Marriott International, Inc. — Q1 2017 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2017, compared with the three months ended March 31, 2016. Marriott operates, franchises, and licenses lodging brands; it completed its Starwood acquisition in September 2016. Q1 2017 includes Starwood’s results, while the prior-year quarter does not, so year-over-year financial comparisons are not like-for-like. Marriott reported 6,161 properties and approximately 1.203 million rooms in 124 countries and territories at quarter-end.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $5.561 billion | $3.772 billion |
| Operating income | $537 million | $367 million |
| Net income | $365 million | $219 million |
| Diluted EPS | $0.94 | $0.85 |
| Operating cash flow | $526 million | $394 million |
| Capital expenditures | $48 million | $42 million |
| Cash and equivalents at period-end | $738 million | $99 million |
| Long-term debt, including current portion | $8.470 billion | $8.506 billion at Dec. 31, 2016 |
Operating margin was approximately 9.7% of revenue in both quarters; net margin was approximately 6.6% in 2017 versus 5.8% in 2016. Revenue included $4.340 billion of cost reimbursements, matched by reimbursed costs; these pass-through amounts increased with Starwood and system activity. Fee revenue totaled $782 million, up 50%, with increases primarily attributable to Starwood and, to a lesser extent, Legacy-Marriott RevPAR and unit growth.
Worldwide systemwide comparable RevPAR increased 3.1% to $108.81; occupancy rose 1.7 percentage points to 69.3%, and ADR increased 0.6% to $157.13. Comparable company-operated house profit margins rose 100 basis points worldwide. Segment profits totaled $634 million versus $415 million, with Starwood materially contributing to the increase.
Cash used in financing was $830 million, including $582 million of treasury-stock purchases and $115 million of dividends paid. Investing provided $184 million, including $311 million of disposition proceeds. Current assets were $3.121 billion and current liabilities $5.223 billion; the reported current ratio was 0.6 to 1.0. Marriott reported $1.713 billion of unused Credit Facility borrowing capacity and $738 million of cash, or $2.451 billion combined. The facility provides up to $4.0 billion of effective borrowings and expires June 10, 2021. Debt had a 3.0% weighted-average interest rate and approximately 5.6-year weighted-average maturity.
Material changes and unusual items
- Starwood drove much of the increases in revenue, segment profits, expenses, debt-related interest costs, and hotel-system scale. The acquisition’s purchase accounting remained preliminary; goodwill was $7.802 billion at quarter-end.
- Merger-related costs and charges were $51 million, comprising $7 million transaction costs, $21 million employee termination costs, and $23 million integration costs, versus $8 million in Q1 2016.
- Adoption of ASU 2016-09 generated a $43 million income-tax benefit, approximately $0.11 per diluted share, and reduced the effective tax rate to 24.7% from 32.8%. This benefited reported earnings and operating cash flow.
- Marriott sold a North American full-service hotel acquired with Starwood for $306 million in cash and transferred its ground lease, reducing future minimum operating lease obligations by approximately $194 million. Two other North American full-service hotels and remaining Miami Beach EDITION residences were classified as held for sale, totaling $400 million.
- Q1 2017 included $43 million of foreign-currency translation gains in other comprehensive income; comprehensive income was $550 million.
Outlook, commentary, and risks
- Management described demand as favorable in many markets amid slow but steady economic growth. It cited stronger North American group demand, growth in Europe, and strength in parts of Asia Pacific; new supply, moderate GDP growth, geopolitical instability, weak oil prices, Zika concerns, and weak South American conditions constrained certain markets.
- Group revenue pace for the remainder of 2017 at systemwide North American full-service hotels was 1.6% higher as of March 31, 2017, compared with the prior-year pace for the remainder of 2016.
- Marriott expected 2017 consolidated investment spending of approximately $500 million to $700 million, including approximately $175 million of maintenance capital spending. Spending also includes items beyond capital expenditures, such as contract acquisition costs, loans, and investments.
- The development pipeline exceeded 430,000 rooms, more than half outside North America; some approved or contracted projects may be delayed or never open. Marriott added 103 properties during the quarter and 22 exited the system.
- Key risks include integration execution and unachieved synergies, retention of Legacy-Starwood personnel, competition including home-sharing services, economic and geopolitical uncertainty, foreign-exchange exposure, cyber/data security and reservation-system disruption, and regulatory or anti-corruption compliance. Marriott was assessing regulatory compliance matters at several foreign Legacy-Starwood locations, including potential FCPA issues; any resulting contingency was not then estimable.
- Disclosed proceedings included a Legacy-Starwood payment-card malware matter and a hotel-owner contract suit alleging territorial-restriction violations. Management did not expect either to significantly affect consolidated results, but outcomes remain uncertain. The filing also reports guarantees with a maximum potential funding amount of $280 million and a recorded liability of $59 million.
Important facts for investors to verify
- Separate acquisition-driven growth from organic performance; the 2017 and 2016 income statements cover different business portfolios.
- Assess recurring earnings apart from the $43 million tax benefit and $51 million merger-related charges, and monitor integration costs and anticipated synergies.
- Review liquidity and refinancing exposure, including commercial paper of $2.285 billion, total debt of $8.470 billion, and the Credit Facility covenant limiting maximum leverage to 4-to-1. Marriott stated it was in compliance.
- Track the preliminary Starwood purchase-price allocation, held-for-sale assets, and unresolved foreign compliance assessment for potential future adjustments or liabilities.
- Compare the $500 million–$700 million investment-spending outlook with actual cash needs, debt levels, share repurchases, and operating cash generation.