MARRIOTT INTERNATIONAL INC quarterly report, Q2 FY2020

Marriott International, Inc. — Q2 2020 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2020. Unaudited results. Marriott operates, franchises, and licenses hotels and related properties, primarily using an asset-light model. The filing attributes the sharp deterioration in results to COVID-19.

Financial performance and liquidity

Metric	Q2 2020	Q2 2019	First half 2020	First half 2019
Total revenue	$1.464 billion	$5.305 billion	$6.145 billion	$10.317 billion
Operating income (loss)	$(154) million	$409 million	$(40) million	$919 million
Net income (loss)	$(234) million	$232 million	$(203) million	$607 million
Diluted earnings (loss) per share	$(0.72)	$0.69	$(0.63)	$1.79
Net cash from operating activities	Not stated separately	Not stated separately	$1.505 billion	$738 million

Q2 gross fee revenue fell 77% to $234 million; net fee revenue fell 78% to $213 million. First-half net fee revenue declined 56% to $817 million. Lower RevPAR and incentive fees were key drivers; co-brand card fees were also lower.
Q2 cost-reimbursement revenue was $1.202 billion, with $1.241 billion of reimbursed expenses. These largely offsetting amounts materially affect reported total revenue.
Worldwide comparable systemwide RevPAR declined 84.4% in Q2 and 55.3% in the first half year over year. Q2 worldwide systemwide occupancy was 18.2%, down 57.4 percentage points.
At June 30, cash and equivalents were $2.283 billion; cash, cash equivalents, and restricted cash totaled $2.300 billion. Current assets were $4.113 billion and current liabilities $6.118 billion; the reported current ratio was 0.7 to 1.0.
Total debt was $11.798 billion, including $1.665 billion current and $10.133 billion long-term, versus $10.940 billion at year-end 2019. Long-term debt had a 3.3% weighted-average interest rate and approximately 4.7-year weighted-average maturity. Shareholders’ equity was a deficit of $79 million.
First-half operating cash flow rose to $1.505 billion from $738 million, supported in part by the $920 million co-brand card agreement cash prepayment, working-capital changes, and lower tax payments. Capital expenditures were $79 million.

Changes, outlook, and management actions

COVID-19 drove a steep contraction in hotel demand and fees. Worldwide RevPAR fell 90% in April, 85% in May, and 78% in June versus the respective 2019 months; July’s decline was 70%. Management said recovery was slow and uneven, with no meaningful return in business and group demand.
Management expected year-over-year declines to continue through the rest of 2020, said prior business levels would not return until at least after 2021, and expected COVID-19’s impact to remain material until at least beyond 2021. These are forward-looking expectations, not guarantees.
Marriott expected 2020 net rooms growth of 2%–3% and full-year capital expenditures and other investments of approximately $400–$450 million. It reported 7,484 properties and about 510,000 rooms in the development pipeline at quarter-end.
The company cut corporate and property-related costs, reduced investment spending, implemented furloughs and reduced work weeks, and suspended share repurchases and cash dividends. It paid a $0.48-per-share dividend in March; no further dividends or buybacks were anticipated until conditions improved, and credit-facility terms restricted them during the waiver period.
Global above-property restructuring was expected to incur $125–$145 million of charges, primarily termination benefits, with substantial completion expected by year-end 2020. An August 6 plan for U.S. above-property positions was estimated at $115–$135 million; property-level restructuring charges were not included in those estimates.
Marriott drew $4.5 billion under its credit facility in March and April, then repaid part, leaving $1.55 billion outstanding at June 30. The facility’s leverage covenant was waived through Q1 2021, subject to a monthly liquidity covenant and tighter restrictions, including on dividends, repurchases, asset sales, and discretionary capital spending. Marriott said it was in compliance and believed available liquidity was adequate.
The company issued $1.6 billion of 5.75% notes due 2025 and $1.0 billion of 4.625% notes due 2030, and repurchased $853 million of notes due in 2022. In July, it redeemed $350 million of notes due October 2020. Commercial paper issuance had stopped amid market constraints and credit-rating changes.

Risks, contingencies, and unusual items

COVID-19 risks include prolonged or renewed travel restrictions, weak travel and group demand, hotel-owner or franchisee distress and fee collection problems, closures or agreement terminations, impairment charges, additional guarantees or support, and restricted financing and development activity.
Marriott recorded $105 million of first-half impairment charges on certain North American leased hotels. Credit-loss provisions were $123 million in the first half; the allowance for credit losses was $206 million at June 30.
The Starwood data-security incident remains subject to lawsuits and government investigations. The U.K. ICO’s proposed fine was £99 million; Marriott’s recorded accrual was $65 million, unchanged from year-end. The company said additional losses were reasonably possible but could not estimate an amount or range beyond amounts already incurred.
For the Starwood incident, first-half 2020 expenses were $18 million and accrued insurance recoveries were $20 million; $44 million of insurance recoveries were received in the first half. A separate incident involving potentially improper access to information for approximately 5.5 million guests was also disclosed.
Guarantees had a maximum potential future funding amount of $277 million and a recorded liability of $142 million. A separate Sheraton Grand Chicago put option, exercisable in 2022, could require a $300 million purchase; its recorded liability was $57 million.
The filing says the previously reported material weakness in internal control over financial reporting was remediated as of June 30, 2020. Disclosure controls were assessed as effective.

Investor verification priorities

Track RevPAR, occupancy, hotel closures, and recovery in business and group travel against management’s outlook.
Assess the quality and sustainability of operating cash flow, including the effect of the $920 million card-agreement prepayment, deferred revenue, and working-capital changes.
Monitor debt maturities, borrowing costs, credit-facility liquidity and covenants, credit ratings, and restrictions on distributions and capital spending.
Verify the timing and cash costs of restructuring and property-level plans, and whether credit losses, guarantees, or lease impairments increase.
Follow the ICO proceeding, related litigation and investigations, insurance recoveries, and developments in the separate guest-data incident.
Check whether expected room growth, pipeline openings, and capital spending remain achievable under market and financing conditions.