The Marcus Corporation: Form 10-Q Summary
Business context and reporting period
The filing covers the 13 and 26 weeks ended June 29, 2017, representing the second quarter and first half of fiscal 2017. Marcus operates two principal segments: movie theatres and hotels and resorts. Fiscal 2017 includes the December 2016 acquisition of Wehrenberg Theatres, the opening of new theatres, and the March 2017 opening of the SafeHouse Chicago restaurant and bar.
Financial performance and condition
| Metric | Second quarter 2017 | Second quarter 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $152.8 million | $135.0 million | $310.7 million | $260.4 million |
| Operating income | $18.7 million | $18.3 million | $36.8 million | $29.6 million |
| Net earnings attributable to Marcus | $10.1 million | $9.3 million | $19.6 million | $14.8 million |
| Diluted EPS, Common Stock | $0.36 | $0.34 | $0.69 | $0.53 |
| Operating margin | 12.3% | 13.5% | 11.8% | 11.4% |
- Theatre revenue increased 22.7% in the quarter and 30.8% in the first half. Theatre operating income increased 14.9% and 27.6%, respectively. Theatre operating margins were 19.1% in the quarter and 20.8% in the first half, versus 20.4% and 21.3% in the comparable periods.
- Hotels and resorts revenue increased 0.6% in the quarter and 1.9% in the first half, while operating income declined 17.5% and 31.1%, respectively. Segment margins declined to 9.8% and 2.9%, from 12.0% and 4.3%.
- Net cash provided by operating activities was $26.6 million for the first half, compared with $28.9 million in the prior-year period. Capital expenditures were $55.1 million versus $41.8 million.
- Cash and cash equivalents were $8.3 million at June 29, 2017, compared with $3.2 million at December 29, 2016. Restricted cash was $7.6 million.
- Long-term debt was $308.4 million and capital lease obligations totaled $29.5 million, including current and noncurrent amounts. Total debt and capital lease obligations increased from year-end levels.
- Management reported approximately $73 million of unused credit lines at quarter-end and stated that liquidity should support ongoing fiscal 2017 operating needs.
- Total assets were $968.5 million and total equity was $407.8 million at June 29, 2017.
- The regular quarterly dividend increased 11.1% beginning in March 2017. First-half dividend payments were $6.7 million.
Material changes versus the prior comparable period
- Revenue and earnings benefited substantially from the Wehrenberg acquisition, which added 14 theatres and 197 screens, as well as the Country Club Hills and Shakopee theatre openings.
- Theatre attendance increased 19.4% in the quarter and 27.9% in the first half. Excluding acquired and newly opened locations, comparable attendance declined 3.6% in the quarter but increased 3.0% in the first half.
- Comparable theatre box office receipts declined 4.1% in the quarter but increased 3.1% in the first half. Comparable concession revenue increased 1.6% and 6.9%, respectively, supported by higher concession spending per guest.
- The second-quarter theatre film slate was weaker than the prior-year slate, and approximately 5% of comparable screens were unavailable for extended periods because of renovations. Approximately $600,000 of preopening expenses also reduced theatre operating income.
- Hotels and resorts were negatively affected by lower comparable room revenue, Easter holiday timing, reduced Milwaukee group business, and startup losses and preopening costs for SafeHouse Chicago.
- Interest expense increased to $3.2 million in the quarter and $6.1 million in the first half, primarily because of capital lease obligations assumed in the Wehrenberg acquisition and higher borrowings.
- Corporate operating losses increased because of higher director costs, including one-time retirement costs for two directors, and higher incentive compensation.
- Investing cash outflows increased primarily because of higher capital spending. Financing cash inflows increased as the company issued debt and managed revolving-credit borrowings.
Guidance, outlook, risks, contingencies, and unusual items
- Management maintained its fiscal 2017 capital expenditure estimate of approximately $100 million to $120 million, excluding significant unidentified acquisitions. Some projects may carry into the following fiscal year.
- Management expects the fiscal 2017 effective tax rate to remain near its historical 38% to 40% range, subject to tax-law changes and other circumstances.
- Management stated that future theatre results remain highly dependent on the quantity and audience appeal of film releases, studio marketing, release windows, weather, competition, and consumer behavior. The third-quarter film slate was tracking below the prior year, while the fourth-quarter slate was viewed as more promising.
- Management expected hotel group-room and banquet bookings for the remainder of fiscal 2017 to be slightly ahead of the prior year and projected RevPAR increases generally tracking or exceeding industry and local-market trends.
- The company issued $50 million of unsecured senior notes bearing interest at 4.32% and maturing in 2027. It also issued a $15 million mortgage note bearing interest at LIBOR plus 2.75%, maturing in fiscal 2020.
- The note agreement requires, among other matters, consolidated debt to remain no higher than 65% of consolidated total capitalization and operating cash flow to fixed charges to remain at least 2.50 to 1. At June 29, 2017, the reported ratios were 44% and 6.7 to 1, respectively.
- The company has an interest-rate swap with a $25 million notional amount expiring January 22, 2018. A $40,000 fair-value increase reduced interest expense during the first half.
- The maximum annual shortfall payment under the digital cinema capital lease arrangement is approximately $6.2 million, although management does not expect shortfall payments based on historical booking patterns.
- No material change to the risk factors in the 2016 Form 10-K was reported. Disclosure controls were evaluated as effective, and no significant changes in internal control were identified.
Investor verification points
- Verify the sustainability of theatre revenue and earnings growth after separating Wehrenberg and other newly opened locations from comparable-theatre performance.
- Monitor upcoming film slate performance, attendance, concession spending, renovation-related screen closures, and theatre operating margins.
- Assess whether SafeHouse Chicago startup losses reverse and whether hotel occupancy, group bookings, RevPAR, and Milwaukee market demand improve.
- Reconcile capital spending plans with operating cash flow, debt repayments, revolving-credit usage, and available liquidity.
- Review compliance with debt covenants and the effect of variable interest rates, the 2020 mortgage maturity, and the 2027 senior notes.
- Evaluate the assumptions supporting the expected tax rate, projected hotel performance, and the anticipated benefit from new villas, theatre amenities, and planned openings.