10-Q 1 d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 18, 2010

OR

 

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

For the transition period from              to             

Commission File 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)

(301) 380-3000

(Registrant’s telephone number, including area code)

 

 

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 362,811,812 shares of Class A Common Stock, par value $0.01 per share, outstanding at July 2, 2010.

 

 

 


Table of Contents

MARRIOTT INTERNATIONAL, INC.

FORM 10-Q TABLE OF CONTENTS

 

          Page No.

Part I.

  

Financial Information (Unaudited):

  

Item 1.

  

Financial Statements

  
  

Condensed Consolidated Statements of Income-Twelve Weeks and Twenty-Four Weeks Ended
June 18, 2010, and June 19, 2009

   2
  

Condensed Consolidated Balance Sheets-as of June 18, 2010, and January 1, 2010

   3
  

Condensed Consolidated Statements of Cash Flows-Twenty-Four Weeks Ended
June 18, 2010, and June 19, 2009

   4
  

Notes to Condensed Consolidated Financial Statements

   5

Item 2.

  

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

   27
  

Forward-Looking Statements

   27

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

   58

Item 4.

  

Controls and Procedures

   58

Part II.

  

Other Information:

  

Item 1.

  

Legal Proceedings

   59

Item 1A.

  

Risk Factors

   59

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

   65

Item 3.

  

Defaults Upon Senior Securities

   65

Item 4.

  

Removed and Reserved

   65

Item 5.

  

Other Information

   65

Item 6.

  

Exhibits

   66
  

Signatures

   67

 

1


Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

MARRIOTT INTERNATIONAL, INC. (“MARRIOTT”)

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

($ in millions, except per share amounts)

(Unaudited)

 

     Twelve Weeks Ended     Twenty-Four Weeks Ended  
     June 18, 2010     June 19, 2009     June 18, 2010     June 19, 2009  

REVENUES

        

Base management fees

   $ 136      $ 126      $ 261      $ 251   

Franchise fees

     105        93        196        181   

Incentive management fees

     46        35        86        78   

Owned, leased, corporate housing, and other revenue

     255        238        484        458   

Timeshare sales and services (including note sale losses of $1 for the twenty-four weeks ended June 19, 2009)

     289        283        574        492   

Cost reimbursements

     1,940        1,787        3,800        3,597   
                                
     2,771        2,562        5,401        5,057   

OPERATING COSTS AND EXPENSES

        

Owned, leased, and corporate housing-direct

     224        217        441        424   

Timeshare-direct

     239        279        474        499   

Reimbursed costs

     1,940        1,787        3,800        3,597   

Restructuring costs

     0        33        0        35   

General, administrative, and other

     142        147        280        363   
                                
     2,545        2,463        4,995        4,918   
                                

OPERATING INCOME

     226        99        406        139   

Gains and other income (including gain on debt extinguishment of $21 for the twenty-four weeks ended June 19, 2009)

     3        3        4        28   

Interest expense

     (44     (28     (89     (57

Interest income

     3        9        7        15   

Equity in losses

     (4     (4     (15     (38
                                

INCOME BEFORE INCOME TAXES

     184        79        313        87   

Provision for income taxes

     (65     (44     (111     (77
                                

NET INCOME

     119        35        202        10   

Add: Net losses attributable to noncontrolling interests, net of tax

     0        2        0        4   
                                

NET INCOME ATTRIBUTABLE TO MARRIOTT

   $ 119      $ 37      $ 202      $ 14   
                                

EARNINGS PER SHARE-Basic

        

Earnings per share attributable to Marriott shareholders

   $ 0.33      $ 0.10      $ 0.56      $ 0.04   
                                

EARNINGS PER SHARE-Diluted

        

Earnings per share attributable to Marriott shareholders

   $ 0.31      $ 0.10      $ 0.54      $ 0.04   
                                

CASH DIVIDENDS DECLARED PER SHARE

   $ 0.0400      $ 0.0000      $ 0.0800      $ 0.0866   
                                

See Notes to Condensed Consolidated Financial Statements

 

2


Table of Contents

MARRIOTT INTERNATIONAL, INC. (“MARRIOTT”)

CONDENSED CONSOLIDATED BALANCE SHEETS

($ in millions)

 

     (Unaudited)
June 18, 2010
    January 1, 2010  

ASSETS

    

Current assets

    

Cash and equivalents (including from VIEs of $3 and $6, respectively)

   $ 100      $ 115   

Accounts and notes receivable (including from VIEs of $113 and $3, respectively)

     956        838   

Inventory (including from VIEs of $194 and $96, respectively)

     1,467        1,444   

Current deferred taxes, net

     242        255   

Prepaid expenses

     93        68   

Other (including from VIEs of $49 and $0, respectively)

     93        131   
                
     2,951        2,851   

Property and equipment (including from VIEs of $20 and $0, respectively)

     1,335        1,362   

Intangible assets

    

Goodwill

     875        875   

Contract acquisition costs and other

     735        731   
                
     1,610        1,606   

Equity and cost method investments

     245        249   

Notes receivable (including from VIEs of $849 and $0, respectively)

     1,230        452   

Deferred taxes, net

     1,074        1,020   

Other (including from VIEs of $16 and $0, respectively)

     202        393   
                
   $ 8,647      $ 7,933   
                

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Current liabilities

    

Current portion of long-term debt (including from VIEs of $118 and $2, respectively)

   $ 142      $ 64   

Accounts payable

     475        562   

Accrued payroll and benefits

     598        519   

Liability for guest loyalty program

     457        454   

Other (including from VIEs of $8 and $7, respectively)

     679        688   
                
     2,351        2,287   

Long-term debt (including from VIEs of $872 and $3, respectively)

     2,769        2,234   

Liability for guest loyalty program

     1,219        1,193   

Other long-term liabilities

     1,084        1,077   

Marriott shareholders’ equity

    

Class A Common Stock

     5        5   

Additional paid-in-capital

     3,552        3,585   

Retained earnings

     3,130        3,103   

Treasury stock, at cost

     (5,458     (5,564

Accumulated other comprehensive (loss) income

     (5     13   
                
     1,224        1,142   
                
   $ 8,647      $ 7,933   
                

The abbreviation VIEs above means Variable Interest Entities.

    

See Notes to Condensed Consolidated Financial Statements

 

3


Table of Contents

MARRIOTT INTERNATIONAL, INC. (“MARRIOTT”)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in millions)

(Unaudited)

 

     Twenty-Four Weeks Ended  
     June 18, 2010     June 19, 2009  

OPERATING ACTIVITIES

    

Net income

   $ 202      $ 10   

Adjustments to reconcile to cash provided by (used in) operating activities:

    

Depreciation and amortization

     81        81   

Income taxes

     61        27   

Timeshare activity, net

     125        80   

Liability for guest loyalty program

     26        63   

Restructuring costs, net

     (6     17   

Asset impairments and write-offs

     6        60   

Working capital changes and other

     27        9   
                

Net cash provided by operating activities

     522        347   

INVESTING ACTIVITIES

    

Capital expenditures

     (64     (83

Dispositions

     0        1   

Loan advances

     (10     (18

Loan collections and sales

     9        7   

Equity and cost method investments

     (9     (14

Contract acquisition costs

     (20     (14

Other

     25        48   
                

Net cash used in investing activities

     (69     (73

FINANCING ACTIVITIES

    

Credit facility, net

     (329     (73

Repayment of long-term debt

     (179     (157

Issuance of Class A Common Stock

     54        8   

Dividends paid

     (14     (61
                

Net cash used in financing activities

     (468     (283
                

DECREASE IN CASH AND EQUIVALENTS

     (15     (9

CASH AND EQUIVALENTS, beginning of period

     115        134   
                

CASH AND EQUIVALENTS, end of period

   $ 100      $ 125   
                

See Notes to Condensed Consolidated Financial Statements

 

4


Table of Contents

MARRIOTT INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Basis of Presentation

The condensed consolidated financial statements present the results of operations, financial position, and cash flows of Marriott International, Inc. (“Marriott,” and together with its subsidiaries “we,” “us,” or the “Company”). In accordance with the guidance for noncontrolling interests in consolidated financial statements, references in this report to our earnings per share, net income and shareholders’ equity attributable to Marriott do not include noncontrolling interests (previously known as minority interests), which we report separately.

These condensed consolidated financial statements have not been audited. We have condensed or omitted certain information and footnote disclosures normally included in financial statements presented in accordance with U.S. generally accepted accounting principles (“GAAP”). Although we believe our disclosures are adequate to make the information presented not misleading, you should read the condensed consolidated financial statements in this report in conjunction with the consolidated financial statements and notes to those financial statements in our Annual Report on Form 10-K for the fiscal year ended January 1, 2010, (“2009 Form 10-K”). Certain terms not otherwise defined in this quarterly report have the meanings specified in our 2009 Form 10-K.

Preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, the reported amounts of revenues and expenses during the reporting periods, and the disclosures of contingent liabilities. Accordingly, ultimate results could differ from those estimates.

Our 2010 second quarter ended on June 18, 2010; our 2009 fourth quarter ended on January 1, 2010; and our 2009 second quarter ended on June 19, 2009. In our opinion, our condensed consolidated financial statements reflect all normal and recurring adjustments necessary to present fairly our financial position as of June 18, 2010, and January 1, 2010, the results of our operations for the twelve and twenty-four weeks ended June 18, 2010, and June 19, 2009, and cash flows for the twenty-four weeks ended June 18, 2010, and June 19, 2009. Interim results may not be indicative of fiscal year performance because of seasonal and short-term variations. We have eliminated all material intercompany transactions and balances between entities consolidated in these financial statements. We have also reclassified certain prior year amounts to conform to our 2010 presentation.

Adoption of New Accounting Standards Resulting in Consolidation of Special Purpose Entities

On January 2, 2010, the first day of the 2010 fiscal year, we adopted Financial Accounting Standards No. 166, “Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140,” or Accounting Standards Update No. 2009-16, “Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets,” (“ASU No. 2009-16”) and Financial Accounting Standards No. 167, “Amendments to FASB Interpretation No. 46(R),” or Accounting Standards Update No. 2009-17, “Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities” (“ASU No. 2009-17”).

Prior to our adoption of these topics, we used certain special purpose entities to securitize Timeshare segment notes receivables, which we treated as off-balance sheet entities, and we retained the servicing rights and varying subordinated interests in the securitized notes. Pursuant to GAAP in effect prior to fiscal 2010, we did not consolidate these special purpose entities in our financial statements because the securitization transactions qualified as sales of financial assets.

As a result of adopting both topics in the 2010 first quarter, we consolidated 13 existing qualifying special purpose entities associated with past securitization transactions. We recorded a one-time non-cash after-tax reduction to shareholders’ equity of $146 million ($238 million pretax) in the 2010 first quarter, representing the cumulative effect of a change in accounting principle. The one-time non-cash after-tax

 

5


Table of Contents

reduction to shareholders’ equity was approximately $41 million greater than we had estimated for this charge, as disclosed in our 2009 Form 10-K, primarily due to increased notes receivable reserves recorded for the newly consolidated notes receivable. This increase in reserves was due to a change in estimate of uncollectible accounts based on historical experience. We now reserve for 100 percent of notes that are in default in addition to the reserve we record on the remaining notes.

We recorded the cumulative effect of the adoption of these topics to our financial statements in the 2010 first quarter. This consisted primarily of reestablishing notes receivable (net of reserves) that had been transferred to special purpose entities as a result of the securitization transactions, eliminating residual interests that we initially recorded in connection with those transactions (and subsequently revalued on a periodic basis), the impact of recording debt obligations associated with third-party interests held in the special purpose entities, and related adjustments to inventory balances accounted for using the relative sales value method. We adjusted the inventory balance to include anticipated future revenue from the resale of inventory that we expect to acquire when we foreclose on defaulted notes.

Adopting these topics had the following impacts on our Condensed Consolidated Balance Sheet at January 2, 2010: (1) assets increased by $970 million, primarily representing the consolidation of notes receivable (and corresponding reserves) partially offset by the elimination of the Company’s retained interests; (2) liabilities increased by $1,116 million, primarily representing the consolidation of debt obligations associated with third party interests; and (3) shareholders’ equity decreased by approximately $146 million. Adopting these topics also impacted our income statement by increasing interest income (reflected in Timeshare sales and services revenue) from notes sold and increasing interest expense from consolidation of debt obligations, partially offset by the absence of accretion income on residual interests that were eliminated. We do not expect to recognize gains or losses from future securitizations of our timeshare notes following the adoption of these topics.

Please also see the parenthetical disclosures on our Condensed Consolidated Balance Sheets that show the amounts of consolidated assets and liabilities associated with variable interest entities (including Timeshare segment securitization variable interest entities) that we consolidated.

Restricted Cash

We recorded restricted cash, totaling $118 million and $76 million at the end of the 2010 second quarter and year-end 2009, respectively, in our Condensed Consolidated Balance Sheets as $87 million and $54 million, respectively, in the “Other current assets” line and $31 million and $22 million, respectively, in the “Other long-term assets” line. Restricted cash primarily consists of cash held in a reserve account related to Timeshare segment notes receivable securitizations; cash held internationally that we have not repatriated due to accounting, statutory, tax and foreign currency risks; and deposits received, primarily associated with timeshare interval, fractional ownership, and residential sales that are held in escrow until the contract is closed.

Fair Value Measurements

We have various financial instruments we must measure at fair value on a recurring basis, including certain marketable securities and derivatives. See Footnote No. 5, “Fair Value of Financial Instruments,” for further information. We also apply the provisions of fair value measurement to various non-recurring measurements for our financial and non-financial assets and liabilities. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). We measure our assets and liabilities using inputs from the following three levels of the fair value hierarchy:

Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date.

Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.),

 

6


Table of Contents

and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

Level 3 includes unobservable inputs that reflect our assumptions about what factors market participants would use in pricing the asset or liability. We develop these inputs based on the best information available, including our own data.

Derivative Instruments

The designation of a derivative instrument as a hedge and its ability to meet the hedge accounting criteria determine how the change in fair value of the derivative instrument is reflected in our Condensed Consolidated Financial Statements. A derivative qualifies for hedge accounting if, at inception, we expect the derivative to be highly effective in offsetting the underlying hedged cash flows or fair value and we fulfill the hedge documentation standards at the time we enter into the derivative contract. We designate a hedge as a cash flow hedge, fair value hedge, or a net investment in foreign operations hedge based on the exposure we are hedging. The asset or liability value of the derivative will change in tandem with its fair value. We record changes in fair value, for the effective portion of qualifying hedges, in other comprehensive income (“OCI”). We release the derivative’s gain or loss from OCI to match the timing of the underlying hedged items’ effect on earnings.

We review the effectiveness of our hedging instruments on a quarterly basis, recognize current period hedge ineffectiveness immediately in earnings, and discontinue hedge accounting for any hedge that we no longer consider to be highly effective. We recognize changes in fair value for derivatives not designated as hedges or those not qualifying for hedge accounting in current period earnings. Upon termination of cash flow hedges, we release gains and losses from OCI based on the timing of the underlying cash flows or revenue recognized, unless the termination results from the failure of the intended transaction to occur in the expected timeframe. Such untimely transactions require us to immediately recognize in earnings gains and losses previously recorded in OCI.

Changes in interest rates, foreign exchange rates, and equity securities expose us to market risk. We manage our exposure to these risks by monitoring available financing alternatives, as well as through development and application of credit granting policies. We also use derivative instruments, including cash flow hedges, net investment in foreign operations hedges, fair value hedges, and other derivative instruments, as part of our overall strategy to manage our exposure to market risks. As a matter of policy, we only enter into transactions that we believe will be highly effective at offsetting the underlying risk, and we do not use derivatives for trading or speculative purposes. See Footnote No. 5, “Fair Value of Financial Instruments,” for additional information.

 

2. New Accounting Standards

ASU No. 2009-16 and ASU No. 2009-17

We adopted ASU No. 2009-16 on the first day of our 2010 fiscal year, which amended FAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” by: (1) eliminating the concept of a qualifying special-purpose entity (“QSPE”); (2) clarifying and amending the criteria for a transfer to be accounted for as a sale; (3) amending and clarifying the unit of account eligible for sale accounting; and (4) requiring that a transferor initially measure at fair value and recognize all assets obtained (for example beneficial interests) and liabilities incurred as a result of a transfer of an entire financial asset or group of financial assets accounted for as a sale. In addition, this topic requires us as a reporting entity to evaluate entities that had been treated as QSPEs under previous accounting guidance for consolidation under the applicable current guidance. The topic also mandates that we supplement our disclosures about, among other things, our continuing involvement with transfers of financial assets previously accounted for as sales, the inherent risks in our retained financial assets, and the nature and financial effect of restrictions on the assets that we continue to report in our balance sheet.

We also adopted ASU No. 2009-17 on the first day of our 2010 fiscal year, which changed the consolidation guidance applicable to variable interest entities (“VIEs”). This topic also amended the

 

7


Table of Contents

guidance on determination of whether an enterprise is the primary beneficiary of a VIE, and is, therefore, required to consolidate an entity, by requiring a qualitative, rather than the prior quantitative, analysis of the VIE. The new qualitative analysis includes, among other things, consideration of who has the power to direct those activities that most significantly impact the entity’s economic performance and who has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. This topic also mandates that the enterprise continually reassess whether it is the primary beneficiary of a VIE, in contrast to the prior standard that required the primary beneficiary only be reassessed when specific events occurred. This topic now also expressly applies to QSPEs, which were previously exempt, and requires additional disclosures about an enterprise’s involvement with a VIE.

See Footnote No. 1, “Basis of Presentation,” for the impact on our financial statements of adopting these topics.

Accounting Standards Update No. 2010-06 “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements” (“ASU No. 2010-06”)

We adopted certain provisions of ASU No. 2010-06 in the 2010 first quarter. Those provisions amended Subtopic 820-10, “Fair Value Measurements and Disclosures – Overall,” by requiring additional disclosures for transfers in and out of Level 1 and Level 2 fair value measurements, as well as requiring fair value measurement disclosures for each “class” of assets and liabilities, a subset of the captions in our Condensed Consolidated Balance Sheets. Our adoption did not have a material impact on our financial statements or disclosures, as we had no transfers between Level 1 and Level 2 fair value measurements and no material classes of assets and liabilities that required additional disclosure. See “Future Adoption of Accounting Standards” for the provisions of this topic that apply to future periods.

Accounting Standards Update No. 2010-09 “Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements” (“ASU No. 2010-09”)

We adopted ASU No. 2010-09 in the 2010 first quarter. ASU No. 2010-09 amended Subtopic 855-10, “Subsequent Events – Overall,” by removing the requirement for a United States Securities and Exchange Commission (“SEC”) registrant to disclose a date, in both issued and revised financial statements, through which that filer had evaluated subsequent events. Accordingly, we removed the related disclosure from Footnote No. 1, “Basis of Presentation.” Our adoption did not have a material impact on our financial statements.

Future Adoption of Accounting Standards

Accounting Standards Update No. 2009-13 “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements” (“ASU No. 2009-13”)

ASU No. 2009-13 addresses the accounting for multiple-deliverable arrangements (complex contracts or related contracts that require the separate delivery of multiple goods and/or services) by expanding the circumstances in which vendors may account for deliverables separately rather than as a combined unit. This update clarifies the guidance on how to separate such deliverables and how to measure and allocate consideration for these arrangements to one or more units of accounting. The existing guidance requires a vendor to use vendor-specific objective evidence or third-party evidence of selling price to separate deliverables in multiple-deliverable arrangements. In addition to retaining this guidance, in situations where vendor-specific objective evidence or third-party evidence is not available, ASU No. 2009-13 will require a vendor to allocate arrangement consideration to each deliverable in multiple-deliverable arrangements based on each deliverable’s relative selling price. This update also expands disclosure requirements for multiple deliverable arrangements, can be applied either prospectively or retrospectively, and is effective for fiscal years beginning on or after June 15, 2010, with early adoption permitted. We are assessing the impact that adoption of ASU No. 2009-13 will have on our financial statements.

ASU No. 2010-06 – Provisions Effective in the 2011 First Quarter

Certain provisions of ASU No. 2010-06 are effective for fiscal years beginning after December 15, 2010, which for us will be our 2011 first quarter. Those provisions, which amended

 

8


Table of Contents

Subtopic 820-10, will require us to present as separate line items all purchases, sales, issuances, and settlements of financial instruments valued using significant unobservable inputs (Level 3) in the reconciliation for fair value measurements, in contrast to the current aggregate presentation as a single line item. Although this may change the appearance of our fair value reconciliations, we do not believe the adoption will have a material impact on our financial statements or disclosures.

 

3. Income Taxes

The Internal Revenue Service (“IRS”) has examined our federal income tax returns, and we have settled all issues for tax years through 2004. We filed a refund claim relating to 2000 and 2001. The IRS disallowed the claims, and in July 2009, we protested the disallowance. This issue is pending in the IRS Appeals Division. The 2005, 2006, 2007, and 2008 field examinations have been completed, and the unresolved issues from those years are now also with the IRS Appeals Division. IRS examinations for 2009 and 2010 are ongoing as part of the IRS’s Compliance Assurance Program. Various state, local, and foreign income tax returns are also under examination by taxing authorities.

As noted in Footnote No. 1, “Basis of Presentation,” we recorded a one-time non-cash pre-tax reduction to shareholders’ equity of approximately $238 million in conjunction with our first quarter 2010 adoption of ASU Nos. 2009-16 and 2009-17. Including the related $92 million decrease in deferred tax liabilities, the after-tax reduction to shareholders’ equity totaled $146 million.

For the second quarter of 2010, we increased unrecognized tax benefits by $2 million (from $222 million at the end of the 2010 first quarter). For the first half of 2010, we decreased unrecognized tax benefits by $25 million (from $249 million at year-end 2009), primarily reflecting the settlement of an unfavorable U.S. Court of Federal Claims decision involving a refund claim associated with a 1994 transaction. The settlement resulted in no further outlay of cash tax, and we do not anticipate any further cash tax payments for this issue. The unrecognized tax benefits balance of $224 million at the end of the 2010 second quarter included $112 million of tax positions that, if recognized, would impact our effective tax rate.

As a large taxpayer, we are under continual audit by the IRS and other taxing authorities. We anticipate concluding U.S. federal appeals negotiations for the 2005, 2006, 2007, and 2008 tax years in the next 12 months where the items under consideration include the taxation of our loyalty and gift card programs and the treatment of funds received from foreign subsidiaries. Conclusion of these negotiations could have a material impact on our unrecognized tax benefit balances.

 

4. Share-Based Compensation

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

We recorded share-based compensation expense related to award grants of $26 million and $22 million for the twelve weeks ended June 18, 2010 and June 19, 2009, respectively, and $50 million for each of the twenty-four weeks ended June 18, 2010 and June 19, 2009. Deferred compensation costs related to unvested awards totaled $173 million and $122 million at June 18, 2010 and January 1, 2010, respectively.

RSUs

We granted 3.7 million RSUs during the first half of 2010 to certain officers and key employees, and those units vest generally over four years in equal annual installments commencing one year after the date of grant. RSUs granted in the first half of 2010 had a weighted average grant-date fair value of $27.

 

9


Table of Contents

SARs

We granted 1.1 million SARs to officers and key employees during the first half of 2010. These SARs expire 10 years after the date of grant and both vest and are exercisable in cumulative installments of one quarter at the end of each of the first four years following the date of grant. These SARs had a weighted average grant-date fair value of $10, and a weighted average exercise price of $27.

To estimate the fair value of each SAR granted, we use a binomial method, under which the weighted average expected SARs terms are calculated as the product of a lattice-based binomial valuation model that uses suboptimal exercise factors. We use historical data to estimate exercise behaviors for separate groups of retirement eligible and non-retirement eligible employees.

We used the following assumptions to determine the fair value of the Employee SARs granted during the first half of 2010.

 

Expected volatility

   32

Dividend yield

   0.71

Risk-free rate

   3.3

Expected term (in years)

   7   

In making these assumptions, we based the risk-free rates on the corresponding U.S. Treasury spot rates for the expected duration at the date of grant, which we converted to a continuously compounded rate, and we based the expected volatility on the weighted average historical volatility, with periods with atypical stock movement given a lower weight to reflect stabilized long-term mean volatility.

Other Information

At the end of the 2010 second quarter, 64 million shares were reserved under the Comprehensive Plan, including 35 million shares under the Stock Option Program and the SAR Program.

 

5. Fair Value of Financial Instruments

We believe that the fair values of our current assets and current liabilities approximate their reported carrying amounts. The following table shows the carrying values and the fair values of non-current financial assets and liabilities that qualify as financial instruments, determined in accordance with current guidance for disclosures on the fair value of financial instruments.

 

     At June 18, 2010     At Year-End 2009  
($ in millions)    Carrying
Amount
    Fair
Value
    Carrying
Amount
    Fair
Value
 

Cost method investments

   $ 46      $ 43      $ 41      $ 43   

Loans to timeshare owners – securitized

     849        976        0        0   

Loans to timeshare owners – non-securitized

     288        307        352        368   

Senior, mezzanine, and other loans – non-securitized

     92        65        100        77   

Residual interests and effectively owned notes

     0        0        197        197   

Restricted cash

     31        31        22        22   

Marketable securities

     18        18        18        18   
                                

Total long-term financial assets

   $ 1,324      $ 1,440      $ 730      $ 725   
                                

Non-recourse debt associated with securitized notes receivable

   $ (869   $ (709   $ 0      $ 0   

Senior Notes

     (1,629     (1,737     (1,627     (1,707

$2,404 Effective Credit Facility

     (96     (96     (425     (425

Other long-term debt

     (149     (141     (154     (154

Other long-term liabilities

     (76     (70     (86     (75

Long-term derivative liabilities

     (2     (2     (1     (1
                                

Total long-term financial liabilities

   $ (2,821   $ (2,755   $ (2,293   $ (2,362
                                

We estimate the fair value of both our securitized long-term loans to timeshare owners and a portion of our non-securitized long-term loans to timeshare owners using a discounted cash flow model. We believe this is comparable to the model that an independent third party would use in the current market. Our model uses default rates, prepayment rates, coupon rates and loan terms for our sold note portfolio as key

 

10


Table of Contents

drivers of risk and relative value, that when applied in combination with pricing parameters, determines the fair value of the underlying notes receivable. We value certain non-securitized loans to timeshare owners at their carrying value, rather than using our pricing model. We believe that the carrying value of such loans approximates fair value because the stated interest rates of these loans are consistent with current market rates and the reserve for these loans appropriately accounts for risks in default rates, prepayment rates, and loan terms.

We estimate the fair value of our senior, mezzanine, and other loans by discounting cash flows using risk-adjusted rates.

We estimate the fair value of our cost method investments by applying a cap rate to stabilized earnings (a market approach). The carrying value of our restricted cash approximates its fair value.

We estimate the fair value of our non-recourse debt associated with securitized loans to timeshare owners by obtaining indicative bids from investment banks that actively issue and facilitate the secondary market for timeshare securities. As an additional measure, we internally generate cash flow estimates by modeling all bond tranches for our active securitization transactions, with consideration for the collateral specific to each tranche. The key drivers in this analysis include default rates, prepayment rates, bond interest rates and other structural factors, which we use to estimate the projected cash flows. In order to estimate market credit spreads by rating, we reviewed market spreads from timeshare note securitizations and other asset-backed transactions that occurred during the fourth quarter of 2009 and the first half of 2010. We then applied those estimated market spreads to swap rates in order to estimate an underlying discount rate for calculating the fair value of the active bonds. We have concluded that the fair value of the bonds reflects a marginal premium over the book value resulting from relatively low current swap rates and credit spreads.

We estimate the fair value of our other long-term debt, excluding leases, using expected future payments discounted at risk-adjusted rates, and we determine the fair value of our senior notes using quoted market prices. We believe the carrying value of our credit facility approximates its fair value due to the short maturity dates of the draws we have executed to date. Other long-term liabilities represent guarantee costs and reserves and deposit liabilities. The carrying values of our guarantee costs and reserves approximate their fair values. We estimate the fair value of our deposit liabilities primarily by discounting future payments at a risk-adjusted rate.

We are required to carry our marketable securities at fair value. The carrying value of our marketable securities at the end of our 2010 second quarter was $18 million, which included debt securities of the U.S. Government, its sponsored agencies and other U.S. corporations invested for our self-insurance programs. These securities are valued using directly observable Level 1 inputs as described in Footnote No. 1, “Basis of Presentation.”

We are also required to carry our derivative assets and liabilities at fair value. As of the end of our 2010 second quarter, we had derivative instruments in a current asset position of $1 million and $1 million in a current liability position valued using Level 1 inputs, $1 million in a current liability position valued using Level 2 inputs, and $2 million in a long-term liability position valued using Level 3 inputs. We value our Level 3 input derivatives using valuations that we calibrate to the initial trade prices, with subsequent valuations based on unobservable inputs to the valuation model, including interest rates and volatilities.

As discussed in more detail in Footnote No. 1, “Basis for Presentation,” and Footnote No. 15, “Variable Interest Entities,” we periodically sell notes receivable originated by our Timeshare segment. We continue to service the notes after the sale, and we retain servicing assets and other interests in the notes. Historically, we accounted for these residual interests, including the servicing assets, as trading securities under the then-applicable standards for accounting for certain investments in debt and equity securities. At the dates of sale and at the end of each reporting period, we estimated the fair value of our residual interests using a discounted cash flow model using Level 3 inputs. With the adoption of the new accounting topics in the first quarter of 2010, we reestablished notes receivable (net of reserves)

 

11


Table of Contents

associated with past securitization transactions, recorded the debt obligations associated with third-party interests held in these special purpose entities and correspondingly eliminated our residual interests (including servicing assets) associated with these transactions. The preceding table includes the carrying amounts and estimated fair values for the long-term portion of the securitized notes receivable and the associated debt obligations.

 

6. Earnings Per Share

The table below illustrates the reconciliation of the earnings and number of shares used in our calculations of basic and diluted earnings per share attributable to Marriott shareholders.

 

    Twelve Weeks Ended   Twenty-Four Weeks Ended
($ in millions, except per share amounts)   June 18, 2010   June 19, 2009   June 18, 2010   June 19, 2009

Computation of Basic Earnings Per Share Attributable to Marriott Shareholders

       

Income attributable to Marriott shareholders

    119     37     202     14

Weighted average shares outstanding

    362.1     356.2     360.7     355.3
                       

Basic earnings per share attributable to

Marriott shareholders

  $ 0.33   $ 0.10   $ 0.56   $ 0.04
                       

Computation of Diluted Earnings Per Share Attributable to Marriott Shareholders

       

Income attributable to Marriott shareholders

  $ 119   $ 37   $ 202   $ 14
                       

Weighted average shares outstanding

    362.1     356.2     360.7     355.3

Effect of dilutive securities

       

Employee stock option and SARs plans

    11.5     7.4     10.7     6.3

Deferred stock incentive plans

    1.1     1.4     1.2     1.5

Restricted stock units

    2.7     1.0     2.9     1.1
                       

Shares for diluted earnings per share attributable to Marriott shareholders

    377.4     366.0     375.5     364.2
                       

Diluted earnings per share attributable to Marriott shareholders

  $ 0.31   $ 0.10   $ 0.54   $ 0.04
                       

We compute the effect of dilutive securities using the treasury stock method and average market prices during the period. We determine dilution based on earnings attributable to Marriott shareholders. In accordance with the applicable accounting guidance for calculating earnings per share, we did not include the following stock options and SARs in our calculation of diluted earnings per share attributable to Marriott shareholders because the exercise prices were greater than the average market prices for the applicable periods:

 

  (a) for the twelve-week period ended June 18, 2010, 2.5 million options and SARs, with exercise prices ranging from $34.11 to $49.03;

 

  (b) for the twelve-week period ended June 19, 2009, 12.6 million options and SARs, with exercise prices ranging from $21.95 to $49.03;

 

  (c) for the twenty-four week period ended June 18, 2010, 3.7 million options and SARs, with exercise prices ranging from $31.05 to $49.03; and

 

  (d) for the twenty-four week period ended June 19, 2009, 12.9 million options and SARs, with exercise prices ranging from $18.94 to $49.03.

In addition, for both the twelve and twenty-four weeks periods ended June 19, 2009, we did not include 1.3 million RSUs in our calculation of diluted earnings per share attributable to Marriott shareholders because to do so would have been antidilutive.

 

12


Table of Contents
7. Inventory

Inventory, totaling $1,467 million and $1,444 million as of June 18, 2010, and January 1, 2010, respectively, consists primarily of Timeshare segment interval, fractional ownership, and residential products totaling $1,450 million and $1,426 million as of June 18, 2010, and January 1, 2010, respectively. Inventory totaling $17 million and $18 million as of June 18, 2010, and January 1, 2010, respectively, primarily relates to hotel operating supplies for the limited number of properties we own or lease. We primarily value Timeshare segment interval, fractional ownership, and residential products at the lower of cost or fair market value, in accordance with applicable accounting guidance, and we generally value operating supplies at the lower of cost (using the first-in, first-out method) or market. Consistent with recognized industry practice, we classify Timeshare segment interval, fractional ownership, and residential products inventory, which has an operating cycle that exceeds 12 months, as a current asset.

The following table shows the composition of our Timeshare segment inventory balances.

 

($ in millions)    June 18, 2010    January 1, 2010

Finished goods

   $ 757    $ 721

Work-in-process

     148      198

Land and infrastructure

     545      507
             
   $ 1,450    $ 1,426
             

 

8. Property and Equipment

The following table shows the composition of our property and equipment balances.

 

($ in millions)    June 18, 2010     January 1, 2010  

Land

   $ 455      $ 454   

Buildings and leasehold improvements

     925        935   

Furniture and equipment

     984        996   

Construction in progress

     199        163   
                
     2,563        2,548   

Accumulated depreciation

     (1,228     (1,186
                
   $ 1,335      $ 1,362   
                

 

9. Notes Receivable

As discussed in Footnote No. 1, “Basis of Presentation,” on the first day of fiscal year 2010, we consolidated certain entities associated with past timeshare notes receivable securitization transactions. Prior to the 2010 first quarter, we were not required to consolidate the special purpose entities utilized to securitize the notes.

The following table shows the composition of our notes receivable balances (net of reserves).

 

($ in millions)    June 18, 2010     January 1, 2010  

Loans to timeshare owners – securitized

   $ 960      $ 0   

Loans to timeshare owners – non-securitized

     346        424   

Senior, mezzanine, and other loans – non-securitized

     188        196   
                
     1,494        620   

Less current portion

    

Loans to timeshare owners – securitized

     (111     0   

Loans to timeshare owners – non-securitized

     (58     (72

Senior, mezzanine, and other loans – non-securitized

     (95     (96
                
   $ 1,230      $ 452   
                

We classify notes receivable due within one year as current assets in the caption “Accounts and notes receivable” in our Condensed Consolidated Balance Sheets. Total long-term notes receivable as of June 18, 2010, and January 1, 2010, of $1,230 million and $452 million, respectively, consisted of loans to timeshare owners of $1,137 million and $352 million, respectively, loans to equity method investees of

 

13


Table of Contents

$2 million and $10 million, respectively, and other notes receivable of $91 million and $90 million, respectively.

The following tables show future principal payments, net of reserves and unamortized discounts, as well as interest rates, reserves and unamortized discounts for our securitized and non-securitized notes receivable.

Notes Receivable Principal Payments (net of reserves and unamortized discounts) and Interest Rates

 

($ in millions)    Non-Securitized
Notes Receivable
    Securitized
Notes Receivable
    Total  

2010

   $ 132      $ 64      $ 196   

2011

     45        113        158   

2012

     57        116        173   

2013

     41        120        161   

2014

     34        120        154   

Thereafter

     225        427        652   
                        

Balance at June 18, 2010

   $ 534      $ 960      $ 1,494   
                        

Weighted average interest rate at June 18, 2010

     10.1     13.0     12.0
                        

Range of stated interest rates at June 18, 2010

     0 to 19.5     5.2 to 19.5     0 to 19.5
                        

Notes Receivable Reserves

 

($ in millions)    Non-Securitized
Notes Receivable
   Securitized
Notes Receivable
   Total

Balance at year-end 2009

   $ 210    $ 0    $ 210
                    

Balance at June 18, 2010

   $ 235    $ 103    $ 338
                    

Notes Receivable Unamortized Discounts

 

($ in millions)    Non-Securitized
Notes Receivable
   Securitized
Notes Receivable
   Total

Balance at year-end 2009

   $ 16    $ 0    $ 16
                    

Balance at June 18, 2010

   $ 13    $ 0    $ 13
                    

Senior, Mezzanine, and Other Loans

We reflect interest income associated with “Senior, mezzanine, and other loans” in the “Interest income” caption in our Condensed Consolidated Statements of Income. We generally do not accrue interest on “Senior, mezzanine, and other loans” that are impaired. At the end of the 2010 second quarter, our recorded investment in impaired “Senior, mezzanine, and other loans” was $94 million. We had an $86 million notes receivable reserve representing an allowance for credit losses, leaving $8 million of our investment in impaired loans, for which we had no related allowance for credit losses. At year-end 2009, our recorded investment in impaired “Senior, mezzanine, and other loans” was $191 million, and we had a $183 million notes receivable reserve representing an allowance for credit losses, leaving $8 million of our investment in impaired loans, for which we had no related allowance for credit losses.

The following table summarizes the activity related to our “Senior, mezzanine, and other loans” notes receivable reserve for the first half of 2010:

 

($ in millions)    Notes Receivable
Reserve
 

Balance at year-end 2009

   $ 183   

Additions

     0   

Write-offs

     (105

Transfers and other

     8   
        

Balance at June 18, 2010

   $ 86   
        

 

14


Table of Contents

Loans to Timeshare Owners

We reflect interest income associated with “Loans to timeshare owners” of $43 million and $10 million for the 2010 and 2009 second quarters, respectively, and $88 million and $23 million for the twenty-four weeks ended June 18, 2010 and June 19, 2009, respectively, in our Condensed Consolidated Statements of Income in the “Timeshare sales and services” revenue caption. Of the $43 million of interest income we recognized in the 2010 second quarter, $33 million was associated with securitized loans and $10 million was associated with non-securitized loans, compared with the $10 million recognized in the 2009 second quarter which related solely to non-securitized loans. Of the $88 million of interest income we recognized in the 2010 first half, $69 million was associated with securitized loans and $19 million was associated with non-securitized loans, compared with the $23 million recognized in the 2009 first half which related solely to non-securitized loans.

The following table summarizes the activity related to our “Loans to timeshare owners” notes receivable reserve for the first half of 2010:

 

($ in millions)    Non-Securitized
Notes Receivable
Reserve
    Securitized
Notes Receivable
Reserve
    Total  

Balance at year-end 2009

   $ 27      $ 0      $ 27   

Additions for current year sales

     16        0        16   

Write-offs

     (34     0        (34

One-time impact of ASU Nos. 2009-16 and 2009-17 (1)

     84        135        219   

Repurchase activity (2)

     29        (29     0   

Other (3)

     27        (3     24   
                        

Balance at June 18, 2010

   $ 149      $ 103      $ 252   
                        

 

  (1)

The non-securitized notes receivable reserve relates to the implementation of ASU Nos. 2009-16 and 2009-17, which required us to establish reserves for certain previously securitized and subsequently repurchased notes held at January 2, 2010.

 

  (2)

Decrease in securitized reserve and increase in non-securitized reserve was attributable to the transfer of the reserve when we repurchased the notes.

 

  (3)

Consists of static pool and default rate assumption changes.

We record an estimate of expected uncollectibility on notes receivable from timeshare purchasers as a reduction of revenue at the time we recognize profit on a timeshare sale. We have fully reserved all defaulted notes in addition to recording a reserve on the estimated uncollectible portion of the remaining notes. For those notes not in default, we assess collectibility based on pools of receivables, because we hold large numbers of homogenous timeshare notes receivable. We estimate uncollectibles based on historical activity for similar timeshare notes receivable. As of June 18, 2010, we estimated average remaining default rates of 10.2 percent for both outstanding non-securitized and securitized timeshare notes receivable, respectively.

We do not record accrued interest on “Loans to timeshare owners” that are over 90 days past due, and the following table shows our recorded investment in such loans.

 

($ in millions)    Non-Securitized
Notes Receivable
   Securitized
Notes Receivable
   Total

Investment in loans on nonaccrual status at June 18, 2010

   $ 116    $ 22    $ 138
                    

Investment in loans on nonaccrual status at January 1, 2010

   $ 113    $ 0    $ 113
                    

 

10. Long-term Debt

As discussed in Footnote No. 1, “Basis of Presentation,” on the first day of fiscal year 2010, we consolidated certain previously unconsolidated entities associated with past timeshare notes receivable securitization transactions, resulting in consolidation of the related debt obligations. We securitized the notes receivable through bankruptcy-remote entities, and the entities’ creditors have no recourse to us.

 

15


Table of Contents

The following table provides detail on our long-term debt balances:

 

($ in millions)    June 18, 2010     January 1, 2010  

Non-recourse debt associated with securitized notes receivable, interest rates ranging from 0.27% to 7.20% (weighted average interest rate of 5.21%)

   $ 987      $ 0   

Less current portion

     (118     0   
                
     869        0   
                

Senior Notes:

    

Series F, interest rate of 4.625%, face amount of $348, maturing June 15, 2012 (effective interest rate of 5.02%) (1)

     347        347   

Series G, interest rate of 5.810%, face amount of $316, maturing November 10, 2015 (effective interest rate of 6.53%) (1)

     303        302   

Series H, interest rate of 6.200%, face amount of $289, maturing June 15, 2016 (effective interest rate of 6.30%) (1)

     289        289   

Series I, interest rate of 6.375%, face amount of $293, maturing June 15, 2017 (effective interest rate of 6.45%) (1)

     291        291   

Series J, interest rate of 5.625%, face amount of $400, maturing February 15, 2013 (effective interest rate of 5.71%) (1)

     398        398   

$2,404 Effective Credit Facility, average interest rate of 0.869%

     96        425   

Other

     200        246   
                
     1,924        2,298   

Less current portion

     (24     (64
                
     1,900        2,234   
                
   $ 2,769      $ 2,234   
                

 

  (1)

Face amount and effective interest rate are as of June 18, 2010.

The non-recourse debt associated with securitized notes receivable was, and to the extent currently outstanding is, secured by the related notes receivable. All of our other long-term debt was, and to the extent currently outstanding is, recourse to us but unsecured.

We are party to a multicurrency revolving credit agreement (the “Credit Facility”) that provides for $2.404 billion of aggregate effective borrowings to support general corporate needs, including working capital, capital expenditures, and letters of credit. The Credit Facility expires on May 14, 2012. Borrowings under the Credit Facility bear interest at the London Interbank Offered Rate (LIBOR) plus a fixed spread. We also pay quarterly fees on the Credit Facility at a rate based on our public debt rating. While borrowings under our Credit Facility generally have short-term maturities, we classify outstanding borrowings as long-term based on our ability and intent to refinance the outstanding borrowings on a long-term basis.

Each of our 13 securitized notes receivable pools contains various triggers relating to the performance of the underlying notes receivable. If a pool of securitized notes receivable fails to perform within the pool’s established parameters (default or delinquency thresholds by deal) there are provisions under which the monthly excess spread we typically receive from that pool (related to the interests we retained) is effectively redirected to accelerate the principal payments to investors based on the subordination of the different tranches until the performance trigger is cured. During the first quarter of 2010, one pool that reached a performance trigger at year-end 2009 returned to compliance while three others reached performance triggers. At the end of the first quarter of 2010, only one of these three pools was still out of compliance with applicable triggers. This pool continued to be under trigger through the end of the second quarter of 2010. No other pools reached performance triggers during the second quarter. As a result, a total of $2 million in cash of excess spread was used to pay down debt during the first half of 2010.

 

16


Table of Contents

The following tables show future principal payments, net of unamortized discounts, and unamortized discounts for our securitized and non-securitized debt.

Debt Principal Payments (net of unamortized discounts)

 

($ in millions)    Non-Recourse Debt    Other Debt    Total

2010

   $ 78    $ 17    $ 95

2011

     124      12      136

2012

     127      455      582

2013

     131      411      542

2014

     131      12      143

Thereafter

     396      1,017      1,413
                    

Balance at June 18, 2010

   $ 987    $ 1,924    $ 2,911
                    

As the contractual terms of the underlying securitized notes receivable determine the maturities of the non-recourse debt associated with them, actual maturities may occur earlier due to prepayments by the notes receivable obligors.

Unamortized Debt Discounts

 

($ in millions)    Non-Recourse Debt    Other Debt    Total

Balance at January 1, 2010

   $ 0    $ 20    $ 20
                    

Balance at June 18, 2010

   $ 0    $ 18    $ 18
                    

We paid cash for interest, net of amounts capitalized, of $74 million in the first half of 2010 and $48 million in the first half of 2009.

 

17


Table of Contents
11. Comprehensive Income and Capital Structure

The following tables detail comprehensive income attributable to Marriott, comprehensive income attributable to noncontrolling interests, and consolidated comprehensive income.

 

     Attributable to Marriott     Attributable to
Noncontrolling Interests
    Consolidated  
($ in millions)    Twelve Weeks Ended     Twelve Weeks Ended     Twelve Weeks Ended  
     June 18,
2010
    June 19, 2009     June 18,
2010
   June 19, 2009     June 18,
2010
    June 19,
2009
 

Net income (loss)

   $ 119      $ 37      $ 0    $ (2   $ 119      $ 35   

Other comprehensive income (loss), net of tax:

             

Foreign currency translation adjustments

     (6     23        0      0        (6     23   

Other derivative instrument adjustments

     1        (5     0      0        1        (5

Unrealized gains on available-for-sale securities

     0        5        0      0        0        5   
                                               

Total other comprehensive (loss) income, net of tax

     (5     23        0      0        (5     23   
                                               

Comprehensive income (loss)

   $ 114      $ 60      $ 0    $ (2   $ 114      $ 58   
                                               
     Attributable to Marriott     Attributable to
Noncontrolling Interests
    Consolidated  
($ in millions)    Twenty-Four Weeks Ended     Twenty-Four Weeks Ended     Twenty-Four Weeks Ended  
     June 18,
2010
    June 19,
2009
    June 18,
2010
   June 19,
2009
    June 18,
2010
    June 19,
2009
 

Net income (loss)

   $ 202      $ 14      $ 0    $ (4   $ 202      $ 10   

Other comprehensive income (loss), net of tax:

             

Foreign currency translation adjustments

     (19     12        0      0        (19     12   

Other derivative instrument adjustments

     1        (4     0      0        1        (4

Unrealized gains on available-for-sale securities

     0        3        0      0        0        3   
                                               

Total other comprehensive (loss) income, net of tax

     (18     11        0      0        (18     11   
                                               

Comprehensive income (loss)

   $ 184      $ 25      $ 0    $ (4   $ 184      $ 21   
                                               

 

18


Table of Contents

The following table details changes in shareholders’ equity attributable to Marriott shareholders. Equity attributable to the noncontrolling interests was zero as of both June 18, 2010 and January 1, 2010. The table also includes the cumulative effect of a change in accounting principle of $146 million recorded directly to retained earnings on the first day of the 2010 fiscal year as a result of our adopting ASU Nos. 2009-16 and 2009-17. See Footnote No. 1, “Basis of Presentation,” for additional information on our adoption of those updates.

 

($ in millions, except per share amounts)     Equity Attributable to Marriott Shareholders  

Common
Shares
Outstanding

        Total     Class A
Common
Stock
   Additional
Paid-in-Capital
    Retained
Earnings
    Treasury
Stock, at
Cost
    Accumulated
Other
Comprehensive
Income (Loss)
 
358.2    Balance at year-end 2009    $ 1,142      $ 5    $ 3,585      $ 3,103      $ (5,564   $ 13   
0   

Impact of adoption of

ASU 2009-16 and ASU 2009-17

     (146     0      0        (146     0        0   
                                                    
358.2    Opening balance fiscal year 2010    $ 996      $ 5    $ 3,585      $ 2,957      $ (5,564   $ 13   
0    Net income      202        0      0        202        0        0   
0    Other comprehensive loss      (18     0      0        0        0        (18
0    Cash dividends ($0.0800 per share)      (29     0      0        (29     0        0   
4.5    Employee stock plan issuance      73        0      (33     0        106        0   
                                                    
362.7    Balance at June 18, 2010    $ 1,224      $ 5    $ 3,552      $ 3,130      $ (5,458   $ (5
                                                    

 

12. Contingencies

Guarantees

We issue guarantees to certain lenders and hotel owners, primarily to obtain long-term management contracts. The guarantees generally have a stated maximum amount of funding and a term of three to 10 years. The terms of guarantees to lenders generally require us to fund if cash flows from hotel operations are inadequate to cover annual debt service or to repay the loan at the end of the term. The terms of the guarantees to hotel owners generally require us to fund if the hotels do not attain specified levels of operating profit. Guarantee fundings to lenders and hotel owners are generally recoverable as loans repayable to us out of future hotel cash flows and/or proceeds from the sale of hotels. We also enter into project completion guarantees with certain lenders in conjunction with hotels and Timeshare segment properties that we or our joint venture partners are building.

The following table shows the maximum potential amount of future fundings for guarantees where we are the primary obligor and the carrying amount of the liability for expected future fundings.

 

($ in millions)

         

Guarantee Type

   Maximum Potential
Amount of  Future

Fundings at
June 18, 2010
   Liability for
Expected Future
Fundings at
June 18, 2010

Debt service

   $ 37    $ 3

Operating profit

     118      20

Other

     56      2
             

Total guarantees where we are the primary obligor

   $ 211    $ 25
             

We included our liability for expected future fundings at June 18, 2010, in our Condensed Consolidated Balance Sheets in the following line items: $3 million in the “Other current liabilities” and $22 million in the “Other long-term liabilities.”

Our guarantees of $211 million listed in the preceding table include $31 million of operating profit guarantees that will not be in effect until the underlying properties open and we begin to operate the properties, $3 million of debt service guarantees that will not be in effect until the underlying debt has been funded, and $7 million of other guarantees.

The guarantees of $211 million in the preceding table do not include $153 million of guarantees related to Senior Living Services lease obligations of $102 million (expiring in 2013) and lifecare bonds of

 

19


Table of Contents

$51 million (estimated to expire in 2016), for which we are secondarily liable. The primary obligors on these liabilities are Sunrise Senior Living, Inc. (“Sunrise”) on both the leases and $7 million of the lifecare bonds; CNL Retirement Properties, Inc. (“CNL”), which subsequently merged with Health Care Property Investors, Inc., on $42 million of the lifecare bonds; and Five Star Senior Living on the remaining $2 million of lifecare bonds. Prior to our sale of the Senior Living Services business in 2003, these preexisting guarantees were guarantees by us of obligations of consolidated Senior Living Services subsidiaries. Sunrise and CNL have indemnified us for any guarantee fundings we may be called upon to make in connection with these lease obligations and lifecare bonds. While we currently do not expect to fund under the guarantees, Sunrise’s SEC filings suggest that Sunrise’s continued ability to meet these guarantee obligations cannot be assured given Sunrise’s financial position and reduced access to liquidity.

The table also does not include lease obligations, for which we became secondarily liable when we acquired the Renaissance Hotel Group N.V. in 1997, consisting of annual rent payments of approximately $6 million and total remaining rent payments through the initial term of approximately $51 million. Most of these obligations expire at the end of 2020. CTF Holdings Ltd. (“CTF”) had originally made available €35 million in cash collateral in the event that we are required to fund under such guarantees (approximately €6 million ($7 million) of which remained at June 18, 2010). Our exposure for the remaining rent payments through the initial term will decline to the extent that CTF obtains releases from the landlords or these hotels exit the system. Since the time we assumed these guarantees, we have not funded any amounts and we do not expect to fund any amounts under these guarantees in the future.

In addition to the guarantees noted in the preceding table, we provided a project completion guarantee to a lender for a project with an estimated aggregate total cost of $592 million. We are liable on a several basis with our partners in an amount equal to our 34 percent pro rata ownership in the joint venture. The carrying value of our liability associated with this guarantee was $28 million at June 18, 2010, as further discussed in Footnote No. 15, “Variable Interest Entities.” The preceding table also does not include a project completion guarantee that we provided to another lender for a project with an estimated aggregate total cost of CAD $483 million (USD $461 million). The associated joint venture will satisfy payments for cost overruns for this project through contributions from the partners or from borrowings, and we are liable on a several basis with our partners in an amount equal to our pro rata ownership in the joint venture, which is 20 percent. We do not expect to fund under the guarantee. The carrying value of our liability associated with this project completion guarantee was $3 million at June 18, 2010.

In addition to the guarantees described in the preceding paragraphs, in conjunction with financing obtained for specific projects or properties owned by joint ventures in which we are a party, we may provide industry standard indemnifications to the lender for loss, liability, or damage occurring as a result of the actions of the other joint venture owner or our own actions.

Commitments and Letters of Credit

In addition to the guarantees noted in the preceding paragraphs, as of June 18, 2010, we had the following commitments outstanding:

 

   

$4 million of loan commitments that we have extended to owners of lodging properties. We expect to fund approximately $1 million of these commitments within three years, and do not expect to fund the remaining $3 million of commitments, $1 million of which will expire within three years, $1 million of which will expire within five years, and $1 million of which will expire after five years.

 

   

Commitments to invest up to $44 million of equity for noncontrolling interests in partnerships that plan to purchase North American full-service and limited-service properties or purchase or develop hotel-anchored mixed-use real estate projects. We expect to fund $24 million of these commitments in one to two years, $10 million within three years and $10 million after three years. If not funded, $24 million of these investment commitments will expire in one to two years and $20 million will expire in more than three years.

 

20


Table of Contents
   

A commitment, with no expiration date, to invest up to $11 million in a joint venture for development of a new property that we expect to fund within three years.

 

   

A commitment, subject to certain conditions, to invest up to $43 million (€35 million) into a new fund to purchase or develop managed Marriott brand hotels in Western Europe that will be managed exclusively by us. In accordance with the agreement, this commitment expired on June 30, 2010.

 

   

A commitment to invest up to $25 million (€20 million) in a joint venture in which we are a partner. We do not expect to fund under this commitment.

 

   

Other investment commitments, generally with no expiration date, totaling $9 million of which we only expect to fund $1 million. That funding is expected to occur within one year.

 

   

Two commitments for an aggregate of $130 million to purchase timeshare and fractional units upon completion of construction for use in our Asia Pacific Points Club and The Ritz-Carlton Destination Club programs. We have already made deposits of $22 million in conjunction with these commitments. With regard to the payment of the remaining $108 million, the payment of $100 million is conditioned on satisfaction of certain conditions, and we have certain claims and contingencies that may have the effect of delaying and/or reducing the amount of such payment, which could otherwise become due in the third or fourth quarter of this year.

 

   

$4 million (€3 million) of other purchase commitments that will be funded over the next 5 years, as follows: $1 million in each of 2011, 2012, 2013 and 2014.

At June 18, 2010, we had $98 million of letters of credit outstanding, the majority of which related to our self-insurance programs. Surety bonds issued as of June 18, 2010, totaled $284 million, the majority of which were requested by federal, state or local governments related to our lodging operations, including our Timeshare segment and self-insurance programs.

 

13. 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, Renaissance Hotels, Renaissance ClubSport, and Autograph Collection properties located in the continental United States and Canada;

 

   

North American Limited-Service Lodging, which includes the Courtyard, Fairfield Inn & Suites, 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, Renaissance Hotels, Courtyard, Fairfield Inn & Suites, 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 residential properties 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 Destination Club, The Ritz-Carlton Residences, and Grand Residences by Marriott timeshare, fractional ownership, and residential properties worldwide.

We evaluate the performance of our segments based primarily on the results of the segment without allocating corporate expenses, income taxes, or indirect general, administrative, and other expenses. With the exception of our Timeshare segment, we do not allocate interest income or interest expense to our

 

21


Table of Contents

segments. Prior to the 2010 first quarter, we included note sale gains/(losses) in our Timeshare segment results. Due to our adoption of ASU Nos. 2009-16 and 2009-17, as discussed in Footnote No. 1, “Basis of Presentation,” we no longer account for note receivable securitizations as sales but rather as secured borrowings as defined in these topics, and therefore, we do not expect to recognize gains or losses on future note receivable securitizations. We include interest income and interest expense associated with our Timeshare segment notes in our Timeshare segment results because financing sales and securitization transactions are an integral part of that segment’s business. In addition, we allocate other gains and losses, equity in earnings or losses from our joint ventures, divisional general, administrative, and other expenses, and income or losses attributable to noncontrolling interests 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.

Revenues

 

     Twelve Weeks Ended    Twenty-Four Weeks Ended
($ in millions)    June 18, 2010    June 19, 2009    June 18, 2010    June 19, 2009

North American Full-Service Segment

   $ 1,231    $ 1,142    $ 2,394    $ 2,308

North American Limited-Service Segment

     507      471      968      912

International Segment

     287      250      554      497

Luxury Segment

     364      324      730      675

Timeshare Segment

     363      355      721      632
                           

Total segment revenues

     2,752      2,542      5,367      5,024

Other unallocated corporate

     19      20      34      33
                           
   $ 2,771    $ 2,562    $ 5,401    $ 5,057
                           

Net Income Attributable to Marriott

     Twelve Weeks Ended     Twenty-Four Weeks Ended  
($ in millions)    June 18, 2010     June 19, 2009     June 18, 2010     June 19, 2009  

North American Full-Service Segment

   $ 85      $ 71      $ 156      $ 140   

North American Limited-Service Segment

     82        72        141        105   

International Segment

     42        27        75        64   

Luxury Segment

     21        15        42        (7

Timeshare Segment

     30        (35     55        (52
                                

Total segment financial results

     260        150        469        250   

Other unallocated corporate

     (49     (48     (102     (114

Interest expense and interest income (1)

     (27     (19     (54     (42

Income taxes (2)

     (65     (46     (111     (80
                                
   $ 119      $ 37      $ 202      $ 14   
                                

 

  (1)

Of the $44 million and $89 million of interest expense shown on the Condensed Consolidated Statements of Income for the twelve and twenty-four weeks ended June 18, 2010, respectively, we allocated $14 million and $28 million, respectively, to our Timeshare Segment.

 

  (2)

The $46 million and $80 million of income taxes for the twelve and twenty-four weeks ended June 19, 2009, included respectively, our provision for income taxes of $44 million and $77 million and taxes attributable to noncontrolling interests of $2 million and $3 million for the applicable periods.

Net Losses Attributable to Noncontrolling Interests

     Twelve Weeks Ended     Twenty-Four Weeks Ended  
($ in millions)    June 18, 2010    June 19, 2009     June 18, 2010    June 19, 2009  

Timeshare Segment net losses attributable to noncontrolling interests

   $ 0    $ 4      $ 0    $ 7   

Provision for income taxes

     0      (2     0      (3
                              
   $ 0    $ 2      $ 0    $ 4   
                              

 

22


Table of Contents

Equity in Losses of Equity Method Investees

     Twelve Weeks Ended     Twenty-Four Weeks Ended  
($ in millions)    June 18, 2010     June 19, 2009     June 18, 2010     June 19, 2009  

North American Full-Service Segment

   $ 1      $ 0      $ 1      $ 0   

North American Limited-Service Segment

     (1     (1     (6     (4

International Segment

     (2     (1     (2     (1

Luxury Segment

     1        (1     0        (31

Timeshare Segment

     (3     (1     (8     (2
                                
   $ (4   $ (4   $ (15   $ (38
                                

Assets

     At Period End
($ in millions)    June 18, 2010    January 1, 2010

North American Full-Service Segment

   $ 1,188    $ 1,175

North American Limited-Service Segment

     476      468

International Segment

     839      849

Luxury Segment

     661      653

Timeshare Segment

     3,375      2,653
             

Total segment assets

     6,539      5,798

Other unallocated corporate

     2,108      2,135
             
   $ 8,647    $ 7,933
             

We estimate that, for the 20-year period from 2010 through 2029, the cash flow associated with completing all phases of our existing portfolio of owned timeshare properties will be approximately $2.7 billion. This estimate is based on our current development plans, which remain subject to change.

 

14. Restructuring Costs and Other Charges

During the latter part of 2008, we experienced a significant decline in demand for domestic and international hotel rooms based in part on the 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 globally 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 (although we did complete note sales in the first and fourth quarters of 2009). These declines resulted in reduced management and franchise fees, cancellation of development projects, reduced timeshare contract sales, and anticipated losses under guarantees and loans. In the fourth quarter of 2008, we put certain company-wide cost-saving measures in place in response to these declines, 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 recorded $137 million of other charges in the 2008 fourth quarter. For information regarding the fourth quarter 2008 charges, see Footnote No. 20, “Restructuring Costs and Other Charges,” in our 2008 Form 10-K. As part of the restructuring actions we began in the fourth quarter of 2008, we initiated further cost savings measures in 2009 associated with our Timeshare segment, hotel development, and above-property level management that resulted in additional restructuring costs of $51 million in 2009, which included $2 million and $33 million of restructuring costs in the 2009 first quarter and 2009 second quarter, respectively. We completed this restructuring in 2009 and do not expect to incur additional expenses in connection with these initiatives. We also recorded $162 million of other charges in 2009, which included $24 million and $127 million of other charges in the 2009 second quarter and 2009 first quarter, respectively. For information regarding the 2009 charges, see Footnote No. 21, “Restructuring Costs and Other Charges,” in our 2009 Form 10-K.

 

23


Table of Contents

Summary of Restructuring Costs and Liability

The following table provides additional information regarding our restructuring, including the balance of the liability at the end of the second quarter of 2010 and total costs incurred through the end of the restructuring in 2009.

 

($ in millions)    Restructuring
Costs
Liability at
January 1,
2010
   Cash
Payments
in the First
Half of 2010
   Restructuring
Costs
Liability at
June 18,

2010
   Total
Cumulative
Restructuring
Costs  through
2009 (1)

Severance-Timeshare

   $ 4    $ 2    $ 2    $ 29

Facilities exit costs-Timeshare

     18      2      16      34

Development cancellations-Timeshare

     0      0      0      10
                           

Total restructuring costs-Timeshare

     22      4      18      73
                           

Severance-hotel development

     1      1      0      4

Development cancellations-hotel development

     0      0      0      22
                           

Total restructuring costs-hotel development

     1      1      0      26
                           

Severance-above property-level management

     2      1      1      7
                           

Total restructuring costs-above property-level management

     2      1      1      7
                           

Total restructuring costs

   $ 25    $ 6    $ 19    $ 106
                           

 

(1)

Includes charges recorded in the 2008 fourth quarter through year-end 2009. Subsequent to fiscal year-end 2009, we did not incur and do not expect to incur additional restructuring expenses.

 

15. Variable Interest Entities

In accordance with the applicable accounting guidance for the consolidation of variable interest entities, we analyze our variable interests, including loans, guarantees, and equity investments, to determine if an entity in which we have a variable interest is a variable interest entity. Our analysis includes both quantitative and qualitative reviews. We base our quantitative analysis on the forecasted cash flows of the entity, and our qualitative analysis on our review of the design of the entity, its organizational structure including decision-making ability, and relevant financial agreements. We also use our qualitative analyses to determine if we must consolidate a variable interest entity as its primary beneficiary.

We periodically sell, without recourse, through special purpose entities, notes receivable originated by our Timeshare segment in connection with the sale of timeshare interval and fractional products. These securitizations provide funding for the Company and transfer the economic risks and substantially all the benefits of the loans to third parties. In a securitization, various classes of debt securities that the special purpose entities issue are generally collateralized by a single tranche of transferred assets, which consist of timeshare notes receivable. The Company services the notes receivable. With each securitization, we may retain a portion of the securities, subordinated tranches, interest-only strips, subordinated interests in accrued interest and fees on the securitized receivables or, in some cases, overcollateralization and cash reserve accounts.

Under GAAP as it existed prior to fiscal year 2010, these entities met the definition of QSPEs, and we were not required to evaluate them for consolidation. We evaluated these entities for consolidation in the 2010 first quarter when we implemented the new accounting topics related to transfers of financial assets in the 2010 first quarter. We created these entities to serve as a mechanism for holding assets and related liabilities, and the entities have no equity investment at risk, making them variable interest entities. We continue to service the notes and transfer all proceeds collected to these special purpose entities and retain rights to receive benefits that are potentially significant to the entities. Accordingly, we concluded under the new accounting topics that we are the entities’ primary beneficiary and, therefore, consolidate them. Please see Footnote No. 1, “Basis of Presentation,” for additional information, including the impact of initial consolidation of these entities.

At June 18, 2010, consolidated assets included in our Condensed Consolidated Balance Sheet that are collateral for the variable interest entities’ obligations had a carrying amount of $1,025 million, comprised

 

24


Table of Contents

of $111 million and $849 million, respectively, of current and long-term notes receivable (net of reserves) and $49 million and $16 million, respectively, of current and long-term restricted cash. Further, at June 18, 2010, consolidated liabilities included in our Condensed Consolidated Balance Sheet for these variable interest entities had a carrying amount of $994 million, comprised of $7 million of interest payable, $118 million of current portion of long-term debt, and $869 million of long-term debt. The noncontrolling interest balance was zero. The creditors of these entities do not have general recourse to us.

Under the terms of our timeshare note sales, we have the right at our option to repurchase defaulted mortgage notes at the outstanding principal balance. The transaction documents typically limit such repurchases to 10 to 15 percent of the transaction’s initial mortgage balance. Voluntary repurchases by us of defaulted notes during the first halves of 2010 and 2009 were $29 million and $35 million, respectively.

We have an equity investment in and a loan receivable due from a variable interest entity that develops and markets fractional ownership and residential interests, and we consolidate the entity because we are the primary beneficiary. We concluded that the entity is a variable interest entity because the voting rights are not proportionate to the economic interests. As a result of consolidating the variable interest entity, the equity investment and the loan receivable were eliminated.

At June 18, 2010, the consolidated assets included in our Condensed Consolidated Balance Sheet that are collateral for the variable interest entity’s obligations had a carrying amount of $30 million, consisting of $27 million of real estate held for development, property, equipment, and other assets and $3 million of cash. Further, at June 18, 2010, the consolidated liabilities included in our Condensed Consolidated Balance Sheet for this variable interest entity had a carrying amount of $4 million and a noncontrolling interest of zero. The creditors of this entity do not have general recourse to us. We have contracted to purchase the noncontrolling interest in the entity for less than $1 million, and we expect the acquisition will be completed in the 2010 third quarter. Our involvement with the entity did not have a material effect on financial performance or cash flows during the first half of 2010.

Our Timeshare segment uses several special purpose entities to maintain ownership of real estate in certain jurisdictions in order to facilitate sales within pooled ownership structures (the “Clubs”). We absorb the variability in the assets of the Clubs to the extent that inventory has not been sold to the ultimate Club member. The Clubs are variable interest entities because the equity investment at risk is not sufficient to permit the entities to finance their activities without additional support from other parties.

We contributed all of the Clubs’ assets to them, in exchange for all of the entities’ beneficial interests. We determined that we are the primary beneficiary of two of the Clubs as we have the power to direct the activities that most significantly impact the economic performance of the entities through our rights to market and sell the assets of the entities and our rights to the proceeds from such sale. At the end of the 2010 second quarter, the assets included in our Condensed Consolidated Balance Sheet associated with the consolidated Clubs had a carrying amount of $171 million, comprised entirely of inventory. The liabilities included in our Condensed Consolidated Balance Sheet had a carrying amount of less than $1 million, and there were no noncontrolling interests. Our involvement with these Clubs did not have a material effect on our financial position, financial performance or cash flows during the first half of 2010. The creditors of these entities do not have general recourse to us.

We determined that we were not the primary beneficiary of one previously consolidated Club beginning in the 2010 first quarter. By virtue of transfer of variable interests to third parties, the power to direct the activities that most significantly impact economic performance of the entity is now shared amongst the variable interest holders. Our maximum exposure to loss is $29 million, which consists of the carrying value of our interest in this entity, which we classify as inventory, and the carrying costs during the holding period.

We have a call option on the equity of a variable interest entity that holds property and land acquired for timeshare development that we currently operate as a hotel, which gives us ultimate power to direct the

 

25


Table of Contents

activities that most significantly impact the entity’s economic performance, and therefore, we consolidate this entity. The entity is a variable interest entity because the equity investment at risk is not sufficient to permit it to finance its activities without additional support from other parties. At June 18, 2010, the entity’s assets included in our Condensed Consolidated Balance Sheet had a carrying amount of $19 million, entirely comprised of property and land. The liabilities included in our Condensed Consolidated Balance Sheet for this variable interest entity had a carrying amount of less than $1 million and a noncontrolling interest of zero. Our involvement with the entity did not have a material affect on our financial performance or cash flows during the first half of 2010. The creditors of this entity do not have general recourse to us.

We have an equity investment in and a loan receivable due from a variable interest entity that develops and markets fractional ownership and residential interests. We concluded that the entity is a variable interest entity because the equity investment at risk is not sufficient to permit the entity to finance its activities without additional support from other parties. We have determined that we are not the primary beneficiary as power to direct the activities that most significantly impact economic performance of the entity is shared amongst the variable interest holders, and therefore do not consolidate the entity. In the 2009 third quarter, we fully impaired our equity investment and certain loans receivable due from the entity. We may fund up to an additional $28 million and do not expect to recover this amount, which we have accrued and included in current liabilities. See Footnote No. 20, “Timeshare Strategy-Impairment Charges,” in our 2009 Form 10-K for additional information. Our remaining maximum exposure to loss is $2 million, which is the outstanding balance of our loan receivable.

In conjunction with the transaction with CTF described more fully in Footnote No. 8, “Acquisitions and Dispositions,” of our Annual Report on Form 10-K for the fiscal year ended December 28, 2007, under the caption “2005 Acquisitions,” we manage certain hotels on behalf of tenant entities 100 percent owned by CTF, which lease the hotels from third-party owners. Due to certain provisions in the management agreements, we account for these contracts as operating leases. At the end of the 2010 second quarter, we managed 11 hotels on behalf of three tenant entities. The entities have minimal equity and minimal assets comprised of hotel working capital and furniture, fixtures, and equipment. In conjunction with the 2005 transaction, CTF had placed money in a trust account to cover cash flow shortfalls and to meet rent payments. In turn, we released CTF from their guarantees fully in connection with eight of these properties and partially in connection with the other three properties. At June 18, 2010, the trust account held approximately $5 million. The tenant entities are variable interest entities because the holder of the equity investment at risk, CTF, lacks the ability through voting rights to make key decisions about the entities’ activities that have a significant effect on the success of the entities. We do not consolidate the entities because we do not bear the majority of the expected losses. We are secondarily liable (after exhaustion of funds from the trust account) for rent payments for eight of the 11 hotels if there are cash flow shortfalls. Future minimum lease payments through the end of the lease term for these hotels totaled approximately $53 million at June 18, 2010. In addition, we are secondarily liable for rent payments of up to an aggregate cap of $16 million for the three other hotels if there are cash flow shortfalls. Our maximum exposure to loss is limited to the rent payments and certain other tenant obligations under the lease, for which we are secondarily liable.

 

26


Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 U.S. Securities and Exchange Commission (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.

In addition, see the “Item 1A. Risk Factors” caption in the “Part II-OTHER INFORMATION” section of this report.

BUSINESS AND OVERVIEW

Lodging

Business conditions for our lodging business improved in the first half of 2010. While the recent recession significantly impacted lodging demand and hotel pricing, occupancies began to improve in the fourth quarter of 2009 and room rates began to both stabilize and improve in some markets in the second quarter 2010. Worldwide average daily rates were essentially flat for company-operated hotels on a constant dollar basis in the 2010 second quarter reflecting the impact of a modest increase in North American rates mostly offset by a modest decline in rates outside North America.

While worldwide revenue per available room (“RevPAR”) in the first half of 2010 remains well below 2008 levels, compared to 2009 levels, we saw strength in properties in Asia and in our luxury properties around the world. North America experienced better demand from corporate transient and association group customers in the first half of 2010 as compared to 2009. During the 2010 first quarter, group meeting cancellations returned to average levels, and expected revenue from future group meetings continued to improve throughout 2010. We also saw greater numbers of corporate group customers in the second quarter of 2010. Nevertheless, our booking windows for both group business and transient business remain very short.

We monitor market conditions continuously and carefully price our rooms daily to meet individual hotel demand levels. We modify the mix of our business to maximize revenue as demand changes. Demand for higher rated rooms improved in the first half of 2010, which allowed us to reduce discounting and special offers for transient business. This mix improvement benefited average daily rates at many hotels. However, room rates associated with special negotiated corporate business, which represented 14 percent of our full service hotel room nights for 2010 through the end of the second quarter, are typically negotiated beginning in late summer for the upcoming year, which limits our ability to raise these rates quickly. With stronger demand emerging as we begin negotiations for 2011, we believe 2011 special negotiated corporate rates will be meaningfully higher. Group business pricing is even less flexible in the near term, as some group business may be booked several years in advance of guest arrival. However, as a result of the recent recession, shorter group booking windows have become more common for 2010 than they were in prior years. And with strengthening demand, group business booked in 2010 is more likely to show stronger price improvement than business booked in 2009.

 

27


Table of Contents

Properties in our system are maintaining very tight cost controls, as we continue to focus on minimizing costs and enhancing property-level house profit margins. Where market conditions dictate as still appropriate, we have maintained many of our 2009 property-level cost saving initiatives such as adjusting menus and restaurant hours, modifying room amenities, cross-training personnel, utilizing personnel at multiple properties where feasible, and not filling some vacant positions. We also reduced above-property costs, which are allocated to hotels, by scaling back systems, processing, and support areas. In addition, we have not filled certain above-property vacant positions, and have encouraged, or, where legally permitted, required employees to use their vacation time accrued during the 2010 fiscal year.

Our lodging business model involves managing and franchising hotels, rather than owning them. At June 18, 2010, we operated 45 percent of the hotel rooms in our system under management agreements, our franchisees operated 53 percent under franchise agreements, and we owned or leased 2 percent. Our emphasis on long-term management contracts and franchising tends to provide more stable earnings in periods of economic softness, while the addition of new hotels to our system generates growth. This strategy has allowed substantial growth while reducing financial leverage and risk in a cyclical industry. In addition, we increase our financial flexibility by reducing our capital investments and adopting a strategy of recycling the investments that we make.

We currently have approximately 95,000 rooms in our lodging development pipeline. During the first half of 2010, we opened 14,929 rooms (gross). Approximately 27 percent of the new rooms were located outside the United States and 12 percent of the room additions were conversions from competitor brands. Of the rooms that converted, 71 percent converted to our Autograph Collection brand. For the full 2010 fiscal year, we expect to open over 30,000 rooms (gross), not including residential or timeshare units.

We calculate RevPAR by dividing room sales for comparable properties by room nights available to guests for the period. 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. RevPAR may not be comparable to similarly titled measures, such as revenues. References to RevPAR throughout this report are in constant dollars, unless otherwise noted.

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.

For our North American comparable properties, systemwide RevPAR (which includes data from our franchised, managed, owned, and leased properties) increased by 2.3 percent in the first half of 2010, compared to the year-ago period, reflecting improved occupancy levels in most markets partially offset by lower average daily rates (on a constant dollar basis). For our properties outside North America, systemwide RevPAR for the first half of 2010 increased 6.5 percent versus the year-ago period, reflecting improved occupancy levels partially offset by lower average daily rates (on a constant dollar basis).

Timeshare

Contract sales of our timeshare products declined in the first half of 2010, compared to the 2009 first half, largely due to tough second quarter comparisons driven by sales promotions in the second quarter of 2009. In the first half of 2010, we have continued the purchase incentives and targeted marketing efforts we instituted throughout 2009, although at lower levels, so pricing improved year-over-year late in the second quarter. Rental revenues increased in the first half with stronger leisure demand for our Marriott Vacation Club product. Demand for fractional and residential units remains weak. Sales and marketing costs as a percentage of contract sales continue to improve. As with Lodging, our Timeshare properties continue to maintain very tight cost controls, and we have not filled certain vacant positions, and have

 

28


Table of Contents

encouraged, or, where legally permitted, required employees to use their vacation time accrued during the 2010 fiscal year.

Since the sale of timeshare and fractional intervals and condominiums follows the percentage-of-completion accounting method, current demand frequently is not reflected in our Timeshare segment results until later accounting periods. Intentional and unintentional construction delays could also reduce nearer-term Timeshare segment results as percentage-of-completion revenue recognition may correspondingly be delayed as well.

On January 2, 2010, the first day of the 2010 fiscal year, we adopted Accounting Standards Update No. 2009-16, “Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets” (“ASU No. 2009-16”) and Accounting Standards Update No. 2009-17, “Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities” (“ASU No. 2009-17”). As a result of adopting both topics in the 2010 first quarter, we consolidated 13 existing qualifying special purpose entities associated with past securitization transactions, and we recorded a one-time non-cash after-tax reduction to shareholders’ equity of $146 million ($238 million pretax) in the 2010 first quarter, representing the cumulative effect of a change in accounting principle.

See Footnote No. 1, “Basis of Presentation,” for more detailed information regarding our adoption of these new accounting topics, including the impact to our Condensed Consolidated Balance Sheet and Condensed Consolidated Statement of Income.

CONSOLIDATED RESULTS

The following discussion presents an analysis of results of our operations for the twelve weeks and twenty-four weeks ended June 18, 2010, compared to the twelve weeks and twenty-four weeks ended June 19, 2009. Including residential products, we opened 234 properties (35,935 rooms) while 31 properties (5,595 rooms) exited the system since the second quarter of 2009.

Revenues

Twelve Weeks. Revenues increased by $209 million (8 percent) to $2,771 million in the second quarter of 2010 from $2,562 million in the second quarter of 2009, as a result of higher: cost reimbursements revenue ($153 million); base management and franchise fees ($22 million); owned, leased, corporate housing, and other revenue ($17 million); incentive management fees ($11 million (comprised of a $4 million increase for North America and a $7 million increase outside of North America)); and Timeshare sales and service revenue ($6 million).

The increase in owned, leased, corporate housing, and other revenue, to $255 million in the 2010 second quarter, from $238 million in the 2009 second quarter, largely reflected $11 million of higher revenue for owned and leased properties and $8 million of higher hotel agreement termination fees associated with five properties that exited our system. The increase in owned and leased revenue primarily reflected increased RevPAR and occupancy levels. Combined branding fees associated with affinity card endorsements and the sale of branded residential real estate totaled $19 million for each of the 2010 and 2009 second quarters.

The increase in incentive management fees, to $46 million in the 2010 second quarter from $35 million in the 2009 second quarter, primarily reflected higher property-level revenue and continued tight property-level cost controls favorably impacting margins in the second quarter of 2010 compared to the second quarter of 2009. The increases in base management fees, to $136 million in the 2010 second quarter from $126 million in the 2009 second quarter, and in franchise fees, to $105 million in the 2010 second quarter from $93 million in the 2009 second quarter, primarily reflected increased RevPAR and the impact of unit growth across the system.

The increase in Timeshare sales and services revenue to $289 million in the 2010 second quarter, from $283 million in the 2009 second quarter, primarily reflected higher financing revenue due to higher interest income and to a lesser extent higher services revenue reflecting increased rental occupancy levels and rates. These favorable impacts were mostly offset by lower development revenue due to tough

 

29


Table of Contents

comparisons driven by sales promotions in the 2009 second quarter and lower reportability as certain timeshare projects in the 2010 second quarter have not yet reached revenue recognition reportability thresholds. See “BUSINESS SEGMENTS: Timeshare,” later in this report for additional information on our Timeshare segment.

Cost reimbursements 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 costs incurred with no added markup, this revenue and related expense has no impact on either our operating income or net income attributable to us. The increase in cost reimbursements revenue, to $1,940 million in the 2010 second quarter from $1,787 million in the 2009 second quarter, reflected the impact of growth across the system, partially offset by lower property-level costs, in response to cost controls. We added 18 managed properties (6,031 rooms) and 182 franchised properties (24,356 rooms) to our system since the end of the 2009 second quarter, net of properties exiting the system.

Twenty-four Weeks. Revenues increased by $344 million (7 percent) to $5,401 million in the first half of 2010 from $5,057 million in the first half of 2009, as a result of higher: cost reimbursements revenue ($203 million); Timeshare sales and service revenue ($82 million); owned, leased, corporate housing, and other revenue ($26 million); base management and franchise fees ($25 million); and incentive management fees ($8 million (entirely associated with properties outside of North America)).

The increase in Timeshare sales and services revenue to $574 million in the first half of 2010, from $492 million in the first half of 2009, primarily reflected higher financing revenue due to higher interest income and to a lesser extent higher services revenue reflecting increased rental occupancy levels and rates. These favorable impacts were partially offset by lower development revenue due to tough comparisons driven by sales promotions in the 2009 second quarter, mitigated by favorable reportability from projects that became reportable in the 2010 first half upon reaching revenue recognition reportability thresholds. See “BUSINESS SEGMENTS: Timeshare” later in this report for additional information on our Timeshare segment.

The increase in owned, leased, corporate housing, and other revenue, to $484 million in the first half of 2010, from $458 million in the first half of 2009, largely reflected $16 million of higher revenue for owned and leased properties and $12 million of higher hotel agreement termination fees associated with five properties that exited our system. The increase in owned and leased revenue primarily reflected increased RevPAR and occupancy levels. Combined branding fees associated with affinity card endorsements and the sale of branded residential real estate totaled $31 million for both the first halves of 2010 and 2009.

The increase in incentive management fees, to $86 million in the first half of 2010 from $78 million in the first half of 2009, primarily reflected higher property-level revenue and continued tight property-level cost controls favorably impacting margins in the first half of 2010 compared to the first half of 2009. The increases in base management fees, to $261 million in the first half of 2010 from $251 million in the first half of 2009, and in franchise fees, to $196 million in the first half of 2010 from $181 million in the first half of 2009, primarily reflected stronger RevPAR and the impact of unit growth across the system.

The increase in cost reimbursements revenue, to $3,800 million in the first half of 2010 from $3,597 million in the first half of 2009, reflected the impact of growth across the system, partially offset by lower property-level costs in response to cost controls.

Restructuring Costs and Other Charges

As part of the restructuring actions we began in the fourth quarter of 2008, we initiated further cost savings measures in 2009 associated with our Timeshare segment, hotel development, above-property level management, and corporate overhead. These further measures resulted in additional restructuring costs of $51 million in fiscal year 2009 ($2 million and $33 million of which we incurred in the first and second quarters of 2009, respectively). For additional information on the 2009 restructuring costs, including the types of restructuring costs incurred in total and by segment, please see Footnote No. 21,

 

30


Table of Contents

“Restructuring Costs and Other Charges,” of the 2009 Form 10-K. For the cumulative restructuring costs incurred since inception and a roll forward of the restructuring liability through June 18, 2010, please see Footnote No. 14, “Restructuring Costs and Other Charges,” of this Form 10-Q.

As a result of our Timeshare segment restructuring efforts, we are projecting approximately $113 million ($73 million after-tax) of annual cost savings in 2010, $52 million ($33 million after-tax) of which we realized in the first half of 2010. The 2010 savings primarily were, and we expect that they will continue to primarily be, reflected in the “Timeshare-direct” and the “General, administrative, and other” expense captions in our Condensed Consolidated Statements of Income.

As a result of the hotel development restructuring efforts across several of our Lodging segments, we are projecting approximately $12 million ($8 million after-tax) of annual cost savings in 2010, $6 million ($4 million after-tax) of which we realized in the first half of 2010. The 2010 savings primarily were, and we expect that they will continue to be, primarily reflected in the “General, administrative, and other” expense caption in our Condensed Consolidated Statements of Income.

We project that the restructuring initiatives we implemented by reducing above property-level lodging management personnel will result in $10 million to $11 million ($6 million to $7 million after-tax) of annual cost savings in 2010, $5 million ($3 million after-tax) of which we realized in the first half of 2010. These savings primarily were, and we expect that they will continue to be, primarily reflected in the “General, administrative, and other” expense caption in our Condensed Consolidated Statements of Income.

Operating Income

Twelve Weeks. Operating income increased by $127 million to $226 million in the 2010 second quarter from $99 million in the second quarter of 2009. This increase reflected $46 million of higher Timeshare sales and services revenue net of direct expenses, a $33 million decrease in restructuring costs, an increase in base management and franchise fees of $22 million, $11 million of higher incentive management fees, $10 million of higher owned, leased, corporate housing, and other revenue net of direct expenses, and a $5 million decrease in general, administrative, and other expenses.

The reasons for the increase of $22 million in base management and franchise fees as well as the increase of $11 million in incentive management fees as compared to the year-ago quarter are noted in the preceding “Revenues” section.

Timeshare sales and services revenue net of direct expenses in the second quarter of 2010 totaled $50 million. The increase of $46 million from the year-ago quarter primarily reflected $35 million of higher financing revenue, which largely reflected increased interest income associated with the impact of ASU Nos. 2009-16 and 2009-17, $9 million of higher development revenue net of product costs and marketing and selling costs, and $4 million of higher services revenue net of expenses, partially offset by $3 million of lower other revenue net of expenses. Higher development revenue net of product costs and marketing and selling costs primarily reflected lower costs due to lower sales volumes and lower marketing and selling costs, as well as a favorable variance from an $8 million charge related to an issue with a state tax authority in the 2009 second quarter, mostly offset by lower development revenue for the reasons stated in the preceding “Revenues” section. See “BUSINESS SEGMENTS: Timeshare” later in this report for additional information regarding our Timeshare segment.

The $10 million (48 percent) increase in owned, leased, corporate housing, and other revenue net of direct expenses was primarily attributable to $6 million of higher hotel agreement termination fees net of property closing costs and stronger RevPAR and higher property-level margins at some owned and leased properties, partially offset by additional rent expense associated with one property.

General, administrative, and other expenses decreased by $5 million (3 percent) to $142 million in the second quarter of 2010 from $147 million in the second quarter of 2009. The quarter-over-quarter variance was favorably impacted by a $7 million write-off of Timeshare segment capitalized software costs in the 2009 second quarter, an $8 million decrease in legal expenses, and a $7 million favorable

 

31


Table of Contents

variance in deferred compensation expenses (with changes to the company’s deferred compensation plan, 2010 second quarter general, administrative, and other expenses had no deferred compensation expenses, compared to a $7 million unfavorable impact in the year-ago quarter from mark-to-market valuations). Somewhat offsetting these favorable items, the quarter-over-quarter variance was unfavorably impacted by $12 million of increased incentive compensation and $4 million of foreign exchange losses. Of the $5 million decrease in total general, administrative, and other expenses, a decrease of $7 million was attributable to our Lodging segments and an increase of $2 million was unallocated.

Twenty-four Weeks. Operating income increased by $267 million to $406 million in the first half of 2010 from $139 million in the first half of 2009. The increase in operating income reflected $107 million of higher Timeshare sales and services revenue net of direct expenses, an $83 million decrease in general, administrative, and other expenses, a $35 million decrease in restructuring costs, a $25 million increase in base management and franchise fees, $9 million of higher owned, leased, corporate housing, and other revenue net of direct expenses, and $8 million of higher incentive management fees.

The reasons for the increase of $25 million in base management and franchise fees as well as the increase of $8 million in incentive management fees as compared to the first half of 2009 are noted in the preceding “Revenues” section.

Timeshare sales and services revenue net of direct expenses in the first half of 2010 totaled $100 million. The increase of $107 million from the year-ago period primarily reflected $72 million of higher financing revenue, which largely reflected increased interest income associated with the impact of consolidating previously unconsolidated securitized notes under ASU Nos. 2009-16 and 2009-17, $23 million of higher development revenue net of product costs and marketing and selling costs, $7 million of higher services revenue net of expenses, and $5 million of higher other revenue, net of expenses. Higher development revenue net of product costs and marketing and selling costs primarily reflected lower costs due to lower sales volumes and lower marketing and selling costs, as well as a favorable variances from both an $8 million charge related to an issue with a state tax authority and a net $3 million impact from contract cancellation allowances in the 2009 first half, partially offset by lower development revenue for the reasons stated in the preceding “Revenues” section. See “BUSINESS SEGMENTS: Timeshare,” later in this report for additional information regarding our Timeshare segment.

The $9 million (26 percent) increase in owned, leased, corporate housing, and other revenue net of direct expenses was primarily attributable to $10 million of higher hotel agreement termination fees net of property closing costs and net stronger results at some owned and leased properties due to higher RevPAR and property-level margins, partially offset by additional rent expense associated with one property.

General, administrative, and other expenses decreased by $83 million (23 percent) to $280 million in the first half of 2010 from $363 million in the first half of 2009. The 2010 first half was favorably impacted by a $6 million reversal in that period of guarantee accruals, primarily related to a completion guarantee for which we satisfied the related requirements, $5 million of decreased legal expenses, as well as the following 2009 expenses that were not incurred in 2010: $49 million of impairment charges related to two security deposits that we deemed unrecoverable in the first quarter of 2009 due, in part, to our decision not to fund certain cash flow shortfalls, partially offset by an $11 million reversal of the 2008 accrual for the funding of those cash flow shortfalls; a $43 million provision for loan losses; a $7 million write-off of Timeshare segment capitalized software costs; and $4 million of bad debt expense on an accounts receivable balance. The period over period variance also reflected a $2 million favorable variance in deferred compensation expenses (with changes to the company’s deferred compensation plan, 2010 first half general, administrative, and other expenses had no deferred compensation expenses, compared to a $2 million unfavorable impact in the year-ago period from mark-to-market valuations). Somewhat offsetting these favorable items were incentive compensation, which was $18 million higher in the 2010 first half, as well as $4 million of increased foreign exchange losses. Of

 

32


Table of Contents

the $83 million decrease in total general, administrative, and other expenses, a decrease of $53 million was attributable to our Lodging segments and a decrease of $30 million was unallocated.

As noted in the preceding paragraph, the decrease in general, administrative, and other expenses included a $43 million decrease in the provision for loan losses to zero in the 2010 first half from $43 million in the first half of 2009. The 2009 provision reflected a $29 million loan loss provision associated with one Luxury segment project and a $14 million loan loss provision associated with a North American Limited-Service segment portfolio.

Gains and Other Income

The table below shows our gains and other income for the twelve and twenty-four weeks ended June 18, 2010, and June 19, 2009:

 

     Twelve Weeks Ended    Twenty-Four Weeks Ended
($ in millions)    June 18, 2010    June 19, 2009    June 18, 2010    June 19, 2009

Gain on debt extinguishment

   $ 0    $ 0    $ 0    $ 21

Gains on sales of real estate and other

     2      3      4      6

Income from cost method joint ventures

     1      0      0      1
                           
   $ 3    $ 3    $ 4    $ 28
                           

Twenty-four Weeks. The $21 million gain on debt extinguishment in the first half of 2009 represents the difference between the purchase price and net carrying amount of Senior Notes we repurchased.

Interest Expense

Twelve Weeks. Interest expense increased by $16 million (57 percent) to $44 million in the second quarter of 2010 compared to $28 million in the second quarter of 2009. This increase was primarily driven by: (1) the consolidation of $1,121 million of debt in the 2010 first quarter associated with previously securitized notes, as discussed in Footnote No. 1, “Basis of Presentation,” which resulted in a $14 million increase in interest expense in the 2010 second quarter related to that debt; (2) a $4 million unfavorable variance to the 2009 second quarter as a result of lower capitalized interest in the 2010 second quarter associated with construction projects; and (3) $3 million of higher interest expense in the 2010 second quarter associated with our executive deferred compensation plan. These increases were partially offset by: (1) $4 million of lower interest expense associated with the maturity of our Series C Senior Notes in the 2009 fourth quarter, and other net debt reductions; and (2) a $2 million decrease in interest expense associated with our Credit Facility, which reflected lower average borrowings under the Credit Facility and a lower average interest rate.

Twenty-four Weeks. Interest expense increased by $32 million (56 percent) to $89 million in the first half of 2010 compared to $57 million in the first half of 2009. This increase was primarily driven by: (1) the consolidation of $1,121 million of debt in the 2010 first quarter associated with previously securitized notes, as discussed in Footnote No. 1, “Basis of Presentation,” which resulted in a $28 million increase in interest expense in the 2010 first half related to that debt; (2) a $10 million unfavorable variance to the 2009 first half as a result of lower capitalized interest in the 2010 first half associated with construction projects; and (3) $6 million of higher interest expense in the 2010 first half associated with our executive deferred compensation plan. These increases were partially offset by: (1) $8 million of lower interest expense associated with our repurchase of $122 million of principal amount of our Senior Notes in 2009, the maturity of our Series C Senior Notes in the 2009 fourth quarter and other net debt reductions; and (2) a $4 million decrease in interest expense associated with our Credit Facility, which reflected lower average borrowings under the Credit Facility and a lower average interest rate.

Interest Income and Income Tax

Twelve Weeks. Interest income decreased by $6 million (67 percent) to $3 million in the second quarter of 2010, from $9 million in the second quarter of 2009, primarily reflecting a $3 million decrease due to a change in the timing of payment of a preferred dividend (paid in the second quarter of 2009, but expected to be paid in the fourth quarter of 2010), and a $2 million decrease primarily associated with a loan for which interest was recognized in the 2009 second quarter, but that we impaired in the 2009 third quarter. Because we recognize interest on impaired loans on a cash basis, we did not recognize any interest on this impaired loan subsequent to its impairment.

 

33


Table of Contents

Our tax provision increased by $21 million (48 percent) to $65 million in the second quarter of 2010 from a tax provision of $44 million in the second quarter of 2009. The increase was primarily due to higher pretax income in 2010 and $7 million of higher tax expense associated with changes to the Company’s deferred compensation plan (the 2010 second quarter had no impact associated with deferred compensation expenses, compared to a $7 million favorable impact in the year-ago quarter). The increase was partially offset by a lower tax rate in the second quarter of 2010, as the 2009 second quarter reflected $17 million of income tax expense primarily related to the treatment of funds received from certain foreign subsidiaries.

Twenty-four Weeks. Interest income decreased by $8 million (53 percent) to $7 million in the first half of 2010, from $15 million in the first half of 2009, reflecting a $3 million decrease due to a change in the timing of payment of a preferred dividend, a $3 million decrease primarily associated with a loan that we impaired in the 2009 third quarter (both of which are discussed in the preceding “Twelve Weeks” discussion), and $2 million of other lower interest.

Our tax provision increased by $34 million (44 percent) to $111 million in the first half of 2010 from a tax provision of $77 million in the first half of 2009. The increase was primarily due to higher pretax income in 2010 and $2 million of higher tax expense associated with changes to the Company’s deferred compensation plan (the 2010 first half had no impact associated with deferred compensation expenses, compared to a $2 million favorable impact in the year-ago period). The increase was partially offset by a lower tax rate in the first half of 2010, as the 2009 first half reflected $43 million of income tax expense primarily related to the treatment of funds received from certain foreign subsidiaries.

Equity in Losses

Twelve Weeks. Equity in losses of $4 million in the second quarter of 2010 remained unchanged from equity in losses of $4 million in the second quarter of 2009.

Twenty-four Weeks. Equity in losses of $15 million in the first half of 2010 decreased by $23 million from equity in losses of $38 million in first half of 2009 and primarily reflected a favorable variance from a $30 million impairment charge in the first half of 2009 associated with a Luxury segment joint venture investment that we determined to be fully impaired. This favorable variance was partially offset by $5 million of decreased earnings in the 2010 first half for a Timeshare segment residential and fractional project joint venture, primarily related to increased cancellation allowances, and impairment charges we recorded in the 2010 first half of $2 million and $1 million associated with a North American Limited-Service segment and a Timeshare segment joint venture, respectively.

Net Losses Attributable to Noncontrolling Interests

Twelve Weeks. Net losses attributable to noncontrolling interests decreased by $2 million in the second quarter of 2010 to zero, compared to $2 million in the second quarter of 2009.

Twenty-four Weeks. Net losses attributable to noncontrolling interests decreased by $4 million in the first half of 2010 to zero, compared to $4 million in the first half of 2009.

Net Income

Twelve Weeks. Net income increased by $84 million (240 percent) to $119 million in the second quarter of 2010 from $35 million in the second quarter of 2009, net income attributable to Marriott increased by $82 million (222 percent) to $119 million in the second quarter of 2010 from $37 million in the second quarter of 2009, and diluted income per share attributable to Marriott increased by $0.21 (210 percent) to $0.31 per share from $0.10 per share in the second quarter of 2009. As discussed in more detail in the preceding sections beginning with “Operating Income,” the $84 million increase in net income compared to the prior year was due to higher Timeshare sales and services revenue net of direct expenses ($46 million), lower restructuring costs ($33 million), higher base management and franchise fees ($22 million), higher incentive management fees ($11 million), higher owned, leased, corporate

 

34


Table of Contents

housing, and other revenue net of direct expenses ($10 million), and lower general, administrative, and other expenses ($5 million). These favorable variances were partially offset by higher income taxes ($21 million), higher interest expense ($16 million), and lower interest income ($6 million).

Twenty-four Weeks. Net income increased by $192 million (1,920 percent) to $202 million in the first half of 2010 from $10 million in the first half of 2009, net income attributable to Marriott increased by $188 million (1,343 percent) to $202 million in first half of 2010 from $14 million in the first half of 2009, and diluted income per share attributable to Marriott increased by $0.50 (1,250 percent) to $0.54 per share from $0.04 per share in the first half of 2009. As discussed in more detail in the preceding sections beginning with “Operating Income,” the $192 million increase in net income compared to the prior year was due to higher Timeshare sales and services revenue net of direct expenses ($107 million), lower general, administrative, and other expenses ($83 million), lower restructuring costs ($35 million), higher base management and franchise fees ($25 million), lower equity losses ($23 million), higher owned, leased, corporate housing, and other revenue net of direct expenses ($9 million), and higher incentive management fees ($8 million). These favorable variances were partially offset by higher income taxes ($34 million), higher interest expense ($32 million), lower gains and other income ($24 million), and lower interest income ($8 million).

Earnings Before Interest Expense, Taxes, Depreciation and Amortization (“EBITDA”)

Earnings before interest expense, taxes, depreciation and amortization (“EBITDA”) is a non-GAAP financial measure that reflects earnings excluding the impact of interest expense, provision for income taxes, depreciation and amortization. We consider EBITDA to be an indicator of operating performance because we use it to measure our ability to service debt, fund capital expenditures, and expand our business. We also use EBITDA, as do analysts, lenders, investors and others, to evaluate companies because it excludes certain items that can vary widely across different industries or among companies within the same industry. For example, interest expense can be dependent on a company’s capital structure, debt levels and credit ratings. Accordingly, the impact of interest expense on earnings can vary significantly among companies. The tax positions of companies can also vary because of their differing abilities to take advantage of tax benefits and because of the tax policies of the jurisdictions in which they operate. As a result, effective tax rates and provision for income taxes can vary considerably among companies. EBITDA also excludes depreciation and amortization because companies utilize productive assets of different ages and use different methods of both acquiring and depreciating productive assets. These differences can result in considerable variability in the relative costs of productive assets and the depreciation and amortization expense among companies.

We also evaluate adjusted EBITDA as an indicator of operating performance. Adjusted EBITDA excludes: (1) the 2009 second quarter restructuring costs and other charges totaling $57 million; and (2) the 2009 first quarter restructuring costs and other charges totaling $129 million. We evaluate non-GAAP measures that exclude the impact of the restructuring costs and other charges incurred in the 2009 first and second quarters because those non-GAAP measures allow for period-over-period comparisons of our on-going core operations before material charges. These non-GAAP measures also facilitate our comparison of results from our on-going operations before material charges with results from other lodging companies. EBITDA and adjusted EBITDA have limitations and should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. Both of these non-GAAP measures exclude certain cash expenses that we are obligated to make. In addition, other companies in our industry may calculate adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

 

35


Table of Contents

The table below shows our EBITDA and Adjusted EBITDA calculations and reconciles those measures with Net Income attributable to Marriott.

 

     Twelve Weeks Ended     Twenty-Four Weeks Ended  
($ in millions)    June 18, 2010     June 19, 2009     June 18, 2010     June 19, 2009  

Net Income attributable to Marriott

   $ 119      $ 37      $ 202      $ 14   

Interest expense

     44        28        89        57   

Tax provision

     65        44        111        77   

Tax provision, noncontrolling interests

     0        2        0        3   

Depreciation and amortization

     42        42        81        81   

Less: Depreciation reimbursed by third-party owners

     (3     (2     (6     (4

Interest expense from unconsolidated joint ventures

     5        6        10        9   

Depreciation and amortization from unconsolidated joint ventures

     6        6        12        12   
                                

EBITDA

   $ 278      $ 163      $ 499      $ 249   

Restructuring costs and other charges

        

Severance

     0        10        0        12   

Facilities exit costs

     0        22        0        22   

Development cancellations

     0        1        0        1   
                                

Total restructuring costs

     0        33        0        35   
                                

Impairment of investments and other

     0        0        0        79   

Reversal of reserve for expected fundings

     0        0        0        (11

Accounts receivable and guarantee charges

     0        3        0        3   

Reserves for loan losses

     0        1        0        43   

Contract cancellation allowances

     0        1        0        5   

Residual interests valuation

     0        12        0        25   

Software development write-off

     0        7        0        7   
                                

Total other charges

     0        24        0        151   
                                

Total restructuring costs and other charges

     0        57        0        186   
                                

Adjusted EBITDA

   $ 278      $ 220      $ 499      $ 435   
                                

BUSINESS SEGMENTS

We are a diversified hospitality company with operations in five business segments: North American Full-Service Lodging, North American Limited-Service Lodging, International Lodging, Luxury Lodging, and Timeshare. See Footnote No. 13, “Business Segments,” for further information on our segments including how we aggregate our individual brands into each segment, and other information about each segment, including revenues, income (loss) attributable to Marriott, net losses attributable to noncontrolling interests, equity in earnings (losses) of equity method investees, and assets.

We added 231 properties (35,664 rooms) and 30 properties (5,570 rooms) exited the system since the end of the 2009 second quarter, not including residential products. We also added 3 residential properties (271 units) and one property (25 units) exited the system since the end of the 2009 second quarter.

Twelve Weeks. Total segment financial results increased by $110 million (73 percent) to $260 million in the second quarter of 2010 from $150 million in the second quarter of 2009, and total segment revenues increased by $210 million to $2,752 million in the second quarter of 2010, an 8 percent increase from revenues of $2,542 million in the second quarter of 2009.

The increase in revenues included a $153 million increase in cost reimbursements revenue, which does not impact operating income or net income attributable to Marriott. The results, compared to the year-ago quarter, reflected an increase of $46 million in Timeshare sales and services revenue net of direct expenses, a $32 million decrease in restructuring costs, a $22 million increase in base management and franchise fees to $241 million in the 2010 quarter from $219 million in the 2009 quarter, an $11 million increase in incentive management fees, an increase of $11 million in owned, leased, corporate housing, and other revenue net of direct expenses, and $7 million of decreased general, administrative, and other expenses. These favorable variances were partially offset by $14 million of interest expense, a $4 million decrease in net losses attributable to noncontrolling interest benefit, and a decrease of $1 million in gains and other income.

The $22 million increase in base management and franchise fees primarily reflected stronger RevPAR and the impact of unit growth across the system. The $11 million increase in incentive management fees

 

36


Table of Contents

primarily reflected higher property-level revenue and continued tight property-level cost controls favorably impacting margins in the second quarter of 2010 compared to the second quarter of 2009. In the second quarter of 2010, 25 percent of our managed properties paid incentive management fees to us versus 23 percent in the second quarter of 2009. In addition, in the second quarter of 2010, 62 percent of our incentive fees were derived from international hotels versus 61 percent in the 2009 second quarter.

Worldwide RevPAR for comparable systemwide properties increased by 7.0 percent (8.5 percent using actual dollars) while worldwide RevPAR for comparable company-operated properties increased by 8.2 percent (9.9 percent using actual dollars). Compared to the year-ago quarter, worldwide comparable company-operated house profit margins in 2010 increased by 90 basis points and worldwide comparable company-operated house profit per available room (“HP-PAR”) increased by 9.3 percent on a constant U.S. dollar basis reflecting the impact of very tight cost controls in 2010 at properties in our system as well as increased demand. North American company-operated house profit margins increased by 90 basis points and HP-PAR at our North American company-operated properties increased by 8.7 percent (9.0 percent using actual dollars) also reflecting very tight cost controls at properties as well as increased demand.

Twenty-four Weeks. Total segment financial results increased by $219 million (88 percent) to $469 million in the first half of 2010 from $250 million in the first half of 2009, and total segment revenues increased by $343 million to $5,367 million in the first half of 2010, a 7 percent increase from revenues of $5,024 million in the first half of 2009.

The increase in revenues included a $203 million increase in cost reimbursements revenue, which does not impact operating income or net income attributable to Marriott. The results, compared to the first half of 2009, reflected an increase of $107 million in Timeshare sales and services revenue net of direct expenses, $53 million of decreased general, administrative, and other expenses, a $33 million decrease in restructuring costs, a $25 million increase in base management and franchise fees to $457 million in the first half of 2010 from $432 million in the first half of 2009, $23 million of lower joint venture equity losses, $8 million of higher incentive management fees, and an increase of $8 million in owned, leased, corporate housing, and other revenue net of direct expenses. These favorable variances were partially offset by $28 million of interest expense, a $7 million decrease in net losses attributable to noncontrolling interest benefit, and a decrease of $3 million in gains and other income.

The $25 million increase in base management and franchise fees primarily reflected stronger RevPAR and the impact of unit growth across the system. The $8 million increase in incentive management fees primarily reflected higher property-level revenue and continued tight property-level cost controls favorably impacting margins in the first half of 2010 compared to the first half of 2009. In the first halves of each of 2010 and 2009, 26 percent of our managed properties paid incentive management fees to us. In addition, in the first half of 2010, 61 percent of our incentive fees were derived from international hotels versus 57 percent in the first half of 2009.

Worldwide RevPAR for comparable systemwide properties increased by 3.1 percent (4.2 percent using actual dollars) while worldwide RevPAR for comparable company-operated properties increased by 4.0 percent (5.5 percent using actual dollars). Compared to the year-ago period, worldwide comparable company-operated house profit margins in the 2010 first half increased by 10 basis points and worldwide comparable company-operated HP-PAR increased by 3.1 percent on a constant U.S. dollar basis reflecting the impact of very tight cost controls in 2010 at properties in our system and increased demand, partially offset by decreased average daily rates. North American company-operated house profit margins declined by 20 basis points and HP-PAR at our North American company-operated properties increased by 0.8 percent (1.0 percent using actual dollars) reflecting very tight cost controls at properties, partially offset by decreased average daily rates.

Summary of Properties by Brand

We opened 46 lodging properties (6,568 rooms) during the second quarter of 2010, while 14 properties (2,311 rooms) exited the system, increasing our total properties to 3,489 (607,252 rooms) inclusive of 31 home and condominium products (2,950 units), for which we manage the related owners’ associations.

 

37


Table of Contents

Unless otherwise indicated, our references to Marriott Hotels & Resorts throughout this report include JW Marriott and Marriott Conference Centers. References to Renaissance Hotels include Renaissance ClubSport, and references to Fairfield Inn & Suites include Fairfield Inn.

The table below shows properties we operated or franchised, by brand, as of June 18, 2010 (excluding 1,869 corporate housing rental units associated with our ExecuStay brand):

 

     Company-Operated    Franchised

Brand

   Properties    Rooms    Properties    Rooms

U.S. Locations

           

Marriott Hotels & Resorts

   141    72,511    184    55,897

Marriott Conference Centers

   11    3,243    0    0

JW Marriott

   13    8,616    5    1,552

Renaissance Hotels

   37    16,963    41    11,757

Renaissance ClubSport

   0    0    2    349

Autograph Collection

   0    0    10    1,529

The Ritz-Carlton

   39    11,587    0    0

The Ritz-Carlton-Residential (1)

   24    2,532    0    0

Courtyard

   281    44,143    499    65,506

Fairfield Inn & Suites

   3    1,055    638    56,725

SpringHill Suites

   32    5,035    235    26,260

Residence Inn

   133    18,997    456    52,001

TownePlace Suites

   34    3,658    156    15,405

Marriott Vacation Club (2)

   42    9,748    0    0

The Ritz-Carlton Destination Club (2)

   7    342    0    0

The Ritz-Carlton Residences (1), (2)

   3    222    0    0

Grand Residences by Marriott-Fractional (2)

   1    199    0    0

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

   2    68    0    0

Non-U.S. Locations

           

Marriott Hotels & Resorts

   132    39,008    35    10,326

JW Marriott

   26    9,972    1    310

Renaissance Hotels

   50    17,213    16    5,042

The Ritz-Carlton

   34    10,171    0    0

The Ritz-Carlton-Residential (1)

   1    112    0    0

The Ritz-Carlton Serviced Apartments

   3    458    0    0

Bulgari Hotels & Resorts

   2    117    0    0

Marriott Executive Apartments

   21    3,580    1    99

Courtyard

   51    11,080    45    7,851

Fairfield Inn & Suites

   0    0    9    1,153

SpringHill Suites

   0    0    1    124

Residence Inn

   3    405    14    2,013

Marriott Vacation Club (2)

   11    2,126    0    0

The Ritz-Carlton Destination Club (2)

   2    127    0    0

The Ritz-Carlton Residences (1), (2)

   1    16    0    0

Grand Residences by Marriott-Fractional (2)

   1    49    0    0
                   

Total

   1,141    293,353    2,348    313,899
                   

 

(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.

 

38


Table of Contents

Total Lodging and Timeshare Products by Segment

At June 18, 2010, we operated or franchised the following properties by segment (excluding 1,869 corporate housing rental units associated with our ExecuStay brand):

 

     Total Lodging and Timeshare 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

   321    13    334    125,641    4,837    130,478

Marriott Conference Centers

   11    0    11    3,243    0    3,243

JW Marriott

   17    1    18    9,781    221    10,002

Renaissance Hotels

   78    2    80    28,720    790    29,510

Renaissance ClubSport

   2    0    2    349    0    349

Autograph Collection

   10    0    10    1,529    0    1,529
                             
   439    16    455    169,263    5,848    175,111

North American Limited-Service Lodging Segment (1)

                 

Courtyard

   779    16    795    109,245    2,793    112,038

Fairfield Inn & Suites

   641    8    649    57,780    947    58,727

SpringHill Suites

   267    1    268    31,295    124    31,419

Residence Inn

   589    16    605    70,998    2,309    73,307

TownePlace Suites

   190    0    190    19,063    0    19,063
                             
   2,466    41    2,507    288,381    6,173    294,554

International Lodging Segment (1)

                 

Marriott Hotels & Resorts

   4    154    158    2,767    44,497    47,264

JW Marriott

   1    26    27    387    10,061    10,448

Renaissance Hotels

   0    64    64    0    21,465    21,465

Courtyard

   1    80    81    404    16,138    16,542

Fairfield Inn & Suites

   0    1    1    0    206    206

Residence Inn

   0    1    1    0    109    109

Marriott Executive Apartments

   0    22    22    0    3,679    3,679
                             
   6    348    354    3,558    96,155    99,713

Luxury Lodging Segment

                 

The Ritz-Carlton

   39    34    73    11,587    10,171    21,758

Bulgari Hotels & Resorts

   0    2    2    0    117    117

The Ritz-Carlton-Residential (2)

   24    1    25    2,532    112    2,644

The Ritz-Carlton Serviced Apartments

   0    3    3    0    458    458
                             
   63    40    103    14,119    10,858    24,977

Timeshare Segment (3)

                 

Marriott Vacation Club

   42    11    53    9,748    2,126    11,874

The Ritz-Carlton Destination Club

   7    2    9    342    127    469

The Ritz-Carlton Residences (2)

   3    1    4    222    16    238

Grand Residences by Marriott-Fractional

   1    1    2    199    49    248

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

   2    0    2    68    0    68
                             
   55    15    70    10,579    2,318    12,897
                             

Total

   3,029    460    3,489    485,900    121,352    607,252
                             

 

(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.

 

39


Table of Contents

The following table provides additional detail, by brand, as of June 18, 2010, for our Timeshare properties:

 

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

100 Percent Company-Developed

     

Marriott Vacation Club

   53    27

The Ritz-Carlton Destination Club and Residences

   9    7

Grand Residences by Marriott and Residences

   4    3

Joint Ventures

     

The Ritz-Carlton Destination Club and Residences

   4    4
         

Total

   70    41
         

 

(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.

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 & Suites properties in these tables because we operate very few 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 the twelve weeks ended June 18, 2010, include the period from March 27, 2010, through June 18, 2010, and the statistics for the twelve weeks ended June 19, 2009, include the period from March 28, 2009, through June 19, 2009, (except in each case, for The Ritz-Carlton brand properties and properties located outside of the continental United States and Canada, which for those properties includes the period from March 1 through the end of May). The occupancy, average daily rate, and RevPAR statistics used throughout this report for the twenty-four weeks ended June 18, 2010, include the period from January 2, 2010, through June 18, 2010, and the statistics for the twenty-four weeks ended June 19, 2009, include the period from January 3, 2009, through June 19, 2009, (except in each case, for The Ritz-Carlton brand properties and properties located outside of the continental United States and Canada, which for those properties includes the period from January 1 through the end of May).

 

40


Table of Contents
     Comparable Company-Operated
North American Properties (1)
    Comparable Systemwide
North American Properties (1)
 
     Twelve Weeks Ended
June 18, 2010
    Change vs. 2009     Twelve Weeks Ended
June 18, 2010
    Change vs. 2009  

Marriott Hotels & Resorts (2)

        

Occupancy

     73.1                      4.4 % pts.      70.0                      4.6 % pts. 

Average Daily Rate

   $ 160.30      1.2   $ 146.03      0.0

RevPAR

   $ 117.21      7.6   $ 102.17      7.1

Renaissance Hotels & Resorts

        

Occupancy

     71.0   3.0 % pts.      70.7   4.6 % pts. 

Average Daily Rate

   $ 159.16      1.6   $ 144.32      0.2

RevPAR

   $ 113.08      6.1   $ 101.97      7.1

Composite North American Full-Service (3)

        

Occupancy

     72.7   4.1 % pts.      70.1   4.6 % pts. 

Average Daily Rate

   $ 160.09      1.3   $ 145.72      0.1

RevPAR

   $ 116.44      7.4   $ 102.14      7.1

The Ritz-Carlton North America

        

Occupancy

     71.6   9.9 % pts.      71.6   9.9 % pts. 

Average Daily Rate

   $ 297.03      0.0   $ 297.03      0.0

RevPAR

   $ 212.67      15.9   $ 212.67      15.9

Composite North American Full-Service and Luxury (4)

        

Occupancy

     72.6   4.8 % pts.      70.2   5.0 % pts. 

Average Daily Rate

   $ 176.29      1.7   $ 156.72      0.6

RevPAR

   $ 127.98      9.0   $ 110.01      8.2

Residence Inn

        

Occupancy

     76.7   4.8 % pts.      77.9   5.5 % pts. 

Average Daily Rate

   $ 115.87      -1.6   $ 113.56      -1.6

RevPAR

   $ 88.88      4.9   $ 88.49      5.8

Courtyard

        

Occupancy

     67.7   3.6 % pts.      69.2   3.4 % pts. 

Average Daily Rate

   $ 108.98      -1.4   $ 111.33      -0.9

RevPAR

   $ 73.82      4.0   $ 77.06      4.2

Fairfield Inn

        

Occupancy

     nm      nm      pts.      66.4   3.1 % pts. 

Average Daily Rate

   $ nm      nm      $ 84.67      -1.7

RevPAR

   $ nm      nm      $ 56.25      3.1

TownePlace Suites

        

Occupancy

     68.8   5.2 % pts.      71.2   6.2 % pts. 

Average Daily Rate

   $ 73.30      -5.6   $ 79.84      -4.5

RevPAR

   $ 50.47      2.1   $ 56.84      4.5

SpringHill Suites

        

Occupancy

     69.5   3.5 % pts.      69.1   4.3 % pts. 

Average Daily Rate

   $ 96.85      -2.1   $ 98.37      -2.8

RevPAR

   $ 67.26      3.2   $ 67.98      3.6

Composite North American Limited-Service (5)

        

Occupancy

     70.4   3.9 % pts.      71.0   4.1 % pts. 

Average Daily Rate

   $ 108.00      -1.7   $ 104.08      -1.6

RevPAR

   $ 76.03      4.0   $ 73.94      4.5

Composite North American (6)

        

Occupancy

     71.7   4.4 % pts.      70.7   4.5 % pts. 

Average Daily Rate

   $ 148.53      0.8   $ 124.31      -0.4

RevPAR

   $ 106.47      7.5   $ 87.90      6.3

 

(1)

Statistics are for the twelve weeks ended June 18, 2010, and June 19, 2009, except for The Ritz-Carlton, for which the statistics are for the three months ended May 31, 2010, and May 31, 2009. For the properties located in Canada, the comparison to 2009 was on a constant U.S. dollar basis.

 

(2)

Marriott Hotels & Resorts includes JW Marriott properties.

 

(3)

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

 

(4)

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

 

(5)

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

 

41


Table of Contents
     Comparable Company-Operated
Properties (1)
    Comparable Systemwide
Properties (1)
 
     Three Months Ended
May 31, 2010
    Change vs. 2009     Three Months Ended
May 31, 2010
    Change vs. 2009  

Caribbean and Latin America (2)

        

Occupancy

                      72.7                5.5 % pts.                       71.2                8.8 % pts. 

Average Daily Rate

   $ 190.08      1.3   $ 171.83      1.3

RevPAR

   $ 138.23      9.5   $ 122.40      15.5

Continental Europe (2)

        

Occupancy

     70.6   3.8 % pts.      68.9   4.6 % pts. 

Average Daily Rate

   $ 163.77      0.0   $ 162.53      -1.9

RevPAR

   $ 115.68      5.6   $ 111.92      5.1

United Kingdom (2)

        

Occupancy

     76.3   4.0 % pts.      75.6   3.9 % pts. 

Average Daily Rate

   $ 150.98      0.3   $ 150.08      0.3

RevPAR

   $ 115.15      5.8   $ 113.43      5.8

Middle East and Africa (2)

        

Occupancy

     76.7   3.8 % pts.      76.7   3.8 % pts. 

Average Daily Rate

   $ 135.92      -6.8   $ 135.92      -6.8

RevPAR

   $ 104.18      -2.0   $ 104.18      -2.0

Asia Pacific (2), (3)

        

Occupancy

     68.2   16.2 % pts.      69.0   13.9 % pts. 

Average Daily Rate

   $ 122.94      -2.5   $ 127.43      -3.4

RevPAR

   $ 83.87      27.7   $ 87.89      21.0

Regional Composite (4), (5)

        

Occupancy

     72.1   7.3 % pts.      71.2   7.5 % pts. 

Average Daily Rate

   $ 150.82      -2.2   $ 150.16      -2.4

RevPAR

   $ 108.81      8.8   $ 106.96      9.0

International Luxury (6)

        

Occupancy

     67.3   10.1 % pts.      67.3   10.1 % pts. 

Average Daily Rate

   $ 317.09      -3.1   $ 317.09      -3.1

RevPAR

   $ 213.49      14.0   $ 213.49      14.0

Total International (7)

        

Occupancy

     71.6   7.6 % pts.      70.9   7.7 % pts. 

Average Daily Rate

   $ 167.72      -1.8   $ 164.43      -2.1

RevPAR

   $ 120.13      9.8   $ 116.55      9.8

 

(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 March 1 through the end of May. For the properties located in countries that use currencies other than the U.S. dollar, the comparison to 2009 was on a constant U.S. dollar basis.

 

(2)

Regional information includes Marriott Hotels & Resorts, Renaissance Hotels, 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, and Courtyard brands.

 

(6)

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

 

(7)

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

 

42


Table of Contents
     Comparable Company-Operated Properties  (1)     Comparable Systemwide Properties (1)  
     Three Months Ended
May 31, 2010
    Change vs. 2009     Three Months Ended
May 31, 2010
    Change vs. 2009  

Composite Luxury (2)

        

Occupancy

     69.8   10.0 % pts.      69.8   10.0 % pts. 

Average Daily Rate

   $ 304.98      -1.3   $ 304.98      -1.3

RevPAR

   $ 213.01      15.1   $ 213.01      15.1

Total Worldwide (3)

        

Occupancy

     71.7   5.4 % pts.      70.7   5.0 % pts. 

Average Daily Rate

   $ 154.52      0.1   $ 131.39      -0.6

RevPAR

   $ 110.74      8.2   $ 92.96      7.0

 

(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 March 1 through the end of May. For the properties located in countries that use currencies other than the U.S. dollar, the comparison to 2009 was on a constant U.S. dollar basis.

 

(2)

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

 

(3)

Total Worldwide statistics include all properties worldwide for Marriott Hotels & Resorts, Renaissance Hotels, Residence Inn, Courtyard, Fairfield Inn & Suites, TownePlace Suites, SpringHill Suites, and The Ritz-Carlton brands. Statistics for properties located in the continental United States and Canada (except for The Ritz-Carlton) represent the twelve weeks ended June 18, 2010, and June 19, 2009. Statistics for all The Ritz-Carlton brand properties and properties located outside of the continental United States and Canada represent the three months ended May 31, 2010, and May 31, 2009.

 

43


Table of Contents
     Comparable Company-Operated
North American Properties (1)
    Comparable Systemwide
North American Properties (1)
 
     Twenty-Four Weeks Ended
June 18, 2010
    Change vs. 2009     Twenty-Four Weeks Ended
June 18, 2010
    Change vs. 2009  

Marriott Hotels & Resorts (2)

        

Occupancy

     69.7                      4.4 % pts.      66.7                      4.3 % pts. 

Average Daily Rate

   $ 156.68      -3.3   $ 143.93      -3.6

RevPAR

   $ 109.28      3.2   $ 96.06      3.0

Renaissance Hotels & Resorts

        

Occupancy

     67.5   3.2 % pts.      67.1   4.6 % pts. 

Average Daily Rate

   $ 154.92      -4.0   $ 141.39      -4.6

RevPAR

   $ 104.56      0.8   $ 94.89      2.5

Composite North American Full-Service (3)

        

Occupancy

     69.3   4.2 % pts.      66.8   4.4 % pts. 

Average Daily Rate

   $ 156.36      -3.4   $ 143.47      -3.8

RevPAR

   $ 108.40      2.7   $ 95.85      2.9

The Ritz-Carlton North America

        

Occupancy

     68.7   8.7 % pts.      68.7   8.7 % pts. 

Average Daily Rate

   $ 298.75      -3.3   $ 298.75      -3.3

RevPAR

   $ 205.25      10.6   $ 205.25      10.6

Composite North American Full-Service and Luxury (4)

        

Occupancy

     69.3   4.6 % pts.      66.9   4.6 % pts. 

Average Daily Rate

   $ 170.57      -2.9   $ 152.94      -3.4

RevPAR

   $ 118.14      4.0   $ 102.35      3.8

Residence Inn

        

Occupancy

     73.1   5.0 % pts.      74.3   4.9 % pts. 

Average Daily Rate

   $ 114.83      -5.0   $ 112.29      -4.3

RevPAR

   $ 83.89      2.0   $ 83.39      2.4

Courtyard

        

Occupancy

     64.0   3.6 % pts.      65.3   2.9 % pts. 

Average Daily Rate

   $ 108.18      -5.6   $ 110.30      -3.9

RevPAR

   $ 69.28      0.0   $ 72.06      0.6

Fairfield Inn

        

Occupancy

     nm      nm      pts.      61.4   2.0 % pts. 

Average Daily Rate

   $ nm      nm      $ 83.73      -3.6

RevPAR

   $ nm      nm      $ 51.43      -0.3

TownePlace Suites

        

Occupancy

     63.4   3.1 % pts.      66.3   4.8 % pts. 

Average Daily Rate

   $ 73.92      -9.2   $ 80.07      -7.1

RevPAR

   $ 46.89      -4.5   $ 53.05      0.1

SpringHill Suites

        

Occupancy

     64.6   3.8 % pts.      65.1   3.4 % pts. 

Average Daily Rate

   $ 97.02      -5.3   $ 97.52      -5.6

RevPAR

   $ 62.71      0.6   $ 63.46      -0.3

Composite North American Limited-Service (5)

        

Occupancy

     66.5   3.9 % pts.      66.9   3.4 % pts. 

Average Daily Rate

   $ 107.36      -5.4   $ 103.21      -4.2

RevPAR

   $ 71.43      0.4   $ 69.07      0.9

Composite North American (6)

        

Occupancy

     68.1   4.3 % pts.      66.9   3.9 % pts. 

Average Daily Rate

   $ 144.68      -3.6   $ 122.27      -3.7

RevPAR

   $ 98.55      2.9   $ 81.83      2.3

 

(1)

Statistics are for the twenty-four weeks ended June 18, 2010, and June 19, 2009, except for The Ritz-Carlton, for which the statistics are for the five months ended May 31, 2010, and May 31, 2009. For the properties located in Canada, the comparison to 2009 was on a constant U.S. dollar basis.

 

(2)

Marriott Hotels & Resorts includes JW Marriott properties.

 

(3)

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

 

(4)

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

 

(5)

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

 

44


Table of Contents
     Comparable Company-Operated Properties  (1)     Comparable Systemwide Properties (1)  
     Five Months Ended
May 31, 2010
    Change vs. 2009     Five Months Ended
May 31, 2010
    Change vs. 2009  

Caribbean and Latin America (2)

        

Occupancy

                          73.0                4.9 % pts.                       69.7                7.8 % pts. 

Average Daily Rate

   $ 193.07      -2.9   $ 174.24      -2.6

RevPAR

   $ 140.94      4.1   $ 121.45      9.7

Continental Europe (2)

        

Occupancy

     65.6   4.2 % pts.      63.9   4.7 % pts. 

Average Daily Rate

   $ 161.90      -2.5   $ 160.29      -4.1

RevPAR

   $ 106.18      4.2   $ 102.50      3.4

United Kingdom (2)

        

Occupancy

     72.6   4.2 % pts.      71.9   4.1 % pts. 

Average Daily Rate

   $ 152.56      -0.1   $ 151.68      -0.2

RevPAR

   $ 110.77      5.9   $ 109.01      5.7

Middle East and Africa (2)

        

Occupancy

     73.1   2.8 % pts.      73.1   2.8 % pts. 

Average Daily Rate

   $ 138.08      -8.9   $ 138.08      -8.9

RevPAR

   $ 100.94      -5.3   $ 100.94      -5.3

Asia Pacific (2), (3)

        

Occupancy

     64.9   14.8 % pts.      65.6   12.6 % pts. 

Average Daily Rate

   $ 122.62      -4.8   $ 127.61      -6.2

RevPAR

   $ 79.53      23.3   $ 83.65      16.0

Regional Composite (4), (5)

        

Occupancy

     68.9   6.9 % pts.      67.7   7.0 % pts. 

Average Daily Rate

   $ 151.59      -4.4   $ 150.65      -4.7

RevPAR

   $ 104.41      6.2   $ 102.06      6.1

International Luxury (6)

        

Occupancy

     63.9   7.7 % pts.      63.9   7.7 % pts. 

Average Daily Rate

   $ 320.28      -4.6   $ 320.28      -4.6

RevPAR

   $ 204.73      8.4   $ 204.73      8.4

Total International (7)

        

Occupancy

     68.3   7.0 % pts.      67.4   7.0 % pts. 

Average Daily Rate

   $ 168.66      -4.3   $ 165.05      -4.6

RevPAR

   $ 115.26      6.6   $ 111.24      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. The statistics are for January 1 through the end of May. For the properties located in countries that use currencies other than the U.S. dollar, the comparison to 2009 was on a constant U.S. dollar basis.

 

(2)

Regional information includes Marriott Hotels & Resorts, Renaissance Hotels, 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, and Courtyard brands.

 

(6)

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

 

(7)

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

 

45


Table of Contents
     Comparable Company-Operated Properties  (1)     Comparable Systemwide Properties  (1)  
     Five Months Ended
May 31, 2010
    Change vs. 2009     Five Months Ended
May 31, 2010
    Change vs. 2009  

Composite Luxury (2)

        

Occupancy

     66.7   8.2 % pts.      66.7   8.2 % pts. 

Average Daily Rate

   $ 307.23      -3.9   $ 307.23      -3.9

RevPAR

   $