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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 26, 2019
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________
Commission File Number 1-12604
| THE MARCUS CORPORATION | ||
| (Exact name of registrant as specified in its charter) | ||
| Wisconsin | 39-1139844 | |
|
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
|
100 East Wisconsin Avenue, Suite 1900 Milwaukee, Wisconsin |
53202-4125 | |
| (Address of principal executive offices) | (Zip Code) | |
| Registrant’s telephone number, including area code: (414) 905-1000 | ||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered |
| Common Stock, $1.00 par value | MCS | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days.
Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check One).
| Large accelerated filer | ¨ | Accelerated filer | x | |
| Non-accelerated filer | ¨ | Smaller reporting company | ¨ | |
| Emerging growth company | ¨ | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
COMMON STOCK OUTSTANDING AT November 1, 2019 – 22,988,399
CLASS B COMMON STOCK OUTSTANDING AT November 1, 2019 – 7,935,769
THE MARCUS CORPORATION
INDEX
| 2 |
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
THE MARCUS CORPORATION
| (in thousands, except share and per share data) |
September 26,
2019 |
December 27,
2018 |
||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 7,451 | $ | 17,114 | ||||
| Restricted cash | 5,086 | 4,813 | ||||||
| Accounts and notes receivable, net of reserves of $270 and $361, respectively | 23,566 | 25,684 | ||||||
| Refundable income taxes | ─ | 5,983 | ||||||
| Other current assets | 18,820 | 15,355 | ||||||
| Total current assets | 54,923 | 68,949 | ||||||
| Property and equipment: | ||||||||
| Land and improvements | 151,205 | 150,122 | ||||||
| Buildings and improvements | 757,324 | 745,886 | ||||||
| Leasehold improvements | 160,787 | 98,885 | ||||||
| Furniture, fixtures and equipment | 377,905 | 314,875 | ||||||
| Finance lease right-of-use assets | 74,348 | 72,631 | ||||||
| Construction in progress | 12,717 | 12,513 | ||||||
| Total property and equipment | 1,534,286 | 1,394,912 | ||||||
| Less accumulated depreciation and amortization | 601,497 | 554,869 | ||||||
| Net property and equipment | 932,789 | 840,043 | ||||||
| Operating lease right-of-use assets | 229,103 | ─ | ||||||
| Other assets: | ||||||||
| Investments in joint ventures | 3,617 | 4,069 | ||||||
| Goodwill | 75,797 | 43,170 | ||||||
| Other | 43,914 | 33,100 | ||||||
| Total other assets | 123,328 | 80,339 | ||||||
| TOTAL ASSETS | $ | 1,340,143 | $ | 989,331 | ||||
See accompanying condensed notes to consolidated financial statements.
| 3 |
THE MARCUS CORPORATION
Consolidated Balance Sheets
| (in thousands, except share and per share data) |
September 26,
2019 |
December 27,
2018 |
||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 37,334 | $ | 37,452 | ||||
| Income taxes | 2,523 | ─ | ||||||
| Taxes other than income taxes | 19,575 | 18,743 | ||||||
| Accrued compensation | 19,218 | 17,547 | ||||||
| Other accrued liabilities | 46,353 | 59,645 | ||||||
| Current portion of finance lease obligations | 2,697 | 5,912 | ||||||
| Current portion of operating lease obligations | 12,904 | ─ | ||||||
| Current maturities of long-term debt | 9,954 | 9,957 | ||||||
| Total current liabilities | 150,558 | 149,256 | ||||||
| Finance lease obligations | 21,381 | 22,208 | ||||||
| Operating lease obligations | 221,047 | ─ | ||||||
| Long-term debt | 235,787 | 228,863 | ||||||
| Deferred income taxes | 41,103 | 41,977 | ||||||
| Deferred compensation and other | 47,767 | 56,908 | ||||||
| Equity: | ||||||||
|
Shareholders’ equity attributable to The Marcus
Corporation
Preferred Stock, $1 par; authorized 1,000,000 shares; none issued |
─ | ─ | ||||||
| Common Stock, $1 par; authorized 50,000,000 shares; issued 23,253,641 shares at September 26, 2019 and 22,843,096 shares at December 27, 2018 | 23,254 | 22,843 | ||||||
| Class B Common Stock, $1 par; authorized 33,000,000 shares; issued and outstanding 7,935,872 shares at September 26, 2019 and 8,346,417 shares at December 27, 2018 | 7,936 | 8,347 | ||||||
| Capital in excess of par | 144,687 | 63,830 | ||||||
| Retained earnings | 458,915 | 439,178 | ||||||
| Accumulated other comprehensive loss | (7,435 | ) | (6,758 | ) | ||||
| 627,357 | 527,440 | |||||||
| Less cost of Common Stock in treasury (266,566 shares at September 26, 2019 and 2,839,079 shares at December 27, 2018) | (4,828 | ) | (37,431 | ) | ||||
| Total shareholders' equity attributable to The Marcus Corporation | 622,529 | 490,009 | ||||||
| Noncontrolling interest | (29 | ) | 110 | |||||
| Total equity | 622,500 | 490,119 | ||||||
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 1,340,143 | $ | 989,331 | ||||
See accompanying condensed notes to consolidated financial statements.
| 4 |
THE MARCUS CORPORATION
Consolidated Statements of Earnings
| September 26, 2019 | September 27, 2018 | |||||||||||||||
| (in thousands, except per share data) | 13 Weeks | 39 Weeks | 13 Weeks | 39 Weeks | ||||||||||||
| Revenues: | ||||||||||||||||
| Theatre admissions | $ | 69,753 | $ | 211,777 | $ | 52,422 | $ | 185,035 | ||||||||
| Rooms | 34,185 | 81,317 | 34,467 | 84,256 | ||||||||||||
| Theatre concessions | 57,051 | 172,126 | 35,476 | 123,687 | ||||||||||||
| Food and beverage | 20,170 | 54,568 | 19,333 | 53,972 | ||||||||||||
| Other revenues | 22,872 | 66,234 | 19,813 | 59,362 | ||||||||||||
| 204,031 | 586,022 | 161,511 | 506,312 | |||||||||||||
| Cost reimbursements | 7,431 | 27,979 | 9,088 | 25,776 | ||||||||||||
| Total revenues | 211,462 | 614,001 | 170,599 | 532,088 | ||||||||||||
| Costs and expenses: | ||||||||||||||||
| Theatre operations | 66,971 | 199,542 | 48,644 | 164,452 | ||||||||||||
| Rooms | 10,829 | 30,173 | 10,958 | 31,026 | ||||||||||||
| Theatre concessions | 21,471 | 63,789 | 10,168 | 35,105 | ||||||||||||
| Food and beverage | 15,842 | 44,353 | 14,966 | 43,930 | ||||||||||||
| Advertising and marketing | 6,653 | 17,664 | 6,178 | 17,317 | ||||||||||||
| Administrative | 18,053 | 54,862 | 16,813 | 52,653 | ||||||||||||
| Depreciation and amortization | 19,226 | 53,484 | 14,569 | 42,899 | ||||||||||||
| Rent | 6,806 | 19,087 | 2,815 | 8,351 | ||||||||||||
| Property taxes | 5,666 | 16,527 | 5,018 | 15,011 | ||||||||||||
| Other operating expenses | 10,127 | 31,729 | 8,969 | 27,032 | ||||||||||||
| Reimbursed costs | 7,431 | 27,979 | 9,088 | 25,776 | ||||||||||||
| Total costs and expenses | 189,075 | 559,189 | 148,186 | 463,552 | ||||||||||||
| Operating income | 22,387 | 54,812 | 22,413 | 68,536 | ||||||||||||
| Other income (expense): | ||||||||||||||||
| Investment income | 187 | 835 | 442 | 433 | ||||||||||||
| Interest expense | (2,807 | ) | (8,959 | ) | (3,180 | ) | (10,000 | ) | ||||||||
| Other expense | (481 | ) | (1,441 | ) | (497 | ) | (1,489 | ) | ||||||||
| Loss on disposition of property, equipment and other assets | (129 | ) | (269 | ) | (359 | ) | (767 | ) | ||||||||
| Equity earnings (loss) from unconsolidated joint ventures, net | (84 | ) | (252 | ) | 30 | 282 | ||||||||||
| (3,314 | ) | (10,086 | ) | (3,564 | ) | (11,541 | ) | |||||||||
| Earnings before income taxes | 19,073 | 44,726 | 18,849 | 56,995 | ||||||||||||
| Income taxes | 4,843 | 10,465 | 2,626 | 12,254 | ||||||||||||
| Net earnings | 14,230 | 34,261 | 16,223 | 44,741 | ||||||||||||
| Net earnings (loss) attributable to noncontrolling interest | (59 | ) | 46 | (8 | ) | 70 | ||||||||||
| Net earnings attributable to The Marcus Corporation | $ | 14,289 | $ | 34,215 | $ | 16,231 | $ | 44,671 | ||||||||
| Net earnings per share – basic: | ||||||||||||||||
| Common Stock | $ | 0.47 | $ | 1.18 | $ | 0.60 | $ | 1.65 | ||||||||
| Class B Common Stock | $ | 0.43 | $ | 1.02 | $ | 0.52 | $ | 1.47 | ||||||||
| Net earnings per share – diluted: | ||||||||||||||||
| Common Stock | $ | 0.46 | $ | 1.10 | $ | 0.56 | $ | 1.56 | ||||||||
| Class B Common Stock | $ | 0.43 | $ | 1.01 | $ | 0.51 | $ | 1.44 | ||||||||
See accompanying condensed notes to consolidated financial statements.
| 5 |
THE MARCUS CORPORATION
Consolidated Statements of Comprehensive Income
| September 26, 2019 | September 27, 2018 | |||||||||||||||
| (in thousands) | 13 Weeks | 39 Weeks | 13 Weeks | 39 Weeks | ||||||||||||
| Net earnings | $ | 14,230 | $ | 34,261 | $ | 16,223 | $ | 44,741 | ||||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||||||
| Amortization of the net actuarial loss and prior service credit related to the pension, net of tax effect of $30, $89, $42 and $125, respectively | 79 | 238 | 113 | 340 | ||||||||||||
| Fair market value adjustment of interest rate swap, net of tax (benefit) effect of $(35), $(340), $70 and $70, respectively | (138 | ) | (968 | ) | 192 | 191 | ||||||||||
| Reclassification adjustment on interest rate swap included in interest expense, net of tax effect of $11, $19, $17 and $49, respectively | 32 | 53 | 46 | 134 | ||||||||||||
| Other comprehensive income (loss) | (27 | ) | (677 | ) | 351 | 665 | ||||||||||
| Comprehensive income | 14,203 | 33,584 | 16,574 | 45,406 | ||||||||||||
| Comprehensive income (loss) attributable to noncontrolling interest | (59 | ) | 46 | (8 | ) | 70 | ||||||||||
| Comprehensive income attributable to The Marcus Corporation | $ | 14,262 | $ | 33,538 | $ | 16,582 | $ | 45,336 | ||||||||
See accompanying condensed notes to consolidated financial statements.
6
THE MARCUS CORPORATION
Consolidated Statements of Cash Flows
| 39 Weeks Ended | ||||||||
| (in thousands) |
September 26,
2019 |
September 27,
2018 |
||||||
| OPERATING ACTIVITIES: | ||||||||
| Net earnings | $ | 34,261 | $ | 44,741 | ||||
| Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||
| Losses (earnings) on investments in joint ventures | 252 | (282 | ) | |||||
| Distributions from joint ventures | 200 | 65 | ||||||
| Loss on disposition of property, equipment and other assets | 269 | 767 | ||||||
| Amortization of favorable lease right | - | 250 | ||||||
| Depreciation and amortization | 53,484 | 42,899 | ||||||
| Amortization of debt issuance costs | 232 | 216 | ||||||
| Share-based compensation | 2,594 | 1,950 | ||||||
| Deferred income taxes | (572 | ) | 1 | |||||
| Deferred compensation and other | 592 | 2,949 | ||||||
| Contribution of the Company’s stock to savings and profit-sharing plan | 1,181 | 1,130 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts and notes receivable | 2,118 | 1,224 | ||||||
| Other assets | 11,057 | (1,793 | ) | |||||
| Accounts payable | (7,524 | ) | (18,620 | ) | ||||
| Income taxes | 8,506 | 12,749 | ||||||
| Taxes other than income taxes | 626 | (1,963 | ) | |||||
| Accrued compensation | 1,671 | 1,105 | ||||||
| Other accrued liabilities | (22,989 | ) | (10,318 | ) | ||||
| Total adjustments | 51,697 | 32,329 | ||||||
| Net cash provided by operating activities | 85,958 | 77,070 | ||||||
| INVESTING ACTIVITIES: | ||||||||
| Capital expenditures | (50,097 | ) | (45,144 | ) | ||||
| Acquisition of theatres, net of cash acquired and working capital assumed | (30,287 | ) | - | |||||
| Proceeds from disposals of property, equipment and other assets | 22 | 86 | ||||||
| Capital contribution in joint venture | - | (743 | ) | |||||
| Other investing activities | (5,809 | ) | (295 | ) | ||||
| Net cash used in investing activities | (86,171 | ) | (46,096 | ) | ||||
| FINANCING ACTIVITIES: | ||||||||
| Debt transactions: | ||||||||
| Proceeds from borrowings on revolving credit facility | 246,000 | 159,000 | ||||||
| Repayment of borrowings on revolving credit facility | (215,000 | ) | (177,000 | ) | ||||
| Principal payments on long-term debt | (24,203 | ) | (11,711 | ) | ||||
| Repayments of capital lease obligations | (1,908 | ) | (1,375 | ) | ||||
| Equity transactions: | ||||||||
| Treasury stock transactions, except for stock options | (747 | ) | (2,566 | ) | ||||
| Exercise of stock options | 1,344 | 6,902 | ||||||
| Dividends paid | (14,478 | ) | (12,277 | ) | ||||
| Distributions to noncontrolling interest | (185 | ) | (65 | ) | ||||
| Net cash used in financing activities | (9,177 | ) | (39,092 | ) | ||||
| Net decrease in cash, cash equivalents and restricted cash | (9,390 | ) | (8,118 | ) | ||||
| Cash, cash equivalents and restricted cash at beginning of period | 21,927 | 20,747 | ||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 12,537 | $ | 12,629 | ||||
| Supplemental Information: | ||||||||
| Interest paid, net of amounts capitalized | $ | 9,540 | $ | 10,321 | ||||
| Income taxes paid (refunded) | 2,530 | (448 | ) | |||||
| Change in accounts payable for additions to property, equipment and other assets | 7,406 | (9,813 | ) | |||||
See accompanying condensed notes to consolidated financial statements.
7
THE MARCUS CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE 13 AND 39 WEEKS ENDED SEPTEMBER 26, 2019
1. General
Basis of Presentation - The unaudited consolidated financial statements for the 13 and 39 weeks ended September 26, 2019 and September 27, 2018 have been prepared by the Company. In the opinion of management, all adjustments, consisting of normal recurring adjustments necessary to present fairly the unaudited interim financial information at September 26, 2019, and for all periods presented, have been made. The results of operations during the interim periods are not necessarily indicative of the results of operations for the entire year or other interim periods. However, the unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 27, 2018.
Accounting Policies - Refer to the Company’s audited consolidated financial statements (including footnotes) for the fiscal year ended December 27, 2018, contained in the Company’s Annual Report on Form 10-K for such year, for a description of the Company’s accounting policies.
During the 39 weeks ended September 26, 2019, there were no significant changes made to the Company’s significant accounting policies other than the changes attributable to the adoption of the Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) , which was adopted on December 28, 2018. The lease policy updates are applied prospectively in the Company’s financial statements from December 28, 2018 forward. Reported financial information for the historical comparable period was not revised and continues to be reported under the accounting standards in effect during the historical periods. See Note 3 for further discussion.
Depreciation and Amortization - Depreciation and amortization of property and equipment are provided using the straight-line method over the shorter of the estimated useful lives of the assets or any related lease terms. Depreciation expense totaled $19,194,000 and $53,433,000 for the 13 and 39 weeks ended September 26, 2019, respectively, and $14,556,000 and $43,037,000 for the 13 and 39 weeks ended September 27, 2018, respectively.
Earnings Per Share - Net earnings per share (EPS) of Common Stock and Class B Common Stock is computed using the two class method. Basic net earnings per share is computed by dividing net earnings by the weighted-average number of common shares outstanding. Diluted net earnings per share is computed by dividing net earnings by the weighted-average number of common shares outstanding, adjusted for the effect of dilutive stock options using the treasury method. Convertible Class B Common Stock is reflected on an if-converted basis. The computation of the diluted net earnings per share of Common Stock assumes the conversion of Class B Common Stock, while the diluted net earnings per share of Class B Common Stock does not assume the conversion of those shares.
8
Holders of Common Stock are entitled to cash dividends per share equal to 110% of all dividends declared and paid on each share of Class B Common Stock. As such, the undistributed earnings for each period are allocated based on the proportionate share of entitled cash dividends. The computation of diluted net earnings per share of Common Stock assumes the conversion of Class B Common Stock and, as such, the undistributed earnings are equal to net earnings for that computation.
The following table illustrates the computation of Common Stock and Class B Common Stock basic and diluted net earnings per share for net earnings and provides a reconciliation of the number of weighted-average basic and diluted shares outstanding:
|
13 Weeks
Ended September 26, 2019 |
13 Weeks
Ended September 27, 2018 |
39 Weeks
Ended September 26, 2019 |
39 Weeks
Ended September 27, 2018 |
|||||||||||||
| (in thousands, except per share data) | ||||||||||||||||
| Numerator: | ||||||||||||||||
| Net earnings attributable to The Marcus Corporation | $ | 14,289 | $ | 16,231 | $ | 34,215 | $ | 44,671 | ||||||||
| Denominator: | ||||||||||||||||
| Denominator for basic EPS | 30,918 | 28,180 | 30,566 | 28,028 | ||||||||||||
| Effect of dilutive employee stock options | 443 | 638 | 518 | 606 | ||||||||||||
| Denominator for diluted EPS | 31,361 | 28,818 | 31,084 | 28,634 | ||||||||||||
| Net earnings per share - basic: | ||||||||||||||||
| Common Stock | $ | 0.47 | $ | 0.60 | $ | 1.18 | $ | 1.65 | ||||||||
| Class B Common Stock | $ | 0.43 | $ | 0.52 | $ | 1.02 | $ | 1.47 | ||||||||
| Net earnings per share - diluted: | ||||||||||||||||
| Common Stock | $ | 0.46 | $ | 0.56 | $ | 1.10 | $ | 1.56 | ||||||||
| Class B Common Stock | $ | 0.43 | $ | 0.51 | $ | 1.01 | $ | 1.44 | ||||||||
9
Shareholders’ Equity - Activity impacting total shareholders’ equity attributable to The Marcus Corporation and noncontrolling interests for the 13 and 39 weeks ended September 26, 2019 and September 27, 2018 was as follows (in thousands, except per share data):
|
Common
Stock |
Class B
Common Stock |
Capital
in Excess of Par |
Retained
Earnings |
Accumulated
Other Comprehensive Loss |
Treasury
Stock |
Shareholders’
Equity Attributable to The Marcus Corporation |
Non-
controlling Interest |
Total
Equity |
||||||||||||||||||||||||||||
| BALANCES AT DECEMBER 27, 2018 | $ | 22,843 | $ | 8,347 | $ | 63,830 | $ | 439,178 | $ | (6,758 | ) | $ | (37,431 | ) | $ | 490,009 | $ | 110 | $ | 490,119 | ||||||||||||||||
| Cash Dividends: | ||||||||||||||||||||||||||||||||||||
| $.15 Class B Common Stock | - | - | - | (1,183 | ) | - | - | (1,183 | ) | - | (1,183 | ) | ||||||||||||||||||||||||
| $.16 Common Stock | - | - | - | (3,633 | ) | - | - | (3,633 | ) | - | (3,633 | ) | ||||||||||||||||||||||||
| Exercise of stock options | - | - | (78 | ) | - | - | 532 | 454 | - | 454 | ||||||||||||||||||||||||||
| Purchase of treasury stock | - | - | - | - | - | (428 | ) | (428 | ) | - | (428 | ) | ||||||||||||||||||||||||
| Savings and profit-sharing contribution | - | - | 810 | - | - | 371 | 1,181 | - | 1,181 | |||||||||||||||||||||||||||
| Reissuance of treasury stock | - | - | 31 | - | - | 16 | 47 | - | 47 | |||||||||||||||||||||||||||
| Issuance of non-vested stock | - | - | (127 | ) | - | - | 127 | - | - | - | ||||||||||||||||||||||||||
| Shared-based compensation | - | - | 777 | - | - | - | 777 | - | 777 | |||||||||||||||||||||||||||
| Reissuance of treasury stock-acquisition | - | - | 77,960 | - | - | 31,237 | 109,197 | - | 109,197 | |||||||||||||||||||||||||||
| Other | - | - | (109 | ) | - | - | - | (109 | ) | - | (109 | ) | ||||||||||||||||||||||||
| Conversions of Class B Common Stock | 411 | (411 | ) | - | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Distributions to noncontrolling interest | - | - | - | - | - | - | - | (60 | ) | (60 | ) | |||||||||||||||||||||||||
| Comprehensive income (loss) | - | - | - | 1,860 | (297 | ) | - | 1,563 | (66 | ) | 1,497 | |||||||||||||||||||||||||
| BALANCES AT MARCH 28, 2019 | 23,254 | 7,936 | 143,094 | 436,222 | (7,055 | ) | (5,576 | ) | 597,875 | (16 | ) | 597,859 | ||||||||||||||||||||||||
| Cash Dividends: | ||||||||||||||||||||||||||||||||||||
| $.15 Class B Common Stock | - | - | - | (1,155 | ) | - | - | (1,155 | ) | - | (1,155 | ) | ||||||||||||||||||||||||
| $.16 Common Stock | - | - | - | (3,675 | ) | - | - | (3,675 | ) | - | (3,675 | ) | ||||||||||||||||||||||||
| Exercise of stock options | - | - | (27 | ) | - | - | 477 | 450 | - | 450 | ||||||||||||||||||||||||||
| Purchase of treasury stock | - | - | - | - | - | (213 | ) | (213 | ) | - | (213 | ) | ||||||||||||||||||||||||
| Reissuance of treasury stock | - | - | 182 | - | - | 96 | 278 | - | 278 | |||||||||||||||||||||||||||
| Issuance of non-vested stock | - | - | (142 | ) | - | - | 142 | - | - | - | ||||||||||||||||||||||||||
| Shared-based compensation | - | - | 949 | - | - | - | 949 | - | 949 | |||||||||||||||||||||||||||
| Distributions to noncontrolling interest | - | - | - | - | - | - | - | (35 | ) | (35 | ) | |||||||||||||||||||||||||
| Comprehensive income (loss) | - | - | - | 18,066 | (353 | ) | - | 17,713 | 171 | 17,884 | ||||||||||||||||||||||||||
| BALANCES AT JUNE 27, 2019 | 23,254 | 7,936 | 144,056 | 449,458 | (7,408 | ) | (5,074 | ) | 612,222 | 120 | 612,342 | |||||||||||||||||||||||||
| Cash Dividends: | ||||||||||||||||||||||||||||||||||||
| $.15 Class B Common Stock | - | - | - | (1,155 | ) | - | - | (1,155 | ) | - | (1,155 | ) | ||||||||||||||||||||||||
| $.16 Common Stock | - | - | - | (3,677 | ) | - | - | (3,677 | ) | - | (3,677 | ) | ||||||||||||||||||||||||
| Exercise of stock options | - | - | (134 | ) | - | - | 574 | 440 | - | 440 | ||||||||||||||||||||||||||
| Purchase of treasury stock | - | - | - | - | - | (478 | ) | (478 | ) | - | (478 | ) | ||||||||||||||||||||||||
| Reissuance of treasury stock | - | - | 28 | - | - | 19 | 47 | - | 47 | |||||||||||||||||||||||||||
| Issuance of non-vested stock | - | - | (131 | ) | - | - | 131 | - | - | - | ||||||||||||||||||||||||||
| Shared-based compensation | - | - | 868 | - | - | - | 868 | - | 868 | |||||||||||||||||||||||||||
| Distributions to noncontrolling interest | - | - | - | - | - | - | - | (90 | ) | (90 | ) | |||||||||||||||||||||||||
| Comprehensive income (loss) | - | - | - | 14,289 | (27 | ) | - | 14,262 | (59 | ) | 14,203 | |||||||||||||||||||||||||
| BALANCES AT SEPTEMBER 26, 2019 | $ | 23,254 | $ | 7,936 | $ | 144,687 | $ | 458,915 | $ | (7,435 | ) | $ | (4,828 | ) | $ | 622,529 | $ | (29 | ) | $ | 622,500 | |||||||||||||||
10
|
Common
Stock |
Class B
Common Stock |
Capital
in Excess of Par |
Retained
Earnings |
Accumulated
Other Comprehensive Income (Loss) |
Treasury
Stock |
Shareholders'
Equity Attributable to The Marcus Corporation |
Non-
controlling Interest |
Total
Equity |
||||||||||||||||||||||||||||
| BALANCES AT DECEMBER 28, 2017 | $ | 22,656 | $ | 8,534 | $ | 61,452 | $ | 403,206 | $ | (7,425 | ) | $ | (43,399 | ) | $ | 445,024 | $ | 100 | $ | 445,124 | ||||||||||||||||
| Amount reclassified to retained earnings on December 29, 2017 in connection with the adoption of ASU No. 2016-01 | - | - | - | (11 | ) | 11 | - | - | - | - | ||||||||||||||||||||||||||
| Amount reclassified to retained earnings on December 29, 2017 in connection with the adoption of ASU No. 2018-02 | - | - | - | 1,574 | (1,574 | ) | - | - | - | - | ||||||||||||||||||||||||||
| Amount reclassified to retained earnings on December 29, 2017 in connection with the adoption of ASU No. 2014-09 | - | - | - | (2,568 | ) | - | - | (2,568 | ) | - | (2,568 | ) | ||||||||||||||||||||||||
| Cash Dividends: | ||||||||||||||||||||||||||||||||||||
| $.14 Class B Common Stock | - | - | - | (1,163 | ) | - | - | (1,163 | ) | - | (1,163 | ) | ||||||||||||||||||||||||
| $.15 Common Stock | - | - | - | (2,907 | ) | - | - | (2,907 | ) | - | (2,907 | ) | ||||||||||||||||||||||||
| Exercise of stock options | - | - | (62 | ) | - | - | 991 | 929 | - | 929 | ||||||||||||||||||||||||||
| Purchase of treasury stock | - | - | - | - | - | (453 | ) | (453 | ) | - | (453 | ) | ||||||||||||||||||||||||
| Savings and profit-sharing contribution | - | - | 651 | - | - | 479 | 1,130 | - | 1,130 | |||||||||||||||||||||||||||
| Reissuance of treasury stock | - | - | 26 | - | - | 23 | 49 | - | 49 | |||||||||||||||||||||||||||
| Issuance of non-vested stock | - | - | (108 | ) | - | - | 108 | - | - | - | ||||||||||||||||||||||||||
| Shared-based compensation | - | - | 596 | - | - | - | 596 | - | 596 | |||||||||||||||||||||||||||
| Conversions of Class B Common Stock | 8 | (8 | ) | - | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Distributions to noncontrolling interest | - | - | - | - | - | - | - | (19 | ) | (19 | ) | |||||||||||||||||||||||||
| Comprehensive income (loss) | - | - | - | 9,821 | (30 | ) | - | 9,791 | (15 | ) | 9,776 | |||||||||||||||||||||||||
| BALANCES AT MARCH 29, 2018 | 22,664 | 8,526 | 62,555 | 407,952 | (9,018 | ) | (42,251 | ) | 450,428 | 66 | 450,494 | |||||||||||||||||||||||||
| Cash Dividends: | ||||||||||||||||||||||||||||||||||||
| $.14 Class B Common Stock | - | - | - | (1,162 | ) | - | - | (1,162 | ) | - | (1,162 | ) | ||||||||||||||||||||||||
| $.15 Common Stock | - | - | - | (2,926 | ) | - | - | (2,926 | ) | - | (2,926 | ) | ||||||||||||||||||||||||
| Exercise of stock options | - | - | (33 | ) | - | - | 1,207 | 1,174 | - | 1,174 | ||||||||||||||||||||||||||
| Purchase of treasury stock | - | - | - | - | - | (496 | ) | (496 | ) | - | (496 | ) | ||||||||||||||||||||||||
| Reissuance of treasury stock | - | - | 143 | - | - | 93 | 236 | - | 236 | |||||||||||||||||||||||||||
| Issuance of non-vested stock | - | - | (127 | ) | - | - | 127 | - | - | - | ||||||||||||||||||||||||||
| Shared-based compensation | - | - | 715 | - | - | - | 715 | - | 715 | |||||||||||||||||||||||||||
| Conversions of Class B Common Stock | 5 | (5 | ) | - | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Comprehensive income (loss) | - | - | - | 18,619 | 344 | - | 18,963 | 93 | 19,056 | |||||||||||||||||||||||||||
| BALANCES AT JUNE 28, 2018 | 22,669 | 8,521 | 63,253 | 422,483 | (8,674 | ) | (41,320 | ) | 466,932 | 159 | 467,091 | |||||||||||||||||||||||||
| Cash Dividends: | ||||||||||||||||||||||||||||||||||||
| $.14 Class B Common Stock | - | - | - | (1,139 | ) | - | - | (1,139 | ) | - | (1,139 | ) | ||||||||||||||||||||||||
| $.15 Common Stock | - | - | - | (2,980 | ) | - | - | (2,980 | ) | - | (2,980 | ) | ||||||||||||||||||||||||
| Exercise of stock options | - | - | (672 | ) | - | - | 5,471 | 4,799 | - | 4,799 | ||||||||||||||||||||||||||
| Purchase of treasury stock | - | - | - | - | - | (1,949 | ) | (1,949 | ) | - | (1,949 | ) | ||||||||||||||||||||||||
| Reissuance of treasury stock | - | - | 32 | - | - | 15 | 47 | - | 47 | |||||||||||||||||||||||||||
| Issuance of non-vested stock | - | - | (113 | ) | - | - | 113 | - | - | - | ||||||||||||||||||||||||||
| Shared-based compensation | - | - | 639 | - | - | - | 639 | - | 639 | |||||||||||||||||||||||||||
| Conversions of Class B Common Stock | 173 | (173 | ) | - | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Distributions to noncontrolling interest | - | - | - | - | - | - | - | (46 | ) | (46 | ) | |||||||||||||||||||||||||
| Comprehensive income (loss) | - | - | - | 16,231 | 351 | - | 16,582 | (8 | ) | 16,574 | ||||||||||||||||||||||||||
| BALANCES AT SEPTEMBER 27, 2018 | $ | 22,842 | $ | 8,348 | $ | 63,139 | $ | 434,595 | $ | (8,323 | ) | $ | (37,670 | ) | $ | 482,931 | $ | 105 | $ | 483,036 | ||||||||||||||||
Accumulated Other Comprehensive Loss – Accumulated other comprehensive loss presented in the accompanying consolidated balance sheets consists of the following, all presented net of tax:
|
September
26,
|
December 27,
2018 |
|||||||
| (in thousands) | ||||||||
| Unrecognized loss on interest rate swap agreements | $ | (1,064 | ) | $ | (149 | ) | ||
| Net unrecognized actuarial loss for pension obligation | (6,371 | ) | (6,609 | ) | ||||
| $ | (7,435 | ) | $ | (6,758 | ) | |||
Fair Value Measurements - Certain financial assets and liabilities are recorded at fair value in the consolidated financial statements. Some are measured on a recurring basis while others are measured on a non-recurring basis. Financial assets and liabilities measured on a recurring basis are those that are adjusted to fair value each time a financial statement is prepared. Financial assets and liabilities measured on a non-recurring basis are those that are adjusted to fair value when a significant event occurs. A fair value measurement assumes that a transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability.
11
The Company’s assets and liabilities measured at fair value are classified in one of the following categories:
Level 1 - Assets or liabilities for which fair value is based on quoted prices in active markets for identical instruments as of the reporting date. At September 26, 2019 and December 27, 2018, respectively, the Company’s $7,017,000 and $5,302,000 of debt and equity securities were valued using Level 1 pricing inputs and were included in other current assets.
Level 2 - Assets or liabilities for which fair value is based on pricing inputs that were either directly or indirectly observable as of the reporting date. At September 26, 2019 and December 27, 2018, respectively, the Company’s $1,441,000 and $205,000 liability related to the Company’s interest rate swap contracts was valued using Level 2 pricing inputs and was included in deferred compensation and other in the consolidated balance sheets.
Level 3 - Assets or liabilities for which fair value is based on valuation models with significant unobservable pricing inputs and which result in the use of management estimates. At September 26, 2019 and December 27, 2018, none of the Company’s fair value measurements were valued using Level 3 pricing inputs. See Note 2 for further discussion on Level 3 assumptions used in regard to the acquisition.
Defined Benefit Plan - The components of the net periodic pension cost of the Company’s unfunded nonqualified, defined-benefit plan are as follows:
|
13 Weeks
Ended September 26, 2019 |
13 Weeks
Ended September 27, 2018 |
39 Weeks
Ended September 26, 2019 |
39 Weeks
Ended September 27, 2018 |
|||||||||||||
| (in thousands) | ||||||||||||||||
| Service cost | $ | 207 | $ | 231 | $ | 625 | $ | 694 | ||||||||
| Interest cost | 372 | 341 | 1,114 | 1,023 | ||||||||||||
| Net amortization of prior service cost and actuarial loss | 109 | 156 | 327 | 466 | ||||||||||||
| Net periodic pension cost | $ | 688 | $ | 728 | $ | 2,066 | $ | 2,183 | ||||||||
Service cost is included in Administrative expense while all other components are recorded within Other expense outside of operating income in the consolidated statements of earnings.
12
Revenue Recognition – The disaggregation of revenues by business segment for the 13 and 39 weeks ended September 26, 2019 is as follows (in thousands):
| 13 Weeks Ended September 26, 2019 | ||||||||||||||||
| Reportable Segment | ||||||||||||||||
| Theatres | Hotels/Resorts | Corporate | Total | |||||||||||||
| Theatre admissions | $ | 69,753 | $ | - | $ | - | $ | 69,753 | ||||||||
| Rooms | - | 34,185 | - | 34,185 | ||||||||||||
| Theatre concessions | 57,051 | - | - | 57,051 | ||||||||||||
| Food and beverage | - | 20,170 | - | 20,170 | ||||||||||||
| Other revenues (1) | 9,781 | 13,003 | 88 | 22,872 | ||||||||||||
| Cost reimbursements | 217 | 7,214 | - | 7,431 | ||||||||||||
| Total revenues | $ | 136,802 | $ | 74,572 | $ | 88 | $ | 211,462 | ||||||||
| (1) | Included in other revenues is an immaterial amount related to rental income that is not considered revenue from contracts with customers under ASC Topic 606. |
| 39 Weeks Ended September 26, 2019 | ||||||||||||||||
| Reportable Segment | ||||||||||||||||
| Theatres | Hotels/Resorts | Corporate | Total | |||||||||||||
| Theatre admissions | $ | 211,777 | $ | - | $ | - | $ | 211,777 | ||||||||
| Rooms | - | 81,317 | - | 81,317 | ||||||||||||
| Theatre concessions | 172,126 | - | - | 172,126 | ||||||||||||
| Food and beverage | - | 54,568 | - | 54,568 | ||||||||||||
| Other revenues (1) | 29,525 | 36,386 | 323 | 66,234 | ||||||||||||
| Cost reimbursements | 646 | 27,333 | - | 27,979 | ||||||||||||
| Total revenues | $ | 414,074 | $ | 199,604 | $ | 323 | $ | 614,001 | ||||||||
| (1) | Included in other revenues is an immaterial amount related to rental income that is not considered revenue from contracts with customers under ASC Topic 606. |
The disaggregation of revenues by business segment for the 13 and 39 weeks ended September 27, 2018 is as follows (in thousands):
| 13 Weeks Ended September 27, 2018 | ||||||||||||||||
| Reportable Segment | ||||||||||||||||
| Theatres | Hotels/Resorts | Corporate | Total | |||||||||||||
| Theatre admissions | $ | 52,422 | $ | - | $ | - | $ | 52,422 | ||||||||
| Rooms | - | 34,467 | - | 34,467 | ||||||||||||
| Theatre concessions | 35,476 | - | - | 35,476 | ||||||||||||
| Food and beverage | - | 19,333 | - | 19,333 | ||||||||||||
| Other revenues (1) | 6,893 | 12,822 | 98 | 19,813 | ||||||||||||
| Cost reimbursements | 218 | 8,870 | - | 9,088 | ||||||||||||
| Total revenues | $ | 95,009 | $ | 75,492 | $ | 98 | $ | 170,599 | ||||||||
| (1) | Included in other revenues is an immaterial amount related to rental income that is not considered revenue from contracts with customers under ASC Topic 606. |
13
| 39 Weeks Ended September 27, 2018 | ||||||||||||||||
| Reportable Segment | ||||||||||||||||
| Theatres | Hotels/Resorts | Corporate | Total | |||||||||||||
| Theatre admissions | $ | 185,035 | $ | - | $ | - | $ | 185,035 | ||||||||
| Rooms | - | 84,256 | - | 84,256 | ||||||||||||
| Theatre concessions | 123,687 | - | - | 123,687 | ||||||||||||
| Food and beverage | - | 53,972 | - | 53,972 | ||||||||||||
| Other revenues (1) | 23,591 | 35,453 | 318 | 59,362 | ||||||||||||
| Cost reimbursements | 1,084 | 24,692 | - | 25,776 | ||||||||||||
| Total revenues | $ | 333,397 | $ | 198,373 | $ | 318 | $ | 532,088 | ||||||||
| (1) | Included in other revenues is an immaterial amount related to rental income that is not considered revenue from contracts with customers under ASC Topic 606. |
The Company had deferred revenue from contracts with customers of $32,499,000 and $37,048,000 as of September 26, 2019 and December 27, 2018, respectively. The Company had no contract assets as of September 26, 2019 and December 27, 2018. During the 13 and 39 weeks ended September 26, 2019, the Company recognized revenue of $4,042,000 and $18,747,000, respectively, that was included in deferred revenues as of December 27, 2018. The majority of the Company’s deferred revenue relates to non-redeemed gift cards, advanced ticket sales and the Company’s loyalty programs.
As of September 26, 2019, the amount of transaction price allocated to the remaining performance obligations under the Company’s advanced ticket sales was $4,680,000 and is reflected in the Company’s consolidated balance sheet as part of deferred revenues, which is included in other accrued liabilities. The Company recognizes revenue as the tickets are redeemed, which is expected to occur within the next two years.
As of September 26, 2019, the amount of transaction price allocated to the remaining performance obligations related to the amount of Hotels and Resorts non-redeemed gift cards was $2,276,000 and is reflected in the Company’s consolidated balance sheet as part of deferred revenues, which is included in other accrued liabilities. The Company recognizes revenue as the gift cards are redeemed, which is expected to occur within the next two years.
The majority of the Company’s revenue is recognized in less than one year from the original contract.
New Accounting Pronouncements – On December 28, 2018, the Company adopted ASU No. 2016-02, Leases (Topic 842) , which is intended to improve financial reporting related to leasing transactions. ASC 842 requires a lessee to recognize on the balance sheet assets and liabilities for rights and obligations created by leased assets with lease terms of more than 12 months. The new guidance also requires disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from the leases. See Note 3 for further discussion.
14
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment , which eliminates Step 2 of the goodwill impairment test that had required a hypothetical purchase price allocation. Rather, entities should apply the same impairment assessment to all reporting units and recognize an impairment loss for the amount by which a reporting unit’s carrying amount exceeds its fair value, without exceeding the total amount of goodwill allocated to that reporting unit. Entities will continue to have the option to perform a qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU No. 2017-04 is effective for the Company in fiscal 2020 and must be applied prospectively. The Company does not believe the new standard will have a material effect on its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General , designed to add, remove and clarify disclosure requirements related to defined benefit pension and other postretirement plans. ASU No. 2018-14 is effective for the Company in fiscal 2021 and early application is permitted. The Company is evaluating the effect that the guidance will have on its financial statement disclosures.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, (ASU No. 2018-13) . The purpose of ASU No. 2018-13 is to improve the disclosures related to fair value measurements in the financial statements. The improvements include the removal, modification and addition of certain disclosure requirements primarily related to Level 3 fair value measurements. ASU No. 2018-13 is effective for the Company in fiscal 2020. The amendments in ASU No. 2018-13 should be applied prospectively. The Company does not expect ASU No. 2018-13 to have a significant impact on its consolidated financial statements.
2. Acquisition
On February 1, 2019, the Company acquired 22 dine-in theatres with 208 screens located in nine Southern and Eastern states from VSS-Southern Theatres LLC (Movie Tavern) for a total purchase price of $139,516,000, consisting of $30,000,000 in cash, subject to certain adjustments, and 2,450,000 shares of the company’s Common Stock with a value of $109,197,000, based on the Company’s closing share price as of January 31, 2019. Acquisition costs incurred as a result of the Movie Tavern acquisition were approximately $1,283,000 and $1,507,000 during fiscal 2019 and fiscal 2018, respectively, and were expensed as incurred and included in administrative expense in the consolidated statements of earnings.
15
The preliminary purchase price allocation reflected in the Company’s consolidated balance sheet on the acquisition date is as follows (in thousands):
| Other current assets | $ | 4,862 | ||
| Property and equipment | 95,564 | |||
| Operating lease right-of-use-assets | 159,011 | |||
| Other (long-term assets) | 9,710 | |||
| Goodwill | 32,697 | |||
| Taxes other than income | (206 | ) | ||
| Other accrued liabilities | (3,322 | ) | ||
| Operating lease obligations | (158,800 | ) | ||
| Total | $ | 139,516 |
The preliminary fair value measurement of tangible and intangible assets and liabilities was based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value measurement hierarchy. Level 3 fair market values were determined using a variety of information, including estimated future cash flows and market comparables. The Company is in the process of completing the purchase price allocation and expects to have it finalized within the 12 month measurement period.
3. Leases
The Company determines if an arrangement is a lease at inception. The Company evaluates each lease for classification as either a finance lease or an operating lease according to accounting guidance ASU No. 2016-02, Leases (Topic 842) . The Company performs this evaluation at the inception of the lease and when a modification is made to a lease. The Company leases real estate and equipment with lease terms of one year to 45 years, some of which include options to extend and/or terminate the lease. The exercise of lease renewal options is done at the Company’s sole discretion. When deemed reasonably certain of exercise, the renewal options are included in the determination of the lease term and related right-of-use asset and lease liability. The depreciable life of the asset is limited to the expected term. The Company’s lease agreements do not contain any residual value guarantees or any restrictions or covenants.
Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease right-of-use assets and labilities are recognized at commencement date of the lease based on the present value of lease payments over the lease term. When readily determinable, the Company uses the implicit rate in the lease in determining the present value of lease payments. When the lease does not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date, including the fixed rate the Company could borrow for a similar amount, over a similar lease term with similar collateral. The Company recognizes right-of-use assets for all assets subject to operating leases in an amount equal to the operating lease liabilities, adjusted for the balances of long-term prepaid rent, favorable lease intangible assets, deferred lease expense, unfavorable lease liabilities and deferred lease incentive liabilities. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term.
16
The majority of the Company’s lease agreements include fixed rental payments. For those leases with variable payments based on increases in an index subsequent to lease commencement, such payments are recognized as variable lease expense as they occur. Variable lease payments that do not depend on an index or rate, including those that depend on the Company’s performance or use of the underlying asset, are also expensed as incurred.
The Company adopted ASC 842 on the first day of fiscal 2019 using the modified retrospective approach. Under this method, the Company was allowed to initially apply the new lease standard at the adoption date and recognize the assets and liabilities in the period of adoption. As such, upon adoption, no adjustments were made to prior period financial information or disclosures and the new lease standard did not result in a cumulative effect adjustment to retained earnings. Finance lease accounting remained substantially unchanged. The adoption of ASC 842 had the following effect on the Company’s financial statements as follows (all relating to operating lease right-of-use assets and obligations):
|
Balance
at
|
ASC 842
Adjustments |
Balance at
December 28, 2018 |
||||||||||
| (in thousands) | ||||||||||||
| Assets | ||||||||||||
| Other current assets | $ | 15,355 | $ | (690 | ) | $ | 14,665 | |||||
| Operating lease right-of-use assets | - | 76,178 | 76,178 | |||||||||
| Other assets (long term) | 33,100 | (8,868 | ) | 24,232 | ||||||||
| Liabilities | ||||||||||||
| Other accrued liabilities | 59,645 | (4,396 | ) | 55,249 | ||||||||
| Current portion of operating lease obligations | - | 5,909 | 5,909 | |||||||||
| Operating lease obligations | - | 75,608 | 75,608 | |||||||||
| Deferred compensation and other | 56,908 | (10,501 | ) | 46,407 | ||||||||
As part of the Company’s adoption of ASC 842, the Company elected the following practical expedients: i) to forego reassessment of its prior conclusion related to lease identification, lease classification and initial direct costs, and ii) to make a policy election not to apply the lease recognition requirements for short-term leases. As a result, the Company does not recognize right-of use assets or lease liabilities for short-term leases that qualify for the policy election (those with an initial term of 12 months or less which do not include a purchase or renewal option which is reasonably certain to be exercised), but will recognize these lease payments as lease costs on a straight-line basis over the lease term.
17
Total lease cost consists of the following:
| Lease Cost | Classification |
13 Weeks
Ended September 26, 2019 |
39 Weeks
Ended September 26, 2019 |
|||||||
| (in thousands) | ||||||||||
| Finance lease costs: | ||||||||||
| Amortization of finance lease assets | Depreciation and amortization | $ | 952 | $ | 2,814 | |||||
| Interest on lease liabilities | Interest expense | 284 | 870 | |||||||
| $ | 1,236 | $ | 3,684 | |||||||
| Operating lease costs: | ||||||||||
| Operating lease costs | Rent expense | $ | 6,386 | $ | 17,752 | |||||
| Variable lease cost | Rent expense | 362 | 1,157 | |||||||
| Short-term lease cost | Rent expense | 58 | 178 | |||||||
| $ | 6,806 | $ | 19,087 | |||||||
| Other Information |
39 Weeks
Ended September 26, 2019 |
|||
| (in thousands) | ||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||
| Financing cash flows from finance leases | $ | 1,908 | ||
| Operating cash flows from finance leases | 870 | |||
| Operating cash flows from operating leases | 18,140 | |||
| Right of use assets obtained in exchange for new lease obligations: | ||||
| Finance lease liabilities | 1,716 | |||
| Operating lease liabilities, including from acquisitions | 163,416 | |||
|
September 26,
2019 |
||||
| (in thousands) | ||||
| Finance leases: | ||||
| Property and equipment – gross | $ | 74,348 | ||
| Accumulated depreciation and amortization | (52,069 | ) | ||
| Property and equipment - net | $ | 22,279 | ||
18
| Lease Term and Discount Rate |
September 26,
2019 |
|||
| Weighted-average remaining lease terms: | ||||
| Finance leases | 10 years | |||
| Operating leases | 15 years | |||
| Weighted-average discount rates: | ||||
| Finance leases | 4.68 | % | ||
| Operating leases | 4.64 | % | ||
Maturities of lease liabilities as of September 26, 2019 are as follows (in thousands):
| Fiscal Year | Operating Leases | Finance Leases | ||||||
| 2019 (excluding the 39 weeks ended September 26, 2019) | $ | 4,649 | $ | 1,020 | ||||
| 2020 | 25,154 | 3,584 | ||||||
| 2021 | 24,485 | 2,992 | ||||||
| 2022 | 25,056 | 2,946 | ||||||
| 2023 | 23,538 | 2,836 | ||||||
| 2024 and thereafter | 221,983 | 16,948 | ||||||
| Total lease payments | 324,865 | 30,326 | ||||||
| Less: amount representing interest | (90,914 | ) | (6,248 | ) | ||||
| Total lease liabilities | $ | 233,951 | $ | 24,078 | ||||
Aggregate minimum lease commitments as of December 27, 2018 under Accounting Standard Codification Topic 840 are as follows (in thousands):
| Fiscal Year | Operating Leases | Capital Leases | |||||||
| 2019 | $ | 11,317 | $ | 3,073 | |||||
| 2020 | 10,169 | 2,978 | |||||||
| 2021 | 9,670 | 2,679 | |||||||
| 2022 | 9,910 | 2,718 | |||||||
| 2023 | 9,038 | 2,718 | |||||||
| 2024 and thereafter | 80,523 | 16,940 | |||||||
| Total minimum lease payments | $ | 130,627 | 31,106 | ||||||
| Less: amount representing interest | (6,978 | ) | |||||||
| Total present value of minimum capital lease payments | $ | 24,128 | |||||||
In fiscal 2018, the Company entered into a build-to-suit lease arrangement in which the Company is responsible for the construction of a new leased theatre and for paying construction costs during development. Construction costs will be reimbursed by the landlord up to an agreed upon amount. During construction, the Company is deemed to not have control of the assets or the leased premises and has recorded the development expenditures in other assets on the consolidated balance sheet. The lease will commence when the Company has access to the right-of-use asset, which is expected to be upon project completion.
19
Digital Cinema Projection Systems - During fiscal 2012, the Company entered into a master licensing agreement with CDF2 Holdings, LLC, a subsidiary of Cinedigm Digital Cinema Corp (CDF2), whereby CDF2 purchased on the Company’s behalf, and then deployed and licensed back to the Company, digital cinema projection systems (the “systems”) for use by the Company in its theatres. As of September 26, 2019, 642 of the Company’s screens were utilizing the systems under a 10-year master licensing agreement with CDF2. Included in Finance lease right-of-use assets is $45,510,000 related to the digital systems as of September 26, 2019 and December 27, 2018, which is being amortized over the remaining estimated useful life of the assets. Accumulated amortization of the digital systems was $45,279,000 and $40,647,000 as of September 26, 2019 and December 27, 2018, respectively.
Under the terms of the master licensing agreement, the Company made an initial one-time payment to CDF2. The Company expects that the balance of CDF2’s costs to deploy the systems will be covered primarily through the payment of virtual print fees (VPF’s) from film distributors to CDF2 each time a digital movie is booked on one of the systems deployed on a Company screen. The Company agreed to make an average number of bookings of eligible digital movies on each screen on which a licensed system has been deployed to provide for a minimum level of VPF’s paid by distributors (standard booking commitment) to CDF2. To the extent the VPF’s paid by distributors are less than the standard booking commitment, the Company must make a shortfall payment to CDF2. Based upon the Company’s historical booking patterns, the Company does not expect to make any shortfall payments during the life of the agreement. Accounting Standards Codification No. 842, Leases , requires that the Company consider the entire amount of the standard booking commitment minimum lease payments for purposes of determining the finance lease obligation. The maximum amount per year that the Company could be required to pay is approximately $6,163,000 until the obligation is fully satisfied.
The Company’s finance lease obligation is being reduced as VPF’s are paid by the film distributors to CDF2. The Company has recorded the reduction of the obligation associated with the payment of VPF’s as a reduction of the interest related to the obligation and the amortization incurred related to the systems, as the payments represent a specific reimbursement of the cost of the systems by the studios. Based on the Company’s expected minimum number of eligible movies to be booked, the Company expects the obligation to be reduced by at least $140,000 within the next 12 months. This reduction will be recognized as an offset to amortization and is expected to offset the majority of the amortization of the systems.
4. Long-Term Debt
The Company utilizes derivatives principally to manage market risks and reduce its exposure resulting from fluctuations in interest rates. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objectives and strategies for undertaking various hedge transactions.
20
The Company entered into two interest rate swap agreements on March 1, 2018 covering $50,000,000 of floating rate debt. The first agreement has a notional amount of $25,000,000, expires March 1, 2021, and requires the Company to pay interest at a defined rate of 2.559% while receiving interest at a defined variable rate of one-month LIBOR (2.125% at September 26, 2019). The second agreement has a notional amount of $25,000,000, expires March 1, 2023, and requires the Company to pay interest at a defined rate of 2.687% while receiving interest at a defined variable rate of one-month LIBOR (2.125% at September 26, 2019). The Company recognizes derivatives as either assets or liabilities on the consolidated balance sheets at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and on the type of hedging relationship. Derivatives that do not qualify for hedge accounting must be adjusted to fair value through earnings. For derivatives that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The Company’s interest rate swap agreements are considered effective and qualify as cash flow hedges. The Company assesses, both at the inception of each hedge and on an on-going basis, whether the derivatives that are used in its hedging transactions are highly effective in offsetting changes in cash flows of the hedged items. As of September 26, 2019, the interest rate swaps were considered highly effective. The fair value of the interest rate swaps on September 26, 2019 and December 27, 2018, respectively, was a liability of $1,441,000 and $205,000, and was included in deferred compensation and other in the consolidated balance sheets. The Company does not expect the interest rate swaps to have a material effect on earnings within the next 12 months.
The Company had an interest rate swap that expired in January 2018. The swap agreement covered $25,000,000 of floating rate debt that required the Company to pay interest at a defined fixed rate of 0.96% while receiving interest at a defined variable rate of one-month LIBOR. The Company’s interest rate swap agreement was considered effective and qualified as a cash flow hedge from inception through June 16, 2016, at which time the derivative was undesignated and the balance in accumulated other comprehensive loss was reclassified into interest expense. As of June 16, 2016, the swap was considered ineffective for accounting purposes and the change in fair value was recorded as an increase or decrease in interest expense. As such, the $13,000 decrease in fair value of the swap for the 39 weeks ended September 27, 2018 was recorded to interest expense.
During the 39 weeks ended September 26, 2019, a note that was scheduled to mature in January 2020 with a balance of $14,638,000, was repaid and replaced with borrowings on the Company’s revolving credit facility.
5. Income Taxes
The Company’s effective income tax rate, adjusted for earnings from noncontrolling interests, for the 13 and 39 weeks ended September 26, 2019 was 25.3% and 23.4%, respectively, and was 13.9% and 21.5% for the 13 and 39 weeks ended September 27, 2018, respectively. During the 39 weeks ended September 27, 2018, the Company recorded income tax benefits related to excess tax benefits on share-based compensation as well as reductions in deferred tax liabilities related to tax accounting method changes the Company made subsequent to the Tax Cuts and Jobs Act of 2017. The Company does not include the income tax expense or benefit related to the net earnings or loss attributable to noncontrolling interests in its income tax expense as the entity is considered a pass-through entity and, as such, the income tax expense or benefit is attributable to its owners.
21
6. Business Segment Information
The Company’s primary operations are reported in the following business segments: Theatres and Hotels/Resorts. Corporate items include amounts not allocable to the business segments. Corporate revenues consist principally of rent and the corporate operating loss includes general corporate expenses. Corporate information technology costs and accounting shared services costs are allocated to the business segments based upon several factors, including actual usage and segment revenues.
Following is a summary of business segment information for the 13 and 39 weeks ended September 26, 2019 and September 27, 2018 (in thousands):
|
13
Weeks Ended
|
Theatres |
Hotels/
|
Corporate
|
Total | ||||||||||||
| Revenues | $ | 136,802 | $ | 74,572 | $ | 88 | $ | 211,462 | ||||||||
| Operating income (loss) | 16,843 | 10,580 | (5,036 | ) | 22,387 | |||||||||||
| Depreciation and amortization | 13,438 | 5,451 | 337 | 19,226 | ||||||||||||
|
13
Weeks Ended
|
Theatres |
Hotels/
|
Corporate
|
Total | ||||||||||||
| Revenues | $ | 95,009 | $ | 75,492 | $ | 98 | $ | 170,599 | ||||||||
| Operating income (loss) | 14,457 | 12,024 | (4,068 | ) | 22,413 | |||||||||||
| Depreciation and amortization | 9,867 | 4,616 | 86 | 14,569 | ||||||||||||
|
39
Weeks Ended
|
Theatres |
Hotels/
|
Corporate
|
Total | ||||||||||||
| Revenues | $ | 414,074 | $ | 199,604 | $ | 323 | $ | 614,001 | ||||||||
| Operating income (loss) | 57,656 | 11,443 | (14,287 | ) | 54,812 | |||||||||||
| Depreciation and amortization | 37,918 | 15,050 | 516 | 53,484 | ||||||||||||
|
39
Weeks Ended
|
Theatres |
Hotels/
|
Corporate
|
Total | ||||||||||||
| Revenues | $ | 333,397 | $ | 198,373 | $ | 318 | $ | 532,088 | ||||||||
| Operating income (loss) | 66,317 | 15,737 | (13,518 | ) | 68,536 | |||||||||||
| Depreciation and amortization | 28,751 | 13,890 | 258 | 42,899 | ||||||||||||
| 22 |
THE MARCUS CORPORATION
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Special Note Regarding Forward-Looking Statements
Certain matters discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Form 10-Q are “forward-looking statements” intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995, including the expectation that the Movie Tavern acquisition will be accretive to earnings, earnings per share and cash flows in the first 12 months following the closing of the transaction. These forward-looking statements may generally be identified as such because the context of such statements include words such as we “believe,” “anticipate,” “expect” or words of similar import. Similarly, statements that describe our future plans, objectives or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties which may cause results to differ materially from those expected, including, but not limited to, the following: (1) the availability, in terms of both quantity and audience appeal, of motion pictures for our theatre division, as well as other industry dynamics such as the maintenance of a suitable window between the date such motion pictures are released in theatres and the date they are released to other distribution channels; (2) the effects of adverse economic conditions in our markets, particularly with respect to our hotels and resorts division; (3) the effects on our occupancy and room rates of the relative industry supply of available rooms at comparable lodging facilities in our markets; (4) the effects of competitive conditions in our markets; (5) our ability to achieve expected benefits and performance from our strategic initiatives and acquisitions; (6) the effects of increasing depreciation expenses, reduced operating profits during major property renovations, impairment losses, and preopening and start-up costs due to the capital intensive nature of our businesses; (7) the effects of weather conditions, particularly during the winter in the Midwest and in our other markets; (8) our ability to identify properties to acquire, develop and/or manage and the continuing availability of funds for such development; (9) the adverse impact on business and consumer spending on travel, leisure and entertainment resulting from terrorist attacks in the United States or other incidents of violence in public venues such as hotels and movie theatres; (10) a disruption in our business and reputational and economic risks associated with civil securities claims brought by shareholders; and (11) our ability to timely and successfully integrate the Movie Tavern operations into our own circuit. Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are made only as of the date of this Form 10-Q and we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.
| 23 |
RESULTS OF OPERATIONS
General
We report our consolidated and individual segment results of operations on a 52- or 53-week fiscal year ending on the last Thursday in December. Fiscal 2019 is a 52-week year beginning on December 28, 2018 and ending on December 26, 2019. Fiscal 2018 was a 52-week year beginning December 29, 2017 and ended on December 27, 2018.
We divide our fiscal year into three 13-week quarters and a final quarter consisting of 13 or 14 weeks. The third quarter of fiscal 2019 consisted of the 13-week period beginning on June 28, 2019 and ended on September 26, 2019. The third quarter of fiscal 2018 consisted of the 13-week period beginning June 29, 2018 and ended on September 27, 2018. The first three quarters of fiscal 2019 consisted of the 39-week period beginning on December 28, 2018 and ended on September 26, 2019. The first three quarters of fiscal 2018 consisted of the 39-week period beginning December 29, 2017 and ended on September 27, 2018. Our primary operations are reported in the following two business segments: movie theatres and hotels and resorts.
Implementation of New Accounting Standards
During the first quarter of fiscal 2019, we adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) , intended to improve financial reporting related to leasing transactions. ASU No. 2016-02 requires a lessee to recognize a right-of-use (“ROU”) asset and a lease liability for most leases. The new guidance requires disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from the leases. Leases are now classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the consolidated statements of net earnings. ASU No. 2018-11, Leases (Topic 842): Targeted Improvements amended ASU No. 2016-02 and allows entities the option to initially apply Topic 842 at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We adopted the new accounting standard as of the first day of fiscal 2019 using the modified retrospective approach, which results in the cumulative effect of adoption recognized at the date of application, rather than as of the earliest period presented. As a result, no adjustment was made to prior period financial information and disclosures.
In conjunction with the adoption of the new standard, companies were able to elect several practical expedients to aid in the transition to Topic 842. We elected the package of practical expedients which permits us to forego reassessment of our prior conclusions related to lease identification, lease classification and initial direct costs. Topic 842 also provides practical expedients for an entity’s ongoing accounting. We made a policy election not to apply the lease recognition requirements for short-term leases. As a result, we did not recognize right-of-use assets or lease liabilities for short-term leases that qualify for the policy election (those with an initial term of 12 months or less which do not include a purchase or renewal option which is reasonably certain to be exercised), but instead will recognize these lease payments as lease costs on a straight-line basis over the lease term.
| 24 |
Adoption of this new standard resulted in a material impact related to the recognition of ROU assets and lease liabilities on the consolidated balance sheet for assets currently subject to operating leases. We recognized lease liabilities representing the present value of the remaining future minimum lease payments for all of our operating leases as of December 28, 2018 of $81.5 million. We recognized ROU assets for all assets subject to operating leases in an amount equal to the operating lease liabilities, adjusted for the balances of long-term prepaid rent, favorable lease intangible assets, deferred lease expense, unfavorable lease liabilities and deferred lease incentive liabilities as of December 28, 2018.
The adoption of the new standard did not have a material effect on our consolidated statements of net earnings.
Overall Results
The following table sets forth revenues, operating income, other income (expense), net earnings and net earnings per common share for the third quarter and first three quarters of fiscal 2019 and fiscal 2018 (in millions, except for per share and variance percentage data):
| Third Quarter | First Three Quarters | |||||||||||||||||||||||||||||||
| Variance | Variance | |||||||||||||||||||||||||||||||
| F2019 | F2018 | Amt. | Pct. | F2019 | F2018 | Amt. | Pct. | |||||||||||||||||||||||||
| Revenues | $ | 211.5 | $ | 170.6 | $ | 40.9 | 24.0 | % | $ | 614.0 | $ | 532.1 | $ | 81.9 | 15.4 | % | ||||||||||||||||
| Operating income | 22.4 | 22.4 | - | - | % | 54.8 | 68.5 | (13.7 | ) | -20.0 | % | |||||||||||||||||||||
| Other income (expense) | (3.3 | ) | (3.6 | ) | 0.3 | 7.0 | % | (10.1 | ) | (11.5 | ) | 1.4 | 12.6 | % | ||||||||||||||||||
|
Net earnings (loss)
attributable to noncontrolling interests |
(0.1 | ) | - | (0.1 | ) | -637.5 | % | - | 0.1 | (0.1 | ) | -34.3 | % | |||||||||||||||||||
|
Net earnings attributable
to The Marcus Corp. |
$ | 14.3 | $ | 16.2 | $ | (1.9 | ) | -12.0 | % | $ | 34.2 | $ | 44.7 | $ | (10.5 | ) | -23.4 | % | ||||||||||||||
|
Net earnings per
common share – diluted: |
$ | 0.46 | $ | 0.56 | $ | (0.10 | ) | -17.9 | % | $ | 1.10 | $ | 1.56 | $ | (0.46 | ) | -29.5 | % | ||||||||||||||
Revenues increased during the third quarter and first three quarters of fiscal 2019 compared to the third quarter and first three quarters of fiscal 2018 due primarily to increased revenues from our theatre division. Operating income (earnings before other income/expense and income taxes) during the third quarter of fiscal 2019 was even with operating income during the third quarter of fiscal 2018, as an increase in theatre division operating income was offset by a decrease in hotels and resorts division operating income and an increase in corporate operating losses. Operating income decreased during the first three quarters of fiscal 2019 compared to the first three quarters of fiscal 2018 due to a decrease in both theatre division and hotels and resorts division operating income and an increase in corporate operating losses. Both of our operating divisions were negatively impacted by nonrecurring expenses during the first three quarters of fiscal 2019. Net earnings attributable to The Marcus Corporation decreased during the third quarter of fiscal 2019 compared to the third quarter of fiscal 2018 due primarily to increased income taxes. Net earnings attributable to The Marcus Corporation decreased during the first three quarters of fiscal 2019 compared to the first three quarters of fiscal 2018 due to decreased operating income, partially offset by increased investment income and decreased interest expense and income taxes.
| 25 |
On February 1, 2019, we acquired the assets of Movie Tavern ® , a New Orleans-based industry leading circuit known for its in-theatre dining concept featuring chef-driven menus, premium quality food and drink and luxury seating. Now branded Movie Tavern by Marcus, the acquired circuit consisted of 208 screens at 22 locations in nine states – Arkansas, Colorado, Georgia, Kentucky, Louisiana, New York, Pennsylvania, Texas and Virginia. The purchase price consisted of $30 million in cash, subject to certain adjustments, and 2,450,000 shares of our common stock (157,056 of which have been placed in escrow to secure certain post-closing indemnification obligations of the seller under the asset purchase agreement), for a total purchase price of approximately $139 million, based upon our closing share price on January 31, 2019. We financed the cash portion of the purchase price from existing sources of cash. The share portion of the purchase price was issued out of treasury stock. We anticipate that the acquired Movie Tavern business will be accretive to earnings, earnings per share and cash flow in the first 12 months following the closing of the transaction.
The acquisition increased our total number of screens by 23%, resulting in increased revenues from our theatre division during the third quarter and first three quarters of fiscal 2019 compared to the prior year periods. O perating income from our theatre division increased during the third quarter of fiscal 2019 compared to the third quarter of fiscal 2018 due primarily to an increase in the average ticket price and concession sales per person from our comparable theatres and an increase in other revenues. O perating income from our theatre division during the fiscal 2019 first three quarters was unfavorably impacted by reduced attendance at our comparable theatres due to a weaker slate of movies during the first three quarters of fiscal 2019 compared to the first three quarters of fiscal 2018, partially offset by increased concession sales per person due to our expanded food and beverage offerings as well as an increase in our average ticket price and other revenues. Acquisition and preopening expenses related to the Movie Tavern acquisition negatively impacted our operating income during the first three quarters of fiscal 2019 by approximately $2.0 million, or $0.05 per diluted common share.
We closed the InterContinental Milwaukee hotel in early January 2019 and began a substantial renovation project that converted this hotel into an experiential arts hotel named Saint Kate ® – The Arts Hotel (the “Saint Kate”). The newly renovated hotel reopened during the first week of June 2019 (although a portion of the rooms and food and beverage outlets didn’t fully open until later in the month). Revenues from our hotels and resorts division during the third quarter of fiscal 2019 compared to the prior year period were unfavorably impacted by decreased cost reimbursements and the negative impact of comparing a newly opened independent hotel (i.e. the Saint Kate) to a stabilized branded hotel (i.e. the InterContinental Milwaukee) last year, partially offset by increased room revenues and food and beverage revenues from our other seven owned hotels. Revenues from our hotels and resorts division during the first three quarters of fiscal 2019 compared to the prior year period were unfavorably impacted by the closing of the renovated hotel for nearly six months and the impact of a major renovation at our Hilton Madison hotel during the first half of the year, offset by increased room revenues and food and beverage revenues from our other six owned hotels and increased cost reimbursements from managed hotels during the first three quarters of fiscal 2019 compared to the first three quarters of fiscal 2018. Decreased operating income from our hotels and resorts division during the third quarter and first three quarters of fiscal 2019 compared to the third quarter and first three quarters of fiscal 2018 was entirely due to preopening expenses and initial start-up losses related to the Saint Kate hotel closure and conversion. These costs totaled approximately $1.6 million, or $0.04 per diluted common share, and $5.5 million, or $0.13 per diluted common share, respectively, during the third quarter and first three quarters of fiscal 2019.
| 26 |
Operating losses from our corporate items, which include amounts not allocable to the business segments, increased during the third quarter and first three quarters of fiscal 2019 compared to the third quarter and first three quarters of fiscal 2018 due in part to increased long-term incentive compensation expenses. In addition, our fiscal 2019 third quarter operating loss from our corporate items was negatively impacted by non-recurring items totaling approximately $550,000 related to a depreciation adjustment and a payroll tax audit settlement.
We recognized investment income of $187,000 and $835,000, respectively, during the third quarter and first three quarters of fiscal 2019 compared to investment income of $442,000 and $433,000 during the third quarter and first three quarters of fiscal 2018. Investment income decreased during the third quarter of fiscal 2019 and increased during the first three quarters of fiscal 2019 compared to the same periods last year due to changes in the value of marketable securities.
Our interest expense totaled $2.8 million for the third quarter of fiscal 2019 compared to $3.2 million for the third quarter of fiscal 2018, a decrease of approximately $400,000, or 11.7%. Our interest expense totaled $9.0 million for the first three quarters of fiscal 2019 compared to $10.0 million for the first three quarters of fiscal 2018, a decrease of approximately $1.0 million, or 10.4%. The decrease in interest expense during the third quarter and first three quarters of fiscal 2019 was due to reduced borrowing levels compared to the third quarter and first three quarters of fiscal 2018. Changes in our borrowing levels due to variations in our operating results, capital expenditures, share repurchases and asset sale proceeds, among other items, may impact our actual reported interest expense in future periods, as would changes in short-term interest rates and changes in the mix between fixed rate debt and variable rate debt in our debt portfolio.
We did not have any significant variations in other expenses, losses on disposition of property, equipment and other assets or net equity earnings (losses) from unconsolidated joint ventures during the third quarter and first three quarters of fiscal 2019 compared to the third quarter and first three quarters of fiscal 2018. The timing of periodic sales and disposals of our property and equipment varies from quarter to quarter, resulting in variations in our reported gains or losses on disposition of property and equipment.
We reported income tax expense for the third quarter and first three quarters of fiscal 2019 of $4.8 million and $10.5 million, respectively, compared to $2.6 million and $12.3 million, respectively, during the third quarter and first three quarters of fiscal 2018. The increase in income tax expense during the third quarter of fiscal 2019 was due in part to the fact that last year we benefitted from reductions in deferred tax liabilities during the third quarter of fiscal 2018 related to tax accounting method changes we made during the quarter. The decrease in income tax expense during the first three quarters of fiscal 2019 was the result of the reduced earnings before income taxes, partially offset by an increased effective income tax rate. Our fiscal 2019 first three quarters effective income tax rate, after adjusting for earnings from noncontrolling interests that are not tax-effected because the entity involved is a tax pass-through entity, was 23.4% and benefitted from excess tax benefits on share-based compensation and nonrecurring adjustments specific to the first three quarters, compared to our fiscal 2018 first three quarters effective income tax rate of 21.5%, which benefited from the reduction in deferred income tax liabilities described above. We continue to anticipate that our effective income tax rate for the remaining quarter of fiscal 2019 will be in the 24-26% range, depending upon the amount of excess tax benefits on share-based compensation that we recognize and excluding any potential changes in federal and state income tax rates. Our actual fiscal 2019 effective income tax rate may be different from our estimated quarterly rates depending upon actual facts and circumstances. Comparisons of income taxes during our fourth quarter of fiscal 2019 will be negatively impacted by the fact that our fiscal 2018 fourth quarter income tax expense benefitted from additional $1.2 million of reductions in deferred income tax liabilities related to tax accounting method changes completed during the quarter.
| 27 |
The operating results of one majority-owned hotel, The Skirvin Hilton, are included in the hotels and resorts division revenue and operating income during the fiscal 2019 and fiscal 2018 periods, and the after-tax net earnings or loss attributable to noncontrolling interests is deducted from or added to net earnings on the consolidated statements of earnings. We reported net earnings attributable to noncontrolling interests of $46,000 and $70,000, respectively, during the first three quarters of fiscal 2019 and fiscal 2018.
Theatres
The following table sets forth revenues, operating income and operating margin for our theatre division for the third quarter and first three quarters of fiscal 2019 and fiscal 2018 (in millions, except for variance percentage and operating margin):
| Third Quarter | First Three Quarters | |||||||||||||||||||||||||||||||
| Variance | Variance | |||||||||||||||||||||||||||||||
| F2019 | F2018 | Amt. | Pct. | F2019 | F2018 | Amt. | Pct. | |||||||||||||||||||||||||
| Revenues | $ | 136.8 | $ | 95.0 | $ | 41.8 | 44.0 | % | $ | 414.1 | $ | 333.4 | $ | 80.7 | 24.2 | % | ||||||||||||||||
| Operating income | 16.8 | 14.5 | 2.3 | 16.5 | % | 57.7 | 66.3 | (8.6 | ) | -13.1 | % | |||||||||||||||||||||
|
Operating margin
(% of revenues) |
12.3 | % | 15.2 | % | 13.9 | % | 19.9 | % | ||||||||||||||||||||||||
Our theatre division revenues increased during the third quarter and first three quarters of fiscal 2019 compared to the third quarter and first three quarters of fiscal 2018 due to the newly acquired Movie Tavern theatres, increased other revenues and increases in our average ticket price and average concession revenues per person at our comparable theatres, partially offset by the impact of decreased attendance due to a weaker film slate during the first three quarters of fiscal 2019.
Our theatre division operating income increased during the third quarter of fiscal 2019 compared to the third quarter of fiscal 2018 due primarily to the impact of the increased revenues described above. Our theatre division operating margin decreased during the third quarter of fiscal 2019 compared to the third quarter of fiscal 2018 due primarily to the inclusion of Movie Tavern operating results. Our Movie Tavern theatres will have a lower operating margin than our legacy theatres because all 22 acquired theatres are leased rather than owned (rent expense is generally significantly higher than depreciation expense). In addition, the fact that a larger portion of Movie Tavern revenues are derived from the sale of in-theatre food and beverage will also contribute to lower operating margins, as food and labor costs are generally higher for those items compared to traditional concession items. Our fiscal 2019 third quarter operating margin was also negatively impacted by higher film costs compared to the prior year period due to a change in film mix (discussed below).
| 28 |
Our theatre division operating income and operating margin decreased during the first three quarters of fiscal 2019 compared to the first three quarters of fiscal 2018 due to reduced attendance and revenues at comparable theatres during the first three quarters of fiscal 2019 compared to the first three quarters of fiscal 2018, driven primarily by a weaker film slate during the first quarter of fiscal 2019. Due to the significant investments we have made in our theatres over the last five years, we have higher fixed costs, such as rent, depreciation and amortization, and higher labor expenses, due in part to our increased number of new food and beverage outlets in our theatres. As a result, it is more difficult to remove costs when attendance declines as it did in the first quarter of fiscal 2019, and operating margins are more likely to decline when that happens. Conversely, during periods with a strong film slate, operating margins potentially increase, as that same “leverage” should benefit our theatre division. Our theatre division operating margin also declined during the first three quarters of fiscal 2019 compared to the first three quarters of fiscal 2018 due to the impact of the Movie Tavern theatres described above.
As described above, our operating income and operating margin were also negatively impacted during the first three quarters of fiscal 2019 by approximately $2.0 million of acquisition and preopening expenses related to the Movie Tavern acquisition (approximately $60,000 of which was incurred during the third quarter of fiscal 2019).
The following table provides a further breakdown of the components of revenues for the theatre division for the third quarter and first three quarters of fiscal 2019 and fiscal 2018 (in millions, except for variance percentage):
| Third Quarter | First Three Quarters | |||||||||||||||||||||||||||||||
| Variance | Variance | |||||||||||||||||||||||||||||||
| F2019 | F2018 | Amt. | Pct. | F2019 | F2018 | Amt. | Pct. | |||||||||||||||||||||||||
| Admission revenues | $ | 69.8 | $ | 52.4 | $ | 17.4 | 33.1 | % | $ | 211.8 | $ | 185.0 | $ | 26.8 | 14.5 | % | ||||||||||||||||
| Concession revenues | 57.0 | 35.5 | 21.5 | 60.8 | % | 172.1 | 123.7 | 48.4 | 39.2 | % | ||||||||||||||||||||||
| Other revenues | 9.8 | 6.9 | 2.9 | 41.9 | % | 29.5 | 23.6 | 5.9 | 25.2 | % | ||||||||||||||||||||||
| 136.6 | 94.8 | 41.8 | 44.1 | % | 413.4 | 332.3 | 81.1 | 24.4 | % | |||||||||||||||||||||||
| Cost reimbursements | 0.2 | 0.2 | - | -0.5 | % | 0.7 | 1.1 | (0.4 | ) | -40.4 | % | |||||||||||||||||||||
| Total revenues | $ | 136.8 | $ | 95.0 | $ | 41.8 | 44.0 | % | $ | 414.1 | $ | 333.4 | $ | 80.7 | 24.2 | % | ||||||||||||||||
As described above, on February 1, 2019, we acquired 22 theatres and 208 screens in conjunction with our Movie Tavern acquisition, contributing a large portion of the increase to our admission and concession revenues during the third quarter of fiscal 2019 compared to the third quarter of fiscal 2018. The Movie Tavern theatres were responsible for the entire increase to our admission and concession revenues during the first three quarters of fiscal 2019 compared to the first three quarters of fiscal 2018. Excluding the Movie Tavern theatres, admission revenues and concession revenues for comparable theatres increased 6.3% and 9.4%, respectively, during the third quarter of fiscal 2019 compared to the third quarter of fiscal 2018. Excluding the Movie Tavern theatres, admission revenues and concession revenues for comparable theatres decreased 5.7% and 1.7%, respectively, during the first three quarters of fiscal 2019 compared to the first three quarters of fiscal 2018.
| 29 |
According to data received from Rentrak (a national box office reporting service for the theatre industry) and compiled by us to evaluate our fiscal 2019 third quarter and first three quarters results, United States box office receipts (excluding new builds for the top 10 theatre circuits) increased 3.0% during our fiscal 2019 third quarter and decreased 6.2% during our first three quarters of fiscal 2019. As a result, our increase in admission revenues for our comparable theatres outperformed the industry by 3.3 percentage points during the third quarter of fiscal 2019 and our decrease in admission revenues for our comparable theatres outperformed the industry by 0.5 percentage points during the first three quarters of fiscal 2019. Our goal is to continue our past pattern of outperforming the industry, but with the majority of our renovations now completed for our legacy circuit, our ability to do so in any given quarter will likely be partially dependent upon film mix, weather, the competitive landscape in our markets and the impact of local sporting events. A favorable film mix that included family-oriented films and a major horror film (both genres have historically performed very well in our legacy Midwestern markets) likely contributed to our third quarter outperformance. During the first quarter of fiscal 2019, we believe colder and snowier weather in the Midwest negatively impacted the performance of our comparable theatres compared to the U.S. averages, negatively impacting our first three quarters comparisons. As discussed further in our fiscal 2019 first quarter Form 10-Q, we also believe film mix negatively impacted our relative performance versus the nation during the fiscal 2019 first quarter. As a result, our year-to-date performance versus the industry, while positive, is less robust than our third quarter outperformance.
Our average ticket price increased 9.2% and 5.2%, respectively, during the third quarter and first three quarters of fiscal 2019 compared to the third quarter and first three quarters of fiscal 2018, due in part to the addition of Movie Tavern theatres in certain markets where competitive pricing is slightly higher than in our legacy Midwestern markets. Excluding Movie Tavern, our average ticket price at comparable theatres increased 6.2% and 2.8%, respectively, during the third quarter and first three quarters of fiscal 2019 compared to the third quarter and first three quarters of fiscal 2018. At the beginning of the second quarter of fiscal 2019, we implemented selected ticket price increases at certain locations in order to reflect the competitive market in which those theatres operate. In addition, we enacted a modest price increase for our proprietary premium large format (“PLF”) screens and converted our admission ticket pricing to a sales tax additive (or “tax-on-top”) model, consistent with the majority of our competitors. These modest ticket price increases likely had a favorable impact on our average ticket price during the fiscal 2019 periods. The fact that our top performing films during the fiscal 2019 periods performed particularly well in our PLF screens (with a corresponding price premium), and that we have more PLF screens this year than we did the prior year also contributed to our increased average ticket price during the third quarter and first three quarters of fiscal 2019 compared to the prior year periods.
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Conversely, we believe that a change in film product mix had a small unfavorable impact on our average ticket price during the third quarter and first three quarters of fiscal 2019 compared to the third quarter and first three quarters of fiscal 2018. Two of our top three performing films during the third quarter and first three quarters of fiscal 2019, The Lion King and Toy Story 4 were films that generally appeal to a younger audience (resulting in a higher percentage of lower-priced children’s tickets sold), negatively impacting our average ticket price during the third quarter and first three quarters of fiscal 2019 compared to the prior year, when only one of our top five films ( Incredibles 2 ) was aimed at a younger audience. A similar film mix change in our fiscal 2019 first quarter (more films aimed at a younger audience than the prior year) also negatively impacted our average ticket price comparison for the first three quarters of fiscal 2019 compared to the first three quarters of fiscal 2018. The overall net increase in average ticket price favorably impacted our admission revenues of our comparable theatres by approximately $3.2 million and $4.7 million, respectively, during the third quarter and first three quarters of fiscal 2019 compared to the third quarter and first three quarters of fiscal 2018.
Our concession revenues increased during the third quarter and first three quarters of fiscal 2019 compared to the third quarter and first three quarters of fiscal 2018 due to the addition of new Movie Tavern theatres and an increase in our average concession revenues per person, partially offset by decreased attendance at comparable theatres during the first three quarters of fiscal 2019. Our average concession revenues per person increased by 31.8% and 28.0%, respectively, during the third quarter and first three quarters of fiscal 2019 compared to the third quarter and first three quarters of fiscal 2018, due in large part to the addition of the Movie Tavern theatres. Excluding Movie Tavern, our average concession revenues per person at comparable theatres increased 9.3% and 7.3%, respectively, during the third quarter and first three quarters of fiscal 2019 compared to the third quarter and first three quarters of fiscal 2018. The increase in our average concession revenues per person contributed approximately $3.2 million and $8.0 million to our comparable theatre concession revenues during the third quarter and first three quarters of fiscal 2019 compared to the third quarter and first three quarters of fiscal 2018.
A change in concession product mix, including increased sales of non-traditional food and beverage items from our increased number of Take Five Lounge S M , Zaffiro’s® Express , Reel Sizzle ® and in-theatre dining outlets were the primary reasons for our increased average concession sales per person during the fiscal 2019 periods. Conversely, we believe that the above-described change in film product mix during the third quarter and first three quarters of fiscal 2019 may have slightly reduced the growth of our overall average concession sales per person during the fiscal 2019 periods, as family-oriented and animated films such as the films in our top three films during the third quarter of fiscal 2019 identified above tend not to contribute to sales of non-traditional food and beverage items as much as adult-oriented films. We expect the recently-acquired Movie Tavern theatres will continue to have a significant (20% or more) favorable impact on our overall average concession sales per person, as the average concession sales per person at these dine-in theatres are, on average, more than double the average concession sales per person we generally achieve at our theatres that do not offer a dine-in option.
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Other revenues increased by approximately $2.9 million and $5.9 million, respectively, during the third quarter and first three quarters of fiscal 2019 compared to the third quarter and first three quarters of fiscal 2018. These increases were primarily due to internet surcharge ticketing fees and preshow advertising income from our new Movie Tavern locations.
Total theatre attendance increased 22.0% and 8.7%, respectively, during the third quarter and first three quarters of fiscal 2019 compared to the third quarter and first three quarters of fiscal 2018. Excluding Movie Tavern, comparable theatre attendance increased 0.2% during the third quarter of fiscal 2019, and decreased 8.2% during the first three quarters of fiscal 2019. The decrease in attendance at comparable theatres during the first three quarters of fiscal 2019 was due primarily to a weaker film slate during the first half of fiscal 2019. Attendance and admission revenues increased during July and September 2019 and decreased during August 2019 compared to the prior year periods.
Our highest grossing films during the fiscal 2019 third quarter included The Lion King , Spider-Man: Far From Home , Toy Story 4 , It Chapter Two and Fast and Furious Presents: Hobbs & Shaw . The film slate during the third quarter of fiscal 2019 was weighted significantly more towards blockbuster movies compared to the prior year, as evidenced by the fact that our top five films during our fiscal 2019 third quarter accounted for 57% of our total box office results, compared to 38% for the top five films during the third quarter of fiscal 2018, both expressed as a percentage of the total admission revenues for the period. This increased reliance on blockbuster films during the fiscal 2019 third quarter had the effect of increasing our film rental costs during the period, as generally the better a particular film performs, the greater the film rental cost tends to be as a percentage of box office receipts.
Movie Tavern performance to date has generally met our expectations, after adjusting for the weaker film slate in 2019 thus far, and the integration is progressing on schedule. We introduced our popular $5 Tuesday movie program at these locations, as well as other promotional and marketing initiatives, immediately following our acquisition. During the second quarter of fiscal 2019, we introduced our Magical Movie Rewards ® loyalty program at all Movie Tavern locations. Data available to us for prior year performance of the Movie Tavern theatres indicates that these theatres have outperformed the national box office on a relative basis by an increasing percentage during each of the first, second and third quarters of fiscal 2019 compared to the same periods of fiscal 2018 – an indication that our programs are having an impact on their performance.
Film product performance for the fourth quarter of fiscal 2019 has started off slightly worse than the same period of fiscal 2018. Top performing films during this period-to-date included Joker , The Addams Family , Maleficent: Mistress of Evil and Terminator: Dark Fate . Other films scheduled to be released during the fiscal 2019 fourth quarter that may generate substantial box office interest include Doctor Sleep , Ford V. Ferrari , Frozen II , A Beautiful Day in the Neighborhood , Jumanji: The Next Level and Cats . The most anticipated film during the fourth quarter of fiscal 2019 is Star Wars: The Rise of Skywalker , which will mark the end of the most recent trilogy. Revenues for the theatre business and the motion picture industry in general are heavily dependent on the general audience appeal of available films, together with studio marketing, advertising and support campaigns and the maintenance of the current “windows” between the date a film is released in theatres and the date a motion picture is released to other channels, including video on-demand and DVD. These are factors over which we have no control.
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Comparisons of theatre division operating income during the fourth quarter of fiscal 2019 to the prior year will benefit from the fact that we incurred approximately $1.7 million in acquisition and preopening expenses during the fourth quarter of fiscal 2018 related to the Movie Tavern acquisition.
We ended the third quarter of fiscal 2019 with a total of 1,092 company-owned screens in 89 theatres and 6 managed screens in one theatre, compared to 884 company-owned screens in 67 theatres and 6 managed screens in one theatre at the end of the third quarter of fiscal 2018. In addition to the screens added due to the Movie Tavern acquisition, we opened one new Ultra Screen DLX ® at an existing Marcus Wehrenberg theatre during the first quarter of fiscal 2019. During our fiscal 2019 second quarter, we completed the addition of DreamLounger SM recliner seating to three Movie Tavern theatres and early in our fiscal 2019 fourth quarter, we completed the addition of DreamLoungers to another Movie Tavern theatre and another Marcus Wehrenberg theatre. We converted 11 Movie Tavern auditoriums to our Super Screen DLX ® concept during the second quarter of fiscal 2019 and converted 9 Movie Tavern auditoriums and one Marcus Wehrenberg auditorium to our Super Screen DLX concept during the third quarter of fiscal 2019. We expect to convert three additional auditoriums to our proprietary PLF concepts during the fourth quarter of fiscal 2019, including two Movie Tavern auditoriums. We also opened a new eight-screen Movie Tavern by Marcus theatre in Brookfield, Wisconsin early in our fiscal 2019 fourth quarter which includes DreamLounger recliner seating and one Super Screen DLX auditorium.
Hotels and Resorts
The following table sets forth revenues, operating income and operating margin for our hotels and resorts division for the third quarter and first three quarters of fiscal 2019 and fiscal 2018 (in millions, except for variance percentage and operating margin):
| Third Quarter | First Three Quarters | |||||||||||||||||||||||||||||||
| Variance | Variance | |||||||||||||||||||||||||||||||
| F2019 | F2018 | Amt. | Pct. | F2019 | F2018 | Amt. | Pct. | |||||||||||||||||||||||||
| Revenues | $ | 74.6 | $ | 75.5 | $ | (0.9 | ) | -1.2 | % | $ | 199.6 | $ | 198.4 | $ | 1.2 | 0.6 | % | |||||||||||||||
| Operating income | 10.6 | 12.0 | (1.4 | ) | -12.0 | % | 11.4 | 15.7 | (4.3 | ) | -27.3 | % | ||||||||||||||||||||
|
Operating margin
(% of revenues) |
14.2 | % | 15.9 | % | 5.7 | % | 7.9 | % | ||||||||||||||||||||||||
The following table provides a further breakdown of the components of revenues for the hotels and resorts division for the third quarter and first three quarters of fiscal 2019 and fiscal 2018 (in millions, except for variance percentage):
| Third Quarter | First Three Quarters | |||||||||||||||||||||||||||||||
| Variance | Variance | |||||||||||||||||||||||||||||||
| F2019 | F2018 | Amt. | Pct. | F2019 | F2018 | Amt. | Pct. | |||||||||||||||||||||||||
| Room revenues | $ | 34.2 | $ | 34.5 | $ | (0.3 | ) | -0.8 | % | $ | 81.3 | $ | 84.2 | $ | (2.9 | ) | -3.5 | % | ||||||||||||||
| Food/beverage revenues | 20.2 | 19.3 | 0.9 | 4.3 | % | 54.6 | 54.0 | 0.6 | 1.1 | % | ||||||||||||||||||||||
| Other revenues | 13.0 | 12.8 | 0.2 | 1.4 | % | 36.4 | 35.5 | 0.9 | 2.6 | % | ||||||||||||||||||||||
| 67.4 | 66.6 | 0.8 | 1.1 | % | 172.3 | 173.7 | (1.4 | ) | -0.8 | % | ||||||||||||||||||||||
| Cost reimbursements | 7.2 | 8.9 | (1.7 | ) | -18.7 | % | 27.3 | 24.7 | 2.6 | 10.7 | % | |||||||||||||||||||||
| Total revenues | $ | 74.6 | $ | 75.5 | $ | (0.9 | ) | -1.2 | % | $ | 199.6 | $ | 198.4 | $ | 1.2 | 0.6 | % | |||||||||||||||
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Division revenues decreased during the third quarter of fiscal 2019 compared to the third quarter of fiscal 2018 due entirely to variations in cost reimbursements from managed properties. Division revenues increased during the first three quarters of fiscal 2019 compared to the first three quarters of fiscal 2018 due in part to an increase in cost reimbursements, partially offset by the fact that the former InterContinental Milwaukee hotel was closed during the majority of the first six months of fiscal 2019 as it underwent a major renovation that converted this hotel into the Saint Kate. The newly renovated hotel reopened during the first week of June 2019 (although a portion of the rooms and food and beverage outlets didn’t fully open until later in the month). Excluding this hotel and cost reimbursements from managed properties, total revenues during the third quarter and first three quarters of fiscal 2019 increased by 1.7% and 2.7%, respectively, compared to the third quarter and first three quarters of fiscal 2018, due primarily to increased room revenues and food and beverage revenues at our seven other owned hotels and resorts.
Room revenues decreased during the third quarter and first three quarters of fiscal 2019 compared to the third quarter and first three quarters of fiscal 2018 due entirely to the closing of the InterContinental hotel and its reopening as a new independent hotel, partially offset by increased revenue per available room, or RevPAR, at our remaining seven company-owned hotels. Excluding the Saint Kate, room revenues during the third quarter and first three quarters of fiscal 2019 increased by 0.7% and 1.1%, respectively, compared to the third quarter and first three quarters of fiscal 2018, despite the fact that our Hilton Madison hotel was undergoing a major renovation during the first half of fiscal 2019 that negatively impacted our overall room revenues. Food and beverage revenues increased during the third quarter and first three quarters of fiscal 2019 compared to the third quarter and first three quarters of fiscal 2018 despite having a closed hotel for most of the first half of fiscal 2019. Excluding the Saint Kate, food and beverage revenues during the third quarter and first three quarters of fiscal 2019 increased by 3.0% and 4.0%, respectively, compared to the third quarter and first three quarters of fiscal 2018, due primarily to increased banquet and catering revenues, and once again despite the negative impact from our Hilton Madison hotel while it was under renovation. Other revenues increased during the first three quarters of fiscal 2019 compared to the first three quarters of fiscal 2018 due in part to increased management fees and revenues from our laundry facility. Cost reimbursements also increased during the first three quarters of fiscal 2019 compared to the first three quarters of fiscal 2018 due to an increase in the number of management contracts in this division.
Our hotels and resorts division operating income decreased and operating margin declined during the third quarter and first three quarters of fiscal 2019 compared to the third quarter and first three quarters of fiscal 2018 due entirely to $1.6 million and $5.5 million, respectively, of preopening expenses and initial startup losses related to the closing and conversion of the InterContinental Milwaukee hotel into the Saint Kate. We also had approximately $500,000 of additional depreciation and amortization attributable to this hotel during the third quarter and first three quarters of fiscal 2019 due to the new investment made at this property. Excluding this hotel, our fiscal 2019 third quarter and first three quarters operating income would have improved by approximately $700,000, or 6%, during the third quarter of fiscal 2019 and $1.8 million, or 11%, during the first three quarters of fiscal 2019, both compared to the prior year periods. Again excluding this hotel, our operating margin was 18.1% and 9.9%, respectively, during the third quarter and first three quarters of fiscal 2019 compared to 17.2% and 8.8%, respectively, during the third quarter and first three quarters of fiscal 2018. This same-hotel improvement can be attributed to increased revenues and a continued focus on cost controls and operating efficiency and was achieved despite the fact that the renovation at the Hilton Madison hotel negatively impacted our operating results during the fiscal 2019 periods.
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Initial guest and community reaction to the new Saint Kate hotel has been very favorable. As an independent hotel, we expect that it will take a period of time for this hotel to ramp up, particularly with group business, and as a result, it is likely that our fiscal 2019 fourth quarter comparisons of Saint Kate to a stabilized branded hotel during the prior year will once again be unfavorable. We believe that over time, the Saint Kate will achieve a higher average daily room rate than the hotel it replaced, ultimately outperforming the previous hotel.
The following table sets forth certain operating statistics for the third quarter and first three quarters of fiscal 2019 and fiscal 2018, including our average occupancy percentage (number of occupied rooms as a percentage of available rooms), our average daily room rate, or ADR, and our total revenue per available room, or RevPAR, for company-owned properties:
| Third Quarter (1) | First Three Quarters (1) | |||||||||||||||||||||||||||||||
| Variance | Variance | |||||||||||||||||||||||||||||||
| F2019 | F2018 | Amt. | Pct. | F2019 | F2018 | Amt. | Pct. | |||||||||||||||||||||||||
| Occupancy pct. | 83.0 | % | 83.5 | % | -0.5 | pts | -0.6 | % | 75.2 | % | 75.7 | % | -0.5 | pts | -0.6 | % | ||||||||||||||||
| ADR | $ | 172.12 | $ | 170.06 | $ | 2.06 | 1.2 | % | $ | 155.91 | $ | 153.47 | $ | 2.44 | 1.6 | % | ||||||||||||||||
| RevPAR | $ | 142.84 | $ | 142.03 | $ | 0.81 | 0.6 | % | $ | 117.19 | $ | 116.09 | $ | 1.10 | 0.9 | % | ||||||||||||||||
| (1) | These operating statistics represent averages of our seven distinct comparable company-owned hotels and resorts, branded and unbranded, in different geographic markets with a wide range of individual hotel performance. The statistics are not necessarily representative of any particular hotel or resort. The statistics exclude the former InterContinental Milwaukee hotel (now the Saint Kate), as this hotel was closed for the majority of the first half of fiscal 2019 and was not comparable to the prior year stabilized branded hotel during the third quarter of fiscal 2019. |
RevPAR increased at the three largest of our seven comparable company-owned properties during both the third quarter and first three quarters of fiscal 2019 compared to the third quarter and first three quarters of fiscal 2018. As noted above, our Hilton Madison hotel was undergoing a major renovation during the first half of fiscal 2019, negatively impacting our overall operating statistics. Excluding the Hilton Madison, our remaining six comparable company-owned hotels experienced a RevPAR increase of 2.8% during the first three quarters of fiscal 2019 compared to the prior year period. According to data received from Smith Travel Research and compiled by us in order to evaluate our fiscal 2019 third quarter and first three quarters results, comparable “upper upscale” hotels throughout the United States experienced an increase in RevPAR of 1.4% and 1.0%, respectively, during our fiscal 2019 third quarter and first three quarters compared to the same periods last year. Data received from Smith Travel Research for our various “competitive sets” – hotels identified in our specific markets that we deem to be competitors to our hotels – indicates that these hotels experienced an increase in RevPAR of 3.2% and 3.6%, respectively, during our third quarter and first three quarters of fiscal 2019 compared to the fiscal 2018 comparable periods.
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An increase in group business at several of our hotels during the fiscal 2019 third quarter compared to the prior year period contributed to our increased RevPAR performance for our comparable company-owned hotels. The increase in group business also accounted for the majority of the increase in banquet and catering revenues described above.
Our comparable hotel RevPAR growth of 0.6% and 0.9% during the third quarter and first three quarters of fiscal 2019 compared to the third quarter and first three quarters of fiscal 2018 was entirely the result of an increase in our comparable ADR. Four of our seven comparable company-owned hotels (including the Hilton Madison, but excluding the Saint Kate) reported increased ADR during the third quarter and first three quarters of fiscal 2019 compared to the third quarter and first three quarters of fiscal 2018.
Looking to future periods, although our company-owned hotels experienced a slight decrease in group bookings during the third quarter of fiscal 2019 compared to the same period last year, our group room revenue bookings for future periods in fiscal 2019 and fiscal 2020 - commonly referred to in the hotels and resorts industry as “group pace” - is running ahead of our group room revenue bookings for future periods last year at this time. Banquet and catering revenue pace for future periods in fiscal 2019 and fiscal 2020 is also currently ahead of where we were last year at this same time.
Nationally, the pace of RevPAR growth has been declining over the past several years and many published reports by those who closely follow the hotel industry suggest that the United States lodging industry will experience very limited overall growth in RevPAR in calendar 2019 and calendar 2020, with some markets possibly experiencing small declines. Whether the relatively positive trends in the lodging industry over the last several years will continue depends in large part on the economic environment, as hotel revenues have historically tracked very closely with traditional macroeconomic statistics such as the Gross Domestic Product. We also continue to monitor hotel supply in our markets, as increased supply without a corresponding increase in demand may have a negative impact on our results. Several of our markets, including Oklahoma City, Oklahoma, Chicago, Illinois and Milwaukee, Wisconsin, have experienced an increase in room supply over the past several years that may be an impediment to any substantial increases in ADR in the near term. We believe that our hotels are less impacted by additional room supply than other hotels in the markets in which we compete, particularly in the Milwaukee market, due in large part to recent renovations that we have made to our hotels. Milwaukee was recently awarded the Democratic National Convention in the summer of 2020, which we believe will not only favorably impact that future year’s results (group pace is up significantly for 2020), but has the potential to have a positive long-term impact on the overall market. Overall, we generally expect our revenue trends to track or exceed the overall industry trends, particularly in our respective markets.
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Our hotels and resorts division operating results during the first three quarters of fiscal 2019 benefited from three management contracts added during fiscal 2018 – the Murieta Inn and Spa in Rancho Murieta, California (added January 2018), along with the DoubleTree by Hilton Hotel El Paso Downtown (added April 2018) and Courtyard by Marriott El Paso Downtown/Convention Center (added August 2018), both in El Paso, Texas. In addition, on April 1, 2019, we assumed management of the Hyatt Regency Schaumburg hotel in Schaumburg, Illinois. This 468-room hotel recently completed a $15 million renovation and offers upscale accommodations, robust amenities and more than 30,000 square feet of indoor and outdoor meeting and event space, including a 3,100 square foot starlit terrace. This is our first Hyatt-branded hotel under management. Conversely, in May 2019, we ceased managing the Heidel House Resort & Spa in Green Lake, Wisconsin, after the owners of this resort decided to close this property permanently. Early in our fiscal 2019 third quarter, the owners of the Sheraton Chapel Hill Hotel in Chapel Hill, North Carolina sold the hotel, and as a result our contract to manage this hotel was terminated. As of the date of this filing, our current portfolio of hotels and resorts includes 20 owned and managed properties across the country.
Comparisons of hotels and resorts division operating income during the fourth quarter of fiscal 2019 to the prior year same period will benefit from the fact that we incurred approximately $500,000 of preopening expenses and $3.7 million in accelerated depreciation during the fourth quarter of fiscal 2018 related to the conversion of the InterContinental Milwaukee hotel to the Saint Kate. Conversely, as described above, we anticipate that we may incur additional initial start-up losses at the Saint Kate of approximately $1 million during the fourth quarter of fiscal 2019 compared to the results last year of the stabilized branded hotel that it replaced, negatively impacting fiscal 2019 fourth quarter operating income comparisons to the prior year.
We continue to explore additional potential growth opportunities and we would also consider opportunities to monetize selected existing owned hotels in the future. The extent of any impact from these opportunities would likely depend upon the timing and nature of the growth opportunity (pure management contract, management contract with equity, joint venture investment, or other opportunity) or divestiture (management retained, equity interest retained, etc.).
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Our movie theatre and hotels and resorts businesses each generate significant and consistent daily amounts of cash, subject to previously-noted seasonality, because each segment’s revenue is derived predominantly from consumer cash purchases. We believe that these relatively consistent and predictable cash sources, as well as the availability of approximately $110 million of unused credit lines as of the end of our fiscal 2019 third quarter, will be adequate to support the ongoing operational liquidity needs of our businesses during the remainder of fiscal 2019.
Financial Condition
Net cash provided by operating activities totaled $86.0 million during the first three quarters of fiscal 2019, compared to $77.1 million during the first three quarters of fiscal 2018. The $8.9 million increase in cash provided by operating activities was due primarily to the favorable timing in the payment of accounts payable and the collection of other assets, partially offset by the unfavorable timing in the payment of income taxes and other accrued liabilities during the first three quarters of fiscal 2019.
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Net cash used in investing activities during the first three quarters of fiscal 2019 totaled $86.2 million, compared to $46.1 million during the first three quarters of fiscal 2018. The increase in net cash used in investing activities of $40.1 million was primarily the result of the $30.3 million cash consideration in the Movie Tavern acquisition and an increase in capital expenditures. We did not incur any acquisition-related capital expenditures during the first three quarters of fiscal 2018. An increase in other assets primarily related to development expenditures of a previously-described new theatre (that will subsequently be reimbursed by the landlord) also contributed to the increase in net cash used in investing activities during the first three quarters of fiscal 2019 compared to the first three quarters of fiscal 2018. Total cash capital expenditures (including normal continuing capital maintenance and renovation projects) totaled $50.1 million during the first three quarters of fiscal 2019 compared to $45.1 million during the first three quarters of fiscal 2018.
Fiscal 2019 first three quarters cash capital expenditures included approximately $21.8 million incurred in our theatre division, including costs associated with the addition of DreamLounger recliner seating and new Ultra Screen and Super Screen DLX auditoriums to existing theatres. We also incurred capital expenditures in our hotels and resorts division during the first three quarters of fiscal 2019 of approximately $28.3 million, consisting primarily of costs associated with the renovation of the Saint Kate and Hilton Madison hotels, as well as normal maintenance capital projects at our other properties. Fiscal 2018 first three quarters cash capital expenditures included approximately $37.0 million incurred in our theatre division, including costs associated with the addition of DreamLounger recliner seating, new Ultra Screen and Super Screen DLX auditoriums and new Zaffiro’s Express and Take Five Lounge outlets to existing theatres. We also incurred capital expenditures in our hotels and resorts division during the first three quarters of fiscal 2018 of approximately $8.1 million, consisting primarily of normal maintenance capital projects.
Net cash used in financing activities during the first three quarters of fiscal 2019 totaled $9.2 million, compared to $39.1 million during the first three quarters of fiscal 2018. We used excess cash during both periods to reduce our borrowings under our revolving credit facility. As short-term borrowings became due, we replaced them as necessary with new short-term borrowings. We also used borrowings from our revolving credit facility to fund the cash consideration in the Movie Tavern acquisition. As a result, we added $246.0 million of new short-term borrowings and we made $215.0 million of repayments on short-term borrowings during the first three quarters of fiscal 2019 (net increase in borrowings on our credit facility of $31.0 million) compared to $159.0 million of new short-term borrowings and $177.0 million of repayments on short-term borrowings made during the first three quarters of fiscal 2018 (net decrease in borrowings on our credit facility of $18.0 million).
We did not issue any new long-term debt during either the first three quarters of fiscal 2019 or fiscal 2018. Principal payments on long-term debt were $24.2 million during the first three quarters of fiscal 2019 and included the repayment of a $14.6 million mortgage note on a hotel, compared to payments of $11.7 million during the first three quarters of fiscal 2018. Our debt-to-capitalization ratio (excluding our finance and operating lease obligations) was 0.28 at September 26, 2019, compared to 0.33 at December 27, 2018.
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We repurchased approximately 30,000 shares of our common stock for approximately $1.1 million in conjunction with the exercise of stock options during the first three quarters of fiscal 2019, compared to 83,000 shares repurchased for approximately $2.9 million in conjunction with the exercise of stock options during the first three quarters of fiscal 2018. As of September 26, 2019, approximately 2.8 million shares remained available for repurchase under prior Board of Directors repurchase authorizations. We expect that we will execute any future repurchases on the open market or in privately-negotiated transactions, depending upon a number of factors, including prevailing market conditions.
In conjunction with the Movie Tavern acquisition, we issued 2,450,000 shares of our common stock to the seller during the first quarter of fiscal 2019 (157,056 of which have been placed in escrow to secure certain post-closing indemnification obligations of the seller under the asset purchase agreement). This non-cash transaction reduced treasury stock and increased capital in excess of par by the value of the shares at closing of approximately $109.2 million.
Dividend payments during the first three quarters of fiscal 2019 totaled $14.5 million compared to dividend payments of $12.3 million during the first three quarters of fiscal 2018. The increase in dividend payments was the result of an increased number of outstanding shares and a 6.7% increase in our regular quarterly dividend payment rate initiated in March 2019.
We believe our total capital expenditures for fiscal 2019 will be approximately $60-$70 million, barring our pursuance of any growth opportunities that could arise in the remaining months and depending upon the timing of our payments on several of the various projects incurred by our two divisions. Some of the payments on projects undertaken during fiscal 2019 may carry over to fiscal 2020. The actual timing and extent of the implementation of all of our current expansion plans will depend in large part on industry and general economic conditions, our financial performance and available capital, the competitive environment, evolving customer needs and trends, and the availability of attractive opportunities. It is likely that our plans will continue to evolve and change in response to these and other factors.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
We have not experienced any material changes in our market risk exposures since December 27, 2018.
| Item 4. | Controls and Procedures |
| a. | Evaluation of disclosure controls and procedures |
| Based on their evaluations and the evaluation of management, as of the end of the period covered by this Quarterly Report on Form 10-Q, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934 (the “Exchange Act”)) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. |
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| b. | Changes in internal control over financial reporting |
| There were no significant changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15 of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. |
| Item 1A. | Risk Factors |
Risk factors relating to us are contained in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 27, 2018. No material change to such risk factors has occurred during the 39 weeks ended September 26, 2019.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
The following table sets forth information with respect to purchases made by us or on our behalf of our Common Stock during the periods indicated. All of these repurchases were made in conjunction with the exercise of stock options and the purchase of shares in the open market and pursuant to the publicly announced repurchase authorization described below.
| Period |
Total
Number of
Shares Purchased |
Average Price
Paid per Share |
Total Number of
Shares Purchased as Part of Publicly Announced Programs (1) |
Maximum
Number of Shares that May Yet be Purchased Under the Plans or Programs (1) |
||||||||||||
| June 28 – July 25 | 10,783 | $ | 32.85 | 10,783 | 2,760,050 | |||||||||||
| July 26 – August 29 | 3,489 | 35.35 | 3,489 | 2,756,561 | ||||||||||||
| August 30 – September 26 | — | — | — | 2,756,561 | ||||||||||||
| Total | 14,272 | $ | 33.46 | 14,272 | 2,756,561 | |||||||||||
| (1) | Through September 26, 2019, our Board of Directors had authorized the repurchase of up to approximately 11.7 million shares of our outstanding Common Stock. Under these authorizations, we may repurchase shares of our Common Stock from time to time in the open market, pursuant to privately negotiated transactions or otherwise. As of September 26, 2019, we had repurchased approximately 8.9 million shares of our Common Stock under these authorizations. The repurchased shares are held in our treasury pending potential future issuance in connection with employee benefit, option or stock ownership plans or other general corporate purposes. These authorizations do not have an expiration date. |
| Item 4. | Mine Safety Disclosures |
Not applicable.
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| Item 6. | Exhibits |
| 31.1 | Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2 | Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32 | Written Statement of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. §1350. |
| 101 | The following materials from The Marcus Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 26, 2019 are filed herewith, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Earnings, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Cash Flows, and (v) the Condensed Notes to Consolidated Financial Statements. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
THE MARCUS CORPORATION
| DATE: November 5, 2019 | By: | / s/ Gregory S. Marcus |
| Gregory S. Marcus | ||
| President and Chief Executive Officer | ||
| DATE: November 5, 2019 | By: | /s/ Douglas A. Neis |
| Douglas A. Neis | ||
| Executive Vice President, Chief Financial Officer and Treasurer | ||
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