Marriott International, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter ended June 30, 2013; unaudited. The 2013 quarter covered 91 days versus 84 days in the prior-year comparison, and the first half covered 184 days versus 168 days. Marriott estimated the extra days added about $25 million to quarterly management and franchise fee revenue and $20 million to operating income; for the first half, the estimates were $62 million and $45 million, respectively.
Financial performance and condition
| Metric | Q2 2013 | Prior-year quarter | First half 2013 | Prior-year first half |
|---|---|---|---|---|
| Revenue | $3.263 billion | $2.776 billion | $6.405 billion | $5.328 billion |
| Operating income | $279 million | $243 million | $505 million | $418 million |
| Net income | $179 million | $143 million | $315 million | $247 million |
| Diluted EPS | $0.57 | $0.42 | $0.99 | $0.72 |
| EBITDA (non-GAAP) | $329 million | $289 million | $597 million | $504 million |
| Cash from operations | $610 million | $417 million |
- Q2 revenue rose 18%, while operating income and net income each increased about 15% and 25%, respectively. Diluted EPS rose 36%, helped in part by fewer weighted-average shares outstanding. First-half revenue rose 20%, operating income 21%, net income 28%, and diluted EPS 38%.
- Revenue growth included substantial cost reimbursements, which are matched by reimbursed expenses and have no effect on operating income or net income. Q2 reimbursements were $2.610 billion versus $2.170 billion; first-half reimbursements were $5.158 billion versus $4.205 billion. Fee growth, hotel-system expansion, stronger demand, and the longer reporting periods also contributed.
- Comparable worldwide systemwide RevPAR increased 4.7% in Q2 to $109.17, with average daily rate up 3.2% and occupancy up 1.1 percentage points to 75.6%. First-half systemwide RevPAR also increased 4.7%.
- Cash and equivalents were $108 million at June 30, 2013, versus $88 million at year-end 2012. Current assets were $1.404 billion and current liabilities $2.467 billion; the reported current ratio was approximately 0.6 to 1.0.
- Total debt was $3.087 billion, including $1.071 billion of commercial paper; long-term debt on the balance sheet was $3.037 billion. Debt increased $152 million from year-end, chiefly due to higher commercial paper borrowings. The company reported a 3.2% average interest rate and approximately 4.6-year average maturity for long-term debt.
- First-half investing cash outflow was $219 million and financing cash outflow was $371 million. The company repurchased $498 million of stock and paid $93 million of dividends in the first half; it purchased 12.4 million shares at an average $40.28 per share.
- Shareholders’ deficit was $1.493 billion at quarter-end, compared with $1.285 billion at year-end, largely reflecting treasury-stock purchases.
Material changes and business developments
- Marriott changed to calendar-year and end-of-month quarterly reporting in 2013 and did not restate historical results, limiting direct period comparisons. The 2013 fiscal year has 368 days versus 364 days in 2012.
- The company operated, franchised, or licensed 3,847 properties with 666,132 rooms in 72 countries and territories at quarter-end. It added 11,460 rooms gross in the first half; more than 140,000 rooms were in the development pipeline.
- Segment results improved in North American Full-Service, North American Limited-Service, and Luxury lodging for the first half, but declined in International lodging to $72 million from $81 million. International segment costs included a $5 million performance-cure payment and higher brand and regional-office expenses.
- Q2 general, administrative, and other expense rose to $179 million from $160 million; first-half expense rose to $359 million from $307 million. The increases included longer-period costs, compensation and overhead, brand initiatives, and contract-acquisition cost impairments and accelerated amortization.
- Q2 included an $8 million gain on sale of part of an investment. The company also recorded a $4 million impairment of a corporate joint-venture investment in Q2.
Outlook, management commentary, and risks
- Management described lodging conditions as improving overall, citing low supply growth, demand, and improved pricing in many markets. It also noted weak near-term group demand, constrained U.S. government-related business, continuing weakness in parts of Europe and the Middle East, and moderating demand in Asia Pacific, including Greater China.
- For full-year 2013, Marriott expected approximately 30,000 gross room additions and approximately 10,000 room exits. It forecast investment spending of approximately $600 million to $800 million, including about $100 million for maintenance capital spending. No earnings or RevPAR guidance is stated in the supplied filing text.
- North American Marriott Hotels company-operated group revenue pace for the remainder of 2013 was up 4% at quarter-end; 2014 group booking pace was up 2%, compared with a 1% decline a year earlier.
- Management expected approximately $95 million of additional cash tax benefits in the second half of 2013 from the 2011 timeshare spin-off; it expected total benefits of approximately $480 million through 2014. No such cash tax benefits were realized in the first half of 2013.
- On July 18, 2013, after quarter-end, Marriott amended its revolving credit facility, increasing capacity from $1.75 billion to $2.0 billion and extending its expiration to July 18, 2018. At June 30, available borrowing capacity, including cash, was $786 million. Management said liquidity sources were adequate, while noting commercial-paper access depends on market demand.
- Guarantees for which Marriott was the primary obligor had a maximum potential funding amount of $211 million and a recorded liability of $58 million. Additional secondary guarantees and other commitments remain; some are indemnified by third parties. Marriott’s maximum exposure to loss on a newly acquired hotel-entity investment, including a contingent commitment, was $76 million.
- Contingencies include an employee equity-award class action for which the company could not estimate a loss range, and a Korean Fair Trade Commission investigation concerning hotel-service pricing; no complaint or legal process had been received. Other risks include economic and geopolitical conditions, competition, contract termination, hotel-owner financing, technology and data security, and guarantees.
Most important facts for investors to verify
- Separate underlying fee and profit growth from the effects of the longer 2013 reporting periods and pass-through cost-reimbursement revenue.
- Assess whether RevPAR gains and fee growth persist, particularly given weak short-term group demand and uneven international markets.
- Monitor commercial-paper refinancing, debt maturities, revolving-credit availability, and the effect of substantial repurchases on liquidity and shareholders’ deficit.
- Compare the $600 million to $800 million investment-spending outlook with realized spending, development additions, and returns on invested capital.
- Track guarantee exposure, the Korean investigation, the equity-award litigation, and realization of expected spin-off tax benefits.