Business context and reporting period
Marriott International, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2016. Marriott operated, franchised, or licensed 4,554 properties in 88 countries and territories across 19 brands. Its asset-light model relies primarily on management and franchise fees rather than hotel ownership. Comparisons below are against the corresponding 2015 periods.
Financial performance and position
- Revenue: Second-quarter revenue was $3.902 billion, up 6%; first-half revenue was $7.674 billion, up 7%. Cost reimbursements accounted for $3.142 billion of quarterly revenue and $6.187 billion for the half, with corresponding reimbursed costs; therefore, consolidated revenue growth includes substantial pass-through amounts.
- Profit: Second-quarter operating income was $389 million, up $20 million; net income was $247 million, up 3%, and diluted EPS was $0.96 versus $0.87. First-half operating income was $756 million, up $55 million; net income was $466 million, up 4%, and diluted EPS was $1.80 versus $1.59. Adjusted EBITDA, a non-GAAP measure, was $494 million for the quarter and $952 million for the half, increases of 8% and 7%, respectively.
- Revenue drivers and margins: First-half fee revenue (base management, franchise, and incentive management fees) rose 5% to $995 million. Worldwide comparable systemwide RevPAR increased 2.9% in Q2 and 2.8% for the first half. Comparable company-operated house-profit margins improved 60 basis points in Q2 and 70 basis points for the half. Operating results benefited from fee growth and improved property productivity; general and administrative expense included Starwood-related costs.
- Cash flow: First-half operating cash flow was $798 million, compared with $752 million. Investing activities used $72 million, versus $352 million provided in 2015, which included much larger disposition proceeds. Financing activities used $143 million, versus $1.068 billion, reflecting lower share repurchases and debt issuance/paydown activity. Cash increased $583 million to $679 million.
- Debt and liquidity: Debt totaled $4.360 billion at June 30, up from $4.107 billion at year-end 2015. Marriott issued $1.5 billion face amount of notes due 2022 and 2026, and repaid commercial paper and maturing notes. Long-term debt had a weighted-average interest rate of 3.0% and maturity of about six years. The company reported $2.5 billion of available credit-facility capacity and $679 million cash; it stated available borrowing capacity including cash was $3.179 billion. The current ratio was 0.6 to 1.0, and shareholders’ deficit was $3.462 billion.
- Shareholder returns: First-half dividends were $0.55 per share, up from $0.45. Marriott repurchased $249 million of stock in the first half and said it expected to be more selective in repurchases until debt was reduced toward leverage targets.
Material changes versus the prior comparable period
- Quarterly and first-half net income increased, while operating income growth reflected higher fees, improved owned/leased and other net revenue, and lower depreciation and amortization expense.
- Interest expense rose to $57 million in Q2 from $42 million and to $104 million for the first half from $78 million. Drivers included new notes and $11 million of bridge-loan commitment cost amortization in Q2 ($13 million for the half).
- General, administrative, and other expense rose 11% in both periods, to $168 million in Q2 and $331 million for the half. Starwood transaction and transition costs were $14 million and $22 million, respectively.
- First-half system growth added 148 properties and 20,724 rooms, with 18 properties and 2,330 rooms exiting. The company reported more than 285,000 rooms in its development pipeline at quarter-end.
Outlook, commentary, risks, and unusual items
- Operating outlook: Management said first-half demand and economic growth were favorable in many markets but weaker than expected at the start of the year. It expected full-year 2016 investment spending of approximately $450 million to $550 million, including about $100 million of maintenance capital spending; this estimate excluded additional Starwood-related investment. Group revenue pace for the remainder of 2016 at North American systemwide full-service hotels was up 5% year over year as of June 30.
- Starwood combination: Shareholders of both companies had approved the transaction; Marriott expected closing in Q3 2016, subject to remaining customary conditions, including an additional Chinese regulatory approval. The amended consideration was 0.80 Marriott shares plus $21 cash per Starwood share. Marriott expected $130 million to $150 million of transaction-cost cash outflows and had issued notes partly to fund the cash consideration and related costs.
- Market and execution risks: Management cited weaker premium corporate transient demand in North America, new select-service supply, oil-and-gas weakness, strong-dollar effects, and moderate GDP growth. Regional pressure included Middle East weakness, terrorism-related demand effects in parts of Europe, and Zika concerns and economic weakness in parts of Latin America. Risks also include Starwood closing, integration, costs and dilution; competition including home-sharing services; currency and economic volatility; hotel-owner financing and contract terminations; and cyber and reservation-system disruption.
- Unusual items and contingencies: The prior-year period included a $41 million gain on redemption of a preferred equity interest and $22 million of real-estate disposition losses; these were absent in 2016. Marriott recorded a 2016 tax valuation-allowance release, partly offset by a $5 million foreign-tax examination reserve. Primary-obligor guarantees had a $217 million maximum potential funding amount and $58 million recorded liability. A separate conditional lender put option could require purchase of the Times Square EDITION hotel component for $315 million after opening, although Marriott said it did not expect exercise. An ongoing Korean Fair Trade Commission investigation had not resulted in a complaint or other legal process.
- Controls and accounting: Management concluded disclosure controls were effective and reported no material second-quarter change in internal control over financial reporting. Marriott was assessing the effects of new revenue-recognition, lease, and stock-compensation standards.
Most important facts for investors to verify
- Whether the Starwood transaction closed on schedule, what financing and transaction costs ultimately resulted, and whether expected integration benefits materialized.
- Whether RevPAR, fee revenue, and hotel-level profit trends persisted, especially given regional weakness and softer-than-expected economic growth.
- How debt, interest expense, liquidity, and share repurchases changed after the Starwood financing and combination.
- Whether 2016 investment spending stayed within the stated $450 million–$550 million range and how much additional combination-related spending occurred.
- Developments in the Korean investigation, tax examinations, guarantees, and the conditional $315 million hotel purchase option.