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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________ 
FORM 10-Q
_______________________________________ 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
OR
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
_________________________________________________ 
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12532513&doc=16
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
 
Accelerated filer
 
¨
Non-accelerated filer
 
¨ 
 
Smaller Reporting Company
 
¨
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 341,130,300 shares of Class A Common Stock, par value $0.01 per share, outstanding at October 24, 2018.




Table of Contents

MARRIOTT INTERNATIONAL, INC.
FORM 10-Q TABLE OF CONTENTS
 
 
 
Page No.
 
 
 
Part I.
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Part II.
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.



Item 6.
 
 
 
 



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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements

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

 
Three Months Ended
 
Nine Months Ended
 
September 30, 2018

September 30, 2017
 
September 30, 2018
 
September 30, 2017
REVENUES
 
 
 
 
 
 
 
Base management fees
$
279

 
$
269

 
$
852

 
$
818

Franchise fees
502

 
419

 
1,394

 
1,182

Incentive management fees
151

 
138

 
482

 
433

Gross fee revenues
932

 
826

 
2,728

 
2,433

Contract investment amortization
(13
)
 
(11
)
 
(44
)
 
(34
)
Net fee revenues
919

 
815

 
2,684

 
2,399

Owned, leased, and other revenue
397

 
433

 
1,226

 
1,309

Cost reimbursement revenue
3,733

 
3,830

 
11,491

 
11,493

 
5,049

 
5,078

 
15,401

 
15,201

OPERATING COSTS AND EXPENSES
 
 
 
 
 
 
 
Owned, leased, and other-direct
315

 
351

 
985

 
1,057

Depreciation, amortization, and other
52

 
54

 
164

 
176

General, administrative, and other
221

 
205

 
685

 
651

Merger-related costs and charges
12

 
28

 
64

 
100

Reimbursed expenses
3,879

 
3,650

 
11,693

 
11,137

 
4,479

 
4,288

 
13,591

 
13,121

OPERATING INCOME
570

 
790

 
1,810

 
2,080

Gains and other income, net
18

 
6

 
191

 
31

Interest expense
(86
)
 
(73
)
 
(246
)
 
(216
)
Interest income
5

 
9

 
16

 
24

Equity in earnings
61

 
6

 
95

 
29

INCOME BEFORE INCOME TAXES
568

 
738

 
1,866

 
1,948

Provision for income taxes
(85
)
 
(253
)
 
(375
)
 
(603
)
NET INCOME
$
483

 
$
485

 
$
1,491

 
$
1,345

EARNINGS PER SHARE
 
 
 
 
 
 
 
Earnings per share - basic
$
1.39

 
$
1.30

 
$
4.23

 
$
3.55

Earnings per share - diluted
$
1.38

 
$
1.29

 
$
4.18

 
$
3.51

CASH DIVIDENDS DECLARED PER SHARE
$
0.41

 
$
0.33

 
$
1.15

 
$
0.96

See Notes to Condensed Consolidated Financial Statements.

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

 
Three Months Ended
 
Nine Months Ended
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
Net income
$
483

 
$
485

 
$
1,491

 
$
1,345

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(66
)
 
107

 
(313
)
 
457

Derivative instrument adjustments, net of tax
(1
)
 
(5
)
 
7

 
(13
)
Unrealized gain (loss) on available-for-sale securities, net of tax

 
1

 

 
(1
)
Pension and postretirement adjustments, net of tax

 

 

 

Reclassification of losses, net of tax
2

 
4

 
18

 
5

Total other comprehensive (loss) income, net of tax
(65
)
 
107

 
(288
)
 
448

Comprehensive income
$
418

 
$
592

 
$
1,203

 
$
1,793

See Notes to Condensed Consolidated Financial Statements.


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MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in millions)
(Unaudited)

 
September 30,
2018
 
December 31,
2017
ASSETS
 
 
 
Current assets
 
 
 
Cash and equivalents
$
373

 
$
383

Accounts and notes receivable, net
2,175

 
1,973

Prepaid expenses and other
242

 
235

Assets held for sale
13

 
149

 
2,803

 
2,740

Property and equipment, net
1,967

 
1,793

Intangible assets
 
 
 
Brands
5,809

 
5,922

Contract acquisition costs and other
2,594

 
2,622

Goodwill
9,067

 
9,207

 
17,470

 
17,751

Equity method investments
689

 
734

Notes receivable, net
122

 
142

Deferred tax assets
171

 
93

Other noncurrent assets
611

 
593

 
$
23,833

 
$
23,846

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities
 
 
 
Current portion of long-term debt
$
617

 
$
398

Accounts payable
759

 
783

Accrued payroll and benefits
1,253

 
1,214

Liability for guest loyalty program
2,305

 
2,121

Accrued expenses and other
1,117

 
1,291

 
6,051

 
5,807

Long-term debt
8,710

 
7,840

Liability for guest loyalty program
3,317

 
2,819

Deferred tax liabilities
551

 
605

Deferred revenue
632

 
583

Other noncurrent liabilities
2,248

 
2,610

Shareholders’ equity
 
 
 
Class A Common Stock
5

 
5

Additional paid-in-capital
5,773

 
5,770

Retained earnings
8,705

 
7,242

Treasury stock, at cost
(11,850
)
 
(9,418
)
Accumulated other comprehensive loss
(309
)
 
(17
)
 
2,324

 
3,582

 
$
23,833

 
$
23,846

See Notes to Condensed Consolidated Financial Statements.

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

 
Nine Months Ended
 
September 30, 2018
 
September 30, 2017
OPERATING ACTIVITIES
 
 
 
Net income
$
1,491

 
$
1,345

Adjustments to reconcile to cash provided by operating activities:
 
 
 
Depreciation, amortization, and other
208

 
210

Share-based compensation
140

 
139

Income taxes
(192
)
 
190

Liability for guest loyalty program
681

 
156

Contract acquisition costs
(110
)
 
(126
)
Merger-related charges
(37
)
 
(117
)
Working capital changes
(233
)
 
(124
)
Gain on asset dispositions
(191
)
 
(30
)
Other
67

 
108

Net cash provided by operating activities
1,824

 
1,751

INVESTING ACTIVITIES
 
 
 
Capital expenditures
(462
)
 
(155
)
Dispositions
460

 
482

Loan advances
(13
)
 
(85
)
Loan collections
47

 
91

Other
49

 
(6
)
Net cash provided by investing activities
81

 
327

FINANCING ACTIVITIES
 
 
 
Commercial paper/Credit Facility, net
1,045

 
480

Issuance of long-term debt
443

 
1

Repayment of long-term debt
(391
)
 
(305
)
Issuance of Class A Common Stock
4

 
4

Dividends paid
(404
)
 
(362
)
Purchase of treasury stock
(2,513
)
 
(2,105
)
Share-based compensation withholding taxes
(105
)
 
(144
)
Net cash used in financing activities
(1,921
)
 
(2,431
)
DECREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
(16
)
 
(353
)
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, beginning of period (1)
429

 
887

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, end of period (1)
$
413

 
$
534

(1) 
The 2018 amounts include beginning restricted cash of $46 million at December 31, 2017, and ending restricted cash of $40 million at September 30, 2018, which we present in the “Prepaid expenses and other” and “Other noncurrent assets” captions of our Balance Sheets.
See Notes to Condensed Consolidated Financial Statements.


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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. and subsidiaries (referred to in this report as “we,” “us,” “Marriott,” or “the Company”). In order to make this report easier to read, we also refer throughout to (i) our Condensed Consolidated Financial Statements as our “Financial Statements,” (ii) our Condensed Consolidated Statements of Income as our “Income Statements,” (iii) our Condensed Consolidated Balance Sheets as our “Balance Sheets,” (iv) our Condensed Consolidated Statements of Cash Flows as our “Statements of Cash Flows,” (v) our properties, brands, or markets in the United States (“U.S.”) and Canada as “North America” or “North American,” and (vi) our properties, brands, or markets in our Caribbean and Latin America, Europe, and Middle East and Africa regions as “Other International,” and together with those in our Asia Pacific segment, as “International.” In addition, references throughout to numbered “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, 2017 (“2017 Form 10-K”). Certain terms not otherwise defined in this Form 10-Q have the meanings specified in our 2017 Form 10-K.
Preparation of financial statements that conform with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, the reported amounts of revenues and expenses during the reporting periods, and the disclosures of contingent liabilities. Accordingly, ultimate results could differ from those estimates.
The accompanying Financial Statements reflect all normal and recurring adjustments necessary to present fairly our financial position as of September 30, 2018 and December 31, 2017, the results of our operations for the three and nine months ended September 30, 2018 and September 30, 2017, and cash flows for the nine months ended September 30, 2018 and September 30, 2017. Interim results may not be indicative of fiscal year performance because of seasonal and short-term variations. We have eliminated all material intercompany transactions and balances between entities consolidated in these Financial Statements.
The accompanying Financial Statements also reflect our adoption of several new accounting standards. See the “New Accounting Standards Adopted” caption below for additional information.
New Accounting Standards Not Yet Adopted
Accounting Standards Update (“ASU”) 2016-02 “Leases” (Topic 842). ASU 2016-02 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 most leases, including operating leases. 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. We will adopt the standard using the modified retrospective transition method as of January 1, 2019, and we will not apply the standard to the comparative periods presented in the year of adoption.
We are still assessing the potential impact that ASU 2016-02 will have on our financial statements and disclosures, but we expect that we will recognize right-of-use lease assets and related lease liabilities for operating leases in the range of $1.0 billion to $1.2 billion, with no impact to our Income Statements or Statements of Cash Flows. Our estimate represents the net present value of lease payments from leases that we had entered into as of September 30, 2018, and that are scheduled to commence by January 1, 2019. The actual impact may differ from

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our estimate depending on our lease portfolio and discount rates on the adoption date. We do not expect any changes related to our current capital lease portfolio, which will be titled “finance leases” under ASU 2016-02.
New Accounting Standards Adopted
ASU 2016-18 “Restricted Cash” (Topic 230). ASU 2016-18 requires companies to include restricted cash with cash and cash equivalents when reconciling beginning and ending amounts shown on the statement of cash flows. We adopted ASU 2016-18 in the 2018 first quarter using the retrospective transition method, and accordingly, we revised prior period amounts, as shown in the “Statements of Cash Flows” table below.
ASU 2016-16 “Accounting for Income Taxes: Intra-Entity Transfers of Assets Other than Inventory” (Topic 740). ASU 2016-16 requires companies to recognize the income tax effects of intercompany sales of assets other than inventory when the transfer occurs. We adopted ASU 2016-16 in the 2018 first quarter using the modified retrospective transition method and recorded an adjustment of $372 million for the cumulative effect to retained earnings at January 1, 2018.
ASU 2016-15 “Classification of Certain Cash Receipts and Cash Payments” (Topic 230). ASU 2016-15 specifies how certain cash receipts and payments are to be classified in the statement of cash flows and primarily impacts our presentation of cash outflows for commercial paper. Under ASU 2016-15, we are required to attribute a portion of the payments to accreted interest and classify that portion as cash outflows for operating activities. We adopted ASU 2016-15 in the 2018 first quarter using the retrospective transition method, and accordingly, we revised prior period amounts, as shown in the “Statements of Cash Flows” table below.
ASU 2016-01 “Recognition and Measurement of Financial Assets and Financial Liabilities” (Topic 825). ASU 2016-01 eliminates the available-for-sale classification for equity investments and requires companies to measure equity investments at fair value and recognize any changes in the fair value in net income. We adopted ASU 2016-01 in the 2018 first quarter using the modified retrospective transition method and recorded a cumulative-effect adjustment of $4 million to retained earnings at January 1, 2018.
ASU 2014-09 “Revenue from Contracts with Customers” (Topic 606). ASU 2014-09 and several related ASUs (collectively referred to as “ASU 2014-09”) supersede the revenue recognition requirements in Topic 605, Revenue Recognition, as well as most industry-specific guidance, and provide a principles-based, comprehensive framework in Topic 606, Revenue Recognition. ASU 2014-09 also specifies the accounting for certain costs to obtain or fulfill a contract with a customer and provides enhanced disclosure requirements. We adopted ASU 2014-09 in the 2018 first quarter using the full retrospective transition method. See Footnote 2. Revenues for disclosures required by ASU 2014-09, including our revenue recognition accounting policies.
When we adopted ASU 2014-09, we applied the following expedients and exemptions, which are allowed by the standard, to our prior period Financial Statements and disclosures:
We used the transaction price at the date of contract completion for our contracts that had variable consideration and were completed before January 1, 2018.
We considered the aggregate effect of all contract modifications that occurred before January 1, 2016 when: (1) identifying satisfied and unsatisfied performance obligations; (2) determining the transaction price; and (3) allocating the transaction price to the satisfied and unsatisfied performance obligations.
We did not: (1) disclose the amount of the transaction price that we allocated to remaining performance obligations; or (2) include an explanation of when we expect to recognize the revenue allocated to remaining performance obligations.
The cumulative effect of adopting ASU 2014-09 was a decrease in 2016 retained earnings of $264 million.
The following tables present the effect of the adoption of ASUs 2014-09, 2016-15, and 2016-18 on our 2017 Financial Statements. Throughout this report, our 2017 financial results reflect the “As Adjusted” amounts shown in the tables below.

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Income Statements
 
Three Months Ended
 
Nine Months Ended
($ in millions, except per share amounts)
September 30, 2017
(As Previously Reported)
 
Adoption of ASU 2014-09
 
September 30, 2017
(As Adjusted)
 
September 30, 2017
(As Previously Reported)
 
Adoption of ASU 2014-09
 
September 30, 2017
(As Adjusted)
REVENUES
 
 
 
 
 
 
 
 
 
 
 
Base management fees
$
269

 
$

 
$
269

 
$
818

 
$

 
$
818

Franchise fees
426

 
(7
)
 
419

 
1,207

 
(25
)
 
1,182

Incentive management fees
136

 
2

 
138

 
437

 
(4
)
 
433

Gross fee revenues
831

 
(5
)
 
826

 
2,462

 
(29
)
 
2,433

Contract investment amortization

 
(11
)
 
(11
)
 

 
(34
)
 
(34
)
Net fee revenues
831

 
(16
)
 
815

 
2,462

 
(63
)
 
2,399

Owned, leased, and other revenue
452

 
(19
)
 
433

 
1,349

 
(40
)
 
1,309

Cost reimbursement revenue
4,380

 
(550
)
 
3,830

 
13,208

 
(1,715
)
 
11,493

 
5,663

 
(585
)
 
5,078

 
17,019

 
(1,818
)
 
15,201

OPERATING COSTS AND EXPENSES
 
 
 
 
 
 
 
 
 
 
 
Owned, leased, and other-direct
356

 
(5
)
 
351

 
1,069

 
(12
)
 
1,057

Depreciation, amortization, and other
68

 
(14
)
 
54

 
218

 
(42
)
 
176

General, administrative, and other
199

 
6

 
205

 
635

 
16

 
651

Merger-related costs and charges
28

 

 
28

 
100

 

 
100

Reimbursed expenses
4,380

 
(730
)
 
3,650

 
13,208

 
(2,071
)
 
11,137

 
5,031

 
(743
)
 
4,288

 
15,230

 
(2,109
)
 
13,121

OPERATING INCOME
632

 
158

 
790

 
1,789

 
291

 
2,080

Gains and other income, net
6

 

 
6

 
31

 

 
31

Interest expense
(73
)
 

 
(73
)
 
(216
)
 

 
(216
)
Interest income
9

 

 
9

 
24

 

 
24

Equity in earnings
6

 

 
6

 
29

 

 
29

INCOME BEFORE INCOME TAXES
580

 
158

 
738

 
1,657

 
291

 
1,948

Provision for income taxes
(188
)
 
(65
)
 
(253
)
 
(486
)
 
(117
)
 
(603
)
NET INCOME
$
392

 
$
93

 
$
485

 
$
1,171

 
$
174

 
$
1,345

EARNINGS PER SHARE
 
 
 
 
 
 
 
 
 
 
 
Earnings per share - basic
$
1.05

 
$
0.25

 
$
1.30

 
$
3.09

 
$
0.46

 
$
3.55

Earnings per share - diluted
$
1.04

 
$
0.25

 
$
1.29

 
$
3.06

 
$
0.45

 
$
3.51


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Statements of Comprehensive Income
 
Three Months Ended
 
Nine Months Ended
($ in millions)
September 30, 2017
(As Previously Reported)
 
Adoption of ASU 2014-09
 
September 30, 2017
(As Adjusted)
 
September 30, 2017
(As Previously Reported)
 
Adoption of ASU 2014-09
 
September 30, 2017
(As Adjusted)
Net income
$
392

 
$
93

 
$
485

 
$
1,171

 
$
174

 
$
1,345

Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
107

 

 
107

 
457

 

 
457

Derivative instrument adjustments, net of tax
(5
)
 

 
(5
)
 
(13
)
 

 
(13
)
Unrealized gain (loss) on available-for-sale securities, net of tax
1

 

 
1

 
(1
)
 

 
(1
)
Pension and postretirement adjustments, net of tax

 

 

 

 

 

Reclassification of losses, net of tax
4

 

 
4

 
5

 

 
5

Total other comprehensive income, net of tax
107

 

 
107

 
448

 

 
448

Comprehensive income
$
499

 
$
93

 
$
592

 
$
1,619

 
$
174

 
$
1,793


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Balance Sheets
($ in millions)
December 31, 2017
(As Previously Reported) (1)
 
Adoption of ASU 2014-09
 
December 31, 2017
(As Adjusted)
ASSETS
 
 
 
 
 
Current assets
 
 
 
 
 
Cash and equivalents
$
383

 
$

 
$
383

Accounts and notes receivable, net
1,999

 
(26
)
 
1,973

Prepaid expenses and other
216

 
19

 
235

Assets held for sale
149

 

 
149

 
2,747

 
(7
)
 
2,740

Property and equipment, net
1,793

 

 
1,793

Intangible assets
 
 
 
 
 
Brands
5,922

 

 
5,922

Contract acquisition costs and other
2,884

 
(262
)
 
2,622

Goodwill
9,207

 

 
9,207

 
18,013

 
(262
)
 
17,751

Equity method investments
735

 
(1
)
 
734

Notes receivable, net
142

 

 
142

Deferred tax assets
93

 

 
93

Other noncurrent assets
426

 
167

 
593

 
$
23,949

 
$
(103
)
 
$
23,846

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
Current liabilities
 
 
 
 
 
Current portion of long-term debt
$
398

 
$

 
$
398

Accounts payable
783

 

 
783

Accrued payroll and benefits
1,214

 

 
1,214

Liability for guest loyalty program
2,064

 
57

 
2,121

Accrued expenses and other
1,541

 
(250
)
 
1,291

 
6,000

 
(193
)
 
5,807

Long-term debt
7,840

 

 
7,840

Liability for guest loyalty program
2,876

 
(57
)
 
2,819

Deferred tax liabilities
604

 
1

 
605

Deferred revenue
145

 
438

 
583

Other noncurrent liabilities
2,753

 
(143
)
 
2,610

Shareholders' equity
 
 
 
 
 
Class A Common Stock
5

 

 
5

Additional paid-in-capital
5,770

 

 
5,770

Retained earnings
7,391

 
(149
)
 
7,242

Treasury stock, at cost
(9,418
)
 

 
(9,418
)
Accumulated other comprehensive loss
(17
)
 

 
(17
)
 
3,731

 
(149
)
 
3,582

 
$
23,949

 
$
(103
)
 
$
23,846

(1) 
Includes reclassifications among various captions, including Deferred revenue and Other noncurrent liabilities, to conform to current period presentation.

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Statements of Cash Flows
 
Nine Months Ended
 
 
 
 
 
Nine Months Ended
($ in millions)
September 30, 2017
(As Previously Reported)
 
Adoption of ASU 2014-09
 
Adoption of ASUs 2016-18 and 2016-15
 
September 30, 2017
(As Adjusted)
OPERATING ACTIVITIES
 
 
 
 
 
 
 
Net income
$
1,171

 
$
174

 
$

 
$
1,345

Adjustments to reconcile to cash provided by operating activities:
 
 
 
 
 
 
 
Depreciation, amortization, and other
218

 
(8
)
 

 
210

Share-based compensation
139

 

 

 
139

Income taxes
73

 
117

 

 
190

Liability for guest loyalty program
236

 
(80
)
 

 
156

Contract acquisition costs

 
(126
)
 

 
(126
)
Merger-related charges
(117
)
 

 

 
(117
)
Working capital changes
98

 
(219
)
 
(3
)
 
(124
)
Gain on asset dispositions
(30
)
 

 

 
(30
)
Other
128

 
5

 
(25
)
 
108

Net cash provided by (used in) operating activities
1,916

 
(137
)
 
(28
)
 
1,751

INVESTING ACTIVITIES
 
 
 
 
 
 
 
Capital expenditures
(155
)
 

 

 
(155
)
Dispositions
482

 

 

 
482

Loan advances
(85
)
 

 

 
(85
)
Loan collections
91

 

 

 
91

Contract acquisition costs
(129
)
 
129

 

 

Other
(14
)
 
8

 

 
(6
)
Net cash provided by investing activities
190

 
137

 

 
327

FINANCING ACTIVITIES
 
 
 
 
 
 
 
Commercial paper/Credit Facility, net
455

 

 
25

 
480

Issuance of long-term debt
1

 

 

 
1

Repayment of long-term debt
(305
)
 

 

 
(305
)
Issuance of Class A Common Stock
4

 

 

 
4

Dividends paid
(362
)
 

 

 
(362
)
Purchase of treasury stock
(2,105
)
 

 

 
(2,105
)
Share-based compensation withholding taxes
(144
)
 

 

 
(144
)
Net cash (used in) provided by financing activities
(2,456
)
 

 
25

 
(2,431
)
(DECREASE) INCREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
(350
)
 

 
(3
)
 
(353
)
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, beginning of period
858

 

 
29

 
887

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, end of period
$
508

 
$

 
$
26

 
$
534

See Footnote 10. Accumulated Other Comprehensive Loss and Shareholders’ Equity for the impact of the adoption of new accounting standards on our shareholders’ equity.

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2. REVENUES
Disaggregation of Revenues
The following tables present our revenues disaggregated by major revenue stream for the three and nine months ended September 30, 2018 and September 30, 2017.
 
Three Months Ended September 30, 2018
($ in millions)
North American Full-Service
 
North American Limited-Service
 
Asia Pacific
 
Other International
 
Total
Gross fee revenues
$
305

 
$
246

 
$
119

 
$
135

 
$
805

Contract investment amortization
(7
)
 
(3
)
 

 
(3
)
 
(13
)
Net fee revenues
298

 
243

 
119

 
132

 
792

Owned, leased, and other revenue
137

 
34

 
46

 
165

 
382

Cost reimbursement revenue
2,688

 
598

 
110

 
264

 
3,660

Total segment revenue
$
3,123

 
$
875

 
$
275

 
$
561

 
$
4,834

Unallocated corporate
 
 
 
 
 
 
 
 
215

Total revenue
 
 
 
 
 
 
 
 
$
5,049

 
Three Months Ended September 30, 2017
($ in millions)
North American Full-Service
 
North American Limited-Service
 
Asia Pacific
 
Other International
 
Total
Gross fee revenues
$
285

 
$
232

 
$
106

 
$
118

 
$
741

Contract investment amortization
(7
)
 
(2
)
 

 
(2
)
 
(11
)
Net fee revenues
278

 
230

 
106

 
116

 
730

Owned, leased, and other revenue
157

 
37

 
48

 
179

 
421

Cost reimbursement revenue
2,661

 
596

 
109

 
296

 
3,662

Total segment revenue
$
3,096

 
$
863

 
$
263

 
$
591

 
$
4,813

Unallocated corporate
 
 
 
 
 
 
 
 
265

Total revenue
 
 
 
 
 
 
 
 
$
5,078

 
Nine Months Ended September 30, 2018
($ in millions)
North American Full-Service
 
North American Limited-Service
 
Asia Pacific
 
Other International
 
Total
Gross fee revenues
$
949

 
$
692

 
$
346

 
$
385

 
$
2,372

Contract investment amortization
(25
)
 
(9
)
 
(1
)
 
(9
)
 
(44
)
Net fee revenues
924

 
683

 
345

 
376

 
2,328

Owned, leased, and other revenue
432

 
104

 
141

 
501

 
1,178

Cost reimbursement revenue
8,422

 
1,737

 
332

 
818

 
11,309

Total segment revenue
$
9,778

 
$
2,524

 
$
818

 
$
1,695

 
$
14,815

Unallocated corporate
 
 
 
 
 
 
 
 
586

Total revenue
 
 
 
 
 
 
 
 
$
15,401


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Nine Months Ended September 30, 2017
($ in millions)
North American Full-Service
 
North American Limited-Service
 
Asia Pacific
 
Other International
 
Total
Gross fee revenues
$
891

 
$
643

 
$
301

 
$
349

 
$
2,184

Contract investment amortization
(19
)
 
(8
)
 
(1
)
 
(6
)
 
(34
)
Net fee revenues
872

 
635

 
300

 
343

 
2,150

Owned, leased, and other revenue
535

 
100

 
138

 
503

 
1,276

Cost reimbursement revenue
8,206

 
1,705

 
318

 
845

 
11,074

Total segment revenue
$
9,613

 
$
2,440

 
$
756

 
$
1,691

 
$
14,500

Unallocated corporate
 
 
 
 
 
 
 
 
701

Total revenue
 
 
 
 
 
 
 
 
$
15,201

Performance Obligations
For our managed hotels, we have performance obligations to provide hotel management services and a license to our hotel system intellectual property for the use of our brand names. As compensation for such services, we are generally entitled to receive base fees, which are a percentage of the revenues of hotels, and incentives fees, which are generally based on a measure of hotel profitability. Both the base and incentive management fees are variable consideration, as the transaction price is based on a percentage of revenue or profit, as defined in each contract. We recognize base management fees on a monthly basis over the term of the agreement as those amounts become payable. We recognize incentive management fees on a monthly basis over the term of the agreement based on each property's financial results, as long as we do not expect a significant reversal due to projected future hotel performance or cash flows in future periods.
For our franchised hotels, we have a performance obligation to provide franchisees and operators a license to our hotel system intellectual property for use of certain of our brand names. As compensation for such services, we are typically entitled to initial application fees and ongoing royalty fees. Our ongoing royalty fees represent variable consideration, as the transaction price is based on a percentage of certain revenues of the hotels, as defined in each contract. We recognize royalty fees on a monthly basis over the term of the agreement as those amounts become payable. Initial application and relicensing fees are fixed consideration payable upon submission of a franchise application or renewal and are recognized on a straight-line basis over the initial or renewal term of the franchise agreements.
Under our management and franchise agreements, we are entitled to be reimbursed for certain costs we incur on behalf of the managed, franchised, and licensed properties, with no added mark-up. These costs primarily consist of payroll and related expenses at managed properties where we are the employer of the employees at the properties, and include certain operational and administrative costs as provided for in our contracts with the owners. We are entitled to reimbursement in the period we incur the related reimbursable costs, which we recognize within the “Cost reimbursement revenue” caption of our Income Statements.
Under our management and franchise agreements, hotel owners and franchisees participate in certain centralized programs and services, such as marketing, sales, reservations, and insurance programs. We operate these programs and services for the benefit of our hotel owners. We do not operate these programs and services to generate a profit over the contract term, and accordingly, when we recover the costs that we incur for these programs and services from our hotel owners, we do not seek a mark-up. The amounts we charge for these programs and services are generally based on sales or other variable metrics and are payable on a monthly basis. We recognize revenue within the “Cost reimbursement revenue” caption of our Income Statements when the amounts may be billed to hotel owners, and we recognize expenses within the “Reimbursed expenses” caption as they are incurred. This pattern of recognition results in temporary timing differences between the costs incurred for centralized programs and services and the related reimbursement from hotel owners in our operating and net income. Over the long term, these programs and services are not designed to impact our economics, either positively or negatively. In addition, proceeds from the sale of our interest in Avendra that we expend for the benefit of our hotel owners are included in “Reimbursed expenses.”

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We provide hotel design and construction review quality assurance (“Global Design”) services to our managed and franchised hotel owners, generally during the period prior to a hotel’s opening or during the period a hotel is converting to a Marriott brand (the “pre-opening period”). As compensation for such services, we may be entitled to receive a one-time fixed fee that is payable during the pre-opening period of the hotel. As these services are not a distinct performance obligation, we recognize the fees on a straight-line basis over the initial term of the management or franchise agreement within the “Owned, leased, and other revenue” caption of our Income Statements.
At our owned and leased hotels, we have performance obligations to provide accommodations and other ancillary services to hotel guests. As compensation for such goods and services, we are typically entitled to a fixed nightly fee for an agreed upon period and additional fixed fees for any ancillary services purchased. These fees are generally payable at the time the hotel guest checks out of the hotel. We generally satisfy the performance obligations over time, and we recognize the revenue from room sales and from other ancillary guest services on a daily basis, as the rooms are occupied and we have rendered the services.
Under our Loyalty Program, we have a performance obligation to provide or arrange for the provision of goods or services for free or at a discount to Loyalty Program members in exchange for the redemption of points earned from past activities. We operate our Loyalty Program as a cross-brand marketing program to participating properties. Our management and franchise agreements require that properties reimburse us for a portion of the costs of operating the Loyalty Program, including costs for marketing, promotion, communication with, and performing member services for Loyalty Program members, with no added mark-up. We receive contributions on a monthly basis from managed, franchised, owned, and leased hotels based on a portion of qualified spend by Loyalty Program members. We recognize these contributions into revenue as the points are redeemed and we provide the related service. The amount of revenue we recognize upon point redemption is impacted by our estimate of the “breakage” for points that members will never redeem. We estimate such amounts based on our historical experience and expectations of future member behavior. We recognize revenue net of the redemption cost within our “Cost reimbursement revenue” caption of our Income Statements, as our performance obligation is to facilitate the transaction between the Loyalty Program member and the managed or franchised property or program partner. We recognize all other Loyalty Program costs as incurred in our “Reimbursed expenses” caption.
We have multi-year agreements for our co-brand credit cards associated with our Loyalty Program. Under these agreements, we have performance obligations to provide a license to the intellectual property associated with our brands and marketing lists (“Licensed IP”) to the financial institutions that issue the credit cards, to arrange for the redemption of Loyalty Program points as discussed in the preceding paragraph, and to provide free night certificates to cardholders. We receive fees from these agreements, including fixed amounts that are primarily payable at contract inception, and variable amounts that are paid to us monthly over the term of the agreements, based on: (1) the number of free night certificates issued and redeemed; (2) the number of Loyalty Program points purchased; and (3) the volume of cardholder spend. We allocate those fees among the performance obligations, including the Licensed IP, our Loyalty Program points, and free night certificates provided to cardholders based on their estimated standalone selling prices. The estimation of the standalone selling prices requires significant judgments based upon generally accepted valuation methodologies regarding the value of our Licensed IP, the amount of funding we will receive, and the number of Loyalty Program points and free night certificates we will issue over the term of the agreements. We base our estimates of these amounts on our historical experience and expectation of future cardholder behavior. We recognize the portion of the Licensed IP revenue that meets the sales-based royalty criteria as the credit cards are used and the remaining portion of the Licensed IP revenue on a straight-line basis over the contract term. In our Income Statements, we primarily recognize Licensed IP revenue in the “Franchise fees” caption, and we recognize a portion in the “Cost reimbursement revenue” caption. We recognize the revenue related to the Loyalty Program points as discussed in the preceding paragraph. We recognize the revenue related to the free night certificates when the related service is provided. If the free night certificate redemption involves a managed or franchised property, we recognize revenue net of the redemption cost, as our performance obligation is to facilitate the transaction between the Loyalty Program member and the managed or franchised property.

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Contract Balances
We generally receive payments from customers as we satisfy our performance obligations. We record a receivable when we have an unconditional right to receive payment and only the passage of time is required before payment is due. We record deferred revenue when we receive payment, or have the unconditional right to receive payment, in advance of the satisfaction of our performance obligations related to franchise application and relicensing fees, Global Design fees, credit card branding license fees, and our Loyalty Program.
Current and noncurrent deferred revenue increased by $81 million, to $766 million at September 30, 2018 from $685 million at December 31, 2017, primarily as a result of our application and relicensing and co-brand credit card activities described above in the “Performance Obligations” caption.
Our current and noncurrent Loyalty Program liability increased by $682 million, to $5,622 million at September 30, 2018 from $4,940 million at December 31, 2017, primarily reflecting an increase in points earned, partially offset by deferred revenue of $1,315 million that we recognized during the first three quarters of 2018.
Costs incurred to obtain and fulfill contracts with customers
We incur certain costs to obtain and fulfill contracts with customers, which we capitalize and amortize on a straight-line basis over the initial, non-cancellable term of the contract. We classify incremental costs of obtaining a contract with a customer in the “Contract acquisition costs and other” caption of our Balance Sheets, the related amortization in the “Contract investment amortization” caption of our Income Statements, and the cash flow impact in the “Contract acquisition costs” caption of our Statements of Cash Flows. We classify certain direct costs to fulfill a contract with a customer in the “Other noncurrent assets” caption of our Balance Sheets, and the related amortization in the “Owned, leased, and other-direct” caption of our Income Statements.
We had capitalized costs to fulfill contracts with customers of $313 million at September 30, 2018 and $295 million at December 31, 2017.
Practical Expedients and Exemptions
We do not disclose the amount of variable consideration that we expect to recognize in future periods in the following circumstances:
(1) if we recognize the revenue based on the amount invoiced for services performed;
(2) for sales-based or usage-based royalty promised in exchange for a license of intellectual property; or
(3) if the consideration is allocated entirely to a wholly unsatisfied promise to transfer a distinct service that forms part of a single performance obligation, and the terms of the consideration relate specifically to our efforts to transfer, or to a specific outcome from transferring the service.
We are required to collect certain taxes and fees from customers on behalf of governmental agencies and remit these back to the applicable governmental agencies on a periodic basis. We do not include these taxes in determining the transaction price.
3.    ACQUISITIONS AND DISPOSITIONS
Acquisitions
In the 2018 second quarter, we purchased the Sheraton Grand Phoenix, a North American Full-Service property that we manage, for $255 million.
Dispositions
In the 2018 third quarter, an equity method investee sold the JW Marriott Mexico City, and we recorded our share of the gain, $55 million, in the “Equity in earnings” caption of our Income Statements.

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In the 2018 second quarter, we sold two North American Full-Service properties — The Tremont Chicago Hotel at Magnificent Mile and Le Centre Sheraton Montreal Hotel — and two Asia Pacific properties — The Westin Denarau Island Resort and The Sheraton Fiji Resort. We recognized total gains of $79 million in the “Gains and other income, net” caption of our Income Statements in the 2018 first three quarters.
In the 2018 second quarter, we sold our interest in three equity method investments, whose assets included a plot of land in Italy, the W Hotel Mexico City, and the Royal Orchid Sheraton Hotel & Towers in Bangkok, and we recognized total gains of $42 million in the “Gains and other income, net” caption of our Income Statements. Also in the 2018 second quarter, an equity method investee sold The Ritz-Carlton Toronto, and we recorded our share of the gain, $10 million, in the “Equity in earnings” caption of our Income Statements.
In the 2018 first quarter, we sold two Caribbean and Latin America properties — The Sheraton Buenos Aires Hotel & Convention Center and Park Tower, A Luxury Collection Hotel, Buenos Aires. We recognized total gains of $53 million in the “Gains and other income, net” caption of our Income Statements.
4.    EARNINGS PER SHARE
The table below presents the reconciliation of the earnings and number of shares used in our calculations of basic and diluted earnings per share:
 
Three Months Ended
 
Nine Months Ended
(in millions, except per share amounts)
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
Computation of Basic Earnings Per Share
 
 
 
 
 
 
 
Net income
$
483

 
$
485

 
$
1,491

 
$
1,345

Shares for basic earnings per share
346.7

 
372.3

 
352.8

 
378.5

Basic earnings per share
$
1.39

 
$
1.30

 
$
4.23

 
$
3.55

Computation of Diluted Earnings Per Share
 
 
 
 
 
 
 
Net income
$
483

 
$
485

 
$
1,491

 
$
1,345

Shares for basic earnings per share
346.7

 
372.3

 
352.8

 
378.5

Effect of dilutive securities
 
 
 
 
 
 
 
Share-based compensation
3.9

 
4.3

 
4.3

 
4.7

Shares for diluted earnings per share
350.6

 
376.6

 
357.1

 
383.2

Diluted earnings per share
$
1.38

 
$
1.29

 
$
4.18

 
$
3.51

5.    SHARE-BASED COMPENSATION
We recorded share-based compensation expense of $47 million in the 2018 third quarter, $44 million in the 2017 third quarter, $140 million in the 2018 first three quarters, and $139 million in the 2017 first three quarters. Deferred compensation costs for unvested awards totaled $219 million at September 30, 2018 and $168 million at December 31, 2017.
RSUs and PSUs
We granted 1.4 million restricted stock units (“RSUs”) during the 2018 first three quarters to certain officers, and key employees, and those units vest generally over four years in equal annual installments commencing one year after the grant date. We also granted 0.1 million performance-based RSUs (“PSUs”) in the 2018 first three quarters to certain executive officers, which are earned, subject to continued employment and the satisfaction of certain performance conditions based on achievement of pre-established targets for RevPAR Index, room openings, and/or net administrative expense over, or at the end of, a three-year performance period. RSUs, including PSUs, granted in the 2018 first three quarters had a weighted average grant-date fair value of $133.

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6.    INCOME TAXES
Our effective tax rate decreased to 14.9 percent for the 2018 third quarter from 34.3 percent for the 2017 third quarter, primarily due to the reduction of the U.S. federal tax rate under the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”), increased earnings in jurisdictions with lower tax rates, tax benefits from dispositions, and adjustments resulting from finalizing prior years’ returns. The decrease was partially offset by the current period’s provisional estimate of tax for global intangible low-taxed income (“GILTI”) under the 2017 Tax Act.
Our effective tax rate decreased to 20.1 percent for the 2018 first three quarters from 31.0 percent for the 2017 first three quarters, primarily due to the reduction of the U.S. federal tax rate under the 2017 Tax Act, increased earnings in jurisdictions with lower tax rates, and the release of tax reserves due to the completion of certain examinations. The decrease was partially offset by tax expense incurred for uncertain tax positions relating to legacy-Starwood operations, the current period’s provisional estimate of tax for GILTI under the 2017 Tax Act, increased state income tax due to a change in our position regarding the future remittance of a portion of the accumulated earnings of non-U.S. subsidiaries, the 2017 release of a tax reserve due to the favorable settlement of a tax position, and net tax expense on dispositions.
We paid cash for income taxes, net of refunds, of $567 million in the 2018 first three quarters and $413 million in the 2017 first three quarters, an increase of $154 million primarily due to taxes paid for the 2017 gain on sale of our interest in Avendra.
Tax Cuts and Jobs Act of 2017
Although we have not completed our accounting for the effects of the 2017 Tax Act, we have where possible made reasonable estimates of the 2017 Tax Act’s effects on our existing deferred tax balances and the Transition Tax, as described below. In cases where we have not been able to make reasonable estimates of the impact of the 2017 Tax Act, as described below, we continue to account for those items based on our existing accounting under ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately before enactment of the 2017 Tax Act. In all cases, we will continue to refine our calculations as we complete additional analyses on the application of the law. As we complete our analysis, collect and prepare necessary data, and interpret any additional regulatory guidance, we may adjust the provisional amounts that we have recorded during a measurement period of up to one year from the enactment of the 2017 Tax Act that could materially impact our provision for income taxes, which could in turn materially affect our tax obligations and effective tax rate, in the periods in which we make such adjustments.
Reduction of U.S. federal corporate tax rate. The 2017 Tax Act reduced the U.S. federal corporate tax rate from 35 percent to 21 percent, effective January 1, 2018. In 2017, we made a reasonable estimate of the net impact of the corporate tax rate reduction on our deferred tax assets and liabilities, which did not materially change in the 2018 first three quarters. However, our estimate could change as we complete our analyses of all impacts of the 2017 Tax Act, including, but not limited to, the state tax effect of adjustments made to federal temporary differences.
Deemed Repatriation Transition Tax. The Transition Tax is a new one-time tax on previously untaxed earnings and profits (“E&P”) of certain of our foreign subsidiaries accumulated post-1986 through year-end 2017. In addition to U.S. federal income taxes, the deemed repatriation of such E&P may result in additional state income taxes in some of the U.S. states in which we operate. In the 2018 first three quarters, we reduced our Transition Tax provisional estimate and recorded a benefit of $5 million, resulting in a net provisional estimated federal and state Transition Tax of $740 million. This adjustment resulted from changes to E&P as a result of completing an IRS audit. Our total Transition Tax estimate could continue to change as we finalize our analysis of untaxed post-1986 E&P, amounts held in cash or other specified assets, and as audits of federal income taxes are completed.
The 2017 Tax Act does not provide for additional income taxes for any remaining undistributed foreign earnings not subject to the Transition Tax, or for any additional outside basis differences inherent in foreign entities, as these amounts continue to be indefinitely reinvested in those foreign operations. Substantially all our unremitted foreign earnings that have not been previously taxed have now been subjected to U.S. taxation under the Transition Tax. In the 2018 first three quarters, we recorded a state tax expense of $27 million relating to our plan to remit a

18

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portion of the accumulated earnings of non-U.S. subsidiaries in the future. This estimate could change as we complete additional analyses of the impacts of the 2017 Tax Act.
State net operating losses and valuation allowances. We must assess whether our state net operating loss valuation allowances are affected by various aspects of the 2017 Tax Act. As discussed above, we have recorded provisional amounts related to state income taxes for certain portions of the 2017 Tax Act, but we have not completed our analysis for the states where we have net operating loss carryovers and valuation allowances. Because we have not yet completed our determination of the need for, or any change in, any valuation allowance, we have not yet recorded any change to valuation allowances.
Other provisions. The 2017 Tax Act also included a new provision designed to tax GILTI. Under GAAP, we are required to make an accounting policy election to either (1) treat any taxes on GILTI inclusions as a current-period expense when incurred (the “period cost method”) or (2) factor such amounts into our measurement of our deferred taxes (the “deferred method”). We adopted the period cost method and recorded a current provision for GILTI tax related to current-year operations in our estimated annual effective tax rate. This estimate could change as we complete additional analysis of the impacts of the 2017 Tax Act.
7.    COMMITMENTS AND CONTINGENCIES
Guarantees
We present the maximum potential amount of our future guarantee fundings and the carrying amount of our liability for our debt service, operating profit, and other guarantees (excluding contingent purchase obligations) for which we are the primary obligor at September 30, 2018 in the following table:
($ in millions)
Guarantee Type
 
Maximum Potential Amount of Future Fundings
 
Recorded Liability for Guarantees
Debt service
 
$
129

 
$
18

Operating profit
 
219

 
109

Other
 
9

 
2

 
 
$
357

 
$
129

Contingent Purchase Obligation
Sheraton Grand Chicago. We granted the owner a one-time right, exercisable in 2022, to require us to purchase the leasehold interest in the land and the hotel for $300 million in cash (the “put option”). If the owner exercises the put option, we have the option to purchase, at the same time the put transaction closes, the underlying fee simple interest in the land for an additional $200 million in cash. We accounted for the put option as a guarantee, and our recorded liability at September 30, 2018 was $57 million.

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8.    LONG-TERM DEBT
We provide detail on our long-term debt balances, net of discounts, premiums, and debt issuance costs, in the following table at the end of the 2018 third quarter and year-end 2017:
 
At Period End
($ in millions)
September 30,
2018
 
December 31,
2017
Senior Notes:
 
 
 
Series K Notes, interest rate of 3.0%, face amount of $600, maturing March 1, 2019
(effective interest rate of 4.4%)
$
599

 
$
598

Series L Notes, interest rate of 3.3%, face amount of $350, maturing September 15, 2022
(effective interest rate of 3.4%)
349

 
348

Series M Notes, interest rate of 3.4%, face amount of $350, maturing October 15, 2020
(effective interest rate of 3.6%)
348

 
348

Series N Notes, interest rate of 3.1%, face amount of $400, maturing October 15, 2021
(effective interest rate of 3.4%)
397

 
397

Series O Notes, interest rate of 2.9%, face amount of $450, maturing March 1, 2021
(effective interest rate of 3.1%)
448

 
447

Series P Notes, interest rate of 3.8%, face amount of $350, maturing October 1, 2025
(effective interest rate of 4.0%)
345

 
345

Series Q Notes, interest rate of 2.3%, face amount of $750, maturing January 15, 2022
(effective interest rate of 2.5%)
745

 
744

Series R Notes, interest rate of 3.1%, face amount of $750, maturing June 15, 2026
(effective interest rate of 3.3%)
743

 
743

Series S Notes, interest rate of 6.8%, face amount of $324, matured May 15, 2018
(effective interest rate of 1.7%)

 
330

Series T Notes, interest rate of 7.2%, face amount of $181, maturing December 1, 2019
(effective interest rate of 2.3%)
190

 
197

Series U Notes, interest rate of 3.1%, face amount of $291, maturing February 15, 2023
(effective interest rate of 3.1%)
291

 
291

Series V Notes, interest rate of 3.8%, face amount of $318, maturing March 15, 2025
(effective interest rate of 2.8%)
335

 
337

Series W Notes, interest rate of 4.5%, face amount of $278, maturing October 1, 2034
(effective interest rate of 4.1%)
292

 
292

Series X Notes, interest rate of 4.0%, face amount of $450, maturing April 15, 2028
(effective interest rate of 4.2%)
443

 

Commercial paper
3,419

 
2,371

Credit Facility

 

Capital lease obligations
167

 
171

Other
216

 
279

 
$
9,327

 
$
8,238

Less: Current portion of long-term debt
(617
)
 
(398
)
 
$
8,710

 
$
7,840

We paid cash for interest, net of amounts capitalized, of $204 million in the 2018 first three quarters and $171 million in the 2017 first three quarters.
We are party to a multicurrency revolving credit agreement (the “Credit Facility”) that provides for up to $4 billion of aggregate effective borrowings to support our commercial paper program and general corporate needs, including working capital, capital expenditures, share repurchases, letters of credit, and acquisitions. 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 Facility” caption later in this report in the “Liquidity and Capital Resources” section of Item 2 below for further information on our Credit Facility and available borrowing capacity at September 30, 2018.

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In the 2018 second quarter, we issued $450 million aggregate principal amount of 4.000 percent Series X Notes due April 15, 2028 (the “Series X Notes”). We will pay interest on the Series X Notes on April 15 and October 15 of each year, commencing on October 15, 2018. We received net proceeds of approximately $443 million from the offering of the Series X Notes, after deducting the underwriting discount and estimated expenses, which were made available for general corporate purposes, which may include working capital, capital expenditures, acquisitions, stock repurchases, or repayment of outstanding commercial paper or other borrowings.
9.    FAIR VALUE OF FINANCIAL INSTRUMENTS
We believe that the fair values of our current assets and current liabilities approximate their reported carrying amounts. We present the carrying values and the fair values of noncurrent financial assets and liabilities that qualify as financial instruments, determined under current guidance for disclosures on the fair value of financial instruments, in the following table:
 
September 30, 2018
 
December 31, 2017
($ in millions)
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Senior, mezzanine, and other loans
$
122

 
$
112

 
$
142

 
$
130

Total noncurrent financial assets
$
122

 
$
112

 
$
142

 
$
130

 
 
 
 
 
 
 
 
Senior Notes
$
(4,926
)
 
$
(4,814
)
 
$
(5,087
)
 
$
(5,126
)
Commercial paper
(3,419
)
 
(3,419
)
 
(2,371
)
 
(2,371
)
Other long-term debt
(204
)
 
(204
)
 
(217
)
 
(221
)
Other noncurrent liabilities
(158
)
 
(158
)
 
(178
)
 
(178
)
Total noncurrent financial liabilities
$
(8,707
)
 
$
(8,595
)
 
$
(7,853
)
 
$
(7,896
)
See the “Fair Value Measurements” caption of Footnote 2. Summary of Significant Accounting Policies of our 2017 Form 10-K for more information on the input levels we use in determining fair value.

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10.    ACCUMULATED OTHER COMPREHENSIVE LOSS AND SHAREHOLDERS’ EQUITY
The following tables detail the accumulated other comprehensive loss activity for the 2018 first three quarters and 2017 first three quarters:
($ in millions)
Foreign Currency Translation Adjustments
 
Derivative Instrument Adjustments
 
Available-For-Sale Securities Unrealized Adjustments
 
Pension and Postretirement Adjustments
 
Accumulated Other Comprehensive Loss
Balance at year-end 2017
$
(23
)
 
$
(10
)
 
$
4

 
$
12

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

 

 

 
(306
)
Amounts reclassified from accumulated other comprehensive loss
10

 
8

 

 

 
18

Net other comprehensive (loss) income
(303
)
 
15

 

 

 
(288
)
Adoption of ASU 2016-01

 

 
(4
)
 

 
(4
)
Balance at September 30, 2018
$
(326
)
 
$
5

 
$

 
$
12

 
$
(309
)
($ in millions)
Foreign Currency Translation Adjustments
 
Derivative Instrument Adjustments
 
Available-For-Sale Securities Unrealized Adjustments
 
Pension and Postretirement Adjustments
 
Accumulated Other Comprehensive Loss
Balance at year-end 2016
$
(503
)
 
$
(5
)
 
$
6

 
$
5

 
$
(497
)
Other comprehensive income (loss) before reclassifications (1)
457

 
(13
)
 
(1
)
 

 
443

Amounts reclassified from accumulated other comprehensive loss

 
5

 

 

 
5

Net other comprehensive income (loss)
457

 
(8
)
 
(1
)
 

 
448

Balance at September 30, 2017
$
(46
)
 
$
(13
)
 
$
5

 
$
5

 
$
(49
)
(1) 
Other comprehensive (loss) income before reclassifications for foreign currency translation adjustments includes intra-entity foreign currency transactions that are of a long-term investment nature, which resulted in a gain of $27 million for the 2018 first three quarters and loss of $142 million for the 2017 first three quarters.
The following table details the changes in common shares outstanding and shareholders’ equity for the 2018 first three quarters:
(in millions, except per share amounts)
 
 
Common
Shares
Outstanding
 
 
Total
 
Class A
Common
Stock
 
Additional
Paid-in-
Capital
 
Retained
Earnings
 
Treasury 
Stock,
at Cost
 
Accumulated
Other
Comprehensive
Loss
359.1

 
Balance at year-end 2017 (as previously reported)
$
3,731

 
$
5

 
$
5,770

 
$
7,391

 
$
(9,418
)
 
$
(17
)

 
Adoption of ASU 2014-09
(149
)
 

 

 
(149
)
 

 

359.1

 
Balance at year-end 2017 (as adjusted)
3,582

 
5

 
5,770

 
7,242

 
(9,418
)
 
(17
)

 
Adoption of ASU 2016-01

 

 

 
4

 

 
(4
)

 
Adoption of ASU 2016-16
372

 

 

 
372

 

 


 
Net income
1,491

 

 

 
1,491

 

 


 
Other comprehensive loss
(288
)
 

 

 

 

 
(288
)

 
Dividends ($1.15 per share)
(404
)
 

 

 
(404
)
 

 

1.4

 
Share-based compensation plans
44

 

 
3

 

 
41

 

(18.5
)
 
Purchase of treasury stock
(2,473
)
 

 

 

 
(2,473
)
 

342.0

 
Balance at September 30, 2018
$
2,324

 
$
5

 
$
5,773

 
$
8,705

 
$
(11,850
)
 
$
(309
)

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11.    BUSINESS SEGMENTS
We are a diversifi