Marriott International, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. The comparable 2013 quarter included 93 days versus 90 days in 2014, so the periods are not identical. Marriott operates, franchises, and licenses lodging brands in 71 countries and territories; its model is predominantly management and franchising rather than property ownership.
Financial results
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $3.293 billion | $3.142 billion | Up 5% |
| Operating income | $254 million | $226 million | Up $28 million |
| Net income | $172 million | $136 million | Up $36 million |
| Diluted EPS | $0.57 | $0.43 | Up 33% |
| Operating cash flow | $182 million | $118 million | Up $64 million |
| Capital expenditures | $61 million | $70 million | Down $9 million |
- Revenue growth included $122 million more cost-reimbursement revenue, which is matched by reimbursed expenses and has no reported operating-income or net-income impact. Fee growth reflected stronger demand, higher RevPAR, system expansion, and increased international incentive fees.
- Operating income benefited from $16 million lower general, administrative, and other expenses, but included $11 million higher depreciation and amortization, primarily due to a $10 million impairment charge on three EDITION hotels.
- The effective tax rate was 25.5%, down from 32.3%. Q1 2014 included a $21 million favorable resolution of a U.S. federal tax issue, a benefit that should be treated as unusual rather than recurring.
- EBITDA was $314 million and adjusted EBITDA, excluding share-based compensation, was $339 million; respective 2013 figures were $273 million and $303 million. These are non-GAAP measures.
- Worldwide comparable systemwide RevPAR increased 6.2% to $103.72, with average daily rate up 3.2% and occupancy up 1.9 percentage points to 69.1%. Worldwide comparable company-operated house-profit margin rose 1.3 percentage points.
Balance sheet, cash flow, and capital allocation
- At March 31, cash and equivalents were $184 million, versus $126 million at year-end 2013. Current assets were $1.565 billion and current liabilities $2.596 billion; the current ratio was 0.6 to 1.0.
- Total debt was $3.302 billion, up $103 million from year-end, mainly due to a $150 million increase in commercial paper. Long-term debt was $3.295 billion. Commercial paper outstanding was $984 million at an average rate of 0.3%; the $2.0 billion revolving credit facility expires in July 2018.
- Marriott reported $1.199 billion of available borrowing capacity including cash, comprising $1.015 billion of remaining facility capacity and $184 million cash. Management said cash from operations, capital-market access, and the facility were adequate for anticipated requirements.
- Q1 investing cash flow was positive $42 million, including $292 million of disposition proceeds, partly offset by a $192 million Protea escrow deposit and $61 million capital expenditures. Financing used $166 million, including $320 million of treasury-stock purchases and $50 million of dividends.
- Marriott repurchased 7.0 million shares for $320 million at an average $50.79 per share; 32.3 million shares remained authorized for repurchase. The quarterly dividend declared was $0.17 per share, versus $0.13 in Q1 2013.
- Shareholders’ deficit was $1.625 billion. The filing attributes the negative balance in part to substantial treasury stock.
Material changes, outlook, and management commentary
- Segment reporting was reorganized around geographic regions. Q1 segment results were $131 million for North American Full-Service, $115 million for North American Limited-Service, and $65 million for International. International results rose 30%; North American Limited-Service rose 8%, while North American Full-Service declined 2%.
- Management cited a favorable demand environment, low supply growth in many U.S. and European markets, improved pricing, and system growth. Demand was uneven: weakness included France, Egypt, Thailand, and markets affected by Russia-Ukraine turmoil; strong demand was reported in several U.S., European, Middle Eastern, and Latin American markets.
- At quarter-end, the system had 3,934 properties and 679,321 rooms. The development pipeline exceeded 200,000 rooms, plus nearly 30,000 rooms approved but not yet under signed contracts. Management expected gross room growth of approximately 6% and net growth of approximately 5% in 2014.
- Management estimated full-year 2014 investment spending of approximately $800 million to $1 billion, including about $150 million for maintenance capital and $193 million for Protea. It also expected approximately $60 million of additional cash tax benefits during the remainder of 2014 from the timeshare spin-off; total expected benefits through 2015 were approximately $480 million.
- Protea Hotels’ brands and management business was acquired on April 1, 2014, after quarter-end, for $193 million in cash. The company had placed $192 million in escrow at March 31; the acquisition added more than 100 hotels and over 10,000 rooms across Sub-Saharan Africa.
- Marriott sold The London EDITION in Q1 for approximately $230 million and agreed to sell the Miami and New York EDITION hotels upon completion. Total expected proceeds for all three were approximately $816 million; Marriott retained long-term management agreements. The $10 million impairment reflected estimated development costs exceeding the fixed sales price.
- A new agreement provides lenders a put option to require Marriott to buy the hotel component of the Times Square EDITION project for $315 million following specified default and acceleration conditions. The option applies during the first two years after opening, with a possible extension; Marriott said it did not expect exercise.
Risks and contingencies
- Guarantees for which Marriott was primary obligor had a maximum potential funding amount of $499 million and a recorded liability of $41 million. The $315 million EDITION put option was the principal new exposure and was not yet in effect.
- Risks highlighted include lodging-industry competition and economic weakness, geopolitical instability and foreign-exchange exposure, new room supply, agreement termination or owner disputes, reliance on third-party owners and financing, development cost overruns, and cybersecurity, privacy, and technology risks.
- Marriott disclosed an ERISA-related lawsuit concerning deferred bonus stock awards; class certification was denied, but the case continued and the company could not estimate a potential loss. A Korean Fair Trade Commission investigation into hotel pricing remained ongoing; Marriott had not received a complaint or other legal process.
- Management stated that market-risk exposure had not materially changed, disclosure controls were effective, and there were no material Q1 changes in internal control over financial reporting.
Important facts for investors to verify
- Whether year-over-year earnings growth is sustainable after adjusting for the $21 million tax benefit, the $10 million impairment, and the unequal quarter lengths.
- Underlying fee and profit growth apart from pass-through cost reimbursements, including RevPAR, occupancy, pricing, and segment trends.
- Execution and funding of the Protea acquisition, 2014 investment-spending range, and expected room-growth targets.
- Debt refinancing and liquidity exposure, especially commercial-paper access, the facility’s covenant headroom, and the 2018 debt maturity concentration.
- Potential exposure under the $315 million EDITION put option, other guarantees, and the outcomes of disclosed legal and regulatory matters.