The FINANCIAL — Marriott International, Inc. on February 14 reported fourth quarter 2017 results.
The discussion in the first section below reflects reported results for the fourth quarter in accordance with U.S. generally accepted accounting principles (GAAP). To further assist investors, the company is also providing adjusted results for the 2017 and 2016 fourth quarters that exclude merger-related adjustments associated with the company’s acquisition of Starwood Hotels & Resorts Worldwide (Starwood) on September 23, 2016. In addition, the company has adjusted results for the 2017 fourth quarter to exclude the gain on the disposition of the company’s ownership interest in Avendra (Avendra gain) and the provisional charge resulting from the U.S. Tax Cuts and Jobs Act of 2017 (Tax Act).
Branding fees from credit cards and residential sales are reported in the Franchise fees line on the income statement. Prior to the first quarter of 2017, those fees were reported in Owned, leased, and other revenue. Reported results for the 2016 periods on pages A-1 and A-2, adjusted results on page A-3, and combined results on page A-4 have been reclassified to conform to the current reporting, according to Marriott International.
Arne M. Sorenson, president and chief executive officer of Marriott International, said, “2017 was a terrific year. We made great progress on the integration of Starwood, capturing significant property and corporate overhead cost synergies while also increasing our worldwide RevPAR index. We entered into a joint venture with Alibaba to better engage with Chinese customers and invested in PlacePass to provide our guests with even more experiential travel opportunities. We also signed strategic new credit card agreements that will allow us to strengthen our customer offerings, generate significant benefits for our owners and franchisees, and provide higher branding fees for Marriott.
“In the first full year after acquiring Starwood, solid RevPAR gains, strong rooms growth, and property-level margin improvement combined to deliver record fee revenue. With our owners and franchisees, we opened over 76,000 rooms during the year to reach over 1.25 million rooms. Significant new signings drove our development pipeline to a record 460,000 rooms, over 80 percent of which are in the upscale, upper upscale or luxury tiers. Compared to combined full year 2016 results, worldwide systemwide RevPAR rose 3 percent during the year; adjusted operating income increased 13 percent; and adjusted earnings per share increased 32 percent. We returned $3.5 billion to shareholders in share repurchases and dividends during the year.
“In 2018, we anticipate our number of rooms will increase roughly 7 percent gross, while rooms deletions should total 1 to 1.5 percent during the year. We also continue to expect global RevPAR will increase by 1 to 3 percent. As a result of U.S. tax reform, we expect our effective tax rate in 2018 will decline meaningfully to approximately 22 percent. Not including incremental asset sales, we expect to return roughly $2.5 billion to shareholders in share repurchases and dividends in 2018.
“Our company was founded on the principle of taking care of our associates, so they take care of our guests, who then keep coming back. For 2018, we plan to invest in our workforce by offering an additional one-time contribution to the Marriott International retirement savings plans. Structured as a $5-to-$1 company match of up to $1,000, the vast majority of participating associates should receive this incremental company contribution. This contribution will be available to eligible associates at company-operated hotels, as well as those in corporate and regional offices, in the U.S. We also expect to invest in global associate support programs.”
Fourth Quarter 2017 GAAP – Financial Results As Reported
Marriott reported net income totaled $201 million in the 2017 fourth quarter, an 18 percent decrease from 2016 fourth quarter net income of $244 million. Reported diluted earnings per share (EPS) was $0.54 in the quarter, a 13 percent decrease from diluted EPS of $0.62 in the year-ago quarter.
Base management and franchise fees totaled $695 million in the 2017 fourth quarter, an 11 percent increase over base management and franchise fees of $624 million in the year-ago quarter. The year-over-year increase in these fees is primarily attributable to higher RevPAR, unit growth, higher branding and relicensing fees, and higher other property-level sales.
Fourth quarter 2017 worldwide incentive management fees increased to $170 million, a 14 percent increase compared to incentive management fees of $149 million in the year-ago quarter. The year-over-year increase was largely due to higher net house profit at full-service properties in North America and the Asia Pacific region.
Owned, leased, and other revenue, net of direct expenses, totaled $95 million in the 2017 fourth quarter, compared to $109 million in the year-ago quarter. The year-over-year decrease largely reflects the negative impact from sold hotels, partially offset by stronger results at a few North American owned and leased hotels.
General, administrative, and other expenses for the 2017 fourth quarter totaled $259 million, compared to $234 million in the year-ago quarter. The year-over-year increase was largely due to higher incentive compensation and $7 million of litigation reserves, partially offset by general and administrative cost savings. General, administrative, and other expenses in the 2016 fourth quarter benefited from an $8 million favorable legal settlement.
Gains and other income, net, totaled $657 million in the 2017 fourth quarter, largely reflecting the $659 million Avendra gain.
Interest expense, net, totaled $58 million in the fourth quarter compared to $62 million in the year-ago quarter. The decrease was largely due to the maturity of Series I Senior Notes.
Equity in earnings for the 2017 fourth quarter totaled $10 million, compared to $2 million in the year-ago quarter. The year-over-year increase largely reflects a $5 million gain on the sale of a hotel in a North American joint venture.
The provision for income taxes totaled $978 million in the fourth quarter, an 83.0 percent effective tax rate, compared to $139 million in the year-ago quarter, a 36.3 percent effective tax rate. With the enactment of the Tax Act, the fourth quarter 2017 tax provision includes a $567 million charge. The charge is the net of a $745 million transition tax on accumulated foreign earnings, which will be paid over eight years, a $159 million tax benefit related to the revaluation of the company’s net deferred tax liabilities at lower rates, and $19 million of other tax benefits. This tax charge is based on the company’s initial analysis of the Tax Act and may be adjusted in future periods. The fourth quarter 2017 tax provision also includes $259 million of taxes related to the Avendra gain, a $34 million reduction of tax benefits related to lower merger-related costs and charges year-over-year and $17 million of taxes related to the increase in earnings. These charges were partially offset by $21 million of tax benefits due to higher proportion of earnings in lower tax jurisdictions, a $10 million tax benefit resulting from the adoption of Accounting Standards Update 2016-09 (the stock-based compensation standard), which changes the GAAP reporting of excess tax benefits associated with employee stock-based compensation, and $7 million of net favorable discrete tax items.
Fourth Quarter 2017 Financial Results As Adjusted
Fourth quarter 2017 adjusted net income totaled $415 million, a 24 percent increase over 2016 fourth quarter adjusted net income of $334 million. Adjusted net income for the fourth quarters of 2017 and 2016 exclude $59 million ($47 million after-tax) and $136 million ($90 million after-tax) of merger-related adjustments, respectively. Adjusted net income for the fourth quarter of 2017 also excludes the $659 million ($400 million after-tax) Avendra gain and the $567 million provisional charge resulting from the Tax Act described above. Adjusted diluted EPS in the fourth quarter totaled $1.12, a 32 percent increase from adjusted diluted EPS of $0.85 in the year-ago quarter. See page A-3 for the calculation of adjusted results.
Base management and franchise fees totaled $695 million in the fourth quarter of 2017, an 11 percent increase over base management and franchise fees of $624 million in the year-ago quarter. The year-over-year increase in these fees is primarily attributable to higher RevPAR, unit growth, higher branding and relicensing fees, and higher other property-level sales.
Fourth quarter 2017 worldwide incentive management fees increased to $170 million, a 14 percent increase compared to incentive management fees of $149 million in the year-ago quarter. The year-over-year increase was largely due to higher net house profit at full-service properties in North America and the Asia Pacific region.
Owned, leased, and other revenue, net of direct expenses, totaled $95 million in the 2017 fourth quarter, compared to $109 million in the year-ago quarter. The year-over-year decrease largely reflects the negative impact from sold hotels, partially offset by stronger results at a few North American owned and leased hotels.
General, administrative, and other expenses for the 2017 fourth quarter totaled $259 million, compared to $234 million in the year-ago quarter. The year-over-year increase was largely due to higher incentive compensation and $7 million of litigation reserves, partially offset by general and administrative cost savings. General, administrative, and other expenses in the 2016 fourth quarter benefited from an $8 million favorable legal settlement.
Interest expense, net, totaled $58 million in the fourth quarter, compared to net expense of $62 million in the year-ago quarter. The decrease was largely due to the maturity of Series I Senior Notes.
Equity in earnings for the 2017 fourth quarter totaled $10 million, compared to $2 million in the year-ago quarter. The year-over-year increase largely reflects a $5 million gain on the sale of a hotel in a North American joint venture.
The adjusted provision for income taxes totaled $164 million in the fourth quarter, a 28.3 percent effective rate, compared to the adjusted provision for income taxes of $185 million in the 2016 fourth quarter, a 35.6 percent effective rate. The adjusted provision for the fourth quarter of 2017 includes $21 million of tax benefits due to higher proportion of earnings in lower tax jurisdictions, a $10 million tax benefit resulting from the adoption of the stock-based compensation standard and $7 million of net favorable discrete tax items, partially offset by $17 million of taxes related to the increase in earnings.
For the fourth quarter, adjusted EBITDA totaled $808 million, a 7 percent increase over fourth quarter 2016 adjusted EBITDA of $756 million. Compared to the prior year, adjusted EBITDA for the fourth quarter of 2017 reflects a $16 million negative impact from sold hotels. See page A-12 for the adjusted EBITDA calculations.
Fourth Quarter 2017 Financial Results Compared to November 7, 2017 Guidance
On November 7, 2017, the company estimated total fee revenue for the fourth quarter would be $825 million to $835 million. Actual total fee revenue of $865 million in the quarter was higher than estimated, largely reflecting RevPAR above the high end of the guidance range and higher than anticipated hotel operating margins, higher than expected branding and relicensing fees, and the recognition of $3 million of previously deferred incentive management fees.
The company estimated owned, leased, and other revenue, net of direct expenses, for the fourth quarter would total approximately $90 million. Actual results of $95 million in the quarter were higher than estimated, largely due to $3 million of termination fees.
The company estimated general, administrative, and other expenses for the fourth quarter would total $240 million to $245 million. Actual expenses of $259 million in the quarter were higher than expected largely due to $7 million of litigation reserves and $5 million of higher than anticipated development expenses.
The company estimated interest expense, net, for the fourth quarter would total approximately $65 million. Actual net expense of $58 million in the quarter was lower than expected due to lower commercial paper balances and the reversal of discount reserves resulting from early loan repayments.
The company estimated equity in earnings for the fourth quarter would total approximately $5 million. Actual earnings of $10 million in the quarter were higher than expected, largely due to a $5 million gain on the sale of a hotel in a North American joint venture.
Selected Performance Information
The company added 132 new properties (21,061 rooms) to its worldwide lodging portfolio during the 2017 fourth quarter, including the Marriott Santa Cruz de la Sierra Hotel, the company’s first hotel in Bolivia, the Bulgari Resort Dubai, and the Delta Hotel Shanghai Baoshan, the first Delta Hotel in the Asia Pacific region. Thirteen properties (2,786 rooms) exited the system during the quarter. At year-end, Marriott’s lodging system encompassed 6,520 properties and timeshare resorts with nearly 1,258,000 rooms.
At year-end, the company’s worldwide development pipeline totaled 2,708 properties with more than 460,000 rooms, including 1,136 properties with roughly 201,000 rooms under construction and 165 properties with nearly 34,000 rooms approved for development, but not yet subject to signed contracts.
In the 2017 fourth quarter, worldwide comparable systemwide constant dollar RevPAR increased 4.6 percent (a 5.3 percent increase using actual dollars). North American comparable systemwide constant dollar RevPAR increased 3.9 percent (a 4.1 percent increase using actual dollars), and international comparable systemwide constant dollar RevPAR increased 6.2 percent (an 8.4 percent increase using actual dollars) for the same period.
Full year 2017 comparisons to combined 2016 information presented below assume Marriott’s acquisition of Starwood and Starwood’s sale of its timeshare business had been completed on January 1, 2015.
The company added 473 new properties (76,589 rooms) to its worldwide lodging portfolio during 2017. Sixty-nine properties (12,952 rooms) exited the system during the year.
For full year 2017, 71 percent of worldwide company-managed hotels earned incentive management fees compared to 70 percent in 2016. In North America, 60 percent of company-managed hotels earned incentive management fees in 2017 compared to 60 percent a year ago. Outside North America, 80 percent of company-managed hotels earned incentive management fees in 2017, compared to 78 percent in 2016. In addition, the company earned 62 percent of its incentive management fees in 2017 at properties outside North America, compared to 61 percent a year ago.
Worldwide comparable company-operated house profit margins increased 80 basis points for full year 2017, largely due to higher RevPAR, better productivity, solid cost controls, and synergies from the Starwood acquisition. House profit margins for comparable company-operated properties outside North America rose 130 basis points and North American comparable company-operated house profit margins increased 40 basis points over 2016.
Balance Sheet
At year-end, Marriott’s total debt was $8,238 million and cash balances totaled $383 million, compared to $8,506 million in debt and $858 million of cash at year-end 2016.
Marriott Common Stock
Weighted average fully diluted shares outstanding used to calculate both reported and adjusted diluted EPS totaled 369.9 million in the 2017 fourth quarter, compared to 394.0 million shares in the year-ago quarter.
The company repurchased 7.4 million shares of common stock in the fourth quarter at a cost of $925 million at an average price of $124.99. For full year 2017, Marriott repurchased 29.2 million shares of common stock at a cost of $3.0 billion at an average price of $103.66. To date in 2018, the company has repurchased 2.3 million shares for $315 million at an average price of $139.02.
OUTLOOK
In the 2018 first quarter, the company plans to adopt Accounting Standards Update 2014-09 (the new revenue standard), which changes the GAAP reporting for revenue and expense recognition for franchise application and relicensing fees, contract investment costs, the quarterly timing of incentive fee recognition, and centralized programs and services, among other items. While the new revenue standard will result in changes to the reporting of certain revenue and expense items, Marriott’s cash flow and business fundamentals will not be impacted. A discussion of expected revenue recognition changes can be found in the company’s Third Quarter 2017 Form 10-Q filed on November 8, 2017.
Discussion about this post