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 September 6, 1996 Commission File No. 1-12188
MARRIOTT INTERNATIONAL, INC.
Delaware 52-0936594
(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 October 4, 1996
- ---------------------- ---------------------
Common Stock, $1.00
par value per share 128,014,926
1
MARRIOTT INTERNATIONAL, INC.
INDEX
Page No.
----------
Part I. Financial Information (Unaudited):
Condensed Consolidated Statement of Income -
Twelve Weeks and Thirty-Six Weeks Ended September 6,
1996 and September 8, 1995 3-4
Condensed Consolidated Balance Sheet -
September 6, 1996 and December 29, 1995 5
Condensed Consolidated Statement of Cash Flows -
Thirty-Six Weeks Ended September 6, 1996
and September 8, 1995 6
Notes to Condensed Consolidated Financial Statements 7-9
Management's Discussion and Analysis of Results
of Operations and Financial Condition 10-13
Part II. Other Information and Signature:
Legal Proceedings 14
Changes in Securities 14
Defaults Upon Senior Securities 14
Submission of Matters to a Vote of Security Holders 14
Other Events 14
Exhibits and Reports on Form 8-K 15
Signature 16
2
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
-------------------------------
September 6, September 8,
1996 1995
------------ ------------
SALES
Lodging
Rooms...................................... $ 836 $ 756
Food and beverage.......................... 271 257
Other...................................... 194 171
-------- --------
1,301 1,184
Contract Services............................ 909 742
-------- --------
2,210 1,926
-------- --------
OPERATING COSTS AND EXPENSES
Lodging
Departmental direct costs
Rooms.................................... 196 183
Food and beverage........................ 220 205
Other...................................... 784 716
-------- --------
1,200 1,104
Contract Services............................ 882 728
-------- --------
2,082 1,832
-------- --------
OPERATING PROFIT
Lodging...................................... 101 80
Contract Services............................ 27 14
-------- --------
Operating profit before
corporate expenses and interest........... 128 94
Corporate expenses............................. (17) (13)
Interest expense............................... (23) (12)
Interest income................................ 7 8
-------- --------
INCOME BEFORE INCOME TAXES.................... 95 77
Provision for income taxes..................... 37 31
-------- --------
NET INCOME..................................... $ 58 $ 46
======== ========
EARNINGS PER SHARE............................. $ 0.43 $ 0.35
======== ========
PER SHARE DIVIDENDS DECLARED................... $ 0.08 $ 0.07
======== ========
See notes to condensed consolidated financial statements
3
MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(in millions, except per share amounts)
(Unaudited)
Thirty-Six Weeks Ended
-------------------------------
September 6, September 8,
1996 1995
-------------------------------
SALES
Lodging
Rooms..................................... $ 2,473 $ 2,270
Food and beverage......................... 901 861
Other..................................... 588 522
--------- ---------
3,962 3,653
Contract Services........................... 2,763 2,398
--------- ---------
6,725 6,051
--------- ---------
OPERATING COSTS AND EXPENSES
Lodging
Departmental direct costs
Rooms................................... 571 532
Food and beverage....................... 690 654
Other..................................... 2,391 2,220
--------- ---------
3,652 3,406
Contract Services........................... 2,669 2,331
--------- ---------
6,321 5,737
--------- ---------
OPERATING PROFIT
Lodging..................................... 310 247
Contract Services........................... 94 67
--------- ---------
Operating profit before
corporate expenses and interest......... 404 314
Corporate expenses............................ (48) (47)
Interest expense.............................. (60) (34)
Interest income............................... 25 29
--------- ---------
INCOME BEFORE INCOME TAXES.................... 321 262
Provision for income taxes.................... 125 105
--------- ---------
NET INCOME.................................... $ 196 $ 157
========= =========
EARNINGS PER SHARE............................ $ 1.44 $ 1.19
========= =========
PER SHARE DIVIDENDS DECLARED.................. $ 0.24 $ 0.21
========= =========
See notes to condensed consolidated financial statements
4
MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions)
(Unaudited)
September 6, December 29,
1996 1995
------------ ------------
ASSETS
Current Assets
Cash and equivalents..................... $ 370 $ 219
Accounts and notes receivable............ 725 724
Other.................................... 451 433
--------- ---------
1,546 1,376
--------- ---------
Property and equipment, including
timeshare inventory and
construction-in-progress................. 1,761 1,049
Intangibles................................ 570 402
Investments in affiliates.................. 545 501
Notes and other receivables................ 305 338
Other assets............................... 484 352
--------- ---------
$ 5,211 $ 4,018
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable......................... $ 927 $ 801
Other.................................... 949 725
--------- ---------
1,876 1,526
--------- ---------
Long-term debt............................. 992 806
Other long-term liabilities................ 772 632
Convertible subordinated debt.............. 293 -
Shareholders' equity
Common stock............................. 129 129
Additional paid-in capital............... 610 617
Retained earnings........................ 560 395
Treasury stock, at cost.................. (21) (87)
--------- ---------
1,278 1,054
--------- ---------
$ 5,211 $ 4,018
========= =========
See notes to condensed consolidated financial statements
5
MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
(Unaudited)
Thirty-Six Weeks Ended
-------------------------------
September 6, September 8,
1996 1995
------------ ------------
OPERATING ACTIVITIES
Net income................................... $ 196 $ 157
Adjustments to reconcile
to cash from operations:
Depreciation and
amortization............................. 102 87
Income taxes and other.................... 125 105
Timeshare activity, net................... (27) (138)
Working capital changes................... 111 72
-------- --------
Cash from operations......................... 507 283
-------- --------
INVESTING ACTIVITIES
Loans to Host Marriott Corporation........... (15) (161)
Loan repayments from Host Marriott
Corporation................................. 33 250
Capital expenditures......................... (182) (108)
Acquisitions................................. (319) (210)
Dispositions of property
and equipment............................... 53 41
Other........................................ (86) (104)
-------- --------
Cash used for investing
activities.................................. (516) (292)
-------- --------
FINANCING ACTIVITIES
Issuances of debt............................ 283 352
Repayments of debt........................... (105) (251)
Issuances of common stock.................... 31 31
Dividends paid............................... (29) (26)
Purchases of treasury stock.................. (20) (12)
-------- --------
Cash provided by
financing activities........................ 160 94
-------- --------
INCREASE IN CASH AND EQUIVALENTS............... $ 151 $ 85
======== ========
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 of Marriott
International, Inc. and its subsidiaries (the "Company") have been prepared
without audit. Certain information and footnote disclosures normally
included in financial statements presented in accordance with generally
accepted accounting principles have been condensed or omitted. The Company
believes the disclosures made are adequate to make the information presented
not misleading. However, the condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended December 29, 1995. Capitalized terms not otherwise defined
herein have the meanings specified in the Annual Report.
In the opinion of the Company, the accompanying condensed consolidated
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position of
the Company as of September 6, 1996 and December 29, 1995, and the results of
operations for the twelve and thirty-six weeks ended September 6, 1996 and
September 8, 1995 and cash flows for the thirty-six weeks ended September 6,
1996 and September 8, 1995. Interim results are not necessarily indicative
of fiscal year performance because of the impact of seasonal and short-term
variations. Certain previously reported amounts have been reclassified to
conform to the 1996 presentation. All material intercompany transactions and
balances between Marriott International, Inc. and its subsidiaries have been
eliminated.
2. Earnings Per Share
------------------
Earnings per share is computed on a fully diluted basis by using the weighted
average number of outstanding common shares plus other potentially dilutive
securities, which totaled 140.2 million and 138.6 million for the twelve and
thirty-six weeks ended September 6, 1996 and 132.3 million and 132.0 million
for the twelve and thirty-six weeks ended September 8, 1995, respectively.
3. Acquisitions
------------
During the second quarter of 1996, a wholly owned subsidiary of the Company
acquired all of the outstanding shares of common stock of Forum Group, Inc.
("Forum"), a leading provider of senior living and healthcare services, for a
total purchase price of approximately $303 million. The acquisition has been
accounted for using the purchase method of accounting. The purchase cost has
been allocated to the assets acquired and liabilities assumed based on
estimated fair values. The excess of the Company's investment in Forum over
the fair value of Forum's net tangible assets of approximately $160 million,
is being amortized over 35 years.
7
The Company's reported results of operations include Forum's operating
results from March 25, 1996, the date of acquisition. Summarized below are
the unaudited pro forma consolidated results of operations of the Company for
the thirty-six weeks ended September 6, 1996 and September 8, 1995 as if
Forum had been acquired at the beginning of the respective periods (in
millions, except per share amounts).
Thirty-Six Weeks Ended
-------------------------------
September 6, September 8,
1996 1995
-------------------------------
Sales.............................. $ 6,774 $ 6,179
========== ==========
Net Income......................... $ 194 $ 155
========== ==========
Earnings Per Share................. $ 1.42 $ 1.17
========== ==========
Unaudited pro forma net income includes interest expense on borrowings
relating to the Company's acquisition of Forum's common stock as well as the
impact on historical interest expense of the revaluation of Forum's debt
based on the Company's borrowing cost. Depreciation and amortization
expense, included in net income, reflects the impact of the revaluation of
property, plant and equipment to its estimated fair value and the excess of
the purchase price over the net tangible assets acquired.
In June 1996, a subsidiary of the Company purchased Russell & Brand Limited,
a leading food service provider in the United Kingdom, for cash consideration
of approximately $25 million.
4. Commitments
-----------
The Company has guaranteed to lenders and other third-parties the performance
of certain affiliates in connection with financing transactions and other
obligations. These guarantees are limited, in the aggregate, to $348 million
at September 6, 1996, including $213 million applicable to guarantees by or
debt obligations of Host Marriott Corporation ("Host Marriott") or
partnerships in which Host Marriott is the general partner.
As of September 6, 1996, the Company's unfunded mortgage loan commitments to
unaffiliated owners of lodging and senior living properties aggregated
approximately $120 million. No amounts were outstanding as of September 6,
1996 under the $225 million Host Marriott Credit Agreement.
8
5. Convertible Subordinated Debt
-----------------------------
On March 25, 1996, the Company received gross proceeds of $288 million from
the issuance of zero coupon subordinated Liquid Yield Option Notes due 2011
(the "LYONs") which have an aggregate principal amount at maturity of $540
million. The LYONs were issued at a discount representing a yield to
maturity of 4.25 percent, and are redeemable, at the Company's option, at any
time on or after March 25, 1999. The LYONs are redeemable at the option of
the holders on March 25, 1999 and March 25, 2006. Each $1,000 principal
amount at maturity of LYONs is convertible, at any time, into 8.760 shares of
the Company's common stock at the option of the holder.
6. New Accounting Standards
------------------------
The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of" and SFAS No. 122,
"Accounting for Mortgage Servicing Rights" in the first quarter of 1996, with
no material effect on the Company's consolidated financial statements. In
accordance with SFAS No. 123, "Accounting for Stock Based Compensation," the
Company will disclose the fair value of options granted and stock issued
under employee stock purchase plans in a footnote to its consolidated
financial statements for the fiscal year ending January 3, 1997. SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," will be adopted during the first quarter of
1997, and will have no material effect on the Company's consolidated
financial statements.
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
- ---------------------------------------------------------------------------
FINANCIAL CONDITION
-------------------
Results of Operations
- ---------------------
The Company reported net income of $58 million for its 1996 third quarter,
up 26 percent from $46 million in the corresponding 1995 quarter.
Earnings per share were 43 cents for the 1996 third quarter, an increase of
23 percent from 1995 third quarter earnings of 35 cents per share. Sales
totaled $2,210 million, up 15 percent from $1,926 million in the 1995 quarter.
For the first three quarters of 1996, the Company reported net income of
$196 million and earnings per share of $1.44, up 25 percent and 21 percent,
respectively, over 1995 results. Sales totaled $6,725 million, a gain of 11
percent over the same period in 1995.
Lodging operations reported a 26 percent increase in operating profit for
-------
the 1996 third quarter to $101 million, while sales were up 10 percent to $1,301
million. Year-to-date operating profit increased 26 percent to $310 million,
with sales up nine percent to $3,962 million. All of the Company's lodging
brands posted gains in revenue per available room (REVPAR) of six percent or
better for the quarter and year-to-date for comparable U.S. company-operated
units. Results also reflected the net addition of 16,600 hotel rooms over the
past 12 months, expansion of the Company's vacation ownership business, and
higher earnings from its 49 percent interest in the Ritz-Carlton hotel
management company.
Marriott Hotels, Resorts and Suites ("MHRS"), the Company's full-service
lodging division, benefited from increased business and leisure travel in the
United States. Average room rates for comparable U.S. properties were up nine
percent to $113 in the 1996 third quarter, while occupancy grew one percentage
point to 80 percent. MHRS results for the first three quarters of 1996 also
benefited from an increase in average room rates of seven percent, to $116, and
more than a one percentage point increase in occupancy to 78 percent. MHRS
reported increases in international full-service hotel sales and operating
profit for both the third quarter and year-to-date which are primarily
attributable to contributions from new properties.
Third quarter 1996 results for the Company's limited-service lodging
brands, Courtyard, Residence Inn and Fairfield Inn, were boosted by strong
summer travel in the United States, as well as new unit growth. Year-to-date
results were positively impacted by a net total of 111 properties (11,400 rooms)
added to these three product lines over the past 12 months and by significant
increases in the average daily rate for each of these brands.
10
Courtyard posted nine and eight percent increases in average room rates to
$79 and $78, for the third quarter and year-to-date, respectively, for
comparable properties. Third quarter occupancy was unchanged at 84 percent
while occupancy for the first three quarters remained at 82 percent. Average
room rates for Residence Inn increased eight percent, to $91, during the third
quarter of 1996 as occupancy for comparable units remained at 89 percent.
Residence Inn generated a seven percent increase in year-to-date average daily
rate for comparable properties while occupancy, at 87 percent, was the same as
in 1995. Fairfield Inn achieved a 13 and 11 percent increase in average room
rates for comparable properties for the third quarter and year-to-date,
respectively, while occupancy declined to 82 percent for the quarter and to 79
percent year-to-date, reflecting a planned shift to higher rated business.
Ritz-Carlton posted substantially higher house profit margins in the 1996
third quarter, benefiting from integration with the Company's lodging systems
and programs. For third quarter 1996, the luxury chain reported a nine percent
gain in average room rates, to $172, and a four percentage point increase in
occupancy for comparable properties, to 76 percent. The Ritz-Carlton brand
reported strong results for the first three quarters of 1996 with a six percent
increase in average room rate, to $181, and a three percent increase in
occupancy, to 76 percent, for comparable properties.
Marriott Vacation Club International ("MVCI") sales and profits advanced on
a nine percent increase in the number of ownership intervals sold, and higher
financing income compared to the 1995 third quarter. MVCI also reported
increases in year-to-date sales and operating profit and the number of timeshare
intervals sold was up 23 percent compared to the same period in 1995.
Contract Services operating profit nearly doubled to $27 million in the
-----------------
1996 third quarter on a 23 percent increase in sales. Year-to-date operating
profit increased 40 percent to $94 million, while sales advanced 15 percent to
$2,763 million. Excluding the impact of the March 1996 acquisition of Forum
Group, Inc. ("Forum") profits increased by 18 percent for the quarter on 16
percent higher sales and year-to-date profits and sales both increased 11
percent.
Marriott Management Services ("MMS") sales and profits were higher this
year in the seasonally slow third quarter. Both healthcare and school services
operations were major contributors to the increase in year-to-date sales and
operating profit. The division continued to gain new business, and has added a
net total of 432 food service and facilities management accounts, including
acquisitions, over the past 12 months.
Marriott Senior Living Services posted significantly higher sales and
profits in the 1996 third quarter, reflecting occupancy gains at established
communities, strong move-in rates at newer facilities, and contributions from
Forum communities. Occupancy for comparable Marriott senior living communities
increased one percentage point to 96 percent for the quarter. Year-to-date sales
and occupancy for comparable units were up over 1995 and the division benefited
from the acquisition of the Forum units.
11
Marriott Distribution Services ("MDS") generated solid sales and profit
increases for both the 1996 third quarter and year-to-date. The division
benefited from the addition of major new restaurant and food service accounts.
To accommodate growth, the division has added four regional distribution centers
since mid-1995, including Columbus, Ohio, its 11th facility, which opened in
August 1996.
Interest expense rose $11 million in the 1996 third quarter and $26 million
year-to-date largely as a result of incremental borrowings to support business
growth. The Company's effective tax rate declined one percentage point from the
prior year to 39 percent in 1996, due to the impact of certain investments and
tax credits.
Liquidity and Capital Resources
- -------------------------------
Cash from operations was $224 million greater in 1996 than in 1995 as net
income and sales of timeshare notes increased in 1996. EBITDA (earnings before
interest expense, income taxes, depreciation and amortization) increased 26
percent to $483 million for the first three quarters of 1996. The Company's cash
flow coverage of total interest cost continues to substantially exceed the
levels required under its credit facilities.
Cash used for investing activities increased by $224 million over 1995 due
to acquisitions and increased capital expenditures, partially offset by higher
asset disposition proceeds. Cash used for acquisitions includes the purchase of
Forum and Russell & Brand Limited. Investing activities also include $57 million
invested in connection with Host Marriott's acquisition of a controlling
interest in two full-service hotels in Mexico City (over 900 rooms) operated by
the Company under long-term agreements and $182 million of capital expenditures.
Asset disposition proceeds include the sale/leaseback of four senior living
communities and the sale of first mortgages on three franchised hotel
properties.
On March 25, 1996, the Company received gross cash proceeds of $288 million
from the issuance of $540 million aggregate amount at maturity, zero coupon
convertible subordinated Liquid Yield Option Notes ("LYONs") due 2011. The
LYONs are expressly subordinated to the Company's $1.1 billion of Senior
Indebtedness, as defined in the indenture governing the LYONs.
The Company's cash and equivalents includes $117 million related to managed
hotels at September 6, 1996, an increase of $23 million from December 29, 1995.
At September 6, 1996 and December 29, 1995, respectively, outstanding drafts
included in accounts payable totaled $155 million and $157 million.
In January 1996, the Company filed a shelf registration with the Securities
and Exchange Commission which provides for the issuance, from time to time, of
up to $500 million in debt, in addition to $50 million which remains available
under a previous shelf registration. In July 1996, the Company entered into
12
a new $1 billion revolving credit facility with a term of five years, replacing
a similar facility which would have expired in 2000. Borrowings under the new
facility generally will bear interest at the London Interbank Offered Rate
("LIBOR") plus a spread which varies with the Company's public debt rating.
Annual fees will also be paid on the total facility at a rate which varies based
on the Company's public debt rating. At the end of the 1996 third quarter, the
Company had more than $900 million of credit available under this new facility.
The Company plans to grow its Lodging business, in part, by investing to
add units to each of its Lodging brands. The Company expects to open
approximately 120,000 hotel rooms across its Lodging brands in years 1996
through 2000. More than 50,000 of these rooms already are in service, under
construction or approved for development, including 14,000 rooms outside the
United States. The Contract Services business is expected to grow mainly through
selling new MMS services, adding new MMS and MDS clients and investing in new
senior living communities. The Company's principal investments will include
mortgage loans, minority equity interests, business acquisitions and direct
ownership of certain lodging and senior living services projects. The Company
expects that cash generated by operations, together with its borrowing capacity,
will be sufficient to finance its planned growth and capital requirements.
Forward-Looking Statements
- --------------------------
Statements in this report which are not strictly historical are "forward-
looking" and are subject to the many risks and uncertainties which affect the
Company's businesses. These uncertainties, which include competition within the
lodging and contract services industries, the balance between supply and demand
for hotel rooms, timesharing resorts and senior living facilities, the Company's
continued ability to obtain new management and distribution contracts and
franchise agreements, the effect of economic conditions, and the availability of
capital to finance planned growth, are described in the Company's filings with
the Securities and Exchange Commission, including Exhibit 99 to this report.
13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
There are no material legal proceedings pending against the Company.
The information in this paragraph is required by Securities and Exchange
Commission regulations that mandate disclosure of any environmental-related fine
that may exceed $100,000. In January 1996, asbestos-containing material was
inadvertently removed by an independent contractor hired by the Company in
connection with certain renovations at a facility managed by the Company. The
Company promptly caused the material to be contained and the condition fully
remediated in accordance with all applicable governmental regulations. After
investigation of the matter by the Industrial Commission of Arizona's Division
of Occupational Safety and Health ("ADOSH"), the Company has agreed to pay a
fine of $189,000. The Arizona Department of Air Quality has investigated the
same matter in connection with enforcement of the federal Clean Air Act and has
indicated that it may impose a fine of up to approximately $200,000. The
Company believes that resolution of this matter will not have a material effect
on the Company.
Item 2. Changes in Securities
- ------------------------------
None.
Item 3. Defaults Upon Senior Securities
- ----------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None.
Item 5. Other Events
- ----------------------
On October 17, 1996, SBC Warburg, Inc., a holder of the Company's LYONs,
notified the Company that it beneficially owns $20,136,000 principal amount at
maturity of LYONs (rather than $14,636,000 as it had previously disclosed to the
Company) which it may from time to time offer and sell pursuant to the Company's
Registration Statement No. 333-03795 under the Securities Act of 1933, as
amended, relating to the LYONs and the Prospectus dated October 9, 1996,
included therein.
14
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
Exhibit
No. Description
------- -----------
11 Computation of Earnings Per Share
12 Computation of Ratio of Earnings to Fixed Charges
99 Forward-Looking Statements
(b) Reports on Form 8-K
None.
15
SIGNATURE
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.
October 18, 1996 /s/Stephen E. Riffee
- ---------------- --------------------------------
Date Stephen E. Riffee
Vice President, Finance and
Chief Accounting Officer
16