UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

For the Quarterly Period Ended June 30, 2016

OR

For the Transition Period from               to            

Commission File Number:  1-7959

 

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

(Exact name of Registrant as specified in its charter)

 

 

One StarPoint

Stamford, CT 06902

(Address of principal executive offices, including zip code)

(203) 964-6000

(Registrant’s telephone number, including area code)

 

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

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  x    No  o

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 the definitions of ‘‘large accelerated filer,”  “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x

Indicate the number of shares outstanding of the issuer’s classes of common stock, as of the latest practicable date:

169,549,884 shares of common stock, par value $0.01 per share, outstanding as of July 22, 2016.

 

 

 

 

 

 

 

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TABLE OF CONTENTS

 

 

 

 

 

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PART I.  FINANCIAL INFORMATION

The following unaudited consolidated financial statements of Starwood Hotels & Resorts Worldwide, Inc. (“we,” “us” or the “Company”) are provided pursuant to the requirements of this Item. In the opinion of management, all adjustments necessary for fair presentation, consisting of normal recurring adjustments, have been included. The consolidated financial statements presented herein have been prepared in accordance with the accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2015, filed on February 25, 2016. See the notes to consolidated financial statements for the basis of presentation. Certain reclassifications have been made to the prior year’s financial statements to conform to the current year presentation. The consolidated financial statements should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this filing. Results for the six months ended June 30, 2016 are not necessarily indicative of results to be expected for the full fiscal year ending December 31, 2016.

 

 

 

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STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except share data)

(Unaudited)

 

The accompanying notes to financial statements are an integral part of the above statements.

 

 

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STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share data)

(Unaudited)

 

The accompanying notes to financial statements are an integral part of the above statements.

 

 

 

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STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In millions)

(Unaudited)

 

 

The accompanying notes to financial statements are an integral part of the above statements.

 

 

 

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STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 

 

 

The accompanying notes to financial statements are an integral part of the above statements.

 

 

 

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The accompanying consolidated financial statements represent the consolidated financial position and consolidated results of operations of Starwood Hotels & Resorts Worldwide, Inc. and our subsidiaries. We are one of the world’s largest hotel and leisure companies. Our principal business is hotels and leisure, which is comprised of a worldwide hospitality network of 1,324 full-service hotels, vacation ownership resorts and residential developments primarily serving two markets:  luxury and upper-upscale. On May 11, 2016, we completed the spin-off of our vacation ownership business and five hotels that will be converted to vacation ownership properties through a Reverse Morris Trust transaction with Interval Leisure Group, Inc. (ILG). As a result, the operations of our former vacation ownership business and the five hotels sold or otherwise conveyed to ILG through the date of the transaction were reclassified to discontinued operations for all periods presented. Prior to this transaction, the principal operations of Starwood Vacation Ownership, Inc. (SVO) included the development and operation of vacation ownership resorts and marketing, selling and financing of vacation ownership interests (VOIs) in the resorts.

The consolidated financial statements include our assets, liabilities, revenues and expenses and those of our controlled subsidiaries and partnerships. In consolidating, all material intercompany transactions are eliminated. We have evaluated all subsequent events through the date the consolidated financial statements were filed with the Securities and Exchange Commission.

Following the guidance for noncontrolling interests in Accounting Standards Codification (ASC) Topic 810, Consolidation, references in this report to our earnings (loss) per share, net income (loss) and stockholders’ equity attributable to Starwood’s common stockholders do not include amounts attributable to noncontrolling interests.

 

 

Future Accounting Standards

In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-09, “Compensation - Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting.” The amendments in this topic are intended to simplify several aspects of the accounting for share-based payment award transactions and are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted. We are still assessing the timing of adoption and the potential impact that ASU No. 2016-09 will have on our financial statements and disclosures.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”, which supersedes existing guidance on accounting for leases and generally requires all leases to be recognized on the balance sheet and is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. The amendments in this ASU are to be applied using a modified retrospective approach. We are still assessing the timing of adoption and the potential impact that ASU No. 2016-02 will have on our financial statements and disclosures.

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements- Going Concern (Subtopic 205-40) Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” This update provides guidance on management’s responsibility to evaluate whether there is substantial doubt about the ability to continue as a going concern and to provide related interim and annual footnote disclosures. The amendments in this ASU are effective for reporting periods ending after December 15, 2016, and we plan to adopt this ASU for the annual period ending on December 31, 2016. We do not believe the adoption of this update will have a material impact on our financial statements.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” This topic provides for five principles which should be followed to determine the appropriate amount and timing of revenue recognition for the transfer of goods and services to customers. The principles in this ASU should be applied to all contracts with customers regardless of industry, with two transition methods of adoption allowed. In July 2015, the FASB approved a one-year deferral of this standard, with a revised effective date for reporting periods beginning after December 15, 2017. Early adoption is permitted for annual periods beginning after December 16, 2016. We plan to adopt this ASU on January 1, 2018. We are still evaluating the financial statement impacts of the guidance in this ASU and determining which transition method we will utilize.

Adopted Accounting Standards

In April 2015, the FASB issued ASU No. 2015-05, “Intangibles- Goodwill and Other- Internal – Use Software (Subtopic 350-40) Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” The amendments in this topic are intended to provide guidance about whether a cloud computing arrangement includes a software license. This update is effective for annual and interim

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periods beginning after December 15, 2015 with early adoption permitted. We adopted this ASU prospectively on January 1, 2016. The adoption of this update did not have a material impact on our financial statements.

In April 2015, the FASB issued ASU No. 2015-03, “Interest- Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs.” The amendments in this topic are intended to simplify the presentation of debt issuance costs and are effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted. We adopted this ASU on January 1, 2016 and retrospectively applied the standard to the December 31, 2015 balance sheet by reclassifying approximately $11 million from other assets to long-term debt and long-term liabilities held for sale.

In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810) Amendments to the Consolidation Analysis.” The amendments in this update are intended to improve and simplify targeted areas of the consolidation guidance and are effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted. We adopted this ASU on January 1, 2016. The adoption of this update did not have a material impact on our financial statements.

 

 

The following is a reconciliation of basic earnings per share to diluted earnings per share for income (loss) from continuing operations attributable to our common stockholders and net income (loss) attributable to our common stockholders (in millions, except per share data):

 

 

Approximately 0.4 million shares and 0.3 million shares for the six months ended June 30, 2016 and 2015, respectively, were excluded from the computation of diluted shares, as their impact would have been anti-dilutive. An insignificant amount of shares were excluded from the computation of diluted shares for the three months ended June 30, 2016 and June 30, 2015.

 

 

 

Note 4.Discontinued Operations

On May 11, 2016, we completed a series of transactions with ILG and certain of its subsidiaries involving our vacation ownership business (the Vistana Vacation Ownership Business). Specifically, (a) we and certain of our subsidiaries engaged in a series of transactions in which certain assets and liabilities, including five hotels to be converted to vacation ownership properties, were (i) sold directly to subsidiaries of ILG or (ii) otherwise conveyed pursuant to an internal restructuring to Vistana Signature Experiences, Inc. (Vistana) or its subsidiaries, which resulted in the separation of the Vistana Vacation Ownership Business from our other businesses, (b) immediately after such separation, via spin-off we distributed the shares of Vistana common stock to our stockholders of record as of March 28, 2016, on a pro rata basis (the Distribution), and (c) immediately after the Distribution, Vistana merged with a subsidiary of ILG (the Merger). The holders of SLC Operating Limited Partnership units also received shares of Vistana common stock. We refer to this series of transactions as the “Transactions.”

Upon the completion of the Transactions, Vistana became a wholly-owned subsidiary of ILG. In addition, upon completion of the Transactions, Starwood stockholders owned approximately 55% of the outstanding shares of ILG on a fully-diluted basis, and the

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existing shareholders of ILG owned approximately 45% of ILG on a fully-diluted basis. As a result of the Transactions, ILG’s board of directors now consists of 13 directors, comprising nine previous ILG directors and four of our director appointees.

As a result of the Transactions, Starwood stockholders and holders of SLC Operating Limited Partnership units entitled to receive shares of Vistana common stock in the Distribution received approximately 0.4309 shares of ILG common stock, which were valued at $14.385 per share based on the average of the high and low of the ILG share price on May 11, 2016, for each share of Vistana common stock they received in the Distribution. In addition, certain subsidiaries of ILG paid certain of our subsidiaries approximately $123 million in consideration for the sale of certain assets and liabilities related to the Vistana Vacation Ownership Business. The total fair value of the stock and cash consideration received by us and our stockholders was approximately $1.2 billion.

As this transaction represented a material strategic shift in our business, in accordance with ASC Topic 205, Presentation of Financial Statements, we have reclassified the financial results of the Vistana Vacation Ownership Business, the impairment charge, and costs associated with the Transactions to discontinued operations in our consolidated statements of operations for all periods presented. Additionally, the related assets and liabilities associated with the discontinued operations in the consolidated balance sheet as of December 31, 2015 have been reclassified as held for sale.

In connection with the Transactions, in the three months ended June 30, 2016 we recorded a non-cash pre-tax impairment charge of $214 million to discontinued operations loss on dispositions resulting from the difference between the carrying value of our investment in the vacation ownership business and the fair value of the consideration received at the transaction date.

Additionally, in connection with the Transactions, we have entered into an exclusive, 80-year global license agreement with Vistana for the use of the Westin and Sheraton brands in vacation ownership. In addition, ILG has the non-exclusive license for the existing St. Regis and The Luxury Collection vacation ownership properties. The agreement provides for a fixed annual license fee of $30 million (adjusted every five years by an inflation factor) and certain variable fees based on sales volumes which are recorded to the management fees, franchise fees and other income line item, within continuing operations. As of June 30, 2016, we had a receivable balance of approximately $13 million due from ILG.

The following table presents financial results of the Vistana Vacation Ownership Business and the five hotels transferred to ILG (in millions):

 

 

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Prior to the Transactions, the Vistana Vacation Ownership Business, excluding the five hotels to be converted to vacation ownership properties, was reported in our vacation ownership and residential segment. The five hotels were reported in the Americas segment.

The following table presents the aggregate carrying amounts of the classes of assets and liabilities of the Vacation Ownership Business and the five hotels transferred to ILG (in millions). For additional information and disclosures of balances as of December 31, 2015, please see our Annual Report on Form 10-K for the year ended December 31, 2015.

 

 

The following table presents the cash flows the Vacation Ownership Business and the five hotels transferred to ILG (in millions):

 

 

 

 

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During the three months ended June 30, 2016, we sold two foreign wholly-owned hotels for cash proceeds net of closing costs of approximately $206 million subject to long-term management agreements. The sales of these last remaining wholly-owned hotels in Italy resulted in a pre-tax gain of $112 million on the underlying net assets, which was more than offset by the recognition of a $202 million cumulative translation adjustment loss due to substantial liquidation of our investments in these foreign entities. These charges were recorded to the gain (loss) on asset dispositions and impairments, net line item, resulting in an overall net loss on the sale.

Additionally, during the six months ended June 30, 2016, we sold one hotel for cash proceeds net of closing costs of approximately $79 million subject to a long-term management agreement. The sale resulted in a pre-tax gain of approximately $5 million, which we deferred and are recognizing into management fees, franchise fees and other income over the initial term of the management agreement. Also, during the six months ended June 30, 2016, we recorded a net gain of $2 million, primarily related to the reduction of an obligation associated with a previous disposition.

During the three months ended June 30, 2015, we sold three wholly-owned hotels for cash proceeds net of closing costs of approximately $527 million. Two of these hotels were sold subject to long-term management agreements. The sale of these hotels resulted in pre-tax gains of approximately $240 million, which we deferred and are recognizing into management fees, franchise fees and other income over the initial term of the management agreements. The other hotel was sold subject to a long-term franchise agreement and resulted in a pre-tax gain of approximately $4 million, which we recorded in the gain (loss) on asset dispositions and impairments, net line item. These gains were partially offset by a loss of $4 million primarily related to asset dispositions and impairments associated with certain hotel renovations.

Additionally, during the six months ended June 30, 2015, we recorded a $17 million gain related to the sale of a minority partnership interest in a hotel, partially offset by a loss of $3 million, primarily related to asset dispositions and impairments associated with certain hotel renovations.

 

 

In June 2016, we entered into a purchase and sale agreement to sell our leasehold interest in a hotel in France. Since we had a definitive agreement and believed it was unlikely that the agreement would be withdrawn, we classified this hotel as held for sale. During the three months ended June 30, 2016, we recognized an impairment charge of $23 million, which was recorded to the gain (loss) on asset dispositions and impairments, net line item, to reflect the fair market value of the hotel based on its purchase price less costs to sell, including $8 million related to a cumulative translation adjustment loss due to anticipated substantial liquidation of our owned and leased hotel holdings in France. The net book value of the hotel and the estimated goodwill of approximately $1 million expected to be allocated to the sale were classified as assets held for sale as of June 30, 2016 and December 31, 2015. This sale was completed in July 2016 subject to a long-term management agreement.

Additionally, in May 2016 we completed a spin-off through a Reverse Morris Trust transaction involving our vacation ownership business (see Note 4) which represented a material strategic shift in our business, and in accordance with ASC 205, Presentation of Financial Statements, the related assets and liabilities associated with the discontinued operations have been reclassified as held for sale in the December 31, 2015 consolidated balance sheet.

 

 

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Long-term debt and short-term borrowings consisted of the following (in millions):

 

 

 

Other liabilities consisted of the following (in millions):

 

 

Deferred Gains. We defer gains realized in connection with the sale of a property that we continue to manage through a long-term management agreement and recognize the gains over the initial term of the related agreement (see Note 5). As of June 30, 2016 and December 31, 2015, we had total deferred gains of approximately $1,381 million and $1,412 million, respectively, included in accrued expenses and other liabilities in our consolidated balance sheets. Amortization of deferred gains is included in management fees, franchise fees and other income in our consolidated statements of operations and totaled approximately $21 million and $42 million in the three and six months ended June 30, 2016, respectively compared to $22 million and $44 million in the three and six months ended June 30, 2015, respectively.

Frequent Guest Program. Starwood Preferred Guest (SPG) is our frequent guest incentive marketing program. SPG members earn points based on spending at our owned, managed and franchised hotels, as incentives to first-time buyers of VOIs and residences, and through participation in affiliated partners’ programs such as co-branded credit cards and airline travel. Points can be redeemed at substantially all of our owned, leased, managed and franchised hotels as well as through other redemption opportunities with third parties, such as conversion to airline miles.

We charge our owned, leased, managed and franchised hotels and affiliated vacation ownership resorts the cost of operating the SPG program, including the estimated cost of our future redemption obligation, based on a percentage of our SPG members’ qualified expenditures. Our management and franchise agreements require that we are reimbursed for the costs of operating the SPG program, including marketing, promotions and communications and performing member services for the SPG members. As points are earned, we increase the SPG point liability for the amount of cash we receive from our managed and franchised hotels and affiliated vacation ownership resorts related to the future redemption obligation. For our owned hotels, we record an expense for the amount of our future

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redemption obligation with the offset to the SPG point liability. When points are redeemed by the SPG members, the hotels recognize revenue and the SPG point liability is reduced.

Through the services of third-party actuarial analysts, we determine the value of the future redemption obligation based on statistical formulas which project the timing of future point redemptions based on historical experience, including an estimate of the “breakage” for points that will never be redeemed, and an estimate of the points that will eventually be redeemed as well as the cost of reimbursing hotels and other third parties for other point redemption opportunities.

We consolidate the assets and liabilities of the SPG program including the liability associated with the future redemption obligation which is included in other long-term liabilities and accrued expenses in the consolidated balance sheets. The total actuarially determined liability as of June 30, 2016 and December 31, 2015, was $1,239 million and $1,219 million, respectively, of which $506 million and $491 million, respectively, was included in accrued expenses.

 

 

 

 

Restructuring and other special charges (credits), net were $16 million and $48 million for the three and six months ended June 30, 2016, respectively, as compared to $12 million and $37 million in the three and six months ended June 30, 2015, respectively. These net charges (credits) are not recorded in our reportable segment earnings.

During the three months ended June 30, 2016, we recorded $16 million of other special charges primarily associated with the planned merger with Marriott International, Inc. (Marriott) (see Note 18).

Additionally, during the six months ended June 30, 2016, we recorded $8 million in net restructuring charges and $24 million of other special charges. The restructuring charges are primarily related to costs associated with our cost savings initiatives announced in 2015. Other special charges primarily consist of $19 million of costs associated with the planned merger with Marriott and a $2 million charge for technology related costs and expenses that we no longer deem recoverable.

During the three months ended June 30, 2015, we recorded $13 million in restructuring costs primarily related to severance costs associated with our previously announced cost savings initiatives and a $1 million credit to other special charges. Other special charges primarily consist of a $6 million charge for technology related costs and expenses that we no longer deem recoverable, offset by the reversal of $5 million of reserves as a result of the favorable resolutions of an exposure from a previous disposition and a dispute with a foreign taxing authority.

Additionally, during the six months ended June 30, 2015, we recorded $8 million in restructuring costs primarily associated with severance as a result of certain cost savings initiatives at our divisions and $17 million of other special charges. Other special charges primarily consist of a $7 million severance charge associated with the resignation of our prior President and Chief Executive Officer and the establishment of $6 million of reserves related to potential liabilities assumed in connection with the Le Méridien acquisition (see Note 17).

As of June 30, 2016, we had remaining restructuring accruals of $3 million, of which $2 million is recorded in accrued expenses and the remainder is recorded in other liabilities. As of December 31, 2015, we had remaining restructuring accruals of $6 million, of which $4 million is recorded in accrued expenses and the remainder is recorded in other liabilities. The following table summarizes activity in the restructuring related accruals during the six months ended June 30, 2016 (in millions):

 

 

 

We enter into forward contracts to manage foreign exchange risk based on market conditions and to hedge certain forecasted transactions. These forward contracts have been designated and qualify as cash flow hedges, and their change in fair value is recorded as a component of other comprehensive income and reclassified into earnings in the same period or periods in which the forecasted transaction occurs. To qualify as a hedge, we need to formally document, designate and assess the effectiveness of the transactions

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that receive hedge accounting. The notional dollar amount of the outstanding Euro forward contracts at June 30, 2016 was $25 million, with an average exchange rate of 1.13, and with terms of less than one year. We review the effectiveness of our hedging instruments on a quarterly basis and record any ineffectiveness into earnings. We discontinue hedge accounting for any hedge that is no longer evaluated to be highly effective. From time to time, we may choose to de-designate portions of hedges when changes in estimates of forecasted transactions occur. For the three and six months ended June 30, 2016, each of these hedges was highly effective in offsetting fluctuations in foreign currencies.

We also enter into forward contracts to manage foreign exchange risk on intercompany loans that are not deemed long-term investment nature. These forward contracts are not designated as hedges, and their change in fair value is recorded in our consolidated statements of operations during each reporting period. The notional dollar amount of these outstanding forward contracts at June 30, 2016 was $1,031 million, with terms of less than one year. These forward contracts provide an economic hedge, as they largely offset foreign currency exposures on intercompany loans.

We enter into interest rate swap agreements to manage interest expense. The swaps qualify as fair value swaps and modify our interest rate exposure by effectively converting debt with a fixed rate to a floating rate. Our objective is to manage the impact of interest rates on the results of operations, cash flows and the market value of our debt. At June 30, 2016, we had five interest rate swap agreements with an aggregate notional amount of $250 million under which we pay floating rates and receive fixed rates of interest (Fair Value Swaps). The Fair Value Swaps hedge the change in fair value of certain fixed rate debt related to fluctuations in interest rates and mature in 2018 and 2019. These interest rate swaps have been designated and qualify as fair value hedges and have met the requirements to assume zero ineffectiveness.

The counterparties to our derivative financial instruments are major financial institutions. We evaluate the credit ratings of the financial institutions and believe that credit risk is at an acceptable level.

The following tables summarize the fair value of our derivative instruments (in millions):

 

 

 

The following table presents the effect of our derivatives on our consolidated statements of operations (in millions):

 

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The interest rate swaps and forward contracts are financial assets and liabilities measured at fair value on a recurring basis.

The interest rate swaps are valued using an income approach. Expected future cash flows are converted to a present value amount based on market expectations of the yield curve on floating interest rates, which are readily available on public markets, and as such, are classified as Level 2.

The forward contracts are over-the-counter contracts that do not trade on a public exchange. The fair values of these contracts are based on inputs such as foreign currency spot rates and forward points that are readily available on public markets, and as such, are classified as Level 2. We consider both our credit risk, as well as our counterparties’ credit risk, in determining fair value, and we did not make an adjustment as it was deemed insignificant based on the short duration of the contracts and our rate of short-term debt.

 

 

We sponsor, or have previously sponsored, numerous funded and unfunded domestic and foreign pension and postretirement benefit plans. The net periodic benefit cost (income) for our domestic pension benefits, foreign pension benefits and postretirement benefits amounted to approximately $(1) million for the three and six months ended June 30, 2016 and approximately $(1) million for the three and six months ended June 30, 2015. Additionally, the net actuarial losses reclassified from accumulated other comprehensive income for our domestic pension benefits, foreign pension benefits and postretirement benefits amounted to approximately $1 million each for the three and six months ended June 30, 2016 and the three and six months ended June 30, 2015.

During the three and six months ended June 30, 2016, we contributed approximately $3 million and $5 million, respectively, to our pension and postretirement benefit plans. For the remainder of 2016, we expect to contribute approximately $6 million to our pension and postretirement benefit plans. A significant portion of the contributions relates to the foreign pension plans, for which we are reimbursed by our managed hotels.

 

 

For the three and six months ended June 30, 2016, our effective income tax rate was 167.3% and 75.6%, respectively. Our effective tax rate differed significantly from the statutory tax rate primarily due to non-deductible pretax losses as a result of both the substantial liquidation of our investments in Italy (see Note 5) and the impairment charge recorded upon classifying our leasehold interest in a hotel in France as assets held for sale (see Note 6). Our effective income tax rate, excluding the impacts of these non-deductible losses, would be 30.0% and 29.7% for the three and six months ended June 30, 2016, respectively.

The total amount of unrecognized tax benefits as of June 30, 2016 was $309 million, of which $101 million would affect our effective tax rate if recognized. It is reasonably possible that approximately $9 million of our unrecognized tax benefits as of June 30, 2016, will reverse within the next twelve months.

We recognize interest and penalties related to unrecognized tax benefits through income tax expense. As of June 30, 2016, we had $24 million accrued for the payment of interest and $2 million accrued for the payment of penalties.

During the six months ended June 30, 2016, we resolved a previous dispute related to a foreign tax audit, which resulted in a tax benefit of $2 million due to the reversal of reserves in excess of the settlement amount.

We are subject to taxation in the U.S. federal jurisdiction, as well as various state and foreign jurisdictions. As of June 30, 2016, we are no longer subject to examination by U.S. federal taxing authorities for years prior to 2007 or to examination by any U.S. state taxing authority prior to 2006. All subsequent periods remain eligible for examination. In the significant foreign jurisdictions in which we operate, we are no longer subject to examination by the relevant taxing authorities for any years prior to 2009.

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We are under regular audit by the Internal Revenue Service (IRS). We have received certain Notices of Proposed Adjustment from the IRS for years 2007 through 2009; however, we disagree with the IRS on certain of these adjustments and have filed a formal appeals protest to dispute them. We intend to vigorously contest these adjustments, including pursuing litigation, if necessary. If upheld or settled, these unagreed adjustments could result in a significant cash tax and interest payment. More than half of this amount would not affect the effective tax rate due to the timing nature of certain issues.

 

 

The following tables represent changes in stockholders’ equity that are attributable to our stockholders and non-controlling interests for the three and six months ended June 30, 2016 (in millions):

 

 

 

Share Issuances and Repurchases. During the three and six months ended June 30, 2016, we issued less than 0.1 million of our common shares as a result of stock option exercises.

During the three and six months ended June 30, 2016, we did not repurchase any common shares. As of June 30, 2016, $458 million remained available under the share repurchase authorization approved by our Board of Directors. Under the terms of our merger agreement with Marriott, we are precluded from repurchasing our stock without their consent.

Dividends. During the three months ended June 30, 2016, we declared and paid approximately $63 million of dividends, or $0.375 per share, to stockholders of record as of May 20, 2016. For the six months ended June 30, 2016, we paid approximately $126 million of dividends, or $0.75 per share.

Distribution of Vistana. In connection with the Transactions, in the three and six months ended June 30, 2016, subsequent to the impairment discussed in Note 4, the net assets of our vacation ownership business were distributed to our stockholders and thereby treated as a reduction in retained earnings.

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Accumulated Other Comprehensive Loss. The following table presents the changes in accumulated other comprehensive loss by component for the six months ended June 30, 2016 (in millions):

 

 

 

 

 

In accordance with our 2013 Long-Term Incentive Compensation Plan (the 2013 LTIP), during the six months ended June 30, 2016, we granted restricted stock, restricted stock units and performance shares to executive officers, members of the Board of Directors and certain employees.

In February 2016, a target number of contingent performance shares, which contain a market condition, were awarded to certain executives. Vesting of the performance shares is dependent upon a market condition and three years of continuous service beginning at date of grant, subject to a prorated adjustment for employees who are terminated under certain circumstances or who retire. The market condition is based on our total stockholder return relative to the total stockholder return of a specified group of peer companies at the end of a three-calendar-year performance period beginning January 1, 2016 and ending December 31, 2018. The number of performance shares earned is determined based on our percentile ranking among these companies. The performance shares are entitled to any dividends made during the performance period in the same proportion as the number of performance shares that vest. Dividends will be paid at the end of the service period.

We classified the performance shares as a share-based equity award, and as such, compensation expense related to these shares is based on the grant-date fair value, which will be recognized ratably over the requisite service period. We determined the fair value of the performance shares using a Monte Carlo simulation valuation model. The Monte Carlo simulation estimates the fair value of our performance awards primarily based on the terms associated with the grant and public information that is readily available. The underlying principles in the Monte Carlo simulation are that publicly traded stocks are fairly priced and the future returns of a stock may be estimated primarily by the stock’s assumed volatility.

During the second quarter of 2016, in connection with the Transactions, outstanding equity awards outstanding on May 11, 2016 were modified and converted into new equity awards pursuant to the plan agreement using conversion ratios designed to maintain the value of these awards to the holders immediately prior to the Transactions. Adjustments to our outstanding stock-based compensation awards resulted in an insignificant amount of compensation expense as their fair value immediately before the Transactions approximated their fair value immediately after the Transactions. Additionally, we cancelled approximately 133,000 restricted stock and units that were held by former employees that are now employees of ILG.

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During the six months ended June 30, 2016, we granted approximately 177,000 performance shares with a grant date fair value of $78.56 per share. In addition, we granted approximately 1,151,000 shares of restricted stock and restricted stock units that had a weighted average grant date fair value of $64.83 per share or unit. In each case, the number of awards granted in the six months ended June 30, 2016 includes the adjustment discussed above to the outstanding equity awards as a result of the Transactions.

We recorded stock-based employee compensation expense, including the impact of reimbursements from third parties, of $13 million and $26 million in the three and six months ended June 30, 2016, respectively, compared to $12 million and $26 million, in the three and six months ended June 30, 2015, respectively.

As of June 30, 2016, there was approximately $78 million of unrecognized compensation cost, net of estimated forfeitures, including the impact of reimbursements from third parties, which is expected to be recognized on a straight-line basis over a weighted-average period of 1.6 years.

 

 

We believe the carrying values of our financial instruments related to current assets and current liabilities approximate fair value. The following table presents the carrying amounts and estimated fair values of our long-term financial instruments (in millions):

 

 

The fair value of other notes receivable is estimated based on the terms of the instrument and current market conditions. These financial instrument assets are recorded in the other assets line item in our consolidated balance sheet.

We estimate the fair value of our publicly traded debt based on the bid prices in the public debt markets. The carrying amount of our floating rate debt is a reasonable basis of fair value due to the variable nature of the interest rates. Our fixed rate debt fair value is determined based upon discounted cash flows for the debt at rates deemed reasonable for the type of debt, prevailing market conditions and the length to maturity for the debt.

The fair values of our letters of credit and surety bonds are estimated to be the same as the contract values based on the nature of the fee arrangements with the issuing financial institutions.

 

 

Our hotel business is segregated into three separate hotel segments: (i) the Americas, (ii) Europe, Africa and the Middle East (EAME), and (iii) Asia Pacific. During the second quarter of 2016, we have classified the results of our vacation ownership business, formerly the vacation ownership and residential segment, as discontinued operations in our consolidated statements of operations for all periods presented. See Note 4, Discontinued Operations, for additional information.

Our reportable segments each have a division president who is responsible for the management of the division. Each division president reports directly to our Chief Executive Officer who is also the Chief Operating Decision Maker (CODM). Financial information for each reportable segment is reviewed by the CODM to assess performance and make decisions regarding the allocation of resources.

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Each hotel segment generates its earnings through a network of owned, leased, consolidated and unconsolidated joint venture hotels and resorts operated primarily under our proprietary brand names including St. Regis®, The Luxury Collection®, W®, Westin®, Le Méridien®, Sheraton®, Four Points® by Sheraton, Aloft®, Element®, and Tribute Portfolio^TM, as well as hotels and resorts which are managed or franchised under these brand names in exchange for fees.

The CODM primarily evaluates the operating performance of a segment based on segment earnings. We define segment earnings as net income attributable to our common stockholders before interest expense, taxes, depreciation and amortization, as well as our share of interest, depreciation and amortization associated with our unconsolidated joint ventures, excluding certain recurring and nonrecurring items, such as restructuring and other special charges (credits), and gains (losses) on asset dispositions and impairments. Residential revenue generated at hotel properties is recorded in the corresponding geographic hotel segment. General, administrative and other expenses directly related to the segments are included in the calculation of segment earnings, whereas corporate general, administrative, and other expenses are not included in the segment earnings calculation. In addition to revenues recorded within our three segments, we also have other revenues from managed and franchised properties, which represent the reimbursement of costs incurred on behalf of managed and franchised property owners. These revenues, together with the corresponding expenses, are not recorded within our segments. Other corporate unallocated revenues and earnings primarily relate to other license fee income and are also reported outside of segment revenues.

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The following tables present revenues and segment earnings for our reportable segments (in millions):

 

 

 

 

 

Variable Interest Entities. We have determined that we have a variable interest in 23 hotels, generally in the form of investments, loans, guarantees, or equity. We determine if we are the primary beneficiary of these hotels by primarily considering the qualitative factors. Qualitative factors include evaluating if we have the power to control the VIE and have the obligation to absorb the losses and rights to receive the benefits of the VIE, that could potentially be significant to the VIE. We have determined that we are not the primary beneficiary of these VIEs and therefore, these entities are not consolidated in our financial statements.

The 23 VIEs associated with our variable interests represent entities that own hotels for which we have entered into management or franchise agreements with the hotel owners. We are paid a fee primarily based on financial metrics of the hotel. The hotels are financed by the owners, generally in the form of working capital, equity and debt.

At June 30, 2016, we have approximately $106 million of investments and a loan balance of $1 million associated with these VIEs. The maximum loss under these agreements equals the carrying value because we are not obligated to fund future cash contributions. In addition, we have not contributed amounts to the VIEs in excess of our contractual obligations.

At December 31, 2015, we evaluated the 22 hotels in which we had a variable interest. As of that date, we had approximately $106 million of investments and a loan balance of $1 million associated with these VIEs.

Guaranteed Loans and Commitments. In limited cases, we have made loans to owners of or partners in hotel or resort ventures for which we have a management or franchise agreement. Loans outstanding under this program totaled $64 million at June 30, 2016.

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We evaluate these loans for impairment, and at June 30, 2016, we believe these loans are collectible. Unfunded loan commitments aggregating to $46 million were outstanding at June 30, 2016, of which $14 million is expected to be funded in the next twelve months. These loans typically are secured by pledges of project ownership interests and/or mortgages on the projects. We also have $289 million of equity and other potential contributions associated with managed, franchised, or joint venture properties, $77 million of which is expected to be funded in the next twelve months.

Surety bonds issued on our behalf as of June 30, 2016 totaled $13 million. Surety bonds may be required by our insurers to secure large deductible insurance programs.

To secure management contracts, we may provide performance guarantees to third-party owners. Most of these performance guarantees allow us to terminate the contract rather than fund shortfalls if certain performance levels are not met. In limited cases, we are obligated to fund shortfalls in performance levels through the issuance of loans. Many of the performance tests are multi-year tests, tied to the results of a competitive set of hotels and have exclusions for force majeure and acts of war or terrorism. During the six months ended June 30, 2016, we amended an agreement associated with two hotels in Greece and as a result of that amendment, we no longer expect to fund a previously reserved performance guarantee of $4 million. We do not anticipate any significant funding under performance guarantees, nor do we anticipate losing a significant number of management or franchise contracts in 2016.

In connection with the purchase of the Le Méridien brand in November 2005, we were indemnified for certain of Le Méridien’s historical liabilities by the entity that bought Le Méridien’s owned and leased hotel portfolio. The indemnity is limited to the financial resources of that entity, which have significantly decreased in recent years. We have received various claims on these historical liabilities. If we have to fund any of these claims, we do not expect to be able to recover such amounts through the indemnification. During the six months ended June 30, 2015, certain employee pension claims were determined to be probable and reasonably estimable, based on the review of additional information provided to us by the plaintiffs, and we recorded a reserve of $6 million associated with these claims.

ILG Indemnifications. In connection with the Transactions associated with the spin-off of the Vistana Vacation Ownership Business (see Note 4) we have provided certain indemnities to ILG for tax, legal and other matters related to pre-Transaction periods. We believe we are adequately reserved for such matters.

Litigation. We are involved in various legal matters that have arisen in the normal course of business, some of which include claims for substantial sums. Accruals have been recorded when the outcome is probable and can be reasonably estimated. As of June 30, 2016, certain contingencies have been evaluated as reasonably possible, but not probable, with a range of exposure of $0 to $26 million. While the ultimate results of claims and litigation cannot be determined, we do not believe that the resolution of these legal matters will have a material adverse effect on our consolidated results of operations, financial position or cash flow. However, depending on the amount and the timing, an unfavorable resolution of some or all of these matters could materially affect our future results of operations or cash flows in a particular period.

 

 

On November 15, 2015, we entered into a definitive merger agreement with Marriott and we amended that agreement on March 20, 2016. The transaction was approved by Marriott and Starwood stockholders on April 8, 2016. At closing, Starwood stockholders will receive 0.80 shares of Marriott common stock and $21.00 in cash for each share of Starwood common stock. On a pro forma basis, Starwood stockholders will own approximately 34% of the combined company’s common stock after the completion of the merger. Following the closing of the merger, Marriott’s Board of Directors will increase from 11 to 14 members with the expected addition of three members of the Starwood Board of Directors.

The transaction is expected to close in the coming weeks and is subject to regulatory approval in China and the satisfaction of other customary closing conditions.

 

 

 

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Forward-Looking Statements

This report includes “forward-looking” statements, as that term is defined in the Private Securities Litigation Reform Act of 1995 or by the Securities and Exchange Commission in our rules, regulations and releases. Forward-looking statements are any statements other than statements of historical fact, including statements regarding our expectations, beliefs, hopes, intentions or strategies regarding the future. In some cases, forward-looking statements can be identified by the use of words such as "may," "will," "expects," "should," "believes," "plans," "anticipates," "estimates," "predicts," "potential," "continue," or other words of similar meaning. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those discussed in, or implied by, the forward-looking statements. Factors that might cause such a difference include, but are not limited to, general economic conditions, our financial and business prospects, our capital requirements, our financing prospects, our relationships with associates and labor unions, our ability to consummate the Planned Marriott Merger (as defined below), or realize the anticipated benefits of such transactions, and those disclosed as risks in other reports filed by us with the Securities and Exchange Commission, including those described in Part I of our most recently filed Annual Report on Form 10-K. We caution readers that any such statements are based on currently available operational, financial and competitive information, and they should not place undue reliance on these forward-looking statements, which reflect management's opinion only as of the date on which they were made. Except as required by law, we disclaim any obligation to review or update these forward-looking statements to reflect events or circumstances as they occur.

INTRODUCTION

Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and costs and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, including those relating to revenue recognition, bad debts, inventories, investments, plant, property and equipment, goodwill and intangible assets, income taxes, financing operations, frequent guest program liability, self-insurance claims payable, restructuring costs, retirement benefits and contingencies and litigation.

We base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions and conditions.

This MD&A includes discussion of our consolidated operating results, as well as discussion about each of our three segments. Additionally, Note 16 to the consolidated financial statements presents further information about our segments.

RESULTS OF OPERATIONS

The following discussion presents an analysis of results of our operations for the three and six months ended June 30, 2016 and 2015.

At June 30, 2016, we had approximately 640 hotels in the active pipeline representing approximately 132,000 rooms, driven by strong interest in all Starwood brands. Of these rooms, 54% are in the upper upscale and luxury segments and 73% are outside of North America. During the second quarter of 2016, we signed 120 hotel management and franchise contracts, representing approximately 21,400 rooms, of which 101 are new builds and 19 are conversions from other brands. Also during the second quarter of 2016, 20 new hotels and resorts (representing approximately 4,200 rooms) entered the system and four hotels (representing approximately 1,000 rooms) left the system.

In addition to our active pipeline, we have a 74% equity interest in Design Hotels AG (Design Hotels), a company that represents and markets a distinct selection of over 300 independent hotels with approximately 22,000 rooms globally. Starwood and Design Hotels entered into an agreement in 2014 that allows greater coordination and cooperation between the companies. Our REVPAR metrics do not include revenue from Design Hotels and, at this stage, Design Hotels’ operating results are inconsequential to our results.

An indicator of the performance of our hotels is REVPAR, as it measures the period-over-period change in rooms revenue for comparable properties. Along with REVPAR, we also evaluate our hotels by measuring the change in Average Daily Rate (ADR) and

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occupancy. This is particularly the case in the United States, where there is no impact on this measure from foreign currency exchange rates.

We continually update and renovate our owned, leased and consolidated joint venture hotels and include these hotels in our Same-Store Owned Hotel results. We also undertake major repositionings of hotels. While undergoing major repositionings, hotels are generally not operating at full capacity and, as such, these repositionings can negatively impact our hotel revenues and are not included in Same-Store Owned Hotel results.

Our SPG guest loyalty program continues to be an industry leader and innovator. The enhancements to the program in recent years, coupled with the introduction of programs like SPG Pro, help us to attract the next wave of global, elite travelers and continue to drive SPG occupancy rates to record levels. We continue to focus on digital innovation and personalization, which helps us better connect with guests and customers, sell through our own channels and deliver more personalized service, all while enhancing our brands.

On May 11, 2016, the Company completed the spin-off of its vacation ownership business and five hotels that will be converted to vacation ownership properties through a Reverse Morris Trust transaction with Interval Leisure Group, Inc. (ILG). As a result, the operations of the vacation ownership business and the five hotels sold or otherwise conveyed to ILG through the date of the transaction were reclassified to discontinued operations for all periods presented. Please see Note 4, Discontinued Operations, of the Notes to our Financial Statements for additional information.

On November 15, 2015, we entered into a definitive agreement, as amended on March 20, 2016, to merge with Marriott International, Inc. (Marriott) (which is referred to in this Quarterly Report as the Planned Marriott Merger). The transaction was approved by Marriott and Starwood stockholders on April 8, 2016. Please see Note 18, Planned Marriott Merger, of the Notes to our Financial Statements for additional information.

During the three and six months ended June 30, 2016 and 2015, we earned revenues at our owned, leased and consolidated joint venture hotels by geographic area as follows ⁽¹⁾:

 

 

 

*Includes U.S. territories

 

 

Three Months Ended June 30, 2016, Compared with Three Months Ended June 30, 2015

Consolidated Results

 

 

The decrease in revenues from owned, leased and consolidated joint venture hotels was primarily due to lost revenues from seven owned hotels that were sold in 2016 and 2015. These sold hotels had revenues of $12 million in the three months ended June 30, 2016 compared to $62 million for the corresponding period in 2015. Revenues at our Same-Store Owned Hotels (23 hotels for the

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three months ended June 30, 2016 and 2015, excluding the seven hotels sold and one additional hotel undergoing a significant repositioning) increased 3.4%, or $9 million, to $263 million for the three months ended June 30, 2016, compared to $254 million in the corresponding period of 2015.

REVPAR at our worldwide Same-Store Owned Hotels increased 3.9% to $194.14 for the three months ended June 30, 2016, compared to the corresponding period in 2015. The increase in REVPAR at these worldwide Same-Store Owned Hotels resulted from an increase of 5.7% in ADR to $251.79 for the three months ended June 30, 2016, compared to $238.26 for the corresponding period in 2015, partially offset by a decrease in occupancy rates to 77.1% for the three months ended June 30, 2016, compared to 78.4% in the corresponding period in 2015.

For the three months ended June 30, 2016, Systemwide REVPAR increased 1.4% in constant dollars, but due to the impact of foreign exchange, increased 0.7% in U.S. Dollars. We saw positive results in North America, where constant dollar Systemwide REVPAR increased 3.4% (increased 3.1% in U.S. Dollars), driven by strong performance at hotels in certain major markets including Hawaii, Toronto, Atlanta and Los Angeles, offset by REVPAR declines in New York, Chicago, Miami and markets closely connected with the oil and gas industry in Western Canada and Southwestern United States. Our international Systemwide REVPAR declined 1.4% in constant dollars but due to the impact of foreign exchange, declined 2.5% in U.S. Dollars. We saw REVPAR growth in Asia excluding Greater China where Systemwide REVPAR was up 2.9% in constant dollars (increased 1.4% in U.S. Dollars), driven by strong performance at our hotels in Thailand, Japan, India and Australia, offset by REVPAR declines in Fiji due to the impact of tropical cyclones, and REVPAR declines in Indonesia and the Maldives. Systemwide REVPAR in Greater China declined 1.8% in constant dollars (declined 5.6% in U.S. Dollars) due to a Systemwide REVPAR decline at our hotels in Mainland China of 0.8% in constant dollars (declined 5.3% in U.S. Dollars) and by weakness in Macao and Taiwan. Mainland China REVPAR performance was driven by REVPAR growth in the North and West-Central regions, offset by REVPAR declines in the South and East. In Europe, Systemwide REVPAR increased 1.1% in constant dollars (increased 2.2% in U.S. Dollars), with strong performance at our hotels in Germany, Poland, Spain and Russia offset by weaker performance in France, Belgium and Turkey due in part to the aftermath of terror attacks in 2015 and 2016. Systemwide REVPAR in Latin America declined 5.1% in constant and U.S. Dollars, driven by weak performance in Brazil, Argentina and Chile, partially offset by REVPAR increases at our hotels in Mexico. Systemwide REVPAR in Africa and the Middle East declined 9.7% in constant dollars (declined 11.3% in U.S. Dollars), driven by lower demand due to the shift of Ramadan to earlier in June this year, as well as by weakness in markets closely connected with the oil and gas industries, partially offset by strong performance in South Africa and Egypt.

The increase in management fees, franchise fees and other income was primarily a result of an $8 million increase in core fees (total management and franchise fees) which were negatively impacted by foreign exchange rates, to $214 million for the three months ended June 30, 2016, compared to $206 million for the corresponding period in 2015. The increase was primarily due to fees from the net addition of 84 managed or franchised hotels to our system since June 30, 2015, and a 0.7% increase in Same-Store Worldwide Systemwide REVPAR compared to the same period in 2015. Additionally, the increase in the second quarter of 2016 was due to $5 million of vacation ownership license fees from ILG after the spin-off of our vacation ownership business. As of June 30, 2016, we had 620 managed properties and 665 franchised properties with approximately 357,800 rooms.

Other revenues from managed and franchised properties increased primarily due to an increase in payroll costs commensurate with a rise in the overall cost of labor at our existing managed hotels and payroll costs for the new hotels entering the system. These revenues represent reimbursements of costs incurred on behalf of managed hotels and franchisees and relate primarily to payroll costs at managed properties where we are the employer. Since the reimbursements are made based upon the costs incurred with no added margin, these revenues and corresponding expenses have no effect on our operating income or our net income.

 

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During the second quarter of 2016, selling, general, administrative and other expenses decreased 6.1% to $93 million, compared to $99 million in 2015, due primarily to various cost savings initiatives.

 

 

Restructuring and other special charges (credits), net during the three months ended June 30, 2016 include $16 million of other special charges primarily associated with costs related to the Planned Marriott Merger (see Note 18).

The restructuring and other special charges (credits), net during the three months ended June 30, 2015 include $13 million in restructuring costs primarily related to severance costs associated with our cost savings initiatives announced in 2015 and a $1 million credit to other special charges. Other special charges primarily consist of a $6 million charge for technology related costs and expenses that we no longer deem recoverable, offset by the reversal of $5 million of reserves as a result of the favorable resolutions of an exposure from a previous disposition and a dispute with a foreign taxing authority.

 

 

The decrease in depreciation and amortization expense for the three months ended June 30, 2016, compared to the corresponding period of 2015, was primarily due to decreased depreciation expense related to sold hotels.

 

 

The increase in operating income for the three months ended June 30, 2016, compared to the corresponding period of 2015, was primarily due to a $18 million increase in management fees, franchise fees and other income, a decrease in selling, general, administrative and other expenses of $6 million and a decrease in depreciation and amortization of $3 million, partially offset by a $9 million decrease in operations (revenues less expenses) related to our owned, leased and consolidated joint venture hotels, and due to an unfavorable variance in restructuring and other special charges (credits), net of $4 million.

 

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Equity earnings and gains from unconsolidated joint ventures, net decreased $3 million for the three months ended June 30, 2016, compared to the corresponding period in 2015, primarily due to certain favorable, non-recurring adjustments recorded at two hotels owned by joint ventures during the three months ended June 30, 2015.

 

 

Net interest expense decreased $2 million for the three months ended June 30, 2016, compared to the same period of 2015, primarily due to a decrease in our senior notes debt balance as $294 million matured and were repaid in late 2015.

Our weighted average interest rate was approximately 3.53% at June 30, 2016 compared to 4.88% at June 30, 2015.

 

 

n/m = not meaningful

During the three months ended June 30, 2016, we recorded a net loss of $114 million, primarily related to the recognition of a $202 million cumulative translation adjustment loss due to the substantial liquidation of our investments in certain foreign entities, following the sale of our two remaining wholly-owned hotels in Italy, which was partially offset by a pre-tax gain of $112 million on the underlying net assets of the foreign hotels, resulting in an overall net loss on the sale (see Note 5) and a $23 million impairment charge recorded upon classifying our leasehold interest in a foreign hotel as assets held for sale (see Note 6).

During the three months ended June 30, 2015, we recorded a net gain of $4 million associated with the sale of one hotel sold subject to a long-term franchise agreement, offset by a loss of $4 million primarily related to asset dispositions and impairments associated with certain hotel renovations.

 

 

The increase in income tax expense for the three months ended June 30, 2016, compared to the same period in 2015, was primarily due to additional tax expense of $30 million related to the tax effects from the sale of foreign hotels in 2016 and a $19 million increase due to higher operating income and a higher overall effective tax rate in the three months ended June 30, 2016.

 

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On May 11, 2016, we completed the spin-off of our former vacation ownership business and five hotels that will be converted to vacation ownership properties through a Reverse Morris Trust transaction with ILG. As a result, the operations of the vacation ownership business and the five hotels sold or otherwise conveyed to ILG through the date of the transaction were reclassified to discontinued operations for all periods presented. Please see Note 4, Discontinued Operations, of the Notes to our Financial Statements for additional information.

 

 

The loss on dispositions from discontinued operations for the three months ended June 30, 2016 primarily included a non-cash pre-tax impairment charge of $214 million, as the net assets of the vacation ownership business and five hotels that were spun-off exceeded the fair value of the consideration received in the Reverse Morris Trust transaction and $30 million in transaction costs related to the spin-off, partially offset by a $3 million tax benefit. The loss on dispositions from discontinued operations for the three months ended June 30, 2015 included $11 million in transaction costs, partially offset by a $4 million tax benefit. Please see Note 4, Discontinued Operations, of the Notes to our Financial Statements for additional information.

 

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Segment Results

The following table summarizes REVPAR, ADR and occupancy for our Same-Store Systemwide Hotels for the three months ended June 30, 2016 and 2015. Same-Store Systemwide Hotels represent results for same-store owned, leased, managed and franchised hotels.

 

 

The following table summarizes REVPAR, ADR and occupancy for our Same-Store Owned Hotels for the three months ended June 30, 2016 and 2015. The results for the three months ended June 30, 2016 and 2015 represent results for 23 owned, leased and consolidated joint venture hotels (excluding seven hotels sold and one hotel undergoing a significant repositioning.

 

 

 

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The following tables summarize segment revenues and segment earnings for the three months ended June 30, 2016 and 2015.

 

 

 

 

We primarily evaluate the operating performance of a segment based on segment earnings. We define segment earnings as net income attributable to our common stockholders before interest expense, taxes, depreciation and amortization, as well as our share of interest, depreciation and amortization associated with our unconsolidated joint ventures, excluding certain recurring and nonrecurring items, such as restructuring and other special charges (credits), loss on early extinguishment of debt and gains (losses) on asset dispositions and impairments. Residential revenue generated at hotel properties is recorded in the corresponding geographic hotel segment. General, administrative and other expenses directly related to the segments are included in the calculation of segment earnings, whereas corporate general, administrative, and other expenses are not included in the segment earnings calculation. In addition to revenues recorded within our three segments, we also have other revenues from managed and franchised properties, which represent the reimbursement of costs incurred on behalf of managed and franchised property owners. These revenues, together with the corresponding expenses, are not recorded within our segments. Other corporate unallocated revenues and earnings primarily relate to other license fee income and are also reported outside of segment revenues. Note 16 to the consolidated financial statements presents further information about our segments.

The Americas

Segment revenues decreased $16 million in the three months ended June 30, 2016, compared to the corresponding period in 2015. The decrease in revenues was primarily related to a $29 million decrease in revenues from our owned, leased and consolidated joint venture hotels, partially offset by an $11 million increase in management fees, franchise fees and other income.

The decrease in revenues from our owned, leased and consolidated joint venture hotels was primarily due to lost revenues from two owned hotels that were sold in 2015. These sold hotels had no revenues for the three months ended June 30, 2016 compared to $30 million for the corresponding period in 2015. This decrease was partially offset by an increase in Same-Store Owned Hotel revenues of $5 million due to an increase in REVPAR of 2.9% to $174.23 for the three months ended June 30, 2016, compared to the corresponding period in 2015.

The increase in management fees, franchise fees and other income for the three months ended June 30, 2016, compared to the same period in 2015, was due to fees from the net addition of 41 managed and franchised hotels since June 30, 2015 and a 2.6% increase in Same-Store Systemwide REVPAR to $139.39 for the three months ended June 30, 2106, compared to the same period in 2015. As of June 30, 2016, the Americas segment had 168 managed properties and 538 franchised properties with approximately 194,000 rooms.

Segment earnings increased $1 million in the three months ended June 30, 2016, compared to the corresponding period in 2015, primarily due to the increase in management fees, franchise fees and other income discussed above, partially offset by a $5 million

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decrease in operations (revenues less expenses) related to our owned, leased and consolidated joint venture hotels and a $4 million increase in divisional overhead expenses primarily due to a favorable litigation settlement in 2015.

EAME

Segment revenues decreased $19 million in the three months ended June 30, 2016, compared to the corresponding period in 2015. The decrease in revenues was primarily related to a $16 million decrease in revenues from our owned, leased and consolidated joint venture hotels and a $3 million decrease in management fees, franchise fees and other income.

The decrease in revenues from our owned, leased and consolidated joint venture hotels was primarily due to lost revenues from five owned hotels that were sold during 2016 and 2015. These sold hotels had revenues of $12 million for the three months ended June 30, 2016 compared to $32 million for the corresponding period in 2015. This decrease was partially offset by an increase in Same-Store Owned Hotel revenues of $4 million due to an increase in REVPAR of 8.5% to $321.06 for the three months ended June 30, 2016, compared to the corresponding period in 2015.

Management fees, franchise fees and other income decreased $3 million in the three months ended June 30, 2016, compared to the corresponding period in 2015. Fees from the net addition of 15 managed or franchised hotels since June 30, 2015 were more than offset by a decrease in Same-Store Systemwide REVPAR of 1.9% to $133.35 for the three months ended June 30, 2016, compared to the corresponding period in 2015. REVPAR in Africa and the Middle East was negatively affected by lower demand due to the shift of Ramadan to earlier in June this year and by the unfavorable impact of foreign exchange rates during the three months ended June 30, 2016, compared to the corresponding period in 2015. As of June 30, 2016, the EAME segment had 184 managed properties and 73 franchised properties with approximately 63,800 rooms.

Segment earnings increased $1 million in the three months ended June 30, 2016, compared to the corresponding period in 2015, primarily due to a decrease in division overhead expenses of $8 million, primarily due to favorable bad debt reversals in 2016 and a charge related to a performance guarantee in 2015, partially offset by the decrease in management fees, franchise fees and other income discussed above and a $3 million decrease in operations (revenue less expenses) related to our owned, leased and consolidated joint venture hotels due to hotels sold in 2016 and 2015.

Asia Pacific

Segment revenues increased $2 million in the three months ended June 30, 2016, compared to the corresponding period in 2015, primarily due to a $1 million increase in residential license fees.

Management fees, franchise fees and other income remained flat, compared to the same period of 2015. The net addition of 28 managed or franchised hotels since June 30, 2015 was offset by a decrease in Same-Store Systemwide REVPAR of 2.6% to $88.00 for the three months ended June 30, 2016, compared to the corresponding period in 2015. REVPAR throughout Asia Pacific was negatively affected by the unfavorable impact of foreign exchange rates during the three months ended June 30, 2016, compared to the corresponding period in 2015. As of June 30, 2016, the Asia Pacific segment had 268 managed properties and 54 franchised properties with approximately 100,100 rooms.

Segment earnings decreased $2 million in the three months ended June 30, 2016, compared to the corresponding period in 2015, primarily due to a $3 million increase in divisional overhead expense.

 

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Six Months Ended June 30, 2016, Compared with Six Months Ended June 30, 2015

Consolidated Results

 

The decrease in revenues from owned, leased and consolidated joint venture hotels was primarily due to lost revenues from seven owned hotels that were sold in 2016 and 2015. These sold hotels had revenues of $20 million in the six months ended June 30, 2016 compared to $126 million for the corresponding period in 2015. Revenues at our Same-Store Owned Hotels (23 hotels for the six months ended June 30, 2016 and 2015, excluding the seven hotels sold and one additional hotel undergoing a significant repositioning) increased 2.0%, or $10 million, to $477 million for the six months ended June 30, 2016, compared to $467 million in the corresponding period of 2015.

REVPAR at our worldwide Same-Store Owned Hotels increased 2.5% to $176.43 for the six months ended June 30, 2016, compared to the corresponding period in 2015. The increase in REVPAR at these worldwide Same-Store Owned Hotels resulted from an increase of 2.9% in ADR to $236.69 for the six months ended June 30, 2016, compared to $230.10 for the corresponding period in 2015, partially offset by a decrease in occupancy rates to 74.5% for the six months ended June 30, 2016, compared to 74.8% in the corresponding period in 2015. REVPAR and ADR were negatively affected by the unfavorable impact of foreign exchange rates.

The increase in management fees, franchise fees and other income was primarily a result of a $15 million increase in core fees (total management and franchise fees) to $412 million for the six months ended June 30, 2016, compared to $397 million for the corresponding period in 2015. The increase was primarily due to fees from the net addition of 84 managed or franchised hotels to our system since June 30, 2015, partially offset by a 0.3% decrease in Same-Store Worldwide Systemwide REVPAR compared to the same period in 2015, primarily due to the negative impact of foreign exchange rates. Additionally, for the six months ended June 30, 2016, other management and franchise revenues included approximately $10 million of fees associated with the termination of certain management and franchise contracts compared to $3 million for the same period in 2015 and $5 million of vacation ownership license fees from ILG after the spin-off of our vacation ownership business.

Other revenues from managed and franchised properties increased primarily due to an increase in payroll costs commensurate with a rise in the overall cost of labor at our existing managed hotels and payroll costs for the new hotels entering the system. These revenues represent reimbursements of costs incurred on behalf of managed hotels and franchisees and relate primarily to payroll costs at managed properties where we are the employer. Since the reimbursements are made based upon the costs incurred with no added margin, these revenues and corresponding expenses have no effect on our operating income or our net income.

 

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During the six months ended June 30, 2016, selling, general, administrative and other expenses decreased 5.8% to $179 million, compared to $190 million in 2015, due, in part, to various cost savings initiatives. In addition, the decrease is due to the amendment of an agreement associated with two hotels in Greece and as a result of that amendment, we no longer expect to fund a previously reserved performance guarantee.

 

 

Restructuring and other special charges (credits), net during the six months ended June 30, 2016 include $9 million in net restructuring charges and $39 million of other special charges. The restructuring charges are primarily related to costs associated with our cost savings initiatives announced in 2015. Other special charges primarily consist of $34 million of costs related to the Planned Marriott Merger (see Note 18) and a $3 million charge for technology related costs and expenses that we no longer deem recoverable.

The restructuring and other special charges, net during the six months ended June 30, 2015 include $21 million in restructuring costs primarily related to severance costs associated with our previously announced cost savings initiatives and $16 million of other special charges. Other special charges primarily consist of a $7 million severance charge associated with the resignation of our prior President and Chief Executive Officer, the establishment of $6 million of reserves related to potential liabilities associated with the 2005 Le Méridien acquisition, and a $6 million charge for technology related costs and exposures that we no longer deem recoverable, partially offset by the reversal of $5 million of reserves as a result of the favorable resolutions of an exposure from a previous disposition and a dispute with a foreign taxing authority.

 

 

The decrease in depreciation and amortization expense for the six months ended June 30, 2016, compared to the corresponding period of 2015, was primarily due to decreased depreciation expense related to sold hotels, partially offset by additional depreciation related to information technology capital expenditures in 2015 and 2016.

 

 

The increase in operating income for the six months ended June 30, 2016, compared to the corresponding period of 2015, was primarily due to a $34 million increase in management fees, franchise fees and other income, a decrease in selling, general, administrative and other expenses of $11 million and a decrease in depreciation and amortization expense of $3 million, partially offset by a $23 million decrease in operations (revenues less expenses) related to our owned, leased and consolidated joint venture hotels and an unfavorable variance in restructuring and other special charges (credits), net of $11 million.

 

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Equity earnings and gains from unconsolidated joint ventures, net decreased $6 million for the six months ended June 30, 2016, compared to the corresponding period in 2015, primarily due to a $4 million gain on the sale of a joint venture hotel during the six months ended June 30, 2015.

 

 

Net interest expense decreased $9 million for the six months ended June 30, 2016, compared to the same period of 2015, primarily due to a decrease in our senior notes debt balance as $294 million matured and were repaid in late 2015.

Our weighted average interest rate was approximately 3.53% at June 30, 2016 compared to 4.88% at June 30, 2015.

 

 

During the six months ended June 30, 2016, we recorded a net loss of $112 million, primarily related to the recognition of a $202 million cumulative translation adjustment loss due to the substantial liquidation of our investments in certain foreign entities, following the sale of our two remaining wholly-owned hotels in Italy, which was partially offset by a pre-tax gain of $112 million on the underlying net assets of the foreign hotels, resulting in an overall net loss on the sale (see Note 5) and a $23 million impairment charge recorded upon classifying our leasehold interest in a foreign hotel as assets held for sale (see Note 6).

During the six months ended June 30, 2015, we recorded a net gain of $14 million, primarily related to a $17 million gain on the sale of a minority partnership interest in a hotel. Additionally, during the six months ended June 30, 2015, we recorded a gain of $4 million associated with the sale of one hotel sold subject to a long-term franchise agreement, offset by a loss of $7 million primarily related to asset dispositions and impairments associated with certain hotel renovations.

 

 

The increase in income tax expense for the six months ended June 30, 2016, compared to the same period in 2015, was primarily due to additional tax expense of $30 million related to the tax effects from the sale of foreign hotels in 2016 and a $15 million increase due to higher operating income and a higher overall effective tax rate in the six months ended June 30, 2016.

 

 

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On May 11, 2016, we completed the spin-off of our former vacation ownership business and five hotels that will be converted to vacation ownership properties through a Reverse Morris Trust transaction with ILG. As a result, the operations of the vacation ownership business and the five hotels sold or otherwise conveyed to ILG through the date of the transaction were reclassified to discontinued operations for all periods presented. Please see Note 4, Discontinued Operations, of the Notes to our Financial Statements for additional information.

 

 

The loss on dispositions from discontinued operations for the six months ended June 30, 2016, primarily included a non-cash pre-tax impairment charge of $214 million, as the net assets of the vacation ownership business and the five hotels that were spun-off exceeded the fair value of the consideration received in the Reverse Morris Trust transaction and $37 million in transaction costs related to the spin-off, partially offset by a $5 million tax benefit. The loss on dispositions from discontinued operations for the six months ended June 30, 2015 includes $17 million in transaction costs, partially offset by a $6 million tax benefit. Please see Note 4, Discontinued Operations, of the Notes to our Financial Statements for additional information.

 

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Segment Results

The following table summarizes REVPAR, ADR and occupancy for our Same-Store Systemwide Hotels for the six months ended June 30, 2016 and 2015. Same-Store Systemwide Hotels represent results for same-store owned, leased, managed and franchised hotels.

 

 

 

The following table summarizes REVPAR, ADR and occupancy for our Same-Store Owned Hotels for the six months ended June 30, 2016 and 2015. The results for the six months ended June 30, 2016 and 2015, represent results for 23 owned, leased and consolidated joint venture hotels (excluding seven hotels sold and one hotel undergoing a significant repositioning).

 

 

 

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The following tables summarize segment revenues and segment earnings for the six months ended June 30, 2016 and 2015.

 

 

 

The Americas

Segment revenues decreased $48 million in the six months ended June 30, 2016, compared to the corresponding period in 2015. The decrease in revenues was primarily related to a $69 million decrease in revenues from our owned, leased and consolidated joint venture hotels, partially offset by a $24 million increase in management fees, franchise fees and other income.

The decrease in revenues from our owned, leased and consolidated joint venture hotels was primarily due to lost revenues from two owned hotels that were sold in 2015. These sold hotels had no revenues for the six months ended June 30, 2016 compared to $75 million for the corresponding period in 2015. This decrease was partially offset by an increase in Same-Store Owned Hotel revenues of $5 million due to an increase in REVPAR of 1.6% to $163.81 for the six months ended June 30, 2016, compared to the corresponding period in 2015.

The increase in management fees, franchise fees and other income for the six months ended June 30, 2016, compared to the same period in 2015, was due to fees from the net addition of 41 managed and franchised hotels since June 30, 2015 and a 1.7% increase in Same-Store Systemwide REVPAR compared to the same period in 2015.

Segment earnings decreased $4 million in the six months ended June 30, 2016, compared to the corresponding period in 2015, primarily due to a $16 million decrease in operations (revenues less expenses) related to our owned, leased and consolidated joint venture hotels, a $7 million increase in divisional overhead expenses and a $5 million decrease in unconsolidated joint venture earnings primarily due to a $4 million gain on the sale of a joint venture hotel during the six months ended June 30, 2015, partially offset by the increase in management fees, franchise fees and other income discussed above.

EAME

Segment revenues decreased $31 million in the six months ended June 30, 2016, compared to the corresponding period in 2015. The decrease in revenues was primarily related to a $27 million decrease in revenues from our owned, leased and consolidated joint venture hotels and a $6 million decrease in management fees, franchise fees and other income.

The decrease in revenues from our owned, leased and consolidated joint venture hotels was primarily due to lost revenues from five owned hotels that were sold during 2016 and 2015. These sold hotels had revenues of $20 million for the six months ended June 30, 2016 compared to $52 million for the corresponding period in 2015. This decrease was partially offset by an increase in Same-Store Owned Hotel revenues of $5 million due to an increase in REVPAR of 5.8% to $260.90 for the six months ended June 30, 2016, compared to the corresponding period in 2015.

Management fees, franchise fees and other income decreased $6 million in the six months ended June 30, 2016, compared to the corresponding period in 2015. Fees from the net addition of 15 managed or franchised hotels since June 30, 2015 were more than offset by a decrease in Same-Store Systemwide REVPAR of 4.2% to $121.99 for the six months ended June 30, 2016, compared to

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the corresponding period in 2015. REVPAR throughout EAME was negatively affected by lower demand due to the shift of Ramadan to earlier in June this year and by the unfavorable impact of foreign exchange rates during the six months ended June 30, 2016, compared to the corresponding period in 2015.

Segment earnings increased $1 million in the six months ended June 30, 2016, compared to the corresponding period in 2015, primarily due to a reduction in divisional overhead which includes the favorable resolution from amending an agreement associated with two hotels in Greece and as a result of that amendment, we no longer expect to fund a previously reserved performance guarantee, partially offset by the decrease in management fees, franchise fees and other income discussed above.

Asia Pacific

Segment revenues increased $5 million in the six months ended June 30, 2016, compared to the corresponding period in 2015, primarily due to a $3 million increase in management fees, franchise fees and other income.

The increase in management fees, franchise fees and other income for the six months ended June 30, 2016, compared to the same period of 2015 was primarily due to fees from the net addition of 28 managed or franchised hotels since June 30, 2015, partially offset by a decrease in Same-Store Systemwide REVPAR of 2.5% to $89.93 for the six months ended June 30, 2016, compared to the corresponding period in 2015. REVPAR throughout Asia Pacific was negatively affected by the unfavorable impact of foreign exchange rates during the six months ended June 30, 2016, compared to the corresponding period in 2015.

Segment earnings remained flat for the six months ended June 30, 2016, compared to the corresponding period in 2015, primarily due to the increase in management fees, franchise fees and other income discussed above, offset by a $3 million increase in divisional overhead.

 

LIQUIDITY AND CAPITAL RESOURCES

Cash From Operating Activities

Cash from operating activities was $210 million for the six months ended June 30, 2016, compared to $360 million for the six months ended June 30, 2015. We generate cash flows from operations primarily from management and franchise revenues and operating income from our owned hotels and resorts. Other sources of cash are distributions from joint ventures and interest income. We use cash principally to fund our operating expenses, dividend payments, share repurchases, interest payments on debt, capital expenditures, and property and income taxes. We believe that our cash from operations and our existing borrowing availability together with capacity for additional borrowings will be adequate to meet all funding requirements for our operating expenses, dividend payments, share repurchases, principal and interest payments on debt, capital expenditures, and property and income taxes.

The ratio of our current assets to current liabilities was 1.19 and 1.03 as of June 30, 2016 and December 31, 2015, respectively. Consistent with industry practice, we sweep the majority of the cash at our owned hotels, in the same jurisdictions, on a daily basis and fund payables as needed through cash on hand, by drawing down on our existing revolving credit facility or issuing commercial paper.

Cash From Investing Activities

Gross capital spending during the six months ended June 30, 2016 was as follows (in millions):

 

 

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Gross capital spending during the six months ended June 30, 2016 included approximately $49 million of maintenance capital and $78 million of development capital. Our capital expenditure program includes both offensive and defensive capital. Defensive spending is related to maintenance and renovations that we believe are necessary to remain competitive in the markets in which we operate. Other than capital to address fire and life safety issues, we consider defensive capital to be discretionary, although reductions to this capital program could result in decreases to our cash flow from operations, as hotels in certain markets could become less desirable. Offensive capital expenditures, which primarily relate to new projects that we expect will generate a return, are also considered discretionary.

In the six months ended June 30, 2016 we received approximately $98 million in net consideration for the sale of certain assets and liabilities in connection with the spin-off of our vacation ownership business and five hotels to be converted to vacation ownership properties.

In order to secure management or franchise agreements, we have made loans to third-party owners, made non-controlling investments in joint ventures and provided certain guarantees and indemnifications. See Note 17 of the consolidated financial statements for our discussion regarding the amount of loans we have outstanding with owners, unfunded loan commitments, equity and other potential contributions, surety bonds outstanding, performance guarantees and indemnifications under which we are obligated, and investments in hotels and joint ventures.

We intend to finance the acquisition of additional hotel properties (including equity investments), hotel renovations, capital improvements, technology spend and other core and ancillary business acquisitions and investments and provide for general corporate purposes (including dividend payments and share repurchases) from cash on hand, net proceeds from asset dispositions, and cash generated from operations.

We periodically review our business to identify assets that we believe either are non-core, no longer complement our business, or could be sold at significant premiums. As part of our asset-light strategy, we are focused on reducing our investment in owned real estate, enhancing our real estate returns and monetizing investments.

Since 2006 and through June 30, 2016, we have sold 94 hotels realizing cash proceeds of approximately $8.1 billion in numerous transactions. To date, where we have sold hotels, we typically have not provided significant seller financing or other financial assistance to buyers. There can be no assurance, however, that we will be able to complete future dispositions on commercially reasonable terms or at all.

Cash From (Used for) Financing Activities

In the second quarter of 2016, we declared and paid a quarterly dividend of approximately $63 million, or $0.375 per share. For the six months ended June 30, 2016, we declared and paid dividends of approximately $126 million, or 0.75 per share. During the six months ended June 30, 2016, we did not repurchase any common shares. As of June 30, 2016, $458 million remained available under the share repurchase authorization approved by our Board of Directors.

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The following is a summary of our debt portfolio (excluding capital leases) as of June 30, 2016:

 

 

Our Revolving Credit Facility (the Facility) is used to fund general corporate cash needs. As of June 30, 2016, we have availability of approximately $1.10 billion under the Facility. The Facility allows for multi-currency borrowing and, when drawn upon, has an applicable margin, inclusive of the commitment fee, of 1.2% plus the applicable currency LIBOR rate.

We have evaluated the commitments of each of the lenders in the Facility, and we have reviewed our debt covenants. We do not anticipate any issues regarding the availability of funds under the Facility. The cost of borrowing of the Facility is determined by a combination of our leverage ratios and credit ratings. Changes in our credit ratings may result in changes in our borrowing costs. Downgrades in our credit ratings would likely increase the relative costs of borrowing and reduce our ability to issue-long-term debt, whereas upgrades would likely reduce costs and increase our ability to issue long-term debt.

The following is a summary of our debt less cash as of June 30, 2016 and December 31, 2015:

 

 

Based upon the current level of operations, management believes that our cash flow from operations, together with our significant cash balances, available borrowings under the Facility, issuance of Commercial Paper and potential additional borrowings will be adequate to meet anticipated requirements for dividend payments, working capital, capital expenditures, marketing and advertising program expenditures, other discretionary investments, interest and scheduled principal payments and share repurchases for the foreseeable future. However, there can be no assurance that we will be able to refinance our indebtedness as it becomes due or on favorable terms. In addition, there can be no assurance that in our continuing business we will generate cash flow at or above historical levels, that currently anticipated results will be achieved or that we will be able to complete dispositions on commercially reasonable terms or at all. As of June 30, 2016, approximately $1,560 million, included in our cash balance above, resided in foreign countries. The offshore cash, if repatriated, may or may not be subject to additional income taxes in various tax jurisdictions including the U.S. The quantification of such taxes is not practicable at this time.

If we are unable to generate sufficient cash flow from operations in the future to service our debt, we may be required to sell additional assets at lower than preferred amounts, reduce capital expenditures, refinance all or a portion of our existing debt or obtain

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additional financing at unfavorable rates. Our ability to make scheduled principal payments, to pay interest on or to refinance our indebtedness depends on our future performance and financial results, which, to a certain extent, are subject to general conditions in or affecting the hotel industry and to general economic, political, financial, competitive, legislative and regulatory factors beyond our control.

We had the following commercial commitments outstanding as of June 30, 2016 (in millions):

 

 

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CRITICAL ACCOUNTING POLICIES

Our preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures. Those estimates and assumptions that we believe are critical and require the use of complex judgment in their application are included in our 2015 Form 10-K. Since the date of our 2015 Form 10-K, there have been no material changes to our critical accounting policies or the methodologies or assumptions we apply under them.

We enter into forward contracts to manage foreign exchange risk in forecasted transactions based in foreign currencies and to manage foreign currency exchange risk on intercompany loans that are not deemed long-term investment nature. We enter into interest rate swap agreements to manage interest expense. We also enter into net investment agreements to manage foreign exchange risk on non-U.S. operations (see Note 10).

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive and principal financial officers, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act)). Based upon the foregoing evaluation, our principal executive and principal financial officers concluded that our disclosure controls and procedures were effective and operating to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and to provide reasonable assurance that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II.  OTHER INFORMATION

We are involved in various claims and lawsuits arising in the ordinary course of business, none of which, in the opinion of management, is expected to have a material adverse effect on our consolidated results of operations, financial position or cash flow.

The discussion of our business and operations should be read together with the risk factors contained in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, filed with the Securities and Exchange Commission, which describe various risks and uncertainties to which we are, or may become, subject. These risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner. At June 30, 2016, there have been no material changes to the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

Date: July 28, 2016

 

 

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