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 12, 1997 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 10, 1997
- -------------------- -------------------
Common Stock $1.00 127,630,044
par value per share
1
MARRIOTT INTERNATIONAL, INC.
INDEX
Page No.
--------
Forward-Looking Statements 3
Part I. Financial Information (Unaudited):
Condensed Consolidated Statements of Income -
Twelve and Thirty-Six Weeks Ended September 12, 1997 and September 6, 1996 4
Condensed Consolidated Balance Sheet -
as of September 12, 1997 and January 3, 1997 5
Condensed Consolidated Statement of Cash Flows -
Thirty-Six Weeks Ended September 12, 1997 and September 6, 1996 6
Notes to Condensed Consolidated Financial Statements 7-11
Management's Discussion and Analysis of Results of Operations
and Financial Condition 12-18
Part II. Other Information and Signature:
Legal Proceedings 19
Changes in Securities 19
Defaults Upon Senior Securities 19
Submission of Matters to a Vote of Security Holders 19
Other Information 19
Exhibits and Reports on Form 8-K 20
Signature 21
2
FORWARD-LOOKING STATEMENTS
When used throughout this report, the words "believes", "anticipates",
"expects", "intends", "hopes" and other similar expressions, which are
predictions of or indicate future events and trends 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; business
strategies and their intended results; 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; the Company's ability to successfully complete its recently
announced spin-off and merger transactions; 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 update or
revise any forward-looking statement to reflect current or future events or
circumstances.
3
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
($ in millions, except per share amounts)
(Unaudited)
Twelve weeks ended Thirty-six weeks ended
------------------------------ ----------------------------
September 12, September 6, September 12, September 6,
1997 1996 1997 1996
------------- ------------ ------------- ------------
SALES
Lodging
Rooms.............................. $ 991 $ 836 $ 2,950 $ 2,473
Food and beverage.................. 314 271 1,027 901
Other.............................. 299 194 791 588
------------- ------------ ------------- ------------
1,604 1,301 4,768 3,962
Contract Services.................... 1,072 909 3,390 2,763
------------- ------------ ------------- ------------
2,676 2,210 8,158 6,725
------------- ------------ ------------- ------------
OPERATING COSTS AND EXPENSES
Lodging
Departmental direct costs
Rooms............................ 227 196 656 571
Food and beverage................ 253 220 780 690
Other operating expenses........... 993 784 2,937 2,391
------------- ------------ ------------- ------------
1,473 1,200 4,373 3,652
Contract Services.................... 1,054 882 3,287 2,669
------------- ------------ ------------- ------------
2,527 2,082 7,660 6,321
------------- ------------ ------------- ------------
OPERATING PROFIT
Lodging............................. 131 101 395 310
Contract Services................... 18 27 103 94
------------- ------------ ------------- ------------
Operating profit before corporate
expenses and interest........... 149 128 498 404
Corporate expenses..................... (22) (17) (64) (48)
Interest expense....................... (24) (23) (77) (60)
Interest income........................ 8 7 19 25
------------- ------------ ------------- ------------
INCOME BEFORE INCOME TAXES 111 95 376 321
Provision for income taxes............. 44 37 149 125
------------- ------------ ------------- ------------
NET INCOME............................. $ 67 $ 58 $ 227 $ 196
============= ============ ============= ============
EARNINGS PER SHARE..................... $ 0.49 $ 0.43 $ 1.67 $ 1.44
============= ============ ============= ============
DIVIDENDS DECLARED PER SHARE........... $ 0.09 $ 0.08 $ 0.26 $ 0.24
============= ============ ============= ============
See notes to condensed consolidated financial statements.
4
MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
($ in millions)
(Unaudited)
September 12, January 3,
1997 1997
------------- -------------
ASSETS
Current Assets
Cash and equivalents............... $ 359 $ 268
Accounts and notes receivable...... 1,041 754
Other.............................. 468 410
---------- ---------
1,868 1,432
---------- ---------
Property and equipment..................... 1,496 1,894
Intangible assets.......................... 1,773 648
Investments in affiliates.................. 544 496
Notes and other receivable................. 355 293
Other assets............................... 288 312
---------- ---------
$ 6,324 $ 5,075
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable................... $ 1,011 $ 891
Other current liabilities.......... 1,109 868
---------- ---------
2,120 1,759
---------- ---------
Long-term debt............................. 1,433 1,010
Other long-term liabilities................ 979 749
Convertible subordinated debt.............. 306 297
Shareholders' equity
Common stock, 128.6 million
shares issued..................... 129 129
Additional paid-in capital......... 678 653
Retained earnings.................. 744 628
Treasury stock, at cost............ (65) (150)
---------- ---------
1,486 1,260
---------- ---------
$ 6,324 $ 5,075
========== =========
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 12, September 6,
1997 1996
------------- -------------
OPERATING ACTIVITIES
Net income................................................... $ 227 $ 196
Adjustments to reconcile to cash provided by operations:
Depreciation and amortization............................ 128 102
Income taxes and other................................... 160 125
Timeshare activity, net.................................. (45) (27)
Working capital changes.................................. 44 111
------------- -------------
Cash provided by operations.................................. 514 507
------------- -------------
INVESTING ACTIVITIES
Acquisitions................................................. (856) (319)
Dispositions................................................. 438 57
Capital expenditures......................................... (350) (182)
Loan advances................................................ (63) (79)
Loan collections and sales................................... 29 94
Other........................................................ (123) (87)
------------- -------------
Cash used in investing activities............................ (925) (516)
------------- -------------
FINANCING ACTIVITIES
Issuances of long-term debt.................................. 584 283
Repayments of long-term debt................................. (11) (105)
Issuances of common stock.................................... 28 31
Dividends paid............................................... (32) (29)
Purchases of treasury stock.................................. (67) (20)
------------- -------------
Cash provided by financing activities........................ 502 160
------------- -------------
INCREASE IN CASH AND EQUIVALENTS............................... 91 151
CASH AND EQUIVALENTS, beginning of period...................... 268 219
------------- -------------
CASH AND EQUIVALENTS, end of period............................ $ 359 $ 370
============= =============
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 September 12, 1997 and January 3, 1997, and the results of
operations for the thirty-six weeks and twelve weeks ended September 12, 1997
and September 6, 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 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 139.4
million and 138.6 million for the thirty-six weeks ended September 12, 1997
and September 6, 1996, respectively, and 139.7 million and 140.2 million for
the twelve weeks ended September 12, 1997 and September 6, 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), an operator and franchisor of 150 hotels in 38 countries under
the Renaissance, New World and Ramada International brands. The total
acquisition cost, of approximately $1 billion, was funded with proceeds from
commercial paper borrowings, supported by the Company's long-term revolving
credit facility. 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.
7
Goodwill is being amortized on a straight-line basis over 40 years. Amounts
allocated to management and licensing agreements are being amortized on a
straight-line basis over the estimated lives of the agreements.
The Company's reported results of operations include RHG's operating results
from 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 12, 1997 and September 6, 1996, as if RHG had been acquired
at the beginning of the respective periods (in millions, except per share
amounts).
Thirty-six weeks Thirty-six weeks
ended ended
September 12, 1997 September 6, 1996
------------------ -----------------
Sales................ $ 8,357 $ 7,305
============= =============
Net Income........... $ 223 $ 181
============= =============
Earnings Per Share... $ 1.63 $ 1.33
============= =============
Unaudited pro forma net income includes interest expense on borrowings
relating to the Company's acquisition of RHG's common stock as well as the
impact on historical interest expense of the revaluation of RHG's debt based
on the Company's borrowing cost. Amortization expense deducted in determining
net income reflects the impact of the excess of the purchase price over the
net tangible assets acquired. The unaudited pro forma consolidated results of
operations are not intended to reflect the Company's expected future results
of operations.
Dr. Henry Cheng Kar-Shun is the Managing Director of New World Development
Company (New World) and, together with his family and affiliated
corporations, owns or otherwise controls a majority of New World's common
stock. Effective June 1, 1997, Dr. Cheng was appointed to the Company's Board
of Directors. Dr. Cheng, New World and their affiliates own all or a portion
of 87 hotels that are operated by the Company, and prior to the Company's
acquisition of RHG, owned a majority of RHG common stock. New World and other
affiliates of Dr. Cheng have indemnified RHG, its subsidiaries and the
Company for certain lease, debt, guarantee and other obligations in
connection with the formation of RHG as a hotel management company in 1995.
Certain 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. Concurrently, the Company
agreed to pay security deposits of approximately $15 million, which will be
refunded upon expiration of the leases. These operating leases have initial
terms of 17 years, and are renewable at the option of the Company. As of
September 12, 1997, sales of 10 of these hotels had closed. On October 10,
1997, the Company agreed to sell, and leaseback under long-term limited-
recourse leases another nine limited service hotels for approximately $129
million in cash. Concurrently, the Company agreed to pay security deposits of
approximately $13 million, which will be refunded upon expiration of the
leases.
8
On April 11, 1997, the Company sold five senior living communities for cash
consideration of approximately $79 million. On September 12, 1997, the
Company agreed to sell another seven senior living communities for cash
consideration of approximately $93 million, two of which closed on that date.
The Company will continue to operate all of 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. On June
21, 1997, the Company sold 29 retirement communities acquired as part of the
Forum acquisition, to Host Marriott Corporation (together with its
subsidiaries, Host Marriott) for approximately $550 million, including
approximately $87 million to be received as expansions at certain communities
are completed. The $463 million received at closing, which is subject to
adjustment based on finalization of working capital levels at the properties,
was comprised of $205 million in cash, $187 million of outstanding debt, $50
million of notes receivable due in 12 months, and $21 million of notes
receivable due January 1, 2001. The notes receivable from Host Marriott bear
interest at nine percent. Under the terms of sale, Host Marriott purchased
all of the common stock of Forum which, at the time of the sale, included the
29 communities, certain working capital and associated debt. The Company will
continue to operate these communities under long-term management agreements.
4. Commitments
-----------
The Company issues guarantees to lenders and other third parties in
connection with financing transactions and other obligations. These
guarantees are limited, in the aggregate, to $205 million at September 12,
1997, including $126 million applicable to guarantees by or debt obligations
of Host Marriott, partnerships in which Host Marriott is the general partner
or other affiliated entities. New World and another affiliate of Dr. Cheng
have severally indemnified the Company for loan guarantees with a maximum
funding of $18 million (which are included in the $126 million above) and
guarantees by RHG of leases with minimum annual payments of approximately $59
million.
As of September 12, 1997, the Company had extended approximately $225 million
of loan commitments to owners of lodging and senior living properties.
Previously, the Company had a $225 million line of credit available to Host
Marriott which was terminated by mutual consent on June 19, 1997.
Letters of credit outstanding on the Company's behalf at September 12, 1997
totaled $138 million, the majority of which related to the Company's self-
insurance program.
At September 12, 1997, the Company had a repurchase obligation of $75 million
related to notes receivable from timeshare interval purchasers that have been
sold with limited recourse.
5. New Accounting Standards
------------------------
On January 4, 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"
9
in the fourth quarter of 1997, and FAS No. 130, "Reporting Comprehensive
Income" and FAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information" during 1998. These statements are not expected to have a
material effect on the Company's consolidated financial statements.
6. Subsequent Event
----------------
On October 1, 1997, the Company announced a definitive agreement to combine
the operations of Marriott Management Services with the North American
operations of Sodexho Alliance, S.A. (Sodexho Alliance), a worldwide food
and management services organization. The combined company, Sodexho
Marriott Services, Inc. (SMS), will be the largest provider of food and
facilities management services in North America, with over 4,800 accounts and
annual sales in excess of $4 billion, and is expected to be listed on the New
York Stock Exchange.
Prior to the merger, a new company comprised of the Company's lodging, senior
living and distribution services businesses will be spun off, on a tax-free
basis, to the Company's shareholders. This new company, which will adopt the
Marriott International, Inc. name, will apply for listing on the New York
Stock Exchange.
Immediately following the spin-off, Sodexho Alliance will make a cash
contribution of approximately $305 million to its North American operations,
which will then be merged with the Company's food service and facilities
management business, to form SMS. As consideration for the merger, Sodexho
Alliance will receive approximately 124 million common shares of SMS. The
Company's shareholders and Sodexho Alliance will own 51 percent and 49
percent, respectively, of SMS. The spin-off and merger transactions are
expected to be completed in early 1998.
In connection with this transaction, the Company expects that its public debt
and commercial paper borrowings will be refinanced by SMS. Prior to the
spin-off, the Company intends to offer to repurchase its outstanding public
senior debt, currently totaling $720 million, through a tender offer. In
addition, the Company intends to repay all outstanding commercial paper prior
to the spin-off and merger transactions. The Company's commercial paper ($580
million outstanding as of October 17, 1997) is supported by a committed bank
revolving credit facility of $1.5 billion. Each outstanding zero-coupon
convertible subordinated note (LYONs) of the Company would be convertible
into 8.76 common shares of both the new Marriott International and SMS. The
LYONs debt will be assigned to the new Marriott International and, through an
intercompany agreement, SMS will assume a pro rata share of the debt
obligation based on the respective equity values of the two companies.
The new Marriott International and SMS will enter into agreements under which
the new Marriott International will distribute food and supplies and provide
administrative and data processing services to SMS. The rights to all
Marriott trademarks and tradenames will be conveyed to the new Marriott
International, which will license certain Marriott tradenames used in the
management services business to SMS. In a transaction expected to result in a
reported loss, Sodexho Alliance has agreed to acquire the Company's food
service and facilities management operations
10
in the United Kingdom for approximately $50 million in cash. This transaction is
expected to close in the fourth quarter of 1997.
The definitive agreement is subject to customary conditions, including approval
by the Company's shareholders, receipt of a favorable ruling from the Internal
Revenue Service, and other regulatory approvals.
11
Item 2. Management's Discussion and Analysis of Results of Operations and
- --------------------------------------------------------------------------
Financial Condition
- -------------------
RESULTS OF OPERATIONS
Twelve Weeks Ended September 12, 1997 Compared to Twelve Weeks Ended September
- ------------------------------------------------------------------------------
6, 1996
- -------
The Company reported net income of $67 million for the 1997 third quarter, on
sales of $2,676 million. This represents a 16 percent increase in net income and
21 percent increase in sales over the third quarter of 1996. Earnings per share
of $.49 for the quarter increased 14 percent over the corresponding 1996
quarter. Excluding the impact of the RHG acquisition, net income and earnings
per share for the quarter were up 24 percent and 23 percent, respectively, on 13
percent sales growth.
LODGING added a net of 39 hotels (6,095 rooms) during the third quarter of 1997.
The Company expects to operate and franchise nearly 1,500 hotels (300,000 rooms)
by the end of 1997. Hotels by brand are as follows:
Hotels at September 12, 1997
---------------------------------
Company-operated Franchised
----------------- --------------
Brand Units Rooms Units Rooms
- ----------------------------------- ----- ------- ----- -------
Marriott Hotels, Resorts and Suites.................... 201 86,598 122 37,101
Ritz-Carlton........................................... 30 10,229 - -
Renaissance............................................ 63 24,404 8 2,587
New World.............................................. 15 7,387 - -
Ramada International................................... 33 7,047 41 7,438
Residence Inn.......................................... 111 14,529 137 15,056
Courtyard.............................................. 204 29,869 126 15,471
Fairfield Inn and Suites............................... 51 7,133 277 24,360
TownePlace Suites...................................... 1 95 - -
--- ------- --- -------
Total.................................................. 709 187,291 711 102,013
=== ======= === =======
Lodging operating profits were up 30 percent, on a sales increase of 23 percent.
The revenue increase resulted from REVPAR growth across all brands, and the net
addition of 413 hotels since the beginning of 1996, including the Renaissance
acquisition. This revenue growth resulted in the Company earning higher base
management and franchise fees. Revenue growth also contributed to higher house
profits which resulted in higher incentive management fees.
Certain third quarter hotel performance statistics are significantly affected by
comparisons for properties in the Atlanta area, which benefited from sharply
higher REVPAR during the 1996 Summer Olympics. Excluding the Atlanta properties,
REVPAR for comparable company-operated U.S. properties across the Marriott
lodging brands, increased eight percent in the 1997 quarter. The following table
includes a summary of average room rates and occupancy statistics for the third
12
quarter of 1997 and 1996, by brand on a reported basis./1/
Twelve weeks ended
-----------------------------------------------------
September 12, 1997 September 6, 1996
----------------------- -----------------------
Brand Rate Occupancy Rate Occupancy
- --------------------------------------- --------- --------- --------- ---------
Marriott Hotels, Resorts and Suites.... $ 121.24 79.6% $ 112.57 79.6%
Ritz-Carlton........................... 169.21 79.9% 168.28 76.5%
Renaissance............................ 112.85 71.6% 109.02 71.4%
Residence Inn.......................... 97.08 87.0% 91.09 88.9%
Courtyard.............................. 83.93 83.7% 78.85 83.6%
Fairfield Inn and Suites............... 53.09 82.0% 54.22 82.0%
Sales for Marriott Hotels, Resorts and Suites, which comprise more than 60
percent of total lodging sales, increased seven percent over the prior year. A
seven percent increase in average room rate generated a REVPAR increase of seven
percent which drove higher base management and franchise fees. Profit growth
also reflects higher incentive fees at many hotels and the net addition of 54
properties since the beginning of 1996. Excluding the Atlanta properties, REVPAR
increased nine percent.
Ritz-Carlton reported an increase in average room rates of one percent and
occupancy increased three percentage points to 80 percent, resulting in a five
percent increase in REVPAR. Excluding the Atlanta properties, REVPAR increased
eight percent in the 1997 third quarter. Ritz-Carlton remains on schedule to
open new, managed properties in San Juan, Puerto Rico and Kuala Lumpur, Malaysia
by early 1998.
Renaissance Hotel Group (RHG), which is comprised of the Renaissance, New World
and Ramada International brands, contributed $177 million in sales during the
1997 third quarter. After intangible amortization and interest expense, the RHG
acquisition reduced earnings per share by $.04 in the 1997 third quarter and is
expected to reduce 1997 earnings per share by $.10 to $.14. REVPAR for Company-
operated U.S. Renaissance hotels increased four percent due to higher room
rates. Excluding the effect of the Atlanta area properties, REVPAR increased
nine percent. Integration of RHG into the Company's payroll, procurement,
marketing and sales, reservation and yield management systems continues to
progress on schedule.
Limited-service brands represent approximately 21 percent of total lodging sales
for the third quarter. Excluding the effect of the Atlanta area properties, each
of the brands increased REVPAR for the quarter.
* Residence Inn, the Company's quality extended-stay brand, posted a REVPAR
increase of six percent, excluding the effect of the Atlanta area
properties, due to an increase in average room rates of nine percent
offset by a two percent decrease in occupancy, to 87 percent. Sales
increased by eight percent, primarily due to the net addition of 52
properties since the beginning of fiscal year 1996 and the increase in
REVPAR.
- -----------
/1/ Comparable statistics are used throughout this discussion, and are based on
Company-operated U.S. properties. The Ramada International and New World brands
do not have any U.S. properties.
13
* Courtyard, the Company's moderate price lodging brand, achieved a sales
increase of seven percent. Average room rates increased by nine percent,
excluding the effect of the Atlanta area properties, resulting in a REVPAR
increase of nine percent. Sales and profits also reflect the net addition
of 77 units from the beginning of fiscal year 1996.
* Fairfield Inn and Suites, the Company's economy lodging brand, had an
increase in REVPAR of two percent over last year, excluding the Atlanta
area properties. While occupancy declined one percent, to 81 percent, for
Company-operated units, average room rates increased by three percent.
Sales increased due to the improved average room rates and the net addition
of 98 units since the beginning of fiscal year 1996, including the
Company's 300th unit in Minneapolis/St. Paul.
Marriott Vacation Club International sold approximately 5,200 timeshare
intervals in the third quarter representing an increase of 27 percent over the
prior year due to strong performances at existing locations and the opening of
three new resort locations.
CONTRACT SERVICES reported operating profit of $18 million on sales of $1,072
million for the 1997 third quarter, representing a 33 percent decrease and an 18
percent increase, respectively, from the third quarter of 1996. Profit
comparisons in the 1997 quarter were affected by recent sales to investors of 36
senior living communities, which continue to be operated under long-term
agreements. Excluding the impact of these transactions (which are largely
offset by reduced interest expense), contract services's profits were up
slightly in the quarter.
Marriott Management Services sales and profits advanced in this seasonally slow
quarter by seven and eight percent, respectively. Higher profits in health care
and corporate services reflected sales gains in existing accounts and
contributions from new contracts. The higher education group benefited from an
increased number of board days in the 1997 third quarter.
Marriott Senior Living Services reported a sales increase of 13 percent in the
third quarter of 1997 over the same period in 1996, primarily due to the opening
of 12 communities since the third quarter of 1996 and a one percentage point
increase in occupancy, to 95 percent, for comparable properties. Operating
profit declined as "ownership profits" from 36 sold properties were replaced
with "managed operating profits". During the third quarter, the Company opened
two Brighton Gardens and one Village Oaks assisted living communities. At the
end of the quarter, the Company operated 81 communities totaling 16,114 units,
and had 23 additional communities under construction.
Marriott Distribution Services' sales were up sharply in the 1997 third quarter
as a result of the recent addition of several major restaurant customers.
Profits were lower in the 1997 quarter due to start-up costs associated with new
centers, as well as costs of integrating the new business into existing
distribution centers.
14
CORPORATE ACTIVITY. Interest expense increased four percent over the third
quarter of 1996, despite lower effective interest rates. The average debt
balance increased due to the acquisition of RHG; however, the increase was
partially offset by proceeds from real estate sales. Corporate expenses
increased due to non-cash items associated with investments generating
significant income tax benefits as well as modest staffing increases to
accommodate growth and new business development. The effective income tax rate
increased from 39 percent to 39.5 percent reflecting approximately a one
percentage point increase due to nondeductible goodwill amortization associated
with the RHG acquisition, partially offset by tax credits generated by certain
investments.
Thirty-Six Weeks Ended September 12, 1997 Compared to Thirty-Six Weeks
- -----------------------------------------------------------------------
Ended September 6, 1996/1/
-----------------------
The Company reported net income of $227 million for the first three quarters, on
sales of $8,158 million. This represents a 16 percent increase in net income and
21 percent increase in sales over the same period in 1996. Earnings per share of
$1.67 for the period increased 16 percent over the corresponding 1996 period.
Excluding the impact of the RHG acquisition, net income and earnings per share
for the period were up 21 and 22 percent, respectively, on 16 percent sales
growth.
LODGING operating profits were up 27 percent, on a sales increase of 20 percent.
The revenue increase resulted from REVPAR growth across all brands averaging
eight percent, the net addition of 413 hotels since the beginning of 1996,
including the Renaissance acquisition, and fewer holidays in the first quarter
of 1997. This revenue growth resulted in the Company earning higher base
management and franchise fees. Revenue growth also contributed to higher house
profits which resulted in higher incentive management fees. The following table
is a summary of year-to-date rate and occupancy statistics by brand.
Thirty-six weeks ended
------------------------------------------------------
September 12, 1997 September 6, 1996
----------------------- ----------------------
Brand Rate Occupancy Rate Occupancy
- -------------------------------------- -------- --------- -------- ---------
Marriott Hotels, Resorts and Suites... $ 126.84 79.5% $ 117.01 79.2%
Ritz-Carlton.......................... 184.28 80.4% 177.80 76.5%
Renaissance........................... 117.37 72.8% 112.21 72.4%
Residence Inn......................... 95.41 85.8% 88.48 87.3%
Courtyard............................. 83.85 82.4% 78.29 82.5%
Fairfield Inn and Suites.............. 50.89 78.4% 50.26 79.8%
Sales for Marriott Hotels, Resorts and Suites, which comprise over 65 percent of
total lodging sales, increased nine percent for the first three quarters over
the same period in 1996, due to strong REVPAR growth and the addition of 54
properties since the beginning of 1996.
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/1/ Year-to-date 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 week including the 1996 New Year's holiday is included in the
first quarter of 1996, and the week including the 1997 New Year's holiday is
included in the fourth quarter of 1996. The adjusted year-to-date 1996
statistics are based on the same calendar days as the 1997 statistics.
Comparable statistics are used throughout this discussion, and are based on
Company-operated U.S. properties. The Ramada International and New World brands
do not have any U.S. properties.
15
REVPAR grew nine percent as average room rates increased by eight percent and
occupancy increased slightly year-over-year. Profits increased as improved
REVPAR generated higher base management fees and higher house profits, resulting
in increased incentive fees at many hotels.
Ritz-Carlton reported an increase in average room rates of four percent and
occupancy increased four percentage points to 80 percent, resulting in a nine
percent increase in REVPAR.
RHG contributed $360 million of sales since the March 29, 1997 acquisition.
After intangible amortization and interest expense, the RHG acquisition reduced
year-to-date earnings per share by $.08 and is expected to reduce full year 1997
earnings per share by $.10 to $.14. REVPAR, for Company-operated U.S.
Renaissance hotels, increased five percent due to higher room rates and a slight
increase in occupancy.
Limited-service brands represented over 20 percent of total lodging sales for
the first three quarters. Residence Inn, Courtyard and Fairfield Inn and Suites
represent the Company in the limited service segments. In addition, the Company
opened the first property under the TownePlace Suites brand, which is designed
to attract extended-stay travelers in the moderate price range.
* Residence Inn posted a REVPAR increase of six percent, due to an increase
in average room rates of eight percent, to $95.41, offset by a slight
decrease in occupancy to 86 percent. In addition to REVPAR increases for
comparable properties, the net addition of 52 properties since the
beginning of fiscal year 1996, including its fourth property outside the
U.S., contributed to a 10 percent growth in sales.
* Courtyard sales increased by nine percent. Average room rates increased
seven percent, to $83.85, while occupancy remained at 82 percent, resulting
in a REVPAR net increase of seven percent. Sales and profits also reflect
the net addition of 77 units from the beginning of fiscal year 1996.
Courtyard opened its 300th unit in Fort Worth, Texas during this period and
expanded its non-U.S. operations to 10 franchised Courtyard units in the
United Kingdom.
* Fairfield Inn and Suites increased sales by nine percent over last year. A
one percent increase in average room rate to $50.89 was offset by a slight
decline in occupancy, to 78 percent for Company-operated units, resulting
in relatively no change in REVPAR. Sales increased due to the net addition
of 98 units since the beginning of fiscal year 1996, including the
Company's 300th unit in Minneapolis/St. Paul.
Marriott Vacation Club International (MVCI) sold over 16,500 timeshare intervals
in the first three quarters of 1997 representing an increase of 26 percent over
the prior year. The Company's increase in sales resulted from very strong
performance in several locations, including MVCI's first European location in
Marbella, Spain, as well as Fort Lauderdale and Orlando, Florida and Hilton
Head, South Carolina. Increased profits from resort development were offset by
reduced financing income, due to lower note sales in the first three quarters of
1997.
16
CONTRACT SERVICES reported operating profit of $103 million on sales of $3,390
million, representing 10 percent and 23 percent increases, respectively, from
the first three quarters of 1996. This profit growth was impacted by (i)
start-up losses for new senior living communities and new distribution services
accounts and centers, (ii) the sale-leaseback of four senior living communities
in August 1996, and (iii) the sale, subject to long-term management agreements,
of 29 senior living communities in June 1997.
Marriott Management Services reported increased profits on a seven percent
increase in sales over the first three quarters of 1996. Increases in sales
were due to the increased number of operating days for higher education, school
services and corporate accounts during the period, and increased sales on
existing comparable accounts.
Marriott Senior Living Services reported year-to-date profit growth on sales
growth of 36 percent primarily due to the acquisition of Forum in the second
quarter of 1996. In addition, occupancy rates on comparable properties increased
two percentage points, to 94 percent and average per diem rates also increased
by five percent, to over $99. A net of 55 properties opened since the
beginning of 1996, including the Company's first properties to feature special
care centers for people with Alzheimer's and other memory disorders, and the
Company's first two Village Oaks communities.
Marriott Distribution Services more than doubled sales by adding several major
restaurant accounts. Three new distribution centers were opened in 1997, an
increase of five since the third quarter of last year. Profits declined due to
the start-up costs at these new centers as well as costs associated with
integration of new business within existing centers.
CORPORATE ACTIVITY. Interest expense increased 28 percent over the first three
quarters of 1996, despite lower effective interest rates, as the average debt
balance increased to finance the RHG acquisition, net of the proceeds of real
estate sales throughout the year. Interest income decreased from $25 million to
$19 million reflecting reduced loans receivable as a result of the collection
and sale of over $200 million of loans in the second half of 1996. Corporate
expenses increased due to non-cash items associated with investments generating
significant income tax benefits as well as modest staff increases to accommodate
growth and new business development.
The effective income tax rate increased from 39 percent to 39.5 percent
reflecting approximately a one percentage point increase due to nondeductible
goodwill amortization associated with the RHG acquisition, partially offset by
tax credits generated by certain investments.
17
LIQUIDITY AND CAPITAL RESOURCES
Cash and equivalents totaled $359 million at September 12, 1997, an increase of
$91 million from year end. Cash provided by operations of $514 million
increased slightly over 1996 as higher net income was offset by working capital
changes reported due to the timing of the 1996 year end. EBITDA increased 20
percent to $581 million. 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.
Net cash used in investing activities totaled $925 million for the first three
quarters of 1997, primarily consisting of the RHG acquisition and expenditures
for the construction of limited-service lodging properties and senior living
communities. Cash generated from dispositions of $438 million, primarily
comprised $209 million from the sale of the 29 Forum properties to Host
Marriott, as well as $103 million from the sale of Senior Living Services
communities and $99 million from the sale of limited service hotels. The Company
expects that, over time, it will sell certain lodging and senior living service
properties under development, or to be developed, while continuing to operate
them under long-term agreements.
The Company entered into a $1.5 billion bank 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.
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 development and
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.
18
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
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There are no material legal proceedings pending against the Company.
Item 2. Changes in Securities
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None.
Item 3. Defaults Upon Senior Securities
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None.
Item 4. Submission of Matters to a Vote of Security Holders
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None.
Item 5. Other Information
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None.
19
Item 6. Exhibits and Reports on Form 8-K
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(a) Exhibits
Exhibit
No. Descriptions
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4 Restated Bylaws of Marriott International, Inc.
10.1 Second Amendment to Distribution Agreement, dated as of
June 21, 1997, by and among Marriott International,
Inc., Host Marriott Corporation and Host Marriott
Services Corporation.
10.2 Stock Purchase Agreement, dated as of June 21, 1997, by
and between Host Marriott Corporation and Marriott
Senior Living Services, Inc.
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 July 7, 1997, the Company filed a report announcing that it had completed
the sale of all of the issued and outstanding stock of Forum Group, Inc.
to Host Marriott. On September 3, 1997, the Company filed a supplementary
report containing pro forma financial information, reflecting the sale.
On September 5, 1997, the Company filed a report describing beneficial
ownership of LYONs in connection with a registered secondary offering
thereof.
20
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 24, 1997 /s/ Stephen E. Riffee
---------------------------
Stephen E. Riffee
Vice President, Finance and
Chief Accounting Officer
21