Marriott International, Inc. — Q3 2014 Form 10-Q
Business context and reporting period. Unaudited results cover the three and nine months ended September 30, 2014, compared with the same 2013 periods. Marriott operates, franchises and licenses hotels across 79 countries and territories; at quarter-end its system comprised 4,127 properties and 702,254 rooms. Its asset-light model relies primarily on management and franchise agreements. The first nine months of 2014 had three fewer reporting days than the comparable 2013 period.
Financial and operating metrics
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $3.460bn | $3.160bn | $10.237bn | $9.565bn |
| Operating income | $298m | $245m | $868m | $750m |
| Net income | $192m | $160m | $556m | $475m |
| Diluted EPS | $0.65 | $0.52 | $1.86 | $1.51 |
| Operating margin (calculated) | 8.6% | 7.8% | 8.5% | 7.8% |
- Revenue quality: Cost reimbursements were $2.768bn in Q3 and $8.201bn for nine months, with corresponding reimbursed costs and no impact on operating or net income. Thus, reported revenue growth includes substantial pass-through amounts.
- Hotel trading: Comparable worldwide systemwide RevPAR rose 8.1% in Q3 to $114.29 and 6.7% for nine months to $111.64. For Q3, worldwide occupancy increased 2.6 percentage points to 76.9% and average daily rate rose 4.5% to $148.55. Nine-month occupancy rose 2.1 points to 74.4%; average daily rate increased 3.7% to $150.00.
- Cash flow and investment: Nine-month operating cash flow was $950m, versus $805m; investing cash outflow was $304m and financing cash outflow was $622m. Capital expenditures were $267m. Cash increased $24m from year-end 2013 to $150m.
- Debt and liquidity: Debt was $3.528bn at September 30, up $329m from year-end; commercial paper was $1.211bn. Cash was $150m and available borrowing capacity was reported as $939m, including $789m of unused Credit Facility capacity. Current assets/current liabilities were 0.6:1. The $2bn revolving facility expires in July 2018; Marriott reported compliance with its covenants.
- Shareholder returns: Marriott repurchased 16.5m shares for $954m during the first nine months, at an average $57.97 per share, and paid $167m in dividends. Declared dividends totaled $0.57 per share for the period.
- Non-GAAP measure: Nine-month EBITDA was $1.034bn and Adjusted EBITDA was $1.140bn; Q3 Adjusted EBITDA was $393m. Adjusted figures exclude share-based compensation and, for 2014 nine months, a $25m EDITION impairment charge.
Material changes versus the prior comparable period
- Q3 revenue increased 9%, operating income 22%, net income 20% and diluted EPS 25%. For nine months, revenue rose 7%, operating income 16%, net income 17% and diluted EPS 23%.
- Growth reflected stronger RevPAR, system expansion, increased management and franchise fees, and higher incentive fees. Q3 base management, franchise and incentive management fees increased $28m, $28m and $14m, respectively.
- North American Limited-Service was a notable contributor: Q3 segment results rose 35% to $177m; North American Full-Service results rose 16% to $122m; International results rose 17% to $62m.
- Debt increased, primarily because commercial paper borrowings rose $377m from year-end. Treasury stock purchases also increased, to $954m from $644m in the 2013 first nine months.
- Comparisons are affected by the different reporting-day counts for the nine-month periods; management estimated the three fewer 2014 days reduced fee revenue by about $5m.
Outlook, management commentary, risks and unusual items
- Management cited favorable demand, higher occupancy and pricing, low supply growth in many U.S. and European markets, and continued system growth. It expected 2014 gross room growth of about 7%, or about 6% net of deletions; the pipeline was nearly 225,000 rooms. No earnings-per-share or net-income guidance is stated in the filing.
- Full-year 2014 investment spending was expected to be approximately $800m–$900m, including about $100m of maintenance capital spending and $193m for Protea Hotels. The Protea brands and management business was acquired for $193m cash in Q2, adding 113 hotels and 10,016 rooms.
- Marriott sold The London EDITION for approximately $230m and retained its long-term management agreement. It had agreements to sell the Miami and New York EDITION hotels after construction; the stated total sale price for the three hotels was approximately $816m. A $25m impairment was recorded in the first half, primarily related to Miami EDITION development costs. Management expected the Miami sale in Q4 2014 and the New York sale in the first half of 2015.
- Q3 effective tax rate was 33.9%, versus 28.1% a year earlier, reflecting factors including higher U.S. earnings and nonrecurring favorable 2013 foreign tax adjustments. The nine-month rate was 31.0%, versus 30.8%; a $21m benefit from resolution of a U.S. federal guest-marketing tax issue partly offset other increases.
- Q3 equity earnings included a $9m reversal of deferred tax liabilities following a foreign tax-law change. Nine-month results also reflected an $11m litigation reserve relating to a corporate investment. These items affect comparability.
- Early in Q4, Marriott issued $400m of 3.1% notes due 2021, receiving net proceeds of approximately $394m, intended for general corporate purposes.
- Risks include economic and geopolitical uncertainty, foreign-exchange exposure, new hotel supply, competition, early termination of management or franchise agreements, development cost overruns, and cyber/privacy threats. Management described weaker demand in parts of France, Eastern Europe and Thailand, and noted that new supply constrained some markets.
- Guarantees where Marriott was primary obligor had a maximum potential funding amount of $144m and a recorded liability of $53m. Separately, a Times Square EDITION agreement could require Marriott to purchase the hotel component for $315m following specified lender enforcement events; management did not expect exercise. An ERISA-related former-employee lawsuit remained pending, with possible loss not estimable; a Korean competition investigation had not resulted in a complaint or other legal process.
Most important facts for investors to verify
- Whether RevPAR, fee growth and the development pipeline continue to translate into recurring earnings, particularly as incentive fees and previously deferred fees contributed to results.
- The underlying operating trend excluding cost-reimbursement pass-through revenue, and the effects of the 2014 impairment, tax items and other nonrecurring items.
- Commercial paper refinancing, leverage and liquidity as debt rose; confirm the post-quarter Series N issuance and use of proceeds in subsequent filings.
- Whether the planned Miami and New York EDITION sales close on schedule and within their fixed prices, given the recorded impairment and development-cost exposure.
- Potential cash exposure from guarantees, the $315m Times Square EDITION put option, litigation and the Korea investigation.
- Actual full-year investment spending and room additions against management’s stated ranges and the pipeline’s conversion to opened hotels.