Marriott International, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Financial statements are unaudited. Marriott operates, franchises, and licenses hotels across 85 countries and territories; its asset-light model relies primarily on management and franchise agreements.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $3.578bn | $3.460bn | $10.780bn | $10.237bn |
| Operating income | $339m | $298m | $1.040bn | $868m |
| Net income | $210m | $192m | $657m | $556m |
| Diluted EPS | $0.78 | $0.65 | $2.38 | $1.86 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $1.080bn | $950m |
Q3 revenue rose 3%, operating income 14%, net income 9%, and diluted EPS 20%. For the first nine months, revenue increased 5%, operating income 20%, net income 18%, and diluted EPS 28%. Lower share counts supported per-share growth: weighted average diluted shares for the nine months fell to 276.1m from 299.4m. Cost reimbursements, which are passed through without markup and do not affect operating or net income, were $2.884bn in Q3 and $8.635bn year to date; reported revenue growth therefore overstates growth in fee-generating revenue.
Comparable worldwide systemwide RevPAR increased 4.5% in Q3 and 5.6% year to date. For the nine months, average daily rate rose 4.3% and occupancy increased 0.9 percentage points to 74.9%. Comparable company-operated house profit margins expanded 50 basis points in Q3 and 80 basis points year to date. Conventional revenue margins are less informative because of the large pass-through reimbursement amounts.
Year-to-date segment profits were $424m for North American Full-Service, $510m for North American Limited-Service, and $203m for International. Limited-Service profit growth was strongest, up 15%; Full-Service rose 4% and International 1%.
Liquidity, debt, and capital allocation
- Cash and equivalents were $95m at September 30, 2015, versus $104m at year-end 2014. Current assets were $1.723bn and current liabilities $3.509bn; the reported current ratio was 0.5 to 1.0.
- Total debt was $4.304bn, up from $3.781bn at year-end. This included $803m of commercial paper and $615m current portion of long-term debt. Long-term debt had a 3.0% weighted average interest rate and approximately five-year weighted average maturity.
- Available borrowing capacity, including cash, was $1.292bn; the $2bn revolving credit facility had $1.197bn of unused capacity. The facility includes a maximum leverage covenant of 4 to 1; management reported compliance.
- Operating cash flow of $1.080bn and disposition proceeds of $612m helped fund $1.821bn of treasury-stock purchases, $189m of dividends, $218m of capital expenditures, and the Delta acquisition. Cash from financing activities was a $1.462bn outflow.
- Issued $800m face amount of Series O and P notes in Q3, due 2021 and 2025, respectively; net proceeds were approximately $790m. The board had 15.7m shares remaining under repurchase authorizations at quarter-end. Cash dividends declared were $0.25 per share in Q3.
Material changes and unusual items
- Franchise fees grew 12% in Q3 and 16% year to date, reflecting system growth and improved RevPAR; base management fees declined 4% in Q3, partly due to lower recognition of previously deferred fees.
- Interest expense rose to $43m in Q3 from $29m and to $121m year to date from $89m, mainly due to prior debt issuance, higher commercial-paper rates, and lower capitalized interest.
- Year-to-date gains and other income included a $41m gain on redemption of preferred equity; expected real-estate disposition losses totaled $22m. Adjusted EBITDA, a company-defined non-GAAP measure, was $431m in Q3 and $1.317bn year to date, versus $393m and $1.140bn, respectively.
- Acquired Delta Hotels and Resorts for approximately $136m in cash, adding 37 open hotels and 9,590 rooms. Marriott ended the quarter with 4,364 properties and 749,990 rooms, including more than 260,000 rooms in its development pipeline.
- Assets held for sale were $139m, with $12m of related liabilities; Marriott expected sales by early 2016. The company recorded disposal charges in the first half.
- Marriott corrected an immaterial historical share-based compensation tax-allocation error through a $25m reclassification between additional paid-in capital and retained earnings; it said prior financial statements were not materially affected.
Outlook, management commentary, and risks
Management expected gross room growth of approximately 7%–8% in 2015, including Delta, and net growth of approximately 6%–7%. It forecast full-year investment spending of $700m–$800m, including approximately $140m of maintenance capital spending. The group revenue pace for North American systemwide full-service hotels was more than 7% ahead for both Q4 2015 and full-year 2016, compared with the prior-year booking pace. Management cited favorable demand and generally low supply growth in the U.S. and Europe, while noting softer or constrained conditions in some markets.
Key risks include lodging cyclicality and new supply, foreign-exchange movements, geopolitical instability and weaker regional demand, hotel-owner financing and agreement termination, development and disposition execution, and cybersecurity and data-protection exposures. Marriott said its credit facility and access to capital markets, together with operating cash generation, were adequate for anticipated liquidity needs. It expected approximately $33m of cash tax benefits related to the 2011 timeshare spin-off during the remainder of 2015.
Contingencies include guarantees for which Marriott was primary obligor with a maximum potential funding amount of $139m and a recorded liability of $56m. An ERISA-related former-employee case was dismissed on summary judgment, but plaintiffs appealed; Marriott cross-appealed. A Korean Fair Trade Commission investigation involving Seoul hotels remained ongoing; Marriott reported no complaint or other legal process. The filing also describes a possible $315m hotel purchase obligation tied to the Times Square EDITION project, which Marriott said was not currently expected to be exercised.
Important facts for investors to verify
- How much earnings and EPS growth reflects recurring hotel fees and operating performance versus share repurchases and the nonrecurring preferred-equity gain.
- Whether RevPAR, room-growth, and group-booking trends persist, particularly given regional weakness, foreign-exchange effects, and new supply.
- Debt maturities, commercial-paper market access, revolver availability, and compliance with the 4-to-1 leverage covenant.
- Whether forecast investment spending and planned asset sales occur as expected, and whether held-for-sale assets require further losses.
- Potential exposure from guarantees, the Times Square EDITION purchase provision, the Korean investigation, and the pending appeal in the ERISA case.