Marcus Earnings 2019-03-28

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 28, 2019

For the transition period from __________ to __________

Commission File Number 1-12604

THE MARCUS CORPORATION

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (414) 905-1000

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.

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).

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).

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).

Securities registered pursuant to Section 12(b) of the Act:

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 May 3, 2019 – 22,956,292

CLASS B COMMON STOCK OUTSTANDING AT May 3, 2019 – 7,935,872

THE MARCUS CORPORATION

INDEX

THE MARCUS CORPORATION

Consolidated Balance Sheets

See accompanying condensed notes to consolidated financial statements.

THE MARCUS CORPORATION

Consolidated Balance Sheets

See accompanying condensed notes to consolidated financial statements.

THE MARCUS CORPORATION

Consolidated Statements of Earnings

See accompanying condensed notes to consolidated financial statements.

THE MARCUS CORPORATION

Consolidated Statements of Comprehensive Income

See accompanying condensed notes to consolidated financial statements.

THE MARCUS CORPORATION

Consolidated Statements of Cash Flows

See accompanying condensed notes to consolidated financial statements.

THE MARCUS CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE 13 WEEKS ENDED MARCH 28, 2019

1. General

Basis of Presentation - The unaudited consolidated financial statements for the 13 weeks ended March 28, 2019 and March 29, 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 March 28, 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 13 weeks ended March 28, 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 $15,955,000 and $14,036,000 for the 13 weeks ended March 28, 2019 and March 29, 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.

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:

Shareholders’ Equity - Activity impacting total shareholders’ equity attributable to The Marcus Corporation and noncontrolling interests for the 13 weeks ended March 28, 2019 and March 29, 2018 was as follows (in thousands, except per share data):

Accumulated Other Comprehensive Loss – Accumulated other comprehensive loss presented in the accompanying consolidated balance sheets consists of the following, all presented net of tax:

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.

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 March 28, 2019 and December 27, 2018, respectively, the Company’s $5,697,000 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 March 28, 2019 and December 27, 2018, respectively, the Company’s $719,000 and $205,000 liability related to the Company’s interest rate swap contracts was valued using Level 2 pricing inputs.

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 March 28, 2019 and December 27, 2018, none of the Company’s fair value measurements were valued using Level 3 pricing inputs, other than those discussed in Note 2.

Defined Benefit Plan - The components of the net periodic pension cost of the Company’s unfunded nonqualified, defined-benefit plan are as follows:

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.

Revenue Recognition – The disaggregation of revenues by business segment for the 13 weeks ended March 28, 2019 is as follows (in thousands):

The disaggregation of revenues by business segment for the 13 weeks ended March 29, 2018 is as follows (in thousands):

The Company had deferred revenue from contracts with customers of $36,562,000 and $37,048,000 as of March 28, 2019 and December 27, 2018, respectively. The Company had no contract assets as of March 28, 2019 and December 27, 2018. During the 13 weeks ended March 28, 2019, the Company recognized revenue of $10,183,000 that was included in deferred revenues as of December 27, 2018.

A significant majority of the Company’s revenue is recorded in less than one year from the original contract. As of March 28, 2019, the amount of transaction price allocated to the remaining performance obligations under the Company’s advanced ticket sales was $4,823,000 and is reflected in the Company 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 with the next two years. As of March 28, 2019, the amount of transaction price allocated to the remaining performance obligations under the Hotels and Resorts loyalty program was $192,000, of which, $71,000 is reflected in the Company’s consolidated balance sheet in deferred compensation and other. The Company recognizes revenue upon reward redemption, which is expected to occur within the next two years. As of March 28, 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 $2,342,000 and is reflected in the Company’s consolidated balance sheet as part of deferred revenues. The Company recognizes revenue as the gift cards are redeemed, which is expected to occur within the next two years.

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.

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 $138,856,000, 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 $1,153,000 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.

The preliminary purchase price allocation reflected in the Company’s consolidated balance sheet on the acquisition date is as follows (in thousands):

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.

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):

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, ii) to not separate lease and non-lease components for all of its leases, and iii) 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.

Total lease cost consists of the following:

Maturities of lease liabilities as of March 28, 2019 are as follows (in thousands):

Aggregate minimum lease commitments as of December 27, 2018 under Accounting Standard Codification Topic 840 are as follows (in thousands):

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.

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 March 28, 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 March 28, 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 $42,191,000 and $40,647,000 as of March 28, 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 $2,675,000 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.

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 (2.50% at March 28, 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 (2.50% at March 28, 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 March 28, 2019, the interest rate swaps were considered highly effective. The fair value of the interest rate swaps on March 28, 2019 and December 27, 2018, respectively, was a liability of $719,000 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 13 weeks ended March 29, 2018 was recorded to interest expense.

Subsequent to March 28, 2019, a note that was scheduled to mature in January 2020 with a balance of $14,653,000 as of March 28, 2019, 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 losses from noncontrolling interests, for the 13 weeks ended March 28, 2019 and March 29, 2018 was 0.7% and 25.8%, respectively. The reduction in the Company’s effective income tax rate is related to excess tax benefits on share-based compensation that the Company recorded during the 13 weeks ended March 28, 2019. 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.

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 weeks ended March 28, 2019 and March 29, 2018 (in thousands):

THE MARCUS CORPORATION

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.

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 first quarter of fiscal 2019 consisted of the 13-week period beginning on December 28, 2018 and ended on March 28, 2019. The first quarter of fiscal 2018 consisted of the 13-week period beginning December 29, 2017 and ended on March 29, 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. ASC Topic 842 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 and no cumulative effect adjustment to retained earnings was necessary.  

In conjunction with the adoption of the new standard, companies are 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 elected the practical expedient to not separate lease and non-lease components for all of our leases. We also 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.

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 first quarter of fiscal 2019 and fiscal 2018 (in millions, except for per share and variance percentage data):

Revenues increased during the first quarter of fiscal 2019 compared to the first quarter of fiscal 2018 due to increased revenues from our theatre division. Operating income (earnings before other income/expense and income taxes) decreased during the first quarter of fiscal 2019 compared to the first quarter of fiscal 2018 due to a decrease in theatre division operating income and increased operating losses from our hotels and resorts division and corporate items. Both of our divisions were negatively impacted by nonrecurring expenses during the first quarter of fiscal 2019. Net earnings attributable to The Marcus Corporation decreased during the first quarter of fiscal 2019 compared to the first quarter of fiscal 2018 due to decreased operating income, partially offset by increased investment income and decreased interest expense and income taxes.

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 an additional 23%, resulting in increased revenues from our theatre division during the first quarter of fiscal 2019 compared to the prior year period. Operating income from our theatre division was unfavorably impacted by reduced attendance at our comparable theatres due to a weaker slate of movies during the fiscal 2019 first quarter compared to the first quarter of fiscal 2018, partially offset by increased concession sales per person due to our expanded food and beverage offerings. Acquisition and preopening expenses related to the Movie Tavern acquisition negatively impacted our operating income during the first quarter of fiscal 2019 by approximately $1.8 million, or $0.04 per diluted common share.

We closed the InterContinental Milwaukee hotel in early January 2019 and began a substantial renovation project that will convert this hotel into an experiential arts hotel named Saint Kate – The Arts Hotel. Revenues from our hotels and resorts division during the first quarter of fiscal 2019 compared to the prior year period were unfavorably impacted by this closing. Division revenues were also negatively impacted by a major renovation currently under way at our Hilton Madison hotel, partially offset by increased room revenues and food and beverage revenues for our other six owned hotels during the first quarter of fiscal 2019 compared to the first quarter of fiscal 2018. An increased operating loss from our hotels and resorts division during the first quarter of fiscal 2019 compared to the first quarter of fiscal 2018 was entirely due to preopening expenses related to the Saint Kate hotel conversion of approximately $1.2 million, or $0.03 per diluted common share.

Operating losses from our corporate items, which include amounts not allocable to the business segments, increased slightly during the first quarter of fiscal 2019 compared to the first quarter of fiscal 2018 due in part to increased long-term incentive compensation expenses. This increase is the result of our improved financial performance and stock performance during the past several years.

We recognized investment income of $473,000 during the first quarter of fiscal 2019 compared to an investment loss of $36,000 during the first quarter of fiscal 2018. Investment income increased during the fiscal 2019 first quarter due to increases in the value of marketable securities.

Our interest expense totaled $3.1 million for the first quarter of fiscal 2019 compared to $3.3 million for the first quarter of fiscal 2018, a decrease of approximately $200,000, or 7.6%. The decrease in interest expense during the first quarter of fiscal 2019 was due to reduced borrowing levels compared to the first quarter of fiscal 2018, partially offset by a higher average interest rate during the first quarter of fiscal 2019 as a result of increases in short-term interest rates on our variable rate debt. In addition, on March 1, 2018, we entered into two interest rate swap agreements, effectively converting $50.0 million in variable rate borrowings to a fixed rate. 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 further 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, gains on disposition of property, equipment and other assets or net equity earnings (losses) from unconsolidated joint ventures during the first quarter of fiscal 2019 compared to the first quarter 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 first quarter of fiscal 2019 of $13,000, a decrease of approximately $3.4 million, or 99.6%, compared to income tax expense of $3.4 million for the first quarter of fiscal 2018. The decrease in income tax expense was primarily the result of the reduced earnings before income taxes. Our fiscal 2019 first quarter effective income tax rate, after adjusting for a loss from noncontrolling interests that is not tax-effected because the entity involved is a tax pass-through entity, was 0.7% and benefitted from excess tax benefits on share-based compensation and nonrecurring adjustments specific to the quarter, compared to our fiscal 2018 first quarter effective income tax rate of 25.8%. We continue to anticipate that our effective income tax rate for the remaining quarters 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.

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 first quarters of fiscal 2019 and fiscal 2018, 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 losses attributable to noncontrolling interests of $66,000 and $15,000, respectively, during the first 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 first quarter of fiscal 2019 and fiscal 2018 (in millions, except for variance percentage and operating margin):

Our theatre division revenues increased during the first quarter of fiscal 2019 compared to the first quarter of fiscal 2018 due to the newly acquired Movie Tavern theatres and an increase in our average concession revenues per person, partially offset by the impact of decreased attendance due to a weaker film slate and a lower average ticket price at our comparable theatres.

Our theatre division operating income and operating margin decreased during the first quarter of fiscal 2019 compared to the first quarter of fiscal 2018 due primarily to the impact of the reduced attendance and revenues at comparable theatres. 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 quarter of fiscal 2019 compared to the first quarter of fiscal 2018 due to the inclusion of two months of Movie Tavern operating results. Our Movie Tavern theatres will have a lower operating margin than our legacy theatres due to the fact that 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.

As described above, our operating income and operating margin were also negatively impacted during the first quarter of fiscal 2019 by approximately $1.8 million of acquisition and preopening expenses related to the Movie Tavern acquisition. In addition, severe winter weather conditions in the Midwest during the first quarter of fiscal 2019 may have slightly negatively impacted attendance at our theatres and increased our snow removal and heating costs by approximately $250,000 compared to the first quarter of fiscal 2018.

The following table provides a further breakdown of the components of revenues for the theatre division for the first quarter of fiscal 2019 and fiscal 2018 (in millions, except for variance percentage):

As described above, on February 1, 2019, we acquired 22 theatres and 208 screens in conjunction with our Movie Tavern acquisition, favorably impacting our overall decrease in admission revenues and contributing the entire increase to our concession revenues during the first quarter of fiscal 2019 compared to the first quarter of fiscal 2018. Excluding the Movie Tavern theatres, admission revenues and concession revenues for comparable theatres decreased 17.8% and 12.2%, respectively, during the first quarter of fiscal 2019 compared to the first quarter of fiscal 2018.

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 first quarter results, United States box office receipts (excluding new builds for the top 10 theatre circuits) decreased 16.5% during our fiscal 2019 first quarter, indicating that our decrease in admission revenues during the first quarter of fiscal 2019 of 17.8% for our comparable theatres underperformed the industry by 1.3 percentage points. 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. 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. As discussed further below, we also believe film mix impacted our relative performance versus the nation during the fiscal 2019 period.

Our average ticket price increased 0.5% during the first quarter of fiscal 2019 compared to the first quarter of fiscal 2018, due entirely 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 decreased 1.4% during the first quarter of fiscal 2019 compared to the first quarter of fiscal 2018. We believe that a change in film product mix had an unfavorable impact on our average ticket price during the first quarter of fiscal 2019 compared to the first quarter of fiscal 2018. Last year’s top film, Black Panther, performed extremely well in our premium large format (PLF) screens, with a corresponding price premium, favorably impacting our average ticket price during the first quarter of fiscal 2018. Conversely, two of our top five films this year, How to Train Your Dragon: The Hidden World and The Lego Movie 2: The Second Part, were animated 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 first quarter of fiscal 2019 compared to the prior year, when none of our top five films were animated films. The decrease in average ticket price unfavorably impacted our admission revenues of our comparable theatres by approximately $750,000 during the first quarter of fiscal 2019 compared to the first quarter 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 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 will likely have a favorable impact on our average ticket price in future periods.

Our concession revenues increased during the first quarter of fiscal 2019 compared to the first quarter 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. Our average concession revenues per person increased by 22.4% during the first quarter of fiscal 2019 compared to the first quarter 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 5.4% during the first quarter of fiscal 2019 compared to the first quarter of fiscal 2018. The increase in our average concession revenues per person contributed approximately $1.9 million to our comparable theatre concession revenues during the first quarter of fiscal 2019 compared to the first quarter 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^SM, 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 first quarter. Conversely, we believe that the above-described change in film product mix during the first quarter of fiscal 2019 may have slightly reduced the growth of our overall average concession sales per person during the fiscal 2019 first quarter, as family-oriented and animated films such as the two films in our top five during the first quarter of fiscal 2019 described 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.

Other revenues increased by approximately $500,000 during the first quarter of fiscal 2019 compared to the first quarter of fiscal 2018. This increase was entirely due to internet surcharge ticketing fees and preshow advertising income from our new Movie Tavern locations.

Total theatre attendance decreased 6.8% during the first quarter of fiscal 2019 compared to the first quarter of fiscal 2018. Excluding Movie Tavern, comparable theatre attendance decreased 16.6% during the quarter, due primarily to a weaker film slate in the current year period. Attendance and admission revenues decreased significantly during January and February, and was partially offset by improved performance during March. January of fiscal 2018 benefited from several strong 2017 holdover films, such as Star Wars; The Last Jedi, Jumanji: Welcome to the Jungle and The Greatest Showman. We did not have as many strong holdovers from 2018 to benefit the first quarter of fiscal 2019. The reduction in February 2019 attendance and admission revenues was due to the fact that our highest grossing film of fiscal 2018, Black Panther, was released during February 2018 and February 2019 film product could not come close to matching those results. We also believe that snowier and colder Midwestern weather and film mix this quarter compared to last year may also have had a slight negative impact on our comparative performance versus the overall industry. We believe our Midwestern circuit outperformed our normal share of the total box office on all three of the above referenced 2017 holdover films last year, negatively impacting our relative performance to the U.S. box office in January this year. Conversely, due to the fact that we underperformed the industry on Black Panther last year, our relative performance to the U.S. improved in February 2019. Finally, our attendance and admission revenues underperformed slightly during March 2019, primarily due to underperformance during the last week of the first quarter when the top film, Us, generally underperformed in the Midwest.

Our highest grossing films during the fiscal 2019 first quarter included Captain Marvel, How to Train Your Dragon: The Hidden World, Aquaman, The Lego Movie 2: The Second Part, and The Upside. The film slate during the first quarter of fiscal 2019 was weighted slightly less towards blockbuster movies compared to the prior year, as evidenced by the fact that our top five films during our fiscal 2019 first quarter accounted for 39% of our total box office results, compared to 46% for the top five films during the first quarter of fiscal 2018, both expressed as a percentage of the total admission revenues for the period. This reduced reliance on blockbuster films during the fiscal 2019 first quarter had the effect of very slightly decreasing 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.

We are pleased with the Movie Tavern performance to date and the integration is progressing on schedule. We immediately introduced our popular $5 Tuesday movie program at these locations, as well as other promotional and marketing initiatives. Although the Movie Tavern theatres were affected by the weaker film slate during the fiscal 2019 first quarter as were our other locations, data available to us for prior year performance of the Movie Tavern theatres indicates that these theatres outperformed the national box office on a relative basis during March – an indication that our programs are having an impact on their performance. Building on that, we plan to launch our Magical Movie Rewards^® loyalty program at all Movie Tavern locations in the second quarter.

Film product performance for the second quarter of fiscal 2019 started off slowly compared to the same period of fiscal 2018, likely due in part to the fact that Easter, with corresponding school vacations, was later this year than the prior year. The busy summer film season began in earnest, however, with the record-setting opening of Avengers: Endgame in late April. Other films scheduled to be released during the next three months that may generate substantial box office interest include Pokémon: Detective Pikachu, John Wick: Chapter 3, Aladdin, Godzilla: King of the Monsters, Rocketman, The Secret Life of Pets 2, X-Men: Dark Phoenix, Men in Black: International, Toy Story 4, Spider-Man: Far From Home, The Lion King, Once Upon A Time in Hollywood and Fast and Furious Presents: Hobbs & Shaw (the last four films will be released during our fiscal 2019 third quarter). The fiscal 2018 second quarter films performed very well and we significantly outperformed last year compared to the U.S. averages, so it remains to be seen whether the fiscal 2019 second quarter film product can match that performance. The anticipated film slate for the second half of fiscal 2019 is currently expected to be quite strong. 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.

We ended the first 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 11 managed screens in two theatres at the end of the first quarter of fiscal 2018. In addition to the screens added due to the Movie Tavern acquisition, we opened one new UltraScreen DLX^® at an existing Marcus Wehrenberg theatre during the first quarter of fiscal 2019. We ceased managing one five-screen theatre during the second quarter of fiscal 2018. Early in our fiscal 2019 second quarter, we completed the addition of DreamLounger^SM recliner seating to three Movie Tavern theatres and we converted 10 Movie Tavern auditoriums to our SuperScreen DLX^® concept. We anticipate converting additional Movie Tavern auditoriums to our proprietary PLF concepts during fiscal 2019. We also recently announced that a new eight-screen theatre currently under construction in Brookfield, Wisconsin will be branded Movie Tavern by Marcus. The new theatre is currently expected to open in October 2019.

Hotels and Resorts

The following table sets forth revenues, operating loss and operating margin for our hotels and resorts division for the first quarter of fiscal 2019 and fiscal 2018 (in millions, except for variance percentage and operating margin):