10-Q 1 mar-q22018x10q.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 June 30, 2018
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
_________________________________________________ 
milogoa01.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: 346,988,137 shares of Class A Common Stock, par value $0.01 per share, outstanding at July 25, 2018.






MARRIOTT INTERNATIONAL, INC.
FORM 10-Q TABLE OF CONTENTS
 
 
 
Page No.
 
 
 
Part I.
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Part II.
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.



Item 6.
 
 
 
 



2


PART I – FINANCIAL INFORMATION
Item 1. Financial Statements

MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
($ in millions, except per share amounts)
(Unaudited)

 
Three Months Ended
 
Six Months Ended
 
June 30, 2018

June 30, 2017
 
June 30, 2018
 
June 30, 2017
REVENUES
 
 
 
 
 
 
 
Base management fees
$
300

 
$
285

 
$
573

 
$
549

Franchise fees
475

 
408

 
892

 
763

Incentive management fees
176

 
155

 
331

 
295

Gross fee revenues
951

 
848

 
1,796

 
1,607

Contract investment amortization
(13
)
 
(12
)
 
(31
)
 
(23
)
Net fee revenues
938

 
836

 
1,765

 
1,584

Owned, leased, and other revenue
423

 
448

 
829

 
876

Cost reimbursement revenue
3,985

 
3,927

 
7,758

 
7,663

 
5,346

 
5,211

 
10,352

 
10,123

OPERATING COSTS AND EXPENSES
 
 
 
 
 
 
 
Owned, leased, and other-direct
334

 
350

 
670

 
706

Depreciation, amortization, and other
58

 
71

 
112

 
122

General, administrative, and other
217

 
234

 
464

 
446

Merger-related costs and charges
18

 
21

 
52

 
72

Reimbursed expenses
3,979

 
3,791

 
7,814

 
7,487

 
4,606

 
4,467

 
9,112

 
8,833

OPERATING INCOME
740

 
744

 
1,240

 
1,290

Gains and other income, net
114

 
25

 
173

 
25

Interest expense
(85
)
 
(73
)
 
(160
)
 
(143
)
Interest income
6

 
8

 
11

 
15

Equity in earnings
21

 
12

 
34

 
23

INCOME BEFORE INCOME TAXES
796

 
716

 
1,298

 
1,210

Provision for income taxes
(186
)
 
(227
)
 
(290
)
 
(350
)
NET INCOME
$
610

 
$
489

 
$
1,008

 
$
860

EARNINGS PER SHARE
 
 
 
 
 
 
 
Earnings per share - basic
$
1.73

 
$
1.29

 
$
2.83

 
$
2.25

Earnings per share - diluted
$
1.71

 
$
1.28

 
$
2.80

 
$
2.23

CASH DIVIDENDS DECLARED PER SHARE
$
0.41

 
$
0.33

 
$
0.74

 
$
0.63

See Notes to Condensed Consolidated Financial Statements.

3


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

 
Three Months Ended
 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
Net income
$
610

 
$
489

 
$
1,008

 
$
860

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(399
)
 
162

 
(247
)
 
350

Derivative instrument adjustments, net of tax
11

 
(6
)
 
8

 
(8
)
Unrealized gain (loss) on available-for-sale securities, net of tax

 
(1
)
 

 
(2
)
Pension and postretirement adjustments, net of tax

 

 

 

Reclassification of losses (gains), net of tax
3

 
1

 
16

 
1

Total other comprehensive (loss) income, net of tax
(385
)
 
156

 
(223
)
 
341

Comprehensive income
$
225

 
$
645

 
$
785

 
$
1,201

See Notes to Condensed Consolidated Financial Statements.


4


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

 
June 30,
2018
 
December 31,
2017
ASSETS
 
 
 
Current assets
 
 
 
Cash and equivalents
$
366

 
$
383

Accounts and notes receivable, net
2,174

 
1,973

Prepaid expenses and other
264

 
235

Assets held for sale
13

 
149

 
2,817

 
2,740

Property and equipment, net
1,958

 
1,793

Intangible assets
 
 
 
Brands
5,842

 
5,922

Contract acquisition costs and other
2,598

 
2,622

Goodwill
9,103

 
9,207

 
17,543

 
17,751

Equity method investments
638

 
734

Notes receivable, net
121

 
142

Deferred tax assets
171

 
93

Other noncurrent assets
596

 
593

 
$
23,844

 
$
23,846

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities
 
 
 
Current portion of long-term debt
$
616

 
$
398

Accounts payable
834

 
783

Accrued payroll and benefits
1,176

 
1,214

Liability for guest loyalty programs
2,177

 
2,121

Accrued expenses and other
1,101

 
1,291

 
5,904

 
5,807

Long-term debt
8,375

 
7,840

Liability for guest loyalty programs
3,314

 
2,819

Deferred tax liabilities
567

 
605

Deferred revenue
645

 
583

Other noncurrent liabilities
2,198

 
2,610

Shareholders’ equity
 
 
 
Class A Common Stock
5

 
5

Additional paid-in-capital
5,728

 
5,770

Retained earnings
8,363

 
7,242

Treasury stock, at cost
(11,011
)
 
(9,418
)
Accumulated other comprehensive loss
(244
)
 
(17
)
 
2,841

 
3,582

 
$
23,844

 
$
23,846

See Notes to Condensed Consolidated Financial Statements.

5


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

 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
OPERATING ACTIVITIES
 
 
 
Net income
$
1,008

 
$
860

Adjustments to reconcile to cash provided by operating activities:
 
 
 
Depreciation, amortization, and other
143

 
145

Share-based compensation
93

 
95

Income taxes
(198
)
 
148

Liability for guest loyalty programs
542

 
184

Contract acquisition costs
(71
)
 
(89
)
Merger-related charges
(23
)
 
(98
)
Working capital changes
(241
)
 
(113
)
Gain on asset dispositions
(173
)
 
(24
)
Other
49

 
78

Net cash provided by operating activities
1,129

 
1,186

INVESTING ACTIVITIES
 
 
 
Capital expenditures
(388
)
 
(104
)
Dispositions
436

 
482

Loan advances
(13
)
 
(48
)
Loan collections
29

 
10

Other
50

 
(17
)
Net cash provided by investing activities
114

 
323

FINANCING ACTIVITIES
 
 
 
Commercial paper/Credit Facility, net
707

 
119

Issuance of long-term debt
443

 
1

Repayment of long-term debt
(387
)
 
(301
)
Issuance of Class A Common Stock
4

 
3

Dividends paid
(262
)
 
(240
)
Purchase of treasury stock
(1,673
)
 
(1,328
)
Share-based compensation withholding taxes
(101
)
 
(135
)
Net cash used in financing activities
(1,269
)
 
(1,881
)
DECREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
(26
)
 
(372
)
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, beginning of period (1)
429

 
887

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, end of period (1)
$
403

 
$
515

(1) 
The 2018 amounts include restricted cash of $46 million at December 31, 2017, and $37 million at June 30, 2018, which we present in the “Prepaid expenses and other” and “Other noncurrent assets” captions of our Balance Sheets.
See Notes to Condensed Consolidated Financial Statements.


6


MARRIOTT INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 in our Caribbean and Latin America, Europe, and Middle East and Africa regions as “Other International,” and together with those in our Asia Pacific segment, 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, 2017 (“2017 Form 10-K”). Certain terms not otherwise defined in this Form 10-Q have the meanings specified in our 2017 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 June 30, 2018 and December 31, 2017, the results of our operations for the three and six months ended June 30, 2018 and June 30, 2017, and cash flows for the six months ended June 30, 2018 and June 30, 2017. 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.
The accompanying Financial Statements also reflect our adoption of several new accounting standards. See the “New Accounting Standards Adopted” caption below for additional information.
New Accounting Standards Not Yet Adopted
Accounting Standards Update (“ASU”) 2016-02 “Leases” (Topic 842). ASU 2016-02 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 most leases, including operating leases. 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. The standard is effective for us beginning in our 2019 first quarter and requires the use of a modified retrospective transition method. We are still assessing the potential impact that ASU 2016-02 will have on our financial statements and disclosures, but we expect that it will have a material effect on our Balance Sheets.

7


New Accounting Standards Adopted
ASU 2016-18 “Restricted Cash” (Topic 230). ASU 2016-18 requires companies to include restricted cash with cash and cash equivalents when reconciling beginning and ending amounts shown on the statement of cash flows. We adopted ASU 2016-18 in the 2018 first quarter using the retrospective transition method, and accordingly, we revised prior period amounts, as shown in the “Statements of Cash Flows” table below.
ASU 2016-16 “Accounting for Income Taxes: Intra-Entity Transfers of Assets Other than Inventory” (Topic 740). ASU 2016-16 requires companies to recognize the income tax effects of intercompany sales of assets other than inventory when the transfer occurs. We adopted ASU 2016-16 in the 2018 first quarter using the modified retrospective transition method and recorded an adjustment of $372 million for the cumulative effect to retained earnings at January 1, 2018.
ASU 2016-15 “Classification of Certain Cash Receipts and Cash Payments” (Topic 230). ASU 2016-15 specifies how certain cash receipts and payments are to be classified in the statement of cash flows and primarily impacts our presentation of cash outflows for commercial paper. Under ASU 2016-15, we are required to attribute a portion of the payments to accreted interest and classify that portion as cash outflows for operating activities. We adopted ASU 2016-15 in the 2018 first quarter using the retrospective transition method, and accordingly, we revised prior period amounts, as shown in the “Statements of Cash Flows” table below.
ASU 2016-01 “Recognition and Measurement of Financial Assets and Financial Liabilities” (Topic 825). ASU 2016-01 eliminates the available-for-sale classification for equity investments and requires companies to measure equity investments at fair value and recognize any changes in the fair value in net income. We adopted ASU 2016-01 in the 2018 first quarter using the modified retrospective transition method and recorded a cumulative-effect adjustment of $4 million to retained earnings at January 1, 2018.
ASU 2014-09 “Revenue from Contracts with Customers” (Topic 606). ASU 2014-09 and several related ASUs (collectively referred to as “ASU 2014-09”) supersede the revenue recognition requirements in Topic 605, Revenue Recognition, as well as most industry-specific guidance, and provide a principles-based, comprehensive framework in Topic 606, Revenue Recognition. ASU 2014-09 also specifies the accounting for certain costs to obtain or fulfill a contract with a customer and provides enhanced disclosure requirements. We adopted ASU 2014-09 in the 2018 first quarter using the full retrospective transition method. See Footnote 2. Revenues for disclosures required by ASU 2014-09, including our revenue recognition accounting policies.
When we adopted ASU 2014-09, we applied the following expedients and exemptions, which are allowed by the standard, to our prior period Financial Statements and disclosures:
We used the transaction price at the date of contract completion for our contracts that had variable consideration and were completed before January 1, 2018.
We considered the aggregate effect of all contract modifications that occurred before January 1, 2016 when: (1) identifying satisfied and unsatisfied performance obligations; (2) determining the transaction price; and (3) allocating the transaction price to the satisfied and unsatisfied performance obligations.
We did not: (1) disclose the amount of the transaction price that we allocated to remaining performance obligations; or (2) include an explanation of when we expect to recognize the revenue allocated to remaining performance obligations.
The cumulative effect of adopting ASU 2014-09 was a decrease in 2016 retained earnings of $264 million.
The following tables present the effect of the adoption of ASUs 2014-09, 2016-15, and 2016-18 on our 2017 Financial Statements. Throughout this report, our 2017 financial results reflect the “As Adjusted” amounts shown in the tables below.

8


Income Statements
 
Three Months Ended
 
Six Months Ended
($ in millions, except per share amounts)
June 30, 2017
(As Previously Reported)
 
Adoption of ASU 2014-09
 
June 30, 2017
(As Adjusted)
 
June 30, 2017
(As Previously Reported)
 
Adoption of ASU 2014-09
 
June 30, 2017
(As Adjusted)
REVENUES
 
 
 
 
 
 
 
 
 
 
 
Base management fees
$
285

 
$

 
$
285

 
$
549

 
$

 
$
549

Franchise fees
416

 
(8
)
 
408

 
781

 
(18
)
 
763

Incentive management fees
148

 
7

 
155

 
301

 
(6
)
 
295

Gross fee revenues
849

 
(1
)
 
848

 
1,631

 
(24
)
 
1,607

Contract investment amortization

 
(12
)
 
(12
)
 

 
(23
)
 
(23
)
Net fee revenues
849

 
(13
)
 
836

 
1,631

 
(47
)
 
1,584

Owned, leased, and other revenue
458

 
(10
)
 
448

 
897

 
(21
)
 
876

Cost reimbursement revenue
4,488

 
(561
)
 
3,927

 
8,828

 
(1,165
)
 
7,663

 
5,795

 
(584
)
 
5,211

 
11,356

 
(1,233
)
 
10,123

OPERATING COSTS AND EXPENSES
 
 
 
 
 
 
 
 
 
 
 
Owned, leased, and other-direct
355

 
(5
)
 
350

 
713

 
(7
)
 
706

Depreciation, amortization, and other
85

 
(14
)
 
71

 
150

 
(28
)
 
122

General, administrative, and other
226

 
8

 
234

 
436

 
10

 
446

Merger-related costs and charges
21

 

 
21

 
72

 

 
72

Reimbursed expenses
4,488

 
(697
)
 
3,791

 
8,828

 
(1,341
)
 
7,487

 
5,175

 
(708
)
 
4,467

 
10,199

 
(1,366
)
 
8,833

OPERATING INCOME
620

 
124

 
744

 
1,157

 
133

 
1,290

Gains and other income, net
25

 

 
25

 
25

 

 
25

Interest expense
(73
)
 

 
(73
)
 
(143
)
 

 
(143
)
Interest income
8

 

 
8

 
15

 

 
15

Equity in earnings
12

 

 
12

 
23

 

 
23

INCOME BEFORE INCOME TAXES
592

 
124

 
716

 
1,077

 
133

 
1,210

Provision for income taxes
(178
)
 
(49
)
 
(227
)
 
(298
)
 
(52
)
 
(350
)
NET INCOME
$
414

 
$
75

 
$
489

 
$
779

 
$
81

 
$
860

EARNINGS PER SHARE
 
 
 
 
 
 
 
 
 
 
 
Earnings per share - basic
$
1.09

 
$
0.20

 
$
1.29

 
$
2.04

 
$
0.21

 
$
2.25

Earnings per share - diluted
$
1.08

 
$
0.20

 
$
1.28

 
$
2.02

 
$
0.21

 
$
2.23


9


Statements of Comprehensive Income
 
Three Months Ended
 
Six Months Ended
($ in millions)
June 30, 2017
(As Previously Reported)
 
Adoption of ASU 2014-09
 
June 30, 2017
(As Adjusted)
 
June 30, 2017
(As Previously Reported)
 
Adoption of ASU 2014-09
 
June 30, 2017
(As Adjusted)
Net income
$
414

 
$
75

 
$
489

 
$
779

 
$
81

 
$
860

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
162

 

 
162

 
350

 

 
350

Derivative instrument adjustments, net of tax
(6
)
 

 
(6
)
 
(8
)
 

 
(8
)
Unrealized (loss) gain on available-for-sale securities, net of tax
(1
)
 

 
(1
)
 
(2
)
 

 
(2
)
Pension and postretirement adjustments, net of tax

 

 

 

 

 

Reclassification of losses, net of tax
1

 

 
1

 
1

 

 
1

Total other comprehensive income, net of tax
156

 

 
156

 
341

 

 
341

Comprehensive income
$
570

 
$
75

 
$
645

 
$
1,120

 
$
81

 
$
1,201


10


Balance Sheets
($ in millions)
December 31, 2017
(As Previously Reported) (1)
 
Adoption of ASU 2014-09
 
December 31, 2017
(As Adjusted)
ASSETS
 
 
 
 
 
Current assets
 
 
 
 
 
Cash and equivalents
$
383

 
$

 
$
383

Accounts and notes receivable, net
1,999

 
(26
)
 
1,973

Prepaid expenses and other
216

 
19

 
235

Assets held for sale
149

 

 
149

 
2,747

 
(7
)
 
2,740

Property and equipment, net
1,793

 

 
1,793

Intangible assets
 
 
 
 
 
Brands
5,922

 

 
5,922

Contract acquisition costs and other
2,884

 
(262
)
 
2,622

Goodwill
9,207

 

 
9,207

 
18,013

 
(262
)
 
17,751

Equity method investments
735

 
(1
)
 
734

Notes receivable, net
142

 

 
142

Deferred tax assets
93

 

 
93

Other noncurrent assets
426

 
167

 
593

 
$
23,949

 
$
(103
)
 
$
23,846

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
Current liabilities
 
 
 
 
 
Current portion of long-term debt
$
398

 
$

 
$
398

Accounts payable
783

 

 
783

Accrued payroll and benefits
1,214

 

 
1,214

Liability for guest loyalty programs
2,064

 
57

 
2,121

Accrued expenses and other
1,541

 
(250
)
 
1,291

 
6,000

 
(193
)
 
5,807

Long-term debt
7,840

 

 
7,840

Liability for guest loyalty programs
2,876

 
(57
)
 
2,819

Deferred tax liabilities
604

 
1

 
605

Deferred revenue
145

 
438

 
583

Other noncurrent liabilities
2,753

 
(143
)
 
2,610

Shareholders' equity
 
 
 
 
 
Class A Common Stock
5

 

 
5

Additional paid-in-capital
5,770

 

 
5,770

Retained earnings
7,391

 
(149
)
 
7,242

Treasury stock, at cost
(9,418
)
 

 
(9,418
)
Accumulated other comprehensive loss
(17
)
 

 
(17
)
 
3,731

 
(149
)
 
3,582

 
$
23,949

 
$
(103
)
 
$
23,846

(1) 
Includes reclassifications among various captions, including Deferred revenue and Other noncurrent liabilities, to conform to current period presentation.

11


Statements of Cash Flows
 
Six Months Ended
 
 
 
 
 
Six Months Ended
($ in millions)
June 30, 2017
(As Previously Reported)
 
Adoption of ASU 2014-09
 
Adoption of ASUs 2016-18 and 2016-15
 
June 30, 2017
(As Adjusted)
OPERATING ACTIVITIES
 
 
 
 
 
 
 
Net income
$
779

 
$
81

 
$

 
$
860

Adjustments to reconcile to cash provided by operating activities:
 
 
 
 
 
 
 
Depreciation, amortization, and other
150

 
(5
)
 

 
145

Share-based compensation
95

 

 

 
95

Income taxes
96

 
52

 

 
148

Liability for guest loyalty program
204

 
(20
)
 

 
184

Contract acquisition costs

 
(89
)
 

 
(89
)
Merger-related charges
(98
)
 

 

 
(98
)
Working capital changes
(6
)
 
(95
)
 
(12
)
 
(113
)
Gain on asset dispositions
(24
)
 

 

 
(24
)
Other
106

 
(14
)
 
(14
)
 
78

Net cash provided by (used in) operating activities
1,302

 
(90
)
 
(26
)
 
1,186

INVESTING ACTIVITIES
 
 
 
 
 
 
 
Capital expenditures
(104
)
 

 

 
(104
)
Dispositions
482

 

 

 
482

Loan advances
(48
)
 

 

 
(48
)
Loan collections
10

 

 

 
10

Contract acquisition costs
(91
)
 
91

 

 

Other
(16
)
 
(1
)
 

 
(17
)
Net cash provided by investing activities
233

 
90

 

 
323

FINANCING ACTIVITIES
 
 
 
 
 
 
 
Commercial paper/Credit Facility, net
105

 

 
14

 
119

Issuance of long-term debt
1

 

 

 
1

Repayment of long-term debt
(301
)
 

 

 
(301
)
Issuance of Class A Common Stock
3

 

 

 
3

Dividends paid
(240
)
 

 

 
(240
)
Purchase of treasury stock
(1,328
)
 

 

 
(1,328
)
Share-based compensation withholding taxes
(135
)
 

 

 
(135
)
Net cash provided by (used in) financing activities
(1,895
)
 

 
14

 
(1,881
)
(DECREASE) INCREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
(360
)
 

 
(12
)
 
(372
)
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, beginning of period
858

 

 
29

 
887

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, end of period
$
498

 
$

 
$
17

 
$
515

See Footnote 10. Accumulated Other Comprehensive Loss and Shareholders’ Equity for the impact of the adoption of new accounting standards on our shareholders’ equity.

12


2. REVENUES
Disaggregation of Revenues
The following tables present our revenues disaggregated by major revenue stream for the three and six months ended June 30, 2018 and June 30, 2017.
 
Three Months Ended June 30, 2018
($ in millions)
North American Full-Service
 
North American Limited-Service
 
Asia Pacific
 
Other International
 
Total
Gross fee revenues
$
345

 
$
250

 
$
110

 
$
128

 
$
833

Contract investment amortization
(7
)
 
(3
)
 
(1
)
 
(2
)
 
(13
)
Net fee revenues
338

 
247

 
109

 
126

 
820

Owned, leased, and other revenue
140

 
37

 
48

 
178

 
403

Cost reimbursement revenue
2,878

 
604

 
111

 
303

 
3,896

Total segment revenue
$
3,356

 
$
888

 
$
268

 
$
607

 
$
5,119

Unallocated corporate
 
 
 
 
 
 
 
 
227

Total revenue
 
 
 
 
 
 
 
 
$
5,346

 
Three Months Ended June 30, 2017
($ in millions)
North American Full-Service
 
North American Limited-Service
 
Asia Pacific
 
Other International
 
Total
Gross fee revenues
$
317

 
$
230

 
$
98

 
$
119

 
$
764

Contract investment amortization
(6
)
 
(3
)
 
(1
)
 
(2
)
 
(12
)
Net fee revenues
311

 
227

 
97

 
117

 
752

Owned, leased, and other revenue
181

 
32

 
49

 
175

 
437

Cost reimbursement revenue
2,785

 
577

 
106

 
296

 
3,764

Total segment revenue
$
3,277

 
$
836

 
$
252

 
$
588

 
$
4,953

Unallocated corporate
 
 
 
 
 
 
 
 
258

Total revenue
 
 
 
 
 
 
 
 
$
5,211

 
Six Months Ended June 30, 2018
($ in millions)
North American Full-Service
 
North American Limited-Service
 
Asia Pacific
 
Other International
 
Total
Gross fee revenues
$
644

 
$
446

 
$
227

 
$
250

 
$
1,567

Contract investment amortization
(18
)
 
(6
)
 
(1
)
 
(6
)
 
(31
)
Net fee revenues
626

 
440

 
226

 
244

 
1,536

Owned, leased, and other revenue
295

 
70

 
95

 
336

 
796

Cost reimbursement revenue
5,734

 
1,139

 
222

 
554

 
7,649

Total segment revenue
$
6,655

 
$
1,649

 
$
543

 
$
1,134

 
$
9,981

Unallocated corporate
 
 
 
 
 
 
 
 
371

Total revenue
 
 
 
 
 
 
 
 
$
10,352


13


 
Six Months Ended June 30, 2017
($ in millions)
North American Full-Service
 
North American Limited-Service
 
Asia Pacific
 
Other International
 
Total
Gross fee revenues
$
606

 
$
411

 
$
195

 
$
231

 
$
1,443

Contract investment amortization
(12
)
 
(6
)
 
(1
)
 
(4
)
 
(23
)
Net fee revenues
594

 
405

 
194

 
227

 
1,420

Owned, leased, and other revenue
378

 
63

 
90

 
324

 
855

Cost reimbursement revenue
5,545

 
1,109

 
209

 
549

 
7,412

Total segment revenue
$
6,517

 
$
1,577

 
$
493

 
$
1,100

 
$
9,687

Unallocated corporate
 
 
 
 
 
 
 
 
436

Total revenue
 
 
 
 
 
 
 
 
$
10,123

Performance Obligations
For our managed hotels, we have performance obligations to provide hotel management services and a license to our hotel system intellectual property for the use of our brand names. As compensation for such services, we are generally entitled to receive base fees, which are a percentage of the revenues of hotels, and incentives fees, which are generally based on a measure of hotel profitability. Both the base and incentive management fees are variable consideration, as the transaction price is based on a percentage of revenue or profit, as defined in each contract. We recognize base management fees on a monthly basis over the term of the agreement as those amounts become payable. We recognize incentive management fees on a monthly basis over the term of the agreement based on each property's financial results, as long as we do not expect a significant reversal due to projected future hotel performance or cash flows in future periods.
For our franchised hotels, we have a performance obligation to provide franchisees and operators a license to our hotel system intellectual property for use of certain of our brand names. As compensation for such services, we are typically entitled to initial application fees and ongoing royalty fees. Our ongoing royalty fees represent variable consideration, as the transaction price is based on a percentage of certain revenues of the hotels, as defined in each contract. We recognize royalty fees on a monthly basis over the term of the agreement as those amounts become payable. Initial application and relicensing fees are fixed consideration payable upon submission of a franchise application or renewal and are recognized on a straight-line basis over the initial or renewal term of the franchise agreements.
Under our management and franchise agreements, we are entitled to be reimbursed for certain costs we incur on behalf of the managed, franchised, and licensed properties, with no added mark-up. These costs primarily consist of payroll and related expenses at managed properties where we are the employer of the employees at the properties, and include certain operational and administrative costs as provided for in our contracts with the owners. We are entitled to reimbursement in the period we incur the related reimbursable costs, which we recognize within the “Cost reimbursement revenue” caption of our Income Statements.
Under our management and franchise agreements, hotel owners and franchisees participate in certain centralized programs and services, such as marketing, sales, reservations, and insurance programs. We operate these programs and services for the benefit of our hotel owners. We do not operate these programs and services to generate a profit over the contract term, and accordingly, when we recover the costs that we incur for these programs and services from our hotel owners, we do not seek a mark-up. The amounts we charge for these programs and services are generally based on sales or other variable metrics and are payable on a monthly basis. We recognize revenue within the “Cost reimbursement revenue” caption of our Income Statements when the amounts may be billed to hotel owners, and we recognize expenses within the “Reimbursed expenses” caption as they are incurred. This pattern of recognition results in temporary timing differences between the costs incurred for centralized programs and services and the related reimbursement from hotel owners in our operating and net income. Over the long term, these programs and services are not designed to impact our economics, either positively or negatively. In addition, proceeds from the sale of our interest in Avendra that we expend for the benefit of our hotel owners are included in “Reimbursed expenses.”

14


We provide hotel design and construction review quality assurance (“Global Design”) services to our managed and franchised hotel owners, generally during the period prior to a hotel’s opening or during the period a hotel is converting to a Marriott brand (the “pre-opening period”). As compensation for such services, we may be entitled to receive a one-time fixed fee that is payable during the pre-opening period of the hotel. As these services are not a distinct performance obligation, we recognize the fees on a straight-line basis over the initial term of the management or franchise agreement within the “Owned, leased, and other revenue” caption of our Income Statements.
At our owned and leased hotels, we have performance obligations to provide accommodations and other ancillary services to hotel guests. As compensation for such goods and services, we are typically entitled to a fixed nightly fee for an agreed upon period and additional fixed fees for any ancillary services purchased. These fees are generally payable at the time the hotel guest checks out of the hotel. We generally satisfy the performance obligations over time, and we recognize the revenue from room sales and from other ancillary guest services on a daily basis, as the rooms are occupied and we have rendered the services.
Under our Loyalty Programs, we have a performance obligation to provide or arrange for the provision of goods or services for free or at a discount to Loyalty Program members in exchange for the redemption of points earned from past activities. We operate our Loyalty Programs as cross-brand marketing programs to participating properties. Our management and franchise agreements require that properties reimburse us for a portion of the costs of operating the Loyalty Programs, including costs for marketing, promotion, communication with, and performing member services for Loyalty Program members, with no added mark-up. We receive contributions on a monthly basis from managed, franchised, owned, and leased hotels based on a portion of qualified spend by Loyalty Program members. We recognize these contributions into revenue as the points are redeemed and we provide the related service. The amount of revenue we recognize upon point redemption is impacted by our estimate of the “breakage” for points that members will never redeem. We estimate such amounts based on our historical experience and expectations of future member behavior. We recognize revenue net of the redemption cost within our “Cost reimbursement revenue” caption of our Income Statements, as our performance obligation is to facilitate the transaction between the Loyalty Program member and the managed or franchised property or program partner. We recognize all other Loyalty Program costs as incurred in our “Reimbursed expenses” caption.
We have multi-year agreements for our co-brand credit cards associated with our Loyalty Programs. Under these agreements, we have performance obligations to provide a license to the intellectual property associated with our brands and marketing lists (“Licensed IP”) to the financial institutions that issue the credit cards, to arrange for the redemption of Loyalty Program points as discussed in the preceding paragraph, and to provide free night certificates to cardholders. We receive fees from these agreements, including fixed amounts that are primarily payable at contract inception, and variable amounts that are paid to us monthly over the term of the agreements, based on: (1) the number of free night certificates issued and redeemed; (2) the number of Loyalty Program points purchased; and (3) the volume of cardholder spend. We allocate those fees among the performance obligations, including the Licensed IP, our Loyalty Program points, and free night certificates provided to cardholders based on their estimated standalone selling prices. The estimation of the standalone selling prices requires significant judgments based upon generally accepted valuation methodologies regarding the value of our Licensed IP, the amount of funding we will receive, and the number of Loyalty Program points and free night certificates we will issue over the term of the agreements. We base our estimates of these amounts on our historical experience and expectation of future cardholder behavior. We recognize the portion of the Licensed IP revenue that meets the sales-based royalty criteria as the credit cards are used and the remaining portion of the Licensed IP revenue on a straight-line basis over the contract term. In our Income Statements, we primarily recognize Licensed IP revenue in the “Franchise fees” caption, and we recognize a portion in the “Cost reimbursement revenue” caption. We recognize the revenue related to the Loyalty Program points as discussed in the preceding paragraph. We recognize the revenue related to the free night certificates when the related service is provided. If the free night certificate redemption involves a managed or franchised property, we recognize revenue net of the redemption cost, as our performance obligation is to facilitate the transaction between the Loyalty Program member and the managed or franchised property.

15


Contract Balances
We generally receive payments from customers as we satisfy our performance obligations. We record a receivable when we have an unconditional right to receive payment and only the passage of time is required before payment is due. We record deferred revenue when we receive payment, or have the unconditional right to receive payment, in advance of the satisfaction of our performance obligations related to franchise application and relicensing fees, Global Design fees, credit card branding license fees, and our Loyalty Programs.
Current and noncurrent deferred revenue increased by $74 million, to $759 million at June 30, 2018 from $685 million at December 31, 2017, primarily as a result of our revenue recognition activity described above in the “Performance Obligations” caption. The increase was primarily attributable to a $79 million increase related to our credit card branding licenses.
Our current and noncurrent Loyalty Program liability increased by $551 million, to $5,491 million at June 30, 2018 from $4,940 million at December 31, 2017, primarily reflecting an increase in points earned and consideration from our credit card agreements, partially offset by revenue recognized. We recognized revenue related to our Loyalty Programs that was previously deferred of $533 million in the 2018 second quarter, $431 million in the 2017 second quarter, $956 million in the 2018 first half, and $855 million in the 2017 first half.
Costs incurred to obtain and fulfill contracts with customers
We incur certain costs to obtain and fulfill contracts with customers, which we capitalize and amortize on a straight-line basis over the initial, non-cancellable term of the contract. We classify incremental costs of obtaining a contract with a customer in the “Contract acquisition costs and other” caption of our Balance Sheets, the related amortization in the “Contract investment amortization” caption of our Income Statements, and the cash flow impact in the “Contract acquisition costs” caption of our Statements of Cash Flows. We classify certain direct costs to fulfill a contract with a customer in the “Other noncurrent assets” caption of our Balance Sheets, and the related amortization in the “Owned, leased, and other-direct” caption of our Income Statements.
We had capitalized costs to fulfill contracts with customers of $307 million at June 30, 2018 and $295 million at December 31, 2017.
Practical Expedients and Exemptions
We do not disclose the amount of variable consideration that we expect to recognize in future periods in the following circumstances:
(1) if we recognize the revenue based on the amount invoiced for services performed;
(2) for sales-based or usage-based royalty promised in exchange for a license of intellectual property; or
(3) if the consideration is allocated entirely to a wholly unsatisfied promise to transfer a distinct service that forms part of a single performance obligation, and the terms of the consideration relate specifically to our efforts to transfer, or to a specific outcome from transferring the service.
We are required to collect certain taxes and fees from customers on behalf of governmental agencies and remit these back to the applicable governmental agencies on a periodic basis. We do not include these taxes in determining the transaction price.
3.    ACQUISITIONS AND DISPOSITIONS
Acquisitions
In the 2018 second quarter, we purchased the Sheraton Grand Phoenix, a North American Full-Service property that we manage, for $255 million.

16


Dispositions
In the 2018 second quarter, we sold two North American Full-Service properties — The Tremont Chicago Hotel at Magnificent Mile and Le Centre Sheraton Montreal Hotel — and two Asia Pacific properties — The Westin Denarau Island Resort and The Sheraton Fiji Resort. We recognized total gains of $67 million in the “Gains and other income, net” caption of our Income Statements.
In the 2018 second quarter, we sold our interest in three equity method investments, whose assets included a plot of land in Italy, the W Hotel Mexico City, and the Royal Orchid Sheraton Hotel & Towers in Bangkok, and we recognized total gains of $42 million in the “Gains and other income, net” caption of our Income Statements. Also in the 2018 second quarter, an equity method investee sold The Ritz-Carlton Toronto, and we recorded our share of the gain, $10 million, in the “Equity in earnings” caption of our Income Statements.
In the 2018 first quarter, we sold two Caribbean and Latin America properties — The Sheraton Buenos Aires Hotel & Convention Center and Park Tower, A Luxury Collection Hotel, Buenos Aires. We recognized total gains of $53 million in the “Gains and other income, net” caption of our Income Statements.
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
 
Six Months Ended
(in millions, except per share amounts)
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
Computation of Basic Earnings Per Share
 
 
 
 
 
 
 
Net income
$
610

 
$
489

 
$
1,008

 
$
860

Shares for basic earnings per share
353.4

 
378.5

 
355.9

 
381.7

Basic earnings per share
$
1.73

 
$
1.29

 
$
2.83

 
$
2.25

Computation of Diluted Earnings Per Share
 
 
 
 
 
 
 
Net income
$
610

 
$
489

 
$
1,008

 
$
860

Shares for basic earnings per share
353.4

 
378.5

 
355.9

 
381.7

Effect of dilutive securities
 
 
 
 
 
 
 
Share-based compensation
3.9

 
4.5

 
4.4

 
4.8

Shares for diluted earnings per share
357.3

 
383.0

 
360.3

 
386.5

Diluted earnings per share
$
1.71

 
$
1.28

 
$
2.80

 
$
2.23

5.    SHARE-BASED COMPENSATION
We recorded share-based compensation expense of $51 million in the 2018 second quarter and $47 million in the 2017 second quarter, $93 million for the 2018 first half, and $95 million for the 2017 first half. Deferred compensation costs for unvested awards totaled $269 million at June 30, 2018 and $168 million at December 31, 2017.
RSUs and PSUs
We granted 1.4 million restricted stock units (“RSUs”) during the 2018 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 granted 0.1 million performance-based RSUs (“PSUs”) in the 2018 first half to certain executive officers, which are earned, subject to continued employment and the satisfaction of certain performance conditions based on achievement of pre-established targets for 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 2018 first half had a weighted average grant-date fair value of $133.

17


6.    INCOME TAXES
Our effective tax rate decreased to 23.3 percent for the 2018 second quarter from 31.7 percent for the 2017 second quarter, primarily due to the reduction of the U.S. federal tax rate under the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) and increased earnings in jurisdictions with lower tax rates. The decrease was partially offset by tax expense related to the gains on dispositions in the 2018 second quarter, the 2017 release of a tax reserve due to the favorable settlement of a tax position, and the current period’s provisional estimate of tax for global intangible low-taxed income (“GILTI”) under the 2017 Tax Act.
Our effective tax rate decreased to 22.4 percent for the 2018 first half from 28.9 percent for the 2017 first half, primarily due to the reduction of the U.S. federal tax rate under the 2017 Tax Act, increased earnings in jurisdictions with lower tax rates, and the release of tax reserves due to the completion of certain examinations. The decrease was partially offset by tax expense related to the gains on dispositions, tax expense incurred for uncertain tax positions relating to legacy-Starwood operations, increased state income tax due to a change in our position regarding the future remittance of a portion of the accumulated earnings of non-U.S. subsidiaries, the current period’s provisional estimate of tax for GILTI under the 2017 Tax Act, and the 2017 release of a tax reserve due to the favorable settlement of a tax position.
We paid cash for income taxes, net of refunds, of $489 million in the 2018 first half and $201 million in the 2017 first half, an increase of $288 million primarily due to taxes paid for the 2017 gain on sale of our interest in Avendra.
Tax Cuts and Jobs Act of 2017
Although we have not completed our accounting for the effects of the 2017 Tax Act, we have where possible made reasonable estimates of the 2017 Tax Act’s effects on our existing deferred tax balances and the Transition Tax, as described below. In cases where we have not been able to make reasonable estimates of the impact of the 2017 Tax Act, as described below, we continue to account for those items based on our existing accounting under ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately before enactment of the 2017 Tax Act. In all cases, we will continue to refine our calculations as we complete additional analyses on the application of the law. As we complete our analysis, collect and prepare necessary data, and interpret any additional regulatory guidance, we may adjust the provisional amounts that we have recorded during a measurement period of up to one year from the enactment of the 2017 Tax Act that could materially impact our provision for income taxes, which could in turn materially affect our tax obligations and effective tax rate, in the periods in which we make such adjustments.
Reduction of U.S. federal corporate tax rate. The 2017 Tax Act reduced the U.S. federal corporate tax rate from 35 percent to 21 percent, effective January 1, 2018. In 2017, we made a reasonable estimate of the net impact of the corporate tax rate reduction on our deferred tax assets and liabilities, which did not change in the 2018 first half. However, our estimate could change as we complete our analyses of all impacts of the 2017 Tax Act, including, but not limited to, the state tax effect of adjustments made to federal temporary differences.
Deemed Repatriation Transition Tax. The Transition Tax is a new one-time tax on previously untaxed earnings and profits (“E&P”) of certain of our foreign subsidiaries accumulated post-1986 through year-end 2017. In addition to U.S. federal income taxes, the deemed repatriation of such E&P may result in additional state income taxes in some of the U.S. states in which we operate. In the 2018 first half, we reduced our Transition Tax provisional estimate and recorded a benefit of $5 million, resulting in a net provisional estimated federal and state Transition Tax of $740 million. This adjustment resulted from changes to E&P as a result of completing an IRS audit. Our total Transition Tax estimate could continue to change as we finalize our analysis of untaxed post-1986 E&P, amounts held in cash or other specified assets, and as audits of federal income taxes are completed.
The 2017 Tax Act does not provide for additional income taxes for any remaining undistributed foreign earnings not subject to the Transition Tax, or for any additional outside basis differences inherent in foreign entities, as these amounts continue to be indefinitely reinvested in those foreign operations. Substantially all our unremitted foreign earnings that have not been previously taxed have now been subjected to U.S. taxation under the Transition Tax. In the 2018 first half, we recorded a state tax expense of $27 million relating to our plan to remit a portion of

18


the accumulated earnings of non-U.S. subsidiaries in the future. This estimate could change as we complete additional analyses of the impacts of the 2017 Tax Act.
State net operating losses and valuation allowances. We must assess whether our state net operating loss valuation allowances are affected by various aspects of the 2017 Tax Act. As discussed above, we have recorded provisional amounts related to state income taxes for certain portions of the 2017 Tax Act, but we have not completed our analysis for the states where we have net operating loss carryovers and valuation allowances. Because we have not yet completed our determination of the need for, or any change in, any valuation allowance, we have not yet recorded any change to valuation allowances.
Other provisions. The 2017 Tax Act also included a new provision designed to tax GILTI. Under GAAP, we may make an accounting policy election to either (1) treat any taxes on GILTI inclusions as a current-period expense when incurred (the “period cost method”) or (2) factor such amounts into our measurement of our deferred taxes (the “deferred method”). We have not yet adopted either accounting policy because we have not completed our analysis of this provision. We recorded a current provision for GILTI tax related to current-year operations in our estimated annual effective tax rate. Because we are still evaluating the GILTI provisions and performing our analysis of future taxable income that is subject GILTI, we have not provided for additional GILTI tax on deferred items.
7.    COMMITMENTS AND CONTINGENCIES
Guarantees
We present the maximum potential amount of our future guarantee fundings and the carrying amount of our liability for our debt service, operating profit, and other guarantees for which we are the primary obligor at June 30, 2018 in the following table:
($ in millions)
Guarantee Type
 
Maximum Potential Amount of Future Fundings
 
Recorded Liability for Guarantees
Debt service
 
$
128

 
$
76

Operating profit
 
229

 
110

Other
 
10

 
2

 
 
$
367

 
$
188

Contingent Purchase Obligations
Times Square EDITION. In the 2018 second quarter, the owner of the Times Square EDITION sold the property, and the lenders terminated our contingent purchase agreement.
Sheraton Grand Chicago. We granted the owner a one-time right, exercisable in 2022, to require us to purchase the leasehold interest in the land and the hotel for $300 million in cash (the “put option”). If the owner exercises the put option, we have the option to purchase, at the same time the put transaction closes, the underlying fee simple interest in the land for an additional $200 million in cash. We accounted for the put option as a guarantee, and our recorded liability at June 30, 2018 was $57 million.

19


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 2018 second quarter and year-end 2017:
 
At Period End
($ in millions)
June 30,
2018
 
December 31,
2017
Senior Notes:
 
 
 
Series K Notes, interest rate of 3.0%, face amount of $600, maturing March 1, 2019
(effective interest rate of 4.4%)
$
599

 
$
598

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%)
348

 
348

Series N Notes, interest rate of 3.1%, face amount of $400, maturing October 15, 2021
(effective interest rate of 3.4%)
397

 
397

Series O Notes, interest rate of 2.9%, face amount of $450, maturing March 1, 2021
(effective interest rate of 3.1%)
448

 
447

Series P Notes, interest rate of 3.8%, face amount of $350, maturing October 1, 2025
(effective interest rate of 4.0%)
345

 
345

Series Q Notes, interest rate of 2.3%, face amount of $750, maturing January 15, 2022
(effective interest rate of 2.5%)
744

 
744

Series R Notes, interest rate of 3.1%, face amount of $750, maturing June 15, 2026
(effective interest rate of 3.3%)
743

 
743

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

 
330

Series T Notes, interest rate of 7.2%, face amount of $181, maturing December 1, 2019
(effective interest rate of 2.3%)
192

 
197

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%)
336

 
337

Series W Notes, interest rate of 4.5%, face amount of $278, maturing October 1, 2034
(effective interest rate of 4.1%)
292

 
292

Series X Notes, interest rate of 4.0%, face amount of $450, maturing April 15, 2028
(effective interest rate of 4.2%)
443

 

Commercial paper
3,079

 
2,371

Credit Facility

 

Capital lease obligations
168

 
171

Other
218

 
279

 
$
8,991

 
$
8,238

Less: Current portion of long-term debt
(616
)
 
(398
)
 
$
8,375

 
$
7,840

We paid cash for interest, net of amounts capitalized, of $144 million in the 2018 first half and $123 million in the 2017 first half.
We are party to a multicurrency revolving credit agreement (the “Credit Facility”) that provides for up to $4,000 million of aggregate effective borrowings to support our commercial paper program and general corporate needs, including working capital, capital expenditures, share repurchases, letters of credit, and acquisitions. 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 June 10, 2021. See the “Cash Requirements and Our Credit Facility” caption later in this report in the “Liquidity and Capital Resources” section of Item 2 below for further information on our Credit Facility and available borrowing capacity at June 30, 2018.

20


In the 2018 second quarter, we issued $450 million aggregate principal amount of 4.000 percent Series X Notes due April 15, 2028 (the “Series X Notes”). We will pay interest on the Series X Notes on April 15 and October 15 of each year, commencing on October 15, 2018. We received net proceeds of approximately $443 million from the offering of the Series X Notes, after deducting the underwriting discount and estimated expenses. We expect to use these proceeds for general corporate purposes, which may include working capital, capital expenditures, acquisitions, stock repurchases, or repayment of outstanding commercial paper or other borrowings.
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:
 
June 30, 2018
 
December 31, 2017
($ in millions)
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Senior, mezzanine, and other loans
$
121

 
$
108

 
$
142

 
$
130

Total noncurrent financial assets
$
121

 
$
108

 
$
142

 
$
130

 
 
 
 
 
 
 
 
Senior Notes
$
(4,927
)
 
$
(4,810
)
 
$
(5,087
)
 
$
(5,126
)
Commercial paper
(3,079
)
 
(3,079
)
 
(2,371
)
 
(2,371
)
Other long-term debt
(207
)
 
(205
)
 
(217
)
 
(221
)
Other noncurrent liabilities
(165
)
 
(165
)
 
(178
)
 
(178
)
Total noncurrent financial liabilities
$
(8,378
)
 
$
(8,259
)
 
$
(7,853
)
 
$
(7,896
)
See the “Fair Value Measurements” caption of Footnote 2. Summary of Significant Accounting Policies of our 2017 Form 10-K for more information on the input levels we use in determining fair value.

21


10.    ACCUMULATED OTHER COMPREHENSIVE LOSS AND SHAREHOLDERS’ EQUITY
The following tables detail the accumulated other comprehensive loss activity for the 2018 first half and 2017 first half:
($ 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 2017
$
(23
)
 
$
(10
)
 
$
4

 
$
12

 
$
(17
)
Other comprehensive (loss) income before reclassifications (1)
(247
)
 
8

 

 

 
(239
)
Amounts reclassified from accumulated other comprehensive loss
8

 
8

 

 

 
16

Net other comprehensive (loss) income
(239
)
 
16

 

 

 
(223
)
Adoption of ASU 2016-01

 

 
(4
)
 

 
(4
)
Balance at June 30, 2018
$
(262
)
 
$
6

 
$

 
$
12

 
$
(244
)
($ 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)
350

 
(8
)
 
(2
)
 

 
340

Amounts reclassified from accumulated other comprehensive loss

 
1

 

 

 
1

Net other comprehensive income (loss)
350

 
(7
)
 
(2
)
 

 
341

Balance at June 30, 2017
$
(153
)
 
$
(12
)
 
$
4

 
$
5

 
$
(156
)
(1) 
Other comprehensive (loss) income before reclassifications for foreign currency translation adjustments includes intra-entity foreign currency transactions that are of a long-term investment nature, which resulted in a gain of $38 million for the 2018 first half and loss of $106 million for the 2017 first half.
The following table details the changes in common shares outstanding and shareholders’ equity for the 2018 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
359.1

 
Balance at year-end 2017 (as previously reported)
$
3,731

 
$
5

 
$
5,770

 
$
7,391

 
$
(9,418
)
 
$
(17
)

 
Adoption of ASU 2014-09
(149
)
 

 

 
(149
)
 

 

359.1

 
Balance at year-end 2017 (as adjusted)
3,582

 
5

 
5,770

 
7,242

 
(9,418
)
 
(17
)

 
Adoption of ASU 2016-01

 

 

 
4

 

 
(4
)

 
Adoption of ASU 2016-16
372

 

 

 
372

 

 


 
Net income
1,008

 

 

 
1,008

 

 


 
Other comprehensive income
(223
)
 

 

 

 

 
(223
)

 
Dividends ($0.74 per share)
(263
)
 

 

 
(263
)
 

 

1.4

 
Share-based compensation plans
(3
)
 

 
(42
)
 

 
39

 

(11.8
)
 
Purchase of treasury stock
(1,632
)
 

 

 

 
(1,632
)
 

348.7

 
Balance at June 30, 2018
$
2,841

 
$
5

 
$
5,728

 
$
8,363

 
$
(11,011
)
 
$
(244
)

22


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 U.S. and Canada;
North American Limited-Service, which includes our Select brands located in the U.S. and Canada; and
Asia Pacific, which includes all brand tiers in our Asia Pacific region;
The following operating segments do not meet the applicable accounting criteria for separate disclosure as reportable business segments: Caribbean and Latin America, Europe, and Middle East and Africa. We present these operating segments together as “Other International” in the tables below.
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, including license fees we receive from our credit card programs and fees from vacation ownership licensing agreements, 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. Beginning in the 2018 first quarter, “Other unallocated corporate” also includes revenues and expenses for our Loyalty Programs, and we reflected this change in the prior period amounts shown in the tables below.
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.
Segment Revenues
 
Three Months Ended
 
Six Months Ended
($ in millions)
June 30, 2018

June 30, 2017
 
June 30, 2018
 
June 30, 2017
North American Full-Service
$
3,356

 
$
3,277

 
$