Marriott International, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Financial statements are unaudited. Marriott operates, franchises, and licenses lodging brands, primarily under an asset-light model. 2018 comparative figures were revised for previously identified Loyalty Program accounting errors.
Financial results and key metrics
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Total revenue | $5.305B | $5.409B | $10.317B | $10.418B |
| Net fee revenue | $984M | $938M | $1.865B | $1.765B |
| Operating income | $409M | $818M | $919M | $1.348B |
| Net income | $232M | $667M | $607M | $1.087B |
| Diluted EPS | $0.69 | $1.87 | $1.79 | $3.02 |
| Operating cash flow | Not stated by quarter | Not stated by quarter | $738M | $1.129B |
| Capital expenditures | Not stated by quarter | Not stated by quarter | $142M | $388M |
- Q2 gross fee revenue increased 5% to $999M; franchise fees rose 11%, while incentive management fees declined 6%.
- Reported total revenue includes substantial cost-reimbursement revenue and matching reimbursed expenses. In Q2, these expenses exceeded reimbursements by $204M, versus reimbursements exceeding expenses by $84M a year earlier; management says these differences can reflect timing and are not designed to affect long-term economics.
- Q2 results included $173M of merger-related costs and charges, including a $126M accrual for the proposed ICO fine and a $34M impairment of a legacy-Starwood office building. The company also cited a $147M reduction in Q2 revenue from updated Loyalty Program estimates.
- Prior-year comparisons were affected by gains on property and investment sales: gains and other income were $1M in Q2 2019 versus $114M in Q2 2018. Interest expense rose to $102M from $85M.
- Worldwide systemwide comparable RevPAR increased 1.2% in both Q2 and the first half. Q2 occupancy was flat at 76.1%; first-half occupancy fell 0.1 percentage points to 72.5%.
- Comparable company-operated house-profit margins declined 10 basis points in North America in the first half and were unchanged internationally.
Balance sheet, debt, and liquidity
- At June 30, 2019, cash and equivalents were $284M; cash, equivalents, and restricted cash totaled $320M, down $40M from year-end 2018. The current-assets-to-current-liabilities ratio was 0.5 to 1.0.
- Total debt was $10.414B, up $1.067B from December 31, 2018, primarily due to higher commercial paper borrowings and new notes. Long-term debt had a 3.3% weighted-average interest rate and approximately five-year weighted-average maturity; 60% was fixed-rate.
- Marriott amended its revolving credit facility to $4.5B, with maturity extended to June 28, 2024. At quarter-end, available borrowing capacity was $1.424B, plus $284M cash. The company reported compliance with covenants, including a maximum leverage covenant of 4:1.
- First-half financing included $1.228B of treasury-stock purchases and $298M of dividends. The company repurchased 3.7M shares in Q2; 25.3M shares remained authorized for repurchase.
- Operating lease liabilities were $1.020B at June 30 following adoption of the new lease standard. Adoption added lease assets and liabilities but did not affect income or cash flows.
Business developments, outlook, and risks
- Marriott added 226 properties and 35,023 rooms in the first half; 30 properties and 5,014 rooms exited. Its system totaled 7,100 properties and 1,345,906 rooms. The development pipeline exceeded 487,000 rooms, including approximately 213,000 under construction.
- Management expected 2019 capital expenditures and other investments of approximately $650M–$750M, including about $225M of maintenance capital spending. The filing provides no specific earnings or RevPAR guidance.
- Management cited generally favorable demand and economic conditions, but noted regional differences, new supply, higher labor costs, and weaker demand in parts of the Middle East and Africa. North American full-service and Asia Pacific segment profits declined year over year, while North American limited-service profits increased.
- The Starwood reservations database incident remained a major contingency. Marriott recorded $148M of Q2 expenses and $22M of accrued insurance recoveries; first-half amounts were $192M and $68M, respectively. The company accrued $126M for the ICO’s proposed £99M fine, which was not final and remained subject to Marriott’s response. Additional losses from lawsuits and investigations were reasonably possible but not estimable.
- Marriott said it expected significant future incident-related legal, regulatory, cybersecurity, privacy, compliance, and insurance costs. It stated that insurance may not cover all losses and that it had not seen a meaningful demand impact to date.
- Disclosure controls were deemed ineffective due to a previously reported material weakness in Loyalty Program accounting. Remediation was ongoing; management had not concluded that the weakness was remediated.
- Other key risks include lodging-sector cyclicality and competition, labor costs and negotiations, international and foreign-exchange exposure, hotel-owner financing and development delays, and reliance on reservation, technology, and data-security systems.
Most important facts for investors to verify
- How the proposed ICO fine is resolved, and the ultimate costs, insurance recoveries, and other liabilities from the Starwood data incident.
- Whether the Loyalty Program estimate adjustment and accounting controls stabilize, and when the material weakness is remediated.
- Whether fee growth, RevPAR trends, and hotel additions offset cost pressures and weaker segment profit comparisons.
- Whether operating cash flow and liquidity remain adequate given debt growth, buybacks, dividends, and working-capital outflows.
- Whether actual 2019 investment spending falls within management’s $650M–$750M estimate.