Marriott International, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. Marriott’s 2014 fiscal year had 365 days, three fewer than 2013’s 368 days. The filing also reports unaudited fourth-quarter results. Unless noted, amounts are in U.S. dollars.
Business context
Marriott operates, franchises and licenses hotels and related properties across numerous brands. Its asset-light model relies primarily on management and franchise agreements; at year-end, it owned or leased only about 2% of system rooms. The system comprised 4,175 properties and 714,765 rooms in 79 countries and territories. Marriott reported North American Full-Service, North American Limited-Service and International segments. Cost reimbursements largely pass through property payroll and other costs without markup and have no effect on operating or net income.
Financial performance and key metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Revenue | $13.796 billion | $12.784 billion | +8% |
| Operating income | $1.159 billion | $988 million | +$171 million |
| Net income | $753 million | $626 million | +20% |
| Diluted EPS | $2.54 | $2.00 | +27% |
| Cash from operations | $1.224 billion | $1.140 billion | +$84 million |
| Capital expenditures | $411 million | $296 million | +$115 million |
| Total debt at year-end | $3.781 billion | $3.199 billion | +$582 million |
Revenue growth reflected higher cost reimbursements (+$764 million), franchise fees (+$79 million), base management fees (+$51 million) and incentive management fees (+$46 million). Operating income growth was led by fee increases; reported revenue includes reimbursements that offset related expenses. Worldwide comparable systemwide RevPAR rose 6.6% to $110.09, with ADR up 3.7% to $150.23 and occupancy up 2.0 percentage points to 73.3%. Comparable company-operated house profit margin increased 120 basis points worldwide.
Segment profits were $1.393 billion, up from $1.197 billion: North American Full-Service $524 million; North American Limited-Service $574 million; and International $295 million. The company reported adjusted EBITDA of $1.524 billion, versus $1.325 billion in 2013; this non-GAAP measure excludes the EDITION impairment and share-based compensation.
Liquidity, debt and capital allocation
Year-end cash was $104 million. Available borrowing capacity, including cash, was $1.032 billion: $928 million of unused Credit Facility capacity plus cash. The $2.0 billion revolving facility expires in July 2018 and includes a maximum leverage covenant of 4-to-1; Marriott reported compliance. Current assets divided by current liabilities were 0.6-to-1.0, compared with 0.7-to-1.0 in 2013.
Debt included $1.072 billion of commercial paper and $3.457 billion of long-term debt, including a $324 million current portion. Long-term debt averaged 3.0% interest and approximately 4.6 years to maturity; 70% was fixed-rate. The company issued $400 million face value of 3.1% Series N Notes due 2021 in 2014. Operating cash flow exceeded capital expenditures by $813 million, before other investing, financing and shareholder-return activities.
Marriott repurchased 24.2 million shares for $1.510 billion in cash during 2014 and paid $223 million in dividends. Contractual obligations totaled $5.564 billion, including debt principal and interest, leases, purchase obligations and other liabilities. Guarantee commitments totaled $276 million; separate primary-obligor guarantees had a recorded liability of $55 million. Marriott expected 2015 investment spending of approximately $600–$800 million.
Material changes, outlook and unusual items
- Net income increased by $127 million. Higher operating fees, joint venture earnings and interest income contributed; higher taxes (+$64 million), depreciation and other expense (+$21 million), and general and administrative expense (+$10 million) partly offset growth.
- Marriott recorded a $25 million net impairment charge related to three EDITION hotels after estimated costs exceeded fixed sale prices. It sold The London EDITION in 2014 and sold The Miami Beach EDITION in early 2015; it expected to sell the New York EDITION in the first half of 2015. Marriott retained long-term management agreements for the hotels.
- The 2014 second-quarter acquisition of Protea Hotels added 113 hotels and 10,016 rooms to the portfolio. Marriott announced a proposed acquisition of Delta Hotels for approximately C$168 million, expected to close in the second quarter of 2015 subject to approvals and other conditions.
- Management expected gross room count to grow approximately 7% in 2015. The year-end development pipeline comprised nearly 240,000 rooms, including nearly 30,000 approved but not yet under signed contracts. Pipeline openings depend on owners’ access to financing and approvals, among other factors.
- Business commentary cited generally favorable demand and low supply growth in many markets. Risks included weaker conditions in parts of Europe and Asia, geopolitical and political disruption, currency movements, new hotel supply, and U.S. government travel spending. New York supply constrained rate growth; demand was weak in parts of France, Eastern Europe, Greater China, Malaysia and Thailand.
- Material risks also include competition, early termination of management or franchise agreements, owner financing difficulties, performance guarantees and loan exposure, development cost overruns, data and cybersecurity incidents, online travel intermediaries, litigation, and uninsurable property losses. Marriott disclosed a continuing Korea Fair Trade Commission investigation; former employees’ class action was dismissed, with an appeal filed.
- The 2011 timeshare spin-off was expected to generate about $480 million of cash tax benefits through 2015; $447 million had been realized through 2014, with approximately $33 million expected in 2015.
Most important facts for investors to verify
- Whether RevPAR, occupancy and room-rate growth persist, especially across regions with weaker demand or new supply.
- Whether the room pipeline converts into opened properties on schedule, and whether the Delta acquisition closes on expected terms.
- Final sale proceeds and any additional development costs or impairments for the EDITION properties.
- Debt refinancing needs, commercial-paper market access, leverage-covenant headroom and the effect of planned investment and share repurchases on liquidity.
- Recoverability of hotel-owner loans and guarantees, and estimates underlying the $2.334 billion guest loyalty program liability; a 10% reduction in estimated point breakage would increase the liability by $142 million.
- Exposure to foreign exchange, taxes, legal proceedings, cybersecurity risks and the concentration of Host Hotels-related revenue.