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 June 14, 2002 Commission File No. 1-13881
MARRIOTT INTERNATIONAL, INC.
Delaware 52-2055918
(State of Incorporation) (I.R.S. Employer Identification Number)
10400 Fernwood Road
Bethesda, Maryland 20817
(301) 380-3000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes [X] No [_]
Shares outstanding
Class at July 5, 2002
- -------------------------------- ----------------------------
Class A Common Stock, 241,801,438
$0.01 par value
MARRIOTT INTERNATIONAL, INC.
INDEX
Page No.
-----------
Forward-Looking Statements ........................................................... 3
Part I. Financial Information (Unaudited):
Condensed Consolidated Statement of Income -
Twelve and Twenty-Four Weeks Ended June 14, 2002 and June 15, 2001 ........... 4
Condensed Consolidated Balance Sheet -
as of June 14, 2002 and December 28, 2001 .................................... 5
Condensed Consolidated Statement of Cash Flows -
Twenty-Four Weeks Ended June 14, 2002 and June 15, 2001 ...................... 6
Notes to Condensed Consolidated Financial Statements ............................. 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................................... 19
Quantitative and Qualitative Disclosures About Market Risk ....................... 28
Part II. Other Information and Signatures:
Legal Proceedings ................................................................ 29
Changes in Securities ............................................................ 29
Defaults Upon Senior Securities .................................................. 29
Submission of Matters to a Vote of Security Holders .............................. 29
Exhibits and Reports on Form 8-K ................................................. 31
Signatures ....................................................................... 32
2
Forward-Looking Statements
We have made 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. Forward-looking statements include the information
concerning our possible or assumed future results of operations and statements
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. Actual
results may differ materially from those expressed in these forward-looking
statements. We caution you not to put undue reliance on any forward-looking
statements.
You should understand that the following important factors, in addition to 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.
. competition in each of our business segments;
. business strategies and their intended results;
. the balance between supply of and demand for hotel rooms,
timeshare units, senior living accommodations and corporate
apartments;
. our continued ability to obtain new operating contracts and
franchise agreements;
. our ability to develop and maintain positive relations with
current and potential hotel and senior living community owners;
. our ability to obtain adequate property and liability insurance
to protect against losses or to obtain such insurance at
reasonable rates;
. the effect of international, national and regional economic
conditions, including the duration and severity of the current
economic downturn in the United States and the pace of the
lodging industry's recovery in the aftermath of the terrorist
attacks on September 11, 2001;
. our ability to recover loan and guaranty advances from hotel
operations or from owners through the proceeds of hotel sales,
refinancing of debt or otherwise;
. the availability of capital to allow us and potential hotel
owners to fund investments;
. the effect that internet reservation channels may have on the
rates that we are able to charge for hotel rooms and timeshare
intervals;
. the anticipated time-frame for exiting our distribution services
business; and
. other risks described from time to time in our filings with the
Securities and Exchange Commission (the SEC).
3
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
($ in millions, except per share amounts)
(Unaudited)
Twelve weeks ended Twenty-four weeks ended
------------------------------ -----------------------------
June 14, June 15, June 14, June 15,
2002 2001 2002 2001
----------- ------------- ------------- ------------
SALES
Management and franchise fees .................... $ 206 $ 227 $ 382 $ 431
Distribution services ............................ 375 397 751 758
Other ............................................ 571 517 1,031 998
----------- ------------- ----------- ------------
1,152 1,141 2,164 2,187
Other revenues from managed and franchised
properties .................................. 1,434 1,309 2,786 2,724
----------- ------------- ----------- ------------
2,586 2,450 4,950 4,911
----------- ------------- ----------- ------------
OPERATING COSTS AND EXPENSES
Distribution services ............................ 377 394 759 753
Other ............................................ 623 508 1,106 969
----------- ------------- ----------- ------------
1,000 902 1,865 1,722
Other costs from managed and franchised
properties .................................. 1,434 1,309 2,786 2,724
----------- ------------- ----------- ------------
2,434 2,211 4,651 4,446
----------- ------------- ----------- ------------
OPERATING PROFIT BEFORE CORPORATE
EXPENSES AND INTEREST ................................ 152 239 299 465
Corporate expenses .................................... (23) (29) (52) (59)
Interest expense ...................................... (21) (27) (40) (49)
Interest income ....................................... 28 20 47 36
----------- ------------- ----------- ------------
INCOME BEFORE INCOME TAXES ............................ 136 203 254 393
Provision for income taxes ............................ (7) (73) (43) (142)
----------- ------------- ----------- ------------
NET INCOME ............................................ $ 129 $ 130 $ 211 $ 251
=========== ============= =========== ============
DIVIDENDS DECLARED PER SHARE .......................... $ .070 $ .065 $ .135 $ .125
=========== ============= =========== ============
EARNINGS PER SHARE
Basic Earnings Per Share ......................... $ .53 $ .53 $ .87 $ 1.03
=========== ============= =========== ============
Diluted Earnings Per Share ....................... $ .50 $ .50 $ .82 $ .97
=========== ============= =========== ============
See notes to condensed consolidated financial statements.
4
MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
($ in millions)
June 14, December 28,
2002 2001
------------- -------------
ASSETS (Unaudited)
Current assets
Cash and equivalents ......................................... $ 200 $ 817
Accounts and notes receivable ................................ 653 611
Inventory .................................................... 94 96
Other ........................................................ 638 606
------------- -------------
1,585 2,130
Property and equipment .......................................... 2,923 2,930
Goodwill ........................................................ 1,092 1,092
Other intangibles ............................................... 476 672
Investments in affiliates ....................................... 1,109 823
Notes and other receivables ..................................... 924 1,038
Other ........................................................... 423 422
------------- -------------
$ 8,532 $ 9,107
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable ............................................. $ 698 $ 697
Other ........................................................ 1,163 1,105
------------- -------------
1,861 1,802
------------- -------------
Long-term debt .................................................. 1,850 2,408
Other long-term liabilities ..................................... 990 1,012
Convertible debt ................................................ 61 407
Shareholders' equity
ESOP preferred stock ......................................... - -
Class A common stock, 255.6 million shares issued ............ 3 3
Additional paid-in capital ................................... 3,186 3,378
Retained earnings ............................................ 1,103 941
Unearned ESOP shares ......................................... (22) (291)
Treasury stock, at cost ...................................... (457) (503)
Accumulated other comprehensive income ....................... (43) (50)
------------- -------------
3,770 3,478
------------- -------------
$ 8,532 $ 9,107
============= =============
See notes to condensed consolidated financial statements.
5
MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
($ in millions)
(Unaudited)
Twenty-four weeks ended
-------------------------------
June 14, June 15,
2002 2001
---------- ----------
OPERATING ACTIVITIES
Net income .................................................... $ 211 $ 251
Adjustments to reconcile to cash provided by operations:
Depreciation and amortization ............................. 86 96
Income taxes and other .................................... 63 95
Timeshare activity, net ................................... (63) (143)
Working capital changes ................................... (7) (115)
---------- ----------
Cash provided by operations ................................... 290 184
---------- ----------
INVESTING ACTIVITIES
Dispositions .................................................. 282 361
Capital expenditures .......................................... (172) (251)
Note advances ................................................. (64) (82)
Note collections and sales .................................... 29 34
Other ......................................................... (53) (145)
---------- ----------
Cash provided by (used in) investing activities ............... 22 (83)
---------- ----------
FINANCING ACTIVITIES
Commercial paper activity, net ................................ 353 (424)
(Repayment) issuance of convertible debt ...................... (347) 405
Issuance of other long-term debt .............................. 11 313
Repayment of other long-term debt ............................. (922) (9)
Issuance of Class A common stock .............................. 27 57
Dividends paid ................................................ (31) (29)
Purchase of treasury stock .................................... (20) (74)
---------- ----------
Cash (used in) provided by financing activities ............... (929) 239
---------- ----------
(DECREASE) INCREASE IN CASH AND EQUIVALENTS ........................ (617) 340
CASH AND EQUIVALENTS, beginning of period .......................... 817 334
---------- ----------
CASH AND EQUIVALENTS, end of period ................................ $ 200 $ 674
========== ==========
See notes to condensed consolidated financial statements.
6
MARRIOTT INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying condensed consolidated financial statements present the
results of operations, financial position and cash flows of Marriott
International, Inc. (together with its subsidiaries, we, us or the
Company).
The accompanying condensed consolidated financial statements have not been
audited. We have condensed or omitted certain information and footnote
disclosures normally included in financial statements presented in
accordance with accounting principles generally accepted in the United
States. We believe the disclosures made are adequate to make the
information presented not misleading. However, you should read the
condensed consolidated financial statements in conjunction with the
consolidated financial statements and notes to those financial statements
included in our Annual Report on Form 10-K for the fiscal year ended
December 28, 2001. Capitalized terms not otherwise defined in this
quarterly report have the meanings specified in our Annual Report.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities as of the date of the financial statements, the reported
amounts of sales and expenses during the reporting period and the
disclosures of contingent liabilities. Accordingly, ultimate results could
differ from those estimates.
In our opinion, the accompanying condensed consolidated financial
statements reflect all normal and recurring adjustments necessary to
present fairly our financial position as of June 14, 2002 and December 28,
2001, the results of operations for the twelve and twenty-four weeks ended
June 14, 2002 and June 15, 2001 and cash flows for the twenty-four weeks
ended June 14, 2002 and June 15, 2001. Interim results may not be
indicative of fiscal year performance because of seasonal and short-term
variations. We have eliminated all material intercompany transactions and
balances between entities included in these financial statements.
Revenue Recognition
Our sales include (1) management and franchise fees, (2) sales from our
distribution services business, (3) sales from lodging properties and
senior living communities owned or leased by us, and sales made by our
other businesses; and (4) certain other revenues from properties franchised
or managed by us. Management fees comprise a base fee, which is a
percentage of the revenues of hotels or senior living communities, and an
incentive fee, which is generally based on unit profitability. Franchise
fees comprise initial application fees and continuing royalties generated
from our franchise programs, which permit the hotel owners and operators to
use certain of our brand names. Other revenues from managed and franchised
properties include direct and indirect costs that are reimbursed to us by
lodging and senior living community owners for properties that we manage or
franchise. Other
7
revenues include revenues from hotel properties and senior living
communities that we own or lease, along with sales from our timeshare,
ExecuStay and Synthetic Fuel businesses.
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 twenty-four weeks ended June 14, 2002 we have
recognized $84 million of incentive management fees, retention of which is
dependent on achievement of hotel profitability for the balance of the year
at levels specified in a number of our management contracts.
Distribution Services: We recognize revenue from our distribution services
business when goods have been shipped and title passes to the customer in
accordance with the terms of the applicable distribution contract.
Timeshare: We recognize revenue from timeshare interest sales in accordance
with Statement of Financial Accounting Standards (FAS) No. 66, "Accounting
for Sales of Real Estate." We recognize sales when a minimum of 10 percent
of the purchase price for the timeshare interval has been received, the
period of cancellation with refund has expired, receivables are deemed
collectible and certain minimum sales and construction levels have been
attained. For sales that do not meet these criteria, we defer all revenue
using the percentage-of-completion or the deposit method as applicable.
Owned and Leased Units: We recognize room sales and revenues from guest
services for our owned and leased units, including ExecuStay, when rooms
are occupied and services have been rendered.
Franchise Revenue: We recognize franchise fee revenues in accordance with
FAS No. 45, "Accounting for Franchise Fee Revenue." Franchise fees are
recognized as revenue in each accounting period as fees are earned and
become receivable from the franchisee.
Other Revenues from Managed and Franchised Properties: We recognize other
revenues from managed and franchised properties when we incur the related
reimbursable costs.
Synthetic Fuel: We recognize revenue from the Synthetic Fuel business when
the synthetic fuel is produced and sold.
8
We recognized sales and operating profit in the twelve and twenty-four
weeks ended June 14, 2002 and June 15, 2001 as shown in the following
table. Lodging includes our Full-Service, Select-Service, Extended-Stay and
Timeshare business segments.
Twelve weeks ended June 14, 2002
------------------------------------------------------------------------------
Senior Living Distribution
Sales Lodging Services Services Synthetic Fuel Total
----------- ------------- ------------ -------------- ------------
($ in millions)
Management and franchise fees ................... $ 197 $ 9 $ - $ - $ 206
Other ........................................... 441 77 375 53 946
----------- ------------- ------------ -------------- ------------
638 86 375 53 1,152
Other revenues from managed and franchised
properties .................................. 1,343 91 - - 1,434
----------- ------------- ------------ -------------- ------------
1,981 177 375 53 2,586
----------- ------------- ------------ -------------- ------------
Operating costs and expenses
Operating costs ................................. 446 81 377 96 1,000
Other costs from managed and franchised
properties .................................. 1,343 91 - - 1,434
----------- ------------- ------------ -------------- ------------
1,789 172 377 96 2,434
----------- ------------- ------------ -------------- ------------
Operating profit (loss) before corporate
expenses and interest ....................... $ 192 $ 5 $ (2) $ (43) $ 152
=========== ============= ============ ============== ============
Twelve weeks ended June 15, 2001
------------------------------------------------------------------------------
Senior Living Distribution
Sales Lodging Services Services Synthetic Fuel Total
----------- ------------- ------------ -------------- ------------
($ in millions)
Management and franchise fees ................... $ 219 $ 8 $ - $ - $ 227
Other ........................................... 442 75 397 - 914
----------- ------------- ------------ -------------- ------------
661 83 397 - 1,141
Other revenues from managed and franchised
properties .................................. 1,228 81 - - 1,309
----------- ------------- ------------ -------------- ------------
1,889 164 397 - 2,450
----------- ------------- ------------ -------------- ------------
Operating costs and expenses
Operating costs ................................. 430 78 394 - 902
Other costs from managed and franchised
properties .................................. 1,228 81 - - 1,309
----------- ------------- ------------ -------------- ------------
1,658 159 394 - 2,211
----------- ------------- ------------ -------------- ------------
Operating profit before corporate expenses and
interest .................................... $ 231 $ 5 $ 3 $ - $ 239
=========== ============= ============ ============== ============
9
Twenty-four weeks ended June 14, 2002
-----------------------------------------------------------------------------
Sales Senior Living Distribution
($ in millions) Lodging Services Services Synthetic Fuel Total
----------- ------------- ------------- -------------- --------------
Management and franchise fees ..................... $ 365 $ 17 $ - $ - $ 382
Other ............................................. 814 159 751 58 1,782
----------- ------------- ------------- -------------- --------------
1,179 176 751 58 2,164
Other revenues from managed and
franchised properties ......................... 2,605 181 - - 2,786
----------- ------------- ------------- -------------- --------------
3,784 357 751 58 4,950
----------- ------------- ------------- -------------- --------------
Operating costs and expenses
Operating costs ................................... 834 165 759 107 1,865
Other costs from managed and
franchised properties ......................... 2,605 181 - - 2,786
----------- ------------- ------------- -------------- --------------
3,439 346 759 107 4,651
----------- ------------- ------------- -------------- --------------
Operating profit (loss) before corporate
expenses and interest ......................... $ 345 $ 11 $ (8) $ (49) $ 299
=========== ============= ============= ============== ==============
Twenty-four weeks ended June 15, 2001
-----------------------------------------------------------------------------
Senior Living Distribution
Sales Lodging Services Services Synthetic Fuel Total
----------- ------------- ------------- -------------- --------------
($ in millions)
Management and franchise fees ..................... $ 415 $ 16 $ - $ - $ 431
Other ............................................. 847 151 758 - 1,756
----------- ------------- ------------- -------------- --------------
1,262 167 758 - 2,187
Other revenues from managed and franchised
properties .................................... 2,562 162 - - 2,724
----------- ------------- ------------- -------------- --------------
3,824 329 758 - 4,911
----------- ------------- ------------- -------------- --------------
Operating costs and expenses
Operating costs ................................... 808 161 753 - 1,722
Other costs from managed and
franchised properties ......................... 2,562 162 - - 2,724
----------- ------------- ------------- -------------- --------------
3,370 323 753 - 4,446
----------- ------------- ------------- -------------- --------------
Operating profit before corporate expenses
and interest .................................. $ 454 $ 6 $ 5 $ - $ 465
=========== ============= ============= ============== ==============
10
2. Earnings Per Share
The following table reconciles the earnings and number of shares used in
the basic and diluted earnings per share calculations (in millions, except
per share amounts).
Twelve weeks ended Twenty-four weeks ended
----------------------------- ----------------------------
June 14, June 15, June 14, June 15,
2002 2001 2002 2001
----------- ------------- ----------- ------------
Computation of Basic Earnings Per Share
Net income ................................................ $ 129 $ 130 $ 211 $ 251
Weighted average shares outstanding ....................... 242.8 243.9 242.4 243.7
----------- ------------ ----------- ------------
Basic Earnings Per Share .................................. $ .53 $ .53 $ .87 $ 1.03
=========== ============ =========== ============
Computation of Diluted Earnings Per Share
Net income ................................................ $ 129 $ 130 $ 211 $ 251
After-tax interest expense on convertible debt ............ 1 1 3 1
----------- ------------ ----------- ------------
Net income for diluted earnings per share ................. $ 130 $ 131 $ 214 $ 252
=========== ============ =========== ============
Weighted average shares outstanding ....................... 242.8 243.9 242.4 243.7
Effect of Dilutive Securities
Employee stock option plan .............................. 8.1 8.1 7.9 8.4
Deferred stock incentive plan ........................... 4.9 5.3 4.9 5.3
Convertible debt ........................................ 4.0 3.0 5.2 1.5
----------- ------------ ----------- ------------
Shares for diluted earnings per share ..................... 259.8 260.3 260.4 258.9
=========== ============ =========== ============
Diluted Earnings Per Share ................................ $ .50 $ .50 $ .82 $ .97
=========== ============ =========== ============
We compute the effect of dilutive securities using the treasury stock
method and average market prices during the period. We use the if-converted
method for convertible debt. The calculations of diluted earnings per share
exclude the following options because the inclusion would have an
antidilutive impact for the applicable period: (a) for the twelve week and
twenty-four week periods ended June 14, 2002, 5.6 million and 5.8 million
options respectively, and (b) for the twelve week and twenty-four week
periods ended June 15, 2001, 5.7 million and 4.6 million options,
respectively.
3. 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 obligations. We recognize
11
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 liability for the Marriott Rewards program was
$674 million at June 14, 2002 and $631 million at December 28, 2001, of
which $423 million and $380 million, respectively, are included in other
long-term liabilities in the accompanying condensed consolidated balance
sheets.
4. Dispositions
In the second quarter of 2002, we sold two lodging properties and one piece
of undeveloped land for $148 million. We will continue to operate the two
hotels under long-term management agreements. One lodging sale is accounted
for under the full accrual method in accordance with FAS No. 66. The other
lodging sale is accounted for under the cost recovery method because the
buyer did not make an adequate minimum initial investment. The sale of one
of the two lodging properties was to a joint venture in which we have a
non-controlling equity interest.
In the second quarter of 2002, we sold five senior living communities for
$59 million. We will continue to operate the communities under long-term
management agreements. These sales are accounted for under the full accrual
method in accordance with FAS No. 66. We will recognize pretax gains of
approximately $6 million provided certain contingencies in the sales
contract expire.
In the first quarter of 2002, we closed on sales of four hotels for cash
proceeds of $97 million, resulting in gains of $13 million. The gains have
been deferred and will be recognized provided certain contingencies in the
sales contracts expire. We will continue to operate the hotels under
long-term management agreements.
5. Comprehensive Income
Total comprehensive income was $138 million and $119 million, respectively,
for the twelve weeks ended June 14, 2002 and June 15, 2001 and $218 million
and $234 million, respectively, for the twenty-four weeks ended June 14,
2002 and June 15, 2001. The principal differences between net income and
total comprehensive income for 2002 and 2001 relate to foreign currency
translation adjustments and fair value changes of certain financial
instruments.
12
6. New Accounting Standards
In the first quarter of 2002, we adopted FAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The adoption of FAS No. 144
had no impact on the Company.
We adopted FAS No. 142, "Goodwill and other Intangible Assets," in the
first quarter of 2002. The new rules require that goodwill is not
amortized, but is reviewed annually for impairment. The adoption of FAS
No. 142 resulted in an increase in net income of approximately $8 million
for the twelve weeks ended June 14, 2002 and $15 million for the
twenty-four weeks ended June 14, 2002. We completed our testing of
goodwill for impairment and have determined that no impairment exists
upon initial adoption of FAS No. 142.
The impact of the adoption of FAS No. 142 on our net income, basic
earnings per share, and diluted earnings per share for the twelve and
twenty-four weeks ended June 14, 2002 and June 15, 2001, as if the
adoption had taken place in the first quarter of 2001, is presented in
the following table (in millions, except per share amounts):
Twelve weeks ended Twenty-four weeks ended
------------------------------ -------------------------------
June 14, June 15, June 14, June 15,
2002 2001 2002 2001
------------- ------------- ------------- --------------
Reported net income ............................. $ 129 $ 130 $ 211 $ 251
Goodwill amortization ........................... - 8 - 15
------------- ------------- ------------- --------------
Adjusted net income ............................. $ 129 $ 138 $ 211 $ 266
============= ============= ============= ==============
Reported basic earnings per share ............... $ .53 $ .53 $ .87 $ 1.03
Goodwill amortization ........................... - .03 - .06
------------- ------------- ------------- --------------
Adjusted basic earnings per share ............... $ .53 $ .56 $ .87 $ 1.09
============= ============= ============= ==============
Reported diluted earnings per share ............. $ .50 $ .50 $ .82 $ .97
Goodwill amortization ........................... - .03 - .06
------------- ------------- ------------- --------------
Adjusted diluted earnings per share ............. $ .50 $ .53 $ .82 $ 1.03
============= ============= ============= ==============
7. Business Segments
We are a diversified hospitality company with operations in seven
business segments:
.. Full-Service Lodging, which includes Marriott Hotels, Resorts and Suites;
The Ritz-Carlton Hotels; Renaissance Hotels, Resorts and Suites; Ramada
International; and Marriott Executive Apartments;
.. Select-Service Lodging, which includes Courtyard, Fairfield Inn and
SpringHill Suites;
.. Extended-Stay Lodging, which includes Residence Inn, TownePlace Suites
and Marriott ExecuStay;
.. Timeshare, which includes the operation, ownership, development and
marketing of Marriott's timeshare properties under the Marriott Vacation
Club International, The Ritz-Carlton Club, Horizons and Marriott Grand
Residence Club brands;
13
.. Senior Living Services, which includes the operation, ownership and
development of senior living communities;
.. Distribution Services, which includes our wholesale food distribution
business; and
.. Synthetic Fuel, which includes the operation of our coal-based synthetic
fuel production facilities. The Synthetic Fuel business generated a tax
benefit of $15 million and tax credits of $43 million in the twelve weeks
ended June 14, 2002 and a tax benefit of $17 million and tax credits of
$48 million in the twenty-four weeks ended June 14, 2002.
We evaluate the performance of our segments based primarily on operating
profit before corporate expenses and interest. We do not allocate income
taxes at the segment level.
We have aggregated the brands and businesses presented within each of our
segments considering their similar economic characteristics, types of
customers, distribution channels, and the regulatory business environment
of the brands and operations within each segment.
Twelve weeks ended Twenty-four weeks ended
--------------------------------- ---------------------------------------
June 14, 2002 June 15, 2001 June 14, 2002 June 15, 2001
-------------- ---------------- ------------------- ------------------
($ in millions)
Sales
Full-Service ................................ $ 1,299 $ 1,260 $ 2,520 $ 2,609
Select-Service .............................. 238 223 445 436
Extended-Stay ............................... 148 162 269 301
Timeshare ................................... 296 244 550 478
-------------- ---------------- ------------------- ------------------
Total Lodging ......................... 1,981 1,889 3,784 3,824
Senior Living Services ...................... 177 164 357 329
Distribution Services ....................... 375 397 751 758
Synthetic Fuel .............................. 53 - 58 -
-------------- ---------------- ------------------- ------------------
$ 2,586 $ 2,450 $ 4,950 $ 4,911
============== ================ =================== ==================
Operating profit (loss) before corporate
expenses and interest
Full-Service ................................ $ 103 $ 127 $ 189 $ 244
Select-Service .............................. 40 43 68 88
Extended-Stay ............................... 10 22 18 40
Timeshare ................................... 39 39 70 82
-------------- ---------------- ------------------- ------------------
Total Lodging .......................... 192 231 345 454
Senior Living Services ...................... 5 5 11 6
Distribution Services ....................... (2) 3 (8) 5
Synthetic Fuel .............................. (43) - (49) -
-------------- ---------------- ------------------- ------------------
$ 152 $ 239 $ 299 $ 465
============== ================ =================== ==================
Sales from Distribution Services exclude sales (made at market terms and
conditions) to our other business segments of $27 million and $41 million
for the twelve weeks ended June 14, 2002 and June 15, 2001, respectively,
and $53 million and $80 million for the twenty-four weeks ended June 14,
2002 and June 15, 2001, respectively.
14
8. Contingencies
We issue guarantees to lenders and other third parties in connection with
financing transactions and other obligations. These guarantees totaled
$577 million at June 14, 2002, including guarantees involving major
customers. In addition, we have made a physical completion guarantee
relating to one hotel property with minimal expected funding. As of June
14, 2002, we had extended approximately $590 million of loan commitments to
owners of lodging properties and senior living communities under which we
expect to fund approximately $112 million by January 3, 2003, and $268
million in total.
Letters of credit outstanding on our behalf at June 14, 2002, totaled $92
million, the majority of which related to our self-insurance programs. At
June 14, 2002, we had repurchase obligations of $61 million related to
notes receivable from timeshare interval purchasers, which have been sold
with limited recourse. Surety bonds issued on our behalf as of June 14,
2002 totaled $490 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.
On March 30, 2001, Green Isle Partners, Ltd., S.E. (Green Isle) filed a
63-page complaint in Federal District Court in Delaware against The
Ritz-Carlton Hotel Company, L.L.C., The Ritz-Carlton Hotel Company of
Puerto Rico, Inc. (Ritz-Carlton Puerto Rico), Marriott International, Inc.,
Marriott Distribution Services, Inc., Marriott International Capital Corp.
and Avendra L.L.C. (Green Isle Partners, Ltd. S.E., v. The Ritz-Carlton
Hotel Company, L.L.C., et al, civil action no. 01-202). Ritz-Carlton Puerto
Rico manages The Ritz-Carlton San Juan Hotel, Spa and Casino located in San
Juan, Puerto Rico under an operating agreement with Green Isle dated
December 15, 1995 (the Operating Agreement).
The claim asserts 11 causes of action: three Racketeer Influenced and
Corrupt Organizations Act (RICO) claims, together with claims based on the
Robinson-Patman Act, breach of contract, breach of fiduciary duty, aiding
and abetting a breach of fiduciary duty, breach of implied duties of good
faith and fair dealing, common law fraud and intentional misrepresentation,
negligent misrepresentation, and fiduciary accounting. The complaint does
not request termination of the Operating Agreement.
The claim includes allegations of: (i) national, non-competitive contracts
and attendant kick-back schemes; (ii) concealing transactions with
affiliates; (iii) false entries in the books and manipulation of accounts
payable and receivable; (iv) excessive compensation schemes and fraudulent
expense accounts; (v) charges of prohibited overhead costs to the project;
(vi) charges of prohibited procurement costs; (vii) inflation of Group
Service Expense; (viii) the use of prohibited or falsified revenues; (ix)
attempts to oust Green Isle from ownership; (x) creating a financial crisis
and then attempting to exploit it by seeking an economically oppressive
contract in connection with a loan; (xi) providing incorrect cash flow
figures and failing appropriately to reveal and explain revised cash flow
figures.
The complaint seeks as damages the $140 million which Green Isle claims to
have invested in the hotel (which includes $85 million in third party
debt), which the plaintiffs seek to treble to $420 million under RICO and
the Robinson-Patman Act.
15
On May 25, 2001, defendants moved to dismiss the complaint or,
alternatively, to stay or transfer. Briefing of the motion is complete but
oral argument has not yet been scheduled. On June 25, 2001, Green Isle
filed its Chapter 11 Bankruptcy Petition in the Southern District of
Florida. On November 11, 2001, the Court granted defendants' motion to
transfer and subsequently did transfer the matter to the United States
District Court for the district of Puerto Rico. In that proceeding, Green
Isle's motion to reject the Ritz-Carlton operating agreement was dismissed
without prejudice.
On April 8, 2002, the Company and its subsidiary, Renaissance Hotel
Operating Company (RHOC), initiated an arbitration proceeding against CTF
Hotel Holdings, Inc. (CTF) and CTF's affiliate, Hotel Property Investments
(B.V.I.) Ltd. (HPI), in connection with a dispute over procurement issues
for certain Renaissance hotels and resorts that RHOC manages for CTF and
HPI. On April 12, 2002, CTF filed a lawsuit under seal in U.S. District
Court in Delaware against the Company, RHOC and Avendra LLC, alleging that,
in connection with procurement at 20 of those hotels, the Company and RHOC
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.
We believe that the Green Isle and CTF lawsuits are without merit and we
intend to vigorously defend against the claims being made against us.
However, we cannot assure you as to the outcome of either lawsuit nor can
we currently estimate the range of any potential loss to the Company.
In the twelve weeks ended June 14, 2002, Marriott recognized a charge of
$7 million in connection with a lawsuit involving the sale of a hotel
previously managed by us.
In addition to the foregoing, we are from time to time involved in legal
proceedings which could, if adversely decided, result in losses to the
Company.
9. Convertible Debt
On May 8, 2001, we received gross proceeds of $405 million from the sale of
zero-coupon convertible senior notes due 2021, known as LYONs. On May 9,
2002, we redeemed for cash the approximately 85 percent of the LYONs that
were tendered for mandatory repurchase by the holders.
The remaining LYONs are convertible into approximately 1.0 million shares
of our Class A Common Stock, have a face value of $70 million 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 amortized the issuance costs of the LYONs into interest expense over the
one-year period ended May 8, 2002. The LYONs are classified as long-term
based on our ability and intent to refinance the obligation with long-term
debt if we are required to repurchase the LYONs.
16
10. Marriott and Cendant Corporation Joint Venture
In the first quarter of 2002, Marriott and Cendant Corporation (Cendant)
completed the formation of a joint venture to further develop and expand
the Ramada and Days Inn brands in the United States. We contributed the
domestic Ramada license agreements and related intellectual property to the
joint venture at their carrying value of approximately $200 million. We
also contributed a $205 million note receivable from us and the joint
venture assumed a $205 million note payable to us, which eliminate upon
consolidation. Cendant contributed the Days Inn license agreement and
related intellectual property with a fair value of approximately $205
million. We each own approximately 50 percent of the joint venture, with
Cendant having the slightly larger interest. We account for our interest in
the joint venture using the equity method. The joint venture can be
dissolved at any time with the consent of both members and is scheduled to
terminate in March 2012. In the event of dissolution, the joint venture's
assets will generally be distributed in accordance with each member's
capital account. In addition, during certain periods of time commencing in
March 2004, first Cendant and later Marriott will have a brief opportunity
to cause a mandatory redemption of Marriott's joint venture equity.
11. Restructuring Costs and Other Charges
In 2001, 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.
The Company responded by implementing certain companywide cost-saving
measures. As a result of our restructuring plan, in the fourth quarter of
2001, we recorded pretax restructuring costs of $124 million, including (1)
$16 million in severance costs; (2) $20 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
relating to development projects no longer deemed viable; and (4) $60
million related to the write-down of the Village Oaks brand of
companion-style senior living communities, which are now classified as held
for sale, to their estimated fair value. We also incurred $147 million of
other charges including (1) $85 million related to reserves for guarantees
and loan losses; (2) $17 million related to accounts receivable reserves;
(3) $13 million 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.
A summary of the remaining restructuring liability is as follows:
Restructuring costs Restructuring costs
and other charges and other charges
liability at liability at
June 14, 2002 December 28, 2001
--------------------- ---------------------
Severance ..................................... $ 5 $ 8
Facilities exit costs ......................... 15 18
--------------------- ---------------------
Total restructuring costs ..................... 20 26
Reserves for guarantees ....................... 27 33
Other ......................................... 1 1
--------------------- ---------------------
Total ......................................... $ 48 $ 60
===================== =====================
17
12. Assets Held for Sale
Included in other current assets at June 14, 2002 and December 28, 2001
are $316 million and $324 million, respectively, of assets held for sale.
At June 14, 2002, assets held for sale consisted of $293 million of
property, plant and equipment and $23 million of other related assets.
Included in other liabilities at June 14, 2002 are $8 million related to
the assets held for sale.
13. Subsequent Events
In June 2002, we sold our interest in a hotel and residential project under
development for approximately $190 million in cash, resulting in a pre-tax
gain of approximately $55 million. The hotel was not sold subject to a
Marriott flag or under Marriott management. We will recognize approximately
$5 million of the pre-tax gain in the third quarter of 2002, and will
recognize the balance in future years provided certain contingencies in the
sales contract expire.
Subsequent to the end of the second quarter, we completed a previously
announced strategic review of the distribution services business. We have
decided to exit the distribution services business, with an anticipated
completion around the end of 2002. We expect the exit will take place
through a combination of sale or transfer of some facilities, closing of
other facilities and other suitable arrangements. We expect to incur
material costs in connection with exiting the business, but we currently
are unable to estimate their magnitude.
18
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
The following discussion presents an analysis of results of our operations for
the twelve and twenty-four weeks ended June 14, 2002 and June 15, 2001. Revenue
per available room (REVPAR) is calculated by dividing room sales for comparable
properties by room nights available to guests for the period. We consider REVPAR
to be a meaningful indicator of our performance because it measures the period
over period change in room revenues for comparable properties. REVPAR may not be
comparable to similarly titled measures such as revenues. Comparable REVPAR,
room rate and occupancy statistics used throughout this report are based upon
U.S. properties operated by us, except that data for Fairfield Inn, TownePlace
Suites and SpringHill Suites also include comparable franchised units. The
inclusion of data for comparable franchised units for these three brands
provides more meaningful information as these brands are predominantly
franchised.
Twelve Weeks Ended June 14, 2002 Compared to Twelve Weeks Ended June 15, 2001
We reported net income of $129 million for the 2002 second quarter on sales of
$2,586 million. This represents a 1 percent decrease in net income and a 6
percent increase in sales compared to the second quarter of 2001. Diluted
earnings per share of $.50 for the quarter was unchanged compared to the 2001
amount. Overall, results reflect weaker hotel demand, stable senior living
results, and losses in our distribution services business, largely offset by the
lower tax rate associated with our Synthetic Fuel business. Systemwide sales
increased to $5.1 billion.
Marriott Lodging, which includes our Full-Service, Select-Service,
Extended-Stay, and Timeshare segments, reported a 17 percent decrease in
operating profit on 5 percent higher sales. Systemwide lodging sales increased
to $4.4 billion.
19
We added a total of 43 lodging properties (6,662 units) during the second
quarter of 2002, and deflagged 8 properties (1,425 units), increasing our
total properties to 2,463 (448,004 units). Properties by brand as of June
14, 2002 (excluding 5,296 rental units relating to Marriott ExecuStay)
are as indicated in the following table.
Company-operated Franchised
------------------------------- -------------------------------------
Brand Properties Rooms Properties Rooms
- -------------------------------------------------------- --------------- ------------ ----------------- ----------------
Full-Service Lodging
Marriott Hotels, Resorts and Suites ............ 252 109,714 181 50,826
The Ritz-Carlton Hotels ........................ 48 15,904 - -
Renaissance Hotels, Resorts and Suites ......... 86 33,035 38 12,254
Ramada International ........................... 4 727 134 19,353
Marriott Executive Apartments and Other ........ 11 1,969 1 99
Select-Service Lodging
Courtyard ...................................... 289 45,913 280 35,714
Fairfield Inn .................................. 2 890 492 46,474
SpringHill Suites .............................. 19 3,023 75 7,723
Extended-Stay Lodging
Residence Inn .................................. 132 17,748 266 29,184
TownePlace Suites .............................. 34 3,666 67 6,774
Timeshare
Marriott Vacation Club International ........... 45 6,526 - -
Horizons ....................................... 2 146 - -
The Ritz-Carlton Club .......................... 4 143 - -
Marriott Grand Residence Club .................. 1 199 - -
--------------- ------------ ----------------- ----------------
Total ............................................... 929 239,603 1,534 208,401
=============== ============ ================= ================
Across our Lodging brands, REVPAR for comparable managed U.S. properties
declined by an average of 8.0 percent in the second quarter 2002. Average
room rates for these hotels declined 6.6 percent and occupancy declined
1.1 percentage points. Management and franchise fees decreased 10 percent
compared to the second quarter 2001. The operating results reflect the
impact of a weaker economy, offset by the $7 million reduction in
amortization expense resulting from the adoption of FAS No. 142 in the
first quarter 2002.
20
Occupancy, average daily rate and REVPAR for each of our principal established
brands are shown in the following table.
Change vs.
Twelve weeks ended Twelve weeks ended
June 14, 2002 June 15, 2001
---------------------- ------------------------
Marriott Hotels, Resorts and Suites
Occupancy ............................................ 73.4% -1.8% pts.
Average daily rate ................................... $ 141.59 -6.6%
REVPAR ............................................... $ 103.95 -8.9%
The Ritz-Carlton Hotels
Occupancy ............................................ 71.9% -1.1% pts.
Average daily rate ................................... $ 252.42 -7.9%
REVPAR ............................................... $ 181.45 -9.3%
Renaissance Hotels, Resorts and Suites
Occupancy ............................................ 69.4% -3.4% pts.
Average daily rate ................................... $ 138.77 -2.6%
REVPAR ............................................... $ 96.35 -7.1%
Courtyard
Occupancy ............................................ 73.4% -2.6% pts.
Average daily rate ................................... $ 96.72 -6.7%
REVPAR ............................................... $ 71.01 -9.8%
Fairfield Inn
Occupancy ............................................ 70.1% 0.4% pts.
Average daily rate ................................... $ 64.91 -1.4%
REVPAR ............................................... $ 45.51 -0.8%
SpringHill Suites
Occupancy ............................................ 73.3% 3.6% pts.
Average daily rate ................................... $ 78.28 -3.8%
REVPAR ............................................... $ 57.37 1.3%
Residence Inn
Occupancy ............................................ 80.4% 0.6% pts.
Average daily rate ................................... $ 98.56 -9.2%
REVPAR ............................................... $ 79.28 -8.6%
TownePlace Suites
Occupancy ............................................ 75.1% 2.7% pts.
Average daily rate ................................... $ 62.69 -8.6%
REVPAR ............................................... $ 47.05 -5.2%
Across Marriott's domestic full-service lodging brands, REVPAR for comparable
company-operated U.S. properties declined 8.8 percent. Average room rates for
these hotels declined 6.3 percent and occupancy decreased 2.0 percentage points
to 72.7 percent.
Our domestic select-service and extended-stay brands had average REVPAR declines
of 6.7 percent, reflecting occupancy declines of 0.3 percentage points and
average room rate declines of 6.3 percent.
21
Results for international lodging operations declined primarily due to the
decrease in international travel.
Our timeshare business achieved a 12 percent increase in contract sales in the
quarter. Sales growth was strong at timeshare resorts in Hawaii, California and
Colorado, partially offset by declines in Florida. Profits for the quarter were
flat compared to the quarter ended June 15, 2001 largely as a result of higher
sales and marketing expenses. Note sale gains were approximately $15 million in
the quarter, compared to $13 million in the quarter ended June 15, 2001. We sold
$85 million in notes in the quarter, compared to $67 million in the quarter
ended June 15, 2001. At June 14, 2002, 28 resorts were in active sales, 21
resorts were sold out and an additional 3 resorts were under development.
Senior Living Services (SLS) posted an 8 percent increase in sales and stable
operating profit in the second quarter of 2002. Operating profit was impacted by
the implementation of cost containment initiatives, $2 million of lower
depreciation expense due to the classification of the Village Oaks communities
as assets held for sale and $1 million of lower amortization expense associated
with the adoption of FAS No. 142 in the first quarter of 2002, offset by higher
casualty insurance costs. Occupancy for comparable communities was 83.5 percent
in the quarter, stable with a year ago. As of June 14, 2002, we operated 156
facilities (26,272) units. In July 2002, we commenced a strategic review of SLS,
which includes an evaluation of all alternatives including a spin-off to
shareholders.
Distribution Services (MDS) posted a 6 percent decline in sales in the second
quarter of 2002, reflecting lower sales volume, partially offset by the
commencement of new contracts since the second quarter of 2001, which include
the distribution of higher priced, but lower margin items. The volume decline is
largely attributable to the loss of one significant customer. The $2 million
operating loss resulted from an overall decline in the number of cases shipped.
Subsequent to the end of the second quarter, we completed a previously announced
strategic review of the distribution services business. We have decided to exit
the distribution services business, with an anticipated completion around the
end of 2002. We expect the exit will take place through a combination of sale or
transfer of some facilities, closing of other facilities and other suitable
arrangements. We expect to incur material costs in connection with exiting the
business, but we currently are unable to estimate their magnitude.
Corporate Expenses, Interest and Taxes. Interest expense decreased $6 million
reflecting lower average outstanding debt balances as well as lower interest
rates, partially offset by less capitalized interest. Corporate expenses
decreased $6 million reflecting the following: (i) 2002 items; the reversal of a
$5 million accrual recorded in the first quarter of 2002 associated with a
payment previously expected to be made in connection with the sale of a parcel
of land, the continued favorable impact of our cost containment initiatives, and
a $7 million reserve in connection with a lawsuit involving the sale of a hotel
previously managed by us; and (ii) 2001 items; the $7 million write-off of an
investment in a technology partner, and a $7 million gain from the sale of two
affordable housing investments. The effective income tax rate decreased from 36
percent to 5 percent due to the impact of the tax benefit and tax credits
arising from our Synthetic Fuel business and the elimination of nondeductible
goodwill amortization, partially offset by the 2001 sale of the affordable
housing investments.
22
Synthetic Fuel. In October 2001, we acquired four coal-based synthetic fuel
production facilities (the Facilities) for $46 million in cash. The Synthetic
Fuel produced at the Facilities qualifies for tax credits based on Section 29 of
the Internal Revenue Code. Under Section 29, tax credits are not available for
Synthetic Fuel produced after 2007. We began operating these Facilities in the
first quarter of 2002. We anticipate that the operation of the Facilities,
together with the benefit arising from the tax credits, will be significantly
accretive to our net income. Although we expect that the Facilities will produce
significant operating losses, we anticipate that these will be offset by the tax
credits generated under Section 29, which we expect to reduce our income tax
expense. In the second quarter of 2002, our Synthetic Fuel business reflected
sales of $53 million and an operating loss of $43 million, resulting in a tax
benefit of $15 million and tax credits of $43 million.
Twenty-Four Weeks Ended June 14, 2002 Compared to Twenty-Four Weeks Ended June
15, 2001
We reported net income of $211 million for the first half of 2002 on sales of
$4,950 million. This represents a 16 percent decrease in net income and a one
percent increase in sales over the same period in 2001. Diluted earnings per
share of $.82 for the first half of the year decreased 15 percent compared to
2001. The overall profit decline in 2002 is primarily due to weaker hotel
results and losses in our distribution services business, partially offset by
the lower tax rate associated with our Synthetic Fuel business and stronger
results associated with our Senior Living Services business segment. Systemwide
sales increased to $9.6 billion.
Marriott Lodging reported a 24 percent decrease in operating profit to $345
million, on one percent lower sales. Systemwide lodging sales increased to $8.4
billion.
We added a total of 77 lodging properties (13,662 units) during the first half
of 2002, and deflagged 12 properties (1,641 units).
Across our Lodging brands, REVPAR for comparable managed U.S. properties
declined by an average of 10.3 percent in the first half of 2002. Average room
rates for these hotels declined 7.1 percent and occupancy declined 2.5
percentage points. Management and franchise fees decreased 12.0 percent compared
to the first half of 2001. The operating results reflect the
23
impact of a weaker economy, offset by the $13 million reduction in amortization
expense resulting from the adoption of FAS No. 142 in the first quarter of 2002.
Occupancy, average daily rate and REVPAR for each of our principal established
brands are shown in the following table.
Twenty-four weeks Change vs.
ended Twenty-four weeks ended
June 14, 2002 June 15, 2001
---------------------- -----------------------------
Marriott Hotels, Resorts and Suites
Occupancy ............................................ 71.4% -2.7% pts.
Average daily rate ................................... $ 141.91 -7.4%
REVPAR ............................................... $ 101.33 -10.8%
The Ritz-Carlton Hotels
Occupancy ............................................ 70.0% -1.4% pts.
Average daily rate ................................... $ 251.09 -9.3%
REVPAR ............................................... $ 175.77 -11.1%
Renaissance Hotels, Resorts and Suites
Occupancy ............................................ 66.9% -4.6% pts.
Average daily rate ................................... $ 136.81 -5.1%
REVPAR ............................................... $ 91.59 -11.2%
Courtyard
Occupancy ............................................ 69.6% -4.9% pts.
Average daily rate ................................... $ 96.86 -6.3%
REVPAR ............................................... $ 67.43 -12.4%
Fairfield Inn
Occupancy ............................................ 65.5% -1.0% pts.
Average daily rate ................................... $ 64.40 -1.5%
REVPAR ............................................... $ 42.15 -3.0%
SpringHill Suites
Occupancy ............................................ 70.5% 2.6% pts.
Average daily rate ................................... $ 79.07 -4.7%
REVPAR ............................................... $ 55.74 -1.1%
Residence Inn
Occupancy ............................................ 77.4% -2.2% pts.
Average daily rate ................................... $ 98.94 -9.6%
REVPAR ............................................... $ 76.53 -12.1%
TownePlace Suites
Occupancy ............................................ 72.5% 3.0% pts.
Average daily rate ................................... $ 62.68 -9.4%
REVPAR ............................................... $ 45.41 -5.5%
Across Marriott's domestic full-service lodging brands (Marriott Hotels, Resorts
and Suites; Renaissance Hotels, Resorts and Suites; and The Ritz-Carlton
Hotels), REVPAR for comparable company-operated U.S. properties declined 10.9
percent during the first half of 2002. Average room rates for these hotels
declined 7.3 percent and occupancy decreased 2.9 percentage points to 70.7
percent.
24
Our domestic select-service and extended-stay brands (Fairfield Inn, Courtyard,
Residence Inn, SpringHill Suites and TownePlace Suites) had average REVPAR
declines of 9.3 percent, reflecting occupancy declines of 2.1 percentage points
and average room rate declines of 6.5 percent.
Results for international lodging operations declined due to the impact of the
decrease in international travel, partially offset by higher margins.
Our timeshare business achieved an 11 percent increase in contract sales in the
first half of 2002. Sales growth was strong at timeshare resorts in Colorado,
Hawaii and California but remained soft in Florida. Profits for the first half
declined 15% largely as a result of higher marketing and selling expenses and
higher product costs. Note sale gains were approximately $28 million compared to
$27 million in the prior year. We sold $174 million in notes in the first half
of 2002 compared to $129 million in the prior year period.
Senior Living Services posted a 9 percent increase in sales and a $5 million
increase in operating profit in the first half of 2002. Operating profit was
impacted by higher per diems, the recognition of a $2 million one-time payment
associated with the sale of the Crestline Senior Living Communities to an
unaffiliated third-party, the result of the implementation of cost containment
initiatives, $3 million of lower depreciation expense due to the classification
of the Village Oaks Communities as assets held for sale and $2 million of lower
amortization expense associated with the adoption of FAS No. 142 in the first
quarter of 2002, partially offset by higher casualty insurance cost. Occupancy
for comparable communities was 83.2 percent in the first half, relatively stable
with a year ago.
Distribution Services posted a 1 percent decrease in sales in the first half of
2002, reflecting lower sales volume, partially offset by the commencement of new
contracts since the first half of 2001, which include the distribution of higher
priced, but lower margin items. Although a number of new contracts have been
obtained over the past year, the number of cases shipped was down 7 percent. The
volume decline is largely attributable to the loss of one significant customer.
The increased proportion of lower margin business, the volume decline, and a $2
million write-off in the first quarter of 2002 of an investment in a customer
contract due to a change in an agreement with one of our customers, caused an
operating loss of $8 million despite the relatively small 1 percent decrease in
sales.
Corporate Expenses, Interest and Taxes. Interest expense decreased $9 million
reflecting lower borrowings and lower interest rates, partially offset by less
capitalized interest. Corporate expenses decreased $7 million, reflecting the
following: (i) 2002 items; the continued favorable impact of our cost
containment initiatives, and a $7 million reserve in connection with a lawsuit
involving the sale of a hotel previously managed by us; and (ii) 2001 items; the
$13 million write-off of two investments in technology partnerships, $5 million
of expenses associated with the start-up of Avendra, LLC, the reversal of a $10
million insurance reserve related to a lawsuit at one of our hotels, and the $7
million gain from the sale of two affordable housing investments. The effective
income tax rate decreased from 36 percent to 17 percent primarily due to the
impact of the tax benefit and tax credits arising from our Synthetic Fuel
business and the elimination of nondeductible goodwill amortization, partially
offset by the 2001 sale of the affordable housing investments.
Synthetic Fuel. In the first half of 2002, our Synthetic Fuel business reflected
sales of $58 million and an operating loss of $49 million, resulting in a tax
benefit of $17 million and tax credits of $48 million.
25
LIQUIDITY AND CAPITAL RESOURCES
We have credit facilities which support our commercial paper program and letters
of credit. At June 14, 2002, our cash balances combined with our available
borrowing capacity under the credit facilities amounted to more than $1.7
billion. We consider these resources, together with cash expected to be
generated by operations, to be adequate to meet our short-term and long-term
liquidity requirements, to finance our long-term growth plans, and to meet debt
service and other cash requirements. We monitor the status of the capital
markets, and regularly evaluate the effect that changes in capital market
conditions may have on our ability to execute our announced growth plans. We
expect that 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 the lodging industry recovers more slowly than we anticipate, we
may have to rely more on bank borrowings which may carry a higher cost than
commercial paper.
Cash and equivalents totaled $200 million at June 14, 2002, a decrease of $617
million from year-end 2001 primarily resulting from repayment of debt. Net
income is stated after recording depreciation expense of $63 million and $61
million for the twenty-four weeks ended June 14, 2002 and June 15, 2001,
respectively, and after amortization expense of $23 million and $35 million,
respectively, for the same time periods. Earnings before interest expense,
income taxes, depreciation and amortization (EBITDA) for the twenty-four weeks
ended June 14, 2002 decreased by $158 million, or 29 percent, to $380 million.
EBITDA is an indicator of operating performance, which can be used to measure
our ability to service debt, fund capital expenditures and expand our business.
However, EBITDA is not an alternative to net income, operating profit, cash from
operations, or any other operating or liquidity measure prescribed by accounting
principles generally accepted in the United States.
Net cash provided by investing activities totaled $22 million for the
twenty-four weeks ended June 14, 2002, and consisted of proceeds from the
disposition of two lodging properties and five senior living communities,
partially offset by capital expenditures and notes receivable advances and
equity investments.
In April 1999, January 2000 and January 2001, we filed "universal shelf"
registration statements with the Securities and Exchange Commission in the
amounts of $500 million, $300 million and $300 million, respectively. As of June
14, 2002, we had offered and sold to the public under these registration
statements, $300 million of debt securities at 7 7/8 %, due 2009 and $300
million at 8 1/8 %, due 2005, leaving a balance of $500 million available for
future offerings.
In January 2001, we issued, through a private placement, $300 million of 7
percent senior unsecured notes, due 2008, and received net proceeds of $297
million. We agreed to make and complete a registered exchange offer for these
notes and completed that exchange offer on January 15, 2002.
On May 8, 2001, we issued zero-coupon convertible senior notes due 2021, known
as LYONs, and received cash proceeds of $405 million. On May 9, 2002, we
redeemed for cash the approximately 85 percent of the LYONs that were tendered
for mandatory repurchase by the holders. The remaining LYONs are convertible
into approximately 1.0 million shares of our Class A Common Stock and carry a
yield to maturity of 0.75 percent. We may not redeem the LYONs prior to May 8,
2004. We may at the option of the holders be required to purchase the LYONs at
their accreted value on May 8 of each of 2004, 2011 and 2016. We may choose to
pay
26
the purchase price for redemptions or repurchases in cash and/or shares of our
Class A Common Stock.
Our contractual obligations and commitments are as summarized in the following
tables:
Payments Due by Period
----------------------------------------------------------
Before
January 3,
Contractual Obligations Total 2003 1 - 3 years 4 - 5 years After 5 years
- --------------------------------------------------------------------------------------------------------
($ in millions)
Debt ....................... $ 1,898 $ 45 $ 772 $ 35 $ 1,046
Operating Leases
Recourse ................ 1,393 93 262 198 840
Non-recourse ............ 712 5 82 119 506
--------- ------- -------- -------- --------
Total Contractual Cash
Obligations ............. $ 4,003 $ 143 $ 1,116 $ 352 $ 2,392
========= ======= ======== ======== ========
The $1,898 million of debt is recorded in the condensed consolidated balance
sheet as long-term debt of $1,850 million and current liabilities of $48
million, which reflects the portion of debt becoming due by June 20, 2003.
Amount of Commitment Expiration Per Period
----------------------------------------------------------
Before
Other Commercial Total Amounts January 3
Commitments Committed 2003 1 - 3 years 4 - 5 years After 5 years
- --------------------------------------------------------------------------------------------------------
($ in millions)
Guarantees ................. $ 577 $ 77 $ 128 $ 263 $ 109
Timeshare note repurchase
obligations ............. 61 - - - 61
------- ------- -------- -------- --------
Total ...................... $ 638 $ 77 $ 128 $ 263 $ 170
======= ======= ======== ======== ========
Total unfunded loan commitments amounted to $590 million at June 14, 2002. We
expect to fund $112 million by January 3, 2003, $143 million in one to three
years, and $13 million in four to five years. We do not expect to fund the
remaining $322 million of commitments, which expire as follows: $55 million by
January 3, 2003; $14 million in one to three years; $1 million in four to five
years; and $252 million after five years.
Share Repurchases
We purchased 0.7 million shares of our Class A Common Stock during the
twenty-four weeks ended June 14, 2002. As of June 14, 2002, we were authorized
by our Board of Directors to repurchase 12.8 million shares.
27
Relationship with Host Marriott
In recognition of the significant changes in the lodging industry over the last
ten years and the age of our agreements with Host Marriott, many provisions of
which predate our 1993 Spinoff, we and Host Marriott concluded that we could
mutually enhance the long term strength and growth of both companies by updating
our existing relationship. Accordingly, we are currently negotiating certain
changes to our management agreements for Host Marriott-owned hotels. The
modifications under discussion would, if made, be effective as of the beginning
of our 2002 fiscal year and would remain subject to the consent of various
lenders to the properties and other third parties. If made, these changes would,
among other things,
. Provide Host Marriott with additional approval rights over budgets and
capital expenditures;
. Extend the effective management agreement termination dates for several
hotels;
. Expand the pool of hotels that Host Marriott could sell with franchise
agreements to one of our approved franchisees and revise the method of
determining the number of hotels that may be sold without a management
agreement or franchise agreement;
. Lower the incentive management fees payable to us by amounts dependent
in part on underlying hotel profitability at eight hotels;
. Reduce certain expenses to the properties and lower Host Marriott's
working capital requirements;
. Confirm that we and our affiliates may earn a profit (in addition to
what we earn through management fees) on certain transactions relating
to Host Marriott-owned properties, and establish the specific
conditions under which we may profit on future transactions; and
. Terminate our existing right to purchase up to 20 percent of Host
Marriott's outstanding common stock upon certain changes of control and
clarify our rights in each of our management agreements to prevent
either a sale of the hotel to our major competitors or specified
changes in control of Host Marriott involving our major competitors.
Although we cannot assure you that these negotiations will be successful, that
the changes will be substantially as we have described above, or that the
consents necessary to implement these changes will be obtained, the negotiations
and documentation have proceeded throughout the second quarter and we anticipate
that the modifications will be completed during the third quarter. The monetary
effect of the anticipated changes will depend on future events such as the
operating results of the hotels. We do not expect these modifications to have a
material financial impact on us.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to our exposures to market risk since
December 28, 2001.
28
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
Incorporated by reference to the description of legal proceedings in the
"Contingencies" footnote in the financial statements set forth in Part I,
"Financial Information".
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
We held our Annual Meeting of Shareholders on May 3, 2002. The shareholders (1)
re-elected directors J.W. Marriott, Jr., Ann M. Fudge and William J. Shaw to
terms of office expiring at the 2005 Annual Meeting of Shareholders (and voted
for the re-election of W. Mitt Romney who resigned as director on April 26, 2002
after shareholder ballots had been mailed); (2) ratified the restatement of the
Marriott International, Inc. 1998 Comprehensive Stock and Cash Incentive Plan
including an increase of 9 million shares of Class A Common Stock authorized for
issuance; (3) defeated a shareholder proposal to adopt cumulative voting for the
election of directors; (4) defeated a shareholder proposal to set a goal of
establishing a Board with at least two-thirds of its members being "independent
directors" as defined in the shareholder proposal; (5) defeated a shareholder
proposal to adopt a policy that provides for a transition to a Board Nominating
and Corporate Governance Committee composed entirely of "independent directors"
as defined in the shareholder proposal; (6) defeated a shareholder proposal to
create a committee of independent directors to prepare a report describing the
risks to shareholders of operating and/or franchising hotels in Myanmar; (7)
defeated a shareholder proposal to adopt, implement and enforce a workforce code
of conduct based on the International Labor Organization's conventions on
workplace human rights; and (8) defeated a shareholder proposal to adopt a
policy that in the future independent accountants will provide only audit
services to the Company and no other services. The following table sets forth
the votes cast with respect to each of these matters.
- ----------------------------------------------------------------------------------------------------
MATTER FOR AGAINST WITHHELD ABSTAIN
- ----------------------------------------------------------------------------------------------------
Re-election of J.W. Marriott, Jr. 2,061,956,106 6,911,800
- ----------------------------------------------------------------------------------------------------
Re-election of Ann M. Fudge 2,050,629,016 18,238,890
- ----------------------------------------------------------------------------------------------------
Re-election of William J. Shaw 2,061,714,176 7,153,730
- ----------------------------------------------------------------------------------------------------
Re-election of W. Mitt Romney 2,051,450,586 17,417,320
- ----------------------------------------------------------------------------------------------------
Ratification of the reinstatement of
the 1998 Comprehensive Stock and
Cash Incentive Plan 1,534,795,850 526,798,902 7,280,550
- ----------------------------------------------------------------------------------------------------
Shareholder proposal on cumulative
voting 383,991,660 1,477,079,202 13,018,240
- ----------------------------------------------------------------------------------------------------
Shareholder proposal on Board of
Directors composition 236,930,810 1,624,136,672 13,021,620
- ----------------------------------------------------------------------------------------------------
Shareholder proposal on composition of
Nominating and Corporate
Governance Committee 264,964,200 1,593,822,802 15,302,100
- ----------------------------------------------------------------------------------------------------
29
- ----------------------------------------------------------------------------------------------------
MATTER FOR AGAINST WITHHELD ABSTAIN
- ----------------------------------------------------------------------------------------------------
Shareholder proposal on Myanmar 73,134,120 1,750,542,272 50,412,710
- ----------------------------------------------------------------------------------------------------
Shareholder proposal on workforce code
of conduct 259,195,170 1,551,567,942 63,325,990
- ----------------------------------------------------------------------------------------------------
Shareholder proposal on independent
accountant services 553,396,892 1,301,104,230 19,587,980
- ----------------------------------------------------------------------------------------------------
30
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
99 Forward-Looking Statements
(b) Reports on Form 8-K
On May 3, 2002, we filed a report on Form 8-K announcing that our Board
of Directors had appointed Ernst & Young LLP as the Company's independent
auditor for 2002, replacing Arthur Andersen LLP.
On May 10, 2002, we filed a report on Form 8-K announcing that we had
repurchased for cash approximately $400 million aggregate principal
amount at maturity of Liquid Yield Option Notes due 2021.
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MARRIOTT INTERNATIONAL, INC.
18th day of July, 2002
/s/ Arne M. Sorenson
------------------------------
Arne M. Sorenson
Executive Vice President and
Chief Financial Officer
/s/ Michael J. Green
------------------------------
Michael J. Green
Vice President, Finance and
Principal Accounting Officer
32