Marvel Achieves Record Results in 2008

by Jeff

NEW YORK–(BUSINESS WIRE)–Marvel Entertainment, Inc. (NYSE: MVL), a global character-based entertainment and licensing company, today reported operating results for its fourth quarter ended December 31, 2008 and record net sales, net income and earnings per share for the full year 2008. Marvel also today reiterated its financial guidance for 2009.

For Q4 2008, Marvel reported net sales of $224.3 million and net income of $63.0 million, or $0.80 per diluted share, compared to net sales of $109.3 million and net income of $27.6 million, or $0.35 per diluted share, in Q4 2007. The improvement reflects recognition of $135.5 million in film production segment revenues principally associated with the DVD performance of Marvel’s Iron Man feature film. For the full year 2008, Marvel reported net sales of $676.2 million and net income of $205.5 million, or $2.61 per diluted share, compared to net sales of $485.8 million and net income of $139.8 million, or $1.70 per diluted share, in 2007. The revenue and net income growth principally reflects the contribution from Marvel Studios which released its first two feature films, Iron Man and The Incredible Hulk, in the summer of 2008.

Marvel Entertainment, Inc.
Segment Net Sales and Operating Income (Unaudited)

 
 
Marvel Entertainment, Inc.

Segment Net Sales and Operating Income (Unaudited)

(in millions)

    Three Months  

Twelve Months
Ended December 31,

  Ended December 31,
     

 

2008

 

2007

 

2008

 

2007

Licensing:

 

Net Sales (1)

  $ 55.3

 

  $

76.1

   

$

292.8    

$ 343.6  
   

Operating Income (1)

   

36.9

   

 

47.5  

 

  242.3

 

   

255.5

 

Publishing:

 

Net Sales

    33.1       30.3  

 

 

125.4

   

 

125.7  
    Operating Income     13.0       12.3       47.3       53.5  

Film Production:

 

Net Sales

    135.5             254.6        
 

 

Operating Income (Loss)  

 

62.1  

 

  (3.1

)

   

102.7

   

 

(7.5 )

All Other:

 

Net Sales (1)

 

 

0.4  

 

  2.9

 

   

3.4

   

 

16.5  
    Operating (Loss) (1)     (4.9 )     (5.1 )  

 

(24.3 )  

  (27.1 )
TOTAL NET SALES   $ 224.3  

  $

109.3

    $ 676.2  

  $

485.8

 

TOTAL OPERATING INCOME

  $ 107.1    

$ 51.6

 

  $ 368.0    

$ 274.4

 

(1) Effective January 1, 2008, revenue and operating income from Marvel’s licensee, Hasbro, previously reported in the Toy segment is recorded within the Licensing segment and Marvel’s in-licensed toy lines are aggregated with corporate overhead in “All Other,” reflecting Marvel’s exit from the toy business during early 2008. Segment information for the prior-year periods has been reclassified accordingly.

Marvel’s Chairman, Morton Handel, commented, “Our fourth quarter and full year results reflect the benefits derived from our strategy to produce our own feature films. In addition to providing a substantial contribution to our operating results, our 2008 theatrical releases have raised the level of global awareness for Marvel and two of our key brands. We look forward to further building awareness of our characters with an active slate of TV animation, including Wolverine and the X-Men currently airing on Nicktoons, Iron Man: Armored Adventures, launching soon on Nicktoons, The Spectacular Spider-Man which will begin airing on Disney XD in March and Marvel Super Hero Squad which debuts this fall on Cartoon Network.

“Underscoring the strength of our financial performance is the growing worldwide prominence of, and consumer affinity for, the Marvel brand as well as our character brands. Marvel is keenly focused on developing our brands and on the partners we choose to work with around the world. This focus affects our decision-making across all of our businesses and is critical to driving long-term consumer demand for Marvel branded products and entertainment.

“A recent example of our partner focus was last week’s multi-year extension of our master toy license agreement with Hasbro, Inc. Hasbro has done a remarkable job with the Marvel Universe on a worldwide basis, and we are very pleased to extend our partnership with them.”

Fourth Quarter Segment Review:

* Q4 ’08 Licensing Segment net sales were better than expected due to stronger than anticipated revenue from international licensing and Marvel’s Spider-Man feature film merchandising joint venture, Spider-Man L.P. Nonetheless, as expected, Q4 ’08 results were below the year ago period in which the May 2007 release of Spider-Man 3 provided greater benefit. Reflecting the revenue decline, Licensing Segment operating income declined to $36.9 million in Q4 2008 from $47.5 million in Q4 2007. Licensing Segment operating margin for Q4 2008 and Q4 2007 was 67% and 62%, respectively. Q4 2007 operating margin was reduced by a charge of $11.5 million associated with talent participations claimed due by Sony regarding the JV. In Q2 2008, the $11.5 million claim was reduced by $8.3 million after Sony revised the amounts claimed.

 
Marvel Entertainment, Inc.

Licensing Sales by Division (Unaudited) (1)

(in millions)

  Three Months Ended   Twelve Months Ended
 

 

12/31/08

 

12/31/07

 

12/31/08

 

12/31/07

Domestic Consumer Products (2)   $ 27.9   $

23.1

  $ 125.6   $ 110.2
International Consumer Products   $ 18.8   $

16.9

  $ 85.9   $ 74.3
Spider-Man L.P. (Domestic and International)   $ 6.5   $

22.7

  $ 57.4   $ 122.0
Studio Licensing   $ 2.1   $

13.4

  $ 23.9   $ 37.1
Total Licensing Segment  

$

55.3   $ 76.1  

$ 292.8

 

$ 343.6

(1) Effective January 1, 2008, income from Marvel’s toy licensee, Hasbro, Inc., is reflected within Marvel’s Licensing segment in Domestic and International Consumer Products. The prior-year periods have been reclassified to reflect this treatment.

(2) Domestic Consumer Products includes substantially all of Marvel’s global interactive licensing business.

* Marvel’s Publishing Segment net sales increased 9%, or $2.8 million, to $33.1 million in Q4 2008 from $30.3 million in Q4 2007, principally reflecting a larger number of high profile titles being released in Q4 2008, as well as one extra week of sales in Q4 2008. Marvel’s major publishing events in 2008 took place in the final three quarters of the year versus major publishing events in 2007 which took place in the first three quarters of the year. Q4 2008 operating income increased 6% to $13.0 million, an operating margin of 39%, compared to 41% in Q4 2007. The decrease in operating margin reflects investments being made in Marvel’s digital media initiatives.

* Marvel’s Film Production Segment recorded sales of $135.5 million in Q4 2008, primarily reflecting revenues related to the Iron Man DVD which was released September 30, 2008. Q4 2008 net sales also include Marvel producer fees for Iron Man and The Incredible Hulk. Against these revenues, Marvel amortized capitalized film production expenses of $68.9 million (based on Marvel’s estimate of each film’s expected “ultimate” performance), contributing $62.1 million to operating income. In Q4 ’07 there was no film production revenue, and there was an operating loss in the segment of $3.1 million, primarily reflecting non-capitalized film-production expenses.

* Under the category All Other, Marvel had operating losses of $4.9 million and $5.1 million in the Q4 2008 and Q4 2007 periods, respectively. All Other in Q4 2008 and Q4 2007, respectively, included $0.4 million and $2.9 million in revenue, and $0.3 million and $0.6 million in operating income related to the wind-down of Marvel’s former toy operations, as well as corporate overhead of $7.2 million and $5.7 million, respectively.

Balance Sheet and Cash Use Update:

Marvel experienced strong cash collections in Q4 2008, principally related to licensing activity. As of December 31, 2008, Marvel had cash and equivalents and short-term investments of $182.0 million (including $43.6 million in restricted cash) and no outstanding borrowings under its $100 million line of credit with HSBC Bank. Marvel’s aggregate outstanding film-related borrowings increased to $213 million at year end 2008, from $182 million at September 30, 2008, as Marvel borrowed $30.7 million to fund the film slate’s liquidity reserve as required by the original financing agreements and for Q4 2008 interest expense paid in Q1 2009. Cash receipts related to Iron Man DVD revenues recorded in Q4 2008, were received in Q1 2009.

During Q4 2008, Marvel repurchased 20,499 shares of its common stock for a total of approximately $0.5 million ($24.80 per share). For the full year 2008, Marvel repurchased 434,708 shares for an aggregate of approximately $10.5 million, or approximately $24.05 per share. The Company has $121.1 million remaining under its share repurchase authorizations. Also during 2008 Marvel repurchased all of the $60 million in outstanding Mezzanine notes under its film slate facility. Marvel’s repurchase of the entire Mezzanine tranche, which bears interest at LIBOR plus 7% and is the highest-cost piece of the film facility, significantly reduces future net interest expense.

Marvel Studios Entertainment Pipeline

(scheduled release dates are subject to change)

 

Marvel Studios Entertainment Pipeline

(scheduled release dates are subject to change)

 

Self-Produced Feature Film Line-Up – Scheduled for Release

Title   Studio   Status

Iron Man 2  

Marvel   Scheduled for May 7, 2010 release
Thor   Marvel   Scheduled for July 16, 2010 release
The First Avenger: Captain America  

Marvel

  Scheduled for May 6, 2011 release
The Avengers   Marvel   Scheduled for July 15, 2011 release
   

Licensed Feature Film Line-Up

   

Title

  Studio/

Distributor

 

Status

X-Men Origins: Wolverine  

Fox

  Scheduled for May 1, 2009 release

 

Self-Produced Animated TV Series Line-Up

   
Title   Studio

  Status
Super Hero Squad  

Marvel Animation

 

26, 30-minute episodes in production
with Film Roman;
scheduled for Q3
2009 release on Cartoon Network

The Avengers: Earth’s Mightiest Heroes  

Marvel Animation  

26, 30-minute episodes in production
with Film Roman;
scheduled for Q3
2011 release

 

Licensed Animated TV Series Line-Up

 

 
Title

  Studio

 

Status

Fantastic Four: World’s Greatest Heroes

  Moonscoop SAS (France)

 

26, 30-minute episodes airing
internationally and on
Marvel.com
and Marvelkids.com

Spectacular Spider-Man  

Culver Studios (U.S.)

 

Will air on Disney XD in the U.S.
beginning in March and
currently
airing on various networks
internationally

Wolverine and the X-Men  

Marvel Animation /

First Serve Toonz (India)

 

52, 30-minute episodes. Episodes
1-26 are currently airing on
Nicktoons
in the U.S. and are on
air internationally. Episodes 27-52
are
currently in pre-production

Black Panther   Marvel Animation / BET  

8, 30-minute episodes in production;

scheduled for Q2 2009 release on BET

Iron Man: Armored Adventures

 

Marvel Animation /

Method Films (France)

 

26, 30-minute episodes in
production; scheduled for Q2 2009
release
in the U.S. on Nicktoons
and various networks internationally

 

Licensed Animated Direct-to-DVD Projects

   
Title   Studio

  Status
Next Avengers: Heroes of Tomorrow  

Lionsgate

  Released September 2, 2008
Hulk Vs.   Lionsgate   Released January 13, 2009

Thor: Son of Asgard

  Lionsgate

 

Scheduled for September 2009 release
 

Licensed Broadway Stage Project

   
Title   Producers

  Status

Spider-Man, the Musical, Julie Taymor director;
music
& lyrics by U2’s Bono and The Edge

 

Hello Entertainment/David Garfinkle,
Martin McCallum, Marvel
Entertainment/ David Maisel,
Sony Pictures Entertainment and
Jeremiah Harris

 

Slated for a February 2010 opening

2009 Financial Guidance:

Today Marvel reiterated the 2009 financial guidance that it initially provided on November 4, 2008. Marvel’s 2009 financial guidance reflects the recognition of a modest portion of remaining Iron Man DVD revenue during the first half of the year with initial pay TV revenue expected in the second half of the year. Marvel’s 2009 financial guidance also reflects the recognition of the majority of The Incredible Hulk DVD revenue during the first half of the year with initial pay TV revenue expected in the second half of the year. Marvel anticipates that Licensing segment revenue will decline in 2009, reflecting an approximately $50 million decrease in licensing revenue related to Spider-Man L.P. in 2009 versus 2008 and lower domestic and international licensing revenue as Marvel will not have any of its own film slate releases during the year. Further, 2008 licensing results included approximately $20 million in one-time gains from settlements. The low end of Marvel’s 2009 financial guidance continues to reflect a discount of 10-15% related to the potential impact on Marvel’s business of the global economic challenges.

Marvel Entertainment – Financial Guidance

(in millions, except per-share amounts)

 

2009  

2008

   

Guidance  

Actual

Net sales   $415 – $460   $676
Net income  

$80 – $105

  $206
Diluted EPS   $1.00 – $1.35

  $2.61

Primary Assumptions for 2009 Financial Guidance:

* The Licensing segment is expected to contribute net sales of approximately $180 million – $200 million in 2009 with an operating margin of approximately 70 – 74%.
* The Film Production segment is expected to contribute revenues of approximately $120 million – $135 million in 2009 and to generate an operating margin of approximately 12% – 18%.
* The Publishing segment is expected to contribute net sales of approximately $115 million – $125 million in 2009, with an operating margin of approximately 31% – 35%, reflecting approximately $6 million in ongoing investments in digital media initiatives.
* Corporate overhead is expected to approximate $30 million in 2009, in line with 2008.
* Marvel anticipates an effective tax rate of 40.5% in 2009.
* Marvel’s guidance is based on 78.9 million diluted shares for 2009 and does not reflect any future share repurchase activity.

Marvel cautions investors that variations in the timing of licenses and entertainment events, the timing of their revenue recognition, and their level of success result in variations and uncertainty in forecasting Marvel’s financial results. These factors could have a material impact on year-over-year annual and sequential quarterly results comparisons as well as on Marvel’s ability to achieve its financial guidance.

About Marvel Entertainment, Inc.

Marvel Entertainment, Inc. is one of the world’s most prominent character-based entertainment companies, built on a proven library of over 5,000 characters featured in a variety of media over seventy years. Marvel utilizes its character franchises in licensing, entertainment (via Marvel Studios and Marvel Animation) and publishing (via Marvel Comics). Marvel’s strategy is to leverage its franchises in a growing array of opportunities around the world, including feature films, consumer products, toys, video games, animated television, direct-to-DVD and online. For more information visit www.marvel.com.

Except for any historical information that they contain, the statements in this news release regarding Marvel’s plans are forward-looking statements that are subject to certain risks and uncertainties, including exposure to the current economic recession, exposure to tightening credit markets, financial difficulties of Marvel’s licensees, a decrease in the level of media exposure or popularity of Marvel’s characters, changing consumer preferences, delays and cancellations of movies and television productions based on Marvel characters, and concentration of Marvel’s toy licensing with one licensee.

In addition, the following factors, among others, could cause the financial performance of Marvel’s film production operations to differ materially from that expressed in any forward-looking statements: (i) Marvel Studios’ potential inability to attract and retain creative talent, (ii) key film talent’s potentially becoming incapacitated or suffering reputational damage, (iii) the potential lack of popularity of Marvel’s films, (iv) the expense associated with producing films, (v) union activity or other events which could interrupt film production, including strikes by Hollywood writers, directors and actors, (vi) changes or disruptions in the way films are distributed, including a decline in the DVD market, (vii) piracy of films and related products, (viii) Marvel Studios’ dependence on a single distributor for its self-produced films, (ix) that Marvel will depend on its film distributors for information related to the accounting of film-production activities, (x) Marvel’s potential inability to meet the conditions necessary for an initial funding of a film under Marvel’s $525 million film slate facility, (xi) Marvel’s potential inability to obtain financing to make more than four films if an interim asset test related to the economic performance of the film slate is not satisfied, (xii) cash flows from our films potentially being insufficient to pay our film facility interest costs, (xiii) fluctuations in reported income or loss related to the accounting of film-production activities and (xiv) a possible default by one of the lending banks in our film facility.

These and other risks and uncertainties are described in Marvel’s filings with the Securities and Exchange Commission, including Marvel’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. Marvel assumes no obligation to publicly update or revise any forward-looking statements.

MARVEL ENTERTAINMENT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(unaudited)
 
  Three Months Ended  

Years Ended
December 31,   December 31,
2008  

2007

  2008   2007
(in thousands, except per share amounts)
   
Net sales $ 224,252 $ 109,288 $ 676,177 $ 485,807
 

Costs and expenses:

Cost of revenues (excluding depreciation expense) 83,344 14,022 191,519 60,933
Selling, general and administrative 34,331 42,488 138,506 147,118
Depreciation and amortization  

395

  1,301  

1,559

 

5,970
Total costs and expenses 118,070 57,811 331,584 214,021
Other income, net   900   150   23,381   2,643
Operating income 107,082 51,627 367,974 274.429
Interest expense 4,756 3,934 18,984 13,756
Interest income 780 580 3,592 2,559
Gain on repurchase of debt  

   

1,916

 

Income before income tax expense and minority interest 103,106 48,273 354,498 263,232
Income tax expense (38,757 ) (19,318 ) (133,180 ) (98,908 )
Minority interest in consolidated joint venture  

(1,342

)   (1,329 )  

(15,783 )

 

(24,501 )
Net income $ 63,007 $ 27,626 $ 205,535 $ 139,823
 
Basic and diluted net income per share:
Weighted average shares outstanding:
Weighted average shares for basic earnings per share 78,408 76,292 78,062 79,751
Effect of dilutive stock options and restricted stock  

451

 

2,153   602   2,716
Weighted average shares for diluted earnings per share  

78,859

 

78,445   78,664   82,467
Net income per share:
Basic

$

0.80

$

0.36

$

2.63

$

1.75
 
Diluted $ 0.80 $ 0.35 $ 2.61 $ 1.70
 
Comprehensive income:
Net income $ 63,007 $ 27,626 $ 205,535 $ 139,823
Other comprehensive loss  

(102 )

 

(182 )   (1,222 )   (962 )
Comprehensive income $ 62,905 $ 27,444 $ 204,313 $ 138,861
MARVEL ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
 
(unaudited)

 
December 31,

2008

  2007
(in thousands, except share data)

ASSETS

 

Current assets:
Cash and cash equivalents $ 105,335 $ 30,153
Restricted cash 43,647 20,836
Short-term investments 32,975 21,016
Accounts receivable, net 144,487 28,679
Inventories, net 11,362 10,647
Income tax receivable 2,029 10,882
Deferred income taxes, net 34,072 21,256
Prepaid expenses and other current assets  

5,135

  4,245
Total current assets 379,042 147,714
 
Fixed assets, net 3,432 2,612
Film inventory

181,564

264,817

Goodwill 346,152 346,152
Accounts receivable, non–current portion

1,321

1,300

Income tax receivable, non–current portion 5,906 4,998
Deferred income taxes, net

13,032

37,116

Deferred financing costs 5,810 11,400
Advances to joint venture partner

870

Other assets   455   1,249
Total assets

$

937,584

$

817,358
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 2,025 $ 3,054
Accrued royalties 76,580 84,694
Accrued expenses and other current liabilities 40,635 37,012
Deferred revenue 81,335 88,617
Film facilities 204,800

 

42,264
Minority interest to be distributed     556
Total current liabilities 405,375 256,197
Accrued royalties, non-current portion 10,499 10,273
Deferred revenue, non-current portion 48,939 58,166
Film facilities, non-current portion 8,201 246,862
Income tax payable, non-current portion 59,267 54,066
Other liabilities  

8,612

  10,291
Total liabilities   540,893   635,855
 
Commitments and contingencies
 

Stockholders’ equity:

Preferred stock, $.01 par value, 100,000,000 shares
authorized,
none issued

Common stock, $.01 par value, 250,000,000 shares authorized,
134,397,258
issued and 78,408,082 outstanding in 2008
and 133,179,310
issued and 77,624,842 outstanding in 2007

1,344 1,333
Additional paid-in capital 750,132 728,815
Retained earnings 555,125 349,590
Accumulated other comprehensive loss  

(4,617 )

 

(3,395 )
Total stockholders’ equity before treasury stock 1,301,984 1,076,343
Treasury stock, at cost, 55,989,176 shares in 2008 and 55,554,468
shares in 2007
  (905,293 )   (894,840 )
Total stockholders’ equity  

396,691

 

181,503
 

Total liabilities and stockholders’ equity

$

937,584

$

817,358
MARVEL ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)
 
Years Ended December 31,
2008   2007
(in thousands)
 
Cash flows from operating activities:
Net income

$

205,535 $ 139,823
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation and amortization 1,559 5,970
Amortization of film inventory 135,339
Gain on repurchase of debt (1,916 )
Amortization of deferred financing costs 4,981 4,980
Unrealized loss on interest rate cap and foreign currency forward
contracts
1,008 915
Non-cash charge for stock based compensation 6,192 7,926
Excess tax benefit from stock-based compensation (8,734 ) (2,454 )
Impairment of long term assets 1,663 1,301
Deferred income taxes 11,500 1,161
Minority interest of joint venture (net of distributions of $16,743
in 2008
and $14,751 in 2007)
(960 ) 9,750
Changes in operating assets and liabilities:
Accounts receivable (115,829 )

42,292

Inventories (715 ) (423 )

Income tax receivable

30,963
Prepaid expenses and other current assets

(890

) 2,986
Film inventory (53,135 ) (251,045 )
Other assets (214 ) (46 )
Deferred revenue (16,509 ) (28,956 )
Income taxes payable 21,151 17,820
Accounts payable, accrued expenses and other current liabilities   (8,738 )

 

10,431
Net cash provided by (used in) operating activities  

181,288

  (6,606 )
 
Cash flow used in investing activities:
Purchases of fixed assets (2,384 ) (2,169 )
Expenditures for product and package design (490 )
Proceeds from sales of equipment
Sales of short–term investments 66,055 333,380
Purchases of short–term investments (78,014 ) (354,396 )
Change in restricted cash  

(22,811

)   (12,309 )
Net cash used in investing activities   (37,154 )

 

(35,984 )
 
Cash flow (used in) provided by financing activities:
Borrowings from film facilities 106,300 255,926
Repayments of film facilities (180,509 )
Borrowings from line of credit 2,000
Repayments of line of credit (19,000 )
Deferred financing costs (609 )
Purchase of treasury stock (10,453 ) (211,954 )
Exercise of stock options 8,572 12,060
Excess tax benefit from stock-based compensation  

8,734

  2,454
Net cash (used in) provided by financing activities   (67,356 )

 

40,877
 
Effect of exchange rates on cash   (1,596 )  

(79

)
Net increase (decrease) in cash and cash equivalents 75,182 (1,792 )
Cash and cash equivalents, at beginning of year  

30,153

  31,945
Cash and cash equivalents, at end of year $ 105,335 $ 30,153

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