Marriott International, Inc. — Q3 2011 Form 10-Q
Business context and period. Unaudited results cover the 12 weeks ended September 9, 2011 and the 36 weeks ended that date; comparisons are to the corresponding periods ended September 10, 2010. Marriott operates lodging management and franchise businesses and a timeshare business, which it planned to spin off.
Financial and operating performance
| Metric | Q3 2011 | 36 weeks 2011 |
|---|---|---|
| Revenue | $2.874 billion, up 9% | $8.624 billion, up 7% |
| Operating income (loss) | $(144) million, versus $167 million | $279 million, down from $573 million |
| Net income (loss) | $(179) million, versus $83 million | $57 million, versus $285 million |
| Diluted EPS | $(0.52), versus $0.22 | $0.15, versus $0.76 |
| Operating cash flow | Not separately provided for the quarter | $885 million, versus $913 million |
| Debt at September 9 | $3.103 billion total: $480 million current and $2.623 billion long-term |
Q3 included a $324 million pre-tax, non-cash timeshare impairment ($234 million after tax), the principal cause of the quarterly loss. Adjusted EBITDA, a non-GAAP measure excluding the impairment and $28 million of other charges, was $240 million for Q3 and $761 million year to date, versus $220 million and $719 million, respectively.
Year-to-date investing cash outflow was $145 million and financing cash outflow was $1.025 billion. Financing included $1.225 billion of treasury-stock purchases and $100 million of dividends, partly offset by $397 million of net commercial-paper/credit-facility borrowing. Cash fell $285 million from year-end 2010 to $220 million. Shareholders’ equity declined to $430 million from $1.585 billion, largely reflecting share repurchases.
Liquidity included $1.273 billion of undrawn credit-facility capacity and $220 million cash; the filing states available borrowing capacity including cash was $1.493 billion. The $1.75 billion revolving facility expires in June 2016 and has a maximum leverage covenant of 4-to-1, which Marriott reported it was meeting.
Material changes and operating trends
- Worldwide comparable systemwide RevPAR rose 6.9% in Q3 to $96.15, with occupancy up 2.3 percentage points to 73.9% and average daily rate up 3.6% to $130.11. Year-to-date RevPAR rose 6.7% to $92.87.
- Management attributed higher management and franchise fees to stronger RevPAR, system growth and, to a lesser extent, favorable foreign exchange. Comparable company-operated house-profit margins increased 90 basis points in Q3 and 60 basis points year to date.
- Revenue growth included higher cost reimbursements, which are matched by reimbursed expenses and do not affect operating or net income. Excluding that pass-through category, the filing reports higher management/franchise fees and other operating revenue.
- Timeshare contract sales were $488 million year to date, broadly unchanged from $489 million. Management cited fewer sales to new customers, a shift from weeks-based to points-based products, and weak luxury fractional and residential demand. Timeshare segment results were a $238 million loss year to date, primarily due to the impairment.
- Marriott repurchased 36.5 million shares year to date at an average $33.56 per share; 12.4 million shares remained authorized for repurchase at quarter-end.
Outlook, commentary and risks
- Management expected to add more than 30,000 rooms gross during 2011 and reported a pipeline exceeding 105,000 rooms. It estimated 2011 investment spending of $500 million to $600 million, including $50 million to $100 million for maintenance capital.
- Marriott expected the timeshare spin-off as Marriott Vacations Worldwide Corporation to close before year-end 2011, subject to board approval, regulatory approvals, third-party consents, financing, intercompany arrangements and tax-related conditions. The filing cautions completion and timing are not assured. Expected transaction costs for full-year 2011 were $40 million to $50 million.
- Management projected approximately $325 million to $350 million of cash tax benefits through 2015 from the spin-off-related structure; approximately $55 million had been realized through the first three quarters. These benefits and the transaction’s tax-free treatment remained subject to IRS rulings and other conditions.
- Management described lodging demand as improving overall but noted global economic uncertainty, weak Middle East demand, and Japan demand still below 2010 levels despite recovery from the earthquake and tsunami. It also noted shorter Congressional calendars and budget concerns weighed on Washington, D.C. demand.
- Key risks include a stalled economic recovery, geopolitical events and disasters, competition and cost inflation, access to capital for owners and development, timeshare/residential demand and purchaser defaults, securitization-market access, and the possibility the spin-off is delayed, changed, taxable or not completed. Guarantees where Marriott was primary obligor had a $265 million maximum potential funding amount and a $64 million recorded liability.
- All 13 timeshare securitization pools were within performance thresholds at quarter-end; management anticipated three might fall outside thresholds in Q4 and estimated approximately $3 million of redirected cash flows for full-year 2011.
Most important facts for investors to verify
- Whether the $324 million timeshare impairment adequately reflects sale values and whether further write-downs or incentives become necessary.
- Progress and final terms of the timeshare spin-off, including IRS tax treatment, financing, costs, and realization of projected cash tax benefits.
- Whether lodging demand and RevPAR gains persist amid economic and geopolitical uncertainty, especially in the Middle East and Japan.
- Liquidity and leverage after substantial repurchases, including commercial-paper refinancing access, debt maturities and compliance with the credit-facility covenant.
- Timeshare loan performance, defaults, securitization-pool triggers, and the cash required to complete timeshare developments.
- The filing is unaudited interim reporting; year-to-date results may not indicate full-year performance.