Marriott International, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2016. Financial statements are unaudited. Marriott completed its Starwood Hotels & Resorts combination on September 23, 2016; reported results include only eight days of Starwood operations.
Financial and operating performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $3.942 billion | $3.578 billion | $11.616 billion | $10.780 billion |
| Operating income | $171 million | $339 million | $927 million | $1.040 billion |
| Net income | $70 million | $210 million | $536 million | $657 million |
| Diluted EPS | $0.26 | $0.78 | $2.04 | $2.38 |
| Adjusted EBITDA | $474 million | $431 million | $1.426 billion | $1.317 billion |
- Revenue growth included higher fee revenue and cost reimbursements. Cost-reimbursement revenue is matched by reimbursed costs; it should not be read as equivalent to growth in fee-based earnings.
- Operating income included $228 million of Q3 merger-related costs and charges and $250 million year to date. These included employee termination, transaction, and integration costs. Merger-related interest expense was an additional $9 million in Q3 and $22 million year to date.
- Worldwide comparable Legacy-Marriott systemwide RevPAR rose 2.5% in Q3 and 2.7% for the first nine months. For the nine-month period, occupancy increased 0.4 percentage points and ADR rose 2.1%.
- Legacy-Marriott comparable company-operated house-profit margins increased 80 basis points worldwide year to date; HP-PAR rose 5.4% on a constant-dollar basis.
- North American Full-Service segment profit rose to $148 million in Q3 and $506 million year to date. North American Limited-Service segment profit was $193 million and $539 million, respectively. International segment profit was $67 million in Q3, down from $69 million, and $217 million year to date, up from $203 million.
Cash flow, debt and liquidity
- Cash from operations was $1.132 billion for the first nine months, versus $1.080 billion a year earlier. Investing activities used $2.487 billion; financing activities provided $2.337 billion. Ending cash was $1.078 billion, up from $96 million at year-end 2015.
- Total debt was $8.822 billion, including $316 million current and $8.506 billion long term, versus $4.107 billion at year-end 2015. The increase primarily reflected Starwood debt and acquisition financing. Debt was unsecured and recourse to Marriott; weighted-average interest rate was 3.3%, with approximately six years’ weighted-average maturity.
- At September 30, available borrowing capacity was $1.401 billion under the $4.0 billion Credit Facility; cash plus this capacity totaled $2.479 billion. The current ratio was 0.7 to 1.0.
- Operating cash flow was below reported net income plus noncash adjustments partly due to working-capital movements and other items; the filing reports a $47 million working-capital cash outflow year to date.
- Dividends declared were $0.30 per share in Q3 and $0.85 per share for the first nine months. Treasury-stock purchases totaled $248 million in cash year to date.
Starwood combination and material changes
- Marriott acquired Starwood for consideration with a reported fair value of $11.698 billion, net of cash acquired; this included $9.198 billion of Marriott stock and $2.412 billion cash consideration.
- Preliminary purchase accounting recorded $8.573 billion of identifiable intangible assets and $6.226 billion of goodwill. Valuations remained subject to refinement during the measurement period of up to one year.
- The combined company had 5,974 properties and approximately 1.17 million rooms at quarter-end, with nearly 420,000 rooms in the development pipeline. Starwood’s eight-day contribution was $168 million revenue and a $131 million net loss, including after-tax merger-related charges.
- Unaudited pro forma nine-month results, assuming the combination occurred January 1, 2015, were revenue of $15.038 billion and net income of $853 million for 2016, versus $14.373 billion and $675 million in 2015. These figures exclude projected cost synergies and are not indicative of actual or future results.
Outlook, risks and contingencies
- No earnings or RevPAR guidance is provided in the filing. Management expected full-year 2016 consolidated investment spending of approximately $425 million to $475 million, including about $100 million for maintenance capital and $75 million for Legacy-Starwood investment spending in Q4.
- Management described demand growth as positive in many markets but weaker than expected at the beginning of the year. Cited pressures included weaker premium corporate transient demand, new hotel supply, oil-and-gas weakness, foreign exchange, geopolitical events, and economic softness in certain regions.
- Management stated that operating cash generation, capital-market access, and the Credit Facility were expected to meet liquidity needs. The Credit Facility leverage limit was temporarily increased to 4.5-to-1 for Q3 and Q4 2016 and Q1 2017; Marriott reported compliance with covenants.
- Key risks include Starwood integration and realizing expected synergies, retention of personnel, disruption to reservation and other systems, competition including home-sharing services, hotel-owner financing and contract termination, foreign currency and international-market exposure, and potential impairment of the enlarged goodwill and intangible-asset balances.
- Contingencies include $251 million of maximum potential future fundings for guarantees where Marriott was primary obligor, with a $60 million recorded liability. A separate $315 million contingent purchase option for the Times Square EDITION hotel was not expected to be exercised by lenders, according to management.
- Legal matters include a putative class action related to Starwood’s 2015 payment-card malware intrusion and a continuing hotel-owner contract claim concerning the merger. The filing states that the Korea Fair Trade Commission investigation into Seoul hotel pricing was closed.
- Disclosure controls were assessed as effective, but the assessment excluded Starwood. Marriott was still assessing and integrating Starwood’s internal controls.
Important facts for investors to verify
- Whether integration costs, employee termination charges, and other merger expenses decline as integration progresses, and whether anticipated efficiencies are achieved.
- How final purchase-accounting valuations affect goodwill, intangible assets, loyalty-program liabilities, deferred taxes, and future amortization or impairment risk.
- Debt, commercial-paper usage, interest expense, Credit Facility capacity, and covenant headroom after financing the acquisition.
- Whether underlying Legacy-Marriott fee growth and RevPAR trends remain positive, particularly in softer markets and amid new room supply.
- Progress on integrating Starwood’s financial controls, reservation systems, and customer-data protections; assess exposure from the disclosed malware incident and related litigation.