Marriott International, Inc. — 2010 Third-Quarter Form 10-Q
Business context and reporting period
Unaudited results cover the 12 and 36 weeks ended September 10, 2010, compared with the corresponding periods ended September 11, 2009. Marriott operates lodging and timeshare businesses across five segments. Its lodging model is primarily management and franchising; at quarter-end, 45% of system rooms were managed, 53% franchised, and 2% owned or leased.
Key financial metrics
| Metric | 12 weeks ended Sep. 10, 2010 | 36 weeks ended Sep. 10, 2010 |
|---|---|---|
| Revenue | $2.648 billion | $8.049 billion |
| Operating income | $167 million | $573 million |
| Net income attributable to Marriott | $83 million | $285 million |
| Diluted EPS | $0.22 | $0.76 |
| Operating cash flow | $913 million for the 36-week period |
Revenue rose 7% in both comparison periods. Cost reimbursements accounted for $1.900 billion of quarterly revenue and $5.700 billion year to date; Marriott states these pass-through amounts have no impact on operating or net income. Worldwide comparable company-operated RevPAR increased 8.4% in the quarter and 5.5% year to date. Quarterly occupancy rose 3.7 percentage points to 71.2%, and average daily rate increased 2.8%. Worldwide company-operated house-profit margins rose 90 basis points in the quarter and 30 basis points year to date.
At September 10, cash and equivalents were $223 million, versus $115 million at fiscal year-end. Total debt was $2.726 billion, including $912 million of non-recourse timeshare securitization debt; debt was $2.298 billion at year-end 2009. Marriott had no Credit Facility borrowings, $2.311 billion of undrawn facility capacity after letters of credit, and stated available borrowing capacity plus cash of $2.534 billion. Capital expenditures were $147 million; dividends paid were $29 million during the 36 weeks. Quarterly declared dividends were $0.04 per share.
Material changes versus the prior comparable period
- Marriott returned to positive earnings from losses in 2009: attributable net income was $83 million versus a $466 million quarterly loss, and $285 million versus a $452 million 36-week loss. Comparisons are heavily affected by $752 million of 2009 timeshare strategy impairment charges ($502 million after tax); no such charges were recorded in 2010.
- Operating income improved by $673 million for the quarter and $940 million year to date, substantially reflecting the absence of those prior-year impairments, alongside stronger lodging fees and timeshare results.
- Interest expense increased to $41 million for the quarter and $130 million year to date, principally because new accounting rules required consolidation of previously securitized timeshare notes and related debt. The adoption also caused a one-time, non-cash $146 million after-tax reduction to shareholders’ equity at the start of 2010.
- Timeshare revenue included interest on newly consolidated securitized loans. Timeshare reserves increased, and Marriott now reserves fully for defaulted notes in addition to reserves on other notes.
Outlook, management commentary, risks and contingencies
- Management reported improving lodging demand and pricing, with stronger corporate transient and association-group demand; banquet and catering spending remained weak. Booking windows remained short. Marriott expected 2011 negotiated corporate rates to be meaningfully higher, based on recent demand.
- Marriott expected to open about 30,000 gross rooms in fiscal 2010 and reported a development pipeline of nearly 95,000 rooms. No formal earnings or revenue guidance is stated in the provided filing text.
- The new Marriott Vacation Club Destinations points program launched in June 2010. Early results exceeded management’s expectations, but sales to existing owners increased while sales to new customers declined. Management expected accelerated new-customer sales in 2011 and said it did not expect to develop new timeshare resorts for the foreseeable future.
- Management projected 2010 annual cost savings of about $113 million in timeshare, $12 million in hotel development, and $10–$11 million from above-property lodging staffing reductions; portions had already been realized during the first three quarters.
- Three of 13 timeshare securitization pools were out of compliance with performance triggers at quarter-end. Marriott expected two to remain out of compliance initially in the fourth quarter, with subsequent cures anticipated; approximately $6 million of cash was redirected to debt repayment during the first three quarters.
- Timeshare purchaser credit is a notable exposure: net notes receivable were $1.476 billion, reserves totaled $312 million, and estimated average remaining default rates on timeshare notes were 9.6%. The filing reports $134 million of timeshare loans on nonaccrual status.
- Guarantees where Marriott was primary obligor had a maximum potential funding amount of $204 million and a recorded liability of $26 million. Additional contingent exposures include $143 million of senior-living guarantees and hotel lease obligations; Marriott said it did not expect to fund those amounts, while noting counterparty financial concerns in one case.
- Other risks include economic and lodging-demand uncertainty, competition, financing and development risk, timeshare/residential sales and defaults, foreign exchange, legal and regulatory matters, and natural or man-made disruptions. The filing says market-risk exposure had not materially changed. Disclosure controls were considered effective.
Most important facts for investors to verify
- How much of the earnings rebound reflects ongoing operating improvement versus the absence of 2009 impairment and restructuring charges.
- The effects of timeshare securitization consolidation on debt, interest expense, cash-flow classification, and future credit losses.
- Timeshare loan delinquencies, reserve adequacy, securitization-pool trigger status, and sales trends under the new points program.
- Whether lodging RevPAR, room-rate recovery, and management/franchise fee growth continue, especially given weak group-related ancillary spending and short booking windows.
- Debt maturities, Credit Facility availability and covenant headroom, and potential funding under guarantees and other commitments.
- The outcome and potential financial effect of tax appeals and other legal or regulatory proceedings; the filing does not provide a clear quantified estimate of any ultimate exposure.