Marriott International, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Amounts are in U.S. dollars. Marriott operates and franchises hotels, primarily through an asset-light model. Results were sharply affected by the COVID-19 pandemic, particularly as travel restrictions and cancellations intensified in March.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Total revenue | $4.681 billion | $5.012 billion | Down 7%; includes largely reimbursed hotel-owner costs |
| Net fee revenue | $604 million | $881 million | Down 31%; no incentive management fees recognized versus $163 million last year |
| Operating income | $114 million | $510 million | Down 78%; approximate operating margin 2.4% versus 10.2% |
| Net income | $31 million | $375 million | Down 92% |
| Diluted EPS | $0.09 | $1.09 | Down 92% |
| Operating cash flow | $514 million | $151 million | Increase included favorable working-capital movements |
| Capital expenditures | $59 million | $66 million | Lower year over year |
Owned, leased and other revenue less direct expenses was $8 million, compared with $50 million a year earlier. Higher depreciation and amortization included $90 million of impairment charges related to COVID-affected North American hotel leases and related property assets. General and administrative expense rose to $270 million, including increased credit-loss and guarantee reserves. Marriott recorded a $12 million income-tax benefit, versus $57 million of tax expense in Q1 2019.
Liquidity, debt and balance sheet
- Cash and equivalents were $1.760 billion at March 31, up from $225 million at year-end 2019. Cash, cash equivalents and restricted cash totaled $1.782 billion.
- Total debt was $12.233 billion, including $1.664 billion current and $10.569 billion long-term, compared with $10.940 billion at year-end. The company drew $2.5 billion under its revolving credit facility in March.
- In April, Marriott drew another $2.0 billion, fully drawing the $4.5 billion facility; it repaid $1.25 billion on May 1, leaving $3.25 billion outstanding. It also issued $1.6 billion of 5.75% notes due 2025, receiving approximately $1.581 billion net proceeds.
- In April, the credit facility amendment waived the leverage covenant through Q1 2021, subject to a new monthly liquidity covenant and tighter restrictions, including on dividends, repurchases, asset sales and discretionary spending. Marriott reported it was meeting applicable covenants.
- In May, amendments to U.S. co-brand credit-card agreements generated $920 million in cash, recorded as deferred revenue and loyalty-program liabilities.
- The current ratio was 0.6 to 1.0. The company said cash, its credit facility and capital-market access remained adequate for liquidity needs, while noting operating cash flow was expected to remain pressured.
Material changes and operating trends
- Worldwide comparable systemwide RevPAR fell 22.5% for the quarter; occupancy declined 14.5 percentage points and ADR fell 1.5%. Regional RevPAR declines included 19.5% in North America, 41.5% in Asia Pacific and 22.9% in EMEA.
- Marriott reported worldwide RevPAR down approximately 60% in March and 90% in April year over year. As of May 8, approximately 25% of its hotels were temporarily closed. Greater China showed improving occupancy into April, while other regions remained at low levels.
- At quarter-end, the system comprised 7,420 properties and 1,391,700 rooms, with nearly 516,000 rooms in the development pipeline. The company expected COVID-19 to reduce 2020 room openings significantly.
- Franchise fees declined 8%, partly offset by $15 million from unit growth. Base management fees fell 24%; incentive fees were nil due to uncertainty about full-year hotel performance.
Outlook, actions and risks
- Management expected a greater revenue decline in Q2 than Q1 and said the pandemic’s financial impact could be material for an unpredictable duration. No specific earnings or revenue guidance was provided.
- Cost actions reduced the corporate G&A monthly run rate by about 30% versus the initial 2020 budget, excluding bad-debt expense. Marriott estimated centralized, system-funded reimbursed expenses could be reduced by about two-thirds versus budget.
- The company expected to eliminate or defer approximately 45% of its original $700–$800 million 2020 investment-spending plan. Share repurchases and dividends were suspended; the Q1 dividend of $0.48 per share had already been paid.
- Major uncertainties include the pandemic’s duration and any resurgence, travel recovery, hotel-owner and franchisee solvency, potential hotel exits, financing availability, impairment risk, and additional guarantee funding. Management also warned that loan defaults and delayed development could affect fees and growth.
- The Starwood data-security matter remained subject to lawsuits and government investigations. The U.K. regulator had proposed a £99 million fine; Marriott’s recorded accrual was $65 million, and the company could not estimate additional potential losses. A separate incident involving possible access to information for up to approximately 5.2 million guests was also disclosed.
- Disclosure controls were judged ineffective because of a previously reported material weakness in internal control related to loyalty-program accounting. Remediation was ongoing.
Investor verification checklist
- Track RevPAR, occupancy, hotel closures and reopening trends by region, alongside the pace of travel and group-booking recovery.
- Reconcile post-quarter liquidity actions, including credit-facility balances, note proceeds, credit-card cash advances, covenant compliance and debt maturities.
- Assess the cash-flow effects of owner/franchisee distress, receivable allowances, guarantee reserves and potential hotel departures.
- Monitor actual spending reductions, deferred investment and the effect on the development pipeline and room openings.
- Follow outcomes and accrual adequacy for the Starwood incident, the newer guest-data incident and other regulatory or litigation matters.
- Review progress in remediating the loyalty-program accounting material weakness and any subsequent assessment of disclosure controls.