Marriott International, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Unaudited results; first-half 2014 had three fewer days than the comparable 2013 period. Marriott operates, franchises, and licenses lodging properties, with 4,087 properties and 696,926 rooms at quarter-end; 42% of rooms were managed, 55% franchised, and 2% owned or leased.
Financial performance
| Metric | Q2 2014 | Q2 2013 | H1 2014 | H1 2013 |
|---|---|---|---|---|
| Revenue | $3.484bn | $3.263bn | $6.777bn | $6.405bn |
| Operating income | $316m | $279m | $570m | $505m |
| Net income | $192m | $179m | $364m | $315m |
| Diluted EPS | $0.64 | $0.57 | $1.21 | $0.99 |
| Operating margin, calculated on reported revenue | 9.1% | 8.6% | 8.4% | 7.9% |
| Adjusted EBITDA | $408m | $372m | $747m | $675m |
Revenue rose 7% in Q2 and 6% in H1; net income increased 7% and 16%, respectively. Reported revenue includes cost reimbursements ($2.763bn in Q2; $5.433bn in H1) matched by reimbursed expenses, with no impact on operating or net income. Fee growth reflected stronger RevPAR, added properties, and higher incentive fees. Worldwide comparable systemwide RevPAR increased 5.8% in Q2 and 5.9% in H1. Company-operated house-profit margins improved 0.8 percentage points in Q2 and 1.0 point in H1.
Cash flow and liquidity: H1 operating cash flow was $669m versus $610m; capital expenditures were $156m, implying operating cash flow less capital expenditures of $513m. Investing activities used $183m and financing activities used $420m. Cash ended at $192m. Current assets were $1.537bn and current liabilities $2.690bn (0.6:1 current ratio); management cited cash management and credit availability as liquidity supports.
Debt: Total debt was $3.404bn, up $205m from year-end 2013, including $1.086bn of commercial paper. The $2.0bn revolving facility had $914m of unused borrowing capacity; reported available borrowing capacity including cash was $1.106bn. Long-term debt average interest rate was 3.2%, average maturity about 4.5 years, and 70% was fixed-rate. Marriott said it met its facility covenants, including maximum leverage of 4:1.
Material changes and unusual items
- H1 diluted EPS increased 22%; share repurchases reduced weighted-average diluted shares to 301.2m from 317.3m. Marriott repurchased 12.0m shares for $657m in H1 and paid $109m in dividends.
- Acquired Protea Hotels’ brands and management business for $193m cash, adding 113 hotels and 10,016 rooms across Sub-Saharan Africa. The acquisition added $20m of goodwill and $184m of intangible assets.
- Sold The London EDITION for approximately $230m and agreed to sell the Miami and New York EDITION hotels for part of a total $816m sale price for the three properties, while retaining management agreements. Recorded a $25m H1 impairment charge on the EDITION hotels, including $15m in Q2, because estimated costs exceeded the fixed sale price.
- Recorded an $11m litigation reserve associated with an investment, contributing to higher equity-method losses. Q2 also included a $7m foreign-exchange loss related to Venezuelan bolivar-denominated assets; approximately $10m of such assets remained.
- H1 effective tax rate fell to 29.5% from 32.1%, primarily due to a $21m benefit from favorable resolution of a U.S. federal tax issue.
Outlook, commentary, and risks
- Management expected 2014 gross room growth of approximately 7%, including Protea, and net growth of approximately 6%. The development pipeline was nearly 215,000 rooms, including 30,000 approved but not yet under signed contracts.
- Management estimated full-year 2014 investment spending of approximately $800m–$1bn, including about $150m for maintenance capital spending and $193m for Protea. It expected approximately $58m of additional cash tax benefits in the remainder of 2014 from the timeshare spin-off.
- Management described demand and pricing as improving in many markets, but identified weaker conditions in France, Egypt, Kuwait, Thailand, and parts of Eastern Europe; U.S. government-related demand remained weak. Political instability and new hotel supply weighed on certain markets.
- Key risks include economic and geopolitical volatility, competition and new lodging supply, termination of management or franchise agreements, financing and development delays, foreign exchange and international regulatory exposure, and technology, cybersecurity, and privacy risks.
- Guarantees where Marriott was primary obligor had maximum potential future fundings of $175m and a recorded liability of $49m. A separate Times Square EDITION lender put option could require Marriott to purchase the hotel component for $315m under specified default conditions after opening; Marriott said it did not expect exercise. The filing also describes an ERISA-related employee stock-award lawsuit with no estimable loss range and a Korean competition authority investigation without a complaint or legal process received.
Most important facts for investors to verify
- Whether RevPAR gains, higher fees, and room growth persist, and how much revenue growth reflects pass-through cost reimbursements rather than earnings.
- Protea integration, expected room additions, and whether pipeline projects open as planned.
- Final costs, impairment exposure, and completion and closing of the Miami and New York EDITION transactions.
- Commercial-paper access, debt maturities, covenant headroom, and the company’s substantial share repurchases relative to cash generation.
- Potential cash exposure from guarantees, the Times Square EDITION put option, legal matters, and the Korean investigation.
- Management’s full-year investment-spending and cash-tax-benefit expectations; these are estimates, not guaranteed outcomes.