Marriott International, Inc. — Q3 2009 Form 10-Q
Business context and reporting period. Unaudited results cover the 12 and 36 weeks ended September 11, 2009; comparisons are to the corresponding periods ended September 5, 2008. Marriott operates lodging management and franchise businesses and a more capital-intensive timeshare business. Management cited recession-driven weak travel demand, reduced business and group activity, and fragile credit markets.
Financial performance and liquidity
| Metric | 12 weeks ended Sept. 11, 2009 | 36 weeks ended Sept. 11, 2009 | Prior comparable period |
|---|---|---|---|
| Revenue | $2.471 billion | $7.528 billion | $2.963 billion and $9.095 billion, respectively |
| Operating income (loss) | $(506) million | $(324) million | $203 million and $711 million, respectively |
| Net income (loss) attributable to Marriott | $(466) million | $(452) million | $94 million and $372 million, respectively |
| Diluted EPS attributable to Marriott | $(1.31) | $(1.27) | $0.25 and $1.00, respectively |
| Operating cash flow | $597 million for 36 weeks | $555 million for prior 36 weeks |
- Revenue fell 17% in both the quarter and year-to-date period. Lower cost-reimbursement revenue accounted for $258 million of the quarterly and $798 million of the year-to-date declines; these reimbursements carry no direct profit contribution because costs are passed through.
- The quarter included $752 million of pretax Timeshare strategy impairment charges ($502 million after tax), primarily non-cash. The filing attributes $614 million to operating income and $138 million to non-operating items. The charges reflect write-downs and funding commitments across timeshare, fractional and residential projects.
- Worldwide comparable systemwide RevPAR fell 19.9% in the quarter and 19.3% year to date, in constant dollars. Comparable company-operated house profit margin declined 490 basis points in the quarter and 440 basis points year to date, despite extensive cost controls.
- Cash and equivalents were $130 million at September 11, 2009, versus $134 million at January 2, 2009. Long-term debt was $2.523 billion and current debt $137 million, for total debt of $2.660 billion, down from $3.095 billion at year-end 2008.
- Available borrowing capacity was reported as $1.706 billion, including $1.576 billion of unused Credit Facility capacity and $130 million of cash. The $2.4 billion effective revolving facility expires May 2012; Marriott reported compliance with its maximum-leverage covenant. It had suspended commercial-paper issuance and did not expect to resume under then-current market conditions.
- Capital expenditures were $112 million for the 36 weeks, versus $220 million in the prior period. Financing cash outflows included $418 million of debt repayments and repurchases and $63 million of dividends; no share repurchases were made in the period.
Material changes and segment trends
- Every segment reported lower revenue year to date: North American full-service down 14%, limited-service down 11%, international down 31%, luxury down 15%, and timeshare down 27%.
- Timeshare contract sales fell 50% in both the quarter and year-to-date period. The segment recorded losses of $681 million for the quarter and $733 million year to date, driven principally by impairments and weaker sales and financing results.
- Comparable hotel demand remained broadly weak. Year-to-date RevPAR declined 20.8% for comparable North American company-operated properties and 21.0% for comparable international company-operated properties. Luxury was particularly pressured: comparable luxury RevPAR fell 26.2% year to date.
- Marriott repurchased $122 million principal amount of senior notes in the first three quarters and recognized a $21 million gain on extinguishment. It paid $79 million of principal and interest to retire Series C notes at maturity on September 15, after quarter-end.
Outlook, commentary, risks and unusual items
- Management said demand remained soft, especially for luxury, group and business-transient travel. Group cancellations and meeting attrition moderated from earlier periods, while leisure, government and other discounted transient demand improved with promotions. Near-term new group bookings remained weak.
- Management emphasized protecting margins, growing market share, promotions and cost reductions. It reported approximately 105,000 rooms in the development pipeline and expected to open more than 33,000 rooms in fiscal 2009, excluding residential and timeshare units.
- Timeshare plans included lower pricing, repurposing or selling certain development assets, deferring new projects and phases, and ending further Marriott-funded luxury residential development. Management projected annual restructuring savings of $95 million to $105 million from the beginning of 2010; it expected $5 million to $6 million of additional restructuring costs in Q4 2009.
- Adoption of accounting standards for transfers of financial assets and variable-interest entities was expected in fiscal 2010. Marriott anticipated consolidating 13 securitization entities, recording a one-time non-cash after-tax charge of approximately $70 million to $95 million, increasing assets by about $950 million to $1.025 billion and liabilities by about $1.020 billion to $1.120 billion. It estimated an ongoing annual pretax income increase of $30 million to $50 million from the accounting change.
- Risks include continued recession and RevPAR pressure, weak timeshare and residential demand, constrained financing and securitization markets, possible further credit-rating downgrades, project and guarantee losses, foreign-exchange exposure, and uncertainty in tax matters. Marriott reported $247 million of unrecognized tax benefits at quarter-end and was contesting tax issues, including the treatment of funds received from foreign subsidiaries.
- Guarantees where Marriott was primary obligor had a maximum potential funding amount of $291 million and a recorded expected-funding liability of $34 million. Additional contingent obligations and investment commitments are described in the filing; management generally did not expect funding under several project guarantees.
- The filing states disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter. No specific full-year earnings or EPS guidance is provided in the supplied filing text.
Important facts for investors to verify
- Whether hotel demand, RevPAR and group bookings recover, and whether cost controls can offset continued rate and occupancy pressure.
- Whether timeshare sales, cancellations, loan performance and retained securitization interests stabilize, and whether the impairment assumptions prove reasonable.
- The availability and cost of credit, covenant headroom, debt maturities and the effects of the planned 2010 consolidation of securitization entities.
- Potential cash requirements from guarantees, purchase commitments and project funding, including exposure to financially stressed counterparties.
- Resolution and cash or earnings impact of disputed tax positions and the $247 million unrecognized-tax-benefit balance.