10-Q 1 mar-q12017x10q.htm 10-Q Document

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 March 31, 2017
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
_________________________________________________ 
miblk.jpg
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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
 
Accelerated filer
 
¨
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
 
Smaller Reporting Company
 
¨
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by 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: 378,890,739 shares of Class A Common Stock, par value $0.01 per share, outstanding at April 26, 2017.




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
 
March 31, 2017
 
March 31, 2016
REVENUES
 
 
 
Base management fees
$
264

 
$
172

Franchise fees
365

 
250

Incentive management fees
153

 
101

 
782

 
523

Owned, leased, and other revenue
439

 
204

Cost reimbursements
4,340

 
3,045

 
5,561

 
3,772

OPERATING COSTS AND EXPENSES
 
 
 
Owned, leased, and other - direct
358

 
166

Reimbursed costs
4,340

 
3,045

Depreciation, amortization, and other
65

 
31

General, administrative, and other
210

 
155

Merger-related costs and charges
51

 
8

 
5,024

 
3,405

OPERATING INCOME
537

 
367

Gains and other income, net

 

Interest expense
(70
)
 
(47
)
Interest income
7

 
6

Equity in earnings
11

 

INCOME BEFORE INCOME TAXES
485

 
326

Provision for income taxes
(120
)
 
(107
)
NET INCOME
$
365

 
$
219

EARNINGS PER SHARE
 
 
 
Earnings per share - basic
$
0.95

 
$
0.86

Earnings per share - diluted
$
0.94

 
$
0.85

CASH DIVIDENDS DECLARED PER SHARE
$
0.30

 
$
0.25

See Notes to Condensed Consolidated Financial Statements.

2


MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in millions)
(Unaudited)

 
Three Months Ended
 
March 31, 2017
 
March 31, 2016
Net income
$
365

 
$
219

Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustments
188

 
22

Derivative instrument adjustments, net of tax
(2
)
 
(5
)
Unrealized (loss) gain on available-for-sale securities, net of tax
(1
)
 
1

Reclassification of losses, net of tax

 
1

Total other comprehensive income, net of tax
185

 
19

Comprehensive income
$
550

 
$
238

See Notes to Condensed Consolidated Financial Statements.


3


MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in millions)

 
(Unaudited)
 
 
 
March 31,
2017
 
December 31,
2016
ASSETS
 
 
 
Current assets
 
 
 
Cash and equivalents
$
738

 
$
858

Accounts and notes receivable, net
1,752

 
1,695

Prepaid expenses and other
231

 
230

Assets held for sale
400

 
588

 
3,121

 
3,371

Property and equipment, net
2,109

 
2,335

Intangible assets
 
 
 
Brands
6,577

 
6,509

Contract acquisition costs and other
2,746

 
2,761

Goodwill
7,802

 
7,598

 
17,125

 
16,868

Equity and cost method investments
745

 
728

Notes receivable, net
267

 
245

Deferred tax assets
119

 
116

Other noncurrent assets
439

 
477

 
$
23,925

 
$
24,140

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities
 
 
 
Current portion of long-term debt
$
309

 
$
309

Accounts payable
661

 
687

Accrued payroll and benefits
1,034

 
1,174

Liability for guest loyalty programs
1,948

 
1,866

Accrued expenses and other
1,271

 
1,111

 
5,223

 
5,147

Long-term debt
8,161

 
8,197

Liability for guest loyalty programs
2,662

 
2,675

Deferred tax liabilities
891

 
1,020

Other noncurrent liabilities
1,820

 
1,744

Shareholders’ equity
 
 
 
Class A Common Stock
5

 
5

Additional paid-in-capital
5,711

 
5,808

Retained earnings
6,750

 
6,501

Treasury stock, at cost
(6,986
)
 
(6,460
)
Accumulated other comprehensive loss
(312
)
 
(497
)
 
5,168

 
5,357

 
$
23,925

 
$
24,140

See Notes to Condensed Consolidated Financial Statements.

4


MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions)
(Unaudited)

 
Three Months Ended
 
March 31, 2017
 
March 31, 2016
OPERATING ACTIVITIES
 
 
 
Net income
$
365

 
$
219

Adjustments to reconcile to cash provided by operating activities:
 
 
 
Depreciation, amortization, and other
65

 
31

Share-based compensation
48

 
28

Income taxes
82

 
58

Liability for guest loyalty programs
60

 
76

Merger-related charges
(36
)
 

Working capital changes
(108
)
 
(45
)
Other
50

 
27

                        Net cash provided by operating activities
526

 
394

INVESTING ACTIVITIES
 
 
 
Capital expenditures
(48
)
 
(42
)
Dispositions
311

 
4

Loan advances
(28
)
 
(16
)
Loan collections
7

 
2

Contract acquisition costs
(54
)
 
(21
)
Other
(4
)
 
9

                        Net cash provided by (used in) investing activities
184

 
(64
)
FINANCING ACTIVITIES
 
 
 
Commercial paper/Credit facility, net
(33
)
 
51

Issuance of long-term debt
1

 

Repayment of long-term debt
(4
)
 
(2
)
Issuance of Class A Common Stock
2

 
6

Dividends paid
(115
)
 
(64
)
Purchase of treasury stock
(582
)
 
(248
)
Other
(99
)
 
(70
)
                        Net cash used in financing activities
(830
)
 
(327
)
(DECREASE) INCREASE IN CASH AND EQUIVALENTS
(120
)
 
3

CASH AND EQUIVALENTS, beginning of period
858

 
96

CASH AND EQUIVALENTS, end of period
$
738

 
$
99

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. and subsidiaries (referred to in this report as “we,” “us,” “Marriott,” or “the Company”). In order to make this report easier to read, we also refer throughout to (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 Condensed Consolidated Statements of Cash Flows as our “Statements of Cash Flows,” (v) our properties, brands, or markets in the United States (“U.S.”) and Canada as “North America” or “North American,” and (vi) our properties, brands, or markets outside of the U.S. 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, 2016 (“2016 Form 10-K”). Certain terms not otherwise defined in this Form 10-Q have the meanings specified in our 2016 Form 10-K.
Preparation of financial statements that conform with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, the reported amounts of revenues and expenses during the reporting periods, and the disclosures of contingent liabilities. 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 March 31, 2017 and December 31, 2016 and the results of our operations and cash flows for the three months ended March 31, 2017 and March 31, 2016. 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. We have made certain reclassifications of our prior year amounts to conform to our current presentation of “Merger-related costs and charges” in our Income Statements.
Beginning in the 2017 first quarter, we reclassified branding fees for third-party residential sales and credit card licensing to the “Franchise fees” caption from the “Owned, leased, and other” caption on our Income Statements, as we believe branding fees are more akin to franchise royalties than owned and leased hotel profits. Branding fees for the three months ended March 31, 2017 totaled $60 million. We reclassified the prior period amounts, which totaled $43 million for the three months ended March 31, 2016, to conform to our current presentation.
In the 2017 first quarter, our Asia Pacific operating segment met the applicable accounting criteria to be a reportable segment. Our Europe, Middle East and Africa, and Caribbean and Latin America operating segments do not individually meet the criteria for separate disclosure as reportable segments, and accordingly we combined them into an “all other category” which we refer to as “Other International.” We reclassified prior period amounts to conform to our current presentation. See Footnote 11Business Segments.”
Acquisition of Starwood Hotels & Resorts Worldwide
On September 23, 2016 (the “Merger Date”), we completed the acquisition of Starwood Hotels & Resorts Worldwide, LLC, formerly known as Starwood Hotels & Resorts Worldwide, Inc. (“Starwood”), through a series of transactions (the “Starwood Combination”), after which Starwood became an indirect wholly-owned subsidiary of the Company. Accordingly, our Income Statements include Starwood’s results of operations in the three months

6


ended March 31, 2017, but exclude Starwood’s results of operations in the three months ended March 31, 2016 as that was prior to the Merger Date. We refer to our business associated with brands that were in our portfolio before the Starwood Combination as “Legacy-Marriott” and to the Starwood business and brands that we acquired as “Legacy-Starwood.” See Footnote 2Acquisitions and Dispositions” for more information on the Starwood Combination.
New Accounting Standards
Accounting Standards Update No. 2014-09 - “Revenue from Contracts with Customers” (“ASU 2014-09”)
ASU 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 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 (“FASB”) has deferred ASU 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 2014-09, and we are evaluating the available adoption methods. We are still assessing the potential impact that ASU 2014-09 will have on our financial statements and disclosures, but we believe that recognition of base management and franchise fees will remain unchanged, but there likely will be changes to our revenue recognition policies related to our loyalty programs and the following:
We expect to recognize franchise application and relicensing fees over the term of the franchise contract rather than at hotel opening.
We expect to present the amortization of contract acquisition costs paid to customers as a reduction of revenue rather than as an amortization expense.
We expect to recognize gains from the sale of real estate assets when control of the asset is transferred to the buyer, generally at the time the sale closes. Under current guidance, we defer gains on sales of real estate assets if we maintain substantial continuing involvement. We do not expect that this change will have a material impact on our Financial Statements, as we typically do not have transactions that require us to defer significant gains.
Accounting Standards Update No. 2016-02 - “Leases” (“ASU 2016-02”)
In February 2016, the FASB issued ASU 2016-02, which introduces a lessee model that brings substantially all leases onto the balance sheet. Under the new standard, a lessee will recognize on its balance sheet a lease liability and a right-of-use asset for all leases, including operating leases, with a term greater than 12 months. The new standard will also distinguish leases as either finance leases or operating leases. This distinction will affect how leases are measured and presented in the income statement and statement of cash flows. ASU 2016-02 is effective for annual and interim periods in fiscal years beginning after December 15, 2018. We are still assessing the potential impact that ASU 2016-02 will have on our financial statements and disclosures.
Accounting Standards Update No. 2016-09 - “Stock Compensation” (“ASU 2016-09”)
We adopted ASU 2016-09 in the 2017 first quarter, which involves several aspects of the accounting for share-based payments. The new guidance had the following impacts on our Financial Statements:
We now record excess tax benefits (or deficiencies) as income tax expense (or benefit) in our Income Statements. Previously, we recorded excess tax benefits (deficiencies) in additional paid-in-capital in our

7


Balance Sheets. As required, we prospectively applied this amendment in our Income Statements, which resulted in a benefit of $43 million to our provision for income taxes, approximately $0.11 per diluted share, for the three months ended March 31, 2017.
We now classify excess tax benefits (or deficiencies) along with other income taxes in operating activities in our Statements of Cash Flows. ASU 2016-09 allowed for this amendment to be applied either prospectively or retrospectively. For consistency with our application of ASU 2016-09 in our Income Statements, we applied this amendment prospectively in our Statements of Cash Flows. For the three months ended March 31, 2017, operating activities in our Statements of Cash Flows includes $43 million from excess tax benefits. For the three months ended March 31, 2016, we classified $6 million of excess tax benefits as financing inflows.
We now classify cash paid to taxing authorities when we withhold shares for employee tax-withholding purposes as a financing activity. As required, we retrospectively applied this amendment in our Statements of Cash Flows, and accordingly we reclassified $61 million of cash outflows from operating activities to financing activities for the three months ended March 31, 2016.
Accounting Standards Update No. 2017-01 - “Clarifying the Definition of a Business” (“ASU 2017-01”)
In January 2017, the FASB issued ASU 2017-01, clarifying the definition of a business to help companies evaluate whether transactions should be accounted for as acquisitions or disposals of assets or businesses. We prospectively adopted ASU 2017-01 in the 2017 first quarter, and as a result, we determined that our planned hotel disposition arising during the period did not meet the definition of a business, and therefore we did not assign any goodwill of the reporting unit to the carrying value of the asset.
2.    ACQUISITIONS AND DISPOSITIONS
Starwood Combination
The following table presents the fair value of each class of consideration that we transferred in the Starwood Combination.
(in millions, except per share amounts)
 
Equivalent shares of Marriott common stock issued in exchange for Starwood outstanding shares
134.4

Marriott common stock price as of Merger Date
$
68.44

Fair value of Marriott common stock issued in exchange for Starwood outstanding shares
9,198

Cash consideration to Starwood shareholders, net of cash acquired of $1,116
2,412

Fair value of Marriott equity-based awards issued in exchange for vested Starwood equity-based awards
71

Total consideration transferred, net of cash acquired
$
11,681

Preliminary Fair Values of Assets Acquired and Liabilities Assumed. Our preliminary estimates of fair values of the assets that we acquired and the liabilities that we assumed are based on the information that was available as of the Merger Date, and we are continuing to evaluate the underlying inputs and assumptions used in our valuations. Accordingly, these preliminary estimates are subject to change during the measurement period, which is up to one year from the Merger Date. During the 2017 first quarter, we refined our valuation models related to certain acquired IT systems, our assumptions for capital expenditure needs of owned and leased hotels, and certain assumptions related to operating lease agreements.
The following table presents our preliminary estimates of fair values of the assets that we acquired and the liabilities that we assumed on the Merger Date as previously reported at year-end 2016 and at the end of the 2017 first quarter.

8


($ in millions)
September 23, 2016
(as reported at
December 31, 2016)
 
Adjustments
 
September 23, 2016
(as adjusted at
March 31, 2017)
Working capital
$
(180
)
 
$
(35
)
 
$
(215
)
Property and equipment, including assets held for sale
1,999

 
(99
)
 
1,900

Identified intangible assets
7,957

 
(40
)
 
7,917

Equity and cost method investments
579

 

 
579

Other noncurrent assets
224

 
(29
)
 
195

Deferred income taxes, net
(1,516
)
 
92

 
(1,424
)
Guest loyalty program
(1,631
)
 
(7
)
 
(1,638
)
Debt
(1,871
)
 

 
(1,871
)
Other noncurrent liabilities
(654
)
 
(32
)
 
(686
)
Net assets acquired
4,907

 
(150
)
 
4,757

Goodwill (1)
6,774

 
150

 
6,924

 
$
11,681

 
$

 
$
11,681

(1) 
Goodwill primarily represents the value that we expect to obtain from synergies and growth opportunities from our combined operations, and it is not deductible for tax purposes. See Footnote 11Business Segments” for our preliminary assignment of goodwill by reportable segment.
Property and Equipment. We provisionally estimated the value of the acquired land, building, and furniture and equipment using a combination of the income, cost, and market approaches, which are primarily based on significant Level 2 and Level 3 assumptions, such as estimates of future income growth, capitalization rates, discount rates, and capital expenditure needs of the hotels. We are continuing to assess the marketplace assumptions and property conditions, which could result in changes to these provisional values.
Identified Intangible Assets. The following table presents our preliminary estimates of the fair values of Starwood’s identified intangible assets and their related estimated useful lives.
 
 
Estimated Fair Value
($ in millions)
 
Estimated Useful
Life (in years)
Brands
 
$
6,452

 
indefinite
Management agreements
 
672

 
10-25
Franchise agreements
 
744

 
10-80
Loyalty program marketing rights
 
49

 
30
 
 
$
7,917

 
 
We provisionally estimated the value of Starwood’s brands using the relief-from-royalty method, which applies an estimated royalty rate to forecasted future cash flows, discounted to present value. We estimated the value of management and franchise agreements using the multi-period excess earnings method, which is a variation of the income approach. This method estimates an intangible asset’s value based on the present value of the incremental after-tax cash flows attributable to the intangible asset. These valuation approaches utilize Level 3 inputs, and we continue to review Starwood’s contracts and historical performance in addition to evaluating the inputs, including the discount rates and growth assumptions, which could result in changes to these provisional values.
Equity Method Investments. Our equity method investments consist primarily of entities that own hotel real estate. We provisionally estimated the value of that real estate using the same methods as for property and equipment described above. We continue to review the terms of the partnership and joint venture agreements, assess the conditions of the properties, and evaluate the discount rates, any discounts for lack of marketability and control as appropriate, and growth assumptions used in valuing these investments, which could result in changes to our provisional values.
Deferred Income Taxes. We provisionally estimated deferred income taxes based on statutory tax rates in the jurisdictions of the legal entities where the acquired noncurrent assets and liabilities are taxed. We continue to assess the tax rates used, and we will update our estimate of deferred income taxes based on any changes to our provisional valuations of the related assets and liabilities and refinement of the effective tax rates, which could result in changes to these provisional values.

9


Guest Loyalty Program. As of the Merger Date, we assumed the fair value of this liability equals Starwood’s historical book value in establishing a provisional estimate for this liability. We are reviewing assumptions utilized in an actuarial valuation of the future redemption obligations, which could result in changes to the provisional value of the program liability.
Debt, Leases, and Other Contractual Obligations or Contingencies. We primarily valued debt using quoted market prices, which are considered Level 1 inputs as they are observable in the market.
We identified certain onerous provisions within a few of the acquired management and other agreements. We valued liabilities associated with these provisions using an income approach and Level 3 inputs, including cash flows, discount rates, and growth assumptions. We continue to review and evaluate Starwood’s agreements, historical performance, discount rates, and growth assumptions, which could result in changes to these provisional values.
In connection with the Starwood Combination, we are currently assessing various regulatory compliance matters at several foreign Legacy-Starwood locations, including compliance with the U.S. Foreign Corrupt Practices Act. The results of this assessment may give rise to contingencies that could require us to record balance sheet liabilities or accrue expenses. While any such amounts are not currently estimable, we will review our provisional assessment of these contingencies as we gather more information.
Dispositions and Planned Dispositions
In the 2017 first quarter, we sold a North American Full-Service hotel, which we had acquired in the Starwood Combination and previously classified as “Assets held for sale,” and received $306 million in cash. In conjunction with the sale, we also transferred the associated ground lease, as a result of which our future minimum operating lease obligations decreased by approximately $194 million as follows: $3 million in 2017, $4 million in 2018, $4 million in 2019, $4 million in 2020, $4 million in 2021, and $175 million thereafter.
At the end of the 2017 first quarter, we held $400 million of assets classified as “Assets held for sale” on our Balance Sheets related to two North American Full-Service hotels and the remaining Miami Beach EDITION residences.
3.    MERGER-RELATED COSTS AND CHARGES
The following table presents pre-tax merger-related costs and other charges that we incurred in connection with the Starwood Combination.
 
Three Months Ended
($ in millions)
March 31, 2017
 
March 31, 2016
Merger-related costs and charges
 
 
 
Transaction costs
$
7

 
$
7

Employee termination costs
21

 

Integration costs
23

 
1

 
51

 
8

Interest expense

 
2

 
$
51

 
$
10

Transaction costs represent costs related to the planning and execution of the Starwood Combination, primarily for financial advisory, legal, and other professional service fees. Employee termination costs represent employee severance, retention, and other termination related benefits. Integration costs primarily represent integration employee salaries and share-based compensation, change management consultants, and technology-related costs. Merger-related interest expense in the 2016 first quarter reflects costs that we incurred for a bridge term loan facility commitment related to the Starwood Combination.

10


In connection with the Starwood Combination, we initiated a restructuring program to achieve cost synergies from our combined operations. We did not allocate costs associated with our restructuring program to any of our business segments. The following table presents our restructuring reserve activity during the 2017 first quarter:
($ in millions)
Employee termination costs
Balance at year-end 2016
$
192

Charges

Cash payments
(39
)
Adjustments (1)
9

Balance at March 31, 2017, classified in “Accrued expenses and other”
$
162

(1) 
Adjustments primarily reflect the reversal of charges for certain employees who accepted other positions at the Company or resigned and the impact of cumulative translation adjustments.
4.    EARNINGS PER SHARE
The table below presents the reconciliation of the earnings and number of shares used in our calculations of basic and diluted earnings per share:
 
Three Months Ended
(in millions, except per share amounts)
March 31, 2017
 
March 31, 2016
Computation of Basic Earnings Per Share
 
 
 
Net income
$
365

 
$
219

Shares for basic earnings per share
384.9

 
254.4

Basic earnings per share
$
0.95

 
$
0.86

Computation of Diluted Earnings Per Share
 
 
 
Net income
$
365

 
$
219

Shares for basic earnings per share
384.9

 
254.4

Effect of dilutive securities
 
 
 
Share-based compensation
5.1

 
4.5

Shares for diluted earnings per share
390.0

 
258.9

Diluted earnings per share
$
0.94

 
$
0.85

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 0.2 million for the 2017 first quarter and 0.5 million for the 2016 first quarter from our calculation of diluted earnings per share because their exercise prices were greater than the average market prices.
5.    SHARE-BASED COMPENSATION
We recorded share-based compensation expense of $48 million in the 2017 first quarter and $28 million in the 2016 first quarter. Deferred compensation costs for unvested awards totaled $301 million at March 31, 2017 and $192 million at December 31, 2016.
RSUs and PSUs
We granted 1.6 million RSUs during the 2017 first quarter 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 granted 0.2 million PSUs in the 2017 first quarter to certain executive officers, subject to continued employment and the satisfaction of certain performance conditions based on achievement of pre-established targets for Adjusted EBITDA, RevPAR Index, room openings, and/or net administrative expense over, or at the end of, a three-year performance period. RSUs, including PSUs, granted in the 2017 first quarter had a weighted average grant-date fair value of $83.

11


SARs
We granted 0.3 million SARs to officers and key employees during the 2017 first quarter. 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 2017 first quarter was $30 and the weighted average exercise price was $88.
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 2017 first quarter:
Expected volatility
30.9
%
Dividend yield
1.3
%
Risk-free rate
2.4
%
Expected term (in years)
7 - 9

6.    INCOME TAXES
Our effective tax rate decreased to 24.7% for the 2017 first quarter from 32.8% for the 2016 first quarter, primarily due to a tax benefit of $43 million from the adoption of ASU 2016-09.
We paid cash for income taxes, net of refunds, of $37 million in the 2017 first quarter and $43 million in the 2016 first quarter.
7.    COMMITMENTS AND CONTINGENCIES
Guarantees
We present the maximum potential amount of our future guarantee fundings and the carrying amount of our liability for guarantees for which we are the primary obligor at March 31, 2017 in the following table:
($ in millions)
Guarantee Type
 
Maximum Potential Amount of Future Fundings
 
Recorded Liability for Guarantees
Debt service
 
$
156

 
$
23

Operating profit
 
116

 
34

Other
 
8

 
2

Total guarantees where we are the primary obligor
 
$
280

 
$
59

Legal Proceedings
In November 2015, Starwood announced a malware intrusion had affected point of sale systems at various outlets within certain Legacy-Starwood branded hotels. This resulted in the potential compromise of credit card data and associated personal information. The affected credit card companies are evaluating whether and to what extent financial penalties should be imposed. In addition, a putative class action arising from the malware intrusion was filed against Starwood on January 5, 2016 in the United States District Court for the Southern District of California. The named plaintiff, Paul Dugas, does not specify any damages sought. Starwood initially filed a motion to dismiss that was granted in part and denied in part in November 2016. The plaintiff filed an amended complaint in December 2016, and in March 2017, we filed another motion to dismiss. On April 6, 2017, the court issued an Order to Show Cause why the case should not be dismissed for lack of subject matter jurisdiction, to which the parties have responded. A hearing has been scheduled for May 12, 2017.
On May 10, 2016, the owners of the Sheraton Grand Chicago and the Westin Times Square, New York, filed suit in the Supreme Court of New York against Starwood and Marriott seeking to enjoin the merger of the two companies. The complaint alleges violations of the territorial restrictions contained in the management agreements for those two hotels arising as a result of the merger of Marriott and Starwood. While the attempt to enjoin the merger ultimately failed, the underlying suit continued as a breach of contract claim, and plaintiffs seek, among

12


other remedies, monetary damages relating to the alleged violations. We are evaluating alternatives for resolving the claims.
We do not expect either proceeding to have a significant impact on our consolidated results of operations as they both relate to matters existing as of the Merger Date.
Other Contingencies
See a description of certain contingencies relating to the Starwood Combination in Footnote 2Acquisitions and Dispositions.”

13


8.    LONG-TERM DEBT
We provide detail on our long-term debt balances, net of discounts, premiums, and debt issuance costs, in the following table at the end of the 2017 first quarter and year-end 2016:
 
At Period End
($ in millions)
March 31, 2017
 
December 31, 2016
Senior Notes:
 
 
 
Series I Notes, interest rate of 6.4%, face amount of $293, maturing June 15, 2017
(effective interest rate of 6.5%)
$
293

 
$
293

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

 
597

Series L Notes, interest rate of 3.3%, face amount of $350, maturing September 15, 2022
(effective interest rate of 3.4%)
348

 
348

Series M Notes, interest rate of 3.4%, face amount of $350, maturing October 15, 2020
(effective interest rate of 3.6%)
347

 
347

Series N Notes, interest rate of 3.1%, face amount of $400, maturing October 15, 2021
(effective interest rate of 3.4%)
396

 
396

Series O Notes, interest rate of 2.9%, face amount of $450, maturing March 1, 2021
(effective interest rate of 3.1%)
447

 
446

Series P Notes, interest rate of 3.8%, face amount of $350, maturing October 1, 2025
(effective interest rate of 4.0%)
344

 
344

Series Q Notes, interest rate of 2.3%, face amount of $750, maturing January 15, 2022
(effective interest rate of 2.5%)
743

 
742

Series R Notes, interest rate of 3.1%, face amount of $750, maturing June 15, 2026
(effective interest rate of 3.3%)
742

 
742

Series S Notes, interest rate of 6.8%, face amount of $324, maturing May 15, 2018
(effective interest rate of 1.7%)
342

 
346

Series T Notes, interest rate of 7.2%, face amount of $181, maturing December 1, 2019
(effective interest rate of 2.3%)
204

 
206

Series U Notes, interest rate of 3.1%, face amount of $291, maturing February 15, 2023
(effective interest rate of 3.1%)
291

 
291

Series V Notes, interest rate of 3.8%, face amount of $318, maturing March 15, 2025
(effective interest rate of 2.8%)
339

 
340

Series W Notes, interest rate of 4.5%, face amount of $278, maturing October 1, 2034
(effective interest rate of 4.1%)
293

 
293

Commercial paper
2,285

 
2,311

Credit Facility

 

Capital lease obligations
173

 
173

Other
286

 
291

 
8,470

 
8,506

Less: Current portion of long-term debt
(309
)
 
(309
)
 
$
8,161

 
$
8,197

We paid cash for interest, net of amounts capitalized, of $49 million in the 2017 first quarter and $23 million in the 2016 first quarter.
We are party to a multicurrency revolving credit agreement (the “Credit Facility”) that provides for up to $4,000 million of aggregate effective borrowings. See the “Cash Requirements and Our Credit Facilities” caption later in this report in the “Liquidity and Capital Resources” section for further information on our Credit Facility and available borrowing capacity at March 31, 2017.

14


9.    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:
 
March 31, 2017
 
December 31, 2016
($ in millions)
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Senior, mezzanine, and other loans
$
267

 
$
255

 
$
245

 
$
231

Total noncurrent financial assets
$
267

 
$
255

 
$
245

 
$
231

 
 
 
 
 
 
 
 
Senior Notes
$
(5,433
)
 
$
(5,453
)
 
$
(5,438
)
 
$
(5,394
)
Commercial paper
(2,285
)
 
(2,285
)
 
(2,311
)
 
(2,311
)
Other long-term debt
(275
)
 
(282
)
 
(280
)
 
(284
)
Total noncurrent financial liabilities
$
(7,993
)
 
$
(8,020
)
 
$
(8,029
)
 
$
(7,989
)
See the “Fair Value Measurements” caption of Footnote 2 “Summary of Significant Accounting Policies” of our 2016 Form 10-K for more information on the input levels we use in determining fair value.
10.    OTHER COMPREHENSIVE (LOSS) INCOME AND SHAREHOLDERS' EQUITY
The following tables detail the accumulated other comprehensive (loss) income activity for the 2017 first quarter and 2016 first quarter:
($ in millions)
Foreign Currency Translation Adjustments
 
Derivative Instrument Adjustments
 
Available-For-Sale Securities Unrealized Adjustments
 
Pension and Postretirement Adjustments
 
Accumulated Other Comprehensive Loss
Balance at year-end 2016
$
(503
)
 
$
(5
)
 
$
6

 
$
5

 
$
(497
)
Other comprehensive income (loss) before reclassifications (1)
188

 
(2
)
 
(1
)
 

 
185

Amounts reclassified from accumulated other comprehensive loss

 

 

 

 

Net other comprehensive income (loss)
188

 
(2
)
 
(1
)
 

 
185

Balance at March 31, 2017
$
(315
)
 
$
(7
)
 
$
5

 
$
5

 
$
(312
)
($ in millions)
Foreign Currency Translation Adjustments
 
Derivative Instrument Adjustments
 
Available-For-Sale Securities Unrealized Adjustments
 
Pension and Postretirement Adjustments
 
Accumulated Other Comprehensive Loss
Balance at year-end 2015
$
(192
)
 
$
(8
)
 
$
4

 
$

 
$
(196
)
Other comprehensive income (loss) before reclassifications (1)
22

 
(5
)
 
1

 

 
18

Amounts reclassified from accumulated other comprehensive loss

 
1

 

 

 
1

Net other comprehensive income (loss)
22

 
(4
)
 
1

 

 
19

Balance at March 31, 2016
$
(170
)
 
$
(12
)
 
$
5

 
$

 
$
(177
)
(1) 
Other comprehensive income before reclassifications for foreign currency translation adjustments includes losses on intra-entity foreign currency transactions that are of a long-term investment nature of $16 million for the 2017 first quarter and $20 million for the 2016 first quarter.

15


The following table details the changes in common shares outstanding and shareholders’ equity for the 2017 first quarter:
(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
386.1

 
Balance at year-end 2016
$
5,357

 
$
5

 
$
5,808

 
$
6,501

 
$
(6,460
)
 
$
(497
)

 
Net income
365

 

 

 
365

 

 


 
Other comprehensive income
185

 

 

 

 

 
185


 
Dividends ($0.30 per share)
(116
)
 

 

 
(116
)
 

 

1.6

 
Employee stock plan
(48
)
 

 
(97
)
 

 
49

 

(6.7
)
 
Purchase of treasury stock
(575
)
 

 

 

 
(575
)
 

381.0

 
Balance at March 31, 2017
$
5,168

 
$
5

 
$
5,711

 
$
6,750

 
$
(6,986
)
 
$
(312
)
11.    BUSINESS SEGMENTS
We are a diversified global lodging company with operations in the following reportable business segments:
North American Full-Service, which includes our Luxury and Premium brands located in the United States and Canada;
North American Limited-Service, which includes our Select brands located in the United States and Canada;
Asia Pacific, which includes all brand tiers in our Asia Pacific region; and
Other International, which includes all brand tiers in our Europe, Middle East and Africa, and Caribbean and Latin America regions.
Our North American Full-Service, North American Limited-Service, and Asia Pacific segments meet the applicable accounting criteria to be reportable segments. Our Europe, Middle East and Africa, and Caribbean and Latin America operating segments individually do not meet the criteria for separate disclosure as reportable segments, and accordingly we combined them into an “all other category” which we refer to as “Other 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, indirect general, administrative, and other expenses, or merger-related costs and charges. We assign gains and losses, equity in earnings or losses from our joint ventures, and direct general, administrative, and other expenses to each of our segments. “Other unallocated corporate” represents a portion of our revenues, general, administrative, and other expenses, merger-related costs and charges, 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 fees from vacation ownership licensing agreements, which we present in the “Franchise fees” caption of our Income Statements.
Our President and Chief Executive Officer, who is 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.

16


Segment Revenues
 
Three Months Ended
($ in millions)
March 31, 2017
 
March 31, 2016
North American Full-Service
$
3,576

 
$
2,321

North American Limited-Service
924

 
833

Asia Pacific
312

 
141

Other International
602

 
415

Total segment revenues
5,414

 
3,710

Other unallocated corporate
147

 
62

         Total consolidated revenues
$
5,561

 
$
3,772

Segment Profits
 
Three Months Ended
($ in millions)
March 31, 2017
 
March 31, 2016
North American Full-Service
$
289

 
$
185

North American Limited-Service
177

 
155

Asia Pacific
82

 
27

Other International
86

 
48

Total segment profits
634

 
415

Other unallocated corporate
(86
)
 
(48
)
Interest expense, net of interest income
(63
)
 
(41
)
Income taxes
(120
)
 
(107
)
          Net income
$
365

 
$
219

Goodwill
($ in millions)
North American
Full-Service
 
North American
Limited-Service
 
Asia Pacific
 
Other International
 
Total
Goodwill
Year-end 2016 balance:
 
 
 
 
 
 
 
 
 
Goodwill
$
2,905

 
$
1,558

 
$
1,572

 
$
1,617

 
$
7,652

Accumulated impairment losses

 
(54
)
 

 

 
(54
)
 
2,905

 
1,504

 
1,572

 
1,617

 
7,598

 
 
 
 
 
 
 
 
 
 
Adjustments (1)
$
51

 
$
30

 
$
33

 
$
36

 
$
150

Foreign currency translation
3

 
(1
)
 
29

 
23

 
54

 
 
 
 
 
 
 
 
 
 
March 31, 2017 balance:
 
 
 
 
 
 
 
 
 
Goodwill
$
2,959

 
$
1,587

 
$
1,634

 
$
1,676

 
$
7,856

Accumulated impairment losses

 
(54
)
 

 

 
(54
)
 
$
2,959

 
$
1,533

 
$
1,634

 
$
1,676

 
$
7,802

(1) 
The table reflects adjustments to our preliminary estimate of goodwill from the Starwood Combination. Because we have not yet finalized the fair values of assets acquired and liabilities assumed, the assignment of goodwill to our reporting units may continue to change during the measurement period. See Footnote 2Acquisitions and Dispositions” for more information.


17


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 124 countries and territories under 30 brand names at the end of the 2017 first quarter. We also develop, operate, and market residential properties and provide services to home/condominium owner associations. Under our business model, we typically manage or franchise hotels, rather than own them. We report our operations in four segments: North American Full-Service, North American Limited-Service, Asia Pacific, and Other International.
mar-q12017x1_chartx49976.jpgmar-q12017x1_chartx51291.jpg
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. In most markets, 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. In the Middle East and Asia, incentive fees typically consist of a percentage of gross operating profit without adjustment for a specified owner return. Net house profit is calculated as gross operating profit (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

18


risk in a cyclical industry. In addition, we believe minimizing our capital investments and adopting a strategy of recycling our investments 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 Loyalty Programs (Marriott Rewards and The Ritz-Carlton Rewards, and Starwood Preferred Guest, which we refer to collectively as “Loyalty Programs”), multichannel reservation systems, 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 address, through various means, hotels in our system that do not meet standards. We continue to enhance the appeal of our proprietary, information-rich, and easy-to-use websites, and of our associated mobile smartphone applications, 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.
Our RevPAR statistics for the 2017 first quarter, and for the 2017 first quarter compared to the 2016 first quarter, include Legacy-Starwood comparable properties for both periods even though Marriott did not own the Legacy-Starwood brands before the Starwood Combination. Therefore, our RevPAR statistics include Legacy-Starwood properties for periods during which fees from the Legacy-Starwood properties are not included in our Income Statements. We provide these RevPAR statistics as an indicator of the performance of our brands and to allow for comparison to industry metrics, and they should not be viewed as necessarily correlating with our fee revenue. 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 our properties, including those that we acquired through the Starwood Combination, that were open and operating under one of our Legacy-Marriott or Legacy-Starwood brands since the beginning of the last full calendar year (since January 1, 2016 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.
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,

19


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 2017 first quarter results reflected a year-over-year increase in the number of properties in our system, including those from the Starwood Combination, favorable demand for our brands in many markets around the world, and slow but steady economic growth. For the three months ended March 31, 2017, comparable worldwide systemwide RevPAR increased 3.1 percent to $108.81, ADR increased 0.6 percent on a constant dollar basis to $157.13, and occupancy increased 1.7 percentage points to 69.3 percent, compared to the same period a year ago.
In North America, 2017 first quarter RevPAR increased, partially driven by higher demand in Washington, D.C. around the presidential inauguration and stronger demand from group business. RevPAR growth was particularly strong in Canada and Hawaii during the 2017 first quarter but was constrained in certain markets by new lodging supply and moderate GDP growth. Group revenue pace for the remainder of 2017 for systemwide full-service hotels in North America was up 1.6 percent as of March 31, 2017, compared to the 2016 first quarter group revenue pace for the remainder of 2016.
Our Europe region experienced higher demand in the 2017 first quarter across most countries, led by strong business travel and group business in the United Kingdom and Germany. In our Asia Pacific region in the 2017 first quarter, RevPAR growth was strong in India, Indonesia, and mainland China, partially constrained by oversupply in certain southern China markets. Middle East demand continued to be impacted by geopolitical instability, oversupply in Dubai and Qatar, and lower oil prices. In South Africa, results were favorable in the 2017 first quarter, reflecting higher international tourism attracted by the weak South African Rand. In the Caribbean and Latin America, growth continued to be constrained by concerns relating to the Zika virus in the Caribbean and weak economic conditions in many markets in South America.
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. For our company-operated properties, we continue to focus on enhancing property-level house profit margins and making productivity improvements.
In the 2017 first quarter compared to the 2016 first quarter, worldwide company-operated house profit margins at comparable properties, including comparable Legacy-Starwood properties, increased by 100 basis points, and worldwide comparable house profit per available room (“HP-PAR”) increased by 6.2 percent on a constant U.S. dollar basis, reflecting improved productivity, solid cost controls, higher occupancy, and rate increases. North American company-operated house profit margins increased by 100 basis points, and HP-PAR increased by 6.3 percent. International company-operated house profit margins increased by 90 basis points, and HP-PAR increased by 6.0 percent.
System Growth and Pipeline
During the 2017 first quarter, we added 103 properties (17,183 rooms) while 22 properties (4,376 rooms) exited our system, increasing our total properties to 6,161 (1,202,963 rooms). Approximately 37 percent of added rooms are located outside North America, and 19 percent of the room additions are conversions from competitor brands.
Since the end of the 2016 first quarter, we added 1,725 properties (443,921 rooms), including 1,342 properties (381,440 rooms) from the Starwood Combination on the Merger Date, and 44 properties (8,286 rooms) exited our system.
At the end of the 2017 first quarter, we had more than 430,000 rooms in our development pipeline, which includes hotel rooms under construction, hotel rooms under signed contracts, and roughly 36,000 hotel rooms approved for development but not yet under signed contracts. More than half of the rooms in our development pipeline are outside North America.

20


Properties and Rooms
At March 31, 2017, we operated, franchised, and licensed the following properties and rooms:
 
Managed
 
Franchised / Licensed
 
Owned/Leased
 
Other (1)
 
Total
 
Properties
 
Rooms
 
Properties
 
Rooms
 
Properties
 
Rooms
 
Properties
 
Rooms
 
Properties
 
Rooms
North American
Full-Service
402

 
183,545

 
631

 
187,210

 
13

 
7,797

 

 

 
1,046

 
378,552

North American
Limited-Service
423

 
66,529

 
3,022

 
345,747

 
20

 
3,006

 
17

 
2,895

 
3,482

 
418,177

Asia
Pacific
491

 
151,922

 
77

 
22,644

 
4

 
953

 

 

 
572

 
175,519

Other
International
511

 
120,921

 
343

 
68,568

 
33

 
9,081

 
89

 
11,193

 
976

 
209,763

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Timeshare

 

 
85

 
20,952

 

 

 

 

 
85

 
20,952

Total
1,827

 
522,917

 
4,158

 
645,121

 
70

 
20,837

 
106

 
14,088

 
6,161

 
1,202,963

(1) 
Other represents unconsolidated equity method investments, which we present in the “Equity in earnings” caption of our Income Statements.
Segment and Brand Statistics
The following tables present RevPAR, occupancy, and ADR statistics for comparable properties, including Legacy-Starwood comparable properties even though Marriott did not own the Legacy-Starwood brands before the Starwood Combination. Systemwide statistics include data from our franchised properties, in addition to our company-operated properties.

21


Comparable Company-Operated North American Properties
 
RevPAR
 
Occupancy
 
Average Daily Rate
 
Three Months Ended March 31, 2017
 
Change vs. Three Months Ended March 31, 2016
 
Three Months Ended March 31, 2017
 
Change vs. Three Months Ended March 31, 2016
 
Three Months Ended March 31, 2017
 
Change vs. Three Months Ended March 31, 2016
JW Marriott
$
195.46

 
5.1
%
 
77.8
%
 
1.5
 %
pts.
 
$
251.33

 
3.0
 %
The Ritz-Carlton
$
297.26

 
3.0
%
 
75.3
%
 
2.4
 %
pts.
 
$
394.67

 
(0.3
)%
W Hotels
$
214.14

 
0.1
%
 
76.6
%
 
0.1
 %
pts.
 
$
279.56

 
 %
Composite North American
Luxury
(1)
$
258.91

 
3.4
%
 
77.2
%
 
1.7
 %
pts.
 
$
335.57

 
1.1
 %
Marriott Hotels
$
139.39

 
3.9
%
 
72.9
%
 
1.3
 %
pts.
 
$
191.27

 
2.0
 %
Sheraton
$
134.71

 
5.4
%
 
74.5
%
 
1.6
 %
pts.
 
$
180.92

 
3.2
 %
Westin
$
159.07

 
3.9
%
 
73.5
%
 
0.6
 %
pts.
 
$
216.48

 
3.0
 %
Composite North American
Upper Upscale
(2)
$
140.72

 
5.0
%
 
73.1
%
 
1.5
 %
pts.
 
$
192.57

 
2.9
 %
North American
Full-Service
(3)
$
161.91

 
4.5
%
 
73.8
%
 
1.5
 %
pts.
 
$
219.37

 
2.4
 %
Courtyard
$
97.05

 
0.8
%
 
69.1
%
 
(0.2
)%
pts.
 
$
140.39

 
1.1
 %
Residence Inn
$
116.34

 
5.1
%
 
76.3
%
 
1.7
 %
pts.
 
$
152.46

 
2.7
 %
Composite North American
Limited-Service
(4)
$
101.61

 
2.2
%
 
71.3
%
 
0.4
 %
pts.
 
$
142.42

 
1.7
 %
North American - All
$
143.30

 
4.0
%
 
73.0
%
 
1.2
 %
pts.
 
$
196.17

 
2.4
 %
Comparable Systemwide North American Properties
 
RevPAR
 
Occupancy
 
Average Daily Rate
 
Three Months Ended March 31, 2017
 
Change vs. Three Months Ended March 31, 2016
 
Three Months Ended March 31, 2017
 
Change vs. Three Months Ended March 31, 2016
 
Three Months Ended March 31, 2017
 
Change vs. Three Months Ended March 31, 2016
JW Marriott
$
192.58

 
4.7
%
 
77.7
%
 
1.7
%
pts.
 
$
248.00

 
2.4
 %
The Ritz-Carlton
$
297.26

 
3.0
%
 
75.3
%
 
2.4
%
pts.
 
$
394.67

 
(0.3
)%
W Hotels
$
214.14

 
0.1
%
 
76.6
%
 
0.1
%
pts.
 
$
279.56

 
 %
Composite North American
Luxury
(1)
$
244.32

 
3.6
%
 
76.4
%
 
1.8
%
pts.
 
$
319.63

 
1.1
 %
Marriott Hotels
$
122.25

 
2.5
%
 
69.9
%
 
1.0
%
pts.
 
$
175.01

 
1.1
 %
Sheraton
$
103.66

 
3.5
%
 
68.7
%
 
1.2
%
pts.
 
$
150.79

 
1.8
 %
Westin
$
153.44

 
4.6
%
 
74.0
%
 
0.9
%
pts.
 
$
207.21

 
3.4
 %
Composite North American
Upper Upscale
(2)
$
125.61

 
3.9
%
 
70.7
%
 
1.3
%
pts.
 
$
177.79

 
2.0
 %
North American
Full-Service
(3)
$
138.28

 
3.9
%
 
71.3
%
 
1.3
%
pts.
 
$
194.02

 
1.9
 %
Courtyard
$
94.72

 
1.2
%
 
68.9
%
 
0.4
%
pts.
 
$
137.45

 
0.6
 %
Residence Inn
$
106.61

 
2.6
%
 
75.0
%
 
0.5
%
pts.
 
$
142.18

 
1.9
 %
Fairfield Inn & Suites
$
70.99

 
3.1
%
 
65.3
%
 
1.3
%
pts.
 
$
108.64

 
1.1
 %
Composite North American
Limited-Service
(4)
$
89.96

 
2.2
%
 
69.8
%
 
0.7
%
pts.
 
$
128.86

 
1.2
 %
North American - All
$
111.62

 
3.1
%
 
70.5
%
 
1.0
%
pts.
 
$
158.40

 
1.7
 %
(1) 
Includes JW Marriott, The Ritz-Carlton, W Hotels, The Luxury Collection, St. Regis, and EDITION.
(2) 
Includes Marriott Hotels, Sheraton, Westin, Renaissance Hotels, Autograph Collection Hotels, Delta Hotels, Gaylord Hotels, Le Méridien, and Tribute Portfolio.
(3) 
Includes Composite North American Luxury and Composite North American Upper Upscale.
(4) 
Includes Courtyard, Residence Inn, Fairfield Inn & Suites, SpringHill Suites, Four Points, and TownePlace Suites. Systemwide also includes Aloft Hotels and Element Hotels.


22


Comparable Company-Operated International Properties
 
RevPAR
 
Occupancy
 
Average Daily Rate
 
Three Months Ended March 31, 2017
 
Change vs. Three Months Ended March 31, 2016
 
Three Months Ended March 31, 2017
 
Change vs. Three Months Ended March 31, 2016
 
Three Months Ended March 31, 2017
 
Change vs. Three Months Ended March 31, 2016
Greater China
$
82.91

 
5.0
 %
 
65.7
%
 
6.6
%
pts.
 
$
126.24

 
(5.5
)%
Rest of Asia Pacific
$
118.88

 
5.6
 %
 
76.2
%
 
4.0
%
pts.
 
$
155.94

 
0.1
 %
Asia Pacific
$
95.44

 
5.3
 %
 
69.4
%
 
5.7
%
pts.
 
$
137.62

 
(3.3
)%
Caribbean & Latin America
$
161.96

 
0.2
 %
 
69.0
%
 
1.8
%
pts.
 
$
234.75

 
(2.3
)%
Europe
$
100.86

 
6.3
 %
 
64.4
%
 
2.3
%
pts.
 
$
156.59

 
2.4
 %
Middle East & Africa
$
120.69

 
(0.7
)%
 
68.9
%
 
1.7
%
pts.
 
$
175.12

 
(3.1
)%
Other International (1)
$
119.17

 
2.2
 %
 
66.8
%
 
2.0
%
pts.
 
$
178.34

 
(0.9
)%
International (2)
$
107.42

 
3.6
 %
 
68.1
%
 
3.8
%
pts.
 
$
157.80

 
(2.3
)%
Worldwide (3)
$
125.81

 
3.8
 %
 
70.6
%
 
2.5
%
pts.
 
$
178.15

 
0.2
 %
Comparable Systemwide International Properties
 
RevPAR
 
Occupancy
 
Average Daily Rate
 
Three Months Ended March 31, 2017
 
Change vs. Three Months Ended March 31, 2016
 
Three Months Ended March 31, 2017
 
Change vs. Three Months Ended March 31, 2016
 
Three Months Ended March 31, 2017
 
Change vs. Three Months Ended March 31, 2016
Greater China
$
83.02

 
5.3
 %
 
65.2
%
 
6.6
%
pts.
 
$
127.34

 
(5.4
)%
Rest of Asia Pacific
$
116.37

 
4.3
 %
 
75.6
%
 
3.1
%
pts.
 
$
153.99

 
0.1
 %
Asia Pacific
$
96.97

 
4.9
 %
 
69.5
%
 
5.2
%
pts.
 
$
139.45

 
(2.9
)%
Caribbean & Latin America
$
129.59

 
(1.6
)%
 
64.4
%
 
0.3
%
pts.
 
$
201.33

 
(2.1
)%
Europe
$
88.85

 
7.0
 %
 
61.4
%
 
3.1
%
pts.
 
$
144.63

 
1.7
 %
Middle East & Africa
$
114.75

 
(0.3
)%
 
68.3
%
 
1.9
%
pts.
 
$
168.05

 
(3.1
)%
Other International (1)
$
105.66

 
2.2
 %
 
63.9
%
 
2.1
%
pts.
 
$
165.35

 
(1.1
)%
International (2)
$
101.97

 
3.2
 %
 
66.3
%
 
3.4
%
pts.
 
$
153.83

 
(2.0
)%
Worldwide (3)
$
108.81

 
3.1
 %
 
69.3
%
 
1.7
%
pts.
 
$
157.13

 
0.6
 %
(1) 
Caribbean & Latin America, Europe, and Middle East & Africa.
(2) 
Asia Pacific and Other International.
(3) 
North American - All and International.
CONSOLIDATED RESULTS
The following discussion presents an analysis of our consolidated results of operations for the 2017 first quarter compared to the 2016 first quarter. In accordance with GAAP, our Income Statements include Starwood’s results of operations in the three months ended March 31, 2017, but do not include Starwood’s results of operations in the three months ended March 31, 2016, as we did not own Starwood during that period.
Fee Revenues
 
Three Months Ended
($ in millions)
March 31, 2017
 
March 31, 2016
 
Change 2017 vs. 2016
Base management fees
$
264

 
$
172

 
$
92

 
53
%
Franchise fees
365

 
250

 
115

 
46
%
Incentive management fees
153

 
101

 
52

 
51
%
 
$
782

 
$
523

 
$
259

 
50
%
First Quarter. The $92 million increase in base management fees primarily reflected $88 million from the Starwood Combination and $7 million from Legacy-Marriott RevPAR and unit growth.
The $115 million increase in franchise fees primarily reflected $100 million from the Starwood Combination and $14 million from Legacy-Marriott RevPAR and unit growth, partially offset by $5 million of lower Legacy-Marriott branding fees.

23


The $52 million increase in incentive management fees was primarily from the Starwood Combination.
In the 2017 first quarter, 58 percent of our Legacy-Marriott managed properties paid incentive management fees to us versus 63 percent in the 2016 first quarter. In North America, 52 percent of Legacy-Marriott managed properties paid incentive fees in the 2017 first quarter compared to 60 percent in the 2016 first quarter. Outside North America, 67 percent of Legacy-Marriott managed properties paid incentive fees in the 2017 first quarter compared to 68 percent in the 2016 first quarter. In addition, in the 2017 first quarter, 45 percent of our incentive management fees from Legacy-Marriott properties came from properties outside of North America versus 46 percent in the 2016 first quarter.
Owned, Leased, and Other
 
Three Months Ended
($ in millions)
March 31, 2017
 
March 31, 2016
 
Change 2017 vs. 2016
Owned, leased, and other revenue
$
439

 
$
204

 
$
235

 
115
%
Owned, leased, and other - direct expense
358

 
166

 
192

 
116
%
 
$
81

 
$
38

 
$
43

 
113
%
First Quarter. Owned, leased, and other revenue, net of direct expenses increased by $43 million, primarily due to the Starwood Combination.
Cost Reimbursements
 
Three Months Ended
($ in millions)
March 31, 2017
 
March 31, 2016
 
Change 2017 vs. 2016
Cost reimbursements revenue
$
4,340

 
$
3,045

 
$
1,295

 
43
%
Reimbursed costs
4,340

 
3,045

 
1,295

 
43
%
The $1,295 million increase in cost reimbursements revenue and reimbursed costs primarily reflected the Starwood Combination, higher property occupancies, and unit growth across our system.
Other Operating Expenses
 
Three Months Ended
($ in millions)
March 31, 2017
 
March 31, 2016
 
Change 2017 vs. 2016
Depreciation, amortization, and other
$
65

 
$
31

 
$
34

 
110
%
General, administrative, and other
210

 
155

 
55

 
35
%
Merger-related costs and charges
51

 
8

 
43

 
538
%
First Quarter. Depreciation, amortization, and other expense increased by $34 million, primarily reflecting depreciation and amortization on assets acquired in the Starwood Combination.
General, administrative, and other expenses increased by $55 million, primarily due to the Starwood Combination.
Merger-related costs and charges increased by $43 million. For more information, see Footnote 3Merger-related costs and charges.”
Non-Operating Income (Expense)
 
Three Months Ended
($ in millions)
March 31, 2017
 
March 31, 2016
 
Change 2017 vs. 2016
Interest expense
$
(70
)
 
$
(47
)
 
$
23

 
49
%
Interest income
7

 
6

 
1

 
17
%
Equity in earnings
11

 

 
11

 
nm

nm means percentage change is not meaningful.

24


First Quarter. Interest expense increased by $23 million, primarily due to an increase in debt as a result of the Starwood Combination, higher interest on Senior Notes issuances net of maturities, and higher commercial paper borrowings and interest rates.
Equity in earnings increased by $11 million, primarily due to the Starwood Combination.
Income Taxes
 
Three Months Ended
($ in millions)
March 31, 2017
 
March 31, 2016
 
Change 2017 vs. 2016
Provision for income taxes
$
(120
)
 
$
(107
)
 
$
13

 
12
%
First Quarter. Provision for income tax increased by $13 million, primarily due to net higher pre-tax earnings from the Starwood Combination ($51 million), partially offset by a tax benefit from the adoption of ASU 2016-09 ($43 million).
BUSINESS SEGMENTS
The following discussion presents our analysis of the operating results of our reportable business segments for the 2017 first quarter compared to the 2016 first quarter. See Footnote 11Business Segments” for other information about each segment, including a reconciliation of segment profits to net income.
North American Full-Service
Since the end of the 2016 first quarter, across our North American Full-Service segment, we added 428 properties (156,233 rooms), including 398 properties (147,623 rooms) from the Starwood Combination on the Merger Date, and seven properties (961 rooms) left our system.
 
Three Months Ended
($ in millions)
March 31, 2017
 
March 31, 2016
 
Change 2017 vs. 2016
Segment revenues
$
3,576

 
$
2,321

 
$
1,255

 
54
%
Segment profits
$
289

 
$
185

 
$
104

 
56
%
First Quarter. North American Full-Service segment profits increased by $104 million, primarily due to the following changes:
$85 million of higher base management and franchise fees, reflecting $88 million of Legacy-Starwood fees, partially offset by $3 million of lower Legacy-Marriott fees, primarily due to lower branding fees ($10 million);
$9 million of higher incentive management fees, primarily driven by $7 million of Legacy-Starwood incentive fees;
$24 million of higher owned, leased, and other revenue, net of direct expenses, primarily reflecting $26 million from owned and leased hotels acquired in the Starwood Combination; and
$13 million of higher depreciation, amortization, and other expenses, primarily due to the Starwood Combination.
Cost reimbursements revenue and expenses for our North American Full-Service segment properties totaled $3,078 million in the 2017 first quarter, compared to $2,050 million in the 2016 first quarter.
North American Limited-Service
Since the end of the 2016 first quarter, across our North American Limited-Service segment, we added 470 properties (62,782 rooms), including 226 properties (34,294 rooms) from the Starwood Combination on the Merger Date, and eight properties (838 rooms) left our system.

25


 
Three Months Ended
($ in millions)
March 31, 2017
 
March 31, 2016
 
Change 2017 vs. 2016
Segment revenues
$
924

 
$
833

 
$
91

 
11
%
Segment profits
$
177

 
$
155

 
$
22

 
14
%
First Quarter. North American Limited-Service segment profits increased by $22 million, primarily due to the following change:
$27 million of higher base management and franchise fees, primarily driven by Legacy-Starwood fees ($14 million) and higher Legacy-Marriott fees as a result of unit growth ($9 million).
Cost reimbursements revenue and expenses for our North American Limited-Service segment properties totaled $702 million in the 2017 first quarter, compared to $639 million in the 2016 first quarter.
Asia Pacific
Since the end of the 2016 first quarter, across our Asia Pacific segment, we added 383 properties (117,313 rooms), including 335 properties (103,611 rooms) from the Starwood Combination on the Merger Date, and nine properties (3,432 rooms) left our system.
 
Three Months Ended
($ in millions)
March 31, 2017
 
March 31, 2016
 
Change 2017 vs. 2016
Segment revenues
$
312

 
$
141

 
$
171

 
121
%
Segment profits
$
82

 
$
27

 
$
55

 
204
%
First Quarter. Asia Pacific segment profits increased by $55 million, primarily due to the following changes:
$30 million of higher base management and franchise fees, primarily due to $27 million of Legacy-Starwood fees;
$31 million of higher incentive management fees, primarily due to $27 million of Legacy-Starwood fees;
$10 million of higher general, administrative, and other expenses, primarily due to the Starwood Combination; and