Marriott International, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; quarterly figures below highlight the fourth quarter. Amounts are U.S. dollars unless noted. Marriott operates, franchises, and licenses lodging brands, primarily under an asset-light model. Starwood results are included in consolidated results since its 2016 acquisition; comparisons therefore reflect a combined company.
Financial performance and liquidity
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $20.758 billion | $20.452 billion | +1.5% |
| Operating income | $2.366 billion | $2.504 billion | -5.5% |
| Net income | $1.907 billion | $1.459 billion | +30.7% |
| Diluted EPS | $5.38 | $3.84 | +40.1% |
| Cash from operations | $2.357 billion | $2.227 billion | +5.8% |
| Capital expenditures | $556 million | $240 million | +$316 million |
Operating margin, calculated as operating income divided by revenue, was approximately 11.4% versus 12.2%. Net income rose despite lower operating income, reflecting, among other items, a substantially lower tax provision in 2018; 2017 included a large one-time tax charge related to the U.S. Tax Cuts and Jobs Act and gains from the Avendra sale.
Fourth quarter: Revenue was $5.289 billion versus $5.251 billion; operating income was $422 million versus $424 million; net income was $317 million versus $114 million; diluted EPS was $0.92 versus $0.31.
Fees and lodging trends: Gross fee revenue increased 10% to $3.638 billion, including franchise fees up 17% to $1.849 billion. Worldwide comparable systemwide RevPAR increased 2.6% to $117.37, with occupancy up 0.4 percentage points to 73.2% and ADR up 2.0% to $160.37. Company-operated house-profit margin improved 40 basis points.
Debt and liquidity: Year-end debt was $9.347 billion, up $1.109 billion year over year; cash and equivalents were $316 million. Available borrowing capacity was reported as $2.067 billion, including $1.751 billion of unused credit-facility capacity and cash. The current ratio was 0.4 to 1.0. The $4 billion revolving credit facility matures in June 2021 and includes a maximum leverage covenant of 4-to-1, which Marriott said it was meeting. Long-term debt had a weighted-average interest rate of 3.3% and maturity of approximately 4.8 years.
Material changes and notable items
- Revenue grew modestly, supported by system growth, RevPAR gains, and higher credit-card branding fees. Segment profits declined in North American Full-Service and Limited-Service, while Asia Pacific profits increased 26%, including property-sale gains.
- Net income and EPS benefited from lower income-tax expense. Conversely, 2017 included a $659 million Avendra disposition gain; 2018 included $132 million of property-sale gains and other disposition-related gains.
- Operating cash flow increased, while investing cash flow shifted to a $52 million outflow from $1.211 billion of inflows in 2017, principally reflecting lower sale proceeds and higher capital spending. Financing cash outflow was $2.374 billion, including $2.850 billion of share repurchases and $543 million of dividends.
- Marriott added 494 properties (80,255 rooms) and removed 107 properties (21,176 rooms); its year-end system totaled 6,906 properties and 1.317 million rooms. The development pipeline reached a record 478,000 rooms.
- In 2018, Marriott unified its legacy loyalty programs under one program; the combined program adopted the Marriott Bonvoy name in February 2019.
Outlook, risks, and contingencies
- Management expected net room growth of approximately 5.5% in 2019, including room exits of 1.0%–1.5%. Expected 2019 capital expenditures and other investments were approximately $500 million–$700 million, including about $225 million of maintenance capital spending.
- The Starwood reservations database incident involved unauthorized access dating to 2014. Marriott estimated an upper limit of approximately 383 million guest records involved, while noting multiple records may relate to the same guest. The filing cites approximately 5.25 million unencrypted and 18.5 million encrypted passport numbers, and 9.1 million encrypted payment-card numbers. Total financial exposure could not be estimated; the company anticipated significant future legal, regulatory, security, and insurance costs.
- Marriott faced approximately 100 putative consumer class actions, a securities class action, a shareholder derivative action, and multiple governmental inquiries or investigations relating to the incident. Management said loss was reasonably possible but could not estimate a loss range.
- A material weakness in internal controls over financial reporting concerned loyalty-program accounting, including resources and data reporting following the loyalty-program combination. Earlier 2018 quarterly results were adjusted for errors that increased first-three-quarter net income by $99 million in total; management deemed the errors immaterial to those quarters. Management and the auditor concluded controls were ineffective at year-end. A remediation plan was underway.
- Other material risks include lodging-cycle and geopolitical exposure, competition (including home-sharing and online travel intermediaries), labor costs and disputes, foreign exchange, integration execution, owner agreement terminations, and the possibility of impairment or uninsured losses.
- Recorded guarantee liabilities were $119 million against maximum potential future fundings of $346 million. Marriott also disclosed a $300 million cash purchase obligation exercisable by the Sheraton Grand Chicago owner in 2022, with a recorded liability of $57 million. Contractual obligations totaled $13.208 billion, excluding $507 million of transition-tax payments and $559 million of unrecognized tax benefits.
Most important facts for investors to verify
- Track remediation and any subsequent corrections related to the loyalty-program material weakness; review the auditor’s adverse internal-control opinion alongside its unqualified opinion on the financial statements.
- Monitor the scale and resolution of data-incident litigation, investigations, insurance recoveries, and related costs; the filing does not provide a clear estimate of total exposure.
- Assess recurring earnings separately from 2017’s Avendra gain and 2018’s property and investment-sale gains, and from year-over-year tax effects.
- Verify debt maturities, commercial-paper refinancing access, leverage covenant headroom, and the impact of planned buybacks and investment spending on liquidity.
- Compare realized room growth and RevPAR with management’s 2019 outlook, and assess pipeline conversion, owner investment capacity, and regional demand risks.