Marriott International, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This annual filing includes fourth-quarter results; it is not a standalone quarterly filing. Unless noted otherwise, financial amounts are in U.S. dollars.
Business context
Marriott operates, franchises, and licenses hotel and related properties through an asset-light model, with most properties owned by third parties. At year-end, its system comprised 7,349 properties and 1,380,921 rooms in 134 countries and territories. Marriott completed its acquisition of Elegant Hotels in December 2019 and integrated its three legacy loyalty programs under Marriott Bonvoy during the year.
Financial and operating results
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $20.972 billion | $20.758 billion | +1% |
| Operating income | $1.800 billion | $2.366 billion | -24% |
| Net income | $1.273 billion | $1.907 billion | -33% |
| Diluted earnings per share | $3.80 | $5.38 | -29% |
| Cash from operations | $1.685 billion | $2.357 billion | -29% |
- Operating margin was approximately 8.6%, versus 11.4% in 2018; net margin was approximately 6.1%, versus 9.2%. Revenue includes substantial cost-reimbursement revenue, which is largely offset by reimbursed expenses.
- Gross fee revenue rose 5% to $3.823 billion, led by franchise fees, which increased 8% to $2.006 billion. Worldwide comparable systemwide RevPAR increased 1.3% to $117.30; occupancy was 73.1% and ADR was $160.55.
- Operating cash flow fell by $672 million, primarily due to timing differences in centralized-program and loyalty-program reimbursements and changes in working capital. Capital expenditures were $653 million.
- Total debt was $10.940 billion at year-end, up from $9.347 billion; long-term debt had a 2.9% weighted-average interest rate and approximately 4.7-year weighted-average maturity. Cash was $225 million. Available borrowing capacity, including cash, was $1.522 billion under the company’s calculation.
- Current assets were $3.127 billion and current liabilities $6.677 billion, a 0.5-to-1 current ratio. Shareholders’ equity declined to $703 million from $2.225 billion.
- Declared dividends were $1.85 per share for 2019. Marriott repurchased 17.3 million shares at an average $130.79 per share.
Material changes versus 2018
- Revenue increased modestly, but operating income, net income, EPS, and operating cash flow declined. Higher fee revenue was outweighed in reported earnings by expense and other-item changes.
- Operating results included $99 million of impairment charges for the Renaissance New York Times Square lease and related assets, and a $15 million expected disposal loss on the Sheraton Phoenix Downtown. The latter was sold in the first quarter of 2020.
- Interest expense increased to $394 million from $340 million. The company issued new notes and commercial paper borrowings increased.
- Marriott recorded a $65 million accrual in the fourth quarter for the U.K. regulator’s proposed fine related to the Starwood reservations database incident, after reducing an earlier accrual.
- Adoption of the new lease standard added $1.013 billion of operating lease assets and $1.053 billion of operating lease liabilities on January 1, 2019; adoption did not affect reported income or cash flows.
Outlook, risks, and contingencies
- Management expected 2020 room growth at a rate consistent with recent experience and forecast $700 million to $800 million of capital expenditures and other investments. These expectations did not include any potential effect from the coronavirus outbreak.
- At the filing date, Marriott reported hotel closures in mainland China and significantly lower demand in Greater China and certain other Asia Pacific markets. It could not estimate the overall financial impact, which could be material to 2020 results.
- The Starwood data-security incident remained subject to consumer, securities, and derivative litigation and numerous regulatory inquiries. Marriott said additional losses beyond amounts incurred could not be estimated; insurance may not cover all costs, fines, or penalties.
- Management and the auditor identified a material weakness in internal controls over financial reporting related to loyalty-program accounting, including insufficient resources and delayed or inaccurate loyalty data. Disclosure controls were also deemed ineffective. The financial-statement audit opinion was unqualified, but the auditor issued an adverse opinion on internal control effectiveness.
- Other material exposures include hotel demand and economic cyclicality, labor costs and disputes, foreign exchange, owner and franchisee financing, cybersecurity and privacy regulation, and possible termination of management or franchise agreements. Marriott’s credit facility includes a maximum leverage covenant of 4-to-1; the company reported compliance at year-end.
- Commitments included $13.908 billion of contractual obligations, $299 million of maximum guarantee fundings, and a $300 million option exercisable by a hotel owner in 2022 requiring Marriott to purchase a leasehold interest. Projected Transition Tax payments of $447 million and $570 million of unrecognized tax benefits were not included in the contractual-obligations total.
Most important facts for investors to verify
- Progress and independent testing of remediation for the loyalty-program accounting material weakness, and whether controls become effective.
- Final resolution and total financial exposure from the Starwood data incident, including the U.K. regulatory proceeding, litigation, insurance recoveries, and ongoing security costs.
- 2020 operating and cash-flow effects of the coronavirus outbreak, particularly the duration of hotel closures and demand weakness in Asia Pacific.
- Debt maturities, commercial-paper market access, covenant headroom, and the impact of elevated debt alongside buybacks, dividends, and planned investment.
- Whether reported earnings and cash flow normalize after loyalty-program reimbursement timing, impairments, asset-sale gains, and other unusual items.