UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| 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 March 26, 2004
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.
Yesx No¨
Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act).
Yesx No¨
Class | Shares outstanding at | |||
Class A Common Stock, $0.01 par value |
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MARRIOTT INTERNATIONAL, INC.
INDEX
| Page No. | ||||
| 3 | ||||
Part I. | ||||
Item 1. | ||||
| 5 | |||
| 6 | ||||
Condensed Consolidated Statement of Cash Flows—Twelve Weeks Ended March 26, 2004 and March 28, 2003 | 7 | |||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||
Item 3. | ||||
Item 4. | ||||
Part II. | ||||
Item 1. | ||||
Item 2. | Changes in Securities, | |||
Item 3. | ||||
Item 4. | ||||
Item 5. | ||||
Item 6. | ||||
2
We have mademake forward-looking statements in this document that are based on the beliefs and assumptions of our management, and on information currently available to our management.us. Forward-looking statements include the information concerningabout our possible or assumed future results of operations in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Liquidity and Capital Resources” and other statements throughout this report preceded by, followed by or that include the words “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,” or similar expressions.
Forward-looking statements involve risks, uncertainties and assumptions. Actualassumptions, and our actual results may differ materially from those expressed in theseour forward-looking statements. We therefore caution you not to put undue reliancerely unduly on any forward-looking statements.
Risks and Uncertainties
You should understand that the following important factors, in addition toas well as those discussed in Exhibit 99 and elsewhere in this quarterly report, could cause results to differ materially from those expressed in such forward-looking statements. Because there is no way to determine in advance, whether, or to what extent, any present uncertainty will ultimately impact our business, you should give equal weight to each of the following:
| • | Competition in each of our business segments. Each of our hotel and timeshare brands competes with major hotel chains in national and international venues and with independent companies in regional markets. Our ability to remain competitive and attract and retain business and leisure travelers depends on our success in distinguishing the quality, value and efficiency of our lodging products and services from market opportunities offered by others. |
| • | Supply of and demand for hotel rooms, timeshare units and corporate apartments.The availability of and demand for hotel rooms, timeshare units and corporate apartments is directly affected by overall economic conditions, regional and national development of competing hotels and timeshare resorts, local supply and demand for extended stay and corporate apartments, and the recovery in business travel. While we monitor the projected and actual room supply and availability, the demand for and occupancy rate of hotel rooms and timeshare units, and the occupancy rates of apartments and extended stay lodging properties in all markets in which we conduct business, we cannot assure you that current factors relating to supply and demand will accurately reflect projected revenue growth or business volume. |
| • | Consistency in owner relations.Our responsibility under our management agreements to manage each hotel and enforce the standards required for our brands may, in some instances, be subject to interpretation. We seek to resolve any disagreements in order to develop and maintain positive relations with current and potential hotel owners and joint venture partners. |
| • | Increase in the costs of conducting our business; Insurance.We take appropriate steps to monitor cost increases in energy, healthcare, insurance, transportation and fuel and other expenses central to the conduct of our business. Market forces beyond our control may nonetheless limit both the scope of property and liability insurance coverage that we can obtain and our ability to obtain such coverage at reasonable rates, particularly in light of continued terrorist activities and threats. We therefore cannot assure you that we will be successful in obtaining such insurance without increases in cost or decreases in coverage levels. |
| • | International, national and regional economic conditions. Because we conduct our business on a national and international platform, our activities are susceptible to changes in the performance of regional and global economies. In recent years, our business has been hurt by decreases in travel resulting from recent economic conditions, the military action in Iraq, and the heightened travel security measures that have resulted from the threat of further terrorism. Our future economic performance is similarly subject to the uncertain magnitude and duration of the economic recovery in the United States, the prospects of improving economic performance in other regions, and the unknown pace of any business travel recovery that results. |
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| • | Threat and spread of communicable diseases. The impact of any significant recurrence of Severe Acute Respiratory Syndrome (“SARS”), or the uncontained spread of any contagious or volatile disease could affect our business. |
PART I — FINANCIAL INFORMATION
| • | Recovery of loan and guarantee investments and recycling of capital; availability of new capital resources. The availability of capital to allow us and potential and current hotel owners to fund new hotel investments, as well as refurbishment and improvement of existing hotels, depends in large measure on capital markets and liquidity factors over which we can exert little control. Our ability to recover loan and guarantee advances from hotel operations or from owners through the proceeds of hotel sales, refinancing of debt or otherwise may also effect our ability to recycle and raise new capital. |
| • | Effect of Internet reservation services. Internet room distribution and reservation channels may adversely affect the rates we may charge for hotel rooms and the manner in which our brands can compete in the marketplace with other brands. We believe that we are taking adequate steps to resolve this competitive threat, but cannot assure you that these steps will prove or remain successful. |
| • | Change in laws and regulations. Our business may be affected by changes in accounting standards, timeshare sales regulations and state and federal tax laws. |
| • | Recent privacy initiatives and State and Federal limitations on marketing solicitation. The National Do Not Call Registry and various state laws regarding marketing and solicitation, including anti-spam legislation, may affect the amount and timing of our sales of timeshare units and other products. |
| • | Interruption of the synthetic fuel operations. Problems related to supply, production, and demand at any of the synthetic fuel facilities, the power plants that buy synthetic fuel from the joint venture or the coal mines where the joint venture buys coal, could be caused by accidents, personnel issues, severe weather or similar unpredictable events. |
| • | Litigation. We cannot predict with certainty the cost of defense, the cost of prosecution, or the ultimate outcome of litigation filed by or against us, including remedies or damage awards. |
| • | Disaster. We cannot assure you that our ability to provide fully integrated business continuity solutions in the event of a disaster will occur without interruption to, or effect on, the conduct of our business. |
| • | Barriers to growth and market entry. Factors influencing real estate development generally, including site availability, financing, planning, zoning and other local approvals, and other limitations which may be imposed by market and submarket factors, such as projected room occupancy, growth in demand opposite projected supply, territorial restrictions in our management and franchise agreements, costs of construction, and anticipated room rate structure, all affect and potentially limit our ability to sustain continued growth through management or franchise agreements for new hotels and the conversion of existing facilities to managed or franchised Marriott brands. |
| • | Other risks described from time to time in our filings with the Securities and Exchange Commission (the SEC). We continually evaluate the risks and possible mitigating factors to such risks and provide additional and updated information in our SEC filings. |
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Item 1. Financial StatementsPART I—FINANCIAL INFORMATION
MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTSSTATEMENT OF INCOME
($ in millions, except per share amounts)
(Unaudited)
| Twelve weeks ended | Thirty-six weeks ended | |||||||||||||||
| September 12, 2003 | September 6, 2002 | September 12, 2003 | September 6, 2002 | |||||||||||||
SALES | ||||||||||||||||
Lodging | ||||||||||||||||
Base management fees | $ | 86 | $ | 82 | $ | 266 | $ | 258 | ||||||||
Incentive management fees | 18 | 25 | 75 | 109 | ||||||||||||
Franchise fees | 61 | 55 | 169 | 160 | ||||||||||||
Owned and leased properties | 84 | 84 | 260 | 273 | ||||||||||||
Cost reimbursements | 1,423 | 1,282 | 4,233 | 3,887 | ||||||||||||
Other revenue | 336 | 341 | 926 | 966 | ||||||||||||
Synthetic Fuel | 93 | 55 | 224 | 113 | ||||||||||||
| 2,101 | 1,924 | 6,153 | 5,766 | |||||||||||||
OPERATING COSTS AND EXPENSES | ||||||||||||||||
Lodging | ||||||||||||||||
Owned and leased – direct | 91 | 86 | 269 | 266 | ||||||||||||
Other lodging – direct | 313 | 286 | 828 | 813 | ||||||||||||
Reimbursed costs | 1,423 | 1,282 | 4,233 | 3,887 | ||||||||||||
Administrative and other | 41 | 55 | 137 | 182 | ||||||||||||
Synthetic Fuel | 96 | 87 | 328 | 194 | ||||||||||||
| 1,964 | 1,796 | 5,795 | 5,342 | |||||||||||||
| 137 | 128 | 358 | 424 | |||||||||||||
Corporate expenses | (35 | ) | (25 | ) | (89 | ) | (77 | ) | ||||||||
Interest expense | (26 | ) | (19 | ) | (77 | ) | (59 | ) | ||||||||
Interest income | 31 | 28 | 78 | 75 | ||||||||||||
Provision for loan losses | (1 | ) | — | (7 | ) | — | ||||||||||
INCOME FROM CONTINUING OPERATIONS, BEFORE MINORITY INTEREST AND INCOME TAXES | 106 | 112 | 263 | 363 | ||||||||||||
Income tax benefit (provision) | 16 | 2 | 72 | (40 | ) | |||||||||||
INCOME FROM CONTINUING OPERATIONS, BEFORE MINORITY INTEREST | 122 | 114 | 335 | 323 | ||||||||||||
Minority interest | (29 | ) | — | (29 | ) | — | ||||||||||
INCOME FROM CONTINUING OPERATIONS | 93 | 114 | 306 | 323 | ||||||||||||
Discontinued Operations | ||||||||||||||||
Income from Senior Living Services, net of tax | 1 | 10 | 9 | 17 | ||||||||||||
(Loss) gain on disposal of Senior Living Services, net of tax | (1 | ) | — | 20 | — | |||||||||||
Loss from Distribution Services, net of tax | — | (2 | ) | — | (7 | ) | ||||||||||
Exit costs – Distribution Services, net of tax | (1 | ) | (19 | ) | (2 | ) | (19 | ) | ||||||||
NET INCOME | $ | 92 | $ | 103 | $ | 333 | $ | 314 | ||||||||
EARNINGS PER SHARE – Basic | ||||||||||||||||
Earnings from continuing operations | $ | .40 | $ | .47 | $ | 1.31 | $ | 1.34 | ||||||||
(Loss) Earnings from discontinued operations | (.01 | ) | (.04 | ) | .12 | (.04 | ) | |||||||||
Earnings per share | $ | .39 | $ | .43 | $ | 1.43 | $ | 1.30 | ||||||||
EARNINGS PER SHARE – Diluted | ||||||||||||||||
Earnings from continuing operations | $ | .38 | $ | .45 | $ | 1.25 | $ | 1.27 | ||||||||
(Loss) Earnings from discontinued operations | (.01 | ) | (.04 | ) | .11 | (.04 | ) | |||||||||
Earnings per share | $ | .37 | $ | .41 | $ | 1.36 | $ | 1.23 | ||||||||
DIVIDENDS DECLARED PER SHARE | $ | 0.075 | $ | 0.070 | $ | 0.220 | $ | 0.205 | ||||||||
See Notes to Condensed Consolidated Financial Statements
4
CONDENSED CONSOLIDATED BALANCE SHEET
($ in millions)
| September 12, 2003 (Unaudited) | January 3, 2003 | |||||||
| ASSETS | ||||||||
Current assets | ||||||||
Cash and equivalents | $ | 113 | $ | 198 | ||||
Accounts and notes receivable | 765 | 522 | ||||||
Prepaid taxes | 254 | 300 | ||||||
Other | 109 | 89 | ||||||
Assets held for sale | 17 | 664 | ||||||
| 1,258 | 1,773 | |||||||
Property and equipment | 2,528 | 2,560 | ||||||
Goodwill | 923 | 923 | ||||||
Other intangible assets | 520 | 495 | ||||||
Investments in affiliates – equity | 479 | 481 | ||||||
Investments in affiliates – notes receivable | 602 | 527 | ||||||
Notes and other receivables, net | ||||||||
Loans to timeshare owners | 211 | 153 | ||||||
Other notes receivable | 293 | 361 | ||||||
Other long-term receivables | 463 | 473 | ||||||
| 967 | 987 | |||||||
Other | 795 | 550 | ||||||
| $ | 8,072 | $ | 8,296 | |||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | 516 | $ | 529 | ||||
Current portion of long-term debt | 259 | 221 | ||||||
Liabilities of businesses held for sale | 28 | 390 | ||||||
Other | 1,080 | 1,067 | ||||||
| 1,883 | 2,207 | |||||||
Long-term debt | 1,359 | 1,492 | ||||||
Casualty self insurance reserves | 142 | 106 | ||||||
Other long-term liabilities and deferred income | 958 | 857 | ||||||
Convertible debt | 62 | 61 | ||||||
Minority interest | 20 | — | ||||||
Shareholders’ equity | ||||||||
Class A common stock | 3 | 3 | ||||||
Additional paid-in capital | 3,298 | 3,224 | ||||||
Retained earnings | 1,374 | 1,126 | ||||||
Deferred compensation | (89 | ) | (43 | ) | ||||
Treasury stock, at cost | (872 | ) | (667 | ) | ||||
Accumulated other comprehensive loss | (66 | ) | (70 | ) | ||||
| 3,648 | 3,573 | |||||||
| $ | 8,072 | $ | 8,296 | |||||
| Twelve Weeks Ended | ||||||||
| March 26, 2004 | March 28, 2003 | |||||||
REVENUES | ||||||||
Base management fees | $ | 99 | $ | 92 | ||||
Franchise fees | 61 | 52 | ||||||
Incentive management fees | 33 | 29 | ||||||
Owned, leased, corporate housing and other revenue | 156 | 137 | ||||||
Timeshare interval sales and services | 318 | 237 | ||||||
Cost reimbursements | 1,585 | 1,408 | ||||||
Synthetic fuel | — | 68 | ||||||
| 2,252 | 2,023 | |||||||
OPERATING COSTS AND EXPENSES | ||||||||
Owned, leased and corporate housing – direct | 132 | 110 | ||||||
Timeshare – direct | 252 | 208 | ||||||
Reimbursed costs | 1,585 | 1,408 | ||||||
General, administrative and other | 132 | 112 | ||||||
Synthetic fuel | — | 127 | ||||||
| 2,101 | 1,965 | |||||||
OPERATING INCOME | 151 | 58 | ||||||
Gains and other income | 4 | 1 | ||||||
Interest expense | (22 | ) | (26 | ) | ||||
Interest income | 26 | 20 | ||||||
Provision for loan losses | 3 | (5 | ) | |||||
Equity in earnings (losses) — Synthetic fuel | (28 | ) | — | |||||
— Other | (2 | ) | (1 | ) | ||||
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | 132 | 47 | ||||||
(Provision) benefit for income taxes | (18 | ) | 40 | |||||
INCOME FROM CONTINUING OPERATIONS | 114 | 87 | ||||||
Discontinued Operations | ||||||||
Income from Senior Living Services, net of tax | — | 30 | ||||||
Loss from Distribution Services, net of tax | — | (1 | ) | |||||
NET INCOME | $ | 114 | $ | 116 | ||||
EARNINGS PER SHARE – Basic | ||||||||
Earnings from continuing operations | $ | .50 | $ | .37 | ||||
Earnings from discontinued operations | — | .13 | ||||||
Earnings per share | $ | .50 | $ | .50 | ||||
EARNINGS PER SHARE – Diluted | ||||||||
Earnings from continuing operations | $ | .47 | $ | .36 | ||||
Earnings from discontinued operations | — | .12 | ||||||
Earnings per share | $ | .47 | $ | .48 | ||||
DIVIDENDS DECLARED PER SHARE | $ | 0.075 | $ | 0.070 | ||||
See Notes to Condensed Consolidated Financial Statements
5
CONDENSED CONSOLIDATED BALANCE SHEET
($ in millions)
March 26, 2004 (Unaudited) | January 2, 2004 | |||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and equivalents | $ | 203 | $ | 229 | ||||
Accounts and notes receivable | 773 | 728 | ||||||
Prepaid taxes | 216 | 223 | ||||||
Other | 117 | 84 | ||||||
Assets held for sale | 10 | — | ||||||
| 1,319 | 1,264 | |||||||
Property and equipment | 2,525 | 2,513 | ||||||
Goodwill | 923 | 923 | ||||||
Other intangible assets | 532 | 526 | ||||||
Equity method investments | 446 | 468 | ||||||
Notes and other receivables, net | ||||||||
Loans to equity method investees | 507 | 558 | ||||||
Loans to timeshare owners | 217 | 152 | ||||||
Other notes receivable | 400 | 389 | ||||||
Other long-term receivables | 535 | 534 | ||||||
| 1,659 | 1,633 | |||||||
Other | 868 | 850 | ||||||
| $ | 8,272 | $ | 8,177 | |||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | 608 | $ | 584 | ||||
Current portion of long-term debt | 60 | 64 | ||||||
Other | 1,043 | 1,122 | ||||||
| 1,711 | 1,770 | |||||||
Long-term debt | 1,669 | 1,391 | ||||||
Casualty self-insurance reserves | 177 | 169 | ||||||
Other long-term liabilities | 1,031 | 1,003 | ||||||
Minority interest | 10 | 6 | ||||||
Shareholders’ equity | ||||||||
Class A common stock | 3 | 3 | ||||||
Additional paid-in capital | 3,362 | 3,317 | ||||||
Retained earnings | 1,559 | 1,505 | ||||||
Deferred compensation | (138 | ) | (81 | ) | ||||
Treasury stock, at cost | (1,077 | ) | (865 | ) | ||||
Accumulated other comprehensive loss | (35 | ) | (41 | ) | ||||
| 3,674 | 3,838 | |||||||
| $ | 8,272 | $ | 8,177 | |||||
See Notes to Condensed Consolidated Financial Statements
6
MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
($ in millions)
(Unaudited)
| Thirty-six weeks ended | Twelve Weeks Ended | |||||||||||||||
| September 12, 2003 | September 6, 2002 | March 26, 2004 | March 28, 2003 | |||||||||||||
OPERATING ACTIVITIES | ||||||||||||||||
Income from continuing operations | $ | 306 | $ | 323 | $ | 114 | $ | 87 | ||||||||
Adjustments to reconcile to cash provided by operating activities: | ||||||||||||||||
Income from discontinued operations | 9 | 10 | — | 7 | ||||||||||||
Discontinued operations – gain (loss) on sale/exit | 18 | (19 | ) | |||||||||||||
Discontinued operations – gain on sale/exit | — | 22 | ||||||||||||||
Depreciation and amortization | 105 | 128 | 39 | 34 | ||||||||||||
Minority interest in results of synthetic fuel business | 29 | — | ||||||||||||||
Income taxes | (148 | ) | 9 | (11 | ) | (37 | ) | |||||||||
Timeshare activity, net | (47 | ) | (62 | ) | ||||||||||||
Other | (92 | ) | 78 | (22 | ) | (53 | ) | |||||||||
Timeshare activity, net | (88 | ) | (104 | ) | ||||||||||||
Working capital changes | (85 | ) | 35 | (83 | ) | (100 | ) | |||||||||
Net cash provided by operating activities | 54 | 460 | ||||||||||||||
Net cash used in operating activities | (10 | ) | (102 | ) | ||||||||||||
INVESTING ACTIVITIES | ||||||||||||||||
Capital expenditures | (144 | ) | (222 | ) | (31 | ) | (63 | ) | ||||||||
Dispositions | 487 | 513 | 4 | 263 | ||||||||||||
Loan advances | (176 | ) | (94 | ) | (25 | ) | (42 | ) | ||||||||
Loan collections and sales | 152 | 61 | 97 | 86 | ||||||||||||
Other | (26 | ) | (65 | ) | (21 | ) | (15 | ) | ||||||||
Net cash provided by investing activities | 293 | 193 | 24 | 229 | ||||||||||||
FINANCING ACTIVITIES | ||||||||||||||||
Commercial paper, net | (97 | ) | 248 | 290 | 388 | |||||||||||
Issuance of long-term debt | 12 | 21 | 2 | — | ||||||||||||
Repayment of long-term debt | (65 | ) | (1,279 | ) | (35 | ) | (21 | ) | ||||||||
Issuance of Class A common stock | 50 | 28 | 17 | 4 | ||||||||||||
Dividends paid | (50 | ) | (49 | ) | (17 | ) | (17 | ) | ||||||||
Purchase of treasury stock | (291 | ) | (131 | ) | (297 | ) | (154 | ) | ||||||||
Cash received from minority interest in synthetic fuel business | 9 | — | ||||||||||||||
Net cash used in financing activities | (432 | ) | (1,162 | ) | ||||||||||||
Net cash (used in) provided by financing activities | (40 | ) | 200 | |||||||||||||
DECREASE IN CASH AND EQUIVALENTS | (85 | ) | (509 | ) | ||||||||||||
(DECREASE) INCREASE IN CASH AND EQUIVALENTS | (26 | ) | 327 | |||||||||||||
CASH AND EQUIVALENTS, beginning of period | 198 | 812 | 229 | 198 | ||||||||||||
CASH AND EQUIVALENTS, end of period | $ | 113 | $ | 303 | $ | 203 | $ | 525 | ||||||||
See Notes to Condensed Consolidated Financial Statements
67
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.Basis of Presentation
The 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 condensed consolidated financial statements in conjunction with the consolidated financial statements and notes to those financial statements in our Annual Report on Form 10-K for the fiscal year ended January 3, 2003.2, 2004. Certain terms not otherwise defined in this quarterly report have the meanings specified in that
Form 10-K 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, the reported amounts of sales and expenses during the reporting period and the disclosures of contingent liabilities. Accordingly, our ultimate results could differ from those estimates. We have reclassified certain prior year amounts to conform to our 20032004 presentation.
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 12, 2003March 26, 2004 and January 3, 2003,2, 2004, and the results of our operations for the twelve and thirty-six weeks ended September 12, 2003 and September 6, 2002, and our cash flows for the thirty-sixtwelve weeks ended September 12, 2003March 26, 2004 and September 6, 2002.March 28, 2003. 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 consolidated in these financial statements.
Revenue Recognition2.New Accounting Standards
Our sales include (1) base and incentive management fees, (2) franchise fees, (3) sales from lodging properties owned or leased by us, (4) cost reimbursements, (5) other lodging revenue, and (6) sales from our Synthetic Fuel business. Management fees comprise a base fee, which is a percentage of the revenues of hotels 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. Cost reimbursements include direct and indirect costs that are reimbursed to us by lodging properties that we manage or franchise. Other lodging revenue includes sales from our Timeshare and ExecuStay businesses (excluding base fees, reimbursed costs and franchise fees).
Management Fees:We recognize base fees as revenue when earned in accordance with the contract. In interim periods and at year end 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. For the thirty-six weeks ended September 12, 2003 we have recognized $75 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.
7
Timeshare: We recognize revenue from timeshare interest sales in accordance with Financial Accounting Standards (FAS) No. 66, “Accounting for Sales of Real Estate.” We recognize sales when (1) a minimum of 10 percent of the purchase price for the timeshare interval has been received, (2) the period of cancellation with refund has expired, (3) we deem receivables collectible and (4) we have attained certain minimum sales and construction levels. For sales that do not meet these criteria, we defer all revenue using the deposit method.
Owned and Leased Units: We recognize room sales and revenues 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.” We recognize franchise fees as revenue in each accounting period as fees are earned and become receivable from the franchisee.
Cost Reimbursements: We recognize cost reimbursements, in accordance with operating agreements, from managed and franchised properties when we incur the related reimbursable costs.
Synthetic Fuel:We recognize revenue from the consolidated Synthetic Fuel joint venture when the synthetic fuel is produced and sold. We also recognize additional revenue based on tax credits allocated to our joint venture partner when the tax credits are generated.
We adopted the disclosure provisions of Financial Accounting Standards Board (FASB) Interpretation No. (FIN) 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” in the fourth quarter of 2002. We applied the recognition and measurement provisions for guarantees issued in 2003 and there was no material impact on our financial statements.
We adopted FIN 46, “Consolidation of Variable Interest Entities” in the first quarter of 2003Entities,” (the “Interpretation”) was effective for all enterprises with variable interests in variable interest entities created after January 31, 2003. FIN 46(R), which was revised in December 2003, and will adoptwas effective for all entities to which the provisions of FIN 46 inwere not applied as of December 24, 2003. We applied the fourth quarterprovisions of 2003 forFIN 46(R) to all previously existing variable interest entities.entities subject to the Interpretation as of March 26, 2004. Under FIN 46,46(R), if an entity is determined to be a variable interest entity, it must be consolidated by the enterprise that absorbs the majority of the entity’s expected losses, if they occur, receives a majority of the entity’s expected residual returns, if they occur, or both. We do not expect to consolidate any previously unconsolidated entities as
As a result of adopting FIN 46.46(R), we have consolidated the two synthetic fuel joint ventures as of March 26, 2004 as we bear the majority of the expected losses. The synthetic fuel joint ventures own four coal-based synthetic fuel production facilities (the “Facilities”). The synthetic fuel produced at the Facilities through 2007 qualifies for tax credits based on Section 29 of the Internal Revenue Code.
Our synthetic fuel business consistsWhile the Facilities produce significant losses, these are more than offset by the tax credits generated under Section 29, which reduce our income tax expense. At March 26, 2004, the ventures had working capital of two entities that are both variable interest entities which Marriott continues to consolidate. See$18 million and the “Synthetic Fuel” footnote for further discussionbook value of the nature, purpose and size of the synthetic fuel business.Facilities was $36 million. The ventures have no long-term debt.
Marriott currently consolidates four entities which will be deemedare variable interest entities under FIN 46.46(R). These entities were established with the same partner to lease four Marriott branded hotels. The combined capital in the four variable interest entities is $5$6 million, andwhich is used primarily to fund hotel working capital. Our equity at risk is $4 million, and we hold 55 percent of the common equity shares. In addition, we guarantee the lease obligations of one of the hotels to the landlord, and our total remaining exposure under this guarantee is $3$1 million; and our total exposure to loss is $7$5 million.
FIN 4646(R) also requires us to disclose information about significant variable interests we hold in variable interest entities, including the nature, purpose, size, and activity of the variable interest entity and our maximum exposure to loss as a result of our involvement with the variable interest entity.
As of the end of the third quarter of 2003, we
8
We have one other significant interest in an entity which will be deemedis a variable interest entity under FIN 46.46(R). In February 2001, we entered into a shareholders’ agreement with an unrelated third party to form a joint venture to own and lease luxury hotels to be managed by us. In February 2002, the joint venture signed its first lease with a third party landlord. The initial capital structure of the joint
8
venture is $4 million of debt and $4 million of equity. We hold 35 percent of the equity, or $1 million, and 65 percent of the debt, or $3 million, for a total investment of $4 million. In addition, each equity partner entered into various guarantees with the landlord to guarantee lease payments. Our total exposure under these guarantees is $17$18 million. Our maximum exposure to loss is $21$22 million. We currently do not consolidate the joint venture and will not upon adoption of FIN 46 since we do not bear the majority of itsthe expected losses.
In May 2003,FIN 46(R) does not apply to qualifying special purpose entities, such as those sometimes used by us to sell notes receivable originated by our timeshare business in connection with the Financial Accounting Standards Board issuedsale of timeshare intervals. We will continue to account for these qualifying special purpose entities in accordance with FAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” The provisions of FAS No. 150 are effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, or our third quarter of 2003. FAS No. 150 has no material impact on our financial statements.140.
3.Earnings Per Share
The following table illustrates the reconciliation of the earnings and number of shares used in the basic and diluted earnings per share calculations (in millions, except per share amounts).calculations.
| Twelve weeks ended | Thirty-six weeks ended | |||||||||||||||||
| (in millions, except per share amounts) | Twelve Weeks Ended | |||||||||||||||||
| September 12, 2003 | September 6, 2002 | September 12, 2003 | September 6, 2002 | March 26, 2004 | March 28, 2003 | |||||||||||||
Computation of Basic Earnings Per Share | ||||||||||||||||||
Income from continuing operations | $ | 93 | $ | 114 | $ | 306 | $ | 323 | $ | 114 | $ | 87 | ||||||
Weighted average shares outstanding | 232.7 | 240.9 | 233.0 | 241.9 | 229.6 | 233.9 | ||||||||||||
Basic earnings per share from continuing operations | $ | 0.40 | $ | 0.47 | $ | 1.31 | $ | 1.34 | $ | 0.50 | $ | 0.37 | ||||||
Computation of Diluted Earnings Per Share | ||||||||||||||||||
Income from continuing operations | $ | 93 | $ | 114 | $ | 306 | $ | 323 | $ | 114 | $ | 87 | ||||||
After-tax interest expense on convertible debt | — | — | — | 4 | — | — | ||||||||||||
Income from continuing operations for diluted earnings per share | $ | 93 | $ | 114 | $ | 306 | $ | 327 | $ | 114 | $ | 87 | ||||||
Weighted average shares outstanding | 232.7 | 240.9 | 233.0 | 241.9 | 229.6 | 233.9 | ||||||||||||
Effect of dilutive securities | ||||||||||||||||||
Employee stock purchase plan | — | — | — | 0.1 | — | — | ||||||||||||
Employee stock option plan | 7.0 | 5.3 | 5.7 | 7.1 | 7.7 | 3.9 | ||||||||||||
Deferred stock incentive plan | 4.7 | 5.0 | 4.8 | 4.9 | 4.3 | 4.8 | ||||||||||||
Restricted stock plan | 0.5 | — | 0.4 | — | ||||||||||||||
Restricted stock units | 0.4 | 0.1 | ||||||||||||||||
Convertible debt | 0.9 | 0.9 | 0.9 | 3.8 | 0.9 | 0.9 | ||||||||||||
Shares for diluted earnings per share | 245.8 | 252.1 | 244.8 | 257.8 | 242.9 | 243.6 | ||||||||||||
Diluted earnings per share from continuing operations | $ | 0.38 | $ | 0.45 | $ | 1.25 | $ | 1.27 | $ | 0.47 | $ | 0.36 | ||||||
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We compute the effect of dilutive securities using the treasury stock method and average market prices during the period. We determinebase our determination as to dilution based on earnings from continuing operations.
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In accordance with FAS No. 128 “Earnings per Share,” we do not include the following stock options in our calculation of diluted earnings per share does not include the following items because the option exercise prices are greater than the average market price for our Class A Common Stock for the applicable period:
(a) for the twelve week period ended March 26, 2004, 6.2 million options, and
(b) for the twelve week period ended March 28, 2003, 20.3 million options.
4.Stock-Based Compensation
We have several stock-based employee compensation plans that we account for using the intrinsic value method under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees.” Accordingly, we do not reflect stock-based employee compensation cost in net income for our Stock Option Program, the Supplemental Executive Stock Option awards or the Stock Purchase Plan. We recognized
The following table shows stock-based employee compensation cost of $4 millioncosts we recognized in the twelve weeks ended March 26, 2004 and $2 million, net of tax, forMarch 28, 2003 and our deferred share grants, restricted share grants and restricted stock unitscompensation balance for the twelve weeks ended September 12, 2003March 26, 2004 and September 6, 2002, respectively. For the thirty-six weeksyear ended September 12, 2003 and September 6, 2002,January 2, 2004.
| ($ in millions) | Reported Stock-Based Compensation Expense, Net of Tax | Deferred Compensation Balance at | ||||||||||
| Twelve Weeks Ended | ||||||||||||
| March 26, 2004 | March 28, 2003 | March 26, 2004 | January 2, 2004 | |||||||||
Deferred share grants | $ | 2 | $ | 2 | $ | 19 | $ | 21 | ||||
Restricted share grants | — | 1 | 15 | 16 | ||||||||
Restricted stock units | 5 | 1 | 104 | 44 | ||||||||
| $ | 7 | $ | 4 | $ | 138 | $ | 81 | |||||
During the first quarter of 2004 we recognized after-tax stock-based employee compensation cost of $13 million and $6 million, respectively. Included in 2003 compensation cost for the twelve and thirty-six weeks ended September 12, 2003, is $2 million and $6 million, respectively, net of tax related to the grant ofgranted approximately 1.91.5 million units (each representing one share of our Class A common stock) under the employee restricted stock unit program which was startedbegan in the first quarter of 2003. At September 12, 2003, there was approximately $49 million in deferred compensation related to unit grants. Under the unit plan, fixed grants will be awarded annually to certain employees.
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The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of FAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation. We have included the impact of measured but unrecognized compensation cost and excess tax benefits credited to additional paid-in capitalpaid-in-capital in the calculation of the diluted pro forma shares for all periods presented.
| Twelve weeks ended | Thirty-six weeks ended | Twelve Weeks Ended | ||||||||||||||||||||||
| ($ in millions, except per share amounts) | September 12, 2003 | September 6, 2002 | September 12, 2003 | September 6, 2002 | March 26, 2004 | March 28, 2003 | ||||||||||||||||||
Net income, as reported | $ | 92 | $ | 103 | $ | 333 | $ | 314 | $ | 114 | $ | 116 | ||||||||||||
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects | 4 | 2 | 13 | 6 | 7 | 4 | ||||||||||||||||||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | (18 | ) | (15 | ) | (52 | ) | (45 | ) | ||||||||||||||||
Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects | (17 | ) | (16 | ) | ||||||||||||||||||||
Pro forma net income | $ | 78 | $ | 90 | $ | 294 | $ | 275 | $ | 104 | $ | 104 | ||||||||||||
Earnings per share: | ||||||||||||||||||||||||
Basic – as reported | $ | .39 | $ | .43 | $ | 1.43 | $ | 1.30 | ||||||||||||||||
Basic—as reported | $ | .50 | $ | .50 | ||||||||||||||||||||
Basic – pro forma | $ | .34 | $ | .37 | $ | 1.26 | $ | 1.14 | ||||||||||||||||
Basic—pro forma | $ | .45 | $ | .44 | ||||||||||||||||||||
Diluted – as reported | $ | .37 | $ | .41 | $ | 1.36 | $ | 1.23 | ||||||||||||||||
Diluted—as reported | $ | .47 | $ | .48 | ||||||||||||||||||||
Diluted – pro forma | $ | .32 | $ | .36 | $ | 1.21 | $ | 1.09 | ||||||||||||||||
Diluted—pro forma | $ | .43 | $ | .42 | ||||||||||||||||||||
105.Marriott Rewards
We defer revenue received from managed, franchised, and Marriott-owned/leased hotels and program partners equal to the fair value of our future redemption obligation.obligation under our Marriott Rewards frequent stay program. 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 the awards redeemed. The
Our liability for the Marriott Rewards program was $742$817 million at September 12, 2003March 26, 2004 and $683$784 million at January 3, 20032, 2004 of which $452$534 million and $418$502 million, respectively, are included in other long-term liabilities and deferred income in the accompanying condensed consolidated balance sheet.
6.Comprehensive Income |
We sold one lodging property during the third quarter of 2003 for approximately $39 million in cash, net of transaction costs. The buyer leased the property, for a term of 20 years to a consolidated joint venture between the buyer and us. The lease payments are fixed for the first five years and variable thereafter. We entered into an agreement with the joint venture to manage the property for an initial term of 20 years. Our gain on the sale of approximately $6 million will be recognized on a straight-line basis in proportion to the gross rental charged to expense.
During the third quarter of 2003, we also sold our 10 percent interest in one of our international joint ventures for approximately $9 million. In connection with the sale we recorded a pre-tax gain of approximately $9 million.
In the second quarter of 2003, we sold two lodging properties for $98 million in cash. We will continue to operate the two hotels under long-term management agreements. The sales are accounted for under the full accrual method of accounting in accordance with FAS No. 66. We sold the properties for a gain of $4 million, which is deferred until certain contingencies in the sales contract expire.
During the third quarter of 2003, we completed the previously announced sale of an approximately 50 percent interest in the Synthetic Fuel business. We received cash and promissory notes totaling $25 million at closing and we are receiving additional profits that are expected to continue over the life of the venture based on the actual amount of tax credits allocated to the purchaser. See the “Synthetic Fuel” footnote.
In the 2003 third quarter, we sold 14 Brighton Gardens assisted living communities to CNL Retirement Properties, Inc. (CNL) for approximately $184 million. We provided a $92 million acquisition loan to CNL in connection with the sale. Sunrise Senior Living, Inc. (Sunrise) currently operates and will continue to operate the 14 communities under long-term management agreements. We recorded a gain, net of taxes, of $1 million.
In the first quarter of 2003, in accordance with definitive agreements entered into on December 30, 2002 to sell our senior living management business to Sunrise and to sell nine senior living communities to CNL, we completed those sales (in addition to the related sale of a parcel of land to Sunrise) for $266 million and recognized a gain, net of taxes, of $23 million. See the “Assets Held for Sale – Discontinued Operations” footnote.
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TotalOur total comprehensive income was $63$120 million and $103$114 million, for the twelve weeks ended September 12,March 26, 2004 and March 28, 2003, and September 6, 2002, respectively, and $337 million and $321 million, respectively, for the thirty-six weeks ended September 12, 2003 and September 6, 2002. The principal difference between net income and total comprehensive income for the applicable 2003 and 2002 periods relates to foreign currency translation adjustments.respectively.
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7.Business Segments
We are a diversified hospitality company with operations in five business segments:
| • | Full-Service Lodging, which includes Marriott Hotels |
| • | Select-Service Lodging, which includes Courtyard, Fairfield Inn and SpringHill Suites; |
| • | Extended-Stay Lodging, which includes Residence Inn, TownePlace Suites, Marriott ExecuStay and Marriott Executive Apartments; |
| • | Timeshare, which includes the development, marketing, operation |
| • | Synthetic Fuel, which includes our interest in the operation of |
We evaluate the performance of our segments based primarily on the results of the segment without allocating corporate expenses, interest expense, and interest income orincome. With the exception of our synthetic fuel segment, we do not allocate income taxes (segment financial results).to our segments. As timeshare note sales are an integral part of the timeshare business, we include timeshare note sale gains in our timeshare segment results and we allocate other gains as well as equity in earnings (losses) from our joint ventures to each of our segments.
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.
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| Twelve weeks ended | Thirty-six weeks ended | |||||||||||||||||||||||
| September 12, 2003 | September 6, 2002 | September 12, 2003 | September 6, 2002 | Twelve Weeks Ended | ||||||||||||||||||||
Sales | ||||||||||||||||||||||||
| March 26, 2004 | March 28, 2003 | |||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||
($ in millions) | ||||||||||||||||||||||||
Full-Service | $ | 1,306 | $ | 1,194 | $ | 3,950 | $ | 3,714 | $ | 1,505 | $ | 1,330 | ||||||||||||
Select-Service | 236 | 231 | 699 | 676 | 247 | 234 | ||||||||||||||||||
Extended-Stay | 138 | 147 | 392 | 416 | 115 | 124 | ||||||||||||||||||
Timeshare | 328 | 297 | 888 | 847 | 385 | 267 | ||||||||||||||||||
Total Lodging | 2,008 | 1,869 | 5,929 | 5,653 | ||||||||||||||||||||
Synthetic Fuel | 93 | 55 | 224 | 113 | ||||||||||||||||||||
Total lodging | 2,252 | 1,955 | ||||||||||||||||||||||
Synthetic fuel | — | 68 | ||||||||||||||||||||||
| $ | 2,101 | $ | 1,924 | $ | 6,153 | $ | 5,766 | $ | 2,252 | $ | 2,023 | |||||||||||||
Segment financial results | ||||||||||||||||||||||||
Income from Continuing Operations | ||||||||||||||||||||||||
($ in millions) | ||||||||||||||||||||||||
Full-Service | $ | 77 | $ | 76 | $ | 259 | $ | 265 | $ | 100 | $ | 95 | ||||||||||||
Select-Service | 28 | 27 | 81 | 95 | 23 | 24 | ||||||||||||||||||
Extended-Stay | 12 | 17 | 37 | 35 | 10 | 10 | ||||||||||||||||||
Timeshare | 23 | 40 | 85 | 110 | 50 | 18 | ||||||||||||||||||
Total Lodging | 140 | 160 | 462 | 505 | ||||||||||||||||||||
Synthetic Fuel | (3 | ) | (32 | ) | (104 | ) | (81 | ) | ||||||||||||||||
Total lodging | 183 | 147 | ||||||||||||||||||||||
Synthetic fuel (after tax) | 11 | 19 | ||||||||||||||||||||||
Unallocated corporate expenses | (30 | ) | (30 | ) | ||||||||||||||||||||
Interest income, provision for loan losses and interest expense | 7 | (11 | ) | |||||||||||||||||||||
Income taxes (excluding Synthetic fuel) | (57 | ) | (38 | ) | ||||||||||||||||||||
| $ | 137 | $ | 128 | $ | 358 | $ | 424 | $ | 114 | $ | 87 | |||||||||||||
Equity in income/(loss) of equity method investees | ||||||||||||||||||||||||
Equity in Earnings (Losses) of Equity Method Investees | ||||||||||||||||||||||||
($ in millions) | ||||||||||||||||||||||||
Full-Service | $ | — | $ | 2 | $ | 7 | $ | 6 | $ | 6 | $ | 5 | ||||||||||||
Select-Service | (4 | ) | (2 | ) | (11 | ) | (5 | ) | (6 | ) | (4 | ) | ||||||||||||
Timeshare | 1 | — | — | — | (3 | ) | (1 | ) | ||||||||||||||||
Synthetic fuel | (28 | ) | — | |||||||||||||||||||||
Corporate | — | — | — | (1 | ) | 1 | (1 | ) | ||||||||||||||||
| $ | (3 | ) | $ | — | $ | (4 | ) | $ | — | $ | (30 | ) | $ | (1 | ) | |||||||||
8.Contingencies
Guarantees, Loan Commitments and Letters of Credit
We issue guarantees to certain lenders and hotel owners primarily to obtain long-term management contracts. The guarantees generally have a stated maximum amount of funding and a term of five years or less. The terms of guarantees to lenders generally require us to fund if cash flows from hotel operations are not adequateinadequate to cover annual debt service or to repay the loan at the end of the term. The terms of the guarantees to hotel owners generally require us to fund if the affected hotels do not attain specified levels of operating profit are not obtained.profit.
We also enter into project completion guarantees with certain lenders in conjunction with hotels and timeshare units that we are being built by us.building.
Additionally, weWe also enter into guarantees in conjunction with the sale of notes receivable originated by our timeshare business. These guarantees have terms of between seven and ten years. The terms of the guarantees require us to repurchase a limited amount of non-performing loans under certain circumstances. When we repurchase non-performing timeshare loans, we will either collect the outstanding loan balance in full or foreclose on the asset and subsequently resell it.
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Our guarantees include $403$377 million related to Senior Living Services lease obligations and lifecare bonds. Sunrise Senior Living, Inc. (Sunrise) is the primary obligor of the leases and a portion of the lifecare bonds, and CNL Retirement Properties, Inc. (CNL) is the primary obligor of the remainder of the lifecare bonds. Prior to the sale of the Senior Living Services business at the end of the first quarter of 2003, these pre-existing guarantees were guarantees by Marriott International, Inc.the Company of obligations of consolidated Senior Living Services subsidiaries. We have been indemnified by Sunrise and CNL with respect tohave indemnified us for any guarantee fundings we may be called on to make in connection with these lease obligations and lifecare bonds. Our guarantees additionallyalso include $47$6 million of other guarantees associated with the Sunrise sale transaction.
The maximum potential amount of future fundings and the carrying amount of the liability for expected future fundings at September 12, 2003March 26, 2004 are as follows ($ in millions):follows:
Guarantee type | Maximum amount of future fundings | Liability for future fundings at September 12, 2003 | ||||||||||
| ($ in millions) | Liability for Future | |||||||||||
Guarantee Type | Maximum Amount of Future Fundings | Fundings at March 26, 2004 | ||||||||||
Debt service | $ | 390 | $ | 10 | $ | 384 | $ | 12 | ||||
Operating profit | 328 | 22 | 300 | 13 | ||||||||
Project completion | 30 | — | 17 | — | ||||||||
Timeshare | 22 | — | 18 | — | ||||||||
Senior Living Services | 450 | — | 383 | — | ||||||||
Other | 84 | 1 | 25 | 2 | ||||||||
| $ | 1,304 | $ | 33 | $ | 1,127 | $ | 27 | |||||
Our guarantees listed above include $316$190 million for guarantees not yet in effect including: 1) $256 million of commitments whichthat will not be in effect until the underlying hotels are open and we begin to manage the properties; and 2) a $60 million contingent obligation related to our synthetic fuel joint venture that will only be in effect in the event the private letter ruling is not obtained by December 15, 2003 and the purchaser exercises a one-time option to return its ownership interest to us (see the “Synthetic Fuel” footnote). Guaranteeproperties. The guarantee fundings to lenders and hotel owners are generally recoverable as loans and are generally repayable to us out of future hotel cash flows and/or proceeds from the sale of hotels. When we repurchase non-performing timeshare loans, we will either collect the outstanding loan balance in full or foreclose on the asset and subsequently resell it.
As of September 12, 2003,March 26, 2004, we had extended approximately $100$66 million of loan commitments to owners of lodging properties and senior living communities under which we expect to fund approximately $50$37 million by January 2,December 31, 2004, and $34$16 million over the next threefollowing two years. We do not expect to fund the remaining $16$13 million of commitments, which expire as follows: $5$10 million in one to three years; and $11$3 million after five years.
Letters of credit outstanding on our behalf at September 12, 2003March 26, 2004 totaled $104 million, the majority of which related to our self-insurance programs. Surety bonds issued on our behalf as of September 12, 2003March 26, 2004 totaled $412$362 million, the majority of which were requested by federal, state, or local governments related to our timeshare and lodging operations and self-insurance programs.
Third-parties have severally indemnified us for guarantees by us of leases with minimum annual payments of approximately $57 million.$78 million, as well as for real estate taxes and other charges associated with the leases.
Litigation and Arbitration
Green Isle litigation. All claims in this matter, which we discussed in “Contingencies” notes in our prior periodic reports and which pertained to The Ritz-Carlton San Juan (Puerto Rico) Hotel, Spa and Casino, were dismissed with prejudice and released pursuant to the Disclosure Statement and Plan of Reorganization which was confirmed by the bankruptcy court on May 1, 2003.
In Town Hotels litigation. On July 28, 2003, In Town Hotels, Inc. and the Company agreed to dismiss the litigation which we discussed in “Contingencies” notes in our prior periodic reports. The terms of the dismissal agreement did not have a material impact on the Company.
Senior Care Associates litigation. All claims in this matter, which we discussed in the “Contingencies” footnotes in our prior periodic reports and which pertained to fourteen Brighton Gardens properties which we previously beneficially owned and which SLS manages, were settled and dismissed without prejudice on July 2, 2003. The terms of the dismissal agreement did not have a material impact on the Company.
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CTF/HPI arbitration and litigation. On April 8, 2002, we initiated an arbitration proceeding against CTF Hotel Holdings, Inc. (CTF) and its affiliate, Hotel Property Investments (B.V.I.) Ltd. (HPI), in connection with a dispute over procurement and other issues for certain Renaissance hotels and resorts that we manage for CTF and HPI. On April 12, 2002, CTF filed a lawsuit in U.S. District Court in Delaware against us and Avendra LLC, alleging that, in connection with procurement at 20 of those hotels, we engaged in improper acts of self-dealing, and claiming breach of fiduciary, contractual and other duties; fraud; misrepresentation; and violations of the RICO and the Robinson-Patman Acts. CTF seeks various remedies, including a stay of the arbitration proceedings against CTF and unspecified actual, treble and punitive damages. The district court enjoined the arbitration with respect to CTF, but granted our request to stay the court proceedings pending the resolution of the arbitration with respect to HPI. Both parties have appealed that ruling. The arbitration panel granted HPI’s request to postponehearing on the hearing which was scheduled to commence in October 2003, and has set a new date ofmatter began April 20,6, 2004.
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Strategic Hotel litigation. On August 20, 2002, several direct or indirect subsidiaries of Strategic Hotel Capital, L.L.C. (Strategic) filed suit against us in the Superior Court of Los Angeles County, California in a dispute related to the management, procurement and rebates related to three California hotels that we manage for Strategic. Strategic alleges that we misused confidential information related to the hotels, improperly allocated corporate overhead to the hotels, engaged in improper self dealing with regard to procurement and rebates, and failed to disclose information related to the above to Strategic. Strategic also claims breach of contract, breach of fiduciary and other duties, unfair and deceptive business practices, unfair competition, and other related causes of action. Strategic seeks various remedies, including unspecified compensatory and exemplary damages, and a declaratory judgment terminating our management agreements. We have filed a cross complaint alleging a breach of Strategic’s covenant not to sue, a breach of the covenant of good faith and fair dealing, breach of an agreement to arbitrate, and a breach of the California unfair competition statute. The California Unfair Competition Statute. Acase is currently in discovery, referee has been appointed, but no trial date has been set.
Senior Housing and Five Star litigation. We and Marriott Senior Living Services, Inc. (SLS) (which on March 28, 2003, became a subsidiary of Sunrise) are parties to actions in the Circuit Court for Montgomery County, Maryland and the Superior Courttrial is set for Middlesex County, Massachusetts both initiated on November 27, 2002. These actions relate to 31 senior living communities that SLS operates for Senior Housing Properties Trust (SNH) and Five Star Quality Care, Inc. (FVE), and SNH/FVE’s attempt to terminate the operating agreements for these communities. In the Massachusetts action, SNH/FVE sought a declaration that the operating agreements between FVE and SLS created a principal-agent relationship, and that SNH/FVE could therefore terminate the agreements at will. The Massachusetts court dismissed that action on March 4, 2003 and entered judgment declaring that (1) the Company could sell the stock of SLS to Sunrise without obtaining SNH/FVE’s consent, (2) the Company could remove Marriott proprietary marks from the communities and (3) that the relationship in the operating agreements was not an agency relationship and not terminable other than as set forth in the agreements. SNH/FVE has appealed the Massachusetts dismissal and declaration. In the Maryland action, we and SLS are seeking, among other relief, a declaration that SLS is not in default or material breach of the operating agreements and a declaration that SNH/FVE had anticipatorily breached those agreements by violating their termination provisions. SNH and FVE filed a counterclaim in the Maryland action seeking a declaration that SLS is in default under the operating agreements and seeking unspecified damages. Trial in the Maryland action is scheduled to begin in April 2004.January 24, 2005.
Whitehouse Hotel litigation. On April 7, 2003, Whitehouse Hotel Limited Partnership and WH Holdings, L.L.C., the owners of the New Orleans Ritz-Carlton Hotel, filed suit against us and the Ritz-Carlton Hotel Company, L.L.C. (“Ritz-Carlton”) in the Civil District Court for the Parish of New Orleans, Louisiana. Ritz-Carlton manages the hotel under contracts that identify it as an independent contractor, and that contain no territorial restrictions either on other Ritz-Carlton hotels or on Marriott hotels. Whitehouse sought a temporary restraining order and injunction to prevent us from managing, under the JW Marriott flag, the former LeMeridien hotel in New Orleans, claiming that the conversion to a JW Marriott would irreparably injure and damage the Ritz-Carlton hotel. The complaint against us and
15
Ritz-Carlton alleges breach of contract, breach of fiduciary and other duties, violation of the Louisiana Unfair Trade Practices Act, breach of implied duty of good faith, civil conspiracy, and detrimental reliance. In addition to unspecified compensatory damages, Whitehouse seeks to enjoin the Company and Ritz-Carlton from both entering into any agreement to operate the former LeMeridien hotel and using or disclosing any confidential information of the New Orleans Ritz-Carlton, Iberville Suites and Maison Orleans hotels. Whitehouse also seeks a declaration of its right to terminate the operating agreements for cause. The court denied both Whitehouse’s motion for a temporary restraining order on April 11, 2003 and its request for expedited discovery on April 15, 2003. In an amended complaint filed on April 23, 2003, Whitehouse added CNL Hospitality Corp. as a defendant, and demanded a jury trial. We moved to dismiss the amended complaint on June 9, 2003, and a hearing on our motion which was scheduled to be heard on October 3, 2003 has been delayed. A new date for the hearing has not been set.
We believe that each of the foregoingCTF, HPI and Strategic’s claims against us and against SLS are without merit, and we intend to vigorously defend against them. However, we cannot assure you as to the outcome of these lawsuitsthe arbitration or the related litigation; nor can we currently estimate the range of potential losses to the Company.
Shareholders’ derivative action against our directors.On January 16, 2003, Daniel and Raizel Taubenfeld filed a shareholder’s derivative action in Delaware state court against each member of our Board of Directors and against Avendra LLC. The company is named as a nominal defendant. The individual defendants are accused of exposing the company to accusations and lawsuits which allege wrongdoing on the part of the company. The complaint alleges that, as a result, the company’s reputation has been damaged leading to business losses and the compelled renegotiation of some management contracts. The substantive allegations of the complaint are derived exclusively from prior press reports. No damage claim is made against us and no specific damage number is asserted as to the individual defendants. Both the directors and the Company have moved to dismiss this action. The plaintiffs have requested that the complaint be dismissed with prejudice only as to the named plaintiffs and have also initiated an action pursuant to Section 220 of the Delaware General Corporation Law to obtain access to certain of the Company’s books and records.
We have outstanding approximately $70 million in face amount of our zero-coupon convertible senior notes due 2021, which are known as LYONs. These LYONs which were issued on May 8, 2001, are convertible into approximately 0.9 million shares of our Class A Common Stock, and carry a yield to maturity of 0.75 percent. We may not redeem the LYONs prior to May 8, 2004. We may at the option of the holders be required to purchase the LYONs at their accreted value on May 8 of each of 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 classify LYONs as long-term debt based on our ability and intent to refinance the obligation with long-term debt if we are required to repurchase the LYONs.
The Company experienced a significant decline in demand for hotel rooms in the aftermath of the September 11, 2001 attacks on New York and Washington and the subsequent dramatic downturn in the economy. This decline resulted in reduced management and franchise fees, cancellation of development projects, and anticipated losses under guarantees and loans. In 2001, we responded by implementing certain companywide cost-saving measures, although we did not significantly change the scope of our operations. As a result of our restructuring plan, in the fourth quarter of 2001 we recorded pre-tax restructuring costs of $62 million, including (1) $15 million in severance costs; (2) $19 million, primarily associated with a loss on a sublease of excess space arising from the reduction in personnel; (3) $28 million related to the write-off of capitalized costs for development projects no longer deemed viable. We also incurred $142 million of other charges including (1) $85 million related to reserves for guarantees and loan losses; (2) $12 million related to accounts receivable reserves; (3) $13 million
16
related to the write-down of properties held for sale; and (4) $32 million related to the impairment of technology related investments and other write-offs.
The following table summarizes our remaining restructuring liability ($ in millions):
| Restructuring costs and other charges liability, January 3, 2003 | Cash payments made in the thirty-six weeks ended September 12, 2003 | Charges (reversed)/accrued in the thirty-six weeks ended September 12, 2003 | Restructuring costs and other charges liability, September 12, 2003 | |||||||||||
Severance | $ | 2 | $ | (1 | ) | $ | (1 | ) | $ | — | ||||
Facilities exit costs | 11 | (1 | ) | 4 | 14 | |||||||||
Total restructuring costs | 13 | (2 | ) | 3 | 14 | |||||||||
Reserves for guarantees | 21 | (13 | ) | — | 8 | |||||||||
Total | $ | 34 | $ | (15 | ) | $ | 3 | $ | 22 | |||||
As a result of the workforce reduction and delay in filling vacant positions, we consolidated excess corporate facilities in 2001. At that time, we recorded a restructuring charge of approximately $14 million primarily related to lease terminations and noncancelable lease costs in excess of estimated sublease income. The liability is paid over the lease term which ends in 2012; and as of January 3, 2003, the balance was $11 million. We have revised our estimates to reflect the impact of higher property taxes, the delay in filling excess space and a reduction in the expected sublease rate we are able to charge, resulting in an increase in the liability of $4 million.
In addition to the above, in 2001, we recorded restructuring charges of $62 million and other charges of $5 million for our Senior Living Services and Distribution Services businesses. The restructuring liability related to these discontinued operations was $1 million as of January 3, 2003 and was recorded on the balance sheet as liabilities of businesses held for sale. We had no remaining restructuring liability related to discontinued operations as of September 12, 2003.
Senior Living Services9.Subsequent Event
On December 17, 2002, we sold twelve senior living communitiesApril 1, 2004, Cendant Corporation exercised its option to CNL for approximately $89 millionredeem our interest in cash. We accountedthe Two Flags joint venture, which owns the trademarks and licenses for the sale underRamada and Days Inn lodging brands in the full accrual method in accordance with FAS No. 66,United States. We expect to receive approximately $200 million on September 1, 2004, and we recorded an after-tax lossover time, use the funds for our ongoing share repurchase program. We expect to record a pre-tax gain of approximately $13 million. On December 30, 2002, we entered into definitive agreements to sell our senior living management business to Sunrise and to sell nine senior living communities to CNL. We completed these sales to Sunrise and CNL in addition to the related sale of a parcel of land to Sunrise on March 28, 2003, for $266 million and recognized a gain, net of taxes, of $23 million.
Also, on December 30, 2002, we purchased 14 senior living communities for approximately $15 million in cash, plus the assumption of $227 million in debt, from an unrelated owner. We had previously agreed to provide a form of credit enhancement on the outstanding debt related to these communities. Management approved and committed to a plan to sell these communities within 12 months. As part of that plan, on March 31, 2003, we acquired all of the subordinated credit-enhanced mortgage securities relating to the 14 communities in a transaction in which we issued $46 million of unsecured Marriott International, Inc. notes, due April 2004. In the 2003 third quarter, we sold the 14 communities to CNL for approximately $184 million. We provided a $92 million acquisition loan to CNL in connection with this transaction in the sale. Sunrise currently operates and willthird quarter of 2004.
We continue to own the trademarks and licenses for Ramada outside of the United States, operate and franchise hotels outside of the 14 communitiesUnited States and Canada under long-term management agreements. We recorded a gain, net of taxes, of approximately $1 million.the Ramada International brand name, and license the Ramada name in Canada to Cendant.
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As a result of the above transactions, at September 12, 2003, the operating results of our Senior Living Services segment are reported in discontinued operations, and the remaining assets are classified as assets held for sale on the balance sheet.
Additional income statement and balance sheet information relating to the Senior Living Services business appears in the following tables ($ in millions):
| Twelve weeks ended | Thirty-six weeks ended | |||||||||||||||
| September 12, 2003 | September 6, 2002 | September 12, 2003 | September 6, 2002 | |||||||||||||
Income Statement Summary | ||||||||||||||||
Sales | $ | 2 | $ | 179 | $ | 184 | $ | 536 | ||||||||
Pre-tax income from operations | $ | 2 | $ | 17 | $ | 15 | $ | 28 | ||||||||
Tax provision | (1 | ) | (7 | ) | (6 | ) | (11 | ) | ||||||||
Income from operations, net of tax | $ | 1 | $ | 10 | $ | 9 | $ | 17 | ||||||||
Pre-tax (loss) gain on disposal | $ | (2 | ) | $ | — | $ | 32 | $ | — | |||||||
Tax benefit (provision) | 1 | — | (12 | ) | — | |||||||||||
(Loss) gain on disposal, net of tax | $ | (1 | ) | $ | — | $ | 20 | $ | — | |||||||
| September 12, 2003 | January 3, 2003 | |||||
Balance Sheet Summary | ||||||
Property, plant and equipment | $ | — | $ | 434 | ||
Goodwill | — | 115 | ||||
Other assets | 8 | 54 | ||||
Liabilities | 15 | 317 | ||||
1815
Distribution Services
As of January 3, 2003, through a combination of sale and transfer of nine facilities and the termination of all operations at four facilities, we had completed our exit of the Distribution Services business. Accordingly, we present the exit costs and the operating results for our Distribution Services business as discontinued operations for the twelve and thirty-six weeks ended September 12, 2003 and September 6, 2002, and classify the remaining assets as held for sale at September 12, 2003 and January 3, 2003.
Additional income statement and balance sheet information relating to the Distribution Services business appears in the following tables ($ in millions):
| Twelve weeks ended | Thirty-six weeks ended | |||||||||||||||
| September 12, 2003 | September 6, 2002 | September 12, 2003 | September 6, 2002 | |||||||||||||
Income Statement Summary | ||||||||||||||||
Sales | $ | — | $ | 351 | $ | — | $ | 1,102 | ||||||||
Pre-tax loss from operations | $ | — | $ | (4 | ) | $ | — | $ | (12 | ) | ||||||
Tax benefit | — | 2 | — | 5 | ||||||||||||
Loss on operations, net of tax | $ | — | $ | (2 | ) | $ | — | $ | (7 | ) | ||||||
Pre-tax exit costs | $ | (1 | ) | $ | (30 | ) | $ | (2 | ) | $ | (30 | ) | ||||
Tax benefit | — | 11 | — | 11 | ||||||||||||
Exit costs, net of tax | $ | (1 | ) | $ | (19 | ) | $ | (2 | ) | $ | (19 | ) | ||||
| September 12, 2003 | January 3, 2003 | |||||
Balance Sheet Summary | ||||||
Property, plant and equipment | $ | 8 | $ | 9 | ||
Other assets | 1 | 21 | ||||
Liabilities | 13 | 49 | ||||
On June 21, 2003, we completed the previously announced sale of an approximately 50 percent interest in the Synthetic Fuel business. We received cash and promissory notes totaling $25 million at closing and we are receiving additional profits that are expected to continue over the life of the venture based on the actual amount of tax credits allocated to the purchaser. When we first announced this potential transaction in January 2003, it was subject to certain closing conditions, including the receipt of a satisfactory private letter ruling from the Internal Revenue Service (“IRS”) regarding the new ownership structure, however, both parties agreed to close on the transaction prior to receipt of a new private letter ruling. We have applied for a private letter ruling. In the event the private letter ruling is not obtained by December 15, 2003, the purchaser will have a one-time option to return its ownership interest to us. To exercise this option, the purchaser would have to pay us $10 million and receive from us certain additional representations and warranties related to the 2003 tax credits allocated to the purchaser. If the private letter ruling is not obtained and the purchaser returns its interest in the Synthetic Fuel business to us, our contingent obligation under the representations and warranties would be included as a guarantee and accounted for under the provisions of FIN 45. The maximum amount of the contingent obligation would depend on the number of tax credits produced and allocated to the purchaser in 2003 and could range from $85 million to $170 million. As of September 12, 2003, $60 million of such guarantees are reflected in the total guarantees of $1,304 million reported in the “Contingencies” footnote.
On June 27, 2003, the IRS issued Announcement 2003-46 publicly confirming that it had suspended the issuance of any new private letter rulings regarding tax credits generated under Section 29 of the Internal Revenue Code. In that announcement, the IRS indicated that it was reviewing the science behind whether existing processes cause coal feedstock to undergo significant chemical change as required by
19
Section 29. We have in place rigorous procedures to ensure compliance with all of the requirements of Section 29; thus we remain confident that our existing four private letter rulings and all of the tax credits claimed by us are valid. We, together with our outside tax advisors and scientific experts, intend to continue to work closely with the IRS to obtain our pending private letter rulings in a timely manner. On September 22, 2003, the IRS commented that they will soon make a decision relating to the issuance of private letter rulings relating to synthetic fuel tax credits.
Given the presence of the one-time right, we have consolidated the joint venture for accounting purposes and we will continue to consolidate it until the right expires. Thereafter, if the right is not exercised, we will use the equity method of accounting. The condensed consolidated balance sheet includes all of the assets, liabilities and equity related to the Synthetic Fuel business and the condensed consolidated statements of income include all of the revenue, expenses and tax benefits. Reflected on both statements is the minority interest, which represents our partner’s share of net assets and net income, respectively, related to the Synthetic Fuel business.
We use derivative instruments as part of our overall strategy to manage our exposure to market risks associated with fluctuations in interest rates and foreign currency exchange rates. We only enter into derivative transactions with major financial institutions and we do not use these instruments for trading or speculative purposes.
We record all derivatives at fair value either as assets or liabilities. We recognize, currently in earnings, changes in fair value of derivatives not designated as hedging instruments and of derivatives designated as fair value hedging instruments. Changes in the fair value of the hedged item in a fair value hedge are recorded as an adjustment to the carrying amount of the hedged item and recognized in earnings in the same income statement line item as the change in the fair value of the derivative.
We record the effective portion of changes in fair value of derivatives designated as cash flow hedging instruments as a component of other comprehensive income and report the ineffective portion currently in earnings. We reclassify amounts included in other comprehensive income into earnings in the same period during which the hedged item affects earnings.
At September 12, 2003, we had one outstanding interest rate swap agreement under which we receive a floating rate of interest and pay a fixed rate of interest. The swap modifies our interest rate exposure by effectively converting a note receivable with a fixed rate to a floating rate. The aggregate notional amount of the swap is $93 million and it matures in 2010. The swap is classified as a fair value hedge, and the change in the fair value of the swap, as well as the change in the fair value of the underlying note receivable, is recognized in interest income. The fair value of the swap was a liability of approximately $3 million at September 12, 2003. The hedge is highly effective and therefore no net gain or loss was reported in earnings in each of the twelve or thirty-six weeks ended September 12, 2003.
At September 12, 2003, we had four outstanding forward foreign exchange contracts to hedge the potential volatility of earnings and cash flows associated with variations in foreign exchange rates. The aggregate notional amount of the forward contracts is approximately 4 million euro, and they all expire in the fourth quarter of 2003. The forward exchange contracts are classified as cash flow hedges, and changes in fair value are recorded as a component of other comprehensive income. The fair value of the forward exchange contracts is approximately zero at September 12, 2003. The hedges are highly effective and therefore there was no net gain or loss reported in earnings in each of the twelve or thirty-six weeks ended September 12, 2003.
At September 12, 2003, we had four outstanding interest swap agreements to manage prepayment risk associated with the interest only strips we retain in conjunction with our timeshare note sales. The aggregate notional amounts of the swaps is approximately $544 million and they expire through 2022. These swaps are not accounted for as hedges in accordance with FAS No. 133. The fair value of the swaps
20
is a net liability of approximately $2 million at September 12, 2003. These swaps have resulted in minimal income statement impact in each of the twelve weeks and thirty-six weeks ended September 12, 2003.
At September 12, 2003, we had one outstanding interest rate swap agreement to manage interest rate risk associated with the interest only strip we retained in conjunction with one of our timeshare note sales. The aggregate notional amount is $122 million and it matures in 2022. The swap is not accounted for as a hedge in accordance with FAS No. 133. The fair value of the swap is approximately $3 million at September 12, 2003. Approximately $3 million of income has been recorded in each of the twelve weeks and thirty-six weeks ended September 12, 2003, respectively. This income is offset by expense of approximately $3 million in the same periods relating to the change in fair value of the interest only strip, which is designated as a trading security under the provisions of FAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.”
At September 12, 2003, we had one outstanding interest rate swap to manage interest rate risk associated with the forecasted fourth quarter 2003 timeshare note sale. The notional amount of the swap is $171 million and the swap will be terminated in the fourth quarter of 2003 when the timeshare note sale occurs. The swap is not accounted for as a hedge in accordance with FAS No. 133. The fair value of the swap is a liability of $2 million. Approximately $2 million of expense has been recorded in each of the twelve weeks and thirty-six weeks ended September 12, 2003 relating to this swap.
21
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
CONSOLIDATED RESULTS
Continuing Operations
The following discussion presents an analysis of results of our operations for the twelve and thirty-six weeks ended September 12, 2003March 26, 2004 and September 6, 2002.March 28, 2003.
Twelve Weeks Ended September 12, 2003March 26, 2004 Compared to Twelve Weeks Ended September 6, 2002March 28, 2003
Revenues
($ in millions)
| Twelve Weeks Ended | ||||||||
| March 26, 2004 | March 28, 2003 | |||||||
Full-Service | $ | 1,505 | $ | 1,330 | ||||
Select-Service | 247 | 234 | ||||||
Extended-Stay | 115 | 124 | ||||||
Timeshare | 385 | 267 | ||||||
Total lodging | 2,252 | 1,955 | ||||||
Synthetic fuel | — | 68 | ||||||
| $ | 2,252 | $ | 2,023 | |||||
Income from Continuing Operations ($ in millions) | ||||||||
| Twelve Weeks Ended | ||||||||
| March 26, 2004 | March 28, 2003 | |||||||
Full-Service | $ | 100 | $ | 95 | ||||
Select-Service | 23 | 24 | ||||||
Extended-Stay | 10 | 10 | ||||||
Timeshare | 50 | 18 | ||||||
Total lodging financial results | 183 | 147 | ||||||
Synthetic fuel (after tax) | 11 | 19 | ||||||
Unallocated corporate expenses | (30 | ) | (30 | ) | ||||
Interest income, provision for loan losses and interest expense | 7 | (11 | ) | |||||
Income taxes (excluding Synthetic fuel) | (57 | ) | (38 | ) | ||||
| $ | 114 | $ | 87 | |||||
Revenues from continuing operations increased 11 percent to $2,252 million in 2004, reflecting revenue from new properties, increased demand for hotel rooms resulting in higher fees to us, and strong sales in our timeshare business.
Income from continuing operations decreased 18increased 31 percent to $93$114 million, and diluted earnings per share from continuing operations declined 16increased 31 percent to $0.38. Sales$0.47. The favorable results were primarily driven by strong timeshare results, partially offset by lower synthetic fuel results. The $8 million decline in after-tax synthetic fuel results from $19 million in 2003 to $11 million in 2004 is due to slightly lower production and the change in ownership of the synthetic fuel operations. In the first quarter of 2003, we were the sole owner of the synthetic fuel business; we sold an approximately 50 percent interest in the business on June 21, 2003.
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Operating Income
Operating income increased by 9 percent$93 million to $2.1 billion. Income$151 million in 2004. The increase is due to stronger operating income from continuing operations reflected a net benefitthe sale of $21 million associated with our Synthetic Fueltimeshare intervals, higher fees in the hotel business and the impact of the change in ownership of the synthetic fuel operation, offset somewhat by higher general and administrative expenses. Prior to the sale of the approximately 50 percent ownership interest in the synthetic fuel operation, the revenue generated and expenses incurred in connection with operating the business were reflected in operating income. Subsequent to the sale and expiration of the put option, we began recording our share of the revenues and expenses of the synthetic fuel joint venture in equity in earnings (losses)—synthetic fuel in the consolidated statement of income. As a 13 percent declineresult, in 2004 our Lodging business results.synthetic fuel operation generated no operating income or loss compared to operating losses of $59 million in 2003.
Marriott Lodging,
We consider lodging revenues and lodging financial results to be meaningful indicators of our performance because they measure our growth in profitability as a lodging company and enable investors to compare the sales and results of our lodging operations to those of other lodging companies.
Lodging, which includes our Full-Service, Select-Service, Extended-Stay, and Timeshare segments, reported a 13 percent decrease in financial results on 7of $183 million in the first quarter of 2004, compared to $147 million in the first quarter of 2003 and revenues of $2,252 million in the first quarter of 2004, a 15 percent higher sales.increase, compared to revenues of $1,955 million in the first quarter of 2003. The results reflect favorable timeshare results and a decline12 percent increase in hotel demand, partially offset by new unit additions, the $9base, franchise and incentive fees, from $173 million gain on the sale of our interest in one of our international joint ventures and business interruption insurance proceeds of $2 million related to the aftermath of the September 11, 2001 attacks and the subsequent impact on Marriott ExecuStay business in New York. In addition, there were no timeshare notes sold, and therefore we recognized no gains in the thirdfirst quarter of 2003 compared to $78$193 million of notes sold in the 2002 thirdfirst quarter which resultedof 2004. The increase in an $18 million gain. Lodging salesbase and franchise fees is driven by higher REVPAR for comparable rooms and new unit growth. Systemwide REVPAR for comparable North American properties increased to $2.0 billion5.4 percent, and Lodging systemwide salesREVPAR for our comparable North American managed properties increased to $4.4 billion.5.0 percent. We added 188 properties (30,613 rooms) and deflagged 24 properties (4,968 rooms) since the first quarter of 2003. The increase in incentive management fees during the quarter reflects the impact of increased international travel and increased business at properties in Orlando, Florida and Anaheim, California.
The reconciliation of Lodging sales to Lodging systemwide sales for the third quarter is as follows ($ in millions):
| Twelve weeks ended | ||||||
| September 12, 2003 | September 6, 2002 | |||||
Lodging sales, as reported | $ | 2,008 | $ | 1,869 | ||
Guest sales revenue generated at franchised properties, excluding revenues which are already included in lodging sales | 1,420 | 1,331 | ||||
Guest sales revenue generated at managed properties, excluding revenues which are already included in lodging sales | 988 | 1,012 | ||||
Lodging systemwide sales | $ | 4,416 | $ | 4,212 | ||
Lodging systemwide sales (referenced above and the comparable information for the thirty-six week periods presented later in this report) comprise revenues generated from guests at managed, franchised, owned, and leased hotels. We consider lodging systemwide sales to be a meaningful indicator of our performance because it measures the growth in revenues of all of the properties that carry one of the Marriott brand names. Our growth in profitability is in large part driven by such overall revenue growth. Nevertheless, lodging systemwide sales should not be considered an alternative to revenues, operating profit, segment financial results, net income, cash flows from operations, or any other operating measure prescribed by accounting principles generally accepted in the United States. In addition lodging systemwide sales may not be comparable to similarly titled measures, such as sales and revenues, which do not include gross sales generated by managed and franchised properties.
2217
Summary of Properties by Brand. We added a total of 45opened 38 lodging properties (8,578(7,380 rooms) during the thirdfirst quarter of 2003,2004, while eightthree hotels (1,018(1,024 rooms) exited the system, increasing our total properties to 2,677 (484,9572,753 (496,920 rooms). PropertiesThe following table shows properties by brand as of September 12, 2003March 26, 2004 (excluding 3,7622,697 rental units relating to Marriott ExecuStay) are as indicated in the following table.:
| Company-Operated | Franchised | Company-Operated | Franchised | |||||||||||||
Brand | Properties | Rooms | Properties | Rooms | Properties | Rooms | Properties | Rooms | ||||||||
Full-Service Lodging | ||||||||||||||||
Marriott Hotels and Resorts | 270 | 117,075 | 199 | 55,946 | ||||||||||||
The Ritz-Carlton Hotels | 55 | 17,794 | — | — | ||||||||||||
Renaissance Hotels and Resorts | 83 | 32,574 | 42 | 13,099 | ||||||||||||
Marriott Hotels & Resorts | 221 | 98,797 | 208 | 58,221 | ||||||||||||
Marriott Conference Centers | 14 | 3,577 | — | — | ||||||||||||
JW Marriott Hotels & Resorts | 30 | 13,527 | 3 | 1,009 | ||||||||||||
The Ritz-Carlton | 57 | 18,644 | — | — | ||||||||||||
Renaissance Hotels & Resorts | 85 | 33,079 | 41 | 12,518 | ||||||||||||
Ramada International | 4 | 727 | 176 | 24,475 | 4 | 727 | 198 | 26,795 | ||||||||
Select-Service Lodging | ||||||||||||||||
Courtyard | 292 | 46,238 | 316 | 40,803 | 296 | 46,839 | 334 | 43,688 | ||||||||
Fairfield Inn | 2 | 855 | 517 | 48,821 | 2 | 855 | 525 | 49,619 | ||||||||
SpringHill Suites | 22 | 3,452 | 84 | 8,802 | 22 | 3,452 | 90 | 9,451 | ||||||||
Extended-Stay Lodging | ||||||||||||||||
Residence Inn | 123 | 16,599 | 320 | 36,182 | 132 | 17,791 | 317 | 35,631 | ||||||||
TownePlace Suites | 31 | 3,376 | 78 | 7,848 | 32 | 3,471 | 80 | 7,991 | ||||||||
Marriott Executive Apartments and other | 11 | 2,068 | 1 | 99 | ||||||||||||
Marriott Executive Apartments and Other | 12 | 2,323 | 1 | 99 | ||||||||||||
Timeshare | ||||||||||||||||
Marriott Vacation Club International | 43 | 7,392 | — | — | 41 | 8,068 | — | — | ||||||||
Horizons by Marriott Vacation Club International | 2 | 256 | — | — | ||||||||||||
The Ritz-Carlton Club | 4 | 228 | — | — | 4 | 244 | — | — | ||||||||
Marriott Grand Residence Club | 2 | 248 | — | — | 2 | 248 | — | — | ||||||||
Horizons by Marriott Vacation Club International | 2 | 256 | — | — | ||||||||||||
Total | 944 | 248,882 | 1,733 | 236,075 | 956 | 251,898 | 1,797 | 245,022 | ||||||||
23
REVPAR. We consider Revenue per Available Room (REVPAR) to be a meaningful indicator of our performance because it measures the period over period change in room revenues for comparable properties. We calculate REVPAR by dividing room sales for comparable properties by room nights available to guests for the period. REVPAR may not be comparable to similarly titled measures such as revenues. We have not presented statistics for Fairfield Inn and SpringHill Suites company-operated North American properties here (or in the comparable information for thirty-six week periods presented later in this report) because these brands only have a few properties that we operate and accordingly such information would not be meaningful for those brands (identified as “nm” in the tables below). Systemwide statistics include data from our franchised properties, in addition to our owned, leased and managed properties. Systemwide internationalInternational statistics by region are based on comparable worldwide units, excluding North America, and reflect constant foreign exchange rates. America.
The following tables showtable shows occupancy, average daily rate and REVPAR for each of our comparable principal established brands:brands. We have not presented statistics for company-operated North American Fairfield Inn and SpringHill Suites properties here because we operate only a small number of properties as both these brands are predominantly franchised and such information would not be meaningful for those brands (identified as “nm” in the tables below).
Comparable Company-Operated North American Properties | Comparable Systemwide North American Properties | |||||||||||||
| Twelve weeks ended September 12, 2003 | Change vs. 2002 | Twelve weeks ended September 12, 2003 | Change vs. 2002 | |||||||||||
Marriott Hotels and Resorts | ||||||||||||||
Occupancy | 72.3 | % | 0.3 | % pts. | 70.6 | % | 0.1 | % pts. | ||||||
Average daily rate | $ | 125.56 | -1.7 | % | $ | 121.45 | -1.2 | % | ||||||
REVPAR | $ | 90.76 | -1.3 | % | $ | 85.76 | -1.0 | % | ||||||
The Ritz-Carlton Hotels1 | ||||||||||||||
Occupancy | 68.6 | % | 4.9 | % pts. | 68.6 | % | 4.9 | % pts. | ||||||
Average daily rate | $ | 202.63 | -2.0 | % | $ | 202.63 | -2.0 | % | ||||||
REVPAR | $ | 139.04 | 5.6 | % | $ | 139.04 | 5.6 | % | ||||||
Renaissance Hotels and Resorts | ||||||||||||||
Occupancy | 68.8 | % | 2.5 | % pts. | 68.5 | % | 2.5 | % pts. | ||||||
Average daily rate | $ | 123.98 | 0.3 | % | $ | 117.81 | -1.1 | % | ||||||
REVPAR | $ | 85.25 | 4.1 | % | $ | 80.76 | 2.6 | % | ||||||
Courtyard | ||||||||||||||
Occupancy | 71.0 | % | -2.0 | % pts. | 72.7 | % | -1.4 | % pts. | ||||||
Average daily rate | $ | 91.42 | -0.5 | % | $ | 92.15 | -0.2 | % | ||||||
REVPAR | $ | 64.92 | -3.2 | % | $ | 66.97 | -2.0 | % | ||||||
Fairfield Inn | ||||||||||||||
Occupancy | nm | nm | 71.1 | % | -1.0 | % pts. | ||||||||
Average daily rate | nm | nm | $ | 66.51 | 0.1 | % | ||||||||
REVPAR | nm | nm | $ | 47.28 | -1.3 | % | ||||||||
SpringHill Suites | ||||||||||||||
Occupancy | nm | nm | 71.7 | % | 0.6 | % pts. | ||||||||
Average daily rate | nm | nm | $ | 81.33 | 1.7 | % | ||||||||
REVPAR | nm | nm | $ | 58.27 | 2.6 | % | ||||||||
Residence Inn | ||||||||||||||
Occupancy | 80.5 | % | -1.0 | % pts. | 81.0 | % | -0.4 | % pts. | ||||||
Average daily rate | $ | 94.19 | -1.5 | % | $ | 95.05 | -1.4 | % | ||||||
REVPAR | $ | 75.83 | -2.7 | % | $ | 77.02 | -1.8 | % | ||||||
TownePlace Suites | ||||||||||||||
Occupancy | 78.1 | % | -1.4 | % pts. | 77.8 | % | -0.1 | % pts. | ||||||
Average daily rate | $ | 64.53 | 0.2 | % | $ | 64.19 | -0.8 | % | ||||||
REVPAR | $ | 50.42 | -1.6 | % | $ | 49.95 | -0.9 | % | ||||||
18
Comparable Company-Operated North American Properties | Comparable Systemwide North American Properties | |||||||||||||||||
| Twelve Weeks Ended March 26, 2004 | Change vs. 2003 | Twelve Weeks Ended March 26, 2004 | Change vs. 2003 | |||||||||||||||
Marriott Hotels & Resorts(1) | ||||||||||||||||||
Occupancy | 70.1 | % | 1.9 | % | pts. | 68.6 | % | 2.0 | % | pts. | ||||||||
Average Daily Rate | $ | 145.92 | 1.0 | % | $ | 137.55 | 1.3 | % | ||||||||||
REVPAR | $ | 102.36 | 3.8 | % | $ | 94.40 | 4.4 | % | ||||||||||
The Ritz-Carlton(2) | ||||||||||||||||||
Occupancy | 67.1 | % | 5.6 | % | pts. | 67.1 | % | 5.6 | % | pts. | ||||||||
Average Daily Rate | $ | 269.47 | 0.9 | % | $ | 269.47 | 0.9 | % | ||||||||||
REVPAR | $ | 180.91 | 10.1 | % | $ | 180.91 | 10.1 | % | ||||||||||
Renaissance Hotels & Resorts | ||||||||||||||||||
Occupancy | 68.1 | % | 3.3 | % | pts. | 67.0 | % | 4.1 | % | pts. | ||||||||
Average Daily Rate | $ | 139.87 | 0.4 | % | $ | 132.22 | 0.6 | % | ||||||||||
REVPAR | $ | 95.20 | 5.5 | % | $ | 88.57 | 7.3 | % | ||||||||||
Composite—Full-Service(3) | ||||||||||||||||||
Occupancy | 69.6 | % | 2.4 | % | pts. | 68.3 | % | 2.5 | % | pts. | ||||||||
Average Daily Rate | $ | 154.27 | 1.3 | % | $ | 143.81 | 1.5 | % | ||||||||||
REVPAR | $ | 107.35 | 4.9 | % | $ | 98.22 | 5.4 | % | ||||||||||
Courtyard | ||||||||||||||||||
Occupancy | 68.3 | % | 3.3 | % | pts. | 68.6 | % | 3.0 | % | pts. | ||||||||
Average Daily Rate | $ | 95.39 | 0.8 | % | $ | 96.01 | 2.4 | % | ||||||||||
REVPAR | $ | 65.16 | 6.0 | % | $ | 65.83 | 7.2 | % | ||||||||||
Fairfield Inn | ||||||||||||||||||
Occupancy | nm | nm | 60.1 | % | 0.6 | % | pts. | |||||||||||
Average Daily Rate | nm | nm | $ | 64.62 | 1.3 | % | ||||||||||||
REVPAR | nm | nm | $ | 38.86 | 2.3 | % | ||||||||||||
SpringHill Suites | ||||||||||||||||||
Occupancy | nm | nm | 67.9 | % | 3.5 | % | pts. | |||||||||||
Average Daily Rate | nm | nm | $ | 83.78 | 2.6 | % | ||||||||||||
REVPAR | nm | nm | $ | 56.86 | 8.1 | % | ||||||||||||
Residence Inn | ||||||||||||||||||
Occupancy | 74.4 | % | 0.0 | % | pts. | 74.7 | % | 1.9 | % | pts. | ||||||||
Average Daily Rate | $ | 99.11 | 1.9 | % | $ | 96.66 | 1.7 | % | ||||||||||
REVPAR | $ | 73.70 | 2.0 | % | $ | 72.24 | 4.4 | % | ||||||||||
TownePlace Suites | ||||||||||||||||||
Occupancy | 70.0 | % | 5.4 | % | pts. | 69.7 | % | 3.8 | % | pts. | ||||||||
Average Daily Rate | $ | 64.33 | 2.3 | % | $ | 64.44 | 0.7 | % | ||||||||||
REVPAR | $ | 45.02 | 11.0 | % | $ | 44.90 | 6.6 | % | ||||||||||
Composite—Select-Service & Extended-Stay(4) |
| |||||||||||||||||
Occupancy | 69.5 | % | 2.8 | % | pts. | 67.8 | % | 2.2 | % | pts. | ||||||||
Average Daily Rate | $ | 93.74 | 1.2 | % | $ | 86.33 | 2.1 | % | ||||||||||
REVPAR | $ | 65.18 | 5.4 | % | $ | 58.55 | 5.5 | % | ||||||||||
Composite—All(5) | ||||||||||||||||||
Occupancy | 69.6 | % | 2.5 | % | pts. | 68.0 | % | 2.3 | % | pts. | ||||||||
Average Daily Rate | $ | 132.41 | 1.2 | % | $ | 111.02 | 1.8 | % | ||||||||||
REVPAR | $ | 92.11 | 5.0 | % | $ | 75.52 | 5.4 | % | ||||||||||
| Marriott Hotels & Resorts includes our JW Marriott Hotels & Resorts brand. |
| (2) | Statistics for The Ritz-Carlton |
| (3) | Full-Service composite statistics include properties for the Marriott Hotels & Resorts, Renaissance Hotels & Resorts and |
| (4) | Select-Service and Extended-Stay composite statistics include properties for the Courtyard, Residence Inn, TownePlace Suites, Fairfield Inn and SpringHill Suites brands. |
| (5) | Composite—All statistics include properties for the Marriott Hotels & Resorts, Renaissance Hotels & Resorts, The Ritz-Carlton, Courtyard, Residence Inn, TownePlace Suites, Fairfield Inn and SpringHill Suites brands. |
2419
| Comparable Company-Operated International Properties | Comparable Systemwide International Properties | |||||||||||||
| Three months ended August 31, 2003 | Change vs. 2002 | Three months ended August 31, 2003 | Change vs. 2002 | |||||||||||
Caribbean & Latin America | ||||||||||||||
Occupancy | 70.1 | % | 4.4 | % pts. | 67.1 | % | 3.1 | % pts. | ||||||
Average daily rate | $ | 112.10 | 2.0 | % | $ | 108.79 | 1.5 | % | ||||||
REVPAR | $ | 78.62 | 8.7 | % | $ | 73.03 | 6.4 | % | ||||||
Continental Europe | ||||||||||||||
Occupancy | 71.9 | % | 0.0 | % pts. | 68.1 | % | 0.1 | % pts. | ||||||
Average daily rate | $ | 115.56 | -5.1 | % | $ | 117.96 | -4.1 | % | ||||||
REVPAR | $ | 83.11 | -5.1 | % | $ | 80.35 | -3.9 | % | ||||||
United Kingdom | ||||||||||||||
Occupancy | 81.3 | % | 2.7 | % pts. | 76.2 | % | 0.7 | % pts. | ||||||
Average daily rate | $ | 144.54 | -5.8 | % | $ | 126.45 | -1.7 | % | ||||||
REVPAR | $ | 117.53 | -2.6 | % | $ | 96.37 | -0.8 | % | ||||||
Middle East & Africa | ||||||||||||||
Occupancy | 74.3 | % | 1.2 | % pts. | 72.4 | % | 2.1 | % pts. | ||||||
Average daily rate | $ | 67.79 | 18.7 | % | $ | 68.43 | 18.9 | % | ||||||
REVPAR | $ | 50.36 | 20.7 | % | $ | 49.58 | 22.6 | % | ||||||
Asia Pacific | ||||||||||||||
Occupancy | 64.5 | % | -8.1 | % pts. | 66.4 | % | -6.4 | % pts. | ||||||
Average daily rate | $ | 78.30 | -5.0 | % | $ | 87.39 | -2.5 | % | ||||||
REVPAR | $ | 50.52 | -15.6 | % | $ | 57.98 | -11.0 | % | ||||||
Across our Lodging brands, REVPAR for comparable company-operatedFor North American properties declined by an average of 0.5 percent in the third quarter of 2003. Average room rates(except for these hotels declined 0.7 percent and occupancy increased 0.1 percentage points, to 72.3 percent.
Across Marriott’s North American Full-Service lodging brands(Marriott Hotels and Resorts; Renaissance Hotels and Resorts;and The Ritz-Carlton Hotels)which includes January and February), the occupancy, average daily rate and REVPAR for comparable company-operated North American properties increased 0.4 percent. Average room rates for these hotels declined 1.2 percent and occupancy increased 1.1 percentage points to 71.4 percent.
Our North American Select-Service and Extended-Stay brands(Fairfield Inn; Courtyard; Residence Inn; SpringHill Suites;and TownePlace Suites)had, for comparable company-operated North American properties, average REVPAR declines of 2.7 percent and average room rate declines of 0.6 percent, while occupancy decreased 1.6 percentage points.
International lodging reported an increase in the results of operations, reflecting the impact of the $9 million gain on the sale of our interest in a joint venture, increased demand at our resorts in the Caribbean and Mexico, slightly offset by the decline in travel to Asia.
The financial results of our Timeshare brands (Marriott Vacation Club International; The Ritz-Carlton Club; Horizons by Marriott Vacation Club International; and Marriott Grand Residence Club) decreased 43 percent, to $23 million, while contract sales increased 23 percent. The decrease is primarily attributable to no note sale gains in the third quarter of 2003, compared to $18 million in the third quarter of 2002. There were no timeshare notes sold in the third quarter of 2003, compared to $78 million in the 2002 third quarter. The decrease is also attributable to higher depreciation expense associated with new technology; and a $2 million loss associated with an interest rate swap agreement. We entered into an interest rate swap agreement during the third quarter of 2003
to manage interest rate risk associated with the forecasted fourth quarter 2003 timeshare note sale.
25
Corporate Expenses, Interest and Taxes.Corporate expenses increased 40 percent to $35 million, reflecting the impact of approximately $10 million of litigation expenses related to two continuing and previously disclosed lawsuits; higher expenses associated with our deferred compensation plan ($3 million); an additional accrual based on revised estimates of noncancelable lease costs and lower expected sublease income associated with excess space arising from the 2001 reduction in personnel ($4 million); partially offset by lower foreign exchange losses ($2 million); and the settlement of an insurance claim ($10 million) for legal expenses incurred in previous years related to lawsuits which were settled in 1999.
Interest expense increased $7 million, reflecting the impact of the mortgage debt assumed in the fourth quarter of 2002 associated with the acquisition of 14 senior living communities, as well as lower capitalized interest resulting from fewer projects under construction, primarily related to our timeshare business. Interest income increased $3 million to $31 million, before reflecting reserves of $1 million for an impaired loan.
Income from continuing operations before income taxes and minority interest generated a tax benefit of $16 million in the third quarter of 2003 compared to a tax benefit of $2 million in the third quarter of 2002. The difference is primarily attributable to lower pre-tax income and includes a tax benefit and tax credits, both associated with our Synthetic Fuel business, totaling $53 millionstatistics used throughout this report for the twelve weeks ended September 12, 2003 and $54 million forMarch 26, 2004, include the period from January 3, 2004 through March 26, 2004, while the twelve weeks ended SeptemberMarch 28, 2003, include the period from January 4, 2003 through March 28, 2003.
The following table shows occupancy, average daily rate and REVPAR for international properties by region.
| Comparable Company-Operated International Properties (1), (2) | Comparable Systemwide International Properties(1), (2) | |||||||||||||||||
| Two Months Ended February 29, 2004 | Change vs. 2003 | Two Months Ended February 29, 2004 | Change vs. 2003 | |||||||||||||||
Caribbean & Latin America | ||||||||||||||||||
Occupancy | 73.1 | % | 4.8 | % | pts. | 71.1 | % | 6.5 | % | pts. | ||||||||
Average daily rate | $ | 153.41 | 3.4 | % | $ | 145.97 | 2.1 | % | ||||||||||
REVPAR | $ | 112.12 | 10.7 | % | $ | 103.77 | 12.4 | % | ||||||||||
Continental Europe | ||||||||||||||||||
Occupancy | 58.2 | % | 0.8 | % | pts. | 57.4 | % | 2.9 | % | pts. | ||||||||
Average daily rate | $ | 125.68 | -2.6 | % | $ | 124.19 | -3.0 | % | ||||||||||
REVPAR | $ | 73.10 | -1.2 | % | $ | 71.33 | 2.1 | % | ||||||||||
United Kingdom | ||||||||||||||||||
Occupancy | 71.2 | % | 6.7 | % | pts. | 62.7 | % | 2.0 | % | pts. | ||||||||
Average daily rate | $ | 174.67 | 4.0 | % | $ | 137.59 | 0.8 | % | ||||||||||
REVPAR | $ | 124.36 | 14.8 | % | $ | 86.26 | 4.1 | % | ||||||||||
Middle East & Africa | ||||||||||||||||||
Occupancy | 73.7 | % | 5.1 | % | pts. | 71.4 | % | 3.7 | % | pts. | ||||||||
Average daily rate | $ | 114.53 | 21.4 | % | $ | 113.26 | 21.4 | % | ||||||||||
REVPAR | $ | 84.38 | 30.5 | % | $ | 80.90 | 28.1 | % | ||||||||||
Asia Pacific(3) | ||||||||||||||||||
Occupancy | 71.2 | % | 1.6 | % | pts. | 71.5 | % | 0.8 | % | pts. | ||||||||
Average daily rate | $ | 88.94 | 1.8 | % | $ | 93.37 | 1.0 | % | ||||||||||
REVPAR | $ | 63.35 | 4.1 | % | $ | 66.72 | 2.2 | % | ||||||||||
Composite International(4) | ||||||||||||||||||
Occupancy | 68.3 | % | 2.7 | % | pts. | 66.4 | % | 2.9 | % | pts. | ||||||||
Average daily rate | $ | 120.78 | 3.3 | % | $ | 120.19 | 1.7 | % | ||||||||||
REVPAR | $ | 82.44 | 7.6 | % | $ | 79.85 | 6.4 | % | ||||||||||
| (1) | International financial results are reported on a period end basis, while international statistics are reported on a month end basis. |
| (2) | The comparison to 2003 is on a currency neutral basis and includes results for January through February. |
| (3) | Excludes Hawaii. |
| (4) | Includes Hawaii. |
20
| Full-Service Lodging | Twelve Weeks Ended | Change | |||||||
| ($ in millions) | March 26, 2004 | March 28, 2003 | 2004/2003 | ||||||
Revenues | $ | 1,505 | $ | 1,330 | 13 | % | |||
Segment results | $ | 100 | $ | 95 | 5 | % | |||
Full-Service Lodging, which includes theMarriott Hotels & Resorts,The Ritz-Carlton,Renaissance Hotels & Resorts,Ramada International andBulgari Hotels & Resorts brands, had revenues of $1,505 million, a 13 percent increase over prior year, and segment results of $100 million compared to $95 million in 2003. The 2004 results reflect a $13 million increase in base management, incentive management and franchise fees, partially offset by increased administrative costs and pre-opening costs for two hotels. The increase in fees is largely due to the growth in the number of rooms and favorable REVPAR. Hotel demand was strong at properties in San Francisco, Orlando and New York. Since the first quarter of 2003, across our Full-Service Lodging segment, we added 89 hotels (17,131 rooms) and deflagged 17 hotels (4,041 rooms).
REVPAR for Full-Service Lodging comparable company-operated North American hotels increased 4.9 percent to $107.35. Occupancy for these hotels increased to 69.6 percent, while average room rates increased 1.3 percent to $154.27.
Financial results for our international operations were strong, reflecting favorable systemwide REVPAR for international properties across all regions and 6.4 percent REVPAR growth overall (excluding the impact of exchange rates). REVPAR for our International company-operated hotels increased 7.6 percent. Occupancy increased 2.7 percentage points, while average room rates increased to $120.78. We experienced strong demand in the Caribbean, Mexico, the Middle East, Asia and the United Kingdom.
Select-Service Lodging ($ in millions) | Twelve Weeks Ended | Change | |||||||
| March 26, 2004 | March 28, 2003 | 2004/2003 | |||||||
Revenues | $ | 247 | $ | 234 | 6 | % | |||
Segment results | $ | 23 | $ | 24 | -4 | % | |||
Select-Service Lodging, which includes theCourtyard, Fairfield Inn andSpringHill Suites brands, had revenues of $247 million, a 6 2002.percent increase over the prior year quarter. The $13 million increase reflects the growth in the number of rooms across our select-service brands and a $5 million increase in base management, incentive management and franchise fees. The increase in fees was more than offset by an increase in the Courtyard joint venture losses and reserves recorded for performance guarantees we expect to fund, resulting in a slight decrease in segment results from $24 million in 2003 taxesto $23 million in 2004.
Across our Select-Service Lodging segment, we added 74 hotels (9,300 rooms) and deflagged five hotels (866 rooms) since the first quarter of 2003.
Extended-Stay Lodging ($ in millions) | Twelve Weeks Ended | Change | |||||||
| March 26, 2004 | March 28, 2003 | 2004/2003 | |||||||
Revenues | $ | 115 | $ | 124 | -7 | % | |||
Segment results | $ | 10 | $ | 10 | — | ||||
Extended-Stay Lodging, which includes theResidence Inn,TownePlace Suites,Marriott Executive Apartments andMarriott ExecuStay brands, had revenues of $115 million, a decrease of 7 percent, and
21
segment results were also impacted flat at $10 million. Our base and incentive management fees decreased $1 million and our franchise fees increased $2 million. The decline in revenue is largely due to the shift in the ExecuStay business towards franchising.
Since the first quarter of 2003 we added 26 hotels (3,180 rooms) to our Extended-Stay Lodging segment.
REVPAR for Select-Service and Extended-Stay Lodging comparable company-operated North American hotels increased 5.4 percent to $65.18. Occupancy for these hotels increased to 69.5 percent, while average room rates increased 1.2 percent to $93.74.
Timeshare ($ in millions) | Twelve Weeks Ended | Change | |||||||
| March 26, 2004 | March 28, 2003 | 2004/2003 | |||||||
Revenues | $ | 385 | $ | 267 | 44 | % | |||
Segment results | $ | 50 | $ | 18 | nm | ||||
The results of ourTimeshare segment (MarriottVacation Club International,The Ritz-Carlton Club,MarriottGrand Residence Club andHorizonsby slightlyMarriott Vacation Club International) more than doubled to $50 million, while revenues increased 44 percent to $385 million. Timeshare revenues of $385 million and $267 million, in 2004 and 2003, respectively, include interval sales, base management fees and cost reimbursements. Contract sales increased 30 percent primarily due to strong seasonal demand for our timeshare resorts in Florida, Hawaii, California, St. Thomas and Colorado. The favorable segment results reflect the impact of leveraging fixed costs on substantially higher state tax rates.sales, increased usage of lower cost marketing channels and a larger proportion of sales at higher margin Ritz-Carlton fractional projects.
Synthetic Fuel.Fuel
Our synthetic fuel operation generated net income of $11 million and $19 million in the first quarter of 2004 and the first quarter of 2003, respectively. In the first quarter of 2004, our synthetic fuel operation reflected an equity loss of $28 million, resulting in a tax benefit of $39 million, including tax credits of $29 million. Included in the equity loss of $28 million is additional income of $11 million received from the joint venture partner, which is based on the actual amount of tax credits allocated to the joint venture partner and expenses of $17 million primarily related to an earn-out paid by us to the previous owners of the synthetic fuel operation. In the first quarter of 2003, our synthetic fuel operation reflected sales of $68 million, and an operating loss of $59 million, resulting in a tax benefit of $78 million, including tax credits of $57 million. A summary of our involvement in the synthetic fuel business follows.
In October 2001, we acquired four coal-based synthetic fuel production facilities (the Facilities)“Facilities”) for $46 million in cash. The synthetic fuel produced at the Facilities through 2007 qualifies for tax credits based on Section 29 of the Internal Revenue Code. Under Section 29, tax creditsCode (credits are not available for synthetic fuel produced after 2007.2007). We began operating these Facilities in the first quarter of 2002. The operation of the Facilities, together with the benefit arising from the tax credits, has been, and we expect will continue to be significantly accretive to our net income. Although the Facilities produce significant losses, these losses are more than offset by the tax credits generated under Section 29, which reduce our income tax expense. In the third quarter of 2003, our Synthetic Fuel business reflected sales of $93 million and a loss of $3 million, before the impact of $29 million of minority interest expense, resulting in a tax benefit of $1 million and tax credits of $52 million. In the third quarter of 2002, our Synthetic Fuel business reflected sales of $55 million and a loss of $32 million, resulting in a tax benefit of $11 million and tax credits of $43 million.
On June 21, 2003, we completed the previously announced sale of an approximately 50 percent ownership interest in the Synthetic Fuel business.synthetic fuel operation. We received cash and promissory notes totaling $25 million at closing, and we are receiving additional profits that are expected towe expect will continue over the life of the venture based on the actual amount of tax credits allocated to the purchaser. When we first announced this potential transaction in January 2003, it was subject to certainCertain post closing conditions, including theour receipt of a satisfactory private letter rulingrulings from the IRS regardingInternal Revenue Service, were satisfied during the newfourth quarter. Those rulings confirm, among other things, both that the process used by our synthetic fuel operations produces a “qualified fuel” as required by Section 29 of the Internal Revenue Code and the validity of the joint venture ownership structure however, both parties agreed to close onwith the transaction prior to receipt of a new private letter ruling. We have applied for a private letter ruling. In the event50 percent purchaser. After reviewing the private letter ruling is not obtained by December 15, 2003,rulings, the purchaser will haveinformed us in writing that it would not be exercising a one-time “put option,” which would potentially have allowed it to return its ownership interest to us. To exercise this option, the purchaser would haveus if satisfactory rulings had not been obtained prior to pay us $10 million and receive from us certain additional representations and warranties related to the 2003 tax credits allocated to the purchaser. If the private letter ruling is not obtained and the purchaser returns its interest in the Synthetic Fuel business to us, our contingent obligation under the representations and warranties would be included asDecember 15, 2003.
22
As a guarantee and accounted for under the provisions of FIN 45. The maximum amountresult of the contingent obligation would depend onput option, we consolidated the number of tax credits produced and allocated to the purchaser in 2003 and could range from $85 million to $170 million. As of September 12, 2003, $60 million of such guarantees are reflected in the total guarantees of $1,304 million reported in the “Liquidity and Capital Resources” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.
On June 27, 2003, the IRS issued Announcement 2003-46 publicly confirming that it had suspended the issuance of any new private letter rulings regarding tax credits generated under Section 29 of the Internal Revenue Code. In that announcement, the IRS indicated that it was reviewing the science behind whether existing processes cause coal feedstock to undergo significant chemical change as required
26
by Section 29. We have in place rigorous procedures to ensure compliance with all of the requirements of Section 29; thus we remain confident that our existing four private letter rulings and all of the tax credits claimed by us are valid. We, together with our outside tax advisors and scientific experts, intend to continue to work closely with the IRS to obtain our pending private letter rulings in a timely manner. On September 22, 2003, the IRS commented that they will soon make a decision relating to the issuance of private letter rulings relating totwo synthetic fuel tax credits.
Givenjoint ventures through November 6, 2003. Effective November 7, 2003, because the presence ofput option was voided, we began accounting for the one-time right, we have consolidated thesynthetic fuel joint venture for accounting purposes and we will continue to consolidate it until the right expires. Thereafter, if the right is not exercised, we will useventures, using the equity method of accounting. The condensedadditional profits we received from the joint venture partner prior to November 7, 2003, are included in synthetic fuel revenue in the income statement. As of March 26, 2004, as a result of adopting FIN 46(R), we have consolidated balance sheet includes all assets, liabilities, and equity related to the Synthetic Fuel business andsynthetic fuel joint ventures as we bear the condensed consolidated statements of income include allmajority of the revenue,expected losses. Beginning in the second quarter of 2004, we will include the sales and expenses of the joint ventures in our consolidated income statement and tax benefits. Reflected on both statements is the minority interest, which representswill reflect our partner’s share of net assets andearnings as a minority interest.
Going forward, we expect our net income respectively, relatedwill continue to benefit from our participation in the Synthetic Fuel business.joint ventures because of the subsequent tax benefits and credits, as well as the earn-out payments from our venture partner; however, the ultimate impact will depend on the amount of coal produced at the synthetic fuel facilities.
27
Thirty-Six Weeks Ended September 12, 2003 Compared to Thirty-Six Weeks Ended September 6, 2002General, Administrative and Other Expenses
Income from continuing operations decreased 5 percent to $306 millionGeneral, administrative and diluted earnings per share from continuing operations declined 2 percent to $1.25. Salesother expenses increased 7 percent to $6.2 billion. Income from continuing operations reflected $199 million of tax benefits, including tax credits, offset by $104 million of operating losses, and $29 million of minority interest expense associated with our Synthetic Fuel business, and reflected a 9 percent decline in our Lodging financial results.
Marriott Lodging, which includes our Full-Service, Select-Service, Extended-Stay, and Timeshare segments, reported a 9 percent decrease in financial results on 5 percent higher sales. The results reflect the continued decline in hotel demand, partially offset by new unit additions, the $9 million gain on the sale of our interest in one of our international joint ventures, and business interruption insurance proceeds of $2 million related to the aftermath of the September 11, 2001 attacks and the subsequent impact on our Marriott ExecuStay business in New York. In addition, we recognized $32 million of timeshare note sale gains in the first three quarters of 2003, compared to $47$20 million in the first three quartersquarter of 2002. We sold $1302004 to $132 million, reflecting higher administrative expenses in both our lodging and timeshare businesses as well as $6 million of notes in the thirty-six weeks ended September 12, 2003, comparedhigher legal fees and $4 million of reserves associated with performance guarantees we expect to $252 million in the thirty-six weeks ended September 6, 2002. Lodging sales increased to $5.9 billion and Lodging systemwide sales increased to $13.1 billion.
The reconciliation of Lodging sales to Lodging systemwide sales is as follows ($ in millions):
| Thirty-six weeks ended | ||||||
| September 12, 2003 | September 6, 2002 | |||||
Lodging sales, as reported | $ | 5,929 | $ | 5,653 | ||
Guest sales revenue generated at franchised properties, excluding revenues which are already included in lodging sales | 3,999 | 3,703 | ||||
Guest sales revenue generated at managed properties, excluding revenues which are already included in lodging sales | 3,151 | 3,243 | ||||
Lodging systemwide sales | $ | 13,079 | $ | 12,599 | ||
We consider lodging systemwide sales to be a meaningful indicator of our performance because it measures the growth in revenues of all of the properties that carry one of the Marriott brand names. Our growth in profitability is in large part driven by such overall revenue growth.
28
The following tables show occupancy, average daily rate and REVPAR for each of our principal established brands for the thirty-six weeks ended September 12, 2003 for our North American properties, and the eight months ended August 31, 2003 for our International properties.
| Comparable Company-Operated North American Properties | Comparable Systemwide North American Properties | |||||||||||||
| Thirty-six weeks ended September 12, 2003 | Change vs. 2002 | Thirty-six weeks ended September 12, 2003 | Change vs. 2002 | |||||||||||
Marriott Hotels and Resorts | ||||||||||||||
Occupancy | 70.5 | % | -0.8 | % pts. | 68.8 | % | -0.6 | % pts. | ||||||
Average daily rate | $ | 134.39 | -2.3 | % | $ | 127.93 | -2.3 | % | ||||||
REVPAR | $ | 94.73 | -3.5 | % | $ | 88.02 | -3.1 | % | ||||||
The Ritz-Carlton Hotels1 | ||||||||||||||
Occupancy | 66.8 | % | 0.1 | % pts. | 66.8 | % | 0.1 | % pts. | ||||||
Average daily rate | $ | 232.93 | -0.9 | % | $ | 232.93 | -0.9 | % | ||||||
REVPAR | $ | 155.62 | -0.7 | % | $ | 155.62 | -0.7 | % | ||||||
Renaissance Hotels and Resorts | ||||||||||||||
Occupancy | 67.1 | % | 0.6 | % pts. | 66.1 | % | 1.1 | % pts. | ||||||
Average daily rate | $ | 132.02 | -1.6 | % | $ | 124.07 | -2.3 | % | ||||||
REVPAR | $ | 88.59 | -0.8 | % | $ | 81.99 | -0.5 | % | ||||||
Courtyard | ||||||||||||||
Occupancy | 68.9 | % | -1.5 | % pts. | 70.1 | % | -0.8 | % pts. | ||||||
Average daily rate | $ | 93.44 | -1.7 | % | $ | 92.99 | -1.2 | % | ||||||
REVPAR | $ | 64.41 | -3.8 | % | $ | 65.17 | -2.4 | % | ||||||
Fairfield Inn | ||||||||||||||
Occupancy | nm | nm | 65.9 | % | -0.7 | % pts. | ||||||||
Average daily rate | nm | nm | $ | 64.96 | 0.1 | % | ||||||||
REVPAR | nm | nm | $ | 42.84 | -0.9 | % | ||||||||
SpringHill Suites | ||||||||||||||
Occupancy | nm | nm | 69.6 | % | 0.8 | % pts. | ||||||||
Average daily rate | nm | nm | $ | 81.19 | 1.5 | % | ||||||||
REVPAR | nm | nm | $ | 56.51 | 2.7 | % | ||||||||
Residence Inn | ||||||||||||||
Occupancy | 78.6 | % | -0.4 | % pts. | 77.9 | % | 0.0 | % pts. | ||||||
Average daily rate | $ | 95.41 | -2.5 | % | $ | 94.48 | -2.0 | % | ||||||
REVPAR | $ | 74.95 | -3.0 | % | $ | 73.56 | -2.0 | % | ||||||
TownePlace Suites | ||||||||||||||
Occupancy | 71.2 | % | -4.0 | % pts. | 72.0 | % | -1.2 | % pts. | ||||||
Average daily rate | $ | 63.68 | 3.0 | % | $ | 63.77 | 0.4 | % | ||||||
REVPAR | $ | 45.34 | -2.5 | % | $ | 45.92 | -1.3 | % | ||||||
29
| Comparable Company-Operated International Properties | Comparable Systemwide International Properties | |||||||||||||
| Eight months ended August 31, 2003 | Change vs. 2002 | Eight months ended August 31, 2003 | Change vs. 2002 | |||||||||||
Caribbean & Latin America | ||||||||||||||
Occupancy | 69.3 | % | 4.3 | % pts. | 66.6 | % | 3.5 | % pts. | ||||||
Average daily rate | $ | 128.26 | 3.2 | % | $ | 124.10 | 2.9 | % | ||||||
REVPAR | $ | 88.86 | 10.0 | % | $ | 82.64 | 8.6 | % | ||||||
Continental Europe | ||||||||||||||
Occupancy | 66.0 | % | -1.0 | % pts. | 62.5 | % | -1.3 | % pts. | ||||||
Average daily rate | $ | 115.63 | -5.8 | % | $ | 117.60 | -4.1 | % | ||||||
REVPAR | $ | 76.32 | -7.2 | % | $ | 73.45 | -6.1 | % | ||||||
United Kingdom | ||||||||||||||
Occupancy | 73.4 | % | -3.4 | % pts. | 69.5 | % | -1.7 | % pts. | ||||||
Average daily rate | $ | 144.56 | -2.2 | % | $ | 123.33 | -3.4 | % | ||||||
REVPAR | $ | 106.13 | -6.5 | % | $ | 85.66 | -5.7 | % | ||||||
Middle East & Africa | ||||||||||||||
Occupancy | 63.5 | % | -2.2 | % pts. | 62.5 | % | -0.3 | % pts. | ||||||
Average daily rate | $ | 69.75 | 10.3 | % | $ | 69.87 | 10.5 | % | ||||||
REVPAR | $ | 44.31 | 6.6 | % | $ | 43.67 | 10.0 | % | ||||||
Asia Pacific | ||||||||||||||
Occupancy | 60.5 | % | -9.8 | % pts. | 63.3 | % | -8.3 | % pts. | ||||||
Average daily rate | $ | 80.68 | -3.9 | % | $ | 88.26 | -1.5 | % | ||||||
REVPAR | $ | 48.85 | -17.3 | % | $ | 55.83 | -13.0 | % | ||||||
For North American properties (except for The Ritz-Carlton Hotels as noted on the previous page), the occupancy, average daily rate and REVPAR statistics used throughout this report for the thirty-six weeks ended September 12, 2003, include the period from January 4, 2003 through September 12, 2003, while the statistics for the thirty-six weeks ended September 6, 2002 include the period from December 29, 2001 through September 6, 2002. The 2003 statistics exclude the impact of the New Year’s holiday, which is historically a slow week.
Across our Lodging brands, REVPAR for comparable company-operated North American properties declined by an average of 2.9 percent in the first three quarters of 2003. Average room rates for these hotels declined 1.7 percent and occupancy decreased 0.8 percentage points, to 70.3 percent.fund.
Across Marriott’s North American Full-Service Lodging brands(Marriott Hotels and Resorts; Renaissance Hotels and Resorts;and The Ritz-Carlton Hotels), REVPAR for comparable company-operated North American properties decreased 2.7 percent. Average room rates for these hotels declined 2.0 percent and occupancy decreased 0.5 percentage points to 69.7 percent.
Our North American Select-Service and Extended-Stay brands(Fairfield Inn; Courtyard; Residence Inn; SpringHill Suites;and TownePlace Suites)had, for comparable company-operated North American properties, average REVPAR declines of 3.2 percent and average room rate declines of 1.5 percent, while occupancy decreased 1.3 percentage points.
International lodging reported an increase in the results of operations, reflecting the impact of the $9 million gain on the sale of our interest in a joint venture, partially offset by the impact of the war and Severe Acute Respiratory Syndrome (SARS) on international travel.
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The financial results of our Timeshare brands (Marriott Vacation Club International; The Ritz-Carlton Club; Horizons by Marriott Vacation Club International; and Marriott Grand Residence Club) decreased 23 percent to $85 million, while contract sales increased 18 percent. The results were impacted by $15 million of lower note sale gains. In the first three quarters of 2003, we closed on one note sale and during the same time period in 2002, we closed on three note sales. The results were also unfavorably impacted by higher financing costs, lower notes receivable, resulting in lower interest income, and higher depreciation expense associated with new technology.
We have presented claims with insurance companies for lost management fees at our hotels and business interruption at our Marriott ExecuStay business from the September 11, 2001 terrorist attacks. In the fourth quarter of 2002, we recognized $1 million in income from insurance proceeds related to lost management fees. In the third quarter of 2003, we recognized insurance proceeds of $2 million associated with our Marriott ExecuStay business. Although we expect to realize further proceeds, we cannot currently estimate the amounts that may be paid to us.
Corporate Expenses, Interest and Taxes.Corporate expenses increased 16 percent to $89 million reflecting approximately $15 million of litigation expenses related to two continuing lawsuits; higher expense associated with our deferred compensation plan ($9 million); an additional accrual based on revised estimates of noncancelable lease costs and lower expected sublease income associated with excess space arising from the 2001 reduction in personnel ($4 million); increased insurance premiums; and higher salary and related expenses associated with positions which were not previously filled due to cost containment efforts; partially offset by the settlement of an insurance claim ($10 million) for legal expenses incurred in previous years related to lawsuits which were settled in 1999; favorable foreign exchange impact ($5 million); and the impact of a $7 million reserve recorded in 2002 in connection with a lawsuit involving the sale of a hotel previously managed by us.Expense
Interest expense increased $18decreased $4 million reflectingto $22 million due to the impactrepayment of the mortgage$234 million of senior debt assumed in the fourth quarter of 2002 associated with2003.
Interest Income and Income Tax
Interest income, before the acquisition of 14 senior living communities,provision for loan losses increased $6 million (30 percent) to $26 million, reflecting increased loan balances as well as lower capitalizedslightly higher interest resulting from fewer projects under construction, primarilyrates.
In the first quarter of 2004, we reversed $3.5 million of loan loss reserves related to our timeshare business. Interest income increased by $3 million, before reflecting reservesthe collection of $7 million for impaired loans at four hotels.a loan which was previously deemed uncollectible.
Income from continuing operations before income taxes and minority interest generated a tax benefitprovision of $72$18 million in the first three quartersquarter of 20032004, compared to a tax provisionbenefit of $40 million in the prior year period.2003 quarter. The difference wasis primarily attributable to the impact of our Synthetic Fuel businesssynthetic fuel joint venture, which generated a tax benefit and tax credits totaling $199of $39 million in the first three quarters of 20032004, compared to $119$78 million in the prior year period. The 2003 taxes were also impacted by slightly higher state tax rates.
Synthetic Fuel. For the thirty-six weeks ended September 12, 2003, our Synthetic Fuel business reflected sales of $224 million and a loss of $104 million, before2003. Excluding the impact of $29 million of minority interest expense, resultingour synthetic fuel joint venture, our pre-tax income was higher in a2004, which also contributed to the unfavorable tax benefit of $37 million and tax credits of $162 million. For the thirty-six weeks ended September 6, 2002, our Synthetic Fuel business reflected sales of $113 million and a loss of $81 million, resulting in a tax benefit of $28 million and tax credits of $91 million.impact.
Discontinued Operations
Senior Living Services
On December 17, 2002, we sold twelve senior living communities to CNL for approximately $89 million in cash. We accounted for the sale under the full accrual method in accordance with FAS No. 66, and we recorded an after-tax loss of approximately $13 million. On December 30, 2002, we entered into definitive agreements to sell our senior living management business to Sunrise and to sell nine senior living communities to CNL. We completed the sales to Sunrise and CNL in addition to the related sale of a parcel of land to Sunrise on March 28, 2003, for $266 million and recognized a gain, net of taxes, of $23 million.
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Also, on December 30, 2002, we purchased 14 senior living communities for approximately $15 million in cash, plus the assumption of $227 million in debt, from an unrelated owner. We had previously agreed to provide a form of credit enhancement on the outstanding debt related to these communities. Management approved and committed to a plan to sell these communities within 12 months. As part of the plan, on March 31, 2003, we acquired all of the subordinated credit-enhanced mortgage securities relating to the 14 communities in a transaction in which we issued $46 million of unsecured Marriott International, Inc. notes, due April 2004. In the 2003 third quarter, we sold the 14 communities to CNL for approximately $184 million. We provided a $92 million acquisition loan to CNL in connection with the sale. Sunrise currently operates and will continue to operate the 14 communities under long-term management agreements. We recorded a gain, net of taxes, of approximately $1 million.
As a result of the above transactions, at September 12, 2003, the operating results of our Senior Living Services segment are reported in discontinued operations, and the remaining assets are classified as assets held for sale on the balance sheet.
In the thirty-six weeks ended September 12, 2003, income from operations, net of tax, totaled $9 million, and we also recorded a gain on disposal, net of tax, of $20 million. In the thirty-six weeks ended September 6, 2002, income from operations, net of tax, totaled $17 million.
Distribution Services
As of January 3, 2003, through a combination of sale and transfer of nine facilities and the termination of all operations at four facilities, we completed our exit of the distribution services business. Accordingly, we present the exit costs and the operating results for our Distribution Services business as discontinued operations for the twelve weeks and thirty-six weeks ended September 12, 2003 and September 6, 2002, and classify the remaining assets as held for sale at September 12, 2003 and January 3, 2003. In the thirty-six weeks ended September 12, 2003, we incurred exit costs, net of tax of $2 million, primarily related to ongoing compensation costs associated with the wind down. The loss from operations, net of tax in the thirty-six weeks ended September 6, 2002 totaled $7 million, and the exit costs, net of tax, totaled an additional $19 million. We expect to incur additional costs associated with the wind down during the balance of 2003. Although we are unable to estimate those costs, we do not expect them to be material since the wind down is substantially complete.
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LIQUIDITY AND CAPITAL RESOURCES
Cash Requirements and our Credit Facilities
We are party to two multicurrency revolving credit agreements that provide for borrowingaggregate borrowings of $1.5$2 billion expiring in 2006 ($1.5 billion expiring in July 2006, and $500 million expiring in August 2006,August), which support our commercial paper program and letters of credit. We entered intoAt March 26, 2004, we had no loans outstanding under the $500 million facility, during the third quarter of 2003, replacing a similar facility which would have expired in February 2004.facilities. At September 12, 2003,March 26, 2004, our cash balances combined with our available borrowing capacity under the credit facilities amounted to approximately $2$1.8 billion. We consider these resources, together with cash we expect to generate from operations, adequate to meet our short-term and long-term liquidity requirements, finance our long-term growth plans, meet debt service and fulfill other cash requirements, including the repayment of $200 million of senior notes due in November 2003.
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 part of our financing and liquidity needs will continue to be met through commercial paper borrowings and access to long-term committed credit facilities. If conditions in the lodging industry deteriorate, we may be unable to place some or all of our commercial paper, and may have to rely more on bank borrowings which may carry a higher cost than commercial paper.requirements.
Cash and equivalents totaled $113$195 million at September 12, 2003,March 26, 2004, a decrease of $85$34 million from year end 2002, primarily reflecting the repayment of debt, purchase of treasury stock and capital expenditures, offset by proceeds from dispositions.year-end 2003.
Earnings23
Timeshare Operating Cash Flows
While our timeshare business generates strong operating cash flow, the timing of both cash outlays for the acquisition and development of new resorts and cash received from purchaser financing affects quarterly amounts. We include timeshare interval sales we finance in cash from operations when we collect cash payments or the notes are sold for cash. The following table shows the net operating activity from our timeshare business (which excludes the portion of net income from our timeshare business, as that number is a component of income from continuing operations):
| ($ in millions) | Twelve Weeks Ended | |||||||
| March 26, 2004 | March 28, 2003 | |||||||
Timeshare development, less cost of sales | $ | (15 | ) | $ | (34 | ) | ||
New timeshare mortgages, net of collections | (75 | ) | (41 | ) | ||||
Financially reportable sales, (in excess of) less than closed sales | (33 | ) | 8 | |||||
Collection on retained interests in notes sold | 32 | 12 | ||||||
Other cash inflows (outflows) | 44 | (7 | ) | |||||
Net cash outflows from timeshare activity | $ | (47 | ) | $ | (62 | ) | ||
EBITDA
Our earnings before interest expense, income taxes, depreciation and amortization (EBITDA) from continuing operations, net of minority interest in pre-tax loss is a financial measure that is not presented in accordance with accounting principles generally accepted inwas $193 million and $155 million, respectively, for the United States.twelve weeks ended March 26, 2004 and March 28, 2003. We consider EBITDA from continuing operations, net of minority interest in pre-tax loss to be an indicator of operating performance whichbecause it can be used to measure our ability to service debt, fund capital expenditures and expand our business. However, EBITDA from continuing operations, net of minority interest in pre-tax lossis a non-GAAP financial measure, and is not an alternative to net income, financial results, or any other operating measure prescribed by accounting principles generally accepted in the United States.
EBITDAThe following table reconciles our net income to EBITDA:
| ($ in millions) | Twelve Weeks Ended | ||||||
| March 26, 2004 | March 28, 2003 | ||||||
Net income | $ | 114 | $ | 116 | |||
Interest expense | 22 | 26 | |||||
Tax provision (benefit) – continuing operations | 18 | (40 | ) | ||||
Tax provision – discontinued operations | — | 19 | |||||
Depreciation | 32 | 29 | |||||
Amortization | 7 | 5 | |||||
EBITDA | $ | 193 | $ | 155 | |||
Our net income is reduced by equity in losses from continuing operations, netsynthetic fuel of minority interest in pre-tax loss$28 million for the twelve weeks ended September 12, 2003 increased by $26 million, or 16 percent, to $189 million;March 26, 2004 and decreased by $59 million, or 11 percent, to $465 million for the thirty-six weeks then ended.
The reconciliation of income from continuing operations, before minority interest and income taxes to EBITDA from continuing operations, net of minority interest in pre-tax loss is as follows ($ in millions):
| Twelve weeks ended | Thirty-six weeks ended | |||||||||||
| September 12, 2003 | September 6, 2002 | September 12, 2003 | September 6, 2002 | |||||||||
Income from continuing operations, before minority interest and income taxes | $ | 106 | $ | 112 | $ | 263 | $ | 363 | ||||
Interest expense | 26 | 19 | 77 | 59 | ||||||||
Depreciation | 30 | 25 | 86 | 76 | ||||||||
Amortization | 7 | 7 | 19 | 26 | ||||||||
Minority interest in pre-tax loss | 20 | — | 20 | — | ||||||||
EBITDA from continuing operations, net of minority interest in pre-tax loss | $ | 189 | $ | 163 | $ | 465 | $ | 524 | ||||
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Reducing income from continuing operations before minority interest and income taxes are losses associated with our synthetic fuel operations of $3 million and $32$59 million for the twelve weeks ended September 12, 2003 and September 6, 2002, respectively, and $104 million and $81 million for the thirty-six weeks ended the same period.March 28, 2003. The Synthetic Fuelsynthetic fuel operating losses include depreciation expense of $2 million for each of the twelve weeks ended September 12, 2003 and September 6, 2002 and $7 million and $5 million, respectively, for the thirty-six weeks then ended.March 28, 2003.
Net cash provided by investing activities totaled $293income above also includes income from our discontinued senior living services business of $30 million, as well as losses from our discontinued distribution services business of $1 million for the thirty-sixtwelve weeks ended September 12, 2003,March 28, 2003. There was no depreciation or amortization expense for our discontinued operations in the first quarters of 2004 and consisted primarily of proceeds from the disposition of our senior living management business to Sunrise and the sale of 23 senior living communities and a parcel of land to CNL, proceeds from a loan sale and other loan collections and disposition of three lodging properties, offset by capital expenditures and loan advances.2003.
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Other Investing Activities
In the first quarter of 2004, other investing activities outflows of $21 million included $17 million for equity investments and $8 million for capitalized development costs. In the first quarter of 2003, other investing activities outflows of $26$15 million included $20$6 million for equity investments and $27 million for investments in long-term contracts and other development, net of other inflows. In 2002, other investing activities outflows of $65 million included $38 million for equity investments and $14$9 million for investments in long-term contracts and other development.
We have $500Debt
In the first quarter of 2004, debt increased by $274 million, available for future offerings under “universal shelf” registration statements we have filed with the Securitiesdue to commercial paper borrowings used to finance capital expenditures and Exchange Commission.share repurchases.
We have outstanding approximately $70 million in face amount of our zero-coupon convertible senior notes due 2021, which are known as LYONs. These LYONs which were issued on May 8, 2001, are convertible into approximately 0.9 million shares of our Class A Common Stock, and carry a yield to maturity of 0.75 percent. We may not redeem the LYONs prior to May 8, 2004. We may at the option of the holders be required to purchase the LYONs at their accreted value on May 8 of each of 2004, 2011 and 2016.2016 (or the following business day if such day is not a business day). We may choose to pay the purchase price for redemptions or repurchases in cash and/or shares of our Class A Common Stock. If we are required to repurchase any of the LYONs in May 2004, we will pay the purchase price in cash. The accreted value of the LYONs and the redemption price on the Monday, May 10, 2004 redemption date will be approximately $62 million. We classify LYONs as long-term debt based on our ability and intent to refinance the obligation with long-term debt if we are required to repurchase the LYONs.
The following table summarizes our contractual obligations ($ in millions):Cendant Joint Venture
| Payments Due by Period | |||||||||||||||
Contractual Obligations | Total | Before January 2, 2004 | 1-3 years | 4-5 years | After 5 years | ||||||||||
Debt | $ | 1,680 | $ | 203 | $ | 577 | $ | 24 | $ | 876 | |||||
Operating Leases | |||||||||||||||
Recourse | 937 | 30 | 185 | 131 | 591 | ||||||||||
Non-recourse | 500 | 8 | 60 | 88 | 344 | ||||||||||
Total Contractual Cash Obligations | $ | 3,117 | $ | 241 | $ | 822 | $ | 243 | $ | 1,811 | |||||
On April 1, 2004, Cendant Corporation exercised its option to redeem our interest in the Two Flags joint venture, which owns the trademarks and licenses for the Ramada and Days Inn lodging brands in the United States. We expect to receive approximately $200 million on September 1, 2004, and over time, use the funds for our ongoing share repurchase program. We expect to record a pre-tax gain of approximately $13 million in connection with this transaction in the third quarter of 2004. We continue to own the trademarks and licenses for Ramada outside of the United States, operate and franchise hotels outside of the United States and Canada under the Ramada International brand name, and license the Ramada name in Canada to Cendant.
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The following table summarizesIn 2003, we earned $24 million from our commitments ($interest in millions):the Two Flags joint venture, which was reflected as equity in earnings in the income statement. As a result of this transaction, our equity in earnings will be reduced in the near term.
| Amount of Commitment Expiration Per Period | |||||||||||||||
Other Commercial Commitments | Total Amounts Committed | Before January 2, 2004 | 1-3 years | 4-5 years | After 5 years | ||||||||||
Guarantees | $ | 1,282 | $ | 18 | $ | 254 | $ | 338 | $ | 672 | |||||
Timeshare note repurchase obligations | 22 | — | — | — | 22 | ||||||||||
Total | $ | 1,304 | $ | 18 | $ | 254 | $ | 338 | $ | 694 | |||||
Our guarantees listed above include $316 million for guarantees not yet in effect including: 1) $256 million of commitments which will not be in effect until the underlying hotels are open and we begin to manage the properties; and 2) a $60 million contingent obligation related to our synthetic fuel joint venture that will only be in effect in the event the private letter ruling is not obtained by December 15, 2003 and the purchaser exercises a one-time option to return its ownership interest to us (see “Synthetic Fuel” footnote). Also included in guarantees above are $403 million related to Senior Living Services lease obligations and lifecare bonds. Sunrise is the primary obligor of the leases and a portion of the lifecare bonds and CNL is the primary obligor of the remainder of the lifecare bonds. Prior to the sale of the Senior Living Services business these pre-existing guarantees were guarantees by Marriott International, Inc. of obligations of consolidated Senior Living Services subsidiaries. Also included in the table above are $47 million of guarantees associated with the Sunrise sale transaction.CONTRACTUAL OBLIGATIONS AND OFF BALANCE SHEET ARRANGEMENTS
Our total unfunded loan commitments amounted to $100 million at September 12, 2003. We expect to fund $50 millioncontractual obligations and off balance sheet arrangements, which we discussed on pages 34 and 35 of commitments byour Annual Report on Form 10-K for fiscal year 2003, have not materially changed since January 2, 2004 and $34 million in one to three years. We do not expect to fund the remaining $16 million of commitments, which expire as follows: $5 million in one to three years; and $11 million after five years.2004.
SHARE REPURCHASES
We purchased 9.16.6 million shares of our Class A Common Stock during the thirty-sixtwelve weeks ended September 12, 2003March 26, 2004 at an average price of $34.70$44.41 per share.
CRITICAL ACCOUNTING POLICIES
Certain of our critical accounting policies require the use of judgment in their application or require estimates of inherently uncertain matters. Our accounting policies which comply with principles generally accepted in the United States, require us to apply methodologies, estimatesalthough a change in the facts and judgments that have a significant impact oncircumstances of the results we report in ourunderlying transactions could significantly change the application of an accounting policy and the resulting financial statements. In our annual report for the 2002 fiscal year on Form 10-K westatement impact. We have discussed those policies that we believe are critical and require the use of complex judgment in their application.
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application in our Annual Report on Form 10-K for fiscal year 2003. Since the date of that Form 10-K, there have been no material changes to our critical accounting policies or the methodologies or assumptions appliedwe apply under them.
35
Item 3.Quantitative and Qualitative Disclosures About Market Risk
We are exposedOur exposure to market risk from changes in interest rates. We manage our exposure to these risks by monitoring available financing alternatives, through development and application of credit granting policies and by entering into derivative arrangements to meet the objectives described above. We dohas not engage in such transactions for trading or speculative purposes. We do not foresee any significant changes in our exposure to fluctuations in interest rates or in how such exposure is managed in the future.materially changed since January 2, 2004.
Item 4.Controls and Procedures
As of the end of the period covered by this quarterly report, we carried out an evaluation, under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act), based on the evaluation of these controls and procedures required by Rules 13a-15(b) or 15d-15(b) of the Exchange Act.. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures which, by their nature, can provide only reasonable assurance regarding management’s control objectives. You should note that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. There have been no changes in the internal control over financial reporting that occurred during the first quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based upon the foregoing evaluation, theour Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures are effective to timely alert them to any material information relating to the Company (including its consolidated subsidiaries) that must be included in our periodic SEC filings.
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PART II — II—OTHER INFORMATION
The legal proceedings and claims described under the heading captioned “Contingencies” in Note 98 of the Notes to Condensed Consolidated Financial Statements set forth in Part I, Item 1 of this Quarterly Report are hereby incorporated by reference. From time to time, we are also subject to certain legal proceedings and claims in the ordinary course of business. We currently are not aware of any such legal proceedings or claims that we believe will have, individually or in aggregate, a material adverse effect on our business, financial condition, or operating results.
Item 2.Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
Changes in Securities and Use of Proceeds
None.
Issuer Purchases of Equity Securities
(in millions, except per share amounts)
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1) | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Program(1) | |||||
January 3, 2004—January 30, 2004 | 2.0 | $ | 45.83 | 2.0 | 10.5 | ||||
January 31, 2004—February 27, 2004 | 2.4 | 44.54 | 2.4 | 8.1 | |||||
February 28, 2004—March 26, 2004 | 2.2 | 42.97 | 2.2 | 5.9 | |||||
| (1) | On February 6, 2003, we announced that our Board of Directors had approved the repurchase of up to 20 million shares of our common stock. That authorization is ongoing and does not have an expiration date. On Friday, April 30, 2004, our Board of Directors increased by 20 million shares the authorization to repurchase our common stock for a total outstanding authorization of approximately 25 million shares. |
Item 3.Defaults Upon Senior Securities
None.
Item 4.Submission of Matters to a Vote of Security Holders
None.
None.
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Item 6.Exhibits and Reports on Form 8-K
(a) Exhibits
| Exhibit No. | Description | |
| 12 | Statement of Computation of Ratio of Earnings to Fixed Charges. | |
| 31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a). | |
| 31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a). | |
| 32 | Section 1350 Certifications. | |
| 99 | Forward-Looking Statements. | |
(b) Reports on Form 8-K |
On July 3, 2003 we filed a report on Form 8-K discussing the completion of the sale of a portion of our Synthetic Fuel business.
On July 17, 2003February 10, 2004, we furnished a report on Form 8-K reporting our financial results for the quarter and year ended June 20, 2003.
January 2, 2004.
38On February 20, 2004, we furnished a report on Form 8-K containing our Consolidated Statement of Income by Quarter for the Fiscal Years Ended January 2, 2004 and January 3, 2003, in a new format.
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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.
|
/s/ Arne M. Sorenson |
Arne M. Sorenson Executive Vice President and Chief Financial Officer |
/s/ Carl T. Berquist |
Carl T. Berquist Executive Vice President, Information and (Principal Accounting |
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