Business context and reporting period
Marriott International, Inc. filed its Form 10-K for the fiscal year ended December 31, 2016. The company operates, franchises, and licenses hotels and related properties, with an asset-light model centered on management and franchise fees. On September 23, 2016, Marriott completed its acquisition of Starwood; reported 2016 results include Starwood only from the closing date, while year-end balance-sheet figures include the combined company.
At year-end, Marriott operated, franchised, or licensed 6,080 properties with 1.19 million rooms in 122 countries and territories. More than 99% of its lodging properties were managed, franchised, licensed, or held through unconsolidated ventures rather than owned or leased directly.
Financial and operating highlights
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $17.072 billion | $14.486 billion |
| Operating income | $1.368 billion | $1.350 billion |
| Net income | $780 million | $859 million |
| Diluted EPS | $2.64 | $3.15 |
| Cash from operations | $1.582 billion | $1.430 billion |
| Capital expenditures | $199 million | $305 million |
| Year-end debt | $8.506 billion | $4.107 billion |
| Year-end cash and equivalents | $858 million | $96 million |
Revenue rose about 18%, while operating income rose about 1%; net income fell about 9% and diluted EPS fell about 16%. Revenue included $13.546 billion of cost reimbursements, which Marriott states have no effect on operating or net income because they are recorded with corresponding expenses. Fee revenue totaled $2.219 billion, up from $1.870 billion.
Fourth-quarter revenue was $5.456 billion, operating income $441 million, net income $244 million, and diluted EPS $0.62. The comparable 2015 quarter reported revenue of $3.706 billion, operating income of $310 million, net income of $202 million, and diluted EPS of $0.77. The large reported revenue increase reflects, in part, Starwood’s inclusion after the merger.
Comparable systemwide RevPAR increased 1.8% to $113.50 in 2016, with occupancy up 0.6 percentage points to 72.5% and average daily rate up 1.0% to $156.53. Worldwide comparable company-operated house-profit margin increased 50 basis points; house profit per available room rose 2.7% on a constant-dollar basis.
Operating cash flow increased to $1.582 billion. Investing cash flow was a $2.409 billion outflow, including $2.412 billion for the Starwood acquisition, net of cash acquired. Financing cash flow was a $1.589 billion inflow. Long-term debt averaged 2.9% interest with an average maturity of approximately 5.9 years; the current ratio was 0.7 at year-end, versus 0.4 a year earlier.
Material changes versus prior period
- Starwood added 1,342 properties and 381,440 rooms at closing. Its post-merger 2016 contribution was $1.906 billion of revenue and a $39 million net loss.
- Marriott recorded $386 million of pre-tax merger-related costs and charges, including $241 million of employee termination costs and $92 million of integration costs; merger-related interest expense was an additional $22 million. Management reported $194 million of after-tax merger-related costs and charges in Starwood’s post-merger results discussion.
- Total assets increased to $24.140 billion from $6.082 billion, and shareholders’ equity shifted from a $3.590 billion deficit to $5.357 billion, substantially reflecting the acquisition and issuance of Marriott shares.
- Goodwill and other intangible assets increased substantially; year-end goodwill was $7.598 billion and intangible assets totaled $9.270 billion. Starwood purchase accounting remained preliminary and subject to measurement-period adjustments.
- Dividends declared increased to $1.15 per share for 2016 from $0.95 in 2015. Marriott repurchased 8.0 million shares in 2016, compared with 25.7 million in 2015.
Outlook, risks, contingencies, and unusual items
- Management expected 2017 investment spending of approximately $500 million to $700 million, including about $175 million of maintenance capital spending. No clear consolidated earnings or EPS guidance is provided in the filing.
- Management cited integration execution, realization and timing of synergies, employee retention, and reservation-system integration as key Starwood-related challenges. The company was still integrating Starwood’s controls and procedures.
- The Credit Facility provided up to $4.0 billion of commitments and matured June 10, 2021. Available borrowing capacity, including cash, was $2.545 billion at year-end. A temporary leverage-covenant limit of 4.5-to-1 applied through the first quarter of 2017; the usual limit was 4-to-1. Management said it expected to remain in compliance and considered liquidity adequate.
- Material risks include economic and lodging-demand weakness, competition including home-sharing services, new hotel supply, foreign exchange, owner or franchisee contract terminations, cybersecurity and privacy, disasters and geopolitical events, and access to financing for hotel owners.
- Marriott was assessing foreign regulatory compliance matters at certain acquired Starwood locations, including potential Foreign Corrupt Practices Act issues; possible liabilities or expenses were not then estimable. It also disclosed litigation related to a Starwood malware intrusion and a continuing hotel-owner contract claim concerning the merger.
- Guarantee commitments had a maximum potential funding amount of $282 million and a recorded liability of $66 million. Contractual obligations totaled $12.158 billion. A separate contingent purchase option could require Marriott to buy the Times Square EDITION hotel component for $315 million following specified defaults; management said it did not expect the option to be exercised.
- Management and the auditor reported effective internal control over financial reporting for the assessed business, but excluded Starwood, which represented 77% of year-end assets, 11% of 2016 revenue, and negative 5% of 2016 net income.
Most important facts for investors to verify
- How much of revenue and earnings growth reflects Starwood, and how the combined company performs on a comparable, full-period basis.
- Whether anticipated integration savings offset merger costs and whether further purchase-accounting adjustments, goodwill impairment, or loyalty-program liability changes arise.
- Debt repayment, commercial-paper access, covenant compliance after the temporary leverage allowance expires, and the effect of interest-rate or currency changes.
- Progress and financial exposure from the Starwood compliance review, malware-related claims, hotel-owner litigation, guarantees, and other contingencies.
- Whether RevPAR and occupancy trends, especially in weaker markets, support continued fee growth and improved operating performance; note that 2016 comparable RevPAR statistics include Starwood properties for the full year even though its results entered the financial statements only after closing.