10-K 1 d450314d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

  x Annual Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the Fiscal Year Ended December 31, 2012

OR

 

  ¨ Transition Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

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)

Maryland

(State or other jurisdiction

of incorporation or organization)

52-1193298

(I.R.S. employer identification no.)

One StarPoint

Stamford, CT 06902

(Address of principal executive

offices, including zip code)

(203) 964-6000

(Registrant’s telephone number,

including area code)

Securities Registered Pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Common Stock, par value $0.01 per share   New York Stock Exchange

Securities Registered Pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     Yes  ¨    No  x

Note: Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period than the registrant was required to submit and post such files).     Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     ¨

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

 

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨    Smaller reporting company  ¨
      (Do not check if smaller reporting company)   

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

As of the last business day of the registrant’s most recently completed second fiscal quarter, June 30, 2012, the aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant computed by reference to the closing sales price as quoted on the New York Stock Exchange was approximately $10.4 billion.

As of February 11, 2013, the registrant had 193,718,203 shares of common stock outstanding.

Documents Incorporated by Reference:

 

Document

 

             Where Incorporated                

Proxy Statement   Part III (Items 10, 11, 12, 13 and 14)

 

 

 


Table of Contents

TABLE OF CONTENTS

 

         Page  
PART I   
  Forward-Looking Statements      1   
Item 1.   Business      1   
Item 1A.   Risk Factors      11   
Item 1B.   Unresolved Staff Comments      21   
Item 2.   Properties      21   
Item 3.   Legal Proceedings      21   
Item 4.   Mine Safety Disclosures      21   
PART II   
Item 5.   Market for Registrants’ Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      21   
Item 6.   Selected Financial Data      24   
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations      24   
Item 7A.   Quantitative and Qualitative Disclosures about Market Risk      49   
Item 8.   Financial Statements and Supplementary Data      50   
Item 9.   Changes In and Disagreements with Accountants on Accounting and Financial Disclosure      50   
Item 9A.   Controls and Procedures      50   
Item 9B.   Other Information      51   
PART III   
Item 10.   Directors, Executive Officers and Corporate Governance      51   
Item 11.   Executive Compensation      53   
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      53   
Item 13.   Certain Relationships and Related Transactions and Director Independence      53   
Item 14.   Principal Accountant Fees and Services      53   
PART IV   

Item 15.

  Exhibits, Financial Statement Schedules      54   


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This Annual Report is filed by Starwood Hotels & Resorts Worldwide, Inc., a Maryland corporation (the “Corporation”). Unless the context otherwise requires, all references to “we”, “us”, “our”, “Starwood”, or the “Company” refer to the Corporation and include those entities owned or controlled by the Corporation.

PART I

Forward-Looking Statements

This Annual Report contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are any statements other than statements of historical fact, including statements regarding the intent, belief or current expectations of Starwood, its directors or its officers with respect to the matters discussed in this Annual Report. 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. Such forward-looking statements appear in several places in this Annual Report, including, without limitation, Item 1. Business and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. All forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those discussed in, or implied by, the forward-looking statements including, without limitation, the risks and uncertainties disclosed under Item 1A. Risk Factors. 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, Starwood undertakes no obligation to publicly update or revise any forward-looking statements to reflect current or future events or circumstances.

 

Item 1. Business

General

We are one of the largest hotel and leisure companies in the world, with 1,134 properties in nearly 100 countries and 171,000 employees at our owned and managed properties. We conduct our hotel and leisure business both directly and through our subsidiaries. We boast one of the industry’s leading loyalty programs, Starwood Preferred Guest (“SPG”), allowing members to earn and redeem points for room stays, room upgrades and flights, with no blackout dates. We also own Starwood Vacation Ownership, Inc., a premier provider of world-class vacation experiences through villa-style resorts and privileged access to Starwood brands.

Our revenue and earnings are derived primarily from hotel operations, which include management and other fees earned from hotels we manage pursuant to management contracts, the receipt of franchise and other fees and the operation of our owned hotels. We consider our hotels and resorts, including vacation ownership resorts (together “Hotels”), generally to be premier establishments with respect to desirability of location, size, facilities, physical condition, quality and variety of services offered in the markets in which they are located. Although obsolescence attributable to age, condition of facilities, and style can adversely affect our Hotels, we and the third-party owners of managed and franchised Hotels expend substantial funds to renovate and maintain our facilities in order to remain competitive. For further information see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources in this Annual Report.

Our hotel business emphasizes the global operation of hotels and resorts primarily in the luxury and upscale segments of the lodging industry. We seek to acquire management or franchise rights with respect to, or interests in, properties in these segments. At December 31, 2012, our hotel business included 1,121 owned, managed or franchised hotels with approximately 328,000 rooms, comprising 53 hotels that we own or lease or in which we have a majority equity interest, 547 hotels managed by us on behalf of third-party owners (including entities in which we have a minority equity interest) and 521 hotels for which we receive franchise fees. Additionally, our vacation ownership and residential business included 13 stand-alone vacation ownership resorts and residential properties at December 31, 2012. All brands (other than the Four Points by Sheraton and the Aloft

 

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and Element brands) represent full-service properties that range in amenities from luxury hotels to more moderately priced hotels. Our Four Points by Sheraton, Aloft and Element brands are select-service properties that cater to more value oriented consumers.

Our operations are in geographically diverse locations around the world. The following tables reflect our hotel and vacation ownership and residential properties by type of revenue source and geographical presence by major geographic area as of December 31, 2012:

 

     Number of
Properties
     Rooms  

Managed and unconsolidated joint venture hotels

     547         183,000   

Franchised hotels

     521         127,700   

Owned hotels (a)

     53         17,300   

Vacation ownership resorts and stand-alone properties

     13         7,400   
  

 

 

    

 

 

 

Total properties

     1,134         335,400   
  

 

 

    

 

 

 

 

(a) Includes wholly owned, majority owned and leased hotels.

 

     Number of
Properties
     Rooms  

North America (and Caribbean)

     576         181,100   

Europe

     164         39,700   

Asia Pacific

     243         77,800   

Africa and the Middle East

     80         21,100   

Latin America (and Mexico)

     71         15,700   
  

 

 

    

 

 

 

Total properties

     1,134         335,400   
  

 

 

    

 

 

 

On July 1, 2012, we completed an internal management reorganization related to our former hotel segment. Whereas our hotel business had previously been included in a single reportable segment, as a result of this reorganization, these results are now segregated into three separate hotel segments: (i) the Americas, (ii) Europe, Africa and the Middle East (“EAME”), and (iii) Asia Pacific. The vacation ownership and residential business remains a separate segment. Note 26 to the consolidated financial statements presents further information about our segments.

For a discussion of our revenues, profits, assets and reportable segments, see our consolidated financial statements of this Annual Report, including the notes thereto.

The Corporation was incorporated in 1980 under the laws of Maryland. Sheraton and Westin, Starwood’s largest brands, have been serving guests for more than 60 years. Starwood Vacation Ownership (and its predecessor, Vistana, Inc.) has been selling vacation ownership interests (“VOIs”) for more than 30 years.

Our principal executive offices are located at One StarPoint, Stamford, Connecticut 06902, and our telephone number is (203) 964-6000.

Hotel Business

Managed and Franchised Hotels. Hotel and resort properties in the United States are often owned by entities that do not manage hotels or own a brand name. Hotel owners typically enter into management contracts with hotel management companies to operate their hotels. When a management company does not offer a brand affiliation, the hotel owner often chooses to pay separate franchise fees to secure the benefits of brand marketing, centralized reservations and other centralized administrative functions, particularly in the sales and marketing area. We believe that companies, such as Starwood, that offer both hotel management services and well-established worldwide brand names appeal to hotel owners by providing the full range of management, marketing and reservation services. In 2012, we opened 68 managed and franchised hotels with approximately 17,500 rooms, and 20 managed and franchised hotels with approximately 4,200 rooms exited our system.

 

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Managed Hotels. We manage hotels worldwide, usually under a long-term agreement with the hotel owner (including entities in which we have a minority equity interest). Our responsibilities under hotel management contracts typically include hiring, training and supervising the managers and employees that operate these facilities. For additional fees, we provide centralized reservation services and coordinate national and international advertising and certain marketing and promotional services. We prepare and implement annual budgets for the hotels we manage and are responsible for allocating property-owner funds for periodic maintenance and repair of buildings and furnishings. In addition to our owned and leased hotels, at December 31, 2012, we managed 547 hotels with approximately 183,000 rooms worldwide.

During the year ended December 31, 2012, we generated management fees by geographic area as follows:

 

United States

     33.5

Asia Pacific

     30.5

Europe

     14.8

Middle East and Africa

     12.7

Latin America, Caribbean & Canada

     8.5
  

 

 

 

Total

     100.0
  

 

 

 

Management contracts typically provide for base fees tied to gross revenue and incentive fees tied to profits as well as fees for other services, including centralized reservations, national and international advertising and sales and marketing. In our experience, owners seek hotel managers that can provide attractively priced base, incentive and marketing fees combined with demonstrated sales and marketing expertise and operations-focused management designed to enhance profitability. Some of our management contracts permit the hotel owner to terminate the agreement when the hotel is sold or otherwise transferred to a third party, as well as if we fail to meet established performance criteria. In addition, many hotel owners seek equity, debt or other investments from us to help finance hotel renovations or conversions to a Starwood brand, so as to align the interests of the owner and Starwood. Our ability or willingness to make such investments may determine, in part, whether we will be offered, will accept or will retain a particular management contract. During the year ended December 31, 2012, we opened 41 managed hotels with approximately 12,500 rooms, and 11 managed hotels with approximately 2,400 rooms exited our system. In addition, during 2012, we signed management agreements for 79 hotels with approximately 21,600 rooms, a small portion of which opened in 2012 and the majority of which will open in the future.

Brand Franchising and Licensing. We franchise our Luxury Collection, Westin, Le Méridien, Sheraton, Four Points by Sheraton, Aloft and Element brand names and generally derive licensing and other fees from franchisees based on a fixed percentage of the franchised hotel’s room revenue, as well as fees for other services, including centralized reservations, national and international advertising and sales and marketing. In addition, a franchisee may purchase hotel supplies, including brand-specific products, from certain Starwood-approved vendors. We also review certain plans for, and the location of, franchised hotels and review their design. At December 31, 2012, there were 521 franchised properties with approximately 127,700 rooms.

During the year ended December 31, 2012, we generated franchise fees by geographic area as follows:

 

United States

     69.9

Latin America, Caribbean & Canada

     13.6

Asia Pacific

     9.0

Europe

     7.0

Middle East and Africa

     0.5
  

 

 

 

Total

     100.0
  

 

 

 

In addition to the franchise contracts we retained in connection with the sale of hotels during the year ended December 31, 2012, we opened 27 franchised hotels with approximately 5,000 rooms, and 9 franchised hotels

 

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with approximately 1,800 rooms exited our system. In addition, during 2012 we signed franchise agreements for 52 hotels with approximately 8,900 rooms, a portion of which opened in 2012 and a portion of which will open in the future.

Owned, Leased and Consolidated Joint Venture Hotels. Historically, we have derived the majority of our revenues and operating income from our owned, leased and consolidated joint venture hotels and a significant portion of these results are driven by the hotels in North America. However, beginning in 2006, we embarked upon a strategy of selling a significant number of hotels. The majority of these hotels were sold subject to long-term management or franchise contracts. Total revenues generated from our owned, leased and consolidated joint venture hotels worldwide for the years ending December 31, 2012, 2011 and 2010 were $1.698 billion, $1.768 billion and $1.704 billion, respectively (total revenues from our owned, leased and consolidated joint venture hotels in North America were $956 million, $1.001 billion and $1.067 billion for 2012, 2011 and 2010, respectively).

The following represents our top five markets in the United States by metropolitan area as a percentage of our total owned, leased and consolidated joint venture revenues for the years ended December 31, 2012 and 2011:

Top Five Domestic Markets in the United States as a % of Total Owned

Revenues for the Years Ended December 31, 2012 and 2011(1)

 

     2012     2011  

Metropolitan Area

   Revenues     Revenues  

New York, NY

     11.9     12.4

Hawaii

     6.7     6.1

Phoenix, AZ

     5.6     5.3

San Francisco, CA

     4.6     4.1

Atlanta, GA

     3.1     3.6

 

(1) Includes the revenues of hotels sold for the period prior to their sale.

The following represents our top five international markets by country as a percentage of our total owned, leased and consolidated joint venture revenues for the years ended December 31, 2012 and 2011:

Top Five International Markets as a % of Total Owned

Revenues for the Years Ended December 31, 2012 and 2011(1)

 

     2012     2011  

Country

   Revenues     Revenues  

Canada

     11.4     11.0

Italy

     6.7     7.4

Spain

     6.1     5.9

Australia

     5.0     4.9

Mexico

     4.6     4.2

 

(1) Includes the revenues of hotels sold for the period prior to their sale.

During the years ended December 31, 2012 and 2011, we invested approximately $315 million and $283 million, respectively, for capital expenditures at owned hotels. These capital expenditures included renovation costs at The Westin Peachtree Plaza in Atlanta, GA, the Sheraton Kauai Resort in Koloa, HI, the Aloft San Francisco Airport in San Francisco, CA, the Four Points by Sheraton Tucson University in Tucson, AZ, the Hotel Alfonso XIII in Seville, Spain, the Hotel Maria Cristina in San Sebastian, Spain and the Hotel Gritti Palace in Venice, Italy.

As discussed above, we have implemented a strategy of reducing our investment in owned real estate and increasing our focus on the management and franchise business. Since 2006, we have sold 73 hotels realizing cash proceeds of approximately $6.1 billion in numerous transactions, including gross cash proceeds of approximately $542 million from the sale of eight hotels during the year ended December 31, 2012. As a result,

 

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our primary business objective is to maximize earnings and cash flow by increasing the number of our hotel management contracts and franchise agreements; selling VOIs; and investing in real estate assets where there is a strategic rationale for doing so, which may include selectively acquiring interests in additional assets and disposing of non-core hotels (including hotels where the return on invested capital is not adequate) and “trophy” assets that may be sold at significant premiums. We plan to meet these objectives by leveraging our global system, broad customer base and other resources and by taking advantage of our scale to reduce costs. The implementation of our strategy and financial planning is impacted by the uncertainty relating to geopolitical and economic environments around the world and its consequent impact on travel.

Following the sale of a significant number of our hotels in the past few years, as of December 31, 2012, we own or lease 53 hotels as follows:

 

Hotel

  

Location

   Rooms  

U.S. Hotels:

     

The St. Regis Hotel, San Francisco

   San Francisco, CA      260   

The St. Regis Bal Harbour Resort

   Bal Harbour, FL      243   

The St. Regis New York

   New York, NY      229   

The Phoenician, Scottsdale

   Scottsdale, AZ      643   

W New York – Times Square

   New York, NY      509   

W New Orleans

   New Orleans, LA      410   

W New Orleans – French Quarter

   New Orleans, LA      98   

The Westin Peachtree Plaza, Atlanta

   Atlanta, GA      1,068   

The Westin Maui Resort & Spa, Ka’anapali

   Maui, HI      759   

The Westin San Francisco Airport

   San Francisco, CA      397   

The Westin St. John Resort & Villas

   St. John, Virgin Islands      175   

Sheraton Kauai Resort

   Koloa, HI      394   

Sheraton Suites Philadelphia Airport

   Philadelphia, PA      251   

Sheraton Steamboat Resort

   Steamboat Springs, CO      208   

Aloft San Francisco Airport

   Millbrae, CA      252   

Aloft Lexington (a)

   Lexington, MA      136   

Aloft Philadelphia Airport

   Philadelphia, PA      136   

Element Lexington (a)

   Lexington, MA      123   

Four Points by Sheraton Philadelphia Airport

   Philadelphia, PA      177   

Four Points by Sheraton Tucson University (b)

   Tucson, AZ      150   

The Tremont Chicago Hotel at Magnificent Mile

   Chicago, IL      135   

 

(a) These hotels were classified in assets held for sale, net, as of December 31, 2012, and we completed the sale of these hotels in January 2013 (see Note 6).
(b) As of December 31, 2012, this hotel is undergoing a conversion to the Aloft Tucson University.

 

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International Hotels:

  

Location

   Rooms  

St. Regis Grand Hotel, Rome

   Rome, Italy      161   

St. Regis Osaka

   Osaka, Japan      160   

St. Regis Florence

   Florence, Italy      100   

Park Tower, Buenos Aires

   Buenos Aires, Argentina      181   

Hotel Alfonso XIII, Seville

   Seville, Spain      151   

Hotel Imperial, Vienna

   Vienna, Austria      138   

Hotel Maria Cristina, San Sebastian

   San Sebastian, Spain      136   

Hotel Goldener Hirsch, Salzburg

   Salzburg, Austria      69   

Hotel Gritti Palace, Venice

   Venice, Italy      90   

W Barcelona

   Barcelona, Spain      473   

W London – Leicester Square

   London, England      192   

The Westin Resort & Spa Cancun

   Cancun, Mexico      379   

The Westin Excelsior, Rome

   Rome, Italy      316   

The Westin Resort & Spa, Puerto Vallarta

   Puerto Vallarta, Mexico      280   

The Westin Denarau Island Resort

   Nadi, Fiji      273   

The Westin Resort & Spa, Los Cabos

   Los Cabos, Mexico      243   

The Westin Excelsior, Florence

   Florence, Italy      171   

The Westin Dublin

   Dublin, Ireland      163   

Sheraton Centre Toronto Hotel

   Toronto, Canada      1,377   

Le Centre Sheraton Montreal Hotel

   Montreal, Canada      825   

Sheraton Maria Isabel Hotel & Towers

   Mexico City, Mexico      755   

Sheraton Buenos Aires Hotel & Convention Center

   Buenos Aires, Argentina      742   

Sheraton on the Park

   Sydney, Australia      557   

Sheraton Rio Hotel & Resort

   Rio de Janeiro, Brazil      542   

Sheraton Gateway Hotel in Toronto International Airport

   Toronto, Canada      474   

Sheraton Lima Hotel & Convention Center

   Lima, Peru      431   

The Park Lane Hotel, London

   London, England      303   

Sheraton Fiji Resort

   Nadi, Fiji      264   

Sheraton Paris Airport Hotel & Conference Centre

   Paris, France      252   

Sheraton Ambassador Hotel

   Monterrey, Mexico      229   

Sheraton Diana Majestic Hotel, Milan

   Milan, Italy      106   

Sheraton Santa Maria de El Paular

   Rascafria, Spain      44   

Vacation Ownership and Residential Business

Our revenues and earnings are also derived from the development, ownership and operation of vacation ownership resorts, marketing and selling VOIs in the resorts and providing financing to customers who purchase such interests. Generally these resorts are marketed under our brand names. Additionally, our revenues and earnings are derived from the development, marketing and selling of residential units at mixed use hotel projects owned by us as well as fees earned from the marketing and selling of residential units at mixed use hotel projects developed by third-party owners of hotels operated under our brands.

We develop, own and operate vacation ownership resorts, market and sell the VOIs in the resorts and, in many cases, provide financing to customers who purchase such ownership interests. Owners of VOIs can trade their interval for intervals at other Starwood vacation ownership resorts, intervals at certain vacation ownership resorts not otherwise sponsored by Starwood through an exchange company, or for hotel stays at Starwood properties. From time to time, we securitize the receivables generated from our sale of VOIs.

 

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We have also entered into arrangements with several owners for mixed use hotel projects that will include a residential component. We have entered into licensing agreements for the use of certain of our brands to allow the owners to offer branded condominiums to prospective purchasers. In consideration, we typically receive a licensing fee equal to a percentage of the gross sales revenue of the units sold. The licensing arrangement generally terminates upon the earlier of sell-out of the units or a specified length of time.

At December 31, 2012, we had 22 owned vacation ownership resorts (including 13 stand-alone, eight mixed-use and one unconsolidated joint venture) in the United States, Mexico and the Bahamas. In addition, we had one wholly-owned residential development in Bal Harbour, FL. At December 31, 2012, we were actively selling VOIs and residences at 18 sites in our portfolio.

In late 2011, we completed the development of a wholly-owned residential project at the St. Regis Bal Harbour Resort in Bal Harbour, FL (“St. Regis Bal Harbour”) and are in the process of selling residential units. During the year ended December 31, 2012, we closed sales of 188 units. From project inception through December 31, 2012, we have closed contracts and recognized revenue on 224 units representing approximately 73% of the total residential units.

During 2012 and 2011, we invested approximately $85 million and $221 million, respectively, for vacation ownership and residential capital expenditures, including construction at the St. Regis Bal Harbour, Westin Desert Willow in Palm Desert, CA, Westin Lagunamar Ocean Resort in Cancun, as well as capital expenditures at the Sheraton Vistana Resort in Orlando, FL.

Our Brands

Through our brands, we are well represented in most major markets around the world. The following table reflects our hotel and vacation ownership properties, by brand, as of December 31, 2012:

 

     Hotels,
VOI and Residential(a)
 
     Properties      Rooms  

St. Regis

     30         6,400   

Luxury Collection

     85         16,400   

W

     44         12,400   

Westin

     192         74,600   

Le Méridien

     96         25,400   

Sheraton

     427         149,800   

Four Points

     171         30,900   

Aloft

     62         9,900   

Element

     10         1,600   

Independent / Other

     17         8,000   
  

 

 

    

 

 

 

Total

     1,134         335,400   
  

 

 

    

 

 

 

 

(a) Includes vacation ownership properties of which 13 are stand-alone, eight are mixed-use and one is an unconsolidated joint venture totaling rooms of 7,400.

Our brand names include the following:

St. Regis® (luxury full-service hotels, resorts and residences) is for connoisseurs who desire the finest expressions of luxury. They provide flawless and bespoke service to high-end leisure and business travelers. St. Regis hotels are located in the ultimate locations within the world’s most desired destinations, important emerging markets and yet to be discovered paradises, and they typically have individual design characteristics to capture the distinctive personality of each location.

The Luxury Collection® (luxury full-service hotels and resorts) is a group of unique hotels and resorts offering exceptional service to an elite clientele. From legendary palaces and remote retreats to timeless modern

 

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classics, these remarkable hotels and resorts enable the most discerning traveler to collect a world of unique, authentic and enriching experiences indigenous to each destination that capture the sense of both luxury and place. They are distinguished by magnificent decor, spectacular settings and impeccable service.

W® (luxury and upscale full-service hotels, retreats and residences) is where iconic design and cutting-edge lifestyle set the stage for exclusive and extraordinary experiences. Each hotel and retreat is uniquely inspired by its destination, where innovative design converges with local influences to create energizing spaces for guests to play or work by day or mix and mingle by night. Guests are invited into dynamic environments that combine entertainment, vibrant lounges, modern guestrooms, and innovative cocktail culture and cuisine. The beats per minute increase as the day transitions to night, amplifying the scene in every W Living Room for guests to socialize and see and be seen. W Hotels Worldwide, a global design powerhouse brought to life through W Happenings, exclusive partnerships and the signature Whatever/Whenever® service philosophy that grants its guests and local community access to what’s new and next.

Westin® (luxury and upscale full-service hotels, resorts and residences) provides innovative programs and instinctive services which transform every aspect of a guest’s stay into a revitalizing experience. Indulge in a deliciously wholesome menu including exclusive SuperFoodsRx® dishes. Energize in the fitness studio with the industry-leading WestinWORKOUT®. Revive in the Heavenly® Bath where luxurious touches create a spa-like experience. And of course, experience truly restorative sleep in the world-renowned Heavenly® Bed—an oasis of lush sheets, down, and patented pillow-top mattress. Whether an epic city center location or refreshing resort destination, Westin ensures guests leave feeling better than when they arrived. Westin. For A Better You.

Le Méridien® (luxury and upscale full-service hotels, resorts and residences) is a Paris-born hotel brand, currently represented by 96 properties in 41 countries worldwide. Le Méridien aims to target the creative mind: an audience inspired by creativity who are eager to learn something new and see things in a different light. A curated approach towards the arts connects Le Méridien with the creative mind in an authentic and credible way. A cultural curator was engaged, responsible for integrating the arts into the guest experience and identifying the appropriate creative talents, a family of cultural innovators, LM100 TM, to define and enrich the guest experience through their dedicated tailor-made creations. This esteemed group comprises of a global array of visionaries, from painters to photographers, musicians to designers and chefs. Le Méridien is more than a hotel, it’s a way of life that provides “A New Perspective”.

Sheraton® (luxury and upscale full-service hotels, resorts and residences) is our largest brand serving the needs of business and leisure travelers worldwide. For over 75 years this iconic brand has welcomed guests, becoming a trusted friend to travelers and one of the world’s most recognized hotel brands. From being the first hotel brand to step into major international markets like China, to completely captivating entire destinations like Waikiki, Sheraton understands that travel is about bringing people together. Our social spaces define and differentiate Sheraton. The Link@SheratonSM experienced with Microsoft is the heart of our lobby. Guests enjoy the upside of everything with Sheraton Club, designed with SPG members in mind. Sheraton Fitness programmed by Core Performance brings guests together as they train and eat healthy on the road. Sheraton transcends lifestyles, generations and geographies and will continue to welcome generation after generation of world travelers as The World’s Gathering Place.

Four Points® (select-service hotels) delights the self-sufficient traveler with what is needed for greater comfort and productivity. Great Hotels. Great Rates. All at the honest value our guests deserve. Our guests start their day feeling energized and finish up relaxed, maybe even with one of our Best Brews (local craft beer). It’s the little indulgences that make their time away from home special.

Aloft® (select-service hotels) first opened in 2008. It opened its 62nd property in 2012. Aloft provides new heights: an oasis where you least expect it, a spirited neighborhood outpost, a haven at the side of the road. Bringing a cozy harmony of modern elements to the classic on-the-road tradition, Aloft offers a sassy, refreshing, ultra effortless alternative for both the business and leisure traveler. Fresh, fun, and fulfilling, Aloft is an experience to be discovered and rediscovered, destination after destination, as you ease on down the road. Style at a Steal.

Element(SM) (extended stay hotels) first opened in 2008, provides a modern, upscale and intuitively designed hotel experience that allows guests to live well and feel in control. Inspired by Westin, Element hotels promote

 

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balance through a thoughtful, upscale environment. Decidedly modern with an emphasis on nature, Element is intuitively constructed with an efficient use of space that encourages guests to stay connected, feel alive, and thrive while they are away. Primarily all Element hotels are LEED certified, depicting the importance of the environment in today’s world. Space to live your life.

Competition

The hotel and timeshare industry is highly competitive. Competition is generally based on quality and consistency of room, restaurant and meeting facilities and services, attractiveness of locations, availability of a global distribution system, price, the ability to earn and redeem loyalty program points and other factors. We believe that we compete favorably in these areas.

Our properties compete with other hotels and resorts in their geographic markets, including facilities owned by local interests and facilities owned by national and international chains. Our principal competitors include other hotel operating companies, national and international hotel brands, and ownership companies (including hotel REITs). While some of our competitors are private management firms, several are large national and international chains that own and operate their own hotels, as well as manage hotels for third-party owners and sell VOIs, under a variety of brands that compete directly with our brands.

Intellectual Property

We operate in a highly competitive industry and our intellectual property, including brands, logos, trademarks, service marks, and trade dress, is an important component of our business. The success of our business depends, in part, on the increased recognition of our brands and our ability to further develop our brands globally through the use of our intellectual property. To that end, we apply to register and renew our intellectual property, enforce our rights against the unauthorized use of our intellectual property by third parties; and otherwise protect our intellectual property through strategies and in jurisdictions where we reasonably deem appropriate.

Environmental Matters

We are subject to certain requirements and potential liabilities under various foreign and U.S. federal, state and local environmental laws, ordinances and regulations (“Environmental Laws”). Under such laws, we could be held liable for the costs of removing or cleaning up hazardous or toxic substances at, on, under, or in our currently or formerly owned or operated properties. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. The presence of hazardous or toxic substances may adversely affect the owner’s ability to sell or rent such real property or to borrow using such real property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic wastes may be liable for the costs of removal or remediation of such wastes at the treatment, storage or disposal facility, regardless of whether such facility is owned or operated by such person. We use certain substances and generate certain wastes that may be deemed hazardous or toxic under applicable Environmental Laws, and we from time to time have incurred, and in the future may incur, costs related to cleaning up contamination resulting from historic uses of certain of our current or former properties or our treatment, storage or disposal of wastes at facilities owned by others. Other Environmental Laws govern occupational exposure to asbestos-containing materials (“ACMs”) and require abatement or removal of certain ACMs (limited quantities of which are present in various building materials such as spray-on insulation, floor coverings, ceiling coverings, tiles, decorative treatments and piping located at certain of our hotels) in the event of damage or demolition, or certain renovations or remodeling. Environmental Laws also regulate polychlorinated biphenyls (“PCBs”), which may be present in electrical equipment. A number of our hotels have underground storage tanks (“USTs”) and equipment containing chlorofluorocarbons (“CFCs”); the operation and subsequent removal or upgrading of certain USTs and the use of equipment containing CFCs also are regulated by Environmental Laws. In connection with our ownership, operation and management of our properties, we could be held liable for costs of remedial or other action with respect to PCBs, USTs or CFCs.

Congress and some states are considering or have undertaken actions to regulate and reduce greenhouse gas emissions. New or revised laws and regulations or new interpretations of existing laws and regulations, such as

 

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those related to climate change, could affect the operation of our hotels and/or result in significant additional expense and operating restrictions. The cost impact of such legislation, regulation, or new interpretations would depend upon the specific requirements enacted and cannot be determined at this time.

Environmental Laws are not the only source of environmental liability. Under common law, owners and operators of real property may face liability for personal injury or property damage because of various environmental conditions such as alleged exposure to hazardous or toxic substances (including, but not limited to, ACMs, PCBs and CFCs), poor indoor air quality, radon or poor drinking water quality.

Although we have incurred and expect to incur remediation and various environmental-related costs during the ordinary course of operations, management does not anticipate that such costs will have a material adverse effect on our operations or financial condition.

Seasonality and Diversification

The hotel industry is seasonal in nature; however, the periods during which our properties experience higher revenues vary from property to property and depend principally upon location. Generally, our revenues and operating income have been lower in the first quarter than in the second, third or fourth quarters.

Comparability of Owned Hotel Results

We continually update and renovate our owned, leased and consolidated joint venture hotels. While undergoing renovation, these hotels are generally not operating at full capacity and, as such, these renovations can negatively impact our owned hotel revenues and operating income. Other events, such as the occurrence of natural disasters may cause a full or partial closure or sale of a hotel, and such events can negatively impact our revenues and operating income. Finally, as we pursue our strategy of reducing our investment in owned real estate assets, the sale of such assets can significantly reduce our revenues and operating income from owned, leased and consolidated joint venture hotels.

Employees

At December 31, 2012, approximately 171,000 people were employed at our corporate offices, owned and managed hotels and vacation ownership resorts, of which approximately 28% were employed in the United States. At December 31, 2012, approximately 27% of the U.S.-based employees were covered by various collective bargaining agreements providing, generally, for basic pay rates, working hours, other conditions of employment and orderly settlement of labor disputes. Generally, labor relations have been maintained in a normal and satisfactory manner, and management believes that our employee relations are satisfactory.

Where You Can Find More Information

We file an annual report on a Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, a proxy statement and other information with the Securities and Exchange Commission (“SEC”). Our SEC filings are available to the public over the internet at the SEC’s website at http://www.sec.gov. Our SEC filings are also available on our website at http://www.starwoodhotels.com/corporate/investor_relations.html as soon as reasonably practicable after they are filed with or furnished to the SEC. You may also read and copy any document we file with the SEC at its public reference room located at 100 F Street, NE, in Washington, D.C. 20549 on official business days during the hours of 10 a.m. to 3 p.m. Please call the SEC at (800) SEC-0330 for further information. Our filings with the SEC are also available at the New York Stock Exchange. For more information on obtaining copies of our public filings at the New York Stock Exchange, you should call (212) 656-5060. You may also obtain a copy of our filings free of charge by calling Investor Relations at (203) 351-3500.

 

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Item 1A. Risk Factors.

Risks Relating to Hotel, Resort, Vacation Ownership and Residential Operations

We Are Subject to All the Operating Risks Common to the Hotel and Vacation Ownership and Residential Industries. Operating risks common to the hotel and vacation ownership and residential industries include:

 

   

changes in general economic conditions, including the severity and duration of downturns in the United States, Europe and global economies;

 

   

impact of war and terrorist activity (including threatened terrorist activity) and heightened travel security measures instituted in response thereto;

 

   

domestic and international political and geopolitical conditions;

 

   

travelers’ fears of exposures to contagious diseases;

 

   

decreases in the demand for transient rooms and related lodging services, including a reduction in business travel as a result of general economic conditions;

 

   

decreases in demand or increases in supply for vacation ownership interests;

 

   

the impact of internet intermediaries on pricing and the value of our brands and our increasing reliance on technology;

 

   

cyclical over-building in the hotel and vacation ownership industries;

 

   

restrictive changes in zoning and similar land use laws and regulations or in health, safety and environmental laws, rules and regulations and other governmental and regulatory action;

 

   

changes in travel patterns;

 

   

changes in operating costs including, but not limited to, energy, labor costs (including the impact of unionization), food costs, workers’ compensation and health-care related costs, insurance and unanticipated costs such as acts of nature and their consequences;

 

   

the costs and administrative burdens associated with compliance with applicable laws and regulations, including, among others, franchising, timeshare, privacy, licensing, accessibility and labor and employment;

 

   

disputes with owners of properties, including condominium hotels, franchisees and homeowner associations which may result in litigation, and non-compliance with insurance and other requirements by such owners;

 

   

the availability and cost of capital to allow us and hotel owners and franchisees to fund construction, renovations and investments;

 

   

foreign exchange fluctuations;

 

   

the financial condition of third-party owners, project developers and franchisees, which may impact our ability to recover indemnity payments that may be owed to us and their ability to fund amounts required under development, management and franchise agreements and in most cases our recourse is limited to the equity value said party has in the property;

 

   

the financial condition of the airline industry and the impact on air travel; and

 

   

regulation or taxation of carbon dioxide emissions by airlines and other forms of transportation.

If We Are Unable to Maintain Existing Management and Franchise Agreements or Obtain New Agreements on as Favorable Terms, Our Operating Results May Be Adversely Affected. We are impacted by our relationships with hotel owners and franchisees. Our hotel management contracts are typically long-term arrangements, but most allow the hotel owner to replace us in certain circumstances, such as the bankruptcy of

 

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the hotel owner or franchisee, the failure to meet certain financial or performance criteria and in certain cases, upon a sale of the property. Our ability to meet these financial and performance criteria is subject to, among other things, the risks common to hotel industries described above. Factors outside of our control, such as the current European sovereign debt crisis, could also have a significant negative impact on the financial condition and viability of our hotel property owners. Additionally, the nature of responsibilities under these management and franchise arrangements may give rise to disagreements with the property owners, making it difficult to maintain positive relationships with current and potential hotel owners and franchisees. Consequently, our operating results would be adversely affected if we could not maintain existing management, franchise or representation agreements or obtain new agreements on as favorable terms as the existing agreements.

We and Our Third Party Licensees May Not Be Able to Sell Residential Properties Using Our Brands for a Profit or at Anticipated Prices. We utilize our brands in connection with the residential portions of certain properties that we develop and license our brands to third parties to use in a similar manner for a fee. Residential properties using our brands could become less attractive due to changes in mortgage rates and the availability of mortgage financing generally, market absorption or oversupply in a particular market. As a result, we and our third party licensees may not be able to sell these residences for a profit or at the prices that we or they have anticipated.

The Recent Recession in the Lodging Industry and the Global Economy Generally Has Impacted and May Continue to Impact Our Financial Results and Growth. The recent economic recession and economic uncertainty in the United States, Europe and much of the rest of the world has had a negative impact on the hotel and vacation ownership and residential industries. Substantial increases in air and ground travel costs and decreases in airline capacity have reduced demand for our hotel rooms and interval and fractional timeshare products. Accordingly, our financial results have been impacted by the economic recession and both our future financial results and growth could be further harmed if recovery from the economic recession slows. In certain cases, we have entered into third party hotel management contracts which contain performance guarantees specifying that certain operating metrics will be achieved. As a result of the impact of the economic downturn on the lodging industry (and despite the stabilization in lodging that began in 2010), we may not meet the requisite performance levels, and we may be forced to loan or contribute monies to fund the shortfall of performance levels or terminate the management contract. For a more detailed description of our performance guarantees, see Note 25 of the consolidated financial statements.

Moreover, many businesses, particularly financial institutions and pharmaceutical companies, face restrictions on the ability to travel and hold conferences or events at resorts and luxury hotels. These restrictions as well as negative publicity associated with such companies holding large conference and corporate events has resulted in reduced corporate bookings that could impact our financial results in the future.

Our Revenues, Profits, or Market Share Could Be Harmed If We Are Unable to Compete Effectively. The hotel, vacation ownership and residential industries are highly competitive. Our properties compete for customers with other hotel and resort properties, ranging from national and international hotel brands to independent, local and regional hotel operators, and, with respect to our vacation ownership resorts and residential projects, with owners reselling their VOIs, including fractional ownership, or apartments. We compete based on a number of factors, including quality and consistency of rooms, restaurant and meeting facilities and services, attractiveness of locations, availability of a global distribution system, price, and the ability to earn and redeem loyalty program points. Some of our competitors may have substantially greater marketing and financial resources than we do, and if we are unable to successfully compete in these areas, our operating results could be adversely affected.

Moreover, our present growth strategy for development of additional lodging facilities entails entering into and maintaining various management agreements, franchise agreements, and leases with property owners. We compete with other hotel companies for this business primarily on the basis of fees, contract terms, brand recognition, and reputation. In connection with entering into these agreements, we may be required to make investments in, or guarantee the obligations of, third parties or guarantee minimum income to third parties. The terms of our management agreements, franchise agreements, and leases for each of our lodging facilities are influenced by contract terms offered by our competitors, among other things. We cannot assure you that any of our current arrangements will continue or that we will be able to enter into future collaborations, renew agreements, or enter into new agreements in the future on terms that are as favorable to us as those that exist today.

 

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Our Businesses Are Capital Intensive and the Failure to Make Necessary Investments Could Adversely Affect the Quality and Reputation of Our Brands. For our owned, managed and franchised properties to remain attractive and competitive, the property owners and we have to spend money periodically to keep the properties well maintained, modernized and refurbished. This creates an ongoing need for cash. Third-party property owners may be unable to access capital or unwilling to spend available capital when necessary, even if required by the terms of our management or franchise agreements. To the extent that property owners and we cannot fund expenditures from cash generated by operations, funds must be borrowed or otherwise obtained. Failure to make the investments necessary to maintain or improve such properties, act in accordance with applicable brand standards or project a consistent brand image could adversely affect the quality and reputation of our brands.

Moreover, third party owners or franchisees may be unwilling or unable to incur the cost of complying with brand standards for new and existing brands as such brands may evolve from time to time. If the reputation or perceived quality of our brands declines, our market share, reputation, business, financial condition or results of operations could be affected.

Any Failure to Protect our Trademarks Could Have a Negative Impact on the Value of Our Brand Names and Adversely Affect Our Business. We believe our trademarks are an important component of our business. We rely on trademark laws to protect our proprietary rights. The success of our business depends in part upon our continued ability to use our trademarks to increase brand awareness and further develop our brand in both domestic and international markets. From time to time, we apply to have certain trademarks registered and there is no guarantee that such trademark registrations will be granted. Further, monitoring the unauthorized use of our intellectual property is difficult. Litigation has been and may continue to be necessary to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. Litigation of this type could result in substantial costs and diversion of resources, may result in counterclaims or other claims against us and could significantly harm our results of operations. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States. We cannot assure you that all of the steps we have taken to protect our trademarks in the United States and foreign countries will be adequate to prevent imitation of our trademarks by others. The unauthorized reproduction of our trademarks could diminish the value of our brand and its market acceptance, competitive advantages or goodwill, which could adversely affect our business.

Our Dependence on Hotel and Resort Development Exposes Us to Timing, Budgeting and Other Risks. We intend to participate in the development of hotel and resort properties and residential components of hotel properties, as suitable opportunities arise, taking into consideration the general economic climate. In addition, the owners and developers of new-build properties that we have entered into management or franchise agreements with are subject to these same risks which may impact the amount and timing of fees we had expected to collect from those properties. New project development has a number of risks, including risks associated with:

 

   

construction delays or cost overruns that may increase project costs;

 

   

receipt of zoning, occupancy and other required governmental permits and authorizations;

 

   

development costs incurred for projects that are not pursued to completion;

 

   

so-called acts of God such as earthquakes, hurricanes, floods or fires that could adversely impact a project;

 

   

defects in design or construction that may result in additional costs to remedy or require all or a portion of a property to be closed during the period required to rectify the situation;

 

   

ability to raise capital; and

 

   

governmental restrictions on the nature or size of a project or timing of completion.

We cannot assure you that any development project, including sites held for development of vacation ownership resorts, will in fact be developed, and, if developed, the time period or the budget of such development may be greater than initially contemplated and the actual number of units or rooms constructed may be less than initially contemplated.

 

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International Operations Are Subject to Unique Political and Monetary Risks. We have significant international operations which as of December 31, 2012 included 164 owned, managed or franchised properties in Europe (including 16 properties with majority ownership); 80 managed or franchised properties in Africa and the Middle East; 71 owned, managed or franchised properties in Latin America (including nine properties with majority ownership); and 243 owned, managed or franchised properties in the Asia Pacific region (including four properties with majority ownership). International operations generally are subject to various political, geopolitical, and other risks that are not present in U.S. operations. These risks include the difficulties involved in managing an organization doing business in many different countries, exposure to local economic conditions, potential adverse changes in the diplomatic relations between foreign countries and the United States, including the threat of international boycott or U.S. anti-boycott legislation, hostility from local populations, including the risk of war, acts of terrorism and civil unrest, restrictions on the repatriation of non-U.S. earnings and withdrawal of foreign investments, restriction on the ability to pay dividends and remit earnings to affiliated companies, uncertainty as to the enforceability of contractual rights and intellectual property rights under local law, conflicts between local law and United States law and compliance with complex and changing laws, regulations and policies. In addition, sales in international jurisdictions typically are made in local currencies, which subject us to risks associated with currency fluctuations. Currency devaluations and unfavorable changes in international monetary and tax policies could have a material adverse effect on our profitability and financing plans, as could other changes in the international regulatory climate and international economic conditions.

Additionally, our current growth strategy is heavily dependent upon growth in international markets. As of December 31, 2012, 85% of our pipeline represented growth outside North America. Further, 60% of our pipeline represents new properties in Asia Pacific and 44% represents new growth in China alone. If our international expansion plans are unsuccessful, our financial results could be materially adversely affected.

Third Party Internet Reservation Channels May Negatively Impact Our Bookings. Some of our hotel rooms are booked through third party internet travel intermediaries such as Expedia.com®, Orbitz.com®, Booking.com®, and CTrip.com®, as well as lesser-known online travel service providers. As the percentage of internet bookings increases, these intermediaries may be able to obtain higher commissions, reduced room rates or other significant contract concessions from us. Moreover, some of these internet travel intermediaries are attempting to commoditize hotel rooms by increasing the importance of price and general indicators of quality (such as “three-star downtown hotel”) at the expense of brand identification. Over time, consumers may develop loyalties to these third party internet reservations systems rather than to our lodging brands. Although we expect to derive most of our business from traditional channels and our websites, our business and profitability could be adversely affected if customer loyalties significantly shift from our lodging brands to their travel services, diverting bookings away from our websites, or through their fees increasing the overall cost of internet bookings for our hotels.

In addition, recent class action litigation against several online travel intermediaries and lodging companies, including Starwood, challenges the legality under antitrust law of certain provisions in contracts with third party intermediaries. While the company is vigorously defending the litigation and believes the contract provisions are lawful, the courts will ultimately determine this issue and an adverse outcome could force us to alter our business arrangements with these third parties and could have a negative impact on our financial condition and results of operations.

A Failure to Keep Pace with Developments in Technology Could Impair Our Operations or Competitive Position. The hospitality industry continues to demand the use of sophisticated technology and systems including technology utilized for property management, brand assurance and compliance, procurement, reservation systems, operation of our customer loyalty program, distribution, revenue management and guest amenities. These technologies can be expected to require refinements, including to comply with the legal requirements such as privacy regulations and requirements established by third parties such as the payment card industry, and there is the risk that advanced new technologies will be introduced. Further, the development and maintenance of these technologies may require significant capital. There can be no assurance that as various systems and technologies become outdated or new technology is required, we will be able to replace or introduce them as quickly as our competition or within budgeted costs and timeframes. Further, there can be no assurance that we will achieve the benefits that may have been anticipated from any new technology or system.

 

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Disasters, Disruptions and Other Impairment of Our Information Technologies and Systems Could Adversely Affect our Business. Our business involves the processing, use, storage and transmission of personal information regarding our employees, customers, hotel owners, and vendors for various business purposes, including marketing and promotional purposes. The protection of personal as well as proprietary information is critical to us. We are subject to numerous laws and regulations designed to protect personal information, including Member State implementation of the European Union Directive on Data Protection and various U.S. federal and state laws. We have established policies and procedures to help protect the privacy and security of our information. However, every year the number of laws and regulations continues to grow, as does the complexity of such laws. Further, privacy regulations, on occasion, may be inconsistent from one jurisdiction to another. Compliance with applicable privacy regulations may increase our operating costs and/or adversely impact our ability to market our products, properties and services to our guests.

We are dependent on information technology networks and systems to process, transmit and store proprietary and personal information, and to communicate among our various locations around the world, which may include our reservation systems, vacation exchange systems, hotel/property management systems, customer and employee databases, call centers, administrative systems, and third party vendor systems. The complexity of this infrastructure contributes to the potential risk of security breaches. We rely on the security of our information systems and, those of our vendors and other authorized third parties, to protect our proprietary and personal information.

Despite our efforts, information networks and systems may be vulnerable to threats such as system, network or internet failures; computer hacking or business disruption; cyber-terrorism; viruses, worms or other malicious software programs; employee error, negligence, fraud, or misuse of systems; or other unauthorized attempts by third parties to access, modify or delete our proprietary and personal information. Although we have taken steps to address these concerns by implementing network security and internal controls, there can be no assurance that a system failure, unauthorized access, or breach will not occur.

Any compromise of our networks or systems, public disclosure, or loss of personal or proprietary information, non-compliance with contractual or legal obligations regarding personal information, or a violation of a privacy or security policy pertaining to personal information could result in a disruption to our operations; damage to our reputation and a loss of confidence from our customers or employees; legal claims or proceedings, liability under laws that protect personal information, regulatory penalties, potentially resulting in significant monetary damages, regulatory enforcement actions, fines, and/or criminal or civil prosecution in one or more jurisdictions; and subjecting us to additional regulatory scrutiny, or additional costs and liabilities which could have a material adverse effect on our business, operations or financial condition.

Significant Owners of Our Properties May Concentrate Risks. There is potential for a concentration of ownership of hotels operated under our brands by any single owner. Following the acquisition of the Le Méridien brand business and a large disposition transaction to one ownership group in 2006, single ownership groups own significant numbers of hotels operated by us. While the risks associated with such ownership are no different than exist generally (i.e., the financial position of the owner, the overall state of the relationship with the owner and their participation in optional programs and the impact on cost efficiencies if they choose not to participate), they are more concentrated. If an owner with a considerable portfolio of hotels were to leave our system, it may have a significant impact in certain of our markets and on our financial condition and results of operations.

Our Real Estate Investments Subject Us to Numerous Risks. We are subject to the risks that generally relate to investments in real property because we own and lease hotels and resorts. The investment returns available from equity investments in real estate depend in large part on the amount of income earned and capital appreciation generated by the related properties, and the expenses incurred. In addition, a variety of other factors affect income from properties and real estate values, including governmental regulations, insurance, zoning, tax and eminent domain laws, interest rate levels and the availability of financing. For example, new or existing real estate zoning or tax laws can make it more expensive and/or time-consuming to develop real property or expand, modify or renovate hotels. When interest rates increase, the cost of acquiring, developing, expanding or renovating real property increases and real property values may decrease as the number of potential buyers decreases. Similarly, as financing becomes less available, it becomes more difficult both to acquire and to sell

 

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real property. Finally, under eminent domain laws, governments can take real property. Sometimes this taking is for less compensation than the owner believes the property is worth. Any of these factors could have a material adverse impact on our results of operations or financial condition. In addition, equity real estate investments are difficult to sell quickly and we may not be able to adjust our portfolio of owned properties quickly in response to economic or other conditions. If our properties do not generate revenue sufficient to meet operating expenses, including debt service and capital expenditures, our income will be adversely affected.

We May Be Subject to Environmental Liabilities. Our properties and operations are subject to a number of Environmental Laws. Under such laws, we could be held liable for the costs of removing or cleaning up hazardous or toxic substances at, on, under, or in our currently or formerly owned or operated properties. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. The presence of hazardous or toxic substances may adversely affect the owner’s ability to sell or rent such real property or to borrow using such real property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic materials or wastes may be liable for the costs of extraction, removal or remediation of such wastes at the treatment, storage or disposal facility, regardless of whether such facility is owned or operated by such person. We use certain substances and generate certain wastes that may be deemed hazardous or toxic under applicable Environmental Laws, and we from time to time have incurred, and in the future may incur, costs related to cleaning up contamination resulting from historic uses at certain of our current or former properties or our treatment, storage or disposal of wastes at facilities owned by others. Other Environmental Laws govern occupational exposure to ACMs and require abatement or removal of certain ACMs (limited quantities of which are present in various building materials such as spray-on insulation, floor coverings, ceiling coverings, tiles, decorative treatments and piping located at certain of our hotels) in the event of damage or demolition, or certain renovations or remodeling. Environmental Laws also regulate PCBs, which may be present in electrical equipment. A number of our hotels have USTs and equipment containing CFCs; the operation and subsequent removal or upgrading of certain USTs and the use of equipment containing CFCs also are regulated by Environmental Laws. In connection with our ownership, operation and management of our properties, we could be held liable for costs of remedial or other action with respect to PCBs, USTs or CFCs.

Congress and some states are considering or have undertaken actions to regulate and reduce greenhouse gas emissions. New or revised laws and regulations or new interpretations of existing laws and regulations, such as those related to climate change, could affect the operation of our hotels and/or result in significant additional expense and operating restrictions on us. The cost impact of such legislation, regulation, or new interpretations would depend upon the specific requirements enacted and cannot be determined at this time.

We Could Be Adversely Affected by Violations of the U.S. Foreign Corrupt Practices Act and Similar Anti-Corruption Laws. Our business operations in countries outside the United States are subject to anti-corruption laws and regulations, including restrictions imposed by the Foreign Corrupt Practices Act (“FCPA”). The FCPA and similar anti-corruption laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to government officials for the purpose of obtaining or retaining business. We operate in many parts of the world that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-corruption laws may conflict with local customs and practices. We train our employees concerning anti-corruption laws and issues, and also require our third-party business partners and agents and others who work with us or on our behalf that they must comply with our anti-corruption policies. We also have policies, procedures and controls in place to monitor internal and external compliance. We cannot provide assurance that our internal controls and procedures will always protect us from the reckless or criminal acts committed by our employees or third-parties with whom we work. If we are found to be liable for violations of the FCPA or similar anti-corruption laws in international jurisdictions, either due to our own acts or out of inadvertence, or due to the acts or inadvertence of others, we could suffer criminal or civil penalties which could have a material and adverse effect on our results of operations, financial condition and cash flows.

Risks Relating to Operations in Syria and Other Countries Subject to Sanction Laws

From time to time, the United States may impose sanctions that prohibit U.S. companies from engaging in business activities with certain persons or foreign countries or governments that it determines are adverse to U.S. foreign policy interests.

 

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For example, the United States has issued an executive order that prohibits U.S. companies from engaging in certain business activities with the government of Syria, a country that the United States has identified as a state sponsor of terrorism. During fiscal 2012, a foreign subsidiary of Starwood generated less than $10,000 of revenue from management and other fees from existing hotels located in Syria. This amount constitutes significantly less than 1% of our worldwide annual revenues. We believe our activities in Syria are in full compliance with U.S. and local law. At any time, the United States may impose additional sanctions against Syria. If so, our existing activities in Syria may be adversely affected, or we may incur costs to respond to an executive order, depending on the nature of any further sanctions that might be imposed.

In addition, in 2011 the United States issued an executive order that prohibited U.S. companies from transacting with the government of Libya and certain entities and individuals associated with the former Gaddafi regime. A foreign subsidiary of Starwood currently has a management contract for one hotel located in Libya, as well as three hotels outside Libya that are indirectly owned by the government of Libya, and we believe our activities in that country have been in compliance with U.S. law. Although the restriction was released following the fall of the Gaddafi regime, the United States may impose additional sanctions against Libya at any time.

Further, our activities in countries that are subject to U.S. sanction laws or countries that have experienced government corruption may reduce demand for our stock among certain investors. Any restrictions on Starwood’s ability to conduct its business operations across the world could negatively impact our financial results.

Risks Relating to Debt Financing

Our Debt Service Obligations May Adversely Affect Our Cash Flow. As a result of our debt obligations, we are subject to: (i) the risk that cash flow from operations will be insufficient to meet required payments of principal and interest, (ii) restrictive covenants, including covenants relating to certain financial ratios, and (iii) interest rate risk. Although we anticipate that we will be able to repay or refinance our existing indebtedness and any other indebtedness when it matures, there can be no assurance that we will be able to do so or that the terms of such refinancing will be favorable. Our leverage may have important consequences including the following: (i) our ability to obtain additional financing for acquisitions, working capital, capital expenditures or other purposes, if necessary, may be impaired or such financing may not be available on terms favorable to us and (ii) a substantial decrease in operating cash flow, EBITDA (as defined in our credit agreements) or a substantial increase in our expenses could make it difficult for us to meet our debt service requirements and restrictive covenants and force us to sell assets and/or modify our operations.

We Have Little Control Over the Availability of Funds Needed to Fund New Investments and Maintain Existing Hotels. In order to fund new hotel investments, as well as refurbish and improve existing hotels, both we and current and potential hotel owners must have access to capital. The availability of funds for new investments and maintenance of existing hotels depends in large measure on capital markets and liquidity factors over which we have little control. Current and prospective hotel owners may find hotel financing expensive and difficult to obtain. Delays, increased costs and other impediments to restructuring such projects may affect our ability to realize fees, recover loans and guarantee advances, or realize equity investments from such projects. Our ability to recover loans and guarantee advances from hotel operations or from owners through the proceeds of hotel sales, refinancing of debt or otherwise may also affect our ability to raise new capital. In addition, downgrades of our public debt ratings by rating agencies could increase our cost of capital. A breach of a covenant could result in an event of default that, if not cured or waived, could result in an acceleration of all or a substantial portion of our debt. For a more detailed description of the covenants imposed by our debt obligations, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Cash Used for Financing Activities in this Annual Report.

Volatility in the Credit Markets May Adversely Impact Our Ability to Sell the Loans That Our Vacation Ownership Business Generates. Our vacation ownership business provides financing to purchasers of our vacation ownership units, and we attempt to sell interests in those loans in the securities markets. Volatility in the credit markets may impact the timing and volume of the timeshare loans that we are able to sell. Although we expect to realize the economic value of our vacation ownership note portfolio even if future note sales are

 

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temporarily or indefinitely delayed, such delays may result in either increased borrowings to provide capital to replace anticipated proceeds from such sales or reduced spending in order to maintain our leverage and return targets.

Risks Relating to So-Called Acts of God, Terrorist Activity and War

Our financial and operating performance may be adversely affected by so-called acts of God, such as natural disasters, in locations where we own and/or operate significant properties and areas of the world from which we draw a large number of customers. For example, in 2011, our hotels in Japan and Thailand experienced reduced bookings as a result of the tsunami and flooding, respectively, in these countries. Similarly, wars (including the potential for war), terrorist activity (including threats of terrorist activity), political unrest and other forms of civil strife and geopolitical uncertainty have caused in the past, and may cause in the future, our results to differ materially from anticipated results. In 2011, our hotels in Syria, Tunisia, Libya and Egypt experienced reduced bookings as a result of the political climate in these countries. If these conditions do not improve, our financial results could be negatively impacted.

Risks Related to Pandemic Diseases

Our business could be materially and adversely affected by the effect of a pandemic disease on the travel industry. For example, the past outbreaks of SARS and avian flu had a severe impact on the travel industry. A prolonged recurrence of SARS, avian flu, swine flu or another pandemic disease also may result in health or other government authorities imposing restrictions on travel. Any of these events could result in a significant drop in demand for our hotel and vacation ownership businesses and adversely affect our financial condition and results of operations.

Our Insurance Policies May Not Cover All Potential Losses

We carry insurance coverage for general liability, property, business interruption, and other risks with respect to our owned and leased properties and we make available insurance programs for owners of properties we manage. These policies offer coverage terms and conditions that we believe are usual and customary for our industry. Generally, our “all-risk” property policies provide that coverage is available on a per occurrence basis and that, for each occurrence, there is a limit as well as various sub-limits on the amount of insurance proceeds we will receive in excess of applicable deductibles. In addition, there may be overall limits under the policies. Sub-limits exist for certain types of claims such as service interruption, debris removal, expediting costs or landscaping replacement, and the dollar amounts of these sub-limits are significantly lower than the dollar amounts of the overall coverage limit. Our property policies also provide that for the coverage of critical earthquake (California and Mexico), named windstorm and flood, all of the claims from each of our properties resulting from a particular insurable event must be combined together for purposes of evaluating whether the annual aggregate limits and sub-limits contained in our policies have been exceeded and any such claims will also be combined with the claims of owners of managed hotels that participate in our insurance program for the same purpose. Therefore, if insurable events occur that affect more than one of our owned hotels and/or managed hotels owned by third parties that participate in our insurance program, the claims from each affected hotel will be added together to determine whether the per occurrence limit, annual aggregate limit or sub-limits, depending on the type of claim, have been reached and if the limits or sub-limits are exceeded each affected hotel will only receive a proportional share of the amount of insurance proceeds provided for under the policy. In addition, under those circumstances, claims by third party owners will reduce the coverage available for our owned and leased properties.

In addition, there are also other risks including but not limited to war, certain forms of terrorism such as nuclear, biological or chemical terrorism, political risks, some environmental hazards and/or acts of God that may be deemed to fall completely outside the general coverage limits of our policies or may be uninsurable or may be too expensive to justify insuring against.

We may also encounter challenges with an insurance provider regarding whether it will pay a particular claim that we believe to be covered under our policy. Should an uninsured loss or a loss in excess of insured

 

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limits occur, we could lose all or a portion of the capital we have invested in a hotel or resort, as well as the anticipated future revenue from the hotel or resort. In that event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the property.

Our Acquisitions/Dispositions and Investments in New Brands May Ultimately Not Prove Successful and We May Not Realize Anticipated Benefits

We consider corporate as well as property acquisitions and investments that complement our business. In many cases, we compete for these opportunities with third parties who may have substantially greater financial resources or different or lower acceptable financial metrics than we do. There can be no assurance that we will be able to identify acquisition or investment candidates or complete transactions on commercially reasonable terms or at all. If transactions are consummated, there can be no assurance that any anticipated benefits will actually be realized. Similarly, there can be no assurance that we will be able to obtain additional financing for acquisitions or investments, or that the ability to obtain such financing will not be restricted by the terms of our debt agreements.

We periodically review our business to identify properties or other assets that we believe either are non-core, no longer complement our business, are in markets which may not benefit us as much as other markets during an economic recovery or could be sold at significant premiums. We are focused on restructuring and enhancing real estate returns and monetizing investments, and from time to time, may attempt to sell these identified properties and assets. There can be no assurance; however, that we will be able to complete dispositions on commercially reasonable terms or at all or that any anticipated benefits will actually be received.

We may develop and launch additional brands in the future. There can be no assurance regarding the level of acceptance of these brands in the development and consumer marketplaces, that the cost incurred in developing the brands will be recovered or that the anticipated benefits from these new brands will be realized.

Investing Through Partnerships or Joint Ventures Decreases Our Ability to Manage Risk

In addition to acquiring or developing hotels and resorts or acquiring companies that complement our business directly, we have from time to time invested, and expect to continue to invest, as a co-venturer. Joint venturers often have shared control over the operation of the joint venture assets. Therefore, joint venture investments may involve risks such as the possibility that the co-venturer in an investment might become bankrupt or not have the financial resources to meet its obligations, or have economic or business interests or goals that are inconsistent with our business interests or goals, or be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives. Consequently, actions by a co-venturer might subject hotels and resorts owned by the joint venture to additional risk. Further, we may be unable to take action without the approval of our joint venture partners. Alternatively, our joint venture partners could take actions binding on the joint venture without our consent. Additionally, should a joint venture partner become bankrupt, we could become liable for our partner’s share of joint venture liabilities.

Our Vacation Ownership Business is Subject to Extensive Regulation and Risk of Default

We market and sell VOIs, which typically entitle the buyer to ownership of a fully-furnished resort unit for a one-week period on either an annual or an alternate-year basis. We also acquire, develop and operate vacation ownership resorts, and provide financing to purchasers of VOIs. These activities are all subject to extensive regulation by the federal government, states or other jurisdictions in which vacation ownership resorts are located and in which VOIs are marketed and sold including regulation of our telemarketing activities under state and federal “Do Not Call” laws. In addition, the laws of most jurisdictions in which we sell VOIs grant the purchaser the right to rescind the purchase contract at any time within a statutory rescission period. Laws in some of the jurisdictions would impose liability on us as the developer of the resort for certain construction related defects. Although we believe that we are in material compliance with all applicable federal, state, local and foreign laws and regulations to which vacation ownership marketing, sales and operations are currently subject, changes in these requirements, or a determination by a regulatory authority that we were not in compliance, could adversely affect us. In particular, increased regulations of telemarketing activities could adversely impact the marketing of our VOIs.

 

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We bear the risk of defaults under purchaser mortgages on VOIs. If a VOI purchaser defaults on the mortgage during the early part of the loan amortization period, we will not have recovered the marketing, selling (other than commissions in certain events), and general and administrative costs associated with such VOI, and such costs will be incurred again in connection with the resale of the repossessed VOI. Accordingly, there is no assurance that the sales price will be fully or partially recovered from a defaulting purchaser or, in the event of such defaults, that our allowance for losses will be adequate.

Risks Related to Our Dependence on Senior Management and Our Ability to Achieve Our Growth Strategy

Our future success and our ability to manage future growth depend in large part upon the efforts of our senior management and our ability to attract and retain key officers and other highly qualified personnel. Competition for such personnel is intense. There can be no assurance that we will continue to be successful in attracting and retaining qualified personnel. Accordingly, there can be no assurance that our senior management will be able to successfully execute and implement our growth and operating strategies.

Over the last few years we have been pursuing a strategy of reducing our investment in owned real estate and increasing our focus on the management and franchise business. As a result, we are planning on substantially increasing the number of hotels we open every year and increasing the overall number of hotels in our system. This increase will require us to recruit and train a substantial number of new associates to work at these hotels as well as increasing our capabilities to enable hotels to open on time and successfully. There can be no assurance that our strategy will be successful.

Tax Risks

Evolving Government Regulation Could Impose Taxes or Other Burdens on Our Business. We rely upon generally available interpretations of tax laws and other types of laws and regulations in the countries and locales in which we operate. We cannot be sure that these interpretations are accurate or that the responsible taxing or other governmental authority is in agreement with our views. The imposition of additional taxes or requirements to change the way we conduct our business could cause us to have to pay taxes that we currently do not collect or pay or increase the costs of our services or increase our costs of operations.

In most cases, where our hotel rooms are booked through third party internet travel intermediaries, the intermediary collects hotel occupancy tax from its customer based on the price that the intermediary paid us for the hotel room. We then remit these taxes to the various tax authorities. Tax authorities in several jurisdictions have taken the position that the tax is also applicable to the intermediaries’ gross profit on these hotel transactions. Tax authorities that take this position have generally sought the additional tax payments from the intermediaries. It is possible, however, that certain tax authorities may also seek to collect the additional tax payments from us. To the extent that any tax authority succeeds in asserting that the hotel occupancy tax applies to the gross revenue on these transactions, we believe that any additional tax would be the responsibility of the intermediary, either directly or as a result of intermediaries’ obligations to indemnify us. Nevertheless, it is possible that we might have additional tax exposure and that we may not be able to collect these taxes from the intermediaries or their customers. In such event, such actions could have a material adverse effect on our business, results of operations and financial condition.

Risks Relating to Ownership of Our Shares

Our Board of Directors May Issue Preferred Stock and Establish the Preferences and Rights of Such Preferred Stock. Our charter provides that the total number of shares of stock of all classes which the Corporation has authority to issue is 1,200,000,000, consisting of one billion shares of common stock and 200 million shares of preferred stock. Our Board of Directors has the authority, without a vote of stockholders, to establish the preferences and rights of any preferred shares to be issued and to issue such shares. The issuance of preferred shares having special preferences or rights could delay or prevent a change in control even if a change

 

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in control would be in the interests of our stockholders. Since our Board of Directors has the power to establish the preferences and rights of preferred shares without a stockholder vote, our Board of Directors may give the holders preferences, powers and rights, including voting rights, senior to the rights of holders of our shares.

Our Board of Directors May Implement Anti-Takeover Devices and Our Bylaws Contain Provisions which May Prevent Takeovers. Certain provisions of Maryland law permit our Board of Directors, without stockholder approval, to implement possible takeover defenses that are not currently in place, such as a classified board. As permitted under the Maryland General Corporation Law, our Bylaws provide that directors have the exclusive right to amend our Bylaws.

We Cannot Provide Assurance That We Will Continue to Pay Dividends. There can be no assurance that we will continue to pay dividends. Our Board of Directors may suspend the payment of dividends if the Board deems such action to be in the best interests of the Company or stockholders. If we do not pay dividends, the price of our common stock must appreciate for you to realize a gain on your investment in the Company. This appreciation may not occur and our stock may, in fact, depreciate in value.

 

Item 1B.  Unresolved Staff Comments.

Not applicable.

 

Item 2. Properties.

Our hotel properties and vacation ownership and residential business properties are described in Part I, Item 1. “Business,” earlier in this report.

Our corporate headquarters are located at One StarPoint, Stamford, Connecticut, which lease expires in February 2027. In addition to our corporate headquarters, we lease space for our divisional offices, service centers and sales offices, both domestically and internationally.

We believe that our corporate headquarters and other leased space are in good condition and are sufficient and suitable for the conduct of our business. In the event we need to expand our operations, we believe that suitable space will be available on commercially reasonable terms.

 

Item 3. Legal Proceedings.

Information regarding Legal Proceedings is incorporated by reference from the “Litigation” section in Note 25, Commitments and Contingencies, of our consolidated financial statements set forth in Item 8. Financial Statements and Supplementary Data of this Annual Report, which is incorporated herein by reference.

 

Item 4. Mine Safety Disclosures.

Not applicable.

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our common stock, par value $0.01 per share (“Corporation Shares”), is traded on the New York Stock Exchange (the “NYSE”) under the symbol “HOT”.

 

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The following table sets forth the quarterly range of the high and low sale prices of the Corporation Shares for the fiscal periods indicated as reported on the NYSE Composite Tape:

 

     High      Low  

2012

     

Fourth quarter

   $ 58.48       $ 50.22   

Third quarter

   $ 61.09       $ 48.37   

Second quarter

   $ 60.81       $ 47.41   

First quarter

   $ 59.10       $ 48.23   

2011

     

Fourth quarter

   $ 54.15       $ 35.78   

Third quarter

   $ 59.45       $ 37.88   

Second quarter

   $ 61.70       $ 50.87   

First quarter

   $ 65.51       $ 54.95   

Approximate Number of Equity Security Holders

As of February 11, 2013, there were approximately 12,000 holders of record of Corporation Shares.

Dividends

We declared cash dividends to holders of Corporation Shares for the fiscal years ended December 31, 2012 and 2011 as follows:

 

     Dividends
Declared
 

2012

  

Annual dividend

   $ 1.25  (a) 

2011

  

Annual dividend

   $ 0.50  (b) 

 

(a) We declared a dividend in the fourth quarter of 2012 to shareholders of record on December 14, 2012, which was paid in December 2012.
(b) We declared a dividend in the fourth quarter of 2011 to shareholders of record on December 15, 2011, which was paid in December 2011.

Conversion of Securities; Sale of Unregistered Securities

Units of SLC Operating Limited Partnership, our wholly-owned subsidiary, are convertible into Corporation Shares at the unit holders’ option, provided that we have the option to settle conversion requests in cash or Corporation Shares. At December 31, 2012 and 2011 there were approximately 158,000 and 159,000 of these units outstanding, respectively.

Issuer Purchases of Equity Securities

During the year ended December 31, 2012, our Board of Directors authorized a $250 million increase to the share repurchase program, and we repurchased 6.3 million common shares at an average price of $50.83 for a total cost of approximately $320 million. As of December 31, 2012, $180 million remained available under the share repurchase authorization.

 

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STOCK RETURN PERFORMANCE AND CUMULATIVE TOTAL RETURN

Set forth below is a line graph comparing the cumulative total stockholder return on the Corporation Shares against the cumulative total return on the S&P 500 and the S&P Hotels, Resorts & Cruise Lines Index (the “S&P Hotel”) for the five fiscal years beginning after December 31, 2007 and ending December 31, 2012. The graph assumes that the value of the investments was $100 on December 31, 2007 and that all dividends and other distributions were reinvested. The comparisons are provided in response to SEC disclosure requirements and are not intended to forecast or be indicative of future performance.

 

LOGO

 

      12/31/07    12/31/08    12/31/09    12/31/10    12/31/11    12/31/12

Starwood

   $100.00    42.70    87.71    146.50    116.83    142.74

S&P 500

   $100.00    63.01    79.69    91.71    93.62    108.59

S&P Hotel

   $100.00    51.71    80.59    123.51    99.68    125.37

 

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Item 6. Selected Financial Data.

The following selected financial data should be read in conjunction with the information set forth under Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and related notes thereto (the “Notes”) beginning on page F-1 of this Annual Report.

 

     Year Ended December 31,  
     2012     2011     2010     2009     2008  
     (In millions, except per share data)  

Revenues

   $ 6,321      $ 5,624      $ 5,071      $ 4,696      $ 5,754   

Operating income

   $ 912      $ 630      $ 600      $ 26      $ 610   

Income (loss) from continuing operations (a)

   $ 470      $ 502      $ 310      $ (1   $ 249   

Diluted earnings per share from continuing operations

   $ 2.39      $ 2.57      $ 1.63      $ 0.00      $ 1.34   

Cash from operating activities

   $ 1,184      $ 641      $ 764      $ 571      $ 646   

Cash from (used for) investing activities

   $ 126      $ (176   $ (71   $ 116      $ (172

Cash used for financing activities

   $ (1,456   $ (755   $ (26   $ (993   $ (243

Aggregate cash distributions paid

   $ 242      $ 99      $ 93      $ 165      $ 172   

Cash distributions and dividends declared per Share

   $ 1.25      $ 0.50      $ 0.30      $ 0.20      $ 0.90   

 

(a) Amounts represent income from continuing operations attributable to Corporation Shares (i.e. excluding non-controlling interests).

 

     At December 31,  
     2012      2011      2010      2009      2008  
     (In millions)  

Total assets

   $ 8,861       $ 9,560       $ 9,776       $ 8,761       $ 9,703   

Long-term debt, net of current maturities

   $ 1,656       $ 2,596       $ 3,215       $ 2,955       $ 3,502   

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This 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 management 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, management evaluates its 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.

Management bases its 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 decisions about the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions and conditions.

 

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CRITICAL ACCOUNTING POLICIES

We believe the following to be our critical accounting policies:

Revenue Recognition. Our revenues are primarily derived from the following sources: (1) hotel and resort revenues at our owned, leased and consolidated joint venture properties; (2) management fees and franchise fees; (3) vacation ownership and residential sales; (4) other revenues from managed and franchised properties. Generally, revenues are recognized when the services have been rendered. The following is a description of the composition of our revenues:

 

   

Owned, Leased and Consolidated Joint Ventures — Represents revenue primarily derived from hotel operations, including the rental of rooms and food and beverage sales from owned, leased or consolidated joint venture hotels and resorts. Revenue is recognized when rooms are occupied and services have been rendered. These revenues are impacted by global economic conditions affecting the travel and hospitality industry as well as relative market share of the local competitive set of hotels. Revenue per available room (“REVPAR”) is a leading indicator of revenue trends at owned, leased and consolidated joint venture hotels as it measures the period-over-period growth in rooms revenue for comparable properties.

 

   

Management Fees and Franchise Fees — Represents fees earned on hotels and resorts managed worldwide, usually under long-term contracts, franchise fees received in connection with the franchise of our Luxury Collection, Westin, Le Méridien, Sheraton, Four Points by Sheraton, Aloft and Element brand names, termination fees and the amortization of deferred gains related to sold properties for which we have significant continuing involvement. Management fees are comprised of a base fee, which is generally based on a percentage of gross revenues, and an incentive fee, which is generally based on the property’s profitability. For any time during the year, when the provisions of our management contracts allow receipt of incentive fees upon termination, incentive fees are recognized for the fees due and earned as if the contract was terminated at that date, exclusive of any termination fees due or payable. Therefore, during periods prior to year-end, the incentive fees recorded may not be indicative of the eventual incentive fees that will be recognized at year-end as conditions and incentive hurdle calculations may not be final. Franchise fees are generally based on a percentage of hotel room revenues. As with our owned, leased and consolidated joint venture hotel revenues discussed above, these revenue sources are affected by conditions impacting the travel and hospitality industry as well as competition from other hotel management and franchise companies.

 

   

Vacation Ownership and Residential Sales — We recognize revenue from VOI sales and financings and the sales of residential units which are typically a component of mixed use projects that include a hotel. Such revenues are impacted by the state of the global economy and, in particular, the U.S. economy, as well as interest rates and other economic conditions affecting the lending market. Revenue is generally recognized upon the buyer demonstrating a sufficient level of initial and continuing investment, when the period of cancellation with refund has expired and receivables are deemed collectible. We determine the portion of revenues to recognize for sales accounted for under the percentage of completion method based on judgments and estimates including total project costs to complete. Additionally, we record reserves against these revenues based on expected default levels. Changes in costs could lead to adjustments to the percentage of completion status of a project, which may result in differences in the timing and amount of revenues recognized from the projects. We have also entered into licensing agreements with third-party developers to offer consumers branded condominiums or residences. Our fees from these agreements are generally based on the gross sales revenue of units sold. Residential fee revenue is recorded in the period that a purchase and sales agreement exists, delivery of services and obligations has occurred, the fee to the owner is deemed fixed and determinable and collectability of the fees is reasonably assured. Residential revenue on whole ownership units is generally recorded using the completed contract method, whereby revenue is recognized only when a sales contract is completed or substantially completed. During the performance period, costs and deposits are recorded on the balance sheet.

 

   

Other Revenues from Managed and Franchised Properties – These revenues represent reimbursements of costs incurred on behalf of managed hotel properties and franchisees. These costs relate primarily to payroll costs at managed properties where we are the employer. Since the reimbursements are made based

 

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upon the costs incurred with no added margin, these revenues and corresponding expenses have no effect on our operating income or our net income.

Goodwill and Intangible Assets. Goodwill and intangible assets arise in connection with acquisitions, including the acquisition of management contracts. We do not amortize goodwill and intangible assets with indefinite lives. Intangible assets with finite lives are amortized over their respective useful lives. In accordance with Accounting Standards Codification (“ASC”) Topic 350, Intangibles – Goodwill and Other, we review all goodwill and intangible assets for impairment annually, or upon the occurrence of a trigger event. ASC Topic 350 permits us to assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis to determine whether the two-step impairment test is necessary. We also have the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. Impairment charges, if any, are recognized in operating results.

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 (see Note 17). Points can be redeemed at substantially all of our owned, managed and franchised hotels as well as through other redemption opportunities with third parties, such as conversion to airline miles.

We charge our owned, managed and franchised hotels 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 related to the future redemption obligation. For our owned hotels, we record an expense for the amount of our future 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 in respect of other redemption opportunities for point redemptions.

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 accompanying consolidated balance sheets. The total actuarially determined liability (see Note 17), as of December 31, 2012 and 2011 was $922 million and $844 million, respectively, of which $275 million and $251 million, respectively, was included in accrued expenses.

Long-Lived Assets. We evaluate the carrying value of our long-lived assets for impairment by comparing the expected undiscounted future cash flows of the assets to the net book value of the assets if certain trigger events occur. If the expected undiscounted future cash flows are less than the net book value of the assets, the excess of the net book value over the estimated fair value is charged to current earnings. Fair value is based upon discounted cash flows of the assets at a rate deemed reasonable for the type of asset and prevailing market conditions, sales of similar assets, appraisals and, if appropriate, current estimated net sales proceeds from pending offers. We evaluate the carrying value of our long-lived assets based on our plans, at the time, for such assets and such qualitative factors as future development in the surrounding area, status of expected local competition and projected incremental income from renovations. Changes to our plans, including a decision to dispose of or change the intended use of an asset, can have a material impact on the carrying value of the asset.

In 2012, we had one hotel, with a carrying value of $9 million, that passed the impairment test despite deteriorating operating results. It is reasonably possible that if the operating results do not improve in the future, the carrying value of this hotel may be impaired.

 

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Loan Loss Reserves. For the vacation ownership and residential segment, we record an estimate of expected uncollectibility on our VOI notes receivable as a reduction of revenue at the time we recognize a timeshare sale. We hold large amounts of homogeneous VOI notes receivable and therefore assess uncollectibility based on pools of receivables. In estimating loan loss reserves, we use a technique referred to as static pool analysis, which tracks defaults for each year’s mortgage originations over the life of the respective notes and projects an estimated default rate. As of December 31, 2012, the average estimated default rate for our pools of receivables was 9.7%.

We use the origination of the notes by brand (Sheraton, Westin, and Other) as the primary credit quality indicator to calculate the loan loss reserve for the vacation ownership notes, as we believe there is a relationship between the default behavior of borrowers and the brand associated with the vacation ownership property they have acquired. In addition to quantitatively calculating the loan loss reserve based on our static pool analysis, we supplement the process by evaluating certain qualitative data, including the aging of the respective receivables, current default trends by brand and origination year, and the Fair Isaac Corporation (“FICO”) scores of the buyers.

Given the significance of our pools of VOI notes receivable, a change in the projected default rate can have a significant impact to our loan loss reserve requirements, with a 0.1% change estimated to have an impact of approximately $4 million.

We consider a VOI note receivable delinquent when it is more than 30 days outstanding. All delinquent loans are placed on nonaccrual status, and we do not resume interest accrual until payment is made. We consider loans to be in default upon reaching 120 days outstanding, at which point, we generally commence the repossession process. Uncollectible VOI notes receivable are charged off when title to the unit is returned to us. We generally do not modify vacation ownership notes that become delinquent or upon default.

For the hotel segments, we measure the impairment of a loan based on the present value of expected future cash flows, discounted at the loan’s original effective interest rate, or the estimated fair value of the collateral. For impaired loans, we establish a specific impairment reserve for the difference between the recorded investment in the loan and the present value of the expected future cash flows or the estimated fair value of the collateral. We apply the loan impairment policy individually to all loans in the portfolio and do not aggregate loans for the purpose of applying such policy. For loans that we have determined to be impaired, we recognize interest income on a cash basis.

Assets Held for Sale. We consider properties to be assets held for sale when management approves and commits to a formal plan to actively market a property or group of properties for sale and a signed sales contract and significant non-refundable deposit or contract break-up fee exist. Upon designation as an asset held for sale, we record the carrying value of each property or group of properties at the lower of its carrying value which includes allocable segment goodwill or its estimated fair value, less estimated costs to sell, and we stop recording depreciation expense. Any gain realized in connection with the sale of a property for which we have significant continuing involvement (such as through a long-term management agreement) is deferred and recognized over the initial term of the related agreement. The operations of the properties held for sale prior to the sale date are recorded in discontinued operations unless we will have continuing involvement (such as through a management or franchise agreement) after the sale.

Legal Contingencies. We are subject to various legal proceedings and claims, the outcomes of which are subject to significant uncertainty. An estimated loss from a loss contingency should be accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. We evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact our financial position or our results of operations.

Income Taxes. We provide for income taxes in accordance with principles contained in ASC Topic 740, Income Taxes. Under these principles, we recognize the amount of income tax payable or refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in our financial statements or tax returns.

 

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Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period when the new rate is enacted. Deferred tax assets are evaluated for future realization and reduced by a valuation allowance to the extent we believe a portion will not be realized. We consider many factors when assessing the likelihood of future realization of our deferred tax assets, including our recent cumulative earnings experience and expectations of future available taxable income by taxing jurisdiction, the carry-back and carry-forward periods available to us for tax reporting purposes and tax attributes.

We measure and recognize the amount of tax benefit that should be recorded for financial statement purposes for uncertain tax positions taken or expected to be taken in a tax return. With respect to uncertain tax positions, we evaluate the recognized tax benefits for derecognition, classification, interest and penalties, interim period accounting and disclosure requirements. Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns.

RESULTS OF OPERATIONS

The following discussion presents an analysis of results of our operations for the years ended December 31, 2012, 2011 and 2010.

Results for the year ended December 31, 2012 were strong. We performed well along all four key drivers of value. We held our costs in check for the fourth year in a row, grew our footprint with quality hotels and contracts, sustained high REVPAR and occupancies in an uncertain environment, and we realized significant value from real estate sales. Our results for the year ended December 31, 2012 benefited from the sales of residential units at the St. Regis Bal Harbour. During 2012, we closed sales of 188 units and realized revenues of $684 million. From project inception through December 31, 2012, we have closed contracts and recognized revenue on 224 units representing approximately 73% of the total residential units.

The uncertainty we saw in major world economies is showing signs of giving way to stronger demand growth. Beyond next year into the foreseeable future, we are bullish about the long-term outlook on the global high-end lodging industry. We are poised to benefit from higher rates in North America and Europe where demand is growing but supply is already limited. Even more importantly, the dramatic economic growth in Asia, Latin America, Middle East and Africa is fueling demand for our brands worldwide.

We remain optimistic that the strength of our brands will continue to drive strong operating results. We believe that we have the highest quality pipeline in the industry, as measured by percentage growth potential as well as our focus on valuable management contracts in the upscale and luxury segments. At December 31, 2012, the Company had approximately 400 hotels in the active pipeline representing approximately 100,000 rooms. Of these rooms, 67% are in the upscale and luxury segments and 85% are outside of North America. During 2012, we signed 131 hotel management and franchise contracts (representing approximately 30,500 rooms). Also, during 2012, 69 new hotels and resorts (representing approximately 17,600 rooms) entered the system and 25 properties (representing approximately 5,500 rooms) exited the system.

An indicator of the performance of our owned, leased and consolidated joint venture hotels, as well as our managed and franchised 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 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.

 

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We may continue to reposition our owned, leased and consolidated joint venture hotels as we pursue our brand and quality strategies. In addition, several owned hotels are located in regions which are seasonal and, therefore, these hotels do not operate at full capacity throughout the year.

We and our hotel owners have continued to invest capital in our hotels and provide innovative ways to utilize public space, such as our Link@SheratonSM experienced with Microsoft, and also by maximizing guest room conveniences. Finally, we believe our SPG loyalty guest program is an industry leader. With our recently announced changes to the program, we expect to drive further loyalty to our properties and brands from our SPG members as well as attract the next wave of global elite members. As the program is constantly refined and new promotions are offered, it provides rewards to our patrons while its growth in membership favorably impacts our results. As we move forward to 2013, we will continue to focus on providing superior guest experiences for our business, leisure, and group customers while maintaining a commitment to controlling our costs.

On July 1, 2012, we completed an internal management reorganization related to how we manage and operate our former hotel operating segment. Whereas our hotel business had previously been included in a single reportable segment, as a result of this reorganization, these results are now segregated into three separate hotel segments: (i) the Americas, (ii) EAME, and (iii) Asia Pacific. Our vacation ownership and residential business remains a separate segment. Prior period data has been restated to be consistent with the current year presentation.

In addition to revenues recorded within our four segments, we also have other revenues from managed and franchised properties, which represent the reimbursement of costs incurred on behalf of managed 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.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes discussion of our consolidated operating results, which were unaffected by our internal management reorganization, as well as discussion about each of our four segments. Additionally, Note 26 to the consolidated financial statements presents further information about our segments.

Year Ended December 31, 2012 Compared with Year Ended December 31, 2011

Consolidated Results

 

     Year Ended
December 31,
2012
     Year Ended
December 31,
2011
     Increase /
(decrease)
from prior
year
    Percentage
change

from prior
year
 
     (in millions)  

Owned, Leased and Consolidated Joint Venture Hotels

   $ 1,698       $ 1,768       $ (70     (4.0 )% 

Management Fees, Franchise Fees and Other Income

     888         814         74        9.1

Vacation Ownership and Residential

     1,287         703         584        83.1

Other Revenues from Managed and Franchised Properties

     2,448         2,339         109        4.7
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Revenues

   $ 6,321       $ 5,624       $ 697        12.4
  

 

 

    

 

 

    

 

 

   

 

 

 

The decrease in revenues from owned, leased and consolidated joint venture hotels was primarily due to lost revenues from 11 owned hotels that were sold or closed in 2011 and 2012. These sold or closed hotels had revenues of $420 million in the year ended December 31, 2012, compared to $484 million for the corresponding period in 2011. Revenues at our Same-Store Owned Hotels (39 hotels for the year ended December 31, 2012 and 2011, excluding the 11 hotels sold and 14 additional hotels undergoing significant repositionings or without comparable results in 2012 and 2011) decreased 0.2%, or $3 million, to $1.252 billion for the year ended December 31, 2012, when compared to $1.255 billion in the corresponding period of 2011.

 

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REVPAR at our worldwide Same-Store Owned Hotels was $160.01 for the year ended December 31, 2012, compared to $159.85 in the corresponding period in 2011. The slight increase in REVPAR at these worldwide Same-Store Owned Hotels resulted from an increase in occupancy rates to 72.5% for the year ended December 31, 2012, compared to 72.3% in the corresponding period in 2011, partially offset by a 0.2% decrease in ADR to $220.71 for the year ended December 31, 2012, compared to $221.17 for the corresponding period in 2011. While REVPAR growth was particularly strong at our owned hotels in San Francisco, California, Mexico City, Mexico and Rio de Janeiro, Brazil, the growth was substantially offset by decreases in REVPAR at our owned hotels in Montreal, Canada, Buenos Aires, Argentina and various cities in Italy.

The increase in management fees, franchise fees and other income was primarily a result of an $89 million increase in management fees and franchise fees to $861 million for the year ended December 31, 2012, compared to $772 million for the corresponding period in 2011. Management fees increased 11.9% to $509 million and franchise fees increased 7.0% to $200 million. These increases were primarily due to the net addition of 48 managed and franchised hotels to our system in 2012 and a 3.2% increase in Worldwide Systemwide REVPAR, compared to the same period in 2011. Other income for the year ended December 31, 2012 decreased $15 million when compared to the corresponding period in 2011, primarily as a result of payments received, in 2011, on promissory notes that had previously been reserved.

Total vacation ownership and residential revenue increased $584 million to $1.287 billion for the year ended December 31, 2012, when compared to the corresponding period in 2011, primarily due to the recognition of residential sales at the St. Regis Bal Harbour. In late 2011, we received the certificate of occupancy for this project and began contract closings and, during the year ended December 31, 2012, we closed sales of 188 units. We realized revenues of $684 million during the year ended December 31, 2012 compared to realized revenues of $122 million for the year ended December 31, 2011. From project inception through December 31, 2012, we have closed contracts and recognized revenue on 224 units representing approximately 73% of the total residential units.

Vacation ownership revenues for the year ended December 31, 2012 increased 3.7% to $587 million, compared to the corresponding period in 2011, primarily due to increased revenues from resort operations. Originated contract sales of VOI inventory decreased 1.8% in the year ended December 31, 2012, when compared to the corresponding period in 2011, primarily due to a lower average price per contract and lower closing efficiency, partially offset by an increase in tour flow. The number of contracts signed decreased 0.9% when compared to 2011 and the average contract amount per vacation ownership unit sold decreased 0.9% to approximately $14,800, driven by inventory mix.

Other revenues from managed and franchised properties increased primarily due to an increase in payroll costs commensurate with increased occupancy 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 hotel and vacation ownership properties 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.

 

     Year Ended
December 31,
2012
     Year Ended
December 31,
2011
     Increase /
(decrease)
from prior
year
     Percentage
change
from prior
year
 
     (in millions)  

Selling, General, Administrative and Other

   $ 370       $ 352       $ 18         5.1

Selling, general, administrative and other expenses increased $18 million to $370 million for the year ended December 31, 2012, when compared to the corresponding period in 2011, primarily due to non-recurring severance expenses and professional expenses incurred in 2012. We recently completed certain organizational changes to our EAME and Americas segments. Some of those changes took place in late 2012 and we recorded

 

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approximately $9 million in severance costs. Other changes took place in early 2013, and we expect to record additional severance costs in the first quarter of 2013.

 

     Year Ended
December 31,
2012
    Year Ended
December 31,
2011
     Increase /
(decrease)
from prior
year
    Percentage
change
from prior
year
 
     (in millions)  

Restructuring and Other Special Charges (Credits), Net

   $ (12   $ 68       $ (80     n/m   

n/m = not meaningful

As a result of a court ruling, during the year ended December 31, 2012, we recorded a favorable adjustment of $11 million to reverse a portion of our litigation reserve associated with a pending appeal of an unfavorable decision in a lawsuit. During the year ended December 31, 2011, we recorded a charge of approximately $70 million related to an unfavorable decision in the above mentioned lawsuit.

 

     Year Ended
December 31,
2012
     Year Ended
December 31,
2011
     Increase /
(decrease)
from prior
year
    Percentage
change
from prior
year
 
     (in millions)  

Depreciation and Amortization

   $ 251       $ 265       $ (14     (5.3 )% 

The decrease in depreciation and amortization expense for the year ended December 31, 2012, when compared to the same period of 2011, was primarily due to reduced depreciation expense from sold hotels and hotels reclassified to assets held for sale, partially offset by additional depreciation related to capital expenditures in the last twelve months. The decrease was also due to a reduction in amortization expense from certain intangible assets that are now fully amortized.

 

     Year Ended
December 31,
2012
     Year Ended
December 31,
2011
     Increase /
(decrease)
from prior
year
     Percentage
change
from prior
year
 
     (in millions)  

Operating Income

   $ 912       $ 630       $ 282         44.8

The increase in operating income for the year ended December 31, 2012, when compared to the corresponding period of 2011, was primarily due to the increase in operating income of approximately $144 million related to vacation ownership and residential sales and the $74 million increase in management fees and franchise fees and other income. During the year ended December 31, 2012, we also recorded an $11 million benefit from a favorable adjustment to a litigation reserve compared to a charge, in 2011, of $70 million related to an unfavorable decision in this same lawsuit. Increases in selling, general, administrative and other expenses of $18 million and a decrease in owned hotel operating income of $12 million were partially offset by the $14 million decrease in depreciation and amortization expense.

 

     Year Ended
December 31,
2012
     Year Ended
December 31,
2011
     Increase /
(decrease)
from prior
year
     Percentage
change
from prior
year
 
     (in millions)  

Equity Earnings (Losses) and Gains and (Losses) from Unconsolidated Ventures, Net

   $ 25       $ 11       $ 14         n/m   

The increase in equity earnings (losses) and gains and (losses) from unconsolidated joint ventures, net for the year ended December 31, 2012, when compared to the same period of 2011, was primarily due to improved operating results at several properties owned by joint ventures in which we hold non-controlling interests, and a $2 million gain realized on the disposal of a non-core asset. Additionally, in 2011, we experienced approximately

 

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$8 million in unfavorable mark-to-market adjustments on US dollar denominated loans at primarily three joint venture properties in Latin America.

 

     Year Ended
December 31,
2012
     Year Ended
December 31,
2011
     Increase /
(decrease)
from prior
year
    Percentage
change
from prior
year
 
     (in millions)  

Net Interest Expense

   $ 170       $ 200       $ (30     (15.0 )% 

Net interest expense decreased $30 million for the year ended December 31, 2012, when compared to the same period of 2011, primarily due to the significant reduction in our debt balances and lower average interest rates, partially offset by a reduction in capitalized interest related to completed construction projects.

Our weighted average interest rate was approximately 5.86% at December 31, 2012, compared to 6.66% at December 31, 2011.

 

     Year Ended
December 31,
2012
     Year Ended
December 31,
2011
     Increase /
(decrease)
from prior
year
     Percentage
change

from prior
year
 
     (in millions)  

Loss on Early Extinguishment of Debt, Net

   $ 128       $ 16       $ 112         n/m   

In December 2012, we redeemed all $500 million of our 7.875% Senior Notes due 2014 and partially redeemed $156 million of our 7.375% Senior Notes due 2015, $29 million of our 6.75% Senior Notes due 2018 and $40 million of our 7.15% Senior Notes due 2019 (the “December 2012 Redemptions”). We recognized a net charge of approximately $113 million, in the year ended December 31, 2012, associated with the December 2012 Redemptions, which primarily represents $108 million in tender premiums and other redemption costs and an $11 million charge to write-off unamortized deferred financing costs and unamortized issuance discounts, partially offset by gains on swap settlements of $6 million.

In June 2012, we redeemed all $495 million of our 6.25% Senior Notes due 2013. We recognized a net charge of approximately $15 million, in the year ended December 31, 2012, associated with this redemption, which represents $18 million in tender premiums and other redemption costs, partially offset by gains on swap settlements of $3 million.

In December 2011, we redeemed all $605 million of our 7.875% Senior Notes due 2012. We recognized a net charge of approximately $16 million associated with this redemption, in the year ended December 31, 2011, which represents the tender premiums, swap settlements and other related redemption costs.

 

     Year Ended
December 31,
2012
    Year Ended
December 31,
2011
     Increase /
(decrease)
from prior
year
    Percentage
change
from prior
year
 
     (in millions)  

Gain (Loss) on Asset Dispositions and Impairments, Net

   $ (21   $       $ (21     n/m   

During the year ended December 31, 2012, we recorded a loss of $9 million related to the impairment of our investment in an unconsolidated joint venture, a loss of $7 million related to the sale of one hotel, $2 million in losses related to the impairments of two hotels whose carrying values exceeded their fair values and a charge of $4 million to reflect the current market price less costs to sell two properties.

During the year ended December 31, 2011, we recorded an impairment charge of $31 million to write-off our noncontrolling interest in a joint venture that owns a hotel in Tokyo, Japan, a $9 million loss due to significant renovations and related asset retirements at two properties, $7 million in losses relating to the impairment of six hotels whose carrying value exceeded their book value and a $2 million loss on an investment in a management contract that was terminated during the period. These amounts were offset by a $50 million

 

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gain as a result of the write-up to fair value of our previously held noncontrolling interest in two hotels in which we obtained a controlling interest (see Note 4).

 

     Year Ended
December 31,
2012
     Year Ended
December 31,
2011
    Increase /
(decrease)
from prior
year
     Percentage
change
from prior
year
 
     (in millions)  

Income Tax (Benefit) Expense

   $ 148       $ (75   $ 223         n/m   

The increase in income tax expense was the result of higher pretax income and a higher effective rate in 2012 compared to 2011 and large tax benefits generated in 2011 as compared to 2012. Additional income tax expense due to higher pretax income was approximately $46 million and the increase due to the effective tax rate in 2012 resulted in incremental income tax expense of approximately $60 million. The increase in the effective rate is primarily due to higher pretax income in the U.S. as a result of the Bal Harbour residential sales previously discussed.

Incremental tax benefits in 2011 compared to 2012 amounted to approximately $117 million. In 2011, we completed transactions that involved certain domestic and foreign subsidiaries. These transactions generated capital gains, increased the tax basis in subsidiaries including U.S partnerships and resulted in the inclusion of foreign earnings for U.S. tax purposes, resulting in a net tax benefit of $87 million. The capital gains were largely reduced by the utilization of capital losses. Additionally, during 2011, the IRS closed its audit with respect to tax years 2004 through 2006 resulting in a $25 million tax benefit primarily related to the reversal of tax and interest reserves.

 

     Year Ended
December 31,
2012
     Year Ended
December 31,
2011
    Increase /
(decrease)
from prior
year
     Percentage
change
from prior
year
 
     (in millions)  

Discontinued Operations Gain (Loss), Net

   $ 92       $ (13   $ 105         n/m   

During the year ended December 31, 2012, we recorded a gain of $92 million (net of tax) primarily related to the gain of $78 million (net of tax) from the sale of one wholly owned hotel, which was sold unencumbered by a management or franchise agreement and a gain of $23 million (net of tax) from the favorable settlement of certain liabilities associated with a former subsidiary of ITT Corporation, which we acquired in 1998. These gains were partially offset by a loss of $5 million (net of tax) related to the impairment and loss on sale of four wholly-owned hotels and a loss of $5 million (net of tax) for accrued interest related to an uncertain tax position associated with a previous disposition.

During the year ended December 31, 2011, we recorded a loss of $13 million (net of tax), primarily related to an $18 million pre-tax loss from the sale of our interest in a consolidated joint venture, offset by a $10 million income tax benefit on the sale. Additionally, we recorded a loss of $5 million (net of tax) for accrued interest related to an uncertain tax position associated with a previous disposition.

 

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Segment Results

The following table summarizes REVPAR, ADR and occupancy for our Same-Store Owned Hotels for the year ended December 31, 2012 and 2011. The results for the year ended December 31, 2012 and 2011 represent results for 39 owned, leased and consolidated joint venture hotels (excluding 11 hotels sold and 14 hotels undergoing significant repositionings or without comparable results in 2012 and 2011).

 

     Year Ended
December 31,
       
     2012     2011     Variance  

Worldwide (39 hotels with approximately 13,400 rooms)

      

REVPAR (1)

   $ 160.01      $ 159.85        0.1

ADR

   $ 220.71      $ 221.17        (0.2 )% 

Occupancy

     72.5     72.3     0.2   

Americas (25 hotels with approximately 10,000 rooms)

      

REVPAR (1)

   $ 138.06      $ 135.38        2.0

ADR

   $ 195.78      $ 192.22        1.9

Occupancy

     70.5     70.4     0.1   

EAME (10 hotels with approximately 2,100 rooms)

      

REVPAR (1)

   $ 243.98      $ 259.18        (5.9 )% 

ADR

   $ 321.49      $ 342.36        (6.1 )% 

Occupancy

     75.9     75.7     0.2   

Asia Pacific (4 hotels with approximately 1,300 rooms)

      

REVPAR (1)

   $ 191.37      $ 185.35        3.2

ADR

   $ 232.06      $ 228.50        1.6

Occupancy

     82.5     81.1     1.4   

The following table summarizes REVPAR, ADR and occupancy for our Same-Store Systemwide Hotels for the year ended December 31, 2012 and 2011. Same-Store Systemwide Hotels represent results for same-store owned, leased, managed and franchised hotels.

 

     Year Months Ended
December 31,
       
     2012     2011     Variance  

Worldwide (901 hotels with approximately 265,900 rooms)

      

REVPAR (1)

   $ 116.51      $ 112.93        3.2

ADR

   $ 169.55      $ 168.49        0.6

Occupancy

     68.7     67.0     1.7   

Americas (544 hotels with approximately 163,800 rooms)

      

REVPAR (1)

   $ 114.17      $ 107.93        5.8

ADR

   $ 161.02      $ 156.05        3.2

Occupancy

     70.9     69.2     1.7   

EAME (199 hotels with approximately 50,100 rooms)

      

REVPAR (1)

   $ 132.37      $ 137.47        (3.7 )% 

ADR

   $ 203.82      $ 215.18        (5.3 )% 

Occupancy

     64.9     63.9     1.0   

Asia Pacific (158 hotels with approximately 52,000 rooms)

      

REVPAR (1)

   $ 108.79      $ 105.36        3.3

ADR

   $ 166.29      $ 166.49        (0.1 )% 

Occupancy

     65.4     63.3     2.1   

 

(1) REVPAR is calculated by dividing room revenue, which is derived from rooms and suites rented or leased, by total room nights available for a given period. REVPAR may not be comparable to similarly titled measures such as revenues.

 

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The following tables summarize segment revenues and segment earnings for the year ended December 31, 2012 and 2011.

 

Segment Revenues    Year Ended
December 31,
2012
     Year Ended
December 31,
2011
     Increase /
(decrease)
from prior
year
    Percentage
change
from prior
year
 
     (in millions)  

Americas

   $ 1,627       $ 1,630       $ (3     (0.2 )% 

EAME

     550         592         (42     (7.1 )% 

Asia Pacific

     337         303         34        11.2

Vacation ownership and residential

     1,271         688         583        84.7
  

 

 

    

 

 

    

 

 

   

 

 

 

Total segment revenues

   $ 3,785       $ 3,213       $ 572        17.8
  

 

 

    

 

 

    

 

 

   

 

 

 

 

Segment Earnings    Year Ended
December 31,
2012
     Year Ended
December 31,
2011
     Increase /
(decrease)
from prior
year
    Percentage
change
from prior
year
 
     (in millions)  

Americas

   $ 581       $ 555       $ 26        4.7

EAME

     179         204         (25     (12.3 )% 

Asia Pacific

     218         186         32        17.2

Vacation ownership and residential

     312         170         142        83.5
  

 

 

    

 

 

    

 

 

   

 

 

 

Total segment earnings

   $ 1,290       $ 1,115       $ 175        15.7
  

 

 

    

 

 

    

 

 

   

 

 

 

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 costs, goodwill impairment and other special charges and gains (losses) on asset dispositions and impairments. 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 four segments, we also have other revenues from managed and franchised properties, which represent the reimbursement of costs incurred on behalf of managed 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 26 to the consolidated financial statements presents further information about our segments.

The Americas

Segment revenues decreased $3 million in the year ended December 31, 2012, compared to the corresponding period in 2011.

Revenues from our owned, leased and consolidated joint venture hotels decreased $38 million, primarily due to lost revenues from 10 owned hotels that were sold or closed in 2011 and 2012. These sold or closed hotels had revenues of $114 million in the year ended December 31, 2012, compared to $209 million for the corresponding period in 2011. Lost revenue from sold hotels was partially offset by a $48 million increase in revenues from eight owned hotels without comparable results in 2012 and 2011 and an increase in revenue of approximately $9 million attributable to the increase in Same-Store Owned Hotel REVPAR of 2.0% to $138.06 for the year ended December 31, 2012, when compared to the corresponding period in 2011.

Revenues from management fees and franchise fees increased $38 million primarily due to the net addition of 16 managed and franchised hotels in 2012 and a 5.8% increase in Same-Store Systemwide REVPAR compared to the same period in 2011.

 

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Segment earnings increased $26 million in the year ended December 31, 2012, compared to the corresponding period in 2011, primarily due to a $44 million increase in earnings from management fees, franchise fees and other income, partially offset by a decrease of $11 million in earnings from our owned, leased and consolidated joint venture hotels.

EAME

Segment revenues decreased $42 million in the year ended December 31, 2012, compared to the corresponding period in 2011. The decrease in revenues was primarily related to a $35 million decrease in our owned, leased and consolidated joint venture hotels, while revenues from management fees, franchise fees and other income remained substantially consistent, despite the net exit of one managed or franchised hotel in 2012.

The decrease in revenues from our owned, leased and consolidated joint venture hotels was primarily due to lost revenue from one owned hotel that was sold in 2011 and the unfavorable impact of foreign currency translation. This sold hotel had no revenue in the year ended December 31, 2012, compared to $14 million for the corresponding period in 2011. Revenues from owned, leased and consolidated joint venture hotels were also negatively impacted by a $5 million decrease in revenues from six owned hotels without comparable results in 2012 and 2011. The decline in owned, leased and consolidated joint venture hotel revenues was also due to the unfavorable impact of foreign currency translation, when compared to the corresponding period in 2011. Finally, Same-Store Owned Hotel revenues decreased $12 million in the year ended December 31, 2012, compared to the same period in 2011, as REVPAR declined 5.9% to $243.98 in 2012; however, in local currency, REVPAR increased 2.4% at these hotels.

Segment earnings decreased $25 million in the year ended December 31, 2012, compared to the corresponding period in 2011, primarily due to a $12 million increase in general overhead expenses, primarily due to $9 million in severance charges previously discussed, a decrease of $6 million in earnings from our owned, leased and consolidated joint venture hotels and the unfavorable impact of foreign currency translation.

Asia Pacific

Segment revenues increased $34 million in the year ended December 31, 2012, compared to the corresponding period in 2011. The increase in revenues was primarily related to a $28 million increase in our revenues from management fees and franchise fees, as well as a $5 million increase in our revenues from our owned, leased and consolidated joint venture hotels. The increase in management fees and franchise fees was due to the net addition of 33 managed and franchised hotels in 2012 and a 3.3% increase in Same-Store Systemwide Hotel REVPAR for the year ended December 31, 2012, when compared to the corresponding period in 2011.

Segment earnings increased $32 million in the year ended December 31, 2012, compared to the corresponding period in 2011, primarily due to a $27 million increase in earnings from management fees, franchise fees and other income and an increase of $6 million in earnings from our owned, leased and consolidated joint venture hotels driven by higher revenues and operational costs savings, partially offset by an increase of $6 million in general overhead expenses, commensurate with the growth in this region.

Vacation ownership and residential

Total vacation ownership and residential services segment revenue increased $583 million to $1.271 billion for the year ended December 31, 2012, when compared to the corresponding period in 2011, primarily due to the recognition of residential sales at the St. Regis Bal Harbour. Segment earnings increased $142 million in the year ended December 31, 2012, compared to the corresponding period in 2011, also driven by residential sales at the St. Regis Bal Harbour and an increase in resort and other income at vacation ownership properties.

 

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Year Ended December 31, 2011 Compared with Year Ended December 31, 2010

Continuing Operations

 

     Year Ended
December 31,
2011
     Year Ended
December 31,
2010
     Increase /
(decrease)
from prior
year
     Percentage
change
from prior
year
 
     (in millions)  

Owned, Leased and Consolidated Joint Venture Hotels

   $ 1,768       $ 1,704       $ 64         3.8

Management Fees, Franchise Fees and Other Income

     814         712         102         14.3

Vacation Ownership and Residential

     703         538         165         30.7

Other Revenues from Managed and Franchised Properties

     2,339         2,117         222         10.5
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Revenues

   $ 5,624       $ 5,071       $ 553         10.9
  

 

 

    

 

 

    

 

 

    

 

 

 

The increase in revenues from owned, leased and consolidated joint venture hotels was primarily due to increased REVPAR (as discussed below) at our existing owned, leased and consolidated joint venture hotels, offset in part by lost revenues from six wholly owned hotels sold or closed in 2011 and 2010. These sold or closed hotels had revenues of $56 million in the year ended December 31, 2011, compared to $158 million in the corresponding period of 2010. Revenues at our Same-Store Owned Hotels (45 hotels for the year ended December 31, 2011 and 2010, excluding the six hotels sold or closed and 14 additional hotels undergoing significant repositionings or without comparable results in 2011 and 2010) increased 9.4%, or $123 million, to $1.441 billion for the year ended December 31, 2011 when compared to $1.318 billion in the corresponding period of 2010 due primarily to an increase in REVPAR.

REVPAR at our Same-Store Owned Hotels increased 11.5% to $159.12 for the year ended December 31, 2011 when compared to the corresponding 2010 period. The increase in REVPAR at these Same-Store Owned Hotels was driven by a 6.4% increase in ADR to $218.65 for the year ended December 31, 2011, compared to $205.49 for the corresponding 2010 period and an increase in occupancy rates to 72.8% for the year ended December 31, 2011 when compared to 69.5% in the corresponding period in 2010. REVPAR at Same-Store Owned Hotels in North America increased 7.3% for the year ended December 31, 2011 when compared to the corresponding period of 2010. REVPAR growth was particularly strong at our owned hotels in San Francisco, California, Maui, Hawaii and Scottsdale, Arizona. REVPAR at our international Same-Store Owned Hotels increased by 17.7% for the year ended December 31, 2011, when compared to the corresponding period of 2010. REVPAR for Same-Store Owned Hotels internationally increased 8.1% excluding the favorable effects of foreign currency translation.

The increase in management fees, franchise fees and other income was primarily a result of an $83 million or 12.0% increase in management and franchise revenue to $772 million for the year ended December 31, 2011, compared to $689 million in the corresponding period of 2010. Management fees increased $46 million or 11.2% and franchise fees increased $26 million or 16.1%, compared to the corresponding period of 2010. These increases were due to growth in REVPAR at existing hotels as well as the net addition of 38 managed and 11 franchised hotels to our system since the beginning of 2011. Additionally, other income increased approximately $19 million, for the year ended December 31, 2011, when compared to the corresponding period of 2010, primarily due to payments received on promissory notes that had previously been reserved due to uncertainty around collection.

Total vacation ownership and residential revenue increased 30.7% to $703 million, for the year ended December 31, 2011, when compared to $538 million in 2010, primarily driven by residential sales related to the St. Regis Bal Harbour which received its certificate of occupancy in late 2011. Originated contract sales of VOI inventory increased 6.1% for the year ended December 31, 2011, when compared to the corresponding period in 2010. This increase was primarily driven by increased tour flow from new buyers and improved sales performance from existing owner channels. The average contract amount per vacation ownership unit sold was relatively unchanged, for the year ended December 31, 2011 when compared to the corresponding period of

 

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2010, at approximately $14,900. Residential revenue increased approximately $125 million for the year ended December 31, 2011 primarily due to residential sales related to the St. Regis Bal Harbour as discussed above.

Other revenues from managed and franchised properties increased primarily due to an increase in payroll costs commensurate with increased occupancy 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 hotel and vacation ownership properties 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 and our net income.

 

     Year Ended
December 31,
2011
     Year Ended
December 31,
2010
     Increase /
(decrease)
from prior
year
     Percentage
change
from prior
year
 
     (in millions)  

Selling, General, Administrative and Other

   $ 352       $ 344       $ 8         2.3

Selling, general, administrative and other expenses for the year ended December 31, 2011 increased 2.3% to $352 million, when compared to the corresponding period of 2010, primarily due to higher legal costs incurred in 2011, while results in 2010 benefitted from the reimbursement of legal costs as a result of a favorable legal settlement. This increase was partially offset by lower incentive compensation in 2011 compared to 2010.

 

     Year Ended
December 31,
2011
     Year Ended
December 31,
2010
    Increase /
(decrease)
from prior
year
     Percentage
change
from prior
year
 
     (in millions)  

Restructuring and Other Special Charges (Credits), Net

   $ 68       $ (75   $ 143         n/m   

During the year ended December 31, 2011, we recorded a charge of approximately $70 million related to an unfavorable decision in a lawsuit.

During the year ended December 31, 2010, we received cash proceeds of $75 million in connection with the favorable settlement of a lawsuit. We recorded this settlement, net of the reimbursement of legal costs incurred in connection with the litigation, as a credit to restructuring and other special (credits) charges. Additionally, we recorded an $8 million credit related to the reversal of a reserve associated with an acquisition in 1998 as the liability is no longer deemed necessary.

 

     Year Ended
December 31,
2011
     Year Ended
December 31,
2010
     Increase /
(decrease)
from prior
year
    Percentage
change
from prior
year
 
     (in millions)  

Depreciation and Amortization

   $ 265       $ 285       $ (20     (7.0 )% 

The decrease in depreciation expense for the year ended December 31, 2011, when compared to the corresponding period of 2010, was primarily due to reduced depreciation expense from sold hotels, partially offset by additional depreciation related to capital expenditures made in the last twelve months.

 

     Year Ended
December 31,
2011
     Year Ended
December 31,
2010
     Increase /
(decrease)
from prior
year
     Percentage
change
from prior
year
 
     (in millions)  

Operating Income

   $ 630       $ 600       $ 30         5.0

The increase in operating income for the year ended December 31, 2011, when compared to the corresponding period of 2010, was primarily due to continued improvement in results from our owned and leased hotels and the increase in management and franchise fees attributable to the increase in REVPAR as well as the

 

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net addition of 49 managed and franchised hotels to our system since the beginning of 2011. Additionally, residential sales at the St. Regis Bal Harbour favorably impacted 2011 operating income by $27 million. Operating income for the year ended December 31, 2011, as compared to 2010, was negatively impacted by a $70 million charge associated with an unfavorable legal decision in 2011, while 2010 benefited from a favorable settlement of a lawsuit of $75 million. Results were also negatively impacted by political unrest in the Middle East and North Africa, as well as the earthquake and tsunami in Japan.

 

     Year Ended
December 31,
2011
     Year Ended
December 31,
2010
     Increase /
(decrease)
from prior
year
     Percentage
change
from prior
year
 
     (in millions)  

Equity Earnings (Losses) and Gains and Losses from Unconsolidated Ventures, Net

   $ 11       $ 10       $ 1         10.0

The increase in equity earnings and gains and losses from unconsolidated joint ventures for the year ended December 31, 2011, when compared to the corresponding period of 2010, was primarily due to improved operating results at several properties owned by joint ventures in which we hold non-controlling interests, partially offset by unfavorable mark-to-market adjustments on US dollar denominated loans at several properties in Latin America.

 

     Year Ended
December 31,
2011
     Year Ended
December 31,
2010
     Increase /
(decrease)
from prior
year
    Percentage
change
from prior
year
 
     (in millions)  

Net Interest Expense

   $ 200       $ 235       $ (35     (14.9 )% 

The decrease in net interest expense for the year ended December 31, 2011, when compared to the corresponding period of 2010, was primarily due to a lower average debt balance and an increase in capitalized interest related to construction projects, primarily relating to the St. Regis Bal Harbour. Our weighted average interest rate was 6.66% at December 31, 2011 as compared to 6.86% at December 31, 2010.

 

     Year Ended
December 31,
2011
     Year Ended
December 31,
2010
     Increase /
(decrease)
from prior
year
     Percentage
change

from prior
year
 
     (in millions)  

Loss on Early Extinguishment of Debt, net

   $ 16       $ 1       $ 15         n/m   

The increase in loss on early extinguishment of debt, net is from the $16 million charge for redemption premiums and other costs associated with the December 2011 redemption of all $605 million of our 7.875% Senior Notes due 2012.

 

     Year Ended
December 31,
2011
     Year Ended
December 31,
2010
    Increase /
(decrease)
from prior
year
    Percentage
change
from prior
year
 
     (in millions)  

Loss on Asset Dispositions and Impairments, Net

   $       $ (39   $ (39     100.0

During the year ended December 31, 2011, we recorded an impairment charge of $31 million to write-off our noncontrolling interest in a joint venture that owns a hotel in Tokyo, Japan, a $9 million loss due to significant renovations and related asset retirements at two properties, $7 million in losses relating to the impairment of six hotels whose carrying value exceeded their book value and a $2 million loss on an investment in a management contract that was terminated during the period. These amounts were offset by a $50 million gain as a result of the write-up to fair value of our previously held noncontrolling interest in two hotels in which we obtained a controlling interest (see Note 4).

 

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During the year ended December 31, 2010, we recorded a net loss on dispositions of approximately $39 million, primarily related to a $53 million loss on the sale of one wholly-owned hotel (see Note 5) as well as a $4 million impairment of fixed assets that are being retired in connection with a significant renovation of a wholly-owned hotel, and a $2 million impairment on one hotel whose carrying value exceeded its fair value. These charges were partially offset by a gain of $14 million from insurance proceeds received for a claim at a wholly-owned hotel that suffered damage from a storm in 2008, a $5 million gain as a result of an acquisition of a controlling interest in a joint venture in which we previously held a non-controlling interest (see Note 4) and a $4 million gain from the sale of non-hotel assets.

 

     Year Ended
December 31,
2011
    Year Ended
December 31,
2010
     Increase /
(decrease)
from prior
year
    Percentage
change
from prior
year
 
     (in millions)  

Income Tax (Benefit) Expense

   $ (75   $ 27       $ (102     n/m   

In 2011, the Company completed transactions that involved certain domestic and foreign subsidiaries. These transactions generated capital gains increased the tax basis in subsidiaries including U.S. partnerships and resulted in the inclusion of foreign earnings for U.S. tax purposes. The capital gains were largely reduced by the utilization of capital losses. Due to the uncertainty regarding the Company’s ability to generate capital gain income, the deferred tax asset associated with these capital losses was offset by a full valuation allowance prior to these transactions. These transactions resulted in a net tax benefit of $87 million. Additionally, during 2011, an income tax benefit of approximately $60 million was generated as the result of the sale of two wholly-owned hotels. Also, in 2011, the IRS closed its audit in respect to tax years 2004 through 2006 resulting in the recognition of a tax benefit of approximately $25 million, primarily for the reversal of tax and interest reserves. These benefits were partially offset by tax on increased pretax income and valuation allowance increases in 2011 compared to 2010.

During 2010, the IRS closed its audit with respect to tax years 1998 through 2003 and the Company recognized a $42 million tax benefit in continuing operations, primarily associated with the refund of interest on taxes already paid. This benefit was partially offset by interest and taxes recorded on uncertain tax positions, which resulted in a charge of $23 million.

 

     Year Ended
December 31,
2011
    Year Ended
December 31,
2010
     Increase /
(decrease)
from prior
year
    Percentage
change
from prior
year
 
     (in millions)  

Discontinued Operations Gain (Loss), Net

   $ (13   $ 168       $ (181     n/m   

During the year ended December 31, 2011, we recorded a loss of $13 million primarily related to an $18 million pretax loss from the sale of our interest in a consolidated joint venture, offset by a $10 million income tax benefit on the sale. Additionally, we recorded $5 million of interest charges related to an uncertain tax position.

During the year ended December 31, 2010, we recorded a gain of $134 million related to the final settlement with the IRS regarding a disposition in a prior year and a pretax gain of approximately $3 million ($36 million after tax) related to the sale of one wholly-owned hotel. The tax benefit was related to the realization of a high tax basis in this hotel that was generated through a previous transaction.

 

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Segment Results

The following table summarizes REVPAR, ADR and occupancy for our Same-Store Owned Hotels for the year ended December 31, 2011 and 2010. The results for the year ended December 31, 2011 and 2010 represent results for 45 owned, leased and consolidated joint venture hotels (excluding six hotels sold and 14 hotels undergoing significant repositionings or without comparable results in 2011 and 2010).

 

     Year Ended
December 31,
       
     2011     2010     Variance  

Worldwide (45 hotels with approximately 15,900 rooms)

      

REVPAR (1)

   $ 159.12      $ 142.76        11.5

ADR

   $ 218.65      $ 205.49        6.4

Occupancy

     72.8     69.5     3.3   

Americas (31 hotels with approximately 12,600 rooms)

      

REVPAR (1)

   $ 140.44      $ 129.30        8.6

ADR

   $ 196.75      $ 190.37        3.4

Occupancy

     71.4     67.9     3.5   

EAME (11 hotels with approximately 2,200 rooms)

      

REVPAR (1)

   $ 255.48      $ 220.08        16.1

ADR

   $ 339.15      $ 299.25        13.3

Occupancy

     75.3     73.5     1.8   

Asia Pacific (3 hotels with approximately 1,100 rooms)

      

REVPAR (1)

   $ 183.33      $ 144.86        26.6

ADR

   $ 218.78      $ 182.58        19.8

Occupancy

     83.8     79.3     4.5   

The following table summarizes REVPAR, ADR and occupancy for our Same-Store Systemwide Hotels for the year ended December 31, 2011 and 2010. Same-Store Systemwide Hotels represent results for same-store owned, leased, managed and franchised hotels.

 

     Year Months Ended
December 31,
       
     2011     2010     Variance  

Worldwide (837 hotels with approximately 252,600 rooms)

      

REVPAR (1)

   $ 114.56      $ 104.43        9.7

ADR

   $ 168.37      $ 158.57        6.2

Occupancy

     68.0     65.9     2.1   

Americas (528 hotels with approximately 161,800 rooms)

      

REVPAR (1)

   $ 107.59      $ 98.25        9.5

ADR

   $ 155.19      $ 148.05        4.8

Occupancy

     69.3     66.4     2.9   

EAME (172 hotels with approximately 44,300 rooms)

      

REVPAR (1)

   $ 143.28      $ 132.58        8.1

ADR

   $ 219.35      $ 199.11        10.2

Occupancy

     65.3     66.6     (1.3

Asia Pacific (137 hotels with approximately 46,500 rooms)

      

REVPAR (1)

   $ 111.90      $ 99.57        12.4

ADR

   $ 169.17      $ 157.03        7.7

Occupancy

     66.1     63.4     2.7   

 

(1) REVPAR is calculated by dividing room revenue, which is derived from rooms and suites rented or leased, by total room nights available for a given period. REVPAR may not be comparable to similarly titled measures such as revenues.

 

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The following tables summarize segment revenues and segment earnings for the year ended December 31, 2011 and 2010.

 

Segment Revenues    Year Ended
December 31,
2011
     Year Ended
December 31,
2010
     Increase /
(decrease)
from prior
year
     Percentage
change
from prior
year
 
     (in millions)  

Americas

   $ 1,630       $ 1,597       $ 33         2.1

EAME

     592         529         63         11.9

Asia Pacific

     303         235         68         28.9

Vacation ownership and residential

     688         526         162         30.8
  

 

 

    

 

 

    

 

 

    

 

 

 

Total segment revenues

   $ 3,213       $ 2,887       $ 326         11.3
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Segment Earnings    Year Ended
December 31,
2011
     Year Ended
December 31,
2010
     Increase /
(decrease)
from prior
year
     Percentage
change
from prior
year
 
     (in millions)  

Americas

   $ 555       $ 484       $ 71         14.7

EAME

     204         191         13         6.8

Asia Pacific

     186         165         21         12.7

Vacation ownership and residential

     170         123         47         38.2
  

 

 

    

 

 

    

 

 

    

 

 

 

Total segment earnings

   $ 1,115       $ 963       $ 152         15.8
  

 

 

    

 

 

    

 

 

    

 

 

 

The Americas

Segment revenues increased $33 million in the year ended December 31, 2011, compared to the corresponding period in 2010, primarily related to the increase in management fees and franchise fees, partially offset by the decrease in revenues from our owned leased and consolidated joint venture hotels.

Revenues from our owned, leased and consolidated joint venture hotels decreased $50 million, primarily due to lost revenues from five owned hotels that were sold or closed in 2010 and 2011. These sold or closed hotels had revenues of $42 million in the year ended December 31, 2011, compared to $142 million for the corresponding period in 2010. Revenues from owned, leased and consolidated joint venture hotels were also negatively impacted by an $11 million decrease in revenues from eight owned hotels without comparable results in 2011 and 2010. These decreases in revenue were offset by an increase in revenue of approximately $51 million attributable to the increase in Same-Store Owned Hotel REVPAR of 8.6% to $140.44 for the year ended December 31, 2011, when compared to the corresponding period in 2010. The increase in revenues is also due to a $14 million increase in revenues from a joint venture in which we obtained a controlling interest during 2010 (see Note 4).

Revenues from management fees and franchise fees increased $52 million for the year ended December 31, 2011, when compared to the corresponding period in 2010, primarily due to the net addition of 23 managed and franchised hotels in 2011 and a 9.5% increase in Same-Store Systemwide REVPAR compared to the same period in 2010.

Segment earnings increased $71 million in the year ended December 31, 2011, compared to the corresponding period in 2010, primarily due to a $57 million increase in earnings from management fees, franchise fees and other income and a decrease in general overhead expenses of $17 million due to lower compensation expense and legal accruals, partially offset by a decrease of $14 million in earnings from our owned, leased and consolidated joint venture hotels.

 

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EAME

Segment revenues increased $63 million in the year ended December 31, 2011, compared to the corresponding period in 2010. The increase in revenues was primarily related to a $55 million increase in our owned, leased and consolidated joint venture hotels and the favorable impact of foreign currency translation.

The increase in revenues from our owned, leased and consolidated joint venture hotels was primarily due to an increase in Same-Store Owned Hotel REVPAR of 16.1% to $255.48 for the year ended December 31, 2011, when compared to the corresponding period in 2010. REVPAR increased 8.7% in local currency for the year ended December 31, 2011, when compared to the corresponding period in 2010. Revenues from owned, leased and consolidated joint venture hotels also benefited from a $21 million increase in revenues from five owned hotels without comparable results in 2011 and 2010.

Revenues from management fees and franchise fees remained substantially consistent, despite the net exit of three managed or franchised hotels in 2011.

Segment earnings increased $13 million in the year ended December 31, 2011, compared to the corresponding period in 2010, primarily due to a $10 million increase in earnings from our owned, leased and consolidated joint venture hotels.

Asia Pacific

Segment revenues increased $68 million in the year ended December 31, 2011, compared to the corresponding period in 2010. The increase in revenues was primarily related to a $45 million increase in our owned, leased and consolidated joint venture hotels and a $23 million increase in our revenues from management fees and franchise fees.

The increase in revenues from our owned, leased and consolidated joint venture hotels was primarily due to a $19 million increase in revenue from one owned, leased and consolidated hotel without comparable results in 2011 and 2010. The increase in management fees and franchise fees was due to the net addition of 29 managed and franchised hotels in 2011, a 12.4% increase in Same-Store Systemwide Hotel REVPAR for the year ended December 31, 2011, when compared to the corresponding period in 2010, and the favorable impact of foreign currency translation.

Segment earnings increased $21 million in the year ended December 31, 2011, compared to the corresponding period in 2010, primarily due to a $27 million increase in earnings from management fees, franchise fees and other income and an increase of $14 million in earnings from our owned, leased and consolidated joint venture hotels, partially offset by an increase of $17 million in general overhead expenses, commensurate with the growth in this region.

Vacation ownership and residential

Total vacation ownership and residential services segment revenue increased $162 million to $688 million for the year ended December 31, 2011, when compared to the corresponding period in 2010, primarily due to the recognition of residential sales at the St. Regis Bal Harbour. Segment earnings increased $47 million in the year ended December 31, 2011, compared to the corresponding period in 2010, also driven by residential sales at the St. Regis Bal Harbour.

 

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LIQUIDITY AND CAPITAL RESOURCES

In 2012, we returned over half a billion dollars of capital to shareholders. We did this through increasing our dividend, paid in December 2012, by 150% and by repurchasing 6.3 million shares in 2012 for a total cost of approximately $320 million. Additionally during 2012, we retired $1.272 billion of debt, and issued $350 million of 3.125% Senior Notes due 2023.

Cash From Operating Activities

Cash flow from operating activities is generated primarily from management and franchise revenues, operating income from our owned hotels and resorts and sales of VOIs and residential units. Other sources of cash are distributions from joint ventures, servicing financial assets and interest income. These are the principal sources of cash used to fund our operating expenses, interest payments on debt, capital expenditures, dividend payments and property and income taxes. We believe that our existing borrowing availability together with capacity for additional borrowings and cash from operations will be adequate to meet all funding requirements for our operating expenses, principal and interest payments on debt, capital expenditures, dividends and share repurchases.

The majority of our cash flow is derived from corporate and leisure travelers and is dependent on the supply and demand in the lodging industry. In a recessionary economy, we experience significant declines in business and leisure travel. The impact of declining demand in the industry and higher hotel supply in key markets could have a material impact on our cash flow from operating activities.

Our day-to-day operations are financed through net working capital, a practice that is common in our industry. The ratio of our current assets to current liabilities was 0.95 and 1.27 as of December 31, 2012 and 2011, respectively. Consistent with industry practice, we sweep the majority of the cash at our owned hotels on a daily basis and fund payables as needed by drawing down on our existing revolving credit facility.

The majority of our restricted cash balance relates to cash used as collateral to reduce fees on letters of credit. Additionally, state and local regulations governing sales of VOIs and residential properties allow the purchaser of such a VOI or property to rescind the sale subsequent to its completion for a pre-specified number of days. In addition, cash payments received from buyers of units under construction are held in escrow during the period prior to obtaining a certificate of occupancy. These payments and the deposits collected from sales during the rescission period are another component of our restricted cash balances in our consolidated balance sheets. At December 31, 2012 and 2011, we had short-term restricted cash balances of $158 million and $232 million, respectively.

 

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Cash From Investing Activities

Gross capital spending during the full year ended December 31, 2012 was as follows (in millions):

 

Maintenance Capital Expenditures (1):

  

Owned, Leased and Consolidated Joint Venture Hotels

   $ 68   

Corporate and information technology

     78   
  

 

 

 

Subtotal

     146   
  

 

 

 
Vacation Ownership and Residential Capital Expenditures:   

Net capital expenditures for inventory (excluding St. Regis Bal Harbour) (2)

     (38

Capital expenditures for inventory — St. Regis Bal Harbour

     27   
  

 

 

 

Subtotal

     (11
  

 

 

 

Development Capital

     271   
  

 

 

 

Total Capital Expenditures

   $ 406   
  

 

 

 

 

(1) Maintenance capital expenditures include renovations, asset replacements and improvements that extend the useful life of the asset.

 

(2) Represents gross inventory capital expenditures of $34 million less cost of sales of $72 million.

Gross capital spending during the year ended December 31, 2012 included approximately $146 million of maintenance capital, and $271 million of development capital. Investment spending on gross vacation ownership interest and residential inventory was $61 million, primarily related to the completion of construction of our hotel and residential project in Bal Harbour, Florida. Our capital expenditure program includes both offensive and defensive capital. Defensive spending is related to maintenance and renovations that we believe are necessary to stay competitive in the markets we are in. 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. The offensive capital expenditures, which are primarily related to new projects that we expect will generate a return, are also considered discretionary. We currently anticipate that our defensive capital expenditures for the full year 2013 (excluding vacation ownership and residential inventory) will be approximately $200 million for maintenance, renovations, and technology capital. In addition, for the full year 2013, we currently expect to spend approximately $350 million for investment projects, various joint ventures and other investments.

In order to secure management or franchise agreements, we have made loans to third-party owners, minority investments in joint ventures and provided certain guarantees and indemnifications related thereto. See Note 25 of the consolidated financial statements for 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 we are obligated under, and investments in hotels and joint ventures.

We intend to finance the acquisition of additional hotel properties (including equity investments), hotel renovations, VOI and residential construction, 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) through our credit facility described below, the net proceeds from dispositions, the assumption of debt, and from cash generated from operations.

We periodically review our business to identify properties or other assets that we believe either are non-core (including hotels where the return on invested capital is not adequate), no longer complement our business, are in markets which may not benefit us as much as other markets during an economic recovery or could be sold at significant premiums. We are focused on enhancing real estate returns and monetizing investments.

 

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Since 2006, we have sold 73 hotels realizing cash proceeds of approximately $6.1 billion in numerous transactions, including gross cash proceeds of approximately $542 million from the sale of eight hotels during the year ended December 31, 2012 (see Note 5 of the consolidated financial statements). There can be no assurance, however, that we will be able to complete future dispositions on commercially reasonable terms or at all.

In late 2011, we received certificates of occupancy for the St. Regis Bal Harbour and, as a result, we began closings of units that had previously been sold. During the year ended December 31, 2012, we closed on 188 additional units. From project inception through December 31, 2012, we have closed contracts on 224 units representing approximately 73% of the total residential units available at the St. Regis Bal Harbour and realized residential revenue of $810 million.

Cash Used for Financing Activities

The following is a summary of our indebtedness (including capital leases) as of December 31, 2012:

 

     Amount
Outstanding at
December 31,
2012 (a)
     Weighted
Average
Interest Rate at
December 31,
2012
    Weighted
Average
Maturity
 
     (Dollars in millions)            (In years)  

Floating Rate Debt

       

Revolving Credit Facility

   $                5.2   

Mortgages and Other

     43         4.65     4.0   
  

 

 

      

Total/Average

   $ 43         4.65     4.0   
  

 

 

      

Fixed Rate Debt

       

Senior Notes

   $ 1,220         5.93     6.4   

Mortgages and Other

     12         3.07     14.6   
  

 

 

      

Total/Average

   $ 1,232         5.90     6.5   
  

 

 

      

Total Debt

       

Total Debt and Average Terms

   $ 1,275         5.86     6.4   
  

 

 

      

 

(a) Excludes approximately $389 million of our share of unconsolidated joint venture debt and securitized vacation ownership debt of $533 million, all of which is non-recourse.

For specifics related to our financing transactions, issuances, and terms entered into for the years ended December 31, 2012 and 2011, see Note 15 of the consolidated financial statements.

In 2012, we repaid approximately $1.2 billion of our fixed rate senior notes with varying maturities. In June 2012, we redeemed all $495 million of our 6.25% Senior Notes, which were scheduled to mature in February 2013. We paid $513 million in connection with the early redemption and recorded a net charge of approximately $15 million, which represents $18 million in tender premiums and other redemption costs, partially offset by swap settlements of $3 million. In December 2012, we redeemed all $500 million of our 7.875% Senior Notes due 2014 and partially redeemed $156 million of our 7.375% Senior Notes due 2015, $29 million of our 6.75% Senior Notes due 2018 and $40 million of our 7.15% Senior Notes due 2019. We paid $833 million in connection with these early redemptions and recorded a net charge of approximately $113 million, which primarily represents $108 million in tender premiums and other redemption costs and an $11 million charge to write-off unamortized deferred financing costs and unamortized issuance discounts, partially offset by gains on swap settlements of $6 million.

Also during 2012, we prepaid $52 million of third party debt previously secured by one owned hotel.

 

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During the twelve months ended December 31, 2012, we repurchased 6.3 million common shares at an average price of $50.83 for a total cost of approximately $320 million (see Note 21).

In December 2012, we issued $350 million of 3.125% Senior Notes, which will mature in February 2023. We used the net proceeds from the offering, together with cash on hand, to finance the December 2012 Redemptions.

During the year ended December 31, 2012, we completed a securitization of approximately $174 million of vacation ownership notes receivable. The securitization transaction did not qualify as a sale for accounting purposes and, accordingly, no gain or loss was recognized and the proceeds are presented as debt. Of the $174 million securitized in 2012, $155 million was previously unsecuritized and approximately $19 million related to the 2005 securitization for which the termination was prefunded. The net cash proceeds from the securitization, after the amount pre-funded for the future termination of the 2005 securitization and associated deal costs, were approximately $140 million (see Note 10). The pre-funded amount of $18 million is included in restricted cash until the 2005 securitization is terminated, which is expected to occur in 2013.

In November 2012, we closed on a new $1.75 billion senior credit facility (the “New Facility”) to replace the existing $1.5 billion credit agreement (the “Existing Facility”). The New Facility matures in February 2018, whereas the Existing Facility was scheduled to mature in November 2013. The New Facility is a multi-currency revolving loan commitment and is expected to be used for general corporate purposes. We have evaluated the commitments of each of the lenders in our New Facility, and we have reviewed our debt covenants and do not anticipate any issues regarding the availability of funds under the New Facility.

In December 2011, we redeemed all $605 million of our 7.875% Senior Notes outstanding, which were originally issued in April 2002 and due May 2012. We paid $628 million in connection with the redemptions and recorded a charge of approximately $16 million, representing the call premiums, and other related redemption costs.

During 2011, we completed the securitization of vacation ownership receivables resulting in net proceeds of approximately $177 million.

 

     December 31,
2012
    December 31,
2011
 
     (in millions)  

Gross Unsecuritized Debt

   $ 1,275      $ 2,197   

less: cash (including restricted cash of $123 million in 2012 and $212 million in 2011)

     (428     (666
  

 

 

   

 

 

 

Net Unsecuritized Debt

   $ 847      $ 1,531   
  

 

 

   

 

 

 

Gross Securitized Debt (non-recourse)

   $ 533      $ 532   

less: cash restricted for securitized debt repayments (not included above)

     (41     (22
  

 

 

   

 

 

 

Net Securitized Debt

   $ 492      $ 510   
  

 

 

   

 

 

 

Total Net Debt

   $ 1,339      $ 2,041   
  

 

 

   

 

 

 

The cost of borrowing under the New 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. A credit rating is not a recommendation to buy, sell or hold securities, is subject to revision or withdrawal at any time by the assigning rating organization and should be evaluated independently of any other rating. During the three months ended March 31, 2012, we were upgraded to investment grade by all three rating agencies. We were subsequently upgraded one additional ratings notch by all three rating agencies during the year ended December 31, 2012.

 

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Our New Facility is used to fund general corporate cash needs. As of December 31, 2012, no amounts were drawn under the New Facility with up to $1.75 billion available for borrowing. The New Facility allows for multi-currency borrowing and, if drawn upon, would have an applicable margin, inclusive of the commitment fee, of 1.25% plus the applicable currency LIBOR rate. Our ability to borrow under the New Facility is subject to compliance with the terms and conditions under the New Facility, including certain leverage covenants. 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 New Facility, and our capacity for additional borrowings will be adequate to meet anticipated requirements for scheduled maturities (primarily our $294 million of Senior Notes due in 2015), dividends, 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 and, if refinanced, on favorable terms. Approximately $145 million, included in our cash balance above, is deemed to be permanently invested in foreign countries and we would be subject to income taxes if we repatriated these amounts. 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.

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 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 and vacation ownership industries and to general economic, political, financial, competitive, legislative and regulatory factors beyond our control.

We had the following contractual obligations(1) outstanding as of December 31, 2012 (in millions):

 

     Total      Due in Less
Than 1 Year
     Due in
1-3 Years
     Due in
3-5 Years
     Due After
5 Years
 

Debt (2)

   $ 1,274       $ 2       $ 297       $ 38       $ 937   

Interest payable

     462         74         155         113         120   

Capital lease obligations

     1                 1                   

Operating lease obligation

     1,410         95         185         167         963   

Unconditional purchase obligations (3)

     143         76         62         5           

Other long-term obligations

     16         1         3         4         8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 3,306       $ 248       $ 703       $ 327       $ 2,028   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) This table excludes unrecognized tax benefits that would require cash outlays for $226 million, the timing of which is uncertain. Refer to Note 14 of the consolidated financial statements for additional discussion on this matter.

 

(2) Excludes securitized debt of $533 million, all of which is non-recourse.

 

(3) Includes commitments that may be reimbursed or satisfied by our managed and franchised properties.

We had the following commercial commitments outstanding as of December 31, 2012 (in millions):

 

     Total      Less Than
1 Year
     1-3 Years      3-5 Years      After 5
Years
 

Standby letters of credit

   $ 117          $ 94          $ 19          $          $ 4   

A dividend of $1.25 per share was paid in December 2012 to shareholders of record as of December 14, 2012.

A dividend of $0.50 per share was paid in December 2011 to shareholders of record as of December 15, 2011.

 

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Off-Balance Sheet Arrangements

Our off-balance sheet arrangements include letters of credit of $117 million, unconditional purchase obligations of $143 million and surety bonds of $80 million. These items are discussed in greater detail in Item 8, Financial Statements and Supplementary Data, and in Note 25.

 

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

In limited instances, we seek to reduce earnings and cash flow volatility associated with changes in interest rates and foreign currency exchange rates by entering into financial arrangements intended to provide a hedge against a portion of the risks associated with such volatility. We continue to have exposure to such risks to the extent they are not hedged.

We enter into a derivative financial arrangement to the extent it meets the objectives described above, and we do not engage in such transactions for trading or speculative purposes.

At December 31, 2012, we were party to the following derivative instruments:

 

   

Forward contracts to hedge forecasted transactions for management and franchise fee revenues earned in foreign currencies. The aggregate dollar equivalent of the notional amounts was approximately $40 million. These contracts expire in 2013.

 

   

Forward foreign exchange contracts to manage the foreign currency exposure related to certain intercompany loans not deemed to be permanently invested. The aggregate dollar equivalent of the notional amounts of the forward contracts was approximately $645 million. These contracts expire in 2013.

 

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The following table sets forth the scheduled maturities and the total fair value of our indebtedness and financial instruments as of December 31, 2012 (in millions, excluding average exchange rates):

 

     Expected Maturity or Transaction Date
At December 31,
            Total at
December 31,
2012
    Total Fair
Value at
December 31,
2012
 
     2013      2014      2015      2016      2017      Thereafter       

Indebtedness

                      

Fixed rate

   $ 1       $       $ 294       $       $       $ 937       $ 1,232      $ 1,406   

Average interest rate

                       5.90  

Floating rate

   $ 1       $ 2       $ 2       $ 35       $ 3       $       $ 43      $ 43   

Average interest rate

                       4.65  

Forward Foreign Exchange Hedge Contracts:

                      

Fixed (EUR) to Fixed (USD)

   $ 40       $       $       $       $       $       $ (1   $ (1

Average Exchange rate

                       1.29     

Forward Foreign Exchange Contracts:

                      

Fixed (EUR) to Fixed (USD)

   $ 55       $       $       $       $       $       $      $   

Average Exchange rate

                       1.31     

Fixed (USD) to Fixed (EUR)

   $ 41       $       $       $       $       $       $      $   

Average Exchange rate

                       0.76     

Fixed (CLP) to Fixed (USD)

   $ 59       $       $       $       $       $       $      $   

Average Exchange rate

                       0.00     

Fixed (THB) to Fixed (USD)

   $ 13       $       $       $       $       $       $      $   

Average Exchange rate

                       0.03     

Fixed (JPY) to Fixed (USD)

   $ 84       $       $       $       $       $       $ 2      $ 2   

Average Exchange rate

                       0.01     

Fixed (MXP) to Fixed (USD)

   $ 10       $       $       $       $       $       $      $   

Average Exchange rate

                       0.08     

Fixed (AUD) to Fixed (USD)

   $ 15       $       $       $       $       $       $      $   

Average Exchange rate

                       0.96     

Fixed (CAD) to Fixed (USD)

   $ 259       $       $       $       $       $       $      $   

Average Exchange rate

                       1.01     

Fixed (GBP) to Fixed (EUR)

   $ 90       $       $       $       $       $       $      $   

Fixed (JPY) to Fixed (THB)

   $ 19       $       $       $       $       $       $      $   

 

Item 8. Financial Statements and Supplementary Data.

The financial statements and supplementary data required by this item appear beginning on page F-1 of this Annual Report and are incorporated herein by reference.

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Not applicable.

 

Item 9A. Controls and Procedures.

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

 

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Rules 13(a)-15(e) and 15(d)-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 13(a)-15(f) and 15(d)-15(f) 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.

Management’s Report on Internal Control over Financial Reporting and the Report of the Corporation’s Independent Registered Public Accounting Firm are set forth in Part II of the Annual Report and are incorporated herein by reference.

 

Item 9B. Other Information.

Not applicable.

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance.

Information regarding directors and corporate governance will be included in our proxy statement for the 2013 Annual Meeting of Stockholders (the “Proxy Statement”). The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the close of our fiscal year ended December 31, 2012 and such information is incorporated herein by reference.

Executive Officers of the Registrants

The following table includes certain information with respect to each of our executive officers.

 

Name

(listed alphabetically, after

Chief Executive Officer)

  

Position

Frits van Paasschen

   Chief Executive Officer and President and a Director

Jeffrey M. Cava

   Executive Vice President and Chief Human Resources Officer

Christie N. Hicks

   Senior Vice President, Starwood Sales Organization

Philip P. McAveety

   Executive Vice President and Chief Brand Officer

Vasant M. Prabhu

   Vice Chairman and Chief Financial Officer

Sergio D. Rivera

   Co-President, The Americas

Kenneth S. Siegel

   Chief Administrative Officer, General Counsel and Secretary

Simon M. Turner

   President, Global Development

Biographies for our executive officers follow:

Frits van Paasschen. Mr. van Paasschen, 52, has been Chief Executive Officer and President of the Company since September 2007. From March 2005 until September 2007, he served as President and Chief Executive Officer of Molson Coors Brewing Company’s largest division, Coors Brewing Company, a brewing company, prior to its merger with Miller Brewing Company and the formation of MillerCoors LLC. Prior to joining Coors, from April 2004 until March 2005, Mr. van Paasschen worked independently through FPaasschen Consulting, a consulting company, and Mercator Investments, a private equity firm, evaluating, proposing, and negotiating private equity transactions. Prior thereto, Mr. van Paasschen spent seven years at Nike, Inc., a designer, developer and marketer of footwear, apparel and accessory products, most recently as Corporate Vice

 

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President/General Manager, Europe, Middle East and Africa from 2000 to 2004. From 1995 to 1997, Mr. van Paasschen served as Vice President, Finance and Planning at Disney Consumer Products, a business segment of The Walt Disney Company that extends the Disney brand to a range of merchandise, and earlier in his career was a management consultant for eight years at the global management consulting firm of McKinsey & Company and the Boston Consulting Group. Mr. van Paasschen has been a director of the Company since September 2007.

Jeffrey M. Cava. Mr. Cava, 61, has been Executive Vice President and Chief Human Resources Officer since May 2008. Mr. Cava served as Executive Vice President Administration and Chief Human Resources Officer for Wendy’s International, Inc., a restaurant franchising company specializing in quick-service hamburgers, from June 2003 to May 2008. Prior to joining Wendy’s, Mr. Cava was Vice President and Chief Human Resources Officer for Nike, Inc., a designer, developer and marketer of footwear, apparel and accessory products; Vice President Human Resources for The Walt Disney Company, Consumer Products Group, a business segment of The Walt Disney Company that extends the Disney brand to a range of merchandise; and Vice President of Global Staffing, Training and Development for ITT Sheraton Corporation, a hotel company. Mr. Cava is also a member of the board of directors and has chaired the compensation committee of The Society for Human Resources Management, a non-profit global human resources professional organization.

Christie N. Hicks. Ms. Hicks, 57, has been Senior Vice President of Sales, Starwood Sales Organization since December, 2009. Ms. Hicks has been with the Company since October, 1999, when she joined as Vice President, Global Sales, North America, a position she held until mid-2001. From June 2001 to October 2009, Ms. Hicks was Senior Vice President, Global Sales of the Company. Prior to joining the Company, Ms. Hicks held a number of sales positions with Hyatt Hotels and Resorts, a global hospitality company, including Vice President, National Sales.

Philip P. McAveety. Mr. McAveety, 46, has been Executive Vice President and Chief Brand Officer since April 2008. Prior to joining the company, Mr. McAveety was Global Brand Director of Camper, SL, a fashion footwear company, from January 2007 until March 2008. From July 1997 until December 2006, he served as Vice President, Brand Marketing, Europe, Middle East and Africa at Nike, Inc., a designer, developer and marketer of footwear, apparel and accessory products.

Vasant M. Prabhu. Mr. Prabhu, 53, has been Vice Chairman and Chief Financial Officer since February 2010. Prior to that, he was Executive Vice President and Chief Financial Officer since January 2004. Prior to joining the Company, Mr. Prabhu served as Executive Vice President and Chief Financial Officer for Safeway Inc., a North American food and drug retailer specializing in grocery and general merchandise, from September 2000 through December 2003. Mr. Prabhu was previously the President of the Information and Media Group at the McGraw-Hill Companies, Inc., a provider of information services for the financial, education, commercial, and commodities market worldwide, from June 1998 to August 2000, and held several senior positions at divisions of PepsiCo, Inc., a global food, snack and beverage company, from June 1992 to May 1998. From August 1983 to May 1992 he was a partner at Booz Allen Hamilton Inc., an international management consulting firm. Mr. Prabhu is a member of the board of directors of Mattel, Inc.

Sergio D. Rivera. Mr. Rivera, 50, has been Co-President, The Americas since June 2012. Previously, Mr. Rivera was President and Chief Executive Officer of Starwood Vacation Ownership, a wholly owned subsidiary of the Company. Prior to 2008, Mr. Rivera held progressively senior management roles within the Company, including Controller, Vice President of Sales and Marketing, Senior Vice President of International Operations, and President of Global Real Estate. Mr. Rivera began his career with the Company through its predecessor company, Vistana Resorts, in 1989.

Kenneth S. Siegel. Mr. Siegel, 57, has been Chief Administrative Officer and General Counsel since May 2006. From November 2000 to May 2006, Mr. Siegel held the position of Executive Vice President and General Counsel. In February 2001, he was also appointed as the Secretary of the Company. Mr. Siegel was formerly the Senior Vice President and General Counsel of Gartner, Inc., a provider of research and analysis on information technology industries, from January 2000 to November 2000. Prior to that time, he served as Senior Vice President, General Counsel and Corporate Secretary of IMS Health Incorporated, an information services company, and its predecessors from February 1997 to December 1999. Prior to that time, Mr. Siegel was a Partner in the law firm of Baker & Botts, LLP. Mr. Siegel is also a Trustee of Cancer Hope Network, a non-profit

 

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entity, a Trustee of Minority Corporate Counsel Association, and a Trustee of the American Hotel & Lodging Educational Foundation.

Simon M. Turner. Mr. Turner, 51, has been President, Global Development since May 2008. From June 1996 to April 2008, he was a principal of Hotel Capital Advisers, Inc., a hotel investment advisory firm. During this period, Mr. Turner served on the board of directors of Four Season Hotels, Inc., serving as a member of the Human Resources Committee and the Audit Committee. He was also a member of the board of directors of Fairmont Raffles Hotels International and was chairman of the Audit Committee. From July 1987 to May 1996, Mr. Turner was a member of the Investment Banking Department of Salomon Brothers, based in both New York and London. He currently serves as a trustee of the Urban Land Institute and is a member of the Dean’s Advisory Board of the School of Hotel Administration at Cornell University.

 

Item 11. Executive Compensation.

Information regarding executive compensation will be included in our Proxy Statement. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the close of our fiscal year ended December 31, 2012 and such information is incorporated herein by reference.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Information regarding security ownership of certain beneficial owners and management and related stockholder matters will be included in our Proxy Statement. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the close of our fiscal year ended December 31, 2012 and such information is incorporated herein by reference.

 

Item 13. Certain Relationships and Related Transactions and Director Independence.

Information regarding certain relationships and related transactions and director independence will be included in our Proxy Statement. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the close of our fiscal year ended December 31, 2012 and such information is incorporated herein by reference.

 

Item 14. Principal Accounting Fees and Services.

Information regarding principal accounting fees and services will be included in our Proxy Statement. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the close of our fiscal year ended December 31, 2012 and such information is incorporated herein by reference.

 

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Item 15. Exhibits, Financial Statement Schedules.

 

  (a) The following documents are filed as part of this Annual Report:

 

  1-2. The financial statements and financial statement schedule listed in the Index to Financial Statements and Schedule following the signature pages hereof.

 

  3. Exhibits:

 

Exhibit
Number

 

Description of Exhibit

3.1   Articles of Amendment and Restatement of the Company, as of May 30, 2007 (incorporated by reference to Appendix A to the Company’s 2007 Notice of Annual Meeting and Proxy Statement filed with the SEC on April 26, 2007).
3.2   Amended and Restated Bylaws of the Company, as amended and restated through April 10, 2006 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the SEC on April 13, 2006 (the “April 13 Form 8-K”).
3.3   Amendment to Amended and Restated Bylaws of the Company, dated as of March 13, 2008 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 18, 2008).
4.1   Termination Agreement dated as of April 7, 2006 between the Company and the Trust (incorporated by reference to Exhibit 4.1 of the April 13 Form 8-K).
4.2   Amended and Restated Rights Agreement, dated as of April 7, 2006, between the Company and American Stock Transfer and Trust Company, as Rights Agent (which includes the form of Amended and Restated Articles Supplementary of the Series A Junior Participating Preferred Stock as Exhibit A, the form of Rights Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Stock as Exhibit C) (incorporated by reference to Exhibit 4.2 of the April 13 Form 8-K).
4.3   Amended and Restated Indenture, dated as of November 15, 1995, as Amended and Restated as of December 15, 1995 between ITT Corporation (formerly known as ITT Destinations, Inc.) and the First National Bank of Chicago, as trustee (incorporated by reference to Exhibit 4.A.IV to the First Amendment to ITT Corporation’s Registration Statement on Form S-3 filed November 13, 1996).
4.4   First Indenture Supplement, dated as of December 31, 1998, among ITT Corporation, the Company and The Bank of New York (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on January 8, 1999).
4.5   Second Indenture Supplement, dated as of April 9, 2006, among the Company, Sheraton Holding Corporation and Bank of New York Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.3 to the April 13 Form 8-K).
4.6   Indenture, dated as of September 13, 2007, between the Company and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 17, 2007 (the “September 17 Form 8-K”)).
4.7   Supplemental Indenture No. 2, dated as of May 23, 2008, between the Company and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 28, 2008).
4.8   Supplemental Indenture No. 4, dated as of November 20, 2009, between the Company and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 23, 2009).
4.9   Indenture, dated as of December 10, 2012, between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on December 10, 2012 (the “December 10 Form 8-K”)).
4.10   Supplemental Indenture No. 1, dated as of December 10, 2012, between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.2 to the December 10 Form 8-K).
  The registrant hereby agrees to file with the Commission a copy of any instrument, including indentures, defining the rights of long-term debt holders of the registrant and its consolidated subsidiaries upon the request of the Commission.

 

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Exhibit
Number

 

Description of Exhibit

10.1   Third Amended and Restated Limited Partnership Agreement of SLC Operating Limited Partnership, dated January 6, 1999, among the Company and the limited partners of SLC Operating Limited Partnership (incorporated by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998).
10.2   Form of Trademark License Agreement, dated as of December 10, 1997, between Starwood Capital Group, L.L.C. and [the Company]/[Starwood Lodging Trust] (incorporated by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997).
10.3   Credit Agreement, dated as of November 30, 2012, by and among the Company, certain of its subsidiaries, as borrowers, the lenders from time to time party thereto, JPMorgan Chase Bank, N.A., as administrative agent, Citigroup Global Markets Inc., as syndication agent, Bank of America, N.A., HSBC Bank USA, National Association and Wells Fargo Bank, National Association, as documentation agents (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on December 5, 2012).
10.4   First Amendment to Credit Agreement, dated as of February 6, 2013, by and among the Company, certain of its subsidiaries, as borrowers, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto. +
10.5   Starwood Hotels & Resorts Worldwide, Inc. 1999 Long-Term Incentive Compensation Plan (the “1999 LTIP”) (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999 (the “1999 Form 10-Q2”)). *
10.6   First Amendment to the 1999 LTIP, dated as of August 1, 2001 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2001). *
10.7   Second Amendment to the 1999 LTIP (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003 (the “2003 Form 10-Q1”)). *
10.8   Form of Non-Qualified Stock Option Agreement pursuant to the 1999 LTIP (incorporated by reference to Exhibit 10.30 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004 (the “2004 Form 10-K”)). *
10.9   Form of Restricted Stock Agreement pursuant to the 1999 LTIP (incorporated by reference to Exhibit 10.31 to the 2004 Form 10-K). *
10.10   Starwood Hotels & Resorts Worldwide, Inc. 2002 Long-Term Incentive Compensation Plan (the “2002 LTIP”) (incorporated by reference to Annex B of the Company’s 2002 Notice of Annual Meeting and Proxy Statement filed with the SEC on April 12, 2002). *
10.11   First Amendment to the 2002 LTIP (incorporated by reference to Exhibit 10.1 to the 2003 Form 10-Q1). *
10.12   Form of Non-Qualified Stock Option Agreement pursuant to the 2002 LTIP (incorporated by reference to Exhibit 10.49 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (the “2002 Form 10-K”)). *
10.13   Form of Restricted Stock Agreement pursuant to the 2002 LTIP (incorporated by reference to Exhibit 10.35 to the 2004 Form 10-K). *
10.14   2004 Long-Term Incentive Compensation Plan, amended and restated as of December 31, 2008 (“2004 LTIP”) (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on January 6, 2009 (the “January 2009 Form 8-K”)). *
10.15   Form of Non-Qualified Stock Option Agreement pursuant to the 2004 LTIP (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004). *
10.16   Form of Restricted Stock Agreement pursuant to the 2004 LTIP (incorporated by reference to Exhibit 10.38 to the 2004 Form 10-K). *
10.17   Form of Non-Qualified Stock Option Agreement pursuant to the 2004 LTIP (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC February 13, 2006 (the “February 2006 Form 8-K”)). *

 

55


Table of Contents

Exhibit
Number

 

Description of Exhibit

10.18   Form of Restricted Stock Agreement pursuant to the 2004 LTIP (incorporated by reference to Exhibit 10.1 to the February 2006 Form 8-K). *
10.19   Form of Amended and Restated Non-Qualified Stock Option Agreement pursuant to the 2004 LTIP (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2006 (the 2006 Form 10-Q2”)). *
10.20   Form of Amended and Restated Restricted Stock Agreement pursuant to the 2004 LTIP (incorporated by reference to Exhibit 10.2 to the 2006 Form 10-Q2). *
10.21   Annual Incentive Plan for Certain Executives, amended and restated as of December 2008 (incorporated by reference to Exhibit 10.2 to the January 2009 Form 8-K). *
10.22   Starwood Hotels & Resorts Worldwide, Inc. Amended and Restated Deferred Compensation Plan, effective as of January 22, 2008 (incorporate by reference to Exhibit 10.35 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007). *
10.23   Form of Indemnification Agreement between the Company and each of its Directors and executive officers (incorporated by reference to Exhibit 10.10 to the Company’s Current Report on Form 8-K filed with the SEC on November 25, 2009). *
10.24   Employment Agreement, dated as of November 13, 2003, between the Company and Vasant Prabhu (incorporated by reference to Exhibit 10.68 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003). *
10.25   Letter Agreement, dated August 14, 2007, between the Company and Vasant Prabhu (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on August 17, 2007 (the “August 17 Form 8-K”)). *
10.26   Amendment, dated as of December 30, 2008, to employment agreement between the Company and Vasant Prabhu (incorporated by reference to Exhibit 10.34 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008 (the “2008 Form 10-K”)). *
10.27   Employment Agreement, dated as of September 25, 2000, between the Company and Kenneth Siegel (incorporated by reference to Exhibit 10.57 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000). *
10.28   Letter Agreement, dated July 22, 2004 between the Company and Kenneth Siegel (incorporated by reference to Exhibit 10.73 to the 2004 Form 10-K). *
10.29   Amendment, dated as of December 30, 2008, to employment agreement between the Company and Kenneth S. Siegel (incorporated by reference to Exhibit 10.43 to the 2008 Form 10-K). *
10.30   Employment Agreement, dated as of August 2, 2007, between the Company and Bruce W. Duncan (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2007). *
10.31   Form of Restricted Stock Unit Agreement between the Company and Bruce W. Duncan pursuant to the 2004 LTIP (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2007). *
10.32   Amended and Restated Employment Agreement, dated as of December 30, 2008, between the Company and Frits van Paasschen (incorporated by reference to Exhibit 10.52 to the 2008 Form 10-K). *
10.33   Form of Non-Qualified Stock Option Agreement between the Company and Frits van Paasschen pursuant to the 2004 LTIP (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2007 (the “2007 Form 10-Q3”)). *
10.34   Form of Restricted Stock Unit Agreement between the Company and Frits van Paasschen pursuant to the 2004 LTIP (incorporated by reference to Exhibit 10.6 to the 2007 Form 10-Q3). *
10.35   Form of Restricted Stock Grant between the Company and Frits van Paasschen pursuant to the 2004 LTIP (incorporated by reference to Exhibit 10.7 to the 2007 Form 10-Q3). *
10.36   Form of Severance Agreement between the Company and each of Messrs. Siegel and Prabhu (incorporated by reference to Exhibit 10.57 to the 2008 Form 10-K). *

 

56


Table of Contents

Exhibit
Number

 

Description of Exhibit

10.37   Letter Agreement, dated August 22, 2008, between the Company and Matthew Avril (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2009 (the “2009 Form 10-Q1”). *
10.38   Amendment, dated as of December 30, 2008, to employment agreement between the Company and Matthew Avril (incorporated by reference to Exhibit 10.2 to the 2009 Form 10-Q1). *
10.39   Amendment, dated as of December 15, 2011, to employment agreement between the Company and Matthew Avril (incorporated by reference to Exhibit 10.41 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011). *
10.40   Amended and Restated Severance Agreement, dated as of December 30, 2008, between the Company and Matthew Avril (incorporated by reference to Exhibit 10.3 to the 2009 Form 10-Q1). *
10.41   Retirement Agreement and Mutual General Release of Claims by and between Starwood International Licensing Company, S.A.R.L., Starwood Hotels & Resorts Worldwide, Inc. and Matthew E. Avril, dated as of April 12, 2012 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC April 16, 2012). *
10.42   Letter Agreement, dated April 15, 2008, between the Company and Simon Turner (incorporated by reference to Exhibit 10.7 to the 2009 Form 10-Q1). *
10.43   Amendment, dated as of December 30, 2008, to employment agreement between the Company and Simon Turner (incorporated by reference to Exhibit 10.8 to the 2009 Form 10-Q1). *
10.44   Amended and Restated Severance Agreement, dated as of December 30, 2008, between the Company and Simon Turner (incorporated by reference to Exhibit 10.9 to the 2009 Form 10-Q1). *
12.1   Calculation of Ratio of Earnings to Total Fixed Charges.+
21.1   List of our Subsidiaries. +
23.1   Consent of Ernst & Young LLP. +
31.1   Certification Pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 – Chief Executive Officer. +
31.2   Certification Pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 – Chief Financial Officer. +
32.1   Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code – Chief Executive Officer. +
32.2   Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code – Chief Financial Officer. +
101   The following materials from Starwood Hotels & Resorts Worldwide, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2012 formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Equity, (v) the Consolidated Statements of Cash Flows, and (vi) notes to the consolidated financial statements. +

 

 

+ Filed herewith.

 

* Indicates management contract or compensatory plan or arrangement

 

57


Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

 

   

STARWOOD HOTELS & RESORTS

WORLDWIDE, INC.

    By:   /s/    FRITS VAN PAASSCHEN
      Frits van Paasschen
      Chief Executive Officer and Director
   

Date: February 21, 2013

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.

 

Signature

  

Title

  

Date

/s/    FRITS VAN PAASSCHEN

   Chief Executive Officer and Director    February 21, 2013
Frits van Paasschen      

/s/    BRUCE W. DUNCAN

   Chairman and Director    February 21, 2013
Bruce W. Duncan      
/s/    VASANT M. PRABHU    Executive Vice President and Chief    February 21, 2013
Vasant M. Prabhu    Financial Officer (Principal Financial Officer)   
/s/    ALAN M. SCHNAID    Senior Vice President, Corporate    February 21, 2013
Alan M. Schnaid    Controller and Principal Accounting Officer   
/s/    ADAM M. ARON    Director    February 21, 2013
Adam M. Aron      
/s/    CHARLENE BARSHEFSKY    Director    February 21, 2013
Charlene Barshefsky      
/s/    THOMAS E. CLARKE    Director    February 21, 2013
Thomas E. Clarke      
/s/    CLAYTON C. DALEY, JR.    Director    February 21, 2013
Clayton C. Daley, Jr.      
/s/    LIZANNE GALBREATH    Director    February 21, 2013
Lizanne Galbreath      
/s/    ERIC HIPPEAU    Director    February 21, 2013
Eric Hippeau      
/s/    AYLWIN B. LEWIS    Director    February 21, 2013
Aylwin B. Lewis      
/s/    STEPHEN R. QUAZZO    Director    February 21, 2013
Stephen R. Quazzo      
/s/    THOMAS O. RYDER    Director    February 21, 2013
Thomas O. Ryder      

 

58


Table of Contents

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

INDEX TO FINANCIAL STATEMENTS AND SCHEDULE

 

     Page  

Management’s Report on Internal Control over Financial Reporting

     F-2   

Report of Independent Registered Public Accounting Firm

     F-3   

Report of Independent Registered Public Accounting Firm

     F-4   

Consolidated Balance Sheets as of December 31, 2012 and 2011

     F-5   

Consolidated Statements of Income for the Years Ended December 31, 2012, 2011 and 2010

     F-6   

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2012, 2011 and 2010

     F-7   

Consolidated Statements of Equity for the Years Ended December 31, 2012, 2011 and 2010

     F-8   

Consolidated Statements of Cash Flows for the Years Ended December 31, 2012, 2011 and 2010

     F-9   

Notes to Financial Statements

     F-10   

Schedule:

  

Schedule II — Valuation and Qualifying Accounts

     S-1   

 

F-1


Table of Contents

Management’s Report on Internal Control over Financial Reporting

Management of Starwood Hotels & Resorts Worldwide, Inc. and its subsidiaries (“Company”) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) or 15(d)-15(f).

Our management assessed the effectiveness of the Company’s internal controls over financial reporting as of December 31, 2012. In making this assessment, the Company’s management used the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on assessment and those criteria, management believes that, as of December 31, 2012, the Company’s internal control over financial reporting is effective.

Management has engaged Ernst & Young LLP, the independent registered public accounting firm that audited the financial statements included in this Annual Report on Form 10-K, to attest to the Company’s internal control over financial reporting. The report is included herein.

 

F-2


Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of Starwood Hotels & Resorts Worldwide, Inc.

We have audited Starwood Hotels & Resorts Worldwide, Inc.’s (the “Company”) internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012 based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2012 and 2011 and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2012 of the Company and our report dated February 21, 2013, expressed an unqualified opinion thereon.

/s/    Ernst & Young LLP

New York, New York

February 21, 2013

 

F-3


Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of Starwood Hotels & Resorts Worldwide, Inc.

We have audited the accompanying consolidated balance sheets of Starwood Hotels & Resorts Worldwide, Inc. (the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2012. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2012 and 2011, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 21, 2013 expressed an unqualified opinion thereon.

/s/    Ernst & Young LLP

New York, New York

February 21, 2013

 

F-4


Table of Contents

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except share data)

 

     December 31,  
     2012     2011  
ASSETS   

Current assets:

    

Cash and cash equivalents

   $ 305      $ 454   

Restricted cash

     158        232   

Accounts receivable, net of allowance for doubtful accounts of $59 and $46

     586        569   

Inventories

     361        812   

Securitized vacation ownership notes receivable, net of allowance for doubtful accounts of $9 and $10

     65        64   

Deferred income taxes

     320        278   

Prepaid expenses and other

     124        125   
  

 

 

   

 

 

 

Total current assets

     1,919        2,534   

Investments

     260        259   

Plant, property and equipment, net

     3,162        3,232   

Assets held for sale, net

     36        42   

Goodwill and intangible assets, net

     2,025        2,053   

Deferred income taxes

     636        639   

Other assets

     385        355   

Securitized vacation ownership notes receivable, net

     438        446   
  

 

 

   

 

 

 
   $ 8,861      $ 9,560   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY   

Current liabilities:

    

Short-term borrowings and current maturities of long-term debt

   $ 2      $ 3   

Accounts payable

     121        144   

Current maturities of long-term securitized vacation ownership debt

     150        130   

Accrued expenses

     1,074        1,177   

Accrued salaries, wages and benefits

     395        375   

Accrued taxes and other

     287        163   
  

 

 

   

 

 

 

Total current liabilities

     2,029        1,992   

Long-term debt

     1,273        2,194   

Long-term securitized vacation ownership debt

     383        402   

Deferred income taxes

     78        46   

Other liabilities

     1,956        1,971   
  

 

 

   

 

 

 
     5,719        6,605   
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholders’ equity:

    

Common stock; $0.01 par value; authorized 1,000,000,000 shares; outstanding 193,121,094 and 195,913,400 shares at December 31, 2012 and 2011, respectively

     2        2   

Additional paid-in capital

     816        963   

Accumulated other comprehensive loss

     (338     (348

Retained earnings

     2,657        2,337   
  

 

 

   

 

 

 

Total Starwood stockholders’ equity

     3,137        2,954   

Noncontrolling interest

     5        1   
  

 

 

   

 

 

 

Total equity

     3,142        2,955   
  

 

 

   

 

 

 
   $ 8,861      $ 9,560   
  

 

 

   

 

 

 

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

 

F-5


Table of Contents

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In millions, except per share data)

 

     Year Ended December 31,  
     2012     2011     2010  

Revenues

      

Owned, leased and consolidated joint venture hotels

   $ 1,698      $ 1,768      $ 1,704   

Vacation ownership and residential sales and services

     1,287        703        538   

Management fees, franchise fees and other income

     888        814        712   

Other revenues from managed and franchised properties

     2,448        2,339        2,117   
  

 

 

   

 

 

   

 

 

 
     6,321        5,624        5,071   

Costs and Expenses

      

Owned, leased and consolidated joint venture hotels

     1,391        1,449        1,395   

Vacation ownership and residential

     961        521        405   

Selling, general, administrative and other

     370        352        344   

Restructuring and other special charges (credits), net

     (12     68        (75

Depreciation

     226        235        252   

Amortization

     25        30        33   

Other expenses from managed and franchised properties

     2,448        2,339        2,117   
  

 

 

   

 

 

   

 

 

 
     5,409        4,994        4,471   

Operating income

     912        630        600   

Equity earnings (losses) and gains and losses from unconsolidated ventures, net

     25        11        10   

Interest expense, net of interest income of $2, $3 and $2

     (170     (200     (235

Loss on early extinguishment of debt, net

     (128     (16     (1

Gain (loss) on asset dispositions and impairments, net

     (21            (39
  

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before taxes and noncontrolling interests

     618        425        335   

Income tax benefit (expense)

     (148     75        (27
  

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     470        500        308   

Discontinued operations:

      

Income (loss) from operations, net of tax (benefit) expense of $0, $0 and $0

                   (1

Gain (loss) on dispositions, net of tax (benefit) expense of $87, $(5) and $(166)

     92        (13     168   
  

 

 

   

 

 

   

 

 

 

Net income

     562        487        475   

Net (income) loss attributable to noncontrolling interests

            2        2   
  

 

 

   

 

 

   

 

 

 

Net income attributable to Starwood

   $ 562      $ 489      $ 477   
  

 

 

   

 

 

   

 

 

 

Earnings (Losses) Per Share — Basic

      

Continuing operations

   $ 2.44      $ 2.65      $ 1.70   

Discontinued operations

     0.48        (0.07     0.91   
  

 

 

   

 

 

   

 

 

 

Net income

   $ 2.92      $ 2.58      $ 2.61   
  

 

 

   

 

 

   

 

 

 

Earnings (Losses) Per Share — Diluted

      

Continuing operations

   $ 2.39      $ 2.57      $ 1.63   

Discontinued operations

     0.47        (0.06     0.88   
  

 

 

   

 

 

   

 

 

 

Net income

   $ 2.86      $ 2.51      $ 2.51   
  

 

 

   

 

 

   

 

 

 

Amounts attributable to Starwood’s Common Shareholders

      

Income (loss) from continuing operations

   $ 470      $ 502      $ 310   

Discontinued operations

     92        (13     167   
  

 

 

   

 

 

   

 

 

 

Net income

   $ 562      $ 489      $ 477   
  

 

 

   

 

 

   

 

 

 

Weighted average number of shares

     193        189        183   
  

 

 

   

 

 

   

 

 

 

Weighted average number of shares assuming dilution

     197        195        190   
  

 

 

   

 

 

   

 

 

 

Dividends declared per share

   $ 1.25      $ 0.50      $ 0.30   
  

 

 

   

 

 

   

 

 

 

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

 

F-6


Table of Contents

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

 

     Year Ended December 31,  
     2012     2011     2010  

Net income

   $ 562      $ 487      $ 475   

Other comprehensive income (loss), net of taxes:

      

Foreign currency translation adjustments

     25        (48     3   

Defined benefit pension and postretirement benefit plans net gains (losses) arising during the year

     (13     (20     (4

Amortization of actuarial gains and losses included in net periodic pension cost

     2        1        1   

Change in fair value of derivatives

            1        (1

Reclassification adjustments for losses (gains) included in net income

     (4     2        1   

Change in fair value of investments

                   (1
  

 

 

   

 

 

   

 

 

 
     10        (64     (1

Comprehensive income

     572        423        474   

Comprehensive (income) loss attributable to noncontrolling interests

            2        2   

Foreign currency translation adjustments attributable to noncontrolling interests

            (1     1   
  

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Starwood

   $ 572      $ 424      $ 477   
  

 

 

   

 

 

   

 

 

 

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

 

F-7


Table of Contents

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

CONSOLIDATED STATEMENTS OF EQUITY

 

     Equity Attributable to Starwood Stockholders              
     Shares      Additional
Paid-in
Capital (1)
    Accumulated
Other
Comprehensive

(Loss)
Income (2)
    Retained
Earnings
    Equity
Attributable to
Noncontrolling

Interests
    Total  
     Shares     Amount             
     (in millions)  

Balance at December 31, 2009

     187      $ 2       $ 552      $ (283   $ 1,553      $ 21      $ 1,845   

Net income (loss)

                                  477        (2     475   

Stock option and restricted stock award transactions, net

     6                248                             248   

ESPP stock issuances

                    5                             5   

Impact of adoption of ASU No. 2009-17

                                  (26            (26

Other comprehensive income (loss)

                                         (1     (1

Dividends declared

                                  (57     (3     (60
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2010

     193        2         805        (283     1,947        15        2,486   

Net income (loss)

                                  489        (2     487   

Stock option and restricted stock award transactions, net

     3                154                             154   

ESPP stock issuances

                    5                             5   

Other comprehensive income (loss)

                           (65            1        (64

Dividends declared

                                  (99     (1     (100

Sale of controlling interest

                                         (13     (13

Other

                    (1                   1          
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

     196        2         963        (348