Marriott International, Inc. — Q1 2010 Form 10-Q
Reporting period: Unaudited twelve weeks ended March 26, 2010; comparison is with the twelve weeks ended March 27, 2009. Marriott operates lodging management and franchise businesses and a timeshare business. Results are interim and may not indicate full-year performance.
Financial performance and liquidity
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Total revenue | $2.630 billion | $2.495 billion |
| Operating income | $180 million | $40 million |
| Net income (loss) attributable to Marriott | $83 million | ($23 million) |
| Diluted earnings (loss) per share | $0.22 | ($0.06) |
| Operating cash flow | $160 million | $203 million |
| Cash and equivalents, period-end | $118 million | $168 million |
- Revenue rose 5%. Cost reimbursements contributed $1.860 billion of Q1 2010 revenue and an equal expense, with no effect on operating or net income.
- Operating income improved by $140 million. General, administrative and other expenses fell $78 million, while Timeshare sales and services revenue net of direct expenses improved by $61 million.
- Worldwide comparable systemwide RevPAR declined 1.3%; occupancy improved, but average daily rates remained lower. Worldwide comparable company-operated house profit margin fell 110 basis points; North American company-operated margin fell 180 basis points.
- Debt was $3.269 billion at March 26, compared with $2.298 billion at January 1. The increase principally reflects consolidation of previously off-balance-sheet timeshare securitization debt, not solely new borrowing. Debt includes $1.043 billion of non-recourse securitization debt.
- Marriott reported $2.017 billion of available borrowing capacity, including $1.899 billion available under its $2.404 billion credit facility and $118 million of cash. The facility expires May 14, 2012; Marriott said it was in compliance with its covenants.
- Cash from operations was $160 million; investing used $24 million and financing used $133 million. Capital expenditures were $25 million and debt repayments were $121 million.
Material changes and unusual items
- Adoption of new transfer and variable-interest-entity accounting standards brought 13 timeshare securitization entities onto the balance sheet. The change added $970 million of assets and $1.116 billion of liabilities at adoption and reduced equity by $146 million after tax ($238 million pretax). It also increased reported timeshare interest income and interest expense; prior-period presentation is therefore not fully comparable.
- The Q1 earnings comparison benefited from substantial prior-year expenses: 2009 included $49 million of security-deposit impairment charges, a $42 million loan-loss provision, a $30 million joint-venture impairment and a $21 million gain on debt extinguishment. The 2010 quarter included a $6 million reversal of guarantee accruals.
- Timeshare segment results improved to $25 million from a $17 million loss, with higher sales activity and financing revenue. The filing attributes much of the financing revenue increase to accounting consolidation, so the increase should not be read as purely underlying operating growth.
Outlook, management commentary and risks
- Management described lodging conditions as still challenging, with room rates below 2008 levels, but reported improving global demand versus both the prior-year and preceding quarter, especially in business transient and association group travel. Corporate group demand remained weak. Management expected pricing to improve later in 2010 if demand and occupancy strengthened.
- Marriott expected to open approximately 25,000–30,000 rooms gross in 2010, excluding residential and timeshare units; it reported more than 95,000 rooms in its development pipeline. It projected 2010 annual savings of approximately $114 million from Timeshare restructuring, $12 million from hotel-development restructuring, and $10–$11 million from above-property and corporate reductions.
- No specific full-year earnings or revenue guidance is provided in the filing. Management said credit-facility capacity and operating cash generation should meet expected liquidity needs, while noting that conditions could deteriorate.
- Timeshare demand improved for interval products, but fractional and residential demand remained weak. Management cautioned that percentage-of-completion accounting can delay recognition of weak demand and that construction delays can defer revenue.
- Risks include continued economic weakness, rate pressure, timeshare purchaser defaults and loan losses, disruption or increased costs in timeshare note securitizations, development and construction cost or completion risks, reduced access to capital, and exposure to guarantees and joint ventures. The filing also identifies competitive, geopolitical, disaster, regulatory, foreign-exchange, technology, privacy and tax risks.
- Contingencies include $228 million of maximum potential future fundings on guarantees where Marriott is primary obligor, with $28 million accrued. Marriott also disclosed other secondary guarantees and project commitments; it did not expect to fund certain of these obligations, but some depend on third parties’ financial condition or project outcomes. Tax appeals and examinations could materially affect unrecognized tax benefits.
Important facts for investors to verify
- Separate operating improvement from prior-year impairment charges and the Q1 accounting change that increased timeshare interest income and debt.
- Track hotel rate recovery against occupancy gains, particularly North American RevPAR and house-profit margins.
- Monitor timeshare loan delinquencies, reserve adequacy, securitization-pool triggers and the effect of newly consolidated debt.
- Confirm available credit capacity, covenant compliance, debt maturities and any change in credit ratings or refinancing conditions.
- Assess progress toward room-opening and cost-savings targets, and developments in guarantee exposure, tax disputes and timeshare/residential commitments.