MARRIOTT INTERNATIONAL INC annual report, FY2017

Marriott International, Inc. — 2017 Form 10-K

Reporting period: Fiscal year ended December 31, 2017; the filing also reports unaudited fourth-quarter results. Unless noted, financial figures are in U.S. dollars. Marriott operates, franchises, and licenses hotel brands, generally with limited property ownership. Its results include Starwood from the September 2016 acquisition date, so year-over-year comparisons are affected by the additional months of Starwood operations in 2017.

Financial and operating highlights

Metric	2017	2016
Revenue	$22.894 billion	$17.072 billion
Operating income	$2.359 billion	$1.368 billion
Net income	$1.372 billion	$780 million
Diluted earnings per share	$3.61	$2.64
Cash provided by operations	$2.436 billion	$1.682 billion
Long-term debt, including current portion	$8.238 billion	$8.506 billion
Cash and equivalents at year-end	$383 million	$858 million

Revenue increased 34%; fee revenue rose 39% to $3.327 billion, with higher Legacy-Starwood fees and Legacy-Marriott growth both contributing. Cost-reimbursement revenue, which is matched by reimbursed expenses and has no operating-income impact, rose 31% to $17.765 billion.
Operating margin was approximately 10.3%, compared with 8.0% in 2016; net margin was approximately 6.0%, compared with 4.6%. These comparisons reflect acquisition timing and unusual items.
Fourth-quarter revenue was $5.875 billion, operating income $570 million, net income $201 million, and diluted EPS $0.54. Fourth-quarter net income included the provisional tax expense under the 2017 Tax Act and the Avendra disposition gain.
Comparable systemwide RevPAR rose 3.1% worldwide to $115.02; occupancy increased 1.4 percentage points to 73.2%, and ADR rose 1.2% to $157.12. Company-operated house-profit margins improved 80 basis points worldwide.
At year-end, the system comprised 6,520 properties and 1,257,666 rooms. The company added 473 properties and reported a record pipeline of about 460,000 rooms.
Operating cash flow increased to $2.436 billion. Capital expenditures were $240 million. Marriott repurchased 29.2 million shares for $3.013 billion in cash and paid $482 million in dividends.
Year-end debt was $8.238 billion, including $2.371 billion of commercial paper. Weighted-average long-term debt interest rate was 2.9%, with approximately five years’ weighted-average maturity. Available borrowing capacity, including cash, was $2.010 billion; the current ratio was 0.5.

Material changes and unusual items

Revenue, operating income, and earnings increased substantially, but 2017 included a full year of Starwood results versus only the post-merger period in 2016. Fee growth also reflected room additions and stronger comparable-property performance.
Gains and other income were $688 million, principally including a $659 million pre-tax gain on the sale of Marriott’s Avendra interest and a $24 million gain on a hotel sale. Marriott committed to use Avendra proceeds above its original investment for the benefit of its hotel system; subsequent spending is expected to be expensed.
The income-tax provision was $1.464 billion, producing a 51.6% effective tax rate. The company recorded a provisional $745 million transition-tax expense and a $159 million benefit from remeasuring deferred taxes after the U.S. federal rate reduction; the filing reports a net $586 million increase in 2017 tax expense from the Tax Act. Estimates remained incomplete and could change.
Merger-related costs and charges were $159 million, down from $386 million in 2016. Interest expense increased to $288 million, primarily reflecting acquisition-related debt and commercial-paper borrowings.
Cash from investing activities was positive $1.020 billion, supported by $1.418 billion of disposition proceeds. Financing activities used $3.931 billion, largely reflecting share repurchases, dividends, and debt repayment.

Outlook, commentary, and risks

Management expected 2018 open-room growth of approximately 7% gross, with exits of 1% to 1.5%. Planned investment spending was approximately $600 million to $700 million, including about $225 million for maintenance capital.
Management expected new U.S. co-brand credit-card agreements to benefit revenue beginning in 2018. It also planned approximately $140 million of workforce investments, about $70 million of which was expected to come from Avendra proceeds.
The company said the Tax Act’s overall effect on future results was expected to be positive, while noting that its analysis and provisional accounting were unfinished. The filing does not provide a quantified earnings forecast.
Key risks include completing Starwood integration and realizing synergies; potential disruption to reservations, loyalty, and technology systems; competition from hotel groups and home-sharing services; economic, geopolitical, currency, and travel-demand volatility; cyberattacks and privacy obligations; labor negotiations; and possible hotel-owner agreement terminations.
Marriott was assessing regulatory compliance matters at several Legacy-Starwood locations, including potential Foreign Corrupt Practices Act issues; any resulting contingency was not estimable. The filing also cites hurricane-related property damage, expected increases in property-insurance costs, and nine Caribbean hotels still closed at year-end.
Contractual obligations totaled $12.130 billion, including $9.121 billion of debt payments and interest and $2.292 billion of operating leases. Separately, estimated Tax Act transition-tax cash payments totaled $600 million. Guarantees had a maximum potential funding amount of $377 million, against a recorded liability of $130 million.

Important facts for investors to verify

Separate organic or comparable-property growth from the effect of Starwood’s inclusion and the expansion of the hotel system.
Review the tax provision, provisional transition-tax estimate, expected payment schedule, and any subsequent measurement-period adjustments.
Assess the sustainability of reported earnings excluding the Avendra and property-sale gains, and understand planned hotel-system spending of those proceeds.
Monitor debt, commercial-paper refinancing access, the 0.5 current ratio, share repurchases, and the timing of significant debt maturities.
Track integration progress, potential FCPA-related contingencies, hurricane closures and insurance costs, and the execution of 2018 room-growth and investment plans.

Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.