Edgar Filing: MARRIOTT INTERNATIONAL INC /MD/

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________________________

FORM 10-Q

_______________________________________



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 1-13881

_______________________________________

MARRIOTT INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

_______________________________________



Delaware		52-2055918
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

10400 Fernwood Road, Bethesda, Maryland (Address of principal executive offices)		20817 (Zip Code)

(301) 380-3000

(Registrant’s telephone number, including area code)

_______________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 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: 390,479,820 shares of Class A Common Stock, par value $0.01 per share, outstanding at October 21, 2016.

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MARRIOTT INTERNATIONAL, INC.

FORM 10-Q TABLE OF CONTENTS



		Page No.

Part I.	Financial Information (Unaudited):

Item 1.	Financial Statements

	Condensed Consolidated Statements of Income - Three and Nine Months Ended September 30, 2016 and September 30, 2015	2

	Condensed Consolidated Statements of Comprehensive Income - Three and Nine Months Ended September 30, 2016 and September 30, 2015	3

	Condensed Consolidated Balance Sheets - as of September 30, 2016 and December 31, 2015	4

	Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2016 and September 30, 2015	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

	Forward-Looking Statements	23

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46

Item 4.	Controls and Procedures	46

Part II.	Other Information:

Item 1.	Legal Proceedings	48

Item 1A.	Risk Factors	48

Item 6.	Exhibits	57

	Signature	59

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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, 2016			September 30, 2015			September 30, 2016			September 30, 2015
REVENUES
Base management fees	$	180		$	170		$	538		$	526
Franchise fees	250			227			692			652
Incentive management fees	81			68			276			238
Owned, leased, and other revenue	279			229			771			729
Cost reimbursements	3,152			2,884			9,339			8,635
	3,942			3,578			11,616			10,780
OPERATING COSTS AND EXPENSES
Owned, leased, and other - direct	194			175			533			552
Reimbursed costs	3,152			2,884			9,339			8,635
Depreciation, amortization, and other	36			31			97			107
General, administrative, and other	161			149			470			446
Merger-related costs and charges	228			—			250			—
	3,771			3,239			10,689			9,740
OPERATING INCOME	171			339			927			1,040
Gains and other income, net	3			—			3			20
Interest expense	(55		)	(43		)	(159		)	(121		)
Interest income	9			5			22			19
Equity in earnings	3			8			8			13
INCOME BEFORE INCOME TAXES	131			309			801			971
Provision for income taxes	(61		)	(99		)	(265		)	(314		)
NET INCOME	$	70		$	210		$	536		$	657
EARNINGS PER SHARE
Earnings per share - basic	$	0.26		$	0.80		$	2.08		$	2.43
Earnings per share - diluted	$	0.26		$	0.78		$	2.04		$	2.38
CASH DIVIDENDS DECLARED PER SHARE	$	0.30		$	0.25		$	0.85		$	0.70

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, 2016		September 30, 2015			September 30, 2016			September 30, 2015
Net income	$	70	$	210		$	536		$	657
Other comprehensive income (loss):
Foreign currency translation adjustments	2		(28		)	27			(47		)
Derivative instrument adjustments, net of tax	1		2			(3		)	9
Unrealized loss on available-for-sale securities, net of tax	—		(3		)	—			(5		)
Reclassification of losses (gains), net of tax	1		(3		)	3			(7		)
Total other comprehensive income (loss), net of tax	4		(32		)	27			(50		)
Comprehensive income	$	74	$	178		$	563		$	607

See Notes to Condensed Consolidated Financial Statements.

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MARRIOTT INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

($ in millions)



	(Unaudited)
	September 30, 2016			December 31, 2015
ASSETS
Current assets
Cash and equivalents	$	1,078		$	96
Accounts and notes receivable, net	1,705			1,103
Prepaid expenses	168			77
Other	65			30
Assets held for sale	771			78
	3,787			1,384
Property and equipment, net	2,411			1,029
Intangible assets
Brands	6,606			197
Contract acquisition costs and other	3,442			1,254
Goodwill	7,175			943
	17,223			2,394
Equity and cost method investments	830			165
Notes receivable, net	240			215
Deferred tax assets	92			672
Other noncurrent assets	419			223
	$	25,002		$	6,082
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current liabilities
Current portion of long-term debt	$	316		$	300
Accounts payable	667			593
Accrued payroll and benefits	1,136			861
Liability for guest loyalty programs	1,860			952
Accrued expenses and other	1,250			527
	5,229			3,233
Long-term debt	8,506			3,807
Liability for guest loyalty programs	2,538			1,622
Deferred tax liabilities	1,308			17
Other noncurrent liabilities	1,580			993
Shareholders’ equity (deficit)
Class A Common Stock	5			5
Additional paid-in-capital	5,740			2,821
Retained earnings	6,375			4,878
Treasury stock, at cost	(6,110		)	(11,098		)
Accumulated other comprehensive loss	(169		)	(196		)
	5,841			(3,590		)
	$	25,002		$	6,082

See Notes to Condensed Consolidated Financial Statements.

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MARRIOTT INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in millions)

(Unaudited)



	Nine Months Ended
	September 30, 2016			September 30, 2015
OPERATING ACTIVITIES
Net income	$	536		$	657
Adjustments to reconcile to cash provided by operating activities:
Depreciation, amortization, and other	97			107
Share-based compensation	117			84
Income taxes	1			120
Liability for guest loyalty programs	179			119
Merger-related charges	172			—
Working capital changes	(47		)	(77		)
Other	77			70
Net cash provided by operating activities	1,132			1,080
INVESTING ACTIVITIES
Acquisition of a business, net of cash acquired	(2,412		)	(137		)
Capital expenditures	(132		)	(218		)
Dispositions	53			612
Loan advances	(24		)	(12		)
Loan collections	61			21
Contract acquisition costs	(55		)	(89		)
Redemption of debt security	—			121
Other	22			75
Net cash (used in) provided by investing activities	(2,487		)	373
FINANCING ACTIVITIES
Commercial paper/Credit Facility, net	1,657			(274		)
Issuance of long-term debt	1,483			790
Repayment of long-term debt	(296		)	(7		)
Issuance of Class A Common Stock	22			39
Dividends paid	(257		)	(189		)
Purchase of treasury stock	(248		)	(1,821		)
Other	(24		)	—
Net cash provided by (used in) financing activities	2,337			(1,462		)
INCREASE (DECREASE) IN CASH AND EQUIVALENTS	982			(9		)
CASH AND EQUIVALENTS, beginning of period	96			104
CASH AND EQUIVALENTS, end of period	$	1,078		$	95

See Notes to Condensed Consolidated Financial Statements.

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MARRIOTT INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

The condensed consolidated financial statements present the results of operations, financial position, and cash flows of Marriott International, Inc. (“Marriott,” and together with its consolidated subsidiaries, “we,” “us,” or “the Company”). 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 properties, brands, or markets in the United States (“U.S.”) and Canada as “North America” or “North American,” and (v) our properties, brands, or markets outside of the U.S. and Canada as “International.” References throughout to numbered “Footnotes” refer to the numbered Notes in these Notes to Condensed Consolidated Financial Statements, unless otherwise noted.

These Financial Statements have not been audited. We have condensed or omitted certain information and footnote disclosures normally included in financial statements presented in accordance with U.S. generally accepted accounting principles (“GAAP”). The financial statements in this report should be read in conjunction with the consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (“2015 Form 10-K”). Certain terms not otherwise defined in this Form 10-Q have the meanings specified in our 2015 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, 2016 and December 31, 2015, the results of our operations for the three and nine months ended September 30, 2016 and September 30, 2015, and cash flows for the nine months ended September 30, 2016 and September 30, 2015. Interim results may not be indicative of fiscal year performance because of seasonal and short-term variations. We have eliminated all material intercompany transactions and balances between entities consolidated in these Financial Statements. We have made certain reclassifications of our prior year amounts to conform to our current presentation of “Brands” and “Deferred tax liabilities” in our Balance Sheets and “Merger-related costs and charges” in our Income Statements.

Acquisition of Starwood Hotels & Resorts Worldwide

On September 23, 2016, we completed the acquisition of Starwood Hotels & Resorts Worldwide, LLC, formerly known as Starwood Hotels & Resorts Worldwide, Inc. (“Starwood”) through a series of transactions, after which Starwood became an indirect wholly-owned subsidiary of the Company (the “Starwood Combination”). The Financial Statements in this report include Starwood’s results of operations for the eight days ended September 30, 2016 and reflect the financial position of our combined company at September 30, 2016. We refer to our business associated with brands that existed prior to the Starwood Combination as “Legacy-Marriott” and to Starwood’s business and brands that we acquired as “Legacy-Starwood.” See Footnote No. 2, “Acquisitions and Dispositions” for more information on the Starwood Combination.

New Accounting Standards

Accounting Standards Update No. 2014-09 - “Revenue from Contracts with Customers” (“ASU No. 2014-09”)

ASU No. 2014-09 supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, as well as most industry-specific guidance, and significantly enhances comparability of revenue recognition practices across entities and industries by providing a principles-based, comprehensive framework for addressing revenue recognition issues. In order for a provider of promised goods or services to recognize as revenue the consideration that it expects to receive in exchange for the promised goods or services, the provider should apply the following

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five steps: (1) identify the contract with a customer(s); (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU No. 2014-09 also specifies the accounting for some costs to obtain or fulfill a contract with a customer and provides enhanced disclosure requirements. The Financial Accounting Standards Board (“FASB”) has deferred ASU No. 2014-09 for one year, and with that deferral, the standard will be effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, which for us will be our 2018 first quarter. We are permitted to use either the retrospective or the modified retrospective method when adopting ASU No. 2014-09. We are still assessing the potential impact that ASU No. 2014-09 will have on our financial statements and disclosures, but we believe that there could be changes to the revenue recognition of real estate sales, franchise fees, and incentive management fees.

Accounting Standards Update No. 2016-02 - “Leases” (“ASU No. 2016-02”)

In February 2016, the FASB issued ASU No. 2016-02, which introduces a lessee model that brings substantially all leases onto the balance sheet. Under the new standard, a lessee will recognize on its balance sheet a lease liability and a right-of-use asset for all leases, including operating leases, with a term greater than 12 months. The new standard will also distinguish leases as either finance leases or operating leases. This distinction will affect how leases are measured and presented in the income statement and statement of cash flows. ASU No. 2016-02 is effective for annual and interim periods in fiscal years beginning after December 15, 2018. We are still assessing the potential impact that ASU No. 2016-02 will have on our financial statements and disclosures.

Accounting Standards Update No. 2016-09 - “Stock Compensation” (“ASU No. 2016-09”)

In March 2016, the FASB issued ASU No. 2016-09, which involves several aspects of the accounting for share-based payments. The new guidance will require excess tax benefits to be recorded as income tax expense (or benefit) in the income statement. Currently, excess tax benefits are recorded in additional paid-in-capital in the balance sheet. In the statement of cash flows, the new guidance requires both excess tax benefits and employee tax withholdings to be presented as operating inflows rather than as financing inflows. ASU No. 2016-09 is effective for annual and interim periods beginning after December 15, 2016. We are still assessing the potential impact that ASU No. 2016-09 will have on our financial statements and disclosures, but we believe that, during periods when our stock price increases, it will generally result in (1) a decrease to our income tax expense and effective tax rate and (2) an increase to our cash flows from operating activities.

2. ACQUISITIONS AND DISPOSITIONS

Acquisition

On September 23, 2016 (the “Merger Date”), we completed the Starwood Combination. Starwood is a leading hospitality company. The combination of our brands creates a more comprehensive portfolio, enhances our global market distribution, and provides opportunities for cost efficiencies. Our combined company now operates or franchises nearly 6,000 properties with over 1.1 million rooms, representing 30 leading brands from the moderate-tier to luxury in 120 countries and territories.

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Shareholders of Starwood received 0.80 shares of our Class A Common Stock and $21.00 in cash for each share of Starwood common stock. The following table presents the fair value of each class of consideration transferred.



(in millions, except per share amounts)
Equivalent shares of Marriott common stock issued in exchange for Starwood outstanding shares	134.4
Marriott common stock price as of Merger Date	$	68.44
Fair value of Marriott common stock issued in exchange for Starwood outstanding shares	9,198
Cash consideration to Starwood shareholders, net of cash acquired of $1,116	2,412
Fair value of Marriott equity-based awards issued in exchange for vested Starwood equity-based awards	88
Total consideration transferred, net of cash acquired	$	11,698

Preliminary Fair Values of Assets Acquired and Liabilities Assumed

The following table presents our preliminary estimates of fair values of the assets that we acquired and the liabilities that we assumed. Our preliminary estimates are based on the information that was available as of the Merger Date, and we are continuing to evaluate the underlying inputs and assumptions used in our valuations. Accordingly, these preliminary estimates are subject to change during the measurement period, which is up to one year from the Merger Date.



($ in millions)
Working capital	$	(115	)
Property and equipment	2,045
Identified intangible assets	8,573
Equity and cost method investments	648
Other noncurrent assets	207
Deferred income taxes, net	(1,845		)
Guest loyalty program	(1,647		)
Debt	(1,876		)
Other noncurrent liabilities	(518		)
Net assets acquired	5,472
Goodwill ⁽¹⁾	6,226
	$	11,698


(1)	Goodwill is calculated as total consideration transferred, net of cash acquired, less identified net assets acquired, and it primarily represents the value that we expect to obtain from synergies and growth opportunities from our combined operations. We have not completed the assignment of goodwill to our reporting units as of the date of this report, and it is not deductible for tax purposes.

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Property and Equipment

We acquired property and equipment, which primarily consists of 15 owned hotels. We provisionally estimated the value of the properties using a combination of the income, cost, and market approaches, which are primarily based on significant Level 2 and Level 3 assumptions, such as estimates of future income growth, capitalization rates, discount rates, and capital expenditure needs of the hotels. We are continuing to assess the marketplace assumptions and property conditions, which could result in changes to these provisional values.

Identified Intangible Assets

The following table presents our preliminary estimates of the fair values of Starwood’s identified intangible assets and their related estimated useful lives.



	Estimated Fair Value (in millions)		Estimated Useful Life (in years)
Brands	$	6,400	indefinite
Management and Operating Lease Agreements	1,394		20-30
Franchise Agreements	729		20-80
Loyalty Program Marketing Rights	50		25-30
	$	8,573

We provisionally estimated the value of Starwood’s brands using the relief-from-royalty method, which applies an estimated royalty rate to forecasted future cash flows, discounted to present value. We estimated the value of management, franchise, and lease agreements using the multi-period excess earnings method, which is a variation of the income approach. This method estimates an intangible asset’s value based on the present value of the incremental after-tax cash flows attributable to the intangible asset. These valuation approaches utilize Level 3 inputs, and we continue to review Starwood’s contracts and historical performance in addition to evaluating the inputs, including the discount rates and growth assumptions, which could result in changes to these provisional values.

Franchise agreements include an exclusive, 80-year global license agreement with Vistana Signature Experiences, Inc. (“Vistana”), Starwood’s former vacation ownership business that is now part of Interval Leisure Group, Inc. (“ILG”), for the use of the Westin and Sheraton brands in vacation ownership. In addition, ILG has the non-exclusive license for the existing St. Regis and The Luxury Collection vacation ownership properties. Under this agreement, we will receive a fixed annual license fee, adjusted for inflation, of $30 million plus certain variable fees based on sales volumes.

Investments

Our provisional estimate of the fair value of the equity method investments that we acquired was $647 million. This value exceeded our share of the book value of the investees' net assets by $501 million, primarily due to the value that we assigned to land and buildings owned by the investees. We provisionally estimated the value of the investees’ real estate using the same methods as for property and equipment described above. Excluding the amount attributable to land, we amortize the difference on a straight-line basis over the underlying assets' estimated useful lives when calculating equity method earnings attributable to us. We are continuing to review the terms of the partnership and joint venture agreements, assess the conditions of the properties, and evaluate the discount rates, any discounts for lack of marketability and control as appropriate, and growth assumptions used in valuing these investments, which could result in changes to our provisional values.

Deferred Income Taxes

Deferred income taxes primarily relate to the fair value of noncurrent assets and liabilities acquired from Starwood, including property and equipment, intangible assets, equity and cost method investments, and long-term debt. We provisionally estimated deferred income taxes based on statutory rates in the jurisdictions of the legal entities where the acquired noncurrent assets and liabilities are recorded. We are continuing to assess the tax rates used, and we will update our estimate of deferred income taxes based on changes to our provisional valuations of

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the related assets and liabilities and refinement of the effective tax rates, which could result in changes to these provisional values.

Guest Loyalty Program

The Starwood Preferred Guest (SPG) program is Starwood’s frequent traveler, customer loyalty, and multi-brand marketing program. Members can earn and redeem points for room stays, room upgrades, and airline flights. As of the Merger Date, we assumed the fair value of this liability equals Starwood’s historical book value in establishing a provisional estimate for this liability. We are in the process of obtaining an actuarial valuation of the future redemption obligations, which could result in changes to these provisional values.

Debt and Lease Obligations

We primarily valued debt using quoted market prices, which are considered Level 1 inputs as they are observable in the market. For more information on Starwood debt, see Footnote No. 8 “Long-Term Debt.”

The following table presents the future minimum lease obligations that we assumed and for which we are the primary obligor as of September 30, 2016:



($ in millions)	Operating Leases		Capital Leases
2016, remaining	$	16	$	3
2017	64		11
2018	61		12
2019	57		12
2020	55		12
Thereafter	630		203
Total minimum lease payments	$	883	$	253
Less: amount representing interest			(86		)
Present value of minimum lease payments			$	167

Most leases have initial terms of up to 20 years, contain one or more renewals at our option, generally for five- or 10-year periods, and 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.

Pro Forma Results of Operations

The following unaudited pro forma information presents the combined results of operations of Marriott and Starwood as if we had completed the Starwood Combination on January 1, 2015, but using our preliminary fair values of assets and liabilities as of the Merger Date. As required by GAAP, these unaudited pro forma results do not reflect any cost saving synergies from operating efficiencies. Accordingly, these unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of what the actual results of operations of the combined company would have been if the Starwood Combination had occurred at the beginning of the period presented, nor are they indicative of future results of operations.



	Nine Months Ended
($ in millions)	September 30, 2016		September 30, 2015
Revenues	$	15,038	$	14,373
Net income	$	853	$	675

The unaudited pro forma results include $54 million of integration costs for the nine months ended September 30, 2016 and $320 million of transaction and employee termination costs for the nine months ended September 30, 2015.

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Starwood Results of Operations

The following table presents the results of Starwood operations included in our Income Statements for the eight days from the Merger Date through the end of the 2016 third quarter.



($ in millions)	September 23, 2016 - September 30, 2016
Revenue	$	168
Net loss	$	(131	)

Dispositions and Planned Dispositions

At the end of the 2016 third quarter, we held $741 million of assets classified as “Assets held for sale” and $37 million of liabilities recorded under “Accrued expenses and other” on our Balance Sheets, both related to hotels that we acquired through the Starwood Combination.

In addition, at the end of the 2016 third quarter, we held $30 million of assets related to the remaining Miami Beach EDITION residences classified as “Assets held for sale” and $3 million of liabilities associated with those assets, which we recorded under “Accrued expenses and other” on our Balance Sheets.

In the 2016 second quarter, we sold a North American Limited-Service segment plot of land and received $46 million in cash.

3. MERGER-RELATED COSTS AND CHARGES

The following table presents pre-tax merger-related costs and other charges that we incurred in connection with the Starwood Combination.



	Three Months Ended				Nine Months Ended
($ in millions)	September 30, 2016		September 30, 2015		September 30, 2016		September 30, 2015
Merger-related costs and charges
Transaction costs	$	18	$	—	$	31	$	—
Employee termination costs	186		—		186		—
Integration costs	24		—		33		—
	228		—		250		—
Interest expense	9		—		22		—
	$	237	$	—	$	272	$	—

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

We reflect our liability at September 30, 2016 for severance and other employee termination charges in our Balance Sheets as $242 million of “Accrued expenses and other.”

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4. EARNINGS PER SHARE

The table below presents the reconciliation of the earnings and number of shares used in our calculations of basic and diluted earnings per share:



	Three Months Ended				Nine Months Ended
(in millions, except per share amounts)	September 30, 2016		September 30, 2015		September 30, 2016		September 30, 2015
Computation of Basic Earnings Per Share
Net income	$	70	$	210	$	536	$	657
Shares for basic earnings per share	266.2		262.2		258.3		270.7
Basic earnings per share	$	0.26	$	0.80	$	2.08	$	2.43
Computation of Diluted Earnings Per Share
Net income	$	70	$	210	$	536	$	657
Shares for basic earnings per share	266.2		262.2		258.3		270.7
Effect of dilutive securities
Employee stock option and appreciation right plans	1.7		2.2		1.8		2.3
Deferred stock incentive plans	0.5		0.6		0.5		0.6
Restricted stock units and restricted stock	2.1		2.3		2.1		2.5
Shares for diluted earnings per share	270.5		267.3		262.7		276.1
Diluted earnings per share	$	0.26	$	0.78	$	2.04	$	2.38

We compute the effect of dilutive securities using the treasury stock method and average market prices during the period. We excluded antidilutive stock options and stock appreciation rights of 0.3 million for both the 2016 third quarter and the 2015 third quarter, 0.3 million for the 2016 first three quarters, and 0.2 million for the 2015 first three quarters from our calculation of diluted earnings per share because their exercise prices were greater than the average market prices.

5. SHARE-BASED COMPENSATION

Legacy-Marriott Plans

Under our Stock and Cash Incentive Plan (the “Stock Plan”), we award: (1) stock options (our “Stock Option Program”) to purchase our Class A Common Stock (“common stock”); (2) stock appreciation rights (“SARs”) for our common stock (our “SAR Program”); (3) restricted stock units (“RSUs”) of our common stock; and (4) deferred stock units. We also issue performance-based RSUs (“PSUs”) to named executive officers and some of their direct reports under the Stock Plan. We grant awards at exercise prices or strike prices that equal the market price of our common stock on the date of grant.

We recorded share-based compensation expense for award grants of $39 million for the 2016 third quarter and $29 million for the 2015 third quarter, $98 million for the 2016 first three quarters, and $84 million for the 2015 first three quarters. Deferred compensation costs for unvested awards totaled $177 million at September 30, 2016 and $116 million at December 31, 2015.

RSUs and PSUs

We granted 1.6 million RSUs during the 2016 first three quarters to certain officers, key employees, and non-employee directors, and those units vest generally over four years in equal annual installments commencing one year after the grant date. We granted 0.2 million PSUs during the 2016 first three quarters to certain executive officers, subject to continued employment and the satisfaction of certain performance conditions based on achievement of pre-established targets for Adjusted EBITDA, RevPAR Index, room openings, and/or net administrative expense over, or at the end of, a three-year vesting period. We also granted 0.6 million PSUs during the 2016 first three quarters to certain senior leaders and members of the Company’s integration team that, subject to continued employment, vest based upon achievement of pre-established targets related to the Starwood Combination over, or at the end of, a three-year performance period. RSUs, including PSUs, granted in the 2016 first three quarters had a weighted average grant-date fair value of $63.

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SARs

We granted 0.4 million SARs to officers and key employees during the 2016 first three quarters. These SARs generally expire ten years after the grant date and both vest and may be exercised in cumulative installments of one quarter at the end of each of the first four years following the grant date. The weighted average grant-date fair value of SARs granted in the 2016 first three quarters was $22 and the weighted average exercise price was $67.

We used the following assumptions as part of a binomial lattice-based valuation to determine the fair value of the SARs we granted during the 2016 first three quarters:



Expected volatility	30.4%
Dividend yield	1.3%
Risk-free rate	1.7 - 1.8%
Expected term (in years)	8 - 10

In making these assumptions, we base expected volatility on the historical movement of the Company’s stock price. We base risk-free rates on the corresponding U.S. Treasury spot rates for the expected duration at the date of grant, which we convert to a continuously compounded rate. The dividend yield assumption takes into consideration both historical levels and expectations of future dividend payout. The weighted average expected terms for SARs are an output of our valuation model which utilizes historical data in estimating the period of time that the SARs are expected to remain unexercised. We calculate the expected terms for SARs for separate groups of retirement eligible, non-retirement eligible employees, and non-employee directors. Our valuation model also uses historical data to estimate exercise behaviors, which include determining the likelihood that employees will exercise their SARs before expiration at a certain multiple of stock price to exercise price.

Legacy-Starwood Plans

In the Starwood Combination we assumed Starwood’s 2013 Long-Term Incentive Compensation Plan (“Starwood LTIP”) and equity awards outstanding under the Starwood LTIP and other Starwood equity plans. On the Merger Date, outstanding Starwood equity awards were converted to equity awards with respect to Marriott’s common stock, resulting in 1.1 million RSUs (“Starwood RSUs”), 1.6 million shares of Restricted Stock (“Starwood Restricted Stock”), and 0.2 million options. The awards generally vest over three years in equal annual installments, subject to a prorated adjustment for employees who are terminated under certain circumstances or who retire. The Starwood RSUs and Starwood Restricted Stock had a weighted average fair value of $68 on the Merger Date.

We recorded share-based compensation expense on these awards of $19 million for the eight days ended September 30, 2016. Deferred compensation costs for unvested awards totaled $87 million as of September 30, 2016.

6. INCOME TAXES

Our effective tax rate increased to 46.4% for the 2016 third quarter from 32.4% for the 2015 third quarter, and to 33.1% for the 2016 first three quarters from 32.4% for the 2015 first three quarters, primarily due to lower benefits from Starwood merger-related costs that were incurred in foreign jurisdictions with lower tax rates, and the portion of merger-related costs that were incurred in the U.S. that are not deductible for U.S. income tax purposes. The year-to-date increase is also due to a $5 million reserve established due to a recent examination of a tax position taken in a foreign jurisdiction, partially offset by a $15 million release of a valuation allowance related to a capital loss.

For the 2016 third quarter, our unrecognized tax benefits balance of $398 million increased by $374 million from year-end 2015, primarily reflecting $365 million of Legacy-Starwood unrecognized tax benefits recorded in connection with the Starwood Combination. The unrecognized tax benefits balance included $269 million of tax positions that, if recognized, would impact our effective tax rate. It is reasonably possible that $38 million of unrecognized tax benefits as of September 30, 2016 will be reversed within the next twelve months. We are

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continuing to analyze whether or not we have properly identified all liabilities associated with tax uncertainties in jurisdictions where Starwood operates, which could result in changes to our provisional values related to our uncertain tax positions.

We file income tax returns, including returns for our subsidiaries, in various jurisdictions around the world. The U.S. Internal Revenue Service (“IRS”) has examined our federal income tax returns, and has settled all issues for tax years through 2013 for Marriott and through 2006 for Starwood. Our Marriott 2014 and 2015 tax year audits are substantially complete, and our Marriott 2016 tax year audit is currently ongoing. Starwood is currently under audit by the IRS for years 2010 through 2012 and in appeals for years 2007 through 2009. Various foreign, state, and local income tax returns are also under examination by the applicable taxing authorities.

We paid cash for income taxes, net of refunds, of $243 million in the 2016 first three quarters and $161 million in the 2015 first three quarters.

7. COMMITMENTS AND CONTINGENCIES

Guarantees

We issue guarantees to certain lenders and hotel owners, chiefly to obtain long-term management contracts. The guarantees generally have a stated maximum funding amount and a term of three to ten years. The terms of guarantees to lenders generally require us to fund if cash flows from hotel operations are inadequate to cover annual debt service or to repay the loan at maturity. The terms of the guarantees to hotel owners generally require us to fund if the hotels do not attain specified levels of operating profit. Guarantee fundings to lenders and hotel owners are generally recoverable out of future hotel cash flows and/or proceeds from the sale of hotels. We also enter into project completion guarantees with certain lenders in conjunction with hotels that we or our joint venture partners are building.

We present the maximum potential amount of our future guarantee fundings and the carrying amount of our liability for guarantees for which we are the primary obligor at September 30, 2016 in the following table:



($ in millions) Guarantee Type	Maximum Potential Amount of Future Fundings		Recorded Liability for Guarantees
Debt service	$	122	$	22
Operating profit	121		37
Other	8		1
Total guarantees where we are the primary obligor	$	251	$	60

Our liability at September 30, 2016, for guarantees for which we are the primary obligor is reflected in our Balance Sheets as $60 million of “Other noncurrent liabilities.”

Our guarantees listed in the preceding table include $14 million of debt service guarantees and $51 million of operating profit guarantees that will not be in effect until the underlying properties open and we begin to operate the properties or certain other events occur.

The table above does not include a “contingent purchase obligation,” which is not currently in effect, that we entered into in the 2014 first quarter to provide credit support to lenders for a construction loan. We entered into that agreement in conjunction with signing a management agreement for The Times Square EDITION hotel in New York City (currently projected to open in 2017), and the hotel’s ownership group obtaining acquisition financing and entering into agreements concerning future construction financing for the mixed use project (which includes both the hotel and adjacent retail space). Under the agreement, we granted the lenders the right, upon an uncured event of default by the hotel owner under, and an acceleration of, the mortgage loan, to require us to purchase the hotel component of the property for $315 million during the first two years after opening (the “put option”). Because we would acquire the building upon exercise of the put option, we have not included the amount in the table above. The lenders may extend the period during which the put option is exercisable for up to three years to complete foreclosure if the loan has been accelerated and certain other conditions are met. We do not currently expect that the lenders will require us to purchase the hotel component. We have no ownership interest in this hotel.

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The preceding table also does not include the following guarantees:

•

$48 million of guarantees for Senior Living Services, consisting of lease obligations of $35 million (expiring in 2019) and lifecare bonds of $13 million (estimated to expire in 2019), for which we are secondarily liable. Sunrise Senior Living, Inc. (“Sunrise”) is the primary obligor on both the leases and $2 million of the lifecare bonds; HCP, Inc., as successor by merger to CNL Retirement Properties, Inc. (“CNL”), is the primary obligor on the remaining $11 million of the lifecare bonds. Before we sold the Senior Living Services business in 2003, these were our guarantees of obligations of our then consolidated Senior Living Services subsidiaries. Sunrise and CNL have indemnified us for any fundings we may be called upon to make under these guarantees. Our liability for these guarantees had a carrying value of $2 million at September 30, 2016. In conjunction with our consent of the 2011 extension of certain lease obligations until 2018, Sunrise provided us with $1 million of cash collateral and an $85 million letter of credit issued by Key Bank to secure our continued exposure under the lease guarantees during the extension term and certain other obligations of Sunrise. The letter of credit balance was $45 million at the end of the 2016 third quarter. During the extension term, Sunrise agreed to make an annual payment to us from the cash flow of the continuing lease facilities, subject to a $1 million annual minimum. In the 2013 first quarter, Sunrise merged with Health Care REIT, Inc. (“HCN”), and Sunrise’s management business was acquired by an entity formed by affiliates of Kohlberg Kravis Roberts & Co. LP, Beecken Petty O’Keefe & Co., Coastwood Senior Housing Partners LLC, and HCN. In April of 2014, HCN and Revera Inc., a private provider of senior living services, acquired Sunrise’s management business.

•

Lease obligations, for which we became secondarily liable when we acquired the Renaissance Hotel Group N.V. in 1997, consisting of annual rent payments of approximately $4 million and total remaining rent payments through the initial term of approximately $16 million. The majority of these obligations expire by the end of 2020. CTF Holdings Ltd. (“CTF”) had originally provided €35 million in cash collateral in the event that we are required to fund under such guarantees, approximately $2 million (€2 million) of which remained at September 30, 2016. Our exposure for the remaining rent payments through the initial term will decline to the extent that CTF obtains releases from the landlords or these hotels exit our system. Since the time we assumed these guarantees, we have not funded any amounts, and we do not expect to fund any amounts under these guarantees in the future.

•

A guarantee relating to the timeshare business, which was outstanding at the time of the 2011 Timeshare spin-off and for which we became secondarily liable as part of the spin-off. The guarantee relates to a Marriott Vacations Worldwide Corporation (“MVW”) payment obligation, for which we had an exposure of $4 million (5 million Singapore Dollars) at September 30, 2016. MVW has indemnified us for this obligation, which we expect will expire in 2022. We have not funded any amounts under this obligation, and do not expect to do so in the future. Our liability for this obligation had a carrying value of $1 million at September 30, 2016.

•

A guarantee for a lease, originally entered into in 2000, for which we became secondarily liable in 2012 as a result of our sale of the ExecuStay corporate housing business to Oakwood Worldwide (“Oakwood”). Oakwood has indemnified us for the obligations under this guarantee. Our total exposure at the end of the 2016 third quarter for this guarantee was $6 million in future rent payments through the end of the lease in 2019.

In addition to the guarantees described in the preceding paragraphs, in conjunction with financing obtained for specific projects or properties owned by us or joint ventures in which we are a party, we may provide industry standard indemnifications to the lender for loss, liability, or damage occurring as a result of the actions of the other joint venture owner or our own actions.

Commitments

In addition to the guarantees we note in the preceding paragraphs, as of September 30, 2016, we had the following commitments outstanding, which are not recorded on our Balance Sheets:


•	Commitments to invest up to $9 million of equity for non-controlling interests in joint ventures. We expect to fund $2 million of these commitments over the next 12 months. We do not expect to fund the remaining $7 million of these commitments, most of which expire in 2019.

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•

We have a right and under certain circumstances an obligation to acquire our joint venture partner’s remaining interests in two joint ventures over the next five years at a price based on the performance of the ventures. In conjunction with this contingent obligation, we advanced $20 million (€15 million) in deposits, $13 million (€11 million) of which are remaining. The amounts on deposit are refundable to the extent we do not acquire our joint venture partner’s remaining interests.


•	Various loan commitments totaling $58 million, of which we expect to fund $10 million in 2016, $28 million in 2017, and $20 million thereafter.

•

Various commitments to purchase information technology hardware, software, accounting, finance, and maintenance services in the normal course of business totaling $477 million. We expect to purchase goods and services subject to these commitments as follows: $58 million in 2016, $157 million in 2017, $115 million in 2018, and $147 million thereafter. The increase in purchase commitments compared to year-end 2015 is primarily due to the consolidation of $353 million of Starwood’s purchase commitments. We are evaluating the contractual nature of such commitments.


•	Several commitments aggregating $41 million, which we do not expect to fund.

Letters of Credit

At September 30, 2016, we had $158 million of letters of credit outstanding (all outside the Credit Facility, as defined in Footnote No. 8, “Long-Term Debt”), the majority of which were for our self-insurance programs. Surety bonds issued as of September 30, 2016, totaled $154 million, the majority of which state governments requested in connection with our self-insurance programs.

Legal Proceedings

The Korea Fair Trade Commission recently informed us that the previously disclosed investigation of pricing practices at several of our hotels in Seoul, Korea is now closed.

In November 2015, Starwood announced a malware intrusion had affected point of sale systems at various outlets within certain Legacy-Starwood branded hotels. This resulted in the potential compromise of credit card data and associated personal information. The affected credit card companies are evaluating whether and to what extent financial penalties should be imposed. In addition, a putative class action arising from the malware intrusion was filed against Starwood on January 5, 2016 in the United States District Court for the Southern District of California. The named plaintiff, Paul Dugas, does not specify any damages sought, and a motion to dismiss the case is awaiting resolution by the Court.

On May 10, 2016, the owners of the Sheraton Grand Chicago and the Westin Times Square, New York, filed suit in the Supreme Court of New York against Starwood and Marriott seeking to enjoin the merger of Starwood and Marriott based upon alleged violations of the territorial restrictions contained in the management agreements for those two hotels arising as a result of the merger of Marriott and Starwood. While the attempt to enjoin the merger ultimately failed, the underlying suit continues as a breach of contract claim, and plaintiffs seek, among other remedies, monetary damages relating to the alleged violations.

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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 as of the end of the 2016 third quarter and year-end 2015:



	At Period End
($ in millions)	September 30, 2016			December 31, 2015
Senior Notes:
Series H Notes, interest rate of 6.2%, face amount of $289, matured June 15, 2016 (effective interest rate of 6.3%)	$	—		$	289
Series I Notes, interest rate of 6.4%, face amount of $293, maturing June 15, 2017 (effective interest rate of 6.5%)	293			293
Series K Notes, interest rate of 3.0%, face amount of $600, maturing March 1, 2019 (effective interest rate of 4.4%)	596			595
Series L Notes, interest rate of 3.3%, face amount of $350, maturing September 15, 2022 (effective interest rate of 3.4%)	348			348
Series M Notes, interest rate of 3.4%, face amount of $350, maturing October 15, 2020 (effective interest rate of 3.6%)	347			347
Series N Notes, interest rate of 3.1%, face amount of $400, maturing October 15, 2021 (effective interest rate of 3.4%)	396			395
Series O Notes, interest rate of 2.9%, face amount of $450, maturing March 1, 2021 (effective interest rate of 3.1%)	446			446
Series P Notes, interest rate of 3.8%, face amount of $350, maturing October 1, 2025 (effective interest rate of 4.0%)	344			343
Series Q Notes, interest rate of 2.3%, face amount of $750, maturing January 15, 2022 (effective interest rate of 2.5%)	742			—
Series R Notes, interest rate of 3.1%, face amount of $750, maturing June 15, 2026 (effective interest rate of 3.3%)	742			—
Commercial paper	1,599			938
Credit Facility	989			—
Other	105			113
Starwood debt:
2018 Senior Notes, interest rate of 6.8%, face amount $371, maturing May 15, 2018 (effective interest rate of 1.6%)	403			—
2019 Senior Notes, interest rate of 7.2%, face amount $210, maturing December 1, 2019 (effective interest rate of 2.2%)	245			—
2023 Senior Notes, interest rate of 3.1%, face amount $350, maturing February 15, 2023 (effective interest rate of 3.1%)	350			—
2025 Senior Notes, interest rate of 3.8%, face amount $350, maturing March 15, 2025 (effective interest rate of 2.8%)	375			—
2034 Senior Notes, interest rate of 4.5%, face amount $300, maturing October 1, 2034 (effective interest rate of 4.1%)	317			—
Capital lease obligations	167			—
Mortgages and other, interest rates ranging from non-interest bearing to 3.7%, various maturities	18			—
	8,822			4,107
Less: Current portion of long-term debt	(316		)	(300		)
	$	8,506		$	3,807

All of our long-term debt is recourse to us but unsecured. We paid cash for interest, net of amounts capitalized, of $99 million in the 2016 first three quarters and $71 million in the 2015 first three quarters.

Our long-term debt balance increased from year-end 2015 primarily due to the consolidation of Starwood’s long-term debt obligations in the 2016 third quarter and the issuance of debt to finance the cash portion of the Starwood Combination.

On the Merger Date, in accordance with the terms of the indentures governing the 2019 and 2023 Senior Notes, we initiated an offer to repurchase any or all Starwood 2019 and 2023 Senior Notes at a price of 101 percent of the aggregate principal amount, plus any accrued and unpaid interest. Upon expiration of the offer early in the 2016 fourth quarter, we extinguished less than $1 million aggregate principal amount of 2019 Senior Notes and $24 million aggregate principal amount of 2023 Senior Notes, resulting in total cash outflows of $24 million.

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In the 2016 second quarter, we issued $1,500 million aggregate principal amount of 2.300 percent Series Q Notes due 2022 (the “Series Q Notes”) and 3.125 percent Series R Notes due 2026 (the “Series R Notes” and together with the Series Q Notes, the “Notes”). We received net proceeds of approximately $1,485 million from the offering of the Notes, after deducting the underwriting discount and estimated expenses. We used these proceeds, together with borrowings under our Credit Facility, as defined below, primarily to finance the cash component of the consideration paid to Starwood shareholders and certain fees and expenses we incurred in connection with the Starwood Combination.

We issued the Notes under an indenture dated as of November 16, 1998 with The Bank of New York Mellon, as successor to JPMorgan Chase Bank, N.A. (formerly known as The Chase Manhattan Bank), as trustee. We may redeem some or all of each series of the Notes prior to maturity under the terms provided in the applicable form of

Note.

In the 2016 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 $4,000 million, up to $2,500 million of which was initially available, with the full $4,000 million becoming available to us with the closing of the Starwood Combination. The availability of the Credit Facility supports our commercial paper program and general corporate needs, including working capital, capital expenditures, share repurchases, letters of credit, and acquisitions. In addition, we used borrowings under the Credit Facility, a portion of which we later repaid with commercial paper supported by the Credit Facility, to finance part of the cash component of the consideration we paid to Starwood shareholders and certain fees and expenses we incurred in connection with the Starwood Combination. Borrowings under the Credit Facility generally bear interest at LIBOR (the London Interbank Offered Rate) plus a spread, based on our public debt rating. We also pay quarterly fees on the Credit Facility at a rate based on our public debt rating. While any outstanding commercial paper borrowings and/or borrowings under our Credit Facility generally have short-term maturities, we classify the outstanding borrowings as long-term based on our ability and intent to refinance the outstanding borrowings on a long-term basis. The Credit Facility expires on June 10, 2021. See the “Cash Requirements and Our Credit Facilities” caption later in this report in the “Liquidity and Capital Resources” section for information on our available borrowing capacity at September 30, 2016.

The following table presents future principal payments, net of discounts, premiums, and debt issuance costs, that are due for our debt as of the end of the 2016 third quarter:



Debt Principal Payments ($ in millions)	Amount
2016, remaining	$	17
2017	305
2018	416
2019	856
2020	363
Thereafter	6,865
Balance at September 30, 2016	$	8,822

9. NOTES RECEIVABLE

The following table presents the composition of our notes receivable balances (net of reserves and unamortized discounts) at the end of the 2016 third quarter and year-end 2015:



	At Period End
($ in millions)	September 30, 2016			December 31, 2015
Senior, mezzanine, and other loans	$	246		$	221
Less current portion	(6		)	(6		)
	$	240		$	215

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We do not have any past due notes receivable amounts at the end of the 2016 third quarter. The unamortized discounts for our notes receivable were $23 million at the end of the 2016 third quarter and $31 million at year-end 2015.

The following table presents the expected future principal repayments (net of reserves and unamortized discounts) as well as interest rates for our notes receivable as of the end of the 2016 third quarter:



Notes Receivable Principal Repayments (net of reserves and unamortized discounts) and Interest Rates ($ in millions)	Amount
2016, remaining	$	4
2017	4
2018	74
2019	16
2020	17
Thereafter	131
Balance at September 30, 2016	$	246
Weighted average interest rate at September 30, 2016	6.8%
Range of stated interest rates at September 30, 2016	0 - 18%

At the end of the 2016 third quarter, our recorded investment in impaired senior, mezzanine, and other loans was $74 million, and we had $57 million allowance for credit losses, leaving $17 million of exposure to our investment in impaired loans. At year-end 2015, our recorded investment in impaired senior, mezzanine, and other loans was $72 million, and we had a $55 million allowance for credit losses, leaving $17 million of exposure to our investment in impaired loans. Our average investment in impaired notes receivable totaled $74 million for the 2016 third quarter, $73 million for the 2016 first three quarters, $71 million for the 2015 third quarter, and $67 million for the 2015 first three quarters.

10. 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, 2016						December 31, 2015
($ in millions)	Carrying Amount			Fair Value			Carrying Amount			Fair Value
Senior, mezzanine, and other loans	$	240		$	226		$	215		$	209
Marketable securities	30			30			37			37
Total noncurrent financial assets	$	270		$	256		$	252		$	246

Senior notes	$	(5,650	)	$	(5,828	)	$	(2,766	)	$	(2,826	)
Commercial paper/ Credit Facility	(2,588		)	(2,588		)	(938		)	(938		)
Other long-term debt	(100		)	(111		)	(99		)	(108		)
Other noncurrent liabilities	(63		)	(63		)	(63		)	(63		)
Total noncurrent financial liabilities	$	(8,401	)	$	(8,590	)	$	(3,866	)	$	(3,935	)

We estimate the fair value of our senior, mezzanine, and other loans, including the current portion, by discounting cash flows using risk-adjusted rates and current market conditions, which are Level 3 inputs.

We carry our marketable securities at fair value. Our marketable securities include debt securities of the U.S. Government, its sponsored agencies and other U.S. corporations invested for our self-insurance programs, as well as shares of publicly traded companies, which we value using directly observable Level 1 inputs. The carrying value of these marketable securities was $30 million at the end of the 2016 third quarter.

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We estimate the fair value of our other long-term debt, including the current portion and excluding leases, using expected future payments discounted at risk-adjusted rates, which are Level 3 inputs. We determine the fair value of our senior notes using quoted market prices, which are directly observable Level 1 inputs. As noted in Footnote No. 8, “Long-Term Debt,” even though our commercial paper borrowings and Credit Facility borrowings generally have short-term maturities of 30 days or less, we classify outstanding commercial paper borrowings and Credit Facility borrowings as long-term based on our ability and intent to refinance them on a long-term basis. As we are a frequent issuer of commercial paper, we use pricing from recent transactions as Level 2 inputs in estimating fair value. At year-end 2015, we determined that the carrying value of our commercial paper and Credit Facility borrowings approximated fair value due to the short maturity. Our other long-term liabilities largely consist of guarantees. We measure our liability for guarantees at fair value on a nonrecurring basis, which is when we issue or modify a guarantee using Level 3 internally developed inputs. At the end of the 2016 third quarter and year-end 2015, we determined that the carrying values of our guarantee liabilities approximated their fair values based on Level 3 inputs.

See the “Fair Value Measurements” caption of Footnote No. 2, “Summary of Significant Accounting Policies” of our 2015 Form 10-K for more information on the input levels we use in determining fair value.

11. OTHER COMPREHENSIVE INCOME (LOSS) AND SHAREHOLDERS' EQUITY (DEFICIT)

The following tables detail the accumulated other comprehensive income (loss) activity for the 2016 first three quarters and 2015 first three quarters:



($ in millions)	Foreign Currency Translation Adjustments			Derivative Instrument Adjustments			Available-For-Sale Securities Unrealized Adjustments		Accumulated Other Comprehensive Loss
Balance at year-end 2015	$	(192	)	$	(8	)	$	4	$	(196	)
Other comprehensive income (loss) before reclassifications ⁽¹⁾	27			(3		)	—		24
Reclassification of losses from accumulated other comprehensive loss	—			3			—		3
Net other comprehensive income	27			—			—		27
Balance at September 30, 2016	$	(165	)	$	(8	)	$	4	$	(169	)



($ in millions)	Foreign Currency Translation Adjustments			Derivative Instrument Adjustments			Available-For-Sale Securities Unrealized Adjustments			Accumulated Other Comprehensive Loss
Balance at year-end 2014	$	(72	)	$	(9	)	$	11		$	(70	)
Other comprehensive (loss) income before reclassifications ⁽¹⁾	(47		)	9			(5		)	(43		)
Reclassification of losses (gains) from accumulated other comprehensive loss	3			(10		)	—			(7		)
Net other comprehensive loss	(44		)	(1		)	(5		)	(50		)
Balance at September 30, 2015	$	(116	)	$	(10	)	$	6		$	(120	)


(1)	Other comprehensive income (loss) before reclassifications for foreign currency translation adjustments includes intra-entity foreign currency transactions that are of a long-term investment nature. These resulted in a loss of $1 million for the 2016 first three quarters and a gain of $33 million for the 2015 first three quarters.

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The following table details the changes in common shares outstanding and shareholders’ equity (deficit) for the 2016 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
256.3		Balance at year-end 2015	$	(3,590	)	$	5	$	2,821	$	4,878		$	(11,098	)	$	(196	)
—		Net income	536			—		—		536			—			—
—		Other comprehensive income	27			—		—		—			—			27
—		Cash dividends ($0.85 per share)	(257		)	—		—		(257		)	—			—
1.8		Employee stock plan	64			—		26		(20		)	58			—
(3.7	)	Purchase of treasury stock	(225		)	—		—		—			(225		)	—
136.1		Starwood Combination ⁽¹⁾	9,286			—		2,893		1,238			5,155			—
390.5		Balance at September 30, 2016	$	5,841		$	5	$	5,740	$	6,375		$	(6,110	)	$	(169	)


(1)	Represents Marriott common stock and equity-based awards issued in the Starwood Combination, which also resulted in the depletion of our accumulated historical losses on reissuances of treasury stock in Retained Earnings.

12. BUSINESS SEGMENTS

We are a diversified global lodging company with operations in the following three reportable business segments, which included the following brands at the end of the 2016 third quarter:


•	North American Full-Service, which includes The Ritz-Carlton, EDITION, JW Marriott, Autograph Collection Hotels, Renaissance Hotels, Marriott Hotels, Delta Hotels and Resorts, and Gaylord Hotels located in the United States and Canada;


•	North American Limited-Service, which includes AC Hotels by Marriott, Courtyard, Residence Inn, SpringHill Suites, Fairfield Inn & Suites, TownePlace Suites, and Moxy Hotels properties located in the United States and Canada; and


•	International, which includes The Ritz-Carlton, Bulgari Hotels & Resorts, EDITION, JW Marriott, Autograph Collection Hotels, Renaissance Hotels, Marriott Hotels, Marriott Executive Apartments, AC Hotels by Marriott, Courtyard, Residence Inn, Fairfield Inn & Suites, Protea Hotels, and Moxy Hotels located outside the United States and Canada.

Due to the timing of the Starwood Combination, it was not practicable to allocate Starwood’s results to our operating segments for the 2016 third quarter. As a result, we included the results of Starwood’s operations for the eight days ended September 30, 2016 in “Other unallocated corporate.”

Our North American Full-Service and North American Limited-Service segments meet the applicable accounting criteria to be reportable business segments. The following four operating segments do not meet the criteria for separate disclosure as reportable business segments: Asia Pacific, Caribbean and Latin America, Europe, and Middle East and Africa, and accordingly, we combined these four operating segments into an “all other category” which we refer to as “International.”

We evaluate the performance of our operating segments using “segment profits” which is based largely on the results of the segment without allocating corporate expenses, income taxes, indirect general, administrative, and other expenses, or merger-related costs and charges. We allocate gains and losses, equity in earnings or losses from our joint ventures, and direct general, administrative, and other expenses to each of our segments. The caption “Other unallocated corporate” in the subsequent discussion represents a portion of our revenues, general, administrative, and other expenses, merger-related costs and charges, equity in earnings or losses, and other gains or losses that we do not allocate to our segments. It also includes license fees we receive from our credit card programs, fees from vacation ownership licensing agreements, and the results of Starwood’s operations for the eight days ended September 30, 2016. See Footnote No. 2, “Acquisitions and Dispositions” for more information on the Starwood Combination.

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Our chief operating decision maker monitors assets for the consolidated company but does not use assets by operating segment when assessing performance or making operating segment resource allocations.

Segment Revenues



	Three Months Ended				Nine Months Ended
($ in millions)	September 30, 2016		September 30, 2015		September 30, 2016		September 30, 2015
North American Full-Service Segment	$	2,222	$	2,128	$	6,903	$	6,555
North American Limited-Service Segment	936		846		2,675		2,405
International	545		532		1,672		1,623
Total segment revenues	3,703		3,506		11,250		10,583
Other unallocated corporate	239		72		366		197
Total consolidated revenues	$	3,942	$	3,578	$	11,616	$	10,780

Segment Profits



	Three Months Ended						Nine Months Ended
($ in millions)	September 30, 2016			September 30, 2015			September 30, 2016			September 30, 2015
North American Full-Service Segment	$	148		$	126		$	506		$	424
North American Limited-Service Segment	193			180			539			510
International	67			69			217			203
Total segment profits	408			375			1,262			1,137
Other unallocated corporate	(231		)	(28		)	(324		)	(64		)
Interest expense, net of interest income	(46		)	(38		)	(137		)	(102		)
Income taxes	(61		)	(99		)	(265		)	(314		)
Net income	$	70		$	210		$	536		$	657

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Acquisition of Starwood Hotels & Resorts Worldwide

On September 23, 2016 (the “Merger Date”), we completed the Starwood Combination. Our Income Statements reflect a net loss of $131 million for Starwood’s results of operations for the eight days ended September 30, 2016, including merger-related costs and charges, net of tax, of $145 million. See both Footnote No. 2, “Acquisitions and Dispositions” and Footnote No. 3, “Merger-related costs and charges” for more information. We did not allocate Starwood’s results to any of our business segments.

Our discussion and analysis of our results of operations in Item 2 generally begins with a discussion of the impact of the Starwood Combination on our results and is followed by a discussion of other factors primarily relating to our Legacy-Marriott operations except where otherwise noted.

Forward-Looking Statements

We make forward-looking statements in Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report based on the beliefs and assumptions of our management and on information currently available to us. Forward-looking statements include information about our possible or assumed future results of operations, which follow under the headings “Business and Overview,” “Liquidity and Capital Resources,” and other statements throughout this report preceded by, followed by or that include the words “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,” or similar expressions.

Any number of risks and uncertainties could cause actual results to differ materially from those we express in our forward-looking statements, including the risks and uncertainties we describe below and other factors we describe from time to time in our periodic filings with the U.S. Securities and Exchange Commission (the “SEC”). We therefore caution you not to rely unduly on any forward-looking statement. The forward-looking statements in this report speak only as of the date of this report, and we undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future developments, or otherwise.

In addition, see the “Item 1A. Risk Factors” caption in the “Part II-OTHER INFORMATION” section of this report.

BUSINESS AND OVERVIEW

We are a worldwide operator, franchisor, and licensor of hotels and timeshare properties in 120 countries and territories under 30 brand names at the end of the 2016 third quarter. We also develop, operate, and market residential properties and provide services to home/condominium owner associations. Under our business model, we typically manage or franchise hotels, rather than own them. We report our operations in three segments: North American Full-Service, North American Limited-Service, and International.

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The following charts present our rooms by ownership type and by segment for our Legacy-Marriott business.

We earn base management fees and in many cases incentive management fees from the properties that we manage, and we earn franchise fees on the properties that others operate under franchise agreements with us. Base fees typically consist of a percentage of property-level revenue while incentive fees typically consist of a percentage of net house profit adjusted for a specified owner return. We calculate net house profit as gross operating profit (house profit) less non-controllable expenses such as insurance, real estate taxes, and capital spending reserves.

Our emphasis on long-term management contracts and franchising tends to provide more stable earnings in periods of economic softness, while adding new hotels to our system generates growth, typically with little or no investment by the Company. This strategy has driven substantial growth while minimizing financial leverage and risk in a cyclical industry. In addition, we believe minimizing our capital investments and adopting a strategy of recycling the investments that we do make maximizes and maintains our financial flexibility.

We remain focused on doing the things that we do well; that is, selling rooms, taking care of our guests, and making sure we control costs both at company-operated properties and at the corporate level (“above-property”). Our brands remain strong as a result of skilled management teams, dedicated associates, superior customer service with an emphasis on guest and associate satisfaction, significant distribution, our Marriott Rewards and The Ritz-Carlton Rewards loyalty programs, a multichannel reservations system, and desirable property amenities. We strive to effectively leverage our size and broad distribution.

We, along with owners and franchisees, continue to invest in our brands by means of new, refreshed, and reinvented properties, new room and public space designs, and enhanced amenities and technology offerings. We address, through various means, hotels in our system that do not meet standards. We continue to enhance the appeal of our proprietary, information-rich, and easy-to-use website, Marriott.com, and of our associated mobile smartphone applications and mobile website that connect to Marriott.com, through functionality and service improvements, and we expect to continue capturing an increasing proportion of property-level reservations via our website.

Our profitability, as well as that of owners and franchisees, has benefited from our approach to property-level and above-property productivity. Properties in our system continue to maintain very tight cost controls. We also control above-property costs, some of which we allocate to hotels, by remaining focused on systems, processing, and support areas.

Performance Measures

We believe Revenue per Available Room (“RevPAR”), which we calculate by dividing room sales for comparable properties by room nights available for the period, is a meaningful indicator of our performance because it measures the period-over-period change in room revenues for comparable properties. RevPAR may not be comparable to similarly titled measures, such as revenues. We also believe occupancy and average daily rate

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(“ADR”), which are components of calculating RevPAR, are meaningful indicators of our performance. Occupancy, which we calculate by dividing occupied rooms by total rooms available, measures the utilization of a property’s available capacity. ADR, which we calculate by dividing property room revenue by total rooms sold, measures average room price and is useful in assessing pricing levels.

For the properties located in countries that use currencies other than the U.S. dollar, the comparisons to the prior year period are on a constant U.S. dollar basis. We calculate constant dollar statistics by applying exchange rates for the current period to the prior comparable period.

We define our comparable properties as those that were open and operating under one of our brands since the beginning of the last full calendar year (since January 1, 2015 for the current period) and have not, in either the current or previous year: (i) undergone significant room or public space renovations or expansions, (ii) been converted between company-operated and franchised, or (iii) sustained substantial property damage or business interruption.

We also believe company-operated house profit margin, which is the ratio of property-level gross operating profit to total property-level revenue, is a meaningful indicator of our performance because this ratio measures our overall ability as the operator to produce property-level profits by generating sales and controlling the operating expenses over which we have the most direct control. House profit includes room, food and beverage, and other revenue and the related expenses including payroll and benefits expenses, as well as repairs and maintenance, utility, general and administrative, and sales and marketing expenses. House profit does not include the impact of management fees, furniture, fixtures and equipment replacement reserves, insurance, taxes, or other fixed expenses.

Legacy-Marriott Business Trends

Our 2016 first three quarters results reflected general economic growth and favorable demand for our Legacy-Marriott brands in many markets around the world, although such economic growth was weaker than the Company expected at the beginning of the year. First three quarters results also reflected a year-over-year increase in the number of properties in our system. For the three months ended September 30, 2016, Legacy-Marriott comparable worldwide systemwide RevPAR increased 2.5 percent to $115.27, ADR increased 2.1 percent on a constant dollar basis to $150.26, and occupancy increased 0.3 percentage points to 76.7 percent, compared to the same period a year ago. For the nine months ended September 30, 2016, Legacy-Marriott comparable worldwide systemwide RevPAR increased 2.7 percent to $113.39, ADR increased 2.1 percent on a constant dollar basis to $152.39, and occupancy increased 0.4 percentage points to 74.4 percent, compared to the same period a year ago.

In North America, 2016 first three quarters lodging demand for our Legacy-Marriott brands reflected increased group business, higher levels of government travel, but weaker premium-priced corporate transient demand. Revenue growth was constrained in certain markets by new select-service lodging supply, weak demand from the oil and gas industries, the impact of the strong dollar on international travel to U.S. gateway markets, and moderate GDP growth. Group revenue pace for systemwide full-service hotels in North America was down 2 percent as of September 30, 2016 for stays in the 2016 fourth quarter and up 4 percent for the 2017 full year, compared to group revenue pace as of September 30, 2015 for comparable periods.

Our Europe region experienced higher demand for our Legacy-Marriott brands in the 2016 first three quarters across most countries, primarily due to increased group and transient business, partially constrained by weaker demand in France, Belgium, and Turkey following terrorism events in those countries. Results were particularly strong in Spain and Portugal. In our Asia Pacific region, corporate and other transient business increased in India and Thailand. RevPAR growth in Greater China in the 2016 first three quarters was constrained by the impact of supply in certain Southern China markets and lower Mainland China travel to Hong Kong, while demand in Shanghai remained strong. Middle East demand was weaker during the 2016 first three quarters reflecting the region’s instability, oversupply in Dubai and Qatar, and lower oil prices. In South Africa, results were favorable in the 2016 first three quarters, reflecting strong local demand and higher international tourism attracted by the weak South African Rand. In the Caribbean and Latin America, growth was driven by strong demand in Mexico and the Olympic Games in Rio de Janeiro, but performance in the region was partially constrained by concerns relating to the Zika Virus and weak economic conditions in South America.

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We monitor market conditions and provide the tools for our hotels to price rooms daily in accordance with individual property demand levels, generally adjusting room rates as demand changes. Our hotels modify the mix of business to improve revenue as demand changes. For our company-operated properties, we continue to focus on enhancing property-level house profit margins and making productivity improvements.

Compared to the 2015 first three quarters, Legacy-Marriott worldwide comparable company-operated house profit margins in the 2016 first three quarters increased by 80 basis points, and Legacy-Marriott worldwide comparable company-operated house profit per available room (“HP-PAR”) increased by 5.4 percent on a constant U.S. dollar basis, reflecting rate increases, improved productivity, and solid cost controls. These same factors contributed to North American company-operated house profit margins increasing by 100 basis points compared to the 2015 first three quarters. HP-PAR at those same properties increased by 6.5 percent. International company-operated house profit margins increased by 20 basis points, and HP-PAR at those properties increased by 3.3 percent reflecting increased demand, higher RevPAR in most locations, and improved productivity.

System Growth and Pipeline

During the 2016 first three quarters, our Legacy-Marriott brands added 232 properties (33,278 rooms) while 24 properties (3,241 rooms) exited our system. Approximately 34 percent of new Legacy-Marriott rooms are located outside North America, and 14 percent of the room additions are conversions from competitor brands. In addition, we added 1,344 properties (381,839 rooms) through the Starwood Combination, increasing our total properties to 5,974.

At the end of the 2016 third quarter, including rooms under Legacy-Starwood brands, we had nearly 420,000 rooms in our development pipeline, which includes hotel rooms under construction, hotel rooms under signed contracts, and more than 46,000 hotel rooms approved for development but not yet under signed contracts.

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Property and Room Summaries

We operated, franchised, and licensed the following properties at September 30, 2016:



	Managed		Franchised / Licensed		Owned/Leased		Other ⁽²⁾		Total
	Properties	Rooms	Properties	Rooms	Properties	Rooms	Properties	Rooms	Properties	Rooms
Legacy-Marriott Brands
North American Full-Service
Marriott Hotels	130	67,427	208	64,821	4	2,102	—	—	342	134,350
JW Marriott	15	9,695	10	4,469	—	—	—	—	25	14,164
Renaissance Hotels	26	11,625	57	16,103	1	310	—	—	84	28,038
Autograph Collection Hotels	3	1,065	58	12,804	—	—	—	—	61	13,869
Delta Hotels and Resorts	25	6,764	12	3,020	—	—	—	—	37	9,784
Gaylord Hotels	5	8,098	—	—	—	—	—	—	5	8,098
The Ritz-Carlton	39	11,410	1	429	—	—	—	—	40	11,839
The Ritz-Carlton Residences ⁽¹⁾	34	4,733	1	55	—	—	—	—	35	4,788
EDITION	2	567	—	—	—	—	—	—	2	567
EDITION Residences ⁽¹⁾	1	25	—	—	—	—	—	—	1	25
Total North American Full-Service	280	121,409	347	101,701	5	2,412	—	—	632	225,522

North American Limited-Service
Courtyard	256	40,821	673	89,786	19	2,816	—	—	948	133,423
Residence Inn	114	17,155	601	70,570	1	192	—	—	716	87,917
Fairfield Inn & Suites	5	1,324	807	73,219	—	—	—	—	812	74,543
SpringHill Suites	31	4,973	322	36,992	—	—	—	—	353	41,965
TownePlace Suites	15	1,740	278	27,709	—	—	—	—	293	29,449
AC Hotels by Marriott	—	—	—	—	—	—	9	1,518	9	1,518
Moxy Hotels	—	—	2	294	—	—	—	—	2	294
Total North American Limited-Service	421	66,013	2,683	298,570	20	3,008	9	1,518	3,133	369,109

International
Marriott Hotels	150	42,184	43	12,582	4	1,445	—	—	197	56,211
JW Marriott	45	17,934	6	1,473	1	496	—	—	52	19,903
Marriott Executive Apartments	28	4,195	—	—	—	—	—	—	28	4,195
Renaissance Hotels	50	16,207	25	6,956	3	749	—	—	78	23,912
Autograph Collection Hotels	3	584	36	9,473	—	—	5	348	44	10,405
The Ritz-Carlton	50	14,135	—	—	2	553	—	—	52	14,688
The Ritz-Carlton Residences ⁽¹⁾	8	416	—	—	—	—	—	—	8	416
The Ritz-Carlton Serviced Apartments	4	579	—	—	—	—	—	—	4	579
EDITION	1	173	—	—	—	—	—	—	1	173

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	Managed		Franchised / Licensed		Owned/Leased		Other ⁽²⁾		Total
	Properties	Rooms	Properties	Rooms	Properties	Rooms	Properties	Rooms	Properties	Rooms
Bulgari Hotels & Resorts	2	117	1	85	—	—	—	—	3	202
Bulgari Residences ⁽¹⁾	1	5	—	—	—	—	—	—	1	5
Courtyard	75	15,892	54	10,411	3	644	—	—	132	26,947
Residence Inn	5	517	2	200	1	140	—	—	8	857
Fairfield Inn & Suites	7	1,070	2	386	—	—	—	—	9	1,456
AC Hotels by Marriott	—	—	—	—	—	—	85	10,886	85	10,886
Protea Hotels	36	4,093	51	3,548	10	1,601	—	—	97	9,242
Moxy Hotels	—	—	4	800	—	—	—	—	4	800
Total International	465	118,101	224	45,914	24	5,628	90	11,234	803	180,877