Marriott International, Inc. — FY2012 Form 10-K
Reporting period: Fiscal year ended December 28, 2012 (52 weeks). The fourth quarter covered 16 weeks; this is an annual report, not a standalone quarterly filing. Unless stated otherwise, financial amounts are in millions of dollars.
Business context
Marriott operates, franchises, and licenses hotels worldwide, with limited property ownership. At year-end it had 3,801 properties and 660,394 rooms in 74 countries and territories. The 2012 business comprised North American Full-Service, North American Limited-Service, International, and Luxury lodging segments. Marriott completed the spin-off of its timeshare business to Marriott Vacations Worldwide (MVW) in November 2011 and now earns licensing fees from MVW.
Key financial metrics
| Metric | FY2012 | FY2011 |
|---|---|---|
| Revenue | $11,814 | $12,317 |
| Operating income | $940 | $526 |
| Net income | $571 | $198 |
| Diluted EPS | $1.72 | $0.55 |
| Cash from operations | $989 | $1,089 |
| Capital expenditures | $437 | $183 |
| Total debt at year-end | $2,935 | $2,171 |
| Cash and equivalents at year-end | $88 | $102 |
- Revenue fell 4%; the decline reflected the timeshare spin-off, partly offset by $779 million of growth in lodging-business revenue. Cost-reimbursement revenue was $9,405 million; corresponding reimbursed costs were also $9,405 million and did not affect operating income.
- Operating income margin was approximately 8.0% of reported revenue, versus 4.3% in 2011. The comparison is substantially affected by the spin-off and the $324 million 2011 timeshare impairment charge.
- Worldwide comparable systemwide RevPAR rose 6.1% to $97.34, with average daily rate up 3.9% to $137.49 and occupancy up 1.5 percentage points to 70.8%. Comparable company-operated house-profit margin improved 120 basis points.
- Operating cash flow declined to $989 million. Investing activities used $585 million and financing activities used $418 million. Marriott repurchased 31.2 million shares for $1.145 billion and paid $191 million in dividends.
- Year-end shareholders’ equity was a deficit of $1,285 million. The current-assets-to-current-liabilities ratio was approximately 0.5:1. Available borrowing capacity, including cash, was $1.321 billion; the $1.75 billion revolving credit facility expires in 2016 and includes a maximum leverage covenant of 4:1, which Marriott reported it was meeting.
Material changes and unusual items
- Net income increased $373 million year over year, including a $296 million favorable effect from the timeshare spin-off. The 2011 comparison included the $324 million pre-tax noncash impairment charge and $34 million in spin-off costs.
- Excluding the spin-off effect, lodging-business results benefited from higher fees, stronger RevPAR, and cost controls. Franchise fees rose to $607 million from $506 million; incentive management fees rose to $232 million from $195 million.
- Marriott acquired the Gaylord brand and hotel management company for $210 million, adding five managed hotels and about 8,100 rooms. It sold its ExecuStay business and recognized a $41 million gain on the sale of a joint-venture interest, including previously deferred gain.
- Debt increased by $764 million, mainly reflecting issuance of Series K and L notes and higher commercial paper, partly offset by repayment of Series F notes. After year-end, Marriott paid $411 million to retire Series J notes at maturity.
- The company recorded $152 million of cash tax benefits in 2012 related to the spin-off-related tax restructuring. It expected approximately $140 million in 2013 and about $480 million cumulatively through 2014; realization depends on tax treatment and related assumptions.
Outlook, commentary, and risks
- Management described lodging demand as improving overall, citing stronger North American demand, international arrivals in Europe, and continued strength in parts of Asia-Pacific. It noted weaker demand in certain European markets, Washington, D.C., Egypt, Jordan, Kuwait, Oman, and India, and moderating demand in China.
- Marriott reported nearly 130,000 rooms in its development pipeline and expected gross additions of approximately 30,000–35,000 rooms in 2013. It forecast 2013 investment spending of approximately $600–$800 million, including about $100 million for maintenance. This is investment-spending guidance, not earnings guidance.
- For comparable North American Marriott Hotels & Resorts, projected 2013 group revenue was up 6% year over year; completed special-corporate-account negotiations indicated average rates about 5% higher, with approximately 85% of negotiations complete at the time of the report.
- Key risks include economic and travel-demand weakness, competition and online travel intermediaries, termination of management or franchise agreements, owner access to financing, international political and currency risks, disasters and terrorism, cybersecurity and privacy failures, brand or service deterioration, and tax uncertainty related to the MVW spin-off.
- Contingencies include primary-obligor guarantees totaling $224 million in maximum potential funding and $70 million in recorded liabilities, plus secondary guarantees and other commitments. Marriott disclosed an unresolved employee equity-award class-action suit and a Korean Fair Trade Commission investigation; it could not estimate a possible loss for the lawsuit.
Important facts for investors to verify
- Separate recurring lodging performance from the effects of the 2011 timeshare spin-off, impairment charge, and 2012 joint-venture gain when comparing earnings.
- Review debt maturities, commercial-paper reliance, the credit-facility leverage covenant, and the post-year-end Series J repayment.
- Assess the assumptions underlying expected cash tax benefits and the tax-free status of the MVW spin-off.
- Track pipeline conversion, planned investment spending, RevPAR and margin trends, and performance in weaker regional markets.
- Review the full notes for guarantee exposure, loan impairments, legal matters, and the valuation assumptions for loyalty-program liabilities; the year-end rewards liability was $2.021 billion.