SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended June 15, 2001 Commission File No. 1-13881
MARRIOTT INTERNATIONAL, INC.
Delaware 52-2055918
(State of Incorporation) (I.R.S. Employer Identification Number)
10400 Fernwood Road
Bethesda, Maryland 20817
(301) 380-3000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes [X] No [_]
Shares outstanding
Class at July 13, 2001
------------------------- ----------------------
Class A Common Stock, 244,705,593
$0.01 par value
MARRIOTT INTERNATIONAL, INC.
INDEX
Page No.
-----------
Forward-Looking Statements............................................................. 3
Part I. Financial Information (Unaudited):
Condensed Consolidated Statements of Income -
Twelve and Twenty-Four Weeks Ended June 15, 2001 and June 16, 2000............... 4
Condensed Consolidated Balance Sheet -
as of June 15, 2001 and December 29, 2000........................................ 5
Condensed Consolidated Statement of Cash Flows -
Twenty-Four Weeks Ended June 15, 2001 and June 16, 2000.......................... 6
Notes to Condensed Consolidated Financial Statements................................ 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................ 15
Quantitative and Qualitative Disclosures About Market Risk.......................... 21
Part II. Other Information and Signatures:
Legal Proceedings................................................................... 22
Changes in Securities............................................................... 22
Defaults Upon Senior Securities..................................................... 22
Submission of Matters to a Vote of Security Holders................................. 22
Other Information................................................................... 22
Exhibits and Reports on Form 8-K.................................................... 23
Signatures.......................................................................... 24
2
Forward-Looking Statements
When used throughout this report, the words "believes," "anticipates,"
"expects," "intends," "estimates," "projects," 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 our business segments; business
strategies and their intended results; the balance between supply of and demand
for hotel rooms, timeshare units, senior living accommodations and corporate
apartments; our ability to obtain new operating contracts and franchise
agreements; our ability to develop and maintain positive relations with current
and potential hotel and senior living community owners; the effect of
international, national and regional economic conditions, including the duration
and severity of the current economic downturn in the United States; the
availability of capital to allow us and potential hotel owners to fund
investments; the effect that internet hotel reservation channels may have on
rates that we are able to charge for hotel rooms; and other risks described from
time to time in our filings with the Securities and Exchange Commission,
including those set forth on Exhibit 99 filed herewith. Given these
uncertainties, we caution you not to place undue reliance on such statements. We
also undertake 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 Twenty-four weeks ended
-------------------------------- ---------------------------------
June 15, June 16, June 15, June 16,
2001 2000 2001 2000
--------------- --------------- --------------- ---------------
SALES
Management and franchise fees................... $ 227 $ 229 $ 431 $ 418
Distribution services........................... 397 381 758 688
Other........................................... 508 480 975 897
--------------- --------------- --------------- ---------------
1,132 1,090 2,164 2,003
Other revenues from managed properties.......... 1,301 1,301 2,710 2,555
--------------- --------------- --------------- ---------------
2,433 2,391 4,874 4,558
OPERATING COSTS AND EXPENSES
Distribution services........................... 394 375 753 694
Other........................................... 499 468 946 869
--------------- --------------- --------------- ---------------
893 843 1,699 1,563
Other costs from managed properties............. 1,301 1,301 2,710 2,555
--------------- --------------- --------------- ---------------
2,194 2,144 4,409 4,118
--------------- --------------- --------------- ---------------
OPERATING PROFIT BEFORE CORPORATE EXPENSES AND
INTEREST 239 247 465 440
Corporate expenses................................... (29) (25) (59) (51)
Interest expense..................................... (27) (27) (49) (50)
Interest income...................................... 20 5 36 10
--------------- --------------- --------------- ---------------
INCOME BEFORE INCOME TAXES........................... 203 200 393 349
Provision for income taxes........................... 73 74 142 129
--------------- --------------- --------------- ---------------
NET INCOME........................................... $ 130 $ 126 $ 251 $ 220
=============== =============== =============== ===============
DIVIDENDS DECLARED PER SHARE......................... $ .065 $ .06 $ .125 $ .115
=============== =============== =============== ===============
EARNINGS PER SHARE
Basic Earnings Per Share........................ $ .53 $ .53 $ 1.03 $ .91
=============== =============== =============== ===============
Diluted Earnings Per Share...................... $ .50 $ .50 $ .97 $ .87
=============== =============== =============== ===============
See notes to condensed consolidated financial statements.
4
MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
($ in millions)
June 15, December 29,
2001 2000
-------------------- ---------------------
ASSETS (Unaudited)
Current assets
Cash and equivalents..................................................... $ 674 $ 334
Accounts and notes receivable............................................ 760 728
Inventory................................................................ 104 97
Other.................................................................... 297 256
-------------------- ---------------------
1,835 1,415
-------------------- ---------------------
Property and equipment.................................................... 3,163 3,241
Intangibles............................................................... 1,812 1,833
Investments in affiliates................................................. 796 747
Notes and other receivables............................................... 759 661
Other..................................................................... 425 340
-------------------- ---------------------
$ 8,790 $ 8,237
==================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable......................................................... $ 708 $ 660
Other.................................................................... 1,060 1,257
-------------------- ---------------------
1,768 1,917
-------------------- ---------------------
Long-term debt............................................................ 1,909 2,016
Other long-term liabilities............................................... 1,107 1,037
Convertible debt.......................................................... 405 -
Shareholders' equity
ESOP preferred stock..................................................... - -
Class A common stock, 255.6 million shares issued........................ 3 3
Additional paid-in capital............................................... 3,445 3,590
Retained earnings........................................................ 985 851
Unearned ESOP shares..................................................... (411) (679)
Treasury stock, at cost.................................................. (360) (454)
Accumulated other comprehensive income................................... (61) (44)
-------------------- ---------------------
3,601 3,267
-------------------- ---------------------
$ 8,790 $ 8,237
==================== =====================
See notes to condensed consolidated financial statements.
5
MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
($ in millions)
(Unaudited)
Twenty-four weeks ended
---------------------------------------------
June 15, June 16,
2001 2000
-------------------- --------------------
OPERATING ACTIVITIES
Net income.............................................................. $ 251 $ 220
Adjustments to reconcile to cash provided by operations:
Depreciation and amortization....................................... 96 87
Income taxes and other.............................................. 95 103
Timeshare activity, net............................................. (143) (73)
Working capital changes............................................. (115) (62)
-------------------- --------------------
Cash provided by operations............................................. 184 275
-------------------- --------------------
INVESTING ACTIVITIES
Dispositions............................................................ 361 294
Capital expenditures.................................................... (251) (455)
Note advances........................................................... (82) (88)
Note collections and sales.............................................. 34 21
Other................................................................... (145) (103)
-------------------- --------------------
Cash used in investing activities....................................... (83) (331)
-------------------- --------------------
FINANCING ACTIVITIES
Commercial paper activity, net.......................................... (424) (21)
Issuance of convertible debt............................................ 405 -
Issuance of other long-term debt........................................ 313 304
Repayment of other long-term debt....................................... (9) (7)
Issuance of Class A common stock........................................ 57 14
Dividends paid.......................................................... (29) (27)
Purchase of treasury stock.............................................. (74) (286)
-------------------- --------------------
Cash provided by (used in) financing activities......................... 239 (23)
-------------------- --------------------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS................................ 340 (79)
CASH AND EQUIVALENTS, beginning of period.................................. 334 489
CASH AND EQUIVALENTS, end of period........................................ -------------------- --------------------
$ 674 $ 410
==================== ====================
See notes to condensed consolidated financial statements.
6
MARRIOTT INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
---------------------
The accompanying condensed consolidated financial statements present the
results of operations, financial position and cash flows of Marriott
International, Inc. (together with its subsidiaries, we, us or the
Company).
The accompanying condensed consolidated financial statements have not been
audited. We have condensed or omitted certain information and footnote
disclosures normally included in financial statements presented in
accordance with accounting principles generally accepted in the United
States. We believe the disclosures made are adequate to make the
information presented not misleading. You should, however read the
financial statements in this report in conjunction with the consolidated
financial statements and notes to those financial statements included in
our Annual Report on Form 10-K (our Annual Report) for the fiscal year
ended December 29, 2000. Capitalized terms not otherwise defined in this
quarterly report have the meanings specified in our Annual Report.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities as of the date of the financial statements, and the
reported amounts of sales and expenses during the reporting period.
Accordingly, ultimate results could differ from those estimates.
In our opinion, the accompanying condensed consolidated financial
statements reflect all normal and recurring adjustments necessary to
present fairly our financial position as of June 15, 2001 and December 29,
2000, the results of operations for the twelve and twenty-four weeks ended
June 15, 2001 and June 16, 2000 and cash flows for the twenty-four weeks
ended June 15, 2001 and June 16, 2000. Interim results may not be
indicative of fiscal year performance because of seasonal and short-term
variations. We have eliminated all material intercompany transactions and
balances between entities included in these financial statements.
2. Revenue Recognition
-------------------
Our sales include (1) management and franchise fees, (2) sales from our
distribution services business, (3) sales from lodging properties and
senior living communities owned or leased by us, and sales made by our
other businesses; and (4) certain other revenues from properties managed by
us. Management fees comprise a base fee, which is a percentage of the
revenues of hotels or senior living communities, and an incentive fee,
which is based on unit profitability. Franchise fees comprise initial
application fees and continuing royalties generated from our franchise
programs, which permit hotel owners and operators to use certain of our
brand names. Other revenues from managed properties include direct and
indirect costs that are reimbursed to us by lodging and senior living
community owners for properties that we manage. Other revenues include
revenues from hotel properties and senior living communities that we own or
lease, along with sales from our timeshare and ExecuStay businesses.
7
We recognize base fees as revenue when earned in accordance with the
contract. In interim periods we recognize incentive fees that would be due
as if the contract were to terminate at that date, exclusive of any
termination fees payable or receivable by us. As of June 15, 2001 we have
recognized $126 million of incentive management fees, retention of which is
dependent on achievement of hotel profitability for the balance of the year
at levels specified in a number of our management contracts.
Distribution Services: We recognize revenue from our distribution services
business when goods have been shipped and title passes to the customer in
accordance with the terms of the applicable distribution contract.
Timeshare: We recognize revenue from timeshare interest sales in accordance
with Statement of Financial Accounting Standards (FAS) No. 66, "Accounting
for Sales of Real Estate." We recognize sales when a minimum of 10 percent
of the purchase price for the timeshare interval has been received, the
period of cancellation with refund has expired, receivables are collectible
and certain minimum sales and construction levels have been attained.
Owned and Leased Units: We recognize room sales and revenues from guest
services for our owned and leased units, including ExecuStay, when rooms
are occupied and services have been rendered.
Franchise Revenue: We recognize franchise fee revenues in accordance with
FAS No. 45, "Accounting for Franchise Fee Revenue." Franchise fees are
recognized as revenue in each accounting period as fees are earned and
become receivable from the franchisee.
Other Revenues from Managed Properties: We recognize other revenues from
managed properties when we incur the related reimbursable costs.
8
We recognized sales in the twelve and twenty-four weeks ended June 15, 2001
and June 16, 2000 as shown in the following table. Lodging includes our full
service, select service, extended stay, and timeshare business segments.
Twelve weeks ended
----------------------------------------------------------
June 15, 2001
----------------------------------------------------------
Senior
Living Distribution
Sales Lodging Services Services Total
----------- ------------ --------------- ---------
($ in millions)
Management and franchise fees........... $ 219 $ 8 $ - $ 227
Other................................... 433 75 397 905
-------- ---------- ------------ --------
652 83 397 1,132
Other revenues from managed
properties............................ 1,220 81 - 1,301
-------- ---------- ------------ --------
$ 1,872 $ 164 $ 397 $ 2,433
======== ========== ============ ========
Operating costs and expenses
Operating costs......................... $ 421 $ 78 $ 394 $ 893
Other costs from managed
properties............................ 1,220 81 - 1,301
-------- ---------- ------------ --------
1,641 159 394 2,194
-------- ---------- ------------ --------
Operating profit before
corporate expenses and
interest.............................. $ 231 $ 5 $ 3 $ 239
======== ========== ============ ========
----------------------------------------------------------
June 16, 2000
----------------------------------------------------------
Senior
Living Distribution
Sales Lodging Services Services Total
----------- ------------ --------------- ---------
($ in millions)
Management and franchise fees........... $ 222 $ 7 $ - $ 229
Other................................... 412 68 381 861
---------- ---------- --------- --------
634 75 381 1,090
Other revenues from managed
properties........................... 1,226 75 - 1,301
---------- ---------- --------- --------
$ 1,860 $ 150 $ 381 $ 2,391
========== ========== ========= ========
Operating costs and expenses
Operating costs......................... $ 390 $ 78 $ 375 $ 843
Other costs from managed
properties............................ 1,226 75 - 1,301
---------- ---------- --------- --------
1,616 153 375 2,144
---------- ---------- --------- --------
Operating profit before
corporate expenses and
interest.............................. $ 244 $ (3) $ 6 $ 247
========== ========== ========= ========
Twenty-four weeks ended
----------------------------------------------------------
June 15, 2001
----------------------------------------------------------
Senior
Living Distribution
Sales Lodging Services Services Total
----------- ------------ --------------- ---------
($ in millions)
Management and franchise fees........... $ 415 $ 16 $ - $ 431
Other................................... 824 151 758 1,733
--------- -------- ------------ --------
1,239 167 758 2,164
Other revenues from managed
properties............................ 2,548 162 - 2,710
--------- -------- ------------ --------
$ 3,787 $ 329 $ 758 $ 4,874
========= ======== ============ ========
Operating costs and expenses
Operating costs......................... $ 785 $ 161 $ 753 $ 1,699
Other costs from managed
properties............................ 2,548 162 - 2,710
--------- -------- ------------ --------
3,333 323 753 4,409
--------- -------- ------------ --------
Operating profit before
corporate expenses and
interest.............................. $ 454 $ 6 $ 5 $ 465
========= ======== ============ ========
-----------------------------------------------------------
June 16, 2000
-----------------------------------------------------------
Senior
Living Distribution
Sales Lodging Services Services Total
----------- ------------ --------------- ---------
($ in millions)
Management and franchise fees........... $ 405 $ 13 $ - $ 418
Other................................... 755 142 688 1,585
--------- -------- ----------- ---------
1,160 155 688 2,003
Other revenues from managed
properties............................ 2,411 144 - 2,555
--------- -------- ----------- ---------
$ 3,571 $ 299 $ 688 $ 4,558
========= ======== =========== =========
Operating costs and expenses
Operating costs......................... $ 713 $ 156 $ 694 $ 1,563
Other costs from managed
properties............................ 2,411 144 - 2,555
--------- -------- ----------- ---------
3,124 300 694 4,118
--------- -------- ----------- ---------
Operating profit before
corporate expenses and
interest.............................. $ 447 $ (1) $ (6) $ 440
========= ======== =========== =========
9
3. Earnings Per Share
------------------
The following table reconciles the earnings and number of shares used in the
basic and diluted earnings per share calculations (in millions, except per
share amounts).
Twelve weeks ended Twenty-four weeks ended
------------------------------------ ------------------------------------
June 15, June 16, June 15, June 16,
2001 2000 2001 2000
---------------- ---------------- ---------------- ----------------
Computation of Basic Earnings Per Share
Net income......................................... $ 130 $ 126 $ 251 $ 220
Weighted average shares outstanding................ 243.9 239.7 243.7 241.9
---------------- ---------------- ---------------- ----------------
Basic Earnings Per Share........................... $ .53 $ .53 $ 1.03 $ .91
================ ================ ================ ================
Computation of Diluted Earnings Per Share
Net income......................................... $ 130 $ 126 $ 251 $ 220
After-tax interest expense on convertible
debt.............................................. 1 - 1 -
---------------- ---------------- ---------------- ----------------
Net income for diluted earnings per share.......... $ 131 $ 126 $ 252 $ 220
================ ================ ================ ================
Weighted average shares outstanding................ 243.9 239.7 243.7 241.9
Effect of Dilutive Securities
Employee stock option plan.................... 8.1 7.0 8.4 6.5
Deferred stock incentive plan................. 5.3 5.1 5.3 5.1
Convertible debt................................... 3.0 - 1.5 -
---------------- ---------------- ---------------- ----------------
Shares for diluted earnings per share.............. 260.3 251.8 258.9 253.5
================ ================ ================ ================
Diluted Earnings Per Share......................... $ .50 $ .50 $ .97 $ .87
================ ================ ================ ================
We compute the effect of dilutive securities using the treasury stock method
and average market prices during the period. We use the if-converted method
for convertible debt.
10
4. Frequent Guest Program
----------------------
We accrue for the cost of redeeming points awarded to members of our
frequent guest program based on the discounted expected costs of
redemption. The liability for this program was $598 million at June 15,
2001 and $554 million at December 29, 2000, of which $373 million and $310
million, respectively, are included in other long-term liabilities in the
accompanying condensed consolidated balance sheet.
5. Dispositions
------------
In the first quarter of 2001, we closed on sales of eight lodging
properties and one senior living community for cash proceeds of $241
million, resulting in gains of $5 million. We recognized $4 million of the
gain and the balance will be recognized as certain contingencies in the
sales contracts expire. We will continue to operate seven of these hotels
under long-term management agreements.
In the second quarter of 2001, we sold four lodging properties for $102
million. We will continue to operate the hotels under long-term
management agreements. In connection with the sale, the buyer terminated
lease agreements for three properties sold and leased back to us in 1997
and 1998. We now manage these three previously leased properties under
long-term management agreements, and gains on the sale of these properties
of $5 million were recognized in the second quarter as a result of the
lease cancellations.
In the second quarter of 2001 we sold land, at book value, for $31 million
to a joint venture which plans to build two resort hotels in Orlando,
Florida, for $547 million. We will provide development services and have
guaranteed completion of the project. The initial owners of the venture
have the right to sell 20 percent of the venture's equity to us upon the
opening of the hotels. At opening we also expect to hold approximately $120
million in mezzanine loans that we have agreed to advance to the joint
venture. We have provided the venture with additional credit facilities for
certain amounts due under the first mortgage loan and to provide for
limited minimum returns to the equity investors in the early years of the
project, although we expect fundings under such support to be less than $5
million.
6. Comprehensive Income
--------------------
Total comprehensive income was $119 million and $127 million, respectively,
for the twelve weeks ended June 15, 2001 and June 16, 2000 and $234 million
and $216 million, respectively, for the twenty-four weeks ended June 15,
2001 and June 16, 2000. The principal difference between net income and
total comprehensive income relates to foreign currency translation
adjustments.
7. New Accounting Standards
------------------------
In the first quarter of 2001, we adopted FAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which resulted in no
material impact to our financial statements.
We will adopt FAS No. 142, "Goodwill and Other Intangible Assets," in the
first quarter of 2002. The new rules require that goodwill is not
amortized, but is reviewed annually for impairment. We estimate that
adoption of FAS No. 142 will result in an annual increase in net income of
approximately $30 million.
11
8. Business Segments
-----------------
We are a diversified hospitality company with operations in six business
segments: Full Service, which includes Marriott Hotels, Resorts and Suites,
Ritz-Carlton, Renaissance Hotels, Resorts and Suites, Ramada International
and the fees we receive for the use of the Ramada name in the United States
and Canada; Select Service, which includes Courtyard, Fairfield Inn and
SpringHill Suites; Extended Stay, which includes Residence Inn, TownePlace
Suites, ExecuStay and Marriott Executive Apartments; Timeshare, which
includes the operation, ownership, development and marketing of Marriott's
timeshare properties under the Marriott, Ritz-Carlton Club and Horizons
brands; Senior Living Services (SLS), which includes the operation,
ownership and development of senior living communities; and Marriott
Distribution Services (MDS), which includes our wholesale food distribution
business. We evaluate the performance of our segments based primarily on
operating profit before corporate expenses and interest. We do not allocate
income taxes at the segment level.
We have aggregated the brands and businesses presented within each of our
segments considering their similar economic characteristics, types of
customers, distribution channels, and the regulatory business environment
of the brands and operations within each segment.
The following table outlines our sales and operating profit by business
segment for the twelve and twenty-four weeks ended June 15, 2001 and June
16, 2000.
Twelve weeks ended Twenty-four weeks ended
------------------------------------- ---------------------------------------
June 15, 2001 June 16, 2000 June 15, 2001 June 16, 2000
------------------ -------------- ---------------- -------------------
($ in millions)
Sales
Full Service................................. $ 1,254 $ 1,302 $ 2,598 $ 2,529
Select Service............................... 222 214 434 405
Extended Stay................................ 161 156 300 281
Timeshare.................................... 235 188 455 356
----------- ------------- --------------- -------------
Total Lodging................................ 1,872 1,860 3,787 3,571
Senior Living Services....................... 164 150 329 299
Distribution Services........................ 397 381 758 688
----------- ------------- --------------- -------------
$ 2,433 $ 2,391 $ 4,874 $ 4,558
=========== ============= =============== =============
Operating profit (loss) before corporate
expenses and interest
Full Service................................. $ 127 $ 133 $ 244 $ 250
Select Service............................... 43 54 88 92
Extended Stay................................ 22 22 40 35
Timeshare.................................... 39 35 82 70
----------- ------------- --------------- -------------
Total Lodging................................ 231 244 454 447
Senior Living Services....................... 5 (3) 6 (1)
Distribution Services........................ 3 6 5 (6)
----------- ------------- --------------- -------------
$ 239 $ 247 $ 465 $ 440
=========== ============= =============== =============
12
Sales of Distribution Services do not include sales (made at market terms
and conditions) to our other business segments of $41 million and $43
million for the twelve weeks ended June 15, 2001 and June 16, 2000,
respectively, and $80 million and $82 million for the twenty-four weeks
ended June 15, 2001 and June 16, 2000.
9. Contingencies
-------------
We issue guarantees to lenders and other third parties in connection with
financing transactions and other obligations. These guarantees were
limited, in the aggregate, to $500 million at June 15, 2001, including
guarantees involving major customers, with minimal expected funding. In
addition, we have made physical completion guarantees relating to three
hotel properties with minimal expected funding. As of June 15, 2001, we had
extended approximately $1,126 million of loan commitments to owners of
lodging properties and senior living communities under which we currently
expect to fund approximately $330 million by December 28, 2001, and $595
million in total. Letters of credit outstanding on our behalf at June 15,
2001, totaled $55 million, the majority of which related to our self-
insurance programs. At June 15, 2001, we had repurchase obligations of $55
million related to notes receivable from timeshare interval purchasers,
which have been sold with limited recourse.
New World Development and another affiliate of Dr. Henry Cheng Kar-Shun, a
director of the Company, have severally indemnified us for guarantees by us
of leases with minimum annual payments of approximately $59 million.
In addition to the foregoing, we are from time to time involved in legal
proceedings which could, if adversely decided, result in losses to the
Company. Although we believe that the lawsuit described below is without
merit, and we intend to vigorously defend against the claims being made
against us, we cannot assure you as to the outcome of this lawsuit nor can
we currently estimate the range of any potential loss to the Company.
On March 30, 2001, Green Isle Partners, Ltd., S.E. (Green Isle) filed a 63-
page complaint in Federal district court in Delaware against The Ritz-
Carlton Hotel Company, L.L.C., The Ritz-Carlton Hotel Company of Puerto
Rico, Inc. (Ritz-Carlton Puerto Rico), Marriott International, Inc.,
Marriott Distribution Services, Inc., Marriott International Capital Corp.
and Avendra L.L.C. (Green Isle Partners, Ltd. S.E., v. The Ritz-Carlton
Hotel Company, L.L.C., et al, civil action no. 01-202). Ritz-Carlton Puerto
Rico manages The Ritz-Carlton San Juan Hotel, Spa and Casino located in San
Juan, Puerto Rico under an operating agreement with Green Isle dated
December 15, 1995 (the Operating Agreement).
The claim asserts 11 causes of action: three Racketeer Influenced and
Corrupt Organizations Act (RICO) claims, together with claims based on the
Robinson-Patman Act, breach of contract, breach of fiduciary duty, aiding
and abetting a breach of fiduciary duty, breach of implied duties of good
faith and fair dealing, common law fraud and intentional misrepresentation,
negligent misrepresentation, and fiduciary accounting. The complaint does
not request termination of the Operating Agreement.
The claim includes allegations of: (i) national, non-competitive contracts
and attendant kick-back schemes; (ii) concealing transactions with
affiliates; (iii) false entries in the books and manipulation of accounts
payable and receivable; (iv) excessive compensation schemes and
13
fraudulent expense accounts; (v) charges of prohibited overhead costs to
the project; (vi) charges of prohibited procurement costs; (vii) inflation
of Group Service Expense; (viii) the use of prohibited or falsified
revenues; (ix) attempts to oust Green Isle from ownership; (x) creating a
financial crisis and then attempting to exploit it by seeking an
economically oppressive contract in connection with a loan; (xi) providing
incorrect cash flow figures, and failing to appropriately reveal and
explain revised cash flow figures.
The complaint seeks as damages the $140 million which Green Isle claims to
have invested in the hotel (which includes $85 million in third party
debt), which the plaintiffs seek to treble to $420 million under RICO and
the Robinson-Patman Act.
On May 25, 2001, defendants moved to dismiss the complaint or,
alternatively, to stay or transfer. Green Isle has not yet responded to the
motion. On June 25, 2001, Green Isle filed its Chapter 11 Bankruptcy
Petition in the Southern district of Florida.
10. Convertible Debt
----------------
On May 8, 2001 we received gross proceeds of $405 million from the sale of
zero-coupon convertible senior notes due 2021, known as LYONs.
The LYONs are convertible into approximately 6.4 million shares of our
Class A common stock and will carry a yield to maturity of 0.75 percent. We
may not redeem the LYONs prior to May 8, 2004, but may at the option of the
holders be required to purchase the LYONs at their accreted value on May 8
of each of 2002, 2004, 2011 and 2016. We may choose to pay the purchase
price for redemptions or repurchases in cash and/or common shares.
We are amortizing the issuance costs of the LYONs into interest expense
over the one-year period ending May 8, 2002. The LYONs are classified as
long-term based on our ability and intent to refinance the obligation with
long-term debt if we are required to repurchase the LYONs.
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
of Operations
-------------
RESULTS OF OPERATIONS
The following discussion presents an analysis of results of our operations for
the twelve and twenty-four weeks ended June 15, 2001 and June 16, 2000. Revenue
per available room (REVPAR) is calculated by dividing room sales for comparable
properties by room nights available to guests for the period. We consider
REVPAR to be a meaningful indicator of our performance because it measures the
period over period growth in room revenues for comparable properties. REVPAR
may not be comparable to similarly titled measures such as revenues. Comparable
REVPAR, room rate and occupancy statistics used throughout this report are based
upon U.S. properties operated by us, except that data for Fairfield Inn also
include comparable franchised units.
Twelve Weeks Ended June 15, 2001 Compared to Twelve Weeks Ended June 16, 2000
-----------------------------------------------------------------------------
We reported net income of $130 million for the 2001 second quarter on sales of
$2,433 million. This represents a three percent increase in net income and a two
percent increase in sales over the second quarter of 2000. Diluted earnings per
share of $.50 was unchanged from the 2000 second quarter. Systemwide sales of
$4.8 billion for the quarter were also unchanged from the prior year.
Marriott Lodging reported a five percent decrease in operating profit while
sales increased slightly to $1,872 million. Systemwide lodging sales remained
the same as the second quarter 2000 at $4.2 billion.
We added a total of 67 lodging properties (10,700 units) during the second
quarter of 2001, and deflagged two properties (221 units), increasing our total
properties to 2,228 (411,987 units). Properties by brand (excluding 7,400
rental units relating to ExecuStay) are as indicated in the following table.
Properties as of June 15, 2001
------------------------------------------------------------
Company-operated Franchised
--------------------------- ------------------------------
Properties Rooms Properties Rooms
------------ ------------ ------------ --------------
Marriott Hotels, Resorts and Suites............ 245 108,737 168 46,716
Ritz-Carlton................................... 41 13,592 - -
Renaissance Hotels, Resorts and Suites......... 81 31,100 33 11,104
Ramada International........................... 5 1,068 65 11,261
Residence Inn.................................. 130 17,240 242 26,543
Courtyard...................................... 284 44,290 253 31,798
Fairfield Inn.................................. 52 7,526 412 36,758
TownePlace Suites.............................. 32 3,392 58 5,811
SpringHill Suites.............................. 13 1,925 56 5,553
Marriott Vacation Club International........... 49 5,840 - -
Marriott Executive Apartments and other........ 9 1,733 - -
-------- --------- -------- ------------
Total..................................... 941 236,443 1,287 175,544
======== ========= ======== ============
15
Across our Lodging brands, REVPAR for comparable company-operated U.S.
properties declined by an average of 4.4 percent in the second quarter 2001.
Occupancy declined 5.5 percentage points to 75.8 percent, while average room
rates rose 2.5 percent.
Occupancy, average daily rate and REVPAR for each of our principal established
brands are shown in the following table.
Twelve weeks
ended Change vs.
June 15, 2001 2000
------------------- ----------------
Marriott Hotels, Resorts and Suites
Occupancy................................................ 75.8% -5.8% pts.
Average daily rate....................................... $ 152.08 +1.7%
REVPAR................................................... $ 115.24 -5.6%
Ritz-Carlton
Occupancy................................................ 74.8% -7.4% pts.
Average daily rate....................................... $ 280.94 +9.6%
REVPAR................................................... $ 210.04 -0.3%
Renaissance Hotels, Resorts and Suites
Occupancy................................................ 72.6% -4.8% pts.
Average daily rate....................................... $ 144.46 -0.6%
REVPAR................................................... $ 104.90 -6.7%
Residence Inn
Occupancy................................................ 80.1% -5.5% pts.
Average daily rate....................................... $ 109.09 +1.5%
REVPAR................................................... $ 87.38 -5.1%
Courtyard
Occupancy................................................ 76.5% -5.1% pts.
Average daily rate....................................... $ 103.46 +4.5%
REVPAR................................................... $ 79.17 -2.1%
Fairfield Inn
Occupancy................................................ 69.8% -4.4% pts.
Average daily rate....................................... $ 63.88 +3.9%
REVPAR................................................... $ 44.57 -2.3%
Across our full-service lodging brands (Marriott Hotels, Resorts and Suites,
Ritz-Carlton and Renaissance Hotels, Resorts and Suites), REVPAR for comparable
company-operated U.S. properties declined by an average of 5.1 percent in the
2001 second quarter. Average room rates increased 2.2 percent, while occupancy
declined 5.7 percentage points.
Our domestic select-service and extended-stay brands (Residence Inn, Courtyard,
Fairfield Inn, TownePlace Suites and SpringHill Suites) added a net of 40 hotel
properties, primarily franchises, during the second quarter of 2001. REVPAR for
comparable properties declined by an average of 2.9 percent. Occupancy
decreased 5.1 percentage points, while average room rates rose 3.5 percent.
Results for international lodging operations continued to be favorable in the
2001 second quarter, reflecting margin control as well as new unit additions.
The growth was slightly offset by the impact of the weakness in the Euro.
16
Marriott Vacation Club International posted an 11 percent increase in operating
profit in the second quarter of 2001 on a 17 percent increase in contract sales.
Results reflect strong demand at timeshares in Hawaii, California and Florida.
In addition, during the second quarter we acquired the Grand Summit property in
Lake Tahoe, California. Note sale gains of $13 million in the quarter, compared
to $6 million in the year ago quarter, also contributed to stronger comparisons.
The overall lodging profit margin, before other revenues and other costs from
managed properties, declined 3.1 percent versus the year earlier quarter.
Margins were impacted by higher sales and marketing costs in the timeshare
brands, lower margins in the ExecuStay business, the move of several hotels from
owned to managed units and lower incentive fees related to the Courtyard joint
venture. The lower incentive fees were offset by higher interest income
associated with the loans made to the joint venture.
Marriott Senior Living Services (SLS) posted nine percent sales growth in the
2001 second quarter, reflecting a two percentage point increase in occupancy for
comparable communities to 85 percent. SLS posted operating profits of $5
million compared to a $3 million loss a year ago, as a result of improved
occupancy rates and lower pre-opening costs.
Marriott Distribution Services (MDS) reported a four percent increase in sales
in the 2001 second quarter, while profits declined to $3 million from $6 million
due to the decline in business from a significant customer. Although a
substantial amount of this business has been replaced, there were operating
inefficiencies associated with the new accounts.
Corporate activity. Interest expense of $27 million remained the same as the
year ago quarter, reflecting a slight increase in borrowings, offset by lower
interest rates. Interest income increased by $15 million to $20 million in the
2001 second quarter due to income associated with higher loan balances,
including loans made to the Courtyard joint venture in the fourth quarter of
2000. Corporate expenses increased $4 million reflecting the $7 million write-
off of an investment in a technology partner, a $1 million foreign exchange loss
compared to a $3 million gain in the prior year, partially offset by a $7
million gain from the sale of two affordable housing tax credit investments.
The effective tax rate decreased to 36 percent in the second quarter as a result
of modifications related to our deferred compensation plan and the impact of
increased income in countries with lower effective tax rates.
Twenty-Four Weeks Ended June 15, 2001 Compared to Twenty-Four Weeks Ended June
------------------------------------------------------------------------------
16, 2000
--------
We reported net income of $251 million for the first half of 2001 on sales of
$4,874 million. This represents a 14 percent increase in net income and a seven
percent increase in sales over the same period in 2000. Diluted earnings per
share of $.97 for the first half of the year increased 11 percent compared to
2000. Overall profit growth in 2001 was favorably impacted by a $15 million
pretax charge, recorded in the first quarter of 2000, related to the write-off
of a contract investment by our distribution services business. Systemwide
sales increased to $9.5 billion.
Marriott Lodging reported a slight increase in operating profit to $454 million,
on six percent higher sales. Systemwide lodging sales increased to $8.4
billion.
We added a total of 129 lodging properties (22,200 units) during the first half
of 2001, and deflagged four properties (700 units).
17
Across our Lodging brands, REVPAR for comparable company-operated U.S.
properties declined by an average of 1.2 percent in the first half of 2001.
Occupancy declined 3.8 percentage points to 74.3 percent, while average room
rates rose 3.9 percent.
Twenty-four
Weeks ended Change vs.
June 15, 2001 2000
----------------- --------------
Marriott Hotels, Resorts and Suites
Occupancy................................................ 74.5% -4.2% pts.
Average daily rate....................................... $ 153.33 +3.2%
REVPAR................................................... $ 114.26 -2.2%
Ritz-Carlton
Occupancy................................................ 73.4% -7.0% pts.
Average daily rate....................................... $ 284.09 +10.1%
REVPAR................................................... $ 208.52 +0.5%
Renaissance Hotels, Resorts and Suites
Occupancy................................................ 71.6% -3.4% pts.
Average daily rate....................................... $ 147.31 +1.9%
REVPAR................................................... $ 105.40 -2.7%
Residence Inn
Occupancy................................................ 79.8% -3.3% pts.
Average daily rate....................................... $ 109.75 +3.7%
REVPAR................................................... $ 87.58 -0.4%
Courtyard
Occupancy................................................ 75.0% -3.1% pts.
Average daily rate....................................... $ 103.04 +5.4%
REVPAR................................................... $ 77.30 +1.2%
Fairfield Inn
Occupancy................................................ 65.9% -3.2% pts.
Average daily rate....................................... $ 63.32 +4.4%
REVPAR................................................... $ 41.74 -0.5%
Across our full-service lodging brands (Marriott Hotels, Resorts and Suites,
Ritz-Carlton and Renaissance Hotels, Resorts and Suites), REVPAR for comparable
company-operated U.S. properties declined by an average of two percent during
the first half of 2001. Occupancy fell 4.3 percentage points, while average room
rates increased 3.7 percent.
Our domestic select-service and extended-stay brands (Residence Inn, Courtyard,
Fairfield Inn, TownePlace Suites, SpringHill Suites) added a net of 157 hotel
properties, primarily franchises, since the second quarter of 2000. During the
first half of 2001, REVPAR for these brands increased slightly, reflecting a 3.1
percentage point decline in occupancy and a 4.9 percent increase in the average
room rate.
Results for international lodging operations were favorable as a result of
profit growth in Europe and Asia as well as new unit growth.
18
Marriott Vacation Club International posted favorable profit growth during the
first half of 2001 on an 18 percent increase in contract sales. Results reflect
continued solid demand in California, Hawaii and Florida. Note sale gains of $27
million compared to $12 million in the prior year also contributed to stronger
comparisons. We sold $129 million in notes in the first half of 2001 compared to
$90 million in the prior year period and we benefited from wider financing
spreads.
The overall lodging profit margin, before other revenues and other costs from
managed properties, declined in the first half of 2001 versus the same period in
the prior year. Margins were impacted by higher sales and marketing costs in the
timeshare brands, lower margins in the ExecuStay business, the move of several
hotels from owned to managed units and lower incentive fees related to the
Courtyard joint venture. The lower incentive fees are offset by higher interest
income associated with the loans made to the joint venture.
Marriott Senior Living Services posted a 10 percent increase in sales in the
first half of 2001, reflecting an increase in occupancy for comparable
communities to 85 percent. SLS posted operating profits of $6 million, compared
to a loss of $1 million a year ago. The favorable comparison was positively
impacted by costs incurred in the first half of 2000 related to start-up
inefficiencies for new properties, higher pre-opening expenses and write-offs
associated with development cancellations. We operate 152 facilities (25,900
units).
Marriott Distribution Services posted a 10 percent increase in sales in the
first half of 2001, reflecting the commencement of new contracts in 2001 and
increased sales from contracts established in 2000. Operating profit of $5
million compared favorably to a loss of $6 million in the first half of 2000,
due to the prior year write-off of the $15 million investment in a contract with
Boston Market, Inc., offset by operating inefficiencies resulting from the
commencement of new contracts.
Corporate activity. Interest expense decreased slightly to $49 million,
reflecting lower interest rates, offset by a slight increase in borrowings.
Interest income increased substantially to $36 million in the first half of
2001, due to income associated with higher loan balances, including the loans
made to the Courtyard joint venture in the fourth quarter of 2000. Corporate
expenses increased $8 million, reflecting the $13 million write-off of two
investments in technology partnerships, $5 million associated with the start-up
of Avendra LLC, and lower foreign exchange gains, offset by the $7 million gain
from the sale of two affordable housing tax credit investments and the reversal
of a long-standing $10 million insurance reserve related to a lawsuit at one of
our hotels. The reversal of the reserve was as a result of us being approached
in the first quarter by plaintiffs' counsel, who indicated that a settlement
could be reached in an amount that would be covered by insurance. We determined
that it was no longer probable that the loss contingency would result in a
material outlay by us and accordingly, we reversed the reserve during the first
quarter. The effective tax rate decreased to 36 percent as a result of
modifications related to our deferred compensation plan and the impact of
increased income in countries with lower effective tax rates.
Avendra LLC. In January 2001 we contributed our hospitality procurement business
into a newly formed joint venture, together with the procurement business of
Hyatt Hotels Corporation. The joint venture, Avendra LLC, is an independent
professional procurement services company serving the North American hospitality
market and selected industries. Bass Hotels and Resorts, Inc., ClubCorp USA
Inc., and Fairmont Hotels and Resorts, Inc. joined Avendra LLC in May 2001.
19
LIQUIDITY AND CAPITAL RESOURCES
We have credit facilities totaling $2 billion, which support our commercial
paper program and letters of credit. At June 15, 2001, we had substantial
available borrowing capacity under the credit facilities together with cash
balances of $674 million. We consider these resources, together with cash
expected to be generated by operations, adequate to meet our short-term and
long-term liquidity requirements, to finance our long-term growth plans, and to
meet debt service and other cash requirements. We monitor the status of the
capital markets, and regularly evaluate the effect that changes in capital
market conditions may have on our ability to execute our announced growth plans.
Cash and equivalents totaled $674 million at June 15, 2001, an increase of $340
million from year-end 2000. Cash balances increased due to temporary levels of
excess cash on hand following the recent issuance of convertible debt. Cash
provided by operations decreased 33 percent compared to the same period in 2000
as a result of timeshare activity and changes in working capital associated with
timing differences. Net income is stated after recording depreciation expense of
$61 million and $55 million for the twenty-four weeks ended June 15, 2001 and
June 16, 2000, respectively, and after amortization expense of $35 million and
$32 million, respectively, for the same time periods. Earnings before interest
expense, income taxes, depreciation and amortization (EBITDA) for the twenty-
four weeks ended June 15, 2001 of $538 million increased by $52 million, or 11
percent compared to the same period in 2000. EBITDA is an indicator of 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 accounting principles generally
accepted in the United States.
Net cash used in investing activities totaled $83 million for the twenty-four
weeks ended June 15, 2001, and consisted of capital expenditures for lodging
properties, note advances and the net impact of tax related investment
transactions, offset by disposition proceeds primarily from the sale of 13
hotels and one senior living community.
We purchased 1.9 million shares of our Class A Common Stock in the twenty-four
weeks ended June 15, 2001, at a cost of $75 million. As of June 15, 2001, we had
been authorized by our Board of Directors to repurchase an additional 17.7
million shares.
In April 1999, January 2000 and January 2001, we filed "universal shelf"
registration statements with the Securities and Exchange Commission in the
amounts of $500 million, $300 million and $300 million, respectively. As of June
15, 2001, we had offered and sold to the public under these registration
statements, $300 million of debt securities at 7-7/8%, due 2009 and $300
million at 8-1/8%, due 2005, leaving a balance of $500 million available for
future offerings.
In January 2001, we issued, through a private placement, $300 million of 7%
senior unsecured notes, due 2008, and received net proceeds of $297 million. We
have agreed to promptly make and complete a registered exchange offer for these
notes and, if required, to implement a resale registration statement. If we fail
to do so on a timely basis, we will pay additional interest to the holders of
these notes. The registered exchange offer is expected to be completed in the
second half of 2001 and significant additional interest payments are not
anticipated.
20
In 1996, MDS became the exclusive provider of distribution services to
Einstein/Noah Bagel Corp. (ENBC), which operates over 450 bagel shops in 29
states and the District of Columbia. In March 2000, ENBC disclosed that its
independent auditors had expressed substantial doubt about ENBC's ability to
continue as a going concern, due to its inability to meet certain financial
obligations. On April 27, 2000, ENBC and its majority-owned operating subsidiary
filed voluntary bankruptcy petitions for protection under Chapter 11 of the
Federal Bankruptcy code in the U.S. Bankruptcy Court for the District of Arizona
in Phoenix. On April 28, 2000, the Court approved a $31 million debtor-in-
possession credit facility to allow for operation of the companies during
reorganization, and also approved the payment in the ordinary course of business
of prepetition trade creditor claims, including those of MDS, subject to
recovery by the debtors under certain circumstances. On July 27, 2000, the
Bankruptcy court extended an order approving ENBC's assumption of the MDS
contract. MDS continues to distribute to ENBC and has been receiving full
payment in accordance with the terms of its contractual agreement. On June 19,
2001, ENBC was acquired by New World Coffee-Manhattan Bagel Inc. and the
contract was assumed by the new owner.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
------------------------------------------------------------------
There have been no material changes to our exposures to market risk since
December 29, 2000.
21
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
--------------------------
Incorporated by reference to the description of legal proceedings in the
"Contingencies" footnote in the financial statements set forth in Part I,
"Financial Information."
Item 2. Changes in Securities
------------------------------
None.
Item 3. Defaults Upon Senior Securities
----------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
We held our Annual Meeting of Shareholders on May 4, 2001. The shareholders (1)
re-elected directors Richard E. Marriott, Gilbert M. Grosvenor, and Harry J.
Pearce to terms of office expiring at the 2004 Annual Meeting of Shareholders;
(2) ratified the appointment of Arthur Andersen LLP as independent auditors; and
(3) defeated a shareholder proposal to adopt cumulative voting for the election
of directors. The following table sets forth the votes cast with respect to
each of these matters.
---------------------------------------------------------------------------------------------------------------
MATTER FOR AGAINST WITHHELD ABSTAIN
---------------------------------------------------------------------------------------------------------------
Re-election of Richard E. Marriott 2,118,954,160 20,336,020
---------------------------------------------------------------------------------------------------------------
Re-election of Gilbert M. Grosvenor 2,118,460,460 20,829,720
---------------------------------------------------------------------------------------------------------------
Re-election of Harry J. Pearce 2,104,970,680 34,319,500
---------------------------------------------------------------------------------------------------------------
Ratification of appointment of Arthur
Andersen LLP as independent auditors 2,102,756,980 26,939,160 9,594,040
---------------------------------------------------------------------------------------------------------------
Proposal to adopt cumulative voting
for the election of directors 333,327,900 1,511,930,810 86,617,100
---------------------------------------------------------------------------------------------------------------
Item 5. Other Information
--------------------------
None.
22
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
(a) Exhibits
Exhibit No. Description
----------- -----------
12 Statement of Computation of Ratio of Earnings to Fixed
Charges.
99 Forward-Looking Statements.
(b) Reports on Form 8-K
None.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MARRIOTT INTERNATIONAL, INC.
27/th/ day of July, 2001
/s/ Arne M. Sorenson
-----------------------
Arne M. Sorenson
Executive Vice President and
Chief Financial Officer
/s/ Linda A. Bartlett
-----------------------
Linda A. Bartlett
Vice President and Controller
(Principal Accounting Officer)
24