SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended March 28, 1997 Commission File No. 1-12188
MARRIOTT INTERNATIONAL, INC.
Delaware 52-0936594
- -------------- -----------------------
(State of (I.R.S. Employer
Incorporation) 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 [ ]
Class Shares outstanding
- ------------------- at April 25, 1997
Common Stock $1.00 ------------------
par value per share 126,611,805
1
MARRIOTT INTERNATIONAL, INC.
INDEX
Page No.
--------
Forward-Looking Statements 3
PART I. Financial Information (Unaudited):
Condensed Consolidated Statement of Income--
Twelve Weeks Ended March 28, 1997 and March 22, 1996 4
Condensed Consolidated Balance Sheet--
March 28, 1997 and January 3, 1997 5
Condensed Consolidated Statement of Cash Flows--
Twelve Weeks Ended March 28, 1997 and March 22, 1996 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 14
Signature 15
2
FORWARD-LOOKING STATEMENTS
When used throughout this report, the words "believes," "anticipates,"
"expects," "intends" and similar expressions, identify forward-looking
statements. Such statements are subject to a number of risks and uncertainties
which could cause actual results to differ materially from those projected,
including: competition within each of the Company's business segments; the
balance between supply of and demand for hotel rooms, timeshare units and senior
living accommodations; the Company's continued ability to obtain new operating
contracts and franchise agreements; the Company's ability to develop and
maintain positive relations with current and potential hotel and retirement
community owners and contract services clients; the effect of international,
national and regional economic conditions; the availability of capital to fund
investments; the Company's ability to achieve synergies and performance
improvements subsequent to closing on acquisitions; and other risks described
from time to time in the Company's filings with the Securities and Exchange
Commission, including those set forth on Exhibit 99 filed herewith. Given these
uncertainties, readers are cautioned not to place undue reliance on such
statements. The Company also undertakes no obligation to publicly release any
revisions to these forward-looking statements that may be made to reflect
current or future events or circumstances.
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
-----------------------------
March 28, March 22,
1997 1996
--------- ---------
SALES
Lodging
Rooms............................. $ 898 $ 781
Food and beverage................. 321 303
Other............................. 231 189
--------- ---------
1,450 1,273
Contract Services................... 1,154 890
--------- ---------
2,604 2,163
--------- ---------
OPERATING COSTS AND EXPENSES
Lodging
Departmental direct costs
Rooms........................... 197 184
Food and beverage............... 239 231
Other operating expenses.......... 893 764
--------- ---------
1,329 1,179
Contract Services................... 1,113 861
--------- ---------
2,442 2,040
--------- ---------
OPERATING PROFIT
Lodging............................. 121 94
Contract Services................... 41 29
--------- ---------
Operating profit before corporate
expenses and interest........... 162 123
Corporate expenses.................... (21) (15)
Interest expense...................... (19) (14)
Interest income....................... 5 9
--------- ---------
INCOME BEFORE INCOME TAXES............ 127 103
Provision for income taxes............ 50 40
--------- ---------
NET INCOME............................ $ 77 $ 63
========= =========
EARNINGS PER SHARE.................... $ .57 $ .47
========= =========
DIVIDENDS DECLARED PER SHARE.......... $ .08 $ .08
========= =========
See notes to condensed consolidated financial statements.
4
MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
($ in millions)
(Unaudited)
March 28, January 3,
1997 1997
--------- ----------
ASSETS
Current Assets
Cash and equivalents.................. $ 1,051 $ 268
Accounts and notes receivable......... 856 754
Other................................. 417 410
-------- --------
2,324 1,432
-------- --------
Property and equipment.................. 2,009 1,894
Intangible assets....................... 592 600
Investments in affiliates............... 534 534
Notes and other receivable.............. 298 293
Other assets............................ 289 322
-------- --------
$ 6,046 $ 5,075
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable...................... $ 948 $ 891
Other current liabilities............. 841 868
-------- --------
1,789 1,759
-------- --------
Long-term debt.......................... 1,850 1,010
Other long-term liabilities............. 785 749
Convertible subordinated debt........... 300 297
Shareholders' equity
Common stock, 128.6 million shares
issued............................... 129 129
Additional paid-in capital............ 651 653
Retained earnings..................... 659 628
Treasury stock, at cost............... (117) (150)
-------- --------
1,322 1,260
-------- --------
$ 6,046 $ 5,075
======== ========
See notes to condensed consolidated financial statements.
5
MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
($ in millions)
(Unaudited)
Twelve weeks ended
-----------------------------
March 28, March 22,
1997 1996
------------ ----------
OPERATING ACTIVITIES
Net income............................. $ 77 $ 63
Adjustments to reconcile to cash
provided by operations:
Depreciation and amortization........ 38 31
Income taxes and other............... 69 58
Timeshare activity, net.............. (7) 9
Working capital changes.............. (44) (8)
-------- -------
Cash provided by operations............ 133 153
-------- -------
INVESTING ACTIVITIES
Capital expenditures................... (119) (44)
Loan advances.......................... (18) (46)
Loan collections and sales............. 19 31
Other.................................. (41) (46)
-------- -------
Cash used in investing activities...... (159) (105)
-------- -------
FINANCING ACTIVITIES
Issuances of long-term debt............ 883 51
Repayments of long-term debt........... (5) (3)
Issuances of common stock.............. 8 16
Dividends paid......................... (10) (9)
Purchases of treasury stock............ (67) -
-------- -------
Cash provided by financing activities.. 809 55
-------- -------
INCREASE IN CASH AND EQUIVALENTS........ $ 783 $ 103
CASH AND EQUIVALENTS, beginning of
period................................. 268 219
-------- -------
CASH AND EQUIVALENTS, end of period..... $ 1,051 $ 322
======== =======
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 January 3, 1997. 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 March 28, 1997 and January 3, 1997, and the results of
operations and cash flows for the twelve weeks ended March 28, 1997 and March
22, 1996. Interim results are not necessarily indicative of fiscal year
performance because of seasonal and short-term variations. All material
intercompany transactions and balances between Marriott International, Inc.
and its consolidated subsidiaries have been eliminated.
Certain amounts previously presented have been reclassified to conform to the
1997 presentation.
2. Earnings Per Share
------------------
Earnings per share is computed on a fully diluted basis using the weighted
average number of common shares and common equivalent shares outstanding plus
other potentially dilutive securities which, in the aggregate, totaled 138.1
million and 134.8 million for the twelve weeks ended March 28, 1997 and March
22, 1996, respectively. Common equivalent shares are computed using the
treasury stock method based on the higher of average or end of period market
prices. The if converted method is used for convertible subordinated debt.
3. Acquisitions and Dispositions
------------------------------
Renaissance Hotel Group N.V. On March 29, 1997, the Company acquired
substantially all of the outstanding common stock of Renaissance Hotel Group
N.V. (RHG), a premier operator and franchisor of 150 hotels in 38 countries.
The total acquisition cost was approximately $1 billion. The Company funded
the stock purchase with proceeds from commercial paper borrowings, supported
by the Company's long-term revolving credit facility.
7
MARRIOTT INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Property Sales. On April 3, 1997, the Company agreed to sell and leaseback,
under long-term, limited-recourse leases, 14 limited service hotels for
approximately $149 million in cash, approximately $15 million of which will
be received upon expiration of the leases. On April 11, 1997, the Company
sold five senior living communities for cash consideration of approximately
$79 million. The Company will continue to operate the communities under long-
term management agreements.
Forum Group, Inc. On March 25, 1996, a wholly-owned subsidiary of the Company
acquired all of the outstanding shares of common stock of Forum Group, Inc.
(Forum), for total cash consideration of approximately $303 million. The
Company's results of operations include Forum from the acquisition date.
Unaudited pro forma consolidated results of operations of the Company for the
twelve weeks ended March 22, 1996, as if Forum had been acquired at December
29, 1995 would have resulted in sales of $2,212 million, net income of $60
million, and earnings per share of $.45.
On March 18, 1997, the Company executed a letter of intent to sell, to Host
Marriott, 29 retirement communities acquired as part of the Forum acquisition
for approximately $540 million, including approximately $63 million to be
received as expansions at certain communities are completed. The $477
million to be received at closing, is comprised of $204 million in cash,
$185 million of outstanding debt, $50 million of notes receivable due 12
months from closing, and $38 million of notes receivable due January 1, 2001.
The notes receivable from Host Marriott will bear interest at nine percent.
Under the terms of the letter of intent, Host Marriott will purchase all of
the common stock of Forum which, at the time of purchase, will include the 29
communities, certain working capital and associated debt. The Company will
continue to operate these communities under long-term agreements. Completion
of the acquisition, which is expected to occur near the end of the second
quarter of 1997, is contingent on customary conditions, including due
diligence, documentation, approval by the Boards of Directors of the Company
and Host Marriott and the expiration or termination of the Hart-Scott-Rodino
Act waiting period requirements.
8
MARRIOTT INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Commitments
-----------
The Company issues guarantees to lenders and other third parties in
connection with financing transactions and other obligations of certain
affiliates. These guarantees are limited, in the aggregate, to $185 million
at March 28, 1997, including $115 million applicable to guarantees by or debt
obligations of Host Marriott or partnerships in which Host Marriott is the
general partner. As of March 28, 1997, the Company had extended approximately
$425 million of loan commitments to owners of lodging and senior living
properties, including a $225 million line of credit to Host Marriott, under
which no advances were outstanding. Letters of credit outstanding on the
Company's behalf at March 28, 1997 totaled $140 million, the majority of
which related to the Company's self-insurance program. At March 28, 1997, the
Company had a repurchase obligation of $70 million related to notes
receivable from timeshare interval purchasers that have been sold with
limited recourse.
5. New Accounting Standards
------------------------
During the first quarter of 1997, the Company adopted FAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," with no material effect on the Company's
consolidated financial statements. The Company will adopt FAS No. 128,
"Earnings per Share" and FAS No. 129 "Disclosure of Information about Capital
Structure" in the fourth quarter of 1997 with 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/(1)/
The Company reported net income of $77 million for the first quarter, on sales
of $2,604 million. This represents a 22 percent increase in net income and 20
percent increase in sales over the first quarter of 1996. Earnings per share of
57 cents for the quarter increased 21 percent over the corresponding 1996
quarter.
LODGING operating profits were up 29 percent, on a sales increase of 14 percent.
The revenue increase resulted from REVPAR growth across all brands averaging
eight percent, the addition of 206 hotels since the beginning of 1996 together
with better weather and fewer holidays in the first quarter of 1997. This
revenue growth resulted in the Company earning higher base management and
franchise fees. House profit increases combined with the revenue growth to
generate higher incentive management fees. A substantial increase in timeshare
sales from the first quarter of 1996 also added to lodging's revenue and profit
growth.
A net total of 33 hotels (3,692 rooms) were added during the first quarter of
1997, increasing the Company's total hotels to 1,185 (230,326 rooms). Units by
brand are as follows:
Hotels at March 28, 1997
------------------------------------------
Brand Company-operated Franchised
- ------------------------------------ ------------------ ------------------
Units Rooms Units Rooms
------- -------- ------- --------
Marriott Hotels, Resorts and Suites. 198 85,409 118 35,491
Ritz-Carlton........................ 33 10,853 - -
Courtyard........................... 200 29,370 105 12,999
Residence Inn....................... 108 14,195 123 13,275
Fairfield Inn and Suites............ 51 7,133 248 21,506
TownePlace Suites................... 1 95 - -
----- ------- ----- ------
Total............................... 591 147,055 594 83,271
===== ======= ===== ======
______________________
/(1)/First quarter 1996 statistics for REVPAR, occupancy and average room rates
have been adjusted to make them comparable to the 1997 statistics. Due to the
variations in the Company's fiscal year, which ends on the Friday closest to
December 31, the last week of calendar 1995 fell into the first quarter of 1996,
but the last week of calendar 1996 fell into the last quarter of 1996. The
adjusted first quarter 1996 statistics are based on the same calendar days as
the 1997 statistics. Properties used for comparable statistics are based on
U.S. properties operated by Marriott for the entire quarter in both 1996 and
1997.
10
Excluding the RHG acquisition, the Company expects to operate or franchise over
1,300 hotels by the end of 1997. As discussed in note 3 to the consolidated
financial statements, the Company acquired substantially all of the outstanding
common stock of RHG on March 29, 1997. The Company estimates that the
acquisition will increase its Earnings Before Interest Expense, Taxes,
Depreciation and Amortization (EBITDA) by $75 million to $85 million in the
first 12 months. Earnings for the 1997 fiscal year are expected to be reduced by
approximately $.10 to $.14 per share, primarily due to goodwill amortization.
Sales for Marriott Hotels, Resorts and Suites, which comprise more than 70
percent of total lodging sales, increased 12 percent over the prior year. An
eight percent increase in average room rate, to $129, and a slight increase in
occupancy to 78 percent, generated a REVPAR increase of nine percent. Profits
increased as improved REVPAR generated higher base management and incentive fees
at many hotels.
Limited-service brands represent about 20 percent of total lodging sales for the
first quarter and each of the three established brands increased REVPAR for the
quarter. In addition, the Company opened the first property of its fourth
limited service brand, TownePlace Suites, which is designed to attract extended-
stay travelers in the moderate price range.
. Courtyard, the Company's moderate price lodging brand, achieved a 12 percent
increase in sales. Courtyard's average room rates increased eight percent,
to $83, while occupancy dropped slightly to 80 percent, resulting in a REVPAR
increase of seven percent. Sales and profits also reflect the addition of 52
units from the beginning of fiscal year 1996. Courtyard opened its 300th
unit in Fort Worth, Texas during this quarter and significantly expanded its
international operations. There are ten franchised Courtyard units in
operation in the United Kingdom, an increase of six from the beginning of
fiscal year 1996.
. The Company's quality extended-stay brand, Residence Inn, posted a REVPAR
increase of six percent, due to an increase in average room rates of nine
percent, to $94, offset by a decrease in occupancy to 84 percent. Residence
Inn opened 35 properties since the beginning of fiscal year 1996, including
its fourth international property.
. Fairfield Inn and Suites, the Company's economy lodging brand, had an
increase in sales of 14 percent over last year. While occupancy declined
slightly to 75 percent, average room rates increased by three percent to $48,
resulting in a slight REVPAR increase. Sales also increased due to the
addition of 69 units since the beginning of fiscal year 1996. Limited REVPAR
growth reflects aggressive rate increases for the past three years and supply
additions in this market over the past several years.
Ritz-Carlton reported an increase in average room rates of five percent, to
$202, and occupancy increased three points to 79 percent, resulting in a nine
percent increase in REVPAR. Ritz-Carlton is on schedule to open new, managed
properties in Japan, Puerto Rico and Malaysia within the next 12 months.
11
Marriott Vacation Club International sold over 5,000 timeshare weeks in the
first quarter representing an increase of nearly 40 percent over the prior year
quarter. The Company experienced very strong sales in several locations,
including its first European location in Marbella, Spain, and is on schedule to
commence sales at another international location in Aruba later in 1997.
Increased profits from resort development were offset by reduced financing
income, due to lower note sales in the first quarter of 1997.
CONTRACT SERVICES reported operating profit of $41 million on sales of $1,154
million, representing 41 percent and 30 percent increases, respectively, from
the first quarter of 1996. Excluding the impact of the Forum acquisition, sales
and operating profits for the first quarter of 1997 would have increased over
the first quarter of 1996 by 23 percent and 10 percent, respectively. Profit
growth was constrained by start up losses for new senior living communities, new
distribution services accounts and recently opened distribution centers and the
impact of the sale-leaseback of four senior living communities in August 1996.
Marriott Management Services reported increased profits on an eight percent
increase in sales over the first quarter of 1996 due to the increased number of
operating days for higher education, school services and corporate accounts
during the first quarter of 1997 and improved weather.
Marriott Senior Living Services reported profit growth of nearly five fold and
sales growth more than doubled primarily due to the acquisition of Forum in the
second quarter of 1996. In addition, occupancy rates and average per diem rates
continued to increase for both independent full-service and assisted living
communities. Three properties opened in the first quarter of 1997, including the
Company's first properties to feature special care centers for people with
Alzheimer's and other memory disorders. The Company currently operates 75
properties and 20 properties are expected to be opened during 1997. The Company
does not expect the pending sale of Forum to have a material impact on net
income as the reduction in operating profits will be offset by lower interest
expense.
Marriott Distribution Services more than doubled sales by adding several major
restaurant accounts, including Boston Market, Steak & Ale and Bennigans. Two
new distribution centers were opened in the 1997 first quarter, an increase of
five since first quarter of last year.
CORPORATE ACTIVITY. Interest expense increased 36 percent over the first
quarter of 1996, despite lower effective interest rates, as the average debt
balance increased. Interest income decreased from $9 million to $5 million
reflecting reduced loans receivable as a result of the collection or sale of
$284 million of loans since the first quarter of 1996. Corporate expenses
increased due to higher outlays for new business development, as well as non-
cash items associated with investments generating significant income tax
benefits. The effective income tax rate increased from 39 percent to 39.5
percent reflecting approximately a one percent increase due to nondeductible
goodwill amortization associated with the RHG acquisition, partially offset by
increased affordable housing tax credits.
12
LIQUIDITY AND CAPITAL RESOURCES
Cash and equivalents totaled $1,051 million at March 28, 1997, an increase of
$783 million from year end. This increase resulted from issuances of commercial
paper shortly before quarter end, the proceeds of which were subsequently used
for the RHG acquisition. The Company uses drafts in its cash management system.
At March 28, 1997 and January 3, 1997, outstanding drafts included in accounts
payable totaled $173 million and $180 million, respectively. At March 28, 1997
and January 3, 1997, cash included $144 million and $133 million, respectively,
related to managed properties.
Cash from operations decreased to $133 million in the quarter, from $153 million
in the first quarter 1996, principally due to higher earnings, offset by lower
timeshare note sales and working capital changes. EBITDA increased 24 percent to
$184 million for the first quarter of 1997. EBITDA is an indicative measure of
the Company's operating performance which can be used to measure the Company's
ability to service debt, fund capital expenditures and expand its business.
However, EBITDA is not an alternative to net income, operating profit, cash from
operations, or any other operating or liquidity measure prescribed by generally
accepted accounting principles.
Cash used in investing activities totaled $159 million, primarily consisting of
expenditures for the construction of limited-service lodging properties and
senior living communities. The Company expects that, over time, it will sell
certain lodging and senior living services properties under development, or to
be developed, while continuing to operate them under long-term agreements.
The Company entered into a $400 million bank facility in February, 1997, which
along with the Company's pre-existing $1 billion revolving credit facility, was
replaced with a single $1.5 billion credit facility on March 27, 1997. This new
facility has a term of five years and bears interest at LIBOR plus a spread,
presently 21.5 basis points, based on the Company's senior debt rating.
Additionally, annual fees are paid on the total facility at a rate, presently 11
basis points, also based on the Company's senior debt rating. On April 25,
1997, the Company had $524 million available under the facility. Net commercial
paper borrowings, supported by these facilities, of $883 million were primarily
used to partially fund the RHG acquisition subsequent to the end of the quarter.
The Company also used commercial paper during the quarter to purchase 1.2
million shares of its common stock at a cost of $63 million and to fund capital
expenditures.
The Company continues to grow its businesses, in part, by investing in new
units. The Company's principal investments will continue to include 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 and proceeds from
the sale of assets, will be sufficient to finance its planned growth and capital
requirements.
13
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
There are no material legal proceedings pending against 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 Information
- --------------------------
None.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
Exhibit
No. Description
--- -----------
10 $1.5 billion Credit Agreement, dated as of March 27, 1997, with
Citibank, N.A. as administrative agent, and certain banks, as
Banks.
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
On February 19, 1997, the Company filed a report describing its
agreement to acquire Renaissance Hotel Group N.V. through a public tender
offer.
On March 27, 1997, the Company filed a report describing a letter of intent
to sell all outstanding stock of its Forum Group, Inc. subsidiary to Host
Marriott.
14
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.
May 9, 1997 /s/ Stephen E. Riffee
-----------------------------------------
Stephen E. Riffee
Vice President, Finance and
Chief Accounting Officer
15