MARRIOTT INTERNATIONAL INC quarterly report, Q1 FY2011

Marriott International, Inc. — Q1 2011 Form 10-Q

Business context and reporting period. The unaudited quarter comprised 12 weeks ended March 25, 2011; comparisons are with the 12 weeks ended March 26, 2010. Marriott operates lodging management and franchise businesses and a timeshare business across five reporting segments. Its strategy emphasizes management and franchising rather than ownership.

Financial performance and position

Metric	Q1 2011	Prior comparable period
Revenue	$2.778 billion	$2.630 billion
Operating income	$191 million	$180 million
Net income	$101 million	$83 million
Diluted EPS	$0.26	$0.22
EBITDA (non-GAAP)	$234 million	$221 million
Operating cash flow	$139 million	$160 million

Revenue grew 6%; net income increased 22% and diluted EPS rose 18%. Revenue included $1.999 billion of cost reimbursements, matched by reimbursed costs and without impact on operating or net income.
Worldwide comparable systemwide RevPAR rose 6.5% to $83.29, with average daily rate up 3.0% and occupancy up 2.1 percentage points to 64.6%. Worldwide comparable company-operated house-profit margin improved 30 basis points; North American margin fell 30 basis points, while international margin increased 180 basis points.
Cash and equivalents were $144 million at quarter-end, down from $505 million at year-end 2010. Net investing cash use was $178 million and financing cash use was $322 million; the quarter included $300 million of treasury-stock purchases and $32 million of dividends paid.
Debt totaled $2.857 billion, including $944 million of non-recourse debt related to securitized timeshare notes. The balance sheet showed $137 million of current debt and $2.720 billion of long-term debt. Marriott reported $42 million of commercial paper and no Credit Facility borrowings.
Available borrowing capacity was reported as $2.430 billion, including $144 million of cash; unused Credit Facility capacity was $2.286 billion. The $2.404 billion facility expires May 14, 2012, and Marriott expected to extend or replace it during 2011, anticipating a higher spread over LIBOR.
Segment financial results rose to $239 million from $209 million. North American Full-Service: $78 million versus $71 million; North American Limited-Service: $72 million versus $59 million; International: $36 million versus $32 million; Luxury: $18 million versus $21 million; Timeshare: $35 million versus $26 million.

Material changes versus the prior period

Higher management and franchise fees, mainly reflecting stronger RevPAR and system growth, were major contributors to improved results. General, administrative and other expenses increased 15% to $159 million, partly offsetting those gains.
Operating cash flow declined by $21 million, with working capital changes and other uses of $146 million versus $74 million in the prior-year quarter. Capital expenditures increased to $62 million from $25 million.
Timeshare contract sales fell 11% to $146 million. Management attributed the decline mainly to difficult comparisons against 2010 promotions and the transition from weeks-based to points-based products. Sales to existing owners represented more than 61% of contract sales, versus 48% a year earlier.
Luxury segment results declined 14%, principally due to higher general and administrative expense. Results in other listed lodging segments increased.
Marriott repurchased 7.8 million shares at an average $38.15 per share; 16 million shares remained authorized for repurchase. The declared quarterly dividend increased to $0.0875 per share from $0.04.

Outlook, management commentary, risks and contingencies

Management described lodging conditions as improving, with stronger demand and pricing in many markets, but noted that RevPAR remained below 2008 levels. Demand was weak in the Middle East amid regional unrest and in Japan following the earthquake and tsunami; Washington, D.C. demand was affected by a shorter Congressional calendar and budget negotiations.
Management reported more than 95,000 rooms in the lodging development pipeline, added 14,203 rooms gross in Q1, and expected approximately 35,000 gross room additions for full-year 2011. The filing does not provide a clear numerical full-year earnings or RevPAR forecast.
Marriott planned a tax-free spin-off of its timeshare operations and development business in late 2011, while retaining lodging management and franchising. Completion depended on board approval, regulatory and third-party consents, an IRS ruling, financing and other conditions; timing and terms were not assured. Marriott expected to receive franchise fees, including approximately 2% of developer contract sales plus $50 million annually for brand use.
Marriott estimated approximately $2.2 billion of cash outflows to complete all phases of its existing owned-timeshare portfolio from 2011 through 2030, based on development plans subject to change. One of 13 timeshare securitization pools was out of compliance with performance triggers at quarter-end; Marriott expected approximately $3 million of cash-flow redirection for 2011 and expected affected pools to cure by the end of Q2.
Guarantees for which Marriott was primary obligor had maximum potential future fundings of $213 million and a recorded expected-funding liability of $27 million. Additional exposures described include senior-living guarantees and hotel lease obligations. Commitments include a $7 million remaining payment for timeshare units expected in Q2 2011 and various joint-venture and property commitments.
Key risks include economic and geopolitical weakness, travel disruptions and disasters, competitive pressure, labor and operating-cost inflation, financing and development risks, timeshare purchaser defaults and securitization-market disruption, and risks to completing the planned spin-off. Marriott also disclosed that marketing vendor Epsilon reported unauthorized access to its customer email list; Marriott stated that names and email addresses, but not other customer information, were accessed.
Other notable matters: a disputed IRS refund claim for 2000–2001 software-development costs remained pending in IRS Appeals; ordinary-course legal proceedings were described as not expected to materially harm results, though outcomes are uncertain. Disclosure controls were assessed as effective, with no material Q1 change in internal control over financial reporting.

Important facts for investors to verify

Whether lodging demand, RevPAR and fee growth persist, particularly in North America and markets affected by geopolitical events or the Japan disaster.
Cash conversion and working-capital trends, given lower operating cash flow, reduced cash balances, and substantial share repurchases and investment outlays.
Debt refinancing and liquidity: the planned Credit Facility extension or replacement, its eventual pricing, and compliance with the 4-to-1 maximum leverage covenant.
Timeshare sales, loan performance and securitization triggers, as well as the estimated long-term development cash requirement.
Spin-off execution, financing, tax treatment, required approvals, final economics and the continuing commercial relationship between the companies.
Potential funding under guarantees and other commitments, and the scope and consequences of the Epsilon data incident.