Business context and reporting period
Marriott International, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2015. It operates, franchises and licenses hotels and related brands worldwide, generally under management and franchise agreements rather than ownership. At quarter-end, its system comprised 4,317 properties and 742,635 rooms in 81 countries and territories.
Financial results and key metrics
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Revenue | $3,689m | $3,484m | $7,202m | $6,777m |
| Operating income | $369m | $316m | $701m | $570m |
| Net income | $240m | $192m | $447m | $364m |
| Diluted EPS | $0.87 | $0.64 | $1.59 | $1.21 |
| Adjusted EBITDA (non-GAAP) | $457m | $408m | $886m | $747m |
- Revenue increased 6% in both the quarter and first half. Cost reimbursements were $2,953m and $5,751m, respectively; these are pass-through revenues and expenses with no reported operating-income or net-income impact.
- Worldwide systemwide comparable RevPAR rose 5.3% in Q2 and 6.0% in the first half. For the first half, occupancy increased 1.1 percentage points to 73.8%, and ADR increased 4.4% to $153.78.
- Company-operated house profit margins increased 70 basis points worldwide in Q2 and 100 basis points in the first half. Total segment profit rose to $388m in Q2 from $379m, and to $762m in the first half from $690m.
- Operating cash flow was $752m for the first half, versus $669m a year earlier. Investing activities provided $352m, compared with $183m used in the prior-year period, principally reflecting property-sale proceeds. Financing used $1,068m, including $1,107m of share repurchases and $124m of dividends.
- Cash was $140m at June 30, 2015. Debt totaled $3,917m, including $1,211m of commercial paper; $614m was classified as current. Available borrowing capacity, including cash, was $929m. The company reported a 0.5-to-1 current ratio and said it was complying with its credit-facility covenants.
- Cash dividends declared were $0.25 per share in Q2; first-half dividends declared totaled $0.45 per share.
Material changes versus the prior comparable period
- Net income rose 25% in Q2 and 23% in the first half; diluted EPS rose 36% and 31%, respectively. Lower weighted-average share counts, reflecting repurchases, also supported EPS growth.
- Growth in franchise, base management and incentive management fees reflected stronger RevPAR and system expansion. North American Limited-Service segment profit increased 19% in Q2 and 24% in the first half; International segment profit declined 23% in Q2 and 4% in the first half.
- Q2 gains and other income, net, were $20m, including a $41m gain on redemption of a preferred equity investment and expected disposal losses totaling $22m. Interest expense increased to $42m in Q2 and $78m in the first half, partly due to debt issuance, higher commercial-paper rates and lower capitalized interest.
- Debt increased $136m from year-end 2014, primarily due to higher commercial-paper borrowings. The company repurchased 14.6m shares for $1,107m in the first half.
- Marriott acquired the Delta Hotels and Resorts brand and related business for approximately $136m cash, adding 37 open hotels with 9,595 rooms. It also completed sales of two EDITION hotels during the first half.
Outlook, commentary, risks and unusual items
- Management described demand and pricing as favorable in many markets, citing low supply growth in the U.S. and Europe, stronger North American pricing and system growth. It expected gross room growth of approximately 8% in 2015, or approximately 7% net of deletions, and had a pipeline exceeding 250,000 rooms.
- Expected 2015 investment spending was approximately $600m–$800m, including about $140m for maintenance capital spending. No annual earnings or EPS guidance was provided in the supplied filing text.
- Management said cash from operations, capital-market access and the $2bn revolving credit facility should meet liquidity needs. It noted commercial-paper market access could weaken in a downturn, potentially increasing reliance on the credit facility.
- Reported results included $22m of expected losses on property disposals, the $41m preferred-equity redemption gain, and impairment charges recorded earlier in 2015 for EDITION-related assets. The first-half tax rate was 32.4%, versus 29.5% a year earlier, partly because 2014 included a favorable $21m tax issue resolution.
- Risks include lodging competition and new supply, economic and geopolitical weakness, currency movements, early termination of management or franchise contracts, owner funding guarantees, development and financing risks, cyber and privacy incidents, and natural disasters or disease outbreaks.
- Legal matters disclosed include an appeal in an employee equity-award case that Marriott had won at summary judgment, and a Korean Fair Trade Commission investigation concerning hotel-service pricing; Marriott said it was cooperating and had not received a complaint.
- The company stated disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- How much reported revenue growth and margin performance is attributable to underlying hotel fees and room demand rather than pass-through reimbursements, acquisitions or one-off items.
- Whether continued RevPAR growth, the development pipeline and expected 2015 room additions translate into recurring fee growth, particularly in weaker international markets.
- Debt maturities, commercial-paper refinancing access, borrowing capacity and the effect of higher rates on interest expense.
- The sustainability of large share repurchases and dividend increases relative to operating cash flow and planned investment spending.
- The eventual sale proceeds and additional charges, if any, for assets held for sale; and the resolution of the Korea investigation, tax examinations and other disclosed legal contingencies.