MARRIOTT INTERNATIONAL INC /MD/ 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Cautionary Statement All statements in this report are made as of the date this Form 10-Q is filed with the U.S. Securities and Exchange Commission (the “SEC”). We undertake no obligation to publicly update or revise these statements, whether as a result of new information, future events or otherwise. We make forward-looking statements in Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this 13 Table of Contents report based on the beliefs and assumptions of our management and on information available to us through the date this Form 10-Q is filed with the SEC. Forward-looking statements include information related to future demand trends and expectations; our expectations regarding rooms growth; our expectations regarding our ability to meet our liquidity requirements; our capital expenditures and other investment spending expectations; our expectations regarding future dividends and share repurchases; and other statements that are preceded by, followed by, or include the words “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,” “foresees,” or similar expressions; and similar statements concerning anticipated future events and expectations that are not historical facts. We caution you that these statements are not guarantees of future performance and are subject to numerous evolving risks and uncertainties that we may not be able to accurately predict or assess, including the risks and uncertainties we describe in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (“2022 Form 10-K”), Part II, Item 1A of this report, and other factors we describe from time to time in our periodic filings with the SEC. BUSINESS AND OVERVIEW Overview We are a worldwide operator, franchisor, and licensor of hotel, residential, timeshare, and other lodging properties under 31 brand names, including our newly added brand, City Express by Marriott ™ . Under our asset-light business model, we typically manage or franchise hotels, rather than own them . We discuss our operations in the following reportable business segments: (1) U.S. & Canada and (2) International. Terms of our management agreements vary, but our management fees generally consist of base management fees and incentive management fees. Base management fees are typically calculated as a percentage of property-level revenue. Incentive management fees are typically calculated as a percentage of a hotel profitability measure, and, in many cases (particularly in our U.S. & Canada, Europe, and Caribbean & Latin America regions), are subject to a specified owner return. Under our franchise agreements, franchise fees are typically calculated as a percentage of property-level revenue or a portion thereof. Additionally, we earn franchise fees for the use of our intellectual property, such as fees from our co-branded credit card, timeshare, and residential programs. Performance Measures We believe Revenue per Available Room (“RevPAR”), which we calculate by dividing room sales for comparable properties by room nights available for the period, is a meaningful indicator of our performance because it measures the period-over-period change in room revenues for comparable properties. RevPAR may not be comparable to similarly titled measures, such as revenues, and should not be viewed as necessarily correlating with our fee revenue. We also believe occupancy and average daily rate (“ADR”), which are components of calculating RevPAR, are meaningful indicators of our performance. Occupancy, which we calculate by dividing occupied rooms by total rooms available, measures the utilization of a property’s available capacity. ADR, which we calculate by dividing property room revenue by total rooms sold, measures average room price and is useful in assessing pricing levels. RevPAR, occupancy, and ADR statistics are on a systemwide basis for comparable properties, unless otherwise stated. Comparisons to prior periods are on a constant U.S. dollar basis. We calculate constant dollar statistics by applying exchange rates for the current period to the prior comparable period. We define our comparable properties as our properties that were open and operating under one of our brands since the beginning of the last full calendar year (since January 1, 2022 for the current period) and have not, in either the current or previous year: (1) undergone significant room or public space renovations or expansions, (2) been converted between company-operated and franchised, or (3) sustained substantial property damage or business interruption. Business Trends We saw strong global RevPAR improvement during the 2023 first quarter compared to the same period in 2022. For the 2023 first quarter, worldwide RevPAR increased 34.3 percent compared to the 2022 first quarter, reflecting ADR growth of 11.3 percent and occupancy improvement of 11.2 percentage points. The increase in 14 Table of Contents RevPAR was driven by improvement in all customer segments, including robust leisure demand as well as strengthening group and business transient demand as compared to the 2022 first quarter. In the U.S. & Canada, RevPAR increased 25.6 percent in the 2023 first quarter compared to the 2022 first quarter, due to ADR growth of 10.1 percent and occupancy improvement of 8.2 percentage points. The improvement in RevPAR reflected strong demand in many markets within the U.S. & Canada, as compared to the 2022 first quarter, which was negatively impacted by the COVID-19 Omicron variant. Internationally, RevPAR improved 63.1 percent in the 2023 first quarter compared to the 2022 first quarter, due to occupancy improvement of 18.3 percentage points and ADR growth of 16.4 percent. The improvement in RevPAR was driven by strengthening demand, especially from cross-border guests, and meaningful growth in ADR in all regions, as compared to the 2022 first quarter, which in various geographic markets was heavily impacted by COVID-19 and government-imposed travel restrictions. The lifting of travel restrictions throughout Asia Pacific, particularly in Greater China, significantly boosted 2023 first quarter demand in that region. Our business is subject to the effects of changes in global and regional conditions and these conditions can change rapidly. We continue to monitor global economic conditions, and although we are not currently seeing signs of a slowdown in lodging demand, the lodging booking window is short and trends can change quickly. Starwood Data Security Incident On November 30, 2018, we announced a data security incident involving unauthorized access to the Starwood reservations database (the “Data Security Incident”). The Starwood reservations database is no longer used for busi ness operations. We are currently unable to reasonably estimate the range of total possible financial impact to the Company from the Data Security Incident in excess of the expenses already recorded. However, we do not believe this incident will impact our long-term financial health. Although our insurance program includes coverage designed to limit our exposure to losses such as those related to the Data Security Incident, that insurance may not be sufficient or available to cover all of our expenses or other losses (including monetary payments to regulators and/or litigants) related to the Data Security Incident. In addition, certain expenses by their nature (such as, for example, expenses related to enhancing our cybersecurity program) are not covered by our insurance program. We expect to incur significant expenses associated with the Data Security Incident in future periods in excess of the amounts already recorded, primarily related to legal proceedings and regulatory investigations (including possible additional monetary payments to regulators and/or litigants as well as costs associated with compliance with any settlements or resolutions of matters). See Note 5 for additional information related to legal proceedings and governmental investigations related to the Data Security Incident. System Growth and Pipeline At the end of the 2023 first quarter, our system had 8,353 properties (1,534,072 rooms), compared to 8,288 properties (1,525,407 rooms) at year-end 2022 and 8,048 properties (1,487,681 rooms) at the end of the 2022 first quarter. The increase compared to year-end 2022 reflected gross additions of 79 properties (11,015 rooms) and deletions of 14 properties (2,351 rooms). Approximately 53 percent of our 2023 first quarter gross room additions were located outside U.S. & Canada, and 25 percent were conversions from competitor brands. At the end of the 2023 first quarter, we had approximately 502,000 hotel rooms in our development pipeline, which includes roughly 200,000 hotel rooms under construction and more than 21,000 hotel rooms approved for development but not yet under signed contracts. Over half of the rooms in our development pipeline are outside U.S. & Canada. We currently expect full-year 2023 total gross rooms growth of approximately 5.5 percent and net rooms growth of 4.0 to 4.5 percent. 15 Table of Contents Properties and Rooms At March 31, 2023, we operated, franchised, and licensed the following properties and rooms: Managed Franchised/Licensed Owned/Leased Residential Total Properties Rooms Properties Rooms Properties Rooms Properties Rooms Properties Rooms U.S. & Canada 627 214,699 5,172 742,406 14 4,656 67 7,158 5,880 968,919 International 1,366 346,498 926 181,819 38 9,209 49 4,733 2,379 542,259 Timeshare — — 93 22,745 — — — — 93 22,745 Yacht — — 1 149 — — — — 1 149 Total 1,993 561,197 6,192 947,119 52 13,865 116 11,891 8,353 1,534,072 Lodging Statistics The following table presents RevPAR, occupancy, and ADR statistics for comparable properties. Systemwide statistics include data from our franchised properties, in addition to our company-operated properties. Three Months Ended March 31, 2023 and Change vs. Three Months Ended March 31, 2022 RevPAR Occupancy Average Daily Rate 2023 vs. 2022 2023 vs. 2022 2023 vs. 2022 Comparable Company-Operated Properties U.S. & Canada $ 169.53 31.3 % 66.0 % 12.0 % pts. $ 256.81 7.5 % Greater China $ 81.68 77.8 % 64.0 % 23.5 % pts. $ 127.63 12.6 % Asia Pacific excluding China $ 116.36 116.2 % 68.0 % 24.2 % pts. $ 171.21 39.3 % Caribbean & Latin America $ 195.21 41.4 % 66.1 % 10.5 % pts. $ 295.22 19.0 % Europe $ 126.48 67.2 % 60.8 % 18.8 % pts. $ 208.12 15.4 % Middle East & Africa $ 140.62 17.0 % 70.0 % 3.8 % pts. $ 200.79 10.6 % International - All (1) $ 115.77 61.3 % 65.8 % 18.6 % pts. $ 175.90 15.6 % Worldwide (2) $ 139.84 43.5 % 65.9 % 15.6 % pts. $ 212.19 9.5 % Comparable Systemwide Properties U.S. & Canada $ 119.74 25.6 % 65.9 % 8.2 % pts. $ 181.61 10.1 % Greater China $ 76.06 78.3 % 62.9 % 23.3 % pts. $ 120.98 12.2 % Asia Pacific excluding China $ 114.64 112.8 % 67.4 % 23.1 % pts. $ 170.20 39.9 % Caribbean & Latin America $ 165.67 40.9 % 67.4 % 11.7 % pts. $ 245.80 16.4 % Europe $ 98.61 75.6 % 57.2 % 19.5 % pts. $ 172.32 15.8 % Middle East & Africa $ 129.77 19.1 % 68.2 % 4.0 % pts. $ 190.18 12.0 % International - All (1) $ 108.80 63.1 % 63.9 % 18.3 % pts. $ 170.39 16.4 % Worldwide (2) $ 116.45 34.3 % 65.3 % 11.2 % pts. $ 178.31 11.3 % (1) Includes Greater China, Asia Pacific excluding China, Caribbean & Latin America, Europe, and Middle East & Africa. (2) Includes U.S. & Canada and International - All. CONSOLIDATED RESULTS Our consolidated results in the 2023 first quarter improved significantly compared to the 2022 first quarter due to the continued recovery in lodging demand from the impacts of COVID-19. The discussion below presents an additional analysis of our consolidated results of operations for the 2023 first quarter compared to the 2022 first quarter. 16 Table of Contents Fee Revenues Three Months Ended (in millions) March 31, 2023 March 31, 2022 Change 2023 vs. 2022 Base management fees $ 293 $ 213 $ 80 38 % Franchise fees 639 500 139 28 % Incentive management fees 201 102 99 97 % Gross fee revenues 1,133 815 318 39 % Contract investment amortization (21) (24) 3 13 % Net fee revenues $ 1,112 $ 791 $ 321 41 % The increase in base management fees in the 2023 first quarter primarily reflected higher RevPAR. The increase in franchise fees in the 2023 first quarter primarily reflected higher RevPAR, higher co-branded credit card fees ($21 million), and unit growth ($18 million). The increase in incentive management fees in the 2023 first quarter primarily reflected higher profits at certain managed hotels. Owned, Leased, and Other Three Months Ended (in millions) March 31, 2023 March 31, 2022 Change 2023 vs. 2022 Owned, leased, and other revenue $ 356 $ 262 $ 94 36 % Owned, leased, and other - direct expenses 281 197 84 43 % Owned, leased, and other, net $ 75 $ 65 $ 10 15 % Owned, leased, and other revenue, net of direct expenses, increased in the 2023 first quarter primarily due to stronger results at our owned and leased properties, partially offset by $29 million of subsidies received for certain of our leased hotels in the 2022 first quarter under German government COVID-19 assistance programs. Cost Reimbursements Three Months Ended (in millions) March 31, 2023 March 31, 2022 Change 2023 vs. 2022 Cost reimbursement revenue $ 4,147 $ 3,146 $ 1,001 32 % Reimbursed expenses 4,136 3,179 957 30 % Cost reimbursements, net $ 11 $ (33) $ 44 133 % Cost reimbursements, net (cost reimbursement revenue, net of reimbursed expenses) varies due to timing differences between the costs we incur for centralized programs and services and the related rei mbursemen ts we receive from hotel owners and franchisees. Over the long term, our centralized programs and services are not designed to impact our economics, either positively or negatively. The increase in cost reimbursements, net in the 2023 first quarter primarily reflected Loyalty Program activity, primarily due to higher program revenues, as well as higher revenues, net of expenses, for our centralized programs and services. 17 Table of Contents Other Operating Expenses Three Months Ended (in millions) March 31, 2023 March 31, 2022 Change 2023 vs. 2022 Depreciation, amortization, and other $ 44 $ 48 $ (4) (8) % General, administrative, and other 202 208 (6) (3) % Merger-related charges and other 1 9 (8) (89) % Non-Operating Income (Expense) Three Months Ended (in millions) March 31, 2023 March 31, 2022 Change 2023 vs. 2022 Gains and other income, net $ 3 $ 4 $ (1) (25) % Interest expense (126) (93) (33) (35) % Interest income 15 5 10 200 % Equity in earnings 1 2 (1) (50) % Interest expense increased in the 2023 first quarter, primarily due to higher average debt balances driven by Senior Notes issuances. Income Taxes Three Months Ended (in millions) March 31, 2023 March 31, 2022 Change 2023 vs. 2022 Provision for income taxes $ (87) $ (99) $ 12 12 % Provision for income taxes decreased by $12 million in the 2023 first quarter, primarily due to the current year release of tax reserves ($103 million), which was mostly due to the completion of a prior year tax audit, partially offset by the increase in operating income ($86 million). BUSINESS SEGMENTS Our segment results in the 2023 first quarter improved significantly compared to the 2022 first quarter due to the continued recovery in lodging demand from the impacts of COVID-19. The following discussion presents an additional analysis of the operating results of our reportable business segments for the 2023 first quarter compared to the 2022 first quarter. Three Months Ended (in millions) March 31, 2023 March 31, 2022 Change 2023 vs. 2022 U.S. & Canada Segment revenues $ 4,278 $ 3,271 $ 1,007 31 % Segment profit 657 454 203 45 % International Segment revenues 1,008 675 333 49 % Segment profit 252 131 121 92 % Properties Rooms March 31, 2023 March 31, 2022 vs. March 31, 2022 March 31, 2023 March 31, 2022 vs. March 31, 2022 U.S. & Canada 5,880 5,752 128 2 % 968,919 951,731 17,188 2 % International 2,379 2,204 175 8 % 542,259 513,249 29,010 6 % 18 Table of Contents U.S. & Canada U.S. & Canada 2023 first quarter segment profit increased, primarily due to $183 million of higher gross fee revenues. The increase in gross fee revenues primarily reflected higher comparable systemwide RevPAR driven by increases in both ADR and occupancy, higher profits at certain managed hotels, and unit growth. International International 2023 first quarter segment profit increased, primarily due to $114 million of higher gross fee revenues, partially offset by $11 million of lower owned, leased, and other revenue, net of direct expenses. The increase in gross fee revenues primarily reflected higher profits at certain managed hotels and higher comparable systemwide RevPAR driven by increases in both occupancy and ADR in all regions, partially offset by net unfavorable foreign exchange rates. The decrease in owned, leased, and other revenue, net of direct expenses primarily reflected subsidies received for certain of our leased hotels in the 2022 first quarter under German government COVID-19 assistance programs, partially offset by stronger results at owned and leased properties. LIQUIDITY AND CAPITAL RESOURCES Our long-term financial objectives include maintaining diversified financing sources, optimizing the mix and maturity of our long-term debt, and reducing our working capital. At the end of the 2023 first quarter, our long-term debt had a weighted average interest rate of 4.2 percent and a weighted average maturity of approximately 5.8 years. Including the effect of interest rate swaps, the ratio of our fixed-rate long-term debt to our total long-term debt was 0.9 to 1.0 at the end of the 2023 first quarter. Sources of Liquidity Our Credit Facility We are party to a $4.5 billion multicurrency revolving credit agreement (the “Credit Facility”). Available borrowings under the Credit Facility support our commercial paper program and general corporate needs. Borrowings under the Credit Facility generally bear interest at SOFR (the Secured Overnight Financing Rate) plus a spread based on our public debt rating. We also pay quarterly fees on the Credit Facility at a rate based on our public debt rating. We classify outstanding borrowings under the Credit Facility and outstanding commercial paper borrowings as long-term based on our ability and intent to refinance the outstanding borrowings on a long-term basis. The Credit Facility expires on December 14, 2027. The Credit Facility contains certain covenants, including a single financial covenant that limits our maximum leverage (consisting of the ratio of Adjusted Total Debt to EBITDA, each as defined in the Credit Facility) to not more than 4.5 to 1.0. Our outstanding public debt does not contain a corresponding financial covenant or a requirement that we maintain certain financial ratios. We currently satisfy the covenants in our Credit Facility and public debt instruments, including the leverage covenant under the Credit Facility, and do not expect the covenants will restrict our ability to meet our anticipated borrowing and liquidity needs. We monitor the status of the capital markets and regularly evaluate the effect that changes in capital market conditions may have on our ability to fund our liquidity needs. We believe the Credit Facility, and our access to capital markets, together with cash we expect to generate from operations, remain adequate to meet our liquidity requirements. Commercial Paper We issue commercial paper in the U.S. Because we do not have purchase commitments from buyers for our commercial paper, our ability to issue commercial paper is subject to market demand. We do not expect that 19 Table of Contents fluctuations in the demand for commercial paper will affect our liquidity, given our borrowing capacity under the Credit Facility and access to capital markets. Uses of Cash Cash, cash equivalents, and restricted cash totaled $571 million at March 31, 2023, an increase of $46 million from year-end 2022, primarily due to net cash provided by operating activities ($887 million), Senior Notes issuances, net of repayments ($493 million), and commercial paper issuances, net of repayments ($117 million), partially offset by share repurchases ($1,135 million), dividends paid ($124 million), capital and technology expenditures ($95 million), and financing outflows for employee stock-based compensation withholding taxes ($72 million). Net cash provided by operating activities increased by $489 million in the 2023 first quarter compared to the 2022 first quarter, primarily due to higher net income (adjusted for non-cash items) and working capital changes driven by accounts receivable timing. Cash inflow from our Loyalty Program in 2020 included $920 million of cash received from the prepayment of certain future revenues under the 2020 amendments to our existing U.S.-issued co-branded credit card agreements, which reduced in both the 2023 first quarter and 2022 first quarter, and will in the future reduce, the amount of cash we receive from these card issuers. We expect such reductions to end by year-end 2023. Our ratio of current assets to current liabilities was 0.5 to 1.0 at the end of the 2023 first quarter. We have significant borrowing capacity under our Credit Facility should we need additional working capital. Capital Expenditures and Other Investments We made capital and technology expenditures of $95 million in the 2023 first quarter and $49 million in the 2022 first quarter. We expect capital expenditures and other investments will total approximately $850 million to $1 billion for the 2023 full year, including capital and technology expenditures, loan advances, contract acquisition costs, and other investing activities (including approximately $250 million for maintenance capital spending). This estimate also includes $100 million of investment spending related to the City Express brand acquisition discussed in Note 7, which closed on May 1, 2023. Share Repurchases and Dividends We repurchased 6.8 million shares of our common stock for $1.1 billion in the 2023 first quarter. Year-to-date through April 28, 2023, we repurchased 8.2 million shares for $1.4 billion. For additional information, see “Issuer Purchases of Equity Securities” in Part II, Item 2. On February 10, 2023, our Board of Directors declared a quarterly cash dividend of $0.40 per share, which was paid on March 31, 2023 to stockholders of record on February 24, 2023. We expect to continue to return cash to stockholders through a combination of share repurchases and cash dividends. Material Cash Requirements As of the end of the 2023 first quarter, there have been no material changes to our cash requirements as disclosed in our 2022 Form 10-K. See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of our 2022 Form 10-K for more information about our cash requirements. Also, see Note 6 for information on our long-term debt. At March 31, 2023, projected Deemed Repatriation Transition Tax payments under the U.S. tax legislation enacted on December 22, 2017, commonly referred to as the 2017 Tax Cuts and Jobs Act, totaled $326 million, of which $84 million is payable within the next 12 months from March 31, 2023. 20 Table of Contents CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures. We have discussed those policies and estimates that we believe are critical and require the use of complex judgment in their application in our 2022 Form 10-K. We have made no material changes to our critical accounting policies or the methodologies or assumptions that we apply under them. Item 3. Quantitative and Qualitative Disclosures About Market Risk Our exposure to market risk has not materially changed since December 31, 2022. See Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in our 2022 Form 10-K for more information on our exposure to market risk.