Marriott International, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. Financial statements are unaudited. Comparisons are with the corresponding 2016 periods. Marriott completed its Starwood acquisition on September 23, 2016, so 2017 results include substantially more Starwood operations than 2016 results.
Business context
Marriott operates, franchises, and licenses lodging brands, generally managing or franchising hotels rather than owning them. At quarter-end, it reported 6,401 properties and 1,239,221 rooms across 126 countries and territories, with 30 brands. Its four reporting segments are North American Full-Service, North American Limited-Service, Asia Pacific, and Other International.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $5,663m | $3,942m | $17,019m | $11,616m |
| Operating income | $632m | $171m | $1,789m | $927m |
| Net income | $392m | $70m | $1,171m | $536m |
| Diluted EPS | $1.04 | $0.26 | $3.06 | $2.04 |
| Operating cash flow | Not separately provided | Not separately provided | $1,916m | $1,206m |
Revenue growth primarily reflects the Starwood Combination. Cost-reimbursement revenue rose 39% in Q3 and 41% year to date, but was matched by reimbursed costs; it does not represent equivalent incremental profit. Merger-related costs and charges were $28m in Q3 and $100m for nine months, down from $228m and $250m, respectively, in 2016.
Comparable worldwide systemwide RevPAR increased 2.1% in Q3 and 2.6% for nine months. Nine-month comparable company-operated house-profit margins improved 70 basis points worldwide (20 basis points in North America and 130 basis points internationally). These comparable statistics include Legacy-Starwood properties in both periods, although 2016 reported results include Starwood only after the merger date.
Balance sheet, liquidity, and capital allocation
- At September 30, 2017, cash and equivalents were $508m; total debt was $8,669m, including $2,791m of commercial paper. Long-term debt excluding current maturities was $8,271m.
- Available borrowing capacity was reported as $1,715m, including $1,207m under the $4.0bn revolving credit facility and $508m of cash. The company said it was in compliance with its covenants, including a maximum leverage ratio of 4:1.
- The current ratio was 0.5:1. Management said operating cash generation, capital-market access, and the credit facility were adequate for anticipated requirements. Long-term debt had a 2.8% weighted-average interest rate and approximately 5.2-year weighted-average maturity.
- Nine-month investing cash flow was positive $190m, including $482m of disposition proceeds; financing cash flow was negative $2,456m, including $2,105m of treasury-stock purchases and $362m of dividends. Cash declined $350m from year-end 2016.
- Full-year 2017 consolidated investment spending was expected to be approximately $550m–$650m, including about $175m of maintenance capital spending. The company repurchased 7.8m shares in Q3; 9.6m shares remained authorized for repurchase at quarter-end.
Outlook, commentary, and risks
- Management cited favorable demand in many markets, slow but steady economic growth, system expansion, and cost control. The development pipeline comprised about 450,000 rooms, more than half outside North America.
- Regional conditions varied: North American growth faced new supply and moderate GDP growth; Middle East and Africa demand was affected by geopolitical instability, Qatar sanctions, and lower oil prices. Hurricanes caused hotel closures and damage in the Caribbean and affected demand patterns in the United States.
- Management expected substantial increases in property-insurance costs in 2018 and possibly later years following the 2017 hurricane season. The filing does not provide a specific earnings or RevPAR forecast.
- Marriott was assessing regulatory compliance matters at several foreign Legacy-Starwood locations, including potential FCPA issues. Any resulting contingencies were not estimable at filing time. Recorded guarantee liabilities totaled $138m; maximum potential future guarantee funding was $394m. Certain hotel-related contingent purchase obligations also remain.
- Key risks include Starwood integration costs and execution, competition including home-sharing services, economic and geopolitical uncertainty, natural disasters, foreign-exchange exposure, cybersecurity and reservation-system disruption, and potential impairment of goodwill and intangibles. Goodwill and other intangible assets totaled about $17.9bn.
- After quarter-end, Marriott disclosed a binding agreement to sell its 55% interest in Avendra for approximately $650m; the company said its share of proceeds above its original investment would be used for the benefit of hotels in its system.
Most important facts for investors to verify
- How much of reported growth and earnings reflects the Starwood acquisition versus underlying legacy-business performance, given the non-comparable periods.
- Whether integration benefits can be realized without additional costs, system disruption, or material compliance contingencies.
- Commercial-paper refinancing access, leverage covenant headroom, and liquidity after substantial buybacks and dividends.
- Actual investment spending versus the $550m–$650m outlook, and the timing and use of Avendra sale proceeds.
- Exposure to hurricane-related property damage, insurance-cost increases, and the adequacy of recorded guarantees and other contingencies.