Marriott International, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited results. Marriott operates, franchises, and licenses hotels and related properties, primarily using an asset-light model. The filing attributes the sharp deterioration in results to COVID-19.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Total revenue | $1.464 billion | $5.305 billion | $6.145 billion | $10.317 billion |
| Operating income (loss) | $(154) million | $409 million | $(40) million | $919 million |
| Net income (loss) | $(234) million | $232 million | $(203) million | $607 million |
| Diluted earnings (loss) per share | $(0.72) | $0.69 | $(0.63) | $1.79 |
| Net cash from operating activities | Not stated separately | Not stated separately | $1.505 billion | $738 million |
- Q2 gross fee revenue fell 77% to $234 million; net fee revenue fell 78% to $213 million. First-half net fee revenue declined 56% to $817 million. Lower RevPAR and incentive fees were key drivers; co-brand card fees were also lower.
- Q2 cost-reimbursement revenue was $1.202 billion, with $1.241 billion of reimbursed expenses. These largely offsetting amounts materially affect reported total revenue.
- Worldwide comparable systemwide RevPAR declined 84.4% in Q2 and 55.3% in the first half year over year. Q2 worldwide systemwide occupancy was 18.2%, down 57.4 percentage points.
- At June 30, cash and equivalents were $2.283 billion; cash, cash equivalents, and restricted cash totaled $2.300 billion. Current assets were $4.113 billion and current liabilities $6.118 billion; the reported current ratio was 0.7 to 1.0.
- Total debt was $11.798 billion, including $1.665 billion current and $10.133 billion long-term, versus $10.940 billion at year-end 2019. Long-term debt had a 3.3% weighted-average interest rate and approximately 4.7-year weighted-average maturity. Shareholders’ equity was a deficit of $79 million.
- First-half operating cash flow rose to $1.505 billion from $738 million, supported in part by the $920 million co-brand card agreement cash prepayment, working-capital changes, and lower tax payments. Capital expenditures were $79 million.
Changes, outlook, and management actions
- COVID-19 drove a steep contraction in hotel demand and fees. Worldwide RevPAR fell 90% in April, 85% in May, and 78% in June versus the respective 2019 months; July’s decline was 70%. Management said recovery was slow and uneven, with no meaningful return in business and group demand.
- Management expected year-over-year declines to continue through the rest of 2020, said prior business levels would not return until at least after 2021, and expected COVID-19’s impact to remain material until at least beyond 2021. These are forward-looking expectations, not guarantees.
- Marriott expected 2020 net rooms growth of 2%–3% and full-year capital expenditures and other investments of approximately $400–$450 million. It reported 7,484 properties and about 510,000 rooms in the development pipeline at quarter-end.
- The company cut corporate and property-related costs, reduced investment spending, implemented furloughs and reduced work weeks, and suspended share repurchases and cash dividends. It paid a $0.48-per-share dividend in March; no further dividends or buybacks were anticipated until conditions improved, and credit-facility terms restricted them during the waiver period.
- Global above-property restructuring was expected to incur $125–$145 million of charges, primarily termination benefits, with substantial completion expected by year-end 2020. An August 6 plan for U.S. above-property positions was estimated at $115–$135 million; property-level restructuring charges were not included in those estimates.
- Marriott drew $4.5 billion under its credit facility in March and April, then repaid part, leaving $1.55 billion outstanding at June 30. The facility’s leverage covenant was waived through Q1 2021, subject to a monthly liquidity covenant and tighter restrictions, including on dividends, repurchases, asset sales, and discretionary capital spending. Marriott said it was in compliance and believed available liquidity was adequate.
- The company issued $1.6 billion of 5.75% notes due 2025 and $1.0 billion of 4.625% notes due 2030, and repurchased $853 million of notes due in 2022. In July, it redeemed $350 million of notes due October 2020. Commercial paper issuance had stopped amid market constraints and credit-rating changes.
Risks, contingencies, and unusual items
- COVID-19 risks include prolonged or renewed travel restrictions, weak travel and group demand, hotel-owner or franchisee distress and fee collection problems, closures or agreement terminations, impairment charges, additional guarantees or support, and restricted financing and development activity.
- Marriott recorded $105 million of first-half impairment charges on certain North American leased hotels. Credit-loss provisions were $123 million in the first half; the allowance for credit losses was $206 million at June 30.
- The Starwood data-security incident remains subject to lawsuits and government investigations. The U.K. ICO’s proposed fine was £99 million; Marriott’s recorded accrual was $65 million, unchanged from year-end. The company said additional losses were reasonably possible but could not estimate an amount or range beyond amounts already incurred.
- For the Starwood incident, first-half 2020 expenses were $18 million and accrued insurance recoveries were $20 million; $44 million of insurance recoveries were received in the first half. A separate incident involving potentially improper access to information for approximately 5.5 million guests was also disclosed.
- Guarantees had a maximum potential future funding amount of $277 million and a recorded liability of $142 million. A separate Sheraton Grand Chicago put option, exercisable in 2022, could require a $300 million purchase; its recorded liability was $57 million.
- The filing says the previously reported material weakness in internal control over financial reporting was remediated as of June 30, 2020. Disclosure controls were assessed as effective.
Investor verification priorities
- Track RevPAR, occupancy, hotel closures, and recovery in business and group travel against management’s outlook.
- Assess the quality and sustainability of operating cash flow, including the effect of the $920 million card-agreement prepayment, deferred revenue, and working-capital changes.
- Monitor debt maturities, borrowing costs, credit-facility liquidity and covenants, credit ratings, and restrictions on distributions and capital spending.
- Verify the timing and cash costs of restructuring and property-level plans, and whether credit losses, guarantees, or lease impairments increase.
- Follow the ICO proceeding, related litigation and investigations, insurance recoveries, and developments in the separate guest-data incident.
- Check whether expected room growth, pipeline openings, and capital spending remain achievable under market and financing conditions.