10-Q 1 mar-q22015x10q.htm 10-Q MAR-Q2.2015-10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________ 
FORM 10-Q
_______________________________________ 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
OR
o
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.)
 
 
10400 Fernwood Road, Bethesda, Maryland
(Address of principal executive offices)
 
20817
(Zip Code)
(301) 380-3000
(Registrant’s telephone number, including area code) 
_______________________________________
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
  
Smaller Reporting Company
 
¨
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 265,887,565 shares of Class A Common Stock, par value $0.01 per share, outstanding at July 17, 2015.






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.
 
 
 
 



1


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
 
Six Months Ended
 
June 30, 2015

June 30, 2014
 
June 30, 2015
 
June 30, 2014
REVENUES
 
 
 
 
 
 
 
Base management fees
$
191

 
$
176

 
$
356

 
$
331

Franchise fees
221

 
194

 
425

 
357

Incentive management fees
81

 
82

 
170

 
153

Owned, leased, and other revenue
243

 
269

 
500

 
503

Cost reimbursements
2,953

 
2,763

 
5,751

 
5,433

 
3,689

 
3,484

 
7,202

 
6,777

OPERATING COSTS AND EXPENSES
 
 
 
 
 
 
 
Owned, leased, and other - direct
183

 
199

 
377

 
384

Reimbursed costs
2,953

 
2,763

 
5,751

 
5,433

Depreciation, amortization, and other
32

 
47

 
76

 
83

General, administrative, and other
152

 
159

 
297

 
307

 
3,320

 
3,168

 
6,501

 
6,207

OPERATING INCOME
369

 
316

 
701

 
570

Gains and other income, net
20

 
3

 
20

 
3

Interest expense
(42
)
 
(30
)
 
(78
)
 
(60
)
Interest income
6

 
4

 
14

 
9

Equity in earnings (losses)
2

 
(8
)
 
5

 
(6
)
INCOME BEFORE INCOME TAXES
355

 
285

 
662

 
516

Provision for income taxes
(115
)
 
(93
)
 
(215
)
 
(152
)
NET INCOME
$
240

 
$
192

 
$
447

 
$
364

EARNINGS PER SHARE
 
 
 
 
 
 
 
Earnings per share - basic
$
0.88

 
$
0.66

 
$
1.63

 
$
1.24

Earnings per share - diluted
$
0.87

 
$
0.64

 
$
1.59

 
$
1.21

CASH DIVIDENDS DECLARED PER SHARE
$
0.25

 
$
0.20

 
$
0.45

 
$
0.37

See Notes to Condensed Consolidated Financial Statements.

2


MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in millions)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
Net income
$
240

 
$
192

 
$
447

 
$
364

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Foreign currency translation adjustments
7

 

 
(19
)
 

Derivative instrument adjustments, net of tax
(2
)
 

 
7

 
1

Unrealized (loss) gain on available-for-sale securities, net of tax
(1
)
 
1

 
(2
)
 
2

Reclassification of losses (gains), net of tax
(2
)
 
1

 
(4
)
 
2

Total other comprehensive (loss) income, net of tax
2

 
2

 
(18
)
 
5

Comprehensive income
$
242

 
$
194

 
$
429

 
$
369


See Notes to Condensed Consolidated Financial Statements.


3


MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in millions)
 
 
(Unaudited)
 
 
 
June 30,
2015
 
December 31,
2014
ASSETS
 
 
 
Current assets
 
 
 
Cash and equivalents
$
140

 
$
104

Accounts and notes receivable, net
1,188

 
1,100

Current deferred taxes, net
309

 
311

Prepaid expenses
68

 
64

Other
56

 
109

Assets held for sale
145

 
233

 
1,906

 
1,921

Property and equipment, net
987

 
1,460

Intangible assets
 
 
 
Contract acquisition costs and other
1,452

 
1,351

Goodwill
962

 
894

 
2,414

 
2,245

Equity and cost method investments
216

 
224

Notes receivable, net
154

 
215

Deferred taxes, net
397

 
530

Other noncurrent assets
247

 
270

 
$
6,321

 
$
6,865

LIABILITIES AND SHAREHOLDERS’ DEFICIT
 
 
 
Current liabilities
 
 
 
Current portion of long-term debt
$
614

 
$
324

Accounts payable
640

 
605

Accrued payroll and benefits
806

 
799

Liability for guest loyalty programs
833

 
677

Accrued expenses and other
624

 
655

 
3,517

 
3,060

Long-term debt
3,303

 
3,457

Liability for guest loyalty programs
1,607

 
1,657

Other noncurrent liabilities
927

 
891

Shareholders’ deficit
 
 
 
Class A Common Stock
5

 
5

Additional paid-in-capital
2,781

 
2,802

Retained earnings
4,573

 
4,286

Treasury stock, at cost
(10,304
)
 
(9,223
)
Accumulated other comprehensive loss
(88
)
 
(70
)
 
(3,033
)
 
(2,200
)
 
$
6,321

 
$
6,865


See Notes to Condensed Consolidated Financial Statements.

4


MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions)
(Unaudited)
 
 
Six Months Ended
 
June 30, 2015
 
June 30, 2014
OPERATING ACTIVITIES
 
 
 
Net income
$
447

 
$
364

Adjustments to reconcile to cash provided by operating activities:
 
 
 
Depreciation, amortization, and other
76

 
83

Share-based compensation
55

 
54

Income taxes
99

 
57

Liability for guest loyalty programs
101

 
68

Working capital changes
(68
)
 
(17
)
Other
42

 
60

                       Net cash provided by operating activities
752

 
669

INVESTING ACTIVITIES
 
 
 
Capital expenditures
(159
)
 
(156
)
Dispositions
581

 
292

Loan advances
(12
)
 
(103
)
Loan collections
14

 
17

Equity and cost method investments
1

 
(5
)
Contract acquisition costs
(72
)
 
(28
)
Acquisition of a business, net of cash acquired
(136
)
 
(184
)
Redemption of preferred equity investment
121

 

Other
14

 
(16
)
                        Net cash provided by (used in) investing activities
352

 
(183
)
FINANCING ACTIVITIES
 
 
 
Commercial paper/Credit Facility, net
136

 
250

Repayment of long-term debt
(4
)
 
(3
)
Issuance of Class A Common Stock
31

 
99

Dividends paid
(124
)
 
(109
)
Purchase of treasury stock
(1,107
)
 
(657
)
                        Net cash used in financing activities
(1,068
)
 
(420
)
INCREASE IN CASH AND EQUIVALENTS
36

 
66

CASH AND EQUIVALENTS, beginning of period
104

 
126

CASH AND EQUIVALENTS, end of period
$
140

 
$
192

See Notes to Condensed Consolidated Financial Statements.


5


MARRIOTT INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.    BASIS OF PRESENTATION
The condensed consolidated financial statements present the results of operations, financial position, and cash flows of Marriott International, Inc. (“Marriott,” and together with its subsidiaries, “we,” “our,” “us,” or the “Company”). In order to make this report easier to read, we refer throughout to (i) our Condensed Consolidated Financial Statements as our “Financial Statements,” (ii) our Condensed Consolidated Statements of Income as our “Income Statements,” (iii) our Condensed Consolidated Balance Sheets as our “Balance Sheets,” (iv) our properties, brands, or markets in the United States and Canada as “North America” or “North American,” and (v) our properties, brands, or markets outside of the United States and Canada as “International.” In addition, references throughout to numbered “Footnotes” refer to the numbered Notes in these Notes to Condensed Consolidated Financial Statements, unless otherwise noted.
These Financial Statements have not been audited. We have condensed or omitted certain information and footnote 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, 2014 (“2014 Form 10-K”). Certain terms not otherwise defined in this Form 10-Q have the meanings specified in our 2014 Form 10-K.
Preparation of financial statements that conform to 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. 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 June 30, 2015 and December 31, 2014, the results of our operations for the three and six months ended June 30, 2015 and June 30, 2014, and cash flows for the six months ended June 30, 2015, and June 30, 2014. Interim results may not be indicative of fiscal year performance because of seasonal and short-term variations. We have eliminated all material intercompany transactions and balances between entities consolidated in these Financial Statements.
New Accounting Standards
Accounting Standards Update No. 2014-09 - “Revenue from Contracts with Customers” (“ASU No. 2014-09”)
ASU No. 2014-09 supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, as well as most industry-specific guidance, and significantly enhances comparability of revenue recognition practices across entities and industries by providing a principles-based, comprehensive framework for addressing revenue recognition issues. In order for a provider of promised goods or services to recognize as revenue the consideration that it expects to receive in exchange for the promised goods or services, the provider should apply the following five steps: (1) identify the contract with a customer(s); (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU No. 2014-09 also specifies the accounting for some costs to obtain or fulfill a contract with a customer and provides enhanced disclosure requirements. The Financial Accounting Standards Board has deferred ASU No. 2014-09 for one year, and with that deferral, the standard will be effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, which for us will be our 2018 first quarter. We are permitted to use either the retrospective or the modified retrospective method when adopting ASU No. 2014-09. We are still assessing the potential impact that ASU No. 2014-09 will have on our financial statements and disclosures.


6


2.    ACQUISITIONS AND DISPOSITIONS
Acquisitions
In the 2015 second quarter, we acquired the Delta Hotels and Resorts brand, management and franchise business, together with related intellectual property, from Delta Hotels Limited Partnership, a subsidiary of British Columbia Investment Management Corporation (“bcIMC”) for approximately $134 million (C$170 million), plus $2 million (C$2 million) of working capital, for a total purchase price of $136 million (C$172 million) in cash. During our 2015 second quarter, we provisionally recognized approximately: $125 million (C$158 million) in intangible assets consisting of contract assets of $17 million (C$22 million), an indefinite-lived brand intangible of $91 million (C$115 million), and goodwill of $17 million (C$22 million); and $11 million (C$14 million) of tangible assets consisting of property and equipment and other assets. Our provisional estimates of fair values are based on the information that was available as of the acquisition date, and we are continuing to evaluate the underlying inputs and assumptions used in our valuations. As a result of the transaction, we added 37 open hotels and resorts with 9,595 rooms across Canada, 27 of which are managed (including 13 under new 30-year management agreements with bcIMC-affiliated entities) and 10 of which are franchised, plus five hotels under development (including one under a new 30-year management agreement with a bcIMC-affiliated entity).
In the 2014 second quarter, we acquired the Protea Hotel Group’s brands and hotel management business (“Protea Hotels”) for $195 million (ZAR 2.059 billion) in cash. We finalized the purchase accounting during the 2015 second quarter, adjusting fair value amounts that we had provisionally recognized in the 2014 second quarter following refinements to our intangible valuation models. The 2015 second quarter adjustments include a decrease to our contract assets of $40 million and a decrease to our indefinite-lived brand intangible of $12 million, with a corresponding increase to goodwill. These adjustments, and the related contract asset amortization impacts, did not have a significant impact on our previously reported Financial Statements, and accordingly, we did not retrospectively adjust those Financial Statements. 
Dispositions and Planned Dispositions
In the 2014 first quarter, we sold The London EDITION to a third party and simultaneously entered into definitive agreements to sell The Miami Beach and The New York (Madison Square Park) EDITION hotels upon completion of construction to the same third party. The total sales price for the three EDITION hotels was approximately $816 million in cash and assumed liabilities. We completed the sale of The Miami Beach EDITION during the 2015 first quarter, and sold The New York (Madison Square Park) EDITION at the beginning of our 2015 second quarter. The cash proceeds were $233 million in the 2014 first quarter, $230 million in the 2015 first quarter, and $343 million in the 2015 second quarter.
In the 2015 first quarter, we recorded a $6 million impairment charge for The New York (Madison Square Park) EDITION, in the “Depreciation, amortization, and other” caption of our Income Statements as our cost estimates exceeded our total fixed sales price. We did not allocate the charge to any of our segments.
In the 2015 first quarter, we sold our interest in an International property and received $27 million (€24 million) in cash.
At the end of the 2015 second quarter, we held $145 million of assets classified as “Assets held for sale” and $15 million of liabilities associated with those assets recorded under “Accrued expenses and other” on our Balance Sheets for assets that we expect to sell by early 2016. We determined that the carrying values of those assets exceeded their fair values, which we estimated using a market approach and Level 3 inputs. Consequently, we recorded charges for the expected disposal loss, which represent the excess of the carrying values, including any goodwill we must allocate, over the fair values, less cost to sell. The assets and liabilities we classified as held for sale and associated charges relate to the following:
$60 million in assets and $6 million in liabilities for an International property. During the 2015 second quarter we recorded an $18 million expected loss in the “Gains and other income, net” caption of our Income Statements when we received a signed letter of intent for the sale of that property.

7


$47 million in assets and $1 million in liabilities for a North American Limited-Service segment plot of land. During the 2015 second quarter, we determined that achieving certain milestones outlined in a signed purchase and sale agreement was likely, and we recorded a $4 million expected loss in the “Gains and other income, net” caption of our Income Statements.
$38 million in assets and $8 million in liabilities for The Miami Beach EDITION residences (the “residences”). During the 2015 first quarter, we recorded a $6 million charge, which we did not allocate to any of our segments, following a review of comparable property values. We classified the residences charge in the “Depreciation, amortization, and other” caption of our Income Statements because it is part of a larger mixed-use project for which we had recorded similar charges in prior periods.
3.    EARNINGS PER SHARE
The table below illustrates the reconciliation of the earnings and number of shares used in our calculations of basic and diluted earnings per share:
 
Three Months Ended
 
Six Months Ended
(in millions, except per share amounts)
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
Computation of Basic Earnings Per Share
 
 
 
 
 
 
 
Net income
$
240

 
$
192

 
$
447

 
$
364

Weighted average shares outstanding
272.4

 
292.5

 
275.1

 
294.3

Basic earnings per share
$
0.88

 
$
0.66

 
$
1.63

 
$
1.24

Computation of Diluted Earnings Per Share
 
 
 
 
 
 
 
Net income
$
240

 
$
192

 
$
447

 
$
364

Weighted average shares outstanding
272.4

 
292.5

 
275.1

 
294.3

Effect of dilutive securities
 
 
 
 
 
 
 
Employee stock option and appreciation right plans
2.3

 
3.0

 
2.4

 
3.2

Deferred stock incentive plans
0.6

 
0.7

 
0.6

 
0.8

Restricted stock units
2.0

 
2.5

 
2.5

 
2.9

Shares for diluted earnings per share
277.3

 
298.7

 
280.6

 
301.2

Diluted earnings per share
$
0.87

 
$
0.64

 
$
1.59

 
$
1.21

We compute the effect of dilutive securities using the treasury stock method and average market prices during the period. We excluded antidilutive stock options and stock appreciation rights of 0.3 million for the 2015 second quarter and 0.2 million for the 2015 first half from our calculation of diluted earnings per share because their exercise prices were greater than the average market prices. We had no antidilutive stock options or stock appreciation rights for the 2014 second quarter and the 2014 first half.
4.    SHARE-BASED COMPENSATION
Under our Stock and Cash Incentive Plan (the “Stock Plan”), we award: (1) stock options (our “Stock Option Program”) to purchase our Class A Common Stock (“common stock”); (2) stock appreciation rights (“SARs”) for our common stock (our “SAR Program”); (3) restricted stock units (“RSUs”) of our common stock; and (4) deferred stock units. We also issue performance-based RSUs (“PSUs”) to named executive officers and some of their direct reports under the Stock Plan. We grant awards at exercise prices or strike prices that equal the market price of our common stock on the date of grant.
We recorded share-based compensation expense for award grants of $30 million for the 2015 second quarter and $29 million for the 2014 second quarter, $55 million for the 2015 first half, and $54 million for the 2014 first half. Deferred compensation costs for unvested awards totaled $175 million at June 30, 2015 and $114 million at December 31, 2014.
RSUs and PSUs
We granted 1.3 million RSUs during the 2015 first half to certain officers and key employees, and those units vest generally over four years in equal annual installments commencing one year after the grant date. We also

8


granted 0.1 million PSUs during the 2015 first half to certain named executive officers and their direct reports, subject to the satisfaction of certain performance conditions based on achievement of pre-established targets for Adjusted EBITDA, RevPAR Index, room openings, and net administrative expense over, or at the end of, a three-year vesting period. RSUs, including PSUs, granted in the 2015 first half had a weighted average grant-date fair value of $79.
SARs
We granted 0.3 million SARs to officers, key employees, and non-employee directors during the 2015 first half. These SARs generally expire ten years after the grant date and both vest and may be exercised in cumulative installments of one quarter at the end of each of the first four years following the grant date. The weighted average grant-date fair value of SARs granted in the 2015 first half was $26 and the weighted average exercise price was $83.
We used the following assumptions as part of a binomial lattice-based valuation to determine the fair value of the SARs we granted during the 2015 first half:
Expected volatility
30
%
Dividend yield
1.04
%
Risk-free rate
1.9 - 2.3%

Expected term (in years)
6 - 10

In making these assumptions, we base expected volatility on the historical movement of the Company’s stock price. We base risk-free rates on the corresponding U.S. Treasury spot rates for the expected duration at the date of grant, which we convert to a continuously compounded rate. The dividend yield assumption takes into consideration both historical levels and expectations of future dividend payout. The weighted average expected terms for SARs are an output of our valuation model which utilizes historical data in estimating the period of time that the SARs are expected to remain unexercised. We calculate the expected terms for SARs for separate groups of retirement eligible and non-retirement eligible employees and non-employee directors. Our valuation model also uses historical data to estimate exercise behaviors, which includes determining the likelihood that employees will exercise their SARs before expiration at a certain multiple of stock price to exercise price. In recent years, non-employee directors have generally exercised grants in their last year of exercisability.
Other Information
As of the end of the 2015 second quarter, we had 24 million remaining shares authorized under the Stock Plan, including 6 million shares under the Stock Option Program and the SAR Program.
5.    INCOME TAXES
Our effective tax rate decreased from 32.6% to 32.4% for the three months ended June 30, 2015 primarily due to a lower effective tax rate on foreign pre-tax earnings and a deferred tax benefit due to changes in state income tax laws, partially offset by higher pre-tax earnings in the U.S., which are taxed at a higher rate. Our effective rate increased from 29.5% to 32.4% for the six months ended June 30, 2015 primarily due to a $21 million prior year resolution of an issue with the U.S. federal tax authorities for a guest marketing program that was favorable to the 2014 first quarter results, in addition to the 2015 second quarter items discussed above.
For the 2015 second quarter, our unrecognized tax benefits balance of $10 million remained unchanged from both the 2015 first quarter and year-end 2014. The unrecognized tax benefits balance included $7 million of tax positions that, if recognized, would impact our effective tax rate.
We file income tax returns, including returns for our subsidiaries, in various jurisdictions around the world. The Internal Revenue Service (“IRS”) has examined our federal income tax returns, and we have settled all issues for tax years through 2009. We participate in the IRS Compliance Assurance Program, which accelerates IRS examination of key transactions with the goal of resolving any issues before the taxpayer files its return. As a result, the audits of our open tax years 2010 through 2013 are complete, while the 2014 and 2015 tax year audits are

9


currently ongoing. Various foreign, state, and local income tax returns are also under examination by the applicable taxing authorities. We believe it is reasonably possible that we will resolve two state apportionment issues during the next 12 months for which we have an unrecognized tax balance of $4 million. One issue is currently under audit, and the second issue is pending an expected court ruling in 2015.
We paid cash for income taxes, net of refunds, of $90 million in the 2015 first half and $54 million in the 2014 first half.
6.    COMMITMENTS AND CONTINGENCIES
Guarantees
We issue guarantees to certain lenders and hotel owners, chiefly to obtain long-term management contracts. The guarantees generally have a stated maximum funding amount and a term of four to ten years. The terms of guarantees to lenders generally require us to fund if cash flows from hotel operations are inadequate to cover annual debt service or to repay the loan at maturity. The terms of the guarantees to hotel owners generally require us to fund if the hotels do not attain specified levels of operating profit. Guarantee fundings to lenders and hotel owners are generally recoverable as loans repayable to us out of future hotel cash flows and/or proceeds from the sale of hotels. We also enter into project completion guarantees with certain lenders in conjunction with hotels that we or our joint venture partners are building.
We present the maximum potential amount of our future guarantee fundings and the carrying amount of our liability for guarantees for which we are the primary obligor at June 30, 2015 in the following table:
($ in millions)
Guarantee Type
Maximum Potential
Amount of Future Fundings
 
Liability for Guarantees
Debt service
$
54

 
$
14

Operating profit
78

 
42

Other
13

 
1

Total guarantees where we are the primary obligor
$
145

 
$
57

Our liability at June 30, 2015, for guarantees for which we are the primary obligor is reflected in our Balance Sheets as $5 million of “Accrued expenses and other” and $52 million of “Other noncurrent liabilities.”
Our guarantees listed in the preceding table include $18 million of debt service guarantees, $21 million of operating profit guarantees, and $1 million of other guarantees that will not be in effect until the underlying properties open and we begin to operate the properties or certain other events occur.
The table above does not include a “contingent purchase obligation,” which is not currently in effect, that we entered into in the 2014 first quarter to provide credit support to lenders for a construction loan. We entered into that agreement in conjunction with signing a management agreement for The Times Square EDITION hotel in New York City (currently projected to open in 2017), and the hotel’s ownership group obtaining acquisition financing and entering into agreements concerning future construction financing for the mixed use project (which includes both the hotel and adjacent retail space). Under the agreement, we granted the lenders the right, upon an uncured event of default by the hotel owner under, and an acceleration of, the mortgage loan, to require us to purchase the hotel component of the property for $315 million during the first two years after opening. Because we would acquire the building upon exercise of the put option, we have not included the amount in the table above. The lenders may extend this period for up to three years to complete foreclosure if the loan has been accelerated and certain other conditions are met. We do not currently expect that the lenders will require us to purchase the hotel component. We have no ownership interest in this hotel.
The preceding table also does not include the following guarantees:
$71 million of guarantees for Senior Living Services lease obligations of $53 million (expiring in 2019) and lifecare bonds of $18 million (estimated to expire in 2019), for which we are secondarily liable. Sunrise Senior Living, Inc. (“Sunrise”) is the primary obligor on both the leases and $3 million of the lifecare bonds; HCP,

10


Inc., as successor by merger to CNL Retirement Properties, Inc. (“CNL”), is the primary obligor on $15 million of the lifecare bonds. Before we sold the Senior Living Services business in 2003, these were our guarantees of obligations of our then consolidated Senior Living Services subsidiaries. Sunrise and CNL have indemnified us for any fundings we may be called upon to make under these guarantees. Our liability for these guarantees had a carrying value of $3 million at June 30, 2015. In conjunction with our consent of the 2011 extension of certain lease obligations until 2018, Sunrise provided us with $1 million of cash collateral and an $85 million letter of credit issued by Key Bank to secure our continued exposure under the lease guarantees during the extension term and certain other obligations of Sunrise. The letter of credit balance was $62 million at the end of the 2015 second quarter, which decreased as a result of lease payments made and lifecare bonds redeemed. During the extension term, Sunrise agreed to make an annual payment to us from the cash flow of the continuing lease facilities, subject to a $1 million annual minimum. In the 2013 first quarter, Sunrise merged with Health Care REIT, Inc. (“HCN”), and Sunrise’s management business was acquired by an entity formed by affiliates of Kohlberg Kravis Roberts & Co. LP, Beecken Petty O’Keefe & Co., Coastwood Senior Housing Partners LLC, and HCN. In April of 2014, HCN and Revera Inc., a private provider of senior living services, acquired Sunrise’s management business.
Lease obligations, for which we became secondarily liable when we acquired the Renaissance Hotel Group N.V. in 1997, consisting of annual rent payments of approximately $5 million and total remaining rent payments through the initial term of approximately $22 million. The majority of these obligations expire by the end of 2020. CTF Holdings Ltd. (“CTF”) had originally provided €35 million in cash collateral in the event that we are required to fund under such guarantees, approximately $3 million (€2 million) of which remained at June 30, 2015. Our exposure for the remaining rent payments through the initial term will decline to the extent that CTF obtains releases from the landlords or these hotels exit the system. Since the time we assumed these guarantees, we have not funded any amounts, and we do not expect to fund any amounts under these guarantees in the future.
Certain guarantees and commitments relating to the timeshare business, which were outstanding at the time of the 2011 Timeshare spin-off and for which we became secondarily liable as part of the spin-off. These Marriott Vacations Worldwide Corporation (“MVW”) payment obligations, for which we currently have a total exposure of $10 million, relate to two guarantees. MVW has indemnified us for these obligations. We expect these obligations will expire as follows: $3 million in 2020, and $7 million (9 million Singapore Dollars) in 2022. We have not funded any amounts under these obligations, and do not expect to do so in the future. Our liability for these obligations had a carrying value of $1 million at June 30, 2015.
A guarantee for a lease, originally entered into in 2000, for which we became secondarily liable in 2012 as a result of our sale of the ExecuStay corporate housing business to Oakwood Worldwide (“Oakwood”). Oakwood has indemnified us for the obligations under this guarantee. Our total exposure at the end of the 2015 second quarter for this guarantee is $6 million in future rent payments through the end of the lease in 2019. Our liability for this guarantee had a carrying value of $1 million at June 30, 2015.
In addition to the guarantees described in the preceding paragraphs, in conjunction with financing obtained for specific projects or properties owned by joint ventures in which we are a party, we may provide industry standard indemnifications to the lender for loss, liability, or damage occurring as a result of the actions of the other joint venture owner or our own actions.
Commitments
In addition to the guarantees we note in the preceding paragraphs, as of June 30, 2015, we had the following commitments outstanding, which are not recorded on our Balance Sheets:
A commitment to invest up to $8 million of equity for a non-controlling interest in a partnership that plans to purchase North American full-service and limited-service properties, or purchase or develop hotel-anchored mixed-use real estate projects. We expect to fund $2 million of this commitment in 2015. We do not expect to fund the remaining $6 million of this commitment, which expires in 2016.

11


A commitment to invest up to $22 million of equity for non-controlling interests in a partnership that plans to purchase or develop limited-service properties in Asia. We expect to fund this commitment as follows: $3 million in 2015 and $3 million in 2016. We do not expect to fund the remaining $16 million of this commitment prior to the end of the commitment period in 2016.
A commitment, with no expiration date, to invest up to $11 million in a joint venture for development of a new property. We expect to fund this commitment as follows: $8 million in 2015 and $3 million in 2016.
A commitment to invest $9 million (R$27 million) for the development of a property. We expect to fund the majority of this commitment in 2015.
We have a right and under certain circumstances an obligation to acquire our joint venture partner’s remaining interests in two joint ventures over the next six years at a price based on the performance of the ventures. In conjunction with this contingent obligation, we advanced $20 million (€15 million) in deposits, $12 million (€11 million) of which is remaining. The amounts on deposit are refundable to the extent we do not acquire our joint venture partner’s remaining interests.
Various commitments to purchase information technology hardware, software, accounting, finance, and maintenance services in the normal course of business totaling $171 million. We expect to purchase goods and services subject to these commitments as follows: $32 million in 2015, $54 million in 2016, $44 million in 2017, and $41 million thereafter.
A $5 million loan commitment that we extended to the operating tenant of a property to cover the cost of renovation shortfalls. We expect to fund this commitment in 2015.
Several commitments aggregating $30 million with no expiration date and which we do not expect to fund.
Letters of Credit
At June 30, 2015, we had $86 million of letters of credit outstanding (all outside the Credit Facility, as defined in Footnote No. 7, “Long-Term Debt,” below), the majority of which were for our self-insurance programs. Surety bonds issued as of June 30, 2015, totaled $153 million, the majority of which federal, state and local governments requested in connection with our self-insurance programs.
Legal Proceedings
On January 19, 2010, several former Marriott employees (the “plaintiffs”) filed a putative class action complaint against us and the Stock Plan (the “defendants”), alleging that certain equity awards of deferred bonus stock granted to the plaintiffs and other current and former employees for fiscal years 1963 through 1989 are subject to vesting requirements under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), that are in certain circumstances more rapid than those set forth in the awards. The action was brought in the United States District Court for the District of Maryland (Greenbelt Division), and Dennis Walter Bond Sr. and Michael P. Steigman were the remaining named plaintiffs. Class certification was denied, and on January 16, 2015, the court granted Marriott’s motion for summary judgment and dismissed the case. Plaintiffs have filed a notice of appeal with the U.S. Court of Appeals for the Fourth Circuit, and we have cross-appealed on statute of limitations grounds.
In March 2012, the Korea Fair Trade Commission (“KFTC”) obtained documents from two of our managed hotels in Seoul, Korea in connection with an investigation which we believe is focused on pricing of hotel services within the Seoul region. Since then, the KFTC has conducted additional fact-gathering at those two hotels and also has collected information from another Marriott managed hotel located in Seoul. We understand that the KFTC also has sought documents from numerous other hotels in Seoul and other parts of Korea that we do not operate, own, or franchise. We have not yet received a complaint or other legal process. We are cooperating with this investigation.

12


7.    LONG-TERM DEBT
We provide detail on our long-term debt balances in the following table as of the end of the 2015 second quarter and year-end 2014:
 
At Period End
($ in millions)
June 30,
2015
 
December 31,
2014
Senior Notes:
 
 
 
Series G, interest rate of 5.8%, face amount of $316, maturing November 10, 2015
(effective interest rate of 6.8%)
$
315

 
$
314

Series H, interest rate of 6.2%, face amount of $289, maturing June 15, 2016
(effective interest rate of 6.3%)
289

 
289

Series I, interest rate of 6.4%, face amount of $293, maturing June 15, 2017
(effective interest rate of 6.5%)
293

 
293

Series K, interest rate of 3.0%, face amount of $600, maturing March 1, 2019
(effective interest rate of 4.4%)
597

 
596

Series L, interest rate of 3.3%, face amount of $350, maturing September 15, 2022
(effective interest rate of 3.4%)
349

 
349

Series M, interest rate of 3.4%, face amount of $350, maturing October 15, 2020
(effective interest rate of 3.6%)
348

 
348

Series N, interest rate of 3.1%, face amount of $400, maturing October 15, 2021
(effective interest rate of 3.4%)
398

 
397

Commercial paper, average interest rate of 0.5% at June 30, 2015
1,211

 
1,072

$2,000 Credit Facility

 

Other
117

 
123

 
3,917

 
3,781

Less current portion classified in:
 
 
 
Current portion of long-term debt
(614
)
 
(324
)
 
$
3,303

 
$
3,457

All of our long-term debt is recourse to us but unsecured. We paid cash for interest, net of amounts capitalized, of $54 million in the 2015 first half and $41 million in the 2014 first half.
We are a party to a multicurrency revolving credit agreement (the “Credit Facility”) that provides for $2,000 million of aggregate borrowings to support general corporate needs, including working capital, capital expenditures, share repurchases, and letters of credit. The availability of the Credit Facility also supports our commercial paper program. Borrowings under the Credit Facility generally bear interest at LIBOR (the London Interbank Offered Rate) plus a spread, based on our public debt rating. We also pay quarterly fees on the Credit Facility at a rate based on our public debt rating. While any outstanding commercial paper borrowings and/or borrowings under our Credit Facility generally have short-term maturities, we classify the outstanding borrowings as long-term based on our ability and intent to refinance the outstanding borrowings on a long-term basis. The Credit Facility expires on July 18, 2018. See the “Cash Requirements and Our Credit Facilities” caption later in this report in the “Liquidity and Capital Resources” section for information on our available borrowing capacity at June 30, 2015.
The following table presents future principal payments that are due for our debt as of the end of the 2015 second quarter:
Debt Principal Payments ($ in millions)
 
Amount
2015
 
$
321

2016
 
298

2017
 
301

2018
 
1,220

2019
 
607

Thereafter
 
1,170

Balance at June 30, 2015
 
$
3,917


13


8.    PROPERTY AND EQUIPMENT
The following table presents the composition of our property and equipment balances at the end of the 2015 second quarter and year-end 2014:
 
 
At Period End
($ in millions)
June 30,
2015
 
December 31,
2014
Land
$
301

 
$
457

Buildings and leasehold improvements
677

 
781

Furniture and equipment
806

 
775

Construction in progress
112

 
365

 
1,896

 
2,378

Accumulated depreciation
(909
)
 
(918
)
 
$
987

 
$
1,460

See Footnote No. 2, “Acquisitions and Dispositions” for information on charges we recorded in the 2015 first half in both the “Depreciation, amortization, and other” and “Gains and other income, net” captions of our Income Statements.
9.    NOTES RECEIVABLE
The following table presents the composition of our notes receivable balances (net of reserves and unamortized discounts) at the end of the 2015 second quarter and year-end 2014:
 
At Period End
($ in millions)
June 30,
2015
 
December 31,
2014
Senior, mezzanine, and other loans
$
241

 
$
242

Less current portion
(87
)
 
(27
)
 
$
154

 
$
215

We do not have any past due notes receivable amounts at the end of the 2015 second quarter. The unamortized discounts for our notes receivable were $25 million at the end of the 2015 second quarter and $25 million at year-end 2014.
The following table presents the expected future principal payments (net of reserves and unamortized discounts) as well as interest rates for our notes receivable as of the end of the 2015 second quarter:
Notes Receivable Principal Payments (net of reserves and unamortized discounts) and Interest Rates ($ in millions)
 
Amount
2015
 
$
13

2016
 
75

2017
 
3

2018
 
4

2019
 
2

Thereafter
 
144

Balance at June 30, 2015
 
$
241

Weighted average interest rate at June 30, 2015
 
6.4
%
Range of stated interest rates at June 30, 2015
 
0 - 10.0%

At the end of the 2015 second quarter, our recorded investment in impaired senior, mezzanine, and other loans was $71 million. We had a $55 million allowance for credit losses, leaving $16 million of exposure to our investment in impaired loans. At year-end 2014, our recorded investment in impaired senior, mezzanine, and other loans was $63 million, and we had a $50 million allowance for credit losses, leaving $13 million of exposure to our

14


investment in impaired loans. The activity in our notes receivable reserve during the 2015 first half consisted of an increase to fully reserve for interest on an impaired note receivable. Our average investment in impaired notes receivable totaled $69 million for the 2015 second quarter; $67 million for the 2015 first half, $105 million for the 2014 second quarter and $104 million for the 2014 first half.
10.    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, determined under current guidance for disclosures on the fair value of financial instruments, in the following table:
 
June 30, 2015
 
December 31, 2014
($ in millions)
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Senior, mezzanine, and other loans
$
154

 
$
153

 
$
215

 
$
214

Marketable securities
42

 
41

 
44

 
44

Total noncurrent financial assets
$
196

 
$
194

 
$
259

 
$
258

 
 
 
 
 
 
 
 
Senior Notes
$
(1,985
)
 
$
(2,047
)
 
$
(2,272
)
 
$
(2,370
)
Commercial paper
(1,211
)
 
(1,211
)
 
(1,072
)
 
(1,072
)
Other long-term debt
(103
)
 
(114
)
 
(108
)
 
(122
)
Other noncurrent liabilities
(57
)
 
(57
)
 
(57
)
 
(57
)
Total noncurrent financial liabilities
$
(3,356
)
 
$
(3,429
)
 
$
(3,509
)
 
$
(3,621
)
We estimate the fair value of our senior, mezzanine, and other loans, including the current portion, by discounting cash flows using risk-adjusted rates, both of which are Level 3 inputs.
We carry our marketable securities at fair value. Our marketable securities include debt securities of the U.S. Government, its sponsored agencies and other U.S. corporations invested for our self-insurance programs, as well as shares of a publicly traded company, which we value using directly observable Level 1 inputs. The carrying value of these marketable securities was $42 million at the end of the 2015 second quarter.
In the 2015 second quarter, the sale of an entity that owns three hotels that we manage triggered the mandatory redemption feature of our preferred equity ownership interest in that entity. We received $121 million in cash and realized a gain of $41 million for the redemption, which we recorded in the “Gains and other income, net” caption of our Income Statements. We had accounted for this investment as a debt security and classified it as a current asset as of year-end 2014. At the date of redemption, it had an amortized cost of $80 million, including accrued interest. We continue to manage the three hotels under long term agreements.
We estimate the fair value of our other long-term debt, including the current portion and excluding leases, using expected future payments discounted at risk-adjusted rates, which are Level 3 inputs. We determine the fair value of our senior notes using quoted market prices, which are directly observable Level 1 inputs. As noted in Footnote No. 7, “Long-Term Debt,” even though our commercial paper borrowings generally have short-term maturities of 30 days or less, we classify outstanding commercial paper borrowings as long-term based on our ability and intent to refinance them on a long-term basis. As we are a frequent issuer of commercial paper, we use pricing from recent transactions as Level 2 inputs in estimating fair value. At the end of the 2015 second quarter and year-end 2014, we determined that the carrying value of our commercial paper approximated its fair value due to the short maturity. Our other long-term liabilities largely consist of guarantees. We measure our liability for guarantees at fair value on a nonrecurring basis, that is when we issue or modify a guarantee, using Level 3 internally developed inputs. At the end of the 2015 second quarter and year-end 2014, we determined that the carrying values of our guarantee liabilities approximated their fair values based on Level 3 inputs.
See the “Fair Value Measurements” caption of Footnote No. 2, “Summary of Significant Accounting Policies” of our 2014 Form 10-K for more information on the input levels we use in determining fair value.

15


11.    OTHER COMPREHENSIVE (LOSS) INCOME AND SHAREHOLDERS' (DEFICIT) EQUITY
The following table details the accumulated other comprehensive (loss) income activity for the 2015 first half:
($ in millions)
Foreign Currency Translation Adjustments
 
Derivative Instrument Adjustments
 
Unrealized Gains on Available-For-Sale Securities
 
Accumulated Other Comprehensive Loss
Balance at year-end 2014
$
(72
)
 
$
(9
)
 
$
11

 
$
(70
)
Other comprehensive (loss) income before reclassifications (1)
(19
)
 
7

 
(2
)
 
(14
)
Reclassification of losses (gains) from accumulated other comprehensive loss
3

 
(7
)
 

 
(4
)
Net other comprehensive (loss) income
(16
)
 

 
(2
)
 
(18
)
Balance at June 30, 2015
$
(88
)
 
$
(9
)
 
$
9

 
$
(88
)
(1)
Other comprehensive (loss) income before reclassifications for foreign currency translation adjustments includes a gain of $36 million on intra-entity foreign currency transactions that are of a long-term investment nature.
The following table details the effect on net income of significant amounts reclassified out of accumulated other comprehensive (loss) income for the 2015 second quarter and 2015 first half:
($ in millions)
Reclassification of Gains (Losses) from Accumulated Other Comprehensive Loss
 
 
Three Months Ended
 
Six Months Ended
 
Accumulated Other Comprehensive Loss Components
June 30, 2015
 
June 30, 2015
Income Statement Line Item Affected
 
 
 
 
 
Foreign Currency Translation Adjustments
 
 
 
 
Property disposition
$

 
$
(3
)
Gains and other income, net
 

 
(3
)
Income before income taxes
 

 

Provision for income taxes
 
$

 
$
(3
)
Net income
 
 
 
 
 
Derivative Instrument Adjustments
 
 
 
 
Cash flow hedges
$
3

 
$
6

Base management and franchise fees
Net investment hedge - property disposition

 
3

Gains and other income, net
Interest rate contracts
(2
)
 
(3
)
Interest expense
 
1

 
6

Income before income taxes
 
1

 
1

Provision for income taxes
 
$
2

 
$
7

Net income
The following table details the changes in common shares outstanding and shareholders’ deficit for the 2015 first half:
(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
279.9

 
Balance at year-end 2014
$
(2,200
)
 
$
5

 
$
2,802

 
$
4,286

 
$
(9,223
)
 
$
(70
)

 
Net income
447

 

 

 
447

 

 


 
Other comprehensive income
(18
)
 

 

 

 

 
(18
)

 
Cash dividends ($0.45 per share)
(124
)
 

 

 
(124
)
 

 

2.0

 
Employee stock plan issuance
7

 

 
(21
)
 
(36
)
 
64

 

(14.6
)
 
Purchase of treasury stock
(1,145
)
 

 

 

 
(1,145
)
 

267.3

 
Balance at June 30, 2015
$
(3,033
)
 
$
5

 
$
2,781

 
$
4,573

 
$
(10,304
)
 
$
(88
)


16


12.    BUSINESS SEGMENTS
We are a diversified global lodging company with operations in the following three reportable business segments:
North American Full-Service, which includes The Ritz-Carlton, EDITION, JW Marriott, Autograph Collection Hotels, Renaissance Hotels, Marriott Hotels, Delta Hotels and Resorts, and Gaylord Hotels located in the United States and Canada;
North American Limited-Service, which includes AC Hotels by Marriott, Courtyard, Residence Inn, SpringHill Suites, Fairfield Inn & Suites, and TownePlace Suites properties located in the United States and Canada;
International, which includes The Ritz-Carlton, Bulgari Hotels & Resorts, EDITION, JW Marriott, Autograph Collection Hotels, Renaissance Hotels, Marriott Hotels, Marriott Executive Apartments, AC Hotels by Marriott, Courtyard, Residence Inn, Fairfield Inn & Suites, Protea Hotels, and Moxy Hotels located outside the United States and Canada.
Our North American Full-Service and North American Limited-Service segments meet the applicable accounting criteria to be reportable business segments. The following four operating segments do not meet the criteria for separate disclosure as reportable business segments: Asia Pacific, Caribbean and Latin America, Europe, and Middle East and Africa, and accordingly, we combined these four operating segments into an “all other category” which we refer to as “International.”
We evaluate the performance of our operating segments using “segment profits” which is based largely on the results of the segment without allocating corporate expenses, income taxes, or indirect general, administrative, and other expenses. We allocate gains and losses, equity in earnings or losses from our joint ventures, and direct general, administrative, and other expenses to each of our segments. The caption “Other unallocated corporate” in the subsequent discussion represents a portion of our revenues, general, administrative, and other expenses, equity in earnings or losses, and other gains or losses that we do not allocate to our segments. It also includes license fees we receive from our credit card programs and license fees from MVW.
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
 
Three Months Ended
 
Six Months Ended
($ in millions)
June 30, 2015

June 30, 2014
 
June 30, 2015
 
June 30, 2014
North American Full-Service Segment
$
2,252

 
$
2,099

 
$
4,427

 
$
4,148

North American Limited-Service Segment
821

 
750

 
1,559

 
1,417

International
549

 
568

 
1,091

 
1,088

Total segment revenues
3,622

 
3,417

 
7,077

 
6,653

Other unallocated corporate
67

 
67

 
125

 
124

         Total consolidated revenues
$
3,689

 
$
3,484

 
$
7,202

 
$
6,777


17


Segment Profits
 
Three Months Ended
 
Six Months Ended
($ in millions)
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
North American Full-Service Segment
$
152

 
$
154

 
$
298

 
$
285

North American Limited-Service Segment
179

 
151

 
330

 
266

International
57

 
74

 
134

 
139

Total segment profits
388

 
379

 
762

 
690

Other unallocated corporate
3

 
(68
)
 
(36
)
 
(123
)
Interest expense, net of interest income
(36
)
 
(26
)
 
(64
)
 
(51
)
Income taxes
(115
)
 
(93
)
 
(215
)
 
(152
)
          Net Income
$
240

 
$
192

 
$
447

 
$
364

The following table details the carrying amount of our goodwill at the end of the 2015 second quarter and year-end 2014:
Goodwill
($ in millions)
North American
Full-Service
Segment
 
North American
Limited-Service
Segment
 
International
 
Total
Goodwill
Year-end 2014 balance:
 
 
 
 
 
 
 
Goodwill
$
392

 
$
125

 
$
431

 
$
948

Accumulated impairment losses

 
(54
)
 

 
(54
)
 
392

 
71

 
431

 
894

 
 
 
 
 
 
 
 
Additions
$
17

 
$

 
$

 
$
17

Adjustments

 

 
51

 
51

 
 
 
 
 
 
 
 
June 30, 2015 balance:
 
 
 
 
 
 
 
Goodwill
$
409

 
$
125

 
$
482

 
$
1,016

Accumulated impairment losses

 
(54
)
 

 
(54
)
 
$
409

 
$
71

 
$
482

 
$
962

See Footnote No. 2, “Acquisitions and Dispositions” for information on goodwill additions and adjustments we recorded in the 2015 second quarter.


18


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
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 currently available to us. Forward-looking statements include information about our possible or assumed future results of operations, which follow under the headings “Business and Overview,” “Liquidity and Capital Resources,” and other statements throughout this report preceded by, followed by or that include the words “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,” or similar expressions.
Any number of risks and uncertainties could cause actual results to differ materially from those we express in our forward-looking statements, including the risks and uncertainties we describe below and other factors we describe from time to time in our periodic filings with the U.S. Securities and Exchange Commission (the “SEC”). We therefore caution you not to rely unduly on any forward-looking statement. The forward-looking statements in this report speak only as of the date of this report, and we undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future developments, or otherwise.
In addition, see the “Item 1A. Risk Factors” caption in the “Part II-OTHER INFORMATION” section of this report.
BUSINESS AND OVERVIEW
We are a worldwide operator, franchisor, and licensor of hotels and timeshare properties in 81 countries and territories under 19 brand names. We also develop, operate, and market residential properties and provide services to home/condominium owner associations. At the end of the 2015 second quarter, we had 4,317 properties (742,635 rooms) in our system, including 41 home and condominium products (4,203 units) for which we manage the related owners’ associations.
Under our business model, we typically manage or franchise hotels, rather than own them. As of June 30, 2015, we operated 41 percent of the hotel rooms in our worldwide system under management agreements; our franchisees operated 56 percent under franchise agreements; and we owned or leased only two percent. The remaining one percent represented unconsolidated joint ventures, in which we have an interest, that manage hotels and provide services to franchised properties. We group our operations into three business segments: North American Full-Service, North American Limited-Service, and International.
We earn base management fees and in many cases 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. Base fees typically consist of a percentage of property-level revenue while incentive fees typically consist of a percentage of net house profit adjusted for a specified owner return. Net house profit is calculated as gross operating profit (house profit) less non-controllable expenses such as insurance, real estate taxes, and capital spending reserves.
Our emphasis on long-term management contracts and franchising tends to provide more stable earnings in periods of economic softness, while adding new hotels to our system generates growth, typically with little or no investment by the Company. This strategy has driven substantial growth while minimizing financial leverage and risk in a cyclical industry. In addition, we believe minimizing our capital investments and adopting a strategy of recycling the investments that we do make maximizes and maintains our financial flexibility.
We remain focused on doing the things that we do well; that is, selling rooms, taking care of our guests, and making sure we control costs both at company-operated properties and at the corporate level (“above-property”). Our brands remain strong as a result of skilled management teams, dedicated associates, superior customer service with an emphasis on guest and associate satisfaction, significant distribution, our Marriott Rewards and The Ritz-Carlton Rewards loyalty programs, a multichannel reservations system, and desirable property amenities. We strive to effectively leverage our size and broad distribution.
We, along with owners and franchisees, continue to invest in our brands by means of new, refreshed, and reinvented properties, new room and public space designs, and enhanced amenities and technology offerings. We

19


address, through various means, hotels in the system that do not meet standards. We continue to enhance the appeal of our proprietary, information-rich, and easy-to-use website, Marriott.com, and of our associated mobile smartphone applications and mobile website that connect to Marriott.com, through functionality and service improvements, and we expect to continue capturing an increasing proportion of property-level reservations via this cost-efficient channel.
Our profitability, as well as that of owners and franchisees, has benefited from our approach to property-level and above-property productivity. Properties in our system continue to maintain very tight cost controls. We also control above-property costs, some of which we allocate to hotels, by remaining focused on systems, processing, and support areas.
Performance Measures
We believe Revenue per Available Room (“RevPAR”), which we calculate by dividing room sales for comparable properties by room nights available for the period, is a meaningful indicator of our performance because it measures the period-over-period change in room revenues for comparable properties. RevPAR may not be comparable to similarly titled measures, such as revenues. We also believe occupancy and average daily rate (“ADR”), which are components of calculating RevPAR, are meaningful indicators of our performance. Occupancy, which we calculate by dividing occupied rooms by total rooms available, measures the utilization of a property’s available capacity. ADR, which we calculate by dividing property room revenue by total rooms sold, measures average room price and is useful in assessing pricing levels.
For the properties located in countries that use currencies other than the U.S. dollar, the comparisons to the prior year period 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 those that were open and operating under one of our brands since the beginning of the last full calendar year (since January 1, 2014 for the current period) and have not, in either the current or previous year: (i) undergone significant room or public space renovations or expansions, (ii) been converted between company-operated and franchised, or (iii) sustained substantial property damage or business interruption. Comparable properties represented the following percentages of our properties on June 30, 2015: (1) 89% of North American properties (90% excluding Delta Hotels and Resorts); (2) 60% of International properties (73% excluding Protea Hotels); and (3) 85% of total properties (88% excluding Delta Hotels and Resorts and Protea Hotels).
We also believe company-operated house profit margin, which is the ratio of property-level gross operating profit to total property-level revenue, is a meaningful indicator of our performance because this ratio measures our overall ability as the operator to produce property-level profits by generating sales and controlling the operating expenses over which we have the most direct control. House profit includes room, food and beverage, and other revenue and the related expenses including payroll and benefits expenses, as well as repairs and maintenance, utility, general and administrative, and sales and marketing expenses. House profit does not include the impact of management fees, furniture, fixtures and equipment replacement reserves, insurance, taxes, or other fixed expenses.
Business Trends
Our 2015 first half results reflected a favorable economic climate and demand for our brands in many markets around the world, reflecting generally low supply growth in the U.S. and Europe, improved pricing in most North American markets, and a year-over-year increase in the number of properties in our system. For the three months ended June 30, 2015, comparable worldwide systemwide RevPAR increased 5.3 percent to $119.32, average daily rates increased 4.4 percent on a constant dollar basis to $154.26, and occupancy increased 0.6 percentage points to 77.4 percent, compared to the same period a year ago. For the six months ended June 30, 2015, comparable worldwide systemwide RevPAR increased 6.0 percent to $113.49, average daily rates increased 4.4 percent on a constant dollar basis to $153.78, and occupancy increased 1.1 percentage points to 73.8 percent, compared to the same period a year ago.

20


Strong U.S. group business demand contributed to increased rate growth in the 2015 first half. Transient demand was also strong across the U.S. as we eliminated discounts, shifted business into higher rated price categories, and raised room rates. Growth was particularly high in the second quarter in New Orleans, Philadelphia, Chicago, San Francisco, and Seattle, where systemwide RevPAR increased by double-digits, and lower in Baltimore from civil unrest and in San Antonio from flooding. In New York City, new lodging supply and bad weather constrained rate growth for the 2015 first half.
In the 2015 first half, bookings for future group business in the U.S. improved. As of the end of the 2015 first half, the group revenue pace for stays in 2015 for company-operated full-service hotels (Marriott, JW Marriott, Renaissance, The Ritz-Carlton, and Gaylord brands) in North America was up about five percent, compared to the booking pace for stays in 2014 as of the end of the 2014 first half. The higher pace reflected improved group demand and greater pricing power.
The Europe region experienced increased demand in the 2015 first half, most predominantly in the United Kingdom and Central Europe, primarily due to increased transient demand driven by advance purchases, special events, and favorable demand related to the weak currency. Western Europe was constrained by weaker group and transient demand in France. Eastern Europe showed mixed results with an increase in transient demand, although the region continued to be impacted by economic deterioration in Russia. In the Asia Pacific region, demand increased in the 2015 first half, led by growth from corporate and other transient business in Japan, Thailand, and India. The growth was partially offset by weaker results in Indonesia, Malaysia, and South Korea. RevPAR in Greater China moderated in the 2015 first half with strong demand in Shanghai, offset by the impact of supply growth in certain Southern China markets and lower mainland China travel to Hong Kong resulting from continued political disruption. Demand for our hotels in our Middle East and Africa regions remained strong in the 2015 first half with the second quarter being negatively impacted by the earlier start of Ramadan. In particular, demand increased in Egypt due to the improving political climate and in Qatar and Saudi Arabia from strong government and group business. Demand in the United Arab Emirates was constrained mainly by new supply and, to a lesser extent, a reduction in travelers from Russia. In the Caribbean and Latin America, strong demand throughout the region in the 2015 first half was driven by greater demand in Mexico and increased leisure travel to our Caribbean and Mexican resorts, constrained somewhat by oversupply of hotels in Panama and the weak economy in Brazil.
We monitor market conditions and provide the tools for our hotels to price rooms daily in accordance with individual property demand levels, generally adjusting room rates as demand changes. Our hotels modify the mix of business to improve revenue as demand changes. Demand for higher rated rooms improved in most markets in the 2015 first half, which allowed our hotels to reduce discounting and special offers for transient business in many markets. This mix improvement benefited ADR. For our company-operated properties, we continue to focus on enhancing property-level house profit margins and making productivity improvements.
System Growth and Pipeline
During the 2015 first half, we added 161 lodging properties (30,437 rooms), while 19 properties (2,357 rooms) exited the system, increasing our total properties to 4,317 (742,635 rooms, including 9,595 rooms from the Delta Hotels and Resorts acquisition). Approximately 26 percent of new rooms are located outside North America, and 14 percent of the room additions are conversions from competitor brands.
At the end of the 2015 second quarter, we had more than 250,000 rooms in our lodging development pipeline, which includes hotel rooms under construction and under signed contracts and also includes approximately 35,000 hotel rooms approved for development but not yet under signed contracts. We expect the number of our hotel rooms (gross) will increase by approximately 8 percent in 2015, including the addition of rooms associated with the Delta Hotels and Resorts transaction, and approximately 7 percent, net of deletions.

21


CONSOLIDATED RESULTS
The following discussion presents our analysis of the significant items of the results of our operations for the 2015 second quarter compared to the 2014 second quarter, and the 2015 first half compared to the 2014 first half.
Revenues
Second Quarter. Revenues increased by $205 million (6 percent) to $3,689 million in the 2015 second quarter from $3,484 million in the 2014 second quarter as a result of higher cost reimbursements revenue ($190 million), higher franchise fees ($27 million), and higher base management fees ($15 million), partially offset by lower owned, leased, and other revenue ($26 million) and lower incentive management fees ($1 million).
Cost reimbursements revenue represents reimbursements of costs incurred on behalf of managed, franchised, and licensed properties and relates, predominantly, to payroll costs at managed properties where we are the employer, but also includes reimbursements for other costs, such as those associated with our rewards programs, reservations, and marketing programs. As we record cost reimbursements based upon costs incurred with no added markup, this revenue and related expense has no impact on either our operating income or net income. The $190 million increase in total cost reimbursements revenue, to $2,953 million in the 2015 second quarter from $2,763 million in the 2014 second quarter, reflected the impact of higher occupancies at our properties and growth across the system. Since the end of the 2014 second quarter, our managed rooms increased by 10,319 rooms and our franchised rooms increased by 34,170 rooms, net of hotels exiting the system.
The $15 million increase in base management fees, to $191 million in the 2015 second quarter from $176 million in the 2014 second quarter, reflected stronger RevPAR ($8 million), the impact of unit growth across the system ($7 million), and increased recognition of previously deferred fees ($5 million), partially offset by the impact of unfavorable foreign exchange rates ($3 million) and lower fees due to properties that converted from managed to franchised ($2 million).
The $27 million increase in franchise fees, to $221 million in the 2015 second quarter from $194 million in the 2014 second quarter, reflected the impact of unit growth across the system ($16 million), stronger RevPAR ($9 million), and increased relicensing and application fees ($3 million), partially offset by the impact of unfavorable foreign exchange rates ($2 million).
Incentive management fees were relatively unchanged at $81 million in the 2015 second quarter compared to $82 million in the 2014 second quarter, as higher net house profit at many of our North American properties was offset predominantly by $7 million of lower net house profit at a few North American properties largely due to renovations, $4 million in unfavorable foreign exchange rates, and $2 million compared to a favorable adjustment recorded in the 2014 second quarter.
The $26 million decrease in owned, leased, and other revenue, to $243 million in the 2015 second quarter from $269 million in the 2014 second quarter, reflected $23 million of lower owned and leased revenue and $3 million in lower other revenue, predominantly from lower branding fees. Lower owned and leased revenue reflected decreased revenue primarily at our International owned and leased properties, $9 million attributable to three International properties that converted to managed or franchised properties, and $6 million of lower revenue at properties under renovation.
First Half. Revenues increased by $425 million (6 percent) to $7,202 million in the 2015 first half from $6,777 million in the 2014 first half as a result of higher cost reimbursements revenue ($318 million), higher franchise fees ($68 million), higher base management fees ($25 million), and higher incentive management fees ($17 million), partially offset by lower owned, leased, and other revenue ($3 million).
The $318 million increase in total cost reimbursements revenue, to $5,751 million in the 2015 first half from $5,433 million in the 2014 first half, reflected the impact of higher occupancies at our properties and growth across the system.
The $25 million increase in total base management fees, to $356 million in the 2015 first half from $331 million in the 2014 first half, reflected stronger RevPAR due to increased demand ($17 million), the impact of unit

22


growth across the system ($12 million), and increased recognition of previously deferred fees ($6 million), partially offset by decreased fees due to properties that converted from managed to franchised ($4 million), the impact of unfavorable foreign exchange rates ($4 million), and lower terminated units ($2 million).
The $68 million increase in total franchise fees, to $425 million in the 2015 first half from $357 million in the 2014 first half, reflected the impact of unit growth across the system ($26 million), increased relicensing and application fees ($23 million), stronger RevPAR due to increased demand ($19 million), and fees from properties that converted to franchised from managed ($4 million), partially offset by impact of unfavorable foreign exchange rates ($3 million).
The $17 million increase in total incentive management fees, to $170 million in the 2015 first half from $153 million in the 2014 first half reflected higher net house profit across our segments, predominantly at our North American properties, despite $7 million of lower revenue at a few properties largely due to renovations, and $6 million in unfavorable foreign exchange rates.
The $3 million decrease in owned, leased, and other revenue, to $500 million in the 2015 first half from $503 million in the 2014 first half, predominantly reflected $10 million of lower owned and leased revenue, partially offset by $7 million in higher other revenue predominantly from hotel service programs that we acquired as part of our 2014 second quarter acquisition of Protea Hotels. Lower owned and leased revenue reflected a decrease of $15 million attributable to four International properties that converted to managed or franchised properties, and $10 million from properties under renovation, partially offset by increased revenues across our other owned and leased properties and $11 million from The Miami Beach EDITION hotel, which opened in the 2014 fourth quarter and which we subsequently sold in the 2015 first quarter as discussed in Footnote No. 2, “Acquisitions and Dispositions.”
Operating Income
Second Quarter. Operating income increased by $53 million to $369 million in the 2015 second quarter from $316 million in the 2014 second quarter. The $53 million increase in operating income reflected a $27 million increase in franchise fees, a $15 million increase in base management fees, a $15 million decrease in depreciation, amortization, and other expense, and a $7 million decrease in general, administrative, and other expenses, partially offset by $10 million of lower owned, leased, and other revenue, net of direct expenses, and $1 million of lower incentive management fees. We discuss the reasons for the changes in base management fees, franchise fees, and incentive management fees compared to the 2014 second quarter in the preceding “Revenues” section.
The $10 million (14 percent) decrease in owned, leased, and other revenue, net of direct expenses was attributable to $6 million of lower owned and leased revenue, net of direct expenses, and $4 million in lower residential branding fees. Lower owned and leased revenue, net of direct expenses of $6 million reflects $3 million higher pre-opening costs, $2 million of weaker performance at a North American Full-Service property under renovation, and $2 million from unfavorable foreign exchange rates.
Depreciation, amortization, and other expense decreased by $15 million (32 percent) to $32 million in the 2015 second quarter from $47 million in the 2014 second quarter. The decrease reflected a $15 million favorable variance to the 2014 impairment charge on the EDITION hotels and $3 million in amortization true-ups, partially offset by a $4 million impairment charge on corporate equipment.
General, administrative, and other expenses decreased by $7 million (4 percent) to $152 million in the 2015 second quarter from $159 million in the 2014 second quarter due to $7 million in lower foreign exchange losses from the 2014 devaluation of assets denominated in Venezuelan Bolivars.
First Half. Operating income increased by $131 million to $701 million in the 2015 first half from $570 million in the 2014 first half. The $131 million increase in operating income reflected a $68 million increase in franchise fees, a $25 million increase in base management fees, a $17 million increase in incentive management fees, a $10 million decrease in general, administrative, and other expenses, a $7 million decrease in depreciation, amortization, and other expense, and a $4 million increase in owned, leased, and other revenue, net of direct

23


expenses. We discuss the reasons for the increases in base management fees, franchise fees, and incentive management fees compared to the 2014 first half in the preceding “Revenues” section.
The $4 million (3 percent) increase in owned, leased, and other revenue, net of direct expenses was largely attributable to $3 million of higher owned and leased revenue, net of direct expenses, $2 million from hotel service programs at Protea Hotels acquired in the 2014 second quarter, and $2 million in other revenue at an owned property, partially offset by $5 million of lower branding fees. The $3 million of higher owned and leased revenue, net of direct expenses primarily reflected $7 million in stronger results at several of our International properties and $3 million of lower lease payments for properties that moved to managed, franchised, or left the system, partially offset by $4 million of higher pre-opening costs, $3 million of weaker performance at a North American Full-Service property under renovation, and $3 million from unfavorable foreign exchange rates.
Depreciation, amortization, and other expense decreased by $7 million (8 percent) to $76 million in the 2015 first half from $83 million in the 2014 first half. The decrease reflected a $25 million favorable variance to the 2014 impairment charge on the EDITION hotels and $3 million in amortization true-ups, partially offset by the 2015 impairment charges of $6 million for The Miami Beach EDITION residences and $6 million for The New York (Madison Square Park) EDITION, which are both discussed in Footnote No. 2, “Acquisitions and Dispositions,” a $4 million impairment charge on corporate equipment, $3 million of accelerated amortization for contract terminations, and $2 million of higher amortization due to new unit growth.
General, administrative, and other expenses decreased by $10 million (3 percent) to $297 million in the 2015 first half from $307 million in the 2014 first half. The decrease largely reflected a $20 million net favorable impact to our legal expenses associated with litigation resolutions and $5 million in lower foreign exchange losses primarily from the 2014 devaluation of assets denominated in Venezuelan Bolivars, partially offset by $6 million in higher reserves for guarantee funding, $4 million of higher other property expenses, and $3 million of higher other tax-related expenses.
Gains and Other Income, Net
 
Three Months Ended
 
Six Months Ended
($ in millions)
June 30, 2015
June 30, 2014
 
June 30, 2015
June 30, 2014
(Loss) gain on expected disposition of real estate and other
$
(21
)
$
3

 
$
(21
)
$
3

Gain on redemption of preferred equity ownership interest
41


 
41


 
$
20

$
3

 
$
20

$
3

Second Quarter. Gains and other income, net increased by $17 million (567 percent) to $20 million in the 2015 second quarter compared to $3 million in the 2014 second quarter. The increase primarily reflects the $41 million gain on the redemption of our preferred equity ownership interest discussed in Footnote No. 10, “Fair Value of Financial Instruments.” The increase was partially offset by expected disposal losses totaling $22 million for an International property ($18 million) and a North American Limited-Service segment plot of land ($4 million), discussed in Footnote No. 2, “Acquisitions and Dispositions.”
First Half. Gains and other income, net increased by $17 million (567 percent) to $20 million in the
2015 first half compared to $3 million in the 2014 first half. The increase primarily reflects the gain on the redemption of our preferred equity ownership interest, partially offset by expected disposal losses described in the preceding “Second Quarter” discussion.
Interest Expense
Second Quarter. Interest expense increased by $12 million (40 percent) to $42 million in the 2015 second quarter compared to $30 million in the 2014 second quarter. The increase was due to interest on the Series N Notes that we issued in the 2014 fourth quarter and higher commercial paper program borrowing rates ($4 million), in addition to net lower capitalized interest expense as a result of the completion of The Miami Beach EDITION in the 2014 fourth quarter and The New York (Madison Square Park) EDITION in the 2015 second quarter ($8 million).

24


First Half. Interest expense increased by $18 million (30 percent) to $78 million in the 2015 first half compared to $60 million in the 2014 first half. The increase was principally from the issuance of Series N Notes in the 2014 fourth quarter and higher commercial paper program borrowing rates ($8 million), in addition to net lower capitalized interest expense as a result of the completion of The Miami Beach EDITION in the 2014 fourth quarter and The New York (Madison Square Park) EDITION in the 2015 second quarter ($9 million).
Interest Income
Second Quarter. Interest income increased by $2 million (50 percent) to $6 million in the 2015 second quarter compared to $4 million in the 2014 second quarter. The increase was primarily due to $3 million earned on the $85 million mezzanine loan (net of a $15 million discount) provided to an owner in conjunction with entering into a franchise agreement for an International property in the 2014 second quarter.
First Half. Interest income increased by $5 million (56 percent) to $14 million in the 2015 first half compared to $9 million in the 2014 first half. This increase was primarily due to $6 million earned for the reason described in the preceding “Second Quarter” discussion.
Equity in Earnings/(Losses)
Second Quarter. Equity in earnings of $2 million in the 2015 second quarter increased by $10 million (125 percent) from equity in losses of $8 million in the 2014 second quarter. The increase primarily reflects an $11 million favorable variance from a 2014 litigation reserve associated with an equity investee.
First Half. Equity in earnings of $5 million in the 2015 first half increased by $11 million (183 percent) from equity in losses of $6 million in the 2014 first half. The increase reflects the 2014 litigation reserve described in the preceding “Second Quarter” discussion.
Provision for Income Tax
Second Quarter. Provision for income tax increased by $22 million (24 percent) to $115 million in the 2015 second quarter, compared to $93 million in the 2014 second quarter. The increase was primarily due to higher pre-tax earnings.
First Half. Provision for income tax increased by $63 million (41 percent) to $215 million in the 2015 first half, compared to $152 million in the 2014 first half. The increase was primarily due to higher pre-tax earnings and a $21 million favorable 2014 resolution of a U.S. federal tax issue relating to a guest marketing program.
Net Income
Second Quarter. Net income increased by $48 million to $240 million in the 2015 second quarter from $192 million in the 2014 second quarter, and diluted earnings per share increased by $0.23 per share (36 percent) to $0.87 per share in the 2015 second quarter from $0.64 per share in the 2014 second quarter. As discussed in more detail in the preceding sections beginning with “Revenues” or as shown in the Income Statements, the $48 million increase in net income compared to the year-ago quarter was due to higher franchise fees ($27 million), higher gains and other income, net ($17 million), higher base management fees ($15 million), lower depreciation, amortization, and other expense ($15 million), higher equity in earnings ($10 million), lower general, administrative, other expenses ($7 million), and higher interest income ($2 million). These changes were partially offset by a higher provision for income tax ($22 million), higher interest expense ($12 million), lower owned, leased, and other revenue, net of direct expenses ($10 million), and lower incentive management fees ($1 million).
First Half. Net income increased by $83 million to $447 million in the 2015 first half from $364 million in the 2014 first half, and diluted earnings per share increased by $0.38 per share (31 percent) to $1.59 per share in the 2015 first half from $1.21 per share in the 2014 first half. As discussed in more detail in the preceding sections beginning with “Revenues” or as shown in the Income Statements, the $83 million increase in net income compared to the year-ago period was due to higher franchise fees ($68 million), higher base management fees ($25 million), higher incentive management fees ($17 million), higher gains and other income, net ($17 million), higher equity in earnings ($11 million), lower general, administrative, and other expenses ($10 million), lower depreciation, amortization, and other expense ($7 million), higher interest income ($5 million), and higher owned, leased, and

25


other revenue, net of direct expenses ($4 million). These increases were partially offset by a higher provision for income tax ($63 million) and higher interest expense ($18 million).
Adjusted Earnings Before Interest Expense, Taxes, Depreciation and Amortization (“Adjusted EBITDA”)
Earnings Before Interest Expense, Taxes, Depreciation and Amortization (“EBITDA”), a financial measure not required by, or presented in accordance with, U.S. GAAP, reflects net income excluding the impact of interest expense, provision for income taxes, and depreciation and amortization. Our non-GAAP measure of Adjusted EBITDA further adjusts EBITDA to exclude (1) the $41 million gain triggered by a mandatory redemption feature of a preferred equity security and the $22 million loss on expected dispositions of real estate, which we recorded in the "Gains and other income, net” caption of our Income Statements in the 2015 second quarter; (2) the EDITION impairment charges of $12 million in the 2015 first quarter, $15 million in the 2014 second quarter, and $25 million in the 2014 first half, which we recorded in the “Depreciation, amortization, and other” caption of our Income Statements following an evaluation of our EDITION hotels and residences for recovery; and (3) share-based compensation expense for all periods presented.
We believe that Adjusted EBITDA is a meaningful indicator of our operating performance because it permits period-over-period comparisons of our ongoing core operations before these items and facilitates our comparison of results before these items with results from other lodging companies.
We use Adjusted EBITDA to evaluate companies because it excludes certain items that can vary widely across different industries or among companies within the same industry, and analysts, lenders, investors, and others use EBITDA or Adjusted EBITDA for similar purposes. For example, interest expense can be dependent on a company’s capital structure, debt levels, and credit ratings, and accordingly interest expense’s impact on earnings varies significantly among companies. Similarly, tax positions will vary among companies as a result of their differing abilities to take advantage of tax benefits and the tax policies of the jurisdictions in which they operate. As a result, effective tax rates and provision for income taxes can vary considerably among companies. Our Adjusted EBITDA also excludes depreciation and amortization expense which we report under “Depreciation, amortization, and other,” as well as depreciation included under “Reimbursed costs” in our Income Statements, because companies utilize productive assets of different ages and use different methods of both acquiring and depreciating productive assets. These differences can result in considerable variability in the relative costs of productive assets and the depreciation and amortization expense among companies. We also exclude share-based compensation expense to address the considerable variability among companies in recording compensation expense because companies use share-based payment awards differently, both in the type and quantity of awards granted.
Adjusted EBITDA has limitations and should not be considered in isolation or a substitute for performance measures calculated under GAAP. This non-GAAP measure excludes certain cash expenses that we are obligated to make. In addition, other companies in our industry may calculate Adjusted EBITDA differently than we do or may not calculate it at all, which limits the usefulness of Adjusted EBITDA as a comparative measure.

26


We present our 2015 and 2014 second quarter and first half Adjusted EBITDA calculations that reflect the changes we describe above and reconcile those measures with Net Income in the following table:
 
Three Months Ended
 
Six Months Ended
($ in millions)
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
Net Income
$
240

 
$
192

 
$
447

 
$
364

Interest expense
42

 
30

 
78

 
60

Tax provision
115

 
93

 
215

 
152

Depreciation and amortization
32

 
32

 
64

 
58

Depreciation classified in reimbursed costs
14

 
13

 
28

 
25

Interest expense from unconsolidated joint ventures

 
1

 
1

 
2

Depreciation and amortization from unconsolidated joint ventures
2

 
3

 
5

 
7

EBITDA
$
445

 
$
364

 
$
838

 
$
668

Loss on expected disposition of real estate
22

 

 
22

 

Gain on redemption of preferred equity ownership interest
(41
)
 

 
(41
)
 

EDITION impairment charges

 
15

 
12

 
25

Share-based compensation (including share-based compensation reimbursed by third-party owners)
31

 
29

 
55

 
54

Adjusted EBITDA
$
457

 
$
408

 
$
886

 
$
747



27


BUSINESS SEGMENTS
We are a diversified global lodging company with operations in the following three reportable business segments: North American Full-Service, North American Limited-Service, and International. See Footnote No. 12, “Business Segments,” to our Financial Statements for other information about each segment, including revenues and a reconciliation of segment profits to net income.
We added 280 properties (51,863 rooms) and 48 properties (5,487 rooms) exited our system since the end of the 2014 second quarter. These figures include the addition of two residential properties (30 units). No residential properties exited the system.
See the “CONSOLIDATED RESULTS” caption earlier in this report for further information.
Second Quarter. Total segment profits (as defined in Footnote No. 12, “Business Segments”) increased by $9 million to $388 million in the 2015 second quarter from $379 million in the 2014 second quarter, and total segment revenues increased by $205 million to $3,622 million in the 2015 second quarter, a 6 percent increase from revenues of $3,417 million in the 2014 second quarter.
The quarter-over-quarter increase in segment revenues of $205 million was a result of $190 million of higher cost reimbursements revenue, $28 million of higher franchise fees, and $15 million of higher base management fees, partially offset by $27 million lower owned, leased, and other revenue and $1 million of lower incentive management fees. The quarter-over-quarter increase in segment profits of $9 million across our business reflected $28 million of higher franchise fees, $15 million of higher base management fees, and $4 million of lower depreciation, amortization, and other expense, partially offset by $23 million of lower gains and other income, net, a $12 million decrease in owned, leased, and other revenue, net of direct expenses, $1 million of lower incentive management fees, and $1 million of higher general, administrative, and other expenses. For more information on the variances see the preceding sections beginning with “Revenues.”
In the 2015 second quarter, 59 percent of our managed properties paid incentive management fees to us versus 45 percent in the 2014 second quarter. In North America, 55 percent of managed properties paid incentive fees in the 2015 second quarter compared to 32 percent in the 2014 second quarter. Outside North America, 66 percent of managed properties paid incentive fees in the 2015 second quarter compared to 67 percent in the 2014 second quarter. In addition, in the 2015 second quarter, 45 percent of our incentive management fees came from properties outside of North America versus 50 percent in the 2014 second quarter.
Compared to the 2014 second quarter, worldwide comparable company-operated house profit margins in the 2015 second quarter increased by 70 basis points and worldwide comparable company-operated house profit per available room (“HP-PAR”) increased by 7.6 percent on a constant U.S. dollar basis, reflecting rate increases, improved productivity, and lower food and utility costs. These same factors, along with lower utility costs, contributed to North American company-operated house profit margins increasing by 80 basis points compared to the 2014 second quarter. HP-PAR at those same properties increased by 7.9 percent. International company-operated house profit margins increased by 60 basis points, and HP-PAR at those properties increased by 6.8 percent reflecting increased demand and higher RevPAR in most locations, improved productivity, and solid cost controls.
First Half. Total segment profits increased by $72 million to $762 million in the 2015 first half from $690 million in the 2014 first half, and total segment revenues increased by $424 million to $7,077 million in the 2015 first half, a 6 percent increase from revenues of $6,653 million in the 2014 first half.
The year-over-year increase in segment revenues of $424 million was a result of $319 million of higher cost reimbursements revenue, $69 million of higher franchise fees, $25 million of higher base management fees, and $17 million of higher incentive management fees, partially offset by $6 million of lower owned, leased, and other revenue. The year-over-year increase in segment profits of $72 million across our business reflected a $69 million increase in franchise fees, a $25 million increase in base management fees, and a $17 million increase in incentive management fees, partially offset by a $13 million increase in general, administrative, and other expenses, a $2

28


million increase in depreciation, amortization, and other expense, and $24 million of lower gains and other income, net. For more information on the variances see the preceding sections beginning with “Revenues.”
In the 2015 first half, 63 percent of our managed properties paid incentive management fees to us versus 47 percent in the 2014 first half. In North America, 58 percent of managed properties paid incentive fees in the 2015 first half compared to 35 percent in the 2014 first half. Outside North America, 71 percent of managed properties paid incentive fees in the 2015 first half compared to 68 percent in the 2014 first half. In addition, in the 2015 first half, 47 percent of our incentive management fees came from properties outside of North America versus 52 percent in the 2014 first half.
Compared to the 2014 first half, worldwide comparable company operated house profit margins in the 2015 first half increased by 100 basis points and HP-PAR increased by 8.7 percent on a constant U.S. dollar basis, reflecting rate increases, improved productivity, and lower food and utility costs. These same factors contributed to North American company-operated house profit margins increasing by 100 basis points compared to the 2014 first half. HP-PAR at those same properties increased by 8.8 percent. International company-operated house profit margins increased by 80 basis points, and HP-PAR at those properties increased by 8.5 percent reflecting increased demand and higher RevPAR in most locations, improved productivity, and solid cost controls.
See “Segment and Brand Statistics” below for detailed information on Systemwide RevPAR and Company-operated RevPAR by segment, region, and brand.

29


Property and Room Summaries
We operated, franchised, and licensed the following properties by segment and brand at June 30, 2015:
 
Company-Operated
 
Franchised / Licensed
 
Other (2)
 
Properties
 
Rooms
 
Properties
 
Rooms
 
Properties
 
Rooms
North American Full-Service
 
 
 
 
 
 
 
 
 
 
 
Marriott Hotels
133

 
69,664

 
197

 
60,478

 

 

JW Marriott
14

 
9,348

 
10

 
4,469

 

 

Marriott Conference Centers
10

 
2,915

 

 

 

 

Renaissance Hotels
32

 
14,681

 
49

 
13,641

 

 

Autograph Collection Hotels
1

 
181

 
48

 
11,381

 

 

Delta Hotels and Resorts
27

 
7,246

 
10

 
2,349

 

 

Gaylord Hotels
5

 
8,098

 

 

 

 

The Ritz-Carlton
40

 
11,691

 

 

 

 

The Ritz-Carlton Residences (1)
31

 
3,757

 
1

 
55

 

 

EDITION
2

 
568

 

 

 

 

EDITION Residences (1)
1

 
25

 

 

 

 

Total North American Full-Service
296


128,174


315


92,373





 
 
 
 
 
 
 
 
 
 
 
 
North American Limited-Service
 
 
 
 
 
 
 
 
 
 
 
Courtyard
275

 
43,310

 
620

 
83,099

 

 

Residence Inn
110

 
16,338

 
571

 
66,889

 

 

Fairfield Inn & Suites
5

 
1,324

 
738

 
67,051

 

 

SpringHill Suites
29

 
4,550

 
298

 
34,102

 

 

TownePlace Suites
15

 
1,741

 
245

 
24,370

 

 

AC Hotels by Marriott

 

 

 

 
5

 
911

Total North American Limited-Service
434


67,263


2,472


275,511


5


911

 
 
 
 
 
 
 
 
 
 
 
 
Total North American Locations
730


195,437


2,787


367,884


5


911

 
 
 
 
 
 
 
 
 
 
 
 
International
 
 
 
 
 
 
 
 
 
 
 
Marriott Hotels
140

 
40,064

 
36

 
10,128

 

 

JW Marriott
49

 
18,905

 
3

 
795

 

 

Marriott Executive Apartments
27

 
4,149

 

 

 

 

Renaissance Hotels
52

 
16,998

 
26

 
7,363

 

 

Autograph Collection Hotels
3

 
584

 
29

 
8,496

 
5

 
348

Protea Hotels
47

 
5,899

 
58

 
3,965

 

 

The Ritz-Carlton
48

 
14,057

 

 

 

 

The Ritz-Carlton Residences (1)
8

 
416

 

 

 

 

The Ritz-Carlton Serviced Apartments
4

 
579

 

 

 

 

Bulgari Hotels & Resorts
2

 
117

 
1

 
85

 

 

Bulgari Residences (1)
1

 
5

 

 

 

 

EDITION
1

 
173

 
1

 
78

 

 

Courtyard
66

 
14,171

 
41

 
7,203

 

 

Residence Inn
5

 
517

 
2

 
200

 

 

Fairfield Inn & Suites
3

 
416

 
1

 
206

 

 

AC Hotels by Marriott

 

 

 

 
77

 
9,448

Moxy Hotels

 

 
1

 
162

 

 

Total International
456

 
117,050

 
199

 
38,681

 
82

 
9,796

 
 
 
 
 
 
 
 
 
 
 
 
Timeshare (3) 

 

 
58

 
12,876

 

 

 
 
 
 
 
 
 
 
 
 
 
 
Total
1,186

 
312,487

 
3,044

 
419,441

 
87

 
10,707

 
(1)