10-K 1 d10k.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 January 2, 2009

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

  For the transition period from              to             

Commission File No. 1-13881

 

 

MARRIOTT INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   52-2055918
(State or other jurisdiction of
incorporation or organization)
  (IRS Employer
Identification No.)
10400 Fernwood Road, Bethesda, Maryland   20817
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s Telephone Number, Including Area Code (301) 380-3000

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Class A Common Stock, $0.01 par value

(349,860,166 shares outstanding as of January 30, 2009)

 

New York Stock Exchange

Chicago 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

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 if disclosure by delinquent filers pursuant to Item 405 of Regulation S-K 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 or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨

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

The aggregate market value of shares of common stock held by non-affiliates at June 13, 2008, was $7,851,648,093.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement prepared for the 2009 Annual Meeting of Shareholders are incorporated by reference into

Part III of this report.

 

 

 


Table of Contents

MARRIOTT INTERNATIONAL, INC.

FORM 10-K TABLE OF CONTENTS

FISCAL YEAR ENDED JANUARY 2, 2009

 

          Page No.

Part I.

     

Item 1.

  

Business

   3

Item 1A.

  

Risk Factors

   16

Item 1B.

  

Unresolved Staff Comments

   20

Item 2.

  

Properties

   20

Item 3.

  

Legal Proceedings

   21

Item 4.

  

Submission of Matters to a Vote of Security Holders

   21

Part II.

     

Item 5.

  

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

   22

Item 6.

  

Selected Financial Data

   23

Item 7.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   24

Item 7A.

  

Quantitative and Qualitative Disclosures About Market Risk

   68

Item 8.

  

Financial Statements and Supplementary Data

   70

Item 9.

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

   120

Item 9A.

  

Controls and Procedures

   120

Item 9B.

  

Other Information

   120

Part III.

     

Item 10.

  

Directors, Executive Officers and Corporate Governance

   121

Item 11.

  

Executive Compensation

   121

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

   121

Item 13.

  

Certain Relationships and Related Transactions, and Director Independence

   121

Item 14.

  

Principal Accounting Fees and Services

   121

Part IV.

     

Item 15.

  

Exhibits and Financial Statement Schedules

   125
  

Signatures

   128

 

2


Table of Contents

Throughout this report, we refer to Marriott International, Inc., together with its subsidiaries, as “we,” “us,” or “the Company.” Unless otherwise specified, each reference to a particular year means the fiscal year ended on the date shown in the table below, rather than the corresponding calendar year:

 

Fiscal Year

  

Fiscal Year-End Date

  

Fiscal Year

  

Fiscal Year-End Date

2008    January 2, 2009    2003    January 2, 2004
2007    December 28, 2007    2002    January 3, 2003
2006    December 29, 2006    2001    December 28, 2001
2005    December 30, 2005    2000    December 29, 2000
2004    December 31, 2004    1999    December 31, 1999

PART I

 

Item 1. Business.

We are a worldwide operator and franchisor of hotels and related lodging facilities. We were organized as a corporation in Delaware in 1997 and became a public company in 1998 when we were “spun off” as a separate entity by the company formerly named “Marriott International, Inc.” Our operations are grouped into the following five business segments:

 

Segment

   Percentage of 2008
Total Revenues
 

North American Full-Service Lodging Segment

   44 %

North American Limited-Service Lodging Segment

   17 %

International Lodging Segment

   12 %

Luxury Lodging Segment

   13 %

Timeshare Segment

   14 %

Other unallocated corporate

   —   %

Prior to November 3, 2007, our operations also included our synthetic fuel business, which we now classify as discontinued operations.

Our business includes our North American Full-Service, North American Limited-Service, International, Luxury, and Timeshare segments. We develop, operate, and franchise hotels and corporate housing properties under 14 separate brand names, and we develop, operate, and market timeshare, fractional ownership, and residential properties under four separate brand names. We also provide services to home/condominium owner associations for projects associated with several of our brands.

Financial information by segment and geographic area for the 2008, 2007, and 2006 fiscal years appears in Footnote No. 19, “Business Segments,” of the Notes to our Consolidated Financial Statements included in this annual report.

 

3


Table of Contents

Lodging

We operate or franchise 3,178 lodging properties worldwide, with 560,681 rooms as of year-end 2008 inclusive of 27 home and condominium products (2,482 units) for which we manage the related owners’ associations. In addition, we provided 2,332 furnished corporate housing rental units, which are not included in the totals. We believe that our portfolio of lodging brands is the broadest of any company in the world and that we are the leader in the quality tier of the vacation timesharing business. Consistent with our focus on management and franchising, we own very few of our lodging properties. We manage and franchise lodging properties employing the following brands:

 

North American Full-Service Lodging Segment    International Lodging Segment

•     Marriott® Hotels & Resorts

  

•     Marriott® Hotels & Resorts

•     JW Marriott® Hotels & Resorts

  

•     JW Marriott® Hotels & Resorts

•     Renaissance® Hotels & Resorts

  

•     Renaissance® Hotels & Resorts

•     Renaissance ClubSport®

  

•     Courtyard by Marriott®

  

•     Fairfield Inn by Marriott®

North American Limited-Service Lodging Segment   

•     Residence Inn by Marriott®

•     Courtyard by Marriott® (“Courtyard”)

  

•     Marriott Executive Apartments®

•     Fairfield Inn by Marriott® (“Fairfield Inn”)

  

•     SpringHill Suites by Marriott ® (“SpringHill Suites”)

  

•     Residence Inn by Marriott® (“Residence Inn”)

   Timeshare Segment

•     TownePlace Suites by Marriott® (“TownePlace Suites”)

  

•     Marriott Vacation Club SM

•     Marriott ExecuStay®

  

•     The Ritz-Carlton Club® and Residences

  

•     Grand Residences by Marriott®

Luxury Lodging Segment   

•     Horizons by Marriott Vacation Club®

•     The Ritz-Carlton®

  

•     Bulgari Hotels & Resorts®

  

•     EditionSM *

  

 

* At year-end 2008, no Edition properties were yet open.

The North American Full-Service segment and the North American Limited-Service segment include properties located in the continental United States and Canada. The Luxury segment includes worldwide properties. The International segment includes full-service and limited-service properties located outside the continental United States and Canada. Unless otherwise indicated, our references to Marriott Hotels & Resorts throughout this report include Marriott Conference Centers and JW Marriott Hotels & Resorts, references to Renaissance Hotels & Resorts include Renaissance ClubSport, and references to Fairfield Inn include Fairfield Inn & Suites.

Company-Operated Lodging Properties

At year-end 2008, we operated 1,058 properties (270,935 rooms) under long-term management agreements with property owners, 35 properties (9,165 rooms) under long-term lease agreements with property owners (management and lease agreements together, “the Operating Agreements”), and six properties (1,448 rooms) as owned. The figures noted for properties operated under long-term management agreements include 27 residential products (2,482 units) for which we manage the related owners’ associations.

Terms of our management agreements vary, but typically, we earn a management fee, which comprises a base management fee, which is a percentage of the revenues of the hotel and an incentive management fee, which is based on the profits of the hotel. Our management agreements also typically include reimbursement of costs of operations (both direct and indirect). Such agreements are generally for initial periods of 20 to 30 years, with options to renew for up to 50 or more additional years. Our lease agreements also vary, but may include fixed annual rentals plus additional rentals based on a percentage of annual revenues in excess of a fixed amount. Many of the Operating Agreements are subordinated to mortgages or other liens securing indebtedness of the owners. Additionally, many of our Operating Agreements permit the owners to terminate the agreement if certain performance metrics are not met and financial returns fail to meet defined levels for a period of time and we have not cured such deficiencies.

For lodging facilities that we operate, we generally are responsible for hiring, training, and supervising the managers and employees required to operate the facilities and for purchasing supplies, both for which we generally are reimbursed by the owners. We provide centralized reservation services and national advertising, marketing and promotional services, as well as various accounting and data processing services. We are generally reimbursed by owners for the cost of providing these services.

 

4


Table of Contents

Franchised Lodging Properties

We have franchising programs that permit the use of many of our lodging brand names and systems by other hotel owners and operators. Under these programs, we generally receive an initial application fee and continuing royalty fees, which typically range from 4 percent to 6 percent of room revenues for all brands, plus 2 percent to 3 percent of food and beverage revenues for certain full-service hotels. In addition, franchisees contribute to our national marketing and advertising programs and pay fees for use of our centralized reservation systems. At year-end 2008, we had 2,079 franchised properties (279,133 rooms).

Timeshare and Residential

We develop, operate, market, and sell timeshare interval, fractional ownership, and residential properties under four brand names and generate revenues from three primary sources: (1) selling fee simple and other forms of timeshare intervals and personal residences; (2) financing consumer purchases; and (3) operating the resorts. Many resorts are located adjacent to company-operated hotels, such as Marriott Hotels & Resorts and The Ritz-Carlton, and owners have access to certain hotel facilities during their vacation. Owners can trade their annual interval for intervals at other Marriott timesharing resorts or for intervals at certain timesharing resorts not otherwise sponsored by Marriott through a third-party exchange company. Owners can also trade their unused interval for points in the Marriott Rewards® frequent stay program, enabling them to stay at over 3,100 company-operated or franchised properties worldwide. We typically open our interval and fractional ownership projects over time with limited inventory available at any one time.

We also sell residential real estate in conjunction with luxury hotel development (Ritz-Carlton-Residential) and Timeshare segment projects (Ritz-Carlton Club-Residential and Grand Residences by Marriott-Residential) and receive branding fees for sales of such branded residential real estate by others. Residences developed in conjunction with hotels are typically constructed and sold by hotel owners with limited amounts, if any, of our capital at risk. We typically open our Timeshare segment residential projects over time with limited inventory available at any one time. While the worldwide residential market is very large, the luxurious nature of our residential properties, the quality and exclusivity associated with our brands, and the hospitality services that we provide, all serve to make our residential properties distinctive.

Seasonality

In general, business at company-operated and franchised properties is relatively stable and includes only moderate seasonal fluctuations. Business at some resort properties may be seasonal depending on location.

Relationship with Major Customer

We operate a number of properties under long-term management agreements that are owned or leased by Host Hotels & Resorts, Inc. (“Host”). In addition, Host is a partner in several partnerships that own properties operated by us under long-term management agreements. See Footnote No. 24, “Relationship with Major Customer,” in the Notes to our Consolidated Financial Statements included in this annual report for more information.

 

5


Table of Contents

Summary of Properties by Brand

At year-end 2008, we operated or franchised the following properties by brand (excluding 2,332 corporate housing rental units):

 

     Company-Operated    Franchised

Brand

   Properties    Rooms    Properties    Rooms

U.S. Locations

           

Marriott Hotels & Resorts

   146    74,074    175    53,118

Marriott Conference Centers

   11    3,133    —      —  

JW Marriott Hotels & Resorts

   11    6,736    5    1,552

Renaissance Hotels & Resorts

   37    16,690    37    10,735

Renaissance ClubSport

   1    174    1    175

The Ritz-Carlton

   37    11,629    —      —  

The Ritz-Carlton-Residential (1)

   22    2,176    —      —  

Courtyard

   276    42,955    452    58,788

Fairfield Inn

   2    855    558    48,823

SpringHill Suites

   26    3,940    181    20,087

Residence Inn

   134    18,566    421    47,686

TownePlace Suites

   34    3,661    129    12,667

Marriott Vacation Club (2) 

   39    9,282    —      —  

The Ritz-Carlton Club-Fractional (2)

   7    339    —      —  

The Ritz-Carlton Club-Residential (1), (2)

   2    138    —      —  

Grand Residences by Marriott-Fractional (2)

   1    199    —      —  

Grand Residences by Marriott-Residential (1), (2)

   1    65    —      —  

Horizons by Marriott Vacation Club (2)

   2    444    —      —  

Non-U.S. Locations

           

Marriott Hotels & Resorts

   123    35,523    34    9,886

JW Marriott Hotels & Resorts

   24    8,837    2    371

Renaissance Hotels & Resorts

   51    17,298    14    4,317

The Ritz-Carlton

   33    10,204    —      —  

The Ritz-Carlton-Residential (1)

   1    93    —      —  

The Ritz-Carlton Serviced Apartments

   3    478    —      —  

Bulgari Hotels & Resorts

   2    117    —      —  

Marriott Executive Apartments

   19    3,118    1    99

Courtyard

   38    8,394    42    7,121

Fairfield Inn

   —      —      9    1,109

SpringHill Suites

   —      —      1    124

Residence Inn

   1    190    17    2,475

Marriott Vacation Club (2)

   10    2,071    —      —  

The Ritz-Carlton Club-Fractional (2)

   3    117    —      —  

The Ritz-Carlton Club-Residential (1), (2)

   1    10    —      —  

Grand Residences by Marriott-Fractional (2)

   1    42    —      —  
                   

Total

   1,099    281,548    2,079    279,133
                   

 

(1)

Represents projects where we manage the related owners’ association. Residential products are included once they possess a certificate of occupancy.

(2)

Indicates a Timeshare product. Includes products in active sales as well as those that are sold out.

 

6


Table of Contents

The following table provides additional detail, by brand, as of year-end 2008, for our Timeshare properties:

 

     Total
Properties (1)
   Properties in
Active Sales (2)

100 Percent Company-Developed

     

Marriott Vacation Club

   49    26

The Ritz-Carlton Club and Residences

   10    8

Grand Residences by Marriott and Residences

   3    3

Horizons by Marriott Vacation Club

   2    2

Joint Ventures

     

The Ritz-Carlton Club and Residences

   3    3
         

Total

   67    42
         

 

(1)

Includes products that are in active sales as well as those that are sold out. Residential products are included once they possess a certificate of occupancy.

(2)

Products in active sales may not be ready for occupancy.

Summary of Properties by Country

At year-end 2008, we operated or franchised properties in the following 66 countries and territories:

 

Country

   Properties (1)    Rooms (1)

Americas

     

Argentina

   1    318

Aruba

   4    1,634

Bahamas

   2    22

Brazil

   4    1,116

Canada

   58    12,277

Cayman Islands

   4    929

Chile

   2    485

Costa Rica

   4    930

Curacao

   1    247

Dominican Republic

   2    445

Ecuador

   1    257

El Salvador

   1    133

Honduras

   1    153

Jamaica

   1    427

Mexico

   18    4,329

Panama

   2    415

Peru

   1    300

Puerto Rico

   6    1,703

Saint Kitts and Nevis

   2    537

Trinidad and Tobago

   1    119

United States

   2,748    448,687

U.S. Virgin Islands

   5    919

Venezuela

   1    269
         

Total Americas

   2,870    476,651

United Kingdom and Ireland

     

Ireland

   7    1,121

United Kingdom (England, Scotland, and Wales)

   54    10,662
         

Total United Kingdom and Ireland

   61    11,783

 

(1)

Includes Timeshare products that are in active sales as well as those that are sold out. Products in active sales may not be ready for occupancy.

 

7


Table of Contents

Country

   Properties (1)    Rooms (1)

Middle East and Africa

     

Armenia

   1    226

Bahrain

   2    452

Egypt

   8    3,564

Israel

   1    342

Jordan

   3    644

Kuwait

   2    573

Qatar

   3    910

Saudi Arabia

   3    749

Turkey

   5    1,470

United Arab Emirates

   6    1,150
         

Total Middle East and Africa

   34    10,080

Asia

     

China

   41    16,279

Guam

   1    357

India

   6    1,518

Indonesia

   9    1,872

Japan

   10    3,155

Malaysia

   7    3,019

Pakistan

   2    506

Philippines

   2    899

Singapore

   2    1,003

South Korea

   4    1,502

Thailand

   13    3,355

Vietnam

   2    874
         

Total Asia

   99    34,339

Australia

   8    2,353

Continental Europe

     

Austria

   8    1,973

Belgium

   5    878

Czech Republic

   5    937

Denmark

   1    401

France

   10    2,557

Georgia

   2    245

Germany

   29    6,819

Greece

   1    314

Hungary

   2    472

Italy

   9    1,873

Kazakhstan

   3    465

Netherlands

   3    921

Poland

   2    754

Portugal

   4    1,164

Romania

   1    402

Russia

   9    2,321

Spain

   9    2,359

Switzerland

   3    620
         

Total Europe

   106    25,475
         

Total-All Countries and Territories

   3,178    560,681
         

 

(1)

Includes Timeshare products that are in active sales as well as those that are sold out. Products in active sales may not be ready for occupancy.

 

8


Table of Contents

Descriptions of Our Brands

North American Full-Service Segment, North American Limited-Service Segment,

and International Segment Lodging Products

Marriott Hotels & Resorts is our global flagship brand, primarily serving business and leisure upper-upscale travelers and meeting groups. Marriott properties are located in downtown, urban, and suburban areas, near airports, and at resort locations. Marriott inspires your best performance during travel, engineering an experience with the services and human touches that help you achieve and recharge.

Typically, properties contain 300 to 700 well-appointed rooms, the Revive bedding package, in-room high-speed Internet access, swimming pools, convention and banquet facilities, destination-driven restaurant and lounges, room service, concierge lounges, wireless Internet access in public places, and parking facilities. Eighteen properties have over 1,000 rooms. Many resort properties have additional recreational facilities, such as tennis courts, golf courses, additional restaurants and lounges, and many have spa facilities. New and renovated properties typically reflect the Great Room, a reinvented lobby featuring functional seating, state-of-the-art technology, and innovative food and beverage concepts in a stylish setting, as well as the new Marriott guest room, which features contemporary residential design, warm colors, rich woods and architectural detail, flat-screen high-definition televisions, “plug and play” technology, and bathrooms reflecting spa-like luxury. At year-end 2008, there were 478 Marriott Hotels & Resorts properties (172,601 rooms), excluding JW Marriott Hotels & Resorts and Marriott Conference Centers.

At year-end 2008, there were 11 Marriott Conference Centers (3,133 rooms) throughout the United States. Some of the centers are used exclusively by employees of sponsoring organizations, while others are marketed to outside meeting groups and individuals. In addition to the features found in a typical Marriott full-service property, the centers typically include expanded meeting room space, banquet and dining facilities, and recreational facilities.

JW Marriott Hotels & Resorts is the Marriott brand’s collection of luxurious properties and resorts that cater to accomplished, discerning travelers seeking an elegant environment and personal service. At year-end 2008, there were 42 properties (17,496 rooms) primarily located in gateway cities and upscale locations throughout the world. JW Marriott Resorts offer attentive service and exceptional amenities, many with world-class golf and spa facilities. In addition to the features found in a typical Marriott full-service property, the facilities and amenities at JW Marriott Hotels & Resorts properties normally include larger guest rooms, higher end décor and furnishings, upgraded in-room amenities, upgraded concierge lounges, business centers and fitness centers, and 24-hour room service.

 

Marriott Hotels & Resorts, Marriott Conference Centers, and JW Marriott
Hotels & Resorts

Geographic Distribution at Year-End 2008

   Properties     

United States (42 states and the District of Columbia)

   348    (138,613 rooms)
       

Non-U.S. (56 countries and territories)

     

Americas

   40   

Continental Europe

   36   

United Kingdom and Ireland

   53   

Asia

   33   

Middle East and Africa

   16   

Australia

   5   
       

Total Non-U.S.

   183    (54,617 rooms)
       

Renaissance Hotels & Resorts is a distinctive, global, full-service brand that targets business and leisure travelers seeking to expand their horizons and live life to the fullest.

Renaissance Hotels & Resorts properties are generally located at downtown locations in major cities, in suburban office parks, near major gateway airports, and in destination resorts. Renaissance hotels echo and embrace their locales-from exquisite, historic castles, to meticulously modern skyscrapers. Most properties contain from 300 to 500 rooms, featuring indigenous and intriguing design elements, distinctive restaurants and lounges, unique in-room dining options, state-of-the-art technology, and inspiring meeting and banquet facilities. At year-end 2008, there were 141 Renaissance Hotels & Resorts properties (49,389 rooms), including two Renaissance ClubSport properties (349 rooms).

 

9


Table of Contents

Renaissance Hotels & Resorts

Geographic Distribution at Year-End 2008

   Properties     

United States (28 states and the District of Columbia)

   76    (27,774 rooms)
       

Non-U.S. (30 countries and territories)

     

Americas

   7   

Continental Europe

   23   

United Kingdom and Ireland

   4   

Asia

   24   

Middle East and Africa

   7   
       

Total Non-U.S.

   65    (21,615 rooms)
       

Courtyard is our upper-moderate price select-service hotel product aimed primarily at transient business travel. Courtyard hotels maintain a residential atmosphere and typically contain 90 to 150 rooms in suburban locales and 140 to 340 rooms in downtown domestic and international locales. Well-landscaped grounds typically include a courtyard with a pool and social areas. Hotels feature functionally designed quality guest rooms and meeting rooms, free in-room high-speed Internet access, free wireless high-speed Internet access (Wi-Fi) in the lobby (in North America), a swimming pool, an exercise room, and The Market (a self-serve food store open 24 hours a day). While many hotels currently offer a breakfast buffet, the brand is in the early phases of a transition to a new state-of-the-art lobby design that offers appealing food and beverage offerings for breakfast and dinner, increased technology and media focus, flexible seating and lighting, and enhanced service offerings. The new lobby environment provides multifunctional space with a variety of options that allow guests to work or relax at their own pace. We believe that the transition to the new lobby design will keep Courtyard well positioned against its competition, providing better value through superior facilities and guest service. At year-end 2008, there were 808 Courtyards (117,258 rooms) operating in 29 countries and territories.

 

Courtyard

Geographic Distribution at Year-End 2008

   Properties     

United States (48 states and the District of Columbia)

   728    (101,743 rooms)
       

Non-U.S. (28 countries and territories)

     

Americas

   31   

Continental Europe

   31   

United Kingdom and Ireland

   1   

Asia

   12   

Middle East and Africa

   2   

Australia

   3   
       

Total Non-U.S.

   80    (15,515 rooms)
       

Fairfield Inn is our hotel brand that competes in the moderate-price tier and is primarily aimed at value-conscious individual business travelers. Fairfield Inn (which includes Fairfield Inn & Suites) offers a broad range of amenities, including free in-room high-speed Internet access and free wireless high-speed Internet access (Wi-Fi) in the lobby, on-site business services (copying, faxing, and printing), a business center/lobby computer with Internet access and print capability, a swimming pool, complimentary hot “Early Eats®” continental breakfast, and exercise facilities (at most locations). A typical Fairfield Inn or Fairfield Inn & Suites property has 60 to 140 rooms in suburban locations and up to 200 rooms in urban destinations. At year-end 2008, there were 296 Fairfield Inn properties and 273 Fairfield Inn & Suites properties (569 hotels total), operating in the United States, Canada, and Mexico.

 

Fairfield Inn and Fairfield Inn & Suites

Geographic Distribution at Year-End 2008

   Properties     

United States (46 states)

   560    (49,678 rooms)
       

Non-U.S. Americas (Canada and Mexico)

   9    (1,109 rooms)
       

 

10


Table of Contents

SpringHill Suites is our all-suite brand in the upper-moderate-price tier primarily targeting business travelers. SpringHill Suites properties typically have 90 to 165 studio suites that have approximately 25 percent more space than a traditional hotel guest room with separate areas for sleeping, working, and relaxing. The brand offers a broad range of amenities, including free in-room high-speed Internet access and free wireless high-speed Internet access (Wi-Fi) in the lobby, The Market (a self-serve food store open 24 hours a day), complimentary “Suite Seasons®” hot breakfast buffet, lobby computer and on-site business services (copying, faxing, and printing), exercise facilities, and a swimming pool. At year-end 2008, there were 208 properties (24,151 rooms) located in the United States and Canada.

Residence Inn is North America’s leading extended-stay brand. For today’s marathon business traveler, Residence Inn allows guests on long-term trips to experience all the comforts of home while traveling so that they can ‘Thrive on Long Stays’ in a particular location. Residence Inn provides connectivity to home and office, exercise options and comfortable places to work or relax. Residence Inn also provides upscale design and style, spacious suites with full kitchens, separate sleeping areas and “real” food at social events or in suite. At year-end 2008, there were 573 Residence Inn properties (68,917 rooms) located in the United States, Canada, and Mexico.

 

Residence Inn

Geographic Distribution at Year-End 2008

   Properties     

United States (47 states and the District of Columbia)

   555    (66,252 rooms)
       

Non-U.S. Americas (Canada and Mexico)

   18    (2,665 rooms)
       

TownePlace Suites is a moderately priced extended-stay hotel product that is designed to appeal to business and leisure travelers who stay for five nights or more. Designed for the self-sufficient, value-conscious traveler, each suite generally provides functional spaces for living and working, including a full kitchen and a home office. TownePlace Suites associates are trained to provide insightful local knowledge, and each hotel specializes in delivering service that helps guests settle in to the local area. Additional amenities include housekeeping services, on-site exercise facilities, an outdoor pool, 24-hour staffing, free in-room high-speed Internet access, and laundry facilities. At year-end 2008, 163 TownePlace Suites properties (16,328 rooms) were located in 38 states.

Marriott ExecuStay provides furnished corporate apartments primarily for long-term stays nationwide. ExecuStay owns no residential real estate and provides units primarily through short-term lease agreements with apartment owners and managers and franchise agreements. At year-end 2008, Marriott leased approximately 2,400 apartments and our 11 franchisees leased nearly 2,700 apartments. Apartments are located in 45 different markets in the United States, of which 37 are franchised.

Marriott Executive Apartments. We provide temporary housing (“Serviced Apartments”) for business executives and others who need quality accommodations outside their home country, usually for 30 or more days. Some Serviced Apartments operate under the Marriott Executive Apartments brand, which is designed specifically for the long-term international traveler. At year-end 2008, 17 Marriott Executive Apartments and three other Serviced Apartments properties (3,217 rooms total) were located in 14 countries and territories. All Marriott Executive Apartments are located outside the United States.

 

11


Table of Contents

Luxury Segment Lodging Products

The Ritz-Carlton is a leading global luxury lifestyle brand of hotels and resorts renowned for their distinctive architecture and for the high quality level of their facilities, dining options, and exceptional personalized guest service. Most of The Ritz-Carlton hotels have 250 to 400 guest rooms and typically include meeting and banquet facilities, a variety of restaurants and lounges, a club level, gift shops, high-speed Internet access, flat-screen high-definition televisions, swimming pools, and parking facilities. Guests at most of The Ritz-Carlton resorts have access to additional recreational amenities, such as tennis courts, golf courses, and health spas. A number of the domestic hotels also include residences that provide luxurious real estate choices from one-bedroom apartments to spacious penthouses. All owners of the residences can avail themselves of the services and facilities offered by the hotel.

 

The Ritz-Carlton

Geographic Distribution at Year-End 2008 (1)

   Properties     

United States (16 states and the District of Columbia)

   59    (13,805 rooms)
       

Non-U.S. (22 countries and territories)

     

Americas

   7   

Continental Europe

   7   

United Kingdom and Ireland

   1   

Asia

   16   

Middle East and Africa

   6   
       

Total Non-U.S.

   37    (10,775 rooms)
       

 

(1)

Includes 23 home and condominium projects (2,269 units) for which we manage the related owners’ associations.

Bulgari Hotels & Resorts. Through a joint venture with jeweler and luxury goods designer Bulgari SpA we operate distinctive luxury hotel properties in prime locations under the name Bulgari Hotels & Resorts. The first property (58 rooms), the Bulgari Hotel Milano, opened in Milan, Italy, in 2004. The second property, the Bulgari Resort Bali, opened in late 2006 and includes 59 private villas, two restaurants, and comprehensive spa facilities. In November 2007, we opened two new restaurants in Tokyo, Japan, which we operate in connection with two new Bulgari retail stores. Other projects are currently in various stages of development in Europe, Asia, and North America.

Edition. In 2007, we announced that we had entered into an agreement with hotel innovator Ian Schrager to create next-generation lifestyle boutique hotels to be designed by Schrager and operated by Marriott. The Edition brand will offer a personal, intimate, individualized, and unique lodging experience on a global scale. These new lifestyle boutique hotels will attempt to push the boundaries, break new ground, and take the hotel industry to a new level. The first Edition hotel is expected to open in 2010.

Timeshare Segment Lodging Products

The Marriott Vacation Club (“MVC”) brand offers full-service villas featuring living and dining areas, one-, two-, and three-bedroom options, a full kitchen, and washer/dryer units. Customers may purchase a one-week interval or more at each resort. In 49 locations worldwide, this brand draws United States and international customers who vacation regularly with a focus on family, relaxation, and recreational activities. In the United States, in addition to other areas, MVC is located in beach and/or golf communities in Arizona, California, South Carolina, Florida, and Hawaii, in ski resorts in California, Colorado, and Utah, and in Las Vegas, Nevada. Internationally, MVC has resorts in Aruba, France, Spain, St. Thomas (U.S. Virgin Islands), the West Indies, and Thailand.

The Ritz-Carlton Club brand is a luxury-tier real estate fractional ownership and personal residence brand that combines the benefits of second-home ownership with personalized services and amenities. This brand is designed as a private club whose members have access to all Ritz-Carlton Clubs, and is offered in ski, golf, and beach destinations in the Bahamas, California, Colorado, St. Thomas (U.S. Virgin Islands), Florida, and Hawaii. Customers typically purchase three-to-five-week intervals, but may also purchase a residence outright.

Grand Residences by Marriott is an upper-quality-tier fractional ownership and personal residence brand for corporate and leisure customers. This brand is currently offering ownership in projects located in Lake Tahoe, California, Panama City, Florida, and London, England. Customers typically purchase three-to-13-week intervals.

Horizons by Marriott Vacation Club is Marriott Vacation Club’s moderately priced timeshare brand whose product offerings and customer base are currently focused on offering family vacations in entertainment communities. Horizons resorts are located in Orlando, Florida and Branson, Missouri. Customers may purchase a one-week interval or more at each resort.

 

12


Table of Contents

The Timeshare segment’s owner base continues to expand, with approximately 391,000 owners at year-end 2008, compared to approximately 371,000 at year-end 2007.

 

Timeshare (all brands)

Geographic Distribution at Year-End 2008

   Resorts    Units

Continental United States

   46    8,895

Hawaii

   6    1,572

Caribbean

   8    1,038

Europe

   5    925

Asia

   2    277
         

Total

   67    12,707
         

Other Activities

Marriott Golf manages 43 golf course facilities as part of our management of hotels and for other golf course owners.

We operate 13 systemwide hotel reservation centers, eight in the United States and Canada and five in other countries and territories, which handle reservation requests for our lodging brands worldwide, including franchised properties. We own one of the U.S. facilities and lease the others.

We focus on increasing value for the consumer and “selling the way the customer wants to buy.” Our Look No Further® Best Rate Guarantee gives customers access to the same rates whether they book through our telephone reservation system, our Web site or any other Marriott reservation channel. Also key to our success is our strong Marriott Rewards loyalty program, and our information-rich and easy-to-use www.Marriott.com Web site. Our reservation system manages and controls inventory availability and pricing set by our hotels, and allows us to utilize online and offline agents where cost effective. With almost 3,200 hotels, economies of scale enable us to minimize costs per occupied room, drive profits for our owners, and maximize our fee revenue.

In late 2007, we rolled out Sales Force One, a sales deployment strategy that aligns sales efforts around customer needs. We believe that this strategy will reduce duplication of sales efforts and enable coverage for a larger number of accounts. To support this strategy, we have begun realigning our sales organization to provide a primary point of contact for group, business transient, extended stay, and catering customers. The realigned sales organization will be known as Global Sales, which will be made up of four components: Enterprise Sales, which is responsible for setting overall segment strategies and account-specific strategies for large corporate and association customers; Area Sales, assigned to a designated geographical area, and which is responsible for proactively selling a cross-brand portfolio; Property Sales, which is responsible for booking group and catering business that falls outside Sales Office parameters; and The Sales Office, which is responsible for evaluating and closing inbound leads, developing new business and executing event planning for select service and extended stay hotels.

Our Architecture and Construction (“A&C”) division provides design, development, construction, refurbishment, and procurement services to owners and franchisees of lodging properties on a voluntary basis outside the scope of and separate from our management or franchise contracts. Similar to third-party contractors, A&C provides these services for owners and franchisees of Marriott-branded properties on a fee basis.

Competition

We encounter strong competition both as a lodging operator and as a franchisor. We believe that by operating a number of hotels among our brands, we stay in direct touch with customers and react to changes in the marketplace more quickly than chains that rely exclusively on franchising. There are approximately 815 lodging management companies in the United States, including several that operate more than 100 properties. These operators are primarily private management firms, but also include several large national chains that own and operate their own hotels and also franchise their brands. Our management contracts are typically long-term in nature, but most allow the hotel owner to replace the management firm if certain financial or performance criteria are not met.

In the current economic environment, faced with softening demand, we have taken steps to reduce operating costs. Due to the competitive nature of our industry, we have focused these efforts on areas that have limited or no impact on the guest experience. While additional reductions may become necessary to preserve operating margins, we

 

13


Table of Contents

would expect to implement any such efforts in a manner designed to maintain customer loyalty, owner preference, and associate satisfaction, to help maintain or increase our market share.

Affiliation with a national or regional brand is prevalent in the U.S. lodging industry. In 2008, approximately 68 percent of U.S. hotel rooms were brand-affiliated. Most of the branded properties are franchises, under which the operator pays the franchisor a fee for use of its hotel name and reservation system. The franchising business is fairly concentrated, with the six largest franchisors operating multiple brands accounting for a significant proportion of all U.S. rooms.

Outside the United States, branding is much less prevalent and most markets are served primarily by independent operators, although branding is more common for new hotel development. We believe that chain affiliation will increase in overseas markets as local economies grow, trade barriers are reduced, international travel accelerates and hotel owners seek the economies of centralized reservation systems and marketing programs.

Based on lodging industry data, we have a 9 percent share of the U.S. hotel market (based on number of rooms) and we estimate less than a 1 percent share of the lodging market outside the United States. We believe that our hotel brands are attractive to hotel owners seeking a management company or franchise affiliation because our hotels typically generate higher occupancies and Revenue per Available Room (“RevPAR”) than direct competitors in most market areas. We attribute this performance premium to our success in achieving and maintaining strong customer preference. We believe that the location and quality of our lodging facilities, our marketing programs, our reservation systems and our emphasis on guest service and satisfaction are contributing factors across all of our brands.

Properties that we operate or franchise are regularly upgraded to maintain their competitiveness. Most of our management agreements provide for the allocation of funds, generally a fixed percentage of revenue, for periodic renovation of buildings and replacement of furnishings. These ongoing refurbishment programs, along with periodic brand initiatives, are generally adequate to preserve or enhance the competitive position and earning power of the hotels and timeshare properties. Competitor hotels converting to one of Marriott’s brands typically complete renovations in conjunction with the conversion.

The vacation ownership industry is comprised of a number of highly competitive companies including several branded hotel companies. Since entering the timeshare industry in 1984, we have become a recognized leader in vacation ownership worldwide. Competition in the timeshare interval, fractional, and residential business is based primarily on the quality and location of timeshare resorts, trust in the brand, the pricing of product offerings, and the availability of program benefits, such as exchange programs. We believe that our focus on offering distinct vacation experiences, combined with our financial strength, diverse market presence, strong brands, and well-maintained properties, will enable us to remain competitive. Approximately 53 percent of our timeshare ownership resort sales come from additional purchases by or referrals from existing owners.

Marriott Rewards is a frequent guest program with over 30 million members and nine participating Marriott brands. The Marriott Rewards program yields repeat guest business by rewarding frequent stays with points toward free hotel stays and other rewards, or airline miles with any of 32 participating airline programs. We believe that Marriott Rewards generates substantial repeat business that might otherwise go to competing hotels and allows the company to tailor promotional offerings to guest needs and interests. In 2008, approximately 50 percent of our room nights were purchased by Marriott Rewards members. In addition, the ability of timeshare owners to convert unused intervals into Marriott Rewards points enhances the competitive position of our timeshare brands. Effective January 15, 2009, the Marriott Rewards program eliminated blackout dates at nearly 2,900 hotels worldwide, giving Marriott Rewards members greater access to redemption nights at the Company’s brands.

In the recent difficult economic climate, Marriott has rolled out aggressive new marketing programs to drive demand, leveraging Marriott Rewards and www.Marriott.com.

Discontinued Operations

Synthetic Fuel

Our synthetic fuel operation consisted of four coal-based synthetic fuel production facilities (the “Facilities”). Because tax credits under Section 45K of the IRC are not available for the production and sale of synthetic fuel produced from coal after calendar year-end 2007, we shut down the Facilities and permanently ceased production of synthetic fuel in late 2007. Accordingly, we now report this business segment as a discontinued operation. Contemporaneously with the shutdown, we transferred the Facilities to the lessors of the sites where the Facilities were located in exchange for the release of our obligations under the leases to restore the premises to their original conditions. The book value of the Facilities was zero at year-end 2007, as a result of the Facilities being transferred to the lessors. Costs associated with shutting down the synthetic fuel operation and transferring the Facilities to the site lessors were not material.

 

14


Table of Contents

Employee Relations

At year-end 2008, we had approximately 146,000 employees, approximately 8,300 of which were represented by labor unions. We believe relations with our employees are positive.

Environmental Compliance

Our compliance with laws and regulations relating to environmental protection and discharge of hazardous materials has not had a material impact on our capital expenditures, earnings or competitive position, and we do not anticipate any material impact from such compliance in the future.

Internet Address and Company SEC Filings

Our Internet address is www.Marriott.com. On the investor relations portion of our Web site, www.Marriott.com/investor, we provide a link to our electronic SEC filings, including our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to these reports. All such filings are available free of charge and are available as soon as reasonably practicable after filing. The information found on our Web site is not part of this or any other report we file with or furnish to the U.S. Securities and Exchange Commission (the “SEC”).

 

15


Table of Contents
Item 1A. Risk Factors.

Forward-Looking Statements

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

Forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in these forward-looking statements, including the risks and uncertainties described below and other factors we describe from time to time in our periodic filings with the SEC. We therefore caution you not to rely unduly on any forward-looking statements. The forward-looking statements in this report speak only as of the date of this report, and we undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

Risks and Uncertainties

We are subject to various risks that could have a negative effect on the Company and its financial condition. You should understand that these risks could cause results to differ materially from those expressed in forward-looking statements contained in this report and in other Company communications. Because there is no way to determine in advance whether, or to what extent, any present uncertainty will ultimately impact our business, you should give equal weight to each of the following:

Lodging Industry Risks

The lodging industry is highly competitive, which may impact our ability to compete successfully with other hotel and timeshare properties for customers. We generally operate in markets that contain numerous competitors. Each of our hotel and timeshare brands competes with major hotel chains in national and international venues and with independent companies in regional markets. Our ability to remain competitive and to attract and retain business and leisure travelers depends on our success in distinguishing the quality, value, and efficiency of our lodging products and services from those offered by others. If we are unable to compete successfully in these areas, this could limit our operating margins, diminish our market share, and reduce our earnings.

We are subject to the range of operating risks common to the hotel, timeshare, and corporate apartment industries. The profitability of the hotels, vacation timeshare resorts, and corporate apartments that we operate or franchise may be adversely affected by a number of factors, including:

 

  (1) the availability of and demand for hotel rooms, timeshare interval, fractional ownership, and residential products, and apartments;

 

  (2) international, national, and regional economic and geopolitical conditions;

 

  (3) the impact of war, actual or threatened terrorist activity and heightened travel security measures instituted in response to war, terrorist activity or threats;

 

  (4) the desirability of particular locations and changes in travel patterns;

 

  (5) travelers’ fears of exposure to contagious diseases, such as Avian Flu and Severe Acute Respiratory Syndrome (“SARS”);

 

  (6) the occurrence of natural disasters, such as earthquakes, tsunamis, and hurricanes;

 

  (7) taxes and government regulations that influence or determine wages, prices, interest rates, construction procedures, and costs;

 

  (8) the costs and administrative burdens associated with compliance with applicable laws and regulations, including, among others, franchising, timeshare, lending, privacy, marketing and sales, licensing, labor, employment, immigration and environmental laws, and regulations applicable under the Office of Foreign Asset Control and the Foreign Corrupt Practices Act;

 

  (9) the availability and cost of capital to allow us and potential hotel owners and joint venture partners to fund investments;

 

  (10) regional and national development of competing properties;

 

16


Table of Contents
  (11) increases in wages and other labor costs, energy, healthcare, insurance, transportation and fuel, and other expenses central to the conduct of our business or the cost of travel for our customers, including recent increases in energy costs and any resulting increase in travel costs or decrease in airline capacity;

 

  (12) organized labor activities, which could cause the diversion of business from hotels involved in labor negotiations, loss of group business, and/or increased labor costs; and

 

  (13) foreign currency exchange fluctuations.

Any one or more of these factors could limit or reduce the demand or the prices our hotels are able to obtain for hotel rooms, timeshare units, residential units, and corporate apartments or could increase our costs and therefore reduce the profit of our lodging businesses. Reduced demand for hotels could also give rise to losses under loans, guarantees, and minority equity investments that we have made in connection with hotels that we manage. Even where such factors do not reduce demand, property-level profit margins may suffer if we are unable to fully recover increased operating costs from our guests. Similarly, our fee revenue could be impacted by weak property-level revenue or profitability.

Our hotel management and franchise agreements may also be subject to premature termination in certain circumstances, such as the bankruptcy of a hotel owner or franchisee, or a failure under some agreements to meet specified financial or performance criteria that are subject to the risks described in this section, which the Company fails or elects not to cure. A significant loss of agreements due to premature terminations could hurt our financial performance or our ability to grow our business.

The current general economic recession and the slowdown in the lodging and timeshare industries will continue to impact our financial results and growth. The present economic recession and the uncertainty over its depth and duration will continue to have a negative impact on the lodging and timeshare industries. There is now general consensus among economists that the economies of the U.S., Europe and much of the rest of the world are now in a recession, and we are experiencing reduced demand for our hotel rooms and timeshare products. Accordingly, our financial results have been impacted by the economic slowdown and we expect that our future financial results and growth will be further harmed while the recession continues.

Operational Risks

Our lodging operations are subject to international, national, and regional conditions. Because we conduct our business on a national and international platform, our activities are susceptible to changes in the performance of regional and global economies. In recent years, our business has been hurt by decreases in travel resulting from recent economic conditions, the military action in Iraq, and the heightened travel security measures that have resulted from the threat of further terrorism. Our future economic performance is similarly subject to the economic environment in the United States and other regions, which has become increasingly uncertain with recent failures and near failures of a number of large financial service companies, the current worldwide recession, the resulting unknown pace of business travel, and the occurrence of any future incidents in the countries where we operate.

New branded hotel products that we launch in the future may not be successful. We may in the future launch additional branded hotel products. We cannot assure that these brands will be accepted by hotel owners, potential franchisees, or the traveling public, that we will recover the costs we incurred in developing the brands, or that the brands will be successful. In addition, each of these new brands involves cooperation and/or consultation with a third party, including some shared control over product design and development, sales and marketing, and brand standards. Disagreements with these third parties regarding areas of consultation or shared control could slow the development of these new brands and/or impair our ability to take actions we believe to be advisable for the success and profitability of such brands.

Risks relating to natural disasters, contagious disease, terrorist activity, and war could reduce the demand for lodging, which may adversely affect our revenues. So called “Acts of God,” such as hurricanes, earthquakes, and other natural disasters and the spread of contagious diseases, such as Avian Flu and SARS, in locations where we own, manage or franchise significant properties, and areas of the world from which we draw a large number of customers can cause a decline in the level of business and leisure travel and reduce the demand for lodging. Actual or threatened war, terrorist activity, political unrest, civil strife, and other geopolitical uncertainty can have a similar effect. Any one or more of these events may reduce the overall demand for hotel rooms, timeshare units, and corporate apartments or limit the prices that we are able to obtain for them, both of which could adversely affect our profits.

We may have disputes with the owners of the hotels that we manage or franchise. Consistent with our focus on management and franchising, we own very few of our lodging properties. The nature of our responsibilities under our management agreements to manage each hotel and enforce the standards required for our brands under both

 

17


Table of Contents

management and franchise agreements may be subject to interpretation and may give rise to disagreements in some instances. Such disagreements may be more likely as hotel returns are depressed as a result of the current economic recession. We seek to resolve any disagreements in order to develop and maintain positive relations with current and potential hotel owners and joint venture partners but have not always been able to do so. Failure to resolve such disagreements has in the past resulted in litigation, and could do so in the future.

Damage to, or other potential losses involving, properties that we own, manage or franchise may not be covered by insurance. We have comprehensive property and liability insurance policies with coverage features and insured limits that we believe are customary. Market forces beyond our control may nonetheless limit the scope of insurance coverage that we can obtain and our ability to obtain coverage at reasonable rates. Certain types of losses, generally of a catastrophic nature, such as earthquakes, hurricanes and floods, or terrorist acts, may be uninsurable or too expensive to justify obtaining insurance. As a result, we may not be successful in obtaining insurance without increases in cost or decreases in coverage levels. In addition, in the event of a substantial loss, the insurance coverage we carry may not be sufficient to pay the full market value or replacement cost of our lost investment or that of hotel owners or in some cases could result in certain losses being totally uninsured. As a result, we could lose some or all of the capital we have invested in a property, as well as the anticipated future revenue from the property, and we could remain obligated for guarantees, debt, or other financial obligations related to the property.

Development and Financing Risks

While we are predominantly a manager and franchisor of hotel properties, we depend on capital to buy, develop and improve hotels and to develop timeshare properties, and we or our hotel owners may be unable to access capital when necessary. In order to fund new hotel investments, as well as refurbish and improve existing hotels, both the Company and current and potential hotel owners must periodically spend money. The availability of funds for new investments and improvement of existing hotels depends in large measure on capital markets and liquidity factors over which we can exert little control. Events over the past several months, including recent failures and near failures of a number of large financial service companies and the contraction of available liquidity and leverage have impaired the capital markets for hotel and real estate investments. As a result, many current and prospective hotel owners are finding hotel financing on commercially viable terms to be difficult or impossible to obtain. In addition, the bankruptcy of Lehman Brothers and the financial condition of other lenders has prevented some projects that are in construction or development, including a few in which the Company has minority equity investments, from drawing on existing financing commitments, and replacement financing may not be available or may only be available on less favorable terms. Delays, increased costs and other impediments to restructuring such projects will reduce our ability to realize fees, recover loans and guarantee advances, or realize equity investments from such projects. Our ability to recover loan 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 recycle and raise new capital. In addition, any future downgrade of our credit ratings by Standard & Poor’s, Moody’s Investor Service or other rating agencies could reduce our availability of capital and increase our cost of capital.

Continued or increased volatility in the credit markets will likely continue to impair our ability to sell the loans that our Timeshare business generates. Our Timeshare business provides financing to purchasers of our timeshare and fractional properties, and we periodically sell interests in those loans in the securities markets. Recent declines in the credit markets will likely continue to impair the timing and volume of the timeshare loans that we sell. Market conditions during the first half of 2008 resulted in terms that were less favorable to us than they were historically, and further deterioration prevented a planned fourth quarter 2008 sale, may delay planned 2009 sales or sharply increase their cost to us until the markets stabilize, or prevent us from selling our timeshare notes entirely. Although we expect to realize the economic value of our timeshare note portfolio even if future note sales are temporarily or indefinitely delayed, such delays in note sales could reduce or postpone future gains, cause us to reduce spending in order to maintain our leverage and return targets, and could also result in increased borrowing to provide capital to replace proceeds from such sales.

Our growth strategy depends upon third-party owners/operators, and future arrangements with these third parties may be less favorable. Our present growth strategy for development of additional lodging facilities entails entering into and maintaining various arrangements with property owners. 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.

Our ability to grow our management and franchise systems is subject to the range of risks associated with real estate investments. Our ability to sustain continued growth through management or franchise agreements for new hotels and the conversion of existing facilities to managed or franchised Marriott brands is affected, and may potentially be limited, by a variety of factors influencing real estate development generally. These include site

 

18


Table of Contents

availability, financing, planning, zoning and other local approvals, and other limitations that may be imposed by market and submarket factors, such as projected room occupancy, changes in growth in demand compared to projected supply, territorial restrictions in our management and franchise agreements, costs of construction, and anticipated room rate structure.

Our development activities expose us to project cost, completion, and resale risks. We develop new hotel, timeshare interval, fractional ownership, and residential properties, both directly and through partnerships, joint ventures, and other business structures with third parties. Our involvement in the development of properties presents a number of risks, including that: (1) recent and continued declines in the capital markets may limit our ability, or that of third parties with whom we do business, to raise capital for completion of projects that have commenced or development of future properties; (2) properties that we develop could become less attractive due to increases in mortgage rates and/or decreases in mortgage availability, market absorption or oversupply, with the result that we may not be able to sell such properties for a profit or at the prices or selling pace we anticipate; (3) construction delays, cost overruns, lender financial defaults, or so called “Acts of God” such as earthquakes, hurricanes, floods or fires may increase overall project costs or result in project cancellations; and (4) we may be unable to recover development costs we incur for projects that are not pursued to completion.

Development activities that involve our co-investment with third parties may result in disputes that could increase project costs, impair project operations, or increase project completion risks. Partnerships, joint ventures, and other business structures involving our co-investment with third parties generally include some form of shared control over the operations of the business and create additional risks, including the possibility that other investors in such ventures could become bankrupt or otherwise lack the financial resources to meet their obligations, or could have or develop business interests, policies or objectives that are inconsistent with ours. Although we actively seek to minimize such risks before investing in partnerships, joint ventures or similar structures, actions by another investor may present additional risks of project delay, increased project costs, or operational difficulties following project completion. Such disputes may also be more likely in the current difficult investment environment.

Risks associated with development and sale of residential properties that are associated with our lodging and timeshare properties or brands may reduce our profits. In certain hotel and timeshare projects we participate, through minority interests and/or licensing fees, in the development and sale of residential properties associated with our brands, including luxury residences, and condominiums under our Ritz-Carlton and Marriott brands. Such projects pose additional risks beyond those generally associated with our lodging and timeshare businesses, which may reduce our profits or compromise our brand equity, including the following:

 

   

Recent decreases in residential real estate, vacation home prices, and demand generally, will reduce our profits and could even result in losses on residential sales, increase our carrying costs due to a slower pace of sales than we anticipated, and could make it more difficult to convince future hotel development partners of the value added by our brands;

 

   

Increases in interest rates, reductions in mortgage availability, or increases in the costs of residential ownership could prevent potential customers from buying residential products or reduce the prices they are willing to pay; and

 

   

Residential construction may be subject to warranty and liability claims, and the costs of resolving such claims may be significant.

Technology, Information Protection, and Privacy Risks

A failure to keep pace with developments in technology could impair our operations or competitive position. The lodging and timeshare industries continue to demand the use of sophisticated technology and systems, including those used for our reservation, revenue management and property management systems, our Marriott Rewards program, and technologies we make available to our guests. These technologies and systems must be refined, updated, and/or replaced with more advanced systems on a regular basis. If we are unable to do so as quickly as our competitors or within budgeted costs and time frames, our business could suffer. We also may not achieve the benefits that we anticipate from any new technology or system, and a failure to do so could result in higher than anticipated costs or could impair our operating results.

An increase in the use of third-party Internet services to book online hotel reservations could adversely impact our revenues. Some of our hotel rooms are booked through Internet travel intermediaries, such as Expedia.com®, Travelocity.com®, and Orbitz.com®, as well as lesser-known online travel service providers. These intermediaries initially focused on leisure travel, but now also provide offerings for corporate travel and group meetings. Although Marriott’s Look No Further® Best Rate Guarantee has greatly reduced the ability of intermediaries to undercut the published rates at our hotels, intermediaries continue to use a variety of aggressive online marketing methods to attract customers, including the purchase, by certain companies, of trademarked online keywords such as “Marriott”

 

19


Table of Contents

from Internet search engines such as Google® and Yahoo® to steer customers toward their Web sites (a practice currently being challenged by various trademark owners in federal court). Although Marriott has successfully limited these practices through contracts with key online intermediaries, the number of intermediaries and related companies that drive traffic to intermediaries’ Web sites is too large to permit us to eliminate this risk entirely. Our business and profitability could be harmed if online intermediaries succeed in significantly shifting loyalties from our lodging brands to their travel services, diverting bookings away from Marriott.com, or through their fees increasing the overall cost of internet bookings for our hotels.

Failure to maintain the integrity of internal or customer data could result in faulty business decisions, damage of reputation and/or subject us to costs, fines or lawsuits. Our businesses require collection and retention of large volumes of internal and customer data, including credit card numbers and other personally identifiable information of our customers as they are entered into, processed by, summarized by, and reported by our various information systems and those of our service providers. We also maintain personally identifiable information about our employees. The integrity and protection of that customer, employee, and company data is critical to us. If that data is inaccurate or incomplete we could make faulty decisions. Our customers and employees also have a high expectation that we will adequately protect their personal information, and the regulatory environment surrounding information security and privacy is increasingly demanding, both in the United States and other jurisdictions in which we operate. A significant theft, loss or fraudulent use of customer, employee or company data could adversely impact our reputation and could result in remedial and other expenses, fines and litigation.

Changes in privacy law could adversely affect our ability to market our products effectively. Our Timeshare segment and, to a lesser extent, our other lodging segments, rely on a variety of direct marketing techniques, including telemarketing, email marketing, and postal mailings. Any further restrictions in laws such as the Telemarketing Sales Rule, CANSPAM Act, and various U.S. state laws, or new federal laws, regarding marketing and solicitation or international data protection laws that govern these activities could adversely affect the continuing effectiveness of telemarketing, email, and postal mailing techniques and could force further changes in our marketing strategy. If this occurs, we may not be able to develop adequate alternative marketing strategies, which could impact the amount and timing of our sales of timeshare units and other products. We also obtain access to potential customers from travel service providers or other companies with whom we have substantial relationships and market to some individuals on these lists directly or by including our marketing message in the other company’s marketing materials. If access to these lists was prohibited or otherwise restricted, our ability to develop new customers, and introduce them to our products could be impaired.

Other Risks

If we cannot attract and retain talented associates, our business could suffer. We compete with other companies both within and outside of our industry for talented personnel. If we are not able to recruit, train, develop and retain sufficient numbers of talented associates, we could experience increased associate turnover, decreased guest satisfaction, low morale, inefficiency or internal control failures. Insufficient numbers of talented associates could also limit our ability to grow and expand our businesses.

Delaware law and our governing corporate documents contain, and our board of directors could implement, anti-takeover provisions that could deter takeover attempts. Under the Delaware business combination statute, a stockholder holding 15 percent or more of our outstanding voting stock could not acquire us without board of director’s consent for at least three years after the date the stockholder first held 15 percent or more of the voting stock. Our governing corporate documents also, among other things, require supermajority votes in connection with mergers and similar transactions. In addition, our board of directors could, without stockholder approval, implement other anti-takeover defenses, such as a stockholder rights plan to replace the stockholder’s rights plan that expired in March 2008.

 

Item 1B. Unresolved Staff Comments.

None.

 

Item 2. Properties.

Company-operated properties are described in Part I, Item 1., “Business,” earlier in this report. We believe our properties are in generally good physical condition with the need for only routine repairs and maintenance and periodic capital improvements. Most of our regional offices and reservation centers, both domestically and internationally, are located in leased facilities. We also lease space in six office buildings with combined space of approximately 1.3 million square feet in Maryland and Florida where our corporate, Ritz-Carlton, and Marriott Vacation Club International headquarters are located.

 

20


Table of Contents
Item 3. Legal Proceedings.

From time to time, we are subject to certain legal proceedings and claims in the ordinary course of business, including adjustments proposed during governmental examinations of the various tax returns we file. We currently are not aware of any legal proceedings or claims that we believe will have, individually or in aggregate, a material adverse effect on our business, financial condition, or operating results.

 

Item 4. Submission of Matters to a Vote of Security Holders.

No matters were submitted to a vote of shareholders during the fourth quarter of the fiscal year covered by this report.

Executive Officers of the Registrant

See Part III, Item 10 of this report for information about our executive officers.

 

21


Table of Contents

Part II

 

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

Market Information and Dividends

The range of prices of our common stock and dividends declared per share for each quarterly period within the last two years are as follows:

 

     Stock Price    Dividends
Declared Per
Share
     High    Low   

2007           First Quarter

   $ 51.50    $ 44.79    $ 0.0625

Second Quarter

     52.00      43.90      0.0750

Third Quarter

     48.85      39.70      0.0750

Fourth Quarter

     45.10      31.34      0.0750
     Stock Price    Dividends
Declared Per
Share
     High    Low   

2008           First Quarter

   $ 37.59    $ 31.17    $ 0.0750

Second Quarter

     37.89      28.33      0.0875

Third Quarter

     30.27      22.12      0.0875

Fourth Quarter

     30.24      11.88      0.0875

At January 30, 2009, there were 349,860,166 shares of Class A Common Stock outstanding held by 46,504 shareholders of record. Our Class A Common Stock is traded on the New York Stock Exchange and the Chicago Stock Exchange. The fiscal year-end closing price for our stock was $20.06 on January 2, 2009, and $34.12 on December 28, 2007. All prices are reported on the consolidated transaction reporting system.

Fourth Quarter 2008 Issuer Purchases of Equity Securities

On August 2, 2007, we announced that our Board of Directors increased, by 40 million shares, the authorization to repurchase our Class A Common Stock for a total outstanding authorization of approximately 51 million shares on that date. We repurchase shares in the open market and in privately negotiated transactions. We did not repurchase any shares during the 2008 fourth quarter. As of year-end 2008, the maximum number of shares that may be purchased under our authorization was 21.3 million.

 

22


Table of Contents
Item 6. Selected Financial Data.

The following table presents a summary of selected historical financial data for the Company derived from our financial statements as of and for our last 10 fiscal years.

Since the information in this table is only a summary and does not provide all of the information contained in our financial statements, including the related notes, you should read “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements.

 

    Fiscal Year (1)
($ in millions, except per share data)   2008   2007     2006     2005   2004   2003   2002     2001     2000     1999

Income Statement Data:

                   

Revenues (2)

  $ 12,879   $ 12,990     $ 11,995     $ 11,129   $ 9,778   $ 8,712   $ 8,222     $ 7,768     $ 7,911     $ 7,026
                                                                     

Operating income (2)

  $ 785   $ 1,188     $ 1,087     $ 699   $ 575   $ 481   $ 455     $ 420     $ 762     $ 621
                                                                     

Income from continuing operations

  $ 359   $ 697     $ 712     $ 543   $ 487   $ 380   $ 365     $ 269     $ 490     $ 399

Cumulative effect of change in accounting principle (3)

    —       —         (109 )     —       —       —       —         —         —         —  

Discontinued operations (4)

    3     (1 )     5       126     109     122     (88 )     (33 )     (11 )     1
                                                                     

Net income

  $ 362   $ 696     $ 608     $ 669   $ 596   $ 502   $ 277     $ 236     $ 479     $ 400
                                                                     

Per Share Data:

                   

Diluted earnings per share from continuing operations

  $ 0.98   $ 1.75     $ 1.65     $ 1.17   $ 1.01   $ 0.77   $ 0.72     $ 0.52     $ 0.96     $ 0.75

Diluted losses per share from cumulative effect of accounting change

    —       —         (0.25 )     —       —       —       —         —         —         —  

Diluted earnings (losses) per share from discontinued operations

    0.01     —         0.01       0.28     0.23     0.25     (0.17 )     (0.06 )     (0.02 )     —  
                                                                     

Diluted earnings per share

  $ 0.99   $ 1.75     $ 1.41     $ 1.45   $ 1.24   $ 1.02   $ 0.55     $ 0.46     $ 0.94     $ 0.75
                                                                     

Cash dividends declared per share

  $ 0.3375   $ 0.2875     $ 0.2400     $ 0.2000   $ 0.1650   $ 0.1475   $ 0.1375     $ 0.1275     $ 0.1175     $ 0.1075
                                                                     

Balance Sheet Data (at year-end):

                   

Total assets

  $ 8,903   $ 8,942     $ 8,588     $ 8,530   $ 8,668   $ 8,177   $ 8,296     $ 9,107     $ 8,237     $ 7,324

Long-term debt (2)

    2,975     2,790       1,818       1,681     836     1,391     1,553       2,708       1,908       1,570

Shareholders’ equity

    1,380     1,429       2,618       3,252     4,081     3,838     3,573       3,478       3,267       2,908

Other Data:

                   

Base management fees (2)

  $ 635   $ 620     $ 553     $ 497   $ 435   $ 388   $ 379     $ 372     $ 383     $ 352

Franchise fees (2)

    451     439       390       329     296     245     232       220       208       180

Incentive management fees (2)

    311     369       281       201     142     109     162       202       316       268
                                                                     

Total fees

  $ 1,397   $ 1,428     $ 1,224     $ 1,027   $ 873   $ 742   $ 773     $ 794     $ 907     $ 800
                                                                     

Fee Revenue-Source:

                   

North America (5)

  $ 1,038   $ 1,115     $ 955     $ 809   $ 682   $ 592   $ 626     $ 664     $ 779     $ 690

Outside North America

    359     313       269       218     191     150     147       130       128       110
                                                                     

Total fees

  $ 1,397   $ 1,428     $ 1,224     $ 1,027   $ 873   $ 742   $ 773     $ 794     $ 907     $ 800
                                                                     

 

(1)

All fiscal years included 52 weeks, except for 2008 and 2002, which each included 53 weeks.

(2)

Balances do not reflect the impact of discontinued operations.

(3)

We adopted Statement of Position 04-2 “Accounting for Real Estate Time-Sharing Transactions,” in our 2006 first quarter, which we reported in our Consolidated Statements of Income as a cumulative effect of change in accounting principle.

(4)

In 2002, we announced our intent to sell, and subsequently did sell, our Senior Living Services business and exited our Distribution Services business. In 2007, we exited our synthetic fuel business. These businesses are now reflected as discontinued operations.

(5)

Includes the continental United States and Canada.

 

23


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

BUSINESS AND OVERVIEW

We are a worldwide operator and franchisor of 3,178 properties (560,681 rooms) and related facilities. The figures in the preceding sentence are as of year-end 2008 and include 27 home and condominium projects (2,482 units) for which we manage the related owners’ associations. In addition, we provided 2,332 furnished corporate housing rental units, which are not included in the totals.

Our operations are grouped into five business segments: North American Full-Service Lodging, North American Limited-Service Lodging, International Lodging, Luxury Lodging, and Timeshare. We operate, develop, and franchise under 18 separate brand names in 66 countries and territories.

We earn base, incentive, and franchise fees based upon the terms of our management and franchise agreements. We earn revenues from the limited number of hotels we own or lease. Revenues are also generated from the following sources associated with our Timeshare segment: (1) selling timeshare interval, fractional ownership, and residential properties; (2) operating the resorts and residential properties; and (3) financing customer purchases of timesharing intervals. Finally, we earn fees in association with affinity card endorsements and the sale of branded residential real estate.

We sell residential real estate either in conjunction with luxury hotel development or on a stand-alone basis under The Ritz-Carlton brand (Ritz-Carlton-Residential), and in conjunction with Timeshare segment projects (Ritz-Carlton Club-Residential and Grand Residences by Marriott-Residential). Our Timeshare segment residential projects are typically opened over time with limited inventory available at any one time. Other residences are typically constructed and sold by third-party developers with limited amounts, if any, of our capital at risk. While the worldwide residential market is very large, the luxurious nature of our residential properties, the quality and exclusivity associated with our brands, and the hospitality services that we provide, all serve to make our residential properties distinctive.

The economic recession, the global credit crisis and eroded consumer confidence all contributed to a difficult business environment in 2008. U.S. lodging demand declined throughout 2008, but especially in the fourth quarter, as a result of slowing economic growth. Outside the United States, international lodging demand was generally stronger in most markets than in the United States, but also softened progressively throughout 2008 and declined markedly in the 2008 fourth quarter. Leisure transient demand in the United States weakened in the first quarter of 2008 and was joined by weakening business transient demand beginning in the second quarter of 2008. Additionally, demand associated with our luxury properties decreased dramatically in the 2008 fourth quarter. These factors were compounded in several markets in the United States where the supply of hotel rooms increased. Last minute new group meeting demand and attendance at group meetings softened considerably throughout 2008 as well, and group meeting cancellations increased significantly in the fourth quarter. While some business customers increased room nights in 2008, including professional services firms, defense contractors, and insurance companies, others declined, including companies associated with the financial services, automotive, and telecommunications industries. In general, for the properties in our system, international, and full-service properties experienced stronger demand worldwide than our limited-service and luxury properties.

U.S. demand for timeshare intervals also softened considerably in 2008, and especially in the fourth quarter, reflecting weak consumer confidence and a very difficult financing environment, while demand in Latin America and Asia for timeshare products was stronger compared to 2007. Demand for Ritz-Carlton fractional and residential units was particularly weak. Since the sale of timeshare and fractional intervals and condominiums follows the percentage-of-completion accounting method, soft demand is frequently not reflected in our Timeshare segment results until later accounting periods. Intentional and unintentional construction delays could also unfavorably impact nearer-term Timeshare segment results as percentage-of-completion revenue recognition may correspondingly be delayed as well.

Responding to the challenging demand environment in 2008 for hotel rooms, we initiated a range of new sales promotions with a focus on leisure and group business opportunities to increase property-level revenue. These promotions were designed to keep current customers loyal while also attracting new guests. In response to increased hesitancy to finalize group bookings, we have also implemented sales associate and customer incentives to close on business. As more customers use social media, we have also found new ways to connect, communicating with more than 300,000 of our customers on YouTube, Twitter, Facebook and through our blog “Marriott on the Move.” We also continue to enhance our Marriott Rewards loyalty program offerings and specifically market to this large and growing customer base.

 

24


Table of Contents

Given this slower demand environment, we worked aggressively to reduce costs and enhance property-level house profit margins by modifying menus and restaurant hours, reviewing and adjusting room amenities, and not filling some vacant positions. While varying by property, most properties in our system have instituted contingency plans with very tight cost controls. We have also reduced the above-property costs by scaling back systems, processing, and support areas that are allocated to the hotels. We have also eliminated certain positions, not filled some vacant positions, and will encourage, and where legally permitted, require employees to use their vacation time accrued during the 2009 fiscal year. Additionally, we canceled certain hotel development projects. For our Timeshare segment, we have slowed or canceled some development projects, closed less efficient timeshare sales offices and increased marketing efforts and purchase incentives. For additional information on our companywide restructuring efforts, see our “Restructuring Costs and Other Charges” caption later in this section.

Our lodging business model involves managing and franchising hotels, rather than owning them. At year-end 2008, 48 percent of the hotel rooms in our system were operated under management agreements, 50 percent were operated under franchise agreements, and 2 percent were owned or leased by us. Our emphasis on property management and franchising tends to provide more stable earnings in periods of economic softness while continued unit expansion, reflecting properties added to our system, generates ongoing growth. With long-term management and franchise agreements, this strategy has allowed substantial growth while reducing leverage and risk in a cyclical industry. Additionally, by reducing our capital investments and adopting a strategy of recycling those investments we do make, we increase our financial flexibility.

We calculate RevPAR by dividing room sales for comparable properties by room nights available to guests for the period. RevPAR may not be comparable to similarly titled measures, such as revenues. We consider RevPAR to be a meaningful indicator of our performance because it measures the period-over-period change in room revenues for comparable properties. References to RevPAR throughout this report are in constant dollars unless otherwise noted.

For our North American comparable properties, RevPAR decreased in 2008, compared to the year-ago period, with moderately greater strength in Manhattan, New York, Houston, Texas, Orlando, Florida, and Los Angeles, California and weaker RevPAR in suburban markets near, among other areas, Orange County, California, Chicago, Illinois, and Detroit, Michigan. Outside North America, 2008 RevPAR increases versus the prior year period were stronger, particularly in the Middle East, Central and Southeast Asia, South America, and Central Europe.

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

Compared to 2007, worldwide comparable company-operated house profit margins for 2008 decreased by 70 basis points reflecting the impact of stronger year-over-year RevPAR associated with international properties and very strong cost control plans in 2008 at properties in our system. This impact was more than offset by the impact of RevPAR declines year-over-year associated with properties in North America reflecting weaker demand and higher expenses in 2008 in North America primarily due to increased utilities and payroll costs.

The Company’s fiscal year ends on the Friday nearest December 31 and while the 2006 and 2007 fiscal years included 52 weeks, the 2008 fiscal year included 53 weeks. As the 53rd week for 2008 included the New Year’s holiday and was seasonally slow, it had the effect of reducing year-over-year RevPAR performance. While worldwide comparable RevPAR for 2008 for company-operated properties decreased 1.1 percent compared to 2007, worldwide comparable RevPAR for 2008 for company-operated properties excluding the extra 53rd week decreased 0.4 percent compared to 2007.

Our brands remain strong as a result of superior customer service with an emphasis on guest and associate satisfaction, the worldwide presence and quality of our brands, our Marriott Rewards loyalty program, an information-rich and easy-to-use Web site, a multichannel central reservations system, and desirable property amenities. We, along with owners and franchisees, continue to invest in our brands by means of new, refreshed, and reinvented properties, new room and public space designs, and enhanced amenities and technology offerings. We continue to enhance the appeal of our proprietary Web site, www.Marriott.com, through functionality and service improvements, and we continue to capture an increasing proportion of property-level reservations via this cost-efficient channel. We have added other languages to Marriott.com and we have enabled guests to use handheld devices to make and confirm reservations and get directions.

 

25


Table of Contents

See Part I, Item 1A., “Risk Factors,” of this report for important information regarding forward-looking statements made in this report and risks and uncertainties that the Company faces.

CONSOLIDATED RESULTS

The following discussion presents an analysis of results of our operations for 2008, 2007, and 2006.

Continuing Operations

Revenues

2008 Compared to 2007

Revenues decreased by $111 million (1 percent) to $12,879 million in 2008 from $12,990 million in 2007, primarily as a result of lower Timeshare sales and service revenue and lower incentive management fees, partially offset by the impact of unit growth across the system. Base management and franchise fees increased by $27 million as a result of improved RevPAR in international markets and unit growth, partially offset by the impact of declines in North American RevPAR. The $27 million increase in combined base management and franchise fees also reflected the impact of both base management fees totaling $6 million in 2007 from business interruption insurance proceeds and $13 million of lower franchise relicensing fees in 2008. Incentive management fees decreased by $58 million primarily reflecting the recognition in the 2007 period of: (1) incentive management fees totaling $17 million that were calculated based on prior periods’ results, but not earned and due until 2007; and (2) $13 million of incentive management fees from business interruption proceeds associated with Hurricane Katrina. The decrease in incentive management fees also reflected lower property-level profitability due to lower occupancy and higher property-level wages and benefits costs and utilities costs, particularly in North America. Partially offsetting the decreases, incentive management fees from international properties increased, reflecting RevPAR and unit growth. See the “BUSINESS SEGMENTS” discussion later in this report for additional information.

The $15 million (1 percent) decrease in owned, leased, corporate housing, and other revenue largely reflected $10 million of lower revenue for owned and leased properties, $17 million of lower revenue associated with a services contract that terminated at the end of the 2007 fiscal year and the receipt in 2008 of $15 million in hotel management and franchise agreement termination fees, compared to $19 million in 2007 and flat branding fees associated with both affinity card endorsements and sale of branded residential real estate (totaling $64 million in both 2008 and 2007), partially offset by $17 million of higher corporate housing revenue. The $10 million decrease in owned and leased revenue primarily reflected the conversion of owned hotels to managed hotels.

Timeshare sales and services revenue in 2008 decreased by $324 million (19 percent) compared to the prior year. The decrease primarily reflected lower demand in 2008, revenue recognition of contract sales for several projects in 2007 that reached reportability thresholds, and lower revenue from several projects with limited available inventory in 2008, as well as a decrease of $65 million in note sale gains in 2008 compared to the prior year. Partially offsetting these decreases in revenue in 2008 compared to the prior year was higher revenue associated with the Asia Pacific points program, increased interest income, revenue associated with projects that became reportable subsequent to 2007, and increased services revenue. See “BUSINESS SEGMENTS: Timeshare,” later in this report for additional information on our Timeshare segment.

The $111 million decrease in total revenue includes $259 million (3 percent) of increased cost reimbursements revenue to $8,834 million in 2008 from $8,575 million in the prior year. This revenue represents reimbursements of costs incurred on behalf of managed and franchised properties and relates, predominantly, to payroll costs at managed properties where we are the employer. As we record cost reimbursements based upon the costs incurred with no added markup, this revenue and related expense has no impact on either our operating income or net income. The increase in reimbursed costs is primarily attributable to sales growth and the growth in the number of properties we manage. We added six managed properties (3,100 rooms) and 157 franchised properties (19,836 rooms) to our system in 2008, net of properties exiting the system.

2007 Compared to 2006

Revenues increased by $995 million (8 percent) to $12,990 million in 2007 from $11,995 million in 2006, as a result of stronger demand for hotel rooms worldwide, which allowed us to increase room rates and favorable exchange rates worldwide. Base management and franchise fees increased by $116 million as a result of stronger RevPAR and unit growth, as we opened 203 properties (29,200 rooms) throughout 2007. In 2006, we recognized

 

26


Table of Contents

$5 million of base management fees that were calculated based on prior periods’ results, but not earned and due until 2006, versus no similar fees in 2007. Incentive management fees increased by $88 million due to stronger RevPAR and property-level margin improvements associated with room rate increases and productivity improvements. Incentive management fees included $17 million and $10 million for 2007 and 2006, respectively, that were calculated based on prior periods’ results, but not earned and due until the periods in which they were recognized. Furthermore, incentive management fees for 2007 included $13 million and base management fees for 2007 included $6 million of business interruption insurance proceeds associated with hurricanes in prior years compared to $1 million of business interruption insurance proceeds received in 2006. Stronger catering, food and beverage, spa, and other profits also drove property-level margins higher. Year-over-year RevPAR increases were driven primarily by rate increases.

Timeshare sales and services revenue increased by $170 million (11 percent) in 2007 over the prior year. The increase largely reflected development revenue increases over the prior year as some newer projects reached revenue recognition thresholds. In 2006, some projects were in the early stages of development and did not reach revenue recognition thresholds until 2007. The increase in revenue also reflects increased services and financing revenue. See “BUSINESS SEGMENTS: Timeshare,” later in this report for additional information on our Timeshare segment.

Owned, leased, corporate housing and other revenue increased by $121 million (11 percent). The increase largely reflected stronger RevPAR and the mix of owned and leased properties in 2007, compared to 2006, and to a lesser extent, higher branding fees associated with both affinity card endorsements and the sale of branded residential real estate (totaling $64 million in 2007 and $52 million in 2006), offset by the recognition of $19 million of hotel management and franchise agreement termination fees in 2007, compared to the recognition of $26 million of such fees in 2006.

The $995 million increase in total revenue includes $500 million (6 percent) of increased cost reimbursements revenue, to $8,575 million in 2007 from $8,075 million in the prior year. The increase in reimbursed costs is primarily attributable to wage increases, sales growth, and the growth in the number of properties we manage. We added 15 managed properties (4,870 rooms) and 138 franchised properties (15,963 rooms) to our system in 2007, net of properties exiting the system.

Restructuring Costs and Other Charges

During the latter part of 2008, we experienced a significant decline in demand for hotel rooms both domestically and internationally as a result, in part, of the recent failures and near failures of a number of large financial service companies in the fourth quarter of 2008 and the dramatic downturn in the economy. Our capital-intensive Timeshare business was also hurt both domestically and internationally by the downturn in market conditions and, particularly the significant deterioration in the credit markets, which resulted in our decision not to complete a note sale in the fourth quarter of 2008. These declines resulted in reduced management and franchise fees, cancellation of development projects, reduced timeshare contract sales, and anticipated losses under guarantees and loans. We responded by implementing certain companywide cost-saving measures, with individual company segments and corporate departments implementing further cost-saving measures. Upper-level management responsible for the Timeshare segment, hotel operations, development, and above-property level management of the various corporate departments and brand teams individually led these decentralized management initiatives. The various initiatives resulted in aggregate restructuring costs of $55 million that we recorded in the fourth quarter of 2008. We also incurred other charges, including charges for guarantees and reserves for loan losses, and inventory write-downs on Timeshare inventory, reserves on accounts receivable, contract cancellation allowances, a charge related to the valuation of Timeshare residual interests, a charge associated with hedge ineffectiveness related to Timeshare note sale hedges, and asset impairments and other charges, detailed further in “Other Charges.”

As part of the restructuring efforts in our Timeshare segment, we reduced and consolidated sales channels in the United States and closed down certain operations in Europe. We recorded Timeshare restructuring costs of $28 million in the 2008 fourth quarter, including: (1) $14 million in severance costs; (2) $5 million in facilities exit costs, primarily associated with noncancelable lease costs in excess of estimated sublease income arising from the reduction in personnel; and (3) $9 million related to the write-off of capitalized costs relating to development projects no longer deemed viable. We expect to complete this restructuring by year-end 2009. We are projecting $55 million to $65 million ($35 million to $42 million after-tax) of annual cost savings beginning in 2009 as a result of the restructuring. These savings will likely be reflected in the “Timeshare-direct” and the “General, administrative, and other expenses” captions in our Consolidated Statements of Income.

As part of the hotel development restructuring efforts across several of our Lodging segments, we discontinued certain development projects that required our investment. We recorded restructuring costs in the 2008 fourth quarter of $24 million, including: (1) $2 million in severance costs; and (2) $22 million related to the write-off of

 

27


Table of Contents

capitalized costs relating to development projects that we discontinued, including capitalized costs related to owned development of Renaissance ClubSport. We expect to complete this restructuring by year-end 2009. We are projecting up to $6 million ($4 million after-tax) of annual cost savings beginning in 2009 as a result of the restructuring. These savings will likely be reflected in the “General, administrative, and other expenses” caption in our Consolidated Statements of Income.

We also implemented restructuring initiatives by reducing above-property level lodging management personnel and corporate overhead. We incurred 2008 fourth quarter restructuring costs of $3 million primarily reflecting severance costs. We expect to complete this restructuring by year-end 2009. We are projecting up to $4 million ($3 million after-tax) of annual cost savings beginning in 2009 as a result of the restructuring. These savings will likely be reflected in the “General, administrative, and other expenses” caption in our Consolidated Statements of Income.

We have provided detailed information related to these restructuring costs and other charges below.

Restructuring Costs

Severance

These various restructuring initiatives resulted in an overall reduction of 1,021 employees (the majority of whom were terminated by January 2, 2009) across the Company. We recorded a total workforce reduction charge of $19 million related primarily to severance and fringe benefits, which consisted of $14 million for the Timeshare segment, $2 million related to hotel development, and $3 million related to above-property level lodging management and corporate overhead. The charge does not reflect amounts billed out separately to owners for property-level severance costs. We also delayed filling vacant positions and reduced staff hours. In connection with these initiatives, we expect to incur an additional $3 million to $4 million related to severance and fringe benefits in 2009 for the Timeshare segment.

Facilities Exit Costs

As a result of workforce reductions and delays in filling vacant positions that were part of the Timeshare segment restructuring, we ceased using certain leased facilities. We recorded a restructuring charge of approximately $5 million associated with these facilities, primarily related to noncancelable lease costs in excess of estimated sublease income. In connection with these initiatives, in 2009, we expect to incur an additional $2 million to $3 million related to ceasing use of additional noncancelable leases.

Development Cancellations

We sometimes incur certain costs associated with the development of hotel and timeshare properties, including legal costs, the cost of land, and planning and design costs. We capitalize these costs as incurred and they become part of the cost basis of the property once it is developed. As a result of the sharp downturn in the economy, we decided to discontinue certain development projects that required our investment, including our Renaissance ClubSport real estate development activities. These cancellations do not impact the two Renaissance ClubSport properties that are currently open. As a result of these development cancellations, we expensed $31 million of previously capitalized costs, which consisted of $9 million of costs for the Timeshare segment and $22 million of costs related to hotel development. We do not currently expect to expense any additional capitalized costs in 2009 in connection with these restructuring initiatives.

Other Charges

Charges for Guarantees and Reserves for Loan Losses

We sometimes issue guarantees to lenders and other third parties in connection with some financing transactions and other obligations. We also advance loans to some owners of properties that we manage. As a result of the downturn in the economy, certain hotels have experienced significant declines in profitability and the owners may not be able to meet debt service obligations to us or, in some cases, to third-party lending institutions. In addition, we expect profit levels at a few hotels to drop below guaranteed levels. As a result, based on cash flow projections, we expect to fund under some of our guarantees, which we do not deem recoverable, and we expect that one of the loans made by us will not be repaid according to its original terms. Due to the expected fundings under guarantees that we deemed nonrecoverable, we recorded charges of $16 million in the fourth quarter of 2008 in the “General, administrative, and other expenses” caption in our Consolidated Statements of Income. Due to the expected loan loss, we recorded a charge of $22 million in the fourth quarter of 2008 in the “Provision for loan losses” caption in our Consolidated Statements of Income.

 

28


Table of Contents

Timeshare Inventory Write-downs

As a result of terminating certain phases of timeshare development in Europe, we recorded an inventory write-down of $9 million in the fourth quarter of 2008. We recorded this charge in the “Timeshare-direct” caption of our Consolidated Statements of Income.

Accounts Receivable-Bad Debts

In the fourth quarter of 2008, we reserved $4 million of accounts receivable, which we deemed uncollectible, generally as a result of the unfavorable hotel operating environment, following an analysis of those accounts. We recorded this charge in the “General, administrative, and other expenses” caption in our Consolidated Statements of Income.

Timeshare Contract Cancellation Allowances

Our financial statements reflect net contract cancellation allowances totaling $12 million recorded in the fourth quarter of 2008 in anticipation that a portion of contract revenue and cost previously recorded for certain projects under the percentage-of-completion method will not be realized due to contract cancellations prior to closing. We have an equity method investment in one of these projects, and reflected $7 million of the $12 million in the “Equity in earnings” caption in our Consolidated Statements of Income. The remaining net $5 million of contract cancellation allowances consisted of a reduction in revenue, net of adjustments to product costs and other direct costs, and was recorded in Timeshare sales and services revenue, net of direct costs.

Timeshare Residual Interests Valuation

The fair market value of our residual interest in timeshare notes sold declined in the fourth quarter of 2008 primarily due to an increase in the market rate of interest at which we discount future cash flows to estimate the fair market value of the retained interests. The increase in the market rate of interest reflects deteriorating economic conditions and disruption in the credit markets, which significantly increased the borrowing costs to issuers. As a result of this change, we recorded a $32 million charge in the “Timeshare sales and services” caption in our Consolidated Statements of Income to reflect the decrease in the fair value of these residual interests.

Timeshare Hedge Ineffectiveness

Given the significant deterioration in the credit markets, we expect that any potential note sale transactions pursued by the Company in the near term will be materially different from arrangements originally contemplated, and accordingly the sensitivity of a hedge the Company previously entered into to manage interest rate risk associated with forecasted note sales no longer significantly corresponds to the sensitivity in expected note sale proceeds. Differences include expected legal structures, modifications to priority of cash flow, and higher costs. The change in terms (inputs) used to determine hedge effectiveness for Timeshare’s note sale hedges resulted in the recognition of $12 million in hedge ineffectiveness. We recorded this hedge ineffectiveness as a reduction in note sale gains in the “Timeshare sales and services” caption in our Consolidated Statements of Income.

Asset Impairments and Other Charges

One project that is in development and in which the Company has a joint venture investment was unable to draw on existing financing commitments as a result of the recent turmoil in the capital markets and the bankruptcy of the project’s major lender. As a result, based on our analysis of expected future cash flows, we determined that our investment in that joint venture was fully impaired, and we recorded an impairment charge of $9 million in the “Equity in earnings” caption in our Consolidated Statements of Income.

In addition, as a result of the economic downturn and the inability of certain developers to obtain financing, we also recorded write-offs of other assets ($12 million) related to development costs associated with projects we no longer deem probable in the “General, administrative, and other expenses” caption of our Consolidated Statements of Income.

We also deemed certain cost method tax investments to be other-than-temporarily impaired because we do not expect to receive any future economic benefit from these investments. Accordingly, we recorded an impairment charge of $9 million for those investments in the “Gains and other income” caption of our Consolidated Statements of Income.

 

29


Table of Contents

Summary of Restructuring Costs and Other Charges

The following table is a summary of the restructuring costs and other charges we recorded in the fourth quarter of 2008, as well as our remaining liability at the end of the fourth quarter of 2008 and remaining restructuring costs expected to be incurred in 2009 as part of these restructuring initiatives:

 

($ in millions)   Total
Charge
  Non-Cash
Charge
  Cash Payments
in the 2008
Fourth Quarter
  Restructuring Costs
and Other Charges
Liability at
January 2, 2009
  Restructuring
Costs Expected
to be Incurred
in 2009

Severance-Timeshare

  $ 14   $ —     $ 3   $ 11   $ 3-4

Facilities exit costs-Timeshare

    5     —       —       5     2-3

Development cancellations-Timeshare

    9     9     —       —       —  
                             

Total restructuring costs-Timeshare

    28     9     3     16     5-7
                             

Severance-hotel development

    2     —       —       2     —  

Development cancellations-hotel development

    22     22     —       —       —  
                             

Total restructuring costs-hotel development

    24     22     —       2     —  
                             

Severance-above property-level management

    3     —       1     2     —  
                             

Total restructuring costs-above property-level management

    3     —       1     2     —  
                             

Total restructuring costs

  $ 55   $ 31   $ 4   $ 20   $ 5-7
                             
             

Reserves for guarantees and loan losses

    38     22     —       16  

Inventory write-downs

    9     9     —       —    

Accounts receivable-bad debts

    4     4     —       —    

Contract cancellation allowances

    12     12     —       —    

Residual interests valuation

    32     32     —       —    

Hedge ineffectiveness

    12     12     —       —    

Impairment of investments and other

    30     30     —       —    
                         

Total other charges

    137     121     —       16  
                         

Total restructuring and other charges

  $ 192   $ 152   $ 4   $ 36  
                         

We anticipate that the remaining liability related to the workforce reduction will be substantially paid by the end of 2009 for the Timeshare segment, by the end of 2009 for hotel development, and by the end of 2009 for above-property level management. The amounts related to the space reduction and resulting lease expense due to the consolidation of facilities in the Timeshare segment will be paid over the respective lease terms through 2012. The remaining liability related to expected fundings under guarantees will likely be substantially paid by year-end 2010. The following tables provide further detail on these charges, including a breakdown by segment:

2008 Operating Income Impact

 

($ in millions)    North
American
Full-Service
Segment
   North
American
Limited-
Service
Segment
   International
Segment
   Luxury
Segment
   Timeshare
Segment
   Other
Unallocated
Corporate
   Total

Severance

   $ —      $ —      $ —      $ 1    $ 14    $ 4    $ 19

Facilities exit costs

     —        —        —        —        5      —        5

Development cancellations

     —        —        —        —        9      22      31
                                                

Total restructuring costs

     —        —        —        1      28      26      55

Charges related to guarantees

     1      15      —        —        —        —        16

Inventory write-downs

     —        —        —        —        9      —        9

Accounts receivable-bad debts

     —        —        —        1      —        3      4

Contract cancellation allowances

     —        —        —        —        5      —        5

Residual interests valuation

     —        —        —        —        32      —        32

Hedge ineffectiveness

     —        —        —        —        12      —        12

Impairment of investments and other

     —        —        —        —        —        12      12
                                                

Total

   $ 1    $ 15    $ —      $ 2    $ 86    $ 41    $ 145
                                                

 

30


Table of Contents

2008 Non-Operating Income Impact

 

($ in millions)    Gains and
Other Income
   Provision
for Loan
Losses
   Equity in
Earnings
   Total

Impairment of investments

   $ 9    $ —      $ 9    $ 18

Contract cancellation allowances

     —        —        7      7

Reserves for loan losses

     —        22      —        22
                           

Total

   $ 9    $ 22    $ 16    $ 47
                           

The following tables provide further detail on restructuring costs we expect to incur in 2009, including breakdown by segment:

2009 Expected Operating Income Impact

 

($ in millions)    North
American
Full-Service
Segment
   North
American
Limited-
Service
Segment
   International
Segment
   Luxury
Segment
   Timeshare
Segment
   Other
Unallocated
Corporate
   Total

Severance

   $ —      $ —      $ —      $ —      $ 3-4    $ —      $ 3-4

Facilities exit costs

     —        —        —        —        2-3      —        2-3

Development cancellations

     —        —        —        —        —        —        —  
                                                

Total restructuring costs

   $ —      $ —      $ —      $ —      $ 5-7    $ —      $ 5-7
                                                

Operating Income

2008 Compared to 2007

Operating income decreased by $403 million (34 percent) to $785 million in 2008 from $1,188 million in 2007. The decrease in operating income reflected $261 million of lower Timeshare sales and services revenue net of direct expenses, $41 million of lower owned, leased, corporate housing, and other revenue net of direct expenses, $58 million of lower incentive management fees, $55 million of restructuring costs recorded in 2008, and a $15 million increase in general, administrative and other expenses, partially offset by an increase in combined base management and franchise fees of $27 million.

Timeshare sales and services revenue net of direct expenses for 2008 totaled $89 million. The decline of $261 million (75 percent) from the prior year primarily reflected $138 million of lower development revenue, net of product costs and marketing and selling costs, $95 million of lower financing revenue net of financing expenses, $34 million of lower reacquired and resales revenue net of expenses, partially offset by $4 million of higher services revenue net of expenses, and $2 million of lower joint venture related expenses. Lower development revenue, net of product costs and marketing and selling costs, primarily reflected lower demand for timeshare interval, fractional, and residential products, lower revenue from several projects with limited available inventory in 2008, a $22 million pretax impairment charge ($10 million net of minority interest benefit), start-up costs and low reportability in 2008 associated with newer projects that have not yet reached revenue recognition thresholds, as well as lower revenue recognition for several projects that reached reportability thresholds in 2007. The decrease in financing revenue net of financing costs primarily reflected lower note sale gains in 2008, compared to the prior year. See “BUSINESS SEGMENTS: Timeshare,” later in this report for additional information regarding our Timeshare segment.

The $41 million (23 percent) decrease in owned, leased, corporate housing, and other revenue net of direct expenses primarily reflected $21 million of lower income, reflecting conversions from owned properties to managed properties, $4 million of lower termination fees, and $17 million of lower revenue associated with a services contract that terminated at the end of the 2007 fiscal year. Partially offsetting the decreases were lower depreciation charges totaling $6 million in 2008 associated with one property, compared to depreciation charges recorded in 2007 of $8 million associated with that same property that was reclassified from “held for sale” to “held and used.”

General, administrative, and other expenses increased by $15 million (2 percent) to $783 million in 2008 from $768 million in 2007. This increase reflected the following items: $44 million of increased expenses associated with, among other things, our unit growth and development, systems improvements, and initiatives to enhance our brands globally; a $16 million charge for certain guarantees; an unfavorable $9 million variance for reserve reversals in 2007; $12 million in write-offs in 2008 of costs related to development cancellations; $4 million of increased foreign exchange losses; and $4 million of charges related to bad debt reserves on accounts receivable. See “Other Charges” section of Footnote No. 20, “Restructuring Costs and Other Charges,” for additional information on the charge related to certain guarantees, development cancellation write-offs, and bad debt reserves. These unfavorable

 

31


Table of Contents

variances were partially offset by a favorable variance related to a 2007 charge of $35 million resulting from excise taxes associated with the settlement of issues raised during the examination by the Internal Revenue Service (“IRS”) and Department of Labor of our employee stock ownership plan (“ESOP”) feature of our Employees’ Profit Sharing, Retirement and Savings Plan and Trust (the “Plan”). See Footnote No. 2, “Income Taxes,” for additional information on the ESOP settlement. Additionally, 2008 included a $28 million favorable impact associated with deferred compensation expenses, compared to an $11 million unfavorable impact in the prior year, both of which reflected mark-to-market valuations. Of the $15 million increase in total general, administrative, and other expenses, an increase of $51 million was attributable to our Lodging and Timeshare segments and a decrease of $36 million, reflecting the 2007 ESOP settlement charge, was unallocated.

The reasons for the decrease of $58 million in incentive management fees as well as the combined base management and franchise fees increase of $27 million over the prior year are noted in the preceding “Revenues” section.

2007 Compared to 2006

Operating income increased by $101 million (9 percent) to $1,188 million in 2007 from $1,087 million in the prior year. The increase in operating income reflects stronger combined base management, incentive management, and franchise fees of $204 million, partially offset by higher general, administrative, and other expenses of $91 million, lower Timeshare sales and services revenue net of direct expenses of $7 million, and lower owned, leased, corporate housing, and other revenue net of direct expenses of $5 million.

The combined base management, incentive management, and franchise fees increase of $204 million reflected strong RevPAR growth, unit growth, and property-level margin improvements and favorable exchange rates worldwide. In 2006, we recognized $5 million of base management fees that were calculated based on prior periods’ results, but not earned and due until 2006, versus no similar fees in 2007. Incentive management fees included $17 million and $10 million for 2007 and 2006, respectively, that were calculated based on prior periods’ results, but not earned and due until the periods in which they were recognized. Furthermore, incentive management fees for 2007 included $13 million and base management fees included $6 million of business interruption insurance proceeds associated with hurricanes in prior years compared to $1 million of business interruption insurance proceeds received in 2006.

Compared to the year-ago period, general, administrative, and other expenses increased by $91 million (13 percent) to $768 million in 2007 from $677 million in 2006. In 2007, we incurred a $35 million charge related to excise taxes associated with the settlement of issues raised during the IRS and Department of Labor examination of our ESOP feature of our Employees’ Profit Sharing, Retirement and Savings Plan and Trust (the “Plan”). See Footnote No. 2, “Income Taxes,” for additional information on the ESOP settlement. Additionally, the increase was attributable to, among other things, increased costs related to our unit growth, development and systems improvements, increased legal expenses, and increased other administrative costs. Also unfavorably impacting general, administrative, and other expenses, when compared to the prior year, were foreign exchange losses totaling $2 million in 2007 compared to foreign exchange gains of $6 million in 2006 and $1 million of guarantee charges in 2007 while the year-ago period reflected $6 million of guarantee reversals. Partially offsetting the aforementioned increases were $4 million of lower hotel operating agreement performance cure payments in 2007 compared to 2006 and a $9 million reversal in 2007 of reserves that were no longer required. Increased legal expenses in 2007 include charges associated with litigation and other legal matters. Of the $91 million increase in total general, administrative, and other expenses, an increase of $13 million was attributable to our Lodging and Timeshare segments and a $78 million increase was unallocated.

Timeshare sales and services revenue net of direct expenses of $350 million decreased by $7 million (2 percent), compared to the prior year, primarily reflecting flat development revenue net of product costs and marketing and selling costs and $12 million of increased financing revenue net of financing expenses, more than offset by the reversal in 2006 of $15 million of contingency reserves and $4 million of lower services revenue net of services expenses. Flat development revenue net of product costs and marketing and selling costs reflected newer projects that reached reportability thresholds in 2007, offset by several other projects that were approaching sell-out. The increase in financing revenue net of financing costs primarily reflects increased accretion, interest income, and higher note sale gains in 2007, compared to 2006.

The $5 million (3 percent) decrease in owned, leased, corporate housing, and other revenue net of direct expenses reflected $19 million in hotel management and franchise agreement termination fees received in 2007, compared to $26 million in 2006. Depreciation charges totaling $8 million were recorded in 2007 associated with one owned property that was reclassified from “held for sale” to “held and used” during 2007 compared to depreciation charges recorded in 2006 of $7 million associated with two properties that were reclassified from “held for sale” to “held and used.” Partially offsetting the aforementioned decreases in owned, leased, corporate housing, and other revenue net

 

32


Table of Contents

of direct expenses was the favorable impact of $4 million associated with both the stronger demand environment in 2007 and the impact of the sale and purchase of several properties.

Gains and Other Income (Expense)

The table below shows our gains and other income for fiscal years 2008, 2007, and 2006:

 

($ in millions)            2008                     2007                    2006          

Gain on debt extinguishment

   $ 28     $ —      $ —    

Gains on sales of real estate and other

     14       39      26  

Loss on expected land sale

     —         —        (37 )

Other note sale/repayment gains

     —         1      2  

Gains on forgiveness of debt

     —         12      —    

(Loss)/gain on sale/income on redemption of joint venture and other investments

     (1 )     31      68  

(Loss)/income from cost method joint ventures

     (3 )     14      15  
                       
   $ 38     $ 97    $ 74  
                       

2008 Compared to 2007

The $28 million gain on debt extinguishment in 2008 represents the difference between the purchase price and net carrying amount of our Senior Notes we repurchased. For additional information on the debt extinguishment, see the “Liquidity and Capital Resources” section later in this report. The $25 million decrease in gains on sales of real estate and other primarily reflected a $23 million gain associated with sales of real estate in our International segment as well as other smaller gains on sale of real estate in 2007 that did not occur in 2008. The $12 million gain on forgiveness of debt in 2007 was associated with government incentives noted in the “2007 Compared to 2006” section below. Gain on sale/income on redemption of joint venture and other investments of $31 million in 2007 reflected an $18 million gain associated with the sale of stock we held and net gains totaling $13 million on the sale of joint venture investments. Income from cost method joint ventures decreased $17 million to a loss of $3 million in 2008 compared to the prior year primarily due to certain cost method tax investments that we deemed to be other-than-temporarily impaired (see the “Other Charges” section of Footnote No. 20, “Restructuring Costs and Other Charges,” for more information).

2007 Compared to 2006

The $12 million gain on forgiveness of debt for 2007 was associated with government incentives. The loans were forgiven in recognition of our contribution to job growth and economic development. Gain on sale/income on redemption of joint venture and other investments of $31 million in 2007 reflected an $18 million gain associated with the sale of stock we held and net gains totaling $13 million on the sale of joint venture investments. Gain on sale/income on redemption of joint venture and other investments of $68 million in 2006 was comprised of $43 million of net gains associated with the sale of joint venture investments and the redemption of preferred stock we held in one investee, which generated a gain of $25 million. Gains on sales of real estate and other increased $13 million in 2007, and primarily reflected a $23 million gain associated with sales of real estate by our International segment in 2007 that did not occur in 2006, partially offset by smaller gains in 2006 that did not occur in 2007.

Interest Expense

2008 Compared to 2007

Interest expense decreased by $21 million (11 percent) to $163 million in 2008 compared to $184 million in 2007. The decrease in interest expense compared to the prior year reflected a charge of $13 million for interest on the excise taxes associated with the ESOP settlement in 2007. Interest expense associated with commercial paper and our Credit Facility decreased in 2008 reflecting a reduction in the amount of commercial paper outstanding, lower interest rates on commercial paper, and increased borrowings under the Credit Facility with a lower interest rate. As a result, year-over-year interest expense was lower by $7 million. We also benefitted from a $15 million decrease in interest costs associated with various programs that we operate on behalf of owners (including our Marriott Rewards, gift certificates, and self-insurance programs) as a result of lower interest rates, a $6 million favorable variance to the prior year for higher capitalized interest associated with construction projects, and the maturity of our Series E Senior Notes in early 2008 yielding a $6 million favorable variance to the prior year. The write-off of $2 million of deferred financing costs in 2007 related to the refinancing of our revolving credit agreement resulted in a favorable variance in 2008. These favorable variances to the prior year were partially offset by the impact of the Series I and Series J Senior Notes issuances, which occurred in the second half of 2007 that increased our interest expense in 2008 by $30 million.

 

33


Table of Contents

2007 Compared to 2006

Interest expense increased by $60 million (48 percent) to $184 million for 2007 from $124 million in 2006. Of the $60 million increase over 2006, $78 million was due to: $26 million of higher interest reflecting a higher outstanding commercial paper balance, primarily due to increased share repurchases and the ESOP settlement payments, and related interest rates; $25 million of interest associated with our Series H Senior Notes issuance, which occurred late in 2006 and our Series I and Series J Senior Notes issuances, which occurred in 2007; a charge of $13 million in 2007 related to the ESOP settlement; charges totaling $53 million and $46 million in 2007 and 2006, respectively, relating to interest on accumulated cash inflows in advance of our cash outflows for various programs that we operate on the owners’ behalf (including our Marriott Rewards, gift certificates, and self-insurance programs); interest totaling $5 million associated with other additional debt; and the write-off of $2 million of deferred financing costs associated with the refinancing of our revolving credit agreement in 2007. See Footnote No. 2, “Income Taxes,” for additional information on the ESOP settlement. The increase in interest on the programs we operate on behalf of the owners over the year-ago period is attributable to higher liability balances and higher interest rates. Partially offsetting the $78 million interest expense increases over 2006 was an $18 million favorable variance to last year for higher capitalized interest associated with construction projects.

Interest Income, Provision for Loan Losses, and Income Tax

2008 Compared to 2007

Interest income, before the provision for loan losses, increased by $1 million (3 percent) to $39 million from $38 million in the prior year.

The provision for loan losses increased by $3 million (18 percent) to $20 million from $17 million in the prior year. The increase reflected provisions recorded in 2008 including a $22 million provision on a fully impaired loan (see the “Other Charges” section of Footnote No. 20, “Restructuring Costs and Other Charges,” for more information) and a $3 million loan loss provision associated with one property. The unfavorable variance associated with the 2008 provisions was mostly offset by favorable variances associated with a $12 million provision recorded in 2007, related to one property, a $5 million provision recorded in 2007 to write off the remaining exposure associated with our investment in a Delta Airlines lease, and the reversal of $5 million of provisions in 2008 related to two previously impaired loans that were repaid. For additional information regarding the Delta Airlines lease investment write-off, see the “Investment in Leveraged Lease” caption later in this report.

Our tax provision decreased by $91 million (21 percent) to $350 million in 2008 from a tax provision of $441 million in 2007 and reflected the impact associated with lower pretax income in 2008, a 2007 charge for a German legislative tax change, and $6 million of taxes in 2007 associated with additional interest on the ESOP settlement. This decrease was partially offset by $39 million in higher deferred compensation costs in 2008 and a higher tax rate in 2008. The higher 2008 tax rate reflected: (1) $29 million of income tax expense primarily related to an unfavorable U.S. Court of Federal Claims decision involving a refund claim associated with a 1994 tax planning transaction; (2) $19 million of income tax expense due primarily to prior years’ tax adjustments, including a settlement with the IRS that resulted in a lower than expected refund of taxes associated with a 1995 leasing transaction; and (3) $24 million of income tax expense related to the tax treatment of funds received from certain foreign subsidiaries that is in ongoing discussions with the IRS.

2007 Compared to 2006

Interest income, before the provision for loan losses, decreased by $11 million (22 percent) to $38 million in 2007 from $49 million in 2006, primarily reflecting lower interest income associated with loans that have been repaid to us, partially offset by the impact associated with new loan fundings.

Loan loss provisions increased by $20 million versus the prior year primarily reflecting a $12 million charge associated with one property and a $5 million charge to write off our remaining exposure associated with our investment in a Delta Airlines lease versus loan loss reversals of $3 million in 2006. For additional information regarding the Delta Airlines lease investment write-off, see the “Investment in Leveraged Lease” caption later in this report.

Our tax provision increased by $61 million (16 percent) to $441 million in 2007 from a tax provision of $380 million in 2006 and reflected higher pretax income from our Lodging and Timeshare segments as well as a higher tax rate in 2007, primarily reflecting both increased taxes associated with our international operations and a less favorable mix of taxable earnings between countries. Increased taxes also reflect a charge for a German legislative tax change in 2007, which had a one-time impact and $6 million of taxes in 2007 associated with additional interest on the ESOP settlement. See Footnote No. 2, “Income Taxes,” for additional information on the ESOP settlement.

 

34


Table of Contents

Equity in Earnings (Losses)

2008 Compared to 2007

Equity in earnings of $15 million in 2008 was unchanged from earnings of $15 million in 2007 and primarily reflected $14 million of increased earnings from a joint venture, which sold portfolio assets in 2008 and had significant associated gains, $10 million of favorable variances for three joint ventures that experienced losses due to start-up costs in the prior year, and $5 million of increased earnings from an international segment joint venture primarily reflecting insurance proceeds received by that joint venture in 2008, partially offset by an unfavorable $11 million impact associated with tax law changes in a country in which two international joint ventures operate, an impairment charge of $9 million associated with one Luxury segment joint venture under development, and a $7 million impact related to contract cancellation allowances recorded at one Timeshare segment joint venture (see the “Other Charges” section of Footnote No. 20, “Restructuring Costs and Other Charges,” for more information on the impairment and contract cancellation allowances).

2007 Compared to 2006

Equity in earnings increased by $12 million to earnings of $15 million from $3 million in 2006 and reflected the mix of investments, compared to 2006, and stronger results at several joint ventures reflecting the strong lodging demand environment in 2007, for one joint venture, the reopening of a hotel, late in 2006, in Mexico, which had been closed following a hurricane in 2005 and strong demand in 2007 for our timeshare products in Hawaii.

Minority Interest

2008 Compared to 2007

Minority interest increased by $14 million in 2008 to a $15 million benefit. The minority interest benefit of $15 million is net of tax and reflected our partners’ share of losses totaling $24 million associated with joint ventures we consolidate net of our partners’ share of tax benefits of $9 million associated with the losses.

Income from Continuing Operations

2008 Compared to 2007

Compared to the prior year, income from continuing operations decreased by $338 million (48 percent) to $359 million in 2008, and diluted earnings per share from continuing operations decreased by $0.77 (44 percent) to $0.98. As discussed in more detail in the preceding sections beginning with “Operating Income,” the decrease versus the prior year was due to lower Timeshare sales and services revenue net of direct expenses ($261 million), lower gains and other income ($59 million), lower incentive management fees ($58 million), restructuring costs recorded in 2008 ($55 million), lower owned, leased, corporate housing, and other revenue net of direct expenses ($41 million), higher general, administrative, and other expenses ($15 million), and higher provision for loan losses ($3 million). Partially offsetting these unfavorable variances were lower income taxes ($91 million), higher base management and franchise fees ($27 million), lower interest expense ($21 million), a higher minority interest benefit ($14 million), and higher interest income ($1 million).

2007 Compared to 2006

Compared to 2006, income from continuing operations decreased by $15 million (2 percent) to $697 million in 2007, and diluted earnings per share from continuing operations increased by $0.10 (6 percent) to $1.75. As discussed in more detail in the preceding sections beginning with “Operating Income,” the decrease versus the prior year is due to higher general, administrative, and other expenses ($91 million), higher taxes ($61 million), higher interest expense ($60 million), higher loan loss provision ($20 million), lower interest income ($11 million), lower Timeshare sales and services revenue net of direct expenses ($7 million), and lower owned, leased, corporate housing, and other revenue net of direct expenses ($5 million). Partially offsetting these unfavorable variances were higher fee income ($204 million), higher gains and other income ($23 million), higher equity investment results ($12 million), and a higher minority interest benefit ($1 million).

Cumulative Effect of Change in Accounting Principle

2006

Statement of Position 04-2, “Accounting for Real Estate Time-Sharing Transactions”

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Financial Accounting Standards (“FAS”) No. 152, “Accounting for Real Estate Time-Sharing Transactions-an amendment of FASB Statements No. 66 and 67,” and the American Institute of Certified Public Accountants issued SOP 04-2. Additionally, the FASB amended FAS No. 66, “Accounting for Sales of Real Estate,” and FAS No. 67, “Accounting for Costs and

 

35


Table of Contents

Initial Rental Operations of Real Estate Projects,” to exclude accounting for real estate time-sharing transactions from these statements. We adopted SOP 04-2 at the beginning of the 2006 first quarter.

Under SOP 04-2, we charge the majority of sales and marketing costs we incur to sell timeshares to expense when incurred. We also record an estimate of expected uncollectibility on notes receivable that we receive from timeshare purchasers as a reduction in revenue at the time that we recognize profit on a timeshare sale. We also account for rental and other operations during holding periods as incidental operations, which require us to record any excess of revenues over costs as a reduction of inventory costs.

The adoption of SOP 04-2 in 2006, which we reported as a cumulative effect of change in accounting principle in our Consolidated Statements of Income, resulted in a non-cash after-tax charge of $109 million ($0.25 per diluted share). The pretax charge totaled $173 million and comprised a $130 million inventory write-down, the establishment of a $25 million notes receivable reserve and an increase in current liabilities of $18 million.

We estimate that, for the 20-year period from 2009 through 2028, the cost of completing improvements and currently planned amenities for our owned timeshare properties will be approximately $3.5 billion.

Business Segments

We are a diversified hospitality company with operations in five business segments:

 

   

North American Full-Service Lodging, which includes the Marriott Hotels & Resorts, Marriott Conference Centers, JW Marriott Hotels & Resorts, Renaissance Hotels & Resorts, and Renaissance ClubSport properties located in the continental United States and Canada;

 

   

North American Limited-Service Lodging, which includes the Courtyard, Fairfield Inn, SpringHill Suites, Residence Inn, TownePlace Suites, and Marriott ExecuStay properties located in the continental United States and Canada;

 

   

International Lodging, which includes the Marriott Hotels & Resorts, JW Marriott Hotels & Resorts, Renaissance Hotels & Resorts, Courtyard, Fairfield Inn, Residence Inn, and Marriott Executive Apartments properties located outside the continental United States and Canada;

 

   

Luxury Lodging, which includes The Ritz-Carlton and Bulgari Hotels & Resorts properties worldwide (together with adjacent residential projects associated with some Ritz-Carlton hotels), as well as Edition, for which no properties are yet open; and

 

   

Timeshare, which includes the development, marketing, operation, and sale of Marriott Vacation Club, The Ritz-Carlton Club and Residences, Grand Residences by Marriott, and Horizons by Marriott Vacation Club timeshare, fractional ownership, and residential properties worldwide.

In addition to the segments above, in 2007 we exited the synthetic fuel business, which was formerly a separate segment but which we now report under discontinued operations.

We evaluate the performance of our segments based primarily on the results of the segment without allocating corporate expenses, interest expense, income taxes, or indirect general, administrative, and other expenses. With the exception of the Timeshare segment, we do not allocate interest income to our segments. Because note sales are an integral part of the Timeshare segment, we include note sale gains in our Timeshare segment results. We also include interest income associated with our Timeshare segment notes in our Timeshare segment results because financing sales are an integral part of that segment’s business. Additionally, we allocate other gains and losses, equity in earnings or losses from our joint ventures, divisional general, administrative, and other expenses, and minority interests in income or losses of consolidated subsidiaries to each of our segments. “Other unallocated corporate” represents that portion of our revenues, general, administrative, and other expenses, equity in earnings or losses, and other gains or losses that are not allocable to our segments.

We aggregate the brands presented within our North American Full-Service, North American Limited-Service, International, Luxury, and Timeshare segments considering their similar economic characteristics, types of customers, distribution channels, the regulatory business environment of the brands and operations within each segment and our organizational and management reporting structure.

 

36


Table of Contents

Total Lodging and Timeshare Products by Segment

At year-end 2008, we operated or franchised the following properties by segment (excluding 2,332 corporate housing rental units associated with our ExecuStay brand):

 

     Total Lodging Products
     Properties    Rooms
     U.S.    Non-U.S.    Total    U.S.    Non-U.S.    Total

North American Full-Service Lodging Segment (1)

                 

Marriott Hotels & Resorts

   317    12    329    124,425    4,558    128,983

Marriott Conference Centers

   11    —      11    3,133    —      3,133

JW Marriott Hotels & Resorts

   15    1    16    7,901    221    8,122

Renaissance Hotels & Resorts

   74    3    77    27,425    1,034    28,459

Renaissance ClubSport

   2    —      2    349    —      349
                             
   419    16    435    163,233    5,813    169,046

North American Limited-Service Lodging Segment (1)

                 

Courtyard

   728    16    744    101,743    2,847    104,590

Fairfield Inn

   560    8    568    49,678    903    50,581

SpringHill Suites

   207    1    208    24,027    124    24,151

Residence Inn

   555    17    572    66,252    2,590    68,842

TownePlace Suites

   163    —      163    16,328    —      16,328
                             
   2,213    42    2,255    258,028    6,464    264,492

International Lodging Segment (1)

                 

Marriott Hotels & Resorts

   4    145    149    2,767    40,851    43,618

JW Marriott Hotels & Resorts

   1    25    26    387    8,987    9,374

Renaissance Hotels & Resorts

   —      62    62    —      20,581    20,581

Courtyard

   —      64    64    —      12,668    12,668

Fairfield Inn

   —      1    1    —      206    206

Residence Inn

   —      1    1    —      75    75

Marriott Executive Apartments

   —      20    20    —      3,217    3,217
                             
   5    318    323    3,154    86,585    89,739

Luxury Lodging Segment

                 

The Ritz-Carlton

   37    33    70    11,629    10,204    21,833

Bulgari Hotels & Resorts

   —      2    2    —      117    117

The Ritz-Carlton-Residential (2)

   22    1    23    2,176    93    2,269

The Ritz-Carlton Serviced Apartments

   —      3    3    —      478    478
                             
   59    39    98    13,805    10,892    24,697

Timeshare Segment (3)

                 

Marriott Vacation Club

   39    10    49    9,282    2,071    11,353

The Ritz-Carlton Club-Fractional

   7    3    10    339    117    456

The Ritz-Carlton Club-Residential (2)

   2    1    3    138    10    148

Grand Residences by Marriott-Fractional

   1    1    2    199    42    241

Grand Residences by Marriott-Residential (1), (2)

   1    —      1    65    —      65

Horizons by Marriott Vacation Club

   2    —      2    444    —      444
                             
   52    15    67    10,467    2,240    12,707
                             

Total

   2,748    430    3,178    448,687    111,994    560,681
                             

 

(1)

North American includes properties located in the continental United States and Canada. International includes properties located outside the continental United States and Canada.

(2)

Represents projects where we manage the related owners’ association. Residential products are included once they possess a certificate of occupancy.

(3)

Includes resorts that are in active sales as well as those that are sold out. Products in active sales may not be ready for occupancy.

 

37


Table of Contents

Revenues

 

($ in millions)          2008                 2007                2006      

North American Full-Service Segment

   $ 5,631     $ 5,476    $ 5,196

North American Limited-Service Segment

     2,233       2,198      2,060

International Segment

     1,544        1,594      1,411

Luxury Segment

     1,659       1,576      1,423

Timeshare Segment

     1,750       2,065      1,840
                     

Total segment revenues

     12,817       12,909      11,930

Other unallocated corporate

     62       81      65
                     
   $ 12,879     $ 12,990    $ 11,995
                     

Income from Continuing Operations

 

($ in millions)        2008             2007             2006      

North American Full-Service Segment

   $ 419     $ 478     $ 455  

North American Limited-Service Segment

     395       461       380  

International Segment

     246       271       237  

Luxury Segment

     78       72       63  

Timeshare Segment

     28       306       280  
                        

Total segment financial results

     1,166       1,588       1,415  

Other unallocated corporate

     (304 )     (287 )     (251 )

Interest income, provision for loan losses, and interest expense

     (144 )     (163 )     (72 )

Income taxes

     (359 )     (441 )     (380 )
                        
   $ 359     $ 697     $ 712  
                        

We allocate net minority interest in losses of consolidated subsidiaries to our segments. Accordingly, as of year-end 2008, we allocated net minority interest in losses of consolidated subsidiaries as reflected in our Consolidated Statements of Income as shown in the following table:

Minority Interest

 

($ in millions)        2008             2007             2006      

North American Full-Service Segment

   $ —       $ —       $ 1  

International Segment

     (1 )     (1 )     (1 )

Luxury Segment

     —         1       —    

Timeshare Segment

     25       1       —    
                        

Total segment minority interest

     24       1       —    

Provision for income taxes

     (9 )     —         —    
                        
   $ 15     $ 1     $ —    
                        

 

Equity in Earnings (Losses) of Equity Method Investees

 

 

($ in millions)        2008             2007             2006      

North American Full-Service Segment

   $ 3     $ 3     $ 2  

North American Limited-Service Segment

     —         2       —    

International Segment

     (2 )     3       —    

Luxury Segment

     (12 )     (4 )     (2 )

Timeshare Segment

     11       10       (2 )
                        

Total segment equity in earnings (losses)

     —         14       (2 )

Other unallocated corporate

     15       1       5  
                        
   $ 15     $ 15     $ 3  
                        

 

38


Table of Contents

Our business includes our North American Full-Service, North American Limited-Service, International, Luxury, and Timeshare segments. We consider total segment revenues and total segment financial results to be meaningful indicators of our performance because they measure our growth in profitability and enable investors to compare the revenues and results of our operations to those of other lodging companies.

2008 Compared to 2007

We added 215 properties (32,842 rooms) and 42 properties (7,525 rooms) exited the system in 2008, not including residential products. We also added six residential properties (567 units) in 2008.

Total segment financial results decreased by $422 million (27 percent) to $1,166 million in 2008 from $1,588 million in the prior year, and total segment revenues decreased by $92 million to $12,817 million in 2008, a 1 percent decrease from revenues of $12,909 million in 2007. While demand was weaker in 2008 compared to 2007, international and full-service properties experienced stronger demand than luxury and limited-service properties. The decrease in revenues included a $259 million increase in cost reimbursements revenue, which does not impact operating income or net income. The results, compared to the year-ago period, reflected a decrease of $261 million in Timeshare sales and services revenue net of direct expenses, $58 million of lower incentive management fees, $51 million of increased general, administrative, and other expenses, a decrease of $37 million in gains and other income, $29 million of restructuring costs recorded in 2008, a decrease of $22 million in owned, leased, corporate housing, and other revenue net of direct expenses, and $14 million of lower equity joint venture results. These unfavorable variances were partially offset by a $27 million (3 percent) increase in combined base management and franchise fees to $1,086 million in the 2008 period from $1,059 million in 2007 and a $23 million increase in minority interest benefit.

Higher RevPAR for comparable rooms, resulting from rate increases in international markets, and new unit growth drove the increase in base management and franchise fees. The $27 million increase in combined base management and franchise fees also reflected the impact of both base management fees totaling $6 million in 2007 from business interruption insurance proceeds and $13 million of lower franchise relicensing fees in 2008. Compared to 2007, incentive management fees decreased by $58 million (16 percent) in 2008 and reflected the recognition in 2007 of $17 million of incentive management fees that were calculated based on prior periods’ results, but not earned and due until 2007. Furthermore, incentive management fees for 2007 also included $13 million of business interruption insurance proceeds, also associated with hurricanes in prior years. The decrease in incentive management fees also reflected lower property-level profitability due to lower RevPAR, higher property-level wages and benefits costs, and utilities costs, particularly in North America. In 2008, 56 percent of our managed properties paid incentive management fees to us versus 67 percent in 2007. In addition, in 2008, 49 percent of our incentive fees were derived from international hotels versus 35 percent in 2007.

Systemwide RevPAR, which includes data from our franchised properties, in addition to our owned, leased, and managed properties, for comparable North American properties decreased by 2.7 percent and RevPAR for our comparable North American company-operated properties decreased by 2.9 percent.

Systemwide RevPAR for comparable international properties increased by 3.6 percent, and RevPAR for comparable international company-operated properties increased by 3.3 percent. Worldwide RevPAR for comparable systemwide properties decreased by 1.5 percent (0.8 percent using actual dollars) while worldwide RevPAR for comparable company-operated properties decreased by 1.1 percent (0.2 percent using actual dollars).

Compared to the year-ago period, worldwide comparable company-operated house profit margins in 2008 decreased by 70 basis points, reflecting the impact of stronger year-over-year RevPAR associated with international properties and very tight cost control plans in 2008 at properties in our system, more than offset by the impact of year-over-year RevPAR decreases associated with properties in North America reflecting weaker demand and also higher expenses in North America primarily due to increased utilities and payroll costs. North American company-operated house profit margins declined by 140 basis points reflecting significant cost control plans at properties, more than offset by the impact of decreased demand and higher operating costs, including those associated with wages and benefits and utilities. For 2008, house profit per available room (“HP-PAR”) at our North American managed properties decreased by 5.8 percent. HP-PAR at our North American limited-service managed properties decreased by 8.0 percent, and worldwide HP-PAR for all our brands increased by 2.6 percent on a constant U.S. dollar basis.

2007 Compared to 2006

We added 203 properties (29,200 rooms) and 55 properties (9,722 rooms) exited the system in 2007, not including residential products. We also added three residential properties (347 units) in 2007.

 

39


Table of Contents

Total segment financial results increased by $173 million (12 percent) to $1,588 million in 2007 from $1,415 million in 2006, and total segment revenues increased by $979 million to $12,909 million in 2007, an 8 percent increase from revenues of $11,930 million in 2006. The results, compared to the prior year, reflect a $204 million (17 percent) increase in combined base management, franchise, and incentive management fees to $1,428 million in 2007 from $1,224 million in 2006, a $16 million increase in earnings associated with equity investments, and a $1 million minority interest benefit. Partially offsetting these favorable variances was a decrease of $18 million in owned, leased, corporate housing, and other revenue net of direct expenses, $13 million of increased general, administrative, and other expenses, a decrease of $10 million in gains and other income, and a decrease of $7 million in Timeshare sales and services revenue net of direct expenses.

Higher RevPAR for comparable rooms, resulting from both domestic and international rate increases, higher property-level food and beverage and other revenue, and new unit growth, drove the increase in base management and franchise fees. In 2006, we recognized $5 million of base management fees that were calculated based on prior periods’ results, but not earned and due until 2006, versus no similar fees in 2007. Incentive management fees increased by $88 million (31 percent) during 2007, reflecting the impact of strong room rate increases and property-level margin improvements associated with productivity improvements. Incentive management fees included $17 million and $10 million for 2007 and 2006, respectively, that were calculated based on prior periods’ earnings, but not earned and due until the periods in which they were recognized. Furthermore, incentive management fees for 2007 also included $13 million of business interruption insurance proceeds associated with hurricanes in prior years and base management fees included $6 million and $1 million of business interruption insurance proceeds, also associated with hurricanes in prior years, received in 2007 and 2006, respectively. In 2007, 67 percent of our managed properties paid incentive management fees to us versus 62 percent in 2006.

Systemwide RevPAR for comparable North American properties increased by 6.0 percent over 2006, and RevPAR for our comparable North American company-operated properties increased by 6.2 percent over 2006.

Systemwide RevPAR for comparable international properties increased by 8.4 percent, and RevPAR for comparable international company-operated properties increased by 8.9 percent. Worldwide RevPAR for comparable systemwide properties increased by 6.5 percent (7.6 percent using actual dollars) while worldwide RevPAR for comparable company-operated properties increased by 7.0 percent (8.8 percent using actual dollars).

Compared to 2006, 2007 worldwide comparable company-operated house profit margins increased by 150 basis points, while North American company-operated house profit margins improved by 160 basis points versus 2006. For 2007, compared to 2006, HP-PAR at our full-service managed properties in North America increased by 10.6 percent. HP-PAR at our North American limited-service managed properties increased by 8.9 percent, and worldwide HP-PAR for all our brands increased by 11.0 percent on a constant dollar basis.

Lodging Development

We opened 215 properties, totaling 32,842 rooms, across our brands in 2008 and 42 properties (7,525 rooms) left the system, not including residential products. We also added six residential properties (567 units). Highlights of the year included:

 

   

Converting 31 properties (6,439 rooms), or 19 percent of our gross room additions for the year, from other brands, and 12 percent of those rooms were located in international markets;

 

   

Opening approximately 24 percent of all the new rooms outside the United States;

 

   

Adding 168 properties (19,747 rooms) to our North American Limited-Service brands; and

 

   

Opening one new Marriott Vacation Club property in Asia on the island of Phuket, Thailand.

We currently have more than 125,000 hotel rooms under construction, awaiting conversion, or approved for development in our hotel development pipeline and we expect to add over 30,000 hotel rooms to our system in 2009.

Recent events, including failures and near failures of a number of large financial service companies, have made the capital markets increasingly volatile. Accordingly, given the difficult lending environment, the Company, owners or franchisees may decide to reevaluate continuing some of the projects included in the development pipeline. While the company has invested in few of its pipeline projects, possible delays, cancellations, or financial restructurings of projects under development could have a negative impact on our financial results.

We believe that we have access to sufficient financial resources to finance our growth, as well as to support our ongoing operations and meet debt service and other cash requirements. Nonetheless, our ability to sell properties

 

40


Table of Contents

that we develop and the ability of hotel developers to build or acquire new Marriott-branded properties, both of which are important parts of our growth plan, depend in part on capital access, availability and cost for other hotel developers and third-party owners. These growth plans are subject to numerous risks and uncertainties, many of which are outside of our control. See the “Forward-Looking Statements” and “Risks and Uncertainties” captions earlier in this report and the “Liquidity and Capital Resources” caption later in this report.

Statistics

The following tables show occupancy, average daily rate, and RevPAR for comparable properties, for each of the brands in our North American Full-Service and North American Limited-Service segments, for our International segment by region, and the principal brand in our Luxury segment, The Ritz-Carlton. We have not presented statistics for company-operated Fairfield Inn properties in these tables because we operate only a limited number of properties, as the brand is predominantly franchised, and such information would not be meaningful (identified as “nm” in the tables that follow). Systemwide statistics include data from our franchised properties, in addition to our owned, leased, and managed properties.

The occupancy, average daily rate, and RevPAR statistics used throughout this report for 2008 include the 53 weeks from December 29, 2007, through January 2, 2009, the statistics for 2007 include the 52 weeks from December 30, 2006, through December 28, 2007, and the statistics for 2006 include the period from December 31, 2005, through December 29, 2006 (except in each case, for The Ritz-Carlton brand properties and properties located outside of the continental United States and Canada, which for them includes the period from January 1 through December 31 for each year).

 

41


Table of Contents
     Comparable Company-Operated
North American Properties (1)
   Comparable Systemwide
North American Properties (1)
         2008         Change vs. 2007        2008         Change vs. 2007

Marriott Hotels & Resorts (2)

             

Occupancy

     70.5 %   -2.1 %   pts.      68.0 %   -2.5 %   pts.

Average Daily Rate

   $ 178.24     1.3 %      $ 163.37     1.4 %  

RevPAR

   $ 125.69     -1.6 %      $ 111.02     -2.2 %  

Renaissance Hotels & Resorts

             

Occupancy

     69.4 %   -1.4 %   pts.      68.9 %   -1.7 %   pts.

Average Daily Rate

   $ 167.17     0.4 %      $ 155.35     0.3 %  

RevPAR

   $ 116.05     -1.5 %      $ 107.08     -2.1 %  

Composite North American Full-Service (3)

             

Occupancy

     70.3 %   -2.0 %   pts.      68.1 %   -2.3 %   pts.

Average Daily Rate

   $ 176.30     1.2 %      $ 162.07     1.2 %  

RevPAR

   $ 123.98     -1.6 %      $ 110.38     -2.2 %  

The Ritz-Carlton North America

             

Occupancy

     68.6 %   -3.1 %   pts.      68.6 %   -3.1 %   pts.

Average Daily Rate

   $ 335.52     -0.4 %      $ 335.52     -0.4 %  

RevPAR

   $ 230.13     -4.7 %      $ 230.13     -4.7 %  

Composite North American Full-Service and Luxury (4)

             

Occupancy

     70.2 %   -2.1 %   pts.      68.1 %   -2.4 %   pts.

Average Daily Rate

   $ 190.29     0.7 %      $ 171.24     0.9 %  

RevPAR

   $ 133.52     -2.2 %      $ 116.67     -2.5 %  

Residence Inn

             

Occupancy

     74.8 %   -2.2 %   pts.      75.4 %   -2.0 %   pts.

Average Daily Rate

   $ 126.06     0.2 %      $ 125.62     1.5 %  

RevPAR

   $ 94.32     -2.7 %      $ 94.70     -1.1 %  

Courtyard

             

Occupancy

     67.0 %   -2.8 %   pts.      68.3 %   -2.7 %   pts.

Average Daily Rate

   $ 127.86     -1.0 %      $ 126.01     0.4 %  

RevPAR

   $ 85.71     -4.9 %      $ 86.07     -3.4 %  

Fairfield Inn

             

Occupancy

     nm     nm          66.2 %   -3.9 %   pts.

Average Daily Rate

     nm     nm        $ 91.75     2.1 %  

RevPAR

     nm     nm        $ 60.78     -3.5 %  

TownePlace Suites

             

Occupancy

     68.7 %   -4.7 %   pts.      69.4 %   -3.4 %   pts.

Average Daily Rate

   $ 87.46     1.0 %      $ 89.22     1.3 %  

RevPAR

   $ 60.12     -5.4 %      $ 61.88     -3.4 %  

SpringHill Suites

             

Occupancy

     69.1 %   -2.9 %   pts.      68.8 %   -3.2 %   pts.

Average Daily Rate

   $ 109.00     0.2 %      $ 108.78     0.9 %  

RevPAR

   $ 75.29     -3.8 %      $ 74.85     -3.6 %  

Composite North American Limited-Service (5)

             

Occupancy

     69.4 %   -2.7 %   pts.      69.9 %   -2.8 %   pts.

Average Daily Rate

   $ 123.69     -0.5 %      $ 116.29     1.2 %  

RevPAR

   $ 85.83     -4.2 %      $ 81.24     -2.8 %  

Composite North American (6)

             

Occupancy

     69.8 %   -2.4 %   pts.      69.2 %   -2.7 %   pts.

Average Daily Rate

   $ 160.85     0.4 %      $ 137.36     1.1 %  

RevPAR

   $ 112.31     -2.9 %      $ 95.04     -2.7 %  

 

(1)

Statistics are for the fifty-three and fifty-two weeks ended January 2, 2009, and December 28, 2007, respectively, except for Ritz-Carlton for which the statistics are for the twelve months ended December 31, 2008, and December 31, 2007.

(2)

Marriott Hotels & Resorts includes JW Marriott Hotels & Resorts.

(3)

Composite North American Full-Service statistics include Marriott Hotels & Resorts and Renaissance Hotels & Resorts properties located in the continental United States and Canada.

(4)

Composite North American Full-Service and Luxury includes Marriott Hotels & Resorts, Renaissance Hotels & Resorts, and Ritz-Carlton.

(5)

Composite North American Limited-Service statistics include Residence Inn, Courtyard, Fairfield Inn, TownePlace Suites, and SpringHill Suites properties located in the continental United States and Canada.

(6)

Composite North American statistics include Marriott Hotels & Resorts, Renaissance Hotels & Resorts, Residence Inn, Courtyard, Fairfield Inn, TownePlace Suites, SpringHill Suites, and The Ritz-Carlton properties located in the continental United States and Canada.

 

42


Table of Contents
     Comparable Company-Operated
Properties (1)
   Comparable Systemwide
Properties (1)
     2008     Change vs. 2007    2008     Change vs. 2007

Caribbean and Latin America (2)

             

Occupancy

     74.1 %   -0.9 %   pts.      70.4 %   -1.6 %   pts.

Average Daily Rate

   $ 195.63     11.6 %      $ 179.94     9.8 %  

RevPAR

   $ 145.05     10.2 %      $ 126.71     7.4 %  

Continental Europe (2)

             

Occupancy

     71.0 %   -3.3 %   pts.      69.8 %   -2.1 %   pts.

Average Daily Rate

   $ 203.88     5.9 %      $ 207.79     7.4 %  

RevPAR

   $ 144.82     1.2 %      $ 144.97     4.4 %  

United Kingdom (2)

             

Occupancy

     74.8 %   -2.0 %   pts.      74.2 %   -2.3 %   pts.

Average Daily Rate

   $ 175.32     1.3 %      $ 174.06     1.4 %  

RevPAR

   $ 131.15     -1.4 %      $ 129.09     -1.7 %  

Middle East and Africa (2)

             

Occupancy

     75.4 %   2.5 %   pts.      75.4 %   2.5 %   pts.

Average Daily Rate

   $ 165.72     10.6 %      $ 165.72     10.6 %  

RevPAR

   $ 125.01     14.4 %      $ 125.01     14.4 %  

Asia Pacific (2), (3)

             

Occupancy

     70.6 %   -4.0 %   pts.      71.0 %   -3.9 %   pts.

Average Daily Rate

   $ 155.27     5.5 %      $ 157.13     4.7 %  

RevPAR

   $ 109.65     -0.2 %      $ 111.52     -0.8 %  

Regional Composite (4), (5)

             

Occupancy

     72.5 %   -2.4 %   pts.      71.4 %   -2.2 %   pts.

Average Daily Rate

   $ 180.81     6.0 %      $ 181.02     6.3 %  

RevPAR

   $ 131.00     2.6 %      $ 129.21     3.1 %  

International Luxury (6)

             

Occupancy

     69.8 %   -0.5 %   pts.      69.8 %   -0.5 %   pts.

Average Daily Rate

   $ 315.83     7.4 %      $ 315.83     7.4 %  

RevPAR

   $ 220.60     6.6 %      $ 220.60     6.6 %  

Total International (7)

             

Occupancy

     72.2 %   -2.2 %   pts.      71.2 %   -2.1 %   pts.

Average Daily Rate

   $ 195.65     6.5 %      $ 193.29     6.7 %  

RevPAR

   $ 141.18     3.3 %      $ 137.69     3.6 %  

 

(1)

We report financial results for all properties on a period-end basis, but report statistics for properties located outside the continental United States and Canada on a month-end basis. The statistics are for January through December. For the properties located in countries that use currencies other than the U.S. dollar, the comparison to 2007 was on a constant U.S. dollar basis.

(2)

Regional information includes Marriott Hotels & Resorts, Renaissance Hotels & Resorts, and Courtyard properties located outside of the continental United States and Canada.

(3)

Excludes Hawaii.

(4)

Includes Hawaii.

(5)

Regional Composite statistics include all properties located outside of the continental United States and Canada for Marriott Hotels & Resorts, Renaissance Hotels & Resorts, and Courtyard.

(6)

Includes The Ritz-Carlton properties located outside of North America and Bulgari Hotels & Resorts.

(7)

Total International includes Regional Composite statistics and statistics for The Ritz-Carlton International and Bulgari Hotels & Resorts.

 

43


Table of Contents
     Comparable Company-Operated
Properties (1)
   Comparable Systemwide
Properties (1)
     2008     Change vs. 2007    2008     Change vs. 2007

Composite Luxury (2)

             

Occupancy

     69.2 %   -1.9 %   pts.      69.2 %   -1.9 %   pts.

Average Daily Rate

   $ 326.63     2.7 %      $ 326.63     2.7 %  

RevPAR

   $ 225.87     -0.1 %      $ 225.87     -0.1 %  

Total Worldwide (3)

             

Occupancy

     70.4 %   -2.3 %   pts.      69.5 %   -2.6 %   pts.

Average Daily Rate

   $ 170.20     2.1 %      $ 146.02     2.2 %  

RevPAR

   $ 119.88     -1.1 %      $ 101.48     -1.5 %  

 

(1)

We report financial results for all properties on a period-end basis, but report statistics for properties located outside the continental United States and Canada on a month-end basis. For the properties located in countries that use currencies other than the U.S. dollar, the comparison to 2007 was on a constant U.S. dollar basis.

(2)

Composite Luxury includes worldwide properties for The Ritz-Carlton and Bulgari Hotels & Resorts.

(3)

Total Worldwide statistics include all properties worldwide for Marriott Hotels & Resorts, Renaissance Hotels & Resorts, Residence Inn, Courtyard, Fairfield Inn, TownePlace Suites, SpringHill Suites, and The Ritz-Carlton. Statistics for properties located in the continental United States and Canada (except for The Ritz-Carlton) represent the fifty-three and fifty-two weeks ended January 2, 2009, and December 28, 2007, respectively. Statistics for all The Ritz-Carlton brand properties and properties located outside of the continental United States and Canada represent the twelve months ended December 31, 2008, and December 31, 2007.

 

44


Table of Contents
     Comparable Company-Operated
North American Properties (1)
   Comparable Systemwide
North American Properties (1)
     2007     Change vs. 2006    2007     Change vs. 2006

Marriott Hotels & Resorts (2)

             

Occupancy

     72.6 %   1.0 %   pts.      70.8 %   0.6 %   pts.

Average Daily Rate

   $ 175.41     5.4 %      $ 160.61     5.5 %  

RevPAR

   $ 127.43     6.9 %      $ 113.66     6.4 %  

Renaissance Hotels & Resorts

             

Occupancy

     73.1 %   0.4 %   pts.      71.8 %   -0.4 %   pts.

Average Daily Rate

   $ 169.93     5.4 %      $ 157.29     5.8 %  

RevPAR

   $ 124.17     5.9 %      $ 112.96     5.1 %  

Composite North American Full-Service (3)

             

Occupancy

     72.7 %   0.9 %   pts.      70.9 %   0.5 %   pts.

Average Daily Rate

   $ 174.54     5.4 %      $ 160.10     5.5 %  

RevPAR

   $ 126.92     6.8 %      $ 113.56     6.2 %  

The Ritz-Carlton North America

             

Occupancy

     72.3 %   0.1 %   pts.      72.3 %   0.1 %   pts.

Average Daily Rate

   $ 331.48     7.3 %      $ 331.48     7.3 %  

RevPAR

   $ 239.67     7.5 %      $ 239.67     7.5 %  

Composite North American Full-Service and Luxury (4)

             

Occupancy

     72.7 %   0.8 %   pts.      71.0 %   0.4 %   pts.

Average Daily Rate

   $ 189.41     5.7 %      $ 169.92     5.7 %  

RevPAR

   $ 137.66     6.9 %      $ 120.65     6.4 %  

Residence Inn

             

Occupancy

     77.7 %   -0.5 %   pts.      78.2 %   -0.8 %   pts.

Average Daily Rate

   $ 124.24     4.6 %      $ 122.44     6.1 %  

RevPAR

   $ 96.53     3.9 %      $ 95.80     5.1 %  

Courtyard

             

Occupancy

     70.4 %   -0.4 %   pts.      72.1 %   -0.2 %   pts.

Average Daily Rate

   $ 127.34     5.6 %      $ 124.12     5.9 %  

RevPAR

   $ 89.69     4.9 %      $ 89.53     5.6 %  

Fairfield Inn

             

Occupancy

     nm     nm          70.5 %   -0.3 %   pts.

Average Daily Rate

     nm     nm        $ 88.19     7.2 %  

RevPAR

     nm     nm        $ 62.17     6.7 %  

TownePlace Suites

             

Occupancy

     74.2 %   -1.1 %   pts.      73.5 %   -2.4 %   pts.

Average Daily Rate

   $ 85.65     8.9 %      $ 86.93     8.4 %  

RevPAR

   $ 63.56     7.2 %      $ 63.89     5.0 %  

SpringHill Suites

             

Occupancy

     72.6 %   0.6 %   pts.      73.2 %   -0.6 %   pts.

Average Daily Rate

   $ 107.86     4.2 %      $ 106.49     6.5 %  

RevPAR

   $ 78.27     5.0 %      $ 77.97     5.7 %  

Composite North American Limited-Service (5)

             

Occupancy

     72.7 %   -0.4 %   pts.      73.6 %   -0.5 %   pts.

Average Daily Rate

   $ 122.63     5.4 %      $ 113.34     6.3 %  

RevPAR

   $ 89.18     4.8 %      $ 83.37     5.6 %  

Composite North American (6)

             

Occupancy

     72.7 %   0.3 %   pts.      72.6 %   -0.2 %   pts.

Average Daily Rate

   $ 159.01     5.8 %      $ 134.62     6.2 %  

RevPAR

   $ 115.60     6.2 %      $ 97.70     6.0 %  

 

(1)

Statistics are for the fifty-two weeks ended December 28, 2007, and December 29, 2006, except for Ritz-Carlton for which the statistics are for the twelve months ended December 31, 2007, and December 31, 2006.

(2)

Marriott Hotels & Resorts includes JW Marriott Hotels & Resorts.

(3)

Composite North American Full-Service statistics include Marriott Hotels & Resorts and Renaissance Hotels & Resorts properties located in the continental United States and Canada.

(4)

Composite North American Full-Service and Luxury includes Marriott Hotels & Resorts, Renaissance Hotels & Resorts, and Ritz-Carlton.

(5)

Composite North American Limited-Service statistics include Residence Inn, Courtyard, Fairfield Inn, TownePlace Suites, and SpringHill Suites properties located in the continental United States and Canada.

(6)

Composite North American statistics include Marriott Hotels & Resorts, Renaissance Hotels & Resorts, Residence Inn, Courtyard, Fairfield Inn, TownePlace Suites, SpringHill Suites, and The Ritz-Carlton properties located in the continental United States and Canada.

 

45


Table of Contents
     Comparable Company-Operated
Properties (1)
   Comparable Systemwide
Properties (1)
     2007     Change vs. 2006    2007     Change vs. 2006

Caribbean and Latin America (2)

             

Occupancy

     76.5 %   2.4 %   pts.      74.8 %   2.8 %   pts.

Average Daily Rate

   $ 167.56     9.2 %      $ 156.76     7.5 %  

RevPAR

   $ 128.25     12.7 %      $ 117.20     11.7 %  

Continental Europe (2)

             

Occupancy

     74.4 %   1.3 %   pts.      72.0 %   1.2 %   pts.

Average Daily Rate

   $ 173.92     5.8 %      $ 174.93     5.4 %  

RevPAR

   $ 129.34     7.7 %      $ 126.01     7.3 %  

United Kingdom (2)

             

Occupancy

     77.8 %   0.1 %   pts.      77.4 %   0.3 %   pts.

Average Daily Rate

   $ 203.27     5.2 %      $ 200.65     4.7 %  

RevPAR

   $ 158.08     5.2 %      $ 155.27     5.1 %  

Middle East and Africa (2)

             

Occupancy

     73.3 %   4.8 %   pts.      72.4 %   4.9 %   pts.

Average Daily Rate

   $ 135.74     9.1 %      $ 133.98     9.0 %  

RevPAR

   $ 99.57     16.8 %      $ 96.95     17.0 %  

Asia Pacific (2), (3)

             

Occupancy

     75.2 %   -0.8 %   pts.      75.3 %   -0.5 %   pts.

Average Daily Rate

   $ 147.79     8.9 %      $ 148.67     7.7 %  

RevPAR

   $ 111.15     7.8 %      $ 111.92     7.0 %  

Regional Composite (4), (5)

             

Occupancy

     75.7 %   0.8 %   pts.      74.6 %   1.0 %   pts.

Average Daily Rate

   $ 168.30     7.0 %      $ 166.03     6.3 %  

RevPAR

   $ 127.44     8.2 %      $ 123.78     7.8 %  

International Luxury (6)

             

Occupancy

     72.7 %   4.0 %   pts.      72.7 %   4.0 %   pts.

Average Daily Rate

   $ 292.24     6.1 %      $ 292.24     6.1 %  

RevPAR

   $ 212.54     12.2 %      $ 212.54     12.2 %  

Total International (7)

             

Occupancy

     75.4 %   1.2 %   pts.      74.4 %   1.3 %   pts.

Average Daily Rate

   $ 180.73     7.2 %      $ 176.57     6.6 %  

RevPAR

   $ 136.29     8.9 %      $ 131.36     8.4 %  

 

(1)

We report financial results for all properties on a period-end basis, but report statistics for properties located outside the continental United States and Canada on a month-end basis. The statistics are for January through December. For the properties located in countries that use currencies other than the U.S. dollar, the comparison to 2006 was on a constant U.S. dollar basis.

(2)

Regional information includes Marriott Hotels & Resorts, Renaissance Hotels & Resorts, and Courtyard properties located outside of the continental United States and Canada.

(3)

Excludes Hawaii.

(4)

Includes Hawaii.

(5)

Regional Composite statistics include all properties located outside of the continental United States and Canada for Marriott Hotels & Resorts, Renaissance Hotels & Resorts, and Courtyard.

(6)

Includes The Ritz-Carlton properties located outside of North America and Bulgari Hotels & Resorts.

(7)

Total International includes Regional Composite statistics and statistics for The Ritz-Carlton International and Bulgari Hotels & Resorts.

 

46


Table of Contents
     Comparable Company-Operated
Properties (1)
   Comparable Systemwide
Properties (1)
     2007     Change vs. 2006    2007     Change vs. 2006

Composite Luxury (2)

             

Occupancy

     72.5 %   1.8 %   pts.      72.5 %   1.8 %   pts.

Average Daily Rate

   $ 314.36     6.6 %      $ 314.36     6.6 %  

RevPAR

   $ 227.87     9.4 %      $ 227.87     9.4 %  

Total Worldwide (3)

             

Occupancy

     73.5 %   0.5 %   pts.      72.9 %   0.1 %   pts.

Average Daily Rate

   $ 165.19     6.2 %      $ 141.60     6.4 %  

RevPAR

   $ 121.34     7.0 %      $ 103.19     6.5 %  

 

(1)

We report financial results for all properties on a period-end basis, but report statistics for properties located outside the continental United States and Canada on a month-end basis. For the properties located in countries that use currencies other than the U.S. dollar, the comparison to 2006 was on a constant U.S. dollar basis.

(2)

Composite Luxury includes worldwide properties for The Ritz-Carlton and Bulgari Hotels & Resorts.

(3)

Total Worldwide statistics include all properties worldwide for Marriott Hotels & Resorts, Renaissance Hotels & Resorts, Residence Inn, Courtyard, Fairfield Inn, TownePlace Suites, SpringHill Suites, and The Ritz-Carlton. Statistics for properties located in the continental United States and Canada (except for The Ritz-Carlton) represent the fifty-two weeks ended December 28, 2007, and December 29, 2006. Statistics for all The Ritz-Carlton brand properties and properties located outside of the continental United States and Canada represent the twelve months ended December 31, 2007, and December 31, 2006.

 

47


Table of Contents

North American Full-Service Lodging includes Marriott Hotels & Resorts, Marriott Conference Centers, JW Marriott Hotels & Resorts, Renaissance Hotels & Resorts, and Renaissance ClubSport.

 

                    Annual Change  
($ in millions)    2008    2007    2006    2008/2007     2007/2006  

Segment revenues

   $ 5,631    $ 5,476    $ 5,196    3 %   5 %
                         

Segment results

   $ 419    $ 478    $ 455    -12 %   5 %
                         

2008 Compared to 2007

In 2008, across our North American Full-Service Lodging segment, we added 15 properties (4,611 rooms) and three properties (493 rooms) left the system.

In 2008, RevPAR for comparable company-operated North American full-service properties decreased by 1.6 percent to $123.98, occupancy decreased by 2.0 percentage points to 70.3 percent, and average daily rates increased by 1.2 percent to $176.30.

The $59 million decrease in segment results, compared to 2007, primarily reflected a $35 million decrease in incentive management fees and a $25 million decrease in owned, leased, and other revenue net of direct expenses, partially offset by a $2 million increase in base management and franchise fees.

The $35 million decrease in incentive management fees was in part due to the recognition, in 2007, of business interruption insurance proceeds totaling $12 million associated with Hurricane Katrina and also reflected lower demand and property-level margins in 2008 compared to 2007. The slight increase of $2 million in base management and franchise fees was a product of unit growth and an additional week of sales, mostly offset by lower RevPAR.

The decrease in owned, leased, and other revenue net of direct expenses of $25 million primarily reflected an unfavorable $7 million impact associated with two properties undergoing renovations in 2008, $8 million of losses associated with three properties, one of which was a new property that opened in 2008, $5 million of lower contract termination fees received, $2 million of lower land rent income, and an unfavorable $3 million impact associated with one property that was sold in 2007 and is now a managed property.

Cost reimbursements revenue and expenses associated with our North American Full-Service segment properties totaled $4,951 million in 2008, compared to $4,782 million in 2007.

2007 Compared to 2006

In 2007, across our North American Full-Service Lodging segment, we added 13 properties (3,947 rooms) and six properties (2,853 rooms) left the system.

In 2007, RevPAR for comparable company-operated North American full-service properties increased by 6.8 percent to $126.92, occupancy increased by 0.9 percentage points to 72.7 percent, and average daily rates increased by 5.4 percent to $174.54.

The $23 million increase in segment results compared to 2006 reflects a $65 million increase in base management, incentive management, and franchise fees, partially offset by a $22 million decline in gains and other income and a $20 million decrease in owned, leased, and other revenue net of direct expenses.

The $65 million increase in fees was largely due to stronger RevPAR and property-level margins, driven primarily by rate increases and productivity improvements. Incentive management fees for 2007 reflect the receipt of $12 million and base management fees for 2007 reflect the receipt of $2 million, both of which were for business interruption insurance proceeds associated with Hurricane Katrina, and no similar fees in 2006. Additionally, 2006 reflected the recognition of $3 million of base management fees that were calculated based on prior periods’ results, but not earned and due until 2006, compared to the recognition of no similar fees in 2007.

Gains and other income was $22 million lower in 2007, compared to 2006, and reflected a $37 million charge in 2006 associated with a straight-line rent receivable, partially offset by the redemption of preferred stock in a cost method investee that generated income of $25 million in 2006 and $34 million of lower other gains in 2007, compared to 2006. The $34 million decrease in other gains compared to the prior year reflects gains in 2006 associated with the sale of joint venture investments and real estate, while 2007 reflects limited similar activity. Owned, leased, and other revenue net of direct expenses decreased by $20 million and reflected properties sold and

 

48


Table of Contents

$10 million of hotel management and franchise agreement termination fees received in 2006, compared to $3 million of such fees received in 2007. General, administrative, and other expenses for 2007 were unchanged compared to 2006 primarily reflecting $5 million of hotel management agreement performance cure payments in 2006 offset by a guarantee charge in 2007 associated with one property and the write-off of a deferred contract acquisition cost associated with another property that left the system.

Cost reimbursements revenue and expenses associated with our North American Full-Service segment properties totaled $4,782 million in 2007, compared to $4,527 million in 2006.

North American Limited-Service Lodging includes Courtyard, Fairfield Inn, SpringHill Suites, Residence Inn, TownePlace Suites, and Marriott ExecuStay.

 

                    Annual Change  
($ in millions)    2008    2007    2006    2008/2007     2007/2006  

Segment revenues

   $ 2,233    $ 2,198    $ 2,060    2 %   7 %
                         

Segment results

   $ 395    $ 461    $ 380    -14 %   21 %
                         

2008 Compared to 2007

In 2008, across our North American Limited-Service Lodging segment, we added 168 properties (19,747 rooms) and 21 properties (2,519 rooms) left the system. The properties that left the system were primarily associated with our Fairfield Inn brand.

In 2008, RevPAR for comparable company-operated North American limited-service properties decreased by 4.2 percent to $85.83, occupancy decreased by 2.7 percentage points to 69.4 percent, and average daily rates decreased by 0.5 percent to $123.69.

The $66 million decrease in segment results, compared to 2007, reflected $43 million of lower incentive management fees, $14 million of higher general, administrative, and other expenses, $13 million of lower owned, leased, corporate housing, and other revenue net of direct expenses, and $4 million of lower gains and other income, partially offset by a $10 million increase in base management and franchise fees.

The $10 million increase in base management and franchise fees was largely due to unit growth, partially offset by a decrease in relicensing fees. The $43 million decrease in incentive management fees was largely due to lower property-level revenue and margins and the recognition, in 2007, of $15 million of incentive management fees that were calculated based on prior periods’ results, but not earned and due until 2007.

The $14 million increase in general, administrative, and other expenses reflected a $15 million charge related to a shortfall funding under a guarantee (see the “Other Charges” caption in Footnote No. 20, “Restructuring Costs and Other Charges,” for more information). The $13 million decrease in owned, leased, corporate housing, and other revenue net of direct expenses primarily reflected $6 million of franchise agreement termination fees received in 2007, which were primarily associated with Fairfield Inn brand properties that left our system, and $7 million of lower income due to lower revenue and property-level margins associated with weaker demand at certain leased properties.

Cost reimbursements revenue and expenses associated with our North American Limited-Service segment properties totaled $1,541 million in 2008, compared to $1,470 million in 2007.

2007 Compared to 2006

In 2007, across our North American Limited-Service Lodging segment, we added 156 properties (17,517 rooms) and 16 properties (1,853 rooms) left the system. The properties that left the system were primarily associated with our Fairfield Inn brand.

In 2007, RevPAR for comparable company-operated North American limited-service properties increased by 4.8 percent to $89.18, occupancy for these properties decreased by 0.4 percentage points to 72.7 percent, and average daily rates increased by 5.4 percent to $122.63.

The $81 million increase in segment results, compared to 2006, primarily reflected an $83 million increase in base management, incentive management, and franchise fees, a $5 million increase in owned, leased, and other revenue net of direct expenses, a $2 million increase in gains and other income, and a $2 million increase in joint venture equity earnings, partially offset by $11 million of higher general, administrative, and other expenses.

 

49


Table of Contents

In 2007, we recognized $15 million of incentive management fees that were calculated based on prior years’ results but not earned and due until 2007 compared to the recognition of no similar fees in 2006. The additional increase in fees is largely due to higher RevPAR, driven by rate increases, which increased base management and franchise fees, and to productivity improvements, which increased property-level margins and incentive management fees. Additionally, growth in the number of rooms contributed to the increase in base management and franchise fees. The $5 million increase in owned, leased, and other revenue net of direct expenses is primarily a result of hotel franchise agreement termination fees of $6 million received in 2007, which were primarily associated with Fairfield Inn brand properties that left our system and $1 million of similar fees in 2006. The $11 million increase in general, administrative, and other expenses in 2007 primarily reflects the impact of unit growth and development and the write-off of $3 million of deferred contract acquisition costs.

Cost reimbursements revenue and expenses associated with our North American Limited-Service segment properties totaled $1,470 million in 2007, compared to $1,423 million in 2006.

International Lodging includes International Marriott Hotels & Resorts, International JW Marriott Hotels & Resorts, International Renaissance Hotels & Resorts, International Courtyard, International Fairfield Inn, International Residence Inn, and Marriott Executive Apartments.

 

                    Annual Change  
($ in millions)    2008    2007    2006    2008/2007     2007/2006  

Segment revenues

   $ 1,544    $ 1,594    $ 1,411    -3 %   13 %
                         

Segment results

   $ 246    $ 271    $ 237    -9 %   14 %
                         

2008 Compared to 2007

In 2008, across our International Lodging segment, we added 21 properties (6,619 rooms) and 16 properties (3,905 rooms) left the system, primarily due to quality issues.

In 2008, RevPAR for comparable company-operated international properties increased by 2.6 percent to $131.00, occupancy for these properties decreased by 2.4 percentage points to 72.5 percent, and average daily rates increased by 6.0 percent to $180.81. Results for our international operations were favorable across most regions, but weakened progressively throughout 2008 and especially in the fourth quarter. RevPAR increases compared to the prior year were strongest in the Middle East, Central and Southeast Asia, South America, and Central Europe.

The $25 million decrease in segment results in 2008, compared to the prior year, primarily reflected a $32 million decrease in gains and other income, a $15 million increase in general, administrative, and other expenses, and a decrease of $5 million in joint venture equity earnings, partially offset by an $18 million increase in incentive management fees and an $11 million increase in combined base management and franchise fees. Owned, leased, and other revenue net of direct expenses remained unchanged in 2008 compared to the prior year.

The increase in fees was largely due to higher RevPAR, driven by rate increases and, to a lesser extent, reflected unit growth and cost control plans, which increased property-level margins and incentive management fees.

The $32 million decrease in gains and other income in 2008, compared to 2007, reflected the recognition of gains totaling $9 million in 2008, compared to gains in 2007 of $41 million. The 2007 gains primarily reflected a $10 million gain associated with the sale of a joint venture and a gain totaling $23 million associated with sales of real estate. The $15 million increase in general, administrative, and other expenses reflected higher wage and benefit costs and costs associated with unit growth and development.

Joint venture equity results were lower than the prior year by $5 million primarily reflecting an unfavorable $11 million impact associated with tax law changes in a country in which two joint ventures operate, partially offset by a $5 million favorable impact associated with insurance proceeds received by one of those same joint ventures.

Owned, leased, and other revenue net of direct of expenses remained unchanged and reflected $17 million of lower income, reflecting conversions from owned properties to managed properties, which was completely offset by $11 million of stronger results at some properties, $5 million of higher termination fees, and $1 million of higher branding fees.

 

50


Table of Contents

Cost reimbursements revenue and expenses associated with our International segment properties totaled $707 million in 2008, compared to $741 million in 2007.

2007 Compared to 2006

In 2007, across our International Lodging segment, we added 20 properties (4,686 rooms) and 31 properties (4,678 rooms) left the system in 2007, primarily due to quality issues.

In 2007, RevPAR for comparable company-operated international properties increased by 8.2 percent to $127.44, occupancy for these properties increased by 0.8 percentage points to 75.7 percent, and average daily rates increased by 7.0 percent to $168.30. Results for our international operations were strong across most regions. RevPAR increases compared to the prior year were particularly strong in Central and Southeast Asia, South America, the Middle East, and Eastern Europe.

The $34 million increase in segment results in 2007 compared to 2006, reflected a $27 million increase in base management, incentive management, and franchise fees, an $11 million increase in gains and other income, and a $3 million increase in joint venture equity earnings, partially offset by $7 million of higher general, administrative, and other expenses. Incentive management fees included $2 million for 2007 that were calculated based on prior periods’ earnings, but not earned and due until recognized, compared to $10 million of similar fees in 2006.

The increase in fees is largely due to strong demand and higher RevPAR, driven by rate increases and favorable exchange rates. The $11 million increase in gains and other income reflected higher gains in 2007 on real estate sales, compared to the year-ago period, offset by lower gains on the sale of joint ventures. The $7 million increase in general, administrative, and other expenses from 2006 is primarily attributable to costs related to our unit growth and development. Owned, leased, and other revenue net of direct expenses remained flat primarily reflecting hotel management and franchise agreement termination fees of $8 million received in 2007 and $12 million of similar fees in 2006, entirely offset by the improved performance of our owned and leased properties in 2007.

Cost reimbursements revenue and expenses associated with our International segment properties totaled $741 million in 2007, compared to $635 million in 2006.

Luxury Lodging includes The Ritz-Carlton and Bulgari Hotels & Resorts.

 

                    Annual Change  
($ in millions)    2008    2007    2006    2008/2007     2007/2006  

Segment revenues

   $ 1,659    $ 1,576    $ 1,423    5 %   11 %
                         

Segment results

   $ 78    $ 72    $ 63    8 %   14 %
                         

2008 Compared to 2007

In 2008, across our Luxury Lodging segment, we added four properties (1,195 rooms) and one property (517 rooms) left the system. In addition, we added seven residential products (654 units) in 2008.

In 2008, RevPAR for comparable company-operated luxury properties decreased by 0.1 percent to $225.87, occupancy for these properties decreased by 1.9 percentage points to 69.2 percent, and average daily rates increased by 2.7 percent to $326.63.

The $6 million increase in segment results, compared to 2007, reflected a $7 million increase in base management and incentive management fees and $18 million of higher owned, leased, and other revenue net of direct expenses, partially offset by $8 million of increased general, administrative, and other expenses, an $8 million decrease in joint venture equity earnings, $1 million of restructuring costs recorded in 2008, (see Footnote No. 20, “Restructuring Costs and Other Charges,” for additional information), and a $1 million decrease in gains and other income. The increase in fees over the year-ago period reflected new properties added to the system, partially offset by the receipt in 2007 of $5 million of business interruption insurance proceeds associated with hurricanes in prior years.

The $18 million increase in owned, leased, and other revenue net of direct expenses reflected charges of $8 million in 2007 for depreciation expense associated with one property that was reclassified to “held and used,” as the property no longer satisfied the criteria to be classified as “held for sale,” compared to $6 million of depreciation charges for that same property in 2008, as well as expenses totaling $3 million in 2007 associated with opening a new leased property, $10 million of improved results in 2008 associated with two properties, one of which was being renovated in 2007, and $2 million of increased branding fees in 2008.

 

51


Table of Contents

The $8 million increase in general, administrative, and other expenses primarily reflected costs associated with unit growth and development as well as bad debt expense related to accounts receivable deemed uncollectible (see the “Other Charges” caption in Footnote No. 20, “Restructuring Costs and Other Charges,” for more information).

The $8 million decrease in joint venture equity earnings primarily reflected a $9 million impairment charge associated with a joint venture investment that we determined to be fully impaired in 2008 (see the “Other Charges” caption in Footnote No. 20, “Restructuring Costs and Other Charges,” for more information).

Cost reimbursements revenue and expenses associated with our Luxury segment properties totaled $1,350 million in 2008, compared to $1,307 million in 2007.

2007 Compared to 2006

In 2007, across our Luxury Lodging segment, we added 11 properties (2,529 rooms) and one property (273 rooms) left the system. In addition, we added three residential products (347 units) in 2007.

In 2007, RevPAR for comparable company-operated luxury properties increased by 9.4 percent to $227.87, occupancy for these properties increased by 1.8 percentage points to 72.5 percent, and average daily rates increased by 6.6 percent to $314.36.

The $9 million increase in segment results, compared to 2006, reflected a $20 million increase in base management and incentive management fees, partially offset by $6 million of increased general, administrative, and other expenses, $3 million of lower owned, leased, and other revenue net of direct expenses, and $2 million of lower equity joint venture results. Fiscal year 2006 included $2 million of base management fees that were calculated based on prior periods’ results, but not earned and due until 2006, compared to no similar fees in 2007. The increase in fees over the prior year reflects stronger RevPAR driven by rate increases, new properties added to the system, the receipt in 2007 of $5 million of business interruption insurance proceeds associated with hurricanes in prior years, the year-over-year favorable impact associated with the reopening, late in 2006, of two properties impacted by the same aforementioned hurricanes and increased branding fees. The $6 million increase in general, administrative, and other expenses is primarily attributable to costs related to our unit growth and development. The $3 million decrease in owned, leased, and other revenue net of direct expenses reflected charges totaling $8 million in 2007 for depreciation expense associated with one property that was reclassified to “held and used,” as the property no longer satisfied the criteria to be classified as “held for sale,” partially offset by a favorable $3 million impact associated with the opening of a new leased property in 2007.

Cost reimbursements revenue and expenses associated with our Luxury segment properties totaled $1,307 million in 2007, compared to $1,261 million in 2006.

 

52


Table of Contents

Timeshare includes our Marriott Vacation Club, The Ritz-Carlton Club and Residences, Grand Residences by Marriott, and Horizons by Marriott Vacation Club brands.

 

                       Annual Change  
($ in millions)    2008     2007     2006     2008/2007     2007/2006  

Segment Revenues

          

Segment revenues

   $ 1,750     $ 2,065     $ 1,840     -15 %   12 %
                            

Segment Results

          

Base management fee revenue

   $ 42     $ 43     $ 34      

Timeshare sales and services, net

     89       350       357      

Restructuring costs

     (28 )     —         —        

Joint venture equity

     11       10       (2 )    

Minority interest

     25       1       —        

General, administrative, and other expense

     (111 )     (98 )     (109 )    
                            

Segment results

   $ 28     $ 306     $ 280     -91 %   9 %
                            

Sales and Services Revenue

          

Development

   $ 953     $ 1,208     $ 1,112      

Services

     336       315       286      

Financing

     106       195       171      

Other revenue

     28       29       8      
                            

Sales and services revenue

   $ 1,423     $ 1,747     $ 1,577     -19 %   11 %
                            

Contract Sales

          

Timeshare

   $ 1,081     $ 1,221     $ 1,207      

Fractional

     35       44       42      

Residential

     10       (9 )     5      
                            

Total company

     1,126       1,256       1,254      

Timeshare

     —         33       28      

Fractional

     (6 )     54       68      

Residential

     (44 )     58       282      
                            

Total joint venture

     (50 )     145       378      
                            

Total Timeshare segment contract sales

   $ 1,076     $ 1,401     $ 1,632     -23 %   -14 %
                            

2008 Compared to 2007

Timeshare segment contract sales, including sales made by our timeshare joint venture projects, represent sales of timeshare interval, fractional ownership, and residential ownership products before the adjustment of percentage-of-completion accounting. Timeshare segment contract sales decreased by $325 million (23 percent) compared to 2007 to $1,076 million from $1,401 million. The decrease in Timeshare segment contract sales in 2008, compared to the prior year, reflected a $173 million decrease in timeshare sales, an $83 million decrease in residential sales, and a $69 million decrease in fractional sales. The decrease in timeshare contract sales reflected the impact of projects approaching sellout and significantly lower demand. Sales of residential and fractional units were significantly impacted by weak demand, as well as increased cancellation allowances of $115 million recorded in anticipation that a portion of contract revenue previously recorded under the percentage-of-completion method for certain projects will not be realized due to contract cancellations prior to closing (see the “Other Charges” caption of Footnote No. 20, “Restructuring Costs and Other Charges,” for additional information).

The $315 million decrease in Timeshare segment revenues to $1,750 million from $2,065 million reflected a $324 million decrease in Timeshare sales and services revenue, and a $1 million decrease in base management fees, partially offset by a $10 million increase in cost reimbursements revenue. The decrease in Timeshare sales and services revenue, compared to the prior year, primarily reflected lower demand for timeshare interval, fractional, and residential projects, lower revenue from projects with limited available inventory in 2008, a decrease of $65 million in note sale gains in 2008, a $32 million impact from the reduced valuation of residual interests, contract cancellation allowances of $17 million, low reportability in 2008 associated with newer projects that have not yet reached revenue recognition reportability thresholds, as well as the recognition, in 2007, of revenues received in prior years for several projects that reached reportability thresholds in 2007. Partially offsetting the decrease was higher revenue associated with the Asia Pacific points program, revenue that became reportable subsequent to the 2007 fiscal year, and increased services revenue. Timeshare segment revenues for 2008 and 2007 included

 

53


Table of Contents

$68 million and $50 million, respectively, of interest income and note sale gains of $16 million and $81 million for 2008 and 2007, respectively.

Segment results of $28 million in 2008 decreased by $278 million from $306 million in 2007, and reflected $261 million of lower Timeshare sales and services revenue net of direct expenses, $28 million of restructuring costs, and $13 million of higher general, administrative, and other expenses, partially offset by a $24 million higher minority interest benefit and $1 million in higher joint venture equity earnings.

The $261 million decrease in Timeshare sales and services revenue net of direct expenses primarily reflected $138 million of lower development revenue net of product costs and marketing and selling costs, $95 million of lower financing revenue net of financing expenses, $34 million of lower reacquired and resales revenue net of expenses, partially offset by $4 million of higher services revenue net of expenses, and $2 million of lower joint venture related expenses. Lower development revenue net of product costs and marketing and selling costs primarily reflected lower demand for timeshare interval, fractional, and residential projects, increased marketing and sales costs, lower revenue from several projects with limited available inventory in 2008, start-up costs in 2008 for newer projects, low reportability in 2008 associated with newer projects that have not yet reached revenue recognition reportability thresholds, revenue recognition for several projects in 2007 that reached reportability thresholds, a $9 million impact from inventory write-downs related to the termination of certain phases of timeshare development in Europe, and a $5 million net impact from contract cancellation allowances (see the “Other Charges” caption of Footnote No. 20, “Restructuring Costs and Other Charges,” for additional information). In addition, development revenue net of product costs and marketing and selling costs reflected an impairment charge. We recorded a pretax charge of $22 million ($10 million net of minority interest benefit) in the 2008 third quarter within the “Timeshare-direct” caption of our Consolidated Statements of Income related to the impairment of a fractional and whole ownership real estate project held for development by a joint venture that we consolidate. We made the adjustment in accordance with FAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” to adjust the carrying value of the real estate to its estimated fair value at year-end 2008. The predominant items we considered in our analysis were the downturn in market conditions including contract cancellations, and tightening in the credit markets, especially for jumbo mortgage loans. We estimated the fair value of the inventory utilizing a probability weighted cash flow model that reflected our expectations of future performance discounted at a 10 year risk-free interest rate determined from the yield curve for U.S. Treasury instruments (3.68 percent). The $25 million benefit associated with minority interest reflected our joint venture partner’s portion of the losses of subsidiaries that we consolidate. The $25 million benefit also reflected the impact of the pretax benefit of $12 million in 2008, representing our joint venture partner’s pretax share of the $22 million impairment charge.

The $95 million decrease in financing revenue, net of financing costs, primarily reflected $65 million of lower note sale gains in 2008 compared to 2007, mostly attributable to higher note sale volumes in 2007, $42 million of lower residual interest accretion, and $6 million of increased financing costs, partially offset by $18 million of increased interest income. Lower note sale gains of $65 million reflected a $12 million charge in the 2008 fourth quarter related to hedge ineffectiveness on note sale hedges and the $42 million of lower residual interest accretion reflected a $32 million charge in the 2008 fourth quarter related to the reduction in the valuation of residual interests due to an increase in the market rate of interest at which future cash flows were discounted to estimate the fair market value (see the “Other Charges” caption of Footnote No. 20, “Restructuring Costs and Other Charges,” for more information regarding these charges). In 2008 and 2007, we sold notes receivable originated by our Timeshare segment in connection with the sale of timeshare interval and fractional ownership products of $300 million and $520 million, respectively. The $34 million of lower reacquired and resales revenue net of expenses represented increased marketing and selling costs coupled with increased product cost relative to prior year.

The $28 million of restructuring costs represented $14 million in severance costs, $9 million in development cancellations, and $5 million in facility exit costs incurred as a result of restructuring initiatives at the segment (see Footnote No. 20, “Restructuring Costs and Other Charges,” for more information related to these initiatives and the costs incurred). The $13 million increase in general, administrative, and other expenses reflected increased costs associated with wages and benefits. Joint venture equity earnings increased $1 million and reflected $10 million of start-up losses incurred in 2007 for three joint ventures, mostly offset by $7 million of contract cancellation allowances recorded at one joint venture in 2008 (see the “Other Charges” caption of Footnote No. 20, “Restructuring Costs and Other Charges,” for additional information) and $3 million of lower earnings in 2008 at one joint venture.

Cost reimbursements revenue and expenses associated with Timeshare segment properties totaled $285 million in 2008, compared to $275 million in 2007.

 

54


Table of Contents

2007 Compared to 2006

Timeshare segment contract sales decreased by 14 percent compared to 2006, reflecting fewer residential and fractional sales, partially offset by increased timeshare sales. Contract sales in 2006 reflected particularly strong joint venture residential sales associated with the launch of our San Francisco and Kapalua, Hawaii products.

The $225 million increase in Timeshare segment revenues to $2,065 million from $1,840 million reflected a $170 million increase in timeshare sales and services revenue, a $46 million increase in cost reimbursements revenue, and $9 million of increased base management fees. The increase in timeshare sales and services revenue primarily reflected newer projects that reached reportability thresholds in 2007 and increased services and financing revenue. Higher base management fees reflect the growing number of timeshare resorts under management. Timeshare segment revenues include $50 million and $41 million of interest income for 2007 and 2006, respectively, and note sale gains of $81 million and $77 million for 2007 and 2006, respectively, recorded in our Consolidated Statements of Income on the “Timeshare sales and services” revenue line, associated with Timeshare segment notes receivable.

Segment results of $306 million in 2007 increased by $26 million over 2006 and primarily reflected $9 million of increased base management fees, $12 million of increased joint venture equity results, and $11 million of lower general, administrative, and other expenses, partially offset by $7 million of lower timeshare sales and services revenue net of expenses. Timeshare sales and services revenue net of direct expenses of $350 million decreased by $7 million, compared to the prior year, primarily reflecting flat development revenue net of product costs and marketing and selling costs and $12 million of increased financing revenue net of financing expenses, partially offset by the $15 million reversal of contingency reserves in 2006 and $4 million of lower services revenue net of services expenses. Flat development revenue net of product costs and marketing and selling costs reflected newer projects that reached reportability thresholds in 2007, offset by several other projects that were approaching sell-out. The increase in financing revenue net of financing costs primarily reflected increased accretion, interest income, and higher note sale gains in 2007, compared to 2006. Compared to the prior year, the $12 million increase in joint venture equity results primarily reflected strong demand in 2007 for our products in Kapalua, Hawaii and start-up costs in 2006 associated with that joint venture. The $11 million decrease in general, administrative, and other expenses reflected lower program and systems expenses in 2007.

Cost reimbursements revenue and expenses associated with Timeshare segment properties totaled $275 million in 2007, compared to $229 million in 2006.

Investment in Leveraged Lease

Historically, we had a $23 million investment in an aircraft leveraged lease with Delta Airlines, which we acquired in 1994. The gross investment was comprised of rentals receivable and the residual value of the aircraft offset by unearned income. On September 14, 2005, Delta Airlines filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code and informed us that it wished to restructure the lease. As a result, our investment was impaired and we had recorded pretax charges of approximately $17 million in 2005 and $1 million in 2006. We recorded an additional $5 million loss related to this investment in fiscal 2007, and have no remaining exposure.

Effective Tax Rate

Tax credits contributed by our synthetic fuel operations have significantly reduced our effective tax rate during the last several years. As we exited the business in November 2007 our effective tax rate increased significantly, thereby reducing our after-tax profits.

DISCONTINUED OPERATIONS

Synthetic Fuel

The tax credits provided under Internal Revenue Code Section 45K were only available for the production and sale of synthetic fuels produced from coal through December 31, 2007. Given high oil prices during 2007 and the anticipated and related phase-out of a significant portion of tax credits available for synthetic fuel produced and sold in 2007, we permanently ceased operations at our synthetic fuel facilities on November 3, 2007 and report this business as a discontinued operation. See Footnote No. 3, “Discontinued Operations-Synthetic Fuel,” in this report for additional information regarding the Synthetic Fuel segment.

2008 Compared to 2007

The synthetic fuel operation generated revenue of $1 million in 2008 and $352 million in 2007. Income from the Synthetic Fuel segment totaled $3 million, net of tax, in 2008, compared to a loss of $1 million in 2007. Income

 

55


Table of Contents

from the Synthetic Fuel segment of $3 million for 2008 primarily reflected the recognition in 2008 of additional tax credits as a result of the determination by the Secretary of the Treasury in 2008 of the Reference Price of a barrel of oil for 2007, partially offset by payments due to third parties based on the amount of additional tax credits.

2007 Compared to 2006

For 2007, the synthetic fuel operation generated revenue of $352 million versus revenue of $165 million for the prior year, primarily reflecting higher production in 2007. Production in 2006 reflected production suspensions instituted in response to high oil prices. Income from the Synthetic Fuel segment declined to a loss of $1 million in 2007 from income of $5 million in 2006, primarily reflecting increased operating losses associated with higher production in 2007, partially offset by increased revenue and increased tax credits associated with higher production and, on the increased operating losses, a higher tax benefit. Results for 2007 also reflect an estimated 70.7 percent phase-out of tax credits due to high oil prices versus a phase-out that was estimated at year-end 2006 to be 39 percent for 2006. Additionally, results in 2007 reflect interest costs of $8 million associated with hedges entered into in response to high oil prices.

SHARE-BASED COMPENSATION

Under our 2002 Comprehensive Stock and Cash Incentive Plan, we award: (1) stock options to purchase our Class A Common Stock (“Stock Option Program”); (2) stock appreciation rights (“SARs”); (3) restricted stock units of our Class A Common Stock; and (4) deferred stock units. We grant awards at exercise prices or strike prices that are equal to the market price of our Class A Common Stock on the date of grant.

During 2008 we granted 5.6 million restricted stock units (2.6 million, most of which were granted in February and had a weighted average grant-date fair value of $35 per unit and 3.0 million were granted in August and had a weighted average grant-date fair value of $26 per unit), 2.7 million Employee SARs (1.8 million, most of which were granted in February and had a weighted average grant-date fair value of $13 per right and 0.9 million were granted in August and had a weighted average grant-date fair value of $10 per right), and 4,000 Non-employee SARs. During that time period, we also granted approximately 218,000 stock options and issued 25,000 deferred stock units. The grants made in August would ordinarily have been made in February 2009, but were accelerated to encourage associate retention in a difficult economic climate. Awards for the most senior executives were not accelerated. See Footnote No. 4, “Share-Based Compensation,” later in this report for additional information.

NEW ACCOUNTING STANDARDS

EITF Issue No. 06-8, “Applicability of the Assessment of a Buyer’s Continuing Investment under FASB Statement No. 66 for Sales of Condominiums”

We adopted the FASB Emerging Issues Task Force (“EITF”) Issue No. 06-8, “Applicability of the Assessment of a Buyer’s Continuing Investment under FASB Statement No. 66 for Sales of Condominiums” (“EITF 06-8”) on December 29, 2007, the first day of our 2008 fiscal year. EITF 06-8 states that in assessing the collectibility of the sales price pursuant to paragraph 37(d) of Financial Accounting Standards (“FAS”) No. 66, “Accounting for Sales of Real Estate” (“FAS No. 66”), an entity should evaluate the adequacy of the buyer’s initial and continuing investment to conclude that the sales price is collectible. If an entity is unable to meet the criteria of paragraph 37, including an assessment of collectibility using the initial and continuing investment tests described in paragraphs 8 through 12 of FAS No. 66, then the entity should apply the deposit method of accounting as described in paragraphs 65 through 67 of FAS No. 66.

Although our adoption of EITF 06-8 had no impact on our wholly owned proj