Marriott International, Inc. — Q1 2018 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2018, compared with the three months ended March 31, 2017. Marriott operates, franchises, and licenses lodging brands globally, with an asset-light strategy focused primarily on management and franchise agreements. 2017 comparative results were recast for adoption of the new revenue recognition standard.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $5,006 million | $4,912 million | +2% |
| Net fee revenue | $827 million | $748 million | +11% |
| Operating income | $500 million | $546 million | -8% |
| Net income | $398 million | $371 million | +7% |
| Diluted EPS | $1.09 | $0.95 | +15% |
| Operating cash flow | $675 million | $462 million | +$213 million |
- Revenue growth was led by franchise fees (+17%), including higher co-brand credit card fees and room growth, and incentive management fees (+11%). Cost-reimbursement revenue is largely offset by reimbursed expenses; these were $3,773 million and $3,835 million, respectively, in Q1 2018.
- Operating income declined despite higher fees. General and administrative expense rose $35 million; merger-related costs fell $17 million. The results included $59 million of gains and other income, primarily a $53 million gain on selling two Buenos Aires hotels. Interest expense rose $5 million.
- The effective tax rate fell to 20.8% from 25.0%, contributing to higher net income. The filing cites the lower U.S. federal rate, release of tax reserves, and other items, partly offset by taxes on legacy-Starwood positions and the property-sale gain.
- Worldwide systemwide comparable RevPAR rose 3.6% to $111.55, with ADR up 1.5% to $159.92 and occupancy up 1.4 percentage points to 69.8%. Worldwide company-operated house-profit margin increased 70 basis points; North American margin declined 10 basis points.
- Segment profits: North American Full-Service $277 million (down 8%); North American Limited-Service $182 million (down 3%); Asia Pacific $112 million (up 19%). Other International segment profit was $159 million, versus $118 million.
- Cash and equivalents were $701 million at quarter-end; cash, cash equivalents, and restricted cash totaled $743 million. Capital expenditures were $64 million. Cash used for treasury stock purchases was $815 million and dividends paid were $118 million.
- Total debt was $8,846 million, including $2,998 million of commercial paper; $988 million was classified as current. Long-term debt was $7,858 million. Marriott reported a $4.0 billion revolving credit facility, with $995 million of borrowing capacity and $1,696 million of stated total available borrowing capacity including cash.
Changes, outlook, and key matters
- The system reached 6,591 properties and 1,266,128 rooms. Marriott added 100 properties in the quarter and reported nearly 465,000 rooms in its development pipeline.
- Management expected 2018 capital expenditures and other investments of approximately $600–$700 million, including about $225 million of maintenance capital spending. No specific earnings or RevPAR guidance is provided in the filing.
- Management said demand and economic growth supported Q1 results, while market-level new supply, slower U.K. growth, geopolitical instability, and hurricane-related disruption constrained some markets. The company stated that it expected the Tax Act’s overall effect on future results to be positive, but had not completed its analysis.
- The provisional federal and state Transition Tax estimate was $740 million after a $5 million Q1 benefit; Marriott also recorded $27 million of state tax expense related to planned future remittances of foreign earnings. Estimates could change as analysis and regulatory guidance develop.
- Guarantees had a maximum potential future funding amount of $373 million and a recorded liability of $186 million. A Sheraton Grand Chicago put option exercisable in 2022 carried a $57 million recorded liability. Marriott reported no reserve requirement from its assessment of certain legacy-Starwood compliance matters.
- Marriott said adoption of the new lease standard in 2019 was expected to materially affect the balance sheet. It also identified continuing Starwood integration, competition, labor costs and negotiations, cybersecurity and privacy, international and currency exposure, and demand disruptions as risks.
- In the second quarter, after quarter-end, Marriott issued $450 million of 4.000% notes due 2028, receiving approximately $443 million net proceeds; the Times Square EDITION owner’s sale also terminated Marriott’s contingent purchase agreement.
Important facts for investors to verify
- Whether fee growth and RevPAR gains persist, particularly given declining North American segment profits and operating income.
- How much of the increase in operating cash flow reflects sustainable operations versus timing and the $325 million increase in the guest-loyalty-program liability.
- Commercial-paper refinancing exposure, upcoming debt maturities, and continued access to the revolving facility and capital markets.
- Final Tax Act effects, including the Transition Tax estimate, GILTI, state taxes, and legacy-Starwood uncertain tax positions.
- Potential effects of loyalty-program accounting estimates and timing differences in reimbursements on reported revenue and margins.
- Execution of the development pipeline and Starwood integration, alongside labor, cybersecurity, insurance, geopolitical, and other lodging-demand risks.