DARDEN fit uv2070 BUSINESS PUBLISHING UNIVERSITY VIRGINIA MARRIOTT CORPORATION In January 1980, the management of Marriott Corporation (MC) faced an interesting dilemma: not only did the corporation have considerable excess debt capacity, but projections of future operations and cash flows indicated that this capacity would increase during the upcoming, year. Management had stated that unused debt capacity was inconsistent with the goal of ‘maximizing shareholder wealth, Excess debt capacity was viewed as comparable to unused plant capacity because the existing equity base could support additional productive assets. Management’s negative view of excess debt capacity had been strengthened by the rising inflation rates of the late 1970s, which were thought to increase the costs of unused debt capacity, both directly and indirectly. As stated in MC’s 1979 annual report: Both the cost of equity and the cost of debt increase with inflation. However, as inflation accelerates, tax deductibility partially offsets the rising cost of debt. On the other hand, business absorbs the full inflationary impact of equity cost increases. A firm which prudently utilizes its full debt capacity substitutes marginally cheaper debt for more expensive equity, thus optimizing the weighted-cost of capital. High inflation rates also had subtle effects on a firm’s capital structure, Measured by its current value, debt previously committed at comparatively low interest rates actually declined in value. When the company’s balance sheet was recast on a current-value basis, the debt-to-total- capital ratio actually declined, implying an increase in debt capacity. Management was therefore faced with two problems. First, it needed to determine the amount of funds that would be available if MC's full debt capacity were utilized. Second, ‘management needed to decide whether to invest the excess funds in new or existing businesses or to retum them to the company’s shareholders by paying higher cash dividends or repurchasing stock. This case was prepared by Professor Diana Hartington. It was written as a basis for elass discussion rather than to illustrate effective or ineffective handling of an administrative situation, Copyright © 1982 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail 10 sales(@dardenbusinesspublishing.com. No part of this publication may be reproduced, stored in a retrieval system, used ina spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. Rev. 1/09, ‘This documents authortzes for use onn Esteban Aroye's Valorain cure at Uneriad San Francisco de Quito - USF, fr March 2017 te Saptembe: 2017uv2070 Marriott Corporation Background Operations through 1974 The Marriott Corporation was founded by J. Willard Marriott in 1927 as a root beer stand. The family first broadened its operation in 1937 as a pioneer in the field of airline catering, and again in the 1950s when it entered the hotel business and began providing food-service management to hospitals. MC’s period of greatest diversification occurred in the late 1960s when, in addition to expanding the company’s existing businesses, MC management made the following moves: (1) acquired several foreign airline catering kitchens; (2) bought the Big Boy coffee shop chain; (3) obtained the rights to use Roy Rogers’s name on a chain of family restaurants; (4) entered the amusement business by initiating plans to develop up to three theme parks; and (5) purchased a ctuise ship business, the Sun Line Shipping Co. The corporation's aggressive growth proceeded unchecked until 1975. From 1968 to 1974, both sales and net income increased at an average annual rate of 22%, while earnings per share nearly tripled. The absolute growth in the size of the corporation was perhaps best reflected in the quadrupling of its capital base in this seven-year period, as shown in Exhibit 1. By the end of 1975, the MC had been organized into the five operating groups described in Exhibit 2: restaurant operations; the business and professional services group; the hotels group; Sun Line Cruises; and theme parks. In 1975, MC’s profits declined for the first time in 20 years. While domestic sales and profits had grown during the year, their rates of growth were slowed and profit margins eroded by the combined effects of inflation and recession. In addition, the rapid business expansion resulting from ‘management's targeted growth rate of 20% per year had generated sizable new-venture startup costs and significant increases in interest expenses. The major factor that affected MC’s 1975 performance, however, was the $5.8 million loss incurred by Sun Line Cruises. Inflation had a devastating effect on this business, as rapidly escalating oil prices increased costs and declining, consumer interest in cruise vacations reduced sales. The 1974 military coup and Turkish invasion of Cyprus, one of the company’s areas of operation, further reduced the company’s revenues. The combined effect of all of these problems was a 12.6% decline in MC’s 1975 net income and a 14% drop in earnings per share. The company’s return on average equity reached a new low of 8.8%! “Marriott changed the end of its operating year in 1978 from July to December to accommodate the seasonality of the theme parks, The financial statements for the five preceding years, 1974-1977, when restated to the new operating, year, showed the following results for 1974-1975: net income increased 0.2%; earnings per share declined 1.4%; and return on average equity reached a low of 9.5%, ‘This documents authortzes for use onn Esteban Aroye's Valorain cure at Uneriad San Francisco de Quito - USF, fr March 2017 te Saptembe: 20173 uv2070 1975-1976 reappraisal In view of the company’s 1975 performance, MC management reassessed its long-term goals, and developed the following objective: continue the company’s growth by renewing the corporation’s historic emphasis on the hotel business. But management believed that the company was too highly leveraged and too dependent on inflexible secured debt to reach this goal easily. Until 1975, MC had relied on the traditional mortgage markets for most of its long-term financing. By the end of 1975, 63% of MC’s long-term obligations (about 81% of the company’s net, worth) was in the form of secured debt. Roughly, 54% of MC’s net property, plant, and equipment was pledged against this debt, making any significant modification to or disposition of these assets, extremely difficult, This situation was regarded by MC management as a constraint on the company’s maneuverability. Furthermore, the corporation’s continued expansion into the restaurant, catering, and amusement businesses had changed the composition of its assets. The assets associated with these new businesses could not be readily mortgaged. For instance, lenders were unwilling to grant mortgages on the assets associated with MC’s theme parks. Originally estimated to cost $80 million, these assets had a final cost of $160 million. Lastly, the mortgage markets had shown wide swings in both interest rates and availability of funds. These variations raised additional questions about the future costs and availability of long-term mortgage debt financing. In short, MC management viewed its continued reliance on the mortgage markets as a constraint on the company’s growth and its ability to capitalize rapidly on high-retum investments. Consequently, management decided to diversify the company’s source of debt, by making MC an A- rated unsecured borrower and by developing a wider market for the debt associated with its hotels. Before it could take these steps, however, MC had to improve its returns and restructure its liabilities To increase the rate of growth in revenues, MC management accelerated the corporation’s marketing efforts. Concurrently, cost-control programs were initiated to improve margins. Moreover, about $100 million of marginally productive assets were disposed of. Reflecting ‘management's renewed commitment to the hotel business, the dispositions included several foreign airline-catering kitchens, the majority interest in an idle cruise ship, a security company, excess land around the existing theme parks, and land originally purchased in anticipation of a third theme park. Exhibit 2 details the changes in MC’s operating units between 1975 and 1979. MC management also reduced planned capital expenditures and increased its hurdle rates for new investments. Some existing hotels were sold to counteract the capital intensity of the hotel business, although MC retained management contracts for these hotels, thereby keeping operational control of the units. MC also increased its reliance on off-balance-sheet financing as a further means ‘This documents authortzes for use onn Esteban Aroye's Valorain cure at Uneriad San Francisco de Quito - USF, fr March 2017 te Saptembe: 20174. uv2070 of reducing the company’s capital intensity.* Finally, the company issued 1.25 million shares of common stock, the first equity issue sine 1975. Results through December 1978 The results of management's actions were almost immediately apparent. All key performance ratios had shown improvement as early as 1976, and the corporation’s cash flow had increased very strongly, up 25% over the 1975 level. In addition, both the proportion of mortgage notes payable to total capital and the ratio of assets pledged to net property, plant, and equipment had declined, while the corporation’s debt maturities had been lengthened. Management had decided that the corporation’s annual cash flow should, at a minimum, equal the sum of the next five years’ debt, maturities, It was able to meet its self-imposed debt limit as early as 1976, when Marriott's cash flow exceeded its five-year debt maturities by 6%. Continued strong returns through 1977 allowed the corporation to place $40 million of 20-year unsecured debt. Several further steps were taken during 1978. First, MC initiated the payment of cash dividends. In addition, management redefined its debt criterion: long-term debt was, at a minimum, to equal 45% of total capital.’ And last, management adjusted the corporation’ target debt rating, from A to BBB. An A rating, management believed, was not all that desirable for growth-oriented companies that required financial flexibility. Furthermore, in the case of companies such as Marriott, which used borrowed funds to meet restrictive loan covenants relative to working capital requirements, the higher credit rating could also be more expensive. MC management had decided that the interest payments saved by less restrictive loan covenants relative to working-capital balances would more than offset the increased interest rates resulting from the lower credit rating. By the end of 1978, management believed that MC was in a financially liquid and flexible position, Sales had increased 15%, but earnings were up 39%, more than double management’s goal of 15% per year earnings growth. Marriott’s cash flows had increased 22%, boosted both by the increased earnings as well as by the receipt of $35 million in after-tax proceeds from the sale of assets, The return on average equity had increased from the 1975 low of 9.5 to 14%, The return on total capital had risen from 13% to 16%. For the most part, each of the corporation’s business segments had done well during the period. While operating margins in the contract food service and restaurant groups had eroded slightly, those of the hotel group had increased, resulting in an overall 2% improvement in the corporate operating margin from 9% in 1975 to 11% in 1978. The major profit gains came from the theme parks—which began operations in 1976—and from a turnaround in the cruise ship business. Exhibit 3 provides operating results for MC’s five business groups. * By keeping its investments in ventures to less than 50%, management could, for accounting purposes, record its investments using the equity method, thereby increasing the rates of return earned. * Long-term debt was defined as Senior debt plus capital-lease obligations. Total capital was defined as total assets less current liabilities ‘This documents authortzes for use onn Esteban Aroye's Valorain cure at Uneriad San Francisco de Quito - USF, fr March 2017 te Saptembe: 20175 uv2070 Long-term debt was at an all-time low of 37.5% of total capital, and the 1978 cash flow exceeded the sum of the next five years’ debt maturities by 11%. These improvements led ‘management to believe that it had $150 million in excess debt capacity. 1979 operating year On the basis of MC’s 1978 returns and those projected for 1979, management increased the company’s capital budget for the year by 14% and repurchased five million shares of common stock ata cost of $74 million. This purchase was intended to offset the dilutive effects of the company’s, stock option plan Despite those major investments, MC’s 1979 performance exceeded that of 1978, as shown in Exhibits 4 and 5. As a result, management continued to believe that the corporation was significantly underleveraged, despite the increase in debt to 41% of total capital. In 1979, the Financial Accounting Standards Board required firms of Marriott’s size to report, the effects of inflation on their financial statements for the first time. The results of recasting Marriott’s financial statements into constant dollar and current value bases are shown in Exhibit 6. MC management favored the current-value approach over the constant-dollar method for several reasons: (1) the company’s assets were largely real-estate based and tended to appreciate rather than depreciate in value; (2) the assets were not subject to any major technological or competitive obsolescence that might necessitate their replacement; and (3) the company’s annual repair and replacement costs traditionally averaged only 50% of the yearly depreciation charge. Management, concluded that its relianee on the company’s historical financial statements had caused it to undervalue MC’s assets and overstate its liabilities. Once again, management believed that the company’s debt capacity had been underestimated. Atthe same time, management concluded that the debt-to-total-capital ratio was not the best. measure of debt capacity because it ignored the market value of assets and liabilities, the reliability and size of cash flows, and the structural differences among competitors within an industry. Instead, management chose to measure debt capacity in terms of earnings’ coverage of net interest. Specifically, management concluded that earnings before interest and taxes—adjusted for actual repair and replacement expenses rather than by the income statement’ depreciation charge—should cover net interest five times. (Exhibit 7 displays the results of applying this debt criterion to the company’s historical financial data.) ‘The uncertainty about the best measure of the company’s debt capacity spilled over into MC management’s investment and capital-budgeting processes. Originally very project-oriented in it investment and financing decisions, management had taken a broader perspective when it diversified away from the mortgage markets. The use of unsecured debt had allowed management to separate the investment and financing decisions, It was still faced with determining the relationship between the corporation’s debt capacity and the earning power of a given project. Management felt that MC's, debt capacity was directly related to a project’s ability to generate a reliable stream of cash to cover ‘This documents authortzes for use onn Esteban Aroye's Valorain cure at Uneriad San Francisco de Quito - USF, fr March 2017 te Saptembe: 2017uv2070 the interest charges associated with its financing, This view implied that the corporation’s prevailing, debt criterion should be applied project by project in the capital-budgeting procedure. Marriott’s 1979 Investment Alternatives While management did have considerable discretion in determining the best investments for the corporation,‘ each of the preceding decisions and factors—as well as the prevailing capital market conditions detailed in Exhibit 8—contributed to the complexity of the 1979 investment decision, Management had identified two general categories of investments * Promoting growth by expanding existing operations or diversifying into new businesses; + Returning capital to the shareholders by increasing the company’s dividends or by buying back some of the outstanding stock. Promote Growth Alternative 1: Accelerate expansion of existing businesses MC management could increase its rate of investment in existing operations. ‘The most promising area for investment was the hotel business. Although a mild recession was anticipated for carly 1980, its effects on the lodging industry in general and on MC in particular were expected to bbe mild, MC hotels catered to business people and convention-goers, whose travel plans were less ‘subject to change than those of vacationers. MC hotels had come through the 1970 recession and the even more severe one in 1974-1975 with healthy earings increases. Prevailing trends in the lodging industry also appeared to favor rapid room expansion. Industry-wide construction had been somewhat constrained recently because of high interest rates, rising construction costs, and selective institutional lending. ‘An inerease in the rate of hotel-room expansion also made sense from a competitive viewpoint. During the latter half of the 1970s, both Hilton and Holiday Inn, two of MC’s major competitors, had diversified their investments away from the pure lodging business into gambling and casino ventures. MC management had decided to avoid the gambling business for ethical reasons and was in a good position to expand in the more traditional markets. At the end of 1979, Marriott had 50 hotels in various stages of development. Completion of these units would result in about a 20% to 25% annual rate of growth in hotel rooms. More than half of those planned hotels were to be managed rather than wholly owned by the Marriott Corp. The * Management's decision-making abilities were constrained only by the corporation's articles of incorporation, which requited the approval of two-thirds ofthe outstanding shares for any merger, sale, or exchange of substantially all. of the assets or businesses of the company ‘This documents authortzes for use onn Esteban Aroye's Valorain cure at Uneriad San Francisco de Quito - USF, fr March 2017 te Saptembe: 2017uv2070 large proportion of managed hotels among the planned units reflected management's emphasis on higher returns on invested capital rather than increased margins, The operating margin on a managed hotel was lower than that of an owned property—8% to 10% versus 15%, on average.* If MC management chose to invest additional funds in the hotel business, it could do so in one of the following ways:* 1. Limited capital investment: MC could take up to a 50% equity position, thus minimizing its capital investment while maximizing the probability of being awarded the management contract on the property. 2, Full capital investment in a property with high and reasonably well-assured returns: MC could expand existing MC hotels where occupaney rates were high and the local, market’s demand was known and readily forecast. 3. Full capital investment but low entry cost: MC could acquire an existing hotel where the Marriott name, management expertise, and referral systems were expected to improve the property's results. 4, Capital put at risk in a new hotel at a new location, Details regarding average construction costs for hotel properties are shown in Exhibit 9 Typically, motels operated in a 30-year life cycle: occupancy would increase dramatically in its first decade, with occupancy rates approaching 100% after about eight years, then decrease gradually ‘over the subsequent twenty years.” In 1979, the average annual occupancy rate in the U.S. lodging industry was about 73%, slightly higher than the 1978 level of 72%. Marriott hotels, however, had aan average occupancy rate of over 80% in 1979, well above the industry average. Alternative 2: Diversify through acquisition Marriott management could also use the company’s funds to acquire another company. Management had every reason to believe that it could identify a company and situation that would benefit from MC’s principal asset: the operating expertise that cut across a broad range of food service, lodging, and entertainment businesses. Exhibit 10 displays recent data on merger and acquisition activity in the market. Return Sharcholders’ Capital * Joseph J. Doyle, “Marriott Corporation-Lodging and Restaurants-1/03/1979.” Research report for Smith Barney Harris Upham & Co., Inc, (New York, New York) © Doyle, “Marriott Corporation—Lodging and Restaurants,” Stephen Rushmore, “The Appraisal of Lodging Facilities,” The Cornell Hotel and Restaurant Administration Quarterly, August 1978. ‘This documents authortzes for use onn Esteban Aroye's Valorain cure at Uneriad San Francisco de Quito - USF, fr March 2017 te Saptembe: 2017uv2070 Alternative 3: Increase dividends MC management could also increase the company’s cash dividends. Although a single lump- sum payment could be made to the shareholders, this tactic would offer only a short-term solution to the company’s problem of excess debt capacity and steadily increasing cash flows. A permanent increase in the company’s payout ratio seemed a more reasonable alternative. A major increase in cash dividends had significant ramifications for existing shareholders as. well as for potential investors. Per-share and other financial data for MC and its principal competitors are shown in Exhibits 11 and 12, Alternative 4: Repurchase shares of common stock A repurchase of common stock carried with it many of the same advantages and disadvantages as the previous alternative. Most serious, potentially, was the possible market interpretation of the move: the idea that MC had fully utilized its growth opportunities. The fact that ‘management had only recently repurchased about five million shares on the open market was also of some significance. By shrinking the company in this manner, however, management had expected that the company’s earnings per share and return on equity would increase enough to offset any negative interpretation of the strategy. Trends in Marriott’ stock price relative to those of its major competitors are shown in Exhibit 12 If management selected this altemative, it would need to make several decisions: © Number of shares to tender. + Price at which to tender the shares. ‘© Whether to retire the shares repurchased, At the end of 1979, the Marriott family owned about 6.5 million shares of the company’s ‘common stock. Nonfamily members of management owned an additional 1.5 million shares through the company’s stock option and profit-sharing plans. Ownership of the remaining shares was largely dispersed among about 50,000 shareholders. ‘This documents authortzes for use onn Esteban Aroye's Valorain cure at Uneriad San Francisco de Quito - USF, fr March 2017 te Saptembe: 2017uv2070 Exhibit 1 MARRIOTT CORPORATION Historic Performance’ Average Predebt Cash Debt Sales % Net Income % PAT/Average Predebt Cash Flow? Capital’ % — Flow/Average Total Change/Year Change/Year Equity/Year % Change/Year Change/Year Capital Capital’ 1968 35.0% NAv NAV Nav. NAV 49.0% 1969 31.0 129 28.0% Nav. BA 434 1970 23.0 129) 362 32.6% 134 494 1971106 124 214 259 13.6 48.0 1972-202 116 23 239 Ba 49.7 1973273 12 20.0 216 132 sad 1974 19.0 14 253 20.1 138 50.4 197514 88 100 189 128 sal 1976 21.6 107 23.0 159 138 50.5 1977153 107 n2 69 141 453 1978146 123 18 04 16.1 382 ‘This documents authortzes for use onn Esteban Aroye's Valorain cure at Uneriad San Francisco de Quito - USF, fr March 2017 te Saptembe: 2017-10- uv2070 Exhibit 2 MARRIOTT CORPORATION Corporate Activities, 1975 and 1979 Operating Group Number of Units Restaurant operations group 7125115 12/28/79 ‘Company-owned restaurants 407 416 Dinner houses and restaurants 18 9 Ice cream parlor restaurants(Farrell’s) 83 1 Cafeterias (principally Hot Shoppes) 40 16 Coffee shops (principally Bob’s Big Boy) 132 180 Fast foods (principally Roy Rogers) 124 194 Franchised restaurants 846 1,013 Coffe shops (Big Boys) 746 901 Ice cream parlor restaurants (Farrell's) 2 32 Fast foods (Roy Rogers) B 80 Production facilities Kitchens providing food research and production for Marriott restaurants, hotels, and flight kitchens as well as forsale to the food service industry and retail food chains 2 0 Business and Professional Services Group (Subsequently named Contract Food Services) Domestic flight kitchens (airline catering) 40 39 International flight kitchens (airline catering) 20 23 Management contracts: provision of food services to business and industry, health care and educational institutions, highway restaurants, et. 168 217 Airline terminal contracts 10 12 Special services (including institutional catering from in-flight kitchens and food service to auto- train passengers) 19 0 Security systems 12 0 Hotels Group ‘Company-owned properties Hotels 19 20 Rooms 8,371 8,348 Exhibit 2 (continued) ‘This documents authortzes for use onn Esteban Aroye's Valorain cure at Uneriad San Francisco de Quito - USF, fr March 2017 te Saptembe: 2017“le uv2070 Operating Group Number of Units Hotels Group (cont’d) ‘Company-managed properties 7125115 12/28/79 Hotels u 2 Rooms 4,616 12,608 Franchised Marriott Inns Inns 12 18 Rooms 2,841 5,328 Resort/hotel condominiums Properties where condominiums are held for retail sale 2 1 Full-service travel bureau 1 0 Sun Line Cruises ‘Number of ships ‘Theme Parks (completed in 1976) 0 2 Source: Marriott Corporation Annual Reports, 1975 and 1979. ‘This documents authortzes for use onn Esteban Aroye's Valorain cure at Uneriad San Francisco de Quito - USF, fr March 2017 te Saptembe: 2017ort 881 or oL 99 0791 4001 ¥ ol Sul a s8t a1 OTe Is 0998s ooorsIs ve oes euue LLporaVAN ou01 est ost oE91 oceers sb 8 oe sez 05998 overe'ls oe ssi cure ase oe sors ‘setloa. su61 om0r sol eel zs z9 0791 orsiis v ol r97 zie ores o£ 060'IS vee eo este otre ou'vees ‘seiloc, Lust ores 001 oo" r Ll 0 Fala Ie i 9z 868 oy Loves 94001 sol z 19, 0 vse ve rose fe oe mle sm % 9L61 poypneu, (suorprur ur sreqjop) ereq wauag NOLLVUOdOD LLORAAVIN ena an Lie v8 orees os'suis OLE, Te, a2if0 pur sdiys asin ‘sed ouoq ddnos® yueaneysoy s2otaias poo} 19en0-) dnos3 [0H ‘uyaeyy $8045 joxd Burpe1ado feo], soo 7 sdigs asin, syed au nord ywemesoy AIDS POO} 19811003) dno8 j210H1 ayo1g Supessdo sopes [20], soto 7 sdigs asin, sed ouoy dnos8 yuesmeysoy ‘A198 poo} 1oeMuOD dno [10H 309 [8 Francisco de Quito - USF, fom March 2017 to Soptember 2017. ban Aeros Valoracn cura at Universidad San ‘This document is athorzes for use on-13- UVA-F.0477 Exhibit 3 (continued) Identifiable Assets Net Assets Employed? Segment 1977 1978 1979 17 1978 1979 Hotel Group $379.10 $351.20 $434.30 $353.70 $303.60. $371.90, Contract food Services 127.9 1386 163.2 993 99.3 124 Restaurant group 162, 184.9 1988 143.8 161.7 175.4 Theme parks? 169 1675 163.9 164 161.4 158 (Cruise ships and other 45,1 43.9 453 36 32 32 Corporate 66.4 1142 159 32.9 68.9 306 Total $949.5 $1,000.30 $1,080.4 $823.70 $826.90 $891.90 Depreciation and Amortization Segment 1977 1978 1979 1977 1978 1979 Hotel group $43.10 $62.90 $80.60 $17.70 $16.00 $16.00 Contract food serv, 99 108 203 14 19 16 Restaurant group 23.7 341 45 118) 125 147 ‘Theme parks? 97 92 63 19 8 92 Cruise ships and other 08 04 12 17 18. 14 Comporate 11.2 27 5.1 08 09 17 Total $9840 $139.10 $158.50 $47.30 S47.0.——_—$50.60 Return on Capital Operating les/Total Capital!” Profit/Total Capital” Segment 1977 1978 1979 1977 1978 1979 Hotel group 0.95% 134% 144% 15.3% 21.90% 23.30% Contract food services 3.67 3.91 3.87 27 23.70 255 Restaurant group 2.20 215 215 1821710 163 ‘Theme parks 0.44 047 033 6 7.30 iL Cruise ships and other 0.67 0.96 1.06 it 15.00 200 Total Marriott 1.32 11 1.69 140 16.20 19. ‘Source: Marriott Corporation Annual Reports, 12/28/79 and 12/29/78, The company changed its year end in 1978 to the Friday closest to December 31. The segment results are presented on the new fiscal-year basis. The unaudited data for 1975 and 1976 as restated were prepared using the same procedures employed to obtain the audited 1977 and 1978 results, " Operating profit represents total operating results before interest, corporate administrative expense, unallocated cconporate charges, and dispositions of business and idle property. * Theme park operating results for 1976 are not comparable with subsequent years because the initial year did not bear the full burden of offseason costs and included charges for depreciation and real estate (axes only from the opening of the parks. Net Identifiable Assets = Total Identifiable Assets — Identifiable Current Liabilities = Total Capital ‘This documents authortzes for use onn Esteban Aroye's Valorain cure at Uneriad San Francisco de Quito - USF, fr March 2017 te Saptembe: 2017-14- UVA. 477 Exhibit 4 MARRIOTT CORPORATION Consolidated Income Statements (dollars in hundreds, except for per-share data) Year Ending 12/25/1975 12/30/1976 12/30/77 12/29/78" 12/2879" Sales $732,396 $890,403 $1,090,313 $1,249,595 $1,509,957 Costs and expenses: Cost of sales and operating expenses 533,222 647,044 «815,510 935,504 1,135,855 General and administrative expenses 31,469 35,023 43,935 50,182 53,616 Rent 30,427 34,146 5 5 EI Taxes, payroll, ete. 28,455 35,929 45,246 50,300 $6,495 Depreciation and amortization” 30,637 36,119 41,279 47,144 50,495 Advertising and promotion 12,289 18,858 28,518 34,901 46,535 Gross interest 28,328 31187 32,565 28,454 32,545 Interest capitalized =10,353-10,432 59 “4,766 4,705 Net interest 17,975 20,755 30,206 23,688 27,840 Profit-sharing contributions 3,604 4,582 5,730 7,792 10,337 Preopening and development expenses 5911 6,183 4,166 4,785 5311 Total costs and expenses $693,989 $838,639 $1,021,190 $1,154,296 $1,386,812 Profit before taxes 38,407 51,764 69,123 95,299 123,145 Gross taxes 19,564 26819 34,638 46334 58,879 Invest. tax credit (flow- through)’ -2,975 5,900 4,565 “5335 6,734 Net taxes 16,589 20,919 30,073, 40,999 52,145 Profit after taxes 21,818 30,845 39,050 54300 71,000 Primary EPS $0.66 $0.90 $1.04 $143 $1.96 Fully diluted EPS NAv NAV. $1.04 $143 1.95 Cash dividends/share* NAv NAW. 3 0.13 0.17 Funds from operations® 70,320 87,543 99,834 «121,588 140,934 Capital expenditures $159,178 $143,235 $81,887 $134,738 $149,000 Data for 1975-1976, ifrestated to an operating year ending in December, would show the results summarized in the table on the next page (data is unaudited) Depreciation and amortization are accounted for on a straight-line basis, “Investment tax credits are accounted for using the flow-through method, “ Marriot issued 2.5% stock dividends annually 1970-1977, except in 1972 when the stock split two-for-one. * Funds provided from operations: net income plus depreciation, deferred taxes, and other items not requiring current outlay of working capital. ‘This documents authortzes for use onn Esteban Aroye's Valorain cure at Uneriad San Francisco de Quito - USF, fr March 2017 te Saptembe: 2017-15- UVA--0477 Exhibit 4 (continued) (millions of dollars) 1797s 12/1976 Sales $775.90 $946.70 Operating expenses 1048 853.6 Gross interest 335 332 Interest capitalized “0s 64 Net interest 23 268 Conporate expenses + income + dispositions 8 B4 Profit before taxes 40.1 52.9 Gross taxes 203 26 Investment tax credit, “4400 5.1 Net taxes 9 209 Profit after taxes $24.20 $32.00 Fully diluted earnings per share $0.69 $0.86 Funds provided from operations $77.60 $92.20 Capital expenditures 15461134 ‘This documents authortzes for use onn Esteban Aroye's Valorain cure at Uneriad San Francisco de Quito - USF, fr March 2017 te Saptembe: 2017-16- UVA-F.0477 Exhibit 5 MARRIOTT CORPORATION Consolidated Balance Sheets' (dollars in thousands) Year Ended asiis 73076 12807 taRONTS 12a8179 ‘Asseta/ Current assets Cash and equivalent Sig.318 $17,760 $16,990 siaga7 1244s Marketable securities a cost 6390) 21993 - 38,510 5825 ‘Accounts receivable 43,588 50,293 61.484 76,174 99,955 Inventories (FIFO) 27.667 ass, 41,08 46,629 Prepaid expenses 9st 9.868 Total current assets 180,710 sim Lincolnshire Hotel 7282 - - - - (Get assets under salefleaseback) Property and equipment Land 358932 $73,784 $106,919 Buildings and improvernents 174053, 270,686 293,679 Leasehold improvements 165,742 198280 213,118 Fumiture/equipment 164967 28401 248,066 Capital leases 5 = 53408 Cruise ships 1,219 11367 taat Idle land and ship 33,262 37,610 5 Construction in progress ox044 16483 29,441 Total property and equipment 706,219 836611 956,072 Depreciation end amortization 128,169 155218 204.152 [Net property and equipment $578,050 $681,303 $751,920 Other assets Investment in/advances to affiliates? SUS? $10.467 $26,548, $25,506 $27,160 Goodwill 8.960 18,656 17549 19.257 19.106 ‘Notes receivable 5 Ss 11670 17805 16.284 Deferred preopening costs 5.636 5,388 - - - Other 14470 14,192 12407 11933 14915, Total other assets 50,623, 48,703 68,178 24\S01 7865 Total assets $736,510 $844,226 $949,510 $1,000,255 $1,080,365 Data for 1975 do not reflect changes in accounting requirements relative to capital leases that were adopted in subsequent years. When instituted in the July 1978 financial statements, the change had the cumulative effect of a$2.4- million deciine in the 1976 retained earnings balance of $63.6 million. The aggregated numbers (dollars in millions) and balance-sheet characteristics of Marriott's affiliates in 1975 and 1979 are summarized below Number of Investments Total Assets Total Liabilities Total Equity July 1975, 2 $53 $46 9 December 1979 (5 of 11 investments) n s2u1 SIs 56 ‘This documents authortzes for use onn Esteban Aroye's Valorain cure at Uneriad San Francisco de Quito - USF, fr March 2017 te Saptembe: 2017-17- UVA-F.0477 Exhibit 5 (continued) Year Ended tnsns 70m a077 nee aT Liab. and shareholders’ equityeurent iblites ‘Shorterm loans S275. $2989 $3976 347384054 Accounts payable BRI 41303 46,666. 66,960 71,528 ‘Acerucd labile S7M3 4865351876 721509 791909 Tneome taxes payable - — 1304 gsr 22 stk Current portion of debt and capitalized leases 11441019 08i319s8 10497 Total cuzent abilities $85,130 $98.268 $125,865 SIT8372.—_SIB8.499 Senior dsbt Interim cons, nansing S048 $16,000 = 5 ‘Mortgage notes payable 207135 219906 214,090 175.565 163,520, Unsecured noes payable U7sé1 sox 07332 oas7 178075 Total senior debt sor 380.928 321.82 286.022.341.595 Capital lease obligations = = 4809223877 aaena Deferred income taxes S6514 —$47343 $5638 $59,903 $65,597 Defered income and othe abilities 366 1007 243510260 205569 CConverible substute debentures wad SMO 2851S RIGS 25918 Sharcholders’ equity ‘Common stock 1 par} S32507 S38567 —S36674 86891 $36,900 pital surpls 16974212250 222.785 2249s 224533 ‘Net deferred compensation payable in stock 3256 3952 4367 6350 7610 Retained earings 4799963575 ——_103,037 arm “Treasury stock, a cost Nav Nav =1,667 =13379 Total equity 253736 ISSA 365,796, 413,303 ‘Total abilities & shareholders equity ST36510 $844,226 $549°510 $1,080,365 Source: Marriott Corporation Annual Reports. Data for 1975-1976 do not reflect changes in accounting requirements relative to capital leases that were adopted in subsequent years. When instituted inthe July 1978 financial statements, the change had the curnulative effect ofa $2,4-million decline in the 1976 retained earnings balance of $63.6 rillion. The value of the net assets pledged against this debt was estimated at $243 million in 1975 and $293 million in 1979. Movements in Marriott's common stock accounts are summarized below nema TASS = 7076 12180777- 12/29/78 Tass 79/77 79/77 1229/78 12228779 Opening numbers of shares 31,183 32,507 35,567 36,507 36,715 Shares issued 324 3,060 L101 385 235 Shares repurchased - - - 177 4351 Closing numbers of shares 32,507 35,567 36,668 36,715 32,098 Estimated number of shareholders, end of period 43,200 47,000 52,800 50,700 Nay ‘This documents authortzes for use onn Esteban Aroye's Valorain cure at Uneriad San Francisco de Quito - USF, fr March 2017 te Saptembe: 2017-18- UVA-F.0477 Exhibit 6 MARRIOTT CORPORATION Inflation-Adjusted Financial Statements (dollars in thousands) A. Current Value Accounting:Changes in shareholders’ equity* Current value, December 29, 1978 $767,719 Discretionary cash flow 99,123 Reduction in current value of debt 25,287 Inerease in current value of assets 77,227 Purchase of treasury stock (74,187) Cash dividends (5,776) ‘Common stock issued and other 3.810 Current value, December 28, 1979 $95,203" Shareholders’ equity, 12/28/79 Historical Cost rent Val ‘Nonmonetary assets (primarily property and equipment) $927,287 $1,356,244 Less: net monetary iabilities- Senior debt and capital leases 365,279 320,736 Convertible debt 26918 20,718 Other monctary liabilities, net. 121,587 121,587 S13.784 463,011 Shareholders’ equity T4303 $593,203 Senior debt and capital leases to total capital 41% 24% Gain from decline in purchasing power of net monetary liabilities Negative working capital Debt and other monetary liabilities Total gain $55,109 B. Total constant-dollar accounting (average 1979 dollars) 1228/79 Net income as reported 571,000 Constant-dollar adjustments Cost of sales (5,203) Depreciation and amortization of property and equipment 18,427) Total constant-dollar adjustments 23,630 Constant-dollar net income S41370 Constant-dollar gain from decline in purchasing power of net amounts owed $55,109, Constant-dollar net income per share (excluding the gain from the deeline in purchasing power of net amounts owed) S131 Shareholders’ equity (constant 1979 dollars) S 703,598 Effective 1979 income tax rate 52.4% ‘This documents authortzes for use onn Esteban Aroye's Valorain cure at Uneriad San Francisco de Quito - USF, fr March 2017 te Saptembe: 2017-19- UVA-F-0477 Exhibit 6 (continued) ©. Five-Year Comparison of Selected Supplementary Financial Data Adjusted for the Effects of Changing Prices (Average 1979 dollars) Cash Net Sales and Dividends Market Price Other Declared per per Common Average Fiscal Years Operating Common Share Consumer Ended Revenue Share at Year End Price Index 1975 $1,045,878 $20.17 1612 1976 1,206,576 16.88 1708 1977 1,305,371 0.04 13.73 ISLS 1978 1,389,647 oa 12:99 195.4 1979 1,509,957 oT 16.53, 2174 ' Property and equipment and investments in affiliates are valued on a discounted cash-flow basis, Projections of future cash flows are adjusted to reflect anticipated asset maintenance requirements. Good willis assigned no value, The rates used to discount the cash flows reflect current market rates * Ifthe current value of existing hote! management agreements were included in the data, this figure would increase by about $275.8 million to $1,169 million. Source: Marriott Corporation, 1979 Annual Report ‘This documents authortzes for use onn Esteban Aroye's Valorain cure at Uneriad San Francisco de Quito - USF, fr March 2017 te Saptembe: 2017-20- UVA. 477 Exhibit 7 MARRIOTT CORPORATION Alternative Measurements of Debt and Marriott Results 197419751976 197719781979 1. Cash flow/yearifive-year debt maturities’ 0.63. «0.84.06. LL LIS- NAW, 2. (Senior debt + Capital leases)/ 53% 55% 48% = 45% = 38% AM (Total assets-current liabilities)? 3. EBITINet interest? 308 = «2.74 2.98-3.29 5.02 5.42 4, EBIT adjustedinet interest? 3.74 est. 351 380-427-643 6.64 5, EBIT-adjusted/gross interest? 265est. 2.40 3.07 3.95535 5.66 "Data reflect July fiscal year. Figure for 1978, ifrestated to December calendar year, would be 1.19. 2 Data reflect December calendar year. EBIT adjusted = EBIT + Depreciation - Actual repairs/replacements ‘This documents authortzes for use onn Esteban Aroye's Valorain cure at Uneriad San Francisco de Quito - USF, fr March 2017 te Saptembe: 2017-21- UVA-F-0477 Exhibit 8 MARRIOTT CORPORATION Market Data: 1975-1979 “4 Annualized Intrast Rate (4) 197519781977 —«1978~=«1879 «1079 «1179 «1278 ‘Average forthe Year ‘Average forthe Month Source: Federal Reserve Bulletin, CPI data compiled by Economic Studies Center, Tayloe Murphy Institute at the University of Virginia “This documents auorzed ruse cnn Esteban Aroye' Valraci cours at Universidad San Francisco de uit - USF, om March 2017 o September 2017,22. UVA-F-0477 Exhibit 9 MARRIOTT CORPORATION Typical Hotel-Motel Costs per Room 1978 ($000s) Furniture, Fixtures, Operating Improvements and Equipment Land Preopening Capital Total Luxury $32.55 85-10 $4020 $1020 SLO-LS ——$43.0-0.5 Standard 20-32 36 25-70 0.7515 07510 270-475 Evonomy 15 24 1035 0510 05-075 120-2425 The Appraisal of Lodging Facilites,” The Cornell Hotel and Restaurant Administration Source: Stephen Rushmore, Quarterly, August 1978, ‘This documents authortzes for use onn Esteban Aroye's Valorain cure at Uneriad San Francisco de Quito - USF, fr March 2017 te Saptembe: 2017syn ayn ayn, orse ss79 poe ose sve Boxe 9st sob ser ‘winyainad ‘pag apa] LLpO-a-VAN wu ps wr oe 66 er ow st 16) nba SHEIAY ext a 09 v6 98 oot £91 sui 991 ysl st ‘unbg wo Some MEW pa HOY, AMINA aBEIDAY ‘a0 9pu>) 9419981104 PIP HOM 84.6) yo spt 8s a8 or oro 68 a ob 06 sol ae 8e9 wr uve wee set 66 66 9 ors. 6 wi soe 60 wo wor wt s89 Ist srr oer ou s¥o use eo sor we zo Giese) GBeAe) (e248) MOLL NED ameA oom Pod PS pea mee (son ur s3eqi0p) zou sel 9 rel Loz VN zee wert EDA od qyaory, “saBuay do uy sorurdaaoo yo ajduzes opie sy dno asiuo, adpoar 1 Jou S999 Om est UP S81 eon st ou Lu zw set eul oe wot uss EDA -sofepay SL6I-SL6T “ORL WoHISMboy pue aBrayy ayy UO EVE NOLLVHOdNOO LLOIAUVIN or nana “t- payee suoquan 120 19pG2} 0} JOU SIeaK Ont 9 9 pasyaany aod qaor 52240 29pU2}, Awa mueyy stuqareg wx sopeg 209K oes ost-ars ors Let nos yostuory oses ost-ors ozs suet oses ost-ars ozs Lust oses ost-ars ozs Let oses ost-ors 07s ust s13y30 9p Suysqoany soquedno jo-roquimy, so anqe, 1464 pute 289%, Francisco de Quito - USF, fom March 2017 to Soptember 2017. Exton Arye Vaoraci?n course at Univer San ‘This documents authorize forse onlinoo oot oor os ss ss ost ss orn srt ot ssi ost LLpO-a-VAN woe eric ove ost Pcl 66°01 sror ost 00% eee S09 aa ws $91 soua EEK Berry evs wee evel seu wo we os ts ae Ise a0 see est PLT seis soueys > Besoayhnmbg SBEDAY, 191 oe 101 uo ero dbyN zo vo 009 wp ove ist ¥s rr or 60 ue we sez we up eres aueys, od sour se sev lez 961 rl sv0 iso oro +00 ove we eat sez id seis aaeys sad suey sovamag oe oe one on 60r sss 09 ve ou) vez o9¢ Lye vie rer M698 in moLswea vol rst va ru orl 06 zor TT x0 ree 992 soz ou sul ans Samnba siesny uum actor aves aos ou eps siz sst zor o 066 oy ow ow os os x, uy wos wenauy, (paou se 40 erp axvys-sad ydaoxa ‘suon pu wt s1e][0p) beg JeouONstyy :stoyadwo3 Ansnpuy saotatag Jaa, NOLLVUOdOD LLORAAVIN Tarr ye: ISAN PaRPUNS A2RS pur “au “ootAIDg soInduIND $,t004 7 PUEPURRS ‘UE an “S9DANO ores, Gust 846 sust 008 aS ost 6461 osc't 8i61 tl sist wonsungy are 64st B0e 866 uz sist su vpouy tp Lot ve 8u6 Ise sist SpIOH wows z60'L 6461 srl sist z168 sist sua copnogt sommay OA pur Tenuuy —uedio Francisco de Quito - USF, fom March 2017 to Soptember 2017. Exton Arye Vaoraci?n course at Univer San ‘This documents authorize forse onlin-25- UVA-F-0477 Exhibit 12 MARRIOTT CORPORATION Comparative Common Stock Data, 1978-1979 (monthly closing price) 108 Sundar & Por 500 100 * * 0 Hot 2 20 rotey, 13 Ara, - ° Ramada, : 5 Lo 7897S 7B 878 1278 «379 we aTe 1270 Source: New York Stock Exchange Daily Stock Index. * Market price per share for Hilton has been adjusted for a two-for-one stack split in December 1978, “his document is authorized ruse ony n Esteban Are’ Valoacin course at Universi San Francisco de Cit - USF, om March 2017 o September 2017,