Marriott International, Inc. — Q1 2012 Form 10-Q
Reporting period: Twelve weeks ended March 23, 2012; unaudited. Comparisons are with the twelve weeks ended March 25, 2011. Marriott completed the spin-off of its timeshare business, Marriott Vacations Worldwide (MVW), in November 2011; accordingly, prior-year results include the former timeshare segment while 2012 results do not.
Financial results and position
| Metric | Q1 2012 | Q1 2011 | Change / context |
|---|---|---|---|
| Revenue | $2,552 million | $2,778 million | Down 8%; the spin-off reduced reported revenue by a net $326 million, partly offset by $100 million growth in lodging revenue. Cost reimbursements, which carry corresponding costs and no profit impact, were $2,035 million. |
| Operating income | $175 million | $191 million | Down $16 million, mainly reflecting the spin-off; lodging operating income increased $18 million. |
| Net income | $104 million | $101 million | Up $3 million. |
| Diluted EPS | $0.30 | $0.26 | Up 15%; weighted average diluted shares fell to 344.6 million from 381.8 million. |
| Operating cash flow | $125 million | $139 million | Down $14 million. |
| Investing cash flow | $(135) million | $(178) million | Capital expenditures were $197 million versus $62 million, including a $160 million hotel-development land and building acquisition. |
| Financing cash flow | $198 million | $(322) million | Includes $590 million net proceeds from 2019 notes, offset in part by debt repayments, $136 million of treasury-stock purchases, and $34 million of dividends paid. |
| Cash and equivalents | $290 million | $102 million at year-end 2011 | Up $188 million during the quarter. |
| Total debt | $2,527 million | $2,171 million at year-end 2011 | Up $356 million; current portion was $755 million and long-term debt was $1,772 million. Debt includes $91 million commercial paper. |
Worldwide comparable systemwide RevPAR increased 6.8% to $88.49, with average daily rate up 3.5% to $133.78 and occupancy up 2.0 percentage points to 66.1%. Worldwide comparable company-operated house-profit margin increased 120 basis points; house profit per available room increased 9.6% on a constant-dollar basis.
By segment, revenue and segment results were: North American Full-Service, $1,301 million and $89 million; North American Limited-Service, $532 million and $84 million; International, $271 million and $35 million; and Luxury, $399 million and $21 million. Segment results exclude unallocated corporate items and are not the same as consolidated net income.
Liquidity, outlook, and management commentary
- Cash plus available borrowing capacity was $1.948 billion at quarter-end. This included $290 million cash and $1.658 billion available under the $1.75 billion revolving credit facility; no facility borrowings were outstanding. The facility expires June 23, 2016, and includes a maximum leverage covenant of 4 to 1. Management said it expects cash generation, capital-market access, and the facility to meet liquidity needs.
- Management expected fiscal 2012 investment spending of approximately $600 million to $800 million, including about $100 million of maintenance capital spending.
- Management expected to add 25,000 to 30,000 gross rooms in 2012 and have 7,000 to 8,000 rooms leave the system, largely for quality reasons. The development pipeline was nearly 115,000 rooms.
- Marriott expected $400 million to $450 million of cash tax benefits from the timeshare spin-off through 2015, including approximately $127 million in fiscal 2012; $76 million had been realized in 2011, and none in Q1 2012.
- Management described lodging demand as improving overall, supported by low supply growth, higher rates and occupancy, and cost controls. It noted weak demand in the greater Washington, D.C. area and Middle East, as well as weaker European markets dependent on regional demand. North American group booking pace for the rest of 2012 was up more than 11% at comparable Marriott Hotels & Resorts.
Material changes, risks, and contingencies
- The year-over-year revenue and operating-income declines principally reflect the timeshare spin-off, rather than a deterioration in lodging operations. For a more comparable view, management reported 2011 Adjusted EBITDA of $197 million after illustrative spin-off adjustments; 2012 reported EBITDA was $215 million. These are non-GAAP measures and are not directly interchangeable.
- Marriott issued $600 million principal amount of 3.000% Series K Notes due 2019, receiving approximately $590 million net. The proceeds may be used for general corporate purposes, including capital spending, acquisitions, share repurchases, or commercial-paper repayment. Long-term debt had a 4.9% average interest rate and approximately 5.6-year average maturity.
- Primary-obligor guarantees had a maximum potential funding amount of $213 million, with a $49 million recorded liability. Separate secondary guarantees totaled $314 million; certain obligations are indemnified by third parties, including MVW. These exposures are not equivalent to expected cash payments.
- Key risks include economic weakness and travel-demand volatility; geopolitical unrest and other disruptions; competition and possible management or franchise agreement terminations; access to financing for hotel owners and development projects; brand and technology risks; and international, currency, privacy, and insurance exposures.
- The company warned that the MVW spin-off’s tax-free treatment and anticipated tax deductions depend on continuing assumptions and representations and could be challenged by tax authorities. A taxable spin-off could create significant tax liabilities. Tax authorities were examining returns; unrecognized tax benefits were $40 million at quarter-end.
- Ordinary-course legal proceedings were described as not expected to materially harm the company, though outcomes are uncertain. Management reported effective disclosure controls and no material first-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Separate ongoing lodging performance from the year-over-year comparison effect of removing the former timeshare segment, and assess the non-GAAP adjusted comparison on its stated assumptions.
- Track RevPAR, occupancy, rates, group bookings, segment results, and the pace and quality of room additions and exits, particularly in weaker markets.
- Monitor cash conversion and planned investment spending against the $600 million to $800 million outlook, including the effect of hotel acquisitions and other investments.
- Review debt maturities, commercial-paper access, credit-facility availability, and compliance with the leverage covenant; the current portion of debt was $755 million.
- Assess realization and timing of expected spin-off tax benefits, the risk to tax-free treatment, and the related MVW indemnification terms.
- Evaluate potential funding exposure under guarantees and other commitments alongside their recorded liabilities, collateral, and indemnities.