Marriott International, Inc. — Form 10-Q Summary
Reporting period: Third quarter ended September 7, 2012, comprising twelve weeks; year-to-date figures cover thirty-six weeks. The unaudited filing compares results with the periods ended September 9, 2011. Marriott had spun off its timeshare business in November 2011, so prior-year comparisons include that business and are not directly comparable.
Business context and operating performance
Marriott primarily manages and franchises hotels rather than owning them. At quarter-end, 43% of system rooms were managed, 54% franchised, 2% owned or leased, and 1% held by unconsolidated joint ventures. The company reported four lodging segments: North American full-service, North American limited-service, international, and luxury.
- Worldwide comparable systemwide RevPAR increased 6.0% in the quarter to $100.40, with average daily rate up 4.7% to $134.59 and occupancy up 0.9 percentage points to 74.6%.
- For the first thirty-six weeks, worldwide systemwide RevPAR rose 6.5% to $97.89; average daily rate increased 4.2% to $136.51 and occupancy rose 1.6 percentage points to 71.7%.
- Worldwide comparable company-operated house-profit margins improved 180 basis points in the quarter and 140 basis points year to date. Management attributed improvement to stronger occupancy and rates, productivity gains, and lower energy costs.
- Marriott added 13,166 rooms gross during the first three quarters and had more than 120,000 rooms in its development pipeline at quarter-end. It reported 3,770 properties and 647,883 rooms across its system, including timeshare properties licensed to MVW.
Financial results and liquidity
| Metric | 12 weeks ended Sep. 7, 2012 | 12 weeks ended Sep. 9, 2011 | 36 weeks ended Sep. 7, 2012 | 36 weeks ended Sep. 9, 2011 |
|---|---|---|---|---|
| Revenue | $2.729 billion | $2.874 billion | $8.057 billion | $8.624 billion |
| Operating income (loss) | $213 million | $(144) million | $631 million | $279 million |
| Net income (loss) | $143 million | $(179) million | $390 million | $57 million |
| Diluted EPS | $0.44 | $(0.52) | $1.16 | $0.15 |
| Operating cash flow | Not presented for the twelve-week period | $808 million | $885 million |
- Revenue declined year over year largely because the prior-year periods included timeshare operations. Excluding the spin-off’s net revenue impact, lodging revenue increased $186 million in the quarter and $427 million year to date. Cost reimbursements are recorded gross with matching expenses and do not affect operating or net income.
- The prior-year third quarter included a $324 million pretax non-cash timeshare impairment charge. This and the spin-off materially affect reported earnings comparisons. In 2012, Marriott recorded a $41 million gain related to the sale of an interest in a North American limited-service joint venture and a $7 million impairment of a cost-method investment.
- Operating cash flow was $808 million year to date, versus $885 million. Capital expenditures were $316 million, compared with $128 million. Cash and equivalents were $105 million at quarter-end.
- Total debt was $2.509 billion, including $408 million current and $2.101 billion long term, up from $2.171 billion at year-end 2011. Commercial paper outstanding was $441 million; there were no Credit Facility borrowings. Available borrowing capacity, including cash, was $1.413 billion. The current ratio was approximately 0.4 to 1.0.
- Marriott issued $600 million of 3.0% Series K notes due 2019 earlier in 2012. After quarter-end, it issued $350 million of 3.25% Series L notes due 2022, receiving approximately $346 million net proceeds. Quarter-end long-term debt had a 4.1% average interest rate and approximately 4.3-year average maturity.
- Year-to-date share repurchases totaled 24.3 million shares at an average $37.24 per share; treasury-stock purchases used $884 million in cash. Dividends declared were $0.36 per share for the first three quarters.
Material changes versus the prior comparable period
- Reported operating income and net income improved substantially, but the comparison is heavily affected by the 2011 timeshare impairment, timeshare segment results, and spin-off. The company no longer reports a Timeshare segment and instead records MVW license fees in franchise revenue and unallocated corporate results.
- Across lodging operations, higher RevPAR and system growth supported management, franchise, and incentive fees. North American limited-service segment results also benefited from the $41 million joint-venture-related gain. International segment results were nearly flat year to date, while North American full-service and luxury results increased.
- Debt increased, reflecting the Series K issuance and increased commercial paper, partly offset by repayment at maturity of Series F notes. Capital spending increased, principally due to the acquisition of land and a building for planned hotel development.
Outlook, management commentary, and risks
- Management expected 2012 gross room additions of approximately 28,000, including about 8,100 rooms associated with Gaylord, and expected approximately 10,000 rooms to exit the system. The 2013 gross-addition outlook was 30,000 to 35,000 rooms. Construction delays had shifted some expected 2012 openings into 2013.
- Management forecast 2012 investment spending of approximately $850 million to $950 million, including about $100 million of maintenance capital spending. It expected approximately $116 million of spin-off-related cash tax benefits in 2012; $91 million had been realized during the first three quarters. Total expected cash tax benefits through 2015 were approximately $400 million to $450 million.
- Management said operating conditions generally improved, but demand was weaker in some markets, including greater Washington, D.C., parts of Europe, and Egypt, Jordan, Kuwait, and Oman. China demand moderated from the first quarter; India faced softer RevPAR amid economic challenges and added supply. Management described group booking pace for comparable North American Marriott full-service properties as up nearly 9% for the remainder of 2012 and over 7% for 2013.
- Key risks include economic weakness and travel-demand shocks; competition and possible early termination of management or franchise agreements; international political, regulatory, currency, and tax risks; owner access to financing; development delays and cost overruns; brand and franchisee execution; cybersecurity and privacy; and the possibility that the timeshare spin-off or related tax deductions fail to receive anticipated tax treatment.
- Guarantees for which Marriott was primary obligor had a maximum potential funding amount of $245 million and a recorded liability of $80 million. Additional secondary guarantees and commitments exist. The filing also describes an unresolved employee class-action lawsuit with no estimable loss range and a Korean Fair Trade Commission investigation for which no complaint had been received.
- The Gaylord brand and hotel management company acquisition closed October 1, 2012, after quarter-end, for $210 million cash. Marriott assumed management of four Gaylord hotels with approximately 7,800 rooms; management of another hotel was expected to begin later.
Important facts for investors to verify
- Separate underlying lodging growth from the effects of the timeshare spin-off and the prior-year $324 million impairment when assessing earnings trends.
- Assess the sustainability of RevPAR and house-profit improvement, including the weaker markets and regional demand trends noted by management.
- Track cash conversion, capital spending, buybacks, debt maturities, commercial-paper access, and the planned use of Series L proceeds.
- Monitor delivery of the stated room-growth pipeline and investment-spending outlook, including construction delays and room exits.
- Review the realization and tax qualification of the anticipated spin-off-related tax benefits, and developments in guarantees, litigation, and the Korean investigation.