UNITED STATES
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 |
For the quarterly period ended March 25, 2005
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarter Ended September 10, 2004
Commission File No. 1-13881
MARRIOTT INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 52-2055918 | |
| (State of Incorporation) | (I.R.S. Employer Identification | |
10400 Fernwood Road, Bethesda, Maryland | 20817 | |
| (Address of Principal Executive Offices) | (Zip Code) | |
10400 Fernwood Road(301) 380-3000
Bethesda, Maryland 20817
(301) 380-3000(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrantregistrant: (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 ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act).
Yes x No ¨
Class | Shares outstanding at | |
Class A Common Stock, $0.01 par value |
INDEX
| Page No. | ||||||
Part I. | ||||||
Item 1. | ||||||
| 5 | ||||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||
| 15 | ||||||
Item 3. | ||||||
Item 4. | ||||||
Part II. | ||||||
Item 1. | ||||||
Item 2. | ||||||
Item 3. | ||||||
Item 4. | ||||||
Item 5. | 33 | |||||
Item 6. | 36 | |||||
| ||||||
| ||||||
2
We make forward-looking statements in this document based on the beliefs and assumptions of our management, and on information currently available to us. Forward-looking statements include the information about our possible or assumed future results of operations in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other statements throughout this report preceded by, followed by or that include the words “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,” or similar expressions.
Forward-looking statements involve risks, uncertainties and assumptions, and our actual results may differ materially from those expressed in our forward-looking statements. We therefore caution you not to rely unduly on any forward-looking statements.
Risks and Uncertainties
You should understand that the following important factors, as well as those discussed in Exhibit 99 and elsewhere in this quarterly report, could cause results to differ materially from those expressed in such forward-looking statements. Because there is no way to determine in advance, whether, or to what extent, any present uncertainty will ultimately impact our business, you should give equal weight to each of the following:
3
4
PART I - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
($ in millions, except per share amounts)
(Unaudited)
| Twelve Weeks Ended | Thirty-Six Weeks Ended | Twelve Weeks Ended | ||||||||||||||||||||||
| September 10, 2004 | September 12, 2003 | September 10, 2004 | September 12, 2003 | March 25, 2005 | March 26, 2004 | |||||||||||||||||||
REVENUES | ||||||||||||||||||||||||
Base management fees | $ | 97 | $ | 86 | $ | 302 | $ | 266 | $ | 111 | $ | 99 | ||||||||||||
Franchise fees | 74 | 61 | 207 | 169 | 70 | 61 | ||||||||||||||||||
Incentive management fees | 21 | 18 | 90 | 75 | 50 | 33 | ||||||||||||||||||
Owned, leased, corporate housing and other revenue | 153 | 132 | 491 | 414 | 167 | 156 | ||||||||||||||||||
Timeshare interval sales and services | 299 | 296 | 898 | 767 | 346 | 318 | ||||||||||||||||||
Cost reimbursements | 1,573 | 1,423 | 4,772 | 4,233 | 1,682 | 1,585 | ||||||||||||||||||
Synthetic fuel | 87 | 93 | 198 | 224 | 108 | — | ||||||||||||||||||
| 2,304 | 2,109 | 6,958 | 6,148 | 2,534 | 2,252 | |||||||||||||||||||
OPERATING COSTS AND EXPENSES | ||||||||||||||||||||||||
Owned, leased and corporate housing – direct | 139 | 118 | 428 | 347 | 145 | 132 | ||||||||||||||||||
Timeshare – direct | 249 | 265 | 746 | 688 | 272 | 252 | ||||||||||||||||||
Reimbursed costs | 1,573 | 1,423 | 4,772 | 4,233 | 1,682 | 1,585 | ||||||||||||||||||
General, administrative and other | 126 | 117 | 385 | 336 | 124 | 132 | ||||||||||||||||||
Synthetic fuel | 118 | 96 | 259 | 328 | 153 | — | ||||||||||||||||||
| 2,205 | 2,019 | 6,590 | 5,932 | 2,376 | 2,101 | |||||||||||||||||||
OPERATING INCOME | 99 | 90 | 368 | 216 | 158 | 151 | ||||||||||||||||||
Gains and other income | 43 | 15 | 95 | 54 | ||||||||||||||||||||
Gains and other income (expense) | (5 | ) | 4 | |||||||||||||||||||||
Interest expense | (23 | ) | (26 | ) | (69 | ) | (77 | ) | (24 | ) | (22 | ) | ||||||||||||
Interest income | 33 | 31 | 98 | 78 | 27 | 26 | ||||||||||||||||||
Provision for loan losses | — | (1 | ) | — | (7 | ) | ||||||||||||||||||
Equity in earnings (losses) -Synthetic fuel | — | — | (28 | ) | — | |||||||||||||||||||
-Other | (8 | ) | (3 | ) | (9 | ) | (1 | ) | ||||||||||||||||
(Provision for) benefit from loan losses | (11 | ) | 3 | |||||||||||||||||||||
Equity in losses - Synthetic fuel | — | (28 | ) | |||||||||||||||||||||
- Other | (5 | ) | (2 | ) | ||||||||||||||||||||
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST | 144 | 106 | 455 | 263 | ||||||||||||||||||||
(Provision) benefit for income taxes | (28 | ) | 16 | (79 | ) | 72 | ||||||||||||||||||
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST | 140 | 132 | ||||||||||||||||||||||
Provision for income taxes | (5 | ) | (18 | ) | ||||||||||||||||||||
INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST | 116 | 122 | 376 | 335 | ||||||||||||||||||||
INCOME BEFORE MINORITY INTEREST | 135 | 114 | ||||||||||||||||||||||
Minority interest | 16 | (29 | ) | 30 | (29 | ) | 10 | — | ||||||||||||||||
INCOME FROM CONTINUING OPERATIONS | 132 | 93 | 406 | 306 | ||||||||||||||||||||
Discontinued Operations | ||||||||||||||||||||||||
Income from Senior Living Services, net of tax | — | — | — | 29 | ||||||||||||||||||||
Income (loss) from Distribution Services, net of tax | 1 | (1 | ) | 1 | (2 | ) | ||||||||||||||||||
NET INCOME | $ | 133 | $ | 92 | $ | 407 | $ | 333 | $ | 145 | $ | 114 | ||||||||||||
EARNINGS PER SHARE – Basic | $ | 0.64 | $ | 0.50 | ||||||||||||||||||||
Earnings from continuing operations | $ | .59 | $ | .40 | $ | 1.78 | $ | 1.31 | ||||||||||||||||
Earnings from discontinued operations | — | (.01 | ) | .01 | .12 | |||||||||||||||||||
Earnings per share | $ | .59 | $ | .39 | $ | 1.79 | $ | 1.43 | ||||||||||||||||
EARNINGS PER SHARE – Diluted | $ | 0.61 | $ | 0.47 | ||||||||||||||||||||
Earnings from continuing operations | $ | .55 | $ | .38 | $ | 1.69 | $ | 1.25 | ||||||||||||||||
(Loss) earnings from discontinued operations | .01 | (.01 | ) | — | .11 | |||||||||||||||||||
Earnings per share | $ | .56 | $ | .37 | $ | 1.69 | $ | 1.36 | ||||||||||||||||
DIVIDENDS DECLARED PER SHARE | $ | 0.085 | $ | 0.075 | $ | 0.245 | $ | 0.220 | $ | 0.085 | $ | 0.075 | ||||||||||||
See Notes to Condensed Consolidated Financial Statements
5
CONDENSED CONSOLIDATED BALANCE SHEET
($ in millions)
| September 10, 2004 (Unaudited) | January 2, 2004 | March 25, 2005 (Unaudited) | December 31, 2004 | |||||||||||||
ASSETS | ||||||||||||||||
Current assets | ||||||||||||||||
Cash and equivalents | $ | 202 | $ | 229 | $ | 377 | $ | 770 | ||||||||
Accounts and notes receivable | 863 | 728 | 974 | 797 | ||||||||||||
Prepaid taxes | 248 | 223 | ||||||||||||||
Current deferred taxes, net | 162 | 162 | ||||||||||||||
Other | 112 | 84 | 220 | 217 | ||||||||||||
Assets held for sale | 15 | — | ||||||||||||||
| 1,440 | 1,264 | 1,733 | 1,946 | |||||||||||||
Property and equipment | 2,454 | 2,513 | 2,352 | 2,389 | ||||||||||||
Intangible assets | ||||||||||||||||
Goodwill | 923 | 923 | 923 | 923 | ||||||||||||
Other intangible assets | 555 | 526 | ||||||||||||||
Contract acquisition costs | 518 | 513 | ||||||||||||||
| 1,441 | 1,436 | |||||||||||||||
Equity method investments | 258 | 468 | 239 | 249 | ||||||||||||
Notes and other receivables, net | ||||||||||||||||
Notes receivable | ||||||||||||||||
Loans to equity method investees | 514 | 558 | 418 | 526 | ||||||||||||
Loans to timeshare owners | 289 | 152 | 369 | 289 | ||||||||||||
Other notes receivable | 424 | 389 | 373 | 374 | ||||||||||||
Other long-term receivables | 497 | 534 | ||||||||||||||
| 1,724 | 1,633 | 1,160 | 1,189 | |||||||||||||
Other long-term receivables | 360 | 326 | ||||||||||||||
Deferred taxes, net | 421 | 397 | ||||||||||||||
Other | 915 | 850 | 723 | 736 | ||||||||||||
| $ | 8,269 | $ | 8,177 | $ | 8,429 | $ | 8,668 | |||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities | ||||||||||||||||
Current portion of long-term debt | $ | 489 | $ | 489 | ||||||||||||
Accounts payable | $ | 574 | $ | 584 | 589 | 570 | ||||||||||
Current portion of long-term debt | 290 | 64 | ||||||||||||||
Other | 1,191 | 1,122 | ||||||||||||||
Accrued payroll and benefits | 392 | 508 | ||||||||||||||
Self-insurance reserves | 77 | 71 | ||||||||||||||
Other payables and accruals | 394 | 416 | ||||||||||||||
Liability for guest loyalty program | 303 | 302 | ||||||||||||||
| 2,055 | 1,770 | |||||||||||||||
| 2,244 | 2,356 | |||||||||||||||
Long-term debt | 1,085 | 1,391 | 835 | 836 | ||||||||||||
Casualty self-insurance reserves | 183 | 169 | ||||||||||||||
Self-insurance reserves | 157 | 163 | ||||||||||||||
Liability for guest loyalty program | 676 | 640 | ||||||||||||||
Other long-term liabilities | 1,179 | 1,003 | 572 | 580 | ||||||||||||
Minority interest | 10 | 6 | 13 | 12 | ||||||||||||
Shareholders’ equity | ||||||||||||||||
Class A common stock | 3 | 3 | 3 | 3 | ||||||||||||
Additional paid-in capital | 3,366 | 3,317 | 3,479 | 3,423 | ||||||||||||
Retained earnings | 1,804 | 1,505 | 2,055 | 1,951 | ||||||||||||
Deferred compensation | (121 | ) | (81 | ) | (182 | ) | (108 | ) | ||||||||
Treasury stock, at cost | (1,259 | ) | (865 | ) | (1,430 | ) | (1,197 | ) | ||||||||
Accumulated other comprehensive loss | (36 | ) | (41 | ) | ||||||||||||
Accumulated other comprehensive income | 7 | 9 | ||||||||||||||
| 3,757 | 3,838 | 3,932 | 4,081 | |||||||||||||
| $ | 8,269 | $ | 8,177 | $ | 8,429 | $ | 8,668 | |||||||||
See Notes to Condensed Consolidated Financial Statements
6
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
($ in millions)
(Unaudited)
| Thirty-Six Weeks Ended | Twelve Weeks Ended | |||||||||||||||
| September 10, 2004 | September 12, 2003 | March 25, 2005 | March 26, 2004 | |||||||||||||
OPERATING ACTIVITIES | ||||||||||||||||
Income from continuing operations | $ | 406 | $ | 306 | ||||||||||||
Adjustments to reconcile to cash provided by operating activities: | ||||||||||||||||
Income from discontinued operations | 1 | 9 | ||||||||||||||
Discontinued operations – gain on sale/exit | — | 18 | ||||||||||||||
Net income | $ | 145 | $ | 114 | ||||||||||||
Adjustments to reconcile to cash used in operating activities: | ||||||||||||||||
Depreciation and amortization | 115 | 105 | 37 | 39 | ||||||||||||
Minority interest in results of synthetic fuel operation | (29 | ) | 29 | (10 | ) | — | ||||||||||
Income taxes | — | (148 | ) | (23 | ) | (11 | ) | |||||||||
Timeshare activity, net | 36 | (88 | ) | (88 | ) | (47 | ) | |||||||||
Other | (51 | ) | (55 | ) | 14 | (11 | ) | |||||||||
Working capital changes | 3 | (75 | ) | (136 | ) | (101 | ) | |||||||||
Net cash provided by operating activities | 481 | 101 | ||||||||||||||
Net cash used in operating activities | (61 | ) | (17 | ) | ||||||||||||
INVESTING ACTIVITIES | ||||||||||||||||
Capital expenditures | (115 | ) | (144 | ) | (35 | ) | (31 | ) | ||||||||
Dispositions | 250 | 487 | 15 | 4 | ||||||||||||
Loan advances | (76 | ) | (176 | ) | (16 | ) | (25 | ) | ||||||||
Loan collections and sales | 134 | 152 | 9 | 97 | ||||||||||||
Equity method investments | (67 | ) | (20 | ) | ||||||||||||
Other | (2 | ) | 3 | (10 | ) | (21 | ) | |||||||||
Net cash provided by investing activities | 124 | 302 | ||||||||||||||
Net cash (used in) provided by investing activities | (37 | ) | 24 | |||||||||||||
FINANCING ACTIVITIES | ||||||||||||||||
Commercial paper, net | 50 | (97 | ) | — | 290 | |||||||||||
Issuance of long-term debt | 16 | 12 | 4 | 2 | ||||||||||||
Repayment of long-term debt | (158 | ) | (65 | ) | (5 | ) | (35 | ) | ||||||||
Issuance of Class A common stock | 100 | 50 | 51 | 17 | ||||||||||||
Dividends paid | (54 | ) | (50 | ) | (19 | ) | (17 | ) | ||||||||
Purchase of treasury stock | (586 | ) | (291 | ) | (320 | ) | (297 | ) | ||||||||
Earn-outs received (paid), net | — | (47 | ) | |||||||||||||
Earn-outs received, net | (6 | ) | 7 | |||||||||||||
Net cash used in financing activities | (632 | ) | (488 | ) | (295 | ) | (33 | ) | ||||||||
DECREASE IN CASH AND EQUIVALENTS | (27 | ) | (85 | ) | (393 | ) | (26 | ) | ||||||||
CASH AND EQUIVALENTS, beginning of period | 229 | 198 | 770 | 229 | ||||||||||||
CASH AND EQUIVALENTS, end of period | $ | 202 | $ | 113 | $ | 377 | $ | 203 | ||||||||
See Notes to Condensed Consolidated Financial Statements
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 1. | Basis of Presentation |
The 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 United StatesU.S. generally accepted accounting principles. We believe the disclosures made are adequate to make the information presented not misleading. You should, however, read the condensed consolidated financial statements in conjunction with the consolidated financial statements and notes to those financial statements in our Annual Report on Form 10-K for the fiscal year ended January 2,December 31, 2004. Certain terms not otherwise defined in this quarterly report have the meanings specified in that Annual Report on Form 10-K.
The preparation of financial statements in conformity with United StatesU.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, the reported amounts of salesrevenues and expenses during the reporting periodperiods and the disclosures of contingent liabilities. Accordingly, our ultimate results could differ from those estimates. We have reclassified certain prior year amounts to conform to our 20042005 presentation.
In our opinion, the accompanying condensed consolidated financial statements reflect all normal and recurring adjustments necessary to present fairly our financial position as of September 10, 2004March 25, 2005 and January 2,December 31, 2004, and the results of our operations for the twelve and thirty-six weeks ended September 10, 2004 and September 12, 2003 and cash flows for the thirty-sixtwelve weeks ended September 10, 2004March 25, 2005 and September 12, 2003.March 26, 2004. 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 consolidated in these financial statements.
| 2. |
FIN 46, “Consolidation of Variable Interest Entities,” (the “Interpretation”) was effective for all enterprises with variable interests in variable interest entities created after January 31, 2003. FIN 46(R), which was revised in December 2003, was effective for all entities to which the provisions of FIN 46 were not applied as of December 24, 2003. We applied the provisions of FIN 46(R) to all entities subject to the Interpretation as of March 26, 2004. Under FIN 46(R), if an entity is determined to be a variable interest entity, it must be consolidated by the enterprise that absorbs the majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both.
As a result of adopting FIN 46(R), we consolidated our two synthetic fuel joint ventures as of March 26, 2004. The synthetic fuel joint ventures own four coal-based synthetic fuel production facilities (the “Facilities”). The synthetic fuel produced at the Facilities through 2007 qualifies for tax credits based on Section 29 of the Internal Revenue Code.
While the Facilities produce significant losses, these losses are more than offset by the tax benefit associated with the losses and the tax credits generated under Section 29 of the Internal Revenue Code. At September 10, 2004, the ventures had working capital of $1 million and the book value of the Facilities was $32 million. The ventures have no long-term debt.
8
We currently consolidate four other entities which are variable interest entities under FIN 46(R). These entities were established with the same partner to lease four Marriott branded hotels. The combined capital in the four variable interest entities is $4 million, which is used primarily to fund hotel working capital. Our equity at risk is $3 million and we hold 55 percent of the common equity shares. In addition, we guarantee a maximum of $1 million of the lease obligations of one of the hotels, and our total exposure to loss is $4 million.
We have one other significant interest in an entity which is a variable interest entity under FIN 46(R). In February 2001, we entered into a shareholders’ agreement with an unrelated third party to form a joint venture to own and lease luxury hotels to be managed by us. In February 2002, the joint venture signed its first lease with a third party landlord. The initial capital structure of the joint venture is $4 million of debt and $4 million of equity. We hold 35 percent of the equity, or $1 million, and 65 percent of the debt, or $3 million, for a total investment of $4 million. In addition, each equity partner entered into various guarantees with the landlord to guarantee lease payments. Our total exposure under these guarantees is $18 million. Our maximum exposure to loss is $22 million. We do not consolidate the joint venture since we do not bear the majority of the expected losses or expected residual returns.
FIN 46(R) does not apply to qualifying special purpose entities, such as those periodically used by us to sell notes receivable originated by our timeshare business in connection with the sale of timeshare intervals. We will continue to account for these qualifying special purpose entities in accordance with Statement of Financial Accounting Standards (“FAS”) No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.”
| Earnings Per Share |
The following table below illustrates the reconciliation of the earnings and number of shares used in the basic and diluted earnings per share calculations.
| Twelve Weeks Ended | Thirty-Six Weeks Ended | Twelve Weeks Ended | ||||||||||||||||
| (in millions, except per share amounts) | September 10, 2004 | September 12, 2003 | September 10, 2004 | September 12, 2003 | March 25, 2005 | March 26, 2004 | ||||||||||||
Computation of Basic Earnings Per Share | ||||||||||||||||||
Income from continuing operations | $ | 132 | $ | 93 | $ | 406 | $ | 306 | ||||||||||
Net income | $ | 145 | $ | 114 | ||||||||||||||
Weighted average shares outstanding | 225.9 | 232.7 | 227.5 | 233.0 | 225.5 | 229.6 | ||||||||||||
Basic earnings per share from continuing operations | $ | 0.59 | $ | 0.40 | $ | 1.78 | $ | 1.31 | ||||||||||
Basic earnings per share | $ | 0.64 | $ | 0.50 | ||||||||||||||
Computation of Diluted Earnings Per Share | ||||||||||||||||||
Income from continuing operations | $ | 132 | $ | 93 | $ | 406 | $ | 306 | ||||||||||
After-tax interest expense on convertible debt | — | — | — | — | ||||||||||||||
Income from continuing operations for diluted earnings per share | $ | 132 | $ | 93 | $ | 406 | $ | 306 | ||||||||||
Net income | $ | 145 | $ | 114 | ||||||||||||||
Weighted average shares outstanding | 225.9 | 232.7 | 227.5 | 233.0 | 225.5 | 229.6 | ||||||||||||
Effect of dilutive securities | ||||||||||||||||||
Employee stock option plan | 8.0 | 7.0 | 8.0 | 5.7 | ||||||||||||||
Deferred stock incentive plan | 4.2 | 4.7 | 4.2 | 4.8 | ||||||||||||||
Employee stock option plans | 9.7 | 7.7 | ||||||||||||||||
Deferred stock incentive plans | 3.7 | 4.3 | ||||||||||||||||
Restricted stock units | 0.8 | 0.5 | 0.7 | 0.4 | 0.7 | 0.4 | ||||||||||||
Convertible debt | — | 0.9 | 0.5 | 0.9 | — | 0.9 | ||||||||||||
Shares for diluted earnings per share | 238.9 | 245.8 | 240.9 | 244.8 | 239.6 | 242.9 | ||||||||||||
Diluted earnings per share from continuing operations | $ | 0.55 | $ | 0.38 | $ | 1.69 | $ | 1.25 | ||||||||||
Diluted earnings per share | $ | 0.61 | $ | 0.47 | ||||||||||||||
9
We compute the effect of dilutive securities using the treasury stock method and average market prices during the period. We determine dilution based on earnings from continuing operations.
In accordance with FASFinancial Accounting Standards (“FAS”) No. 128, “Earnings per Share,” we dodid not include the following stock options in our calculationcalculations of diluted earnings per share because the option exercise prices arewere greater than the average market priceprices for our Class A Common Stock for the applicable period:periods:
| (a) | for the twelve |
| (b) | for the twelve |
We have several stock-basedshare-based employee compensation plans that we account for using the intrinsic value method under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” Accordingly, we do not reflect stock-basedshare-based employee compensation cost in net income for our Stock Option Program, the Supplemental Executive Stock Option awards or the Employee Stock Purchase Plan.
The following table shows stock-basedshare-based employee compensation costs we recognized in the twelve and thirty-six weeks ended September 10,March 25, 2005 and March 26, 2004, and September 12, 2003 and our deferred compensation balance at September 10, 2004March 25, 2005 and January 2,December 31, 2004.
| Reported Stock-Based Compensation Expense, Net of Tax | ||||||||||||
| Twelve Weeks Ended | Thirty-Six Weeks Ended | |||||||||||
| ($ in millions) | September 10, 2004 | September 12, 2003 | September 10, 2004 | September 12, 2003 | ||||||||
Deferred share grants | $ | 1 | $ | 1 | $ | 3 | $ | 4 | ||||
Restricted share grants | 1 | 1 | 3 | 3 | ||||||||
Restricted stock units | 4 | 2 | 15 | 6 | ||||||||
| $ | 6 | $ | 4 | $ | 21 | $ | 13 | |||||
| Reported Share-Based Compensation, Net of Tax | ||||||||||||
Deferred Compensation Balance at | Twelve Weeks Ended | |||||||||||
| ($ in millions) | September 10, 2004 | January 2, 2004 | March 25, 2005 | March 26, 2004 | ||||||||
Deferred share grants | $ | 16 | $ | 21 | $ | 1 | $ | 1 | ||||
Restricted share grants | 12 | 16 | — | 1 | ||||||||
Restricted stock units | 93 | 44 | 7 | 5 | ||||||||
| $ | 121 | $ | 81 | $ | 8 | $ | 7 | |||||
| Deferred Compensation Balance | ||||||||||||
($ in millions)
| March 25, 2005 | December 31, 2004 | ||||||||||
Deferred share grants | $ | 12 | $ | 14 | ||||||||
Restricted share grants | 10 | 10 | ||||||||||
Restricted stock units | 160 | 84 | ||||||||||
| $ | 182 | $ | 108 | |||||||||
During the thirty-six weeks ended September 10, 2004,first quarter of 2005, we granted approximately 1.61.4 million units (each representing one share of our Class A common stock) under the restricted stock unit program which began in the first quarter of 2003.program.
10
The following table illustrates the effect on net income and earnings per share as if we had applied the fair value recognition provisions of FAS No. 123, “Accounting for Stock-Based Compensation,” to stock-basedshare-based employee compensation. We have included the impact of measured but unrecognized compensation cost and excess tax benefits credited to additional paid-in-capital in the calculation of the diluted pro forma shares for all periods presented. In addition, we have included the estimated impact of reimbursements from third parties.
| Twelve Weeks Ended | Thirty-Six Weeks Ended | Twelve Weeks Ended | ||||||||||||||||||||||
| ($ in millions, except per share amounts) | September 10, 2004 | September 12, 2003 | September 10, 2004 | September 12, 2003 | March 25, 2005 | March 26, 2004 | ||||||||||||||||||
Net income, as reported | $ | 133 | $ | 92 | $ | 407 | $ | 333 | $ | 145 | $ | 114 | ||||||||||||
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects | 6 | 4 | 21 | 13 | ||||||||||||||||||||
Deduct: Total stock-based employee compensation expense determined under fair value-based method for | (17 | ) | (18 | ) | (53 | ) | (52 | ) | ||||||||||||||||
Add: Share-based employee compensation expense included in reported net income, net of related tax effects | 8 | 7 | ||||||||||||||||||||||
Deduct: Total share-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects and estimated reimbursed costs | (14 | ) | (13 | ) | ||||||||||||||||||||
Pro forma net income | $ | 122 | $ | 78 | $ | 375 | $ | 294 | $ | 139 | $ | 108 | ||||||||||||
Earnings per share: | ||||||||||||||||||||||||
Basic – as reported | $ | 0.59 | $ | 0.39 | $ | 1.79 | $ | 1.43 | $ | 0.64 | $ | 0.50 | ||||||||||||
Basic – pro forma | $ | 0.54 | $ | 0.34 | $ | 1.65 | $ | 1.26 | $ | 0.62 | $ | 0.47 | ||||||||||||
Diluted – as reported | $ | 0.56 | $ | 0.37 | $ | 1.69 | $ | 1.36 | $ | 0.61 | $ | 0.47 | ||||||||||||
Diluted – pro forma | $ | 0.51 | $ | 0.32 | $ | 1.55 | $ | 1.21 | $ | 0.58 | $ | 0.44 | ||||||||||||
We defer revenue received from managed, franchised, and Marriott-owned/leased hotels and program partners equal to the fair value of our future redemption obligation. We determine the fair value of the future redemption obligation based on statistical formulas which project timing of future point redemption based on historical levels, including an estimate of the “breakage” for points that will never be redeemed, and an estimate of the points that will eventually be redeemed. These judgmental factors determine the required liability for outstanding points.
Our management and franchise agreements require that we be reimbursed currently for the costs of operating the program, including marketing, promotion, and communicating with, and performing member services for the Marriott Rewards members. Due to the requirement that hotels reimburse us for program operating costs as incurred, we receive and recognize the balance of the revenue from hotels in connection with the Marriott Rewards program at the time such costs are incurred and expensed. We recognize the component of revenue from program partners that corresponds to program maintenance services over the expected life of the points awarded.
Upon the redemption of points, we recognize as revenue the amounts previously deferred, and recognize the corresponding expense relating to the cost of the awards redeemed.
Our liability for the Marriott Rewards program was $883 million at September 10, 2004 and $784 million at January 2, 2004 of which $601 million and $502 million, respectively, are included in other long-term liabilities in the accompanying condensed consolidated balance sheet.
| Comprehensive Income and Capital Structure |
Our total comprehensive income was $131$143 million and $63$120 million for the twelve weeks ended September 10,March 25, 2005 and March 26, 2004, and September 12, 2003, respectively, and $412 million and $337 million, respectively, for the thirty-six weeks ended September 10, 2004 and September 12, 2003. The principal difference between net income and comprehensive income forrespectively.
For the twelve weeks ended September 10, 2004 relates to foreign currency translation adjustments, while the principal difference between net income and comprehensive income for the thirty-six weeks then ended relates to a change in accounting estimate partially offset by foreign currency translation adjustments. The principal difference between net income and comprehensive income for both the twelve and thirty-six weeks ended September 12, 2003 relates to foreign currency translation adjustments.
For the thirty-six weeks ended September 10, 2004March 25, 2005, approximately 3.71.8 million shares of our Class A Common Stock were issued as a result of exercised options. In addition, during the 2005 first quarter we repurchased approximately 5.2 million shares of our Class A Common Stock at a cost of $328 million.
11
| Business Segments |
We are a diversified hospitality company with operations in five business segments:
| • | Full-Service Lodging, which includes Marriott Hotels & Resorts, The Ritz-Carlton, Renaissance Hotels & Resorts |
| • | Select-Service Lodging, which includes Courtyard, Fairfield Inn and SpringHill Suites; |
| • | Extended-Stay Lodging, which includes Residence Inn, TownePlace Suites, Marriott ExecuStay and Marriott Executive Apartments; |
| • | Timeshare, which includes the development, marketing, operation and ownership of timeshare properties under the Marriott Vacation Club International, The Ritz-Carlton Club, Marriott Grand Residence Club and Horizons by Marriott Vacation Club International brands; and |
| • | Synthetic Fuel, which includes our interest in the operation of coal-based synthetic fuel production facilities. |
We evaluate the performance of our segments based primarily on the results of the segment without allocating corporate expenses, interest expense,income, provision for loan losses, and interest income.expense. With the exception of our synthetic fuelthe Synthetic Fuel segment, we do not allocate income taxes to our segments. The synthetic fuel operation generated a tax benefit and credits of $28$62 million and $53$39 million respectively, for the twelve weeks ended September 10,March 25, 2005 and March 26, 2004, and September 12, 2003, and $105 million and $199 million, respectively, for the thirty-six weeks then ended.respectively. As timeshare note sales are an integral part of the timeshare business we include timeshare note sale gains in our timeshareTimeshare segment results, and we allocate other gains as well as equity in earnings (losses) from our joint ventures and divisional general, administrative and other expenses to each of our segments.
Our tax provision of $5 million in 2005 includes a tax provision of $67 million before the impact of the Synthetic Fuel segment, partially offset by a $15 million tax benefit associated with the Synthetic Fuel segment losses and $47 million of synthetic fuel tax credits. Our tax provision of $18 million in 2004 includes a tax provision of $57 million before the impact of the Synthetic Fuel segment, partially offset by a $10 million tax benefit associated with the Synthetic Fuel segment losses and $29 million of synthetic fuel tax credits.
We have aggregated the brands and businesses presented within each of our segments considering their similar economic characteristics, types of customers, distribution channels and the regulatory business environment of the brands and operations within each segment.
| Twelve Weeks Ended | Thirty-Six Weeks Ended | Twelve Weeks Ended | ||||||||||||||||||||||
| ($ in millions) | September 10, 2004 | September 12, 2003 | September 10, 2004 | September 12, 2003 | March 25, 2005 | March 26, 2004 | ||||||||||||||||||
Revenues | ||||||||||||||||||||||||
Full-Service | $ | 1,459 | $ | 1,314 | $ | 4,512 | $ | 3,977 | $ | 1,629 | $ | 1,505 | ||||||||||||
Select-Service | 277 | 236 | 788 | 699 | 272 | 247 | ||||||||||||||||||
Extended-Stay | 133 | 138 | 377 | 392 | 126 | 115 | ||||||||||||||||||
Timeshare | 348 | 328 | 1,083 | 856 | 399 | 385 | ||||||||||||||||||
Total lodging | 2,217 | 2,016 | 6,760 | 5,924 | ||||||||||||||||||||
Synthetic fuel | 87 | 93 | 198 | 224 | ||||||||||||||||||||
Total Lodging | 2,426 | 2,252 | ||||||||||||||||||||||
Synthetic Fuel | 108 | — | ||||||||||||||||||||||
| $ | 2,304 | $ | 2,109 | $ | 6,958 | $ | 6,148 | $ | 2,534 | $ | 2,252 | |||||||||||||
Income from Continuing Operations | ||||||||||||||||||||||||
| Twelve Weeks Ended | ||||||||||||||||||||||||
($ in millions)
| March 25, 2005 | March 26, 2004 | ||||||||||||||||||||||
Net Income | ||||||||||||||||||||||||
Full-Service | $ | 79 | $ | 77 | $ | 292 | $ | 259 | $ | 116 | $ | 100 | ||||||||||||
Select-Service | 42 | 28 | 104 | 81 | 33 | 23 | ||||||||||||||||||
Extended-Stay | 20 | 12 | 48 | 37 | 16 | 10 | ||||||||||||||||||
Timeshare | 34 | 23 | 135 | 85 | 63 | 50 | ||||||||||||||||||
Total lodging | 175 | 140 | 579 | 462 | ||||||||||||||||||||
Synthetic fuel (after-tax) | 31 | 21 | 73 | 66 | ||||||||||||||||||||
Total Lodging financial results | 228 | 183 | ||||||||||||||||||||||
Synthetic Fuel (after-tax) | 18 | 11 | ||||||||||||||||||||||
Unallocated corporate expenses | (28 | ) | (35 | ) | (91 | ) | (89 | ) | (26 | ) | (30 | ) | ||||||||||||
Interest income, provision for loan losses and interest expense | 10 | 4 | 29 | (6 | ) | (8 | ) | 7 | ||||||||||||||||
Income taxes (excluding Synthetic fuel) | (56 | ) | (37 | ) | (184 | ) | (127 | ) | ||||||||||||||||
Income taxes (excluding Synthetic Fuel) | (67 | ) | (57 | ) | ||||||||||||||||||||
| $ | 132 | $ | 93 | $ | 406 | $ | 306 | $ | 145 | $ | 114 | |||||||||||||
| Twelve Weeks Ended | ||||||||||||||||||||||||
($ in millions)
| March 25, 2005 | March 26, 2004 | ||||||||||||||||||||||
Equity in Earnings (Losses) of Equity Method Investees | ||||||||||||||||||||||||
Full-Service | $ | 2 | $ | 6 | ||||||||||||||||||||
Select-Service | (5 | ) | (6 | ) | ||||||||||||||||||||
Timeshare | (2 | ) | (3 | ) | ||||||||||||||||||||
Synthetic Fuel | — | (28 | ) | |||||||||||||||||||||
Corporate | — | 1 | ||||||||||||||||||||||
| $ | (5 | ) | $ | (30 | ) | |||||||||||||||||||
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| Twelve Weeks Ended | Thirty-Six Weeks Ended | |||||||||||||||
| ($ in millions) | September 10, 2004 | September 12, 2003 | September 10, 2004 | September 12, 2003 | ||||||||||||
Equity in Earnings (Losses) of Equity Method Investees | ||||||||||||||||
Full-Service | $ | (2 | ) | $ | — | $ | 6 | $ | 10 | |||||||
Select-Service | (3 | ) | (4 | ) | (9 | ) | (11 | ) | ||||||||
Timeshare | (2 | ) | 1 | (6 | ) | — | ||||||||||
Synthetic fuel | — | — | (28 | ) | — | |||||||||||
Corporate | (1 | ) | — | — | — | |||||||||||
| $ | (8 | ) | $ | (3 | ) | $ | (37 | ) | $ | (1 | ) | |||||
| Contingencies |
Guarantees
We issue guarantees to certain lenders and hotel owners primarily to obtain long-term management contracts. The guarantees generally have a stated maximum amount of funding and a term of five years or less. The terms of guarantees to lenders generally require us to fund if cash flows from hotel operations are inadequate to cover annual debt service or to repay the loan at the end of the term. The terms of the guarantees to hotel owners generally require us to fund if the affected hotels do not attain specified levels of operating profit.
We also enter into project completion guarantees with certain lenders in conjunction with hotels and timeshare units that we or our joint venture partners are building.
The maximum potential amount of future fundings for guarantees where we are the primary obligor and the carrying amount of the liability for expected future fundings at March 25, 2005, are as follows:
($ in millions)
Guarantee Type | Maximum Potential Future Fundings | Liability for Future March 25, 2005 | ||||
Debt service | $ | 216 | $ | 13 | ||
Operating profit | 262 | 8 | ||||
Project completion | 56 | — | ||||
Other | 44 | 4 | ||||
Total guarantees where Marriott International is the primary obligor | $ | 578 | $ | 25 | ||
Our guarantees of $578 million listed above include $360$81 million for guarantees that will not be in effect until the underlying hotels open and we begin to manage the properties. The $81 million of guarantees not in effect is comprised of $62 million of operating profit guarantees and $19 million of debt service guarantees. Guarantee fundings to lenders and hotel owners are generally recoverable as loans and are generally repayable to us out of future hotel cash flows and/or proceeds from the sale of hotels.
In addition to the guarantees noted above, in conjunction with financing obtained for specific projects or properties owned by joint ventures in which we are a party, we may provide industry standard indemnifications to the lender for loss, liability, or damage occurring as a result of the actions of the other joint venture owner or our own actions.
The guarantees of $578 million in the table above do not include $349 million related to Senior Living Services lease obligations and lifecare bonds.bonds for which we are secondarily liable. Sunrise Senior Living, Inc. (“Sunrise”) is the primary obligor of the leases and a portion of the lifecare bonds, and CNL Retirement Properties, Inc. (“CNL”) is the primary obligor of the remainder of the lifecare bonds. Prior to the sale of the Senior Living Services business at the end of the first quarter of 2003, these pre-existing guarantees were guarantees by the Company of obligations of consolidated Senior Living Services subsidiaries. Sunrise and CNL have indemnified us for any guarantee fundings we may be called on to make in connection with these lease obligations and lifecare bonds.
We also enter into project completion guarantees with certain lenders in conjunction with hotels and timeshare units that we or our joint venture partners are building.do not expect to fund under the guarantees.
The maximum potential amount of future fundings and the carrying amount of the liability for expected future fundings at September 10, 2004 are as follows:
($ in millions) | Maximum Potential Future Fundings | Liability for Future Fundings at September 10, 2004 | ||||
Debt service | $ | 319 | $ | 3 | ||
Operating profit | 288 | 18 | ||||
Senior Living Services | 360 | — | ||||
Project completion | 51 | — | ||||
Other | 55 | 4 | ||||
| $ | 1,073 | $ | 25 | |||
Our guarantees of $1,073$578 million listedin the table above also do not include $92 millionlease obligations for guarantees that will not be in effect until the underlying hotels open and we begin to manage the properties. The $92 million of guarantees not in effect is comprised of $65 million of operating profit guarantees and $27 million of debt service guarantees. Guarantee fundings to lenders and hotel owners are generally recoverable as loans and are generally repayable to us out of future hotel cash flows and/or proceeds from the sale of hotels.
13
In addition to the guarantees noted above, in conjunction with financing obtained for specific projects or properties owned by joint ventures in which we are a party,became secondarily liable when we may provide industry standard indemnifications toacquired the lender for loss, liability, or damage occurring as a resultRenaissance Hotel Group N.V. in 1997, consisting of the actions of the other joint venture owner or our own actions, in each case limited to the lessor of (i) our ownership interest in the entity; or (ii) the actual loss, liability or damage occurring as a result of our actions.
Also in addition to the guarantees noted above, we have guaranteed lease obligations with minimum annual rent payments of approximately $56$46 million and total remaining rent payments through the initial term plus available extensions of approximately $1.46$1.50 billion. We are also guarantee payment ofsecondarily obligated for real estate taxes and other charges associated with the leases. Third parties have severally indemnified us for all payments we may be required to make.make in connection with these obligations. Since we assumed thesethe guarantees, seven years ago we have not funded any amounts, and we do not expect to fund any amounts under these guarantees in the future.
Loan Commitments and Letters of Credit
AsIn addition to the guarantees noted above, as of September 10, 2004,March 25, 2005, we had extended approximately $80$81 million of loan commitments to owners of lodging properties, under which we expect to fund approximately $34$12 million by December 31, 2004,30, 2005, and $18$13 million over the following two years.year. We do not expect to fund the remaining $28$56 million of commitments, which expire as follows: $14$54 million in one to three years; and $14$2 million after five years. At March 25, 2005, we also have commitments to invest $37 million of equity for a minority interest in two partnerships that plan to purchase both full-service and select-service hotels in the United States.
At September 10, 2004,March 25, 2005, we also had $123$93 million of letters of credit outstanding on our behalf, the majority of which are related to our self-insurance programs. Surety bonds issued on our behalf as of September 10, 2004,March 25, 2005, totaled $420$504 million, the majority of which were requested by federal, state or local governments related to our timeshare and lodging operations and self-insurance programs.
We announced in the first quarter of 2005 that we had signed an agreement with Whitbread PLC to establish a 50/50 joint venture to acquire Whitbread’s portfolio of 46 franchised Marriott and Renaissance hotels of over 8,000 rooms, and for us to take over management of the entire portfolio of hotels upon the transfer of the hotels to the new joint venture. The joint venture expects to sell properties to investors over the next two years subject to long-term management agreements with us. The transaction is subject to Whitbread shareholder approval, which occurred on April 22, 2005, and other conditions. Closing is expected to occur in May 2005, although we cannot assure you that the transaction will be completed.
We expect to contribute to the joint venture £90 million (approximately $168 million) in the second quarter of 2005 for a 50 percent stake in the joint venture. Whitbread will contribute its interest in the 46 hotels, the joint venture will place £660 million (approximately $1,234 million) of debt, and Whitbread will receive £710 million (approximately $1,328 million) and the other 50 percent stake in the venture. As the joint venture sells the hotels, our interest in the joint venture will be redeemed.
Litigation and Arbitration
CTF/HPI arbitration and litigation. On April 8, 2002, we initiated an arbitration proceeding against CTF Hotel Holdings, Inc. (CTF) and its affiliate, Hotel Property Investments (B.V.I.) Ltd. (HPI)(“HPI”), in connection with a dispute over procurement and other issues for certain Renaissance hotels and resorts that we manage for CTF Hotel Holdings, Inc. and HPI. On April 12, 2002, CTF Hotel Holdings, Inc. filed a lawsuit in U.S. District Court in Delaware against us and Avendra LLC, alleging that, in connection with procurement at 20 of those hotels, we engaged in improper acts of self-dealing, and claiming breach of fiduciary, contractual and other duties; fraud; misrepresentation; and violations of the RICO and the Robinson-Patman Acts. CTF Hotel Holdings, Inc. seeks various remedies, including a stay of the arbitration proceedings against CTF Hotel Holdings, Inc. and unspecified actual, treble and punitive damages. The district court enjoined the arbitration with respect to CTF Hotel Holdings, Inc., but granted our request to stay the court proceedings pending the resolution of the arbitration with respect to HPI. Both parties have appealed that ruling. The arbitration panel hearing on the matter began on April 6, 2004, and concluded on June 11, 2004. Briefing is concluded and the matter is now before the panel for decision.has been concluded.
In a decision dated August 23, 2004, a panel of the Third Circuit affirmed the district court’s stay of the arbitration as to CTF Hotel Holdings, Inc. but reversed the district court’s stay of the trial. On September 7, 2004, we filed with the Third Circuit a petition for rehearing and for rehearing en banc in which we asked the court to reconsider its decision vacating the stay of the trial. The petition was denied on September 24, 2004. No scheduling order has been entered by the district court.
We believe that CTF’s and HPI’s claims against us are without merit, and we intend to vigorously defend against them. However, we cannot assure you asSubsequent to the outcomeend of the 2005 first quarter, we signed a purchase and sale agreement with CTF Holdings Ltd., the indirect parent company of CTF Hotel Holdings, Inc. As part of that transaction, we and CTF Holdings Ltd. and its subsidiaries agreed to dismiss all litigation pending between us, including litigation and arbitration or the related litigation; nor can we currently estimate the range of any potential losses to the Company.involving CTF Hotel Holdings, Inc. and its affiliates described above. See Footnote No. 7, “Subsequent Events” for additional information.
Synthetic Fuel
14
Our long-term debt at September 10, 2004 and January 2, 2004, consisted of the following:
| ($ in millions) | September 10, 2004 | January 2, 2004 | ||||||
Senior Notes: | ||||||||
Series B, interest rate of 6.875%, maturing November 15, 2005 | $ | 200 | $ | 200 | ||||
Series C, interest rate of 7.875%, maturing September 15, 2009 | 299 | 299 | ||||||
Series D, interest rate of 8.125%, maturing April 1, 2005 | 275 | 275 | ||||||
Series E, interest rate of 7.0%, maturing January 15, 2008 | 293 | 293 | ||||||
Other senior note, interest rate of 3.114% at January 2, 2004, matured April 1, 2004 | — | 46 | ||||||
Commercial paper, average interest rate of 1.2% at September 10, 2004 | 50 | — | ||||||
Mortgage debt, average interest rate of 7.9%, maturing May 1, 2025 | 176 | 178 | ||||||
Other | 82 | 102 | ||||||
LYONs | �� | — | 62 | |||||
| 1,375 | 1,455 | |||||||
Less current portion | (290 | ) | (64 | ) | ||||
| $ | 1,085 | $ | 1,391 | |||||
As of September 10, 2004 all debt, other than mortgage debt and $10 million of other debt, is unsecured.
On April 7, 2004, we sent notice to the holders of our Liquid Yield Option Notes due 2021 (the “Notes”), that, subject to the terms of the indenture governing the Notes, we would purchase for cash, at the option of each holder, any Notes tendered by the holder and not withdrawn on May 10, 2004, at a purchase price of $880.50 per $1,000 principal amount at maturity. The Notes, issued on May 8, 2001, carried a yield to maturity of 0.75 percent, and were convertible into approximately 0.9 million shares of our Class A Common Stock.
Holders of all outstanding Notes, approximately $70 million aggregate principal amount at maturity, tendered their Notes for repurchase. Accordingly, on May 11, 2004, we repurchased all of the outstanding Notes for aggregate cash consideration of approximately $62 million. No Notes remain outstanding following the purchase.
On April 1, 2004, Cendant exercised its option to redeem our interest in the Two Flags joint venture, which at that time owned the trademarks and licenses for the Ramada and Days Inn lodging brands in the United States. In the third quarter of 2004, we recorded a pre-tax gain of approximately $13 million in connection with this transaction when we collected our $200 million note receivable and the sale was complete.
For our entire 2003 fiscal year, we earned $24 million from our interest in the Two Flags joint venture, which was reflected as equity in earnings in the income statement. In the third quarter of 2003, our equity earnings included $5 million attributable to our interest in the Two Flags joint venture, while our third quarter 2004 equity earnings reflect no impact associated with the Two Flags joint venture due to the redemption of our interest. We recognized equity in earnings from the Two Flags joint venture of $6 million and $17 million for the thirty-six weeks ended September 10, 2004 and September 12, 2003, respectively. For the twelve andthirty-six weeks ended September 10, 2004 we recognized $4 million and $8 million, respectively, of interest income in connection with the $200 million note, collected in the third quarter of 2004, related to the purchase of our interest in the Two Flags joint venture.
We continue to own the trademarks and licenses for Ramada International outside of the United States, operate and franchise hotels outside of the United States and Canada under the Ramada International brand name, and license the Ramada name in Canada to Cendant. However, subsequent to the third quarter 2004, the Company and Cendant signed a non-binding letter of intent for Cendant to purchase Ramada
15
International, primarily a franchised brand from the Company. The transaction, which we expect to complete during the fourth quarter of 2004, is still pending approval by regulatory authorities and final negotiation of terms. We do not expect that the transaction will have a material impact to the Company.
In the second quarter of 2004, we sold $150 million of notes receivable generated by our timeshare business in connection with the sale of timeshare intervals. In conjunction with the sale, we received net proceeds of $141 million, retained residual interests of $33 million, and recorded a gain of $27 million. We used the following key assumptions to measure the fair value of the residual interests: discount rate of 7.9 percent; expected annual prepayments, including defaults, of 18.5 percent; expected weighted average life of prepayable notes receivable, excluding prepayments and defaults, of 81 months; and expected weighted average life of prepayable notes receivable, including prepayments and defaults, of 41 months. Our key assumptions are based on experience.
In October 2001, we acquired four coal-based synthetic fuel production facilities (the “Facilities”) for $46 million in cash from PacifiCorp Financial Services (“PacifiCorp”). Three of the four plants are held in one entity and one of the plants is held in a separate entity. The synthetic fuel produced at the Facilities through 2007 qualifies for tax credits based onavailable under Section 29 of the Internal Revenue Code (creditsfor the production and sale of synthetic fuels were established by Congress to encourage the development of alternative domestic energy sources. Congress deemed that the incentives provided by Section 29 credits would not be necessary if the price of oil increased beyond certain thresholds as prices would then provide a more natural market for these alternative fuels. As a result, the tax credits available under Section 29 for the production and sale of synthetic fuel in any given calendar year are notphased-out if the Reference Price of a barrel of oil for that year falls within a specified, inflation-adjusted price range. The Reference Price of a barrel of oil is an estimate of the annual average wellhead price per barrel of domestic crude oil and is determined for each calendar year by the Secretary of the Treasury by April 1 of the following year. In 2003 and 2004, the Reference Price was roughly $3.43 and $4.72 lower, respectively, than the average price for those years of the benchmark NYMEX futures contract for a barrel of light, sweet crude oil. The price range within which the credit is phased-out was set in 1980 and is adjusted annually for inflation. In 2004, the Reference Price phase-out range was $51.35 to $64.47. Because the Reference Price of a barrel of oil for 2004 was below that range, at $36.75, there was no reduction of the tax credits available for synthetic fuel produced after 2007).and sold in 2004. We began operating these Facilitiescannot predict with any accuracy the future price of a barrel of oil. If the Reference Price of a barrel of oil in 2005 or future years exceeds the first quarter of 2002. Although the Facilities produce significant losses, these losses are more than offset byapplicable phase-out threshold for those years, the tax credits generated under Section 29, which reduceby our income tax expense.
On June 21, 2003, we sold an approximately 50 percent ownership interest in the synthetic fuel entities. We received cash and promissory notes totaling $25 million at closing,facilities in those years could be reduced or eliminated and we are receiving additional profits that we expect will continue over the life of the ventures basedcould be required to reimburse our joint venture partner for excess earn-out payments and capital contributions received with respect to those years, which would have a negative impact on the actual amount of tax credits allocated to the purchaser.
As a result of a put option, we consolidated the two synthetic fuel joint ventures through November 6, 2003. Effective November 7, 2003, because the put option was voided, we began accounting for the synthetic fuel joint ventures, using the equity method of accounting. Beginning March 26, 2004, as a result of adopting FIN 46(R), we have again consolidated the synthetic fuel joint ventures and we reflect our partner’s share of the operating losses as minority interest.financial statements.
In July 2004, Internal Revenue Service (“IRS”) field auditors issued a notice of proposed adjustment and later a Summary Report to PacifiCorp that included a challenge tochallenged the placed-in-service dates of three of theour four synthetic fuel facilities owned by one of our synthetic fuel joint ventures.facilities. One of the conditions to qualify for tax credits under Section 29 of the Internal Revenue Code is that the production facility must have been placed-in-serviceplaced in service before July 1, 1998.
We strongly believe that all the facilities meet the placed-in-service requirement. Although we are engaged in discussions with the IRS and are confident this issue will be resolved in our favor and not result in a material charge to us, we cannot assure you as to the ultimate outcome of this matter. If this issue is ultimately resolved against us, we could be prevented from realizing projected future tax credits and have to reverse previously utilized credits, requiring payment of substantial additional taxes. Since acquiring the plants, we have recognized approximately $482 million of tax credits from all four plants through March 25, 2005. The tax credits recognized through March 25, 2005, associated with the three facilities in question totaled approximately $376 million.
| 7. | Subsequent Events |
Courtyard Joint Venture
Subsequent to the end of the 2005 first quarter, Sarofim Realty Advisors, on behalf of an institutional investor, completed the acquisition of a 75 percent interest in the Courtyard Joint Venture, and we signed a new long-term management agreement with the joint venture. The transaction will result in an accelerating pace of reinventions and upgrades at the joint venture’s hotels.
As of the end of the 2005 first quarter, we and Host Marriott owned equal shares in the 120-property joint venture. With the addition of the new equity, our interest in the joint venture has declined to approximately 21 percent and Host Marriott’s interest has declined to less than 4 percent. As part of the completed transaction, our mezzanine loan to the joint venture (including accrued interest) totaling approximately $269 million has been repaid. We are making available to the joint venture a seven year subordinated loan of up to $129 million, primarily to fund renovation costs in 2005 and 2006 for the remaining hotels in the portfolio.
FAS No. 123 (revised 2004), “Share-Based Payment”
In December 2004, the Financial Accounting Standards Board issued FAS No. 123 (revised 2004), “Share-Based Payment” (“FAS No. 123R”), which is a revision of FAS No. 123, “Accounting for Stock-Based Compensation.” FAS No. 123R supersedes APB Opinion No. 25, “Accounting for Stock Issued to
Employees,” and amends FAS No. 95, “Statement of Cash Flows.” Registrants were initially required to adopt FAS No. 123R as of the beginning of the first interim or annual period that begins after June 15, 2005. On October 6, 2004,April 14, 2005, subsequent to the end of our 2005 first quarter, the thirdSecurities and Exchange Commission adopted a new rule that allows companies to implement FAS No. 123R at the beginning of their next fiscal year, instead of the next reporting period, that begins after June 15, 2005. We will adopt FAS No. 123R at the beginning of our 2006 fiscal year. We estimate the adoption of FAS No. 123R, using the modified prospective method, will result in incremental pre-tax expense in fiscal year 2006 of approximately $25 million, based on our current share-based payment compensation plans.
Pending Transaction With CTF Holdings Ltd.
Subsequent to the end of the 2005 first quarter, we signed a purchase and sale agreement with CTF Holdings Ltd. (“CTF”) to purchase 32 properties from CTF for an aggregate price of $1,452 million. All of the properties are operated by us or our subsidiaries and include 29 Renaissance Hotels & Resorts brand properties and three Courtyard brand properties. The agreement permits us to designate substitute purchasers at closing. Sunstone Hotel Investors, Inc. (“Sunstone”) and Walton Street Capital, L.L.C. (“Walton Street”) signed separate agreements with us to be substitute purchasers and acquire 13 hotels and certain joint venture interests from CTF for approximately $1 billion at the transaction’s closing. Sunstone will purchase five hotels and one joint venture interest for $419 million. Walton Street will purchase eight hotels for $578 million. We will purchase the remaining 19 hotels and one joint venture interest for approximately $455 million.
As part of this transaction, Walton Street agreed to purchase our minority interest in one CTF hotel for approximately $12 million. Walton Street and Sunstone have also agreed to invest a combined $68 million to further upgrade the 13 hotels they will acquire and enter into new long-term management agreements with us.
As part of the transaction, we and CTF have agreed to dismiss all litigation currently pending between us, including litigation and arbitration involving CTF and its affiliates described under Footnote No. 6, “Contingencies.”
We expect to sell 13 of the hotels we purchase in this transaction to third-party owners. The remaining six hotels are operated under leases, five of which expire by 2012.
In addition to the transactions outlined above, we and CTF have agreed to modify management agreements on 29 CTF-leased hotels, 28 located in Europe and one hotel located in the United States. We became secondarily liable for annual rent payments for these hotels when we acquired the Renaissance Hotel Group N.V. in 1997.
We will continue to manage 16 of these hotels under new long-term management agreements. CTF has agreed to place approximately $95 million in trust accounts to cover possible shortfalls in cash flow necessary to meet rent payments under these leases. In turn, we have agreed to release CTF affiliates from their guarantees in connection with these leases. Once the transaction is complete, our financial statements will reflect us as lessee on these hotels with minimum annual payments of approximately $48 million.
For the remaining 13 European leased hotels, CTF will be permitted to terminate management agreements with us as CTF obtains releases from landlords of our back-up guarantees. Pending completion of the CTF-landlord agreements, we will continue to manage these hotels under short-term management agreements and will remain secondarily liable under these leases. CTF will make available €35 million ($46 million) in cash collateral in the event we are required to fund under such guarantees. As CTF obtains releases from the landlords and these hotels exit the system, our contingent liabilities will decline.
We will continue to manage three hotels in the United Kingdom under amended management agreements with CTF-affiliated companies. We will also continue to manage 14 properties in Asia on behalf of New World Development Company Limited and its affiliates. CTF’s principals are officers, directors and stockholders of New World Development Company Limited. The owners of the UK and Asian hotels have agreed to invest $17 million to renovate those properties.
We expect to record a $91 million one-time, non-cash write-off in the second quarter of 2005 primarily associated with the termination of the existing management agreements. We will enter into new, long-term management agreements with Walton Street and Sunstone at the closing of the transactions, which are expected to occur by June 30, 2005. The new management agreements will be longer and more valuable than the existing agreements, but because the existing agreements will be terminated, accounting rules require us to record the charge.
Completion of these transactions is subject to certain conditions, as well as a variety of consents from owners of certain leased properties and debt that encumbers certain of the hotels. There can be no assurance that all of the necessary conditions will be met or consents obtained. If CTF meets all of its conditions to close and we fail to close the transaction, we are subject to paying a $45 million breakup fee. Similarly, if Sunstone and Walton Street fail to close their transactions under the same circumstances, they are subject to comparable breakup fees.
Synthetic Fuel
On April 29, 2005, we entered into an amendment agreementsagreement with our synthetic fuel partner that resultpartner. This amendment extends until June 30, 2005, the period in a shift in the allocation of tax credits between us. On the synthetic fuel facility that is not being reviewed by the IRS,which our partner will increasehas the right to elect to have its allocation of tax credits from approximately 50 percent to 90 percent for the next six months and pay a higher price per tax credit to us for that additional share of tax credits. With respect toownership interest in the three synthetic fuel facilities under IRS review,that are subject to the IRS’s placed-in-service challenge redeemed. Our joint venture partner has the right to have us redeem its ownership interest in those three facilities because the IRS’s placed-in-service challenge remained outstanding as of March 31, 2005. Until our partner exercises this right, our partner will reduce its allocationbe allocated 1 percent of the tax credits from approximately 50 percent to an average of roughly 5 percent during the next six months.those three facilities. If the IRS’ placed-in-service challenge regarding the three facilities is not successfully resolved by March 31, 2005, our partner will havedoes not exercise the right to return
16
its ownership interest in those three facilities to Marriott at that time. We will have the flexibility to continue to operate at current levels, reduce production, and/or sell an interest to another party. If there is a successful resolutionus by March 31,June 30, 2005, our partner’s share of the tax credits from all fourthose facilities will return to approximately 50 percent. In any event, on March 31, 2005, our share of the tax credits from the one facility not under review will return to approximately 50 percent.
Since acquiring the plants, we have recognized approximately $384 million of tax credits from all four plants through September 10, 2004. The tax credits recognized through September 10, 2004 associated with the three facilities in question totaled approximately $283 million.
17percent effective June 1, 2005.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
We make forward-looking statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report based on the beliefs and assumptions of our management and on information currently available to us. Forward-looking statements include information about our possible or assumed future results of operations which follow under the headings “Business and Overview,” “Liquidity and Capital Resources” and other statements throughout this report preceded by, followed by or that include the words “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,” or similar expressions.
Forward-looking statements involve risks, uncertainties and assumptions, including risks described below and other risks that we describe from time to time in our periodic filings with the SEC, and our actual results may differ materially from those expressed in our forward-looking statements. We therefore caution you not to rely unduly on any forward-looking statement. The forward-looking statements in this report speak only as of the date of the report, and we undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.
Risks and Uncertainties
We are subject to various risks that could have a negative effect on the Company and its financial condition. You should understand that these risks could cause results to differ materially from those expressed in forward-looking statements contained in this report and in other Company communications. Because there is no way to determine in advance whether, or to what extent, any present uncertainty will ultimately impact our business, you should give equal weight to each of the following.
The lodging industry is highly competitive, which may impact our ability to compete successfully with other hotel and timeshare properties for customers. We generally operate in markets that contain numerous competitors. Each of our hotel and timeshare brands competes with major hotel chains in national and international venues and with independent companies in regional markets. Our ability to remain competitive and attract and retain business and leisure travelers depends on our success in distinguishing the quality, value and efficiency of our lodging products and services from those offered by others. If we are unable to compete successfully in these areas, this could limit our operating margins, diminish our market share and reduce our earnings.
We are subject to the range of operating risks common to the hotel, timeshare and corporate apartment industries. The profitability of the hotels, vacation timeshare resorts and corporate apartments that we operate or franchise may be adversely affected by a number of factors, including:
| (1) | the availability of and demand for hotel rooms, timeshares and apartments; |
| (2) | international, national and regional economic conditions; |
| (3) | the desirability of particular locations and changes in travel patterns; |
| (4) | taxes and government regulations that influence or determine wages, prices, interest rates, construction procedures and costs; |
| (5) | the availability of capital to allow us and potential hotel owners and joint venture partners to fund investments; |
| (6) | regional and national development of competing properties; and |
| (7) | increases in wages and other labor costs, energy, healthcare, insurance, transportation and fuel, and other expenses central to the conduct of our business. |
Any one or more of these factors could limit or reduce the demand, and therefore the prices we are able to obtain, for hotel rooms, timeshare units and corporate apartments, or could increase our costs, and therefore reduce the profits of our businesses. In addition, reduced demand for hotels could also give rise to losses under loans, guarantees and minority equity investments that we have made in connection with hotels that we manage.
The uncertain pace of the lodging industry’s recovery will continue to impact our financial results and growth.Both the Company and the lodging industry were hurt by several events occurring over the last few years, including the global economic downturn, the terrorist attacks on New York and Washington, Severe Acute Respiratory Syndrome (SARS) and military action in Iraq. Business and leisure travel decreased and remained depressed as some potential travelers reduced or avoided discretionary travel in light of increased delays and safety concerns and economic declines stemming from an erosion in consumer confidence. Weaker hotel performance reduced management and franchise fees and gave rise to fundings or losses under loans, guarantees and minority investments that we have made in connection with some hotels that we manage, which, in turn, has had a material adverse impact on our financial performance. Although both the lodging and travel industries are recovering, the pace, duration and full extent of that recovery remain unclear. Accordingly, our financial results and growth could be harmed if that recovery stalls or is reversed.
Our lodging operations are subject to international, national and regional conditions. Because we conduct our business on a national and international platform, our activities are susceptible to changes in the performance of regional and global economies. In recent years, our business has been hurt by decreases in travel resulting from recent economic conditions, the military action in Iraq, and the heightened travel security measures that have resulted from the threat of further terrorism. Our future economic performance is similarly subject to the uncertain magnitude and duration of the economic recovery in the United States, the prospects of improving economic performance in other regions, the unknown pace of any business travel recovery that results, and the occurrence of any future incidents in the countries in which we operate.
Our growth strategy depends upon third-party owners/operators, and future arrangements with these third parties may be less favorable. Our present growth strategy for development of additional lodging facilities entails entering into and maintaining various arrangements with property owners. The terms of our management agreements, franchise agreements and leases for each of our lodging facilities are influenced by contract terms offered by our competitors, among other things. We cannot assure you that any of our current arrangements will continue. Moreover, we may not be able to enter into future collaborations, or to renew or enter into agreements in the future, on terms that are as favorable to us as those under existing collaborations and agreements.
We may have disputes with the owners of the hotels that we manage or franchise. Consistent with our focus on management and franchising, we own very few of our lodging properties. The nature of our responsibilities under our management agreements to manage each hotel and enforce the standards required for our brands under both management and franchise agreements may, in some instances, be subject to interpretation and may give rise to disagreements. We seek to resolve any disagreements in order to develop and maintain positive relations with current and potential hotel owners and joint venture partners, but have not always been able to do so. Failure to resolve such disagreements has in the past resulted in litigation, and could do so in the future.
Our ability to grow our management and franchise systems is subject to the range of risks associated with real estate investments.Our ability to sustain continued growth through management or franchise agreements for new hotels and the conversion of existing facilities to managed or franchised Marriott brands is affected, and may potentially be limited, by a variety of factors influencing real estate development generally. These include site availability, financing, planning, zoning and other local approvals, and other limitations that may be imposed by market and submarket factors, such as projected room occupancy, growth in demand opposite projected supply, territorial restrictions in our management and franchise agreements, costs of construction and anticipated room rate structure.
We depend on capital to buy and maintain hotels, and we may be unable to access capital when necessary. In order to fund new hotel investments, as well as refurbish and improve existing hotels, both the Company and current and potential hotel owners must periodically spend money. The availability of funds for new investments and maintenance of existing hotels depends in large measure on capital markets and liquidity factors over which we can exert little control. Our ability to recover loan and guarantee advances from hotel operations or from owners through the proceeds of hotel sales, refinancing of debt or otherwise may also affect our ability to recycle and raise new capital.
In the event of damage to or other potential losses involving properties that we own, manage or franchise, potential losses may not be covered by insurance. We have comprehensive property and liability insurance policies with coverage features and insured limits that we believe are customary. Market forces beyond our control may nonetheless limit both the scope of property and liability insurance coverage that we can obtain and our ability to obtain coverage at reasonable rates. There are certain types of losses, generally of a catastrophic nature, such as earthquakes and floods or terrorist acts, that may be uninsurable or may be too expensive to justify insuring against. As a result, we may not be successful in obtaining insurance without increases in cost or decreases in coverage levels. In addition, we may carry insurance coverage that, in the event of a substantial loss, would not be sufficient to pay the full current market value or current replacement cost of our lost investment or that of hotel owners, or in some cases could also result in certain losses being totally uninsured. As a result, we could lose all, or a portion of, the capital we have invested in a property, as well as the anticipated future revenue from the property, and we could remain obligated for guarantees, debt or other financial obligations related to the property.
Risks relating to acts of God, terrorist activity and war could reduce the demand for lodging, which may adversely affect our revenues. Acts of God, such as natural disasters and the spread of contagious diseases, in locations where we own, manage or franchise significant properties and areas of the world from which we draw a large number of customers can cause a decline in the level of business and leisure travel and reduce the demand for lodging. Wars (including the potential for war), terrorist activity (including threats of terrorist activity), political unrest and other forms of civil strife and geopolitical uncertainty can have a similar effect. Any one or more of these events may reduce the overall demand for hotel rooms, timeshare units and corporate apartments, or limit the prices that we are able to obtain for them, both of which could adversely affect our revenues.
Increasing use of third-party internet reservation services may adversely impact our revenues. Some of our hotel rooms are booked through internet travel intermediaries serving both the leisure, and increasingly, the corporate travel sectors. While Marriott’s Look No Further Best Rate Guarantee has greatly reduced the ability of these internet travel intermediaries to undercut the published rates of Marriott hotels, these internet travel intermediaries continue their attempts to commoditize hotel rooms, by aggressively marketing to price-sensitive travelers and corporate accounts and increasing the importance of general indicators of quality (such as “three-star downtown hotel”) at the expense of brand identification. These agencies hope that consumers will eventually develop brand loyalties to their travel services rather than to our lodging brands. Although we expect to continue to maintain and even increase the strength of our brands in the online marketplace, if the amount of sales made through internet intermediaries increases significantly, our business and profitability may be harmed.
Changes in privacy law could adversely affect our ability to market our products effectively. Our timeshare business, and to a lesser extent our lodging segments, rely on a variety of direct marketing techniques, including telemarketing and mass mailings. Recent initiatives, such as the National Do Not Call Registry and various state laws regarding marketing and solicitation, including anti-spam legislation, have created some concern about the continuing effectiveness of telemarketing and mass mailing techniques and could force further changes in our marketing strategy. If this occurs, we may not be able to develop adequate alternative marketing strategies, which could impact the amount and timing of our sales of timeshare units and other products. We also obtain lists of potential customers from travel service providers with whom we have substantial relationships and market to some individuals on these lists directly. If the acquisition of these lists were outlawed or otherwise restricted, our ability to develop new customers and introduce them to our products could be impaired.
Operating risks at our synthetic fuel operations could reduce the tax benefits generated by those facilities. The Company owns an interest in four synthetic fuel production facilities. Section 29 of the Internal Revenue Code provides tax credits for the production and sale of synthetic fuels produced from coal through 2007. Although the Company’s synthetic fuel facilities incur significant losses, those losses are more than offset by
the tax credits generated under Section 29, which reduce the Company’s income tax expense. Problems related to supply, production and demand at any of the synthetic fuel facilities, the power plants and other end users that buy synthetic fuel from the facilities, or the coal mines from which the facilities buy coal could diminish the productivity of our synthetic fuel operations and adversely impact the ability of those operations to generate tax credits. In addition, if the Company’s businesses do not generate sufficient profits, we might suffer losses associated with generating tax credits that we were unable to utilize.
An adverse decision by the IRS with respect to the placed-in-service date of three of our synthetic fuel facilities could increase our tax liabilities. In July 2004, IRS field auditors challenged the placed-in-service dates of three of our four synthetic fuel facilities. One of the conditions to qualify for tax credits under Section 29 of the Internal Revenue Code is that the production facility must have been placed in service before July 1, 1998. If this issue is ultimately resolved against us, we could be prevented from realizing projected future tax credits and have to reverse previously utilized credits, requiring payment of substantial additional taxes. Since acquiring the plants, we have recognized approximately $482 million of tax credits from all four plants through March 25, 2005. The tax credits recognized through March 25, 2005, associated with the three facilities in question totaled approximately $376 million.
High oil prices in 2005 and beyond could reduce or eliminate the tax credits generated by our synthetic fuel facilities. The tax credits available under Section 29 of the Internal Revenue Code for the production and sale of synthetic fuel produced in any given year are phased out if the Reference Price of a barrel of oil for that year falls within a specified, inflation-adjusted price range. The Reference Price of a barrel of oil is an estimate of the annual average wellhead price per barrel of domestic crude oil and is determined for each calendar year by the Secretary of the Treasury by April 1 of the following year. In 2003 and 2004, the Reference Price was roughly $3.43 and $4.72 lower, respectively, than the average price for those years of the benchmark NYMEX futures contract for a barrel of light, sweet crude oil for those years. The price range within which the credit is phased-out was set in 1980 and is adjusted annually for inflation. In 2004, the phase-out range was $51.35 to $64.47. Because the Reference Price of a barrel of oil for 2004 was below that range, at $36.75, there was no reduction of the tax credits available for synthetic fuel produced and sold in 2004. We cannot predict with any accuracy the future price of a barrel of oil. If the Reference Price of a barrel of oil in 2005 or future years exceeds the applicable phase-out threshold for those years, the tax credits generated by our synthetic fuel facilities in those years could be reduced or eliminated and we could be required to reimburse our joint venture partner for excess earn-out payments and capital contributions received with respect to those years, which would have a negative impact on our financial statements.
BUSINESS AND OVERVIEW
The favorable momentum that we saw building in 2004 has continued into 2005. Demand for our properties is strong in most markets around the world. Comparable RevPAR for our worldwide systemwide properties increased 8.8 percent since the year ago quarter, driven principally by rate increases, but also by occupancy improvements. Demand associated with business travel continues to improve and leisure demand remains strong. The combination of low airfares and the weak dollar contributed to strong international travel to the United States. Resorts in the Caribbean, Mexico, and the Middle East were also popular with vacationers from around the world, and demand in China remained strong.
We currently have more than 55,000 rooms in our development pipeline and expect to add 25,000 to 30,000 hotel rooms and timeshare units to our system in 2005. During the first quarter, over 35 percent of the rooms added to our system were conversions from competitor brands.
Our brands are strong because of our superior customer service with an emphasis on guest satisfaction, the location and quality of our products, popular Marriott Rewards loyalty program, an information-rich and easy-to-use web site, and desired amenities including meeting and banquet facilities, fitness centers, award wining restaurants, and high speed and wireless internet access.
CONSOLIDATED RESULTS
Continuing Operations
The following discussion presents an analysis of results of our operations for the twelve and thirty-six weeks ended September 10, 2004 and September 12, 2003.March 25, 2005 as compared to the twelve weeks ended March 26, 2004.
Twelve Weeks Ended September 10, 2004 Compared to Twelve Weeks Ended September 12, 2003Revenues
| Twelve Weeks Ended | ||||||
Revenues ($ in millions) | September 10, 2004 | September 12, 2003 | ||||
Full-Service | $ | 1,459 | $ | 1,314 | ||
Select-Service | 277 | 236 | ||||
Extended-Stay | 133 | 138 | ||||
Timeshare | 348 | 328 | ||||
Total lodging | 2,217 | 2,016 | ||||
Synthetic fuel | 87 | 93 | ||||
| $ | 2,304 | $ | 2,109 | |||
Revenues increased 913 percent to $2,304$2,534 million in 2005 from $2,252 million in 2004, primarily reflecting higher fees resulting from strong demand for hotel rooms and unit expansion,reflected in year-over-year RevPAR increases driven by rate increases as well as strongoccupancy improvement and unit expansion. Also favorably impacting revenue were higher financially reportable development revenue associated with our timeshare demand.operations and the accounting impact associated with the consolidation of our synthetic fuel operations in 2005 versus accounting for the synthetic fuel operations using the equity method of accounting in the year ago quarter.
Reflected in the 13 percent increase in total revenue is $97 million of increased cost reimbursements revenue, to $1,682 million in the 2005 first quarter from $1,585 million in the year ago quarter. This revenue represents reimbursements of costs incurred on behalf of managed and franchised properties and relate, predominantly, to payroll costs at managed properties where we are the employer. As cost reimbursements revenue is paid to us based upon the costs incurred with no added mark-up, this revenue and related reimbursed costs expense have no impact on either our operating income or net income.
Operating Income
Operating income increased $9$7 million to $99$158 million in 2005 from $151 million in 2004. The increase is primarily due to higher fees, which are related both to stronger REVPAR driven principally by increased occupancy and average daily rate and to the growth in the number of rooms, and stronger timeshare results reflecting strong demand and improved margins, partially offset by higherand lower general and administrative expenses, andpartially offset by the impact of the change in the method of accounting for our synthetic fuel operations. Operating income for 2005 includes a higher synthetic fuel operating loss associated with both higher productionof $45 million versus no operating income or loss in the prior year quarter. For additional information, see our “Synthetic Fuel” segment discussion which follows.General, administrative and other expenses decreased $8 million in the inclusionfirst quarter of net synthetic earn-out payments received as a component of2005 to $124 million, primarily due to lower litigation expenses in 2005.
Gains and Other Income
The table below shows our gains and other income in 2004.for the twelve weeks ended March 25, 2005 and March 26, 2004:
| Twelve Weeks Ended | |||||||
| ($ in millions) | March 25, 2005 | March 26, 2004 | |||||
Synthetic fuel earn-out payments made, net | $ | (9 | ) | $ | — | ||
Gains on sales of real estate | 4 | 4 | |||||
| $ | (5 | ) | $ | 4 | |||
Net synthetic fuel earn-out payments made of $5 million for the 2004 first quarter were a component of synthetic fuel equity losses.
Interest Expense
| Twelve Weeks Ended | ||||||||
Income from Continuing Operations ($ in millions) | September 10, 2004 | September 12, 2003 | ||||||
Full-Service | $ | 79 | $ | 77 | ||||
Select-Service | 42 | 28 | ||||||
Extended-Stay | 20 | 12 | ||||||
Timeshare | 34 | 23 | ||||||
Total lodging financial results | 175 | 140 | ||||||
Synthetic fuel (after-tax) | 31 | 21 | ||||||
Unallocated corporate expenses | (28 | ) | (35 | ) | ||||
Interest income, provision for loan losses and interest expense | 10 | 4 | ||||||
Income taxes (excluding Synthetic fuel) | (56 | ) | (37 | ) | ||||
| $ | 132 | $ | 93 | |||||
18Interest expense increased $2 million (9 percent) to $24 million primarily due to higher interest associated with the Marriott Rewards program.
Interest Income, Provision for Loan Losses and Income Tax
Interest income increased $1 million (4 percent) to $27 million, reflecting higher cash balances, partially offset by the impact of loans repaid to us in 2004.
Provision for loan losses increased $14 million to $11 million from a prior year benefit of $3 million reflecting an $11 million charge in the current year associated with one property and a $3 million reversal in the prior year associated with a loan previously deemed uncollectible.
Income from continuing operations increased 42 percentbefore income taxes and minority interest generated a tax provision of $5 million in the first quarter of 2005, compared to $132a tax provision of $18 million in the first quarter of 2004. The difference is attributable to the impact of our synthetic fuel joint ventures, which generated a tax benefit and tax credits of $62 million in 2005, compared to $39 million in 2004, partially offset by $10 million of higher taxes attributable to higher pre-tax income in 2005 associated with our other activities.
Our tax provision of $5 million in 2005 includes a tax provision of $67 million before the impact of the Synthetic Fuel segment, partially offset by a $15 million tax benefit associated with the Synthetic Fuel segment losses and $47 million of synthetic fuel tax credits. Our tax provision of $18 million in 2004 includes a tax provision of $57 million before the impact of the Synthetic Fuel segment, partially offset by a $10 million tax benefit associated with the Synthetic Fuel segment losses and $29 million of synthetic fuel tax credits.
Minority Interest
Minority interest increased from zero in the first quarter of 2004 to a benefit of $10 million in the first quarter of 2005, as a result of the impact of a change in the method of accounting for our synthetic fuel operations. For additional information, see our “Synthetic Fuel” segment discussion which follows.
Net Income
Net income increased 27 percent to $145 million in 2005, and diluted earnings per share from continuing operations increased 4530 percent to $0.55.$0.61. The favorable results were primarily driven by higher fees, strong hotel demand, new unit growth,Timeshare results, strong timeshareSynthetic Fuel segment results increased gains, higher net interest(including tax credits) and strong synthetic fuel results which include both the tax benefit associated with the losseslower general and the tax credits, and aadministrative expenses. These favorable minority interest variance,impacts were partially offset by an increase in our loan loss provision related to one property and higher income taxes excluding the syntheticassociated with our non-synthetic fuel impact andactivities, reflecting higher general and administrative expenses.pre-tax income.
Business Segments
We are a diversified hospitality company with operations in five business segments:
| • | Full-Service Lodging, which includes Marriott Hotels & Resorts, The Ritz-Carlton, Renaissance Hotels & Resorts and Bulgari Hotels & Resorts; |
| • | Select-Service Lodging, which includes Courtyard, Fairfield Inn and SpringHill Suites; |
| • | Extended-Stay Lodging, which includes Residence Inn, TownePlace Suites, Marriott ExecuStay and Marriott Executive Apartments; |
| • | Timeshare, which includes the development, marketing, operation and ownership of timeshare properties under the Marriott Vacation Club International, The Ritz-Carlton Club, Marriott Grand Residence Club and Horizons by Marriott Vacation Club International brands; and |
| • | Synthetic Fuel, which includes our interest in the operation of coal-based synthetic fuel production facilities. |
We evaluate the performance of our segments based primarily on the results of the segment without allocating corporate expenses, interest income, provision for loan losses, and interest expense. With the exception of the Synthetic Fuel segment, we do not allocate income taxes to our segments. As timeshare note sales are an integral part of the timeshare business we include timeshare note sale gains in our Timeshare segment results, and we allocate other gains as well as equity in earnings (losses) from our joint ventures and divisional general, administrative and other expenses to each of our segments.
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.
Marriott Lodging
We consider lodging revenues and lodging financial results to be meaningful indicators of our performance because they measure our growth in profitability as a lodging company and enable investors to compare the sales and results of our lodging operations to those of other lodging companies.
| Revenues | Twelve Weeks Ended | |||||
| ($ in millions) | March 25, 2005 | March 26, 2004 | ||||
Full-Service | $ | 1,629 | $ | 1,505 | ||
Select-Service | 272 | 247 | ||||
Extended-Stay | 126 | 115 | ||||
Timeshare | 399 | 385 | ||||
Total Lodging | 2,426 | 2,252 | ||||
Synthetic Fuel | 108 | — | ||||
| $ | 2,534 | $ | 2,252 | |||
| Net Income | Twelve Weeks Ended | |||||||||
| ($ in millions) | March 25, 2005 | March 26, 2004 | ||||||||
Full-Service | $ | 116 | $ | 100 | ||||||
Select-Service | 33 | 23 | ||||||||
Extended-Stay | 16 | 10 | ||||||||
Timeshare | 63 | 50 | ||||||||
Total Lodging financial results | 228 | 183 | ||||||||
Synthetic Fuel (after-tax) | 18 | 11 | ||||||||
Unallocated corporate expenses | (26 | ) | (30 | ) | ||||||
Interest income, provision for loan losses and interest expense | (8 | ) | 7 | |||||||
Income taxes (excluding Synthetic Fuel) | (67 | ) | (57 | ) | ||||||
| $ | 145 | $ | 114 | |||||||
Lodging, which includes our Full-Service, Select-Service, Extended-Stay, and Timeshare segments, reported financial results of $175$228 million in the thirdfirst quarter of 2005, compared to $183 million in the first quarter of 2004 compared to $140and revenues of $2,426 million in the thirdfirst quarter of 2003 and revenues of $2,217 million in the third quarter of 2004, a 102005, an 8 percent increase from revenues of $2,016$2,252 million in the thirdfirst quarter of 2003.2004. The results reflect a 16 percent$38 million increase (20 percent) in base, franchise and incentive fees, from $165$193 million in the thirdfirst quarter of 20032004 to $192$231 million in the thirdfirst quarter of 2004,2005, and favorable timeshare results and increased gains of $9 million.Timeshare segment results. The increase in base and franchise fees was driven by higher REVPARRevPAR for comparable rooms, primarily resulting from both domestic and international occupancy and rate increases as well as occupancy improvements and new unit growth.
We have added 177155 properties (28,376(24,183 rooms) and deflagged 4850 properties (7,675(7,777 rooms) since the thirdend of the first quarter of 2003.2004. Most of the deflagged properties were Fairfield Inns. In addition, 210 properties (28,081 rooms) exited our system as a result of the sale of our Ramada International Hotels & Resorts franchised brand in the fourth quarter of 2004. Systemwide REVPARRevPAR for comparable North American properties increased 7.78.4 percent, and REVPARRevPAR for our comparable North American company-operated properties increased 8.38.0 percent. Systemwide REVPARRevPAR for comparable international properties, including Ritz-Carlton, increased 15.611.4 percent, and REVPARRevPAR for comparable international company-operated properties including Ritz-Carlton increased 17.614.9 percent. The increase in incentiveIncentive management fees increased $17 million (52 percent) during the quarter, reflectsreflecting the impact of increased international travel, particularly in Asia, and increased business at properties throughout North America and
increased international travel both driving strong property level profits. The increase also reflects recognition in North America.the 2005 first quarter of $8 million of incentive fees that were calculated based on prior period earnings, but not earned and due until the 2005 first quarter. Worldwide REVPARRevPAR for comparable company-operated properties increased 10.69.2 percent while worldwide REVPARRevPAR for comparable systemwide properties increased 9.38.8 percent. In addition, worldwide company-operated property level house profit margins increased 130 basis points.
Our properties in the southeast region of the United States experienced cancellations and a few properties closed due to mandatory evacuations and power outages resulting from hurricanes Frances and Charley in the 2004 third quarter. However, the post hurricane business from area residents, Federal Emergency Management Agency (“FEMA”), and insurance company representatives offset most of the impact.
19
Summary of Properties by Brand. We opened 3627 lodging properties (6,045(4,525 rooms) during the thirdfirst quarter of 2004,2005, while 2111 hotels (2,962(1,466 rooms) exited the system, increasing our total properties to 2,806 (505,6582,648 (484,904 rooms). The following table below shows properties by brand as of September 10, 2004March 25, 2005 (excluding 2,5471,978 rental units relating to Marriott ExecuStay):
| Company-Operated | Franchised | Company-Operated | Franchised | |||||||||||||
Brand | Properties | Rooms | Properties | Rooms | Properties | Rooms | Properties | Rooms | ||||||||
Full-Service Lodging | ||||||||||||||||
Marriott Hotels & Resorts | 226 | 100,928 | 213 | 58,788 | 222 | 99,034 | 221 | 61,261 | ||||||||
Marriott Conference Centers | 14 | 3,577 | — | — | 14 | 3,577 | — | — | ||||||||
JW Marriott Hotels & Resorts | 30 | 13,833 | 4 | 1,205 | 31 | 14,408 | 4 | 1,205 | ||||||||
The Ritz-Carlton | 57 | 18,613 | — | — | 57 | 18,598 | — | — | ||||||||
Renaissance Hotels & Resorts | 89 | 34,178 | 43 | 13,094 | 89 | 33,976 | 46 | 14,245 | ||||||||
Ramada International | 4 | 727 | 199 | 27,031 | 4 | 726 | — | — | ||||||||
Bulgari Hotel & Resort | 1 | 58 | — | — | 1 | 58 | — | — | ||||||||
Select-Service Lodging | ||||||||||||||||
Courtyard | 297 | 47,034 | 349 | 45,628 | 302 | 48,019 | 361 | 47,410 | ||||||||
Fairfield Inn | 2 | 855 | 522 | 48,270 | 2 | 855 | 515 | 46,985 | ||||||||
SpringHill Suites | 23 | 3,597 | 98 | 10,473 | 23 | 3,597 | 103 | 11,047 | ||||||||
Extended-Stay Lodging | ||||||||||||||||
Residence Inn | 132 | 17,791 | 325 | 36,578 | 132 | 17,791 | 337 | 37,979 | ||||||||
TownePlace Suites | 34 | 3,661 | 79 | 7,894 | 34 | 3,661 | 83 | 8,155 | ||||||||
Marriott Executive Apartments | 13 | 2,372 | 1 | 99 | 14 | 2,486 | 1 | 99 | ||||||||
Timeshare | ||||||||||||||||
Marriott Vacation Club International | 43 | 8,537 | — | — | 44 | 8,895 | — | — | ||||||||
The Ritz-Carlton Club | 4 | 261 | — | — | 4 | 261 | — | — | ||||||||
Marriott Grand Residence Club | 2 | 248 | — | — | 2 | 248 | — | — | ||||||||
Horizons by Marriott Vacation Club International | 2 | 328 | — | — | 2 | 328 | — | — | ||||||||
Total | 973 | 256,598 | 1,833 | 249,060 | 977 | 256,518 | 1,671 | 228,386 | ||||||||
REVPAR. We consider Revenue per Available Room (REVPAR)(“RevPAR”)
We consider RevPAR to be a meaningful indicator of our performance because it measures the period over periodperiod-over-period change in room revenues for comparable properties. We calculate REVPARRevPAR by dividing room sales for comparable properties by room nights available to guests for the period. REVPARRevPAR may not be comparable to similarly titled measures, such as revenues.
The following table shows occupancy, average daily rate and REVPARRevPAR for each of our comparable principal established brands. We have not presented statistics for company-operated North American Fairfield Inn and SpringHill Suites properties here because we operate only a limited number of properties, as both these brands are predominantly franchised and such information would not be meaningful for those brands (identified as “nm” in the table below)following table). Systemwide statistics include data from our franchised properties, in addition to our owned, leased and managed properties.
For North American properties (except for The Ritz-Carlton which includes June through August), the occupancy, average daily rate and REVPARRevPAR statistics used throughout this report for the twelve weeks ended September 10,March 25, 2005, include the period from January 1, 2005 through March 25, 2005, while the twelve weeks ended March 26, 2004, include the period from June 19,January 3, 2004 through September 10,March 26, 2004 while the twelve weeks ended September 12, 2003, include the period from June 21, 2003 through September 12, 2003.(except, in each case, for The Ritz-Carlton, which includes only January and February).
20
| Comparable Company-Operated North American Properties | Comparable Systemwide North American Properties | Comparable Company-Operated North American Properties | Comparable Systemwide North American Properties | |||||||||||||||||||||||||||||||||||||
| Twelve Weeks Ended September 10, 2004 | Change vs. 2003 | Twelve Weeks Ended September 10, 2004 | Change vs. 2003 | Twelve Weeks Ended March 25, 2005 | Change vs. 2004 | Twelve Weeks Ended March 25, 2005 | Change vs. 2004 | |||||||||||||||||||||||||||||||||
Marriott Hotels & Resorts(1) | ||||||||||||||||||||||||||||||||||||||||
Occupancy | 74 | .7% | 2 | .7% | pts | . | 72 | .6% | 2 | .6% | pts | . | 69 | .9% | 0 | .1% | pts | . | 68 | .3% | 0 | .4% | pts | . | ||||||||||||||||
Average Daily Rate | $ | 132 | .71 | 3 | .7% | $ | 126 | .86 | 3 | .7% | $ | 156 | .66 | 6 | .0% | $ | 145 | .96 | 5 | .8% | ||||||||||||||||||||
REVPAR | $ | 99 | .17 | 7 | .6% | $ | 92 | .09 | 7 | .5% | ||||||||||||||||||||||||||||||
RevPAR | $ | 109 | .44 | 6 | .1% | $ | 99 | .66 | 6 | .4% | ||||||||||||||||||||||||||||||
The Ritz-Carlton(2) | ||||||||||||||||||||||||||||||||||||||||
Occupancy | 70 | .6% | 2 | .5% | pts | . | 70 | .6% | 2 | .5% | pts | . | 67 | .1% | 0 | .3% | pts | . | 67 | .1% | 0 | .3% | pts | . | ||||||||||||||||
Average Daily Rate | $ | 229 | .09 | 9 | .2% | $ | 229 | .09 | 9 | .2% | $ | 305 | .53 | 13 | .1% | $ | 305 | .53 | 13 | .1% | ||||||||||||||||||||
REVPAR | $ | 161 | .70 | 13 | .3% | $ | 161 | .70 | 13 | .3% | ||||||||||||||||||||||||||||||
RevPAR | $ | 204 | .87 | 13 | .5% | $ | 204 | .87 | 13 | .5% | ||||||||||||||||||||||||||||||
Renaissance Hotels & Resorts | ||||||||||||||||||||||||||||||||||||||||
Occupancy | 71 | .3% | 3 | .6% | pts | . | 71 | .2% | 3 | .3% | pts | . | 69 | .4% | 3 | .1% | pts | . | 67 | .8% | 2 | .6% | pts | . | ||||||||||||||||
Average Daily Rate | $ | 123 | .14 | 0 | .3% | $ | 118 | .82 | 1 | .1% | $ | 146 | .29 | 5 | .5% | $ | 139 | .02 | 6 | .3% | ||||||||||||||||||||
REVPAR | $ | 87 | .82 | 5 | .3% | $ | 84 | .56 | 6 | .1% | ||||||||||||||||||||||||||||||
RevPAR | $ | 101 | .47 | 10 | .4% | $ | 94 | .30 | 10 | .6% | ||||||||||||||||||||||||||||||
Composite – Full-Service(3) | ||||||||||||||||||||||||||||||||||||||||
Occupancy | 73 | .7% | 2 | .8% | pts | . | 72 | .2% | 2 | .7% | pts | . | 69 | .6% | 0 | .6% | pts | . | 68 | .2% | 0 | .7% | pts | . | ||||||||||||||||
Average Daily Rate | $ | 141 | .64 | 4 | .1% | $ | 133 | .57 | 4 | .0% | $ | 164 | .62 | 6 | .6% | $ | 152 | .05 | 6 | .3% | ||||||||||||||||||||
REVPAR | $ | 104 | .45 | 8 | .2% | $ | 96 | .47 | 8 | .0% | ||||||||||||||||||||||||||||||
RevPAR | $ | 114 | .56 | 7 | .4% | $ | 103 | .63 | 7 | .5% | ||||||||||||||||||||||||||||||
Residence Inn | ||||||||||||||||||||||||||||||||||||||||
Occupancy | 84 | .1% | 3 | .7% | pts | . | 83 | .9% | 3 | .0% | pts | . | 76 | .7% | 2 | .7% | pts | . | 76 | .0% | 1 | .9% | pts | . | ||||||||||||||||
Average Daily Rate | $ | 98 | .22 | 3 | .1% | $ | 97 | .95 | 2 | .7% | $ | 105 | .63 | 6 | .1% | $ | 103 | .26 | 6 | .2% | ||||||||||||||||||||
REVPAR | $ | 82 | .63 | 7 | .8% | $ | 82 | .22 | 6 | .5% | ||||||||||||||||||||||||||||||
RevPAR | $ | 80 | .96 | 10 | .0% | $ | 78 | .45 | 9 | .0% | ||||||||||||||||||||||||||||||
Courtyard | ||||||||||||||||||||||||||||||||||||||||
Occupancy | 73 | .3% | 2 | .7% | pts | . | 75 | .0% | 2 | .7% | pts | . | 67 | .9% | -0 | .7% | pts | . | 68 | .5% | 0 | .3% | pts | . | ||||||||||||||||
Average Daily Rate | $ | 94 | .68 | 4 | .8% | $ | 96 | .95 | 5 | .0% | $ | 106 | .57 | 9 | .7% | $ | 104 | .36 | 7 | .9% | ||||||||||||||||||||
REVPAR | $ | 69 | .38 | 8 | .9% | $ | 72 | .73 | 8 | .8% | ||||||||||||||||||||||||||||||
RevPAR | $ | 72 | .37 | 8 | .7% | $ | 71 | .51 | 8 | .4% | ||||||||||||||||||||||||||||||
Fairfield Inn | ||||||||||||||||||||||||||||||||||||||||
Occupancy | nm | nm | 73 | .0% | 1 | .5% | pts | . | nm | nm | 63 | .4% | 1 | .8% | pts | . | ||||||||||||||||||||||||
Average Daily Rate | nm | nm | $ | 69 | .75 | 2 | .6% | nm | nm | $ | 71 | .87 | 7 | .7% | ||||||||||||||||||||||||||
REVPAR | nm | nm | $ | 50 | .93 | 4 | .7% | |||||||||||||||||||||||||||||||||
RevPAR | nm | nm | $ | 45 | .53 | 10 | .9% | |||||||||||||||||||||||||||||||||
TownePlace Suites | ||||||||||||||||||||||||||||||||||||||||
Occupancy | 78 | .8% | 0 | .7% | pts | . | 80 | .5% | 3 | .1% | pts | . | 70 | .4% | -0 | .3% | pts | . | 71 | .0% | 1 | .5% | pts | . | ||||||||||||||||
Average Daily Rate | $ | 66 | .84 | 3 | .6% | $ | 65 | .53 | 1 | .8% | $ | 68 | .48 | 7 | .0% | $ | 71 | .03 | 9 | .3% | ||||||||||||||||||||
REVPAR | $ | 52 | .68 | 4 | .5% | $ | 52 | .78 | 5 | .9% | ||||||||||||||||||||||||||||||
RevPAR | $ | 48 | .21 | 6 | .6% | $ | 50 | .46 | 11 | .7% | ||||||||||||||||||||||||||||||
SpringHill Suites | ||||||||||||||||||||||||||||||||||||||||
Occupancy | nm | nm | 75 | .6% | 3 | .8% | pts | . | nm | nm | 69 | .7% | 3 | .5% | pts | . | ||||||||||||||||||||||||
Average Daily Rate | nm | nm | $ | 85 | .22 | 3 | .5% | nm | nm | $ | 90 | .36 | 8 | .6% | ||||||||||||||||||||||||||
REVPAR | nm | nm | $ | 64 | .43 | 8 | .9% | |||||||||||||||||||||||||||||||||
RevPAR | nm | nm | $ | 62 | .94 | 14 | .4% | |||||||||||||||||||||||||||||||||
Composite – Select-Service & Extended-Stay(4) | ||||||||||||||||||||||||||||||||||||||||
Occupancy | 76 | .5% | 2 | .8% | pts | . | 77 | .0% | 2 | .5% | pts | . | 70 | .5% | 0 | .7% | pts | . | 69 | .5% | 1 | .4% | pts | . | ||||||||||||||||
Average Daily Rate | $ | 93 | .25 | 4 | .4% | $ | 88 | .19 | 3 | .7% | $ | 103 | .28 | 8 | .4% | $ | 94 | .61 | 7 | .3% | ||||||||||||||||||||
REVPAR | $ | 71 | .32 | 8 | .4% | $ | 67 | .92 | 7 | .2% | ||||||||||||||||||||||||||||||
RevPAR | $ | 72 | .79 | 9 | .5% | $ | 65 | .79 | 9 | .5% | ||||||||||||||||||||||||||||||
Composite – All(5) | ||||||||||||||||||||||||||||||||||||||||
Occupancy | 74 | .7% | 2 | .8% | pts | . | 74 | .9% | 2 | .6% | pts | . | 69 | .9% | 0 | .6% | pts | . | 69 | .0% | 1 | .1% | pts | . | ||||||||||||||||
Average Daily Rate | $ | 124 | .19 | 4 | .2% | $ | 107 | .37 | 3 | .9% | $ | 140 | .64 | 7 | .1% | $ | 118 | .65 | 6 | .7% | ||||||||||||||||||||
REVPAR | $ | 92 | .78 | 8 | .3% | $ | 80 | .43 | 7 | .7% | ||||||||||||||||||||||||||||||
RevPAR | $ | 98 | .35 | 8 | .0% | $ | 81 | .81 | 8 | .4% | ||||||||||||||||||||||||||||||
| (1) | Marriott Hotels & Resorts includes our JW Marriott Hotels & Resorts brand. |
| (2) | Statistics for The Ritz-Carlton are for |
| (3) | Full-Service composite statistics include properties for the Marriott Hotels & Resorts, Renaissance Hotels & Resorts and The Ritz-Carlton brands. |
| (4) | Select-Service and Extended-Stay composite statistics include properties for the Courtyard, Residence Inn, TownePlace Suites, |
Fairfield Inn and SpringHill Suites brands.
| (5) | Composite – All statistics include properties for the Marriott Hotels & Resorts, Renaissance Hotels & Resorts, The Ritz-Carlton, |
21Courtyard, Residence Inn, TownePlace Suites, Fairfield Inn and SpringHill Suites brands.
Systemwide international statistics by region are based on comparable worldwide units, excluding North America. The following table shows occupancy, average daily rate and REVPARRevPAR for international properties by region/brand.
| Comparable Company-Operated International Properties (1), (2) | Comparable Systemwide International Properties (1), (2) | Comparable Company-Operated International Properties (1), (2) | Comparable Systemwide International Properties (1), (2) | |||||||||||||||||||||||||||||||||||||
| Three Months Ended August 31, 2004 | Change vs. 2003 | Three Months Ended August 31, 2004 | Change vs. 2003 | Two Months Ended February 28, 2005 | Change vs. 2004 | Two Months Ended February 28, 2005 | Change vs. 2004 | |||||||||||||||||||||||||||||||||
Caribbean & Latin America | ||||||||||||||||||||||||||||||||||||||||
Occupancy | 73 | .4% | 4 | .6% | pts | . | 71 | .6% | 6 | .1% | pts | . | 76 | .7% | 7 | .5% | pts | . | 70 | .8% | 3 | .4% | pts | . | ||||||||||||||||
Average daily rate | $ | 123 | .28 | 11 | .7% | $ | 117 | .87 | 10 | .9% | $ | 163 | .09 | 8 | .3% | $ | 154 | .81 | 7 | .2% | ||||||||||||||||||||
REVPAR | $ | 90 | .49 | 19 | .3% | $ | 84 | .35 | 21 | .2% | ||||||||||||||||||||||||||||||
RevPAR | $ | 125 | .16 | 20 | .1% | $ | 109 | .64 | 12 | .6% | ||||||||||||||||||||||||||||||
Continental Europe | ||||||||||||||||||||||||||||||||||||||||
Occupancy | 74 | .1% | 1 | .8% | pts | . | 71 | .7% | 3 | .4% | pts | . | 58 | .9% | 2 | .0% | pts | . | 57 | .0% | 1 | .5% | pts | . | ||||||||||||||||
Average daily rate | $ | 123 | .81 | 3 | .3% | $ | 125 | .83 | 3 | .4% | $ | 139 | .67 | 3 | .3% | $ | 137 | .57 | 4 | .6% | ||||||||||||||||||||
REVPAR | $ | 91 | .72 | 5 | .9% | $ | 90 | .27 | 8 | .4% | ||||||||||||||||||||||||||||||
RevPAR | $ | 82 | .30 | 7 | .0% | $ | 78 | .43 | 7 | .4% | ||||||||||||||||||||||||||||||
United Kingdom | ||||||||||||||||||||||||||||||||||||||||
Occupancy | 78 | .3% | -3 | .5% | pts | . | 77 | .3% | 0 | .6% | pts | . | 70 | .0% | -1 | .6% | pts | . | 63 | .1% | 0 | .4% | pts | . | ||||||||||||||||
Average daily rate | $ | 186 | .93 | 11 | .4% | $ | 147 | .93 | 4 | .6% | $ | 183 | .83 | 5 | .8% | $ | 145 | .90 | 1 | .1% | ||||||||||||||||||||
REVPAR | $ | 146 | .36 | 6 | .6% | $ | 114 | .32 | 5 | .5% | ||||||||||||||||||||||||||||||
RevPAR | $ | 128 | .72 | 3 | .3% | $ | 92 | .09 | 1 | .8% | ||||||||||||||||||||||||||||||
Middle East & Africa | ||||||||||||||||||||||||||||||||||||||||
Occupancy | 70 | .7% | -1 | .6% | pts | . | 70 | .7% | -1 | .6% | pts | . | 75 | .4% | 8 | .1% | pts | . | 73 | .3% | 7 | .8% | pts | . | ||||||||||||||||
Average daily rate | $ | 87 | .20 | 5 | .0% | $ | 87 | .20 | 5 | .0% | $ | 110 | .70 | 15 | .0% | $ | 109 | .30 | 14 | .4% | ||||||||||||||||||||
REVPAR | $ | 61 | .62 | 2 | .7% | $ | 61 | .62 | 2 | .7% | ||||||||||||||||||||||||||||||
RevPAR | $ | 83 | .50 | 28 | .8% | $ | 80 | .13 | 28 | .0% | ||||||||||||||||||||||||||||||
Asia Pacific(3) | ||||||||||||||||||||||||||||||||||||||||
Occupancy | 77 | .0% | 12 | .5% | pts | . | 77 | .1% | 11 | .3% | pts | . | 71 | .7% | 2 | .3% | pts | . | 72 | .1% | 2 | .6% | pts | . | ||||||||||||||||
Average daily rate | $ | 87 | .62 | 12 | .7% | $ | 91 | .31 | 10 | .0% | $ | 105 | .67 | 12 | .6% | $ | 109 | .07 | 10 | .1% | ||||||||||||||||||||
REVPAR | $ | 67 | .45 | 34 | .6% | $ | 70 | .39 | 28 | .9% | ||||||||||||||||||||||||||||||
Sub-total Composite International(4),(5) | ||||||||||||||||||||||||||||||||||||||||
Occupancy | 75 | .6% | 5 | .8% | pts | . | 74 | .9% | 5 | .6% | pts | . | ||||||||||||||||||||||||||||
Average daily rate | $ | 113 | .56 | 6 | .9% | $ | 117 | .46 | 5 | .6% | ||||||||||||||||||||||||||||||
REVPAR | $ | 85 | .82 | 15 | .9% | $ | 88 | .01 | 14 | .2% | ||||||||||||||||||||||||||||||
RevPAR | $ | 75 | .73 | 16 | .2% | $ | 78 | .66 | 14 | .2% | ||||||||||||||||||||||||||||||
The Ritz-Carlton International | ||||||||||||||||||||||||||||||||||||||||
Occupancy | 74 | .2% | 13 | .2% | pts | . | 74 | .2% | 13 | .2% | pts | . | 71 | .2% | 8 | .2% | pts | . | 71 | .2% | 8 | .2% | pts | . | ||||||||||||||||
Average daily rate | $ | 186 | .90 | 3 | .7% | $ | 186 | .90 | 3 | .7% | $ | 225 | .15 | 12 | .2% | $ | 225 | .15 | 12 | .2% | ||||||||||||||||||||
REVPAR | $ | 138 | .62 | 26 | .3% | $ | 138 | .62 | 26 | .3% | ||||||||||||||||||||||||||||||
RevPAR | $ | 160 | .30 | 26 | .9% | $ | 160 | .30 | 26 | .9% | ||||||||||||||||||||||||||||||
Total Composite International(4) | ||||||||||||||||||||||||||||||||||||||||
Occupancy | 75 | .4% | 6 | .7% | pts | . | 74 | .9% | 6 | .2% | pts | . | 69 | .5% | 3 | .6% | pts | . | 67 | .0% | 2 | .6% | pts | . | ||||||||||||||||
Average daily rate | $ | 121 | .56 | 7 | .2% | $ | 123 | .09 | 6 | .0% | $ | 139 | .96 | 8 | .9% | $ | 137 | .24 | 7 | .1% | ||||||||||||||||||||
REVPAR | $ | 91 | .68 | 17 | .6% | $ | 92 | .15 | 15 | .6% | ||||||||||||||||||||||||||||||
Total Worldwide(6) | ||||||||||||||||||||||||||||||||||||||||
RevPAR | $ | 97 | .21 | 14 | .9% | $ | 91 | .92 | 11 | .4% | ||||||||||||||||||||||||||||||
Total Worldwide(5) | ||||||||||||||||||||||||||||||||||||||||
Occupancy | 74 | .9% | 3 | .8% | pts | . | 74 | .9% | 3 | .3% | pts | . | 69 | .8% | 1 | .2% | pts | . | 68 | .7% | 1 | .3% | pts | . | ||||||||||||||||
Average daily rate | $ | 123 | .47 | 4 | .9% | $ | 110 | .44 | 4 | .5% | $ | 140 | .51 | 7 | .4% | $ | 121 | .06 | 6 | .8% | ||||||||||||||||||||
REVPAR | $ | 92 | .48 | 10 | .6% | $ | 82 | .72 | 9 | .3% | ||||||||||||||||||||||||||||||
RevPAR | $ | 98 | .14 | 9 | .2% | $ | 83 | .15 | 8 | .8% | ||||||||||||||||||||||||||||||
| (1) | International financial results are reported on a |
| (2) | The comparison to |
| (3) | Excludes Hawaii. |
| (4) | Includes Hawaii. |
| (5) |
22
Full-Service Lodging ($ in millions) | Twelve Weeks Ended | Change | Twelve Weeks Ended | Change | ||||||||||||||
| September 10, 2004 | September 12, 2003 | 2004/2003 | March 25, 2005 | March 26, 2004 | 2005/2004 | |||||||||||||
Revenues | $ | 1,459 | $ | 1,314 | 11 | % | $ | 1,629 | $ | 1,505 | 8 | % | ||||||
Segment results | $ | 79 | $ | 77 | 3 | % | $ | 116 | $ | 100 | 16 | % | ||||||
Full-Service Lodging includes ourMarriott Hotels & Resorts,The Ritz-Carlton,Renaissance Hotels & Resorts,Ramada International andBulgari Hotels & Resorts brands. Our thirdfirst quarter 20042005 segment results reflect a $13$25 million increase in base management, incentive management and franchise fees, and $5 million of other revenue, partially offset by $7 million of higher general and administrative costs. The increase in fees is largely due to higher REVPAR, reflectingstronger RevPAR, driven by rate and occupancy and rate increases andfavorably impacting house profit levels, the growth in the number of rooms.rooms and the recognition in the 2005 first quarter of $8 million of incentive fees that were calculated based on prior period earnings, but not earned and due until the 2005 first quarter. Since the thirdfirst quarter of 2003,2004, across our Full-Service Lodging segment, we have added 7031 hotels (14,337(9,595 rooms) and deflagged 19five hotels (3,995(2,199 rooms)., excluding Ramada International. In addition, 210 properties (28,081 rooms) exited our system as a result of the sale of our Ramada International Hotels & Resorts franchised brand in the fourth quarter of 2004. Owned and leased property results were slightly unfavorable to the year ago quarter, reflecting $6 million of severance payments and other costs associated with the temporary closing of a property undergoing renovation in Ireland, partially offset by improved performance at other properties.
GainsFurther impacting segment results, gains were flat with$1 million lower than last year, whileand equity results were slightly$4 million lower than last year. On April 1, 2004, Cendant Corporation (“Cendant”) exercised its option to redeem our interest in the Two Flags joint venture, which ownsowned the trademarks and licenses for the Ramada and Days Inn lodging brands in the United States. In the thirdfirst quarter of 2003,2004, our equity earnings included $5$6 million attributable to our interest in the Two Flags joint venture, while our third quarter 2004 equity earnings do not reflect any amounts associated with the Two Flags joint venture due to the redemption of our interest. We recorded a pre-tax gain of approximately $13 million in the third quarter of 2004 when we received the proceeds from the Two Flags sale. In the prior year quarter we recognized a $9 million gain associated with our sale of an international joint venture.
REVPARRevPAR for Full-Service Lodging comparable company-operated North American hotels increased 8.27.4 percent to $104.45.$114.56. Occupancy for these hotels increased to 73.769.6 percent, while average daily rates increased 4.16.6 percent to $141.64.$164.62.
Financial results for our international operations were strong across most regions, generating a 17.614.9 percent REVPARRevPAR increase for comparable company-operated hotels including The Ritz-Carlton. Occupancy increased 6.73.6 percentage points, while average daily rates increased to $121.56. International operations were unfavorably impacted by SARS in 2003. As noted above, in$139.96. Versus the year ago quarter we recognized a $9 million gain associated with our sale of an international joint venture. Versus the prior year quarter, we experienced stronger demand particularly in Mexico, the Caribbean and Egypt. Demand remained strong in China, Hong Kong, Australia, Egypt and Brazil.while the European markets generally remain less robust.
Select-Service Lodging ($ in millions) | Twelve Weeks Ended | Change | Twelve Weeks Ended | Change | ||||||||||||||
| September 10, 2004 | September 12, 2003 | 2004/2003 | March 25, 2005 | March 26, 2004 | 2005/2004 | |||||||||||||
Revenues | $ | 277 | $ | 236 | 17 | % | $ | 272 | $ | 247 | 10 | % | ||||||
Segment results | $ | 42 | $ | 28 | 50 | % | $ | 33 | $ | 23 | 43 | % | ||||||
Select-Service Lodgingincludes ourCourtyard, Fairfield Inn andSpringHill Suites brands. The $14$10 million increase in segment results reflects a $9$7 million increase in base management, incentive management and franchise fees, a favorable variance of $4 million on gains, essentially flatslight increase in equity results, and flat$5 million of lower general and administrative costs.costs, partially offset by $2 million of lower gains. General and administrative costs for the prior year reflected $3 million for performance guarantees we expected to fund. The increase in fees is largely due to higher REVPAR,RevPAR, driven primarily by occupancy and rate increases and occupancy improvements favorably impacting house profit levels, and to the growth in the number of rooms. Across our Select-Service Lodging segment, we have added 8481 hotels (10,425(9,475 rooms) and deflagged 2644 hotels (3,539(5,498 rooms) since the thirdfirst quarter of 2003.2004.
23
Extended-Stay Lodging ($ in millions) | Twelve Weeks Ended | Change | Twelve Weeks Ended | Change | ||||||||||||||
| September 10, 2004 | September 12, 2003 | 2004/2003 | March 25, 2005 | March 26, 2004 | 2005/2004 | |||||||||||||
Revenues | $ | 133 | $ | 138 | -4 | % | $ | 126 | $ | 115 | 10 | % | ||||||
Segment results | $ | 20 | $ | 12 | 67 | % | $ | 16 | $ | 10 | 60 | % | ||||||
Extended-Stay Lodging includes ourResidence Inn,TownePlace Suites,Marriott Executive Apartments, andMarriott ExecuStay brands. The decline in revenue is primarily attributable to the shift in the ExecuStay business towards franchising. Our base and incentive management fees were roughly flat compared to$3 million higher than last year while our franchise fees, principally associated with our Residence Inn brand, increased $2 million. The increase in franchise fees is largely due to higher REVPARRevPAR and the growth in the number of rooms. Since the thirdfirst quarter of 2003,2004, across our Extended-Stay Lodging segment, we have added 2128 hotels (2,303(2,947 rooms) and deflagged one hotel (80 rooms). In addition, we recorded $4Corporate housing and other revenue declined $5 million compared to the year ago quarter primarily as a result of gains in 2004 versus no gains in 2003.the shift towards franchising for our ExecuStay experienced improved results comparedbrand. General and administrative costs were favorable to the prior year quarter, resulting from increased occupancy and rate,by $6 million, primarily in the New York market, along with reduced operatingreflecting lower costs associated with theExecuStay’s shift towards franchising.
REVPARRevPAR for Select-Service and Extended-Stay Lodging comparable company-operated North American hotels increased 8.49.5 percent to $71.32.$72.79. Occupancy for these hotels increased to 76.570.5 percent, while average daily rates increased 4.48.4 percent to $93.25.$103.28.
Timeshare ($ in millions) | Twelve Weeks Ended | Change | Twelve Weeks Ended | Change | ||||||||||||||
| September 10, 2004 | September 12, 2003 | 2004/2003 | March 25, 2005 | March 26, 2004 | 2005/2004 | |||||||||||||
Revenues | $ | 348 | $ | 328 | 6 | % | $ | 399 | $ | 385 | 4 | % | ||||||
Segment results | $ | 34 | $ | 23 | 48 | % | $ | 63 | $ | 50 | 26 | % | ||||||
Timeshare includes ourMarriott Vacation Club International, The Ritz-Carlton Club, Marriott Grand Residence Club and Horizons by Marriott Vacation Club International brands. Timeshare revenues of $348$399 million in 20042005 and $328$385 million in 2003,2004 include interval sales, base management fees, resort rental fees, and cost reimbursements. IncludingTimeshare contract sales, including sales made by our threetimeshare joint ventures, contract sales,venture projects, which represent sales of timeshare intervals before adjustment for percentage of completion accounting, increased 25decreased 5 percent primarily due toreflecting limited available inventory at Ritz-Carlton projects in the current year versus strong demandRitz-Carlton contract sales in South Carolina, California, and Nevada.the year ago quarter. The favorable segment results reflect a 19 percent increase in timeshare interval sales and services revenue primarily reflecting higher financially reportable development revenue, higher margins primarily resulting from the use of lower cost marketing channels,product costs associated with the mix of units sold, $3 million of gains associated with land sales, slightly higher services income and lower financing costs, partially offset by higherrelatively flat joint venture results and general and administrative expenses. Additionally, the third quarter 2003 results were impacted by a $2 million loss associated with an interest rate swap agreement. Reported revenue growth trailed contract sales growth because of a higher proportion of sales in joint venture projects and projects with lower average construction completion levels.
Synthetic Fuel
For the twelve weeks ended September 10, 2004,March 25, 2005, the synthetic fuel operation generated revenue of $87$108 million and net income from continuing operations of $31$18 million comprised of: operating losses of $31$45 million and a $1 million tax provision, offset by net earn-out payments received of $19 million, tax credits of $29 million, and minority interest of $15 million reflecting our partner’s share of the operating losses.
For the twelve weeks ended September 12, 2003, the synthetic fuel operation generated revenue of $93 million and income from continuing operations of $21 million comprised of: operating losses of $3 million, which includes net earn-out payments made of $5 million; and minority interest expense of
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$29 million, reflecting our partner’s share of the tax credits, tax benefits and operating losses; a $1 million tax benefit; and tax credits of $52 million. The $10 million increase in synthetic fuel results to $31 million from $21 million is primarily due to our sale of a 50 percent interest in the synthetic fuel joint ventures in the third quarter of 2003 and to slightly higher production in 2004. In connection with the sale, a higher percentage (90 percent) of the tax credits was allocated to our joint venture partner in the 2003 third quarter compared to roughly 50 percent in the 2004 third quarter. See Note 12, “Synthetic Fuel” in Part I, Item 1, Notes to Condensed Consolidated Financial Statements, for further information related to our synthetic fuel operations.
General, Administrative and Other Expenses
General, administrative and other expenses increased $9 million, in the third quarter of 2004 to $126 million, reflecting higher administrative expenses in both our lodging and timeshare businesses, primarily associated with increased overhead costs related to the Company’s unit growth and increased development costs associated with our timeshare joint ventures. Lower litigation expenses of $9 million in 2004 were offset by $10 million of insurance proceeds received in 2003.
Gains and Other Income
The following table shows our gains and other income for the twelve weeks ended September 10, 2004 and September 12, 2003:
| Twelve Weeks Ended | ||||||
| ($ in millions) | September 10, 2004 | September 12, 2003 | ||||
Net synthetic fuel earn-out payments received | $ | 19 | $ | — | ||
Gains on sale of real estate | 9 | 6 | ||||
Gains on sale of joint ventures | 15 | 9 | ||||
| $ | 43 | $ | 15 | |||
Interest Expense
Interest expense decreased $3 million to $23 million primarily due to the repayment of $234 million of senior debt in the fourth quarter of 2003 and other debt reductions, partially offset by lower capitalized interest resulting from fewer projects under construction.
Interest Income and Income Tax
Interest income, before the provision for loan losses increased $2 million (6 percent) to $33 million, reflecting higher loan balances and higher rates. For the twelve weeks ended September 10, 2004 we recognized $4 million of interest income in connection with the $200 million note, collected in the third quarter of 2004, related to the purchase of our interest in the Two Flags joint venture.
Income from continuing operations before income taxes generated a tax provision of $28 million in the third quarter of 2004, compared to a tax benefit of $16$15 million, in 2003. The difference is primarily attributable to the impact of our synthetic fuel joint ventures, which generated a tax benefit and tax credits of $28 million in 2004, compared to $53 million in 2003, and to higher pre-tax income. In the 2003 third quarter, we sold a 50 percent interest in our synthetic fuel joint ventures and we currently consolidate the joint ventures.
Minority Interest
The principal difference between minority interest for the third quarter of 2004 versus the third quarter of 2003 is related to the change in the ownership structure of the synthetic fuel joint ventures as a result of the sale of 50 percent of our interest in the joint ventures. Due to the purchaser’s put option which expired on November 6, 2003, minority interest for the third quarter of 2003 reflected our partner’s share of the synthetic fuel operating losses and their share of the associated tax benefit along with their share of the tax credits. For the third quarter of 2004, minority interest reflects our partner’s share of the synthetic fuel losses only.
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Thirty-Six Weeks Ended September 10, 2004 Compared to Thirty-Six Weeks Ended September 12, 2003
Revenues ($ in millions) | Thirty-Six Weeks Ended | |||||
| September 10, 2004 | September 12, 2003 | |||||
Full-Service | $ | 4,512 | $ | 3,977 | ||
Select-Service | 788 | 699 | ||||
Extended-Stay | 377 | 392 | ||||
Timeshare | 1,083 | 856 | ||||
Total lodging | 6,760 | 5,924 | ||||
Synthetic fuel | 198 | 224 | ||||
| $ | 6,958 | $ | 6,148 | |||
Revenues increased 13 percent to $6,958 million in 2004, reflecting higher fees related to increased demand for hotel rooms and unit expansion, as well as strong sales in our timeshare segment.
Operating Income
Operating income increased $152 million to $368 million in 2004. The increase is primarily due to higher fees which are related both to stronger REVPAR driven principally by increased occupancy and average daily rate and to the growth in the number of rooms, and stronger timeshare results which are mainly attributable to strong demand and improved margins, partially offset by higher general and administrative expenses and a higher synthetic fuel operating loss associated with both higher production, the change in the ownership structure of the joint ventures as a result of the sale of 50 percent of our interest in the joint ventures and the inclusion of net synthetic fuel earn-out payments received as a component of gains and other income in 2004.
For the thirty-six weeks ended September 10, 2004, the synthetic fuel operation generated $61 million of operating losses compared to operating losses of $104 million for the thirty-six weeks ended September 12, 2003. For the thirty-six weeks ended September 12, 2003, 100 percent of the operating losses of the synthetic fuel joint ventures were recorded by us. While we sold a 50 percent ownership interest in the synthetic fuel joint ventures in the 2003 third quarter, we continued to consolidate the joint ventures in the 2003 third quarter because the purchaser had a put option, which expired November 6, 2003, wherein the purchaser had the ability to return its ownership interest to us. Effective November 7, 2003, as a result of the put option’s expiration, we began accounting for the synthetic fuel joint ventures using the equity method of accounting, and therefore our share of the losses of the synthetic fuel joint ventures were recorded below operating income in the first quarter of 2004. As a result of adopting FIN 46(R) on March 26, 2004, we again consolidated the synthetic fuel joint ventures and recorded 100 percent of the operating losses during the second and third quarters as a component of operating income.
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Income from Continuing Operations ($ in millions) | Thirty-Six Weeks Ended | |||||||
| September 10, 2004 | September 12, 2003 | |||||||
Full-Service | $ | 292 | $ | 259 | ||||
Select-Service | 104 | 81 | ||||||
Extended-Stay | 48 | 37 | ||||||
Timeshare | 135 | 85 | ||||||
Total lodging financial results | 579 | 462 | ||||||
Synthetic fuel (after-tax) | 73 | 66 | ||||||
Unallocated corporate expenses | (91 | ) | (89 | ) | ||||
Interest income, provision for loan losses and interest expense | 29 | (6 | ) | |||||
Income taxes (excluding Synthetic fuel) | (184 | ) | (127 | ) | ||||
| $ | 406 | $ | 306 | |||||
Income from continuing operations increased 33 percent to $406 million, and diluted earnings per share from continuing operations increased 35 percent to $1.69. The favorable results were primarily driven by strong hotel demand, new unit growth, strong timeshare results, higher interest income as a result of higher balances and rates, lower interest expense due to debt reductions, lower loan loss provisions, stronger synthetic fuel results and increased gains of $41 million, partially offset by higher income taxes excluding the synthetic fuel impact, and higher general and administrative expenses. In addition, international operations were unfavorably impacted by the war in Iraq and SARS in 2003.
Marriott Lodging
We consider lodging revenues and lodging financial results to be meaningful indicators of our performance because they measure our growth in profitability as a lodging company and enable investors to compare the sales and results of our lodging operations to those of other lodging companies.
Lodging, which includes our Full-Service, Select-Service, Extended-Stay, and Timeshare segments, reported financial results of $579 million in the first three quarters of 2004, compared to $462 million in the first three quarters of 2003 and revenues of $6,760 million in the first three quarters of 2004, a 14 percent increase from revenues of $5,924 million in the first three quarters of 2003. The results reflect a 17 percent increase in base, franchise and incentive fees, from $510 million in the first three quarters of 2003 to $599 million in the first three quarters of 2004, favorable timeshare results and increased gains of $13 million. The increase in base and franchise fees was driven by higher REVPAR for comparable rooms primarily resulting from both domestic and international occupancy and average daily rate increases and new unit growth. Systemwide REVPAR for comparable North American properties increased 7.5 percent, and REVPAR for our comparable North American company-operated properties increased 7.8 percent. Systemwide REVPAR for comparable international properties, including Ritz-Carlton, increased 17.4 percent, and REVPAR for comparable international company-operated properties including Ritz-Carlton increased 20.0 percent. The increase in incentive management fees during the first three quarters of the year reflects the impact of increased international travel, particularly in Asia, and increased business at properties in North America. We have added 177 properties (28,376 rooms) and deflagged 48 properties (7,675 rooms) since the third quarter of 2003. Worldwide REVPAR for comparable company-operated properties increased 10.6 percent while worldwide REVPAR for comparable systemwide properties increased 9.4 percent.
The following table shows occupancy, average daily rate and REVPAR for each of our comparable principal established brands. We have not presented statistics for company-operated North American Fairfield Inn and SpringHill Suites properties because we operate only a limited number of properties as both these brands are
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predominantly franchised and such information would not be meaningful for those brands (identified as “nm” in the table below). Systemwide statistics include data from our franchised properties, in addition to our owned, leased and managed properties. For North American properties (except for The Ritz-Carlton which includes January through August), the occupancy, average daily rate and REVPAR statistics used throughout this report for the thirty-six weeks ended September 10, 2004, include the period from January 3, 2004 through September 10, 2004, while the thirty-six weeks ended September 12, 2003, include the period from January 4, 2003 through September 12, 2003.
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| Comparable Company-Operated North American Properties | Comparable Systemwide North American Properties | |||||||||||||||||||
| Thirty-Six Weeks Ended September 10, 2004 | Change vs. 2003 | Thirty-Six Weeks Ended September 10, 2004 | Change vs. 2003 | |||||||||||||||||
Marriott Hotels & Resorts(1) | ||||||||||||||||||||
Occupancy | 73 | .4% | 3 | .1% | pts | . | 71 | .4% | 3 | .0% | pts | . | ||||||||
Average Daily Rate | $ | 141 | .13 | 2 | .2% | $ | 133 | .42 | 2 | .4% | ||||||||||
REVPAR | $ | 103 | .61 | 6 | .6% | $ | 95 | .25 | 6 | .9% | ||||||||||
The Ritz-Carlton(2) | ||||||||||||||||||||
Occupancy | 71 | .1% | 5 | .4% | pts | . | 71 | .1% | 5 | .4% | pts | . | ||||||||
Average Daily Rate | $ | 256 | .48 | 5 | .3% | $ | 256 | .48 | 5 | .3% | ||||||||||
REVPAR | $ | 182 | .40 | 13 | .9% | $ | 182 | .40 | 13 | .9% | ||||||||||
Renaissance Hotels & Resorts | ||||||||||||||||||||
Occupancy | 70 | .6% | 4 | .1% | pts | . | 69 | .9% | 4 | .0% | pts | . | ||||||||
Average Daily Rate | $ | 133 | .83 | 0 | .3% | $ | 127 | .31 | 1 | .1% | ||||||||||
REVPAR | $ | 94 | .54 | 6 | .5% | $ | 88 | .97 | 7 | .3% | ||||||||||
Composite – Full-Service(3) | ||||||||||||||||||||
Occupancy | 72 | .8% | 3 | .5% | pts | . | 71 | .1% | 3 | .3% | pts | . | ||||||||
Average Daily Rate | $ | 151 | .35 | 2 | .6% | $ | 141 | .18 | 2 | .8% | ||||||||||
REVPAR | $ | 110 | .12 | 7 | .8% | $ | 100 | .45 | 7 | .8% | ||||||||||
Residence Inn | ||||||||||||||||||||
Occupancy | 79 | .8% | 1 | .7% | pts | . | 79 | .7% | 2 | .3% | pts | . | ||||||||
Average Daily Rate | $ | 99 | .14 | 3 | .2% | $ | 97 | .25 | 2 | .6% | ||||||||||
REVPAR | $ | 79 | .08 | 5 | .4% | $ | 77 | .50 | 5 | .7% | ||||||||||
Courtyard | ||||||||||||||||||||
Occupancy | 71 | .7% | 3 | .5% | pts | . | 72 | .7% | 3 | .3% | pts | . | ||||||||
Average Daily Rate | $ | 95 | .43 | 3 | .3% | $ | 96 | .74 | 4 | .1% | ||||||||||
REVPAR | $ | 68 | .47 | 8 | .6% | $ | 70 | .34 | 9 | .1% | ||||||||||
Fairfield Inn | ||||||||||||||||||||
Occupancy | nm | nm | 67 | .8% | 1 | .4% | pts | . | ||||||||||||
Average Daily Rate | nm | nm | $ | 67 | .64 | 2 | .0% | |||||||||||||
REVPAR | nm | nm | $ | 45 | .83 | 4 | .2% | |||||||||||||
TownePlace Suites | ||||||||||||||||||||
Occupancy | 75 | .5% | 4 | .3% | pts | . | 76 | .1% | 4 | .5% | pts | . | ||||||||
Average Daily Rate | $ | 65 | .40 | 2 | .7% | $ | 64 | .70 | 1 | .2% | ||||||||||
REVPAR | $ | 49 | .37 | 8 | .9% | $ | 49 | .23 | 7 | .6% | ||||||||||
SpringHill Suites | ||||||||||||||||||||
Occupancy | nm | nm | 72 | .5% | 3 | .8% | pts | . | ||||||||||||
Average Daily Rate | nm | nm | $ | 84 | .58 | 3 | .5% | |||||||||||||
REVPAR | nm | nm | $ | 61 | .33 | 9 | .2% | |||||||||||||
Composite – Select-Service & Extended-Stay(4) | ||||||||||||||||||||
Occupancy | 73 | .9% | 3 | .2% | pts | . | 73 | .3% | 2 | .7% | pts | . | ||||||||
Average Daily Rate | $ | 93 | .85 | 3 | .3% | $ | 87 | .53 | 3 | .2% | ||||||||||
REVPAR | $ | 69 | .38 | 7 | .9% | $ | 64 | .18 | 7 | .2% | ||||||||||
Composite – All(5) | ||||||||||||||||||||
Occupancy | 73 | .2% | 3 | .4% | pts | . | 72 | .4% | 3 | .0% | pts | . | ||||||||
Average Daily Rate | $ | 130 | .71 | 2 | .9% | $ | 110 | .53 | 3 | .1% | ||||||||||
REVPAR | $ | 95 | .65 | 7 | .8% | $ | 80 | .00 | 7 | .5% | ||||||||||
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Systemwide international statistics by region are based on comparable worldwide units, excluding North America. The following table shows occupancy, average daily rate and REVPAR for international properties by region/brand.
| Comparable Company-Operated International Properties (1), (2) | Comparable Systemwide International Properties (1), (2) | |||||||||||||||||||
| Eight Months Ended August 31, 2004 | Change vs. 2003 | Eight Months Ended August 31, 2004 | Change vs. 2003 | |||||||||||||||||
Caribbean & Latin America | ||||||||||||||||||||
Occupancy | 72 | .9% | 4 | .6% | pts | . | 71 | .4% | 6 | .1% | pts | . | ||||||||
Average daily rate | $ | 140 | .09 | 8 | .3% | $ | 133 | .02 | 7 | .2% | ||||||||||
REVPAR | $ | 102 | .09 | 15 | .6% | $ | 94 | .96 | 17 | .2% | ||||||||||
Continental Europe | ||||||||||||||||||||
Occupancy | 69 | .6% | 3 | .5% | pts | . | 67 | .3% | 4 | .7% | pts | . | ||||||||
Average daily rate | $ | 127 | .15 | 2 | .2% | $ | 127 | .89 | 1 | .6% | ||||||||||
REVPAR | $ | 88 | .46 | 7 | .6% | $ | 86 | .07 | 9 | .3% | ||||||||||
United Kingdom | ||||||||||||||||||||
Occupancy | 76 | .1% | 3 | .9% | pts | . | 73 | .0% | 3 | .6% | pts | . | ||||||||
Average daily rate | $ | 182 | .28 | 7 | .9% | $ | 144 | .05 | 3 | .2% | ||||||||||
REVPAR | $ | 138 | .78 | 13 | .7% | $ | 105 | .21 | 8 | .5% | ||||||||||
Middle East & Africa | ||||||||||||||||||||
Occupancy | 73 | .3% | 7 | .9% | pts | . | 73 | .3% | 7 | .9% | pts | . | ||||||||
Average daily rate | $ | 100 | .83 | 11 | .4% | $ | 100 | .83 | 11 | .4% | ||||||||||
REVPAR | $ | 73 | .86 | 25 | .0% | $ | 73 | .86 | 25 | .0% | ||||||||||
Asia Pacific(3) | ||||||||||||||||||||
Occupancy | 74 | .9% | 14 | .7% | pts | . | 75 | .6% | 13 | .2% | pts | . | ||||||||
Average daily rate | $ | 91 | .26 | 10 | .4% | $ | 94 | .98 | 7 | .7% | ||||||||||
REVPAR | $ | 68 | .31 | 37 | .3% | $ | 71 | .82 | 30 | .4% | ||||||||||
Sub-total Composite International(4), (5) | ||||||||||||||||||||
Occupancy | 73 | .2% | 8 | .3% | pts | . | 72 | .4% | 7 | .7% | pts | . | ||||||||
Average daily rate | $ | 118 | .79 | 5 | .4% | $ | 120 | .56 | 4 | .0% | ||||||||||
REVPAR | $ | 86 | .96 | 18 | .8% | $ | 87 | .29 | 16 | .3% | ||||||||||
The Ritz-Carlton International | ||||||||||||||||||||
Occupancy | 71 | .2% | 14 | .0% | pts | . | 71 | .2% | 14 | .0% | pts | . | ||||||||
Average daily rate | $ | 200 | .88 | 1 | .1% | $ | 200 | .88 | 1 | .1% | ||||||||||
REVPAR | $ | 143 | .00 | 26 | .0% | $ | 143 | .00 | 26 | .0% | ||||||||||
Total Composite International(4) | ||||||||||||||||||||
Occupancy | 73 | .0% | 8 | .9% | pts | . | 72 | .3% | 8 | .2% | pts | . | ||||||||
Average daily rate | $ | 127 | .66 | 5 | .3% | $ | 127 | .01 | 4 | .2% | ||||||||||
REVPAR | $ | 93 | .17 | 20 | .0% | $ | 91 | .84 | 17 | .4% | ||||||||||
Total Worldwide(6) | ||||||||||||||||||||
Occupancy | 73 | .1% | 4 | .8% | pts | . | 72 | .4% | 3 | .9% | pts | . | ||||||||
Average daily rate | $ | 129 | .95 | 3 | .4% | $ | 113 | .46 | 3 | .5% | ||||||||||
REVPAR | $ | 95 | .02 | 10 | .6% | $ | 82 | .10 | 9 | .4% | ||||||||||
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| Thirty-Six Weeks Ended | Change 2004/2003 | ||||||||
Full-Service Lodging ($ in millions) | September 10, 2004 | September 12, 2003 | |||||||
Revenues | $ | 4,512 | $ | 3,977 | 13 | % | |||
Segment results | $ | 292 | $ | 259 | 13 | % | |||
Full-Service Lodging includes ourMarriott Hotels & Resorts, The Ritz-Carlton, Renaissance Hotels & Resorts, Ramada InternationalandBulgari Hotels & Resorts brands. The 2004 segment results reflect a $57 million increase in base management, incentive management and franchise fees, partially offset by increased administrative costs. The increase in fees is largely due to stronger REVPAR, driven primarily by occupancy and rate increases, and the growth in the number of rooms. Since the third quarter of 2003, across our Full-Service Lodging segment, we have added 70 hotels (14,337 rooms) and deflagged 19 hotels (3,995 rooms).
Gains were up $4 million and joint venture results were down $4 million compared to the prior year. On April 1, 2004, Cendant exercised its option to redeem our interest in the Two Flags joint venture, which owns the trademarks and licenses for the Ramada and Days Inn lodging brands in the United States. In the first three quarters of 2003, our equity earnings included $17 million attributable to our interest in the Two Flags joint venture, while our equity in earnings for the first three quarters of 2004 reflect only a $6 million impact due to the redemption of our interest. We recorded a pre-tax gain of $13 million in the third quarter of 2004 when we received the proceeds from the Two Flags sale. In the prior year third quarter we recognized a $9 million gain associated with our sale of an international joint venture.
REVPAR for Full-Service Lodging comparable company-operated North American hotels increased 7.8 percent to $110.12. Occupancy for these hotels increased to 72.8 percent, while average daily rates increased 2.6 percent to $151.35.
Financial results for our international operations were strong across most regions, generating a 20.0 percent REVPAR increase for comparable company-operated hotels including Ritz-Carlton. Occupancy increased 8.9 percentage points, while average daily rates increased to $127.66. International operations were unfavorably impacted by SARS in 2003. As noted above, in the year ago third quarter we recognized a $9 million gain associated with our sale of an international joint venture. Versus the prior year, we experienced stronger demand particularly in China, Hong Kong, Australia, Brazil, Egypt, Mexico, and the United Kingdom.
| Thirty-Six Weeks Ended | Change 2004/2003 | ||||||||
Select-Service Lodging ($ in millions) | September 10, 2004 | September 12, 2003 | |||||||
Revenues | $ | 788 | $ | 699 | 13 | % | |||
Segment results | $ | 104 | $ | 81 | 28 | % | |||
Select-Service Lodgingincludes ourCourtyard, Fairfield Inn andSpringHill Suites brands. The increase in revenues over the prior year, reflects stronger REVPAR, driven primarily by occupancy and rate increases, and the growth in the number of rooms across our select-service brands. Base management, incentive management and franchise fees increased $21 million, and gains were $10 million higher than the prior year period. These increases were partially offset by reserves recorded for performance guarantees we expect to fund and an increase in administrative costs, resulting in an increase in segment results from $81 million in 2003 to $104 million in 2004. Across our Select-Service Lodging segment, we have added 84 hotels (10,425 rooms) and deflagged 26 hotels (3,539 rooms) since the third quarter of 2003.
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| Thirty-Six Weeks Ended | Change 2004/2003 | ||||||||
Extended-Stay Lodging ($ in millions) | September 10, 2004 | September 12, 2003 | |||||||
Revenues | $ | 377 | $ | 392 | -4 | % | |||
Segment results | $ | 48 | $ | 37 | 30 | % | |||
Extended-Stay Lodging includes ourResidence Inn,TownePlace Suites,Marriott Executive Apartments, andMarriott ExecuStay brands. The decline in revenue is primarily attributable to the shift in the ExecuStay business towards franchising. Our base and incentive management fees were essentially flat with last year while our franchise fees, principally associated with our Residence Inn brand, increased $7 million. The increase in franchise fees is largely due to the growth in the number of rooms and an increase in REVPAR. Since the third quarter of 2003 we have added 21 hotels (2,303 rooms) and deflagged one hotel (80 rooms). In addition, gains of $8 million in 2004 were favorable to the prior year by $3 million. ExecuStay experienced improved results compared to the first three quarters of last year, resulting from increased occupancy, primarily in the New York market, coupled with lower operating costs associated with the shift in business towards franchising.
REVPAR for Select-Service and Extended-Stay Lodging comparable company-operated North American hotels increased 7.9 percent to $69.38. Occupancy for these hotels increased to 73.9 percent, while average daily rates increased 3.3 percent to $93.85.
| Thirty-Six Weeks Ended | Change 2004/2003 | ||||||||
Timeshare ($ in millions) | September 10, 2004 | September 12, 2003 | |||||||
Revenues | $ | 1,083 | $ | 856 | 27 | % | |||
Segment results | $ | 135 | $ | 85 | 59 | % | |||
Timeshare includes ourMarriott Vacation Club International, The Ritz-Carlton Club, Marriott Grand Residence Club and Horizons by Marriott Vacation Club International brands. Timeshare revenues of $1,083 million and $856 million, in 2004 and 2003, respectively, include interval sales, base management fees and cost reimbursements. Including our three joint ventures, contract sales, which represent sales of timeshare intervals before adjustment for percentage of completion accounting, increased 36 percent primarily due to strong demand in South Carolina, Florida, Hawaii, California, St. Thomas and Aruba. The favorable segment results reflect a 17 percent increase in timeshare interval sales and services, higher margins primarily resulting from the use of lower cost marketing channels, and the mix of units sold, partially offset by a lower note sale gain and higher administrative expenses. Our note sale in the second quarter of 2004 resulted in a $27 million gain versus a $32 million gain in the second quarter of 2003. In addition to a lower note sale gain, we adjusted the discount rate used in determining the fair value of our residual interests due to current trends in interest rates, and recorded a $7 million charge in the second quarter of 2004. Additionally, the 2003 results reflected a $2 million loss associated with an interest rate swap agreement. Reported revenue growth trailed contract sales growth because of a higher proportion of sales in joint venture projects and projects with lower average construction completion.
Synthetic Fuel
For the thirty-six weeks ended September 10, 2004, the synthetic fuel operation generated revenue of $198 million and income from continuing operations of $73 million comprised of second and third quarter items: operating losses of $61 million, offset by net earn-out payments received of $28 million, a $2 million tax benefit, tax credits which amounted to $64$47 million, and minority interest of $29 million reflecting our partner’s share of the operating losses and first quarter items:of $10 million.
For the twelve weeks ended March 26, 2004, the synthetic fuel operation generated net income of $11 million comprised of: equity losses of $28 million which include net earn-out payments made of $6 million,entirely offset by a tax benefit of $10$39 million, andincluding tax credits which amounted toof $29 million.
32
ForWe adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities,” (“FIN 46(R)”) on the thirty-six weeks ended September 12, 2003,last day of the 2004 first quarter. As a result of adopting FIN 46(R), we consolidated the synthetic fuel operation generated revenueoperations. Accordingly, as we accounted for the synthetic fuel operations using the equity method of $224accounting throughout most of the 2004 first quarter, there was no operating income impact, whereas there is an operating income impact in the first quarter of 2005.
The $7 million increase in synthetic fuel net income to $18 million from $11 million is primarily due to higher production in 2005 and incomeour increased proportion of tax credits associated with the three synthetic fuel facilities under IRS review, partially offset by our decreased proportion of tax credits associated with the facility not under IRS review.
On April 29, 2005, we entered into an amendment agreement with our synthetic fuel partner. This amendment extends until June 30, 2005, the period in which our partner has the right to elect to have its approximately 50 percent ownership interest in the three synthetic fuel facilities that are subject to the IRS’s placed-in-service challenge redeemed. Our joint venture partner has the right to have us redeem its ownership interest in those three facilities because the IRS’s placed-in-service challenge remained outstanding as of March 31, 2005. Until our partner exercises this right, our partner will be allocated 1 percent of the tax credits from continuing operations of $66 million comprised of: operating losses of $104 million, which includes net earn-out payments made of $37 million; minoritythose three facilities. If our partner does not exercise the right to return its ownership interest expense of $29 million reflectingin those three facilities to us by June 30, 2005, our partner’s share of the tax credits tax benefits, and operating losses; a $37 million tax benefit; and tax credits which amountedfrom those facilities will return to $162 million. The $7 million increase in synthetic fuel results to $73 million from $66 million is primarily due to our sale of aapproximately 50 percent interest in the synthetic fuel joint ventures in the third quarter of 2003 and to slightly higher production in 2004. In connection with the sale, a higher percentage (90 percent) of the tax credits was allocated to our joint venture partner in the 2003 third quarter compared to roughly 50 percent in the 2004 third quarter. See Note 12, “Synthetic Fuel” in Part I, Itemeffective June 1, Notes to Condensed Consolidated Financial Statements, for further information related to our synthetic fuel operations.2005.
General, Administrative and Other ExpensesImpact of Future Adoption of Accounting Standards
General, administrativeStatement of Position 04-2, “Accounting for Real Estate Time-sharing Transactions”
In December 2004, the American Institute of Certified Public Accountants issued Statement of Position (“SOP”) 04-2, “Accounting for Real Estate Time-sharing Transactions,” and the FASB amended FAS No. 66, “Accounting for Sales of Real Estate,” and FAS No. 67 “Accounting for Costs and Initial Rental Operations of Real Estate Projects,” to exclude accounting for real estate time-sharing transactions from these statements. The SOP will be effective for fiscal years beginning after June 15, 2005.
Under the SOP, the majority of the costs incurred to sell timeshares will be charged to expense when incurred. In regards to notes receivable issued in conjunction with a sale, an estimate of uncollectibility that is expected to occur must be recorded as a reduction of revenue at the time that profit is recognized on a timeshare sale. Rental and other expenses increased $49operations during holding periods must be accounted for as incidental operations, which require that any excess costs be recorded as a reduction of inventory costs.
We estimate that the initial adoption of the SOP, which will be reported as a cumulative effect of a change in accounting principle in our fiscal year 2006 financial statements, will result in a one-time non-cash pre-tax charge of approximately $150 million, inconsisting primarily of the first three quarterswrite-off of 2004 to $385 million, reflecting higher administrative expenses in both our lodgingdeferred selling costs and timeshare businesses, primarily associated with increased overhead costs related toestablishing the Company’s unit growth and increased development costs associated with our timeshare joint ventures, as well as $3 millionrequired reserve on notes. We estimate that the ongoing impact of higher litigation expenses, a $6 million reduction in foreign exchange gains, and $10 million of insurance proceeds received in 2003, partially offset by lower deferred compensation expenses.adoption will be immaterial.
Gains and Other IncomeFAS No. 123 (revised 2004), “Share-Based Payment”
The following table shows our gainsIn December 2004, the FASB issued FAS No. 123 (revised 2004), “Share-Based Payment” (“FAS No. 123R”), which is a revision of FAS No. 123, “Accounting for Stock-Based Compensation.” FAS No. 123R supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and other income foramends FAS No. 95, “Statement of Cash Flows.” Registrants were initially required to adopt FAS No. 123R as of the thirty-six weeks ended September 10, 2004 and September 12, 2003:
| Thirty-Six Weeks Ended | ||||||
| ($ in millions) | September 10, 2004 | September 12, 2003 | ||||
Timeshare note sale gains | $ | 27 | $ | 32 | ||
Net synthetic fuel earn-out payments received | 28 | — | ||||
Gains on sale of real estate | 25 | 13 | ||||
Gains on sale of joint ventures | 15 | 9 | ||||
| $ | 95 | $ | 54 | |||
Interest Expense
Interest expense decreased $8 million to $69 million primarily duebeginning of the first interim period that begins after June 15, 2005. On April 14, 2005, subsequent to the repayment of $234 million of senior debt in the fourth quarter of 2003 and other debt reductions, partially offset by lower capitalized interest resulting from fewer projects under construction.
Interest Income and Income Tax
Interest income, before the provision for loan losses increased $20 million (26 percent) to $98 million, reflecting higher loan balances, including the $200 million note, collected in the third quarter of 2004, related to the purchaseend of our interest in2005 first quarter, the Two Flags joint venture,Securities and higher interest rates. ForExchange Commission adopted a new rule that allows companies to implement FAS No. 123R at the thirty-six weeks ended September 10, 2004, we recognized $8 millionbeginning of interest income in connection withtheir next fiscal year, instead of the $200 million note.
Income from continuing operations before income taxes generated a tax provision of $79 million innext reporting period that begins after June 15, 2005. We will adopt FAS No. 123R at the first three quarters of 2004, compared to a tax benefit of $72 million in 2003. The difference is primarily attributable to the impactbeginning of our synthetic fuel joint venture, which generated a tax benefit and tax credits2006 fiscal year. We estimate the adoption of $105FAS No. 123R, using the modified prospective method, will result in incremental pre-tax expense in fiscal year 2006 of approximately $25 million, in 2004, compared to $199 million in 2003, and to higher pre-tax income. In the third quarter of 2003 we sold a 50 percent interest inbased on our synthetic fuel joint ventures and we currently consolidate the joint ventures.
33current share-based payment compensation plans.
Minority Interest
The principal difference between minority interest for the thirty-six weeks ended September 10, 2004 versus the thirty-six weeks ended September 12, 2003 is related to the change in the ownership structure of the synthetic fuel joint ventures as a result of the sale of 50 percent of our interest in the joint ventures. Due to the purchaser’s put option which expired on November 6, 2003, minority interest for the thirty-six weeks ended September 12, 2003 reflected our partner’s share of the synthetic fuel operating losses and their share of the associated tax benefit along with their share of the tax credits. For the thirty-six weeks ended September 10, 2004, minority interest reflects our partner’s share of the synthetic fuel losses only.
34
LIQUIDITY AND CAPITAL RESOURCES
Cash Requirements and our Credit Facilities
We are party to two multicurrency revolving credit agreements that provide for aggregate borrowings of $2 billion expiring in 2006 ($1.5 billion expiring in July and $500 million expiring in August), which support our commercial paper program and letters of credit. At September 10, 2004,March 25, 2005, we had no loans outstanding under the facilities. At September 10, 2004,March 25, 2005, our cash balances combined with our available borrowing capacity under the credit facilities amounted to approximately $2$2.3 billion. We consider these resources, together with cash we expect to generate from operations, adequate to meet our short-term and long-term liquidity requirements, finance our long-term growth plans, meet debt service and fulfill other cash requirements.requirements, including repayment of our Series D senior notes totaling $275 million which matured on April 1, 2005, subsequent to the end of the 2005 first quarter, and our Series B senior notes totaling $200 million which mature on November 15, 2005.
Cash and equivalents totaled $202$377 million at September 10, 2004,March 25, 2005, a decrease of $27$393 million from year-end 2003,2004, primarily reflecting purchases of treasury stock, debt repayments, loan advancescash used in operations, and capital expenditures, partially offset by loan collections and sales, cash from dispositions, commercial paper borrowings, and cash provided by operating activities.
Timeshare Operating Cash Flowsreceipts associated with the issuance of common stock.
While our timeshare business generates strong operating cash flow, the timing of both cash outlays for the acquisition and development of new resorts and cash received from purchaser financing affects quarterly amounts. We include timeshare interval sales we finance in cash from operations when we collect cash payments or the notes are sold for cash.
The following table shows the net operating activity from our timeshare business (which excludes the portion of net income from our timeshare business, as that number is a component of income from continuing operations)net income):
| Thirty-Six Weeks Ended | ||||||||
| ($ in millions) | September 10, 2004 | September 12, 2003 | ||||||
Timeshare development, less cost of sales | $ | 45 | $ | (75 | ) | |||
New timeshare mortgages, net of collections | (291 | ) | (181 | ) | ||||
Note sale gains | (27 | ) | (32 | ) | ||||
Note sale proceeds | 141 | 130 | ||||||
Financially reportable sales less than closed sales | 61 | 36 | ||||||
Collection on retained interests in notes sold | 78 | 36 | ||||||
Other cash inflows (outflows) | 29 | (2 | ) | |||||
Net cash inflows (outflows) from timeshare activity | $ | 36 | $ | (88 | ) | |||
| Twelve Weeks Ended | ||||||||
($ in millions)
| March 25, 2005 | March 26, 2004 | ||||||
Timeshare development, less cost of sales | $ | 18 | $ | (6 | ) | |||
New timeshare mortgages, net of collections | (85 | ) | (71 | ) | ||||
Loan repurchases | (4 | ) | (4 | ) | ||||
Financially reportable sales in excess of closed sales | (52 | ) | (42 | ) | ||||
Collection on retained interests in notes sold and servicing fees | 22 | 32 | ||||||
Other cash inflows | 13 | 44 | ||||||
Net cash outflows from timeshare activity | $ | (88 | ) | $ | (47 | ) | ||
Asset Securitizations and Other
In June 2004, we sold $150 million of notes receivable generated by our timeshare business in connection with the sale of timeshare intervals. In conjunction with the sale, we received net proceeds of $141 million, retained residual interests of $33 million, and recorded a gain of $27 million. We used the following key assumptions to measure the fair value of the residual interests: discount rate of 7.9 percent; expected annual prepayments, including defaults, of 18.5 percent; expected weighted average life of prepayable notes receivable, excluding prepayments and defaults, of 81 months; and expected weighted average life of prepayable notes receivable, including prepayments and defaults, of 41 months. Our key assumptions are based on experience.
35
In March 2004 we also sold one lodging note associated with an equity method investee, for cash proceeds of $57 million.
Debt
In the first three quarters of 2004, debt decreased by $80 million from $1,455 million to $1,375 million, due to the second quarter 2004 repurchase of all of our Liquid Yield Option Notes due 2021 (the “Notes”) totaling $62 million, the maturity in the second quarter of 2004 of $46 million of senior notes and other debt reductions of $22 million, partially offset by a $50 million increase in commercial paper borrowings used to finance capital expenditures, share repurchases, and our Notes repurchase.
On April 7, 2004, we sent notice to the holders of our Notes that, subject to the terms of the indenture governing the Notes, we would purchase for cash, at the option of each holder, any Notes tendered by the holder and not withdrawn on May 10, 2004, at a purchase price of $880.50 per $1,000 principal amount at maturity. The Notes, issued on May 8, 2001, carried a yield to maturity of 0.75 percent, and were convertible into approximately 0.9 million shares of our Class A Common Stock.
Holders of all outstanding Notes, approximately $70 million aggregate principal amount at maturity, tendered their Notes for repurchase. Accordingly, on May 11, 2004, we repurchased all of the outstanding Notes for aggregate cash consideration of approximately $62 million. No Notes remain outstanding following the purchase.
Cendant Joint Venture
On April 1, 2004, Cendant exercised its option to redeem our interest in the Two Flags joint venture, which owns the trademarks and licenses for the Ramada and Days Inn lodging brands in the United States. We recorded a pre-tax gain of approximately $13 million in connection with this transaction in the third quarter of 2004 when we collected our $200 million note receivable and the sale was complete.
For our entire 2003 fiscal year, we earned $24 million from our interest in the Two Flags joint venture, which was reflected as equity in earnings in the income statement. Our equity in earnings attributable to the Two Flags joint venture was $5 million and $17 million for the twelve and thirty-six weeks ended September 12, 2003, respectively, versus $6 million for the thirty-six weeks ended September 10, 2004. For the thirty-six weeks ended September 10, 2004, we recognized $8 million of interest income in connection with the $200 million note, collected in the third quarter of 2004, related to the purchase of our interest in the Two Flags joint venture.
We continue to own the trademarks and licenses for Ramada International outside of the United States, operate and franchise hotels outside of the United States and Canada under the Ramada International brand name, and license the Ramada name in Canada to Cendant. However, subsequent to the third quarter 2004, the Company and Cendant signed a non-binding letter of intent for Cendant to purchase Ramada International, primarily a franchised brand from the Company. Pending approval by regulatory authorities and final negotiation of terms, the transaction is expected to be completed in the fourth quarter of 2004. We do not expect the transaction to have a material impact to the Company.
CONTRACTUAL OBLIGATIONS AND OFF BALANCE SHEET ARRANGEMENTS
Except for the increase in commercial paper borrowings and the repurchase of our Liquid Yield Option Notes due 2021, both discussed in “Debt” above, our contractual obligations and off balance sheet arrangements, which we discussed on pages 34 and 35 of our Annual Report on Form 10-K for fiscal year 2003, have not materially changed since January 2, 2004.
SHARE REPURCHASESShare Repurchases
We purchased 12.95.2 million shares of our Class A Common Stock during the thirty-sixtwelve weeks ended September 10, 2004March 25, 2005, at an average price of $45.71$64.10 per share.
36Courtyard Joint Venture
Subsequent to the end of the 2005 first quarter, Sarofim Realty Advisors, on behalf of an institutional investor, completed the acquisition of a 75 percent interest in the Courtyard Joint Venture, and we signed a new long-term management agreement with the joint venture. The transaction will result in an accelerating pace of reinventions and upgrades at the joint venture’s hotels.
As of the end of the 2005 first quarter, we and Host Marriott owned equal shares in the 120-property joint venture. With the addition of the new equity, our interest in the joint venture has declined to approximately
21 percent and Host Marriott’s interest declined to less than 4 percent. As part of the completed transaction, our mezzanine loan to the joint venture (including accrued interest) totaling approximately $269 million has been repaid. We are making available to the joint venture a seven year subordinated loan of up to $129 million, primarily to fund renovation costs in 2005 and 2006 for the remaining hotels in the portfolio.
Pending Transaction-Marriott and Whitbread Joint Venture
We announced in the first quarter of 2005 that we had signed an agreement with Whitbread PLC to establish a 50/50 joint venture to acquire Whitbread’s portfolio of 46 franchised Marriott and Renaissance hotels of over 8,000 rooms, and for us to take over management of the entire portfolio of hotels upon the transfer of the hotels to the new joint venture. The joint venture expects to sell properties to investors over the next two years subject to long-term management agreements with us. The transaction is subject to Whitbread shareholder approval, which occurred on April 22, 2005, and other conditions.Closing is expected to occur in May 2005, although we cannot assure you that the transaction will be completed.
We expect to contribute to the joint venture approximately £90 million ($168 million) in the second quarter of 2005 for a 50 percent stake in the joint venture. Whitbread will contribute its interest in the 46 hotels, the joint venture will place approximately £660 million ($1,234 million) of debt, and Whitbread will receive approximately £710 million ($1,328 million) and the other 50 percent stake in the venture. As the joint venture sells the hotels, our interest in the joint venture will be redeemed.
Pending Transaction Subsequent to Quarter End-CTF Holdings Ltd. (“CTF”)
Subsequent to the end of the 2005 first quarter, we signed a purchase and sale agreement with CTF to purchase 32 properties from CTF for an aggregate price of $1,452 million. All of the properties are operated by us or our subsidiaries and include 29 Renaissance Hotels & Resorts brand properties and three Courtyard brand properties. The agreement permits us to designate substitute purchasers at closing. Sunstone Hotel Investors, Inc. (“Sunstone”) and Walton Street Capital, L.L.C. (“Walton Street”) signed separate agreements with us to be substitute purchasers and acquire 13 hotels and certain joint venture interests from CTF for approximately $1 billion at the transaction’s closing. Sunstone will purchase five hotels and one joint venture interest for $419 million. Walton Street will purchase eight hotels for $578 million. We will purchase the remaining 19 hotels and one joint venture interest for approximately $455 million.
As part of this transaction, Walton Street agreed to purchase our minority interest in one CTF hotel for approximately $12 million. Walton Street and Sunstone have also agreed to invest a combined $68 million to further upgrade the 13 hotels they will acquire and enter into new long-term management agreements with us.
As part of the transaction, we and CTF have agreed to dismiss all litigation currently pending between us, including litigation and arbitration involving CTF and its affiliates described under Footnote No. 6, “Contingencies.”
We expect to sell 13 of the hotels we purchase in this transaction to third-party owners. The remaining six hotels are operated under leases, five of which expire by 2012.
In addition to the transactions outlined above, we and CTF have agreed to modify management agreements on 29 CTF-leased hotels, 28 located in Europe and one hotel located in the United States. We became secondarily liable for annual rent payments for these hotels when we acquired the Renaissance Hotel Group N.V. in 1997. We will continue to manage 16 of these hotels under new long-term management agreements. CTF has agreed to place approximately $95 million in trust accounts to cover possible shortfalls in cash flow necessary to meet rent payments under these leases. In turn, we have agreed to release CTF affiliates from their guarantees in connection with these leases. Once the transaction is complete, our financial statements will reflect us as lessee on these hotels with minimum annual payments of approximately $48 million.
For the remaining 13 European leased hotels, CTF will be permitted to terminate management agreements with us as CTF obtains releases from landlords of our back-up guarantees. Pending completion of the CTF-landlord agreements, we will continue to manage these hotels under short-term management agreements and will remain secondarily liable under these leases. CTF will make available €35 million ($46 million) in cash collateral in the event that we are required to fund under such guarantees. As CTF obtains releases from the landlords and these hotels exit the system, our contingent liabilities will decline.
We will continue to manage three hotels in the United Kingdom under amended management agreements with CTF-affiliated companies. We will also continue to manage 14 properties in Asia on behalf of New World Development Company Limited and its affiliates. CTF’s principals are officers, directors and stockholders of New World Development Company Limited. The owners of the UK and Asian hotels have agreed to invest $17 million to renovate those properties.
We expect to record a $91 million one-time, non-cash write-off in the second quarter of 2005 primarily associated with the termination of the existing management agreements. We will enter into new, long-term management agreements with Walton Street and Sunstone at the closing of the transactions, which are expected to occur by June 30, 2005. The new management agreements will be longer and more valuable than the existing agreements, but because the existing agreements will be terminated, accounting rules require us to record the charge.
Completion of these transactions is subject to certain conditions, as well as a variety of consents from owners of certain leased properties and debt that encumbers certain of the hotels. There can be no assurance that all of the necessary conditions will be met or consents obtained.If CTF meets all of its conditions to close and we fail to close the transaction, we are subject to paying a $45 million breakup fee. Similarly, if Sunstone and Walton Street fail to close their transactions under the same circumstances, they are subject to comparable breakup fees.
CRITICAL ACCOUNTING POLICIESESTIMATES
CertainThe preparation of our critical accounting policies require the use of judgmentfinancial statements in their application or require estimates of inherently uncertain matters. Our accounting policies complyaccordance with United StatesU.S. generally accepted accounting principles although a change in the factsrequires management to make estimates and circumstances of the underlying transactions could significantly change the resulting financial statement impact.assumptions that affect reported amounts and related disclosures. We have discussed those policiesestimates that we believe are critical and require the use of complex judgment in their application in our Annual Report on Form 10-K for fiscal year 2003.2004. Since the date of that Form 10-K, there have been no material changes to our critical accounting policies or the methodologies or assumptions we apply under them.
OTHER MATTERS
Our independent auditor, Ernst & Young LLP (E&Y) recently notified the Securities and Exchange Commission (“SEC”), the Public Company Accounting Oversight Board and the Audit Committee of our Board of Directors that certain non-audit services E&Y performed in China for a large number of public companies, including Marriott, have raised questions regarding E&Y’s independence in its performance of audit services.
With respect to Marriott, from 2001 through May of 2004, E&Y performed tax calculation and preparation services for Marriott employees located in Beijing (4 to 8 employees during the applicable period), and affiliates of E&Y made payment of the relevant taxes on behalf of Marriott. The payment of those taxes involved handling of Company related funds, which is not permitted under SEC auditor independence rules. These actions by affiliates of E&Y have been discontinued, and both the amount of the taxes and the fees paid to E&Y in connection with these services are de minimis.
The Audit Committee and E&Y discussed E&Y’s independence with respect to the Company in light of the foregoing facts. E&Y informed the Audit Committee that it does not believe that the holding and paying of those funds impaired E&Y’s independence with respect to the Company. The Company, based on its own review, also is not aware of any additional non-audit services that may compromise E&Y’s independence in performing audit services for the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk has not materially changed since January 2,December 31, 2004.
Item 4.Controls and Procedures
Disclosure Controls and Procedures
As of the end of the period covered by this quarterly report, we carried out an evaluation, under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act). ManagementAct of 1934), and management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management’s control objectives. You should note that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. There have been no changes in the internal control over financial reporting that occurred during the third quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based upon the foregoing evaluation, our Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures are effective to timely alert themensure that information required to any material information relating tobe disclosed by the Company (including its consolidated subsidiaries)in the reports that must be includedit files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in our periodic SEC filings.the rules and forms of the Securities and Exchange Commission.
37Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting that occurred during the first quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
The legal proceedings and claims described under the heading captioned “Contingencies” in Note 86 of the Notes to Condensed Consolidated Financial Statements set forth in Part I, Item 1 of this Quarterly Report are hereby incorporated by reference. We also refer you to the discussion of The Ritz-Carlton Bali Resort and Spa litigation on page 16 of our 2004 Annual Report on Form 10-K. From time to time, we are also subject to certain legal proceedings and claims in the ordinary course of business. We currently are not aware of any such legal proceedings or claims that we believe will have, individually or in aggregate, a material adverse effect on our business, financial condition, or operating results.
Legal Proceeding Terminated During the Third Quarter
Strategic Hotel litigation. On August 20, 2002, several direct or indirect subsidiaries of Strategic Hotel Capital, L.L.C. (Strategic) filed suit against us in the Superior Court of Los Angeles County, California in a dispute related to the management, procurement and rebates related to three California hotels that we manage for Strategic. On June 4, 2004 we signed an agreement to resolve the litigation filed by Strategic Hotel Capital, L.L.C. on terms that are not material to the Company. The court formally dismissed the suit on July 12, 2004, after certain necessary third party consents were obtained.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
| (a) | Unregistered Sale of Securities |
None.
| (b) | Use of Proceeds |
None.
| (c) | Issuer Purchases of Equity Securities |
(in millions, except per share amounts)
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1) | Maximum Number of Shares | |||||
June 19, 2004 – July 16, 2004 | 0.4 | $ | 49.50 | 0.4 | 24.3 | ||||
July 17, 2004 – August 13, 2004 | 3.5 | 47.34 | 3.5 | 20.8 | |||||
August 14, 2004 – September 10, 2004 | 1.1 | 47.34 | 1.1 | 19.7 | |||||
(in millions, except per share amounts)
Period | Total of Shares | Average Price per Share | Total Number of Publicly | Maximum That May Yet Be the Plans or | |||||
January 1, 2005 – January 28, 2005 | 1.2 | $ | 61.92 | 1.2 | 17.4 | ||||
January 29, 2005 – February 25, 2005 | 1.6 | 63.43 | 1.6 | 15.8 | |||||
February 26, 2005 – March 25, 2005 | 2.4 | 65.77 | 2.4 | 13.4 | |||||
| (1) | On April 30, 2004, we announced that our Board of Directors increased by 20 million shares, the authorization to repurchase our common stock for a total outstanding authorization of approximately 25 million shares on that date. That authorization is ongoing and does not have an expiration date. We repurchase shares in the open-market and in privately negotiated transactions. |
Item 3.Defaults Upon Senior Securities
None.
Item 4.Submission of Matters to a Vote of Security Holders
None.
38
None.
| Rather than filing a separate Current Report on Form 8-K under Item 1.01, Entry into a Material Definitive Agreement, we have elected to timely report the following information in this Quarterly Report on Form 10-Q: |
1. Agreements Relating to CTF Holdings Ltd.
On April 27, 2005, we entered into a Purchase and Sale Agreement with CTF Holdings Ltd. and certain of its subsidiaries (collectively, “CTF”), relating to the acquisition of 32 hotels and certain joint venture interests for a purchase price of approximately $1.452 billion. We currently operate 29 of the hotels under the Renaissance Hotels & Resorts brand and three of the hotels under the Courtyard by Marriott brand. Marriott has managed the hotels being sold since we acquired the Renaissance Hotel Group, N.V. from affiliates of CTF and public shareholders in 1997.
Also on April 27, 2005, we entered into a Purchase and Sale Agreement with WSRH Holdings, LLC (“WSRH”), an entity formed by Walton Street Capital, and a separate Purchase and Sale Agreement with Sunstone Hotel Investors, Inc. (“Sunstone”), pursuant to which WSRH and Sunstone each will become a purchaser designee of Marriott and acquire certain of the hotel properties and joint venture interests from CTF. We expect closing for the three transactions will occur simultaneously in June, 2005. A brief
description of the terms and conditions of each of these purchase and sale agreements that are material to Marriott appears below.
Marriott and CTF are also parties to management agreements under the Renaissance Hotels & Resorts and Courtyard by Marriott brands with respect to 33 other hotels that CTF will continue to own. CTF and Marriott have agreed to enter into amendments to revise certain terms of the management agreements for these other hotels.
Purchase and Sale Agreement with CTF
The agreement provides for the sale, for a price of approximately $1.452 billion, of fee-simple, leasehold and/or equity interests in 32 hotels, the minority interest in an entity that owns an additional hotel, and related personal property, permits and contracts, through acquisition of equity or assets relating to each hotel, and the assumption of various liabilities associated with the ownership and operation of the hotels. The price is subject to adjustment on the basis of, among other things, the outstanding amount of certain debt encumbering the hotels, various capital expenditures, and the exclusion of various hotels from the transaction if certain casualty losses occur prior to closing or if third-party consents required for the assignment of certain hotel interests have not been obtained. Marriott and CTF have agreed to indemnify and hold each other harmless for breaches of the various representations, warranties and covenants contained in the agreement, subject to specified time and dollar limitations.
The closing of the transactions contemplated by the agreement is subject to a number of conditions, including (i) completion of the related transactions described below; (ii) receipt of a variety of consents from owners of certain leased properties and from holders of debt that encumbers certain of the hotels; (iii) delivery to us of certain CTF-affiliate guarantees covering various CTF obligations with respect to the purchase agreement and the related transactions described above; (iv) our ability to obtain satisfactory title insurance policies for the transferred hotel properties; and (v) the repurchase or defeasance by an affiliate of CTF of bonds issued by a third party that encumber some of the hotel properties (the “Outstanding Bonds”). If at closing certain hotel-specific closing conditions have not been satisfied, the remaining hotels will be sold, we will continue to manage the affected hotels for a specified period of time, and the affected hotels will be sold later if the applicable conditions have been satisfied by December 31, 2005. The agreement may be terminated (i) by mutual written consent of Marriott and CTF; (ii) by either party if certain conditions set forth in the agreement are not fulfilled on the closing date or if closing does not occur by June 30, 2005 (subject to our electing to postpone closing to November 15, 2005 if the Outstanding Bonds have not been repurchased or defeased by June 30, 2005); (iii) if a governmental authority prohibits the transactions; or (iv) by us upon payment to CTF of a termination fee in the amount of $45 million. If we were to terminate the agreement, we would have no further liability to CTF under the agreement beyond payment of the termination fee (if applicable), the related transactions described below would not take place, and the status quo would be restored with respect to management of the hotels involved in these transactions.
Marriott may designate one or more purchasers to acquire all or any part of the interests being sold under the agreement, and pursuant to that provision we have designated WSRH and Sunstone as purchaser-designees. The material terms of our agreement with each purchaser-designee are described below.
Related Transactions
On or before closing under the purchase and sale agreement with CTF, Marriott and CTF will enter into a number of other transactions that relate to 28 CTF-leased hotels located in Europe and one in the United States that are not part of the sale. We became secondarily liable for annual rent payments for these hotels when we acquired the Renaissance Hotel Group N.V. in 1997. Under these related transactions:
At closing, Marriott, CTF and certain of CTF’s affiliates will also execute mutual releases with respect to certain disputes which will dismiss all pending litigation and arbitration between them.
Purchase and Sale Agreement with WSRH
WSRH will purchase from CTF at closing, for a purchase price of approximately $578 million, eight hotels, consisting of fee-simple interests in six hotel properties, leasehold interests of two hotels, and related personal property, permits and contracts through acquisition of equity or assets relating to each hotel; and will assume various liabilities associated with the ownership and operation of the hotels. WSRH also will purchase our minority interest in one CTF hotel for approximately $12 million. The purchase price is subject to adjustment on the basis of, among other things, various capital expenditures, and the exclusion of various hotels from the transaction if certain casualty losses occur prior to closing or if consents required for the assignment of certain hotels have not been obtained. Marriott and WSRH have agreed to indemnify and hold each other harmless for breaches of the various representations, warranties and covenants contained in the agreement, subject to specified time and dollar limitations. Each party is liable to the other for certain liquidated damages if it defaults under the agreement.
The closing of the transactions contemplated by the agreement is subject to a number of conditions, including WSRH’s ability to obtain satisfactory title insurance policies for the hotel properties. In addition, the agreement may be terminated by mutual written consent of Marriott and WSRH, or by either party if certain conditions set forth in the agreement are not fulfilled on the closing date, if closing does not occur by June 30, 2005 (subject to WSRH and Marriott both electing to postpone closing to November 15, 2005 if an affiliate of CTF has not repurchased or defeased the Outstanding Bonds by June 30, 2005), or if a governmental authority prohibits the transactions.
Contemporaneously with the closing of the WSRH transactions, WSRH has agreed to enter into long-term management agreements with us for each of the hotels being acquired by WSRH.
Purchase and Sale Agreement with Sunstone
Sunstone will purchase from CTF at closing five hotels and CTF’s minority interest in an entity that owns an additional hotel and related personal property, permits and contracts through acquisitions of equity or assets relating to each hotel; and will assume various liabilities associated with the ownership and operation of the hotels. The purchase price of approximately $419 million is subject to adjustment on the basis of, among other things, various capital expenditures, and the exclusion of various hotels from the transaction if certain casualty losses occur prior to closing or if consents required for the assignment of certain hotels have not been obtained. Marriott and Sunstone have agreed to indemnify and hold each other harmless for breaches of the various representations, warranties and covenants contained in the agreement, subject to specified time and dollar limitations. Each party is liable to the other for certain liquidated damages if it defaults under the agreement.
The closing of the transactions contemplated by the agreement is subject to a number of conditions, including Sunstone’s ability to obtain satisfactory title insurance policies for the hotel properties. In addition, the agreement may be terminated by mutual written consent of Marriott and Sunstone, or by either party if certain conditions set forth in the agreement are not fulfilled on the closing date, if closing does not occur by June 30, 2005 (subject to Sunstone and Marriott both electing to postpone closing to November 15, 2005 if an affiliate of CTF has not repurchased or defeased the Outstanding Bonds by June 30, 2005), or if a governmental authority prohibits the transactions.
Contemporaneously with the closing of the Sunstone transactions, Sunstone has agreed to enter into long-term management agreements with us for each of the hotels being acquired by Sunstone.
2. Amendment to Synthetic Fuel Agreement.
On April 29, 2005, we entered into an amendment agreement with our synthetic fuel partner (amending an agreement filed as Exhibit 10.6 to our quarterly report on Form 10-Q for the quarter ended June 20, 2003, that was previously amended by an agreement filed as Exhibit 10.2 to our report on Form 8-K dated October 6, 2004). This amendment extends until June 30, 2005, the period in which our partner has the right to elect to have its approximately 50 percent ownership interest in the three synthetic fuel facilities that are subject to the IRS’s placed-in-service challenge redeemed. Our joint venture partner has the right to have us redeem its ownership interest in those three facilities because the IRS’s placed-in-service challenge remained outstanding as of March 31, 2005. Until our partner exercises this right, our partner will be allocated 1 percent of the tax credits from those three facilities. If our partner does not exercise the right to return its ownership interest in those three facilities to us by June 30, 2005, our partner’s share of the tax credits from those facilities will return to approximately 50 percent effective June 1, 2005.
Exhibits
| Exhibit No. | Description | |
| 12 | Statement of Computation of Ratio of Earnings to Fixed Charges. | |
| 31.1 | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a). | |
| 31.2 | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a). | |
| 32 | Section 1350 Certifications. | |
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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. |
|
/s/ Arne M. Sorenson |
Arne M. Sorenson |
Executive Vice President and Chief Financial Officer |
/s/ Carl T. Berquist |
Carl T. Berquist |
Executive Vice President, Financial Information and Enterprise Risk Management and
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