MARRIOTT INTERNATIONAL INC quarterly report, Q1 FY2015

Marriott International, Inc. — Q1 2015 Form 10-Q

Reporting period: Three months ended March 31, 2015; unaudited. Marriott is a global hotel operator, franchisor and licensor, with 4,228 properties and 723,301 rooms at quarter-end. Its model relies primarily on management and franchise agreements rather than property ownership.

Financial performance and liquidity

Metric	Q1 2015	Q1 2014	Change
Revenue	$3,513 million	$3,293 million	+7%
Operating income	$332 million	$254 million	+31%
Net income	$207 million	$172 million	+20%
Diluted EPS	$0.73	$0.57	+28%
Adjusted EBITDA	$429 million	$339 million	+27%
Operating cash flow	$262 million	$182 million	+$80 million

• Reported revenue included $2,798 million of cost reimbursements, matched by reimbursed costs and recorded without markup; these pass-through items do not affect operating or net income.
• Worldwide comparable systemwide RevPAR rose 6.8% to $107.51, with ADR up 4.4% to $153.23 and occupancy up 1.6 percentage points to 70.2%.
• Segment profits were $146 million in North American Full-Service (+11%), $151 million in North American Limited-Service (+31%), and $77 million in International (+18%).
• Cash and equivalents were $120 million at March 31, 2015. Total debt was $4,028 million, including $1,320 million of commercial paper; long-term debt was $3,703 million, excluding the current portion. Available borrowing capacity was $800 million, including $680 million under the credit facility and $120 million in cash.
• Current assets were $1,828 million and current liabilities $3,030 million; the reported current ratio was 0.6 to 1. Shareholders’ deficit was $2,537 million.
• Cash flow from investing was an outflow of $22 million, including $75 million of capital expenditures and a $136 million escrow deposit for the Delta acquisition, partly offset by $247 million of dispositions. Financing cash outflow was $224 million, including $429 million of treasury-stock purchases and $56 million of dividends; commercial paper borrowings increased by $246 million.
• Declared dividends were $0.20 per share, versus $0.17 a year earlier. Marriott repurchased 5.5 million shares at an average $78.35 per share.

Material changes versus Q1 2014

• Revenue increased $220 million, led by higher cost reimbursements (+$128 million), franchise fees (+$41 million), incentive management fees (+$18 million), and owned, leased and other revenue (+$23 million). Franchise growth included higher relicensing fees and system expansion.
• Operating income rose $78 million. Higher management and franchise fees and improved property results more than offset higher depreciation and amortization and other expenses.
• Net income increased $35 million, despite a $41 million rise in income tax expense. The effective tax rate increased to 32.4% from 25.5%, primarily because Q1 2014 benefited from a $21 million favorable resolution of a U.S. federal tax issue.
• Adjusted EBITDA is a non-GAAP measure; Marriott’s reconciliation adds back impairment charges and share-based compensation. It should not be treated as a substitute for GAAP results.
• Operating cash flow improved to $262 million from $182 million. Cash rose $16 million from year-end, while total debt increased $247 million, principally due to higher commercial paper borrowings.

Outlook, management commentary and risks

• Management described demand as favorable in many markets, citing low supply growth in the U.S. and Europe, stronger North American pricing and system growth. North American group bookings for 2015 stays at company-operated full-service hotels were running about 4% ahead of the comparable prior-year booking pace.
• The company had nearly 240,000 rooms in its development pipeline. Management expected gross room growth of approximately 8% in 2015, including Delta, and net growth of approximately 7%.
• Expected 2015 investment spending was approximately $600 million to $800 million, including about $140 million for maintenance capital spending and $135 million for Delta Hotels and Resorts.
• Delta was acquired on the first day of Q2 for approximately $136 million, including working capital. The Q1 cash-flow statement includes the $136 million escrow deposit. The acquisition added 37 open Canadian hotels and resorts with more than 10,000 rooms.
• Marriott completed the sale of The Miami Beach EDITION in Q1 and sold The New York EDITION at the beginning of Q2. Q1 included separate $6 million impairment charges for the New York EDITION and Miami Beach EDITION residences, for $12 million total.
• Key risks identified include economic weakness and regional instability, new hotel supply, currency fluctuations, competition and online travel intermediaries, premature termination of management or franchise agreements, owner financing constraints, guarantees to owners, development and construction risks, data security and privacy, and natural disasters or terrorism.
• Primary-obligor guarantees had a maximum potential funding amount of $140 million and a recorded liability of $57 million. The filing also describes other contingent guarantees and commitments. Marriott reported a $315 million put option connected with the Times Square EDITION financing, not currently in effect, and said it did not expect exercise.
• The company said its credit facility covenants were satisfied and expected liquidity, operating cash generation and capital-market access to meet anticipated requirements. It cautioned that commercial-paper access depends on market demand.
• Marriott stated that market-risk exposure had not materially changed since year-end 2014. Disclosure controls were assessed as effective, with no material Q1 change in internal control over financial reporting.

Important facts for investors to verify

• Whether RevPAR and demand trends, particularly in North America and international markets, persist and support the stated room-growth outlook.
• Whether the $600 million to $800 million investment-spending estimate, Delta integration and pipeline openings proceed on schedule and within budget.
• Debt refinancing and commercial-paper market access, including the $1,329 million of scheduled 2018 debt principal payments and reported $800 million of available borrowing capacity.
• The performance of impaired EDITION assets and any further costs or obligations tied to the New York EDITION sale, including its operating-permit conditions and repurchase option.
• Developments in guarantee exposures, tax examinations and contingencies, including the Korea Fair Trade Commission investigation and appeal of the dismissed employee ERISA case.
• The effects of share repurchases and dividends on cash, debt and the company’s shareholders’ deficit.