MARRIOTT INTERNATIONAL INC /MD/ - Quarter Report: 2022 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________
FORM 10-Q
_________________________________________________
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended September 30, 2022
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from to
Commission File No. 1-13881
_________________________________________________
MARRIOTT INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
_______________________________________
| Delaware | 52-2055918 | |||||||||||||||||||
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |||||||||||||||||||
| 7750 Wisconsin Avenue | Bethesda | Maryland | 20814 | |||||||||||||||||
(Address of principal executive offices) | (Zip Code) | |||||||||||||||||||
(301) 380-3000
(Registrant’s telephone number, including area code)
| Securities registered pursuant to Section 12(b) of the Act: | ||||||||||||||
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered | ||||||||||||
| Class A Common Stock, $0.01 par value | MAR | Nasdaq Global Select Market | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ý | Accelerated filer | ¨ | |||||||||||||||||
| Non-accelerated filer | ¨ | Smaller reporting company | ☐ | |||||||||||||||||
| Emerging growth company | ☐ | |||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ | ||||||||||||||||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 316,539,613 shares of Class A Common Stock, par value $0.01 per share, outstanding at October 27, 2022.
MARRIOTT INTERNATIONAL, INC.
FORM 10-Q TABLE OF CONTENTS
| Page No. | ||||||||
| Part I. | ||||||||
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Part II. | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 6. | ||||||||
2
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
($ in millions, except per share amounts)
(Unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | ||||||||||||||||||||
| REVENUES | |||||||||||||||||||||||
| Base management fees | $ | 275 | $ | 190 | $ | 757 | $ | 452 | |||||||||||||||
| Franchise fees | 678 | 533 | 1,847 | 1,270 | |||||||||||||||||||
| Incentive management fees | 106 | 53 | 343 | 141 | |||||||||||||||||||
| Gross fee revenues | 1,059 | 776 | 2,947 | 1,863 | |||||||||||||||||||
| Contract investment amortization | (22) | (21) | (65) | (56) | |||||||||||||||||||
| Net fee revenues | 1,037 | 755 | 2,882 | 1,807 | |||||||||||||||||||
| Owned, leased, and other revenue | 345 | 241 | 971 | 536 | |||||||||||||||||||
| Cost reimbursement revenue | 3,931 | 2,950 | 10,997 | 7,068 | |||||||||||||||||||
| 5,313 | 3,946 | 14,850 | 9,411 | ||||||||||||||||||||
| OPERATING COSTS AND EXPENSES | |||||||||||||||||||||||
| Owned, leased, and other-direct | 301 | 204 | 779 | 507 | |||||||||||||||||||
| Depreciation, amortization, and other | 50 | 64 | 147 | 166 | |||||||||||||||||||
| General, administrative, and other | 216 | 212 | 655 | 610 | |||||||||||||||||||
| Restructuring, merger-related charges, and other | 2 | 4 | 11 | 8 | |||||||||||||||||||
| Reimbursed expenses | 3,786 | 2,917 | 10,792 | 7,005 | |||||||||||||||||||
| 4,355 | 3,401 | 12,384 | 8,296 | ||||||||||||||||||||
| OPERATING INCOME | 958 | 545 | 2,466 | 1,115 | |||||||||||||||||||
| Gains and other income, net | 3 | — | 9 | 6 | |||||||||||||||||||
| Loss on extinguishment of debt | — | (164) | — | (164) | |||||||||||||||||||
| Interest expense | (100) | (107) | (288) | (323) | |||||||||||||||||||
| Interest income | 7 | 8 | 18 | 22 | |||||||||||||||||||
| Equity in earnings (losses) | 1 | (4) | 18 | (24) | |||||||||||||||||||
| INCOME BEFORE INCOME TAXES | 869 | 278 | 2,223 | 632 | |||||||||||||||||||
| Provision for income taxes | (239) | (58) | (538) | (1) | |||||||||||||||||||
| NET INCOME | $ | 630 | $ | 220 | $ | 1,685 | $ | 631 | |||||||||||||||
| EARNINGS PER SHARE | |||||||||||||||||||||||
| Earnings per share - basic | $ | 1.94 | $ | 0.67 | $ | 5.15 | $ | 1.93 | |||||||||||||||
| Earnings per share - diluted | $ | 1.94 | $ | 0.67 | $ | 5.13 | $ | 1.92 | |||||||||||||||
See Notes to Condensed Consolidated Financial Statements.
3
MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in millions)
(Unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | ||||||||||||||||||||
| Net income | $ | 630 | $ | 220 | $ | 1,685 | $ | 631 | |||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
| Foreign currency translation adjustments | (340) | (138) | (653) | (197) | |||||||||||||||||||
| Other adjustments, net of tax | 1 | — | 5 | — | |||||||||||||||||||
| Total other comprehensive income (loss), net of tax | (339) | (138) | (648) | (197) | |||||||||||||||||||
| Comprehensive income | $ | 291 | $ | 82 | $ | 1,037 | $ | 434 | |||||||||||||||
See Notes to Condensed Consolidated Financial Statements.
4
MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in millions)
| (Unaudited) | |||||||||||
| September 30, 2022 | December 31, 2021 | ||||||||||
| ASSETS | |||||||||||
| Current assets | |||||||||||
| Cash and equivalents | $ | 1,045 | $ | 1,393 | |||||||
| Accounts and notes receivable, net | 2,378 | 1,982 | |||||||||
| Prepaid expenses and other | 261 | 251 | |||||||||
| 3,684 | 3,626 | ||||||||||
| Property and equipment, net | 1,509 | 1,503 | |||||||||
| Intangible assets | |||||||||||
| Brands | 5,727 | 5,979 | |||||||||
| Contract acquisition costs and other | 2,880 | 2,947 | |||||||||
| Goodwill | 8,765 | 9,073 | |||||||||
| 17,372 | 17,999 | ||||||||||
| Equity method investments | 332 | 387 | |||||||||
| Notes receivable, net | 132 | 144 | |||||||||
| Deferred tax assets | 228 | 228 | |||||||||
| Operating lease assets | 947 | 1,062 | |||||||||
| Other noncurrent assets | 559 | 604 | |||||||||
| $ | 24,763 | $ | 25,553 | ||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities | |||||||||||
| Current portion of long-term debt | $ | 558 | $ | 805 | |||||||
| Accounts payable | 746 | 726 | |||||||||
| Accrued payroll and benefits | 1,260 | 1,187 | |||||||||
| Liability for guest loyalty program | 3,094 | 2,522 | |||||||||
| Accrued expenses and other | 1,454 | 1,167 | |||||||||
| 7,112 | 6,407 | ||||||||||
| Long-term debt | 8,860 | 9,333 | |||||||||
| Liability for guest loyalty program | 3,552 | 3,949 | |||||||||
| Deferred tax liabilities | 273 | 169 | |||||||||
| Deferred revenue | 1,085 | 1,181 | |||||||||
| Operating lease liabilities | 1,007 | 1,098 | |||||||||
| Other noncurrent liabilities | 1,811 | 2,002 | |||||||||
| Stockholders’ equity | |||||||||||
| Class A Common Stock | 5 | 5 | |||||||||
| Additional paid-in-capital | 5,919 | 5,892 | |||||||||
| Retained earnings | 11,795 | 10,305 | |||||||||
| Treasury stock, at cost | (15,666) | (14,446) | |||||||||
| Accumulated other comprehensive loss | (990) | (342) | |||||||||
| 1,063 | 1,414 | ||||||||||
| $ | 24,763 | $ | 25,553 | ||||||||
See Notes to Condensed Consolidated Financial Statements.
5
MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions)
(Unaudited)
| Nine Months Ended | |||||||||||
| September 30, 2022 | September 30, 2021 | ||||||||||
| OPERATING ACTIVITIES | |||||||||||
| Net income | $ | 1,685 | $ | 631 | |||||||
| Adjustments to reconcile to cash provided by operating activities: | |||||||||||
| Depreciation, amortization, and other | 212 | 222 | |||||||||
| Stock-based compensation | 144 | 138 | |||||||||
| Income taxes | 197 | (292) | |||||||||
| Liability for guest loyalty program | (17) | 54 | |||||||||
| Contract acquisition costs | (92) | (143) | |||||||||
| Restructuring, merger-related charges, and other | (1) | (5) | |||||||||
| Working capital changes | (225) | 71 | |||||||||
Loss on extinguishment of debt | — | 164 | |||||||||
| Deferred revenue changes and other | 19 | (95) | |||||||||
| Net cash provided by operating activities | 1,922 | 745 | |||||||||
| INVESTING ACTIVITIES | |||||||||||
| Capital and technology expenditures | (192) | (114) | |||||||||
| Dispositions | — | 8 | |||||||||
| Loan advances | (10) | (10) | |||||||||
| Loan collections | 12 | 38 | |||||||||
| Other | 53 | (3) | |||||||||
| Net cash used in investing activities | (137) | (81) | |||||||||
| FINANCING ACTIVITIES | |||||||||||
| Credit Facility, net | (1,050) | (150) | |||||||||
| Issuance of long-term debt | 983 | 1,787 | |||||||||
| Repayment of long-term debt | (578) | (2,172) | |||||||||
| Issuance of Class A Common Stock | — | 2 | |||||||||
| Debt extinguishment costs | — | (155) | |||||||||
| Dividends paid | (195) | — | |||||||||
| Purchase of treasury stock | (1,235) | — | |||||||||
| Stock-based compensation withholding taxes | (88) | (85) | |||||||||
| Other | 25 | 12 | |||||||||
| Net cash used in financing activities | (2,138) | (761) | |||||||||
| DECREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH | (353) | (97) | |||||||||
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, beginning of period (1) | 1,421 | 894 | |||||||||
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, end of period (1) | $ | 1,068 | $ | 797 | |||||||
(1)The 2022 amounts include beginning restricted cash of $28 million at December 31, 2021, and ending restricted cash of $23 million at September 30, 2022, which we present in the “Prepaid expenses and other” and “Other noncurrent assets” captions of our Balance Sheets.
See Notes to Condensed Consolidated Financial Statements.
6
MARRIOTT INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The condensed consolidated financial statements present the results of operations, financial position, and cash flows of Marriott International, Inc. and subsidiaries (referred to in this report as “we,” “us,” “Marriott,” or the “Company”). In order to make this report easier to read, we also refer throughout to (1) our Condensed Consolidated Financial Statements as our “Financial Statements,” (2) our Condensed Consolidated Statements of Income as our “Income Statements,” (3) our Condensed Consolidated Balance Sheets as our “Balance Sheets,” (4) our Condensed Consolidated Statements of Cash Flows as our “Statements of Cash Flows,” (5) our properties, brands, or markets in the United States and Canada as “U.S. & Canada,” and (6) our properties, brands, or markets in our Caribbean and Latin America, Europe, Middle East and Africa, Greater China, and Asia Pacific excluding China regions, as “International.” In addition, references throughout to numbered “Notes” refer to these Notes to Condensed Consolidated Financial Statements, unless otherwise stated.
These Financial Statements have not been audited. We have condensed or omitted certain information and disclosures normally included in financial statements presented in accordance with U.S. generally accepted accounting principles (“GAAP”). The financial statements in this report should be read in conjunction with the consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (“2021 Form 10-K”). Certain terms not otherwise defined in this Form 10-Q have the meanings specified in our 2021 Form 10-K.
Preparation of financial statements that conform with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, the reported amounts of revenues and expenses during the reporting periods, and the disclosures of contingent liabilities. The uncertainty created by the coronavirus pandemic (“COVID-19”) has made such estimates more difficult and subjective. Accordingly, ultimate results could differ from those estimates.
The accompanying Financial Statements reflect all normal and recurring adjustments necessary to present fairly our financial position as of September 30, 2022 and December 31, 2021, the results of our operations for the three and nine months ended September 30, 2022 and September 30, 2021, and cash flows for the nine months ended September 30, 2022 and September 30, 2021. Interim results may not be indicative of fiscal year performance because of seasonal and short-term variations, as well as the impact of COVID-19. We have eliminated all material intercompany transactions and balances between entities consolidated in these Financial Statements.
NOTE 2. EARNINGS PER SHARE
The table below presents the reconciliation of the earnings and number of shares used in our calculations of basic and diluted earnings per share:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| (in millions, except per share amounts) | September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||||||||
| Computation of Basic Earnings Per Share | |||||||||||||||||||||||
| Net income | $ | 630 | $ | 220 | $ | 1,685 | $ | 631 | |||||||||||||||
| Shares for basic earnings per share | 324.5 | 327.3 | 327.0 | 327.0 | |||||||||||||||||||
| Basic earnings per share | $ | 1.94 | $ | 0.67 | $ | 5.15 | $ | 1.93 | |||||||||||||||
| Computation of Diluted Earnings Per Share | |||||||||||||||||||||||
| Net income | $ | 630 | $ | 220 | $ | 1,685 | $ | 631 | |||||||||||||||
| Shares for basic earnings per share | 324.5 | 327.3 | 327.0 | 327.0 | |||||||||||||||||||
| Effect of dilutive securities | |||||||||||||||||||||||
| Stock-based compensation | 1.2 | 2.0 | 1.4 | 2.1 | |||||||||||||||||||
| Shares for diluted earnings per share | 325.7 | 329.3 | 328.4 | 329.1 | |||||||||||||||||||
| Diluted earnings per share | $ | 1.94 | $ | 0.67 | $ | 5.13 | $ | 1.92 | |||||||||||||||
7
NOTE 3. STOCK-BASED COMPENSATION
We granted 1.1 million restricted stock units (“RSUs”) during the 2022 first three quarters to certain officers and employees, and those units vest generally over four years in equal annual installments commencing one year after the grant date. We also granted 0.1 million performance-based RSUs (“PSUs”) in the 2022 first three quarters to certain executives, which are earned, subject to continued employment and the satisfaction of certain performance and market conditions, generally based on the degree of achievement of pre-established targets for 2024 adjusted EBITDA performance and relative total stockholder return over the 2022 to 2024 performance period. RSUs, including PSUs, granted in the 2022 first three quarters had a weighted average grant-date fair value of $169 per unit.
We recorded stock-based compensation expense for RSUs and PSUs of $45 million in the 2022 third quarter, $40 million in the 2021 third quarter, $136 million in the 2022 first three quarters, and $130 million in the 2021 first three quarters. Deferred compensation costs for unvested awards for RSUs and PSUs totaled $223 million at September 30, 2022 and $189 million at December 31, 2021.
NOTE 4. INCOME TAXES
Our effective tax rate was 27.5 percent for the 2022 third quarter compared to 21.1 percent for the 2021 third quarter. The increase in our effective tax rate was primarily due to the current year tax expense from the completion of prior years’ tax audits.
Our effective tax rate was 24.2 percent for the 2022 first three quarters compared to 0.2 percent for the 2021 first three quarters. The increase in our effective tax rate was primarily due to the prior year tax benefit from the release of tax reserves due to the favorable resolution of Legacy-Starwood tax audits, as well as the current year tax expense from the completion of prior years’ tax audits.
We paid cash for income taxes, net of refunds, of $341 million in the 2022 first three quarters and $293 million in the 2021 first three quarters.
NOTE 5. COMMITMENTS AND CONTINGENCIES
Guarantees
We present the maximum potential amount of our future guarantee fundings and the carrying amount of our liability for our debt service, operating profit, and other guarantees (excluding contingent purchase obligations) for which we are the primary obligor at September 30, 2022 in the following table:
($ in millions) Guarantee Type | Maximum Potential Amount of Future Fundings | Recorded Liability for Guarantees | ||||||||||||
| Debt service | $ | 77 | $ | 11 | ||||||||||
| Operating profit | 174 | 104 | ||||||||||||
| Other | 15 | 4 | ||||||||||||
| $ | 266 | $ | 119 | |||||||||||
Our maximum potential guarantees listed in the preceding table include $42 million of guarantees that will not be in effect until the underlying properties open and we begin to operate the properties or certain other events occur.
Contingent Purchase Obligation
Sheraton Grand Chicago. In 2017, we granted the owner a one-time right to require us to purchase the leasehold interest in the land and the hotel for $300 million in cash (the “put option”). In the 2021 third quarter, we entered into an amendment with the owner to move the exercise period of the put option from the 2022 first half to the 2024 first half. If the owner exercises the put option, the closing is expected to occur in the 2024 fourth quarter, and we have the option to purchase, at the same time the put transaction closes, the fee simple interest in the underlying land for an additional $200 million in cash. We account for the put option as a guarantee, and our recorded liability was $300 million at September 30, 2022 and December 31, 2021.
8
Starwood Data Security Incident
Description of Event
On November 30, 2018, we announced a data security incident involving unauthorized access to the Starwood reservations database (the “Data Security Incident”). Working with leading security experts, we determined that there was unauthorized access to the Starwood network since 2014 and that an unauthorized party had copied information from the Starwood reservations database and taken steps towards removing it. The Starwood reservations database is no longer used for business operations.
Litigation, Claims, and Government Investigations
Following our announcement of the Data Security Incident, approximately 100 lawsuits were filed by consumers and others against us in U.S. federal, U.S. state and Canadian courts related to the incident. The plaintiffs in the cases that remain pending, who generally purport to represent various classes of consumers, generally claim to have been harmed by alleged actions and/or omissions by the Company in connection with the Data Security Incident and assert a variety of common law and statutory claims seeking monetary damages, injunctive relief, costs and attorneys’ fees, and other related relief. The active U.S. cases are consolidated in the U.S. District Court for the District of Maryland (the “District Court”), pursuant to orders of the U.S. Judicial Panel on Multidistrict Litigation (the “MDL”). On May 3, 2022, the District Court granted in part and denied in part class certification of various U.S. groups of consumers. We appealed the District Court’s decision, and on July 14, 2022, the U.S. Court of Appeals for the Fourth Circuit granted our petition to appeal. On September 8, 2022, the District Court held that the City of Chicago (which brought claims against us that are consolidated in the MDL proceeding) could not pursue injunctive claims but could pursue monetary claims. The Canadian cases have effectively been consolidated into a single case in the province of Ontario. We dispute the allegations in these lawsuits and are vigorously defending against such claims.
In addition, various U.S. federal, U.S. state and foreign governmental authorities made inquiries, opened investigations, or requested information and/or documents related to the Data Security Incident and related matters. Although some of these matters have been resolved or no longer appear to be active, some remain open. We are in discussions with the Attorney General offices from 49 states and the District of Columbia and the Federal Trade Commission. Based on the ongoing discussions, we believe it is probable that we will incur losses and have recorded an accrual in the 2022 third quarter for an estimated loss contingency; the amount of this accrual is not material to our Financial Statements. We are also in discussion with the regulatory authority in Australia to resolve its investigation and requests.
While we believe it is reasonably possible that we may incur losses in excess of the amounts recorded associated with the above described MDL proceedings and regulatory investigations related to the Data Security Incident, it is not possible to reasonably estimate the amount of such losses or range of loss that might result from adverse judgments, settlements, fines, penalties or other resolution of these proceedings and investigations based on: (1) in the case of the above described MDL proceedings, the current stage of these proceedings, the absence of specific allegations as to alleged damages, the uncertainty as to the certification of a class or classes and the size of any certified class, and the lack of resolution of significant factual and legal issues; and (2) in the case of the above described regulatory investigations, the lack of resolution with the Federal Trade Commission and the state Attorneys General.
9
NOTE 6. LONG-TERM DEBT
We provide detail on our long-term debt balances, net of discounts, premiums, and debt issuance costs, in the following table as of September 30, 2022 and year-end 2021:
| ($ in millions) | September 30, 2022 | December 31, 2021 | |||||||||
| Senior Notes: | |||||||||||
Series L Notes, interest rate of 3.3%, face amount of $173, redeemed June 15, 2022 (effective interest rate of 3.4%) | $ | — | $ | 173 | |||||||
Series P Notes, interest rate of 3.8%, face amount of $350, maturing October 1, 2025 (effective interest rate of 4.0%) | 348 | 347 | |||||||||
Series Q Notes, interest rate of 2.3%, face amount of $399, matured January 15, 2022 (effective interest rate of 2.5%) | — | 399 | |||||||||
Series R Notes, interest rate of 3.1%, face amount of $750, maturing June 15, 2026 (effective interest rate of 3.3%) | 747 | 746 | |||||||||
Series U Notes, interest rate of 3.1%, face amount of $291, maturing February 15, 2023 (effective interest rate of 3.1%) | 291 | 291 | |||||||||
Series V Notes, interest rate of 3.8%, face amount of $318, maturing March 15, 2025 (effective interest rate of 2.8%) | 325 | 327 | |||||||||
Series W Notes, interest rate of 4.5%, face amount of $278, maturing October 1, 2034 (effective interest rate of 4.1%) | 289 | 290 | |||||||||
Series X Notes, interest rate of 4.0%, face amount of $450, maturing April 15, 2028 (effective interest rate of 4.2%) | 446 | 445 | |||||||||
Series Z Notes, interest rate of 4.2%, face amount of $350, maturing December 1, 2023 (effective interest rate of 4.4%) | 349 | 349 | |||||||||
Series AA Notes, interest rate of 4.7%, face amount of $300, maturing December 1, 2028 (effective interest rate of 4.8%) | 298 | 297 | |||||||||
Series CC Notes, interest rate of 3.6%, face amount of $550, maturing April 15, 2024 (effective interest rate of 3.9%) | 532 | 566 | |||||||||
Series DD Notes, interest rate of 2.1%, face amount of $224, matured October 3, 2022 (effective interest rate of 1.2%) | 224 | 226 | |||||||||
Series EE Notes, interest rate of 5.8%, face amount of $600, maturing May 1, 2025 (effective interest rate of 6.0%) | 596 | 595 | |||||||||
Series FF Notes, interest rate of 4.6%, face amount of $1,000, maturing June 15, 2030 (effective interest rate of 4.8%) | 988 | 987 | |||||||||
Series GG Notes, interest rate of 3.5%, face amount of $1,000, maturing October 15, 2032 (effective interest rate of 3.7%) | 986 | 986 | |||||||||
Series HH Notes, interest rate of 2.9%, face amount of $1,100, maturing April 15, 2031 (effective interest rate of 3.0%) | 1,090 | 1,090 | |||||||||
Series II Notes, interest rate of 2.8%, face amount of $700, maturing October 15, 2033 (effective interest rate of 2.8%) | 694 | 693 | |||||||||
Series JJ Notes, interest rate of 5.0%, face amount of $1,000, maturing October 15, 2027 (effective interest rate of 5.4%) | 983 | — | |||||||||
| Credit Facility | — | 1,050 | |||||||||
| Finance lease obligations | 141 | 146 | |||||||||
| Other | 91 | 135 | |||||||||
| $ | 9,418 | $ | 10,138 | ||||||||
| Less current portion | (558) | (805) | |||||||||
| $ | 8,860 | $ | 9,333 | ||||||||
We paid cash for interest, net of amounts capitalized, of $203 million in the 2022 first three quarters and $251 million in the 2021 first three quarters.
In September 2022, we issued $1.0 billion aggregate principal amount of 5.000 percent Series JJ Notes due October 15, 2027 (the “Series JJ Notes”). We will pay interest on the Series JJ Notes in April and October of each year, commencing in April 2023. We received net proceeds of approximately $983 million from the offering of the Series JJ Notes, after deducting the underwriting discount and estimated expenses, which were made available for general corporate purposes, including working capital, capital expenditures, acquisitions, stock repurchases or repayment of outstanding indebtedness.
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In June 2022, we redeemed all $173 million aggregate principal amount of our outstanding Series L Notes due in September 2022.
We are party to a multicurrency revolving credit agreement (as amended, the “Credit Facility”) that provides for up to $4.5 billion of aggregate borrowings for general corporate needs, including working capital, capital expenditures, letters of credit, acquisitions, and to support our commercial paper program if and when we resume issuing commercial paper. Borrowings under the Credit Facility generally bear interest at LIBOR (the London Interbank Offered 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 (if any) as long-term based on our ability and intent to refinance the outstanding borrowings on a long-term basis. The Credit Facility expires on June 28, 2024.
We entered into amendments to the Credit Facility in April 2020 and January 2021 (the “Credit Facility Amendments”). The debt leverage covenant in the Credit Facility, which is tested each quarter and was waived pursuant to the Credit Facility Amendments through and including the fourth quarter of 2021, resumed beginning with the quarter that ended March 31, 2022. The Credit Facility Amendments adjusted the required leverage levels for this covenant starting at 5.50 to 1.00 for the test period that ended on March 31, 2022 and gradually stepping down to 4.00 to 1.00 over the succeeding five fiscal quarters, as further described in the Credit Facility. The Credit Facility Amendments also amended certain other terms of the Credit Facility, including reducing the rate floor for the LIBOR Daily Floating Rate and the Eurocurrency Rate.
NOTE 7. ACQUISITION
In the 2022 fourth quarter, we announced that we reached an agreement with Hoteles City Express, S.A.B. de C.V. to acquire the City Express brand portfolio for $100 million. As of October 19, 2022, the portfolio included 152 mid-scale hotels (17,356 rooms) located in Mexico, Costa Rica, Colombia, and Chile. Upon closing of the transaction, which is subject to regulatory approval and other customary closing conditions, City Express will become our 31st brand and the City Express hotels will become part of our franchise system. We expect the transaction could close between the end of 2022 and the first half of 2023.
NOTE 8. FAIR VALUE OF FINANCIAL INSTRUMENTS
We believe that the fair values of our current assets and current liabilities approximate their reported carrying amounts. We present the carrying values and the fair values of noncurrent financial assets and liabilities that qualify as financial instruments in the following table:
| September 30, 2022 | December 31, 2021 | ||||||||||||||||||||||
| ($ in millions) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||||||||
| Senior, mezzanine, and other loans | $ | 132 | $ | 122 | $ | 144 | $ | 131 | |||||||||||||||
| Total noncurrent financial assets | $ | 132 | $ | 122 | $ | 144 | $ | 131 | |||||||||||||||
| Senior Notes | $ | (8,671) | $ | (7,808) | $ | (8,009) | $ | (8,480) | |||||||||||||||
| Credit Facility | — | — | (1,050) | (1,050) | |||||||||||||||||||
| Other long-term debt | (56) | (49) | (135) | (140) | |||||||||||||||||||
| Other noncurrent liabilities | (393) | (393) | (414) | (414) | |||||||||||||||||||
| Total noncurrent financial liabilities | $ | (9,120) | $ | (8,250) | $ | (9,608) | $ | (10,084) | |||||||||||||||
See Note 12. Fair Value of Financial Instruments and the “Fair Value Measurements” caption of Note 2. Summary of Significant Accounting Policies of our 2021 Form 10-K for more information on the input levels we use in determining fair value.
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NOTE 9. ACCUMULATED OTHER COMPREHENSIVE LOSS AND STOCKHOLDERS’ EQUITY
The following tables detail the accumulated other comprehensive loss activity for the 2022 first three quarters and 2021 first three quarters:
| ($ in millions) | Foreign Currency Translation Adjustments | Other Adjustments | Accumulated Other Comprehensive Loss | ||||||||||||||
| Balance at year-end 2021 | $ | (351) | $ | 9 | $ | (342) | |||||||||||
Other comprehensive (loss) income before reclassifications (1) | (653) | 9 | (644) | ||||||||||||||
| Reclassification adjustments | — | (4) | (4) | ||||||||||||||
| Net other comprehensive (loss) income | (653) | 5 | (648) | ||||||||||||||
| Balance at September 30, 2022 | $ | (1,004) | $ | 14 | $ | (990) | |||||||||||
| ($ in millions) | Foreign Currency Translation Adjustments | Other Adjustments | Accumulated Other Comprehensive Loss | ||||||||||||||
| Balance at year-end 2020 | $ | (139) | $ | 4 | $ | (135) | |||||||||||
Other comprehensive loss before reclassifications (1) | (197) | — | (197) | ||||||||||||||
| Reclassification adjustments | — | — | — | ||||||||||||||
| Net other comprehensive loss | (197) | — | (197) | ||||||||||||||
| Balance at September 30, 2021 | $ | (336) | $ | 4 | $ | (332) | |||||||||||
(1)Other comprehensive (loss) income before reclassifications for foreign currency translation adjustments includes intra-entity foreign currency transactions that are of a long-term investment nature, which resulted in gains of $76 million for the 2022 first three quarters and $30 million for the 2021 first three quarters.
The following tables detail the changes in common shares outstanding and stockholders’ equity for the 2022 first three quarters and 2021 first three quarters:
| (in millions, except per share amounts) | |||||||||||||||||||||||||||||||||||||||||
| Common Shares Outstanding | Total | Class A Common Stock | Additional Paid-in-Capital | Retained Earnings | Treasury Stock, at Cost | Accumulated Other Comprehensive Loss | |||||||||||||||||||||||||||||||||||
| 326.3 | Balance at year-end 2021 | $ | 1,414 | $ | 5 | $ | 5,892 | $ | 10,305 | $ | (14,446) | $ | (342) | ||||||||||||||||||||||||||||
| — | Net income | 377 | — | — | 377 | — | — | ||||||||||||||||||||||||||||||||||
| — | Other comprehensive income | 14 | — | — | — | — | 14 | ||||||||||||||||||||||||||||||||||
| 1.0 | Stock-based compensation plans | (33) | — | (61) | — | 28 | — | ||||||||||||||||||||||||||||||||||
| 327.3 | Balance at March 31, 2022 | $ | 1,772 | $ | 5 | $ | 5,831 | $ | 10,682 | $ | (14,418) | $ | (328) | ||||||||||||||||||||||||||||
| — | Net income | 678 | — | — | 678 | — | — | ||||||||||||||||||||||||||||||||||
| — | Other comprehensive loss | (323) | — | — | — | — | (323) | ||||||||||||||||||||||||||||||||||
| — | Dividends ($0.30 per share) | (98) | — | — | (98) | — | — | ||||||||||||||||||||||||||||||||||
| — | Stock-based compensation plans | 43 | — | 41 | — | 2 | — | ||||||||||||||||||||||||||||||||||
| (1.9) | Purchase of treasury stock | (300) | — | — | — | (300) | — | ||||||||||||||||||||||||||||||||||
| 325.4 | Balance at June 30, 2022 | $ | 1,772 | $ | 5 | $ | 5,872 | $ | 11,262 | $ | (14,716) | $ | (651) | ||||||||||||||||||||||||||||
| — | Net income | 630 | — | — | 630 | — | — | ||||||||||||||||||||||||||||||||||
| — | Other comprehensive loss | (339) | — | — | — | — | (339) | ||||||||||||||||||||||||||||||||||
| — | Dividends ($0.30 per share) | (97) | — | — | (97) | — | — | ||||||||||||||||||||||||||||||||||
| 0.1 | Stock-based compensation plans | 47 | — | 47 | — | — | — | ||||||||||||||||||||||||||||||||||
| (6.2) | Purchase of treasury stock | (950) | — | — | — | (950) | — | ||||||||||||||||||||||||||||||||||
| 319.3 | Balance at September 30, 2022 | $ | 1,063 | $ | 5 | $ | 5,919 | $ | 11,795 | $ | (15,666) | $ | (990) | ||||||||||||||||||||||||||||
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| Common Shares Outstanding | Total | Class A Common Stock | Additional Paid-in-Capital | Retained Earnings | Treasury Stock, at Cost | Accumulated Other Comprehensive Loss | |||||||||||||||||||||||||||||||||||
| 324.4 | Balance at year-end 2020 | $ | 430 | $ | 5 | $ | 5,851 | $ | 9,206 | $ | (14,497) | $ | (135) | ||||||||||||||||||||||||||||
| — | Net loss | (11) | — | — | (11) | — | — | ||||||||||||||||||||||||||||||||||
| — | Other comprehensive loss | (155) | — | — | — | — | (155) | ||||||||||||||||||||||||||||||||||
| 1.2 | Stock-based compensation plans | (30) | — | (64) | — | 34 | — | ||||||||||||||||||||||||||||||||||
| 325.6 | Balance at March 31, 2021 | $ | 234 | $ | 5 | $ | 5,787 | $ | 9,195 | $ | (14,463) | $ | (290) | ||||||||||||||||||||||||||||
| — | Net income | 422 | — | — | 422 | — | — | ||||||||||||||||||||||||||||||||||
| — | Other comprehensive income | 96 | — | — | — | — | 96 | ||||||||||||||||||||||||||||||||||
| — | Stock-based compensation plans | 44 | — | 43 | 1 | — | — | ||||||||||||||||||||||||||||||||||
| 325.6 | Balance at June 30, 2021 | $ | 796 | $ | 5 | $ | 5,830 | $ | 9,618 | $ | (14,463) | $ | (194) | ||||||||||||||||||||||||||||
| — | Net income | 220 | — | — | 220 | — | — | ||||||||||||||||||||||||||||||||||
| — | Other comprehensive loss | (138) | — | — | — | — | (138) | ||||||||||||||||||||||||||||||||||
| 0.1 | Stock-based compensation plans | 40 | — | 39 | — | 1 | — | ||||||||||||||||||||||||||||||||||
| 325.7 | Balance at September 30, 2021 | $ | 918 | $ | 5 | $ | 5,869 | $ | 9,838 | $ | (14,462) | $ | (332) | ||||||||||||||||||||||||||||
NOTE 10. CONTRACTS WITH CUSTOMERS
Our current and noncurrent liability for guest loyalty program increased by $175 million, to $6,646 million at September 30, 2022, from $6,471 million at December 31, 2021, primarily reflecting an increase in points earned by members. This includes a $191 million reclassification from deferred revenue to the liability for guest loyalty program primarily due to points that were earned during the period by members using our U.S.-issued co-brand credit cards, which were prepaid by the financial institutions in 2020. The increase was partially offset by $2,025 million of revenue recognized in the 2022 first three quarters, that was deferred as of December 31, 2021. The current portion of our liability for guest loyalty program increased compared to December 31, 2021, due to higher estimated redemptions in the short-term.
Current and noncurrent deferred revenue decreased by $162 million, to $1,365 million at September 30, 2022, from $1,527 million at December 31, 2021, primarily as a result of $256 million of revenue recognized in the 2022 first three quarters that was deferred as of December 31, 2021, as well as the reclassification from deferred revenue to the liability for guest loyalty program, which we discuss above. The decrease was partially offset by deferred revenue related to our co-brand credit cards, gift cards, certain centralized programs and services fees, and franchise application and relicensing fees.
Our allowance for credit losses increased to $195 million at September 30, 2022 from $187 million at December 31, 2021, primarily reflecting our provision for credit losses, partially offset by write-offs of amounts deemed uncollectible. In the 2022 third quarter, we recorded a $6 million net reversal of our provision for credit losses. In the 2022 first three quarters, we recorded a $27 million provision for credit losses.
NOTE 11. BUSINESS SEGMENTS
We discuss our operations in the following two operating segments, both of which meet the applicable criteria for separate disclosure as a reportable business segment: (1) U.S. & Canada and (2) International.
We evaluate the performance of our operating segments using “segment profit/loss” which is based largely on the results of the segment without allocating corporate expenses, income taxes, indirect general, administrative, and other expenses, merger-related costs, or most above-property restructuring charges. We assign gains and losses, equity in earnings or losses, direct general, administrative, and other expenses, and other restructuring charges to each of our segments. “Unallocated corporate and other” includes a portion of our revenues (including license fees we receive from our credit card programs and fees from vacation ownership licensing agreements), revenues and expenses for our Loyalty Program, general, administrative, and other expenses, restructuring, merger-related
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charges, and other expenses, equity in earnings or losses, and other gains or losses that we do not allocate to our segments.
Our chief operating decision maker monitors assets for the consolidated Company but does not use assets by operating segment when assessing performance or making operating segment resource allocations.
Segment Revenues
The following tables present our revenues disaggregated by segment and major revenue stream for the 2022 third quarter, 2021 third quarter, 2022 first three quarters, and 2021 first three quarters:
| Three Months Ended September 30, 2022 | Three Months Ended September 30, 2021 | ||||||||||||||||||||||||||||||||||
| ($ in millions) | U.S. & Canada | International | Total | U.S. & Canada | International | Total | |||||||||||||||||||||||||||||
| Gross fee revenues | $ | 649 | $ | 241 | $ | 890 | $ | 478 | $ | 156 | $ | 634 | |||||||||||||||||||||||
| Contract investment amortization | (16) | (6) | (22) | (15) | (6) | (21) | |||||||||||||||||||||||||||||
| Net fee revenues | 633 | 235 | 868 | 463 | 150 | 613 | |||||||||||||||||||||||||||||
| Owned, leased, and other revenue | 114 | 205 | 319 | 93 | 134 | 227 | |||||||||||||||||||||||||||||
| Cost reimbursement revenue | 3,253 | 468 | 3,721 | 2,450 | 337 | 2,787 | |||||||||||||||||||||||||||||
| Total reportable segment revenue | $ | 4,000 | $ | 908 | $ | 4,908 | $ | 3,006 | $ | 621 | $ | 3,627 | |||||||||||||||||||||||
Unallocated corporate and other | 405 | 319 | |||||||||||||||||||||||||||||||||
Total revenue | $ | 5,313 | $ | 3,946 | |||||||||||||||||||||||||||||||
| Nine Months Ended September 30, 2022 | Nine Months Ended September 30, 2021 | ||||||||||||||||||||||||||||||||||
| ($ in millions) | U.S. & Canada | International | Total | U.S. & Canada | International | Total | |||||||||||||||||||||||||||||
| Gross fee revenues | $ | 1,821 | $ | 630 | $ | 2,451 | $ | 1,101 | $ | 375 | $ | 1,476 | |||||||||||||||||||||||
| Contract investment amortization | (45) | (20) | (65) | (41) | (15) | (56) | |||||||||||||||||||||||||||||
| Net fee revenues | 1,776 | 610 | 2,386 | 1,060 | 360 | 1,420 | |||||||||||||||||||||||||||||
| Owned, leased, and other revenue | 330 | 575 | 905 | 185 | 320 | 505 | |||||||||||||||||||||||||||||
| Cost reimbursement revenue | 9,282 | 1,273 | 10,555 | 5,810 | 854 | 6,664 | |||||||||||||||||||||||||||||
| Total reportable segment revenue | $ | 11,388 | $ | 2,458 | $ | 13,846 | $ | 7,055 | $ | 1,534 | $ | 8,589 | |||||||||||||||||||||||
Unallocated corporate and other | 1,004 | 822 | |||||||||||||||||||||||||||||||||
Total revenue | $ | 14,850 | $ | 9,411 | |||||||||||||||||||||||||||||||
Segment Profit
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| ($ in millions) | September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||||||||
| U.S. & Canada | $ | 652 | $ | 485 | $ | 1,833 | $ | 972 | |||||||||||||||
| International | 227 | 86 | 568 | 142 | |||||||||||||||||||
Unallocated corporate and other | 83 | (194) | 92 | (181) | |||||||||||||||||||
| Interest expense, net of interest income | (93) | (99) | (270) | (301) | |||||||||||||||||||
| Provision for income taxes | (239) | (58) | (538) | (1) | |||||||||||||||||||
| Net income | $ | 630 | $ | 220 | $ | 1,685 | $ | 631 | |||||||||||||||
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 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 the future effects on our business of the coronavirus pandemic (“COVID-19”); Revenue per Available Room (“RevPAR”), average daily rate (“ADR”), occupancy and other future demand and recovery trends and expectations; our expectations
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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; our expectations regarding our acquisition of the City Express brand and the addition of the City Express hotels to our franchise system; 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, 2021 (“2021 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
We are a worldwide operator, franchisor, and licensor of hotel, residential, and timeshare properties under numerous brand names at different price and service points. Consistent with our focus on management, franchising, and licensing, we own very few of our lodging properties. We discuss our operations in the following reportable business segments: (1) U.S. & Canada and (2) International.
We earn base management fees and, under many agreements, incentive management fees from the properties that we manage, and we earn franchise fees on the properties that others operate under franchise agreements with us. In most markets, base management and franchise fees typically consist of a percentage of property-level revenue, or certain property-level revenue in the case of franchise fees, while incentive management fees typically consist of a percentage of net house profit after a specified owner return. For our hotels in the Middle East and Africa, Asia Pacific excluding China, and Greater China regions, incentive management fees typically consist of a percentage of gross operating profit without adjustment for a specified owner return. Net house profit is calculated as gross operating profit (also referred to as “house profit”) less non-controllable expenses such as property insurance, real estate taxes, and furniture, fixtures, and equipment (“FF&E”) reserves. Additionally, we earn franchise fees for use of our intellectual property, including fees from our co-brand credit card, timeshare, and residential programs.
Performance Measures
We believe 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 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 (including rooms in hotels temporarily closed due to issues related to COVID-19), 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, 2021 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, with the exception of properties closed or otherwise experiencing interruptions related to COVID-19, which we continue to classify as comparable. RevPAR, occupancy, and ADR comparisons between 2022 and 2019, which we discuss under the “Impact of COVID-19” caption below, reflect properties that are defined as comparable as of September 30, 2022, June 30, 2022, or March 31, 2022 (as applicable), even if in 2019 they were not open and operating for the full year or did not meet all the other criteria listed above. Unless otherwise stated, all comparisons to pre-pandemic or 2019 are comparing to the same time period each year.
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Impact of COVID-19
While COVID-19 continues to negatively impact our business and industry, primarily in Greater China and Asia Pacific excluding China, we continued to see strong global RevPAR improvement in the 2022 third quarter. For the first time since the pandemic began, quarterly worldwide RevPAR exceeded 2019 levels, with growth of 1.8 percent compared to the 2019 third quarter, reflecting ADR growth of 10.2 percent compared to pre-pandemic levels and rising occupancy. In the 2022 third quarter, occupancy reached 69.2 percent, a decline of only 5.8 percentage points compared to the same period in 2019, which was an improvement from the 2022 second quarter decline of 7.1 percentage points and the 2022 first quarter decline of 13.7 percentage points compared to the same periods in 2019. The global recovery continued across all customer segments, led by robust leisure demand and strengthening group demand. Business transient demand also continued to improve during the quarter, although it continues to lag behind 2019 levels.
RevPAR in the 2022 third quarter compared to the 2021 third quarter improved 28.5 percent in our U.S. & Canada segment, 66.1 percent in our International segment, and 36.3 percent worldwide. RevPAR in the 2022 first three quarters compared to the 2021 first three quarters increased 56.4 percent in our U.S. & Canada segment, 77.2 percent in our International segment, and 60.9 percent worldwide.
In the U.S. & Canada, RevPAR improved 3.5 percent in the 2022 third quarter compared to the same period in 2019, due to ADR growth of 10.4 percent, partially offset by a decline in occupancy of 4.7 percentage points. In the 2022 first three quarters, RevPAR declined 2.8 percent compared to the same period in 2019, due to a decline in occupancy of 6.9 percentage points, partially offset by ADR growth of 7.1 percent. The decline in occupancy as compared to 2019 improved sequentially in each of the 2022 first three quarters, reflecting stronger demand in many markets across the region.
Internationally, RevPAR declined 2.4 percent in the 2022 third quarter compared to the same period in 2019, due to a decline in occupancy of 7.9 percentage points, partially offset by ADR growth of 9.8 percent. In the 2022 first three quarters, RevPAR declined 16.3 percent compared to the same period in 2019, due to a decline in occupancy of 13.3 percentage points, partially offset by ADR growth of 3.8 percent. In the 2022 third quarter, RevPAR remained constrained in Greater China and Asia Pacific excluding China, but exceeded pre-pandemic 2019 levels in the Caribbean & Latin America, Europe, and Middle East & Africa, driven by strengthening demand and an increase in cross-border travel.
We continue to take measures to mitigate the negative financial and operational impacts of COVID-19 for our hotel owners and our own business. At the property level, we continue to work with owners and franchisees by adjusting renovation requirements for certain properties. At the corporate level, we remain focused on managing our corporate general and administrative costs and are being disciplined with respect to our capital expenditures and other investment spending.
As lodging demand continues to recover from the lows seen in the early months of the pandemic, we have seen and continue to see industry-wide labor shortages causing challenges in hiring or re-hiring for certain positions, primarily in certain U.S. markets. In response, we have enhanced our recruitment and retention efforts and increased compensation where needed to maintain competitiveness. As a result of these efforts, we have made good progress staffing our hotels despite the challenging labor market.
The impact of COVID-19 on the Company remains fluid, as does our corporate and property-level response. We believe COVID-19 will continue to have a negative impact on our future results for a period of time that we are currently unable to predict. The overall operational and financial impact is highly dependent on the risk factors disclosed under the heading “Risks Relating to COVID-19” in Part I, Item 1A, “Risk Factors,” of our 2021 Form 10-K and could be affected by other factors we are not currently able to predict.
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 business operations.
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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), increased expenses and capital investments for information technology and information security and data privacy, and increased expenses for compliance activities and to meet increased legal and regulatory requirements. 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 2022 third quarter, our system had 8,162 properties (1,507,350 rooms), compared to 7,989 properties (1,479,179 rooms) at year-end 2021 and 7,892 properties (1,463,692 rooms) at the end of the 2021 third quarter. The increase compared to year-end 2021 reflects gross additions of 249 properties (42,787 rooms) and deletions of 76 properties (14,595 rooms). Approximately 25 percent of our 2022 first three quarters gross room additions were conversions from competitor brands.
At the end of the 2022 third quarter, we had more than 502,000 hotel rooms in our development pipeline, which includes approximately 204,800 hotel rooms under construction and roughly 33,300 hotel rooms approved for development but not yet subject to signed contracts. Over half of the rooms in our development pipeline are outside U.S. & Canada.
We currently expect full-year 2022 total gross rooms growth of approximately 4.5 percent and net rooms growth of approximately 3.0 percent, which includes the impact of the Company’s decision to suspend its operations in Russia and does not include the rooms associated with the City Express brand acquisition discussed in Note 7. The decrease in our expectation for gross rooms growth in 2022, compared to our previous estimate, is primarily due to delayed openings in Greater China where COVID-19 restrictions have resulted in extended construction timelines.
Properties and Rooms
At September 30, 2022, 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 | 633 | 215,948 | 5,093 | 732,399 | 26 | 6,483 | 66 | 6,935 | 5,818 | 961,765 | |||||||||||||||||||||||||||||||||||||||||||||||||
| International | 1,326 | 338,913 | 844 | 170,834 | 38 | 9,209 | 44 | 3,928 | 2,252 | 522,884 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Timeshare | — | — | 92 | 22,701 | — | — | — | — | 92 | 22,701 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Total | 1,959 | 554,861 | 6,029 | 925,934 | 64 | 15,692 | 110 | 10,863 | 8,162 | 1,507,350 | |||||||||||||||||||||||||||||||||||||||||||||||||
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Lodging Statistics
The following tables present 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 September 30, 2022 and Change vs. Three Months Ended September 30, 2021 | ||||||||||||||||||||||||||||||||||||||
| RevPAR | Occupancy | Average Daily Rate | ||||||||||||||||||||||||||||||||||||
| 2022 | vs. 2021 | 2022 | vs. 2021 | 2022 | vs. 2021 | |||||||||||||||||||||||||||||||||
| Comparable Company-Operated Properties | ||||||||||||||||||||||||||||||||||||||
| U.S. & Canada | $ | 164.32 | 41.2 | % | 69.4 | % | 12.2 | % | pts. | $ | 236.69 | 16.4 | % | |||||||||||||||||||||||||
| Greater China | $ | 67.48 | 5.3 | % | 59.3 | % | 4.3 | % | pts. | $ | 113.87 | (2.3) | % | |||||||||||||||||||||||||
| Asia Pacific excluding China | $ | 88.15 | 169.8 | % | 62.7 | % | 29.5 | % | pts. | $ | 140.52 | 42.9 | % | |||||||||||||||||||||||||
| Caribbean & Latin America | $ | 111.98 | 42.8 | % | 59.1 | % | 12.9 | % | pts. | $ | 189.46 | 11.8 | % | |||||||||||||||||||||||||
| Europe | $ | 188.55 | 93.1 | % | 73.3 | % | 24.5 | % | pts. | $ | 257.08 | 28.6 | % | |||||||||||||||||||||||||
| Middle East & Africa | $ | 97.67 | 43.3 | % | 61.6 | % | 10.1 | % | pts. | $ | 158.65 | 19.9 | % | |||||||||||||||||||||||||
International - All (1) | $ | 102.53 | 61.7 | % | 63.1 | % | 16.1 | % | pts. | $ | 162.61 | 20.4 | % | |||||||||||||||||||||||||
Worldwide (2) | $ | 129.91 | 49.5 | % | 65.9 | % | 14.4 | % | pts. | $ | 197.20 | 16.9 | % | |||||||||||||||||||||||||
| Comparable Systemwide Properties | ||||||||||||||||||||||||||||||||||||||
| U.S. & Canada | $ | 128.94 | 28.5 | % | 71.8 | % | 7.9 | % | pts. | $ | 179.58 | 14.3 | % | |||||||||||||||||||||||||
| Greater China | $ | 64.78 | 8.2 | % | 58.3 | % | 5.4 | % | pts. | $ | 111.12 | (1.8) | % | |||||||||||||||||||||||||
| Asia Pacific excluding China | $ | 87.91 | 139.3 | % | 62.7 | % | 27.2 | % | pts. | $ | 140.15 | 35.4 | % | |||||||||||||||||||||||||
| Caribbean & Latin America | $ | 96.11 | 45.0 | % | 57.5 | % | 12.6 | % | pts. | $ | 167.27 | 13.4 | % | |||||||||||||||||||||||||
| Europe | $ | 156.10 | 90.3 | % | 72.0 | % | 25.0 | % | pts. | $ | 216.92 | 24.1 | % | |||||||||||||||||||||||||
| Middle East & Africa | $ | 94.78 | 49.7 | % | 62.0 | % | 10.8 | % | pts. | $ | 152.92 | 23.7 | % | |||||||||||||||||||||||||
International - All (1) | $ | 101.37 | 66.1 | % | 63.3 | % | 17.3 | % | pts. | $ | 160.11 | 20.7 | % | |||||||||||||||||||||||||
Worldwide (2) | $ | 120.60 | 36.3 | % | 69.2 | % | 10.8 | % | pts. | $ | 174.19 | 15.1 | % | |||||||||||||||||||||||||
| Nine Months Ended September 30, 2022 and Change vs. Nine Months Ended September 30, 2021 | ||||||||||||||||||||||||||||||||||||||
| RevPAR | Occupancy | Average Daily Rate | ||||||||||||||||||||||||||||||||||||
| 2022 | vs. 2021 | 2022 | vs. 2021 | 2022 | vs. 2021 | |||||||||||||||||||||||||||||||||
| Comparable Company-Operated Properties | ||||||||||||||||||||||||||||||||||||||
| U.S. & Canada | $ | 157.56 | 86.2 | % | 65.3 | % | 21.3 | % | pts. | $ | 241.46 | 25.3 | % | |||||||||||||||||||||||||
| Greater China | $ | 54.38 | (18.2) | % | 47.9 | % | (7.7) | % | pts. | $ | 113.51 | (5.0) | % | |||||||||||||||||||||||||
| Asia Pacific excluding China | $ | 75.29 | 129.3 | % | 55.5 | % | 23.4 | % | pts. | $ | 135.72 | 32.4 | % | |||||||||||||||||||||||||
| Caribbean & Latin America | $ | 121.10 | 84.1 | % | 59.7 | % | 20.6 | % | pts. | $ | 202.84 | 20.7 | % | |||||||||||||||||||||||||
| Europe | $ | 146.25 | 187.8 | % | 62.2 | % | 33.7 | % | pts. | $ | 235.21 | 31.7 | % | |||||||||||||||||||||||||
| Middle East & Africa | $ | 110.94 | 66.7 | % | 62.6 | % | 16.0 | % | pts. | $ | 177.07 | 24.1 | % | |||||||||||||||||||||||||
International - All (1) | $ | 90.07 | 64.4 | % | 55.7 | % | 13.7 | % | pts. | $ | 161.76 | 24.0 | % | |||||||||||||||||||||||||
Worldwide (2) | $ | 120.00 | 76.4 | % | 59.9 | % | 17.1 | % | pts. | $ | 200.26 | 26.1 | % | |||||||||||||||||||||||||
| Comparable Systemwide Properties | ||||||||||||||||||||||||||||||||||||||
| U.S. & Canada | $ | 119.16 | 56.4 | % | 67.5 | % | 13.7 | % | pts. | $ | 176.60 | 24.6 | % | |||||||||||||||||||||||||
| Greater China | $ | 52.09 | (16.6) | % | 47.0 | % | (7.0) | % | pts. | $ | 110.95 | (4.2) | % | |||||||||||||||||||||||||
| Asia Pacific excluding China | $ | 75.03 | 116.9 | % | 55.6 | % | 22.6 | % | pts. | $ | 134.93 | 28.9 | % | |||||||||||||||||||||||||
| Caribbean & Latin America | $ | 100.89 | 89.2 | % | 56.9 | % | 19.6 | % | pts. | $ | 177.18 | 24.2 | % | |||||||||||||||||||||||||
| Europe | $ | 119.44 | 183.6 | % | 59.8 | % | 33.0 | % | pts. | $ | 199.71 | 27.2 | % | |||||||||||||||||||||||||
| Middle East & Africa | $ | 104.51 | 70.4 | % | 62.2 | % | 16.4 | % | pts. | $ | 168.02 | 25.5 | % | |||||||||||||||||||||||||
International - All (1) | $ | 87.29 | 77.2 | % | 55.5 | % | 16.5 | % | pts. | $ | 157.25 | 24.5 | % | |||||||||||||||||||||||||
Worldwide (2) | $ | 109.53 | 60.9 | % | 63.9 | % | 14.6 | % | pts. | $ | 171.52 | 24.2 | % | |||||||||||||||||||||||||
(1)Includes Greater China, Asia Pacific excluding China, Caribbean & Latin America, Europe, and Middle East & Africa.
(2)Includes U.S. & Canada and International - All.
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CONSOLIDATED RESULTS
Our results in the 2022 third quarter and 2022 first three quarters continued to be impacted by COVID-19. See the “Impact of COVID-19” section above for more information about the impact to our business during the 2022 third quarter and 2022 first three quarters, and the discussion below for additional analysis of our consolidated results of operations for the 2022 third quarter compared to the 2021 third quarter and for the 2022 first three quarters compared to the 2021 first three quarters.
Fee Revenues
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| ($ in millions) | September 30, 2022 | September 30, 2021 | Change 2022 vs. 2021 | September 30, 2022 | September 30, 2021 | Change 2022 vs. 2021 | |||||||||||||||||||||||||||||||||||||||||
| Base management fees | $ | 275 | $ | 190 | $ | 85 | 45 | % | $ | 757 | $ | 452 | $ | 305 | 67 | % | |||||||||||||||||||||||||||||||
| Franchise fees | 678 | 533 | 145 | 27 | % | 1,847 | 1,270 | 577 | 45 | % | |||||||||||||||||||||||||||||||||||||
| Incentive management fees | 106 | 53 | 53 | 100 | % | 343 | 141 | 202 | 143 | % | |||||||||||||||||||||||||||||||||||||
| Gross fee revenues | 1,059 | 776 | 283 | 36 | % | 2,947 | 1,863 | 1,084 | 58 | % | |||||||||||||||||||||||||||||||||||||
| Contract investment amortization | (22) | (21) | (1) | (5) | % | (65) | (56) | (9) | (16) | % | |||||||||||||||||||||||||||||||||||||
| Net fee revenues | $ | 1,037 | $ | 755 | $ | 282 | 37 | % | $ | 2,882 | $ | 1,807 | $ | 1,075 | 59 | % | |||||||||||||||||||||||||||||||
The increases in base management fees in the 2022 third quarter and 2022 first three quarters primarily reflected higher RevPAR due to the ongoing recovery in lodging demand from the impacts of COVID-19.
The increases in franchise fees in the 2022 third quarter and 2022 first three quarters primarily reflected higher RevPAR due to the ongoing recovery in lodging demand from the impacts of COVID-19, higher co-brand credit card fees ($25 million and $101 million, respectively), and unit growth ($29 million and $84 million, respectively).
The increases in incentive management fees in the 2022 third quarter and 2022 first three quarters primarily reflected higher profits at certain managed hotels due to the ongoing recovery in lodging demand from the impacts of COVID-19.
Owned, Leased, and Other
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| ($ in millions) | September 30, 2022 | September 30, 2021 | Change 2022 vs. 2021 | September 30, 2022 | September 30, 2021 | Change 2022 vs. 2021 | |||||||||||||||||||||||||||||||||||||||||
| Owned, leased, and other revenue | $ | 345 | $ | 241 | $ | 104 | 43 | % | $ | 971 | $ | 536 | $ | 435 | 81 | % | |||||||||||||||||||||||||||||||
| Owned, leased, and other - direct expenses | 301 | 204 | 97 | 48 | % | 779 | 507 | 272 | 54 | % | |||||||||||||||||||||||||||||||||||||
| Owned, leased, and other, net | $ | 44 | $ | 37 | $ | 7 | 19 | % | $ | 192 | $ | 29 | $ | 163 | 562 | % | |||||||||||||||||||||||||||||||
Owned, leased, and other revenue, net of direct expenses, increased in the 2022 third quarter and the 2022 first three quarters primarily due to stronger results at our owned and leased properties driven by the ongoing recovery in lodging demand from the impacts of COVID-19, partially offset by lower termination fees ($23 million and $39 million, respectively) and an estimated monetary payment related to a portfolio of 12 leased hotels in the U.S. & Canada ($19 million and $31 million, respectively).
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Cost Reimbursements
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| ($ in millions) | September 30, 2022 | September 30, 2021 | Change 2022 vs. 2021 | September 30, 2022 | September 30, 2021 | Change 2022 vs. 2021 | |||||||||||||||||||||||||||||||||||||||||
| Cost reimbursement revenue | $ | 3,931 | $ | 2,950 | $ | 981 | 33 | % | $ | 10,997 | $ | 7,068 | $ | 3,929 | 56 | % | |||||||||||||||||||||||||||||||
| Reimbursed expenses | 3,786 | 2,917 | 869 | 30 | % | 10,792 | 7,005 | 3,787 | 54 | % | |||||||||||||||||||||||||||||||||||||
| Cost reimbursements, net | $ | 145 | $ | 33 | $ | 112 | 339 | % | $ | 205 | $ | 63 | $ | 142 | 225 | % | |||||||||||||||||||||||||||||||
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 reimbursements 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 2022 third quarter primarily reflects higher revenues, net of expenses, for our centralized programs and services and higher Loyalty Program revenues, net of expenses.
The increase in cost reimbursements, net in the 2022 first three quarters primarily reflects higher revenues, net of expenses, for our centralized programs and services and lower expenses related to our insurance program, partially offset by Loyalty Program activity, primarily due to higher program expenses.
Other Operating Expenses
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| ($ in millions) | September 30, 2022 | September 30, 2021 | Change 2022 vs. 2021 | September 30, 2022 | September 30, 2021 | Change 2022 vs. 2021 | |||||||||||||||||||||||||||||||||||||||||
| Depreciation, amortization, and other | $ | 50 | $ | 64 | $ | (14) | (22) | % | $ | 147 | $ | 166 | $ | (19) | (11) | % | |||||||||||||||||||||||||||||||
| General, administrative, and other | 216 | 212 | 4 | 2 | % | 655 | 610 | 45 | 7 | % | |||||||||||||||||||||||||||||||||||||
| Restructuring, merger-related charges, and other | 2 | 4 | (2) | (50) | % | 11 | 8 | 3 | 38 | % | |||||||||||||||||||||||||||||||||||||
Depreciation, amortization, and other expenses decreased in the 2022 first three quarters, primarily due to lower impairment charges.
General, administrative, and other expenses increased in the 2022 first three quarters primarily due to higher compensation costs and higher administrative costs.
Non-Operating Income (Expense)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| ($ in millions) | September 30, 2022 | September 30, 2021 | Change 2022 vs. 2021 | September 30, 2022 | September 30, 2021 | Change 2022 vs. 2021 | |||||||||||||||||||||||||||||||||||||||||
| Gains and other income, net | $ | 3 | $ | — | $ | 3 | nm* | $ | 9 | $ | 6 | $ | 3 | 50 | % | ||||||||||||||||||||||||||||||||
Loss on extinguishment of debt | — | (164) | 164 | 100 | % | — | (164) | 164 | 100 | % | |||||||||||||||||||||||||||||||||||||
| Interest expense | (100) | (107) | 7 | 7 | % | (288) | (323) | 35 | 11 | % | |||||||||||||||||||||||||||||||||||||
| Interest income | 7 | 8 | (1) | (13) | % | 18 | 22 | (4) | (18) | % | |||||||||||||||||||||||||||||||||||||
| Equity in earnings (losses) | 1 | (4) | 5 | 125 | % | 18 | (24) | 42 | 175 | % | |||||||||||||||||||||||||||||||||||||
* Percentage change is not meaningful.
The loss on extinguishment of debt in the 2021 third quarter was due to the September 2021 tender offer in which we purchased and retired $1 billion aggregate principal amount of our 5.750 percent Series EE Notes maturing May 1, 2025.
Interest expense decreased in the 2022 first three quarters, primarily due to lower average debt balances driven by Senior Notes maturities and repurchases.
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Equity in earnings (losses) changed in the 2022 first three quarters primarily due to our share of the gains on the sales of properties held by equity method investees ($23 million) and the ongoing recovery in lodging demand from the impacts of COVID-19.
Income Taxes
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| ($ in millions) | September 30, 2022 | September 30, 2021 | Change 2022 vs. 2021 | September 30, 2022 | September 30, 2021 | Change 2022 vs. 2021 | |||||||||||||||||||||||||||||||||||||||||
| Provision for income taxes | $ | (239) | $ | (58) | $ | (181) | (312) | % | $ | (538) | $ | (1) | $ | (537) | nm* | ||||||||||||||||||||||||||||||||
* Percentage change is not meaningful.
Our tax provision changed in the 2022 third quarter, compared to our tax provision in the 2021 third quarter, primarily due to the increase in operating income ($108 million), the prior year tax benefit from the loss on extinguishment of debt ($42 million), and the current year tax expense from the completion of prior years’ tax audits ($27 million).
Our tax provision changed in the 2022 first three quarters, compared to our tax provision in the 2021 first three quarters, primarily due to the increase in operating income ($335 million), the prior year release of tax reserves due to the favorable resolution of Legacy-Starwood tax audits ($118 million), the prior year tax benefit from the loss on extinguishment of debt ($42 million), and the current year tax expense from the completion of prior years’ tax audits ($27 million).
BUSINESS SEGMENTS
Our segment results in the 2022 third quarter and 2022 first three quarters continued to be impacted by COVID-19. See the “Impact of COVID-19” section above for more information about the impact to our business during the 2022 third quarter and 2022 first three quarters and the discussion below for additional analysis of the operating results of our reportable business segments.
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| ($ in millions) | September 30, 2022 | September 30, 2021 | Change 2022 vs. 2021 | September 30, 2022 | September 30, 2021 | Change 2022 vs. 2021 | |||||||||||||||||||||||||||||||||||||||||
U.S. & Canada | |||||||||||||||||||||||||||||||||||||||||||||||
| Segment revenues | $ | 4,000 | $ | 3,006 | $ | 994 | 33 | % | $ | 11,388 | $ | 7,055 | $ | 4,333 | 61 | % | |||||||||||||||||||||||||||||||
| Segment profit | 652 | 485 | 167 | 34 | % | 1,833 | 972 | 861 | 89 | % | |||||||||||||||||||||||||||||||||||||
| International | |||||||||||||||||||||||||||||||||||||||||||||||
| Segment revenues | 908 | 621 | 287 | 46 | % | 2,458 | 1,534 | 924 | 60 | % | |||||||||||||||||||||||||||||||||||||
| Segment profit | 227 | 86 | 141 | 164 | % | 568 | 142 | 426 | 300 | % | |||||||||||||||||||||||||||||||||||||
| Properties | Rooms | ||||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2022 | September 30, 2021 | vs. September 30, 2021 | September 30, 2022 | September 30, 2021 | vs. September 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||
| U.S. & Canada | 5,818 | 5,656 | 162 | 3 | % | 961,765 | 938,103 | 23,662 | 3 | % | |||||||||||||||||||||||||||||||||||||
| International | 2,252 | 2,144 | 108 | 5 | % | 522,884 | 502,888 | 19,996 | 4 | % | |||||||||||||||||||||||||||||||||||||
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U.S. & Canada
Third Quarter
U.S. & Canada quarterly segment profit increased, primarily due to the following:
•$171 million of higher gross fee revenues, primarily reflecting higher comparable systemwide RevPAR driven by increases in both ADR and occupancy and higher profits at certain managed hotels due to the ongoing recovery in lodging demand from the impacts of COVID-19, as well as unit growth; and
•$17 million of higher cost reimbursement revenue, net of reimbursed expenses;
partially offset by:
•$27 million of lower owned, leased, and other revenue, net of direct expenses, primarily reflecting lower termination fees and an estimated monetary payment related to a portfolio of 12 leased hotels in the U.S. & Canada ($19 million), partially offset by stronger results at owned and leased properties due to the ongoing recovery in lodging demand from the impacts of COVID-19.
First Three Quarters
U.S. & Canada 2022 first three quarters segment profit increased primarily due to:
•$720 million of higher gross fee revenues, primarily reflecting higher comparable systemwide RevPAR driven by increases in both ADR and occupancy and higher profits at certain managed hotels due to the ongoing recovery in lodging demand from the impacts of COVID-19, as well as unit growth, partially offset by lower residential branding fees;
•$103 million of higher cost reimbursement revenue, net of reimbursed expenses; and
•$21 million of higher owned, leased, and other revenue, net of direct expenses, primarily reflecting stronger results at owned and leased properties due to the ongoing recovery in lodging demand from the impacts of COVID-19, partially offset by lower termination fees and an estimated monetary payment related to a portfolio of 12 leased hotels in the U.S. & Canada ($31 million).
International
Third Quarter
International quarterly segment profit increased primarily due to:
•$85 million of higher gross fee revenues, due to higher comparable systemwide RevPAR driven by increases in both ADR and occupancy in all regions except Greater China and higher profits at certain managed hotels due to the ongoing recovery in lodging demand from the impacts of COVID-19, partially offset by net unfavorable foreign exchange rates; and
•$25 million of higher owned, leased, and other revenue, net of direct expenses, primarily reflecting stronger results at owned and leased properties due to the ongoing recovery in lodging demand from the impacts of COVID-19.
First Three Quarters
International 2022 first three quarters segment profit increased primarily due to:
•$255 million of higher gross fee revenues, primarily reflecting higher comparable systemwide RevPAR driven by increases in both ADR and occupancy in all regions except Greater China and higher profits at certain managed hotels due to the ongoing recovery in lodging demand from the impacts of COVID-19, as well as unit growth, partially offset by net unfavorable foreign exchange rates;
22
•$120 million of higher owned, leased, and other revenue, net of direct expenses, primarily reflecting stronger results at owned and leased properties due to the ongoing recovery in lodging demand from the impacts of COVID-19, partially offset by lower termination fees; and
•$38 million of higher cost reimbursement revenue, net of reimbursed expenses.
STOCK-BASED COMPENSATION
See Note 3 for more information.
LIQUIDITY AND CAPITAL RESOURCES
Our long-term financial objectives include diversifying our financing sources, optimizing the mix and maturity of our long-term debt, and reducing our working capital. At the end of the 2022 third quarter, our long-term debt had a weighted average interest rate of 3.9 percent and a weighted average maturity of approximately 6.0 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 2022 third quarter.
We remain focused on preserving our financial flexibility and managing our debt maturities. We also remain focused on managing our corporate general and administrative costs and our capital expenditures and other investment spending.
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 currently believe the Credit Facility, our cash on hand, and our access to capital markets remain adequate to meet our liquidity requirements.
Sources of Liquidity
Our Credit Facility
Our Credit Facility provides for up to $4.5 billion of aggregate borrowings for general corporate needs, including working capital, capital expenditures, letters of credit, acquisitions, and to support our commercial paper program if and when we resume issuing commercial paper. Borrowings under the Credit Facility generally bear interest at LIBOR (the London Interbank Offered 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 (if any) as long-term based on our ability and intent to refinance the outstanding borrowings on a long-term basis. The Credit Facility expires on June 28, 2024. As of September 30, 2022, we had no outstanding borrowings under the Credit Facility.
We entered into amendments to the Credit Facility in April 2020 and January 2021 (the “Credit Facility Amendments”). The debt leverage covenant in the Credit Facility, which is tested each quarter and was waived pursuant to the Credit Facility Amendments through and including the fourth quarter of 2021, resumed beginning with the quarter that ended March 31, 2022. The Credit Facility Amendments adjusted the required leverage levels for this covenant starting at 5.50 to 1.00 for the test period that ended on March 31, 2022 and gradually stepping down to 4.00 to 1.00 over the succeeding five fiscal quarters, as further described in the Credit Facility. The Credit Facility Amendments also amended certain other terms of the Credit Facility, including reducing the rate floor for the LIBOR Daily Floating Rate and the Eurocurrency Rate. 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.
Commercial Paper
Due to changes to our credit ratings as a result of the impact of COVID-19 on our business, we currently are not issuing commercial paper. As a result, we have had to rely more on borrowings under the Credit Facility and issuance of senior notes.
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Uses of Cash
Cash, cash equivalents, and restricted cash totaled $1,068 million at September 30, 2022, a decrease of $353 million from year-end 2021, primarily due to share repurchases ($1,235 million), Credit Facility repayments, net of borrowings ($1,050 million), dividends paid ($195 million), capital and technology expenditures ($192 million), and financing outflows for employee stock-based compensation withholding taxes ($88 million), partially offset by net cash provided by operating activities ($1,922 million) and Senior Notes issuances, net of repayments ($411 million).
Net cash provided by operating activities increased by $1,177 million in the 2022 first three quarters compared to the 2021 first three quarters, primarily due to higher net income (adjusted for non-cash items and the prior year loss on extinguishment of debt). Cash inflow from our Loyalty Program in 2020 included $920 million of cash received from the prepayment of certain future revenues under the amendments to our existing U.S.-issued co-brand credit card agreements, which reduced in both the 2021 and 2022 first three quarters, 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 2022 third 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 $192 million in the 2022 first three quarters and $114 million in the 2021 first three quarters. We expect capital expenditures and other investments will total approximately $500 million for the 2022 full year, including capital and technology expenditures, contract acquisition costs, loan advances, and other investing activities (including approximately $200 million for maintenance capital spending and our new headquarters). If the City Express brand acquisition discussed in Note 7 closes in 2022, we will have an additional $100 million of investment spending.
Share Repurchases and Dividends
We purchased 6.2 million shares in the 2022 third quarter for $950 million. Year-to-date through October 31, 2022, we repurchased 11.1 million shares for $1,700 million. For additional information, see “Issuer Purchases of Equity Securities” in Part II, Item 2.
Our Board of Directors declared the following quarterly cash dividends in 2022: (1) $0.30 per share declared on May 2, 2022 and paid on June 30, 2022 to stockholders of record on May 16, 2022; and (2) $0.30 per share declared on August 4, 2022 and paid on September 30, 2022 to stockholders of record on August 18, 2022.
We expect to continue to return cash to stockholders through share repurchases and dividends in the remainder of 2022.
Material Cash Requirements
As of the end of the 2022 third quarter, there have been no material changes to our cash requirements as disclosed in our 2021 Form 10-K. See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of our 2021 Form 10-K for more information about our cash requirements. Also, see Note 6 for information on our long-term debt.
At September 30, 2022, 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 $336 million, of which $89 million is payable within the next 12 months from September 30, 2022.
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 2021 Form 10-K. We
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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, 2021. See Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in our 2021 Form 10-K for more information on our exposure to market risk.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this quarterly report under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Management necessarily applied its judgment in assessing the costs and benefits of those controls and procedures, which by their nature, can provide only reasonable assurance about management’s control objectives. You should note that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective and operating to provide reasonable assurance that we record, process, summarize, and report the information we are required to disclose in the reports that we file or submit under the Exchange Act within the time periods specified in the rules and forms of the SEC, and to provide reasonable assurance that we accumulate and communicate such information to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions about required disclosure.
Changes in Internal Control Over Financial Reporting
We made no changes in internal control over financial reporting during the 2022 third quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings
See the information under the “Litigation, Claims, and Government Investigations” caption in Note 5, which we incorporate here by reference. Within this section, we use a threshold of $1 million in disclosing material environmental proceedings involving a governmental authority.
As previously disclosed in our 2021 Form 10-K, several counties and cities in California asserted that the Ritz-Carlton hotels in California failed to comply with certain state statutes regulating hazardous and other waste handling and disposal. In July 2022, we executed final settlement documents to fully settle the matter, and in August the settlement was approved by the Superior Court of the State of California, County of Riverside. The settlement involves payments by the Company below the above-referenced $1 million disclosure threshold.
From time to time, we are also subject to other legal proceedings and claims in the ordinary course of business, including adjustments proposed during governmental examinations of the various tax returns we file. While management presently believes that the ultimate outcome of these other proceedings, individually and in aggregate, will not materially harm our financial position, cash flows, or overall trends in results of operations, legal proceedings are inherently uncertain, and unfavorable rulings could, individually or in aggregate, have a material adverse effect on our business, financial condition, or operating results.
Item 1A. Risk Factors
We are subject to various risks that make an investment in our securities risky. You should carefully consider the risk factors disclosed in Part I, Item 1A, “Risk Factors,” of our 2021 Form 10-K. There are no material changes to the risk factors discussed in our 2021 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a)Unregistered Sale of Securities
None.
(b)Use of Proceeds
None.
(c)Issuer Purchases of Equity Securities
| (in millions, except per share amounts) | ||||||||||||||||||||||||||
| Period | Total Number of Shares Purchased | Average Price per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs (1) | ||||||||||||||||||||||
| July 1, 2022 - July 31, 2022 | 1.0 | $ | 144.77 | 1.0 | 14.5 | |||||||||||||||||||||
| August 1, 2022 - August 31, 2022 | 2.5 | $ | 158.22 | 2.5 | 12.0 | |||||||||||||||||||||
| September 1, 2022 - September 30, 2022 | 2.7 | $ | 153.48 | 2.7 | 9.3 | |||||||||||||||||||||
(1)On February 28, 2019, we announced that our Board of Directors increased our common stock repurchase authorization by 25 million shares. As of September 30, 2022, 9.3 million shares remained available for repurchase under Board approved authorizations. We repurchase shares in the open market and in privately negotiated transactions and account for these shares as treasury stock.
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Item 6. Exhibits
We have not filed as exhibits certain instruments defining the rights of holders of the long-term debt of Marriott pursuant to Item 601(b)(4)(iii) of Regulation S-K promulgated under the Exchange Act, because the amount of debt authorized and outstanding under each such instrument does not exceed 10 percent of the total assets of the Company and its consolidated subsidiaries. The Company agrees to furnish a copy of any such instrument to the Commission upon request.
| Exhibit No. | Description | Incorporation by Reference (where a report is indicated below, that document has been previously filed with the SEC and the applicable exhibit is incorporated by reference thereto) | ||||||||||||
| 3.1 | Restated Certificate of Incorporation. | |||||||||||||
| 3.2 | Amended and Restated Bylaws. | |||||||||||||
| 31.1 | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a). | |||||||||||||
| 31.2 | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a). | |||||||||||||
| 32 | Section 1350 Certifications. | |||||||||||||
| 101 | The following financial statements from Marriott International, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in Inline XBRL: (i) the Condensed Consolidated Statements of Income; (ii) the Condensed Consolidated Statements of Comprehensive Income; (iii) the Condensed Consolidated Balance Sheets; and (iv) the Condensed Consolidated Statements of Cash Flows. | Submitted electronically with this report. | ||||||||||||
| 101.INS | XBRL Instance Document - the instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document. | Submitted electronically with this report. | ||||||||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document. | Submitted electronically with this report. | ||||||||||||
| 101.CAL | XBRL Taxonomy Calculation Linkbase Document. | Submitted electronically with this report. | ||||||||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. | Submitted electronically with this report. | ||||||||||||
| 101.LAB | XBRL Taxonomy Label Linkbase Document. | Submitted electronically with this report. | ||||||||||||
| 101.PRE | XBRL Taxonomy Presentation Linkbase Document. | Submitted electronically with this report. | ||||||||||||
| 104 | The cover page from Marriott International, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in Inline XBRL (included as Exhibit 101). | Submitted electronically with this report. | ||||||||||||
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| MARRIOTT INTERNATIONAL, INC. | ||
| November 3, 2022 | ||
| /s/ Felitia Lee | ||
| Felitia Lee | ||
| Controller and Chief Accounting Officer (Duly Authorized Officer) | ||
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