Marriott International, Inc. — Q2 2009 Form 10-Q
Reporting period: Twelve weeks ended June 19, 2009; year-to-date figures cover the twenty-four weeks ended June 19, 2009. Comparisons are with the periods ended June 13, 2008. Financial statements are unaudited; amounts are in millions except per-share data.
Business context
Marriott operates lodging and timeshare businesses across North American full-service, North American limited-service, international, luxury and timeshare segments. Its lodging model is primarily management and franchising: at quarter-end, 48% of system rooms were managed, 50% franchised and 2% owned or leased. Management attributed weak results to the recession, tight credit, soft travel demand and lower consumer confidence. H1 North American comparable company-operated RevPAR fell 20.9%.
Financial performance
| Metric | Q2 2009 | Q2 2008 | H1 2009 | H1 2008 |
|---|---|---|---|---|
| Revenue | $2,562 | $3,185 | $5,057 | $6,132 |
| Operating income | $100 | $313 | $182 | $508 |
| Income from continuing operations | $35 | $151 | $10 | $272 |
| Net income attributable to Marriott | $37 | $157 | $14 | $278 |
| Diluted EPS from continuing operations | $0.10 | $0.41 | $0.04 | $0.74 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $347 | $357 |
Revenue declined 20% in Q2 and 18% in H1. Cost reimbursements, which Marriott says do not affect operating income or net income, were $1,787 in Q2 and $3,597 in H1. Excluding those pass-through reimbursements, the filing does not present a single comparable net-revenue measure.
Q2 operating income fell 68%; H1 operating income fell 64%. Lower management and franchise fees, incentive fees, timeshare results and owned/leased property results were major drivers. Q2 and H1 included restructuring costs of $33 and $35, respectively. H1 also included $151 of other charges, including impairments, loan-loss provisions, residual-interest valuation charges and a software write-off.
Worldwide comparable systemwide RevPAR decreased 21.4% in Q2 and 19.1% in H1; comparable company-operated RevPAR declined 23.0% and 20.7%, respectively. Worldwide company-operated house-profit margin contracted 450 basis points in Q2 and 410 basis points in H1, despite tight cost controls.
Cash, debt and liquidity
H1 operating cash flow was $347, versus $357 a year earlier. Investing activities used $73, compared with $259; financing activities used $283, compared with $305. Cash decreased $9 from year-end to $125. H1 capital expenditures were $83, dividends paid $61, and debt repayments and repurchases totaled $230.
At June 19, total debt was $2,849, down from $3,095 at year-end; this included $136 current debt and $2,713 long-term debt. The $2.4 billion effective revolving credit facility had $896 drawn, with $1.369 billion of unused capacity after letters of credit. Marriott reported $1.494 billion of available borrowing capacity including cash. Long-term debt ratings were BBB- from S&P and Baa3 from Moody’s, both described as lowest investment grade. The credit facility includes a maximum leverage covenant of 4:1; Marriott said it was in compliance.
Changes, outlook and risks
- Demand and segment performance: All five segments reported lower revenue year over year. H1 Timeshare segment results shifted to a $52 loss from $74 income; contract sales fell 49% to $338. Luxury demand was particularly weak. Management said Q2 leisure demand improved from Q1, largely due to discounting, while group cancellations moderated but meeting attrition remained significant.
- Cost actions and outlook: Marriott projected approximately 30,000 gross room openings for fiscal 2009, excluding residential and timeshare units; its development pipeline exceeded 110,000 rooms. It projected annual restructuring-related savings of $70–$90 ($43–$55 after tax), with $30 already realized. It expected $8–$13 of additional restructuring costs in H2 and aimed to complete initiatives by year-end. No full-year earnings or revenue guidance is stated in the provided filing text.
- Timeshare and securitization exposure: Weak demand, cancellations and limited credit availability may affect inventory values, cash flows and note sales. Seven securitized loan pools reached performance triggers amid increased defaults; Marriott expected these triggers to reduce cash inflows by about $20 compared with full-year 2008. More than 90-day delinquencies were $22 on $1.260 billion of timeshare principal outstanding; Marriott’s stated maximum exposure to the securitization entities was its residual interests, valued at $180.
- Other unusual items: Marriott recorded a $21 H1 gain from repurchasing $122 principal amount of senior notes. H1 included $43 of loan-loss provisions, a $49 security-deposit impairment, a $30 joint-venture impairment and $25 of residual-interest valuation charges. A $17 Q2 tax expense, and $43 H1 tax expense, primarily related to the IRS treatment of funds received from foreign subsidiaries; the issue is contested. Unrecognized tax benefits were $226 at quarter-end.
- Contingencies and risks: Primary-obligor guarantees totaled $291 maximum potential future funding, with a $33 recorded liability. Marriott also disclosed additional secondary guarantees and project commitments. Risks include prolonged recession, further RevPAR declines, credit-market disruption, refinancing and rating pressure, timeshare inventory impairment, defaults, foreign exchange, H1N1-related travel effects, and legal or tax outcomes. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether lodging demand, RevPAR and hotel margins stabilize, and whether cost controls can offset further demand weakness.
- Whether projected restructuring savings materialize and whether additional charges or timeshare inventory impairments arise.
- Timeshare loan delinquencies, securitization trigger effects, note-sale capacity and valuation assumptions for retained interests.
- Cash generation, credit-facility availability, covenant headroom, debt maturities and credit-rating developments.
- Resolution and potential financial impact of the foreign-subsidiary tax dispute and other tax examinations.