Marriott International, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2013; year-to-date period ended September 30, 2013. The comparison periods are not equal in length: 2013 Q3 had 92 days versus 84 days in 2012, and the 2013 first three quarters had 276 days versus 252 days in 2012. The financial statements are unaudited.
Business context and operating performance
Marriott operates, franchises, and licenses lodging brands across four segments, with a business model focused primarily on management and franchising rather than hotel ownership. At quarter-end, its system included 3,883 properties and 670,507 rooms in 72 countries and territories.
Comparable worldwide systemwide RevPAR rose 4.8% in Q3 to $104.77, supported by a 3.4% increase in average daily rate and a 1.0 percentage-point increase in occupancy to 74.6%. Management cited improving demand, generally low U.S. supply growth, and better pricing, while noting weaker demand in some markets.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | First three quarters 2013 | First three quarters 2012 |
|---|---|---|---|---|
| Revenue | $3.160 billion | $2.729 billion | $9.565 billion | $8.057 billion |
| Operating income | $245 million | $213 million | $750 million | $631 million |
| Net income | $160 million | $143 million | $475 million | $390 million |
| Diluted EPS | $0.52 | $0.44 | $1.51 | $1.16 |
| Operating cash flow | Not provided for quarter alone | $805 million | $808 million | |
| Capital expenditures | Not provided for quarter alone | $226 million | $316 million |
- Q3 revenue increased 16%, operating income 15%, net income 12%, and diluted EPS 18%. The extra eight reporting days contributed an estimated $37 million of management, franchise, and incentive fee revenue and $26 million of operating income. Cost reimbursements, which are passed through with corresponding expenses and no operating-income impact, were a substantial part of reported revenue growth.
- For the first three quarters, revenue increased 19%, operating income 19%, net income 22%, and diluted EPS 30%. The additional 24 days were estimated to add $99 million in management, franchise, and incentive fee revenue and $71 million in operating income.
- At September 30, cash and equivalents were $144 million, total debt was $3.156 billion, and shareholders’ deficit was $1.409 billion. The current ratio was approximately 0.7:1. Available borrowing capacity, including cash, was $1.353 billion.
- Year-to-date financing included $644 million of treasury-stock purchases and $144 million of dividends paid. Marriott purchased 15.6 million shares at an average $40.31 per share; 18.7 million shares remained authorized for repurchase.
Material changes and unusual items
- Q3 segment results were mixed: North American Full-Service results rose to $96 million from $76 million; North American Limited-Service fell to $131 million from $157 million, primarily because the prior-year quarter included a $41 million joint-venture sale gain; International rose to $39 million from $36 million; and Luxury rose to $22 million from $20 million.
- General, administrative, and other expenses increased to $167 million in Q3 from $132 million, reflecting additional reporting days, higher international and brand-investment costs, and a $3 million impairment of deferred contract acquisition costs. Year-to-date expenses rose to $526 million from $439 million.
- Q3 gains and other income were $1 million, versus $36 million in the prior-year quarter, largely because the prior period included gains associated with a joint-venture sale. Year-to-date gains were $14 million versus $43 million.
- Debt increased from $2.935 billion at year-end 2012, reflecting higher commercial paper borrowings and issuance of $350 million of 3.375% Series M notes due 2020, partly offset by repayment of the $400 million Series J notes at maturity. Marriott extended and increased its revolving credit facility to $2.0 billion, with an expiration date of July 18, 2018.
- After quarter-end, Marriott acquired a managed property for an additional $110 million in cash. The company had entered into a non-binding letter of intent to sell three EDITION hotels for approximately $800 million; the London property’s $232 million of assets were classified as held for sale at quarter-end. The filing does not establish that the proposed sale will be completed.
Outlook, commentary, and risks
- Management expected approximately 30,000 gross room additions in 2013 and approximately 10,000 room exits, largely for financial or quality reasons. The signed development pipeline exceeded 144,000 rooms, with more than 31,000 additional rooms approved but not yet under signed contracts.
- Management expected 2013 investment spending of approximately $600 million to $700 million, including about $100 million for maintenance capital spending. The filing also expected approximately $35 million of additional spin-off-related cash tax benefits in Q4 2013; total expected benefits through 2015 were approximately $480 million.
- North American Marriott Hotels group revenue pace was up nearly 7% for the remainder of 2013 and over 4% for 2014, as of quarter-end. Management reported improving short-term group demand in Q3 but continued weakness in government-related demand.
- Key operating risks include economic and political uncertainty, reduced U.S. government travel and spending, regional demand weakness, competition, premature management or franchise agreement termination, hotel-owner access to financing, execution of the development pipeline, and brand, technology, data-security, and international operating risks.
- Contingencies include guarantees with a maximum potential funding amount of $197 million where Marriott is primary obligor, plus $182 million where it is secondarily liable. The company also disclosed an unresolved employee equity-award class action with no estimable loss range and a Korean competition authority investigation for which no complaint had been received.
Important facts for investors to verify
- Separate underlying fee and operating trends from the effects of extra reporting days and pass-through cost reimbursements.
- Track RevPAR, group booking pace, and regional weakness—particularly government-related demand and the reported declines in some markets.
- Assess whether expense growth, including international and brand-investment costs, is sustainable relative to fee and operating-income growth.
- Monitor commercial paper dependence, debt maturities, liquidity, share repurchases, and compliance with the credit facility’s maximum leverage covenant.
- Confirm progress on the EDITION hotel sale, planned investment spending, room pipeline conversions, and disclosed guarantees and legal matters.