Principles of Consolidation

- The consolidated financial statements include the accounts of The Marcus Corporation and all of its subsidiaries, including a 50% owned joint venture entity in which the Company has a controlling financial interest. The Company has ownership interests greater than 50% in one joint venture that is considered a Variable Interest Entity (VIE) that is also included in the accounts of the Company. The Company is the primary beneficiary of the VIE and the Company’s interest is considered a majority voting interest. The equity interest of outside owners in consolidated entities is recorded as noncontrolling interests in the consolidated balance sheets, and their share of earnings is recorded as net earnings (losses) attributable to noncontrolling interests in the consolidated statements of earnings in accordance with the partnership agreements. In fiscal 2017, the Company purchased the noncontrolling interest of a joint venture from its former partner.

Investments in affiliates which are 50% or less owned by the Company for which the Company exercises significant influence but does not have control are accounted for on the equity method. The Company has investments in equity investments without readily determinable fair values, which represents investments in entities where the Company does not have the ability to significantly influence the operations of the entities.

Immaterial Restatement of Prior year Financial Statements -

Beginning in the fiscal 2018 first quarter, the Company began appropriately presenting cost reimbursements and reimbursed costs on a gross basis and presented two new line items in the consolidated statements of earnings. These cost reimbursements and reimbursed costs were previously reported on a net basis. Reimbursed costs primarily consist of payroll and related expenses at managed properties where the Company is the employer and may include certain operational and administrative costs as provided for in the Company’s contracts with owners. These costs are reimbursed back to the Company. As these costs have no added markup, the revenue and related expense have no impact on operating income or net earnings. Cost reimbursements and reimbursed costs, which totaled $

30,838

,000 and $

30,460

,000 for fiscal 2017 and fiscal 2016, respectively, have been separately presented in the prior year statements of earnings to correct the prior year presentation. The Company believes this correction is immaterial to the consolidated financial statements.

Change in Accounting Policy

– The Company adopted Financial Accounting Standards Board Accounting Standards Update No. 2014-09 (ASU No. 2014-09),

Revenue from Contracts with Customers

, on the first day of fiscal 2018. These revenue recognition policy updates were applied prospectively in the Company’s financial statements from December 29, 2017 forward. Reported financial information for the historical comparable periods was not revised and continues to be reported under the accounting standards in effect during the historical periods. See Note 2 for further discussion.

Fair Value Measurements

- Certain financial assets and liabilities are recorded at fair value in the 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.

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 December 27, 2018 and December 28, 2017, respectively, the Company’s $5,302,000 and $4,053,000 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 valuation models for which pricing inputs were either directly or indirectly observable as of the reporting date. At December 27, 2018 and December 28, 2017, respectively, the $

205,000

liability and $13,000 asset related to the Company’s interest rate hedge contracts were 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 December 27, 2018 and December 28, 2017, none of the Company’s recorded assets or liabilities were valued using Level 3 pricing inputs, other than those discussed in Note 3.

The carrying value of the Company’s financial instruments (including cash and cash equivalents, restricted cash, accounts receivable, notes receivable and accounts payable) approximates fair value. The fair value of the Company’s $

118,000

,000 of senior notes, valued using Level 2 pricing inputs, is approximately $110,022,000 at December 27, 2018, determined based upon discounted cash flows using current market interest rates for financial instruments with a similar average remaining life. The carrying amounts of the Company’s remaining long-term debt approximate their fair values, determined using current rates for similar instruments, or Level 2 pricing inputs.

Accounts and Notes Receivable

- The Company evaluates the collectibility of its accounts and notes receivable based on a number of factors. For larger accounts, an allowance for doubtful accounts is recorded based on the applicable parties’ ability and likelihood to pay based on management’s review of the facts. For all other accounts, the Company recognizes an allowance based on length of time the receivable is past due based on historical experience and industry practice.

Inventory

- Inventories, consisting of food and beverage and concession items, are stated at the lower of cost or market. Cost has been determined using the first-in, first-out method. Inventories of $4,138,000 and $4,062,000 as of December 27, 2018 and December 28, 2017, respectively, were included in other current assets.

Property and Equipment

- The Company states property and equipment at cost. Major renewals and improvements are capitalized, while maintenance and repairs that do not improve or extend the lives of the respective assets are expensed currently. Included in property and equipment are assets related to capital leases. These assets are depreciated over the shorter of the estimated useful lives or related lease terms.

Long-Lived Assets

- The Company periodically considers whether indicators of impairment of long-lived assets held for use are present. If such indicators are present, the Company determines whether the sum of the estimated undiscounted future cash flows attributable to such assets is less than their carrying amounts. The Company recognizes any impairment losses based on the excess of the carrying amount of the assets over their fair value. For the purpose of determining fair value, defined as the amount at which an asset or group of assets could be bought or sold in a current transaction between willing parties, the Company utilizes currently available market valuations of similar assets in its respective industries, often expressed as a given multiple of operating cash flow. The Company evaluated the value of its property and equipment and other long-lived assets during fiscal 2018, fiscal 2017 and fiscal 2016 and did not report any impairment losses during those years.

Acquisition -

The Company recognizes identifiable assets acquired, liabilities assumed and noncontrolling interests assumed in an acquisition at their fair values at the acquisition date based upon all information available to it, including third-party appraisals. Acquisition-related costs, such as the due diligence and legal fees, are expensed as incurred. The excess of the acquisition cost over the fair value of the identifiable net assets is reported as goodwill.

Goodwill -

The Company reviews goodwill for impairment annually or more frequently if certain indicators arise. The Company performs its annual impairment test on the last day of its fiscal year. The Company believes performing the test at the end of the fiscal year is preferable as the test is predicated on qualitative factors which are developed and finalized near fiscal year-end. Goodwill is tested for impairment at a reporting unit level, determined to be at an operating segment level. When reviewing goodwill for impairment, the Company considers the amount of excess fair value over the carrying value of the reporting unit, the period of time since its last quantitative test, and other factors to determine whether or not to first perform a qualitative test. When performing a qualitative test, the Company assesses numerous factors to determine whether it is more likely than not that the fair value of its reporting unit is less than its carrying value. Examples of qualitative factors that the Company assesses include its share price, its financial performance, market and competitive factors in its industry, and other events specific to the reporting unit. If the Company concludes that it is more likely than not that the fair value of its reporting unit is less than its carrying value, the Company performs a two-step quantitative impairment test by comparing the carrying value of the reporting unit to the estimated fair value. No impairment was identified as of December 27, 2018 or December 28, 2017. The Company has never recorded a goodwill impairment loss.

Debt Issuance Costs -

The Company records debt issuance costs on long-term debt as a direct deduction from the related debt liability. Debt issuance costs related to the Company’s revolving credit facility are included in other long-term assets. Debt issuance costs are deferred and amortized over the term of the related debt agreements. Amortization of debt issuance costs totaled $287,000, $308,000 and $303,000 for fiscal 2018, fiscal 2017 and fiscal 2016, respectively, and were included in interest expense on the consolidated statements of earnings.

Investments

– Debt and equity securities are stated at fair value, with the change in fair value recorded as investment income or loss. The cost of securities sold is based upon the specific identification method. Realized gains and losses and declines in value judged to be other-than-temporary are included in investment income. The Company evaluates securities for other-than-temporary impairment on a periodic basis and principally considers the type of security, the severity of the decline in fair value, and the duration of the decline in fair value in determining whether a security’s decline in fair value is other-than-temporary. The Company had no investment losses from debt and equity securities during fiscal 2018, fiscal 2017 or fiscal 2016.

Insurance Reserves

- The Company uses a combination of insurance and self insurance mechanisms, including participation in captive insurance entities, to provide for the potential liabilities for certain risks, including workers’ compensation, healthcare benefits, general liability, property insurance, director and officers’ liability insurance, cyber liability, employment practices liability and business interruption. Liabilities associated with the risks that are retained by the company are not discounted and are estimated, in part, by considering historical claims experience, demographic factors and severity factors.

Income Taxes -

The Company recognizes deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets represent items to be used as a tax deduction or credit in the future tax returns for which the Company has already properly recorded the tax benefit in the income statement. The Company regularly assesses the probability that the deferred tax asset balance will be recovered against future taxable income, taking into account such factors as earnings history, carryback and carryforward periods, and tax strategies. When the indications are that recovery is not probable, a valuation allowance is established against the deferred tax asset, increasing income tax expense in the year that conclusion is made.

The Company assesses income tax positions and records tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances and information available at the reporting dates. For those tax positions where it is more-likely-than-not that a tax benefit will be sustained, the Company records the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more-likely-than-not that a tax benefit will be sustained, no tax benefit is recognized in the financial statements. See Note 9 - Income Taxes.

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 the Class B Common Stock. As such, the undistributed earnings for each year 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.

	Year Ended
	December 27, 2018		December 28, 2017		December 29, 2016
	(in thousands, except per share data)
Numerator:
Net earnings attributable to The Marcus Corporation	$	53,391	$	64,996	$	37,902

Denominator:
Denominator for basic EPS		28,105		27,789		27,551
Effect of dilutive employee stock options		608		614		406
Denominator for diluted EPS		28,713		28,403		27,957

Net earnings per share – Basic:
Common Stock	$	1.96	$	2.42	$	1.41
Class B Common Stock	$	1.75	$	2.17	$	1.28
Net earnings per share- Diluted:
Common Stock	$	1.86	$	2.29	$	1.36
Class B Common Stock	$	1.72	$	2.13	$	1.27

Options to purchase 15,500 shares, 250,000 shares and 14,000 shares of common stock at prices ranging from $38.51 to $41.35, $31.20 to $31.55 and $23.37 to $31.55 per share were outstanding at December 27, 2018, December 28, 2017 and December 29, 2016, respectively, but were not included in the computation of diluted EPS because the options’ exercise price was greater than the average market price of the common shares, and therefore, the effect would be antidilutive.

Concentration of Risk -

As of December 27, 2018, 7% of the Company’s employees were covered by a collective bargaining agreement, of which 96% were covered by an agreement that will expire within one year. As of December 28, 2017, 7% of the Company’s employees were covered by a collective bargaining agreement, of which 1% were covered by an agreement that expired within one year.

New Accounting Pronouncements

- In February 2016, the Financial Accounting Standards Board (FASB) issued 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 will also require disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from the leases. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the consolidated statements of earnings. In July 2018, the FASB also issued ASU No. 2018-11,

Leases (Topic 842): Targeted Improvements,

which amends 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. The new standard is effective for fiscal years beginning after December 15, 2018. The Company adopted the new accounting standard as of the first day of fiscal 2019 using the modified retrospective approach, which will result 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 will be made to prior period financial information and disclosures.

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. The Company expects to elect the package of practical expedients which permits the Company to forego reassessment of its prior conclusions related to lease identification, lease classification and initial direct costs. Topic 842 also provides practical expedients for an entity’s ongoing accounting. The Company expects to elect the practical expedient to not separate lease and non-lease components for all of its leases. The Company also expects to make a policy election not to apply the lease recognition requirements for short-term leases.. As a result, the Company will 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.

The Company is finalizing its evaluation of the impact of the adoption of Topic 842 on its consolidated financial statements and expects 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. The Company will recognize lease liabilities representing the present value of the remaining future minimum lease payments for all of its operating leases as of December 28, 2018. The Company estimates that the amount recorded related to these liabilities will be between $75,000,000 and $100,000,000. The Company will recognize 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, deferred lease expense and deferred lease incentive liabilities as of December 28, 2018.

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 fiscal years beginning after December 15, 2019, including interim periods within that year. 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.

On December 29, 2017, the Company adopted and applied to all contracts ASU No. 2014-09,

Revenue from Contracts with Customers

, a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The Company elected the modified retrospective method for the adoption of ASU No. 2014-09 and its related ASU amendments. Under this method, the Company recognized the cumulative effect of the changes in retained earnings at the date of adoption. Reported financial information for the historical comparable periods was not revised and continues to be reported under the accounting standards in effect during the historical periods.

The Company performed a review of the requirements of ASU No. 2014-09 and related ASUs in preparation for adoption of the new standard. The Company reviewed its key revenue streams and related customer contracts and has applied the five-step model of the standard to these revenue streams and compared the results to its current accounting practices. The majority of the Company’s revenues continue to be recognized in a manner consistent with historical practice. See Note 2 for further discussion.

On December 29, 2017, the Company adopted ASU No. 2016-01,

Recognition and Measurement of Financial Assets and Financial Liabilities

, which primarily affects the accounting for equity investments, financial liabilities under fair value option, and the presentation and disclosure requirements of financial instruments. Upon adoption, the Company made an $11,000 cumulative effect adjustment to reclassify the unrealized loss of an equity investment previously classified as available for sale from accumulated other comprehensive loss to opening retained earnings. All future changes in fair value for this equity security will be recognized through net earnings. In addition, the Company holds two investments that were previously accounted for under the cost method of accounting, which under ASU No. 2016-01 were deemed to not have readily determinable fair values and thus were not impacted by the adoption of ASU No. 2016-01. The adoption of this standard did not have a material impact on such investments or the Company’s consolidated financial statements.

On December 29, 2017, the Company adopted ASU No. 2016-15,

Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments

, which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The standard must be applied using a retrospective transition method for each period presented. The adoption of the new standard did not have an effect on the Company’s consolidated financial statements.

On December 29, 2017, the Company adopted ASU No. 2016-18,

Statement of Cash Flows (Topic 230) - Restricted Cash

. ASU No. 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As such, restricted cash and restricted cash equivalents are included with cash and cash equivalents when reconciling the beginning of period and ending of period total amount shown on the statement of cash flows. ASU No. 2016-18 was applied on a retrospective basis and prior periods were adjusted to conform to the current period’s presentation. Upon adoption, the Company recorded a $967,000 and $12,553,000 increase in net cash used in investing activities for fiscal 2017 and fiscal 2016, respectively, related to reclassifying the changes in its restricted cash balance from investing activities to cash and cash equivalent balances within the consolidated statement of cash flows.

On December 29, 2017, the Company adopted ASU No. 2017-01,

Business Combinations (Topic 805) - Clarifying the Definition of a Business

, which clarifies the definition of a business with the objective of adding guidance and providing a more robust framework to assist reporting organizations with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The adoption of the new standard did not have an effect on the Company’s consolidated financial statements.

On December 29, 2017, the Company adopted ASU No. 2017-05,

Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets

. ASU No. 2017-05 clarifies the scope and accounting of a financial asset that meets the definition of an “in-substance nonfinancial asset” and defines the term “in-substance nonfinancial asset.” It also covers the transfer of nonfinancial assets to another entity in exchange for a non-controlling ownership interest in that entity. The adoption of the new standard did not have an effect on the Company’s consolidated financial statements.

On December 29, 2017, the Company adopted ASU No. 2017-07,

Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Benefit Cost

. The ASU requires the service cost component of net periodic benefit cost to be presented in the same income statement line item as other employee compensation costs arising from services rendered during the period. Other components of the net periodic benefit cost are to be presented separately, in an appropriately titled line item outside of any subtotal of operating income or disclosed in the footnotes. The standard also limits the amount eligible for capitalization to the service cost component. ASU No. 2017-07 was applied on a retrospective basis and the prior periods were adjusted to conform to the current period’s presentation. For fiscal 2017 and fiscal 2016, expense of $1,712,000 and $1,519,000, respectively, was reclassified from operating income to other expense outside of operating income in the consolidated statements of earnings.

On December 29, 2017, the Company adopted ASU No. 2017-09,

Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting

, to provide clarity and reduce both the diversity in practice and cost and complexity when applying the guidance in Topic 718,

Compensation - Stock Compensation

. The amendments in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The adoption of the new standard did not have an effect on the Company’s consolidated financial statements.

On December 29, 2017, the Company early adopted ASU No. 2017-12,

Targeted Improvements to Accounting for Hedging Activities

, which amends the hedge accounting recognition and presentation requirements in Accounting Standards Codification 815,

Derivatives and Hedging (Topic 815)

. ASU No. 2017-12 is designed to improve the transparency and understandability of information about an entity’s risk management activities and to reduce the complexity of and simplifying the application of hedge accounting. The adoption of the new standard did not have an effect on the Company’s consolidated financial statements.

On December 29, 2017, the Company early adopted ASU No. 2018-02,

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

. The amendments in ASU No. 2018-02 allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. The amendments in ASU No. 2018-02 also require certain disclosures about stranded tax effects. Upon adoption, the Company made a $

1,574

,000 cumulative effect adjustment from accumulated other comprehensive loss to opening retained earnings due to the effect of the change in the U.S. federal corporate income tax rate resulting from the Tax Cuts and Jobs Act of 2017.