Marriott International, Inc. — Q1 2016 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2016, compared with Q1 2015. Marriott operates, franchises, and licenses lodging brands, generally managing or franchising rather than owning hotels. It reported 4,480 properties in 87 countries and territories at quarter-end.
Financial performance and key metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $3.772 billion | $3.513 billion | +7% |
| Management, franchise, and incentive fees | $480 million | $458 million | +5% |
| Operating income | $367 million | $332 million | +11% |
| Net income | $219 million | $207 million | +6% |
| Diluted EPS | $0.85 | $0.73 | +16% |
| Adjusted EBITDA (non-GAAP) | $458 million | $429 million | +7% |
| Operating cash flow | $333 million | $262 million | +$71 million |
- Reported revenue growth included a $247 million increase in cost reimbursements, which was matched by reimbursed costs. Fee growth reflected unit growth and stronger property performance; incentive management fees rose 13% to $101 million.
- Operating income increased partly because Q1 2015 included $12 million of EDITION impairment charges. Q1 2016 general and administrative expense included $8 million of Starwood transaction and transition costs.
- Comparable worldwide systemwide RevPAR rose 2.6% to $105.91, with ADR up 2.4% to $152.84 and occupancy up 0.1 percentage point to 69.3%. Company-operated house profit margins increased 70 basis points worldwide.
- Segment profits: North American Full-Service $185 million (+27%); North American Limited-Service $155 million (+3%); International $75 million (-3%).
Balance sheet, cash flow, and liquidity
- Cash and equivalents were $99 million at March 31, versus $96 million at year-end 2015. Current assets were $1.424 billion and current liabilities $3.247 billion; the current ratio was 0.4 to 1.
- Total debt was $4.159 billion, including $300 million current and $3.859 billion long-term. Commercial paper outstanding was $991 million. Debt was unsecured and recourse to Marriott; long-term debt had a 3.0% weighted-average interest rate and approximately four-year weighted-average maturity.
- Available borrowing capacity, including cash, was $1.108 billion. The $2.0 billion revolving credit facility supported commercial paper; Marriott expected to amend it to as much as $3.75 billion and extend its maturity to 2021.
- Cash from operations of $333 million was offset by $64 million of investing outflow and $266 million of financing outflow. The company repurchased $248 million of stock and paid $64 million in dividends. Dividends declared were $0.25 per share, up from $0.20.
- Shareholders’ deficit was $3.667 billion. The filing reports a 32.8% effective tax rate, compared with 32.4% in Q1 2015.
Material changes, outlook, and risks
- Marriott and Starwood amended their merger agreement in March. Starwood shareholders were to receive 0.80 Marriott shares and $21 cash per share. Both companies’ shareholders approved the combination on April 8, 2016; Marriott expected closing in mid-2016, subject to remaining customary conditions, regulatory approvals, and disposition or spin-off of Starwood’s vacation ownership business.
- Marriott obtained a commitment for a $3.5 billion, 364-day bridge facility and was pursuing alternative financing. The company cautioned that financing might not be available on acceptable terms. It expected to finance the cash consideration with a mix of variable- and fixed-rate debt.
- Management expected 2016 investment spending of approximately $450–$550 million, including about $100 million of maintenance capital spending, excluding additional Starwood-related investment. Expected Starwood transaction closing costs were $130–$150 million. Marriott said it would be more selective with share repurchases while managing post-combination debt.
- Business commentary was generally favorable, but demand faced headwinds from new supply, weak oil-and-gas demand, moderate GDP growth, weather, and currency movements. Middle East demand was weaker; Q1 group occupancy in North America was affected by Easter timing. U.S. group revenue pace for the remainder of 2016 was up 7% year over year as of March 31.
- Key exposures include merger execution, financing and integration risks; economic and geopolitical uncertainty; competition, including home-sharing services; foreign exchange; owner guarantee funding; legal and regulatory matters; cyber/privacy risks; and natural disasters or disease outbreaks. Primary-obligor guarantees had a $222 million maximum potential funding amount and a $60 million recorded liability. A separate $315 million Times Square EDITION purchase put option was disclosed; Marriott did not expect it to be exercised.
- Other unusual items: Q1 2016 included $12 million of costs to obtain the bridge commitment, of which $2 million was expensed as interest. The filing identifies ongoing Korea Fair Trade Commission fact-gathering; it reported no complaint or legal process received.
Important facts for investors to verify
- Progress and final terms of the Starwood transaction, remaining approvals, Vistana disposition, funding costs, and integration plans.
- Whether RevPAR and fee growth continue, especially given regional weakness and additions to hotel supply.
- Debt, commercial paper access, credit-facility amendment, and post-merger leverage; confirm the debt and commercial-paper movements against the underlying statements, as the MD&A debt discussion contains an internally inconsistent commercial-paper change description.
- Delivery of the $450–$550 million investment-spending outlook and the amount and timing of merger-related costs.
- Potential cash exposure from guarantees, the Times Square EDITION put option, impaired loans, and unresolved legal or regulatory matters.