Marriott International, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; unaudited. Marriott operates, franchises and licenses lodging brands in 130 countries and territories. Its asset-light model relies primarily on management and franchise fees. Comparatives for 2017 reflect retrospective adoption of revenue-recognition accounting.
Financial performance
| Metric ($ millions, except per-share data) | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Total revenue | 5,346 | 5,211 | 10,352 | 10,123 |
| Net fee revenue | 938 | 836 | 1,765 | 1,584 |
| Operating income | 740 | 744 | 1,240 | 1,290 |
| Net income | 610 | 489 | 1,008 | 860 |
| Diluted EPS | $1.71 | $1.28 | $2.80 | $2.23 |
| Operating cash flow | Not reported quarterly | Not reported quarterly | 1,129 | 1,186 |
- Q2 revenue rose 3%, net fee revenue 12%, and net income 25% year over year; first-half revenue rose 2%, net fee revenue 11%, and net income 17%.
- Reported operating income declined slightly in Q2 and 4% in the first half. Cost-reimbursement revenue and corresponding expenses are largely pass-through items; their temporary timing differences reduced reported net contribution by $130 million in Q2 and $232 million in the first half versus the prior-year periods.
- Worldwide comparable systemwide RevPAR increased 3.8% in Q2 and 3.7% in the first half. First-half company-operated house-profit margins rose 60 basis points, supported by RevPAR growth and cost savings.
- Q2 gains and other income were $114 million, including $67 million of gains from hotel sales and $42 million from equity-investment sales. First-half gains and other income were $173 million. These gains materially supported reported earnings.
- First-half operating cash flow was $1.129 billion; capital expenditures were $388 million, implying cash flow after capex of approximately $741 million. Cash, cash equivalents and restricted cash totaled $403 million at June 30; balance-sheet cash and equivalents were $366 million.
Debt, liquidity and capital allocation
- Total debt was $8.991 billion at June 30, up from $8.238 billion at year-end 2017; long-term debt excluding its current portion was $8.375 billion. Commercial paper was $3.079 billion. Interest expense was $85 million in Q2 and $160 million in the first half, higher than the corresponding 2017 periods.
- The $4.0 billion revolving credit facility had $915 million of available borrowing capacity; Marriott reported total available borrowing capacity of $1.281 billion including cash. It reported compliance with its maximum-leverage covenant of 4:1. The current ratio was 0.5:1.
- First-half financing included $1.673 billion of treasury-stock purchases and $262 million of dividends paid. The company repurchased 6.2 million shares in Q2; 20.4 million shares remained authorized for repurchase at quarter-end. Dividends declared were $0.74 per share for the first half.
- Marriott issued $450 million of 4.0% notes due 2028. Management expected full-year 2018 capital expenditures and other investments of approximately $800–$900 million, including about $225 million of maintenance capital spending.
Material changes, outlook and risks
- Fee growth reflected unit additions, RevPAR gains and higher co-brand credit-card fees. Marriott added 242 properties (38,192 rooms) in the first half; its system totaled 6,717 properties and 1,286,725 rooms. The development pipeline was approximately 466,000 rooms.
- Segment profit increased in Q2 across the three reportable segments; Asia Pacific’s increase was especially large and substantially reflected property and equity-investment sale gains. First-half North American Full-Service segment profit declined slightly.
- Management said lodging demand was generally favorable, while identifying new supply in some North American markets and geopolitical instability in parts of the Middle East and Africa as constraints. It provided no full-year earnings or RevPAR guidance in the supplied filing text.
- The 2017 Tax Act lowered the effective tax rate: 23.3% in Q2 versus 31.7%, and 22.4% for the first half versus 28.9%. Tax accounting remained provisional; the estimated federal and state transition tax was $740 million, and future adjustments could materially affect tax expense and obligations.
- Risks highlighted include continued Starwood integration and realization of synergies, travel and economic weakness, competition and new room supply, foreign-exchange and geopolitical exposure, cybersecurity and privacy, and labor negotiations. Agreements covering approximately half of Marriott’s organized U.S. associates had expired or were expiring in 2018.
- Guarantees had a maximum potential future funding amount of $367 million and a recorded liability of $188 million. A Sheraton Grand Chicago put option exercisable in 2022 could require a $300 million purchase; its recorded liability was $57 million. Marriott also noted ordinary-course legal proceedings and said it did not expect them to materially harm results, while acknowledging their uncertainty.
- Marriott acquired the managed Sheraton Grand Phoenix for $255 million in Q2. It expects to renovate and sell the property subject to a long-term management agreement. The company also expects adoption of the new lease standard in 2019 to materially affect its balance sheet.
Investor verification priorities
- Separate recurring fee and operating performance from gains on property and investment sales when assessing earnings quality.
- Review cash-flow conversion, capital spending and share repurchases alongside increased debt and commercial-paper reliance.
- Track RevPAR, room openings and pipeline conversion, especially North American supply and weaker Middle East and Africa trends.
- Assess loyalty-program liabilities and revenue estimates, including point breakage and co-brand card assumptions; the loyalty liability reached $5.491 billion.
- Monitor final Tax Act accounting, guarantee exposures, Starwood integration and the potential effects of labor, cyber, currency and geopolitical risks.