Marriott International, Inc. — Q2 2011 Form 10-Q
Business context and period. The unaudited filing covers the 12 and 24 weeks ended June 17, 2011, compared with the corresponding periods ended June 18, 2010. Marriott operates lodging management and franchise businesses alongside timeshare development and sales. Most hotel rooms were managed or franchised rather than owned or leased.
Key financial results
| Metric | 12 weeks | 24 weeks |
|---|---|---|
| Revenue | $2.972 billion, up 7% from $2.771 billion | $5.750 billion, up 6% from $5.401 billion |
| Operating income | $232 million, versus $226 million | $423 million, versus $406 million |
| Net income | $135 million, versus $119 million | $236 million, versus $202 million |
| Diluted EPS | $0.37, versus $0.31 | $0.63, versus $0.54 |
| EBITDA (non-GAAP) | $287 million, versus $278 million | $521 million, versus $499 million |
Cost reimbursements—matched by reimbursed expenses and with no operating or net income impact—were $2.116 billion for the quarter and $4.115 billion for the half-year. Excluding this pass-through item, reported revenue growth was driven chiefly by management and franchise fees, reflecting stronger RevPAR and room growth. General, administrative and other expenses rose 12% in Q2 and 14% in the first half, partly offsetting operating gains. Comparable company-operated house profit margins increased 70 basis points in Q2 and 50 basis points in the first half year over year.
Hotel operating indicators: Worldwide systemwide comparable RevPAR rose 6.8% in Q2 to $98.39, with occupancy up 2.1 percentage points to 72.4% and average daily rate up 3.6% to $135.84. For the first half, RevPAR increased 6.7% to $91.14. Regional performance was uneven: Middle East and Africa systemwide RevPAR fell 15.9% in Q2 amid regional unrest, while Asia Pacific rose 11.8%.
Cash, debt and liquidity
- Operating cash flow was $481 million in the first half, down from $522 million; investing used $226 million, compared with $69 million used a year earlier; financing used $643 million, versus $468 million.
- Cash and equivalents fell to $117 million from $505 million at year-end 2010. The decrease included $668 million of treasury-stock purchases, $129 million of debt repayment and $64 million of dividends.
- Total debt was $2.922 billion at June 17, 2011, up from $2.829 billion at year-end. Current debt was $482 million; long-term debt was $2.440 billion. Commercial paper outstanding was $156 million, and there were no Credit Facility borrowings at quarter-end.
- After quarter-end, Marriott extended its revolving credit facility to June 23, 2016 and reduced its size from $2.404 billion to $1.75 billion. The company reported $2.290 billion of available borrowing capacity at June 17, calculated using the facility then in place and including cash.
- Management expected 2011 investment spending of approximately $500 million to $700 million, including $50 million to $100 million for maintenance capital spending. Cash outflow to complete timeshare properties under development was estimated at approximately $214 million through 2016.
Material changes, outlook and risks
- Management described lodging conditions as improving overall. Transient and leisure demand was strong, while group demand remained soft but was improving. The company expected to add approximately 35,000 rooms gross in 2011 and reported a pipeline of more than 100,000 rooms.
- Timeshare contract sales were $309 million for the first half, down 5%. Management attributed the decline mainly to difficult comparisons with prior-year promotions and the transition from weeks-based to points-based products. Sales to existing owners represented 61% of contract sales in both Q2 and the first half; management planned to shift more marketing toward new owners in the second half.
- Marriott planned to spin off its timeshare operations and development business as Marriott Vacations Worldwide Corporation through a proposed tax-free distribution in late 2011. Completion remained subject to board approval, regulatory and third-party consents, financing, inter-company arrangements and a favorable IRS ruling. Marriott anticipated brand fees of about 2% of developer contract sales plus $50 million annually, and several hundred million dollars of cash tax benefits over time; neither completion nor benefits were assured.
- At quarter-end, maximum potential future fundings on guarantees where Marriott was primary obligor were $260 million, with a $63 million recorded liability. Separate secondary guarantees totaled $169 million. Marriott also disclosed commitments, letters of credit and surety bonds.
- Timeshare credit risks included $121 million of owner loans on nonaccrual status and $154 million of past-due loans. All 13 securitized loan pools met performance thresholds at quarter-end; management anticipated one pool might temporarily breach thresholds in Q3 and estimated approximately $3 million of cash-flow redirection for full-year 2011.
- Other risks included economic and geopolitical uncertainty, weak group or timeshare demand, Japan earthquake and tsunami impacts, Middle East unrest, rising operating costs, competition, financing and development risks, and the possibility of a delayed, changed or taxable spin-off. Marriott also reported a vendor email-list breach; the vendor said the accessed data was limited to customer names and email addresses.
Important facts for investors to verify
- Progress, conditions, financing and tax treatment of the proposed timeshare spin-off, including the expected brand-fee and tax-benefit arrangements.
- Underlying lodging growth after separating pass-through cost reimbursements, and whether RevPAR and margins continue to improve across regions.
- Cash generation, debt maturities and refinancing capacity following the amended credit facility and the substantial first-half share repurchases.
- Timeshare loan delinquencies, reserve adequacy, securitization triggers and the outlook for contract sales and development cash needs.
- Potential guarantee and other contingent funding exposure, including the distinction between recorded liabilities and maximum stated commitments.