MARRIOTT INTERNATIONAL INC annual report, FY2010

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Marriott International, Inc. — FY2010 Form 10-K

Business context and reporting period

Marriott operates and franchises hotels and related lodging businesses, with a Timeshare development and sales segment. At December 31, 2010, its system comprised 3,545 properties and 618,104 rooms in 70 countries and territories; approximately 98% of rooms were managed or franchised rather than owned or leased. Fiscal 2010 ended December 31 and contained 52 weeks. Fiscal 2009 ended January 1, 2010 and also contained 52 weeks; the fourth quarter of each year contained 16 weeks.

Financial performance and liquidity

  • Revenue rose 7% to $11.691 billion from $10.908 billion. The $557 million increase in cost-reimbursement revenue largely offset corresponding expenses and did not affect operating or net income.
  • Operating income was $695 million, versus an operating loss of $152 million in 2009. Net income attributable to Marriott was $458 million, or diluted EPS of $1.21, compared with a $346 million net loss and diluted loss per share of $0.97. Approximate operating margin was 5.9%, versus negative 1.4% in 2009.
  • FY2010 fourth-quarter revenue was $3.642 billion, operating income $122 million, net income attributable to Marriott $173 million, and diluted EPS $0.46.
  • Worldwide comparable systemwide RevPAR increased 5.8%; company-operated RevPAR increased 6.3% to $103.30, as occupancy rose 4.1 percentage points to 68.7% and average daily rate was flat. International systemwide RevPAR rose 9.2%; North American systemwide RevPAR rose 4.9%.
  • Operating cash flow was $1.151 billion, up from $868 million. Capital expenditures were $307 million; cash and equivalents ended the year at $505 million.
  • Total debt was $2.829 billion, including $1.016 billion of newly consolidated non-recourse timeshare securitization debt. Long-term debt excluding current maturities was $2.691 billion. Marriott repaid its $425 million credit-facility balance and reported $2.831 billion of available borrowing capacity, including cash. The current ratio was approximately 1.4:1.
  • Year-end total assets were $8.983 billion and shareholders’ equity $1.585 billion. Cash dividends declared totaled $0.2075 per share for 2010.

Material changes versus prior period

  • The lodging recovery lifted fees and segment results: base management and franchise fees increased by $73 million combined, and incentive management fees increased by $28 million. Lodging segment results were $862 million, compared with $683 million in 2009.
  • Timeshare segment results improved to $121 million from a $679 million loss. Timeshare contract sales, including joint ventures, were $685 million, up 3% from $665 million, but remained far below $1.076 billion in 2008.
  • The large year-over-year earnings improvement is not solely an operating comparison: 2009 included $752 million of pretax Timeshare strategy impairment charges and $51 million of restructuring costs. FY2010 also included $111 million of long-lived asset impairment charges.
  • Adoption of new consolidation and transfer-of-financial-assets standards brought 13 securitization entities onto the balance sheet. Marriott recorded a one-time, noncash $146 million after-tax reduction to opening equity; the adoption also increased reported timeshare interest income and expense and changed cash-flow classification.
  • Cash flow from operations rose, while debt increased by $531 million year over year, primarily because of the securitization consolidation; Marriott had no year-end borrowings under its revolving credit facility.

Outlook, commentary, risks, and unusual items

  • Management said lodging demand and RevPAR improved during 2010, with stronger trends late in the year, but RevPAR remained below 2008 levels. It expected to add approximately 35,000 hotel rooms gross in 2011; nearly 105,000 rooms were under construction, awaiting conversion, or approved in the pipeline.
  • Management expected to extend or replace its $2.4 billion credit facility during 2011 and considered liquidity adequate. The facility expires in May 2012 and includes a maximum leverage covenant of 4:1; Marriott reported compliance.
  • In February 2011, Marriott announced a proposed tax-free spin-off of its Timeshare operations and development business, targeted for completion by year-end 2011. The transaction remained subject to regulatory approvals, third-party consents, an IRS ruling, financing arrangements, and board approval.
  • An $85 million tax benefit from settling IRS issues materially reduced 2010 tax expense; a further $12 million benefit primarily reflected revisions to prior-year foreign tax estimates. The reported effective tax rate was 16.8%.
  • Timeshare credit remains a key exposure: the year-end allowance for timeshare notes was $218 million, and management estimated a 9.25% average remaining default rate. Seven securitized pools triggered during 2010; six had cured by year-end and one remained out of compliance.
  • Other principal risks include economic and travel-demand weakness, competition, owner financing and property performance, timeshare and residential development exposure, currency and international risks, catastrophic events, data security and privacy, and possible termination of management or franchise agreements. The filing reports ordinary-course legal proceedings; management did not expect their outcome to materially harm the company, while noting outcomes are uncertain.

Important facts for investors to verify

  • Whether the proposed Timeshare spin-off is completed on the stated timetable and how its final terms, financing, and pro forma financials affect Marriott.
  • How much of the earnings rebound reflects sustainable lodging recovery versus the absence of 2009 impairments and the 2010 tax settlement benefit.
  • Performance of timeshare receivables and securitization pools, reserve adequacy, and the consequences of any further defaults or cash-flow triggers.
  • Debt and liquidity after securitization consolidation, including the refinancing or replacement of the revolving credit facility before its May 2012 expiry.
  • Growth in room rates as well as occupancy, since management noted that average daily rates were flat worldwide and weak banquet and catering spending persisted.