10-Q 1 mar-q12019x10q.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, 2019
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 every Interactive Data File required to be submitted 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 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
 
¨ 
 
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
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Trading Symbol(s)
 
Name of Each Exchange on Which Registered
Class A Common Stock, $0.01 par value
 
MAR
 
Nasdaq Global Select Market
Chicago Stock Exchange
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 332,988,834 shares of Class A Common Stock, par value $0.01 per share, outstanding at April 30, 2019.





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
 
March 31, 2019
 
March 31, 2018
REVENUES
 
 
 
Base management fees
$
282

 
$
273

Franchise fees
450

 
417

Incentive management fees
163

 
155

Gross fee revenues
895

 
845

Contract investment amortization
(14
)
 
(18
)
Net fee revenues
881

 
827

Owned, leased, and other revenue
375

 
406

Cost reimbursement revenue
3,756

 
3,776

 
5,012

 
5,009

OPERATING COSTS AND EXPENSES
 
 
 
Owned, leased, and other-direct
325

 
336

Depreciation, amortization, and other
54

 
54

General, administrative, and other
222

 
247

Merger-related costs and charges
9

 
34

Reimbursed expenses
3,892

 
3,808

 
4,502

 
4,479

OPERATING INCOME
510

 
530

Gains and other income, net
5

 
59

Interest expense
(97
)
 
(75
)
Interest income
6

 
5

Equity in earnings
8

 
13

INCOME BEFORE INCOME TAXES
432

 
532

Provision for income taxes
(57
)
 
(112
)
NET INCOME
$
375

 
$
420

EARNINGS PER SHARE
 
 
 
Earnings per share - basic
$
1.10

 
$
1.17

Earnings per share - diluted
$
1.09

 
$
1.16

See Notes to Condensed Consolidated Financial Statements.

3


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

 
Three Months Ended
 
March 31, 2019
 
March 31, 2018
Net income
$
375

 
$
420

Other comprehensive (loss) income:
 
 
 
Foreign currency translation adjustments
33

 
152

Derivative instrument adjustments, net of tax
(1
)
 
(3
)
Reclassification of (income) loss, net of tax
(1
)
 
13

Total other comprehensive (loss) income, net of tax
31

 
162

Comprehensive income
$
406

 
$
582

See Notes to Condensed Consolidated Financial Statements.


4


MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in millions)
 
(Unaudited)
 
 
 
March 31,
2019
 
December 31,
2018
ASSETS
 
 
 
Current assets
 
 
 
Cash and equivalents
$
258

 
$
316

Accounts and notes receivable, net
2,218

 
2,133

Prepaid expenses and other
259

 
257

 
2,735

 
2,706

Property and equipment, net
1,961

 
1,956

Intangible assets
 
 
 
Brands
5,959

 
5,790

Contract acquisition costs and other
2,643

 
2,590

Goodwill
9,053

 
9,039

 
17,655

 
17,419

Equity method investments
584

 
732

Notes receivable, net
124

 
125

Deferred tax assets
171

 
171

Operating lease assets
979

 

Other noncurrent assets
537

 
587

 
$
24,746

 
$
23,696

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities
 
 
 
Current portion of long-term debt
$
231

 
$
833

Accounts payable
745

 
767

Accrued payroll and benefits
1,039

 
1,345

Liability for guest loyalty program
2,625

 
2,529

Accrued expenses and other
1,208

 
963

 
5,848

 
6,437

Long-term debt
10,025

 
8,514

Liability for guest loyalty program
2,888

 
2,932

Deferred tax liabilities
441

 
485

Deferred revenue
743

 
731

Operating lease liabilities
889

 

Other noncurrent liabilities
2,309

 
2,372

Shareholders’ equity
 
 
 
Class A Common Stock
5

 
5

Additional paid-in-capital
5,706

 
5,814

Retained earnings
9,219

 
8,982

Treasury stock, at cost
(12,967
)
 
(12,185
)
Accumulated other comprehensive loss
(360
)
 
(391
)
 
1,603

 
2,225

 
$
24,746

 
$
23,696

See Notes to Condensed Consolidated Financial Statements.

5


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

 
Three Months Ended
 
March 31, 2019
 
March 31, 2018
OPERATING ACTIVITIES
 
 
 
Net income
$
375

 
$
420

Adjustments to reconcile to cash provided by operating activities:
 
 
 
Depreciation, amortization, and other
68

 
73

Share-based compensation
40

 
42

Income taxes
(7
)
 
24

Liability for guest loyalty program
52

 
208

Contract acquisition costs
(56
)
 
(29
)
Merger-related charges
(10
)
 
(16
)
Working capital changes
(401
)
 
(98
)
Gain on asset dispositions
(4
)
 
(60
)
Other
94

 
111

Net cash provided by operating activities
151

 
675

INVESTING ACTIVITIES
 
 
 
Capital expenditures
(66
)
 
(64
)
Dispositions
2

 
108

Loan advances

 
(12
)
Loan collections
4

 
5

Other
(28
)
 
12

Net cash (used in) provided by investing activities
(88
)
 
49

FINANCING ACTIVITIES
 
 
 
Commercial paper/Credit Facility, net
665

 
627

Issuance of long-term debt
841

 

Repayment of long-term debt
(603
)
 
(13
)
Issuance of Class A Common Stock
5

 
4

Dividends paid
(139
)
 
(118
)
Purchase of treasury stock
(797
)
 
(815
)
Share-based compensation withholding taxes
(95
)
 
(95
)
Net cash used in financing activities
(123
)
 
(410
)
(DECREASE) INCREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
(60
)
 
314

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, beginning of period (1)
360

 
429

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, end of period (1)
$
300

 
$
743

(1) 
The 2019 amounts include beginning restricted cash of $44 million at December 31, 2018, and ending restricted cash of $42 million at March 31, 2019, 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, 2018 (“2018 Form 10-K”). Certain terms not otherwise defined in this Form 10-Q have the meanings specified in our 2018 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, 2019 and December 31, 2018, the results of our operations for the three months ended March 31, 2019 and March 31, 2018, and cash flows for the three months ended March 31, 2019 and March 31, 2018. As described in Part II, Item 8 of our 2018 Form 10-K, in the 2018 fourth quarter, we identified errors related to our Loyalty Program, which resulted in the understatement of cost reimbursement revenue, net of reimbursed expenses. We presented revised information for the 2018 first, second, and third quarters in our 2018 Form 10-K, and the accompanying Income Statement for the three months ended March 31, 2018 reflects the revised information. 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 ASU 2016-02. See the “New Accounting Standards Adopted” caption below for additional information.
New Accounting Standards Adopted
Accounting Standards Update (“ASU”) No. 2016-02 - “Leases” (Topic 842). ASU 2016-02 introduces a lessee model that brings substantially all leases onto the balance sheet. Under the standard, a lessee recognizes on its balance sheet a lease liability and a right-of-use asset for most leases, including operating leases. The new standard also distinguishes leases as either finance leases or operating leases. This distinction affects how leases are measured and presented in the income statement and statement of cash flows. We adopted ASU 2016-02 in the 2019 first quarter using the modified retrospective transition method. Our accounting for finance leases remained substantially unchanged. Adoption of the standard resulted in the recording of $1,013 million of operating lease assets and $1,053 million of operating lease liabilities, as of January 1, 2019. We did not adjust our prior period Balance Sheets. Adoption of the standard did not impact our Income Statements or our Statements of Cash Flows.

7


When we adopted ASU 2016-02, we applied the package of practical expedients allowed by the standard, and therefore, we did not reassess:
Whether any expired or existing contracts are or contain leases under the new definition;
The lease classification for any expired or existing leases; or
Whether previously capitalized costs continue to qualify as initial direct costs.
See Footnote 7. Leases for disclosures required by ASU 2016-02.
2.    ACQUISITIONS
In the 2019 first quarter, we accelerated our option to acquire our partner’s remaining interests in two joint ventures. As a result of the transaction, we recognized an indefinite-lived brand asset for AC Hotels by Marriott of $156 million and management and franchise contract assets, with a weighted-average term of 24 years, totaling $34 million.
3.    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, 2019
 
March 31, 2018
Computation of Basic Earnings Per Share
 
 
 
Net income
$
375

 
$
420

Shares for basic earnings per share
339.6

 
358.4

Basic earnings per share
$
1.10

 
$
1.17

Computation of Diluted Earnings Per Share
 
 
 
Net income
$
375

 
$
420

Shares for basic earnings per share
339.6

 
358.4

Effect of dilutive securities
 
 
 
Share-based compensation
3.2

 
4.9

Shares for diluted earnings per share
342.8

 
363.3

Diluted earnings per share
$
1.09

 
$
1.16

4.    SHARE-BASED COMPENSATION
RSUs and PSUs
We granted 1.5 million restricted stock units (“RSUs”) during the 2019 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 also granted 0.1 million performance-based RSUs (“PSUs”) in the 2019 first quarter 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 gross room openings, Marriott Bonvoy™ loyalty member penetration, and adjusted operating income growth over, or at the end of, a three-year performance period. RSUs, including PSUs, granted in the 2019 first quarter had a weighted average grant-date fair value of $117.
We recorded share-based compensation expense for RSUs and PSUs of $38 million in the 2019 first quarter and $39 million in the 2018 first quarter. Deferred compensation costs for unvested awards for RSUs and PSUs totaled $314 million at March 31, 2019 and $167 million at December 31, 2018.

8


5.    INCOME TAXES
Our effective tax rate decreased to 13.2 percent for the 2019 first quarter from 21.1 percent for the 2018 first quarter, primarily due to the prior year tax expense incurred for uncertain tax positions relating to legacy-Starwood operations, the prior year state income tax expense due to a change in our position regarding the future remittance of accumulated earnings of non-U.S. subsidiaries, prior year tax on dispositions, and increased earnings in jurisdictions with lower tax rates. The decrease was partially offset by the 2018 release of tax reserves due to the completion of certain examinations.
We paid cash for income taxes, net of refunds, of $64 million in the 2019 first quarter and $88 million in the 2018 first quarter.
6.    COMMITMENTS AND CONTINGENCIES
Guarantees
We present the maximum potential amount of our future guarantee fundings and the carrying amount of our liability for our debt service, operating profit, and other guarantees (excluding contingent purchase obligations) for which we are the primary obligor at March 31, 2019 in the following table:
($ in millions)
Guarantee Type
 
Maximum Potential Amount of Future Fundings
 
Recorded Liability for Guarantees
Debt service
 
$
116

 
$
15

Operating profit
 
195

 
98

Other
 
9

 
1

 
 
$
320

 
$
114

Contingent Purchase Obligation
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 March 31, 2019 was $57 million.
Data Security Incident
Description of Event
On November 30, 2018, we announced a data security incident involving unauthorized access to the Starwood reservations database (the “Data Security Incident”). Working with leading security experts, we determined that there was unauthorized access to the Starwood network since 2014 and that an unauthorized party had copied information from the Starwood reservations database and taken steps towards removing it. While our forensic review of the incident is now complete, certain data analytics work continues. We have completed the planned phase out of the operation of the Starwood reservations database, effective as of the end of 2018.
Expenses and Insurance Recoveries
In the 2019 first quarter, we recorded $44 million of expenses related to the Data Security Incident and $46 million of accrued insurance recoveries, which we recorded in either the “Reimbursed expenses” or “Merger-related costs and charges” captions of our Income Statements. Expenses primarily included customer care and legal costs. We recognize insurance recoveries when they are probable of receipt and present them in our Income Statements in the same caption as the related loss, up to the amount of total loss incurred in prior and current periods.

9


Litigation, Claims, and Government Investigations
To date, approximately 100 lawsuits have been filed by consumers and others against us in U.S. federal, U.S. state and Canadian courts related to the Data Security Incident. The vast majority of these cases are putative consumer class actions, in which the plaintiffs, who purport to represent various classes of consumers, generally claim to have been harmed by alleged actions and/or omissions by the Company in connection with the Data Security Incident and assert a variety of common law and statutory claims seeking monetary damages, injunctive relief, costs and attorneys’ fees, and other related relief. All of the U.S. cases have been consolidated and transferred to the U.S. District Court for the District of Maryland, pursuant to orders of the U.S. Judicial Panel on Multidistrict Litigation (MDL). In addition, a putative class action lawsuit was filed against us and certain of our current officers and directors on December 1, 2018 alleging violations of the federal securities laws in connection with statements regarding our cybersecurity systems and controls, and seeking certification of a class of affected persons, unspecified monetary damages, costs and attorneys’ fees, and other related relief. Two shareholder derivative complaints were also filed on February 26, 2019 and March 15, 2019 against the Company, certain of its officers and certain of the members of our Board of Directors, alleging, among other claims, breach of fiduciary duty, corporate waste, unjust enrichment, mismanagement and violations of the federal securities laws, and seeking unspecified monetary damages and restitution, changes to the Company’s corporate governance and internal procedures, costs and attorneys’ fees, and other related relief. These cases are also covered by the MDL order. We dispute the allegations in the lawsuits described above and intend to defend vigorously against such claims.
In addition, numerous U.S. federal, U.S. state and foreign governmental authorities are investigating, or otherwise seeking information and/or documents related to, the Data Security Incident and related matters, including Attorneys General offices from all 50 states and the District of Columbia, the Federal Trade Commission, the Securities and Exchange Commission, certain committees of the U.S. Senate and House of Representatives, the Information Commissioner’s Office in the United Kingdom (“ICO”) as lead supervisory authority in the European Economic Area, and regulatory authorities in various other jurisdictions. Following the Data Security Incident, the ICO notified us that it had opened an investigation into the Company’s online privacy policy and related practices and an investigation into the Company’s handling of data subject access requests. These investigations are separate from the ICO’s investigation related to the Data Security Incident. 
While we believe it is reasonably possible that we may incur losses associated with the above described proceedings and investigations, it is not possible to estimate the amount of loss or range of loss, if any, that might result from adverse judgments, settlements, fines, penalties, or other resolution of these proceedings and investigations based on the stage of these proceedings and investigations, the absence of specific allegations as to alleged damages, the uncertainty as to the certification of a class or classes and the size of any certified class, if applicable, and/or the lack of resolution of significant factual and legal issues.
7. LEASES
We enter into operating and finance leases primarily for hotels, offices, and equipment. Most leases have initial terms of up to 20 years, and contain one or more renewals at our option, generally for five- or 10-year periods. We have generally not included these renewal periods in the lease term as it is not reasonably certain that we will exercise the renewal option. In addition, our leases generally contain fixed and variable components. The variable components of leases of land or building facilities are primarily based on operating performance of the leased property. Our lease agreements may also include non-lease components, such as common area maintenance, which we combine with the lease component to account for both as a single lease component. We calculate the present value of future payments using a discount rate equal to our incremental borrowing rate.
The following table details the composition of lease expense for the 2019 first quarter:
 
 
Three Months Ended
($ in millions)
 
March 31, 2019
Operating lease cost 
 
$
45

Variable lease cost
 
27


10


The following tables present our future minimum lease payments and additional information about our lease obligations as of March 31, 2019:
($ in millions)
Operating Leases
 
Finance Leases
2019, remaining
$
132

 
$
10

2020
161

 
13

2021
142

 
13

2022
136

 
13

2023
107

 
13

Thereafter
665

 
165

Total minimum lease payments
$
1,343

 
$
227

Less: Amount representing interest
(323
)
 
(65
)
Present value of minimum lease payments 
$
1,020

 
$
162

As of March 31, 2019, we had entered into an agreement that we expect to account for as an operating lease with a 20-year term for our new headquarters office, which is not reflected in our Balance Sheets or in the table above as the lease has not commenced.
 
March 31, 2019
Weighted Average Remaining Lease Term (in years)
 
Operating leases
11

Finance leases
15

Weighted Average Discount Rate
 
Operating leases
5.0
%
Finance leases
4.4
%
The following table details the classification of lease liabilities in our Balance Sheets:
($ in millions)
Caption
 
March 31, 2019
Operating lease liabilities
 
 
 
Current
Accrued expenses and other
 
$
131

Noncurrent
Operating lease liabilities
 
889

 
 
 
$
1,020

Finance lease liabilities
 
 
 
Current
Current portion of long-term debt
 
$
6

Noncurrent
Long-term debt
 
156

 
 
 
$
162

The following table presents supplemental cash flow information for the 2019 first quarter:
 
 
Three Months Ended
($ in millions)
 
March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
Operating cash outflows for operating leases
 
$
44

Operating cash outflows for finance leases
 
2

Financing cash outflows for finance leases
 
1


11


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

 
$
600

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

 
349

Series M Notes, interest rate of 3.4%, face amount of $350, maturing October 15, 2020
(effective interest rate of 3.6%)
349

 
349

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

 
397

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

 
448

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%)
745

 
745

Series R Notes, interest rate of 3.1%, face amount of $750, maturing June 15, 2026
(effective interest rate of 3.3%)
744

 
743

Series T Notes, interest rate of 7.2%, face amount of $181, maturing December 1, 2019
(effective interest rate of 2.3%)
186

 
188

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%)
334

 
335

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

 
443

Series Y Notes, floating rate, face amount of $550, maturing December 1, 2020
(effective interest rate of 3.2% at March 31, 2019)
548

 
547

Series Z Notes, interest rate of 4.2%, face amount of $350, maturing December 1, 2023
(effective interest rate of 4.4%)
347

 
347

Series AA Notes, interest rate of 4.7%, face amount of $300, maturing December 1, 2028
(effective interest rate of 4.8%)
297

 
297

Series BB Notes, floating rate, face amount of $300, maturing March 8, 2021
(effective interest rate of 3.2% at March 31, 2019)
298

 

Series CC Notes, interest rate of 3.6%, face amount of $550, maturing April 15, 2024
(effective interest rate of 3.9%)
550

 

 
 
 
 
Commercial paper
2,911

 
2,245

Credit Facility

 

Finance lease obligations
162

 
163

Other
219

 
223

 
$
10,256

 
$
9,347

Less: Current portion of long-term debt
(231
)
 
(833
)
 
$
10,025

 
$
8,514

We paid cash for interest, net of amounts capitalized, of $70 million in the 2019 first quarter and $51 million in the 2018 first quarter.
We are party to a multicurrency revolving credit agreement (the “Credit Facility”) that provides for up to $4 billion 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

12


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 March 31, 2019.
In the 2019 first quarter, we issued $300 million aggregate principal amount of LIBOR plus 0.650 percent Series BB Notes due March 8, 2021 (the “Series BB Notes”) and $550 million aggregate principal amount of 3.600 percent Series CC Notes due April 15, 2024 (the “Series CC Notes”). We will pay interest on the Series BB Notes in March, June, September, and December of each year, commencing in June 2019, and will pay interest on the Series CC Notes in April and October of each year, commencing in October 2019. We received net proceeds of approximately $841 million from the offering of the Series BB Notes and Series CC Notes, after deducting the underwriting discount and estimated expenses, which were made available 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:
 
March 31, 2019
 
December 31, 2018
($ in millions)
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Senior, mezzanine, and other loans
$
124

 
$
120

 
$
125

 
$
116

Total noncurrent financial assets
$
124

 
$
120

 
$
125

 
$
116

 
 
 
 
 
 
 
 
Senior Notes
$
(6,778
)
 
$
(6,828
)
 
$
(5,928
)
 
$
(5,794
)
Commercial paper
(2,911
)
 
(2,911
)
 
(2,245
)
 
(2,245
)
Other long-term debt
(180
)
 
(183
)
 
(184
)
 
(182
)
Other noncurrent liabilities
(152
)
 
(152
)
 
(153
)
 
(153
)
Total noncurrent financial liabilities
$
(10,021
)
 
$
(10,074
)
 
$
(8,510
)
 
$
(8,374
)
See the “Fair Value Measurements” caption of Footnote 2. Summary of Significant Accounting Policies of our 2018 Form 10-K for more information on the input levels we use in determining fair value.

13


10.    ACCUMULATED OTHER COMPREHENSIVE LOSS AND SHAREHOLDERS’ EQUITY
The following tables detail the accumulated other comprehensive loss activity for the 2019 first quarter and 2018 first quarter:
($ in millions)
Foreign Currency Translation Adjustments
 
Derivative Instrument Adjustments
 
Pension and Postretirement Adjustments
 
Accumulated Other Comprehensive Loss
Balance at year-end 2018
$
(403
)
 
$
8

 
$
4

 
$
(391
)
Other comprehensive income (loss) before reclassifications (1)
33

 
(1
)
 

 
32

Reclassification of income

 
(1
)
 

 
(1
)
Net other comprehensive income (loss)
33

 
(2
)
 

 
31

Balance at March 31, 2019
$
(370
)
 
$
6

 
$
4

 
$
(360
)
($ 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 income (loss) before reclassifications (1)
152

 
(3
)
 

 

 
149

Reclassification of losses
9

 
4

 

 

 
13

Net other comprehensive income
161

 
1

 

 

 
162

Adoption of ASU 2016-01

 

 
(4
)
 

 
(4
)
Balance at March 31, 2018
$
138

 
$
(9
)
 
$

 
$
12

 
$
141

(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 $8 million for the 2019 first quarter and loss of $36 million for the 2018 first quarter.
The following table details the changes in common shares outstanding and shareholders’ equity for the 2019 first quarter and 2018 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
339.1

 
Balance at year-end 2018
$
2,225

 
$
5

 
$
5,814

 
$
8,982

 
$
(12,185
)
 
$
(391
)

 
Adoption of ASU 2016-02
1

 

 

 
1

 

 


 
Net income
375

 

 

 
375

 

 


 
Other comprehensive income
31

 

 

 

 

 
31


 
Dividends ($0.41 per share)
(139
)
 

 

 
(139
)
 

 

1.7

 
Share-based compensation plans
(62
)
 

 
(108
)
 

 
46

 

(6.7
)
 
Purchase of treasury stock
(828
)
 

 

 

 
(828
)
 

334.1

 
Balance at March 31, 2019
$
1,603

 
$
5

 
$
5,706

 
$
9,219

 
$
(12,967
)
 
$
(360
)

14


(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
420

 

 

 
420

 

 


 
Other comprehensive income
162

 

 

 

 

 
162


 
Dividends ($0.33 per share)
(118
)
 

 

 
(118
)
 

 

1.3

 
Share-based compensation plans
(48
)
 

 
(85
)
 

 
37

 

(5.6
)
 
Purchase of treasury stock
(782
)
 

 

 

 
(782
)
 

354.8

 
Balance at March 31, 2018
$
3,588

 
$
5

 
$
5,685

 
$
7,920

 
$
(10,163
)
 
$
141

11.    CONTRACTS WITH CUSTOMERS
Our current and noncurrent Loyalty Program liability increased by $52 million, to $5,513 million at March 31, 2019 from $5,461 million at December 31, 2018, primarily reflecting an increase in points earned, partially offset by deferred revenue of $543 million that we recognized in the 2019 first quarter.
12.    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. “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.
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.

15


Segment Revenues
The following tables present our revenues disaggregated by segment and major revenue stream for the three months ended March 31, 2019 and March 31, 2018:
 
Three Months Ended March 31, 2019
($ in millions)
North American Full-Service
 
North American Limited-Service
 
Asia Pacific
 
Other International
 
Total
Gross fee revenues
$
316

 
$
212

 
$
118

 
$
129

 
$
775

Contract investment amortization
(8
)
 
(3
)
 

 
(3
)
 
(14
)
Net fee revenues
308

 
209

 
118

 
126

 
761

Owned, leased, and other revenue
147

 
31

 
41

 
144

 
363

Cost reimbursement revenue
2,850

 
529

 
111

 
259

 
3,749

Total segment revenue
$
3,305

 
$
769

 
$
270

 
$
529

 
$
4,873

Unallocated corporate
 
 
 
 
 
 
 
 
139

Total revenue
 
 
 
 
 
 
 
 
$
5,012

 
Three Months Ended March 31, 2018
($ in millions)
North American Full-Service
 
North American Limited-Service
 
Asia Pacific
 
Other International
 
Total
Gross fee revenues
$
299

 
$
196

 
$
117

 
$
122

 
$
734

Contract investment amortization
(11
)
 
(3
)
 

 
(4
)
 
(18
)
Net fee revenues
288

 
193

 
117

 
118

 
716

Owned, leased, and other revenue
155

 
33

 
47

 
158

 
393

Cost reimbursement revenue
2,856

 
514

 
111

 
251

 
3,732

Total segment revenue
$
3,299

 
$
740

 
$
275

 
$
527

 
$
4,841

Unallocated corporate
 
 
 
 
 
 
 
 
168

Total revenue
 
 
 
 
 
 
 
 
$
5,009

Segment Profits
 
Three Months Ended
($ in millions)
March 31, 2019
 
March 31, 2018
North American Full-Service
$
289

 
$
277

North American Limited-Service
202

 
182

Asia Pacific
103

 
112

Other International
95

 
159

Unallocated corporate
(166
)
 
(128
)
Interest expense, net of interest income
(91
)
 
(70
)
Income taxes
(57
)
 
(112
)
Net Income
$
375

 
$
420


16


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 due to 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 hotel, residential, and timeshare properties in 131 countries and territories under 30 brands at the end of the 2019 first quarter. Under our asset-light business model, we typically manage or franchise hotels, rather than own them. We discuss our operations in the following reportable business segments: North American Full-Service, North American Limited-Service, and Asia Pacific. 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.
chart-b2c29ecd852e581ca9ca03.jpgchart-cdad8a56348258de990a03.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 management and franchise fees typically consist of a percentage of property-level revenue, or certain property-level revenue in the case of franchise fees, while incentive management fees typically consist of a percentage of net house profit after a specified owner return. In our Middle East and Africa and Asia Pacific regions, incentive management fees typically consist of a percentage of gross operating profit without adjustment for a specified owner return. Net house profit is calculated as gross operating profit (also referred to as “house profit,” which we discuss under the “Performance Measures” section below) less non-controllable expenses such as property insurance, real estate taxes, and capital spending reserves.

17


Our emphasis on long-term management contracts and franchising tends to provide more stable earnings in periods of economic softness, while adding new hotels to our system generates growth, typically with little or no investment by the Company. This strategy has driven substantial growth while minimizing financial leverage and risk in a cyclical industry. In addition, we believe minimizing our capital investments and adopting a strategy of recycling 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”). We provide our guests new and memorable experiences through our portfolio of brands, innovative technology, personalized guest recognition, and access to travel experiences through our Marriott Bonvoy Moments program. Our brands remain strong due to our skilled management teams, dedicated associates, superior guest service with an emphasis on guest and associate satisfaction, significant distribution, Loyalty Program, multichannel reservation systems, and desirable property amenities. We strive to effectively leverage our size and broad distribution. We believe that Marriott Bonvoy™ (our “Loyalty Program”) generates substantial repeat business that might otherwise go to competing hotels, and we strategically market to its large and growing member base to generate revenue.
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, technology offerings, and guest experiences. We address, through various means, hotels in our system that do not meet our 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.
Our profitability, as well as that of owners and franchisees, has benefited from our approach to property-level and above-property productivity. Managed properties in our system continue to maintain 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.
Data Security Incident
On November 30, 2018, we announced a data security incident involving unauthorized access to the Starwood reservations database (the “Data Security Incident”). We have completed the planned phase out of the operation of the Starwood reservations database, effective as of the end of 2018.
To date, we have not seen a meaningful impact on demand as a result of the Data Security Incident.
We are currently unable to estimate the range of total possible financial impact to the Company from the Data Security Incident. However, we do not believe this incident will impact our long-term financial health. Although we maintain insurance designed to limit our exposure to losses such as those related to the Data Security Incident, that insurance may not be sufficient or available to cover all of our expenses or other losses (including fines) related to the Data Security Incident. We expect that the cost of such insurance will increase significantly. We expect to incur significant expenses associated with the Data Security Incident in future periods, primarily related to legal proceedings and regulatory investigations (including fines), increased expenses and capital investments for IT and information security, customer care, and increased expenses for insurance, compliance activities, and to meet increased legal and regulatory requirements. See Footnote 6. Commitments and Contingencies for information related to expenses incurred in the 2019 first quarter, insurance recoveries, and legal proceedings and governmental investigations related to the Data Security Incident.
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.

18


Performance Measures
We believe Revenue per Available Room (“RevPAR”), which we calculate by dividing room sales for comparable properties by room nights available for the period, is a meaningful indicator of our performance because it measures the period-over-period change in room revenues for comparable properties. RevPAR may not be comparable to similarly titled measures, such as revenues, and should not be viewed as necessarily correlating with our fee revenue. We also believe occupancy and average daily rate (“ADR”), which are components of calculating RevPAR, are meaningful indicators of our performance. Occupancy, which we calculate by dividing occupied rooms by total rooms available, measures the utilization of a property’s available capacity. ADR, which we calculate by dividing property room revenue by total rooms sold, measures average room price and is useful in assessing pricing levels. 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 that were open and operating under one of our brands since the beginning of the last full calendar year (since January 1, 2018 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, 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 2019 first quarter results reflected a year-over-year increase in the number of properties in our system, favorable demand for our brands in many markets around the world, and generally favorable economic conditions. For the three months ended March 31, 2019, comparable worldwide systemwide RevPAR increased 1.1 percent to $110.16, ADR increased 1.5 percent on a constant dollar basis to $160.24, and occupancy decreased 0.3 percentage points to 68.7 percent, compared to the same period a year ago.
In North America, RevPAR increased in the 2019 first quarter, driven by higher group demand, partially due to the shift in Easter timing. RevPAR growth was partially constrained by new lodging supply in certain markets, the partial shutdown of the U.S. federal government in January 2019, and hurricane recovery demand in 2018. In our Asia Pacific segment in the 2019 first quarter, RevPAR growth was driven by India, Indonesia, Japan, and most markets in Greater China, but was partially constrained by lower demand in South Korea, Thailand, and Hainan Island. Our Europe region experienced higher demand in the 2019 first quarter, led by the U.K. and Spain, partially constrained by lower demand in France due to demonstrations in Paris. In our Middle East and Africa region, RevPAR declined due to ongoing geopolitical and economic instability and supply growth in the Middle East, partially offset by RevPAR growth in Africa. RevPAR grew across our Caribbean and Latin America region, driven by higher ADR, but was partially constrained by lower demand in Mexico, particularly in resort markets.
For our company-operated properties, we continue to focus on enhancing property-level house profit margins and making productivity improvements. In the 2019 first quarter, compared to the 2018 first quarter, North American company-operated house profit margins at comparable properties increased by 30 basis points, primarily reflecting revenue initiatives, procurement savings, and increased productivity. International company-operated house profit margins decreased by 30 basis points, primarily due to RevPAR declines in our Middle East and Africa region, partially offset by margin improvements in our Asia Pacific segment and Caribbean and Latin America region.

19


System Growth and Pipeline
During the 2019 first quarter, we added 114 properties (18,842 rooms) while 15 properties (2,693 rooms) exited our system, increasing our total properties to 7,003 (1,332,826 rooms). Approximately 42 percent of added rooms are located outside North America, and 16 percent of the room additions are conversions from competitor brands.
Since the end of the 2018 first quarter, we added 508 properties (84,192 rooms), while 93 properties (17,518 rooms) exited our system.
At the end of the 2019 first quarter, we had approximately 475,000 rooms in our development pipeline, which includes hotel rooms under construction, hotel rooms under signed contracts, and approximately 25,000 hotel rooms approved for development but not yet under signed contracts. Approximately half of the rooms in our development pipeline are outside North America.
Properties and Rooms
At March 31, 2019, we operated, franchised, and licensed the following properties and rooms:
 
Managed
 
Franchised/Licensed
 
Owned/Leased
 
Total
 
Properties
 
Rooms
 
Properties
 
Rooms
 
Properties
 
Rooms
 
Properties
 
Rooms
North American Full-Service
407

 
183,246

 
716

 
205,315

 
9

 
5,275

 
1,132

 
393,836

North American Limited-Service
411

 
64,889

 
3,536

 
410,974

 
20

 
3,006

 
3,967

 
478,869

Asia Pacific
621

 
181,552

 
103

 
27,982

 
2

 
410

 
726

 
209,944

Other International
596

 
129,882

 
461

 
89,588

 
32

 
8,410

 
1,089

 
227,880

Timeshare

 

 
89

 
22,297

 

 

 
89

 
22,297

Total
2,035

 
559,569

 
4,905

 
756,156

 
63

 
17,101

 
7,003

 
1,332,826


20


Segment and Brand Statistics
The following tables present RevPAR, occupancy, and ADR statistics for comparable properties. Systemwide statistics include data from our franchised properties, in addition to our company-operated properties.
Comparable Company-Operated Properties
 
Three Months Ended March 31, 2019 and Change vs. Three Months Ended March 31, 2018
 
RevPAR
 
Occupancy
 
Average Daily Rate
 
2019
 
vs. 2018
 
2019
 
vs. 2018
 
2019
 
vs. 2018
North American Luxury (1)
$
285.63

 
1.7
 %
 
75.9
%
 
(2.2
)%
pts.
 
$
376.42

 
4.8
 %
North American Upper Upscale (2)
$
140.91

 
1.1
 %
 
72.3
%
 
(0.4
)%
pts.
 
$
194.99

 
1.7
 %
North American Full-Service (3)
$
166.02

 
1.3
 %
 
72.9
%
 
(0.7
)%
pts.
 
$
227.76

 
2.3
 %
North American Limited-Service (4)
$
102.02

 
(1.5
)%
 
69.4
%
 
(2.1
)%
pts.
 
$
147.06

 
1.6
 %
North American - All (5)
$
145.70

 
0.7
 %
 
71.8
%
 
(1.2
)%
pts.
 
$
203.00

 
2.3
 %
Greater China
$
83.19

 
2.7
 %
 
64.8
%
 
1.6
 %
pts.
 
$
128.45

 
0.2
 %
Rest of Asia Pacific
$
130.59

 
4.2
 %
 
75.9
%
 
2.8
 %
pts.
 
$
172.08

 
0.4
 %
Asia Pacific
$
103.41

 
3.5
 %
 
69.5
%
 
2.1
 %
pts.
 
$
148.77

 
0.4
 %
Caribbean & Latin America
$
160.09

 
3.2
 %
 
66.9
%
 
0.1
 %
pts.
 
$
239.19

 
3.0
 %
Europe
$
113.76

 
1.2
 %
 
64.9
%
 
(0.1
)%
pts.
 
$
175.28

 
1.4
 %
Middle East & Africa
$
117.53

 
(4.1
)%
 
70.3
%
 
1.6
 %
pts.
 
$
167.16

 
(6.3
)%
International - All (6)
$
112.69

 
1.4
 %
 
68.4
%
 
1.4
 %
pts.
 
$
164.67

 
(0.6
)%
Worldwide (7)
$
129.19

 
1.0
 %
 
70.1
%
 
0.1
 %
pts.
 
$
184.28

 
0.9
 %
Comparable Systemwide Properties
 
Three Months Ended March 31, 2019 and Change vs. Three Months Ended March 31, 2018
 
RevPAR
 
Occupancy
 
Average Daily Rate
 
2019
 
vs. 2018
 
2019
 
vs. 2018
 
2019
 
vs. 2018
North American Luxury (1)
$
265.03

 
2.4
 %
 
75.2
%
 
(1.7
)%
pts.
 
$
352.26

 
4.8
 %
North American Upper Upscale (2)
$
125.83

 
1.7
 %
 
69.4
%
 
(0.5
)%
pts.
 
$
181.24

 
2.3
 %
North American Full-Service (3)
$
139.49

 
1.8
 %
 
70.0
%
 
(0.6
)%
pts.
 
$
199.27

 
2.6
 %
North American Limited-Service (4)
$
90.87

 
(0.3
)%
 
68.9
%
 
(1.0
)%
pts.
 
$
131.87

 
1.1
 %
North American - All (5)
$
111.69

 
0.8
 %
 
69.4
%
 
(0.8
)%
pts.
 
$
161.00

 
2.0
 %
Greater China
$
82.43

 
2.9
 %
 
64.3
%
 
1.8
 %
pts.
 
$
128.17

 
 %
Rest of Asia Pacific
$
126.88

 
3.6
 %
 
74.6
%
 
2.0
 %
pts.
 
$
170.09

 
0.8
 %
Asia Pacific
$
104.12

 
3.3
 %
 
69.3
%
 
1.9
 %
pts.
 
$
150.18

 
0.5
 %
Caribbean & Latin America
$
122.49

 
3.6
 %
 
65.2
%
 
(0.1
)%
pts.
 
$
187.89

 
3.8
 %
Europe
$
100.24

 
2.2
 %
 
63.5
%
 
0.2
 %
pts.
 
$
157.73

 
1.9
 %
Middle East & Africa
$
111.78

 
(3.7
)%
 
69.4
%
 
1.6
 %
pts.
 
$
160.99

 
(5.9
)%
International - All (6)
$
106.24

 
1.9
 %
 
67.1
%
 
1.1
 %
pts.
 
$
158.23

 
0.2
 %
Worldwide (7)
$
110.16

 
1.1
 %
 
68.7
%
 
(0.3
)%
pts.
 
$
160.24

 
1.5
 %
(1) 
Includes JW Marriott, The Ritz-Carlton, W Hotels, The Luxury Collection, St. Regis, and EDITION.
(2) 
Includes Marriott Hotels, Sheraton, Westin, Renaissance, Autograph Collection, Delta Hotels, Gaylord Hotels, and Le Méridien. Systemwide also includes Tribute Portfolio.
(3) 
Includes North American Luxury and North American Upper Upscale.
(4) 
Includes Courtyard, Residence Inn, Fairfield by Marriott, SpringHill Suites, TownePlace Suites, Four Points, Aloft, Element, and AC Hotels by Marriott. Systemwide also includes Moxy.
(5) 
Includes North American Full-Service and North American Limited-Service.  
(6) 
Includes Asia Pacific, Caribbean & Latin America, Europe, and Middle East & Africa.
(7) 
Includes North American - All and International - All.  

21


CONSOLIDATED RESULTS
The following discussion presents an analysis of our consolidated results of operations for the 2019 first quarter compared to the 2018 first quarter.
Fee Revenues
 
Three Months Ended
($ in millions)
March 31, 2019
 
March 31, 2018
 
Change 2019 vs. 2018
Base management fees
$
282

 
$
273

 
$
9

 
3
 %
Franchise fees
450

 
417

 
33

 
8
 %
Incentive management fees
163

 
155

 
8

 
5
 %
Gross fee revenues
895

 
845

 
50

 
6
 %
Contract investment amortization
(14
)
 
(18
)
 
(4
)
 
(22
)%
Net fee revenues
$
881

 
$
827

 
$
54

 
7
 %
First Quarter
The $9 million increase in base management fees primarily reflected $7 million from unit growth.
The $33 million increase in franchise fees primarily reflected $19 million from unit growth, $4 million of higher branding fees, and $4 million from AC Hotels by Marriott properties whose fees were previously presented in the “Equity in earnings” caption of our Income Statements.
The $8 million increase in incentive management fees primarily reflected higher profits at North American Full-Service managed hotels.
Owned, Leased, and Other
 
Three Months Ended
($ in millions)
March 31, 2019
 
March 31, 2018
 
Change 2019 vs. 2018
Owned, leased, and other revenue
$
375

 
$
406

 
$
(31
)
 
(8
)%
Owned, leased, and other - direct expenses
325

 
336

 
(11
)
 
(3
)%
 
$
50

 
$
70

 
$
(20
)
 
(29
)%
First Quarter
Owned, leased, and other revenue, net of direct expenses decreased by $20 million, primarily due to $21 million of lower termination fees and $6 million of lower owned and leased profits attributable to properties under renovation, partially offset by $9 million of profits attributable to the Sheraton Grand Phoenix, which we purchased in June 2018.
Cost Reimbursements
 
Three Months Ended
($ in millions)
March 31, 2019
 
March 31, 2018
 
Change 2019 vs. 2018
Cost reimbursement revenue
$
3,756

 
$
3,776

 
$
(20
)
 
(1
)%
Reimbursed expenses
3,892

 
3,808

 
84

 
2
 %
 
$
(136
)
 
$
(32
)
 
$
(104
)
 
325
 %
Cost reimbursement revenue, net of reimbursed expenses, varies due to temporary timing differences between the costs we incur for centralized programs and services and the related reimbursements we receive from hotel owners and franchisees. Over the long term, our centralized programs and services are not designed to impact our economics, either positively or negatively.

22


First Quarter
Cost reimbursement revenue, net of reimbursed expenses, decreased by $104 million, primarily due to lower Loyalty Program revenues net of expenses.
Other Operating Expenses
 
Three Months Ended
($ in millions)
March 31, 2019
 
March 31, 2018
 
Change 2019 vs. 2018
Depreciation, amortization, and other
$
54

 
$
54

 
$

 
 %
General, administrative, and other
222

 
247

 
(25
)
 
(10
)%
Merger-related costs and charges
9

 
34

 
(25
)
 
(74
)%
First Quarter
General, administrative, and other expenses decreased by $25 million, primarily due to $35 million expensed in 2018 for the company-funded supplemental retirement savings plan contributions and $7 million of lower foreign exchange losses, partially offset by $5 million of higher administrative costs and $5 million of higher bad debt expenses.
Merger-related costs and charges decreased by $25 million, primarily due to lower integration costs.
Non-Operating Income (Expense)
 
Three Months Ended
($ in millions)
March 31, 2019
 
March 31, 2018
 
Change 2019 vs. 2018
Gains and other income, net
$
5

 
$
59

 
$
(54
)
 
(92
)%
Interest expense
(97
)
 
(75
)
 
22

 
29
 %
Interest income
6

 
5

 
1

 
20
 %
Equity in earnings
8

 
13

 
(5
)
 
(38
)%
First Quarter
Gains and other income, net decreased by $54 million, primarily due to the 2018 gains on our property sales ($53 million).
Interest expense increased by $22 million, primarily due to higher interest on Senior Note issuances, net of maturities ($15 million) and higher commercial paper interest rates ($6 million).
Income Taxes
 
Three Months Ended
($ in millions)
March 31, 2019
 
March 31, 2018
 
Change 2019 vs. 2018
Provision for income taxes
$
(57
)
 
$
(112
)
 
$
(55
)
 
(49
)%
First Quarter
Provision for income taxes decreased by $55 million, primarily due to the prior year tax expense incurred for uncertain tax positions relating to legacy-Starwood operations ($30 million), the prior year state income tax expense due to a change in our position regarding the future remittance of accumulated earnings of non-U.S. subsidiaries ($27 million), prior year tax expense on dispositions ($14 million), lower operating income ($9 million), and increased earnings in jurisdictions with lower tax rates ($7 million). The decrease was partially offset by the prior year release of tax reserves due to the completion of certain examinations ($34 million).

23


BUSINESS SEGMENTS
The following discussion presents an analysis of the operating results of our reportable business segments: North American Full-Service, North American Limited-Service, and Asia Pacific, for the 2019 first quarter compared to the 2018 first quarter. See Footnote 12. Business Segments for other information about each segment, including revenues and a reconciliation of segment profits to net income.
North American Full-Service
Since the end of the 2018 first quarter, across our North American Full-Service segment, we added 42 properties (10,610 rooms), and 16 properties (5,357 rooms) left our system.
 
Three Months Ended
($ in millions)
March 31, 2019
 
March 31, 2018
 
Change 2019 vs. 2018
Segment revenues
$
3,305

 
$
3,299

 
$
6

 
%
Segment profits
$
289

 
$
277

 
$
12

 
4
%
First Quarter
North American Full-Service segment profits increased by $12 million, primarily due to the following:
$11 million of higher base management and franchise fees, primarily reflecting $7 million from unit growth and $5 million from RevPAR growth;
$6 million of higher incentive management fees, primarily driven by higher profits at managed hotels;
$6 million of lower owned, leased, and other revenue, net of direct expenses, primarily reflecting $16 million of lower termination fees, partially offset by $9 million of profits attributable to the Sheraton Grand Phoenix, which we purchased in June 2018; and
$3 million of higher cost reimbursement revenue, net of reimbursed expenses.
North American Limited-Service
Since the end of the 2018 first quarter, across our North American Limited-Service segment, we added 287 properties (34,908 rooms), and 41 properties (3,580 rooms) left our system.
 
Three Months Ended
($ in millions)
March 31, 2019
 
March 31, 2018
 
Change 2019 vs. 2018
Segment revenues
$
769

 
$
740

 
$
29

 
4
%
Segment profits
$
202

 
$
182

 
$
20

 
11
%
First Quarter
North American Limited-Service segment profits increased by $20 million, primarily due to the following:
$14 million of higher base management and franchise fees, primarily reflecting $12 million from unit growth; and
$6 million of higher cost reimbursement revenue, net of reimbursed expenses.
Asia Pacific
Since the end of the 2018 first quarter, across our Asia Pacific segment, we added 88 properties (21,177 rooms), and 11 properties (3,448 rooms) left our system.

24


 
Three Months Ended
($ in millions)
March 31, 2019
 
March 31, 2018
 
Change 2019 vs. 2018
Segment revenues
$
270

 
$
275

 
$
(5
)
 
(2
)%
Segment profits
$
103

 
$
112

 
$
(9
)
 
(8
)%
First Quarter
Asia Pacific segment profits decreased by $9 million, primarily due to the following:
$4 million of lower cost reimbursement revenue, net of reimbursed expenses;
$3 million of higher general, administrative, and other expenses, primarily due to higher bad debt expenses; and
$1 million of higher base management and franchise fees, due to $5 million from RevPAR and unit growth, partially offset by $3 million from net unfavorable exchange rates.
SHARE-BASED COMPENSATION
See Footnote 4. Share-Based Compensation for more information.
NEW ACCOUNTING STANDARDS
See Footnote 1. Basis of Presentation for information on our adoption of new accounting standards.
LIQUIDITY AND CAPITAL RESOURCES
Cash Requirements and Our Credit Facility
We are party to a multicurrency revolving credit agreement (the “Credit Facility”) that provides for up to $4 billion 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.
The Credit Facility contains certain covenants, including a single financial covenant that limits our maximum leverage (consisting of the ratio of Adjusted Total Debt to EBITDA, each as defined in the Credit Facility) to not more than 4 to 1. The Credit Facility defines EBITDA as net income less cost reimbursement revenue, plus reimbursed expenses, plus the sum of interest expense, income taxes, depreciation, amortization, and non-recurring non-cash charges.
Our outstanding public debt does not contain a corresponding financial covenant or a requirement that we maintain certain financial ratios. We currently satisfy the covenants in our Credit Facility and public debt instruments, including the leverage covenant under the Credit Facility, and do not expect the covenants will restrict our ability to meet our anticipated borrowing and guarantee levels or increase those levels should we decide to do so in the future.
We believe the Credit Facility and our access to capital markets, together with cash we expect to generate from operations, remain adequate to meet our short-term and long-term liquidity requirements, finance our long-term growth plans, meet debt service, and fulfill other cash requirements.
We issue commercial paper in the U.S. We do not have purchase commitments from buyers for our commercial paper; therefore, our ability to issue commercial paper is subject to market demand. We reserve unused capacity under our Credit Facility to repay outstanding commercial paper borrowings if the commercial paper market is not

25


available to us for any reason when outstanding borrowings mature. We do not expect that fluctuations in the demand for commercial paper will affect our liquidity, given our borrowing capacity under the Credit Facility.
At March 31, 2019, our available borrowing capacity amounted to $1,340 million and reflected borrowing capacity of $1,082 million under our Credit Facility and our cash balance of $258 million. We calculated that borrowing capacity by taking $4 billion of effective aggregate bank commitments under our Credit Facility and subtracting $2,918 million of outstanding commercial paper (there being no outstanding letters of credit under our Credit Facility).
We monitor the status of the capital markets and regularly evaluate the effect that changes in capital market conditions may have on our ability to execute our announced growth plans and fund our liquidity needs. We expect to continue meeting part of our financing and liquidity needs primarily through commercial paper borrowings, issuances of Senior Notes, and access to long-term committed credit facilities. If conditions in the lodging industry deteriorate, or if disruptions in the capital markets take place as they did in the immediate aftermath of both the 2008 worldwide financial crisis and the events of September 11, 2001, we may be unable to place some or all of our commercial paper on a temporary or extended basis and may have to rely more on borrowings under the Credit Facility, which we believe will be adequate to fund our liquidity needs, including repayment of debt obligations, but which may carry a higher cost than commercial paper. Since we continue to have ample flexibility under the Credit Facility’s covenants, we expect that undrawn bank commitments under the Credit Facility will remain available to us even if business conditions were to deteriorate markedly.
Our financial objectives include diversifying our financing sources, optimizing the mix and maturity of our long-term debt, and reducing our working capital. At the end of the 2019 first quarter, our long-term debt had a weighted average interest rate of 3.3 percent and a weighted average maturity of approximately 4.4 years. The ratio of fixed-rate long-term debt to total long-term debt was 0.6 to 1.0 at the end of the 2019 first quarter.
Cash, cash equivalents, and restricted cash totaled $300 million at March 31, 2019, a decrease of $60 million from year-end 2018, primarily reflecting purchase of treasury stock ($797 million), dividend payments ($139 million), financing outflows for employee share-based compensation withholding taxes ($95 million), and capital expenditures ($66 million). The following cash inflows partially offset these cash outflows: higher commercial paper borrowings ($665 million), long-term debt issuances, net of repayments ($238 million), and net cash provided by operating activities ($151 million). Net cash provided by operating activities in the 2019 first quarter includes a net cash outflow from working capital changes of $401 million, primarily due to a net outflow for accrued payroll and benefits of $297 million, driven by the timing of payment of the company’s match of prior year retirement savings plan contributions and the payment of the 2018 supplemental retirement savings plan contributions.
Our ratio of current assets to current liabilities was 0.5 to 1.0 at the end of the 2019 first quarter. We minimize working capital through cash management, strict credit-granting policies, and aggressive collection efforts. We also have significant borrowing capacity under our Credit Facility should we need additional working capital.
We made capital expenditures of $66 million in the 2019 first quarter and $64 million in the 2018 first quarter, an increase of $2 million. We expect spending on capital expenditures and other investments will total approximately $600 million to $800 million for the 2019 full year, including contract acquisition costs, equity and other investments, loan advances, and various capital expenditures (including approximately $225 million for maintenance capital spending).
Over time, we have sold hotels, both completed and under development, subject to long-term management agreements. The ability of third-party purchasers to raise the debt and equity capital necessary to acquire such properties depends in part on the perceived risks in the lodging industry and other constraints inherent in the capital markets. We monitor the status of the capital markets and regularly evaluate the potential impact of changes in capital market conditions on our business operations. In the Starwood Combination, we acquired various hotels and joint venture interests in various hotels, many of which we have sold or are seeking to sell, and in 2018, we acquired the Sheraton Grand Phoenix, which we expect to renovate and sell subject to a long-term management agreement. We also expect to continue making selective and opportunistic investments to add units to our lodging business, which may include property acquisitions, new construction, loans, guarantees, and noncontrolling equity

26


investments. Over time, we seek to minimize capital invested in our business through asset sales subject to long-term management or franchise agreements.
Share Repurchases
We purchased 6.7 million shares of our common stock during the 2019 first quarter at an average price of $124.16 per share. As of March 31, 2019, 29.0 million shares remained available for repurchase under Board approved authorizations. For additional information, see “Issuer Purchases of Equity Securities” in Part II, Item 2.
Dividends
On February 15, 2019, our Board of Directors declared a quarterly cash dividend of $0.41 per share, which we paid March 29, 2019 to shareholders of record on March 1, 2019.
Contractual Obligations and Off-Balance Sheet Arrangements
As of the end of the 2019 first quarter, there have been no significant changes to our “Contractual Obligations” table, “Other Commitments” table, or “Letters of Credit” paragraph in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of our 2018 Form 10-K, other than those described below.
Total debt increased $909 million to $10,256 million at March 31, 2019 from $9,347 million at December 31, 2018, reflecting the issuance of our Series BB and CC Notes and higher commercial paper borrowings, partially offset by the maturity of our Series K Notes. See Footnote 8. Long-Term Debt for more information on our total debt at March 31, 2019.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures. We have discussed those policies and estimates that we believe are critical and require the use of complex judgment in their application in our 2018 Form 10-K. Since the date of our 2018 Form 10-K, we have made no material changes to our critical accounting policies or the methodologies or assumptions that we apply under them.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk has not materially changed since December 31, 2018.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
As of the end of the period covered by this quarterly report, we evaluated, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)). Management necessarily applied its judgment in assessing the costs and benefits of those controls and procedures, which by their nature, can provide only reasonable assurance about management’s control objectives. You should note that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Based upon this evaluation, our Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were not effective because of the previously reported material weakness in internal control over financial reporting, which we describe in Part II, Item 9A of our 2018 Form 10-K.
Remediation of Material Weakness
We continue to implement our remediation plan for the previously reported material weakness in internal control over financial reporting, described in Part II, Item 9A of our 2018 Form 10-K, which includes steps to

27


increase dedicated personnel, improve reporting processes, and enhance related supporting technology. We are committed to maintaining a strong internal control environment and implementing measures designed to help ensure that control deficiencies contributing to the material weakness are remediated as soon as possible. We will consider the material weakness remediated after the applicable controls operate for a sufficient period of time, and management has concluded, through testing, that the controls are operating effectively.
Changes in Internal Control Over Financial Reporting
On January 1, 2019, we adopted ASU 2016-02. Upon adoption, we implemented changes in internal control over financial reporting related to the development of new accounting policies, lease recognition processes, review control procedures, and financial statement disclosures.
Other than the changes related to our remediation efforts and ASU 2016-02 described above, we made no changes in internal control over financial reporting during the 2019 first quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

28


PART II – OTHER INFORMATION
Item 1. Legal Proceedings
See the information under the “Litigation, Claims, and Government Investigations” caption in Footnote 6. Commitments and Contingencies, which we incorporate here by reference.
From time to time, we are also subject to other legal proceedings and claims in the ordinary course of business, including adjustments proposed during governmental examinations of the various tax returns we file. While management presently believes that the ultimate outcome of these proceedings, individually and in aggregate, will not materially harm our financial position, cash flows, or overall trends in results of operations, legal proceedings are inherently uncertain, and unfavorable rulings could, individually or in aggregate, have a material adverse effect on our business, financial condition, or operating results.
Item 1A. Risk Factors
Risks and Uncertainties
We are subject to various risks that could have a negative effect on us or on our financial condition. You should understand that these risks could cause results to differ materially from those we express in forward-looking statements contained in this report or in other Company communications. Because there is no way to determine in advance whether, or to what extent, any present uncertainty will ultimately impact our business, you should give equal weight to each of the following:
Our industry is highly competitive, which may impact our ability to compete successfully for guests with other hotel properties and home sharing or rental services. We operate in markets that contain many competitors. Each of our hotel brands competes with major hotel chains, regional hotel chains, independent hotels, and home sharing and rental services across national and international venues. Our ability to remain competitive and attract and retain business and leisure travelers depends on our success in distinguishing the quality, value, and efficiency of our lodging products and services, including our Loyalty Program, direct booking channels, and consumer-facing technology platforms and services, from those offered by others. If we cannot compete successfully in these areas, our operating margins could contract, our market share could decrease, and our earnings could decline. Further, new lodging supply in individual markets could have a negative impact on the hotel industry and hamper our ability to increase room rates or occupancy in those markets.
Economic downturns could impact our financial results and growth. Weak economic conditions in one or more parts of the world, changes in oil prices and currency values, disruptions in national, regional, or global economies generally and the travel business in particular that might result from changing governmental policies in areas such as trade, travel, immigration, healthcare, and related issues, political instability in some areas, and the uncertainty over how long any of these conditions could continue, could have a negative impact on the lodging industry. Because of such uncertainty, we continue to experience weakened demand for our hotel rooms in some markets. Our future financial results and growth could be further harmed or constrained if economic or these other conditions worsen. U.S. government travel and travel associated with U.S. government operations are also a significant part of our business, and this aspect of our business has suffered and could in the future suffer due to U.S. federal spending cuts, or government hiring restrictions and any further limitations that may result from presidential or congressional action or inaction, including for example, a U.S. federal government shutdown, such as the partial shutdown that occurred in December 2018 and January 2019.
Risks Relating to Our Integration of Starwood
The continued diversion of resources and management’s attention to the integration of Starwood could still adversely affect our day-to-day business. While the integration of Starwood is largely complete, integration-related matters still place a significant burden on our management and internal resources and may continue to do so for some time, which could have adverse effects on our business or financial results.

29


Some of the anticipated benefits of combining Starwood and Marriott may still not be realized. We decided to acquire Starwood with the expectation that the Starwood Combination would result in various benefits. Although we have already achieved substantial benefits, others remain subject to several uncertainties, including whether we can achieve certain revenue synergies.
Integration could also involve unexpected costs. Disruptions of each legacy company’s ongoing businesses, processes, and systems could adversely affect the combined company. We have encountered challenges in harmonizing our different reservations and other systems, our Loyalty Program, and other business practices, and we may encounter additional or increased challenges related to integration. Because of these or other factors, we cannot assure you when or that we will be able to fully realize additional benefits from the Starwood Combination in the form of enhancing revenues or achieving other operating efficiencies, cost savings, or benefits, or that challenges encountered with our harmonization efforts will not have adverse effects on our business or reputation.
Program changes associated with our integration efforts could have a negative effect on guest preference or behavior. Our integration efforts involved significant changes to certain of our guest programs and services, including our Loyalty Program, co-branded credit card arrangements, and consumer-facing technology platforms and services. While we believe such changes enhance these programs and services for our guests and will drive guest preference and satisfaction, these changes remain subject to various uncertainties, including whether the changes could be negatively perceived by certain guests and consumers, could affect guest preference or could alter reservation, spending or other guest or consumer behavior, all of which could adversely affect our market share, reputation, business, financial condition, or results of operations.
Risks Relating to Our Business
Operational Risks
Premature termination of our management or franchise agreements could hurt our financial performance. Our hotel management and franchise agreements may be subject to premature termination in certain circumstances, such as the bankruptcy of a hotel owner or franchisee, or a failure under some agreements to meet specified financial or performance criteria that are subject to the risks described in this section, which we fail or elect not to cure. Some courts have also applied agency law principles and related fiduciary standards to managers of third-party hotel properties, including us (or have interpreted hotel management agreements to be “personal services contracts”). Property owners may assert the right to terminate management agreements even where the agreements provide otherwise, and some courts have upheld such assertions about our management agreements and may do so in the future. If terminations occur for these or other reasons, we may need to enforce our right to damages for breach of contract and related claims, which may cause us to incur significant legal fees and expenses. Any damages we ultimately collect could be less than the projected future value of the fees and other amounts we would have otherwise collected under the management or franchise agreement. A significant loss of agreements due to premature terminations could hurt our financial performance or our ability to grow our business.
Our lodging operations are subject to global, national, and regional conditions. Because we conduct our business on a global platform, changes in global and regional economies and governmental policies impact our activities. In recent years, decreases in travel resulting from weak economic conditions and the heightened travel security measures resulting from the threat of further terrorism have hurt our business. Our future performance could be similarly affected by the economic and political environment in each of our operating regions, the resulting unknown pace of both business and leisure travel, and any future incidents or changes in those regions.
The growing significance of our operations outside of the U.S. makes us increasingly susceptible to the risks of doing business internationally, which could lower our revenues, increase our costs, reduce our profits, disrupt our business, or damage our reputation. More than a third of the rooms in our system are located outside of the U.S. and its territories. We expect that our international operations, and resulting revenues, will continue to grow. This increasingly exposes us to the challenges and risks of doing business outside the U.S., many of which are outside of our control, and which could reduce our revenues or profits, increase our costs, result in significant liabilities or sanctions, disrupt our business, or damage our reputation. These challenges include: (1) compliance with complex and changing laws, regulations and government policies that may impact our operations, such as foreign ownership

30


restrictions, import and export controls, and trade restrictions; (2) compliance with U.S. and foreign laws that affect the activities of companies abroad, such as competition laws, cybersecurity and privacy laws, currency regulations, and other laws affecting dealings with certain nations; (3) the difficulties involved in managing an organization doing business in many different countries; (4) uncertainties as to the enforceability of contract and intellectual property rights under local laws; (5) rapid changes in government policy, political or civil unrest, acts of terrorism, or the threat of international boycotts or U.S. anti-boycott legislation; and (6) currency exchange rate fluctuations, which may impact the results and cash flows of our international operations.
Any failure by our international operations to comply with anti-corruption laws or trade sanctions could increase our costs, reduce our profits, limit our growth, harm our reputation, or subject us to broader liability. We are subject to restrictions imposed by the U.S. Foreign Corrupt Practices Act and anti-corruption laws and regulations of other countries applicable to our operations, such as the UK Bribery Act. Anti-corruption laws and regulations generally prohibit companies and their intermediaries from making certain payments to government officials or other persons in order to influence official acts or decisions or to obtain or retain business. These laws also require us to maintain adequate internal controls and accurate books and records. We have properties in many parts of the world where corruption is common, and our compliance with anti-corruption laws may potentially conflict with local customs and practices. The compliance programs, internal controls and policies we maintain and enforce to promote compliance with applicable anti-bribery and anti-corruption laws may not prevent our associates, contractors or agents from acting in ways prohibited by these laws and regulations. We are also subject to trade sanctions administered by the U.S. Office of Foreign Assets Control and the U.S. Department of Commerce, and authorities in other countries where we do business. Our compliance programs and internal controls also may not prevent conduct that is prohibited under these rules. The U.S. or other countries may impose additional sanctions at any time against any country in which or with whom we do business. Depending on the nature of the sanctions imposed, our operations in the relevant country could be restricted or otherwise adversely affected. Any violations of anti-corruption laws and regulations or trade sanctions could result in significant civil and criminal penalties, reduce our profits, disrupt or have a material adverse effect on our business, damage our reputation, or result in lawsuits being brought against the Company or its officers or directors. In addition, the operation of these laws or an imposition of further restrictions in these areas could increase our cost of operations, reduce our profits or cause us to forgo development opportunities, or cease operations in certain countries, that would otherwise support growth.
Exchange rate fluctuations and foreign exchange hedging arrangements could result in significant foreign currency gains and losses and affect our business results. We earn revenues and incur expenses in foreign currencies as part of our operations outside of the U.S. Accordingly, fluctuations in currency exchange rates may significantly increase the amount of U.S. dollars required for foreign currency expenses or significantly decrease the U.S. dollars we receive from foreign currency revenues. We are also exposed to currency translation risk because the results of our non-U.S. business are generally reported in local currency, which we then translate to U.S. dollars for inclusion in our Financial Statements. As a result, changes between the foreign exchange rates and the U.S. dollar affect the amounts we record for our foreign assets, liabilities, revenues and expenses, and could have a negative effect on our financial results. We expect that our exposure to foreign currency exchange rate fluctuations will grow as the relative contribution of our non-U.S. operations increases. We enter into foreign exchange hedging agreements with financial institutions to reduce exposures to some of the principal currencies in which we receive management and franchise fees, but these efforts may not be successful. These hedging agreements also do not cover all currencies in which we do business, do not eliminate foreign currency risk entirely for the currencies that they do cover, and involve costs and risks of their own in the form of transaction costs, credit requirements and counterparty risk.
Some of our management agreements and related contracts require us to make payments to owners if the hotels do not achieve specified levels of operating profit. Some of our contracts with hotel owners require that we fund shortfalls if the hotels do not attain specified levels of operating profit. We may not be able to recover any fundings of such performance guarantees, which could lower our profits and reduce our cash flows.
Our new programs and new branded products may not be successful. We cannot assure you that new or newly acquired brands, such as those we acquired as a result of the Starwood Combination, our investments in PlacePass

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and the joint venture with Alibaba, our Homes & Villas by Marriott International home rental offering, or any other new programs or products we may launch in the future, will be accepted by hotel owners, potential franchisees, or the traveling public or other guests. We also cannot be certain that we will recover the costs we incurred in developing or acquiring the brands or any new programs or products, or that those brands, programs, or products will be successful. In addition, some of our new or newly acquired brands involve or may involve cooperation and/or consultation with one or more third parties, including some shared control over product design and development, sales and marketing, and brand standards. Disagreements with these third parties could slow the development of these brands and/or impair our ability to take actions we believe to be advisable for the success and profitability of such brands. Our home rental offering relies on third-party property management companies to provide sufficient inventory that meets our criteria and to service guests in accordance with our standards, and challenges or disagreements related to these arrangements could impact the growth and success of this offering.
Risks relating to natural or man-made disasters, contagious disease, terrorist activity, and war could reduce the demand for lodging, which may adversely affect our revenues. So called “Acts of God,” such as hurricanes, earthquakes, tsunamis, floods, volcanic activity, wildfires, and other natural disasters, as well as man-made disasters and the potential spread of contagious diseases in locations where we own, manage, or franchise significant properties and areas of the world from which we draw a large number of guests, have in the past caused and could in the future cause a decline in business or leisure travel and reduce demand for lodging to an extent and for durations that we are not able to predict. Actual or threatened war, terrorist activity, political unrest, or civil strife, and other geopolitical uncertainty could have a similar effect. Any one or more of these events may reduce the overall demand for lodging or limit the prices that we can obtain, both of which could adversely affect our profits. If a terrorist event were to involve one or more of our branded properties, demand for our properties in particular could suffer, which could further hurt our revenues and profits.
Disagreements with owners of hotels that we manage or franchise may result in litigation or delay implementation of product or service initiatives. Consistent with our focus on management and franchising, we own very few of our lodging properties. The nature of our responsibilities under our management agreements to manage each hotel and enforce the standards required for our brands under both management and franchise agreements may be subject to interpretation and will from time to time give rise to disagreements, which may include disagreements over the need for or payment for new product, service or systems initiatives, the timing and amount of capital investments, and reimbursement for certain system initiatives and costs. Such disagreements may be more likely when hotel returns are weaker. We seek to resolve any disagreements to develop and maintain positive relations with current and potential hotel owners, franchisees, and joint venture partners, but we cannot always do so. Failure to resolve such disagreements has resulted in litigation, and could do so in the future. If any such litigation results in an adverse judgment, settlement, or court order, we could suffer significant losses, our profits could be reduced, or our future ability to operate our business could be constrained.
Our business depends on the quality and reputation of our company and our brands, and any deterioration could adversely impact our market share, reputation, business, financial condition, or results of operations. Certain events, including those that may be beyond our control, could affect the reputation of one or more of our properties or more generally impact the reputation of our brands. Many other factors also can influence our reputation and the value of our brands, including service, food quality and safety, availability and management of scarce natural resources, supply chain management, diversity, human rights, and support for local communities. Reputational value is also based on perceptions, and broad access to social media makes it easy for anyone to provide public feedback that can influence perceptions of us, our brands and our hotels, and it may be difficult to control or effectively manage negative publicity, regardless of whether it is accurate. While reputations may take decades to build, negative incidents can quickly erode trust and confidence, particularly if they result in adverse mainstream and social media publicity, governmental investigations or penalties, or litigation. Negative incidents could lead to tangible adverse effects on our business, including lost sales, boycotts, reduced enrollment and/or participation in our Loyalty Program, disruption of access to our websites and reservation systems, loss of development opportunities, or associate retention and recruiting difficulties. Any decline in the reputation or perceived quality of our brands or corporate image could affect our market share, reputation, business, financial condition, or results of operations. The Data Security Incident could have a negative impact on our reputation, our corporate image and our relationship with our guests.

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If our brands, goodwill or other intangible assets become impaired, we may be required to record significant non-cash charges to earnings. As of March 31, 2019, we had $17.7 billion of goodwill and other intangible assets. We review goodwill and indefinite-lived intangible assets for impairment annually or whenever events or circumstances indicate impairment may have occurred. Estimated fair values of our bra