<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended September 11, 1998 Commission File No. 1-13881
MARRIOTT INTERNATIONAL, INC.
Delaware 52-2055918
(State of Incorporation) (I.R.S. Employer Identification Number)
10400 Fernwood Road
Bethesda, Maryland 20817
(301) 380-3000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes [X] No [_]
Shares outstanding
Class at October 9, 1998
- --------------------- ------------------
Class A Common Stock,
$0.01 par value 242,775,247
1
<PAGE>
MARRIOTT INTERNATIONAL, INC.
(Formerly "New Marriott MI, Inc.")
INDEX
<TABLE>
<CAPTION>
Page No.
-----------
<S> <C>
Forward-Looking Statements 3
Part I. Financial Information (Unaudited):
Condensed Consolidated Statements of Income -
Twelve and Thirty-Six Weeks Ended September 11, 1998 and
September 12, 1997 4
Condensed Consolidated Balance Sheet -
as of September 11, 1998 and January 2, 1998 5
Condensed Consolidated Statement of Cash Flows -
Thirty-Six Weeks Ended September 11, 1998 and September 12, 1997 6
Notes to Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of Results of Operations
and Financial Condition 12
Quantitative and Qualitative Disclosures About Market Risk 19
Part II. Other Information and Signature:
Legal Proceedings 20
Changes in Securities 20
Defaults Upon Senior Securities 20
Submission of Matters to a Vote of Security Holders 20
Other Information 20
Exhibits and Reports on Form 8-K 21
Signature 22
</TABLE>
2
<PAGE>
Forward-Looking Statements
When used throughout this report, the words "believes," "anticipates,"
"expects," "intends," "hopes," "estimates," "projects," and other similar
expressions, which are predictions of or indicate future events and trends
identify forward-looking statements. Such statements are subject to a number of
risks and uncertainties which could cause actual results to differ materially
from those projected, including: competition within each of the Company's
business segments; business strategies and their intended results; the balance
between supply of and demand for hotel rooms, timeshare units and senior living
accommodations; the Company's continued ability to obtain new operating
contracts and franchise agreements; the Company's ability to develop and
maintain positive relations with current and potential hotel and retirement
community owners; the effect of international, national and regional economic
conditions; the availability of capital to allow the Company and potential hotel
and retirement community owners to fund investments; the ability of the Company,
and other parties upon which the Company's businesses also rely, to modify or
replace on a timely basis, their computer software and other systems in order to
function properly prior to, in and beyond, the year 2000; and other risks
described from time to time in the Company's filings with the Securities and
Exchange Commission, including those set forth on Exhibit 99 filed herewith.
Given these uncertainties, readers are cautioned not to place undue reliance on
such statements. The Company also undertakes no obligation to publicly update or
revise any forward-looking statement to reflect current or future events or
circumstances.
3
<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
($ in millions, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Twelve weeks ended Thirty-six weeks ended
------------------------------------ ----------------------------------
September 11, September 12, September 11, September 12,
1998 1997 1998 1997
---------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
SALES
Lodging
Rooms.......................................... $ 1,159 $ 991 $ 3,500 $ 2,950
Food and beverage.............................. 401 314 1,315 1,027
Other.......................................... 307 299 959 791
--------------- ---------------- ---------------- --------------
1,867 1,604 5,774 4,768
Contract Services.................................. 396 469 1,220 1,409
--------------- ---------------- ---------------- --------------
2,263 2,073 6,994 6,177
--------------- ---------------- ---------------- --------------
OPERATING COSTS AND EXPENSES
Lodging
Departmental direct costs
Rooms..................................... 281 227 806 656
Food and beverage......................... 332 253 1,017 780
Remittances to hotel owners (including $147,
$137, $590 and $425, respectively, to
related parties) ......................... 379 340 1,301 1,020
Other operating expenses....................... 719 653 2,158 1,917
--------------- ---------------- ---------------- --------------
1,711 1,473 5,282 4,373
Contract Services.................................. 388 464 1,199 1,374
--------------- ---------------- ---------------- --------------
2,099 1,937 6,481 5,747
--------------- ---------------- ---------------- --------------
OPERATING PROFIT
Lodging .......................................... 156 131 492 395
Contract Services.................................. 8 5 21 35
--------------- ---------------- ---------------- --------------
Operating profit before corporate
expenses and interest..................... 164 136 513 430
Corporate expenses...................................... (25) (20) (74) (60)
Interest expense........................................ (6) (3) (15) (18)
Interest income......................................... 7 8 25 19
--------------- ---------------- ---------------- --------------
INCOME BEFORE INCOME TAXES ............................. 140 121 449 371
Provision for income taxes.............................. 54 47 173 144
--------------- ---------------- ---------------- --------------
NET INCOME.............................................. $ 86 $ 74 $ 276 $ 227
=============== ================ ================ ==============
BASIC EARNINGS PER SHARE................................ $ .34 $ .29 $ 1.09 $ .89
=============== ================ ================ ==============
DILUTED EARNINGS PER SHARE.............................. $ .32 $ .27 $ 1.02 $ .84
=============== ================ ================ ==============
DIVIDENDS DECLARED PER SHARE............................ $ .05 $ .15
=============== ================
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
($ in millions)
<TABLE>
<CAPTION>
September 11, January 2,
1998 1998
---------------- ----------------
ASSETS (Unaudited)
<S> <C> <C>
Current Assets
Cash and equivalents......................................................... $ 335 $ 289
Accounts and notes receivable................................................ 807 724
Other........................................................................ 371 354
----------------- ----------------
1,513 1,367
----------------- ----------------
Property and equipment.......................................................... 2,021 1,537
Intangibles..................................................................... 1,722 1,448
Investments in affiliates....................................................... 244 530
Notes and other receivable...................................................... 383 414
Other........................................................................... 272 261
----------------- ----------------
$ 6,155 $ 5,557
================= ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable............................................................. $ 865 $ 839
Other ....................................................................... 877 800
----------------- ----------------
1,742 1,639
----------------- ----------------
Long-term debt.................................................................. 539 112
Other long-term liabilities..................................................... 999 910
Convertible subordinated debt................................................... 319 310
Shareholders' Equity
Class A common stock, 255.6 million shares issued............................ 3 -
Additional paid-in capital................................................... 2,693 -
Retained earnings............................................................ 132 -
Treasury stock, at cost...................................................... (272) -
Investments and net advances from Old Marriott............................... - 2,586
----------------- ----------------
2,556 2,586
----------------- ----------------
$ 6,155 $ 5,557
================= ================
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
($ in millions)
(Unaudited)
<TABLE>
<CAPTION>
Thirty-six weeks ended
-------------------------------------
September 11, September 12,
1998 1997
----------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income................................................................. $ 276 $ 227
Adjustments to reconcile to cash provided by operations:
Depreciation and amortization.......................................... 93 85
Income taxes and other................................................. 104 163
Timeshare activity, net................................................ 41 (45)
Working capital changes................................................ (6) 35
----------------- ----------------
Cash provided by operations................................................ 508 465
----------------- ----------------
INVESTING ACTIVITIES
Acquisitions............................................................... (48) (856)
Dispositions............................................................... 109 437
Capital expenditures....................................................... (566) (328)
Loan advances.............................................................. (24) (63)
Loan collections and sales................................................. 165 29
Other...................................................................... (91) (120)
----------------- ----------------
Cash used in investing activities.......................................... (455) (901)
----------------- ----------------
FINANCING ACTIVITIES
Issuances of long-term debt................................................ 881 10
Repayments of long-term debt............................................... (463) (9)
Advances (to) from Old Marriott ........................................... (117) 535
Issuances of Class A common stock.......................................... 7 -
Dividends paid............................................................. (24) -
Purchases of treasury stock................................................ (291) -
----------------- ----------------
Cash (used in) provided by financing activities............................ (7) 536
----------------- ----------------
INCREASE IN CASH AND EQUIVALENTS................................................ 46 100
CASH AND EQUIVALENTS, beginning of period....................................... 289 239
----------------- ----------------
CASH AND EQUIVALENTS, end of period............................................. $ 335 $ 339
================= ================
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
MARRIOTT INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
---------------------
The accompanying condensed consolidated financial statements present the
results of operations, financial condition and cash flows of Marriott
International, Inc. (together with its subsidiaries, the Company), formerly
New Marriott MI, Inc., as if it were a separate entity for all periods
presented. Until March 27, 1998, the Company was a wholly-owned subsidiary
of the former Marriott International, Inc. (Old Marriott).
The accompanying condensed consolidated financial statements have been
prepared without audit. Certain information and footnote disclosures
normally included in financial statements presented in accordance with
generally accepted accounting principles have been condensed or omitted.
The Company believes the disclosures made are adequate to make the
information presented not misleading. However, the condensed consolidated
financial statements should be read in conjunction with the combined
financial statements and notes thereto included in the Company's Annual
Report on Form 10-K (the Annual Report) for the fiscal year ended January
2, 1998. Capitalized terms not otherwise defined herein have the meanings
specified in the Annual Report.
The preparation of financial statements in conformity with 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, and the reported amounts of sales
and expenses during the reporting period. Accordingly, ultimate results
could differ from those estimates.
In the opinion of the Company, the accompanying condensed consolidated
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position
of the Company as of September 11, 1998 and January 2, 1998, the results of
operations for the thirty-six weeks and twelve weeks ended September 11,
1998 and September 12, 1997 and cash flows for the thirty-six weeks ended
September 11, 1998 and September 12, 1997. Interim results are not
necessarily indicative of fiscal year performance because of seasonal and
short-term variations. All material intercompany transactions and balances
between Marriott International, Inc. and its subsidiaries have been
eliminated.
2. Spinoff
-------
On March 27, 1998, all of the issued and outstanding common stock of the
Company was distributed, on a pro rata basis, as a special dividend (the
Spinoff) to holders of common stock of Old Marriott, and the Company was
renamed "Marriott International, Inc." Old Marriott's historical cost basis
in the assets and liabilities of the Company has been carried over. Old
Marriott received a private letter ruling from the Internal Revenue Service
that the Spinoff would be tax-free to it and its shareholders. For each
share of common stock in Old Marriott, shareholders received one share of
Company Common Stock and one share of Company Class A Common Stock. On May
21, 1998, all outstanding shares of Company Common Stock were converted, on
a one-for-one basis, into shares of Company Class A Common Stock. Company
Class A Common Stock is listed on the New York Stock Exchange.
7
<PAGE>
Also on March 27, 1998, Old Marriott was renamed Sodexho Marriott Services,
Inc. (SMS) and its food service and facilities management business was
combined with the North American operations of Sodexho Alliance, S.A.
(Sodexho), a worldwide food and management services organization.
For purposes of governing certain of the ongoing relationships between the
Company and SMS after the Spinoff and to provide for orderly transition,
the Company and SMS entered into various agreements including the Employee
Benefits and Other Employment Matters Allocation Agreement, Liquid Yield
Option Notes (LYONs) Allocation Agreement, Tax Sharing Agreement, Trademark
and Trade Name License Agreement, Noncompetition Agreement, Employee
Benefit Services Agreement, Procurement Services Agreement, Distribution
Services Agreement and other transitional services agreements. Effective as
of the Spinoff date, pursuant to these agreements, the Company assumed
sponsorship of certain of Old Marriott's employee benefit plans and
insurance programs and succeeded to Old Marriott's liability to LYONs
holders under the LYONs Indenture, nine percent of which was assumed by
SMS.
Changes in Investments and Net Advances from Old Marriott represent the net
income of the Company plus the net cash transferred between Old Marriott
and the Company, and certain non-cash items.
Prior to the Spinoff, the Company operated as a unit of Old Marriott,
utilizing Old Marriott's centralized systems for cash management, payroll,
purchasing and distribution, employee benefit plans, insurance and
administrative services. As a result, substantially all cash received by
the Company was deposited in and commingled with Old Marriott's general
corporate funds. Similarly, operating expenses, capital expenditures and
other cash requirements of the Company were paid by Old Marriott and
charged directly or allocated to the Company. Certain assets and
liabilities related to the Company's operations were managed and controlled
by Old Marriott on a centralized basis. Prior to the Spinoff such assets
and liabilities were allocated to the Company based on the Company's use
of, or interest in, those assets and liabilities. In the opinion of
management, the methods for allocating costs, assets and liabilities prior
to the Spinoff were reasonable. The Company now performs these functions
independently and the costs incurred have not been materially different
from those allocated prior to the Spinoff.
3. Earnings Per Share
------------------
For periods prior to March 27, 1998, the number of weighted average shares
outstanding and the effect of dilutive securities used in the earnings per
share calculations are based upon the weighted average number of Old
Marriott shares outstanding, and the Old Marriott effect of dilutive
securities for the applicable period, adjusted (i) for the distribution
ratio in the Spinoff of one share of Company Common Stock and one share of
Company Class A Common Stock for every share of Old Marriott common stock,
and (ii) to reflect the conversion of Company Common Stock into Company
Class A Common Stock on May 21, 1998.
8
<PAGE>
The following table illustrates the reconciliation of the earnings and
number of shares used in the basic and diluted earnings per share
calculations (in millions, except per share amounts).
<TABLE>
<CAPTION>
Twelve weeks ended Thirty-six weeks ended
----------------------------------- ------------------------------------
September 11, September 12, September 11, September 12,
1998 1997 1998 1997
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Computation of Basic Earnings Per Share
Net income................................... $ 86 $ 74 $ 276 $ 227
Weighted average shares outstanding.......... 249.8 254.6 252.5 253.7
---------------- ---------------- ---------------- ----------------
Basic Earnings Per Share .................... $ .34 $ .29 $ 1.09 $ .89
================ ================ ================ ================
Computation of Diluted Earnings Per Share
Net income................................... $ 86 $ 74 $ 276 $ 227
After-tax interest expense on convertible
subordinated debt......................... 2 2 5 5
---------------- ---------------- ---------------- ----------------
Net income for diluted earnings per share. $ 88 $ 76 $ 281 $ 232
================ ================ ================ ================
Weighted average shares outstanding.......... 249.8 254.6 252.5 253.7
Effect of Dilutive Securities
Employee stock purchase plan.............. 0.1 - 0.1 -
Employee stock option plan................ 8.4 9.3 8.8 7.8
Deferred stock incentive plan............. 5.7 6.0 5.7 5.8
Convertible subordinated debt............. 9.5 9.5 9.5 9.5
---------------- ---------------- ---------------- ----------------
Shares for diluted earnings per share... 273.5 279.4 276.6 276.8
---------------- ---------------- ---------------- ----------------
Diluted Earnings Per Share................... $ .32 $ .27 $ 1.02 $ .84
================ ================ ================ ================
</TABLE>
The effect of dilutive securities is computed using the treasury stock
method and average market prices during the period. The if-converted method
is used for convertible subordinated debt.
4. Acquisitions
------------
Renaissance Hotel Group N.V. On March 29, 1997, the Company acquired
substantially all of the outstanding common stock of Renaissance Hotel
Group N.V. (RHG). The purchase cost of $937 million was funded by Old
Marriott. The Company's reported results of operations include RHG's
operating results from the date of acquisition. Unaudited pro forma results
of operations
9
<PAGE>
of the Company for the thirty-six weeks ended September 12, 1997, as if RHG
had been acquired on January 4, 1997, would have resulted in sales of
$6,375 million, net income of $222 million, and diluted earnings per share
of $.82 after deducting pro forma interest expense of $12 million as if the
acquisition borrowings had been incurred by the Company. The unaudited pro
forma results of operations do not reflect the Company's expected future
results of operations.
The Ritz-Carlton Hotel Company LLC. On March 19, 1998, the Company
increased its ownership interest in The Ritz-Carlton Hotel Company LLC to
approximately 98 percent for consideration of approximately $90 million.
The Company expects to acquire the remaining two percent within the next
several years. The acquisition has been accounted for using the purchase
method of accounting. Prior to March 19, 1998, the Company's investment in
The Ritz-Carlton Hotel Company LLC was accounted for using the equity
method of accounting.
5. Commitments
-----------
The Company issues guarantees to lenders and other third parties in
connection with financing transactions and other obligations. These
guarantees are limited, in the aggregate, to $183 million at September 11,
1998, including $79 million applicable to guarantees by or debt obligations
of Host Marriott, partnerships in which Host Marriott is the general
partner or other affiliated entities. New World and another affiliate of
Dr. Cheng (a Director of the Company) have severally indemnified the
Company for guarantees by RHG of leases with minimum annual payments of
approximately $59 million.
As of September 11, 1998, the Company had extended approximately $166
million of loan commitments to owners of lodging and senior living
properties. Letters of credit outstanding on the Company's behalf at
September 11, 1998, totaled $89 million, the majority of which related to
the Company's self-insurance program. At September 11, 1998, the Company
had a repurchase obligation of $79 million related to notes receivable from
timeshare interval purchasers that have been sold with limited recourse.
6. Comprehensive Income
--------------------
In 1998, the Company adopted Statement of Financial Accounting Standards
(FAS) No. 130, "Reporting Comprehensive Income" by including footnote
disclosure of comprehensive income. All components of other comprehensive
income up to the date of the Spinoff were reflected within Investments and
Net Advances from Old Marriott during such periods. Total comprehensive
income was $90 million and $71 million, respectively, for the twelve weeks
ended September 11, 1998 and September 12, 1997, and was $291 million and
$215 million, respectively, for the thirty-six weeks ended September 11,
1998 and September 12, 1997. The principal difference between net income
and total comprehensive income relates to foreign currency translation
adjustments.
7. New Accounting Standards
------------------------
The Company will adopt FAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" in the fourth quarter of 1998. The
Company is evaluating the impact of this statement on its consolidated
financial statements. The Company will adopt FAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which is expected to have
no material effect on the Company's consolidated financial statements, in
the fourth quarter of 2000.
10
<PAGE>
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-5, "Reporting on the Costs of
Start-Up Activities." The Company will adopt SOP 98-5 in the fourth quarter
of 1998 by expensing pre-opening costs for Company owned lodging and senior
living communities as incurred. This is expected to have no material impact
on the Company's 1998 consolidated financial statements, although future
periods may be impacted.
On November 20, 1997, the Emerging Issues Task Force (EITF) of the
Financial Accounting Standards Board reached a consensus on EITF 97-2
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the sales and expenses of a managed entity in
its financial statements. As a result of EITF 97-2, and related discussions
with the staff of the Securities and Exchange Commission, in the 1998
fourth quarter the Company will change its accounting policy to no longer
include the working capital and sales of managed hotels and retirement
communities in its financial statements. Instead, the Company's sales will
include fees earned plus costs recovered from owners of managed hotels and
retirement communities. Prior periods will be restated. Reflecting this
change in accounting policy in the Company's financial statements would
have reduced each of sales and operating expenses by approximately $673
million and $412 million for the twelve weeks ended September 11, 1998 and
September 12, 1997, respectively, and by approximately $1,765 million and
$1,237 million for the thirty-six weeks ended September 11, 1998 and
September 12, 1997, respectively, and each of current assets and current
liabilities by approximately $538 million, as of September 11, 1998, with
no impact on operating profit, net income, earnings per share, debt or
equity.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
- --------------------------------------------------------------------------
Financial Condition
- -------------------
RESULTS OF OPERATIONS/(1)/
Twelve Weeks Ended September 11, 1998 Compared to Twelve Weeks Ended September
- ------------------------------------------------------------------------------
12, 1997
- --------
The Company reported net income of $86 million for the 1998 third quarter, on
sales of $2,263 million. This represents a 16 percent increase in net income and
a nine percent increase in sales over the third quarter of 1997. Diluted
earnings per share of $.32 for the quarter increased 19 percent over the 1997
amount.
Lodging operations reported a 19 percent increase in operating profit on 16
percent higher sales. The results reflect room rate growth at U.S. hotels well
in excess of inflation, contributions from new units, as well as weaker
operating results in Asia, offset by higher financing income for Marriott
Vacation Club International. Lodging sales increased six percent before the
impact of consolidating The Ritz-Carlton Hotel Company LLC. Sales for
full-service and luxury brands comprised 73 percent of total lodging sales.
A net total of 42 hotels (5,325 rooms) were added during the third quarter of
1998, increasing the Company's total hotels to 1,596 (315,289 rooms). Hotels by
brand are as indicated in the following table.
<TABLE>
<CAPTION>
Hotels at September 11, 1998
------------------------------------------------------
Company-operated Franchised
--------------------------- ------------------------
Units Rooms Units Rooms
------------- ------------ ---------- -------------
<S> <C> <C> <C> <C>
Marriott Hotels, Resorts and Suites ...................... 209 90,312 138 41,517
Ritz-Carlton ............................................. 34 11,628 - -
Renaissance .............................................. 69 27,354 13 4,985
New World ................................................ 7 3,651 - -
Ramada International ..................................... 9 1,700 39 6,576
Courtyard ................................................ 238 35,905 158 19,059
Residence Inn ............................................ 120 15,845 165 18,058
Fairfield Inn and Suites ................................. 52 7,258 328 28,930
TownePlace Suites ........................................ 2 190 7 697
Marriott Executive Residences and Other .................. 8 1,624 - -
------------- ------------ ---------- -------------
Total .................................................... 748 195,467 848 119,822
============= ============ ========== =============
</TABLE>
In October 1998, the Company announced plans to convert its 13 Fairfield Suites
(1,287 rooms) together with 14 properties under construction to SpringHill
Suites, a newly developed brand in the upper-moderate-extended-stay tier.
Renaissance hotels posted a REVPAR increase of six percent due to a five percent
increase in average room rates to $118 and a one percentage point increase in
occupancy to 72 percent.
- ------------
(1) Average daily rate, occupancy and REVPAR statistics are based on comparable
Company-operated U.S. properties, except for Fairfield Inn and Suites,
which data also include comparable franchised units.
12
<PAGE>
Renaissance is now integrated into the Marriott reservation system, as well as
sales, marketing and other programs.
Sales for Marriott Hotels, Resorts and Suites increased six percent over the
prior year period. A six percent increase in average room rates, to $129,
partially offset by a slight decrease in occupancy to 80 percent, generated a
REVPAR increase of five percent. Profits increased as improved REVPAR generated
higher base management, franchise and incentive fees at many hotels.
Ritz-Carlton reported an increase in average room rates of nine percent, to
$189, with occupancy down three percentage points to 76 percent, resulting in a
five percent increase in REVPAR. The results of Ritz-Carlton properties have
been consolidated following the increase in the Company's ownership interest to
approximately 98 percent on March 19, 1998, resulting in sales of approximately
$163 million during the 1998 quarter, with no impact on net income.
The combined limited-service lodging brands reported 10 percent higher sales.
Profit growth over the prior year reflected increased base and incentive
management fees on Company-operated properties and the expansion of franchising
programs. The limited-service brands added a net of 38 properties (4,269 rooms),
primarily franchises, during the third quarter of 1998.
. The Company's quality tier extended-stay brand, Residence Inn, posted a
REVPAR increase of four percent, due to an increase in average room rates of
three percent to $100, and a one percentage point increase in occupancy to 87
percent. Residence Inn opened eight properties during the quarter.
. Courtyard, the Company's moderate-price lodging brand, achieved a 10 percent
increase in sales. Courtyard's average room rates increased six percent to
$89, while occupancy decreased by one percentage point to 82 percent,
resulting in a REVPAR increase of five percent. Courtyard opened 12
properties during the quarter.
. Fairfield Inn and Suites, the Company's economy lodging brand, posted an
increase in average room rates of three percent to $58, which was partially
offset by a slight decrease in occupancy to 80 percent, resulting in an
increase in REVPAR of two percent. Fairfield Inn and Suites opened 15
properties during the quarter.
Marriott Vacation Club International posted substantial profit growth in the
1998 third quarter. The division generated a 14 percent increase in contract
sales, reflecting strong sales activity at timeshare resorts in Florida, South
Carolina, Hawaii and Spain, as well as higher financing income.
Contract Services reported operating profit of $8 million on sales of $396
million in the 1998 third quarter, representing a 60 percent increase and a 16
percent decrease, respectively, from the third quarter of 1997. Both businesses
contributed to the increase in operating profit.
Marriott Senior Living Services reported higher sales and profits in the 1998
third quarter. Results were aided by contributions from 17 senior living
communities added over the past 12 months including three assisted living
facilities opened in the 1998 third quarter. Occupancy for comparable
communities remained at 94 percent for the quarter. At September 11, 1998, the
division operated 98 independent full-service and assisted living
communities totaling approximately 18,800 units.
13
<PAGE>
Marriott Distribution Services (MDS) achieved higher profits in the 1998 third
quarter, despite lower sales. The division benefited from consolidation of its
food distribution facilities, and the realization of operating efficiencies
following a period of rapid expansion in 1996-97. See "Liquidity and Capital
Resources" below for a discussion of the possible future impact to MDS of the
recent bankruptcy filing by a major MDS customer.
Corporate activity. Interest expense increased by $3 million, primarily due to
1998 investing activities and share repurchases since the Spinoff. Interest
income decreased by $1 million reflecting lower notes receivable balances.
Corporate expenses increased primarily due to Year 2000 software modification
costs of $2 million. The effective income tax rate decreased from 39 percent to
38.5 percent primarily due to the increased proportion of foreign operations in
countries with relatively low effective tax rates.
Thirty-Six Weeks Ended September 11, 1998 Compared to Thirty-Six Weeks Ended
- ----------------------------------------------------------------------------
September 12, 1997
- ------------------
The Company reported net income of $276 million for the three quarters, on sales
of $6,994 million. This represents a 22 percent increase in net income and a 13
percent increase in sales over the same period in 1997. Diluted earnings per
share of $1.02 for the period increased 21 percent over the corresponding 1997
period.
Lodging operating profits were up 25 percent, on a sales increase of 21 percent.
The revenue increase primarily resulted from REVPAR growth across all brands and
the addition of 476 hotels since the beginning of 1997. This revenue growth
resulted in the Company earning higher base management and franchise fees and
also contributed to higher house profits which resulted in higher incentive
management fees. The Company experienced weaker operating results in Asia,
partially offset by higher financing income for Marriott Vacation Club
International. Lodging sales increased 13 percent before the impact of
consolidating The Ritz-Carlton Hotel Company LLC. Sales for full-service and
luxury brands comprised 74 percent of total lodging sales.
Sales for Marriott Hotels, Resorts and Suites increased seven percent over the
prior year period. An eight percent increase in average room rates, to $137,
partially offset by a one percentage point decline in occupancy to 79 percent,
generated a REVPAR increase of six percent. Profits increased as improved REVPAR
generated higher base management fees and higher house profits, resulting in
increased incentive fees at many hotels.
Renaissance hotels achieved a REVPAR increase of seven percent due to a seven
percent increase in room rates to $129, with occupancy maintained at 71 percent.
Renaissance is now integrated into the Marriott reservation system, as well as
sales, marketing and other programs.
Ritz-Carlton reported an increase in average room rates of 10 percent, to $206,
while occupancy decreased two percentage points to 77 percent, resulting in a
seven percent increase in REVPAR.
Limited-service brands represented about 19 percent of total lodging sales for
the first three quarters, and each of the brands increased REVPAR for this
period.
. Residence Inn posted a REVPAR increase of four percent, due to an increase in
average room rates of five percent to $100, partially offset by a decrease in
occupancy to 85 percent. Sales
14
<PAGE>
growth in 1998, of 11 percent, also benefited from the addition of 61
properties since the beginning of fiscal year 1997.
. Courtyard achieved an 11 percent increase in sales. Courtyard's average room
rates increased eight percent to $90, while occupancy dropped by one
percentage point to 81 percent, resulting in a REVPAR increase of six percent.
Sales and profits also reflect the addition of 82 units since the beginning of
fiscal year 1997.
. Fairfield Inn and Suites achieved a three percent increase in REVPAR, driven
by a four percent increase in average room rates to $57, partially offset by a
one percentage point decrease in occupancy to 76 percent. Fairfield Inn and
Suites has opened 96 properties since the beginning of fiscal year 1997.
Marriott Vacation Club International generated an 11 percent increase in
contract sales. The Company experienced increased profits from resort
development, together with higher financing income.
Contract Services reported operating profit of $21 million on sales of $1,220
million in 1998, representing 40 percent and 13 percent decreases, respectively,
from the first three quarters of 1997. Profit growth was impacted by the June
1997 sale of 29 senior living communities, which the Company continues to
operate under long-term agreements. Operating profit for Contract Services
nearly doubled over the first three quarters of 1997 after adjusting for the
impact of this transaction.
Marriott Senior Living Services reported 16 percent higher sales for the first
three quarters of 1998. Results were boosted by contributions from 26 senior
living communities added since the beginning of 1997. Occupancy for comparable
communities remained at 94 percent.
Marriott Distribution Services generated higher profits in the first three
quarters of 1998, despite lower sales, reflecting increased operating
efficiencies. Refer to the Liquidity and Capital Resources section for a
discussion of the possible future impact of the bankruptcy of a major customer.
Corporate activity. Interest expense decreased by $3 million, primarily due to
Host Marriott's assumption of $187 million of mortgage debt associated with the
June 1997 sale of 29 senior living communities, partially offset by the interest
arising from 1998 investing activities and share repurchases since the Spinoff.
Interest income increased by $6 million reflecting higher notes receivable
balances. Corporate expenses increased primarily due to Year 2000 software
modification costs of $8 million. The effective income tax rate decreased from
39 percent to 38.5 percent primarily due to the increased proportion of foreign
operations in countries with relatively low effective tax rates.
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash and equivalents totaled $335 million at September 11, 1998, an increase of
$46 million from year end. Cash provided by operations of $508 million increased
nine percent over 1997. EBITDA increased by $83 million, or 18 percent, to $557
million. EBITDA is an indicator of operating performance which can be used to
measure the Company's ability to service debt, fund capital expenditures and
expand its business. However, EBITDA is not an alternative to net income,
operating profit, cash from operations, or any other operating or liquidity
measure prescribed by generally accepted accounting principles.
Net cash used in investing activities totaled $455 million for the first three
quarters of 1998, primarily comprising the increase in the Company's ownership
interest in The Ritz-Carlton Hotel Company LLC, together with expenditures for
the development of limited-service lodging properties and senior living
communities, partially offset by proceeds from loan collections and sales. Cash
generated from dispositions of $109 million was primarily due to the sales of
limited-service lodging properties and senior living communities. The Company
continues to operate these properties under long-term agreements.
The Company continues to grow its businesses, in part, by investing in new
units. The Company's principal investments are expected to continue to include
loans, minority equity interests, business acquisitions and direct development
and ownership of certain lodging and senior living services projects. The
Company expects to sell certain lodging and senior living service properties
under development, or to be developed, while continuing to operate them under
long-term agreements.
The Company believes that cash generated by operations, together with its
borrowing capacity and proceeds from the sale of assets, will be sufficient to
finance its planned growth and capital requirements. Nonetheless, the Company's
ability to sell properties that it develops, and the ability of hotel or senior
living community developers to build or acquire new Marriott properties, both of
which are important components of the Company's growth plans, are to some extent
dependent on the availability and price of capital. The Company is monitoring
the status of the capital markets, which have shown unusual volatility during
the past several months, and is in the process of evaluating the effect, if any,
that capital market conditions may have on its ability to execute its announced
growth plans. If this analysis demonstrates that the Company's growth plans
should be modified, new growth plans may be necessary.
The Company purchased 9.3 million shares of Class A Common Stock in the
twenty-four weeks ended September 11, 1998, at a cost of $291 million. As of
September 11, 1998, the Company had been authorized by its Board of Directors to
purchase a further 10.7 million shares.
In 1996, MDS became the exclusive provider of distribution services to Boston
Chicken Inc. (BCI). In May 1998, BCI disclosed that its independent auditors had
expressed substantial doubt about BCI's ability to continue as a going concern.
On October 5, 1998, BCI and its Boston Market-controlled subsidiaries filed
voluntary bankruptcy petitions for protection under Chapter 11 of the Federal
Bankruptcy Code in the U.S. Bankruptcy Court for the District of Arizona in
Phoenix (the Court), and announced restaurant closings representing
approximately 16 percent of the restaurants in the Boston Market chain.
Subsequently, a franchisee of BCI announced closings of a further five percent
of the restaurants in the Boston Market chain. MDS continues to distribute to
BCI and has been receiving payment of post-petition balances in accordance with
the terms of its contractual
16
<PAGE>
relationship with BCI. In addition, the Court has approved, and MDS has
received, payment for substantially all of its pre-petition accounts receivable
balances. The impact of BCI's bankruptcy on the Company depends on numerous
uncertainties, and management is still in the process of assessing the potential
effect on the Company's future results of operations and financial position.
Under certain circumstances, if the contract were to terminate, or if BCI were
to cease or further curtail its operations: (i) MDS may be unable to recover
some or all of an aggregate of approximately $32 million in contract investment,
receivables and inventory; and (ii) MDS could have warehouse capacity and
rolling stock in excess of its likely future requirements.
YEAR 2000 PROBLEM
The "Year 2000 problem" has arisen because many existing computer programs and
chip-based embedded technology systems use only the last two digits to refer to
a year, and therefore do not properly recognize a year that begins with "20"
instead of the familiar "19." If not corrected, many computer applications could
fail or create erroneous results. As required by recent guidance from the
Securities and Exchange Commission (SEC) applicable to all public companies, the
following disclosure provides more detail regarding the Company's Year 2000
compliance than previous reports filed by the Company.
State of Readiness. The Company has adopted an eight-step process toward Year
2000 readiness, consisting of the following: (i) Awareness: fostering
understanding of, and commitment to, the problem and its potential risks;
(ii) Inventory: identifying and locating systems and technology components that
may be affected; (iii) Assessment: reviewing these components for Year 2000
compliance, and assessing the scope of Year 2000 issues; (iv) Planning: defining
the technical solutions and labor and work plans necessary for each affected
system; (v) Remediation/Replacement: completing the programming to renovate or
replace the problem software or hardware; (vi) Testing and Compliance
Validation: conducting testing, followed by independent validation by a separate
internal verification team; (vii) Implementation: placing the corrected systems
and technology back into the business environment; and (viii) Quality Assurance:
utilizing a dedicated audit team to review significant projects for adherence to
quality standards and program methodology.
The Company has grouped its systems and technology into three categories for
purposes of Year 2000 compliance: (i) information resource applications and
technology (IT Applications) -- enterprise-wide systems supported by the
Company's centralized information technology organization (IR);
(ii) Business-initiated systems (BIS) -- systems that have been initiated by an
individual business unit, and that are not supported by the Company's IR
organization; and (iii) Building Systems -- non-IT equipment at properties that
use embedded computer chips, such as elevators, automated room key systems and
HVAC equipment. The Company is prioritizing its efforts based on how severe an
effect noncompliance would have on customer service, core business processes or
revenues, and whether there are viable, non-automated fallback procedures
(System Criticality).
The Company measures the completion of each phase based on documented and
quantified results, weighted for System Criticality. As of the end of the 1998
third quarter, the Awareness and Inventory phases were complete for IT
Applications and nearly complete for BIS and Building Systems. For IT
Applications, the Assessment, Planning and Remediation/Replacement phases were
each over 80 percent complete, and Testing and Compliance Validation had been
completed for a number of key
17
<PAGE>
systems, with most of the remaining work in its final stage. For BIS and
Building Systems, Assessment and Planning were in the mid- to upper-range of
completion, with a substantial amount of work in process, while the progress
level for Remediation/Replacement and Testing and Compliance Validation had not
yet been documented and quantified. Quality Assurance is also in progress for IT
Applications and is scheduled to begin for BIS and Building Systems in the near
future. The Company's goal is to substantially complete the
Remediation/Replacement and Testing phases for its System Critical IT
Applications by the end of 1998, with 1999 reserved for unplanned contingencies
and for Compliance Validation and Quality Assurance. For System Critical BIS and
Building Systems, the same level of completion is targeted for June 1999 and
September 1999, respectively.
The Company has initiated Year 2000 compliance communications with its
significant third party suppliers, vendors and business partners, including its
franchisees. The Company is focusing its efforts on the business interfaces most
critical to its customer service, core business processes and revenues,
including those third parties that support the most critical enterprise-wide IT
Applications, franchisees generating the most revenues, suppliers of the most
widely used Building Systems and BIS, the top 100 suppliers, by dollar volume,
of non-IT products, and financial institutions providing the most critical
payment processing functions. Responses have been received from a majority of
the firms in this group.
The Company is also establishing a common approach for testing and addressing
Year 2000 compliance issues for its managed and franchised properties. This
includes a guidance protocol for Company-operated properties, and a Year 2000
"Toolkit" for franchisees containing relevant Year 2000 compliance information.
The Company is also utilizing a Year 2000 best-practices sharing system.
Costs. Many of the costs of Year 2000 compliance will be reimbursed to the
Company or otherwise paid directly by owners and clients pursuant to existing
contracts. The Company estimates that the pre-tax costs to be borne by it to
address the Year 2000 problem will be approximately $40-$50 million, and will be
expensed as incurred. Through the third fiscal quarter of 1998, approximately
$8 million of these costs (on a pre-tax basis) have been incurred and expensed.
In addition, the Company had previously planned and/or begun implementing
several system replacement projects to modernize and improve its systems. The
Year 2000 problem heightened the need for the timely completion and some project
schedules have been accelerated. These project costs have been included in the
Company's budgeting process and its internal forecasts, and already form part of
the Company's financial plans. Like the Year 2000 costs referred to in the
preceding paragraph, many of these systems replacement costs will be reimbursed
to the Company or otherwise paid directly by owners and clients pursuant to
existing contracts. The Company estimates that the pre-tax costs to be borne by
it from these system replacements will be approximately $40-$45 million, most of
which will be capitalized and amortized over the useful lives of the assets.
The actual costs to be incurred by the Company will depend on a number of
factors which cannot be accurately predicted, including the extent and
difficulty of the remediation and other work to be done, the availability and
cost of consultants, the extent of testing required to demonstrate Year 2000
compliance, and the Company's ability to timely collect all payments due to it
under existing contracts.
18
<PAGE>
Year 2000 Contingency Plans. The Company's centralized services, and
Company-operated properties, already have detailed contingency plans in place
covering a variety of possible events, including natural disasters, interruption
of utility service, general computer failure, and the like. The Company is
reviewing these existing contingency plans for potential modification to address
specific Year 2000 issues, and expects to continue this process during the next
four fiscal quarters.
Risks of the Company's Year 2000 Issues. Based on current information, the
Company believes that the Year 2000 problem will not have a material adverse
effect on the Company, its business or its financial condition. There can,
however, be no assurances that Year 2000 remediation by the Company or third
parties will be properly and timely completed, and failure to do so could have a
material adverse effect on the Company, its business and its financial
condition. The Company cannot predict the actual effects to it of the Year 2000
problem, which depends on numerous uncertainties such as: (i) the factors listed
above under Costs; (ii) whether significant third parties, including its
franchisees, properly and timely address the Year 2000 issue; (iii) whether
broad-based or systemic economic failures may occur, and the severity and
duration of such failures, which could include disruptions in passenger
transportation or transportation systems generally, loss of utility and/or
telecommunications services, and errors or failures in financial transactions or
payment processing systems such as credit cards; and (iv) whether the Company
becomes the subject of litigation or other proceedings regarding any Year
2000-related events and the outcome of any such litigation or proceedings.
As part of its contingency planning, the Company is analyzing the most
reasonably likely worst-case scenario that could result from Year 2000-related
failures. The Company's best estimate of this scenario, based on current
information, follows. Failure by third parties to achieve Year 2000 compliance
could cause short-term disruptions in travel patterns, potentially caused by
actual or perceived problems with travel systems (such as the air traffic
control system), and potential temporary disruptions in the supply of utility,
telecommunications and financial services, which may be local or regional in
scope. These events could lead travelers to accelerate travel to late 1999,
postpone travel to later in 2000 or cancel travel plans, which could in turn
affect lodging patterns and occupancy. Such failures could be more pronounced in
certain areas outside the U.S. where Year 2000 compliance efforts are not
believed to be as advanced. In addition, failure by either the Company or third
parties to achieve Year 2000 compliance could cause short-term operational
inconveniences and inefficiencies for the Company. This may temporarily divert
management's time and attention from ordinary business activities. To the extent
reasonably achievable, the Company will seek to prevent and/or mitigate the
effects of such possible failures through its compliance and contingency
planning efforts.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
There have been no material changes to the Company's exposures to market risk
since January 2, 1998.
19
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
There are no material legal proceedings pending against the Company.
Item 2. Changes in Securities
- ------------------------------
None.
Item 3. Defaults Upon Senior Securities
- ----------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None.
Item 5. Other Information
- --------------------------
None.
20
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
Exhibit
No. Description
--- -----------
27 Financial Data Schedule for the Registrant.
99 Forward-Looking Statements.
(b) Reports on Form 8-K
None.
21
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MARRIOTT INTERNATIONAL, INC.
October 23, 1998 /s/ Stephen E. Riffee
----------------------------
Stephen E. Riffee
Vice President, Finance and
Chief Accounting Officer
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> JAN-01-1999 JAN-02-1998
<PERIOD-START> JAN-03-1998 JAN-04-1997
<PERIOD-END> SEP-11-1998 SEP-12-1997
<CASH> 335 0
<SECURITIES> 0 0
<RECEIVABLES> 807 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 1,513 0
<PP&E> 2,021 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 6,155 0
<CURRENT-LIABILITIES> 1,742 0
<BONDS> 0 0
0 0
0 0
<COMMON> 3 0
<OTHER-SE> 2,553 0
<TOTAL-LIABILITY-AND-EQUITY> 6,155 0
<SALES> 0 0
<TOTAL-REVENUES> 6,994 6,177
<CGS> 0 0
<TOTAL-COSTS> 6,481 5,747
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 15 18
<INCOME-PRETAX> 449 371
<INCOME-TAX> 173 144
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 276 227
<EPS-PRIMARY> 1.09 .89
<EPS-DILUTED> 1.02 .84
</TABLE>
<PAGE>
EXHIBIT 99
<PAGE>
Forward-Looking Statements
The following factors, among others, could cause actual results to differ
materially from those contained in forward-looking statements made in this
report or presented elsewhere by management.
Dependence on Others: The Company's present growth strategy for development of
additional lodging and senior living facilities entails entering into and
maintaining various arrangements with present and future property owners,
including Host Marriott Corporation and New World Development Company Limited.
There can be no assurance that any of the Company's current strategic
arrangements will be continued, or that the Company will be able to enter into
future collaborations.
Contract Terms for New Units: The terms of the operating contracts, distribution
agreements, franchise agreements and leases for each of the Company's lodging
facilities and retirement communities are influenced by contract terms offered
by the Company's competitors at the time such agreements are entered into.
Accordingly, there can be no assurance that contracts entered into or renewed in
the future will be on terms that are as favorable to the Company as those under
existing agreements.
Competition: The profitability of hotels, vacation timeshare resorts, retirement
communities, and distribution centers operated by the Company is subject to
general economic conditions, competition, the desirability of particular
locations, the relationship between supply of and demand for hotel rooms,
vacation timeshare resorts, senior living facilities, and distribution services,
and other factors. The Company generally operates in markets that contain
numerous competitors and the continued success of the Company will be dependent,
in large part, upon the ability to compete in such areas as access, location,
quality of accommodations, amenities, specialized services, cost containment
and, to a lesser extent, the quality and scope of food and beverage services and
facilities.
Supply and Demand: The lodging industry may be adversely affected by (i) supply
additions, (ii) international, national and regional economic conditions,
(iii) changes in travel patterns, (iv) taxes and government regulations which
influence or determine wages, prices, interest rates, construction procedures
and costs, and (v) the availability of capital to allow the Company and
potential hotel and retirement community owners to fund investments. The
Company's timeshare and senior living service businesses are also subject to the
same or similar uncertainties and, accordingly, there can be no assurance that
the present level of demand for timeshare intervals and senior living
communities will continue, or that there will not be an increase in the supply
of competitive units, which could reduce the prices at which the Company is able
to sell or rent units.
Year 2000 Compliance: A failure by the Company or third parties with whom it
does business to successfully address the Year 2000 problem, as described in
Item 2 of this Report (Management's Discussion and Analysis of Results of
Operations and Financial Condition), could have a material adverse effect
on the Company, its business and financial condition.
