Marriott International, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited results; dollar amounts below are in millions unless stated otherwise. Marriott operates and franchises hotels across 134 countries and territories and 30 brands, primarily under an asset-light model. The 2018 comparable figures were revised for previously identified Loyalty Program accounting errors.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $5,284 | $5,051 | $15,601 | $15,469 |
| Net fee revenue | $939 | $919 | $2,804 | $2,684 |
| Operating income | $607 | $596 | $1,526 | $1,944 |
| Net income | $387 | $503 | $994 | $1,590 |
| Diluted EPS | $1.16 | $1.43 | $2.95 | $4.45 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $1,190 | $1,824 |
- Q3 revenue rose 5%, while net income fell 23%. Nine-month revenue rose 1%, while net income fell 37%. Lower prior-year gains from asset and equity-investment sales, higher interest expense, and the 2019 data-incident accrual were among the factors affecting comparisons.
- Q3 gross fee revenue increased 2%; base management fees rose 4% and franchise fees 6%, while incentive management fees fell 11%. For nine months, gross fee revenue increased 4%.
- Comparable systemwide RevPAR increased 1.5% in Q3 and 1.3% for the first nine months. Q3 worldwide occupancy was 76.3%, up 0.6 percentage points; ADR was $160.02, up 0.7% on a constant-dollar basis.
- Company-operated house-profit margins for the first nine months declined 30 basis points in North America, primarily due to wage increases, and increased 10 basis points internationally.
- Nine-month cash from operations was $1,190, down from $1,824. Capital expenditures were $235, compared with $462 in 2018. Cash, cash equivalents and restricted cash totaled $300 at September 30; balance-sheet cash and equivalents were $276.
- Total debt was $10,779, up $1,432 from year-end 2018; long-term debt excluding current maturities was $10,552. Interest expense for nine months rose to $299 from $246. The current ratio was 0.5 to 1.0.
Liquidity, outlook and significant developments
- Available borrowing capacity was reported as $1,344, comprising $1,068 under the $4.5 billion revolving credit facility and $276 of cash. The facility matures June 28, 2024; Marriott reported compliance with its covenants, including a maximum leverage covenant of 4:1.
- Management expects full-year 2019 capital expenditures and other investments of approximately $1.0–$1.1 billion, including about $225 million of maintenance capital spending. This estimate includes acquisitions, contract acquisition costs, investments and other capital needs. The filing provides no earnings or RevPAR guidance.
- Marriott accrued $122 for the UK Information Commissioner’s Office’s proposed £99 million fine related to the Starwood data security incident. The fine was not final as of the filing; Marriott disputed it. The company recorded $198 of incident-related expenses and $77 of accrued insurance recoveries for the first nine months, and said additional losses could not be reasonably estimated.
- Management said it had not seen a meaningful demand impact from the incident and did not believe it would affect long-term financial health, but expected significant future legal, regulatory, cybersecurity and compliance costs; insurance may not cover all losses.
- Marriott added 343 properties (52,743 rooms) and had nearly 495,000 rooms in its development pipeline at quarter-end. Subsequent to quarter-end, it purchased W New York–Union Square for $206, sold The St. Regis New York for $310 while retaining a long-term management agreement, and announced a proposed acquisition of Elegant Hotels, subject to conditions.
- Adoption of lease accounting in 2019 added operating lease assets and liabilities to the balance sheet; Marriott said adoption did not affect income or cash flows. It recorded $955 of operating lease assets and $868 of operating lease liabilities at September 30.
Risks and controls
- Disclosure controls were deemed ineffective because of a previously reported material weakness related to Loyalty Program accounting. Remediation was ongoing, and management did not expect the weakness to be fully remediated by December 31, 2019.
- Other key risks include data-incident litigation and investigations, cybersecurity and privacy exposure, competition and new lodging supply, economic and geopolitical conditions, labor costs and disputes, foreign exchange, and dependence on hotel owners and franchisees.
- The company reported $447 of future Transition Tax payments under the 2017 Tax Act. It also disclosed a $300 Sheraton Grand Chicago put option exercisable in 2022, with a recorded liability of $57.
Most important facts for investors to verify
- Final outcome and total cost of the proposed ICO fine, related litigation and investigations, and the adequacy and collectability of insurance recoveries.
- Progress and testing results for remediation of the Loyalty Program-related material weakness and implications for confidence in reported results.
- Drivers of reduced operating cash flow and earnings, including Loyalty Program estimates, merger-related charges, interest expense and the prior-year gains that did not recur.
- Debt and refinancing exposure, commercial-paper market access, available credit-facility capacity, and planned capital allocation.
- Whether room-pipeline growth converts into openings and fee growth, and whether RevPAR and property-level margins withstand labor costs, market supply and regional demand pressures.