Marriott International, Inc. — Form 10-Q Summary
Business context and reporting period. This unaudited filing covers the 12 weeks ended June 18, 2010 (second quarter) and the 24 weeks ended June 18, 2010 (first half), compared with the periods ended June 19, 2009. Marriott operates and franchises hotels and runs a timeshare business across five segments. At quarter-end, it operated or franchised 3,489 properties with 607,252 rooms; its model was predominantly management and franchising, with about 2% of system rooms owned or leased.
Financial performance and liquidity
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Revenue | $2.771 billion | $2.562 billion | $5.401 billion | $5.057 billion |
| Operating income | $226 million | $99 million | $406 million | $139 million |
| Net income attributable to Marriott | $119 million | $37 million | $202 million | $14 million |
| Diluted EPS | $0.31 | $0.10 | $0.54 | $0.04 |
| Operating cash flow | Not separately provided for quarter | $522 million | $347 million | |
| Capital expenditures | Not separately provided for quarter | $64 million | $83 million |
- First-half EBITDA, a non-GAAP measure, was $499 million versus $249 million; adjusted EBITDA was $499 million versus $435 million. The adjusted measure excludes specified 2009 restructuring and other charges.
- Worldwide comparable systemwide RevPAR rose 7.0% in Q2 and 3.1% in the first half. First-half RevPAR increased 2.3% in North America and 6.5% outside North America. Improvement was generally occupancy-led; average daily rates remained weak in many markets.
- Cash and equivalents were $100 million at June 18, down $15 million from year-end. Total debt was $2.911 billion versus $2.298 billion at year-end, including $987 million of non-recourse timeshare securitization debt. Available borrowing capacity, including cash, was reported as $2.310 billion. The $2.404 billion credit facility expires May 2012; Marriott said it was in compliance with covenants.
- Marriott generated $522 million of operating cash flow, repaid $329 million net under the credit facility and $179 million of long-term debt, and paid $14 million of dividends during the first half. The board declared a $0.04-per-share quarterly dividend, paid June 25.
Material changes versus the prior comparable period
- Q2 revenue rose 8% and first-half revenue rose 7%; growth reflected higher fees, property-system growth, timeshare financing revenue, and cost reimbursements. Reimbursements are recorded with matching expenses and do not affect operating or net income.
- Operating income and earnings increased substantially, helped by stronger lodging performance, lower restructuring costs, and lower general and administrative expenses. Prior-year expenses included impairment, loan-loss, restructuring, and other charges; the comparison is therefore not solely a measure of underlying improvement.
- Marriott adopted new consolidation and transfer-accounting rules in the first quarter, bringing 13 timeshare securitization entities onto its balance sheet. Adoption caused a one-time, noncash $146 million after-tax reduction to equity and increased reported assets and liabilities. It also increased reported timeshare interest income and interest expense and changed cash-flow classification. This limits direct comparability with 2009.
- Timeshare contract sales fell 23% in Q2 to $161 million and 4% in the first half to $325 million. Timeshare segment results improved to $30 million in Q2 from a $35 million loss, and to $55 million in the first half from a $52 million loss, with much of the improvement tied to financing/accounting effects and lower prior-year charges.
Outlook, management commentary, risks, and unusual items
- Management described lodging conditions as improving: occupancy strengthened, room rates stabilized or improved in some markets, and group bookings improved. Booking windows remained short. Management expected meaningfully higher negotiated corporate rates for 2011, but this was an expectation, not firm guidance.
- Marriott expected to open more than 30,000 gross rooms in fiscal 2010 and reported approximately 95,000 rooms in its development pipeline. It projected 2010 annual savings of about $113 million from timeshare restructuring, $12 million from hotel-development restructuring, and $10–$11 million from above-property lodging management changes.
- The new Marriott Vacation Club Destinations points program launched after quarter-end. Management estimated approximately $10 million of 2010 start-up costs and anticipated lower unsold maintenance expense over time; results depend on customer uptake and execution.
- Timeshare securitization performance triggers redirect excess cash to debt repayment. One pool remained out of compliance at quarter-end; Marriott expected five additional pools to reach triggers in Q3, with all expected to cure during Q3 or Q4. It estimated about $8 million of 2010 cash-flow redirection.
- Risks include an uneven economic recovery, weak timeshare and residential demand, customer loan defaults, financing-market disruption, property-owner disputes and contract terminations, development and completion risks, foreign exchange, and exposure to disasters, disease, geopolitical events, labor and regulatory changes. Marriott also disclosed guarantees, commitments, letters of credit, and surety bonds; primary-obligor guarantees had a maximum potential funding amount of $211 million and a $25 million recorded liability.
- Tax authorities continued examining returns. Unrecognized tax benefits were $224 million; the company anticipated federal appeals negotiations that could materially affect those balances. Marriott said market-risk exposure had not materially changed and disclosure controls were effective.
Important facts for investors to verify
- Separate operating recovery from the effects of the new timeshare consolidation rules and unusually large prior-year charges; assess sustainable earnings and cash conversion.
- Track RevPAR composition—occupancy versus average daily rates—and the durability of demand and pricing improvements across regions and brands.
- Monitor timeshare contract sales, loan delinquencies and reserves, securitization triggers, and cash redirection; compare reported timeshare profit with underlying sales performance.
- Review debt maturities, credit-facility availability and covenant headroom, and the effects of consolidated non-recourse securitization debt on reported leverage.
- Assess execution and costs of the new points-based program, the development pipeline, projected cost savings, guarantees, and outstanding investment and purchase commitments.