Marriott International, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Financial statements are unaudited. Marriott completed its Starwood acquisition in September 2016; 2017 results include Starwood, while comparable 2016 income-statement periods do not. Accordingly, much of the reported year-over-year growth reflects the acquisition.
Financial performance
- Second quarter: Revenue was $5.795 billion, up 49%; operating income was $620 million, up 59%; net income was $414 million, up 68%. Diluted EPS was $1.08 versus $0.96.
- First half: Revenue was $11.356 billion, up 48%; operating income was $1.157 billion, up 53%; net income was $779 million, up 67%. Diluted EPS was $2.02 versus $1.80.
- Revenue includes cost reimbursements of $4.488 billion in Q2 and $8.828 billion in the first half, matched by reimbursed costs; these pass-through amounts do not represent equivalent operating profit. Fee revenue grew 54% in Q2 and 52% in the first half.
- Q2 interest expense was $73 million, versus $57 million; first-half interest expense was $143 million, versus $104 million. First-half effective tax rate was 27.6%, compared with 30.5%, including a $56 million tax benefit from adopting share-based compensation accounting guidance.
- Comparable worldwide systemwide RevPAR increased 2.2% in Q2 and 2.7% in the first half. First-half company-operated comparable house-profit margins rose 70 basis points; house profit per available room increased 4.6% on a constant-dollar basis.
Cash flow, debt and liquidity
- First-half operating cash flow was $1.302 billion, compared with $862 million. Investing activities provided $233 million, mainly reflecting $482 million of disposition proceeds; financing activities used $1.895 billion.
- Cash and equivalents were $498 million at June 30, down $360 million from year-end. The company repurchased $1.328 billion of stock and paid $240 million in dividends during the first half.
- Total debt was $8.313 billion, including $2.431 billion of commercial paper; current debt was $402 million and long-term debt was $7.911 billion. The company reported a 2.8% weighted-average long-term debt interest rate and approximately 5.5-year weighted-average maturity.
- Available borrowing capacity, including cash, was $2.065 billion; the $4.0 billion revolving credit facility had $1.567 billion of unused capacity. The current-assets-to-current-liabilities ratio was 0.5. Management said available liquidity and expected operating cash flow were adequate for anticipated needs.
Changes, outlook and notable items
- Starwood contributed substantially to increases across fee revenue and segments. First-half segment profit increased to $1.355 billion from $854 million; the largest segment was North American Full-Service, with $621 million versus $358 million.
- Marriott added 203 properties and 32,756 rooms in the first half; its system totaled 6,254 properties and 1,217,608 rooms at June 30. The development pipeline exceeded 440,000 rooms.
- Management forecast 2017 consolidated investment spending of approximately $500 million to $700 million, including about $175 million for maintenance capital spending. The filing provides no specific earnings or RevPAR guidance.
- Q2 included a $24 million gain on a hotel sale, reported within $25 million of gains and other income. First-half hotel sale proceeds were $475 million. Merger-related costs and charges were $72 million in the first half, including integration costs.
- A settlement concerning certain acquired hotel agreements includes an owner’s one-time 2022 right to require Marriott to purchase the Sheraton Grand Chicago for $300 million, and an operating-support guarantee capped at $65 million. Marriott is also assessing regulatory compliance matters at certain former Starwood locations, including potential Foreign Corrupt Practices Act issues; possible liabilities were not estimable.
- Key risks include Starwood integration and synergy execution, economic and geopolitical uncertainty, competition and new lodging supply, cyber and data-security exposure, and international compliance. Management reported disclosure controls were effective and no material second-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Separate acquisition-driven growth from underlying Legacy-Marriott performance; 2016 comparatives exclude Starwood.
- Review the preliminary Starwood purchase-price allocation and potential changes to acquired asset, intangible, loyalty-program and goodwill valuations.
- Assess liquidity and refinancing exposure, including commercial-paper dependence, the low current ratio, debt maturities and continued share repurchases.
- Track the Sheraton Grand Chicago purchase option and support guarantee, as well as outcomes of the foreign compliance review.
- Compare actual investment spending and operating performance with management’s stated 2017 spending range and business commentary.