Financial Information

PART II

Item 8. Financial Statements and Supplementary Data.

MARRIOTT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. ACQUISITIONS AND DISPOSITIONS

2016 Acquisitions

We completed the Starwood Combination on September 23, 2016 (the “Merger Date”). Before the combination, Starwood was a leading hospitality company and a competitor of ours. 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 over 6,000 properties with nearly 1.2 million rooms, representing 30 leading brands from the moderate-tier to luxury in 122 countries and territories.

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 that we transferred.

Preliminary Fair Values of Assets Acquired and Liabilities Assumed. Our preliminary estimates of fair values of the assets that we acquired and the liabilities that we assumed are based on 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. During the 2016 fourth quarter, we refined our valuation models to reflect changes in assumptions related to contractual terms (such as territorial provisions and royalty rates), operating margins, discount rates, tax rates, and growth rates.

The following table presents our preliminary estimates of fair values of the assets that we acquired and the liabilities that we assumed on the Merger Date, as previously reported at the end of the 2016 third quarter and as of year-end 2016.

⁽¹⁾   Goodwill primarily represents the value that we expect to obtain from synergies and growth opportunities from our combined operations, and it is not deductible for tax purposes. See Footnote 13 “Intangible Assets and Goodwill” for our preliminary assignment of goodwill by reportable segment.

Property and Equipment. We acquired property and equipment, which primarily consisted of 15 owned hotels. We provisionally estimated the value of the land, building, and furniture and equipment associated with the hotels 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.

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 and franchise 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. We valued the lease agreements and leasehold interests using an income approach. 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, Starwood’s former vacation ownership business that is now part of ILG, for the exclusive use of the Westin and Sheraton brands in vacation ownership. In addition, the same agreement provides ILG with a non-exclusive license for St. Regis and The Luxury Collection vacation ownership properties existing on the Merger Date. Under this agreement, we receive a fixed annual license fee, adjusted for inflation, of $30 million plus certain variable fees based on sales volumes.

Equity Method Investments. We provisionally estimated the value of the investees’ real estate using the same methods as for property and equipment described above. We continue 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 adjustments of the assets and liabilities that we acquired from Starwood, including property and equipment, intangible assets, equity method investments, and long-term debt. We provisionally estimated deferred income taxes based on statutory tax rates in the jurisdictions of the legal entities where the acquired noncurrent assets and liabilities are taxed. We continue to assess the tax rates used, and we will update our estimate of deferred income taxes based on any changes to our provisional valuations of 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 SPG program is Starwood’s frequent traveler, customer loyalty, and multi-brand marketing program. We are reviewing the assumptions utilized in an actuarial valuation of the future redemption obligations, which could result in changes to the provisional value of the program liability.

Debt, Leases, and Other Contractual Obligations or Contingencies. We primarily valued debt using quoted market prices, which are considered Level 1 inputs as they are observable in the market. For more information, see Footnote 11 “Long-Term Debt.”

Most of the leases we acquired 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.

We identified certain onerous provisions within a few of the acquired management agreements. We valued liabilities associated with these provisions using an income approach and Level 3 inputs, including cash flows, discount rates, and growth assumptions. We continue to review and evaluate Starwood’s agreements, historical performance, discount rates, and growth assumptions, which could result in changes to these provisional values.

In connection with the Starwood Combination, we are currently assessing various regulatory compliance matters at several foreign Legacy-Starwood locations, including compliance with the U.S. Foreign Corrupt Practices Act. The results of this assessment may give rise to contingencies that could require us to record balance sheet liabilities or accrue expenses. While any such amounts are not currently estimable, we will review our provisional assessment of these contingencies as we gather more information.

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, we present these unaudited pro forma results for informational purposes only, and they 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.

The unaudited pro forma results include $113 million of integration costs for 2016 and $397 million of transaction and employee termination costs for 2015.

Starwood Results of Operations. The following table presents the results of Starwood operations included in our Income Statements from the Merger Date through year-end 2016.

2016 Dispositions and Planned Dispositions as of Year-End 2016

In the 2016 fourth quarter, we sold a North American Full-Service property, which we had acquired in the Starwood Combination, and received $165 million in cash. In the 2016 second quarter, we sold a North American Limited-Service segment plot of land and received $46 million in cash. We had previously classified these assets as “Assets held for sale.”

At year-end 2016, we held $588 million of assets classified as “Assets held for sale” and $26 million of liabilities recorded under “Accrued expenses and other” on our Balance Sheets, related to two hotels that we acquired through the Starwood Combination and the remaining Miami Beach EDITION residences.

2015 Acquisitions

In the 2015 second quarter, we acquired the Delta Hotels brand, management and franchise business, together with related intellectual property for approximately $134 million (C$170 million), plus $2 million (C$2 million) of working capital, for a total purchase price of $136 million (C$172 million) in cash. We finalized the purchase accounting during the 2015 third quarter and recognized approximately: $127 million (C$161 million) in intangible assets consisting of contract assets of $17 million (C$22 million), an indefinite-lived brand intangible of $91 million (C$115 million), and goodwill of $19 million (C$24 million); and $9 million (C$11 million) of tangible assets consisting of property and equipment and other assets. As a result of the transaction, we added 37 open hotels and resorts with 9,590 rooms across Canada, including 27 properties under management agreements and 10 properties under franchise agreements, plus five hotels under development.

2015 Dispositions and Planned Dispositions as of Year-End 2015

We sold The Miami Beach EDITION during the 2015 first quarter, and we sold The New York (Madison Square Park) EDITION at the beginning of the 2015 second quarter. We received total cash proceeds of $566 million in 2015. In the 2015 first quarter, we recorded a $6 million impairment charge for The New York (Madison Square Park) EDITION in the “Depreciation, amortization, and other” caption of our Income Statements as our cost estimates exceeded our total fixed sales price. We did not allocate the charge to any of our segments.

In the 2015 first quarter, we sold our interest in an International property and received $27 million (€24 million) in cash.

In the 2015 third quarter, our equity method investment in an entity that owns two hotels was redeemed. We received $42 million in cash, which was our basis in the investment, and included the proceeds in the “Other” caption of our Investing Activities section of our Consolidated Statements of Cash Flows.

In the 2015 fourth quarter, we sold an International property and received $62 million in cash. We recorded a loss of $11 million in the “Gains and other income, net” caption of our Income Statements.

At year-end 2015, we held $78 million of assets 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. We determined that the carrying values of those assets exceeded their fair values, which we estimated using a market approach and Level 3 inputs. Consequently, we recorded charges for the expected disposal loss, which represents the amount by which the carrying values, including any goodwill we must allocate, exceeds the fair values, less our anticipated cost to sell. We classified assets as held for sale and associated liabilities that relate to the following:

• $47 million in assets and $1 million in liabilities for a North American Limited-Service segment plot of land. During the 2015 second quarter, we determined that achieving certain milestones outlined in a signed purchase and sale agreement was likely, and we recorded a $4 million expected loss in the “Gains and other income, net” caption of our Income Statements.
   
  
• $31 million in assets and $2 million in liabilities for The Miami Beach EDITION residences (the “residences”). During the 2015 first quarter, we recorded a $6 million charge, which we did not allocate to any of our segments, following a review of comparable property values. We classified the residences charge in the “Depreciation, amortization, and other” caption of our Income Statements because it was part of a larger mixed-use project for which we had recorded similar charges in prior periods. During 2015, we sold five residences and received $20 million in cash.