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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________ 
FORM 10-Q
_______________________________________ 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File No. 1-13881
_________________________________________________ 
milogoa04.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
 
20817
(Address of principal executive offices)
 
(Zip Code)
(301) 380-3000
(Registrant’s telephone number, including area code) 
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Trading Symbol(s)
 
Name of Each Exchange on Which Registered
Class A Common Stock, $0.01 par value
 
MAR
 
Nasdaq Global Select Market
Class A Common Stock, $0.01 par value
 
MAR
 
Chicago Stock Exchange
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
 
Accelerated filer
 
¨
Non-accelerated filer
 
¨
 
Smaller Reporting Company
 
 
 
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 326,937,219 shares of Class A Common Stock, par value $0.01 per share, outstanding at October 25, 2019.


Table of Contents

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.
 
 
 
 



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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements

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

 
Three Months Ended
 
Nine Months Ended
 
September 30, 2019

September 30, 2018
 
September 30, 2019
 
September 30, 2018
REVENUES
 
 
 
 
 
 
 
Base management fees
$
291

 
$
279

 
$
882

 
$
852

Franchise fees
530

 
502

 
1,505

 
1,394

Incentive management fees
134

 
151

 
462

 
482

Gross fee revenues
955

 
932

 
2,849

 
2,728

Contract investment amortization
(16
)
 
(13
)
 
(45
)
 
(44
)
Net fee revenues
939

 
919

 
2,804

 
2,684

Owned, leased, and other revenue
393

 
397

 
1,186

 
1,226

Cost reimbursement revenue
3,952

 
3,735

 
11,611

 
11,559

 
5,284

 
5,051

 
15,601

 
15,469

OPERATING COSTS AND EXPENSES
 
 
 
 
 
 
 
Owned, leased, and other-direct
326

 
315

 
982

 
985

Depreciation, amortization, and other
52

 
52

 
162

 
164

General, administrative, and other
220

 
221

 
671

 
685

Merger-related costs and charges
9

 
12

 
191

 
64

Reimbursed expenses
4,070

 
3,855

 
12,069

 
11,627

 
4,677

 
4,455

 
14,075

 
13,525

OPERATING INCOME
607

 
596

 
1,526

 
1,944

Gains and other income, net
10

 
18

 
16

 
191

Interest expense
(100
)
 
(86
)
 
(299
)
 
(246
)
Interest income
8

 
5

 
20

 
16

Equity in earnings
2

 
61

 
10

 
95

INCOME BEFORE INCOME TAXES
527

 
594

 
1,273

 
2,000

Provision for income taxes
(140
)
 
(91
)
 
(279
)
 
(410
)
NET INCOME
$
387

 
$
503

 
$
994

 
$
1,590

EARNINGS PER SHARE
 
 
 
 
 
 
 
Earnings per share - basic
$
1.17

 
$
1.45

 
$
2.97

 
$
4.51

Earnings per share - diluted
$
1.16

 
$
1.43

 
$
2.95

 
$
4.45

See Notes to Condensed Consolidated Financial Statements.

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

 
Three Months Ended
 
Nine Months Ended
 
September 30, 2019
 
September 30, 2018
 
September 30, 2019
 
September 30, 2018
Net income
$
387

 
$
503

 
$
994

 
$
1,590

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
(182
)
 
(66
)
 
(111
)
 
(313
)
Derivative instrument adjustments and other, net of tax
8

 
(1
)
 
6

 
7

Reclassification of (income) loss, net of tax
(4
)
 
2

 
(8
)
 
18

Total other comprehensive income (loss), net of tax
(178
)
 
(65
)
 
(113
)
 
(288
)
Comprehensive income
$
209

 
$
438

 
$
881

 
$
1,302

See Notes to Condensed Consolidated Financial Statements.


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MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in millions)
 
(Unaudited)
 
 
 
September 30,
2019
 
December 31,
2018
ASSETS
 
 
 
Current assets
 
 
 
Cash and equivalents
$
276

 
$
316

Accounts and notes receivable, net
2,394

 
2,133

Prepaid expenses and other
230

 
257

 
2,900

 
2,706

Property and equipment, net
1,960

 
1,956

Intangible assets
 
 
 
Brands
5,908

 
5,790

Contract acquisition costs and other
2,642

 
2,590

Goodwill
8,990

 
9,039

 
17,540

 
17,419

Equity method investments
580

 
732

Notes receivable, net
109

 
125

Deferred tax assets
169

 
171

Operating lease assets
955

 

Other noncurrent assets
599

 
587

 
$
24,812

 
$
23,696

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities
 
 
 
Current portion of long-term debt
$
227

 
$
833

Accounts payable
813

 
767

Accrued payroll and benefits
1,207

 
1,345

Liability for guest loyalty program
2,185

 
2,529

Accrued expenses and other
1,306

 
963

 
5,738

 
6,437

Long-term debt
10,552

 
8,514

Liability for guest loyalty program
3,439

 
2,932

Deferred tax liabilities
291

 
485

Deferred revenue
799

 
731

Operating lease liabilities
868

 

Other noncurrent liabilities
2,287

 
2,372

Shareholders’ equity
 
 
 
Class A Common Stock
5

 
5

Additional paid-in-capital
5,773

 
5,814

Retained earnings
9,522

 
8,982

Treasury stock, at cost
(13,958
)
 
(12,185
)
Accumulated other comprehensive loss
(504
)
 
(391
)
 
838

 
2,225

 
$
24,812

 
$
23,696

See Notes to Condensed Consolidated Financial Statements.

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Table of Contents

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

 
Nine Months Ended
 
September 30, 2019
 
September 30, 2018
OPERATING ACTIVITIES
 
 
 
Net income
$
994

 
$
1,590

Adjustments to reconcile to cash provided by operating activities:
 
 
 
Depreciation, amortization, and other
207

 
208

Share-based compensation
138

 
140

Income taxes
(98
)
 
(157
)
Liability for guest loyalty program
163

 
415

Contract acquisition costs
(140
)
 
(110
)
Merger-related charges
137

 
(37
)
Working capital changes
(404
)
 
(101
)
Gain on asset dispositions
(15
)
 
(191
)
Other
208

 
67

Net cash provided by operating activities
1,190

 
1,824

INVESTING ACTIVITIES
 
 
 
Capital expenditures
(235
)
 
(462
)
Dispositions
4

 
460

Loan advances
(23
)
 
(13
)
Loan collections
49

 
47

Other
(38
)
 
49

Net cash (used in) provided by investing activities
(243
)
 
81

FINANCING ACTIVITIES
 
 
 
Commercial paper/Credit Facility, net
1,177

 
1,045

Issuance of long-term debt
852

 
443

Repayment of long-term debt
(621
)
 
(391
)
Issuance of Class A Common Stock
7

 
4

Dividends paid
(455
)
 
(404
)
Purchase of treasury stock
(1,828
)
 
(2,513
)
Share-based compensation withholding taxes
(132
)
 
(105
)
Other
(7
)
 

Net cash used in financing activities
(1,007
)
 
(1,921
)
(DECREASE) INCREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
(60
)
 
(16
)
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, beginning of period (1)
360

 
429

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

 
$
413

(1) 
The 2019 amounts include beginning restricted cash of $44 million at December 31, 2018, and ending restricted cash of $24 million at September 30, 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

Table of Contents

MARRIOTT INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The condensed consolidated financial statements present the results of operations, financial position, and cash flows of Marriott International, Inc. and subsidiaries (referred to in this report as “we,” “us,” “Marriott,” or “the Company”). In order to make this report easier to read, we also refer throughout to (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 “Notes” refer to these Notes to Condensed Consolidated Financial Statements, unless otherwise stated.
These Financial Statements have not been audited. We have condensed or omitted certain information and disclosures normally included in financial statements presented in accordance with U.S. generally accepted accounting principles (“GAAP”). The financial statements in this report should be read in conjunction with the consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the fiscal year ended December 31, 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 September 30, 2019 and December 31, 2018, the results of our operations for the three and nine months ended September 30, 2019 and September 30, 2018, and cash flows for the nine months ended September 30, 2019 and September 30, 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 and nine months ended September 30, 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

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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 Note 7 for disclosures required by ASU 2016-02.
NOTE 2. ACQUISITIONS AND DISPOSITIONS
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.
In the 2019 fourth quarter, we purchased the W New York - Union Square, a North-American Full-Service property, for $206 million.
Planned Acquisition
In the 2019 fourth quarter, we announced that we reached an agreement with the board of Elegant Hotels Group plc (“Elegant”) on the terms of a recommended all cash offer for Elegant, which owns and operates seven hotels and a beachfront restaurant on the island of Barbados. Under the terms of the offer, each Elegant shareholder would be entitled to receive 110 pence per Elegant share. The offer values the entire issued and to be issued ordinary share capital of Elegant at approximately £100.8 million ($130.1 million). The offer price implies an enterprise value for Elegant of approximately $199.0 million, including Elegant's total net debt as of March 31, 2019, converted at an exchange rate as of October 17, 2019. Following the acquisition, we intend to renovate the Elegant hotels and over time we expect to market them for sale subject to long-term management agreements under which we would continue to manage the hotels as all-inclusive resorts under one or more of our collection brands. Completion of the transaction is subject to satisfaction or waiver of the offer conditions set out in the offer announcement, including approval by Elegant shareholders.
Disposition
In the 2019 fourth quarter, we sold The St. Regis New York for $310 million. We will continue to operate the hotel under a long-term management agreement. As of September 30, 2019, we held $211 million of property, equipment, and current assets related to The St. Regis New York.

8

Table of Contents

NOTE 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
 
Nine Months Ended
(in millions, except per share amounts)
September 30, 2019
 
September 30, 2018
 
September 30, 2019
 
September 30, 2018
Computation of Basic Earnings Per Share
 
 
 
 
 
 
 
Net income
$
387

 
$
503

 
$
994

 
$
1,590

Shares for basic earnings per share
329.9

 
346.7

 
334.4

 
352.8

Basic earnings per share
$
1.17

 
$
1.45

 
$
2.97

 
$
4.51

Computation of Diluted Earnings Per Share
 
 
 
 
 
 
 
Net income
$
387

 
$
503

 
$
994

 
$
1,590

Shares for basic earnings per share
329.9

 
346.7

 
334.4

 
352.8

Effect of dilutive securities
 
 
 
 
 
 
 
Share-based compensation
2.6

 
3.9

 
2.8

 
4.3

Shares for diluted earnings per share
332.5

 
350.6

 
337.2

 
357.1

Diluted earnings per share
$
1.16

 
$
1.43

 
$
2.95

 
$
4.45


NOTE 4. SHARE-BASED COMPENSATION
RSUs and PSUs
We granted 1.6 million restricted stock units (“RSUs”) during the 2019 first three quarters 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 three quarters 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 three quarters had a weighted average grant-date fair value of $117 per RSU.
We recorded share-based compensation expense for RSUs and PSUs of $44 million in the 2019 third quarter, $47 million in the 2018 third quarter, $130 million for the 2019 first three quarters, and $140 million for the 2018 first three quarters. Deferred compensation costs for unvested awards for RSUs and PSUs totaled $219 million at September 30, 2019 and $167 million at December 31, 2018.
NOTE 5. INCOME TAXES
Our effective tax rate increased to 26.4 percent for the 2019 third quarter from 15.4 percent for the 2018 third quarter, primarily due to the prior year tax benefits from dispositions and lower benefits resulting from finalizing prior years’ returns.
Our effective tax rate increased to 21.9 percent for the 2019 first three quarters from 20.5 percent for the 2018 first three quarters, primarily due to the 2018 release of tax reserves, the prior year benefits from dispositions, and the non-tax deductible accrual for the loss contingency related to the Proposed ICO Fine discussed in Note 6. The increase was partially offset by a shift in earnings to jurisdictions with lower tax rates, the prior year tax expense for uncertain tax positions, and the prior year state income tax expense for the future remittance of accumulated earnings of non-U.S. subsidiaries.
We paid cash for income taxes, net of refunds, of $376 million in the 2019 first three quarters and $567 million in the 2018 first three quarters.

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NOTE 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 September 30, 2019 in the following table:
($ in millions)
Guarantee Type
 
Maximum Potential Amount of Future Fundings
 
Recorded Liability for Guarantees
Debt service
 
$
53

 
$
6

Operating profit
 
192

 
105

Other
 
11

 
3

 
 
$
256

 
$
114


Our guarantees listed in the preceding table include $47 million of guarantees that will not be in effect until the underlying properties open and we begin to operate the properties or certain other events occur.
Contingent Purchase Obligation
Sheraton Grand Chicago. 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 fee simple interest in the underlying land for an additional $200 million in cash. We accounted for the put option as a guarantee, and our recorded liability at September 30, 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. The Starwood reservations database is no longer used for business operations.
Expenses and Insurance Recoveries
We recorded $6 million of expenses and $9 million of accrued insurance recoveries related to the Data Security Incident during the 2019 third quarter, and $198 million of expenses, partially offset by $77 million of accrued insurance recoveries, related to the Data Security Incident during the 2019 first three quarters. Expenses year-to-date primarily included the accrual for the loss contingency related to the Proposed ICO Fine discussed below, along with 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 expense, up to the amount of total expense incurred in prior and current periods. We present expenses and insurance recoveries related to the Data Security Incident in either the “Reimbursed expenses” or “Merger-related costs and charges” captions of our Income Statements.
Litigation, Claims, and Government Investigations
Following our announcement of the Data Security Incident, approximately 100 lawsuits were filed by consumers and others against us in U.S. federal, U.S. state and Canadian courts related to the incident. 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). The plaintiffs in the U.S. and Canadian cases, who generally purport to represent various classes of consumers or other individuals, generally claim to have been harmed by alleged actions and/or omissions by the Company in connection with the Data Security Incident and

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assert a variety of common law and statutory claims seeking monetary damages, injunctive relief, costs and attorneys’ fees, and other related relief. Among the U.S. cases consolidated in the MDL proceeding is a putative class action lawsuit that 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. The MDL proceeding also includes two shareholder derivative complaints that were filed on February 26, 2019 and March 15, 2019, respectively, 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. We dispute the allegations in the lawsuits described above and intend to defend vigorously against such claims. We have filed motions to dismiss several of the cases covered by the MDL proceeding, but the cases generally remain at an early stage. There has been some consolidation of the Canadian cases, with seven cases now pending across five provinces, and we expect there could be further consolidation in the future. In addition, in April 2019, we received a letter purportedly on behalf of a shareholder of the Company (also one of the named plaintiffs in the putative securities class action described above) demanding that our Board of Directors take action against the Company’s current and certain former officers and directors to recover damages for alleged breaches of fiduciary duties and related claims arising from the Data Security Incident. The Board of Directors has constituted a demand review committee to investigate the claims made in the demand letter, and the committee has retained independent counsel to assist with the investigation. The committee’s investigation is ongoing.
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. On July 9, 2019, we announced that the ICO had communicated its intent to issue a fine in the amount of £99 million against the Company in relation to the Data Security Incident (the “Proposed ICO Fine”). In the 2019 second quarter, we recorded an accrual in the amount of the Proposed ICO Fine for this loss contingency. We present the accrual (which totaled $122 million at September 30, 2019) in the “Accrued expenses and other” caption of our Balance Sheets and the related expense in the “Merger-related costs and charges” caption of our Income Statements. In late August 2019, we submitted a written response to the ICO vigorously defending our position, which we had the right to do before the amount of the fine is finally determined and the fine can be issued by the ICO. To date, we have not received from the ICO a final notice of determination or fine. Following the Data Security Incident, the ICO also 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 and the Proposed ICO Fine does not relate to either of these separate investigations.
While we believe it is reasonably possible that we may incur additional 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, in excess of the amounts already incurred 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.

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NOTE 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- to 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 third quarter and 2019 first three quarters:
 
 
September 30, 2019
($ in millions)
 
Three Months Ended
 
Nine Months Ended
Operating lease cost 
 
$
47

 
$
138

Variable lease cost
 
27

 
85


Additionally, in the 2019 second quarter, we recorded an expense of $34 million in the “Merger-related costs and charges” caption of our Income Statements due to the impairment of a legacy-Starwood office building accounted for as a finance lease.
The following table presents our future minimum lease payments as of September 30, 2019:
($ in millions)
Operating Leases
 
Finance Leases
2019, remaining
$
44

 
$
3

2020
172

 
13

2021
156

 
13

2022
148

 
13

2023
113

 
13

Thereafter
666

 
165

Total minimum lease payments
$
1,299

 
$
220

Less: Amount representing interest
(300
)
 
(61
)
Present value of minimum lease payments 
$
999

 
$
159

 
 
 
 
Current (1)
131

 
6

Noncurrent (2)
868

 
153

 
$
999

 
$
159


(1) 
Operating leases recorded in the “Accrued expenses and other” and finance leases recorded in the “Current portion of long-term debt” captions of our Balance Sheets.
(2) 
Operating leases recorded in the “Operating lease liabilities” and finance leases recorded in the “Long-term debt” captions of our Balance Sheets.

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As of September 30, 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.
The following table presents additional information about our lease obligations as of September 30, 2019:
 
 
Operating leases
 
Finance leases
Weighted Average Remaining Lease Term (in years)
 
11

 
15

Weighted Average Discount Rate
 
4.9
%
 
4.4
%

The following table presents supplemental cash flow information for the 2019 first three quarters:
 
Nine Months Ended
($ in millions)
September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash outflows for operating leases
$
133

Operating cash outflows for finance leases
5

Financing cash outflows for finance leases
4



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NOTE 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 third quarter and year-end 2018:
 
At Period End
($ in millions)
September 30,
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%)
449

 
448

Series P Notes, interest rate of 3.8%, face amount of $350, maturing October 1, 2025
(effective interest rate of 4.0%)
346

 
345

Series Q Notes, interest rate of 2.3%, face amount of $750, maturing January 15, 2022
(effective interest rate of 2.5%)
746

 
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%)
182

 
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%)
333

 
335

Series W Notes, interest rate of 4.5%, face amount of $278, maturing October 1, 2034
(effective interest rate of 4.1%)
291

 
292

Series X Notes, interest rate of 4.0%, face amount of $450, maturing April 15, 2028
(effective interest rate of 4.2%)
444

 
443

Series Y Notes, floating rate, face amount of $550, maturing December 1, 2020
(effective interest rate of 2.7% at September 30, 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 2.8% at September 30, 2019)
299

 

Series CC Notes, interest rate of 3.6%, face amount of $550, maturing April 15, 2024
(effective interest rate of 3.9%)
569

 

 
 
 
 
Commercial paper
3,422

 
2,245

Credit Facility

 

Finance lease obligations
159

 
163

Other
216

 
223

 
$
10,779

 
$
9,347

Less: Current portion of long-term debt
(227
)
 
(833
)
 
$
10,552

 
$
8,514


We paid cash for interest, net of amounts capitalized, of $247 million in the 2019 first three quarters and $204 million in the 2018 first three quarters.

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In the 2019 fourth quarter, we issued $550 million aggregate principal amount of 2.125 percent Series DD Notes due October 3, 2022 (the “Series DD Notes”). We will pay interest on the Series DD Notes in April and October of each year, commencing in April 2020. In connection with the offering, we entered into interest rate swap agreements, which have the economic effect of converting the Series DD Notes into floating rate debt with a variable interest rate of one-month LIBOR plus 0.754 percent. We received net proceeds of approximately $545 million from the offering of the Series DD Notes, after deducting the underwriting discount and estimated expenses. We expect to use these proceeds for general corporate purposes, which may include working capital, capital expenditures, acquisitions, stock repurchases, or repayment of outstanding commercial paper or other borrowings.
In the 2019 second quarter, we amended and restated our multicurrency revolving credit agreement (the “Credit Facility”) to extend the maturity date of the Credit Facility and increase the aggregate amount of available borrowings to up to $4.5 billion. The available borrowings support our commercial paper program and general corporate needs. 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 28, 2024. 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 September 30, 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 pay interest on the Series BB Notes in March, June, September, and December of each year, commencing in June 2019, and we pay interest on the Series CC Notes in April and October of each year, commencing in October 2019. In connection with the offering, we entered into interest rate swap agreements, which have the economic effect of converting the Series CC Notes into floating rate debt with a variable interest rate of one-month LIBOR plus 1.1205 percent. 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.
NOTE 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:
 
September 30, 2019
 
December 31, 2018
($ in millions)
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Senior, mezzanine, and other loans
$
109

 
$
107

 
$
125

 
$
116

Total noncurrent financial assets
$
109

 
$
107

 
$
125

 
$
116

 
 
 
 
 
 
 
 
Senior Notes
$
(6,800
)
 
$
(7,023
)
 
$
(5,928
)
 
$
(5,794
)
Commercial paper
(3,422
)
 
(3,422
)
 
(2,245
)
 
(2,245
)
Other long-term debt
(177
)
 
(185
)
 
(184
)
 
(182
)
Other noncurrent liabilities
(156
)
 
(156
)
 
(153
)
 
(153
)
Total noncurrent financial liabilities
$
(10,555
)
 
$
(10,786
)
 
$
(8,510
)
 
$
(8,374
)

See the “Fair Value Measurements” caption of Note 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.

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NOTE 10. ACCUMULATED OTHER COMPREHENSIVE LOSS AND SHAREHOLDERS’ EQUITY
The following tables detail the accumulated other comprehensive loss activity for the 2019 first three quarters and 2018 first three quarters:
($ in millions)
Foreign Currency Translation Adjustments
 
Derivative Instrument and Other Adjustments
 
Accumulated Other Comprehensive Loss
Balance at year-end 2018
$
(403
)
 
$
12

 
$
(391
)
Other comprehensive (loss) income before reclassifications (1)
(111
)
 
6

 
(105
)
Reclassification of income

 
(8
)
 
(8
)
Net other comprehensive loss
(111
)
 
(2
)
 
(113
)
Balance at September 30, 2019
$
(514
)
 
$
10

 
$
(504
)

($ in millions)
Foreign Currency Translation Adjustments
 
Derivative Instrument and Other Adjustments
 
Accumulated Other Comprehensive Loss
Balance at year-end 2017
$
(23
)
 
$
6

 
$
(17
)
Other comprehensive (loss) income before reclassifications (1)
(313
)
 
7

 
(306
)
Reclassification of losses
10

 
8

 
18

Net other comprehensive (loss) income
(303
)
 
15

 
(288
)
Adoption of ASU 2016-01

 
(4
)
 
(4
)
Balance at September 30, 2018
$
(326
)
 
$
17

 
$
(309
)

(1) 
Other comprehensive loss before reclassifications for foreign currency translation adjustments includes intra-entity foreign currency transactions that are of a long-term investment nature, which resulted in gains of $20 million for the 2019 first three quarters and $27 million for the 2018 first three quarters.

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Table of Contents

The following tables detail the changes in common shares outstanding and shareholders’ equity for the 2019 first three quarters and 2018 first three quarters:
(in millions, except per share amounts)
 
 
Common
Shares
Outstanding
 
 
Total
 
Class A Common Stock
 
Additional Paid-in-Capital
 
Retained Earnings
 
Treasury Stock, at Cost
 
Accumulated Other Comprehensive Loss
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
)

 
Net income
232

 

 

 
232

 

 


 
Other comprehensive income
34

 

 

 

 

 
34


 
Dividends ($0.48 per share)
(159
)
 

 

 
(159
)
 

 

0.2

 
Share-based compensation plans
30

 

 
23

 

 
7

 

(3.7
)
 
Purchase of treasury stock
(500
)
 

 

 

 
(500
)
 

330.6

 
Balance at June 30, 2019
1,240

 
5

 
5,729

 
9,292

 
(13,460
)
 
(326
)

 
Net income
387

 

 

 
387

 

 


 
Other comprehensive income
(178
)
 

 

 

 

 
(178
)

 
Dividends ($0.48 per share)
(157
)
 

 

 
(157
)
 

 

0.1

 
Share-based compensation plans
46

 

 
44

 

 
2

 

(3.8
)
 
Purchase of treasury stock
(500
)
 

 

 

 
(500
)
 

326.9

 
Balance at September 30, 2019
$
838

 
$
5

 
$
5,773

 
$
9,522

 
$
(13,958
)
 
$
(504
)

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Table of Contents

(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