| MARRIOTT INTERNATIONAL INC /MD/ Item 1A Risk Factors |
| Forward-Looking Statements We make forward-looking statements 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 in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” 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 are subject to a number of risks and uncertainties which could cause actual results to differ materially from those expressed in these forward-looking statements, including risks and uncertainties described below and other factors that we describe from time to time in our periodic filings with the SEC We therefore caution you not to rely unduly on any forward-looking statements |
| The forward-looking statements in this report speak only as of the date of this 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 to 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 and geopolitical conditions; (3) the impact of war and terrorist activity (including threats of terrorist activity) and heightened travel security measures instituted or business and leisure travel in response to war, terrorist activity or threats; (4) the desirability of particular locations and changes in travel patterns; (5) travelers’ fears of exposures to contagious diseases, such as Severe Acute Respiratory Syndrome (“SARS”) and Avian Flu; (6) the occurrence of natural disasters, such as earthquakes, tsunamis or hurricanes; (7) taxes and government regulations that influence or determine wages, prices, interest rates, construction procedures and costs; (8) the availability and cost of capital to allow us and potential hotel owners and joint venture partners to fund investments; (9) regional and national development of competing properties; (10) increases in wages and other labor costs, energy, healthcare, insurance, transportation and fuel, and other expenses central to the conduct of our business, including recent increases in energy costs and further increases forecasted by the Department of Energy for the winter of 2006; and (11) organized labor activities, including those in New York, San Francisco, Los Angeles, Waikiki Beach and Boston where some of our hotels are subject to collective bargaining agreements that will expire in 2006 |
| 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 profit of our lodging 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 |
| Even where such factors do not reduce demand, our profit margins may suffer if we are unable to fully recover increased operating costs from our customers |
| 16 ______________________________________________________________________ [42]Table of Contents The uncertain pace and duration of the current growth environment in the lodging industry 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 in September 2001, the global outbreak of SARS in 2003 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 |
| Although both the lodging and travel industries have now largely recovered, the duration, pace and full extent of the current growth environment remains unclear |
| Moreover, the aftermath of Hurricanes Katrina, Rita, and Wilma and any negative long-term effect that Gulf Coast recovery efforts may have on the US economy could set back or impede the progress of the industry’s and our recovery |
| 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 |
| Actions by organized labor could reduce our profits in certain major market cities |
| Employees at certain of our managed hotels are covered by collective bargaining agreements that will expire in 2006 |
| Potential labor activities could cause the diversion of business to hotels that are not involved in the negotiations, loss of group business in the affected cities and perhaps other cities, and/or increased labor costs |
| In 2005, affected hotels in these cities contributed approximately 2 percent of our combined base management, incentive management and franchise fee revenue |
| In 2005, we earned approximately 6 percent of our combined base management, incentive management and franchise fee revenue from downtown hotels (union and non-union) in affected markets |
| 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, changes in growth in demand compared to 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 |
| 17 ______________________________________________________________________ [43]Table of Contents Our development activities expose us to project cost, completion and resale risks |
| We develop new hotel, timeshare, fractional ownership and personal residence ownership properties, both directly and through partnerships, joint ventures, and other business structures with third parties |
| Our involvement in the development of properties presents a number of risks, including that (1) construction delays, cost overruns, or acts of God such as earthquakes, hurricanes, floods or fires may increase overall project costs or result in project cancellations; (2) we may be unable to recover development costs we incur for projects that are not pursued to completion; (3) conditions within capital markets may limit our ability, or that of third parties with whom we do business, to raise capital for completion of projects that have commenced or development of future properties; and (4) properties that we develop could become less attractive due to changes in mortgage rates, market absorption, or oversupply, with the result that we may not be able to sell such properties for a profit or at the prices we anticipate |
| Development activities which involve our co-investment with third parties may further increase completion risk or result in disputes which could increase project costs or impair project operations |
| Partnerships, joint ventures and other business structures involving our co-investment with third parties generally include some form of shared control over the operations of the business, and create additional risks, including the possibility that other investors in such ventures could become bankrupt or otherwise lack the financial resources to meet their obligations, or could have or develop business interests, policies or objectives that are inconsistent with ours |
| Although we actively seek to minimize such risks before investing in partnerships, joint ventures, or similar structures, actions by another investor may present additional risks of project delay, increased project costs, or operational difficulties following project completion |
| 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, hurricanes 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, contagious disease, terrorist activity and war could reduce the demand for lodging, which may adversely affect our revenues |
| Acts of God, such as hurricanes, earthquakes and other natural disasters and the spread of contagious diseases, such as SARS and Avian Flu, 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 |
| An increase in the use of third-party internet reservation services could adversely impact our revenues |
| Some of our hotel rooms are booked through internet travel intermediaries, such as Travelocity |
| com^®, serving both the leisure and, increasingly, the corporate travel and group meeting 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 |
| 18 ______________________________________________________________________ [44]Table of Contents Changes in privacy law could adversely affect our ability to market our products effectively |
| Our Timeshare segment, and to a lesser extent our other 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 |
| The Internal Revenue Code provides tax credits for the production and sale of synthetic fuels produced from coal through 2007 |
| Although our synthetic fuel facilities incur significant losses, those losses are more than offset by the tax credits generated, which reduce our 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 |
| High oil prices in 2006 and beyond could reduce or eliminate the tax credits generated by our synthetic fuel facilities |
| The tax credits available under the Internal Revenue Code for the production and sale of synthetic fuel in any given year are phased out if the Reference Price of a barrel of oil for that year falls within a specified 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 approximately equal to 89 percent of the average price in those years of the benchmark NYMEX futures contract for a barrel of light, sweet crude oil |
| The price range within which the tax credit is phased out was set in 1980 and is adjusted annually for inflation |
| In 2004, the phase-out range was dlra51dtta35 to dlra64dtta47 |
| Because the Reference Price for a barrel of oil for 2004 was below that range, at dlra36dtta75, there was no reduction of the tax credits available for synthetic fuel produced and sold in 2004 |
| Assuming a 2 percent inflation adjustment factor for 2005 and assuming that the ratio of the Reference Price to the average wellhead price of the benchmark NYMEX futures contract remains approximately the same in 2005 as it was in 2004, we currently estimate that, because the average NYMEX price for January through December 2005 was approximately dlra56dtta71, there was no reduction of the tax credits available for synthetic fuel produced and sold in 2005 |
| Assuming a 2 percent inflation adjustment factor for each of 2005 and 2006 and assuming that the ratio of the Reference Price to the average price of the benchmark NYMEX futures contract remains the same in 2006 as it was in 2004, we currently estimate that the tax credits available for production and sale of synthetic fuel in 2006 would begin to be phased out if the average price of the benchmark NYMEX futures contract in 2006 exceeds approximately dlra60 and would be fully phased out if the average price of the benchmark NYMEX futures contract in 2006 exceeds approximately dlra75 |
| The average price of the benchmark NYMEX futures contract for 2006, through February 16, 2006 was dlra64dtta36 |
| As a result of high oil prices in the first several weeks of 2006, the synthetic fuel operation elected to suspend production of synthetic fuel in mid-January 2006 |
| On February 17, 2006, we restarted production and have taken steps to minimize operating losses that could occur if more than a majority of tax credits are phased out in 2006 as a result of high oil prices |
| We will continue to monitor the situation, and if circumstances warrant, we may again suspend production in the future |
| We cannot predict with any accuracy the future price of a barrel of oil |
| If the Reference Price of a barrel of oil in 2006 or 2007 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, which would have a negative impact on our results of operations |