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 17, 2011

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

(Address of principal executive offices)

 

20817

(Zip Code)

(301) 380-3000

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  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   ¨  (Do not check if a smaller reporting company)    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: 352,902,263 shares of Class A Common Stock, par value $0.01 per share, outstanding at July 1, 2011.

 

 

 


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  17, 2011 and June 18, 2010

     2   
 

Condensed Consolidated Balance Sheets-as of June 17, 2011, and December 31, 2010

     3   
 

Condensed Consolidated Statements of Cash Flows-Twenty-Four Weeks Ended June 17, 2011 and June  18, 2010

     4   
  Notes to Condensed Consolidated Financial Statements      5   
    Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations      23   
  Forward-Looking Statements      23   
    Item 3.   Quantitative and Qualitative Disclosures About Market Risk      51   
    Item 4.   Controls and Procedures      52   
Part II.   Other Information:   
    Item 1.   Legal Proceedings      53   
    Item 1A.   Risk Factors      53   
    Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      61   
    Item 3.   Defaults Upon Senior Securities      61   
    Item 4.   Removed and Reserved      61   
    Item 5.   Other Information      61   
    Item 6.   Exhibits      62   
  Signatures      63   

 

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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 17,
2011
    June 18,
2010
    June 17,
2011
    June 18,
2010
 

REVENUES

        

Base management fees

   $ 149      $ 136      $ 283      $ 261   

Franchise fees

     120        105        223        196   

Incentive management fees

     50        46        92        86   

Owned, leased, corporate housing, and other revenue

     249        255        473        484   

Timeshare sales and services

     288        289        564        574   

Cost reimbursements

     2,116        1,940        4,115        3,800   
                                
     2,972        2,771        5,750        5,401   

OPERATING COSTS AND EXPENSES

        

Owned, leased, and corporate housing-direct

     220        224        424        441   

Timeshare-direct

     245        239        470        474   

Reimbursed costs

     2,116        1,940        4,115        3,800   

General, administrative, and other

     159        142        318        280   
                                
     2,740        2,545        5,327        4,995   
                                

OPERATING INCOME

     232        226        423        406   

Gains and other income

     3        3        5        4   

Interest expense

     (37     (44     (78     (89

Interest income

     3        3        7        7   

Equity in losses

     0        (4     (4     (15
                                

INCOME BEFORE INCOME TAXES

     201        184        353        313   

Provision for income taxes

     (66     (65     (117     (111
                                

NET INCOME

   $ 135      $ 119      $ 236      $ 202   
                                

EARNINGS PER SHARE-Basic

        

Earnings per share

   $ 0.38      $ 0.33      $ 0.65      $ 0.56   
                                

EARNINGS PER SHARE-Diluted

        

Earnings per share

   $ 0.37      $ 0.31      $ 0.63      $ 0.54   
                                

CASH DIVIDENDS DECLARED PER SHARE

   $ 0.1000      $ 0.0400      $ 0.1875      $ 0.0800   
                                

See Notes to Condensed Consolidated Financial Statements

 

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MARRIOTT INTERNATIONAL, INC. (“MARRIOTT”)

CONDENSED CONSOLIDATED BALANCE SHEETS

($ in millions)

 

     (Unaudited)
June 17,  2011
    December 31, 2010  

ASSETS

    

Current assets

    

Cash and equivalents

   $ 117      $ 505   

Accounts and notes receivable (including from VIEs of $119 and $125 respectively)

     1,006        938   

Inventory

     1,365        1,489   

Current deferred taxes, net

     237        246   

Prepaid expenses

     93        81   

Other (including from VIEs of $47 and $31 respectively)

     120        123   
                
     2,938        3,382   

Property and equipment

     1,483        1,307   

Intangible assets

    

Goodwill

     875        875   

Contract acquisition costs and other

     844        768   
                
     1,719        1,643   

Equity and cost method investments

     278        250   

Notes receivable (including from VIEs of $799 and $910, respectively)

     1,127        1,264   

Deferred taxes, net

     910        932   

Other (including from VIEs of $14 and $14, respectively)

     336        205   
                
   $ 8,791      $ 8,983   
                

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Current liabilities

    

Current portion of long-term debt (including from VIEs of $122 and $126, respectively)

   $ 482      $ 138   

Accounts payable

     607        634   

Accrued payroll and benefits

     674        692   

Liability for guest loyalty program

     487        486   

Other (including from VIEs of $5 and $3, respectively)

     667        551   
                
     2,917        2,501   

Long-term debt (including from VIEs of $773 and $890, respectively)

     2,440        2,691   

Liability for guest loyalty program

     1,361        1,313   

Other long-term liabilities

     937        893   

Marriott shareholders’ equity

    

Class A Common Stock

     5        5   

Additional paid-in-capital

     3,615        3,644   

Retained earnings

     3,401        3,286   

Treasury stock, at cost

     (5,874     (5,348

Accumulated other comprehensive loss

     (11     (2
                
     1,136        1,585   
                
   $ 8,791      $ 8,983   
                

The abbreviation VIEs above means Variable Interest Entities.

See Notes to Condensed Consolidated Financial Statements

 

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MARRIOTT INTERNATIONAL, INC. (“MARRIOTT”)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in millions)

(Unaudited)

 

     Twenty-Four Weeks Ended  
     June 17, 2011     June 18, 2010  

OPERATING ACTIVITIES

    

Net income

   $ 236      $ 202   

Adjustments to reconcile to cash provided by operating activities:

    

Depreciation and amortization

     76        81   

Income taxes

     74        61   

Timeshare activity, net

     113        125   

Liability for guest loyalty program

     35        26   

Restructuring costs, net

     (4     (6

Asset impairments and write-offs

     5        6   

Working capital changes and other

     (54     27   
                

Net cash provided by operating activities

     481        522   

INVESTING ACTIVITIES

    

Capital expenditures

     (91     (64

Loan advances

     (11     (10

Loan collections and sales

     88        9   

Equity and cost method investments

     (70     (9

Contract acquisition costs

     (47     (20

Other

     (95     25   
                

Net cash used in investing activities

     (226     (69
                

FINANCING ACTIVITIES

    

Commercial paper/credit facility, net

     156        (329

Repayment of long-term debt

     (129     (179

Issuance of Class A Common Stock

     62        54   

Dividends paid

     (64     (14

Purchase of treasury stock

     (668     0   
                

Net cash used in financing activities

     (643     (468
                

DECREASE IN CASH AND EQUIVALENTS

     (388     (15

CASH AND EQUIVALENTS, beginning of period

     505        115   
                

CASH AND EQUIVALENTS, end of period

   $ 117      $ 100   
                

See Notes to Condensed Consolidated Financial Statements

 

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MARRIOTT INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Basis of Presentation

The condensed consolidated financial statements present the results of operations, financial position, and cash flows of Marriott International, Inc. (“Marriott,” and together with its subsidiaries “we,” “us,” or the “Company”). In order to make this report easier to read, we refer throughout to (i) our Condensed Consolidated Financial Statements as our “Financial Statements,” (ii) our Condensed Consolidated Statements of Income as our “Income Statements,” our Condensed Consolidated Balance Sheets as our “Balance Sheets,” (iii) our properties, brands, or markets in the United States and Canada as “North America” or “North American,” and (iv) our properties, brands, or markets outside of the United States and Canada as “international.”

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 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 December 31, 2010, (“2010 Form 10-K”). Certain terms not otherwise defined in this Form 10-Q have the meanings specified in our 2010 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 2011 second quarter ended on June 17, 2011; our 2010 fourth quarter ended on December 31, 2010; and our 2010 second quarter ended on June 18, 2010. In our opinion, our financial statements reflect all normal and recurring adjustments necessary to present fairly our financial position as of June 17, 2011, and December 31, 2010, the results of our operations for the twelve and twenty-four weeks ended June 17, 2011, and June 18, 2010, and cash flows for the twenty-four weeks ended June 17, 2011, and June 18, 2010. 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 2011 presentation. See Footnote No. 13, “Business Segments,” for additional information on the reclassification of segment revenues, segment financial results, and segment assets to reflect movement of Hawaii to our North American segments from our International segment.

Restricted Cash

Restricted cash in our Balance Sheets at the end of the 2011 second quarter and year-end 2010 is recorded as $62 million and $55 million, respectively, in the “Other current assets” line and $114 million and $30 million, respectively, in the “Other long-term assets” line. Restricted cash primarily consists of cash proceeds of a note receivable that are restricted as collateral for other debt; cash held in a reserve account related to Timeshare segment notes receivable securitizations; cash held internationally that we have not repatriated due to statutory, tax and currency risks; and deposits received, primarily associated with timeshare interval, fractional ownership, and residential sales that are held in escrow until the contract has closed.

 

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2. New Accounting Standards

Accounting Standards Update No. 2010-06 – Provisions Effective in the 2011 First Quarter (“ASU No. 2010-06”)

Certain provisions of ASU No. 2010-06 became effective during our 2011 first quarter. Those provisions, which amended Subtopic 820-10, 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 of fair value measurements, in contrast to the previous aggregate presentation as a single line item. The adoption did not have a material impact on our financial statements or disclosures.

Future Adoption of Accounting Standards

Accounting Standards Update No. 2011-04 – “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU No. 2011-04”)

ASU No. 2011-04 generally provides a uniform framework for fair value measurements and related disclosures between GAAP and International Financial Reporting Standards (“IFRS”). Additional disclosure requirements in the update include: (1) for Level 3 fair value measurements, quantitative information about unobservable inputs used, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs; (2) for an entity’s use of a nonfinancial asset that is different from the asset’s highest and best use, the reason for the difference; (3) for financial instruments not measured at fair value but for which disclosure of fair value is required, the fair value hierarchy level in which the fair value measurements were determined; and (4) the disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy. ASU 2011-04 will be effective for interim and annual periods beginning on or after December 15, 2011, which for us will be our 2012 first quarter. We are currently evaluating the impact ASU 2011-04 will have on our financial statements.

See the “Fair Value Measurements” caption of Footnote No. 1, “Summary of Significant Accounting Policies” of our 2010 Form 10-K for additional information on the three levels of fair value measurements.

Accounting Standards Update No. 2011-05 – “Comprehensive Income (Topic 220): Presentation of Comprehensive Income” (“ASU No. 2011-05”)

ASU No. 2011-05 amends existing guidance by allowing only two options for presenting the components of net income and other comprehensive income: (1) in a single continuous financial statement, statement of comprehensive income or (2) in two separate but consecutive financial statements, consisting of an income statement followed by a separate statement of other comprehensive income. Also, items that are reclassified from other comprehensive income to net income must be presented on the face of the financial statements. ASU No. 2011-05 requires retrospective application, and it is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 (for us this will be our 2012 first quarter), with early adoption permitted. We believe the adoption of this update will change the order in which certain financial statements are presented and provide additional detail on those financial statements when applicable, but will not have any other impact on our financial statements.

 

3. Income Taxes

We file income tax returns, including returns for our subsidiaries, in various jurisdictions around the world. We filed an Internal Revenue Service (“IRS”) refund claim relating to 2000 and 2001 for certain software development costs. The IRS disallowed the claims, and in July 2009, we protested the disallowance. This issue was settled in the 2011 second quarter. The IRS has examined our federal income tax returns, and we have settled all issues for tax years through 2009.

We participated in the IRS Compliance Assurance Program (“CAP”) for the 2010 tax year, and are participating in CAP for 2011. This program accelerates the examination of key transactions with the

 

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goal of resolving any issues before the tax return is filed. Various income tax returns are also under examination by foreign, state and local taxing authorities.

For the second quarter of 2011, we decreased unrecognized tax benefits by $4 million from $38 million at the end of the 2011 first quarter primarily due to the closing of the 2005 through 2008 IRS audit examinations. For the first half of 2011, we decreased unrecognized tax benefits by $5 million from $39 million at year-end 2010 primarily due to the closing of the 2005 through 2008 IRS audit examinations. The unrecognized tax benefits balance of $34 million at the end of the 2011 second quarter included $20 million of tax positions that, if recognized, would impact our effective tax rate.

As a large taxpayer, the IRS and other taxing authorities continually audit us. Although we do not anticipate that a significant impact to our unrecognized tax benefit balance will occur during the next 52 weeks as a result of these audits, it remains possible that the amount of our liability for unrecognized tax benefits could change over that time period.

 

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 $22 million and $26 million for the twelve weeks ended June 17, 2011 and June 18, 2010, respectively, and $43 million and $50 million for the twenty-four weeks ended June 17, 2011 and June 18, 2010, respectively. Deferred compensation costs related to unvested awards totaled $171 million and $113 million at June 17, 2011 and December 31, 2010, respectively.

RSUs

We granted 2.5 million RSUs during the first half of 2011 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 2011 had a weighted average grant-date fair value of $40.

SARs

We granted 0.7 million SARs to officers and key employees during the first half of 2011. 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 $16 and a weighted average exercise price of $41.

We use a binomial method to estimate the fair value of each SAR granted, under which we calculate the weighted average expected SARs terms as the product of a lattice-based binomial valuation model that uses suboptimal exercise factors. We use historical data to estimate exercise behaviors and terms to retirement 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 2011.

 

Expected volatility

     32

Dividend yield

     0.73

Risk-free rate

     3.4

Expected term (in years)

     8   

In making these assumptions, we based 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. We based 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.

 

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Other Information

At the end of the 2011 second quarter, 54 million shares were reserved under the Comprehensive Plan, including 27 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. We show 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, in the following table.

 

     At June 17, 2011     At Year-End 2010  
($ in millions)    Carrying
Amount
    Fair Value     Carrying
Amount
    Fair Value  

Cost method investments

   $ 31      $ 26      $ 60      $ 63   

Loans to timeshare owners – securitized

     799        969        910        1,097   

Loans to timeshare owners – non-securitized

     217        233        170        176   

Senior, mezzanine, and other loans – non-securitized

     111        77        184        130   

Restricted cash

     114        114        30        30   

Marketable securities

     52        52        18        18   
                                

Total long-term financial assets

   $ 1,324      $ 1,471      $ 1,372      $ 1,514   
                                

Non-recourse debt associated with securitized notes receivable

   $ (773   $ (814   $ (890   $ (921

Senior Notes

     (1,285     (1,450     (1,631     (1,771

Commercial paper

     (156     (156     0        0   

Other long-term debt

     (143     (138     (142     (138

Other long-term liabilities

     (105     (103     (71     (67

Long-term derivative liabilities

     (1     (1     (1     (1
                                

Total long-term financial liabilities

   $ (2,463   $ (2,662   $ (2,735   $ (2,898
                                

We estimate the fair value of the securitized notes receivable 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 securitized notes receivable portfolio as key drivers of risk and relative value, that when applied in combination with pricing parameters, determines the fair value of the underlying notes receivable.

We estimate the fair value of the portion of our non-securitized notes receivable that we believe will ultimately be securitized in the same manner as securitized notes receivable. We value the remaining non-securitized notes receivable at their carrying value, rather than using our pricing model. We believe that the carrying value of such notes receivable approximates fair value because the stated interest rates of these loans are consistent with current market rates and the reserve for these notes receivable 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 notes receivable using internally generated cash flow estimates derived by modeling all bond tranches for our active notes receivable securitization transactions, with consideration for the collateral specific to each tranche. The key drivers in our 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 notes receivable securitizations and other asset-backed transactions that occurred in the market during the first half of 2011 and fiscal year 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 payable.

 

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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. At the end of the 2011 second quarter the carrying value of our commercial paper approximated its fair value due to the short maturity. 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. We value these securities using directly observable Level 1 inputs. The carrying value of our marketable securities at the end of our 2011 second quarter was $52 million, which included debt securities of the U.S. Government, its sponsored agencies and other U.S. corporations invested for our self-insurance programs as well as shares of a publicly traded company. During the 2011 second quarter, a company in which we owned an investment that we accounted for using the cost method became a publicly traded company. Accordingly, we reclassified the investment to marketable securities and now record our investment at fair value. As of the end of the 2011 second quarter, this investment had a fair value of $32 million, which was $10 million lower than our cost basis. We do not believe this investment is other-than-temporarily impaired based on the following factors: the operating performance of the underlying company; the relatively short time period that the company has been publicly traded; overall share price volatility in the lodging sector during the 2011 second quarter; and we have the intent and ability to hold this investment for the foreseeable future. We have reflected the unrealized loss in accumulated other comprehensive loss at June 17, 2011.

We are also required to carry our derivative assets and liabilities at fair value. As of the end of our 2011 second quarter, we had derivative instruments in a long-term liability position of $1 million 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.

See the “Fair Value Measurements” caption of Footnote No. 1, “Summary of Significant Accounting Policies” of our 2010 Form 10-K for additional information.

 

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.

 

     Twelve Weeks Ended      Twenty-Four Weeks Ended  
     June 17, 2011      June 18, 2010      June 17, 2011      June 18, 2010  
(in millions, except per share amounts)                            

Computation of Basic Earnings Per Share

           

Net income

   $ 135       $ 119       $ 236       $ 202   

Weighted average shares outstanding

     356.9         362.1         362.0         360.7   
                                   

Basic earnings per share

   $ 0.38       $ 0.33       $ 0.65       $ 0.56   
                                   

Computation of Diluted Earnings Per Share

           

Net income

   $ 135       $ 119       $ 236       $ 202   
                                   

Weighted average shares outstanding

     356.9         362.1         362.0         360.7   

Effect of dilutive securities

           

Employee stock option and SARs plans

     9.1         11.5         9.8         10.7   

Deferred stock incentive plans

     0.9         1.1         0.9         1.2   

Restricted stock units

     2.5         2.7         3.2         2.9   
                                   

Shares for diluted earnings per share

     369.4         377.4         375.9         375.5   
                                   

Diluted earnings per share

   $ 0.37       $ 0.31       $ 0.63       $ 0.54   
                                   

 

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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.

In accordance with the applicable accounting guidance for calculating earnings per share, we have not included the following stock options and SARs in our calculation of diluted earnings per share because the exercise prices were greater than the average market prices for the applicable periods:

 

  (a) for the twelve-week period ended June 17, 2011, 1.0 million options and SARs, with exercise prices ranging from $36.22 to $49.03;

 

  (b) 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;

 

  (c) for the twenty-four week period ended June 17, 2011, 1.0 million options and SARs, with exercise prices ranging from $ 40.84 to $49.03; and

 

  (d) 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.

 

7. Inventory

Inventory, totaling $1,365 million as of June 17, 2011 and $1,489 million as of December 31, 2010, consists primarily of Timeshare segment interval, fractional ownership, and residential products totaling $1,346 million as of June 17, 2011 and $1,472 million as of December 31, 2010. Inventory totaling $19 million and $17 million as of June 17, 2011 and December 31, 2010, respectively, primarily relates to hotel operating supplies for the limited number of properties we own or lease. We primarily record 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.

We show the composition of our Timeshare segment inventory balances in the following table:

 

($ in millions)    June 17, 2011      December 31, 2010  

Finished goods

   $ 582       $ 732   

Work-in-process

     240         101   

Land and infrastructure

     524         639   
                 
   $ 1,346       $ 1,472   
                 

 

8. Property and Equipment

We show the composition of our property and equipment balances in the following table:

 

($ in millions)    June 17, 2011     December 31, 2010  

Land

   $ 614      $ 514   

Buildings and leasehold improvements

     963        854   

Furniture and equipment

     1,067        984   

Construction in progress

     143        204   
                
     2,787        2,556   

Accumulated depreciation

     (1,304     (1,249
                
   $ 1,483      $ 1,307   
                

 

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9. Notes Receivable

We show the composition of our notes receivable balances (net of reserves and unamortized discounts) in the following table:

 

($ in millions)    June 17, 2011     December 31, 2010  

Loans to timeshare owners – securitized

   $ 913      $ 1,028   

Loans to timeshare owners – non-securitized

     275        225   

Senior, mezzanine, and other loans – non-securitized

     120        191   
                
     1,308        1,444   

Less current portion

    

Loans to timeshare owners – securitized

     (114     (118

Loans to timeshare owners – non-securitized

     (58     (55

Senior, mezzanine, and other loans – non-securitized

     (9     (7
                
   $ 1,127      $ 1,264   
                

We classify notes receivable due within one year as current assets in the caption “Accounts and notes receivable” in our Balance Sheets. We show the composition of our long-term notes receivable balances (net of reserves and unamortized discounts) in the following table:

 

($ in millions)    June 17, 2011      December 31, 2010  

Loans to timeshare owners

   $ 1,016       $ 1,080   

Loans to equity method investees

     2         2   

Other notes receivable

     109         182   
                 
   $ 1,127       $ 1,264   
                 

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  

2011

   $ 46      $ 66      $ 112   

2012

     57        116        173   

2013

     34        121        155   

2014

     28        122        150   

2015

     24        118        142   

Thereafter

     206        370        576   
                        

Balance at June 17, 2011

   $ 395      $ 913      $ 1,308   
                        

Weighted average interest rate at June 17, 2011

     9.5     13.1     12.0
                        

Range of stated interest rates at June 17, 2011

     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 2010

   $ 203       $ 89       $ 292   
                          

Balance at June 17, 2011

   $ 200       $ 73       $ 273   
                          

Notes Receivable Unamortized Discounts (1)

 

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

Balance at year-end 2010

   $ 13       $ 0       $ 13   
                          

Balance at June 17, 2011

   $ 13       $ 0       $ 13   
                          

 

(1) 

The discounts for both June 17, 2011 and year-end 2010 relate entirely to our Senior, Mezzanine, and Other Loans.

 

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Senior, Mezzanine, and Other Loans

We reflect interest income associated with “Senior, mezzanine, and other loans” in the “Interest income” caption in our Income Statements. At the end of the 2011 second quarter, our recorded investment in impaired “Senior, mezzanine, and other loans” was $98 million. We had a $78 million notes receivable reserve representing an allowance for credit losses, leaving $20 million of our investment in impaired loans, for which we had no related allowance for credit losses. At year-end 2010, our recorded investment in impaired “Senior, mezzanine, and other loans” was $83 million, and we had a $74 million notes receivable reserve representing an allowance for credit losses, leaving $9 million of our investment in impaired loans, for which we had no related allowance for credit losses. During the 2011 and 2010 first halves, our average investment in impaired “Senior, mezzanine, and other loans” totaled $90 million and $143 million, respectively.

The following table summarizes the activity related to our “Senior, mezzanine, and other loans” notes receivable reserve for the first half of 2011:

 

($ in millions)    Notes  Receivable
Reserve
 

Balance at year-end 2010

   $ 74   

Additions

     1   

Reversals

     (6

Transfers and other

     9   
        

Balance at June 17, 2011

   $ 78   
        

At the end of the 2011 second quarter, past due senior, mezzanine, and other loans totaled $6 million.

Loans to Timeshare Owners

We reflect interest income associated with “Loans to timeshare owners” of $37 million and $43 million for the 2011 and 2010 second quarters, respectively, and $76 million and $88 million for the twenty-four weeks ended June 17, 2011 and June 18, 2010, respectively, in our Income Statements in the “Timeshare sales and services” revenue caption. Of the $37 million of interest income we recognized from these loans in the 2011 second quarter, $30 million was associated with securitized loans and $7 million was associated with non-securitized loans, compared with $33 million associated with securitized loans and $10 million associated with non-securitized loans recognized in the 2010 second quarter. Of the $76 million of interest income we recognized in the first half of 2011, $62 million was associated with securitized loans and $14 million was associated with non-securitized loans, compared with $69 million associated with securitized loans and $19 million associated with non-securitized loans in the first half of 2010.

The following table summarizes the activity related to our “Loans to timeshare owners” notes receivable reserve for the first half of 2011:

 

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

Balance at year-end 2010

   $ 129      $ 89      $ 218   

Additions for current year securitizations

     14        0        14   

Write-offs

     (38     0        (38

Defaulted note repurchase activity (1)

     22        (22     0   

Other (2)

     (5     6        1   
                        

Balance at June 17, 2011

   $ 122      $ 73      $ 195   
                        

 

(1) 

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

(2) 

Consists of static pool and default rate assumption changes.

As of June 17, 2011 and year-end 2010, we estimated average remaining default rates of 7.76 percent and 9.25 percent, respectively, for both non-securitized and securitized timeshare notes receivable.

 

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We show our recorded investment in nonaccrual “Loans to timeshare owners” loans in the following table:

 

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

Investment in loans on nonaccrual status at June 17, 2011

   $ 103       $ 18       $ 121   
                          

Investment in loans on nonaccrual status at year-end 2010

   $ 113       $ 15       $ 128   
                          

Average investment in loans on non-accrual status during the first half of 2011

   $ 108       $ 16       $ 124   
                          

Average investment in loans on non-accrual status during the first half of 2010

   $ 115       $ 11       $ 126   
                          

We show the aging of the recorded investment (before reserves) in “Loans to timeshare owners” in the following table:

 

($ in millions)    June 17, 2011  

31 – 90 days past due

   $ 33   

91 – 150 days past due

     20   

Greater than 150 days past due

     101   
        

Total past due

     154   

Current

     1,229   
        

Total loans to timeshare owners

   $ 1,383   
        

 

10. Long-term Debt

We provide detail on our long-term debt balances in the following table:

 

($ in millions)    June 17, 2011     December 31, 2010  

Non-recourse debt associated with securitized notes receivable, interest rates ranging from 0.27% to 7.20% (weighted average interest rate of 4.97%)

   $ 895      $ 1,016   

Less current portion

     (122     (126
                
     773        890   
                

Senior Notes:

    

Series F, interest rate of 4.625%, face amount of $348, maturing June 15, 2012 (effective interest rate of 5.01%) (1)

     348        348   

Series G, interest rate of 5.810%, face amount of $316, maturing November 10, 2015 (effective interest rate of 6.52%) (1)

     305        304   

Series H, interest rate of 6.200%, face amount of $289, maturing June 15, 2016 (effective interest rate of 6.28%) (1)

     289        289   

Series I, interest rate of 6.375%, face amount of $293, maturing June 15, 2017 (effective interest rate of 6.43%) (1)

     291        291   

Series J, interest rate of 5.625%, face amount of $400, maturing February 15, 2013 (effective interest rate of 5.69%) (1)

     399        399   

Commercial paper, average interest rate of 0.3523% at June 17, 2011

     156        0   

$2,404 Effective Credit Facility

     0        0   

Other

     239        182   
                
     2,027        1,813   

Less current portion

     (360     (12
                
     1,667        1,801   
                
   $ 2,440      $ 2,691   
                

 

(1) 

Face amount and effective interest rate are as of June 17, 2011.

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. Other debt in the preceding table includes capital leases, among other items.

On June 23, 2011, after the end of the second quarter, we amended and restated our multicurrency revolving credit agreement (the “Credit Facility”) to extend the facility's expiration from May 14, 2012 to June 23, 2016 and reduce (at our direction) the facility size from $2.404 billion to $1.75 billion of aggregate effective borrowings. The material terms of the amended and restated Credit Facility are

 

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otherwise unchanged, and the facility continues to support general corporate needs, including working capital, capital expenditures, and letters of credit. The availability of the Credit Facility also supports our commercial paper program. Borrowings under the Credit Facility bear interest at LIBOR (the London Interbank Offered Rate) plus a spread, based on our public debt rating. We also pay quarterly fees on the Credit Facility at a rate also based on our public debt rating. While any outstanding commercial paper borrowings and/or borrowings under our Credit Facility generally have short-term maturities, we classify the outstanding borrowings as long-term based on our ability and intent to refinance the outstanding borrowings on a long-term basis. See the “Cash Requirements and Our Credit Facilities” caption later in this report in the “Liquidity and Capital Resources” section for information on our available borrowing capacity at June 17, 2011.

Each of our 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) transaction provisions effectively redirect the monthly excess spread we typically receive from that pool (related to the interests we retained), 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 2011, one pool that reached a performance trigger at year-end 2010 returned to meeting performance thresholds, while one other pool reached a performance trigger. At the end of the first quarter of 2011, this was the only pool that was still not meeting performance thresholds. This pool returned to compliance during the 2011 second quarter. At the end of the 2011 second quarter, there were no pools out of compliance. As a result of performance triggers, a total of $2 million in cash of excess spread was used to pay down debt during the first half of 2011. At June 17, 2011, we had 13 securitized notes receivable pools outstanding.

We show future principal payments (net of unamortized discounts) and unamortized discounts for our securitized and non-securitized debt in the following tables:

Debt Principal Payments (net of unamortized discounts)

 

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

2011

   $ 70       $ 6       $ 76   

2012

     124         517         641   

2013

     129         415         544   

2014

     131         71         202   

2015

     125         313         438   

Thereafter

     316         705         1,021   
                          

Balance at June 17, 2011

   $ 895       $ 2,027       $ 2,922   
                          

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 December 31, 2010

   $ 0       $ 16       $ 16   
                          

Balance at June 17, 2011

   $ 0       $ 14       $ 14   
                          

We paid cash for interest, net of amounts capitalized, of $65 million in the first half of 2011 and $74 million in the first half of 2010.

 

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11. Comprehensive Income and Capital Structure

We detail comprehensive income in the following table:

 

     Twelve Weeks Ended     Twenty-Four Weeks Ended  
($ in millions)    June 17,
2011
    June 18,
2010
    June 17,
2011
    June 18,
2010
 

Net income

   $ 135      $ 119      $ 236      $ 202   

Other comprehensive income (loss), net of tax:

        

Foreign currency translation adjustments

     10        (6     15        (19

Other derivative instrument adjustments

     (13     1        (14     1   

Unrealized losses on available-for-sale securities

     (10     0        (10     0   
                                

Total other comprehensive loss, net of tax

     (13     (5     (9     (18
                                

Comprehensive income

   $ 122      $ 114      $ 227      $ 184   
                                

The following table details changes in shareholders’ equity.

 

(in millions, except per share amounts)        
Common
Shares
Outstanding
         Total     Class A
Common
Stock
     Additional
Paid-in-
Capital
    Retained
Earnings
    Treasury Stock,
at Cost
    Accumulated
Other
Comprehensive
Loss
 
  366.9     

Balance at year-end 2010

   $ 1,585      $ 5       $ 3,644      $ 3,286      $ (5,348   $ (2
  0     

Net income

     236        0         0        236        0        0   
  0     

Other comprehensive loss

     (9     0         0        0        0        (9
  0     

Cash dividends ($0.1875 per share)

     (68     0         0        (68     0        0   
  4.6     

Employee stock plan issuance

     67        0         (29     (53     149        0   
  (18.5  

Purchase of Treasury stock

     (675     0         0        0        (675     0   
                                                         
  353.0     

Balance at June 17, 2011

   $ 1,136      $ 5       $ 3,615      $ 3,401      $ (5,874   $ (11
                                                         

 

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 four to ten 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.

We show 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 the following table.

 

($ in millions)

Guarantee Type

   Maximum Potential
Amount  of Future Fundings
at June 17, 2011
     Liability for Expected
Future Fundings
at June 17, 2011
 

Debt service

   $ 58       $ 6   

Operating profit

     153         55   

Other

     49         2   
                 

Total guarantees where we are the primary obligor

   $ 260       $ 63   
                 

We included our liability for expected future fundings at June 17, 2011, in our Balance Sheet as follows: $3 million in the “Other current liabilities” and $60 million in the “Other long-term liabilities.”

 

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Our guarantees listed in the preceding table include $24 million of operating profit guarantees that will not be in effect until the underlying properties open and we begin to operate the properties.

The guarantees in the preceding table do not include the following:

 

   

$116 million of guarantees related to Senior Living Services lease obligations of $73 million (expiring in 2013) and lifecare bonds of $43 million (estimated to expire in 2016), for which we are secondarily liable. Sunrise Senior Living, Inc. (“Sunrise”) is the primary obligor on both the leases and $6 million of the lifecare bonds; Health Care Property Investors, Inc., as successor by merger to CNL Retirement Properties, Inc. (“CNL”), is the primary obligor on $36 million of the lifecare bonds, and Five Star Senior Living is the primary obligor on the remaining $1 million of lifecare bonds. Before we sold the Senior Living Services business in 2003, these were our guarantees of obligations of our then consolidated Senior Living Services subsidiaries. Sunrise and CNL have indemnified us for any fundings we may be called upon to make under these guarantees. 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 limited access to liquidity.

 

   

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 $53 million. Most of these obligations expire by the end of 2020. CTF Holdings Ltd. (“CTF”) had originally provided €35 million in cash collateral in the event that we are required to fund under such guarantees, approximately $7 million (€5 million) of which remained at June 17, 2011. 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.

 

   

A project completion guarantee to a lender for a joint venture 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. Our liability associated with this guarantee had a carrying value of $16 million at June 17, 2011, as further discussed in Footnote No. 15, “Variable Interest Entities.”

 

   

A project completion guarantee that we provided to another lender for a joint venture project with an estimated aggregate total cost of $520 million (Canadian $508 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 20 percent pro rata ownership in the joint venture. In 2010, our partners executed documents indemnifying us for any payments that may be required for this guarantee obligation. Our liability associated with this project completion guarantee had a carrying value of $3 million at June 17, 2011.

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 17, 2011, we had the following commitments outstanding:

 

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A commitment to invest up to $8 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 this commitment within three years.

 

   

A commitment, with no expiration date, to invest up to $29 million (€20 million) in a joint venture in which we are a partner. We do not expect to fund under this commitment.

 

   

A commitment for $18 million (HKD $141 million) to purchase vacation ownership units upon completion of construction for sale in our Timeshare segment. We have already made deposits of $11 million in conjunction with this commitment. We expect to pay the remaining $7 million upon acquisition of the units in the 2011 third quarter.

 

   

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, with no expiration date, to invest up to $7 million in a joint venture that we do not expect to fund.

 

   

$3 million (€2 million) of other purchase commitments that we expect to fund over the next three years, as follows: $1 million in each of 2012, 2013 and 2014.

 

   

Commitments to subsidize vacation ownership associations for costs that otherwise would be covered by annual maintenance fees associated with vacation ownership interests or units that have not yet been built were $6 million, which we expect will be paid in 2011.

 

   

$3 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 $2 million of commitments, $1 million of which will expire within three years and $1 million of which will expire after five years.

 

   

A $1 million commitment, with no expiration date, to a hotel real estate investment trust in which we have an ownership interest that we do not expect to fund. The commitment is pledged as collateral for certain trust investments.

 

   

A commitment to invest up to $3 million in a joint venture, which we expect to fund in 2011.

 

   

We have a right and under certain circumstances an obligation to acquire our joint venture partner’s remaining 50 percent interest in two joint ventures over the next ten years at a price based on the performance of the ventures. We made a $7 million (€5 million) deposit in conjunction with this contingent obligation in the 2011 first quarter and expect to make two additional deposits of €5 million each in fiscal year 2012, after certain conditions are met. The deposits are refundable to the extent we do not acquire our joint venture partner’s remaining interests.

 

   

We have a commitment to invest up to $5 million (€4 million) in an existing joint venture during the third quarter of 2011 if certain events take place.

 

   

We have a right and under certain circumstances an obligation to acquire the landlord’s interest in the real estate property and attached assets of a hotel that we lease for approximately $64 million (€45 million) during the next three years.

At June 17, 2011, we had $78 million of letters of credit outstanding ($75 million under our Credit Facility and $3 million outside the Credit Facility), the majority of which related to our self-insurance programs. Surety bonds issued as of June 17, 2011, totaled $201 million, the majority of which federal, state and local governments requested in connection with our lodging operations, Timeshare segment operations, and self-insurance programs.

 

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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 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 United States and Canada;

 

   

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

 

   

Luxury Lodging, which includes The Ritz-Carlton, Bulgari Hotels & Resorts, and EDITION properties worldwide (together with residential properties associated with some Ritz-Carlton hotels); 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. See Footnote No. 16, “Planned Spin-off,” later in this report for a discussion of our plans for a spin-off of our timeshare operations and timeshare development business.

In 2011, we changed the management reporting structure for properties located in Hawaii. In conjunction with that change, we now report revenues, financial results, assets, and liabilities for properties located in Hawaii in our North American segments rather than in our International segment. In addition, we now recognize in our Timeshare segment some base management fees we previously recognized in our International segment. For comparability, we have reclassified prior year segment revenues, segment financial results, and segment assets to reflect these changes. These reclassifications only affect our segment reporting, and do not change our total consolidated revenue, operating income, or net income or our total segment revenues or total segment financial results.

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 segments. 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 we do not allocate 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.

 

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Revenues

 

     Twelve Weeks Ended      Twenty-Four Weeks Ended  
($ in millions)    June 17, 2011      June 18, 2010      June 17, 2011      June 18, 2010  

North American Full-Service Segment

   $ 1,305       $ 1,243       $ 2,556       $ 2,413   

North American Limited-Service Segment

     564         507         1,066         968   

International Segment

     301         274         567         532   

Luxury Segment

     391         364         776         730   

Timeshare Segment

     390         364         748         724   
                                   

Total segment revenues

     2,951         2,752         5,713         5,367   

Other unallocated corporate

     21         19         37         34   
                                   
   $ 2,972       $ 2,771       $ 5,750       $ 5,401   
                                   

Net Income

 

     Twelve Weeks Ended     Twenty-Four Weeks Ended  
($ in millions)    June 17, 2011     June 18, 2010     June 17, 2011     June 18, 2010  

North American Full-Service Segment

   $ 89      $ 83      $ 167      $ 154   

North American Limited-Service Segment

     98        82        170        141   

International Segment

     45        42        81        74   

Luxury Segment

     20        21        38        42   

Timeshare Segment

     29        32        64        58   
                                

Total segment financial results

     281        260        520        469   

Other unallocated corporate

     (58     (49     (120     (102

Interest expense and interest income (1)

     (22     (27     (47     (54

Income taxes

     (66     (65     (117     (111
                                
   $ 135      $ 119      $ 236      $ 202   
                                

 

(1) 

Of the $37 million and $78 million of interest expense shown on the Income Statement for the twelve and twenty-four weeks ended June 17, 2011, respectively, we allocated $12 and $24 million, respectively, to our Timeshare Segment. Of the $44 million and $89 million of interest expense shown on the Income Statement for the twelve and twenty-four weeks ended June 18, 2010, respectively, we allocated $14 and $28 million, respectively, to our Timeshare segment.

Equity in Losses of Equity Method Investees

 

     Twelve Weeks Ended     Twenty-Four Weeks Ended  
($ in millions)    June 17, 2011     June 18, 2010     June 17, 2011     June 18, 2010  

North American Full-Service Segment

   $ 1      $ 1      $ 0      $ 1   

North American Limited-Service Segment

     1        (1     (1     (6

International Segment

     (1     (2     (1     (2

Luxury Segment

     (1     1        (2     0   

Timeshare Segment

     0        (3     0        (8
                                

Total segment equity in losses

   $ 0      $ (4   $ (4   $ (15
                                

Assets

 

     At Period End  
($ in millions)    June 17, 2011      December 31, 2010  

North American Full-Service Segment

   $ 1,240       $ 1,221   

North American Limited-Service Segment

     520         465   

International Segment

     1,024         822   

Luxury Segment

     899         871   

Timeshare Segment

     3,172         3,310   
                 

Total segment assets

     6,855         6,689   

Other unallocated corporate

     1,936         2,294   
                 
   $ 8,791       $ 8,983   
                 

We estimate that the cash outflow associated with completing all phases of our existing portfolio of owned timeshare properties currently under development will be approximately $214 million. This

 

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estimate is based on our current development plans, which remain subject to change, and we expect the phases currently under development will be completed by 2016.

 

14. Acquisitions

In the first quarter of 2011, we contributed approximately $51 million (€37 million) in cash for the intellectual property and associated 50 percent interests in two new joint ventures formed for the operation, management and development of AC Hotels by Marriott, initially in Europe but eventually in other parts of the world. The hotels will be managed by the joint ventures or franchised at the direction of the joint ventures. As noted in Footnote No. 12, “Contingencies,” we have a right and, in some circumstances, an obligation to acquire the remaining interest in the joint ventures over the next ten years.

In the first quarter of 2011, we acquired certain assets and a leasehold on a hotel for an initial payment of $34 million (€25 million) in cash plus fixed annual rent. See Footnote No. 17, “Leases,” for additional information. As noted in Footnote No. 12, “Contingencies,” we also have a right and, in some circumstances, an obligation to acquire the landlord’s interest in the real estate property and attached assets of this hotel for $64 million (€45 million) during the next three years.

 

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.

Variable interest entities related to our timeshare note securitizations

We periodically securitize, 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 us 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. We service 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.

At June 17, 2011, consolidated assets on our Balance Sheet included collateral for the obligations of those variable interest entities with a carrying amount of $979 million, comprised of $114 million of current notes receivable and $799 million of long-term notes receivable (each net of reserves), $5 million of interest receivable and $47 million and $14 million, respectively, of current and long-term restricted cash. Further, at June 17, 2011, consolidated liabilities on our Balance Sheet included liabilities for those variable interest entities with a carrying amount of $900 million, comprised of $5 million of interest payable, $122 million of current portion of long-term debt, and $773 million of long-term debt. The noncontrolling interest balance for those entities was zero. The creditors of those entities do not have general recourse to us. As a result of our involvement with these entities, we recognized $62 million of interest income, offset by $24 million of interest expense to investors.

 

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We show our cash flows to and from the timeshare notes securitization variable interest entities in the following table:

 

($ in millions)    Twenty-Four Weeks Ended  
     June 17, 2011     June 18, 2010  

Cash inflows:

            

Principal receipts

   $ 110      $ 116   

Interest receipts

     64        69   
                

Total

     174        185   
                

Cash outflows:

            

Principal to investors

     (100     (105

Repurchases

     (22     (29

Interest to investors

     (20     (24
                

Total

     (142     (158
                

Net Cash Flows

   $ 32      $ 27   
                

Under the terms of our timeshare note securitizations, 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 20 percent of the transaction’s initial mortgage balance. We made voluntary repurchases of defaulted notes of $22 million during the first half of 2011 and $29 million during the first half of 2010. Our maximum exposure to loss relating to the entities that own these notes is the overcollateralization amount (the difference between the loan collateral balance and the balance on the outstanding notes), plus cash reserves and any residual interest in future cash flows from collateral.

Other variable interest entities

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 among the variable interest holders, and therefore we do not consolidate the entity. In 2009, we fully impaired our equity investment and certain loans receivable due from the entity. In 2010, the continued application of equity losses to our outstanding loan receivable balance reduced its carrying value to zero. We may fund up to an additional $16 million and do not expect to recover this amount, which we have accrued and included in current liabilities. We do not have any remaining exposure to loss related to this entity.

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 2007, under the caption “2005 Acquisitions,” we manage 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 June 17, 2011, we managed ten 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 its guarantees fully in connection with seven of these properties and partially in connection with the other three properties. At the end of the 2011 first quarter, the trust account had been fully depleted. 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 liable for rent payments for seven of the ten hotels if there are cash flow shortfalls. Future minimum lease payments through the end of the lease term for these hotels totaled approximately $33 million. In addition, we are 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.

 

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16. Planned Spin-off

On February 14, 2011, we announced a plan to separate the company’s businesses into two separate, publicly traded companies. Under the plan, we expect to spin-off our timeshare operations and timeshare development business as a new independent company through a special tax-free dividend to our shareholders in late 2011. The new company will focus on the timeshare business as the exclusive developer and operator of timeshare, fractional, and related products under the Marriott brand and the exclusive developer of fractional and related products under The Ritz-Carlton brand. In the separation, we will retain the lodging management and franchise businesses. We expect to receive franchise fees totaling approximately two percent of developer contract sales plus $50 million annually for the new timeshare company’s use of the Marriott timeshare and Ritz-Carlton fractional brands. The franchise fee is also expected to include a periodic inflation adjustment. We also expect that the anticipated spin-off will result in the recognition over a number of years of several hundred million dollars of cash tax benefits to Marriott relating to the value of the timeshare business.

The new timeshare company, Marriott Vacations Worldwide Corporation (“MVW”), filed an initial Form 10 registration statement with the SEC on June 28, 2011. We expect that the common stock of MVW will be listed on a national securities exchange. We do not expect that MVW will pay a quarterly cash dividend or be investment grade in the near term. The transaction is subject to final approval by our board of directors, the receipt of normal and customary regulatory approvals and third-party consents, the execution of inter-company agreements, receipt of a favorable ruling from the Internal Revenue Service, arrangement of adequate financing facilities, and other related matters. We anticipate the receipt of the IRS private-letter tax ruling in September, confirming that the distribution of shares of Marriott Vacations Worldwide common stock will not result in the recognition, for U.S. federal income tax purposes, of income, gain or loss by us or our shareholders, except, in the case of our shareholders, for cash received in lieu of fractional shares. The transaction will not require shareholder approval and will have no impact on Marriott’s contractual obligations to the existing securitizations. While we expect that the planned spin-off will be completed before year-end 2011, we cannot assure you that it will be completed on the anticipated schedule or that its terms will not change. See “Part II, Item 1A – Risk Factors” for certain risk factors relating to the Planned Spin-off Risks.

Because of the anticipated continuing involvement between the companies, we do not expect the planned spin-off of the timeshare operations and timeshare development business to qualify under GAAP for discontinued operations presentation in our financial statements.

 

17. Leases

As noted in Footnote No. 14, “Acquisitions,” in the 2011 first quarter we acquired a leasehold on a hotel for an initial payment of $34 million (€25 million) in cash plus fixed annual rent. We account for this leasehold as a capital lease, and the following table details the aggregate minimum lease payments through the initial lease term, which ends in 2014:

 

($ in millions)    Minimum  Lease
Payments
 

2011

   $ 1   

2012

     2   

2013

     2   

2014

     65   
        

Total minimum lease payments

     70   

Less: amount representing interest

     (6
        

Present value of net minimum lease payments

   $ 64   
        

See Footnote No. 21, “Leases,” of our 2010 Form 10-K for information regarding our other leases.

 

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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 we express 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

Conditions for our lodging business improved in the first half of 2011 reflecting an improving economic climate in most markets around the world, strong unit growth, and the impact of operating efficiencies across our company. While the recent recession significantly affected lodging demand and hotel pricing, occupancies began to improve late in 2009 and that improvement continued throughout 2010. Room rates began to stabilize and improve in some markets in the 2010 second quarter, and that improvement continued, strengthened and expanded to other markets throughout the rest of 2010. In the second quarter of 2011 as compared to the year ago quarter, worldwide average daily rates increased 3.6 percent on a constant dollar basis to $135.84 for comparable systemwide properties, with RevPAR increasing 6.8 percent to $98.39 and occupancy increasing 2.1 percentage points to 72.4 percent. For the first half of 2011, as compared to the first half of 2010, worldwide average daily rates increased 3.3 percent on a constant dollar basis to $132.73 for comparable systemwide properties, with RevPAR increasing 6.7 percent to $91.14 and occupancy increasing 2.2 percentage points to 68.7 percent.

While worldwide RevPAR for the first half of 2011 remains well below 2008 levels, we continued to see strengthening in comparable properties in South America, Asia, Europe, and the Caribbean, and in our luxury properties around the world. Demand at properties in the Middle East weakened further reflecting unrest in that region. While demand in Japan was weak in the 2011 first quarter reflecting the impact of the aftermath of the earthquake and tsunami, demand began to improve in the 2011 second quarter, but remained below 2010 levels. For comparable properties in North America, most markets reflect strong demand and modest supply growth. In Washington, D.C., a shorter Congressional calendar and continued budget concerns reduced lodging demand in the 2011 first half.

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 increase revenue as demand changes. Demand for higher rated rooms improved in 2010 and that improvement has continued into 2011, which allowed us to reduce discounting and special offers for transient business. This mix improvement benefited average daily rates at many hotels.

Our hotels serve both transient and group customers. Overall, business transient and leisure transient demand is strong, while group demand remains soft, but is improving. Group customers typically book rooms and meeting space with significant lead times. Typically, two-thirds of group business is booked

 

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prior to the year of arrival and one-third is booked in the year of arrival. Group pricing tends to lag transient pricing due to the significant lead times for group bookings.

Properties in our system continue to maintain very tight cost controls. Where appropriate for market conditions, we have maintained many of our 2009 property-level cost saving initiatives regarding menus and restaurant hours, room amenities, cross-training personnel, and utilizing personnel at multiple properties where feasible. We also control above-property costs, which we allocate to hotels, by remaining focused on systems, processing, and support areas. In addition, we continue to require (where legally permitted) or encourage employees to use their vacation time accrued during the year.

Our lodging business model involves managing and franchising hotels, rather than owning them. At June 17, 2011, we operated 44 percent of the hotel rooms in our system under management agreements, our franchisees operated 53 percent under franchise agreements, we owned or leased two percent, and one percent were operated or franchised through unconsolidated joint ventures. 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 believe we increase our financial flexibility by reducing our capital investments and adopting a strategy of recycling the investments that we make.

During the first half of 2011, we added 18,332 rooms (gross) to our system. Approximately 70 percent of new rooms were located outside the United States, 38 percent of the new rooms were associated with the new AC Hotels joint venture, and 15 percent of the room additions were conversions from competitor brands. We currently have more than 100,000 rooms in our lodging development pipeline. For the full 2011 fiscal year, we expect to add approximately 35,000 rooms (gross) to our system. The figures in this paragraph do not include residential, timeshare, or ExecuStay units.

We consider RevPAR, which we calculate by dividing room sales for comparable properties by room nights available to guests for the period, 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. Constant dollar statistics are calculated by applying exchange rates for the current period to the prior comparable period.

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. House 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. House profit does not include the impact of management fees, furniture, fixtures and equipment replacement reserves, insurance, taxes, or other fixed expenses.

We earn base management fees and incentive management fees on the hotels that we manage, and we earn franchise fees on the hotels operated by others under franchise agreements with us. Base fees are typically a percentage of property-level revenue while incentive fees are typically a percentage of net house profit adjusted for a specified owner return. Net house profit is calculated as gross operating profit (house profit) less non-controllable expenses such as insurance, real estate taxes, capital spending reserves, and the like. As compared to the first half of 2010, base management, incentive and franchise fees increased in the first half of 2011 reflecting strengthening RevPAR and unit growth.

Timeshare

On February 14, 2011, we announced a plan to split the company’s businesses into two separate, publicly traded companies. Under the plan, we expect to spin-off our timeshare operations and timeshare development business as a new independent company (Marriott Vacation Worldwide Corporation)

 

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through a special tax-free dividend to our shareholders in late 2011. Please see Footnote No. 16, “Planned Spin-off,” of the Notes to our Financial Statements and “Part II, Item 1A – Risk Factors; Planned Spin-off Risks” for additional information.

Timeshare segment contract sales, including sales made by our timeshare joint venture projects, represent sales of timeshare interval, fractional ownership, and residential ownership products before the adjustment for percentage-of-completion accounting. Contract sales for our timeshare, fractional, and residential products decreased in the first half of 2011, compared to 2010, largely due to difficult comparisons driven by sales promotions in the first half of 2010 as well as the start-up impact of our shift from the sale of weeks-based to points-based products. By year-end 2010, timeshare pricing had improved because we had largely discontinued or reduced the purchase incentives. In addition, beginning in May of 2010, we began targeting more of our marketing efforts towards our existing owner base as we launched our points-based Marriott Vacation Club Destinations program. Contract sales to existing owners totaled 61 percent of contract sales for both the 2011 second quarter and the 2011 first half and 48 percent of contract sales for both the 2010 second quarter and the 2010 first half. While sales to existing customers were strong, with fewer sales to new customers and a lower average contract price, contract sales declined as compared to the 2010 first half. We expect to shift our marketing focus from the existing owner base to new owners in the second half of 2011. Demand for luxury fractional and residential units remains weak.

As with Lodging, our Timeshare properties continue to maintain very tight cost controls, and during 2011 we continue to require (where legally permitted) or encourage employees to use their vacation time accrued during 2011.

CONSOLIDATED RESULTS

The following discussion presents an analysis of results of our operations for the twelve weeks and twenty-four weeks ended June 17, 2011, compared to the twelve weeks and twenty-four weeks ended June 18, 2010.

Revenues

Twelve Weeks. Revenues increased by $201 million (7 percent) to $2,972 million in the second quarter of 2011 from $2,771 million in the second quarter of 2010, as a result of higher: cost reimbursements revenue ($176 million); base management and franchise fees ($28 million); and incentive management fees ($4 million (comprised of a $2 million increase for North America and a $2 million increase outside of North America)). These increases were partially offset by lower owned, leased, corporate housing, and other revenue ($6 million) and lower Timeshare sales and services revenue ($1 million).

The increases in base management fees, to $149 million in the 2011 second quarter from $136 million in the 2010 second quarter, and in franchise fees, to $120 million in the 2011 second quarter from $105 million in the 2010 second quarter, primarily reflected stronger RevPAR and the impact of unit growth across the system. The increase in incentive management fees primarily reflected higher net property-level income at many hotels driven by strong demand.

The decrease in owned, leased, corporate housing, and other revenue, to $249 million in the 2011 second quarter, from $255 million in the 2010 second quarter, primarily reflected $6 million of lower revenue from owned and leased properties and $6 million of lower hotel agreement termination fees, partially offset by $5 million of higher corporate housing and other revenue. The decrease in owned and leased revenue primarily reflected lower revenues at one leased property and the conversion of one property from leased to managed. Combined branding fees associated with affinity card endorsements and the sale of branded residential real estate totaled $18 million for each of the 2011 and 2010 second quarters.

The decrease in Timeshare sales and services revenue to $288 million in the 2011 second quarter, from $289 million in the 2010 second quarter, primarily reflected lower financing revenue and lower other revenue, mostly offset by higher development revenue and higher services revenue. See “BUSINESS SEGMENTS: Timeshare” later in this report for additional information on our Timeshare segment.

 

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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 $2,116 million in the 2011 second quarter from $1,940 million in the 2010 second quarter, reflected the impact of higher property-level demand and growth across the system, partially offset by lower property-level costs in response to cost controls. Net of hotels exiting the system, we added 5,606 managed rooms and 11,415 franchised rooms to our system since the end of the 2010 second quarter.

Twenty-four Weeks. Revenues increased by $349 million (6 percent) to $5,750 million in the first half of 2011 from $5,401 million in the first half of 2010, as a result of higher: cost reimbursements revenue ($315 million); base management and franchise fees ($49 million); and incentive management fees ($6 million (comprised of a $3 million increase for North America and a $3 million increase outside of North America)). These increases were partially offset by lower owned, leased, corporate housing, and other revenue ($11 million) and lower Timeshare sales and services revenue ($10 million).

The increases in base management fees, to $283 million in the first half of 2011 from $261 million in the first half of 2010, and in franchise fees, to $223 million in the first half of 2011 from $196 million in the first half of 2010, primarily reflected stronger RevPAR and the impact of unit growth across the system. The increase in incentive management fees primarily reflected higher net property-level income at many hotels driven by strong demand.

The decrease in owned, leased, corporate housing, and other revenue, to $473 million in the first half of 2011, from $484 million in the first half of 2010, reflected $16 million of lower revenue from owned and leased properties and $4 million of lower hotel agreement termination fees, partially offset by $5 million of higher corporate housing and other revenue and $3 million of higher total branding fees. The decrease in owned and leased revenue primarily reflected lower revenues at one leased property and the conversion of one property from leased to managed. Combined branding fees associated with affinity card endorsements and the sale of branded residential real estate totaled $34 million and $31 million in the first halves of 2011 and 2010, respectively.

The decrease in Timeshare sales and services revenue to $564 million in the first half of 2011, from $574 million in the first half of 2010, primarily reflected $12 million of lower financing revenue and $10 million of lower other revenue, partially offset by $11 million of higher services revenue. Development revenue increased by $1 million and reflected favorable reportability related to reserves on notes recorded in the first half of 2010, almost entirely offset by lower sales volumes. See “BUSINESS SEGMENTS: Timeshare” later in this report for additional information on our Timeshare segment.

The increase in cost reimbursements revenue, to $4,115 million in the first half of 2011 from $3,800 million in the first half of 2010, reflected the impact of higher property-level demand and growth across the system, partially offset by lower property-level costs in response to cost controls.

Operating Income

Twelve Weeks. Operating income increased by $6 million to $232 million in the 2011 second quarter from $226 million in the 2010 second quarter. The increase reflected a $28 million increase in franchise and base management fees and $4 million of higher incentive management fees, partially offset by a $17 million increase in general, administrative, and other expenses, $7 million of lower Timeshare sales and services revenue net of direct expenses, and $2 million of lower owned, leased, corporate housing, and other revenue net of direct expenses. We discuss the reasons for the increases of $28 million in franchise and base management fees and $4 million in incentive management fees as compared to the 2010 second quarter in the preceding “Revenues” section.

General, administrative, and other expenses increased by $17 million (12 percent) to $159 million in the second quarter of 2011 from $142 million in the second quarter of 2010. The increase primarily reflected

 

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the following items: $7 million of higher legal expenses, $6 million of higher compensation costs, a $5 million performance cure payment for a North American Full-Service property, and $3 million of transaction-related expenses associated with the planned spin-off of the timeshare business, partially offset by a $5 million reversal of a loan loss provision in the 2011 second quarter related to one property with increased expected future cash flows.

The $17 million increase in total general, administrative, and other expenses consisted of a $7 million increase that we did not allocate to any of our segments; a $6 million increase allocated to our North American Full-Service segment; a $3 million increase allocated to our International segment; a $2 million increase allocated to our Timeshare segment; a $1 million increase allocated to our North American Limited-Service segment; partially offset by a $2 million decrease allocated to our Luxury segment.

Timeshare sales and services revenue net of direct expenses totaled $43 million in the second quarter of 2011 and $50 million in the 2010 second quarter. The decrease of $7 million as compared to the second quarter of 2010, primarily reflected $6 million of lower financing revenue net of expense and $1 million of lower development revenue net of product costs and marketing and selling costs. The $6 million decrease in financing revenue net of expense primarily reflected decreased interest income due to lower notes receivable balances. Lower development revenue net of product costs and marketing and selling costs primarily reflected higher product costs, mostly offset by higher development revenue. See “BUSINESS SEGMENTS: Timeshare,” later in this report for additional information on our Timeshare segment.

The $2 million (6 percent) decrease in owned, leased, corporate housing, and other revenue net of direct expenses was primarily attributable to $4 million of lower hotel agreement termination fees, net of termination costs, $4 million lower results at a hotel in Japan that experienced lower demand as a result of the recent earthquake and tsunami, partially offset by $2 million of net stronger results at some owned and leased hotels primarily driven by higher RevPAR and property-level margins, and $3 million of higher other revenue net of expenses.

Twenty-four Weeks. Operating income increased by $17 million to $423 million in the first half of 2011 from $406 million in the first half of 2010. The increase reflected a $49 million increase in franchise and base management fees, $6 million of higher owned, leased, corporate housing, and other revenue net of direct expenses and $6 million of higher incentive management fees, partially offset by a $38 million increase in general, administrative, and other expenses and $6 million of lower Timeshare sales and services revenue net of direct expenses. We address the reasons for the increases of $49 million in franchise and base management fees and $6 million in incentive management fees as compared to the first half of 2010 in the preceding “Revenues” section.

The $6 million (14 percent) increase in owned, leased, corporate housing, and other revenue net of direct expenses was primarily attributable to $5 million of net stronger results at some owned and leased properties due to higher RevPAR and property-level margins, $3 million of higher branding fees, $3 million favorable impact of unit additions, net of unit deletions and $2 million of higher other revenue net of expenses, partially offset by $5 million of lower results at a hotel in Japan that experienced lower demand as a result of the recent earthquake and tsunami and $2 million of lower hotel agreement termination fees, net of termination costs.

General, administrative, and other expenses increased by $38 million (14 percent) to $318 million in the first half of 2011 from $280 million in the first half of 2010. The increase primarily reflected the following items: $13 million of higher compensation costs, $7 million of higher legal expenses, $5 million of transaction-related expenses, primarily associated with the planned spin-off of the timeshare business, a $5 million performance cure payment for a North American Full-Service property, $5 million of increased other expenses primarily associated with higher costs in international markets and initiatives to enhance and grow our brands globally, and a $5 million reversal in the first half of 2010 of guarantee accruals, primarily related to a completion guarantee for which we satisfied the related requirements, partially offset by a $5 million reversal in the 2011 first half of a loan loss provision related to one property with increased expected future cash flows.

 

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The $38 million increase in total general, administrative, and other expenses consisted of an $18 million increase that we did not allocate to any of our segments; an $8 million increase allocated to our North American Full-Service segment; a $6 million increase allocated to our Luxury segment; a $3 million increase allocated to our International segment; a $2 million increase allocated to our Timeshare segment; and a $1 million increase allocated to our North American Limited-Service segment.

Timeshare sales and services revenue net of direct expenses totaled $94 million in the first half of 2011 and $100 million in the 2010 first half. The decrease of $6 million as compared to the first half of 2010, primarily reflected $12 million of lower financing revenue and $1 million of lower services revenue net of expenses, partially offset by $8 million of higher development revenue net of product costs and marketing and selling costs. The $12 million decrease in financing revenue primarily reflected decreased interest income due to lower notes receivable balances. Higher development revenue net of product costs and marketing and selling costs primarily reflected a favorable variance from a net $12 million reserve in the first half of 2010 and lower products costs in the 2011 first half, partially offset by lower sales volumes in the 2011 first half. See “BUSINESS SEGMENTS: Timeshare,” later in this report for additional information on our Timeshare segment.

Gains and Other Income

We show our gains and other income for the twelve and twenty-four weeks ended June 17, 2011, and June 18, 2010 in the following table:

 

     Twelve Weeks Ended      Twenty-Four Weeks Ended  
($ in millions)    June 17, 2011      June 18, 2010      June 17, 2011      June 18, 2010  

Gains on sales of real estate and other

   $ 3       $ 2       $ 5       $ 4   

Income from cost method joint ventures

     0         1         0         0   
                                   
   $ 3       $ 3       $ 5       $ 4   
                                   

Interest Expense

Twelve Weeks. Interest expense decreased by $7 million (16 percent) to $37 million in the second quarter of 2011 compared to $44 million in the second quarter of 2010. This decrease was primarily driven by: (1) a $3 million increase in capitalized interest associated with construction projects; (2) a $2 million decrease in interest expense on securitized notes, which reflected a lower average outstanding balance and a lower average interest rate on those notes; and (3) a $1 million decrease in interest expense associated with our revolving credit facility and commercial paper program, which reflected lower average borrowings and interest rates. See the “LIQUIDITY AND CAPITAL RESOURCES” caption later in this report for additional information regarding our credit facility.

Twenty-four Weeks. Interest expense decreased by $11 million (12 percent) to $78 million in the first half of 2011 compared to $89 million in the first half of 2010. This decrease was primarily driven by: (1) a $4 million decrease in interest expense on securitized notes, which reflected a lower average outstanding balance and a lower average interest rate on those notes; (2) a $3 million increase in capitalized interest associated with construction projects; and (3) a $2 million decrease in interest expense associated with our revolving credit facility and commercial paper program, which reflected lower average borrowings and interest rates.

Interest Income and Income Tax

Twelve Weeks. Interest income was unchanged at $3 million in the second quarter of each of 2011 and 2010.

Our tax provision increased by $1 million (2 percent) to a tax provision of $66 million in the second quarter of 2011 from a tax provision of $65 million in the second quarter of 2010. The increase was primarily due to higher pretax income in 2011. The increase was partially offset by a decrease in the effective tax rate due to a greater percentage of pre-tax income in low tax jurisdictions and by a decrease in unrecognized tax benefits due to the closing of the 2005 through 2008 IRS audit examinations.

 

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Twenty-four Weeks. Interest income was unchanged at $7 million in the first half of each of 2011 and 2010.

Our tax provision increased by $6 million (5 percent) to a tax provision of $117 million in the first half of 2011 from a tax provision of $111 million in the first half of 2010. The increase was primarily due to higher pretax income in 2011. The increase was partially offset by a decrease in the effective tax rate due to a greater percentage of pre-tax income in low tax jurisdictions and by a decrease in unrecognized tax benefits due to the closing of the 2005 through 2008 IRS audit examinations.

Equity in Losses

Twelve Weeks. Equity in losses of $0 in the second quarter of 2011 decreased by $4 million from $4 million in the second quarter of 2010 and primarily reflected $2 million of lower losses for a Timeshare segment residential and fractional project joint venture and $2 million of increased earnings from stronger property-level performance at two North American Limited-Service joint ventures.

Twenty-four Weeks. Equity in losses of $4 million in the first half of 2011 decreased by $11 million from $15 million in the first half of 2010 and primarily reflected $7 million of lower losses for a Timeshare segment residential and fractional project joint venture (we stopped recognizing our share of the joint venture’s losses as our investment, including loans due from the joint venture, was reduced to zero in 2010) and a favorable variance from joint venture impairment charges in the 2010 first half of $3 million ($2 million associated with our North American Limited-Service segment and $1 million associated with our Timeshare segment).

Net Income

Twelve Weeks. Net income increased by $16 million (13 percent) to $135 million in the second quarter of 2011 from $119 million in the second quarter of 2010, and diluted earnings per share increased by $0.06 (19 percent) to $0.37 per share from $0.31 per share in the second quarter of 2010. As discussed in more detail in the preceding sections beginning with “Operating Income,” the $16 million increase in net income compared to the prior year was due to higher franchise and base management fees ($28 million), lower interest expense ($7 million), higher incentive management fees ($4 million), and lower equity in losses ($4 million). Higher general, administrative, and other expenses ($17 million), lower Timeshare sales and services revenue net of direct expenses ($7 million), lower owned, leased, corporate housing, and other revenue net of direct expenses ($2 million) and higher income taxes ($1 million) partially offset these items.

Twenty-four Weeks. Net income increased by $34 million (17 percent) to $236 million in the first half of 2011 from $202 million in the first half of 2010, and diluted earnings per share increased by $0.09 (17 percent) to $0.63 per share from $0.54 per share in the first half of 2010. As discussed in more detail in the preceding sections beginning with “Operating Income,” the $34 million increase in net income compared to the prior year was due to higher franchise and base management fees ($49 million), lower equity in losses ($11 million), lower interest expense ($11 million), higher owned, leased, corporate housing, and other revenue net of direct expenses ($6 million), higher incentive management fees ($6 million), and higher gains and other income ($1 million). Higher general, administrative, and other expenses ($38 million), lower Timeshare sales and services revenue net of direct expenses ($6 million), and higher income taxes ($6 million) partially offset these items.

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

EBITDA, a financial measure that is not prescribed or authorized by United States generally accepted accounting principles (“GAAP”), 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

 

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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.

EBITDA has limitations and should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. This non-GAAP measure excludes certain cash expenses that we are obligated to make. We show our EBITDA calculations and reconcile that measure with Net Income in the following table.

 

     Twelve Weeks Ended     Twenty-Four Weeks Ended  
($ in millions)    June 17, 2011     June 18, 2010     June 17, 2011     June 18, 2010  

Net Income

   $ 135      $ 119      $ 236      $ 202   

Interest expense

     37        44        78        89   

Tax provision

     66        65        117        111   

Depreciation and amortization

     41        42        76        81   

Less: Depreciation reimbursed by third-party owners

     (3     (3     (7     (6

Interest expense from unconsolidated joint ventures

     4        5        8        10   

Depreciation and amortization from unconsolidated joint ventures

     7        6        13        12   
                                

EBITDA

   $ 287      $ 278      $ 521      $ 499   
                                

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,” of the Notes to our Financial Statements for further information on our segments including how we aggregate our individual brands into each segment, the reclassification of certain 2010 segment revenues, segment financial results, and segment assets to reflect our movement of Hawaii to our North American segments from our International segment, and other information about each segment, including revenues, net income, equity in earnings (losses) of equity method investees, and assets.

We added 194 properties (31,518 rooms) and 27 properties (5,722 rooms) exited our system since the end of the 2010 second quarter. These figures do not include residential or ExecuStay units. During that time we also added 5 residential properties (824 units) and no residential properties exited the system. These property additions include 72 hotels (7,421 rooms) which are operated or franchised as part of our unconsolidated joint venture with AC Hoteles, S.A. See Footnote No. 14, “Acquisitions,” for additional information about AC Hotels by Marriott.

Twelve Weeks. Total segment financial results increased by $21 million (8 percent) to $281 million in the second quarter of 2011 from $260 million in the second quarter of 2010, and total segment revenues increased by $199 million to $2,951 million in the second quarter of 2011, a 7 percent increase from revenues of $2,752 million in the second quarter of 2010.

The quarter-over-quarter increase in revenues included a $176 million increase in cost reimbursements revenue, which does not impact operating income or net income. The results, compared to the year-ago quarter, reflected a $28 million increase in franchise and base management fees to $269 million in the second quarter of 2011 from $241 million in the second quarter of 2010, $4 million of lower joint venture equity losses, $4 million of higher incentive management fees to $50 million in the second quarter of 2011 from $46 million in the second quarter of 2010, an increase of $3 million in gains and other income, and a $2 million decrease in interest expense. A $10 million increase in general, administrative, and other expenses, a decrease of $7 million in Timeshare sales and services revenue net of direct expenses, and a decrease of $3 million in owned, leased, corporate housing, and other revenue net of direct expenses partially offset these favorable variances. For more detailed information regarding the variances see the preceding sections beginning with “Operating Income.”

 

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The $28 million increase in franchise and base management fees primarily reflected stronger RevPAR and the impact of unit growth across the system. In the second quarter of both 2011 and 2010, 25 percent of our managed properties paid incentive management fees to us. In addition, in the second quarter of 2011, 61 percent of our incentive fees came from properties outside the United States versus 62 percent in the 2010 second quarter.

See “Statistics” below for detailed information on Systemwide RevPAR and Company-operated RevPAR by segment, region, and brand.

Compared to the second quarter of 2010, worldwide comparable company-operated house profit margins in the second quarter of 2011 increased by 70 basis points and worldwide comparable company-operated house profit per available room (“HP-PAR”) increased by 8.0 percent on a constant U.S. dollar basis, reflecting higher occupancy, rate increases, and the impact of tight cost controls in 2011 at properties in our system, partially offset by higher property-level compensation. North American company-operated house profit margins increased by 100 basis points compared to the 2010 second quarter reflecting higher occupancy, rate increases, and the impact of tight cost controls, partially offset by lower attrition fees, higher property-level compensation and increased state unemployment taxes. HP-PAR at those same properties increased by 9.0 percent reflecting higher demand and RevPAR. International company-operated house profit margins increased by 10 basis points and HP-PAR at those properties increased by 6.2 percent reflecting increased demand and higher RevPAR in most locations and continued tight property-level cost controls, partially offset by higher property-level compensation and the effects of low demand in the Middle East.

Twenty-four Weeks. Total segment financial results increased by $51 million (11 percent) to $520 million in the first half of 2011 from $469 million in the first half of 2010, and total segment revenues increased by $346 million to $5,713 million in the first half of 2011, a 6 percent increase from revenues of $5,367 million in the first half of 2010.

The year-over-year increase in revenues included a $315 million increase in cost reimbursements revenue, which does not impact operating income or net income. The results, compared to the first half of 2010, primarily reflected a $49 million increase in franchise and base management fees to $506 million in the first half of 2011 from $457 million in the first half of 2010, $11 million of lower joint venture equity losses, an increase of $4 million in owned, leased, corporate housing, and other revenue net of direct expenses, $6 million of higher incentive management fees to $92 million in the first half of 2011 from $86 million in the first half of 2010, a $4 million decrease in interest expense, and an increase of $3 million in gains and other income. A $20 million increase in general, administrative, and other expenses and a decrease of $6 million in Timeshare sales and services revenue net of direct expenses partially offset these favorable variances. For more detailed information regarding the variances see the preceding sections beginning with “Operating Income.”

The $49 million increase in franchise and base management fees primarily reflected stronger RevPAR and the impact of unit growth across the system. In the first half of 2011, 27 percent of our managed properties paid incentive management fees to us versus 26 percent in the first half of 2010. For both the 2011 and 2010 first halves, 61 percent of our incentive fees came from properties outside the United States.

See “Statistics” below for detailed information on Systemwide RevPAR and Company-operated RevPAR by segment, region, and brand.

Compared to the first half of 2010, worldwide comparable company-operated house profit margins in the first half of 2011 increased by 50 basis points and worldwide comparable company-operated HP-PAR increased by 7.4 percent on a constant U.S. dollar basis, reflecting higher occupancy, rate increases, and the impact of tight cost controls in 2011 at properties in our system, partially offset by higher property-level compensation. North American company-operated house profit margins increased by 40 basis points compared to the first half of 2010 reflecting higher occupancy, rate increases, and the impact of

 

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tight cash controls, partially offset by increased state unemployment tax rates, lower attrition fees, and higher property-level compensation. HP-PAR at those same properties increased by 6.6 percent reflecting higher demand and RevPAR. International company-operated house profit margins increased by 70 basis points and HP-PAR at those properties increased by 9.0 percent reflecting increased demand and higher RevPAR in most locations and continued tight property-level cost controls, partially offset by higher property-level compensation and the effects of low demand in the Middle East.

Summary of Properties by Brand

Including residential properties, we added 32 lodging properties (4,512 rooms) during the second quarter of 2011, while 10 properties (1,630 rooms) exited the system, increasing our total properties to 3,661 (633,704 rooms). These figures include 36 home and condominium products (3,774 units), for which we manage the related owners’ associations.

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.

 

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At June 17, 2011, we operated or franchised the following properties by brand (excluding 2,068 corporate housing rental units):

 

     Company-Operated      Franchised      Unconsolidated
Joint Ventures
 

Brand

   Properties      Rooms      Properties      Rooms      Properties      Rooms  

U.S. Locations

                 

Marriott Hotels & Resorts

     142         73,057         182         55,381         0         0   

Marriott Conference Centers

     11         3,298         0         0         0         0   

JW Marriott

     14         9,226         7         2,914         0         0   

Renaissance Hotels

     37         16,899         40         11,478         0         0   

Renaissance ClubSport

     0         0         2         349         0         0   

Autograph Collection

     0         0         16         4,118         0         0   

The Ritz-Carlton

     39         11,587         0         0         0         0   

The Ritz-Carlton-Residential (1)

     28         3,197         0         0         0         0   

EDITION

     1         353         0         0         0         0   

Courtyard

     282         44,210         519         68,229         0         0   

Fairfield Inn & Suites

     3         1,055         649         57,945         0         0   

SpringHill Suites

     34         5,311         245         27,453         0         0   

Residence Inn

     135         19,477         462         52,590         0         0   

TownePlace Suites

     34         3,658         161         15,939         0         0   

Marriott Vacation Club (2)

     42         9,882         0         0         0         0   

The Ritz-Carlton Destination Club (2)

     8         359         0         0         0         0   

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

     3         222         0         0         0         0   

Grand Residences by Marriott-Fractional (2)

     1         199         0         0         0         0   

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

     2         68         0         0         0         0   

Non-U.S. Locations

                 

Marriott Hotels & Resorts

     135         40,145         36         10,740         0         0   

JW Marriott

     28         10,539         2         574         0         0   

Renaissance Hotels

     53         17,750         19         5,465         0         0   

Autograph Collection

     0         0         0         0         4         278   

The Ritz-Carlton

     37         11,253         0         0         0         0   

The Ritz-Carlton-Residential (1)

     2         271         0         0         0         0   

The Ritz-Carlton Serviced Apartments

     4         579         0         0         0         0   

EDITION

     1         78         0         0         0         0   

AC Hotels by Marriott

     0         0         0         0         68         7,143   

Bulgari Hotels & Resorts

     2         117         0         0         0         0   

Marriott Executive Apartments

     21         3,463         1         99         0         0   

Courtyard

     55         12,023         48         8,296         0         0   

Fairfield Inn & Suites

     0         0         11         1,361         0         0   

SpringHill Suites

     0         0         1         124         0         0   

Residence Inn

     3         405         15         2,154         0         0   

TownePlace Suites

     0         0         1         105         0         0   

Marriott Vacation Club (2)

     11         2,106         0         0         0         0   

The Ritz-Carlton Destination Club (2)

     2         117         0         0         0         0   

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

     1         16         0         0         0         0   

Grand Residences by Marriott-Fractional (2)

     1         49         0         0         0         0   
                                                     

Total

     1,172         300,969         2,417         325,314         72         7,421   
                                                     

 

(1) 

Represents projects where we manage the related owners’ association. We include residential products 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.

 

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Total Lodging and Timeshare Products by Segment

At June 17, 2011, we operated or franchised the following properties by segment (excluding 2,068 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

     324         14         338         128,438         5,244         133,682   

Marriott Conference Centers

     11         0         11         3,298         0         3,298   

JW Marriott

     21         1         22         12,140         221         12,361   

Renaissance Hotels

     77         2         79         28,377         790         29,167   

Renaissance ClubSport

     2         0         2         349         0         349   

Autograph Collection

     16         0         16         4,118         0         4,118   
                                                     
     451         17         468         176,720         6,255         182,975   

North American Limited-Service Lodging Segment (1)

                 

Courtyard

     801         17         818         112,439         2,929         115,368   

Fairfield Inn & Suites

     652         10         662         59,000         1,155         60,155   

SpringHill Suites

     279         1         280         32,764         124         32,888   

Residence Inn

     597         17         614         72,067         2,450         74,517   

TownePlace Suites

     195         1         196         19,597         105         19,702   
                                                     
     2,524         46         2,570         295,867         6,763         302,630   

International Lodging Segment (1)

                 

Marriott Hotels & Resorts

     0         157         157         0         45,641         45,641   

JW Marriott

     0         29         29         0         10,892         10,892   

Renaissance Hotels

     0         70         70         0         22,425         22,425   

Courtyard

     0         86         86         0         17,390         17,390   

Fairfield Inn & Suites

     0         1         1         0         206         206   

Residence Inn

     0         1         1         0         109         109   

Marriott Executive Apartments

     0         22         22         0         3,562         3,562   
                                                     
     0         366         366         0         100,225         100,225   

Luxury Lodging Segment

                 

The Ritz-Carlton

     39         37         76         11,587         11,253         22,840   

Bulgari Hotels & Resorts

     0         2         2         0         117         117   

EDITION

     1         1         2         353         78         431   

The Ritz-Carlton-Residential (2)

     28         2         30         3,197         271         3,468   

The Ritz-Carlton Serviced Apartments

     0         4         4         0         579         579   
                                                     
     68         46         114         15,137         12,298         27,435   

Unconsolidated Joint Ventures

                 

Autograph Collection

     0         4         4         0         278         278   

AC Hotels by Marriott

     0         68         68         0         7,143         7,143   
                                                     
     0         72         72         0         7,421         7,421   

Timeshare Segment (3)

                 

Marriott Vacation Club

     42         11         53         9,882         2,106         11,988   

The Ritz-Carlton Destination Club

     8         2         10         359         117         476   

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   
                                                     
     56         15         71         10,730         2,288         13,018   
                                                     

Total

     3,099         562         3,661         498,454         135,250         633,704   
                                                     

 

(1) 

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

(2) 

Represents projects where we manage the related owners’ association. We include residential products 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.

 

34


Table of Contents

The following table provides additional detail, by brand, as of June 17, 2011, 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

     12         9   

Grand Residences by Marriott and Residences

     4         3   

Joint Ventures

     

The Ritz-Carlton Destination Club and Residences

     2         2   
                 

Total

     71         41   
                 

 

(1) 

Includes products that are in active sales as well as those that are sold out. We include residential products 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 the brand is predominantly franchised and we operate very few properties, so 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 we use throughout this report for the twelve weeks ended June 17, 2011, include the period from March 26, 2011, through June 17, 2011, and the statistics for the twelve weeks ended June 18, 2010, include the period from March 27, 2010, through June 18, 2010, (except in each case, for The Ritz-Carlton brand properties and properties located outside of the United States, which for those properties includes the period from March 1 through the end of May). The occupancy, average daily rate, and RevPAR statistics we use throughout this report for the twenty-four weeks ended June 17, 2011, include the period from January 1, 2011, through June 17, 2011, and the statistics for the twenty-four weeks ended June 18, 2010, include the period from January 2, 2010, through June 18, 2010, (except in each case, for The Ritz-Carlton brand properties and properties located outside of the United States, which for those properties includes the period from January 1 through the end of May).

 

35


Table of Contents
     Comparable Company-Operated
North American Properties (1)
    Comparable Systemwide
North American Properties (1)
 
     Twelve Weeks Ended
June 17, 2011
    Change vs.
2010
    Twelve Weeks Ended
June 17, 2011
    Change  vs.
2010
 

Marriott Hotels & Resorts (2)

        

Occupancy

     74.6     0.9 % pts.      71.7     1.2 % pts. 

Average Daily Rate

   $ 168.64        4.2   $ 153.14        3.6

RevPAR

   $ 125.79        5.4   $ 109.79        5.5

Renaissance Hotels & Resorts

        

Occupancy

     72.4     1.0 % pts.      71.9     1.0 % pts. 

Average Daily Rate

   $ 168.37        3.6   $ 150.41        3.0

RevPAR

   $ 121.82        5.1   $ 108.16        4.5

Composite North American Full-Service (3)

        

Occupancy

     74.2     0.9 % pts.      71.7     1.2 % pts. 

Average Daily Rate

   $ 168.59        4.1   $ 152.65        3.5

RevPAR

   $ 125.05        5.4   $ 109.50        5.3

The Ritz-Carlton North America

        

Occupancy

     73.9     3.8 % pts.      73.9     3.8 % pts. 

Average Daily Rate

   $ 311.67        4.8   $ 311.67        4.8

RevPAR

   $ 230.43        10.6   $ 230.43        10.6

Composite North American Full-Service and Luxury (4)

        

Occupancy

     74.1     1.3 % pts.      71.9     1.4 % pts. 

Average Daily Rate

   $ 185.82        4.6   $ 164.47        4.0

RevPAR

   $ 137.78        6.4   $ 118.24        6.0

Residence Inn

        

Occupancy

     78.6     2.2 % pts.      79.5     2.0 % pts. 

Average Daily Rate

   $ 117.77        1.2   $ 115.73        2.3

RevPAR

   $ 92.55        4.1   $ 91.96        4.9

Courtyard

        

Occupancy

     71.0     3.1 % pts.      71.5     2.8 % pts. 

Average Daily Rate

   $ 112.61        3.2   $ 114.21        3.2

RevPAR

   $ 79.92        7.9   $ 81.72        7.4

Fairfield Inn

        

Occupancy

     nm        nm  pts.      69.2     3.5 % pts. 

Average Daily Rate

   $ nm        nm      $ 89.20        3.8

RevPAR

   $ nm        nm      $ 61.75        9.4

TownePlace Suites

        

Occupancy

     74.8     6.0 % pts.      75.3     4.7 % pts. 

Average Daily Rate

   $ 75.02        2.4   $ 82.82        3.2

RevPAR

   $ 56.15        11.3   $ 62.32        10.1

SpringHill Suites

        

Occupancy

     71.3     3.4 % pts.      71.7     3.7 % pts. 

Average Daily Rate

   $ 100.61        4.2   $ 99.91        2.6

RevPAR

   $ 71.75        9.3   $ 71.62        8.1

Composite North American Limited-Service (5)

        

Occupancy

     73.4     3.1 % pts.      73.3     3.0 % pts. 

Average Daily Rate

   $ 110.98        2.7   $ 106.36        2.8

RevPAR

   $ 81.47        7.1   $ 77.99        7.2

Composite North American (6)

        

Occupancy

     73.8     2.0 % pts.      72.8     2.4 % pts. 

Average Daily Rate

   $ 154.62        3.7   $ 127.87        3.1

RevPAR

   $ 114.17        6.6   $ 93.07        6.6

 

(1) 

Statistics are for the twelve weeks ended June 17, 2011, and June 18, 2010, except for The Ritz-Carlton, for which the statistics are for the three months ended May 31, 2011, and May 31, 2010. North American statistics include only properties located in the United States.

(2) 

Marriott Hotels & Resorts includes JW Marriott properties.

(3) 

Composite North American Full-Service statistics include Marriott Hotels & Resorts and Renaissance Hotels properties.

(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.

(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.

 

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Table of Contents
     Comparable Company-Operated
Properties (1)
    Comparable Systemwide
Properties (1)
 
     Three Months Ended
May 31, 2011
    Change vs.
2010
    Three Months Ended
May 31, 2011
    Change vs.
2010
 

Caribbean and Latin America (2)

        

Occupancy

     74.0     2.9 % pts.      72.1     2.4 % pts. 

Average Daily Rate

   $ 190.44        4.8   $ 177.33        8.7

RevPAR

   $ 140.95        9.1   $ 127.79        12.4

Europe (2)

        

Occupancy

     74.9     2.0 % pts.      73.2     2.3 % pts. 

Average Daily Rate

   $ 176.92        6.1   $ 174.02        5.7

RevPAR

   $ 132.47        8.9   $ 127.42        9.1

Middle East and Africa (2)

        

Occupancy

     56.9     -19.0 % pts.      56.7     -16.9 % pts. 

Average Daily Rate

   $ 148.70        10.6   $ 144.79        9.1

RevPAR

   $ 84.59        -17.0   $ 82.15        -15.9

Asia Pacific (2)

        

Occupancy

     72.2     6.1 % pts.      71.4     4.2 % pts. 

Average Daily Rate

   $ 139.56        7.8   $ 144.07        5.2

RevPAR

   $ 100.79        17.7   $ 102.86        11.8

Regional Composite (3)

        

Occupancy

     72.3     1.4 % pts.      71.2     1.3 % pts. 

Average Daily Rate

   $ 165.41        6.7   $ 164.08        6.5

RevPAR

   $ 119.66        8.9   $ 116.86        8.5

International Luxury (4)

        

Occupancy

     65.2     -2.5 % pts.      65.2     -2.5 % pts. 

Average Daily Rate

   $ 312.48        5.2   $ 312.48        5.2

RevPAR

   $ 203.60        1.4   $ 203.60        1.4

Total International (5)

        

Occupancy

     71.5     1.0 % pts.      70.6     1.0 % pts. 

Average Daily Rate

   $ 181.90        5.9   $ 177.77        5.8

RevPAR

   $ 129.98        7.3   $ 125.54        7.3

 

(1) 

We report financial results for all properties on a period-end basis, but report statistics for properties located outside the 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 2010 was on a constant U.S. dollar basis.

(2) 

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

(3) 

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

(4) 

Includes The Ritz-Carlton properties located outside the United States and Canada and Bulgari Hotels & Resorts properties.

(5) 

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

 

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Table of Contents
     Comparable Company-Operated
Properties (1)
    Comparable Systemwide
Properties (1)
 
     Three Months Ended
May 31, 2011
    Change vs.
2010
    Three Months Ended
May 31, 2011
    Change vs.
2010
 

Composite Luxury (2)

        

Occupancy

     70.3     1.2 % pts.      70.3     1.2 % pts. 

Average Daily Rate

   $ 311.98        5.0   $ 311.98        5.0

RevPAR

   $ 219.17        6.8   $ 219.17        6.8

Total Worldwide (3)

        

Occupancy

     73.1     1.7 % pts.      72.4     2.1 % pts. 

Average Daily Rate

   $ 162.41        4.3   $ 135.84        3.6

RevPAR

   $ 118.79        6.8   $ 98.39        6.8

 

(1) 

We report financial results for all properties on a period-end basis, but report statistics for properties located outside the United States and Canada on a month-end basis. For the properties located in countries that use currencies other than the U.S. dollar, the comparison to 2010 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 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 United States (except for The Ritz-Carlton) represent the twelve weeks ended June 17, 2011, and June 18, 2010. Statistics for The Ritz-Carlton brand properties and properties located outside of the United States represent the three months ended May 31, 2011, and May 31, 2010.

 

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Table of Contents
     Comparable Company-Operated
North American Properties (1)
    Comparable Systemwide
North American Properties (1)
 
     Twenty-Four Weeks  Ended
June 17, 2011
    Change vs.
2010
    Twenty-Four Weeks  Ended
June 17, 2011
    Change vs.
2010
 

Marriott Hotels & Resorts (2)

        

Occupancy

     70.8     0.2 % pts.      68.5     1.2 % pts. 

Average Daily Rate

   $ 166.08        4.3   $ 150.85        3.2

RevPAR

   $ 117.54        4.6   $ 103.36        4.9

Renaissance Hotels & Resorts

        

Occupancy

     69.2     1.2 % pts.      68.7     1.3 % pts. 

Average Daily Rate

   $ 165.56        3.9   $ 149.29        3.6

RevPAR

   $ 114.63        5.8   $ 102.53        5.6

Composite North American Full-Service (3)

        

Occupancy

     70.5     0.4 % pts.      68.5     1.2 % pts. 

Average Daily Rate

   $ 165.98        4.2   $ 150.57        3.2

RevPAR

   $ 117.00        4.8   $ 103.21        5.0

The Ritz-Carlton North America

        

Occupancy

     71.3     3.4 % pts.      71.3     3.4 % pts. 

Average Daily Rate

   $ 313.37        4.0   $ 313.37        4.0

RevPAR

   $ 223.55        9.2   $ 223.55        9.2

Composite North American Full-Service and Luxury (4)

        

Occupancy

     70.6     0.7 % pts.      68.7     1.3 % pts. 

Average Daily Rate

   $ 181.16        4.5   $ 160.76        3.5

RevPAR

   $ 127.85        5.5   $ 110.47        5.5

Residence Inn

        

Occupancy

     74.7     1.7 % pts.      75.7     2.0 % pts. 

Average Daily Rate

   $ 117.35        1.5   $ 114.50        2.3

RevPAR

   $ 87.63        3.8   $ 86.73        5.0

Courtyard

        

Occupancy

     66.7     2.4 % pts.      67.2     2.3 % pts. 

Average Daily Rate

   $ 111.66        2.9   $ 112.98        2.9

RevPAR

   $ 74.42        6.8   $ 75.90        6.6

Fairfield Inn

        

Occupancy

     nm        nm  pts.      63.9     3.2 % pts. 

Average Daily Rate

   $ nm        nm      $ 87.95        3.7

RevPAR

   $ nm        nm      $ 56.22        9.2

TownePlace Suites

        

Occupancy

     68.6     5.2 % pts.      70.6     5.1 % pts. 

Average Daily Rate

   $ 75.02        1.5   $ 82.68        2.7

RevPAR

   $ 51.50        9.8   $ 58.38        10.6

SpringHill Suites

        

Occupancy

     66.8     3.0 % pts.      67.6     3.8 % pts. 

Average Daily Rate

   $ 102.69