Marriott International, Inc. — 2012 Second-Quarter Form 10-Q
Business context and reporting period. This unaudited filing covers the 12 weeks ended June 15, 2012, and the first 24 weeks of fiscal 2012, compared with the corresponding 2011 periods. Marriott primarily manages and franchises hotels; at quarter-end, 43% of system rooms were managed, 54% franchised, 2% owned or leased, and 1% operated or franchised by unconsolidated joint ventures. The 2011 comparisons include the former timeshare business before its November 2011 spin-off, so reported year-over-year revenue and results are not directly like-for-like.
Financial and operating performance
| Metric | 12 weeks ended June 15, 2012 | 12 weeks ended June 17, 2011 | 24 weeks ended June 15, 2012 | 24 weeks ended June 17, 2011 |
|---|---|---|---|---|
| Revenue | $2,776 million | $2,972 million | $5,328 million | $5,750 million |
| Operating income | $243 million | $232 million | $418 million | $423 million |
| Net income | $143 million | $135 million | $247 million | $236 million |
| Diluted EPS | $0.42 | $0.37 | $0.72 | $0.63 |
| Operating cash flow | — | $417 million | $481 million |
- Revenue and earnings: Quarterly and first-half revenue each declined 7%, principally reflecting the timeshare spin-off; Marriott said lodging-business revenue rose $139 million in the quarter and $239 million in the first half. Quarterly operating income increased $11 million, while first-half operating income decreased $5 million. Net income and diluted EPS increased in both periods.
- Hotel trends: Comparable systemwide worldwide RevPAR rose 6.7% to $104.01 in the quarter and 6.7% to $96.52 in the first half, on higher rates and occupancy. Worldwide company-operated house-profit margins improved 110 basis points in both periods. Europe showed more modest RevPAR growth; management cited weak demand in some regional markets and in greater Washington, D.C.
- Cash flow and investment: First-half operating cash flow was $417 million, versus $481 million. Capital expenditures were $257 million, compared with $91 million, largely reflecting a $160 million land-and-building acquisition for a planned hotel.
- Debt and liquidity: Debt was $2.56 billion at June 15, up from $2.17 billion at year-end 2011; this included $478 million of commercial paper. Cash was $105 million. The company reported $1.376 billion of available borrowing capacity, including cash, and no revolver borrowings. Its current-assets-to-current-liabilities ratio was approximately 0.5 to 1. Long-term debt averaged 4.1% interest and 4.4 years to maturity; 78% was fixed-rate.
- Capital returns: Marriott repurchased 14.7 million shares for $550 million during the first half, at an average $37.40 per share. Cash dividends paid were $67 million; declared dividends were $0.23 per share for the first half.
Material changes and unusual items
- The timeshare spin-off removed the former segment from 2012 operating results, while Marriott now receives MVW license fees, reported as franchise revenue. The 2011 comparison included timeshare sales and services revenue of $288 million for the quarter and $564 million for the first half.
- Marriott issued $600 million of 3.0% Series K notes due 2019, receiving approximately $590 million net proceeds, and repaid $356 million of principal and interest at maturity on Series F notes.
- Quarterly results included a $14 million hotel termination fee and a $2 million business-interruption payment relating to a leased Japanese hotel. A Luxury-segment joint venture recorded losses associated primarily with impairment of residential properties; Marriott reported $8 million of equity-method losses in the quarter.
- After quarter-end, Marriott completed a sale of an interest in a North American limited-service joint venture, receiving about $90 million. It expected to recognize approximately $40 million of gain and $5 million of deferred base-fee revenue in the third quarter.
Outlook, risks, and contingencies
- Management expected to add 20,000–25,000 rooms gross in fiscal 2012 and anticipated approximately 9,000 room exits. The development pipeline was about 115,000 rooms, excluding the planned Gaylord transaction. The company-operated room-addition outlook is not a financial earnings forecast.
- Marriott expected fiscal 2012 investment spending of approximately $850–$950 million, including about $100 million of maintenance capital spending. This measure also includes items such as acquisitions, loan advances, contract acquisition costs, and equity investments.
- The proposed $210 million acquisition of the Gaylord brand and hotel management company, expected to close by October 2012, remained subject to shareholder, lender, and other approvals. Marriott anticipated adding four hotels and nearly 8,000 rooms.
- Management expected $400–$450 million of cash tax benefits from the timeshare spin-off through 2015, including $127 million expected in 2012; none had been realized in the first half of 2012. These benefits and the intended tax treatment depend on the continuing validity of assumptions and representations and may be challenged by tax authorities.
- Primary-obligor guarantees had a maximum potential funding amount of $224 million and a recorded liability of $56 million. Marriott also disclosed $306 million of guarantees for which it was secondarily liable. Guarantee fundings are generally recoverable, but may expose the company to loss.
- Risks include economic weakness and uneven lodging demand, especially in parts of Europe and Washington, D.C.; competition; hotel-owner financing and contract termination risks; international, currency, disaster, and geopolitical exposure; and execution of new brands and development plans. A putative employee class action remained unresolved, with potential loss not estimable; Marriott was also cooperating with a Korean Fair Trade Commission investigation and had not received a complaint.
- The filing provides no specific full-year earnings or EPS guidance. Marriott said it believed operating cash generation, capital-market access, and its credit facility were adequate for anticipated needs, while noting that commercial-paper market disruption could increase reliance on the facility.
Important facts for investors to verify
- Assess underlying lodging growth separately from the prior-year timeshare business and from pass-through cost-reimbursement revenue.
- Track RevPAR, booking pace, room additions and exits, and performance in weaker markets against management’s outlook.
- Confirm the timing and conditions of the Gaylord transaction, the expected joint-venture sale gain, and the fiscal-year investment-spending range.
- Monitor debt and commercial-paper levels, available credit, share repurchases, and cash-tax-benefit realization.
- Review the status and potential exposure of guarantees, the employee litigation, the Korean investigation, and the tax assumptions supporting the spin-off.