Marriott International, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless stated otherwise. Unaudited. Marriott operates, franchises, and licenses lodging brands in 131 countries and territories, primarily under an asset-light model.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $5.012 billion | $5.009 billion | Approximately flat |
| Net fee revenue | $881 million | $827 million | +7% |
| Operating income | $510 million | $530 million | -4% |
| Net income | $375 million | $420 million | -11% |
| Diluted EPS | $1.09 | $1.16 | -6% |
| Operating cash flow | $151 million | $675 million | Down $524 million |
| Capital expenditures | $66 million | $64 million | +$2 million |
Total revenue was nearly unchanged because cost-reimbursement revenue declined slightly; this largely pass-through revenue is offset by reimbursed expenses. Net fee revenue grew on unit growth and higher franchise, management, and incentive fees. Operating income and net income fell, with lower property-sale gains and higher interest expense partly offset by lower merger-related and general and administrative expenses. The effective tax rate was 13.2%, versus 21.1%, mainly reflecting prior-year tax items and a greater share of earnings in lower-tax jurisdictions. Derived operating margin was approximately 10.2%, compared with 10.6%.
Comparable worldwide systemwide RevPAR increased 1.1% to $110.16; ADR rose 1.5% to $160.24, while occupancy decreased 0.3 percentage points to 68.7%. North American comparable systemwide RevPAR rose 0.8%; Asia Pacific rose 3.3%, while Middle East and Africa declined 3.7%. Segment profit increased 4% in North American Full-Service and 11% in North American Limited-Service, and decreased 8% in Asia Pacific. North American company-operated comparable house-profit margin improved 30 basis points; international margin declined 30 basis points.
Liquidity, debt, and balance sheet
Cash and equivalents were $258 million at March 31, 2019; cash, cash equivalents, and restricted cash totaled $300 million, down $60 million from year-end. Operating cash flow was pressured by a $401 million working-capital outflow, principally timing of payroll and retirement-plan payments. The filing attributes the year-over-year cash-flow decline largely to working capital and other operating cash-flow movements.
Total debt was $10.256 billion, up $909 million from December 31, 2018; long-term debt was $10.025 billion and current debt was $231 million. The increase reflected new notes and higher commercial paper borrowings, partly offset by repayment of maturing notes. Marriott issued $300 million of floating-rate Series BB Notes and $550 million of 3.6% Series CC Notes. Long-term debt carried a 3.3% weighted-average interest rate and approximately 4.4-year weighted-average maturity. The current ratio was 0.5 to 1.0.
Available borrowing capacity was reported as $1.340 billion, including $1.082 billion under the $4 billion revolving credit facility and $258 million cash. Marriott said it met its credit-facility covenants, including the maximum 4-to-1 leverage covenant, and believed cash generation, capital-market access, and committed facilities would meet expected liquidity needs. The facility expires June 10, 2021.
Adoption of lease accounting in Q1 added operating lease assets and liabilities; at March 31, operating lease assets were $979 million and operating lease liabilities were $1.020 billion. Adoption did not affect income statements or cash flows. Marriott reported total minimum operating lease payments of $1.343 billion, before discounting.
Material changes, outlook, and risks
- Marriott expects 2019 capital expenditures and other investments of approximately $600 million to $800 million, including approximately $225 million of maintenance capital spending. No full-year earnings or RevPAR guidance is provided in the supplied filing text.
- System growth continued: 114 properties and 18,842 rooms were added in Q1, while 15 properties and 2,693 rooms exited. The system totaled 7,003 properties and 1,332,826 rooms; the development pipeline was approximately 475,000 rooms.
- Marriott accelerated its option to acquire a partner’s remaining interests in two joint ventures, recording a $156 million AC Hotels by Marriott brand asset and $34 million of management and franchise contract assets.
- The Starwood reservations database data-security incident remains a significant uncertainty. Marriott recorded $44 million of incident expenses and $46 million of accrued insurance recoveries in Q1. Approximately 100 related consumer and other lawsuits, a securities class action, shareholder derivative actions, and government investigations were disclosed. Marriott said it could not estimate the possible total financial impact and expects further costs; insurance may not cover all losses, and cyber-insurance costs are expected to rise. The company reported no meaningful demand impact to date.
- Disclosure controls were considered ineffective due to a previously reported material weakness in Loyalty Program accounting. Marriott was implementing remediation; the weakness would be considered remediated only after controls operate effectively for a sufficient period and testing supports that conclusion. The 2018 comparative information had been revised for Loyalty Program accounting errors.
- Other risks include lodging competition and economic or geopolitical weakness, new hotel supply, labor costs and disputes, foreign-exchange exposure, owner financing and contract termination risks, and potential impairment of substantial goodwill and intangible assets.
- Marriott reported a $57 million liability for the Sheraton Grand Chicago put option, exercisable in 2022, which could require a $300 million purchase. It also disclosed $320 million of maximum potential future fundings on specified guarantees, with $114 million of recorded guarantee liabilities.
Most important facts for investors to verify
- Whether the Loyalty Program accounting material weakness has been remediated and whether subsequent reporting remains reliable.
- The ultimate legal, regulatory, insurance, remediation, and cybersecurity costs associated with the Starwood data-security incident.
- Debt and commercial-paper levels, refinancing access, covenant headroom, and the stated $1.340 billion of available borrowing capacity.
- Whether RevPAR, occupancy, and fee growth continue, particularly given weaker North American limited-service occupancy and Middle East and Africa performance.
- Delivery of the approximately 475,000-room pipeline and execution of the $600 million to $800 million 2019 investment plan.
- Cash generation after working-capital timing effects, share repurchases, dividends, and debt financing.