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 June 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: 254,400,460 shares of Class A Common Stock, par value $0.01 per share, outstanding at July 15, 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 Six Months Ended June 30, 2016 and June 30, 2015	2

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

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

	Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 2016 and June 30, 2015	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

	Forward-Looking Statements	19

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39

Item 4.	Controls and Procedures	39

Part II.	Other Information:

Item 1.	Legal Proceedings	40

Item 1A.	Risk Factors	40

Item 6.	Exhibits	50

	Signature	51

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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						Six Months Ended
	June 30, 2016			June 30, 2015			June 30, 2016			June 30, 2015
REVENUES
Base management fees	$	186		$	191		$	358		$	356
Franchise fees	235			221			442			425
Incentive management fees	94			81			195			170
Owned, leased, and other revenue	245			243			492			500
Cost reimbursements	3,142			2,953			6,187			5,751
	3,902			3,689			7,674			7,202
OPERATING COSTS AND EXPENSES
Owned, leased, and other - direct	173			183			339			377
Reimbursed costs	3,142			2,953			6,187			5,751
Depreciation, amortization, and other	30			32			61			76
General, administrative, and other	168			152			331			297
	3,513			3,320			6,918			6,501
OPERATING INCOME	389			369			756			701
Gains and other income, net	—			20			—			20
Interest expense	(57		)	(42		)	(104		)	(78		)
Interest income	7			6			13			14
Equity in earnings	5			2			5			5
INCOME BEFORE INCOME TAXES	344			355			670			662
Provision for income taxes	(97		)	(115		)	(204		)	(215		)
NET INCOME	$	247		$	240		$	466		$	447
EARNINGS PER SHARE
Earnings per share - basic	$	0.97		$	0.88		$	1.83		$	1.63
Earnings per share - diluted	$	0.96		$	0.87		$	1.80		$	1.59
CASH DIVIDENDS DECLARED PER SHARE	$	0.30		$	0.25		$	0.55		$	0.45

See Notes to Condensed Consolidated Financial Statements.

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MARRIOTT INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

($ in millions)

(Unaudited)



	Three Months Ended						Six Months Ended
	June 30, 2016			June 30, 2015			June 30, 2016			June 30, 2015
Net income	$	247		$	240		$	466		$	447
Other comprehensive income (loss):
Foreign currency translation adjustments	3			7			25			(19		)
Derivative instrument adjustments, net of tax	1			(2		)	(4		)	7
Unrealized loss on available-for-sale securities, net of tax	(1		)	(1		)	—			(2		)
Reclassification of losses (gains), net of tax	1			(2		)	2			(4		)
Total other comprehensive income (loss), net of tax	4			2			23			(18		)
Comprehensive income	$	251		$	242		$	489		$	429

See Notes to Condensed Consolidated Financial Statements.

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MARRIOTT INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

($ in millions)



	(Unaudited)
	June 30, 2016			December 31, 2015
ASSETS
Current assets
Cash and equivalents	$	679		$	96
Accounts and notes receivable, net	1,152			1,103
Prepaid expenses	71			77
Other	26			30
Assets held for sale	31			78
	1,959			1,384
Property and equipment, net	1,056			1,029
Intangible assets
Contract acquisition costs and other	1,473			1,451
Goodwill	947			943
	2,420			2,394
Equity and cost method investments	179			165
Notes receivable, net	227			215
Deferred taxes, net	586			672
Other noncurrent assets	223			223
	$	6,650		$	6,082
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities
Current portion of long-term debt	$	303		$	300
Accounts payable	621			593
Accrued payroll and benefits	756			861
Liability for guest loyalty programs	992			952
Accrued expenses and other	572			527
	3,244			3,233
Long-term debt	4,057			3,807
Liability for guest loyalty programs	1,720			1,622
Other noncurrent liabilities	1,091			1,010
Shareholders’ deficit
Class A Common Stock	5			5
Additional paid-in-capital	2,787			2,821
Retained earnings	5,185			4,878
Treasury stock, at cost	(11,266		)	(11,098		)
Accumulated other comprehensive loss	(173		)	(196		)
	(3,462		)	(3,590		)
	$	6,650		$	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)



	Six Months Ended
	June 30, 2016			June 30, 2015
OPERATING ACTIVITIES
Net income	$	466		$	447
Adjustments to reconcile to cash provided by operating activities:
Depreciation, amortization, and other	61			76
Share-based compensation	59			55
Income taxes	61			99
Liability for guest loyalty programs	131			101
Working capital changes	(45		)	(68		)
Other	65			42
Net cash provided by operating activities	798			752
INVESTING ACTIVITIES
Capital expenditures	(78		)	(159		)
Dispositions	53			581
Loan advances	(24		)	(12		)
Loan collections	2			14
Contract acquisition costs	(37		)	(72		)
Acquisition of a business, net of cash acquired	—			(136		)
Redemption of debt security	—			121
Other	12			15
Net cash (used in) provided by investing activities	(72		)	352
FINANCING ACTIVITIES
Commercial paper/Credit Facility, net	(941		)	136
Issuance of long-term debt	1,483			—
Repayment of long-term debt	(294		)	(4		)
Issuance of Class A Common Stock	16			31
Dividends paid	(140		)	(124		)
Purchase of treasury stock	(249		)	(1,107		)
Other	(18		)	—
Net cash used in financing activities	(143		)	(1,068		)
INCREASE IN CASH AND EQUIVALENTS	583			36
CASH AND EQUIVALENTS, beginning of period	96			104
CASH AND EQUIVALENTS, end of period	$	679		$	140

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”). In order to make this report easier to read, we also refer throughout to (i) our Condensed Consolidated Financial Statements as our “Financial Statements,” (ii) our Condensed Consolidated Statements of Income as our “Income Statements,” (iii) our Condensed Consolidated Balance Sheets as our “Balance Sheets,” (iv) our 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 June 30, 2016 and December 31, 2015, the results of our operations for the three and six months ended June 30, 2016 and June 30, 2015, and cash flows for the six months ended June 30, 2016 and June 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.

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 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.

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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 all income tax effects of awards, including 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 excess tax benefits to be presented as an operating inflow rather than as a financing inflow. 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.

2. ACQUISITIONS AND DISPOSITIONS

Planned Acquisition

On November 15, 2015, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) to combine with Starwood Hotels & Resorts Worldwide, Inc. (“Starwood”). The Merger Agreement provides for the Company to combine with Starwood in a series of transactions after which Starwood will be an indirect wholly owned subsidiary of the Company (the “Starwood Combination”). On March 20, 2016, we entered into Amendment Number 1 (the “Amendment”) to the Merger Agreement. The Amendment modified the merger consideration payable to shareholders of Starwood. If the combination transactions are completed, shareholders of Starwood will receive 0.80 shares of our Class A Common Stock, par value $0.01 per share, and $21.00 in cash, without interest, for each share of Starwood common stock, par value $0.01 per share, that they own immediately before these transactions. On April 8, 2016, shareholders of both Marriott and Starwood approved the combination transactions, and in the 2016 first half, we cleared the antitrust and competition reviews in a number of jurisdictions, including the United States, Canada, Saudi Arabia, Mexico, and European Union. We expect that the combination will close in the 2016 third quarter, after remaining customary conditions are satisfied, including receipt of an additional antitrust approval.

Dispositions and Planned Dispositions

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

At the end of the 2016 second quarter, we held $31 million of assets related to the remaining Miami Beach EDITION residences (the “residences”) classified as “Assets held for sale” and $2 million of liabilities associated with those assets, which we recorded under “Accrued expenses and other” on our Balance Sheet.

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3. EARNINGS PER SHARE

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



	Three Months Ended				Six Months Ended
(in millions, except per share amounts)	June 30, 2016		June 30, 2015		June 30, 2016		June 30, 2015
Computation of Basic Earnings Per Share
Net income	$	247	$	240	$	466	$	447
Weighted average shares outstanding	254.3		272.4		254.3		275.1
Basic earnings per share	$	0.97	$	0.88	$	1.83	$	1.63
Computation of Diluted Earnings Per Share
Net income	$	247	$	240	$	466	$	447
Weighted average shares outstanding	254.3		272.4		254.3		275.1
Effect of dilutive securities
Employee stock option and appreciation right plans	1.7		2.3		1.9		2.4
Deferred stock incentive plans	0.5		0.6		0.6		0.6
Restricted stock units	1.5		2.0		1.9		2.5
Shares for diluted earnings per share	258.0		277.3		258.7		280.6
Diluted earnings per share	$	0.96	$	0.87	$	1.80	$	1.59

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 the 2016 second quarter and 0.6 million for the 2016 first half and 0.3 million for the 2015 second quarter and 0.2 million for the 2015 first half from our calculation of diluted earnings per share because their exercise prices were greater than the average market prices.

4. SHARE-BASED COMPENSATION

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 $31 million for the 2016 second quarter and $30 million for the 2015 second quarter, $59 million for the 2016 first half, and $55 million for the 2015 first half. Deferred compensation costs for unvested awards totaled $213 million at June 30, 2016 and $116 million at December 31, 2015.

RSUs and PSUs

We granted 1.6 million RSUs during the 2016 first half to certain officers and key employees, and those units vest generally over four years in equal annual installments commencing one year after the grant date. We granted 0.2 million PSUs during the 2016 first half 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 half to certain senior leaders and members of the Company’s Starwood integration team that, contingent upon the closing of the Starwood Combination and 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 half had a weighted average grant-date fair value of $63.

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SARs

We granted 0.4 million SARs to officers, key employees, and non-employee directors during the 2016 first half. 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 half was $24 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 half:



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.

Other Information

As of the end of the 2016 second quarter, we had 23 million remaining shares authorized under the Stock Plan.

5. INCOME TAXES

Our effective tax rate decreased from 32.4% to 28.3% for the three months ended June 30, 2016, and from 32.4% to 30.5% for the six months ended June 30, 2016, primarily due to a 2016 release of a valuation allowance related to a capital loss, partially offset by a $5 million reserve established due to a recent examination of a tax position taken in a foreign jurisdiction.

For the 2016 second quarter, our unrecognized tax benefits balance of $32 million increased by $8 million from year-end 2015, consisting of $4 million for tax positions taken during the current period and a $4 million reserve due to a recent examination of a tax position taken in a foreign jurisdiction. The unrecognized tax benefits balance included $22 million of tax positions that, if recognized, would impact our effective tax rate.

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 we have settled all issues for tax years through 2013. We participate in the IRS Compliance Assurance Program, which accelerates IRS examination of key transactions with the goal of resolving any issues before the taxpayer files its return. As a result, our 2014 tax year audit is substantially complete. Our 2015 and 2016 tax year audits are currently ongoing. 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 $128 million in the 2016 first half and $90 million in the 2015 first half.

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6. 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 four 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 as loans repayable to us 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 June 30, 2016 in the following table:



($ in millions) Guarantee Type	Maximum Potential Amount of Future Fundings		Recorded Liability for Guarantees
Debt service	$	113	$	21
Operating profit	96		36
Other	8		1
Total guarantees where we are the primary obligor	$	217	$	58

Our liability at June 30, 2016, for guarantees for which we are the primary obligor is reflected in our Balance Sheets as $58 million of “Other noncurrent liabilities.”

Our guarantees listed in the preceding table include $11 million of debt service guarantees, $44 million of operating profit guarantees, and $1 million of other 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.

The preceding table also does not include the following guarantees:

•

$53 million of guarantees for Senior Living Services, consisting of lease obligations of $38 million (expiring in 2019) and lifecare bonds of $15 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 $3 million of the lifecare bonds; HCP, Inc., as successor by merger to CNL Retirement Properties, Inc. (“CNL”), is the primary obligor on the remaining $12 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 $3 million at June 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

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the lease guarantees during the extension term and certain other obligations of Sunrise. The letter of credit balance was $49 million at the end of the 2016 second 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 $17 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 June 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 (6 million Singapore Dollars) at June 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 June 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 second 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 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 June 30, 2016, we had the following commitments outstanding, which are not recorded on our Balance Sheets:

•

A commitment to invest up to $8 million of equity for a non-controlling interest in a partnership that plans to purchase North American full-service and limited-service properties, or purchase or develop hotel-anchored mixed-use real estate projects. We expect to fund $1 million of this commitment. We do not expect to fund the remaining $7 million of this commitment prior to the end of the commitment period in 2019.


•	A commitment to invest up to $22 million of equity for non-controlling interests in a partnership that plans to purchase or develop limited-service properties in Asia. We expect to fund $2 million of this commitment in 2016. We do not expect to fund the remaining $20 million of this commitment prior to the end of the commitment period in 2016.

•

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.

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•	A commitment to invest up to $3 million of equity into a joint venture in which we have a non-controlling interest in order to fund renovations of guest rooms. We expect to fully fund this commitment, which expires in 2016.


•	Various loan commitments totaling $52 million, of which we expect to fund $5 million in 2016, $38 million in 2017, and $9 million thereafter.


•	Various commitments to purchase information technology hardware, software, accounting, finance, and maintenance services in the normal course of business totaling $120 million. We expect to purchase goods and services subject to these commitments as follows: $54 million in 2016, $51 million in 2017, $11 million in 2018, and $4 million thereafter.


•	Several commitments aggregating $40 million, which we do not expect to fund.

Letters of Credit

At June 30, 2016, we had $77 million of letters of credit outstanding (all outside the Credit Facility, as defined in Footnote No. 7, “Long-Term Debt”), the majority of which were for our self-insurance programs. Surety bonds issued as of June 30, 2016, totaled $160 million, the majority of which state governments requested in connection with our self-insurance programs.

Legal Proceedings

In March 2012, the Korea Fair Trade Commission (“KFTC”) obtained documents from two of our managed hotels in Seoul, Korea in connection with an investigation which we believe is focused on pricing of hotel services within the Seoul region. Since then, the KFTC has conducted additional fact-gathering at those two hotels and also has collected information from another Marriott managed hotel located in Seoul. We understand that the KFTC also has sought documents from numerous other hotels in Seoul and other parts of Korea that we do not operate, own, or franchise. We have not received a complaint or other legal process. We are cooperating with this investigation, which continues to be ongoing.

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7. LONG-TERM DEBT

We provide detail on our long-term debt balances in the following table as of the end of the 2016 second quarter and year-end 2015:



	At Period End
($ in millions)	June 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%)	395			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%)	741			—
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	—			938
Credit Facility	—			—
Other	108			113
	4,360			4,107
Less: Current portion of long-term debt	(303		)	(300		)
	$	4,057		$	3,807

All of our long-term debt is recourse to us but unsecured. We paid cash for interest, net of amounts capitalized, of $65 million in the 2016 first half and $54 million in the 2015 first half.

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 will pay interest on the Series Q Notes on January 15 and July 15 of each year, commencing on January 15, 2017, and will pay interest on the Series R Notes on June 15 and December 15 of each year, commencing on December 15, 2016. We received net proceeds of approximately $1,485 million from the offering of the Notes, after deducting the underwriting discount and estimated expenses. We expect to use these proceeds, together with borrowings under our Credit Facility, as defined below, to finance the cash component of the consideration to Starwood shareholders and certain fees and expenses we incur in connection with the Starwood Combination or, if the Starwood Combination is not consummated, for general corporate purposes, which may include working capital, capital expenditures, acquisitions, stock repurchases or repayment of outstanding commercial paper or other borrowings.

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 available to us at the time of the amendment.

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Upon the closing of the Starwood Combination, which remains subject to the receipt of an additional antitrust approval and other customary closing conditions, the full $4,000 million of aggregate commitments will be available under the Credit Facility. 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 may use borrowings under the Credit Facility, or commercial paper supported by the Credit Facility, to finance part of the cash component of the consideration to Starwood shareholders and certain fees and expenses we incur 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 June 30, 2016.

The following table presents future principal payments that are due for our debt as of the end of the 2016 second quarter:



Debt Principal Payments (net of unamortized discounts) ($ in millions)	Amount
2016	$	6
2017	302
2018	9
2019	606
2020	358
Thereafter	3,079
Balance at June 30, 2016	$	4,360

8. 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 second quarter and year-end 2015:



	At Period End
($ in millions)	June 30, 2016			December 31, 2015
Senior, mezzanine, and other loans	$	234		$	221
Less current portion	(7		)	(6		)
	$	227		$	215

We do not have any past due notes receivable amounts at the end of the 2016 second quarter. The unamortized discounts for our notes receivable were $29 million at the end of the 2016 second quarter and $31 million at year-end 2015.

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



Notes Receivable Principal Payments (net of reserves and unamortized discounts) and Interest Rates ($ in millions)	Amount
2016	$	5
2017	3
2018	62
2019	5
2020	6
Thereafter	153
Balance at June 30, 2016	$	234
Weighted average interest rate at June 30, 2016	7.7%
Range of stated interest rates at June 30, 2016	0 - 18%

At the end of the 2016 second 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 $73 million for the 2016 second quarter, $73 million for the 2016 first half, $69 million for the 2015 second quarter, and $67 million for the 2015 first half.

9. FAIR VALUE OF FINANCIAL INSTRUMENTS

We believe that the fair values of our current assets and current liabilities approximate their reported carrying amounts. We present the carrying values and the fair values of noncurrent financial assets and liabilities that qualify as financial instruments, determined under current guidance for disclosures on the fair value of financial instruments, in the following table:



	June 30, 2016						December 31, 2015
($ in millions)	Carrying Amount			Fair Value			Carrying Amount			Fair Value
Senior, mezzanine, and other loans	$	227		$	214		$	215		$	209
Marketable securities	35			35			37			37
Total noncurrent financial assets	$	262		$	249		$	252		$	246

Senior notes	$	(3,959	)	$	(4,117	)	$	(2,766	)	$	(2,826	)
Commercial paper	—			—			(938		)	(938		)
Other long-term debt	(94		)	(109		)	(99		)	(108		)
Other noncurrent liabilities	(62		)	(62		)	(63		)	(63		)
Total noncurrent financial liabilities	$	(4,115	)	$	(4,288	)	$	(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, both of 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 $35 million at the end of the 2016 second quarter.

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. 7, “Long-Term Debt,” even though our commercial paper borrowings generally have short-term

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maturities of 30 days or less, we classify outstanding commercial paper 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 approximated its 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, that is when we issue or modify a guarantee, using Level 3 internally developed inputs. At the end of the 2016 second 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.

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

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



($ 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⁾	25			(4		)	—		21
Reclassification of losses from accumulated other comprehensive loss	—			2			—		2
Net other comprehensive income (loss)	25			(2		)	—		23
Balance at June 30, 2016	$	(167	)	$	(10	)	$	4	$	(173	)



($ 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⁾	(19		)	7			(2		)	(14		)
Reclassification of losses (gains) from accumulated other comprehensive loss	3			(7		)	—			(4		)
Net other comprehensive (loss) income	(16		)	—			(2		)	(18		)
Balance at June 30, 2015	$	(88	)	$	9		$	9		$	(88	)


(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 $3 million for the 2016 first half and a gain of $36 million for the 2015 first half.

The following table details the changes in common shares outstanding and shareholders’ deficit for the 2016 first half:



(in millions, except per share amounts)
Common Shares Outstanding			Total			Class A Common Stock		Additional Paid-in- Capital			Retained Earnings			Treasury Stock, at Cost			Accumulated Other Comprehensive Loss
256.3		Balance at year-end 2015	$	(3,590	)	$	5	$	2,821		$	4,878		$	(11,098	)	$	(196	)
—		Net income	466			—		—			466			—			—
—		Other comprehensive income	23			—		—			—			—			23
—		Cash dividends ($0.55 per share)	(140		)	—		—			(140		)	—			—
1.8		Employee stock plan	4			—		(34		)	(19		)	57			—
(3.7	)	Purchase of treasury stock	(225		)	—		—			—			(225		)	—
254.4		Balance at June 30, 2016	$	(3,462	)	$	5	$	2,787		$	5,185		$	(11,266	)	$	(173	)

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11. 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 second 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.

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, or indirect general, administrative, and other expenses. 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, 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 and license fees from MVW.

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.

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Segment Revenues



	Three Months Ended				Six Months Ended
($ in millions)	June 30, 2016		June 30, 2015		June 30, 2016		June 30, 2015
North American Full-Service Segment	$	2,360	$	2,252	$	4,681	$	4,427
North American Limited-Service Segment	906		821		1,739		1,559
International	571		549		1,127		1,091
Total segment revenues	3,837		3,622		7,547		7,077
Other unallocated corporate	65		67		127		125
Total consolidated revenues	$	3,902	$	3,689	$	7,674	$	7,202

Segment Profits



	Three Months Ended						Six Months Ended
($ in millions)	June 30, 2016			June 30, 2015			June 30, 2016			June 30, 2015
North American Full-Service Segment	$	173		$	152		$	358		$	298
North American Limited-Service Segment	191			179			346			330
International	75			57			150			134
Total segment profits	439			388			854			762
Other unallocated corporate	(45		)	3			(93		)	(36		)
Interest expense, net of interest income	(50		)	(36		)	(91		)	(64		)
Income taxes	(97		)	(115		)	(204		)	(215		)
Net income	$	247		$	240		$	466		$	447

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

Forward-Looking Statements

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

Any number of risks and uncertainties could cause actual results to differ materially from those we express in our forward-looking statements, including the risks and uncertainties we describe below and other factors we describe from time to time in our periodic filings with the U.S. Securities and Exchange Commission (the “SEC”). We therefore caution you not to rely unduly on any forward-looking statement. The forward-looking statements in this report speak only as of the date of this report, and we undertake no obligation to update or revise any forward-looking statement, whether 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 88 countries and territories under 19 brand names at the end of the 2016 second 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.

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.

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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 this cost-efficient channel.

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.

Pending Combination with Starwood Hotels & Resorts Worldwide, Inc.

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 (“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.

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

Business Trends

Our 2016 first half results reflected general economic growth and favorable demand for our brands in many markets around the world, although such economic growth was weaker than the Company expected at the beginning of the year. First half results also reflected a year-over-year increase in the number of properties in our system. For the three months ended June 30, 2016, comparable worldwide systemwide RevPAR increased 2.9 percent to $118.97, ADR increased 1.9 percent on a constant dollar basis to $154.25, and occupancy increased 0.8 percentage points to 77.1 percent, compared to the same period a year ago. For the six months ended June 30, 2016, comparable worldwide systemwide RevPAR increased 2.8 percent to $112.45, ADR increased 2.2 percent on a constant dollar basis to $153.53, and occupancy increased 0.5 percentage points to 73.2 percent, compared to the same period a year ago.

In North America, 2016 first half lodging demand reflected strong group business, higher levels of discounted leisure travel, but weaker premium-priced corporate transient demand. Demand was particularly strong in the Los Angeles, San Francisco, Dallas, and Atlanta markets. 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.

In the 2016 first half, bookings for future group business in the U.S. remained strong. Group revenue pace for the remainder of 2016 for systemwide full-service hotels (Marriott, JW Marriott, Renaissance, The Ritz-Carlton, and Gaylord brands) in North America was up five percent as of June 30, 2016, compared to the 2015 first half group revenue pace for the remainder of 2015.

Our Europe region experienced higher demand in the 2016 first half 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, Japan, and Thailand. RevPAR growth in Greater China in the 2016 first half 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 half reflecting the region’s instability, oversupply in Dubai, and lower oil prices. In Africa, results were favorable in the 2016 first half, reflecting strong local demand and higher international tourism attracted by the weak South African Rand. In the Caribbean and Latin America, Mexico continued to experience strong demand, but overall performance in the region declined due to concerns relating to the Zika Virus and weak economic conditions.

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. Demand for higher rated rooms continued in many markets in the 2016 first half, which allowed our hotels to optimize mix in markets with low supply growth and increase ADR. For our company-operated properties, we continue to focus on enhancing property-level house profit margins and making productivity improvements.

System Growth and Pipeline

During the 2016 first half, we added 148 properties (20,724 rooms), while 18 properties (2,330 rooms) exited our system, increasing our total properties to 4,554. Approximately 34 percent of new rooms are located outside North America, and 15 percent of the room additions are conversions from competitor brands.

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At the end of the 2016 second quarter, we had more than 285,000 rooms in our development pipeline, which includes hotel rooms under construction, hotel rooms under signed contracts, and approximately 33,000 hotel rooms approved for development but not yet under signed contracts. This development pipeline information does not include rooms that would join our system through the Starwood Combination.

CONSOLIDATED RESULTS

The following discussion presents our analysis of results of our operations for the 2016 second quarter compared to the 2015 second quarter and the 2016 first half compared to the 2015 first half.

Revenues



	Three Months Ended									Six Months Ended
($ in millions)	June 30, 2016		June 30, 2015		Change 2016 vs. 2015					June 30, 2016		June 30, 2015		Change 2016 vs. 2015
Base management fees	$	186	$	191	$	(5	)	(3	)%	$	358	$	356	$	2		1	%
Franchise fees	235		221		14			6	%	442		425		17			4	%
Incentive management fees	94		81		13			16	%	195		170		25			15	%
	515		493		22			4	%	995		951		44			5	%
Owned, leased, and other revenue	245		243		2			1	%	492		500		(8		)	(2	)%
Cost reimbursements	3,142		2,953		189			6	%	6,187		5,751		436			8	%
	$	3,902	$	3,689	$	213		6	%	$	7,674	$	7,202	$	472		7	%

Second Quarter. The $5 million decrease in base management fees reflected lower deferred fees ($9 million), the impact of unfavorable foreign exchange rates ($4 million), and properties that converted from managed to franchised ($2 million), partially offset by stronger sales at existing properties ($5 million) and the impact of unit growth across our system ($5 million).

The $14 million increase in franchise fees reflected the impact of unit growth across our system ($12 million), stronger sales at existing properties ($5 million), and higher fees due to properties that converted from managed to franchised ($3 million), partially offset by lower relicensing fees ($3 million) and the impact of unfavorable foreign exchange rates ($2 million).

The $13 million increase in incentive management fees reflected higher net house profit, unit growth across our segments, and incentive fees earned from a limited-service portfolio ($5 million), partially offset by the impact of unfavorable foreign exchange rates ($2 million).

The $2 million increase in owned, leased, and other revenue reflected $7 million in higher other revenue predominately from branding fees ($5 million), partially offset by $5 million of lower owned and leased revenue. The decrease in owned and leased revenue was due to properties that converted to managed ($13 million), partially offset by improved results at properties following renovations ($9 million).

The $189 million increase in cost reimbursements revenue reflected growth in the Marriott Rewards program, the impact of higher property occupancies, and growth across our system.

First Half. The $2 million increase in base management fees reflected stronger sales at existing properties ($11 million) and the impact of unit growth across our system ($11 million), partially offset by lower deferred fees ($9 million), the impact of unfavorable foreign exchange rates ($9 million), and higher fees due to properties that converted from managed to franchised ($3 million).

The $17 million increase in franchise fees reflected the impact of unit growth across our system ($24 million), stronger sales at existing properties ($8 million), and higher fees due to properties that converted from managed to franchised ($4 million), partially offset by lower relicensing fees ($18 million) and the impact of unfavorable foreign exchange rates ($4 million).

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The $25 million increase in incentive management fees reflected higher net house profit, unit growth across our segments, incentive fees earned from a limited-service portfolio ($6 million), and $4 million of higher deferred fees, partially offset by the impact of unfavorable foreign exchange rates ($4 million).

The $8 million decrease in owned, leased, and other revenue reflected $34 million of lower owned and leased revenue, partially offset by $26 million in higher other revenue predominately from branding fees ($22 million). The decrease in owned and leased revenue primarily reflected properties that converted to managed ($42 million), partially offset by improved results at properties following renovations ($13 million).

The $436 million increase in cost reimbursements revenue reflected growth in the Marriott Rewards program, the impact of higher property occupancies, and growth across our system.

Operating Income

Second Quarter. Operating income increased by $20 million to $389 million in the 2016 second quarter from $369 million in the 2015 second quarter. The increase in operating income reflected a $22 million increase in fee revenue, a $12 million increase in owned, leased, and other revenue, net of direct expenses, and a $2 million decrease in depreciation, amortization, and other expense, partially offset by a $16 million increase in general, administrative, and other expenses. We discuss the reasons for the increases in fee revenue (base management fees, franchise fees, and incentive management fees) compared to the 2015 second quarter in the preceding “Revenues” section.

Owned, leased, and other revenue, net of direct expenses increased by $12 million (20 percent) to $72 million in the 2016 second quarter from $60 million in the 2015 second quarter. The increase was largely attributable to $5 million of higher owned and leased revenue, net of direct expenses and $5 million in higher branding fees. The $5 million of higher owned and leased revenue, net of direct expenses reflected $3 million in lower pre-opening expenses and $3 million of net favorable operating results following renovations, partially offset by $2 million from properties that converted to managed.

Depreciation, amortization, and other expense decreased by $2 million (6 percent) to $30 million in the 2016 second quarter from $32 million in the 2015 second quarter. The decrease primarily reflected a $4 million favorable variance to the 2015 impairment charge on corporate equipment.

General, administrative, and other expenses increased by $16 million (11 percent) to $168 million in the 2016 second quarter from $152 million in the 2015 second quarter due to $14 million in Starwood transaction and transition costs and $5 million of higher administrative costs, partially offset by $2 million in lower reserves for guarantee funding.

First Half. Operating income increased by $55 million to $756 million in the 2016 first half from $701 million in the 2015 first half. The increase in operating income reflected a $44 million increase in fee revenue, a $30 million increase in owned, leased, and other revenue, net of direct expenses, and a $15 million decrease in depreciation, amortization, and other expense, partially offset by a $34 million increase in general, administrative, and other expenses. We discuss the reasons for the increases in fee revenue (base management fees, franchise fees, and incentive management fees) compared to the 2015 first half in the preceding “Revenues” section.

Owned, leased, and other revenue, net of direct expenses increased by $30 million (24 percent) to $153 million in the 2016 first half from $123 million in the 2015 first half. The increase was largely attributable to $22 million in higher branding fees, $3 million of higher termination fees, and $2 million of higher owned and leased revenue, net of direct expenses. The $2 million of higher owned and leased revenue, net of direct expenses reflected $6 million of net favorable operating results following renovations and $4 million of lower pre-opening expenses, partially offset by $9 million from a property that converted to managed.

Depreciation, amortization, and other expense decreased by $15 million (20 percent) to $61 million in the 2016 first half from $76 million in the 2015 first half. The decrease primarily reflected a favorable variance to the 2015 impairment charges on the EDITION hotels ($12 million) and corporate equipment ($4 million).

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General, administrative, and other expenses increased by $34 million (11 percent) to $331 million in the 2016 first half from $297 million in the 2015 first half. The increase reflected $22 million in Starwood transaction and transition costs, $14 million of higher legal expenses net of litigation resolutions, and $11 million of higher administrative costs, partially offset by $12 million in lower reserves for guarantee funding.

Gains and Other Income, Net

Second Quarter. Gains and other income, net decreased by $20 million (100 percent) to $0 million in the 2016 second quarter compared to $20 million in the 2015 second quarter. The decrease is primarily due to the net gain that we recorded in the prior year, which consisted of a $41 million gain on the redemption of a preferred equity ownership interest, partially offset by $22 million of losses on dispositions of real estate.

First Half. Gains and other income, net decreased by $20 million (100 percent) to $0 million in the

2016 first half compared to $20 million in the 2015 first half due to the changes described in the preceding “Second Quarter” discussion.

Interest Expense

Second Quarter. Interest expense increased by $15 million (36 percent) to $57 million in the 2016 second quarter compared to $42 million in the 2015 second quarter. The increase was due to the amortization of costs for a bridge term loan facility commitment that we obtained in the 2016 first quarter and terminated in the 2016 second quarter ($11 million) and the issuances of Series Q and R Notes in the 2016 second quarter and Series O and P Notes in the 2015 third quarter ($9 million), partially offset by the maturities of Series H Notes in the 2016 second quarter and Series G Notes in the 2015 fourth quarter ($5 million).

First Half. Interest expense increased by $26 million (33 percent) to $104 million in the 2016 first half compared to $78 million in the 2015 first half. The increase was primarily due the issuances of Series Q and R Notes in the 2016 second quarter and Series O and P Notes in the 2015 third quarter ($15 million), the amortization of costs for a bridge term loan facility commitment that we obtained in the 2016 first quarter and terminated in the 2016 second quarter ($13 million), and net lower capitalized interest as a result of the completion of The New York (Madison Square Park) EDITION in the 2015 second quarter ($6 million), partially offset by the maturities of Series H notes in the 2016 second quarter and Series G Notes in the 2015 fourth quarter ($10 million).

Provision for Income Tax

Second Quarter. Provision for income tax decreased by $18 million (16 percent) to $97 million in the 2016 second quarter compared to $115 million in the 2015 second quarter. The decrease was primarily due to lower pre-tax earnings and a 2016 release of a valuation allowance related to a capital loss, partially offset by a $5 million reserve established due to a recent examination of a tax position taken in a foreign jurisdiction.

First Half. Provision for income tax decreased by $11 million (5 percent) to $204 million in the 2016 first half, compared to $215 million in the 2015 first half. The decrease was primarily due to a 2016 release of a valuation allowance related to a capital loss, partially offset by a $5 million reserve established due to a recent examination of a tax position taken in a foreign jurisdiction.

Adjusted Earnings Before Interest Expense, Taxes, Depreciation and Amortization (“Adjusted EBITDA”)

Earnings Before Interest Expense, Taxes, Depreciation and Amortization (“EBITDA”), a financial measure not required by, or presented in accordance with, U.S. GAAP, reflects Net Income excluding the impact of interest expense, provision for income taxes, and depreciation and amortization. Our non-GAAP measure of Adjusted EBITDA further adjusts EBITDA to exclude (1) pre-tax transaction and transition costs associated with the Starwood Combination, which we recorded in the “General, administrative, and other” caption of our Income Statements in the 2016 second quarter and 2016 first half, (2) the $41 million pre-tax gain on the redemption of a preferred equity ownership interest accounted for as a debt security and the $22 million pre-tax loss on dispositions of real estate, which we recorded in the “Gains and other income, net” caption of our Income Statements in the 2015 second quarter, (3) pre-tax impairment charges of $12 million in the 2015 first quarter, which we recorded in

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the “Depreciation, amortization, and other” caption of our Income Statements, and (4) share-based compensation expense for all periods presented.

We believe that Adjusted EBITDA is a meaningful indicator of our operating performance because it permits period-over-period comparisons of our ongoing core operations before these items and facilitates our comparison of results before these items with results from other lodging companies, and because it excludes certain items that can vary widely across different industries or among companies within the lodging industry. For example, interest expense can be dependent on a company’s capital structure, debt levels, and credit ratings, and accordingly interest expense’s impact on earnings varies significantly among companies. Similarly, tax positions will vary among companies as a result of their differing abilities to take advantage of tax benefits and the tax policies of the jurisdictions in which they operate. As a result, effective tax rates and provision for income taxes can vary considerably among companies. Our Adjusted EBITDA also excludes depreciation and amortization expense which we report under “Depreciation, amortization, and other,” as well as depreciation included under “Reimbursed costs” in our Income Statements, because companies utilize productive assets of different ages and use different methods of both acquiring and depreciating productive assets. These differences can result in considerable variability in the relative costs of productive assets and the depreciation and amortization expense among companies. We also exclude share-based compensation expense to address the considerable variability among companies in recording compensation expense because companies use share-based payment awards differently, both in the type and quantity of awards granted.

Adjusted EBITDA has limitations and should not be considered in isolation or a substitute for performance measures calculated under GAAP. This non-GAAP measure excludes certain cash expenses that we are obligated to make. In addition, other companies in our industry may calculate Adjusted EBITDA differently than we do or may not calculate it at all, which limits the usefulness of Adjusted EBITDA as a comparative measure.

We present our 2016 and 2015 second quarter and first half Net Income, as presented in accordance with GAAP, and Adjusted EBITDA calculations that reflect the changes we describe above and reconcile those measures in the following table:



	Three Months Ended					Six Months Ended
($ in millions)	June 30, 2016		June 30, 2015			June 30, 2016		June 30, 2015
Net Income	$	247	$	240		$	466	$	447
Interest expense	57		42			104		78
Tax Provision	97		115			204		215
Depreciation and amortization	30		32			61		64
Depreciation classified in Reimbursed costs	14		14			28		28
Interest expense from unconsolidated joint ventures	1		—			2		1
Depreciation and amortization from unconsolidated joint ventures	3		2			6		5
EBITDA	449		445			$	871	$	838
Starwood transaction and transition costs	14		—			22		—
Gain on redemption of debt security	—		(41		)	—		(41		)
Loss on dispositions of real estate	—		22			—		22
EDITION impairment charges	—		—			—		12
Share-based compensation (including share-based compensation reimbursed by third-party owners)	31		31			59		55
Adjusted EBITDA	$	494	$	457		$	952	$	886

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BUSINESS SEGMENTS

We are a diversified global lodging company with operations in three reportable business segments: North American Full-Service, North American Limited-Service, and International. See Footnote No. 11, “Business Segments,” to our Financial Statements for other information about each segment, including revenues and a reconciliation of segment profits to net income.

We added 285 properties (41,752 rooms), and 50 properties (6,301 rooms) exited our system since the end of the 2015 second quarter.

See the “CONSOLIDATED RESULTS” caption earlier in this report for further information.



	Three Months Ended								Six Months Ended
($ in millions)	June 30, 2016		June 30, 2015		Change 2016 vs. 2015				June 30, 2016		June 30, 2015		Change 2016 vs. 2015
Total segment revenues	$	3,837	$	3,622	$	215	6	%	$	7,547	$	7,077	$	470	7	%
Total segment profits	$	439	$	388	$	51	13	%	$	854	$	762	$	92	12	%

Second Quarter. The quarter-over-quarter increase in segment revenues of $215 million was a result of $194 million of higher cost reimbursements revenue, $13 million of higher franchise fees, and $13 million of higher incentive management fees, partially offset by $5 million of lower base management fees. The quarter-over-quarter increase in segment profits of $51 million reflected $20 million of prior year losses recorded in gains and other income, net, $13 million of higher franchise fees, $13 million of higher incentive management fees, an $11 million increase in owned, leased, and other revenue, net of direct expenses, and a $3 million increase in equity in earnings, partially offset by $5 million of lower base management fees, $2 million of higher general, administrative, and other expenses, and $2 million of higher depreciation, amortization, and other expense. For more information on the variances see the preceding sections beginning with “Revenues.”

In the 2016 second quarter, 64 percent of our managed properties paid incentive management fees to us versus 59 percent in the 2015 second quarter. In North America, 62 percent of managed properties paid incentive fees in the 2016 second quarter compared to 55 percent in the 2015 second quarter. Outside North America, 66 percent of managed properties paid incentive fees in both the 2016 second quarter and the 2015 second quarter. The percentage of North American properties that paid incentive management fees to us increased compared to the 2015 second quarter due to a large North American Limited-Service portfolio of properties that paid incentive management fees in the 2016 second quarter but did not do so in the 2015 second quarter. In addition, in the 2016 second quarter, 42 percent of our incentive management fees came from properties outside of North America versus 45 percent in the 2015 second quarter.

Compared to the 2015 second quarter, worldwide comparable company-operated house profit margins in the 2016 second quarter increased by 60 basis points and worldwide comparable company-operated house profit per available room (“HP-PAR”) increased by 4.8 percent on a constant U.S. dollar basis, reflecting rate increases, improved productivity, and lower utility costs. These same factors contributed to North American company-operated house profit margins increasing by 100 basis points compared to the 2015 second quarter. HP-PAR at those same properties increased by 6.5 percent. International company-operated house profit margins decreased by 10 basis points due to declines in our Middle East region. HP-PAR at International company-operated properties increased by 1.3 percent primarily reflecting increased demand and higher RevPAR in most locations, improved productivity, and solid cost controls.

First Half. The year-over-year increase in segment revenues of $470 million was a result of $443 million of higher cost reimbursements revenue, $25 million of higher incentive management fees, $16 million of higher franchise fees, and $2 million of higher base management fees, partially offset by $16 million of lower owned, leased, and other revenue. The year-over-year increase in segment profits of $92 million across our business reflected $25 million of higher incentive management fees, a $22 million increase in owned, leased, and other revenue, net of direct expenses, $20 million of prior year losses recorded in gains and other income, net, $16 million of higher franchise fees, a $6 million decrease in general, administrative, and other expenses, a $2 million

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increase in base management fees, and a $1 million increase in equity in earnings. For more information on the variances see the preceding sections beginning with “Revenues.”

In the 2016 first half, 68 percent of our managed properties paid incentive management fees to us versus 63 percent in the 2015 first half. In North America, 66 percent of managed properties paid incentive fees in the 2016 first half compared to 58 percent in the 2015 first half. Outside North America, 70 percent of managed properties paid incentive fees in the 2016 first half versus 71 percent in the 2015 first half. The percentage of North American properties that paid incentive management fees to us increased compared to the 2015 first half due to a large North American Limited-Service portfolio of properties that paid incentive management fees in the 2016 first half but did not do so in the 2015 first half. In addition, in the 2016 first half, 44 percent of our incentive management fees came from properties outside of North America versus 47 percent in the 2015 first half.

Compared to the 2015 first half, worldwide comparable company-operated house profit margins in the 2016 first half increased by 70 basis points and HP-PAR increased by 4.8 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 90 basis points compared to the 2015 first half. HP-PAR at those same properties increased by 5.9 percent. International company-operated house profit margins increased by 10 basis points, and HP-PAR at those properties increased by 2.6 percent reflecting increased demand, higher RevPAR in most locations, and improved productivity.

See “Segment and Brand Statistics” below for detailed information on systemwide RevPAR and company-operated RevPAR by segment, region, and brand.

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Property and Room Summaries

We operated, franchised, and licensed the following properties by segment and brand at June 30, 2016:



	Company-Operated		Franchised / Licensed		Other ⁽²⁾		Total
	Properties	Rooms	Properties	Rooms	Properties	Rooms	Properties	Rooms
North American Full-Service
Marriott Hotels	123	66,332	207	64,560	—	—	330	130,892
JW Marriott	15	9,695	10	4,469	—	—	25	14,164
Marriott Conference Centers	10	2,879	—	—	—	—	10	2,879
Renaissance Hotels	28	12,239	56	15,799	—	—	84	28,038
Autograph Collection Hotels	3	1,065	57	12,649	—	—	60	13,714
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⁾	32	4,001	1	55	—	—	33	4,056
EDITION	2	567	—	—	—	—	2	567
EDITION Residences ⁽¹⁾	1	25	—	—	—	—	1	25
Total North American Full-Service	283	123,075	344	100,981	—	—	627	224,056

North American Limited-Service
Courtyard	275	43,637	661	88,010	—	—	936	131,647
Residence Inn	113	16,982	590	69,106	—	—	703	86,088
Fairfield Inn & Suites	5	1,324	788	71,532	—	—	793	72,856
SpringHill Suites	31	4,973	318	36,524	—	—	349	41,497
TownePlace Suites	15	1,740	273	27,214	—	—	288	28,954
AC Hotels by Marriott	—	—	—	—	8	1,352	8	1,352
Moxy Hotels	—	—	2	294	—	—	2	294
Total North American Limited-Service	439	68,656	2,632	292,680	8	1,352	3,079	362,688

Total North American	722	191,731	2,976	393,661	8	1,352	3,706	586,744

International
Marriott Hotels	153	43,265	42	12,510	—	—	195	55,775
JW Marriott	47	18,554	5	1,355	—	—	52	19,909
Marriott Executive Apartments	27	4,131	—	—	—	—	27	4,131
Renaissance Hotels	53	16,956	25	6,957	—	—	78	23,913
Autograph Collection Hotels	3	584	34	9,291	5	348	42	10,223
Protea Hotels	46	5,701	51	3,583	—	—	97	9,284
The Ritz-Carlton	52	14,686	—	—	—	—	52	14,686
The Ritz-Carlton Residences ⁽¹⁾	8	416	—	—	—	—	8	416
The Ritz-Carlton Serviced Apartments	4	579	—	—	—	—	4	579
Bulgari Hotels & Resorts	2	117	1	85	—	—	3	202
Bulgari Residences ⁽¹⁾	1	5	—	—	—	—	1	5
EDITION	1	173	1	78	—	—	2	251
Courtyard	76	16,068	51	9,685	—	—	127	25,753
Residence Inn	5	517	2	200	—	—	7	717
Fairfield Inn & Suites	6	848	2	386	—	—	8	1,234
AC Hotels by Marriott	—	—	—	—	83	10,277	83	10,277
Moxy Hotels	—	—	2	414	—	—	2	414
Total International	484	122,600	216	44,544	88	10,625	788	177,769

Timeshare⁽³⁾