
Business context and reporting period
The company operates movie theatres and hotels/resorts. The report covers the 13 weeks ended September 29, 2016 and the first 39 weeks of fiscal 2016. Comparisons are to the comparable fiscal 2015C periods, which ended September 24, 2015. Fiscal 2015C included a 53rd week, making fourth-quarter comparisons less comparable.
Financial results and key metrics
| Metric | Q3 2016 | Q3 2015C | 39 weeks 2016 | 39 weeks 2015C |
|---|---|---|---|---|
| Revenue | $144.7 million | $133.9 million | $405.1 million | $390.4 million |
| Operating income | $24.7 million | $19.8 million | $54.3 million | $45.0 million |
| Operating margin | 17.1% | 14.8% | 13.4% | 11.5% |
| Net earnings attributable to Marcus | $14.4 million | $10.9 million | $29.2 million | $23.1 million |
| Diluted EPS, Common Stock | $0.51 | $0.39 | $1.05 | $0.83 |
| Net cash from operations | Not separately reported | Not separately reported | $44.8 million | $41.2 million |
Q3 revenue increased 8.1%, operating income increased 24.6%, and net earnings attributable to Marcus increased 32.2%. For the first 39 weeks, revenue increased 3.8%, operating income increased 20.5%, and attributable net earnings increased 26.1%. Interest expense declined to $2.1 million in Q3 and $7.0 million year to date from $2.5 million and $7.4 million, respectively.
Theatres generated Q3 revenue of $81.9 million and operating income of $18.1 million, with a 22.1% operating margin. Year-to-date theatre revenue was $238.8 million and operating income was $51.5 million, with a 21.6% margin. Hotels/resorts generated Q3 revenue of $62.6 million and operating income of $10.6 million; year-to-date revenue was $165.9 million and operating income was $15.1 million.
Comparable hotel RevPAR increased 2.7% in Q3 and 4.6% year to date. Comparable theatre attendance increased 14.7% in Q3 and 3.0% year to date. Average ticket price increased 4.2% and 4.6%, respectively, while average concession revenue per person increased 1.4% and 3.8%.
Liquidity, debt and capital resources
At September 29, 2016, cash and cash equivalents were $5.9 million, restricted cash was $5.5 million, and total current assets were $41.3 million. Total debt, including current maturities and excluding capital lease obligations, was approximately $232.9 million; capital lease obligations totaled $16.6 million. Total equity was $385.1 million.
Operating cash flow of $44.8 million was more than offset by $58.1 million of capital expenditures, producing $40.3 million of net cash used in investing activities after other investing inflows. The company reported $5.3 million of net cash used in financing activities and ended the period with $5.9 million of cash.
In June 2016, the company entered into a new five-year, $225 million revolving credit agreement maturing June 16, 2021. Borrowings were $89.0 million at September 29, 2016, with an effective interest rate of approximately 1.64%. Approximately $136 million of unused credit lines were available, after considering outstanding letters of credit. The company was in compliance with all debt covenants; debt-to-total-capitalization was 0.35 under the credit agreement and 0.38 under the company’s stated calculation, while fixed-charge coverage was 7.4.
Material changes versus the prior comparable period
- Theatre performance improved substantially due to a stronger film slate, higher attendance, pricing, concession spending, premium-format screens, recliner seating and cost controls.
- Theatre operating margin increased to 22.1% in Q3 from 17.9% and to 21.6% year to date from 20.3%.
- Hotels/resorts revenue declined because of the October 2015 sale of Hotel Phillips and lower food and beverage revenue, although year-to-date operating income benefited from cost controls, higher RevPAR and the absence of a prior-year $2.6 million hotel impairment charge.
- No impairment charge was recorded in 2016; the prior-year 39-week period included $2.9 million of impairment charges.
- The company repaid a $37.2 million term loan and replaced its prior credit arrangements with the new revolving facility. Year-to-date principal debt payments were $51.9 million versus $6.3 million in the prior comparable period.
- Capital expenditures were $58.1 million year to date versus $59.1 million, with approximately $49.5 million directed to theatres and $8.4 million to hotels/resorts.
- Share repurchases increased to approximately 331,000 shares for about $6.3 million year to date. Approximately 2.9 million shares remained authorized for repurchase at quarter end.
Guidance, outlook, commentary and risks
Management expects to achieve more than $2 million of fiscal 2016 theatre cost savings and expects to receive an approximately $3.3 million one-time Screenvision incentive payment in the fourth quarter if an attendance milestone is reached. Management estimates fiscal 2016 capital expenditures of approximately $75 million to $80 million, excluding potential additional growth opportunities.
Management expects the remaining-quarter effective tax rate to remain near the historical 38%–40% range, subject to actual results and tax-related changes. Fourth-quarter theatre comparisons may be challenging because fiscal 2015C included the blockbuster Star Wars: The Force Awakens and an additional operating week.
Key risks include the availability and appeal of motion pictures, changes in theatrical release windows, economic conditions, competition, hotel supply and demand, weather, property renovation and impairment costs, access to financing, execution of acquisitions and strategic initiatives, and reduced consumer spending or disruptions caused by terrorism or other public-venue incidents. Management stated that no material change occurred in previously reported risk factors or market-risk exposures.
The company has contingent exposure under its digital projection-system licensing arrangement. Although management does not expect shortfall payments, the maximum potential annual payment is approximately $6.2 million until the obligation is satisfied. The company also completed hotel renovations and is investing in new theatres, premium screens, dining concepts and Grand Geneva villas.
Investor verification points
- Verify whether the anticipated approximately $3.3 million Screenvision incentive payment was received and how it affected fourth-quarter results.
- Assess fourth-quarter performance against the difficult prior-year comparison, including the extra fiscal week and Star Wars: The Force Awakens.
- Monitor theatre attendance, ticket pricing, concession spending and the sustainability of the cost-savings program.
- Review hotel demand, group bookings, food and beverage trends, renovation disruptions and RevPAR relative to competitors.
- Confirm capital-expenditure spending, new theatre openings and the effect of expansion projects on leverage and liquidity.
- Evaluate variable-rate debt exposure, covenant headroom and the potential effect of interest-rate changes.
- Review the tax-deferred reinvestment associated with the Hotel Phillips sale and the company’s plans to monetize or acquire hotel properties.