10-Q 1 hq263018.htm FORM 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549 

Form 10-Q

 (Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
OR
¨
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. 001-34521
HYATT HOTELS CORPORATION
(Exact Name of Registrant as Specified in Its Charter)

Delaware
 
20-1480589
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
150 North Riverside Plaza 8th Floor, Chicago, Illinois
 
60606
(Address of Principal Executive Offices)
 
(Zip Code)
(312) 750-1234
(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  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x    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. (Check One):
Large accelerated filer
x
 
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 check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨    No  x
At July 27, 2018, there were 43,269,180 shares of the registrant’s Class A common stock, $0.01 par value, outstanding and 68,069,643 shares of the registrant’s Class B common stock, $0.01 par value, outstanding.



HYATT HOTELS CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 2018

TABLE OF CONTENTS




PART I. FINANCIAL INFORMATION
 
Item 1.    Financial Statements.

HYATT HOTELS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions of dollars, except per share amounts)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
REVENUES:
 
 
 
 
 
 
 
Owned and leased hotels
$
485

 
$
576

 
$
1,000

 
$
1,145

Management, franchise, and other fees
142

 
130

 
274

 
244

Amortization of management and franchise agreement assets constituting payments to customers
(5
)
 
(5
)
 
(10
)
 
(9
)
Net management, franchise, and other fees
137

 
125

 
264

 
235

Other revenues
9

 
5

 
20

 
22

Revenues for the reimbursement of costs incurred on behalf of managed and franchised properties
502

 
443

 
958

 
873

Total revenues
1,133

 
1,149

 
2,242

 
2,275

DIRECT AND SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES:
 
 
 
 
 
 
 
Owned and leased hotels
357

 
428

 
741

 
852

Depreciation and amortization
79

 
86

 
162

 
173

Other direct costs
7

 
1

 
15

 
17

Selling, general, and administrative
83

 
90

 
178

 
189

Costs incurred on behalf of managed and franchised properties
500

 
443

 
960

 
888

Direct and selling, general, and administrative expenses
1,026

 
1,048

 
2,056

 
2,119

Net gains and interest income from marketable securities held to fund rabbi trusts
6

 
9

 
9

 
24

Equity earnings (losses) from unconsolidated hospitality ventures
2

 
1

 
(11
)
 
(2
)
Interest expense
(19
)
 
(20
)
 
(38
)
 
(41
)
Gains on sales of real estate
1

 
60

 
530

 
60

Other income (loss), net
5

 
5

 
(13
)
 
48

INCOME BEFORE INCOME TAXES
102

 
156

 
663

 
245

PROVISION FOR INCOME TAXES
(25
)
 
(53
)
 
(175
)
 
(87
)
NET INCOME
77

 
103

 
488

 
158

NET INCOME AND ACCRETION ATTRIBUTABLE TO NONCONTROLLING INTERESTS

 

 

 

NET INCOME ATTRIBUTABLE TO HYATT HOTELS CORPORATION
$
77

 
$
103

 
$
488

 
$
158

EARNINGS PER SHAREBasic
 
 
 
 
 
 
 
Net income
$
0.67

 
$
0.82

 
$
4.19

 
$
1.24

Net income attributable to Hyatt Hotels Corporation
$
0.67

 
$
0.82

 
$
4.19

 
$
1.24

EARNINGS PER SHAREDiluted
 
 

 
 
 
 
Net income
$
0.66

 
$
0.81

 
$
4.12

 
$
1.22

Net income attributable to Hyatt Hotels Corporation
$
0.66

 
$
0.81

 
$
4.12

 
$
1.22

CASH DIVIDENDS DECLARED PER SHARE
$
0.15


$

 
$
0.30

 
$




See accompanying Notes to condensed consolidated financial statements.

1

HYATT HOTELS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions of dollars)
(Unaudited)

 
Three Months Ended
 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
Net income
$
77

 
$
103

 
$
488

 
$
158

Other comprehensive income (loss), net of taxes:
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of tax benefit of $1 for the three and six months ended June 30, 2018 and $- for the three and six months ended June 30, 2017
(46
)
 
19

 
(23
)
 
60

Unrealized gains on available-for-sale debt securities, net of tax expense of $- for the three and six months ended June 30, 2018 and June 30, 2017, and unrealized gains on available-for-sale equity securities, net of tax expense of $7 and $28 for the three and six months ended June 30, 2017

 
11

 

 
45

Other comprehensive income (loss)
(46
)
 
30

 
(23
)
 
105

COMPREHENSIVE INCOME
31

 
133

 
465

 
263

COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS

 

 

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO HYATT HOTELS CORPORATION
$
31

 
$
133

 
$
465

 
$
263





















See accompanying Notes to condensed consolidated financial statements.

2

HYATT HOTELS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions of dollars, except share and per share amounts)
(Unaudited)

 
June 30, 2018
 
December 31, 2017
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
628

 
$
503

Restricted cash
254

 
234

Short-term investments
154

 
49

Receivables, net of allowances of $24 and $21 at June 30, 2018 and December 31, 2017, respectively
379

 
350

Inventories
13

 
14

Prepaids and other assets
152

 
153

Prepaid income taxes
12

 
24

Assets held for sale
135

 

Total current assets
1,727

 
1,327

Investments
207

 
212

Property and equipment, net
3,376

 
4,034

Financing receivables, net of allowances
14

 
19

Goodwill
152

 
150

Intangibles, net
294

 
305

Deferred tax assets
153

 
141

Other assets
1,393

 
1,384

TOTAL ASSETS
$
7,316

 
$
7,572

LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST, AND EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Current maturities of long-term debt
$
11

 
$
11

Accounts payable
130

 
136

Accrued expenses and other current liabilities
300

 
352

Current contract liabilities
335


348

Accrued compensation and benefits
112

 
145

Liabilities held for sale
28

 

Total current liabilities
916

 
992

Long-term debt
1,429

 
1,440

Long-term contract liabilities
429


424

Other long-term liabilities
841

 
863

Total liabilities
3,615

 
3,719

Commitments and contingencies (see Note 12)


 


Redeemable noncontrolling interest in preferred shares of a subsidiary

 
10

EQUITY:
 
 
 
Preferred stock, $0.01 par value per share, 10,000,000 shares authorized and none outstanding at June 30, 2018 and December 31, 2017

 

Class A common stock, $0.01 par value per share, 1,000,000,000 shares authorized, 43,489,266 issued and outstanding at June 30, 2018, and Class B common stock, $0.01 par value per share, 400,364,055 shares authorized, 68,069,643 shares issued and outstanding at June 30, 2018. Class A common stock, $0.01 par value per share, 1,000,000,000 shares authorized, 48,231,149 issued and outstanding at December 31, 2017, and Class B common stock, $0.01 par value per share, 402,748,249 shares authorized, 70,753,837 shares issued and outstanding at December 31, 2017
1

 
1

Additional paid-in capital
399

 
967

Retained earnings
3,571

 
3,054

Accumulated other comprehensive loss
(276
)
 
(185
)
Total stockholders’ equity
3,695

 
3,837

Noncontrolling interests in consolidated subsidiaries
6

 
6

Total equity
3,701

 
3,843

TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST, AND EQUITY
$
7,316

 
$
7,572


See accompanying Notes to condensed consolidated financial statements.

3

HYATT HOTELS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions of dollars)
(Unaudited)


 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
488

 
$
158

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Gains on sales of real estate
(530
)
 
(60
)
Depreciation and amortization
162

 
173

Deferred income taxes
(12
)
 
(8
)
Equity losses from unconsolidated hospitality ventures
11

 
2

Amortization of management and franchise agreement assets constituting payments to customers
10

 
9

Realized losses
2

 
41

Working capital changes and other
(101
)
 
(5
)
Net cash provided by operating activities
30

 
310

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of marketable securities and short-term investments
(439
)
 
(251
)
Proceeds from marketable securities and short-term investments
347

 
252

Contributions to equity method and other investments
(24
)
 
(23
)
Return of equity method and other investments
13

 
200

Acquisitions, net of cash acquired
(5
)
 
(243
)
Capital expenditures
(121
)
 
(133
)
Proceeds from sales of real estate, net of cash disposed
992

 
296

Other investing activities
11

 
(8
)
Net cash provided by investing activities
774

 
90

CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from debt
20

 
420

Repayments of debt
(22
)
 
(295
)
Repurchases of common stock
(588
)
 
(348
)
Proceeds from redeemable noncontrolling interest in preferred shares in a subsidiary

 
9

Repayments of redeemable noncontrolling interest in preferred shares in a subsidiary
(10
)
 

Dividends paid
(35
)
 

Other financing activities
(12
)
 
(5
)
Net cash used in financing activities
(647
)
 
(219
)
EFFECT OF EXCHANGE RATE CHANGES ON CASH
1

 
2

NET INCREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, INCLUDING CASH CLASSIFIED WITHIN CURRENT ASSETS HELD FOR SALE
158

 
183

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH RECLASSIFIED TO ASSETS HELD FOR SALE
(9
)
 

NET INCREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
149

 
183

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH—BEGINNING OF YEAR
752

 
573

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH—END OF PERIOD
$
901

 
$
756













See accompanying Notes to condensed consolidated financial statements.

Supplemental disclosure of cash flow information:
 
June 30, 2018
 
June 30, 2017
Cash and cash equivalents
$
628

 
$
400

Restricted cash (1)
254

 
340

Restricted cash included in other assets (1)
19

 
16

Total cash, cash equivalents, and restricted cash
$
901

 
$
756

 
 
 
 
(1) Restricted cash generally represents sales proceeds pursuant to like-kind exchanges, captive insurance subsidiary requirements, debt service on bonds, escrow deposits, and other arrangements.

 
Six Months Ended June 30,
 
2018
 
2017
Cash paid during the period for interest
$
37

 
$
40

Cash paid during the period for income taxes
$
213

 
$
63

Non-cash investing and financing activities are as follows:
 
 
 
Non-cash contributions to equity method investments (see Note 6, Note 12)
$
53

 
$
4

Change in accrued capital expenditures
$
5

 
$
23

 
 
 
 
































See accompanying Notes to condensed consolidated financial statements.

4


HYATT HOTELS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions of dollars, unless otherwise indicated)
(Unaudited)
 
1.    ORGANIZATION
Hyatt Hotels Corporation, a Delaware corporation, and its consolidated subsidiaries (collectively "Hyatt Hotels Corporation") provide hospitality and other services on a worldwide basis through the development, ownership, operation, management, franchising, and licensing of hospitality and wellness-related businesses. We develop, own, operate, manage, franchise, license, or provide services to a portfolio of properties consisting of full service hotels, select service hotels, resorts, and other properties, including branded spas and fitness studios, and timeshare, fractional, and other forms of residential or vacation properties. At June 30, 2018, (i) we operated or franchised 343 full service hotels, comprising 132,041 rooms throughout the world, (ii) we operated or franchised 401 select service hotels, comprising 56,869 rooms, of which 352 hotels are located in the United States, and (iii) our portfolio included 6 franchised all inclusive Hyatt-branded resorts, comprising 2,401 rooms, and 3 destination wellness resorts, comprising 399 rooms. At June 30, 2018, our portfolio of properties operated in 59 countries around the world.
As used in these Notes and throughout this Quarterly Report on Form 10-Q, (i) the terms "Hyatt," "Company," "we," "us", or "our" mean Hyatt Hotels Corporation and its consolidated subsidiaries and (ii) the term "portfolio of properties" refers to hotels and other properties, including branded spas and fitness studios and residential vacation ownership units, that we develop, own, operate, manage, franchise, license, or provide services to, including under our Park Hyatt, Miraval, Grand Hyatt, Hyatt Regency, Hyatt, Andaz, Hyatt Centric, The Unbound Collection by Hyatt, Hyatt Place, Hyatt House, Hyatt Ziva, Hyatt Zilara, exhale, and Hyatt Residence Club brands.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information or footnotes required by GAAP for complete annual financial statements. As a result, this Quarterly Report on Form 10-Q should be read in conjunction with the Consolidated Financial Statements and accompanying Notes in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 (the "2017 Form 10-K").
We have eliminated all intercompany accounts and transactions in our condensed consolidated financial statements. We consolidate entities under our control, including entities where we are deemed to be the primary beneficiary.
Management believes the accompanying condensed consolidated financial statements reflect all adjustments, which are all of a normal recurring nature, considered necessary for a fair presentation of the interim periods.
2.    RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Summary of Significant Accounting Policies
Our significant accounting policies are detailed in Part IV, Item 15, "Exhibits and Financial Statement Schedule—Note 2 to our Consolidated Financial Statements" within the 2017 Form 10-K. Upon adoption of Accounting Standards Update No. 2014-09 ("ASU 2014-09"), Revenue from Contracts with Customers (Topic 606) and Accounting Standards Update No. 2016-01 ("ASU 2016-01"), Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, our accounting policies have been revised as follows:
Revenue Recognition—Our revenues are primarily derived from the following products and services and are generally recognized when control of the product or service has transferred to the customer:
Owned and leased hotels revenues:
Owned and leased hotels revenues are derived from room rentals and services provided at our owned and leased properties and are recognized over time as rooms are occupied and when services are rendered. We present revenues net of sales, occupancy, and other taxes. Taxes collected on behalf of and remitted to governmental taxing authorities are excluded from the

5


transaction price of the underlying products and services. In relation to the loyalty program, a portion of our owned and leased hotels revenues is deferred upon initial stay as points are earned by program members at an owned or leased hotel, and revenues are recognized upon redemption at an owned or leased hotel.
Management, franchise, and other fees:
Management fees primarily consist of a base fee, which is generally computed as a percentage of gross revenues, and an incentive fee, which is generally computed based on a hotel profitability measure. Management fees are recognized over time as services are performed. Additionally, included within our management fees are royalty fees that we recognize as owners derive value from access to Hyatt’s intellectual property ("IP"), including our brand names. Incentive fees may be subject to minimum annual profitability thresholds, and we recognize incentive fee revenues over time as services are rendered only to the extent that a significant reversal is not probable.
Franchise fees consist of an initial fee and ongoing royalty fees calculated based on a percentage of gross room revenues and, as applicable, food and beverage revenues. Royalty fees are recognized over time as franchisees derive value from the license to Hyatt's IP. Initial fees are deferred and recognized over the expected customer life, which is typically the initial term of the franchise agreement.
Management, franchise, and other fees include license fee revenues associated with the licensing of the Hyatt brand name through our co-branded credit card program. License fee revenues are recognized over time as the licensee derives value from access to Hyatt’s brand names.
Net management, franchise, and other fees are reduced by the amortization of management and franchise agreement assets constituting payments to customers ("Contra revenue"). Consideration provided to customers is recognized in other assets and amortized over the expected customer life, which is typically the initial term of the management or franchise agreement.
Other revenues:
Other revenues include revenues from the sale of promotional awards through our co-branded credit card and spa and fitness revenues from exhale. We recognize the revenue from our co-branded credit card upon the fulfillment or expiration of a card member's promotional awards. Revenue is recognized net of expenses incurred to fulfill the promotional award as we are deemed the agent in the transaction. Spa and fitness revenues are recognized at the point in time the products or services are provided to the customer.
Revenues for the reimbursement of costs incurred on behalf of managed and franchised properties:
Revenues for the reimbursement of costs incurred on behalf of managed and franchised properties represent the reimbursement of costs incurred on behalf of the owners of properties. These costs relate primarily to payroll costs at managed properties where we are the employer, as well as costs associated with reservations, sales, marketing, technology (collectively, "systemwide services"), and the loyalty program operated on behalf of owners. Hyatt is reimbursed for costs incurred based on the terms of the contracts, and revenue is recognized as the underlying performance obligations are satisfied.
Gains on Sales of Real Estate—Gains on sales of real estate are generally recognized when control of the property transfers to the buyer.
Equity Method Investments—We have investments in unconsolidated hospitality ventures accounted for under the equity method. These investments are an integral part of our business and are strategically and operationally important to our overall results. When we receive a distribution from an investment, we determine whether it is a return on our investment or a return of our investment based on the underlying nature of the distribution. We assess investments in unconsolidated hospitality ventures for impairment quarterly.

6


Debt and Equity Securities—Excluding equity securities classified as equity method investments, debt and equity securities consist of various investments:
Equity securities consist of interest-bearing money market funds, mutual funds, common shares, and preferred shares. Equity securities with a readily determinable fair value are recorded at fair value on our condensed consolidated balance sheets based on listed market prices or dealer quotations where available. Equity investments without a readily determinable fair value are recognized at cost less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer.
Debt securities consist of various types including preferred shares, time deposits, and fixed income securities, including U.S. government obligations, obligations of other government agencies, corporate debt, mortgage-backed and asset-backed securities, and municipal and provincial notes and bonds. Debt securities are classified as either trading, available for sale ("AFS"), or held to maturity ("HTM").
Trading securities—recognized at fair value based on listed market prices or dealer price quotations where available. Net gains and losses on trading securities are reflected in net gains and interest income from marketable securities held to fund rabbi trusts or other income (loss), net, depending on the nature of the investment, on our condensed consolidated statements of income.
AFS securities—recognized at fair value based on listed market prices or dealer price quotations, where available. Unrealized gains and losses on AFS debt securities are recognized in accumulated other comprehensive loss on our condensed consolidated balance sheets. Realized gains and losses on debt securities are recognized in other income (loss), net on our condensed consolidated statements of income.
HTM securities—debt security investments which we have the ability to hold until maturity and are recorded at amortized cost.
AFS and HTM debt securities are assessed for impairment quarterly.
Loyalty Program—We administer the loyalty program for the benefit of the Hyatt portfolio of properties owned, operated, managed, franchised, or licensed by us during the period of their participation in the loyalty program. The loyalty program is primarily funded through contributions from eligible revenues from loyalty program members, and the funds are used for the redemption of member awards and payment of operating expenses.
The costs of operating the loyalty program, including the estimated cost of award redemption, are charged to the participating properties based on members' qualified expenditures. The revenues received from the properties are deferred, and revenues are recognized as loyalty points are redeemed, net of redemption expense, through revenues for the reimbursement of costs incurred on behalf of managed and franchised properties. Operating costs are expensed as incurred through costs incurred on behalf of managed and franchised properties.
We actuarially determine the amount to recognize as revenue when points are redeemed based on statistical formulas that estimate the timing of future point redemptions based on historical experience, including an estimate of breakage for points that will not be redeemed, and an estimate of the points that will eventually be redeemed. Any revenues in excess of the anticipated future redemptions are used to fund the operational expenses of the program.
The loyalty program is funded by payments from the properties and returns on marketable securities. The program invests amounts received from the properties in marketable securities which are included in other current and noncurrent assets (see Note 4). The current and noncurrent deferred revenue liabilities of the loyalty program are classified as contract liabilities (see Note 3).
Adopted Accounting Standards
Revenue from Contracts with Customers—In May 2014, the Financial Accounting Standards Board ("FASB") released ASU 2014-09. ASU 2014-09 supersedes the requirements in Topic 605, Revenue Recognition, and provides a single, comprehensive revenue recognition model for contracts with customers. Subsequently, the FASB issued several related ASUs which further clarified the application of the standard including ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delayed the effective date by one year making it effective for interim and fiscal years beginning after December 14, 2017.

7


We adopted ASU 2014-09, and all related ASUs, utilizing the full retrospective transition method on January 1, 2018, which required us to adjust each prior reporting period presented. The adoption of ASU 2014-09 impacts the timing of the recognition of gains on sales of real estate subject to a long-term management agreement, and the associated impact to deferred tax assets (see Note 11), the classification of Contra revenue, and the timing of revenue recognition related to incentive fees. However, we do not expect the new standard to have a significant impact on incentive fee revenue on a full-year basis. The adoption of ASU 2014-09 also impacts the timing of revenue recognition related to the loyalty program and as a result of the change, we recognized an increase of $116 million to the contract liability related to the loyalty program at January 1, 2018. Upon adoption of ASU 2014-09, we recognized a cumulative effect of a change in accounting principle through retained earnings, including a reclassification of $523 million related to deferred gains at January 1, 2018. We also reclassified certain management and franchise agreement assets from intangibles, net to other assets and certain current and long-term liabilities to current and long-term contract liabilities.
Financial Instruments - Recognition, Measurement, Presentation, and Disclosure—In January 2016, the FASB released ASU 2016-01. ASU 2016-01 revised the accounting for equity investments, excluding those accounted for under the equity method, and the presentation and disclosure requirements for financial instruments. ASU 2016-01 superseded the guidance to classify equity securities with readily determinable fair values into different categories (i.e., trading versus AFS) and requires all equity securities to be measured at fair value on a recurring basis unless an equity security does not have a readily determinable fair value. Equity securities without a readily determinable fair value are remeasured at fair value only in periods in which an observable price change is available or upon identification of an impairment. All changes in fair value are recognized in net income on our condensed consolidated statements of income.
On January 1, 2018, we adopted the provisions of ASU 2016-01 on a modified retrospective basis through a cumulative-effect adjustment to our opening condensed consolidated balance sheet. Upon adoption, unrealized gains of $68 million, net of tax, were reclassified from accumulated other comprehensive loss to opening retained earnings.
Accounting for Income Taxes - Intra-Entity Asset Transfers—In October 2016, the FASB released Accounting Standards Update No. 2016-16 ("ASU 2016-16"), Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. ASU 2016-16 requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. We adopted ASU 2016-16 on January 1, 2018 on a modified retrospective basis resulting in a decrease of $4 million to retained earnings.
Statement of Cash Flows - Restricted Cash—In November 2016, the FASB released Accounting Standards Update No. 2016-18 ("ASU 2016-18"), Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force). ASU 2016-18 requires amounts generally described as restricted cash to be included within cash and cash equivalents when reconciling the total beginning and ending amounts for the periods shown on the condensed consolidated statements of cash flows. We adopted the provisions of ASU 2016-18 on January 1, 2018 on a retrospective basis. Upon adoption of ASU 2016-18, restricted cash of $249 million, including $15 million which is recognized within other assets on our consolidated balance sheet at December 31, 2017, is included within the beginning balance of cash and cash equivalents on our condensed consolidated statement of cash flows for the six months ended June 30, 2018. The table below summarizes the changes on our condensed consolidated statements of cash flows for the six months ended June 30, 2017:
 
Six Months Ended June 30,
 
2017
Operating activities
$
1

Investing activities
262

Financing activities
2

Cash, cash equivalents, and restricted cash - beginning of year
91

Cash, cash equivalents, and restricted cash - end of period
$
356

Business Combinations - Definition of a Business—In January 2017, the FASB released Accounting Standards Update No. 2017-01 ("ASU 2017-01"), Business Combinations (Topic 805): Clarifying the Definition of a Business. ASU 2017-01 clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions or dispositions of assets or businesses. Generally, our acquisitions and dispositions of individual hotels were previously accounted for as business combinations, however, upon adoption of ASU 2017-01,

8


there is an increased likelihood that certain acquisitions and dispositions of individual hotels will be accounted for as asset transactions. We adopted ASU 2017-01 on January 1, 2018 on a prospective basis and evaluate the impact of the standard on acquisitions and dispositions based on the relevant facts and circumstances.
Derivatives and Hedging - Accounting for Hedging Activities—In August 2017, the FASB released Accounting Standards Update No. 2017-12 ("ASU 2017-12") to improve the financial reporting of hedging relationships to better portray the economic results by making improvements to simplify the application of the hedge accounting guidance in current GAAP. ASU 2017-12 is effective for interim periods and fiscal years beginning after December 15, 2018, with early adoption permitted. We early adopted ASU 2017-12 on April 1, 2018 on a modified retrospective basis, which did not impact our condensed consolidated financial statements upon adoption.


9


The impact of the changes made to our condensed consolidated financial statements as a result of the adoption of ASU 2014-09, ASU 2016-01, and ASU 2016-16 were as follows:
 
Three Months Ended June 30, 2017
 
Six Months Ended June 30, 2017
 
As Reported
 
Effect of the adoption of
ASU 2014-09
 
As Adjusted
 
As Reported
 
Effect of the adoption of
ASU 2014-09
 
As Adjusted
REVENUES:
 
 
 
 
 
 
 
 
 
 
 
Owned and leased hotels
$
577

 
$
(1
)
 
$
576

 
$
1,149

 
$
(4
)
 
$
1,145

Management, franchise, and other fees
130

 

 
130

 
252

 
(8
)
 
244

Amortization of management and franchise agreement assets constituting payments to customers

 
(5
)
 
(5
)
 

 
(9
)
 
(9
)
Net management, franchise, and other fees
130

 
(5
)
 
125

 
252

 
(17
)
 
235

Other revenues
15

 
(10
)
 
5

 
37

 
(15
)
 
22

Revenues for the reimbursement of costs incurred on behalf of managed and franchised properties
473

 
(30
)
 
443

 
944

 
(71
)
 
873

Total revenues
1,195

 
(46
)
 
1,149

 
2,382

 
(107
)
 
2,275

DIRECT AND SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES:
 
 
 
 
 
 
 
 
 
 
 
Owned and leased hotels
430

 
(2
)
 
428

 
857

 
(5
)
 
852

Depreciation and amortization
91

 
(5
)
 
86

 
182

 
(9
)
 
173

Other direct costs
6

 
(5
)
 
1

 
25

 
(8
)
 
17

Selling, general, and administrative
90

 

 
90

 
189

 

 
189

Costs incurred on behalf of managed and franchised properties
473

 
(30
)
 
443

 
944

 
(56
)
 
888

Direct and selling, general, and administrative expenses
1,090

 
(42
)
 
1,048

 
2,197

 
(78
)
 
2,119

Net gains and interest income from marketable securities held to fund rabbi trusts
10

 
(1
)
 
9

 
25

 
(1
)
 
24

Equity earnings (losses) from unconsolidated hospitality ventures
1

 

 
1

 
(2
)
 

 
(2
)
Interest expense
(20
)
 

 
(20
)
 
(41
)
 

 
(41
)
Gains on sales of real estate
34

 
26

 
60

 
34

 
26

 
60

Other income (loss), net
2

 
3

 
5

 
42

 
6

 
48

INCOME BEFORE INCOME TAXES
132

 
24

 
156

 
243

 
2

 
245

PROVISION FOR INCOME TAXES
(45
)
 
(8
)
 
(53
)
 
(86
)
 
(1
)
 
(87
)
NET INCOME
87

 
16

 
103

 
157

 
1

 
158

NET INCOME AND ACCRETION ATTRIBUTABLE TO NONCONTROLLING INTERESTS

 

 

 

 

 

NET INCOME ATTRIBUTABLE TO HYATT HOTELS CORPORATION
$
87

 
$
16

 
$
103

 
$
157

 
$
1

 
$
158

EARNINGS PER SHARE—Basic
 
 
 
 
 
 
 
 
 
 
 
Net income
$
0.69

 
$
0.13

 
$
0.82

 
$
1.23

 
$
0.01

 
$
1.24

Net income attributable to Hyatt Hotels Corporation
$
0.69

 
$
0.13

 
$
0.82

 
$
1.23

 
$
0.01

 
$
1.24

EARNINGS PER SHARE—Diluted
 
 
 
 
 
 
 
 
 
 
 
Net income
$
0.68

 
$
0.13

 
$
0.81

 
$
1.22

 
$

 
$
1.22

Net income attributable to Hyatt Hotels Corporation
$
0.68

 
$
0.13

 
$
0.81

 
$
1.22

 
$

 
$
1.22



10


 
December 31, 2017
 
January 1, 2018
 

As Reported
 
Effect of the adoption of
ASU 2014-09
 

As Adjusted
 
Effect of the adoption of ASU 2016-01 and ASU 2016-16
 
As Adjusted
ASSETS
 
 
 
 
 
 
 
 
 
Investments
$
211

 
$
1

 
$
212

 
$
(27
)
 
$
185

Intangibles, net
683

 
(378
)
 
305

 

 
305

Deferred tax assets
242

 
(101
)
 
141

 
1

 
142

Other assets
1,006

 
378

 
1,384

 
22

 
1,406

TOTAL ASSETS
7,672

 
(100
)
 
7,572

 
(4
)
 
7,568

LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST, AND EQUITY
 
 
 
 
 
 
 
 

Accounts payable
$
175

 
$
(39
)
 
$
136

 
$

 
$
136

Accrued expenses and other current liabilities
635

 
(283
)
 
352

 

 
352

Current contract liabilities

 
348

 
348

 

 
348

Long-term contract liabilities

 
424

 
424

 

 
424

Other long-term liabilities
1,725

 
(862
)
 
863

 

 
863

Total liabilities
4,131

 
(412
)
 
3,719

 

 
3,719

Retained earnings
2,742

 
312

 
3,054

 
64

 
3,118

Accumulated other comprehensive loss
(185
)
 

 
(185
)
 
(68
)
 
(253
)
Total equity
3,531

 
312

 
3,843

 
(4
)
 
3,839

TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST, AND EQUITY
7,672

 
(100
)
 
7,572

 
(4
)
 
7,568

The adoption of ASU 2014-09 resulted in a reclassification of $10 million from investing into operating activities during the six months ended June 30, 2017 related to cash outflows representing payments to customers. There were no impacts to cash provided by or used in financing activities on our condensed consolidated statements of cash flows.
Future Adoption of Accounting Standards
Leases—In February 2016, the FASB released Accounting Standards Update No. 2016-02 ("ASU 2016-02"), Leases (Topic 842). ASU 2016-02 requires lessees to record lease contracts on the balance sheet by recognizing a right-of-use asset and lease liability; the accounting for lessors remains largely unchanged. The provisions of ASU 2016-02 are to be applied using a modified retrospective approach and are effective for interim periods and fiscal years beginning after December 15, 2018, with early adoption permitted. The real estate leases for a majority of our owned and leased hotels include contingent lease payments, which will be excluded from the impact of ASU 2016-02. We are currently evaluating the impact of adopting ASU 2016-02 and expect this ASU may have a material effect to our condensed consolidated financial statements.
Financial Instruments - Credit Losses—In June 2016, the FASB released Accounting Standards Update No. ("ASU 2016-13"), Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 replaces the existing impairment model for most financial assets from an incurred loss impairment model to a current expected credit loss model, which requires an entity to recognize an impairment allowance equal to its current estimate of all contractual cash flows the entity does not expect to collect. ASU 2016-13 also requires credit losses relating to AFS debt securities to be recognized through an allowance for credit losses. The provisions of ASU 2016-13 are to be applied using a modified retrospective approach and are effective for interim periods and fiscal years beginning after December 15, 2019, with early adoption permitted. We are currently evaluating the impact of adopting ASU 2016-13.
3.    REVENUE FROM CONTRACTS WITH CUSTOMERS
Performance Obligations
We provide products and services to our customers including third-party hotel owners, guests at owned and leased hotels and spa and fitness centers, and a third-party partner through our co-branded credit card program. The products and services offered are comprised of the following performance obligations:

11


Management and Franchise Agreements:
License to Hyatt’s IP, including the Hyatt brand names—We receive variable consideration from third-party hotel owners in exchange for providing access to our IP, including the Hyatt brand names. The license represents a license of symbolic IP and in exchange for providing the license, Hyatt receives sales-based royalty fees. Royalty fees are generally determined based on a percentage of gross revenues for managed hotels and are generally included in the hotel management fee. Royalty fees for franchised hotels are based on a percentage of gross room revenues and, as applicable, food and beverage revenues. Fees generally are payable on a monthly basis as the third-party hotel owners derive value from access to our IP. Royalty fees are recognized over time through management, franchise, and other fees as services are rendered. Under our franchise agreements, we also receive initial fees from third-party hotel owners. The initial fees do not represent a distinct performance obligation and, therefore, are combined with the royalty fees and recognized through management, franchise, and other fees over the expected customer life.
Systemwide services—We provide sales, reservations, technology, and marketing services on behalf of owners of managed and franchised properties. The promise to provide systemwide services is not a distinct performance obligation because it is attendant to the license of our IP. Therefore, the promise to provide systemwide services is combined with the license of our IP to form a single performance obligation. We have two accounting models depending on the terms of the agreements:
Cost reimbursement model—Third-party hotel owners are required to reimburse us for all costs incurred to operate the systemwide programs with no added margin. The reimbursements are recognized over time within revenues for the reimbursement of costs incurred on behalf of managed and franchised properties. We have discretion over how we spend program revenues and, therefore, we are the principal with respect to the promise to provide systemwide services. Expenses incurred related to the systemwide programs are recognized within costs incurred on behalf of managed and franchised properties. The reimbursement of systemwide services is billed on a monthly basis based upon an annual estimate of costs to be incurred and are recognized as revenue commensurate with incurring the cost. To the extent that actual costs vary from estimated costs, a true-up billing or refund is issued to the hotels. Any amounts collected and not yet recognized as revenues are deferred and classified as contract liabilities. Any costs incurred in excess of revenues collected are classified as receivables.
Fund model—Third-party hotel owners are invoiced a systemwide assessment fee primarily based on a percentage of hotel revenues on a monthly basis. We recognize the revenues over time as services are provided through revenues for the reimbursement of costs incurred on behalf of managed and franchised properties. We have discretion over how we spend program revenues and, therefore, we are the principal with respect to systemwide services. Expenses related to the systemwide programs are recognized as incurred through costs incurred on behalf of managed and franchised properties. Over time, we manage the systemwide programs to break-even, but the timing of the revenue received from the owners may not align with the timing of the expenses to operate the programs. Therefore, the difference between the revenues and expenses may impact our net income.
Hotel management agreement services—We provide hotel management agreement services, which form a single performance obligation that qualifies as a series, under the terms of our management agreements. In exchange for providing these services, we receive variable consideration in the form of management fees, which are comprised of base and incentive fees. Incentive fees are typically subject to the achievement of certain annual profitability targets, and therefore, we apply judgment in determining the amount of incentive fees recognized each period. Incentive fees revenue is recognized to the extent it is probable that we will not reverse a significant portion of the fees in a subsequent period. We rely on internal financial forecasts and historical trends to estimate the amount of incentive fees revenue recognized and the probability that incentive fees will reverse in the future. Generally, base management fees are due and payable on a monthly basis as services are provided, and incentive fees are due and payable based on the

12


terms of the agreement, but at a minimum, incentive fees are billed and collected annually. Revenue is recognized over time through management, franchise, and other fees.
Under the terms of certain management agreements, primarily within the United States, we are the employer of hotel employees. When we are the employer, we are reimbursed for costs incurred related to the employee management services with no added margin, and the reimbursements are recognized over time as services are rendered within revenues for the reimbursement of costs incurred on behalf of managed and franchised properties. In jurisdictions in which we are the employer, we have discretion over how employee management services are provided and, therefore, we are the principal and revenues are recognized on a gross basis.
Loyalty program administration—We administer the loyalty program for the benefit of the Hyatt portfolio of properties owned, managed, franchised, or licensed by us. Under the program, members earn loyalty points that can be redeemed for future products and services. Points earned by loyalty program members represent a material right to free or discounted goods or services in the future.
The loyalty program has one performance obligation that consists of marketing and managing the program and arranging for award redemptions by members. The costs of operating the loyalty program are charged to the properties through an assessment fee based on members’ qualified expenditures. The assessment fee is billed and collected monthly, and the revenue received by the program is deferred until a member redeems points. Upon redemption of points at managed and franchised properties, we recognize the previously deferred revenue through revenues for the reimbursement of costs incurred on behalf of managed and franchised properties, net of redemption expense paid to managed and franchised hotels. We are responsible for arranging for the redemption of promotional awards, but we do not directly fulfill the award night obligation except at owned and leased hotels. Therefore, we are the agent with respect to this performance obligation for managed and franchised hotels, and we are the principal with respect to owned hotels. When loyalty points are redeemed at owned and leased hotels, we recognize revenue through owned and leased hotels revenues on our condensed consolidated statements of income.
The revenue recognized each period includes an estimate of breakage for the loyalty points that will not be redeemed. Determining breakage involves significant judgment, and we engage third-party actuaries to estimate the ultimate redemption ratios used in the breakage calculations and to estimate the amount of revenue recognized upon redemption. Changes to the expected ultimate redemption assumptions are reflected in the current period.
Room rentals and other services provided at owned and leased hotels—We provide room rentals and other services to our guests, including but not limited to spa, laundry, and parking. These products and services each represent individual performance obligations and, in exchange for these services, we receive fixed amounts based on published rates or negotiated contracts. Payment is due in full at the time the services are rendered or the goods are provided. If a guest enters into a package including multiple goods or services, the fixed price is allocated to each distinct good or service based on the stand-alone selling price for each item. Revenue is recognized over time within owned and leased hotels revenues when we transfer control of the good or service to the customer. Room rental revenue is recognized on a daily basis as the guest occupies the room, and revenue related to other products and services is recognized when the product or service is provided to the guest.
Hotels commonly enter into arrangements with online travel agencies, trade associations, and other entities. As part of these arrangements, Hyatt may pay the other party a commission or rebate based on the revenue generated through that channel. The determination of whether to recognize revenues gross or net of rebates and commission is made based on the terms of each contract.
Spa and fitness services—Exhale spa and fitness studios provide guests with spa and fitness services as well as retail products in exchange for fixed consideration. Each spa and fitness service represents an individual performance obligation. Payment is due in full and revenue is recognized at the point in time the services are rendered or the products are delivered. If a guest purchases a spa or fitness package, the fixed price is allocated to each distinct product or service based on the published stand-alone selling price for each item and revenues are recognized as the services are rendered.

13


Co-branded credit card—We have a co-branded credit card agreement with a third party and under the terms of the agreement, we have various performance obligations: granting a license to the Hyatt name, arranging for the fulfillment of points issued to cardholders through the loyalty program, and awarding cardholders with free room nights upon achievement of certain program milestones. The loyalty points and free room nights represent material rights that can be redeemed for free or discounted services in the future.
In exchange for the products and services provided, we receive fixed and variable consideration which is allocated between the performance obligations based upon the relative stand-alone selling prices. Significant judgment is involved in determining the relative stand-alone selling prices, and therefore, we engaged a third-party valuation specialist to assist us. We utilize a relief from royalty method to determine the revenue allocated to the license, which is recognized over time. We utilize observable transaction prices and adjusted market assumptions to determine the stand-alone selling price of a loyalty point, and we utilize a cost plus margin approach to determine the stand-alone selling price of the free room nights. The revenues allocated to loyalty program points and free night awards are deferred and recognized upon redemption, net of redemption expense, as we are deemed to be the agent in the transaction. We are responsible for arranging for the redemption of promotional awards, but we do not directly fulfill the award night obligation except at owned and leased hotels. Therefore, we are the agent for managed and franchised hotels and we are the principal with respect to owned hotels. When loyalty points and free nights are redeemed at owned and leased hotels, we recognize revenue through owned and leased hotels revenues on our condensed consolidated statements of income.
We satisfy the following performance obligations over time: the license of Hyatt’s symbolic IP, hotel management agreement services, administration of the loyalty program, and the license to our brand name through our co-branded credit card agreement. Each of these performance obligations is considered a sales-based royalty or a series of distinct services, and although the activities to fulfill each of these promises may vary from day to day, the nature of each promise is the same and the customer benefits from the services every day.
For each performance obligation satisfied over time, we recognize revenue using an output method based on the value transferred to the customer. Revenue is recognized based on the transaction price and the observable outputs related to each performance obligation. We deem the following to be a faithful depiction of our progress in satisfying these performance obligations:
revenues and operating profits earned by the hotels during the reporting period for access to Hyatt’s IP, as it is indicative of the value third-party owners derive;
underlying revenues and operating profits of the hotels for the promise to provide management agreement services to the hotels;
award night redemptions for the administration of the loyalty program performance obligation; and  
cardholder spend for the license to the Hyatt name through our co-branded credit card, as it is indicative of the value our partner derives from the use of our name.
Within our management agreements, we have two performance obligations: providing a license to Hyatt’s IP and providing management agreement services. Although these constitute two separate performance obligations, both obligations represent services that are satisfied over time, and Hyatt recognizes revenue using an output method based on the performance of the hotel. Therefore, we have not allocated the transaction price between these two performance obligations as the allocation would result in the same pattern of revenue recognition.

14


Disaggregated Revenues
The following tables present our revenues disaggregated by the nature of the product or service:
 
Three months ended June 30, 2018
Disaggregated revenue stream
Owned and leased hotels
Americas management and franchising
ASPAC management and franchising
EAME/SW Asia management and franchising
Corporate and other
Eliminations
Total
Rooms revenues
$
275

$

$

$

$
6

$
(10
)
$
271

Food and beverage
169




3


172

Other
34




8


42

Owned and leased hotels
478




17

(10
)
485

 
 
 
 
 
 
 
 
Base management fees

53

10

9


(13
)
59

Incentive management fees

20

17

9


(8
)
38

Franchise fees

34

1




35

Other fees

1

2

1

1


5

License fees




5


5

Management, franchise, and other fees

108

30

19

6

(21
)
142

Contra revenue

(3
)

(2
)


(5
)
Net management, franchise, and other fees

105

30

17

6

(21
)
137

 
 
 
 
 
 
 
 
Other revenues




8

1

9

 
 
 
 
 
 
 
 
Revenues for the reimbursement of costs incurred on behalf of managed and franchised properties

461

23

17

1


502

 
 
 
 
 
 
 
 
Total
$
478

$
566

$
53

$
34

$
32

$
(30
)
$
1,133


15


 
Six months ended June 30, 2018
Disaggregated revenue stream
Owned and leased hotels
Americas management and franchising
ASPAC management and franchising
EAME/SW Asia management and franchising
Corporate and other
Eliminations
Total
Rooms revenues
$
572

$

$

$

$
13

$
(19
)
$
566

Food and beverage
341




5


346

Other
72




16


88

Owned and leased hotels
985




34

(19
)
1,000

 
 
 
 
 
 
 
 
Base management fees

102

21

16


(27
)
112

Incentive management fees

33

34

19


(14
)
72

Franchise fees

62

1




63

Other fees

9

4

2

2


17

License fees




10


10

Management, franchise, and other fees

206

60

37

12

(41
)
274

Contra revenue

(6
)
(1
)
(3
)


(10
)
Net management, franchise, and other fees

200

59

34

12

(41
)
264

 
 
 
 
 
 
 
 
Other revenues




17

3

20

 
 
 
 
 
 
 
 
Revenues for the reimbursement of costs incurred on behalf of managed and franchised properties

881

43

33

1


958

 
 
 
 
 
 
 
 
Total
$
985

$
1,081

$
102

$
67

$
64

$
(57
)
$
2,242


16


 
Three months ended June 30, 2017
Disaggregated revenue stream
Owned and leased hotels
Americas management and franchising
ASPAC management and franchising
EAME/SW Asia management and franchising
Corporate and other
Eliminations
Total
Rooms revenues
$
331

$

$

$

$
6

$
(10
)
$
327

Food and beverage
197




3


200

Other
41




8


49

Owned and leased hotels
569




17

(10
)
576

 







Base management fees

52

9

8


(17
)
52

Incentive management fees

19

15

7


(7
)
34

Franchise fees

29

1




30

Other fees

5

2

1

1


9

License fees




5


5

Management, franchise, and other fees

105

27

16

6

(24
)
130

Contra revenue

(3
)
(1
)
(1
)


(5
)
Net management, franchise, and other fees

102

26

15

6

(24
)
125

 
 
 
 
 
 
 
 
Other revenues




3

2

5

 







Revenues for the reimbursement of costs incurred on behalf of managed and franchised properties

409

20

14



443

 







Total
$
569

$
511

$
46

$
29

$
26

$
(32
)
$
1,149


17


 
Six months ended June 30, 2017
Disaggregated revenue stream
Owned and leased hotels
Americas management and franchising
ASPAC management and franchising
EAME/SW Asia management and franchising
Corporate and other
Eliminations
Total
Rooms revenues
$
657

$

$

$

$
12

$
(19
)
$
650

Food and beverage
392




6


398

Other
82




15


97

Owned and leased hotels
1,131




33

(19
)
1,145

 
 
 
 
 
 
 
 
Base management fees

100

18

14


(33
)
99

Incentive management fees

31

29

16


(12
)
64

Franchise fees

54

2




56

Other fees

10

3

2

1


16

License fees




9


9

Management, franchise, and other fees

195

52

32

10

(45
)
244

Contra revenue

(6
)
(1
)
(2
)


(9
)
Net management, franchise, and other fees

189

51

30

10

(45
)
235

 
 
 
 
 
 
 
 
Other revenues
13




5

4

22

 
 
 
 
 
 
 
 
Revenues for the reimbursement of costs incurred on behalf of managed and franchised properties

810

37

26



873

 
 
 
 
 
 
 
 
Total
$
1,144

$
999

$
88

$
56

$
48

$
(60
)
$
2,275

Contract Balances
Our payments from customers are based on the billing terms established in our contracts. Customer billings are classified as accounts receivable when our right to consideration is unconditional. If our right to consideration is conditional on future performance under the contract, the balance is classified as a contract asset. Under the terms of our management agreements, we earn incentive management fees based on a percentage of hotel profitability. The incentive fee may be contingent on the hotel achieving certain annual profitability targets. We recognize an incentive fee receivable each month to the extent it is probable that we will not reverse a significant portion of the fees in a subsequent period. However, due to the profitability hurdles in the contract, incentive fees are considered contract assets until the risk related to the achievement of the profitability metric no longer exists. Once the annual profitability hurdle has been met, the incentive fee receivable balance will be reflected within accounts receivable.
Our contract assets were $3 million and insignificant at June 30, 2018 and December 31, 2017, respectively. At June 30, 2018, the contract assets were included in receivables, net. As our profitability hurdles are generally calculated on a full-year basis, we expect our contract asset balance to be insignificant at year-end.
Payments received in advance of performance under the contract are classified as contract liabilities and recognized as revenue as we perform under the contract.

18


Contract liabilities consisted of the following at June 30, 2018 and December 31, 2017:

June 30, 2018

December 31, 2017

$ Change

% Change
Current contract liabilities
$
335


$
348


$
(13
)

(3.9
)%
Long-term contract liabilities
429


424


5


1.4
 %
Total contract liabilities
$
764

 
$
772

 
$
(8
)
 
(1.0
)%
At June 30, 2018 and December 31, 2017, the contract liabilities balances above include the following:
 
June 30, 2018
 
December 31, 2017
Advanced deposits
$
43

 
$
59

Deferred revenue related to the loyalty program
581

 
561

Deferred revenue related to systemwide services
14

 
9

Initial fees received from franchise owners
31

 
27

Other deferred revenue
95

 
116

Total contract liabilities
$
764

 
$
772

Revenue recognized during the three months ended June 30, 2018 and June 30, 2017 included in the contract liability balance at the beginning of each year was $217 million and $208 million, respectively. Revenue recognized during the six months ended June 30, 2018 and June 30, 2017 included in the contract liability balance at the beginning of each year was $441 million and $423 million, respectively. This revenue was primarily related to advanced deposits and revenue from the loyalty program, which is recognized net of redemption reimbursements paid to third parties.
Revenue Allocated to Remaining Performance Obligations
Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods. Contracted revenue expected to be recognized in future periods was approximately $155 million at June 30, 2018, of which we expect to recognize approximately 45% of the revenue over the next 12 months and the remainder thereafter.
We did not estimate revenues expected to be recognized related to our unsatisfied performance obligations for the following:
Deferred revenue related to the loyalty program and revenue from base and incentive management fees as the revenue is allocated to a wholly unperformed performance obligation in a series;
Revenues related to royalty fees as they are considered sales-based royalty fees; and
Revenues received for free nights granted through our co-branded credit card as the awards are required to be redeemed within 12 months.
We elected to apply the practical expedient that permits the omission of prior period information about revenue allocated to future performance obligations under ASU 2014-09.
4.    DEBT AND EQUITY SECURITIES
We make investments in debt and equity securities that we believe are strategically and operationally important to our business. These investments take the form of (i) equity method investments where we have the ability to significantly influence the operations of the entity, (ii) marketable securities held to fund operating programs and for investment purposes, and (iii) other types of investments.

19


Equity Method Investments
 
June 30, 2018
 
December 31, 2017
Equity method investments
$
207

 
$
185

During the three months ended June 30, 2018, we completed an asset acquisition of our partner's interest in certain unconsolidated hospitality ventures in Brazil for a net purchase price of approximately $5 million. During the three months ended March 31, 2018, we recognized impairment charges of $16 million related to these investments in equity earnings (losses) from unconsolidated hospitality ventures on our condensed consolidated statements of income as the carrying value was in excess of fair value. The fair value was determined to be a Level Three fair value measure, and the impairment was deemed other-than-temporary.
During the three and six months ended June 30, 2018, we recognized gains of $2 million and $10 million, respectively, in equity earnings (losses) from unconsolidated hospitality ventures on our condensed consolidated statements of income resulting from sales activity related to certain equity method investments within our owned and leased hotels segment. During the six months ended June 30, 2018, we received related sales proceeds of $10 million.
During the six months ended June 30, 2017, an unconsolidated hospitality venture within our owned and leased hotels segment sold a hotel. We received proceeds of $4 million and recognized a gain of $2 million in equity earnings (losses) from unconsolidated hospitality ventures on our condensed consolidated statements of income.
The following table presents summarized financial information for all unconsolidated hospitality ventures in which we hold an investment accounted for under the equity method:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Total revenues
$
132

 
$
179

 
$
264

 
$
453

Gross operating profit
49

 
67

 
88

 
145

Income (loss) from continuing operations
16

 
16

 
(3
)
 
(2
)
Net income (loss)
16

 
16

 
(3
)
 
(2
)
Marketable Securities
We hold marketable securities with readily determinable fair values to fund certain operating programs and for investment purposes. Additionally, we periodically transfer available cash and cash equivalents to purchase marketable securities for investment purposes.
Marketable Securities Held to Fund Operating Programs—Marketable securities held to fund operating programs, which are recorded at fair value and included on our condensed consolidated balance sheets, were as follows:
 
June 30, 2018
 
December 31, 2017
Loyalty program
$
389

 
$
403

Deferred compensation plans held in rabbi trusts (Note 8 and 10)
415

 
402

Captive insurance companies
114

 
111

Total marketable securities held to fund operating programs
$
918

 
$
916

Less current portion of marketable securities held to fund operating programs included in cash and cash equivalents, short-term investments, and prepaids and other assets
(169
)
 
(156
)
Marketable securities held to fund operating programs included in other assets
$
749

 
$
760


20


Net realized and unrealized gains (losses) and interest income from marketable securities held to fund the loyalty program are recognized in other income (loss), net on our condensed consolidated statements of income:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
2018
 
2017
 
2018
 
2017
Loyalty program
$
1

 
$
4

 
$
(3
)
 
$
7

Net realized and unrealized gains and interest income from marketable securities held to fund rabbi trusts are recognized in net gains and interest income from marketable securities held to fund rabbi trusts on our condensed consolidated statements of income:


Three Months Ended June 30,
 
Six Months Ended June 30,
2018
 
2017
 
2018
 
2017
Unrealized gains
$
3

 
$
5

 
$
2

 
$
16

Realized gains
3

 
4

 
7

 
8

Net gains and interest income from marketable securities held to fund rabbi trusts
$
6

 
$
9

 
$
9

 
$
24

Our captive insurance companies hold marketable securities which are classified as AFS debt securities and are invested in U.S. government agencies, time deposits, and corporate debt securities. We classify these investments as current or long-term, based on their contractual maturity dates, which range from 2018 through 2022.
Marketable Securities Held for Investment Purposes—Marketable securities held for investment purposes, which are recorded at fair value and included on our condensed consolidated balance sheets, were as follows:
 
June 30, 2018
 
December 31, 2017
Interest bearing money market funds
$
44

 
$
26

Time deposits
137

 
37

Common shares
131

 
131

Total marketable securities held for investment purposes
$
312

 
$
194

Less current portion of marketable securities held for investment purposes included in cash and cash equivalents and short-term investments
(181
)
 
(63
)
Marketable securities held for investment purposes included in other assets
$
131

 
$
131

During 2013, we invested in the common shares of Playa Hotels & Resorts B.V. ("Playa"), and we accounted for our common share investment as an equity method investment. In March 2017, Playa completed a business combination, and Playa Hotels & Resorts N.V. ("Playa N.V.") is now publicly traded on the NASDAQ. Our investment is accounted for as an equity security with a readily determinable fair value as we do not have the ability to significantly influence the operations of the entity. The fair value of the common shares is classified as Level One in the fair value hierarchy as we are able to obtain market available pricing information. The remeasurement of our investment at fair value resulted in unrealized gains of $7 million and insignificant gains recognized in other income (loss), net on our condensed consolidated statements of income for the three and six months ended June 30, 2018, respectively (see Note 18). We did not sell any shares of common stock during the six months ended June 30, 2018.

21


Other Investments
Preferred shares—During 2013, we also invested $271 million in Playa for convertible redeemable preferred shares which were classified as an AFS debt security. The fair value of the preferred shares was: 
 
 
2017
Fair value at January 1
 
$
290

Gross unrealized losses
 
(54
)
Realized losses (1) (Note 18)
 
(40
)
Interest income (Note 18)
 
94

Cash redemption
 
(290
)
Fair value at June 30
 
$

(1) The realized losses were the result of a difference between the fair value of the initial investment and the contractual redemption price of $8.40 per share.
HTM Debt Securities—At June 30, 2018 and December 31, 2017, we held investments in HTM debt securities of $47 million, respectively, which are investments in third-party entities that own certain of our hotels and are recorded within other assets in our condensed consolidated balance sheets. The securities are mandatorily redeemable between 2020 and 2025. The amortized cost of our investments approximate fair value. We estimated the fair value of our investments using internally developed discounted cash flow models based on current market inputs for similar types of arrangements. Based upon the lack of available market data, our investments are classified as Level Three within the fair value hierarchy. The primary sensitivity in these calculations is based on the selection of appropriate discount rates. Fluctuations in these assumptions could result in different estimates of fair value.
Equity Securities Without a Readily Determinable Fair Value—At June 30, 2018 and December 31, 2017, we had investments of $9 million and $27 million, respectively, in equity securities without a readily determinable fair value, which represent investments in entities where we do not have the ability to significantly influence the operations of the entity. At December 31, 2017, the securities were included in investments on our condensed consolidated balance sheets. As a result of the adoption of ASU 2016-01 on January 1, 2018, we have reclassified the investments to other assets on our condensed consolidated balance sheet at June 30, 2018.
Due to ongoing operating cash flow shortfalls in the business underlying an equity security during the three months ended June 30, 2018, we recognized an impairment charge for our full investment balance of $22 million in other income (loss), net on our condensed consolidated statements of income (see Note 18) as we deemed that the carrying value was in excess of the fair value. The fair value was determined to be a Level Three fair value measure.

22


Fair Value—We measured the following financial assets at fair value on a recurring basis:
 
June 30, 2018
 
Cash and cash equivalents
 
Short-term investments
 
Prepaids and other assets
 
Other assets
Level One - Quoted Prices in Active Markets for Identical Assets
 
 
 
 
 
 
 
 
 
Interest bearing money market funds
$
99

 
$
99

 
$

 
$

 
$

Mutual funds
415

 

 

 

 
415

Common shares
131

 

 

 

 
131

Level Two - Significant Other Observable Inputs
 
 
 
 
 
 
 
 
 
Time deposits
150

 

 
140

 

 
10

U.S. government obligations
155

 

 

 
39

 
116

U.S. government agencies
44

 

 
2

 
7

 
35

Corporate debt securities
167

 

 
12

 
33

 
122

Mortgage-backed securities
24

 

 

 
6

 
18

Asset-backed securities
43

 

 

 
11

 
32

Municipal and provincial notes and bonds
2

 

 

 
1

 
1

Total
$
1,230

 
$
99

 
$
154

 
$
97

 
$
880

 
December 31, 2017
 
Cash and cash equivalents
 
Short-term investments
 
Prepaids and other assets
 
Other assets
Level One - Quoted Prices in Active Markets for Identical Assets
 
 
 
 
 
 
 
 
 
Interest bearing money market funds
$
75

 
$
75

 
$

 
$

 
$

Mutual funds
402

 

 

 

 
402

Common shares
131

 

 

 

 
131

Level Two - Significant Other Observable Inputs
 
 
 
 
 
 
 
 
 
Time deposits
50

 

 
39

 

 
11

U.S. government obligations
158

 

 

 
38

 
120

U.S. government agencies
47

 

 
2

 
7

 
38

Corporate debt securities
179

 

 
8

 
33

 
138

Mortgage-backed securities
25

 

 

 
6

 
19

Asset-backed securities
40

 

 

 
10

 
30

Municipal and provincial notes and bonds
3

 

 

 
1

 
2

Total
$
1,110

 
$
75

 
$
49

 
$
95

 
$
891

During the three and six months ended months ended June 30, 2018 and June 30, 2017, there were no transfers between levels of the fair value hierarchy. We do not have non-financial assets or non-financial liabilities required to be measured at fair value on a recurring basis.

23


5.    FINANCING RECEIVABLES
 
June 30, 2018
 
December 31, 2017
Unsecured financing to hotel owners
$
123

 
$
127

Less allowance for losses
(109
)
 
(108
)
Total long-term financing receivables, net of allowances
$
14

 
$
19

Allowance for Losses and Impairments—The following table summarizes the activity in our unsecured financing receivables allowance:
 
2018
 
2017
Allowance at January 1
$
108

 
$
100

  Provisions
2

 
2

  Other adjustments
(1
)
 
1