Marriott International, Inc. — FY2011 Form 10-K
Business context and reporting period. The filing covers the 52-week fiscal year ended December 30, 2011, with comparison to FY2010 ended December 31, 2010. Marriott operates, franchises, and licenses hotels and related lodging brands, primarily through management and franchise agreements rather than property ownership. Its system comprised 3,718 properties and 643,196 rooms at year-end across 73 countries and territories.
On November 21, 2011, Marriott spun off its timeshare operations and development business to shareholders as Marriott Vacations Worldwide (MVW). Marriott retains licensing and other continuing relationships with MVW. Pre-spin-off timeshare results remain in Marriott’s historical continuing operations, so FY2011 includes only pre-spin-off activity while FY2010 includes a full year.
Financial performance and key metrics
| Metric | FY2011 | FY2010 |
|---|---|---|
| Revenue | $12.317 billion | $11.691 billion |
| Operating income | $526 million | $695 million |
| Net income attributable to Marriott | $198 million | $458 million |
| Diluted EPS | $0.55 | $1.21 |
| Cash from operations | $1.089 billion | $1.151 billion |
| Capital expenditures | $183 million | $307 million |
| Year-end cash and equivalents | $102 million | $505 million |
| Year-end long-term debt | $1.816 billion | $2.691 billion |
Revenue rose 5%, chiefly from stronger lodging demand, system growth, and higher management and franchise fees. Cost reimbursements accounted for $8.843 billion of revenue and are matched by reimbursed costs, with no direct effect on operating or net income. Operating margin was approximately 4.3% versus 5.9% in FY2010.
Worldwide comparable systemwide RevPAR increased 6.4% to $92.69, as occupancy rose 2.0 percentage points to 69.6% and average daily rate increased 3.4% to $133.26. Comparable company-operated house-profit margins rose 60 basis points worldwide.
Operating cash flow remained substantial but declined 5%. Financing activities used $1.245 billion, including $1.425 billion of treasury-stock purchases and $134 million of dividends paid. Total debt was $2.171 billion at year-end, including $331 million of commercial paper; Marriott had no Credit Facility borrowings. Shareholders’ equity was negative $781 million, reflecting primarily the $1.162 billion spin-off reduction and share repurchases.
Liquidity included $102 million cash and $1.418 billion of unused Credit Facility capacity; the facility totals $1.75 billion and expires in June 2016. The current ratio was approximately 0.5, down from 1.4 at FY2010 year-end, principally reflecting the spin-off. The facility includes a maximum leverage covenant of 4-to-1, which Marriott reported it was meeting.
Material changes versus the prior comparable period
- Net income fell 57% and diluted EPS fell 55%. The main driver was a $324 million non-cash pre-tax timeshare impairment charge in FY2011; FY2010 had no comparable charge.
- FY2011 also included $34 million of spin-off transaction expenses, an $18 million impairment of marketable securities, and a $34 million tax expense to write off deferred tax assets transferred to MVW. FY2010 benefited from an $85 million IRS settlement tax benefit.
- Management and franchise fees increased: base fees rose to $602 million from $562 million, and franchise fees to $506 million from $441 million. Incentive fees rose to $195 million from $182 million.
- Debt declined by $658 million, primarily because $1.016 billion of non-recourse timeshare securitization debt transferred to MVW, partly offset by higher commercial paper and other debt.
- Reported year-end assets decreased to $5.910 billion from $8.983 billion, largely due to the spin-off and transfer of timeshare assets. FY2011 share repurchases totaled 43.4 million shares for $1.425 billion.
Fourth-quarter figures, with both FY2011 and FY2010 fourth quarters comprising 16 weeks: revenue was $3.693 billion versus $3.642 billion; operating income was $247 million versus $122 million; net income was $141 million versus $173 million; diluted EPS was $0.41 versus $0.46.
Outlook, management commentary, risks, and unusual items
- Management expected approximately 30,000 gross room additions in 2012; more than 110,000 rooms were under construction, awaiting conversion, or approved in the development pipeline.
- Expected FY2012 investment spending was $550 million to $750 million, including $50 million to $100 million of maintenance capital spending. Management stated that financing capacity and operating cash generation were expected to support liquidity and growth.
- Marriott expected special corporate negotiated room rates for 2012 to be higher than the prior year. It also expected the spin-off-related cash tax benefits to total approximately $400 million to $450 million through 2015, including $115 million to $125 million in FY2012; approximately $80 million was realized in FY2011.
- Management described lodging conditions as improved in 2011, but noted uncertain U.S. growth, slowing European growth, weak Middle East demand, and regional variation. It emphasized pricing discipline, cost control, brand investment, and continued growth through third-party owners.
- Key risks include economic weakness and travel disruption; intense competition; hotel-owner financing constraints and agreement termination; international political, regulatory, currency, and tax exposure; execution and acceptance of newer brands; real-estate development and impairment risk; data-security and privacy incidents; and possible disputes or liabilities under guarantees and leases.
- A vendor, Epsilon, reported an unauthorized access incident involving customer names and email addresses; Marriott said other customer data was not accessed and affected customers were notified. Legal proceedings were described as ordinary-course matters, with outcomes uncertain; management did not expect them to materially harm the company overall.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management and the auditor concluded internal controls were effective.
Important facts for investors to verify
- Assess the underlying lodging earnings trend separately from the $324 million timeshare impairment, $34 million spin-off costs, and unusual tax items; confirm the treatment of pre-spin-off timeshare results in comparisons.
- Reconcile total debt, current maturities, commercial paper, contractual debt payments, and remaining availability under the Credit Facility; monitor leverage covenant headroom.
- Review the sustainability and realization of the projected $400 million to $450 million spin-off cash tax benefits, including IRS ruling assumptions and tax-sharing indemnities.
- Track RevPAR, fee growth, development-pipeline conversion, and performance in weaker regions, particularly the Middle East and Europe, against management’s 2012 outlook.
- Evaluate exposure to hotel guarantees, leases, owner distress, and outstanding commitments; the filing lists $468 million of guarantee commitments and separate project-completion guarantees.
- Consider the scale of capital returns: FY2011 repurchases were $1.425 billion, and the board announced an additional 35 million-share repurchase authorization in February 2012.