Marriott International, Inc. — Q1 2013 Form 10-Q
Business context and reporting period. Unaudited results cover the 93 days ended March 31, 2013, versus 84 days ended March 23, 2012. Marriott changed to calendar-year and end-of-month reporting in 2013; the extra nine days materially affect comparison. Management estimates those days added $37 million of combined base, franchise, and incentive fees and $23 million of operating income. Marriott operates, franchises, and licenses lodging brands and reported 3,822 properties and 663,163 rooms across 74 countries and territories.
Financial and operating performance
| Metric | Q1 2013 | Prior comparable period |
|---|---|---|
| Revenue | $3.142 billion | $2.552 billion |
| Operating income | $226 million | $175 million |
| Net income | $136 million | $104 million |
| Diluted EPS | $0.43 | $0.30 |
| EBITDA (company-defined, non-GAAP) | $268 million | $215 million |
| Operating cash flow | $118 million | $125 million |
| Capital expenditures | $70 million | $197 million |
| Cash and equivalents at period end | $221 million | $88 million at year-end 2012 |
| Total debt at period end | $3.255 billion | $2.935 billion at year-end 2012 |
Cost reimbursements were $2.548 billion, matched by reimbursed costs and with no effect on operating or net income; they represented much of the reported revenue increase. Management cited stronger demand, system growth, higher fees, and the extra reporting days as drivers of results. The effective tax rate was 32%, compared with 29% in the prior period. Marriott declared dividends of $0.13 per share, up from $0.10.
Comparable worldwide systemwide RevPAR rose 4.6% to $97.48, occupancy increased 0.6 percentage points to 67.5%, and average daily rate rose 3.8% to $144.50. Luxury RevPAR increased 9.8%; Europe systemwide RevPAR declined 1.8%, while Greater China RevPAR was flat. Figures are constant-dollar comparisons where applicable.
Liquidity, debt, and capital allocation
Operating cash flow was $118 million. Investing activities used $88 million and financing activities provided $103 million. The increase in cash largely reflected higher commercial-paper borrowing; commercial paper outstanding was $1.238 billion. Marriott paid $411 million of principal and interest to retire Series J notes at maturity and repurchased 5.4 million shares for approximately $217 million. The company reported $732 million of available borrowing capacity, including cash, and a current-assets-to-current-liabilities ratio of approximately 0.7 to 1.0. Shareholders’ deficit was $1.377 billion.
The $1.75 billion revolving credit facility expires in June 2016 and includes a maximum leverage covenant of 4:1; Marriott said it was in compliance. The company expects 2013 investment spending of approximately $600 million to $800 million, including about $100 million of maintenance capital spending. Its $3.255 billion debt balance had a reported average interest rate of 3.1% and average maturity of approximately 4.8 years.
Material changes, outlook, and risks
- Marriott expects to add approximately 30,000 to 35,000 rooms gross in 2013, with about 10,000 rooms expected to leave the system. The development pipeline exceeded 135,000 rooms.
- Management described lodging conditions as improving overall, with low supply growth and stronger transient demand. It noted weaker short-term corporate and government group demand in North America, constrained in part by U.S. government spending restrictions. North American full-service group booking pace for the rest of 2013 was up 4%; 2014 pace was up 5%.
- Risks highlighted include economic weakness and government travel cuts, regional and geopolitical disruption, competition, early termination of management or franchise agreements, hotel-owner financing constraints, development and joint-venture risks, brand and service quality, technology and cybersecurity, and foreign-exchange and regulatory exposure. Marriott said international operations represented approximately 15% of Q1 revenue.
- Guarantees for which Marriott was primary obligor had maximum potential future fundings of $209 million and a recorded liability of $60 million. Separately, secondarily liable guarantees totaled $190 million; indemnities and collateral apply to certain obligations. These maximum exposures are not stated expected losses.
- A former-employee putative class action involving historical deferred stock awards remains pending; the company said it could not estimate a possible loss. A Korean Fair Trade Commission investigation concerning hotel-service pricing was ongoing; Marriott said it had not received a complaint or other legal process.
- Marriott expects approximately $480 million of cash tax benefits through 2014 from its 2011 timeshare spin-off, of which $228 million had been realized through year-end 2012; approximately $143 million was expected in the second half of 2013. No such benefits were realized in Q1 2013.
- The company provided no specific earnings or RevPAR forecast in the supplied filing text. Disclosure controls were assessed as effective; a phased enterprise financial-systems upgrade was underway.
Important facts for investors to verify
- Normalize year-over-year growth for the nine extra reporting days; the periods are not equal length, and interim results may be seasonal.
- Separate pass-through cost reimbursements from fee revenue when assessing revenue growth and margins.
- Track commercial-paper refinancing, debt maturities, credit-facility covenant headroom, and the distinction between cash and total stated borrowing capacity.
- Assess whether operating cash generation supports planned investment, buybacks, dividends, and debt service.
- Monitor group-booking trends, regional RevPAR—especially Europe and Greater China—and delivery of the room pipeline.
- Review the status and potential financial impact of the unresolved litigation, Korean investigation, and guarantee commitments.