SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x]10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended September 7,June 15, 2001 Commission File No. 1-13881
MARRIOTT INTERNATIONAL, INC.
Delaware 52-2055918
(State of Incorporation) (I.R.S. Employer Identification Number)
10400 Fernwood Road
Bethesda, Maryland 20817
(301) 380-3000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes [x][X] No [_]
Shares outstanding
Class at October 5,November 30, 2001
- ------------------------------------ ---------------------------- ---------------------------
Class A Common Stock, 241,518,145240,980,998
$0.01 par value
1
MARRIOTT INTERNATIONAL, INC.
INDEX
Page No.
------------------------
Forward-Looking Statements......................................................... 3
Part I. Financial Information (Unaudited):
Condensed Consolidated Statements of Income -
Twelve and Thirty-SixTwenty-Four Weeks Ended September 7,June 15, 2001 and September 8, 2000........................................................June 16, 2000 ........ 4
Condensed Consolidated Balance Sheet -
as of September 7,June 15, 2001 and December 29, 2000................................2000 ................................. 5
Condensed Consolidated Statement of Cash Flows -
Thirty-SixTwenty-Four Weeks Ended September 7,June 15, 2001 and September 8, 2000...............June 16, 2000 ................... 6
Notes to Condensed Consolidated Financial Statements............................Statements .......................... 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................................Operations ................................................. 16
Quantitative and Qualitative Disclosures About Market Risk...................... 23Risk .................... 22
Part II. Other Information and Signatures:
Legal Proceedings............................................................... 24Proceedings ............................................................. 23
Changes in Securities........................................................... 24Securities ......................................................... 23
Defaults Upon Senior Securities................................................. 24Securities ............................................... 23
Submission of Matters to a Vote of Security Holders............................. 24Holders ........................... 23
Other Information............................................................... 24Information ............................................................. 23
Exhibits and Reports on Form 8-K................................................8-K .............................................. 24
Signatures .................................................................... 25
Signatures...................................................................... 26
2
Forward-Looking Statements
When used throughout this report, the words "believes," "anticipates,"
"expects," "intends," "estimates," "projects," and other similar expressions,
which are predictions of or indicate future events and trends, identify
forward-
lookingforward-looking statements. Such statements are subject to a number of risks and
uncertainties which could cause actual results to differ materially from those
projected, including: competition within each of our business segments; business
strategies and their intended results; the balance between supply of and demand
for hotel rooms, timeshare units, senior living accommodations and corporate
apartments; our ability to obtain new operating contracts and franchise
agreements; our ability to develop and maintain positive relations with current
and potential hotel and senior living community owners; the effect of
international, national and regional economic conditions, including the duration
and severity of the current economic downturn in the United States and the
aftermath of the September 11, 2001 terrorist attacks on New York and
Washington; the availability of capital to allow us and potential hotel owners
to fund investments; the effect that internet hotel reservation channels may
have on rates that we are able to charge for hotel rooms; and other risks
described from time to time in our filings with the Securities and Exchange
Commission, including those set forth on Exhibit 99 filed herewith. Given these
uncertainties, we caution you not to place undue reliance on such statements. We
also undertake no obligation to publicly update or revise any forward-looking
statement to reflect current or future events or circumstances.
3
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
------------------------------- -----------------------------
MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
($ in millions, except per share amounts)
(Unaudited)
Twelve weeks ended Thirty-sixTwenty-four weeks ended
--------------------------------- -----------------------------------
September 7, September 8, September 7, September 8,------------------------------ -------------------------------
June 15, June 16, June 15, June 16,
2001 2000 2001 2000
------------- ------------- ------------- --------------
-------------- --------------(As revised) (As revised) (As revised) (As revised)
SALES
Management and franchise fees...............fees .................... $ 187227 $ 215229 $ 618431 $ 633418
Distribution services....................... 385 356 1,143 1,044
Other....................................... 503 473 1,478 1,370services ............................ 397 381 758 688
Other ............................................ 517 485 998 907
------------- ------------- ------------- --------------
-------------- --------------
1,075 1,044 3,239 3,0471,141 1,095 2,187 2,013
Other revenues from managed properties...... 1,270 1,259 3,980 3,814properties ........... 1,309 1,314 2,724 2,573
------------- ------------- ------------- --------------
-------------- --------------
2,345 2,303 7,219 6,8612,450 2,409 4,911 4,586
OPERATING COSTS AND EXPENSES
Distribution services....................... 384 351 1,137 1,045
Other....................................... 513 477 1,459 1,346services ............................ 394 375 753 694
Other ............................................ 508 473 969 879
------------- ------------- ------------- --------------
-------------- --------------
897 828 2,596 2,391902 848 1,722 1,573
Other costs from managed properties......... 1,270 1,259 3,980 3,814properties .............. 1,309 1,314 2,724 2,573
------------- ------------- ------------- --------------
-------------- --------------
2,167 2,087 6,576 6,2052,211 2,162 4,446 4,146
------------- -------------- --------------------------- ------------- --------------
OPERATING PROFIT BEFORE CORPORATE EXPENSES AND
INTEREST........................................ 178 216 643 656INTEREST ............................................. 239 247 465 440
Corporate expenses............................... (13)expenses .................................... (29) (72) (80)(25) (59) (51)
Interest expense................................. (26) (22) (75) (72)expense ...................................... (27) (27) (49) (50)
Interest income.................................. 23 9 59 19income ....................................... 20 5 36 10
------------- -------------- --------------------------- ------------- --------------
INCOME BEFORE INCOME TAXES....................... 162 174 555 523TAXES ............................ 203 200 393 349
Provision for income taxes....................... 61 64 203 193taxes ............................ 73 74 142 129
------------- ------------- ------------- --------------
-------------- --------------
NET INCOME.......................................INCOME ............................................ $ 101130 $ 110126 $ 352251 $ 330220
============= ============== =========================== ============= ==============
DIVIDENDS DECLARED PER SHARE.....................SHARE .......................... $ .065 $ .06 $ .19.125 $ .175.115
============= ============== =========================== ============= ==============
EARNINGS PER SHARE
Basic Earnings Per Share....................Share ......................... $ .41.53 $ .46.53 $ 1.441.03 $ 1.37.91
============= ============== =========================== ============= ==============
Diluted Earnings Per Share..................Share ....................... $ .39.50 $ .43.50 $ 1.36.97 $ 1.30.87
============= ============== =========================== ============= ==============
See notes to condensed consolidated financial statements.
4
MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
($ in millions)
September 7,June 15, December 29,
2001 2000
-------------------- ---------------------------------- -------------
ASSETS (Unaudited)
Current assets
Cash and equivalents.....................................................equivalents ........................................................ $ 874674 $ 334
Accounts and notes receivable............................................ 660receivable ............................................... 760 728
Inventory................................................................ 101Inventory ................................................................... 104 97
Other.................................................................... 313Other ....................................................................... 297 256
-------------------- ---------------------
1,948------------- -------------
1,835 1,415
-------------------- ---------------------------------- -------------
Property and equipment.................................................... 3,110equipment ......................................................... 3,163 3,241
Intangibles............................................................... 1,801Intangibles .................................................................... 1,812 1,833
Investments in affiliates................................................. 828affiliates ...................................................... 796 747
Notes and other receivables............................................... 900receivables .................................................... 759 661
Other..................................................................... 433Other .......................................................................... 425 340
-------------------- ---------------------------------- -------------
$ 9,0208,790 $ 8,237
==================== ================================== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable.........................................................payable ............................................................ $ 732708 $ 660
Other.................................................................... 1,113Other ....................................................................... 1,060 1,257
-------------------- ---------------------
1,845------------- -------------
1,768 1,917
-------------------- ---------------------------------- -------------
Long-term debt............................................................ 1,912debt ................................................................. 1,909 2,016
Other long-term liabilities............................................... 1,222liabilities .................................................... 1,107 1,037
Convertible debt.......................................................... 406debt ............................................................... 405 -
Shareholders' equity
ESOP preferred stock.....................................................stock ........................................................ - -
Class A common stock, 255.6 million shares issued........................issued ........................... 3 3
Additional paid-in capital............................................... 3,426capital .................................................. 3,445 3,590
Retained earnings........................................................ 1,062earnings ........................................................... 985 851
Unearned ESOP shares..................................................... (372)shares ........................................................ (411) (679)
Treasury stock, at cost.................................................. (425)cost ..................................................... (360) (454)
Accumulated other comprehensive income................................... (59)income ...................................... (61) (44)
-------------------- ---------------------
3,635------------- -------------
3,601 3,267
-------------------- ---------------------------------- -------------
$ 9,0208,790 $ 8,237
==================== ================================== =============
See notes to condensed consolidated financial statements.
5
MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
($ in millions)
(Unaudited)
Thirty-sixTwenty-four weeks ended
---------------------------------------------
September 7,-------------------------------------
June 15, June 16,
2001 September 8, 2000
-------------------- ------------------------------------- ----------------
OPERATING ACTIVITIES
Net income..............................................................income .......................................................... $ 352251 $ 330220
Adjustments to reconcile to cash provided by operations:
Depreciation and amortization....................................... 147 134amortization ................................... 96 87
Income taxes and other.............................................. 151 198other .......................................... 95 103
Timeshare activity, net............................................. (218) (122)net ......................................... (143) (73)
Working capital changes............................................. 16 73
-------------------- --------------------changes ......................................... (115) (62)
----------------- ----------------
Cash provided by operations............................................. 448 613
-------------------- --------------------operations ......................................... 184 275
----------------- ----------------
INVESTING ACTIVITIES
Dispositions............................................................ 508 381Dispositions ........................................................ 361 294
Capital expenditures.................................................... (360) (627)expenditures ................................................ (251) (455)
Note advances........................................................... (147) (118)advances ....................................................... (82) (88)
Note collections and sales.............................................. 42 29
Other................................................................... (169) (160)
-------------------- --------------------sales .......................................... 34 21
Other ............................................................... (145) (103)
----------------- ----------------
Cash used in investing activities....................................... (126) (495)
-------------------- --------------------activities ................................... (83) (331)
----------------- ----------------
FINANCING ACTIVITIES
Commercial paper activity, net.......................................... (423) (239)net ...................................... (424) (21)
Issuance of convertible debt............................................debt ........................................ 405 -
Issuance of other long-term debt........................................ 316 332debt .................................... 313 304
Repayment of other long-term debt....................................... (13) (10)debt ................................... (9) (7)
Issuance of Class A common stock........................................ 69 30stock .................................... 57 14
Dividends paid.......................................................... (45) (41)paid ...................................................... (29) (27)
Purchase of treasury stock.............................................. (91) (301)
-------------------- --------------------stock .......................................... (74) (286)
----------------- ----------------
Cash provided by (used in) financing activities......................... 218 (229)
-------------------- --------------------activities ..................... 239 (23)
----------------- ----------------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS................................ 540 (111)EQUIVALENTS .............................. 340 (79)
CASH AND EQUIVALENTS, beginning of period..................................period ................................ 334 489
-------------------- ------------------------------------- ----------------
CASH AND EQUIVALENTS, end of period........................................period ...................................... $ 874674 $ 378
==================== ====================410
================= ================
See notes to condensed consolidated financial statements.
6
MARRIOTT INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
---------------------
The accompanying condensed consolidated financial statements present the
results of operations, financial position and cash flows of Marriott
International, Inc. (together with its subsidiaries, we, us or the
Company).
The accompanying condensed consolidated financial statements have not been
audited. We have condensed or omitted certain information and footnote
disclosures normally included in financial statements presented in
accordance with accounting principles generally accepted in the United
States. We believe the disclosures made are adequate to make the
information presented not misleading. You should, however read the
financial statements in this report in conjunction with the consolidated
financial statements and notes to those financial statements included in
our Annual Report on Form 10-K (our Annual Report) for the fiscal year
ended December 29, 2000. Capitalized terms not otherwise defined in this
quarterly report have the meanings specified in our Annual Report.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities as of the date of the financial statements, and the
reported amounts of sales and expenses during the reporting period.
Accordingly, ultimate results could differ from those estimates.
In our opinion, the accompanying condensed consolidated financial
statements reflect all normal and recurring adjustments necessary to
present fairly our financial position as of September 7,June 15, 2001 and December 29,
2000, the results of operations for the twelve and thirty-sixtwenty-four weeks ended
September 7,June 15, 2001 and September 8,June 16, 2000 and cash flows for the thirty-sixtwenty-four weeks
ended September 7,June 15, 2001 and September 8,June 16, 2000. Interim results may not be
indicative of fiscal year performance because of seasonal and short-term
variations. We have eliminated all material intercompany transactions and
balances between entities included in these financial statements.
Financial Statement Revision
We have revised the consolidated financial statements to change our method
of accounting for the Marriott Rewards Program in accordance with Staff
Accounting Bulletin (SAB) No. 101 "Revenue Recognition in Financial
Statements." The effect of adopting SAB No. 101 on January 1, 2000 was to
increase both revenues and expenses by $63 million for the year ended
December 29, 2000, $17 million for the twelve weeks ended June 15, 2001 and
by $37 million for the twenty-four weeks ended June 15, 2001. However,
there was no change in financial position, cashflows, net income or basic
and diluted earnings per share. In addition, we added disclosures related
to revenue recognition and certain other items to the notes to the
consolidated financial statements.
7
Revenue Recognition
Our sales include (1) management and franchise fees, (2) sales from our
distribution services business, (3) sales from lodging properties and
senior living communities owned or leased by us, and sales made by our
other businesses; and (4) certain other revenues from properties managed by
us. Management fees comprise a base fee, which is a percentage of the
revenues of hotels or senior living communities, and an incentive fee,
which is generally based on unit profitability. Franchise fees comprise
initial application fees and continuing royalties generated from our
franchise programs, which permit the hotel owners and operators to use
certain of our brand names. Other revenues from managed properties include
direct and indirect costs that are reimbursed to us by lodging and senior
living community owners for properties that we manage. Other revenues
include revenues from hotel properties and senior living communities that
we own or lease, along with sales from our timeshare and ExecuStay
businesses.
7
We recognize base fees as revenue when earned in accordance with the
contract. In interim periods we recognize incentive fees that would be due
as if the contract were to terminate at that date, exclusive of any
termination fees payable or receivable by us. As of September 7,June 15, 2001 we have
recognized $165$126 million of incentive management fees, retention of which is
dependent on achievement of hotel profitability for the balance of the year
at levels specified in a number of our management contracts.
Distribution Services: We recognize revenue from our distribution services
business when goods have been shipped and title passes to the customer in
accordance with the terms of the applicable distribution contract.
Timeshare: We recognize revenue from timeshare interest sales in accordance
with Statement of Financial Accounting Standards (FAS) No. 66, "Accounting
for Sales of Real Estate." We recognize sales when a minimum of 10 percent
of the purchase price for the timeshare interval has been received, the
period of cancellation with refund has expired, receivables are deemed
collectible and certain minimum sales and construction levels have been
attained.
Owned and Leased Units: We recognize room sales and revenues from guest
services for our owned and leased units, including ExecuStay, when rooms
are occupied and services have been rendered.
Franchise Revenue: We recognize franchise fee revenues in accordance with
FAS No. 45, "Accounting for Franchise Fee Revenue." Franchise fees are
recognized as revenue in each accounting period as fees are earned and
become receivable from the franchisee.
Other Revenues from Managed Properties: We recognize other revenues from
managed properties when we incur the related reimbursable costs.
8
We recognized sales in the twelve and thirty-sixtwenty-four weeks ended September 7,June 15, 2001
and September 8,June 16, 2000 as shown in the following table. Lodging includes our
full service, select service, extended stay,Full Service, Select Service, Extended Stay, and timeshareTimeshare business
segments.
Twelve weeks ended
---------------------------------------------------------------------------------------------------
September 7,June 15, 2001 September 8,June 16, 2000
------------------------------------------------------------------------------------------------- -----------------------------------------------
SalesSenior Senior
Living Distribution Senior Living Distribution
Sales Lodging Services Services Total Lodging Services Services Total
------------ ----------- ------------ --------- --------------- -------------- -------- --------- --------------- -------------- ----------------- ----------- ------------- ----------
($ in millions) (As revised) (As revised) (As revised) (As revised)
($ in millions)
Management and franchise
fees......................fees ..................... $ 179219 $ 8 $ - $ 187227 $ 207222 $ 87 $ - $ 215
Other....................... 429 74 385 888 409 64 356 829229
Other ........................ 442 75 397 914 417 68 381 866
------------ ----------- ------------- --------- --------------- -------------- -------- --------- --------------- -------------- -------
608 82 385 1,075 616 72 356 1,044---------- ----------- ------------- ----------
661 83 397 1,141 639 75 381 1,095
Other revenues from managed
properties................ 1,187 83 - 1,270 1,178properties ............... 1,228 81 - 1,2591,309 1,239 75 - 1,314
------------ ----------- ------------- --------- --------------- -------------- -------- --------- --------------- -------------- -------
$1,795 $165 $385 $2,345 $1,794 $153 $356 $2,303---------- ----------- ------------- ----------
$ 1,889 $ 164 $ 397 $ 2,450 $ 1,878 $ 150 $ 381 $ 2,409
============ =========== ============= ========= =============== ============== ======== ========= =============== ============== ================= =========== ============= ==========
Operating costs and expenses
Operating costs.............costs .............. $ 434430 $ 79 $38478 $ 897394 $ 400902 $ 77 $351395 $ 82878 $ 375 $ 848
Other costs from managed
properties................ 1,187 83 - 1,270 1,178properties ............... 1,228 81 - 1,2591,309 1,239 75 - 1,314
------------ ----------- ------------- --------- --------------- -------------- ------------------ ----------- ------------- ----------
1,658 159 394 2,211 1,634 153 375 2,162
------------ ----------- ------------- --------- --------------- -------------- -------
1,621 162 384 2,167 1,578 158 351 2,087
--------- --------------- -------------- -------- --------- --------------- -------------- ----------------- ----------- ------------- ----------
Operating profit before
corporate expenses and
interest..................interest ................. $ 174231 $ 5 $ 3 $ 1239 $ 178244 $ 216(3) $ (5)6 $ 5 $ 216247
============ =========== ============= ========= =============== ============== ======== ========= =============== ============== =======
========== =========== ============= ==========
Thirty-sixTwenty-four weeks ended
---------------------------------------------------------------------------------------------------
September 7,June 15, 2001 September 8,June 16, 2000
------------------------------------------------------------------------------------------------- -----------------------------------------------
SalesSenior Senior
Living Distribution Senior Living Distribution
Sales Lodging Services Services Total Lodging Services Services Total
------------ ----------- ------------ --------- --------------- -------------- -------- --------- --------------- -------------- ----------------- ----------- ------------- ----------
($ in millions) (As revised) (As revised) (As revised) (As revised)
($ in millions)
Management and franchise
fees......................fees ..................... $ 594415 $ 2416 $ - $ 618431 $ 612405 $ 2113 $ - $ 633
Other....................... 1,253 225 1,143 2,621 1,164 206 1,044 2,414418
Other ........................ 847 151 758 1,756 765 142 688 1,595
------------ ----------- ------------- --------- --------------- -------------- -------- --------- --------------- -------------- -------
1,847 249 1,143 3,239 1,776 227 1,044 3,047---------- ----------- ------------- ----------
1,262 167 758 2,187 1,170 155 688 2,013
Other revenues from managed
properties................ 3,735 245properties ............... 2,562 162 - 3,980 3,589 2252,724 2,429 144 - 3,8142,573
------------ ----------- ------------- --------- --------------- -------------- -------- --------- --------------- -------------- -------
$5,582 $494 $1,143 $7,219 $5,365 $452 $1,044 $6,861---------- ----------- ------------- ----------
$ 3,824 $ 329 $ 758 $ 4,911 $ 3,599 $ 299 $ 688 $ 4,586
============ =========== ============= ========= =============== ============== ======== ========= =============== ============== ================= =========== ============= ==========
Operating costs and expenses
Operating costs............. $1,219 $240 $1,137 $2,596 $1,113 $233 $1,045 $2,391costs .............. $ 808 $ 161 $ 753 $ 1,722 $ 723 $ 156 $ 694 $ 1,573
Other costs from managed
properties................ 3,735 245properties ............... 2,562 162 - 3,980 3,589 2252,724 2,429 144 - 3,8142,573
------------ ----------- ------------- --------- --------------- -------------- ------------------ ----------- ------------- ----------
3,370 323 753 4,446 3,152 300 694 4,146
------------ ----------- ------------- --------- --------------- -------------- -------
4,954 485 1,137 6,576 4,702 458 1,045 6,205
--------- --------------- -------------- -------- --------- --------------- -------------- ----------------- ----------- ------------- ----------
Operating profit before
corporate expenses and
interest..................interest ................. $ 628 $ 9454 $ 6 $ 6435 $ 663465 $ 447 $ (1) $ (6) $ (1) $ 656440
============ =========== ============= ========= =============== ============== ======== ========= =============== ============== ================= =========== ============= ==========
9
2. Earnings Per Share
------------------
The following table reconciles the earnings and number of shares used in
the basic and diluted earnings per share calculations (in millions, except
per share amounts).
Twelve weeks ended Thirty- sixTwenty-four weeks ended
------------------------------------ ------------------------------------
September 7, September 8, September 7, September 8,----------------------------- -----------------------------
June 15, June 16, June 15, June 16,
2001 2000 2001 2000
---------------- ---------------- ---------------- ---------------------------- ------------- ------------ -------------
Computation of Basic Earnings Per Share
Net income.........................................income.................................... $ 101130 $ 110126 $ 352251 $ 330220
Weighted average shares outstanding................ 244.8 240.1 244.1 241.3
---------------- ---------------- ---------------- ----------------outstanding .......... 243.9 239.7 243.7 241.9
------------ ------------- ------------ -------------
Basic Earnings Per Share...........................Share ..................... $ .41.53 $ .46.53 $ 1.441.03 $ 1.37
================ ================ ================ ================.91
============ ============= ============ =============
Computation of Diluted Earnings Per Share
Net income.........................................income ................................... $ 101130 $ 110126 $ 352251 $ 330220
After-tax interest expense on convertible
debt............................................. 2debt ...................................... 1 - 31 -
---------------- ---------------- ---------------- ---------------------------- ------------- ------------ -------------
Net income for diluted earnings per share..........share .... $ 103131 $ 110126 $ 355252 $ 330
================ ================ ================ ================220
============ ============= ============ =============
Weighted average shares outstanding................ 244.8 240.1 244.1 241.3outstanding .......... 243.9 239.7 243.7 241.9
Effect of Dilutive Securities
Employee stock purchase plan.................. - - 0.1 0.1
Employee stock option plan.................... 8.3 8.6 8.5 7.2plan ............... 8.1 7.0 8.4 6.5
Deferred stock incentive plan.................plan ............ 5.3 5.55.1 5.3 5.55.1
Convertible debt................................... 6.4debt ............................. 3.0 - 3.11.5 -
---------------- ---------------- ---------------- ---------------------------- ------------- ------------ -------------
Shares for diluted earnings per share.............. 264.8 254.2 261.1 254.1
================ ================ ================ ================share ........ 260.3 251.8 258.9 253.5
============ ============= ============ =============
Diluted Earnings Per Share.........................Share ................... $ .39.50 $ .43.50 $ 1.36.97 $ 1.30
================ ================ ================ ================.87
============ ============= ============ =============
We compute the effect of dilutive securities using the treasury stock
method and average market prices during the period. We use the if-converted
method for convertible debt.
3. Frequent Guest Program
----------------------Marriott Rewards
----------------
We accruedefer revenue received from managed, franchised, and
Marriott-owned/leased hotels and program partners equal to the fair value
of our future redemption obligation. We recognize the component of revenue
from program partners that corresponds to program maintenance services over
the expected life of the points awarded. Upon the redemption of points, we
recognize as revenue the amounts previously deferred, and recognize the
corresponding expense relating to the cost of redeeming points awarded to members of our frequent
guest program based on the discounted expected costs of redemption.awards redeemed. The
liability for thisthe Marriott Rewards program was $611$598 million at September 7,June 15,
2001 and $554 million at December 29, 2000, of which $390$373 million and $310
million, respectively, are included in other long-term liabilities in the
accompanying condensed consolidated balance sheet.
10
4. Dispositions
------------
In the first quarter of 2001, we closed on sales of eight lodging
properties and one senior living community for cash proceeds of $241
million, resulting in gains of $5 million. We
10
recognized $4 million of the
gain and the balance will be recognized as certain contingencies in the
sales contracts expire. We will continue to operate seven of these hotels
under long-term management agreements.
In the second quarter of 2001, we sold four lodging properties for $102
million. We will continue to operate the hotels under long-term management
agreements. In the second quarter of 2001, in connection with the sale, the
buyer terminated lease agreements for three properties sold and leased back
to us in 1997 and 1998. In the third quarter of 2001, an additional six
lease agreements were terminated. We now manage these nine previously
leased properties under long-term management agreements, and gains on the
sale of these properties of $5 million were recognized in both the second
quarter and third quarter as a result of the lease cancellations.
In the second quarter of 2001 we sold land, at book value, for $31 million
to a joint venture which plans to build two resort hotels in Orlando,
Florida, for $547 million. We will provide development services and have
guaranteed completion of the project. The initial owners of the venture
have the right to sell 20 percent of the venture's equity to us upon the
opening of the hotels. At opening we also expect to hold approximately $120
million in mezzanine loans that we have agreed to advance to the joint
venture. We have provided the venture with additional credit facilities for
certain amounts due under the first mortgage loan and to provide for
limited minimum returns to the equity investors in the early years of the
project, although we expect fundings under such support to be less than $5
million.
In the third quarter of 2001, we sold two lodging properties, and some
undeveloped land, for cash proceeds of $146 million, resulting in gains of
$7 million. We recognized $1 million of the gain and the balance will be
recognized as certain contingencies in the sales contracts expire. We will
continue to operate the two hotels under long-term management agreements.
5. Comprehensive Income
--------------------
Total comprehensive income was $103$119 million and $109$127 million, respectively,
for the twelve weeks ended September 7,June 15, 2001 and September 8,June 16, 2000 and $337$234 million
and $325$216 million, respectively, for the thirty-sixtwenty-four weeks ended September 7,June 15,
2001 and September 8,June 16, 2000. The principal difference between net income and
total comprehensive income relates to foreign currency translation
adjustments.
6. New Accounting Standards
------------------------
In the first quarter of 2001, we adopted FAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which resulted in no
material impact to our financial statements.
We will adopt FAS No. 142, "Goodwill and Other Intangible Assets," in the
first quarter of 2002. The new rules require that goodwill is not
amortized, but is reviewed annually for impairment. We estimate that
adoption of FAS No. 142 will result in an annual increase in net income of
approximately $30 million.
11
7. Business Segments
-----------------
We are a diversified hospitality company with operations in six business
segments:
. Full Service Lodging, which includes Marriott Hotels, Resorts and Suites,
The Ritz-Carlton Hotels, Renaissance Hotels, Resorts and Suites, Ramada
International and the fees we receive for the use of the Ramada name in the
United States and Canada;
. Select Service Lodging, which includes Courtyard, Fairfield Inn and
SpringHill Suites;
. Extended Stay Lodging, which includes Residence Inn, TownePlace Suites,
ExecuStay and Marriott Executive Apartments;
. Timeshare, which includes the operation, ownership, development and
marketing of Marriott's timeshare properties under the Marriott,
Ritz-
CarltonRitz-Carlton Club and Horizons brands;
. Senior Living Services, which includes the operation, ownership and
development of senior living communities; and
. Distribution Services, which includes our wholesale food distribution
business.
We evaluate the performance of our segments based primarily on operating
profit before corporate expenses and interest. We do not allocate income
taxes at the segment level.
We have aggregated the brands and businesses presented within each of our
segments considering their similar economic characteristics, types of
customers, distribution channels, and the regulatory business environment
of the brands and operations within each segment.
12
The following table outlines our sales and operating profit by business
segment for the twelve and thirty-sixtwenty-four weeks ended September 7,June 15, 2001 and September 8,June
16, 2000.
Twelve weeks ended Thirty-sixTwenty-four weeks ended
------------------------------------------------------------------------- -------------------------------------
September 7, September 8, September 7, September 8,June 15, 2001 June 16, 2000 June 15, 2001 June 16, 2000
---------------- ---------------- ----------------- ------------------- ------------------ -----------------
($ in millions) (As revised) (As revised) (As revised) (As revised)
Sales
Full Service.............................. $1,163 $1,216 $3,761 $3,745Service ......................... $ 1,260 $ 1,312 $ 2,609 $ 2,543
Select Service............................ 207 214 641 619Service ....................... 223 216 436 408
Extended Stay.............................Stay ........................ 162 157 173 457 454
Timeshare................................. 268 191 723 547301 282
Timeshare ............................ 244 193 478 366
---------------- ---------------- ----------------- ------------------- ------------------
-----------------
Total Lodging............................. 1,795 1,794 5,582 5,365Lodging ........................ 1,889 1,878 3,824 3,599
Senior Living Services.................... 165 153 494 452Services ............... 164 150 329 299
Distribution Services..................... 385 356 1,143 1,044Services ................ 397 381 758 688
---------------- ---------------- ----------------- ------------------- ------------------
-----------------
$2,345 $2,303 $7,219 $6,861$ 2,450 $ 2,409 $ 4,911 $ 4,586
================ ================ ================= =================== ================== =================
Operating profit (loss) before corporate
expenses and interest
Full Service..............................Service ......................... $ 127 $ 133 $ 244 $ 250
Select Service ....................... 43 54 88 92
Extended Stay ........................ 22 22 40 35
Timeshare ............................ 39 35 82 70
$ 104 $ 314 $ 354
Select Service............................ 45 47 133 139
Extended Stay............................. 21 32 61 67
Timeshare................................. 38 33 120 103---------------- ---------------- ----------------- ------------------- ------------------
-----------------
Total Lodging............................. 174 216 628 663Lodging ........................ 231 244 454 447
Senior Living Services.................... 3 (5) 9 (6)
Distribution Services..................... 1Services ............... 5 (3) 6 (1)
Distribution Services ................ 3 6 5 (6)
---------------- ---------------- ----------------- ------------------- ------------------
-----------------
$ 178239 $ 216247 $ 643465 $ 656440
================ ================ ================= =================== ================== =================
Sales offrom Distribution Services do not includeexclude sales (made at market terms and
conditions) to our other business segments of $37$41 million and $40$43 million
for the twelve weeks ended September 7,June 15, 2001 and September 8,June 16, 2000, respectively,
and $117$80 million and $123$82 million for the thirty-sixtwenty-four weeks ended September 7,June 15,
2001 and September 8, 2000.June 16, 2000, respectively.
13
8. Contingencies
-------------
We issue guarantees to lenders and other third parties in connection with
financing transactions and other obligations. These guarantees were
limited, in the aggregate, to $556$500 million at September 7,June 15, 2001, including
guarantees involving major customers. We are currently unable to estimate
the impact that the recent terrorist attacks on New York and Washington
could have on the extent to which we may fund under these guarantees. In
addition, we have made physical completion guarantees relating to three
hotel properties with minimal expected funding. As of September 7,June 15, 2001, we had
extended approximately $940$1,126 million of loan commitments to owners of
lodging properties and senior living communities under which we currently
expectexpected to
fund approximately $230$330 million by December 28, 2001, and $528$595 million in
total. Letters of credit outstanding on our behalf at September
7,June 15, 2001,
totaled $69$55 million, the majority of which related to our self-
insuranceself-insurance
programs. At 13
September 7,June 15, 2001, we had repurchase obligations of $54$55 million
related to notes receivable from timeshare interval purchasers, which have
been sold with limited recourse.
New World Development and another affiliate of Dr. Henry Cheng Kar-Shun, a
director of the Company, have severally indemnified us for guarantees by us
of leases with minimum annual payments of approximately $59 million.
In addition to the foregoing, we are from time to time involved in legal
proceedings which could, if adversely decided, result in losses to the
Company. Although we believe that the lawsuit described below is without
merit, and we intend to vigorously defend against the claims being made
against us, we cannot assure you as to the outcome of this lawsuit nor can
we currently estimate the range of any potential loss to the Company.
On March 30, 2001, Green Isle Partners, Ltd., S.E. (Green Isle) filed a
63-
page63-page complaint in Federal district court in Delaware against The
Ritz-Carlton Hotel Company, L.L.C., The Ritz-Carlton Hotel Company of
Puerto Rico, Inc. (Ritz-Carlton Puerto Rico), Marriott International, Inc.,
Marriott Distribution Services, Inc., Marriott International Capital Corp.
and Avendra L.L.C. (Green Isle Partners, Ltd. S.E., v. The Ritz-Carlton
Hotel Company, L.L.C., et al, civil action no. 01-202). Ritz-Carlton Puerto
Rico manages Thethe Ritz-Carlton San Juan Hotel, Spa and Casino located in San
Juan, Puerto Rico under an operating agreement with Green Isle dated
December 15, 1995 (the Operating Agreement).
The claim asserts 11 causes of action: three Racketeer Influenced and
Corrupt Organizations Act (RICO) claims, together with claims based on the
Robinson-
PatmanRobinson-Patman Act, breach of contract, breach of fiduciary duty, aiding
and abetting a breach of fiduciary duty, breach of implied duties of good
faith and fair dealing, common law fraud and intentional misrepresentation,
negligent misrepresentation, and fiduciary accounting. The complaint does
not request termination of the Operating Agreement.
The claim includes allegations of: (i) national, non-competitive contracts
and attendant kick-back schemes; (ii) concealing transactions with
affiliates; (iii) false entries in the books and manipulation of accounts
payable and receivable; (iv) excessive compensation schemes and fraudulent
expense accounts; (v) charges of prohibited overhead costs to the project;
(vi) charges of prohibited procurement costs; (vii) inflation of Group
Service Expense; (viii) the use of prohibited or falsified revenues; (ix)
attempts to oust Green Isle from ownership; (x) creating a financial crisis
and then attempting to exploit it by seeking an economically
14
oppressive contract in connection with a loan; (xi) providing incorrect
cash flow figures and failing to appropriately reveal and explain revised
cash flow figures.
The complaint seeks as damages the $140 million which Green Isle claims to
have invested in the hotel (which includes $85 million in third party
debt), which the plaintiffs seek to treble to $420 million under RICO and
the Robinson-Patman Act.
On May 25, 2001, defendants moved to dismiss the complaint or,
alternatively, to stay or transfer. Briefing of the motion is complete but
oral argument has not yet been scheduled. On June 25, 2001, Green Isle
filed its Chapter 11 Bankruptcy Petition in the Southern District of
Florida.
14
9. Convertible Debt
----------------
On May 8, 2001 we received grosscash proceeds of $405 million from the sale of
zero-coupon convertible senior notes due 2021, known as LYONs.
The LYONs are convertible into approximately 6.4 million shares of our
Class A common stock and will carry a yield to maturity of 0.75 percent. We
may not redeem the LYONs prior to May 8, 2004, but may at the option of the
holders be required to purchase the LYONs at their accreted value on May 8
of each of 2002, 2004, 2011 and 2016. We may choose to pay the purchase
price for redemptions or repurchases in cash and/or shares of our Class A
common stock.
We are amortizing the issuance costs of the LYONs into interest expense
over the one-year period ending May 8, 2002. The LYONs are classified as
long-term based on our ability and intent to refinance the obligation with
long-term debt if we are required to repurchase the LYONs.
10. Subsequent Events
-----------------
Dispositions
In the third quarter of 2001, we sold two lodging properties, and some
undeveloped land, for cash proceeds of $146 million, resulting in gains of
$7 million. We recognized $1 million of the gain and the balance will be
recognized as certain contingencies in the sales contracts expire. We will
continue to operate the two hotels under long-term management agreements.
September 11, 2001 Terrorist Attacks
The Company has been adversely affected in the aftermath of the recent
terrorist attacks on New York and Washington. Since the attacks, our hotels
have experienced significant short-term declines in occupancy compared to
the prior year. At present, it is not possible to predict either the
severity or duration of such declines in the medium-medium or long-term, or the
potential impact on the Company's results of operations, financial
condition or cash flows. However, as a result of the significant short-term
declines in occupancy, the Company has taken steps to reduce costs,
including reductions in staff. The Company is undertaking a comprehensive
analysis of its cost structure including, among other things, overall
staffing levels and facilities related costs. Furthermore, the Company is
evaluating hotel financial performance subsequent to September 11, 2001 and
its impact on the Company's investments and contingent obligations.
Declines in hotel profitability reduce management and franchise fees and
could give rise to fundings or losses under investments and contingent
obligations that we have made in connection with hotels that we manage or
franchise. The outcome of the Company's analysis may result in charges to
operations and potentially a material adverse impact on our financial
position, results of operations and cashflows.
15
Item 2. Management's Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
of Operations
-------------
RESULTS OF OPERATIONS
The following discussion presents an analysis of results of our operations for
the twelve and thirty-sixtwenty-four weeks ended September 7,June 15, 2001 and September 8,June 16, 2000. Revenue
per available room (REVPAR) is calculated by dividing room sales for comparable
properties by room nights available to guests for the period. We consider REVPAR
to be a meaningful indicator of our performance because it measures the period
over period growth in room revenues for comparable properties. REVPAR may not be
comparable to similarly titled measures such as revenues. Comparable REVPAR,
room rate and occupancy statistics used throughout this report are based upon
U.S. properties operated by us, except that data for Fairfield Inn also include
comparable franchised units.
Twelve Weeks Ended September 7,June 15, 2001 Compared to Twelve Weeks Ended September 8,
--------------------------------------------------------------------------------June 16, 2000
----- -----------------------------------------------------------------------------
We reported net income of $101$130 million for the 2001 thirdsecond quarter on sales of
$2,345$2,450 million. This represents an eighta three percent decreaseincrease in net income and a two
percent increase in sales compared toover the thirdsecond quarter of 2000. Diluted earnings per
share of $.39 decreased by nine percent compared to$.50 was unchanged from the 2000 thirdsecond quarter. Revenues, excluding other revenues from managed properties,Systemwide sales of
$1.1$4.8 billion for the quarter increased three percent over lastwere also unchanged from the prior year.
Marriott Lodging which includes our Full Service, Select Service, Extended Stay
and Timeshare segments, reported a 19five percent decrease in operating profit
while sales increased slightly to $1,795$1,889 million. Lodging revenues, excluding other
revenues from managed properties, of approximately $600 million were flat
compared toSystemwide lodging sales
remained the same as the second quarter a year ago. Lodging revenues were impacted by the
transfer of several hotels from owned to managed status and lower incentive fees
resulting from lower REVPAR, offset by unit additions.2000 at $4.2 billion.
We added a total of 11867 lodging properties (14,862(10,700 units) during the thirdsecond
quarter of 2001, and deflagged fourtwo properties (938(221 units), increasing our total
properties to 2,342 (425,9112,228 (411,987 units). Properties by brand (excluding 7,1717,400 rental
units relating to ExecuStay) are as indicated in the following table.
Properties as of September 7,June 15, 2001
-----------------------------------------------------------
Company-operated Franchised
------------------------------------------------------- -----------------------------
Properties Rooms Properties Rooms
------------ ------------ ------------- ------------- ------------- --------------
Marriott Hotels, Resorts and Suites.................. 246 109,316 176 48,501
Ritz-Carlton......................................... 43 14,073Suites ........................ 245 108,737 168 46,716
Ritz-Carlton ............................................... 41 13,592 - -
Renaissance Hotels, Resorts and Suites............... 82 31,159 36 11,486Suites ..................... 81 31,100 33 11,104
Ramada International.................................International ....................................... 5 1,068 124 17,40565 11,261
Residence Inn........................................ 132 17,524 248 27,068
Courtyard............................................Inn .............................................. 130 17,240 242 26,543
Courtyard .................................................. 284 44,290 259 32,591253 31,798
Fairfield Inn........................................Inn .............................................. 52 7,526 419 37,389412 36,758
TownePlace Suites.................................... 33 3,542 63 6,412Suites .......................................... 32 3,392 58 5,811
SpringHill Suites.................................... 16 2,426 61 6,097Suites .......................................... 13 1,925 56 5,553
Marriott Vacation Club International................. 53 6,255International ....................... 49 5,840 - -
Marriott Executive Apartments and other.............. 10 1,783other .................... 9 1,733 - -
------------ ------------ ------------- ------------- Total................................................ 956 238,962 1,386 186,949
============ ============------------- --------------
Total ................................................... 941 236,443 1,287 175,544
============= ============= ============= ==============
16
Across our Lodging brands, REVPAR for comparable company-operated U.S.
properties declined by an average of 10.04.4 percent in the thirdsecond quarter 2001.
Occupancy declined 5.65.5 percentage points to 74.975.8 percent, andwhile average room
rates declined 3.4rose 2.5 percent.
Occupancy, average daily rate and REVPAR for each of our principal established
brands are shown in the following table.
Twelve weeks
ended
September 7,June 15, 2001 Change vs. 2000
-------------------- ----------------- ------------------
Marriott Hotels, Resorts and Suites
Occupancy................................................ 74.8% -5.2%Occupancy ............................................ 75.8% -5.8% pts.
Average daily rate.......................................rate ................................... $ 133.05 -5.4%
REVPAR...................................................152.08 +1.7%
REVPAR ............................................... $ 99.49 -11.6%115.24 -5.6%
Ritz-Carlton
Occupancy................................................ 70.0% -8.5%Occupancy ............................................ 74.8% -7.4% pts.
Average daily rate.......................................rate ................................... $ 220.24 +1.2%
REVPAR...................................................280.94 +9.6%
REVPAR ............................................... $ 154.23 -9.7%210.04 -0.3%
Renaissance Hotels, Resorts and Suites
Occupancy................................................ 68.2% -7.1%Occupancy ............................................ 72.6% -4.8% pts.
Average daily rate.......................................rate ................................... $ 125.01 -4.2%
REVPAR...................................................144.46 -0.6%
REVPAR ............................................... $ 85.21 -13.3%104.90 -6.7%
Residence Inn
Occupancy................................................ 81.7% -4.6%Occupancy ............................................ 80.1% -5.5% pts.
Average daily rate.......................................rate ................................... $ 105.77 -1.8%
REVPAR...................................................109.09 +1.5%
REVPAR ............................................... $ 86.41 -7.1%87.38 -5.1%
Courtyard
Occupancy................................................ 75.5% -6.0%Occupancy ............................................ 76.5% -5.1% pts.
Average daily rate.......................................rate ................................... $ 97.81 +0.4%
REVPAR...................................................103.46 +4.5%
REVPAR ............................................... $ 73.85 -7.0%79.17 -2.1%
Fairfield Inn
Occupancy................................................ 72.9% -3.4%Occupancy ............................................ 69.8% -4.4% pts.
Average daily rate.......................................rate ................................... $ 65.07 +1.3%
REVPAR...................................................63.88 +3.9%
REVPAR ............................................... $ 47.47 -3.2%44.57 -2.3%
Across our full-service lodging brands (Marriott Hotels, Resorts and Suites,
Ritz-Carlton and Renaissance Hotels, Resorts and Suites), REVPAR for comparable
company-operated U.S. properties declined by an average of 11.65.1 percent in the
2001 thirdsecond quarter. Average room rates decreased 4.7increased 2.2 percent, andwhile occupancy
declined 5.7 percentage points.
Our domestic select-service and extended-stay brands (Residence Inn, Courtyard,
Fairfield Inn, TownePlace Suites and SpringHill Suites) added a net of 3540 hotel
properties, primarily franchises, during the thirdsecond quarter of 2001. REVPAR for
comparable properties declined by an average of 6.92.9 percent. Occupancy decreased
5.35.1 percentage points, andwhile average room rates declined slightly.
Our timeshare brandsrose 3.5 percent.
Results for international lodging operations continued to be favorable in the
2001 second quarter, reflecting margin control as well as new unit additions.
The growth was slightly offset by the impact of the weakness in the Euro.
17
Marriott Vacation Club International posted a 15an 11 percent increase in operating
profit in the thirdsecond quarter of 2001 on a 5717 percent increase in contract sales.
Results reflect strong demand at timeshares in Hawaii, California and Florida, andFlorida.
In addition, during the second quarter 2001 acquisition ofwe acquired the Grand Residence Club
17
Summit property in
Lake Tahoe, California. Note sale gains of $13 million in the quarter, compared
to $7$6 million in the year ago quarter, also contributed to stronger comparisons. The results were negatively impacted by higher sales and
marketing costs.
The overall lodging profit margin, before other revenues and other costs from
managed properties, declined 6.53.3 percentage points versus the year earlier
quarter. Margins were impacted by lower REVPAR, the transfer of several hotels
from owned to managed status, higher sales and marketing costs in the
timeshare brands, and lower margins in the ExecuStay business.business, the move of several
hotels from owned to managed units and lower incentive fees related to the
Courtyard joint venture. The lower incentive fees were offset by higher interest
income associated with the loans made to the joint venture.
Marriott Senior Living Services (SLS) posted eightnine percent sales growth in the
2001 thirdsecond quarter, reflecting a slighttwo-percentage point increase in occupancy for
comparable communities to 85.885 percent. SLS posted operating profits of $3$5 million
compared to a $5$3 million loss a year ago. The favorable comparison is due to
costs incurred in 2000 related to development, start-upago, as a result of improved occupancy
rates and debt associated with
one facility developed by an unaffiliated third party, as well as cost control
measures adopted in 2001.lower pre-opening costs.
Marriott Distribution Services (MDS) reported an eighta four percent increase in sales
in the 2001 thirdsecond quarter, and $1 million of operatingwhile profits a decrease of $4declined to $3 million from the prior year. The unfavorable variance is$6 million
due to the decline in business from a significant customer. Although a
substantial amount of this business has been replaced, there were operating
inefficiencies associated with the new accounts.
Corporate activity. Interest expense increased 18 percent to $26of $27 million remained the same as the
year ago quarter, reflecting ana slight increase in borrowings, partially offset by lower
interest rates. Interest income increased by $14$15 million to $23$20 million in the
2001 thirdsecond quarter due to income associated with higher loan balances,
including loans made to the Courtyard joint venture in the fourth quarter of
2000. Corporate expenses declined 55 percentincreased $4 million reflecting the $7 million
write-off of an investment in a technology partner, a $1 million foreign
exchange loss compared to a $3 million gain in the third quarter to $13 million, primarily due toprior year, partially offset
by a $4$7 million gain onfrom the sale of two affordable housing tax investments, the impact of cost containment
initiatives and a $2 million decline in our net deferred compensation expense.credit
investments. The effective tax rate increased slightlydecreased to 37.536 percent in the thirdsecond
quarter as a result of modifications related to our deferred compensation plan
partially offset byand the impact of increased income in countries with lower effective tax rates.
Thirty-SixTwenty-Four Weeks Ended September 7,June 15, 2001 Compared to Thirty-SixTwenty-Four Weeks Ended ---------------------------------------------------------------------------
September 8,June
- ------------------------------------------------------------------------------
16, 2000
------------------ --------
We reported net income of $352$251 million for the first three quartershalf of 2001 on sales of
$7,219$4,911 million. This represents a seven14 percent increase in net income and an fivea seven
percent increase in sales over the same period in 2000. Diluted earnings per
share of $1.36$.97 for the first three quartershalf of the year increased 511 percent compared to
2000. Overall profit growth in 2001 was favorably impacted by a $15 million
pretax charge, recorded in the first quarter of 2000, related to the write-off
of a contract investment by our distribution services business. Revenues, excluding
other revenues from managed properties, of $3.2 billion for the first three
quarters of 2001Systemwide sales
increased six percent over last year.
18
to $9.5 billion.
Marriott Lodging reported a five percent decreaseslight increase in operating profit to $628$454 million,
on foursix percent higher sales. Lodging revenues, excluding other
revenues from managed properties, of $1.8 billionSystemwide lodging sales increased four percent over
last year.to $8.4 billion.
We added a total of 251129 lodging properties (37,080(22,200 units) during the first three
quartershalf
of 2001, and deflagged 8four properties (1,638(700 units).
18
Across our Lodging brands, REVPAR for comparable company-operated U.S.
properties declined by an average of 4.11.2 percent in the first three quartershalf of 2001.
Occupancy declined 4.33.8 percentage points to 74.674.3 percent, while average room
rates rose 1.53.9 percent.
Thirty-sixTwenty-four
weeks ended September 7, 2001 Change vs.
June 15, 2001 2000
------------------- -----------------------------------
Marriott Hotels, Resorts and Suites
Occupancy................................................ 74.6% -4.5%Occupancy................................. 74.5% -4.2% pts.
Average daily rate.......................................rate ...................... $ 146.55 +0.5%
REVPAR...................................................153.33 +3.2%
REVPAR .................................. $ 109.34 -5.3%114.26 -2.2%
Ritz-Carlton
Occupancy................................................ 72.1% -7.6%Occupancy ............................... 73.4% -7.0% pts.
Average daily rate.......................................rate ...................... $ 260.60 +7.2%
REVPAR...................................................284.09 +10.1%
REVPAR .................................. $ 187.89 -3.0%208.52 +0.5%
Renaissance Hotels, Resorts and Suites
Occupancy................................................ 70.4% -4.7%Occupancy ............................... 71.6% -3.4% pts.
Average daily rate.......................................rate ...................... $ 140.12 +0.2%
REVPAR...................................................147.31 +1.9%
REVPAR .................................. $ 98.67 -6.0%105.40 -2.7%
Residence Inn
Occupancy................................................ 80.4% -3.7%Occupancy ............................... 79.8% -3.3% pts.
Average daily rate.......................................rate ...................... $ 108.47 +1.8%
REVPAR...................................................109.75 +3.7%
REVPAR .................................. $ 87.24 -2.7%87.58 -0.4%
Courtyard
Occupancy................................................ 75.2% -4.1%Occupancy ............................... 75.0% -3.1% pts.
Average daily rate.......................................rate ...................... $ 101.29 +3.8%
REVPAR...................................................103.04 +5.4%
REVPAR .................................. $ 76.15 -1.6%77.30 +1.2%
Fairfield Inn
Occupancy................................................ 68.3%Occupancy ............................... 65.9% -3.2% pts.
Average daily rate.......................................rate ...................... $ 63.94 +3.2%
REVPAR...................................................63.32 +4.4%
REVPAR .................................. $ 43.65 -1.5%41.74 -0.5%
Across our full-service lodging brands (Marriott Hotels, Resorts and Suites,
Ritz-Carlton and Renaissance Hotels, Resorts and Suites), REVPAR for comparable
company-operated U.S. properties declined by an average of 5.1two percent during
the first three quartershalf of 2001. Occupancy fell 4.74.3 percentage points, while average room
rates increased one3.7 percent.
Our domestic select-service and extended-stay brands (Residence Inn, Courtyard,
Fairfield Inn, TownePlace Suites, SpringHill Suites) added a net of 160157 hotel
properties, primarily franchises, since the thirdsecond quarter of 2000. During the
first three quartershalf of 2001,
19
REVPAR for these brands decreased 1.9 percent,increased slightly, reflecting a 3.93.1
percentage point decline in occupancy and a 3.14.9 percent increase in the average
room rate.
Our timeshare brandsResults for international lodging operations were favorable as a result of
profit growth in Europe and Asia as well as new unit growth.
19
Marriott Vacation Club International posted a 17 percent increase infavorable profit growth during the
first three quartershalf of 2001 on a 32an 18 percent increase in contract sales. Results reflect
continued solid demand in California, Hawaii and Florida,Florida. Note sale gains of $27
million compared to $12 million in the prior year also contributed to stronger
comparisons. We sold $129 million in notes in the first half of 2001 compared to
$90 million in the prior year period and the second quarter 2001
acquisition of the Grand Residence Club property in Lake Tahoe, California. The
profitwe benefited from the development activity was negatively impacted by increased
marketing and sales costs.wider financing
spreads.
The overall lodging profit margin, before other revenues and other costs from
managed properties, declined 3.32.2 percentage points in the first three quartershalf of 2001
versus the same period in the prior year. The decline in margin reflects
lower incentive fees related to the Courtyard joint venture and the impact of
lower RevPar, the transfer of several hotels from owned to managed status,Margins were impacted by higher sales
and marketing costs in the timeshare brands, and lower margins in the ExecuStay
business.business, the move of several hotels from owned to managed units and lower
incentive fees related to the Courtyard joint venture. The lower incentive fees resulting from the Courtyard
joint venture
are offset by higher interest income associated with the loans made to the joint
venture.
Marriott Senior Living Services posted a nine10 percent increase in sales in the
first three quartershalf of 2001, reflecting a 2.5 percentage pointan increase in occupancy for comparable
communities to 85.585 percent. The businessSLS posted operating profits of $9$6 million, compared
to a loss of $6$1 million a year ago. The favorable comparison was positively
impacted by costs incurred in the first half of 2000 related to start-up
inefficiencies for new properties, debt associated with one
facility developed by an unaffiliated third party, higher pre-opening expenses and write-offs
associated with development cancellations. At September 7, 2001,
we operatedWe operate 152 facilities (25,742(25,900
units).
Marriott Distribution Services posted a nine10 percent increase in sales in the
first three quartershalf of 2001, reflecting the commencement of new contracts in 2001 and
increased sales from contracts established in 2000, partially offset by
the decline in business from one significant customer.2000. Operating profit of $6$5
million compared favorably to a loss of $1$6 million in the first three quartershalf of 2000,
due to the prior year write-off of the $15 million investment in a contract with
Boston Market, Inc., offset by operating inefficiencies resulting from the
commencement of new contracts.
Corporate activity. Interest expense increased $3 milliondecreased slightly to $75$49 million,
reflecting anlower interest rates, offset by a slight increase in borrowings, partially offset by lower interest rates.borrowings.
Interest income increased substantially to $59$36 million in the first three
quartershalf of
2001, due to income associated with higher loan balances, including the loans
made to the Courtyard joint venture in the fourth quarter of 2000. Corporate
expenses decreasedincreased $8 million, reflecting the $11$13 million write-off of two
investments in technology partnerships, $5 million associated with the start-up
of Avendra LLC, and lower foreign exchange gains, offset by the $7 million gain
from the sale of fourtwo affordable housing tax credit investments and the reversal
of a long-standing $10 million insurance reserve related to a lawsuit at one of
our hotels, lower expenses as a result of our cost containment initiatives, offset
by the $13 million write-off of two investments in technology partnerships,
lower deferred compensation expense, and lower foreign exchange gains.hotels. The reversal of the insurance reserve was as a result of us being approached
in the first quarter by the plaintiffs' counsel, who indicated that a settlement
could be reached in an amount that would be covered by insurance. We determined
that it was no longer probable that the loss contingency would result in a
material outlay by us and accordingly, we reversed the reserve during the first
quarter. The effective tax rate decreased to 36.536 percent as a result of
modifications related to our deferred compensation plan and the impact of
increased income in countries with lower effective tax rates.
20
Avendra LLC. In January 2001 we contributed our hospitality procurement business
into a newly formed joint venture, together with the procurement business of
Hyatt Hotels Corporation. The joint venture, Avendra LLC, is an independent
professional procurement services company serving the North American hospitality
market and selected industries. Bass Hotels and Resorts, Inc., ClubCorp USA
Inc., and Fairmont Hotels and Resorts, Inc. joined Avendra LLC in May 2001.
OUTLOOK FOR FOURTH QUARTER OF FISCAL 2001 AND FISCAL 2002
This outlook is based on preliminary indications only and actual results for the
fourth quarter and fiscal 2001 may differ. See "Forward-Looking Statements" at
the beginning of this report.
For the remainder of 2001, we expect our business environment to remain
unusually challenging. For internal planning purposes, the Company is assuming
that REVPAR for its fourth quarter will decline 25 to 35 percent from last
year's fourth quarter. Although we cannot predict our fourth quarter earnings
with confidence, based on these assumptions, fourth quarter earnings could be
$0.20 to $0.30 per share.
Similarly, while the level of uncertainty is substantially higher for 2002 than
would normally be expected at this time, we are basing our internal estimates on
three to five percent lower REVPAR than 2001, or roughly 15 percent lower REVPAR
than 2000 levels. Based on these assumptions, after taking into account $0.12
per share of incremental earnings from the new accounting rules relating to
goodwill, our 2002 earnings per share could be roughly flat with 2001 levels,
with quarterly earnings and REVPAR comparisons improving over the course of
2002.
We expect investment spending for the full year 2001 to be roughly the same as
earlier forecasts, totaling $1.3 to $1.4 billion. We expect investment spending
levels in 2002 to decline at least one-third compared to 2001.
As a result of current industry conditions, we anticipate that fundings under
our guarantees and other charges related to our loan portfolio and employee
severance could occur in the fourth quarter. We are not yet able to estimate the
extent of any such fundings or charges.
See "Liquidity and Capital Resources" for a further discussion of our financial
position and our liquidity.
2120
LIQUIDITY AND CAPITAL RESOURCES
We have credit facilities, which support our commercial paper program and
letters of credit. At September 7,June 15, 2001, our cash balances combined with our
available borrowing capacity under the credit facilities was over $2nearly $2.7
billion. We consider these resources, together with cash expected to be
generated by operations, adequate to meet our short-term and long-term liquidity
requirements, to finance our long-term growth plans, and to meet debt service
and other cash requirements. We monitor the status of the capital markets, and
regularly evaluate the effect that changes in capital market conditions may have
on our ability to execute our announced growth plans. We expect that both theThe Company and the lodging industry will behas been
adversely affected in the aftermath of the recent terrorist attacks on New York
and Washington. Since the attacks, our hotels have experienced significant
short-
termshort-term declines in occupancy compared to the prior year. At present, it is
not possible to predict either the severity or duration of such declines in the
medium-medium or long-term. Weakerlong-term, or the potential impact on the Company's results of
operations, financial condition or cash flows. However, as a result of the
significant short-term declines in occupancy, the Company has taken steps to
reduce costs, including reductions in staff. The Company is undertaking a
comprehensive analysis of its cost structure including, among other things,
overall staffing levels and facilities related costs. Furthermore, the Company
is evaluating hotel financial performance wouldsubsequent to September 11, 2001 and
its impact on the Company's investments and contingent obligations. Declines in
hotel profitability reduce management and franchise fees and could give rise to
fundings or losses under loans, guaranteesinvestments and minority investmentscontingent obligations that we have
made in connection with hotels that we manage which could,or franchise. The outcome of the
Company's analysis may result in turn, have ancharges to operations and potentially a
material adverse impact on our financial performance. We
are currently unable to estimate the impact that the terrorist attacks could
have on ourposition, results of operations liquidity, or capital resources.and
cashflows.
Cash and equivalents totaled $874$674 million at September 7,June 15, 2001, an increase of $540$340
million from year-end 2000. Cash balances increased due to temporary levels of
excess cash on hand following the recent issuance of convertible debt in the
2001 second quarter.debt. Cash
provided by operations decreased 2733 percent compared to the same period in 2000
as a result of timeshare activity and changes in working capital associated with
timing differences. Net income is stated after recording depreciation expense of
$93$61 million and $84$55 million for the thirty-sixtwenty-four weeks ended September 7,June 15, 2001 and
September 8,June 16, 2000, respectively, and after amortization expense of $54$35 million and
$50$32 million, respectively, for the same time periods. Earnings before interest
expense, income taxes, depreciation and amortization (EBITDA) for the
thirty-sixtwenty-four weeks ended September 7,June 15, 2001 of $777$538 million, increased by $48$52 million,
or seven11 percent compared to the same period in 2000. EBITDA is an indicator of
operating performance which can be used to measure the Company's ability to
service debt, fund capital expenditures and expand its business. However, EBITDA
is not an alternative to net income, operating profit, cash from operations, or
any other operating or liquidity measure prescribed by accounting principles
generally accepted in the United States.
Net cash used in investing activities totaled $126$83 million for the thirty-sixtwenty-four
weeks ended September 7,June 15, 2001, and consisted of capital expenditures for lodging
properties, note advances and the net impact of tax related investment
transactions, offset by disposition proceeds primarily from the dispositionsale of real estate.13
hotels and one senior living community.
We purchased 3.91.9 million shares of our Class A common stockCommon Stock in the thirty-sixtwenty-four
weeks ended September 7,June 15, 2001, at a cost of $161$75 million. As of September 7,June 15, 2001, we had
been authorized by our Board of Directors to repurchase an additional 15.717.7
million shares.
In April 1999, January 2000 and January 2001, we filed "universal shelf"
registration statements with the Securities and Exchange Commission in the
amounts of $500 million, $300 million and 22
$300 million, respectively. As of September 7,June
15, 2001, we had offered and sold to the public under these registration
statements, $300 million of debt securities at 7 7/8%,8 %, due 2009 and $300
million at 8 1/8%,8 %, due 2005, leaving a balance of $500 million available for
future offerings.
21
In January 2001, we issued, through a private placement, $300 million of 7%seven
percent senior unsecured notes, due 2008, and received net proceeds of $297
million. We have agreed to make and complete a registered exchange offer for
these notes and, if required, to implement a resale shelf registration
statement. A registration statement
for the exchange offer has been filed with the Securities and Exchange
Commission but it is not yet effective. Under the terms of the note issue,If we fail to do so on a timely basis, we will pay additional
interest to the holders of these notes if we fail to
complete thenotes. The registered exchange offer on a timely basis. We expect the
registered exchange offeris
expected to be completed in the fourth quarter of 2001 and while we will make some
additional interest payments, we do not expect those payments to be significant.
On May 8, 2001, we issued zero-coupon convertible senior notes due 2021, known
as LYONs.LYONs, and received cash proceeds of $405 million. The LYONs are convertible
into approximately 6.4 million shares of our Class A common stock and carry a
yield to maturity of 0.75 percent.
In 1996, MDS became the exclusive provider of distribution services to
Einstein/Noah Bagel Corp. (ENBC), which operates over 450 bagel shops in 29
states and the District of Columbia. In March 2000, ENBC disclosed that its
independent auditors had expressed substantial doubt about ENBC's ability to
continue as a going concern, due to its inability to meet certain financial
obligations. On April 27, 2000, ENBC and its majority-owned operating subsidiary
filed voluntary bankruptcy petitions for protection under Chapter 11 of the
Federal Bankruptcy code in the U.S. Bankruptcy Court for the District of Arizona
in Phoenix. On April 28, 2000, the Court approved a $31 million
debtor-
in-possessiondebtor-in-possession credit facility to allow for operation of the companies
during reorganization, and also approved the payment in the ordinary course of
business of prepetition trade creditor claims, including those of MDS, subject
to recovery by the debtors under certain circumstances. On July 27, 2000, the
Bankruptcy court extendedCourt entered an order approving ENBC's assumption of the MDS contract. MDS
continues to distribute to ENBC and has been receiving full payment in
accordance with the terms of its contractual agreement. On June 19, 2001, ENBC
was acquired by New World Coffee-Manhattan Bagel Inc. and the contract was
assumed by the new owner.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- ------------------------------------------------------------------
There have been no material changes to our exposures to market risk since
December 29, 2000.
2322
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
Incorporated by reference to the description of legal proceedings in the
"Contingencies" footnote in the financial statements set forth in Part I,
"Financial Information."
Item 2. Changes in Securities
- ------------------------------
None.
Item 3. Defaults Upon Senior Securities
- ----------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None.We held our Annual Meeting of Shareholders on May 4, 2001. The shareholders (1)
re-elected directors Richard E. Marriott, Gilbert M. Grosvenor, and Harry J.
Pearce to terms of office expiring at the 2004 Annual Meeting of Shareholders;
(2) ratified the appointment of Arthur Andersen LLP as independent auditors; and
(3) defeated a shareholder proposal to adopt cumulative voting for the election
of directors. The following table sets forth the votes cast with respect to each
of these matters.
- -------------------------------------------------------------------------------------------------------------
MATTER FOR AGAINST WITHHELD ABSTAIN
- -------------------------------------------------------------------------------------------------------------
Re-election of Richard E. Marriott 2,118,954,160 20,336,020
- -------------------------------------------------------------------------------------------------------------
Re-election of Gilbert M. Grosvenor 2,118,460,460 20,829,720
- -------------------------------------------------------------------------------------------------------------
Re-election of Harry J. Pearce 2,104,970,680 34,319,500
- -------------------------------------------------------------------------------------------------------------
Ratification of appointment of Arthur
Andersen LLP as independent auditors 2,102,756,980 26,939,160 9,594,040
- -------------------------------------------------------------------------------------------------------------
Proposal to adopt cumulative voting for
the election of directors 333,327,900 1,511,930,810 86,617,100
- -------------------------------------------------------------------------------------------------------------
Item 5. Other Information
- --------------------------
None.
2423
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
Exhibit No. Description
----------- -----------
4 Indenture, dated as of May 8, 2001, relating to the Liquid
Yield Option Notes due 2021, with Bank of New York, as
trustee (incorporated by reference to Exhibit 4.2 to our
Registration Statement on Form S-3, Registration Number 333-
66406).
10 $1,500,000,000 Credit Agreement dated July 31, 2001 with
Citibank, N.A., as Administrative Agent, and certain banks.
12 Statement of Computation of Ratio of Earnings to
Fixed Charges.Charges (incorporated by reference to
Exhibit 12 to our Form 10-Q for the fiscal
quarter ended June 15, 2001).
99 Forward-Looking Statements.
(b) Reports on Form 8-K
None.
2524
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MARRIOTT INTERNATIONAL, INC.
19th10th day of October,December, 2001
/s/ Arne M. Sorenson
--------------------
Arne M. Sorenson
Executive Vice President and
Chief Financial Officer
/s/ Linda A. Bartlett
---------------------
Linda A. Bartlett
Vice President and Controller
(Principal Accounting Officer)
2625