Marriott International, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Unaudited results; 2017 comparisons reflect the company’s retrospective adoption of revenue-recognition accounting. Marriott operates, franchises and licenses lodging brands, generally using an asset-light model. At quarter-end, it had 6,782 properties and 1,298,583 rooms across 129 countries and territories.
Financial performance
| Metric | Q3 2018 | Q3 2017 | First nine months 2018 | First nine months 2017 |
|---|---|---|---|---|
| Revenue | $5.049 billion | $5.078 billion | $15.401 billion | $15.201 billion |
| Operating income | $570 million | $790 million | $1.810 billion | $2.080 billion |
| Net income | $483 million | $485 million | $1.491 billion | $1.345 billion |
| Diluted EPS | $1.38 | $1.29 | $4.18 | $3.51 |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $1.824 billion | $1.751 billion |
- Revenue and fees: Q3 revenue declined about 1%, while gross fee revenue rose 13% to $932 million, including a 20% increase in franchise fees. Nine-month revenue increased about 1%; gross fee revenue rose 12% to $2.728 billion.
- Profitability: Q3 operating income fell about 28%, while net income was nearly unchanged. Nine-month operating income fell about 13%, but net income rose about 11%, supported in part by lower income-tax expense. The reported operating-income margin was about 11.3% for Q3, versus 15.6% a year earlier; nine-month margin was about 11.8%, versus 13.7%.
- Cash flow and investment: Nine-month investing cash flow was $81 million, including $462 million of capital expenditures and $460 million of disposition proceeds. Financing used $1.921 billion, including $2.513 billion of treasury-stock purchases and $404 million of dividends. Cash, cash equivalents and restricted cash ended at $413 million; balance-sheet cash and equivalents were $373 million.
- Debt and liquidity: Total debt was $9.327 billion at September 30, up from $8.238 billion at year-end 2017. Long-term debt was $8.710 billion, in addition to $617 million current. The company reported $948 million of available borrowing capacity including cash, and $575 million of unused Credit Facility capacity. Its current-assets-to-current-liabilities ratio was 0.5 to 1.0. The Credit Facility has a 4-to-1 maximum leverage covenant; Marriott said it was in compliance.
- Other metrics: Worldwide systemwide RevPAR increased 1.9% in Q3 and 3.1% for the first nine months. Q3 ADR rose 2.2% and occupancy decreased 0.2 percentage points to 76.0%. Nine-month company-operated house-profit margins improved 50 basis points.
Changes versus prior comparable periods
- Q3 segment profits declined at North American Full-Service ($248 million versus $295 million) and North American Limited-Service ($206 million versus $255 million); Asia Pacific rose to $106 million from $93 million. Nine-month Asia Pacific segment profit increased to $358 million from $260 million, while both North American segments declined.
- Cost-reimbursement revenue less reimbursed expenses shifted to a $146 million deficit in Q3 from a $180 million surplus, and to a $202 million deficit for nine months from a $356 million surplus. Marriott attributed the change mainly to loyalty-program activity, spending of Avendra sale proceeds and reservations and marketing activity; it described these as timing differences in programs not designed to affect long-term economics.
- Q3 results included $61 million of equity-method earnings, mainly Marriott’s share of an investee’s property-sale gain. Nine-month gains and other income totaled $191 million, versus $31 million, principally reflecting property and investment dispositions. Disposition-related gains also contributed to nine-month equity earnings.
- Interest expense increased to $86 million in Q3 and $246 million for nine months, mainly due to higher commercial-paper rates and borrowings. The effective tax rate declined to 14.9% in Q3 from 34.3%, and to 20.1% for nine months from 31.0%.
Outlook, commentary and risks
- Management described demand and economic conditions as generally favorable, while citing new lodging supply, natural disasters and weak September transient demand in some markets. The company added 348 properties in the first nine months and reported an approximately 471,000-room development pipeline.
- Marriott expected full-year 2018 capital expenditures and other investments of approximately $750 million to $850 million, including about $200 million for maintenance capital spending. No specific earnings or RevPAR guidance was provided in the supplied filing text.
- Management said the 2017 Tax Act’s overall future effect was expected to be positive, but tax accounting remained incomplete. The provisional transition-tax estimate was $740 million; further analysis or regulatory guidance could change tax expense, obligations or effective rates.
- Marriott expected to recognize $1.0 billion to $1.2 billion of operating-lease right-of-use assets and related liabilities upon adopting the lease standard in 2019; it expected no income-statement or cash-flow impact.
- Risks highlighted include economic and travel-demand weakness, competition and new room supply, natural disasters and geopolitical instability, labor negotiations and strikes, Starwood integration and reservation-system challenges, cybersecurity and privacy exposures, foreign-exchange movements, and the ability of hotel owners to obtain financing. Strikes were ongoing at certain hotels as of the filing.
- Guarantee exposure at quarter-end included maximum potential future fundings of $357 million and recorded guarantee liabilities of $129 million. A Sheraton Grand Chicago put option exercisable in 2022 could require a $300 million purchase; the related recorded liability was $57 million. Marriott stated ordinary-course legal proceedings were not expected to materially harm results, while noting outcomes are uncertain.
Important facts for investors to verify
- How much of the Q3 operating-income decline reflects timing in reimbursed programs versus underlying hotel and corporate cost trends.
- The sustainability of fee growth, RevPAR gains, loyalty-program economics and the improvement in international segment results.
- Debt, commercial-paper refinancing needs, interest costs, covenant headroom and liquidity after substantial share repurchases.
- Final tax effects of the 2017 Tax Act, including the transition-tax estimate and unresolved state-tax and GILTI items.
- Execution and timing of the development pipeline, planned investment spending, Starwood integration and hotel-owner financing conditions.