10-Q 1 mar-q32011x10q.htm 10-Q MAR-Q3.2011-10Q
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________ 
FORM 10-Q
_______________________________________ 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 9, 2011
OR
o
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  ý    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  ý    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
 
ý
  
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  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 335,126,113 shares of Class A Common Stock, par value $0.01 per share, outstanding at September 23, 2011.



MARRIOTT INTERNATIONAL, INC.
FORM 10-Q TABLE OF CONTENTS
 
 
 
Page No.
 
 
 
Part I.
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Part II.
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 



1


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
 
Thirty-Six Weeks Ended
 
September 9,
2011
 
September 10,
2010
 
September 9,
2011
 
September 10,
2010
REVENUES
 
 
 
 
 
 
 
Base management fees
$
136

 
$
123

 
$
419

 
$
384

Franchise fees
124

 
109

 
347

 
305

Incentive management fees
29

 
21

 
121

 
107

Owned, leased, corporate housing, and other revenue
254

 
220

 
727

 
704

Timeshare sales and services
286

 
275

 
850

 
849

Cost reimbursements
2,045

 
1,900

 
6,160

 
5,700

 
2,874

 
2,648

 
8,624

 
8,049

OPERATING COSTS AND EXPENSES
 
 
 
 
 
 
 
Owned, leased, and corporate housing-direct
219

 
213

 
643

 
654

Timeshare-direct
250

 
219

 
720

 
693

Timeshare strategy-impairment charges
324

 

 
324

 

Reimbursed costs
2,045

 
1,900

 
6,160

 
5,700

General, administrative, and other
180

 
149

 
498

 
429

 
3,018

 
2,481

 
8,345

 
7,476

OPERATING (LOSS) INCOME
(144
)
 
167

 
279

 
573

(Losses) gains and other income
(16
)
 
3

 
(11
)
 
7

Interest expense
(39
)
 
(41
)
 
(117
)
 
(130
)
Interest income
2

 
4

 
9

 
11

Equity in losses
(2
)
 
(5
)
 
(6
)
 
(20
)
(LOSS) INCOME BEFORE INCOME TAXES
(199
)
 
128

 
154

 
441

Benefit (provision) for income taxes
20

 
(45
)
 
(97
)
 
(156
)
NET (LOSS) INCOME
$
(179
)
 
$
83

 
$
57

 
$
285

EARNINGS PER SHARE-Basic
 
 
 
 
 
 
 
(Losses) earnings per share
$
(0.52
)
 
$
0.23

 
$
0.16

 
$
0.79

EARNINGS PER SHARE-Diluted
 
 
 
 
 
 
 
(Losses) earnings per share
$
(0.52
)
 
$
0.22

 
$
0.15

 
$
0.76

CASH DIVIDENDS DECLARED PER SHARE
$
0.1000

 
$
0.0400

 
$
0.2875

 
$
0.1200

See Notes to Condensed Consolidated Financial Statements

2


MARRIOTT INTERNATIONAL, INC. (“MARRIOTT”)
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in millions)
 
 
(Unaudited)
 
 
 
September 9,
2011
 
December 31,
2010
ASSETS
 
 
 
Current assets
 
 
 
Cash and equivalents
$
220

 
$
505

Accounts and notes receivable (including from VIEs of $118 and $125 respectively)
1,011

 
938

Inventory
1,029

 
1,489

Current deferred taxes, net
234

 
246

Prepaid expenses
85

 
81

Other (including from VIEs of $36 and $31 respectively)
99

 
123

 
2,678

 
3,382

Property and equipment
1,480

 
1,307

Intangible assets
 
 
 
Goodwill
875

 
875

Contract acquisition costs and other
841

 
768

 
1,716

 
1,643

Equity and cost method investments
271

 
250

Notes receivable (including from VIEs of $751 and $910, respectively)
1,102

 
1,264

Deferred taxes, net
1,005

 
932

Other (including from VIEs of $14 and $14, respectively)
213

 
205

 
$
8,465

 
$
8,983

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities
 
 
 
Current portion of long-term debt (including from VIEs of $119 and $126, respectively)
$
480

 
$
138

Accounts payable
619

 
634

Accrued payroll and benefits
735

 
692

Liability for guest loyalty program
487

 
486

Other (including from VIEs of $4 and $3, respectively)
779

 
551

 
3,100

 
2,501

Long-term debt (including from VIEs of $711 and $890, respectively)
2,623

 
2,691

Liability for guest loyalty program
1,360

 
1,313

Other long-term liabilities
952

 
893

Marriott shareholders’ equity
 
 
 
Class A Common Stock
5

 
5

Additional paid-in-capital
3,657

 
3,644

Retained earnings
3,165

 
3,286

Treasury stock, at cost
(6,381
)
 
(5,348
)
Accumulated other comprehensive loss
(16
)
 
(2
)
 
430

 
1,585

 
$
8,465

 
$
8,983

The abbreviation VIEs above means Variable Interest Entities.
See Notes to Condensed Consolidated Financial Statements

3


MARRIOTT INTERNATIONAL, INC. (“MARRIOTT”)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions)
(Unaudited)
 
 
Thirty-Six Weeks Ended
 
September 9,
2011
 
September 10,
2010
OPERATING ACTIVITIES
 
 
 
Net income
$
57

 
$
285

Adjustments to reconcile to cash provided by operating activities:
 
 
 
Depreciation and amortization
116

 
121

Income taxes
20

 
91

Timeshare activity, net
158

 
213

Timeshare strategy-impairment charges
324

 

Liability for guest loyalty program
32

 
26

Restructuring costs, net
(4
)
 
(9
)
Asset impairments and write-offs
32

 
9

Working capital changes and other
150

 
177

Net cash provided by operating activities
885

 
913

INVESTING ACTIVITIES
 
 
 
Capital expenditures
(128
)
 
(147
)
Dispositions
1

 
3

Loan advances
(20
)
 
(16
)
Loan collections and sales
109

 
14

Equity and cost method investments
(71
)
 
(15
)
Contract acquisition costs
(54
)
 
(35
)
Other
18

 
35

Net cash used in investing activities
(145
)
 
(161
)
FINANCING ACTIVITIES
 
 
 
Commercial paper/credit facility, net
397

 
(425
)
Repayment of long-term debt
(196
)
 
(268
)
Issuance of Class A Common Stock
99

 
78

Dividends paid
(100
)
 
(29
)
Purchase of treasury stock
(1,225
)
 

Net cash used in financing activities
(1,025
)
 
(644
)
(DECREASE) INCREASE IN CASH AND EQUIVALENTS
(285
)
 
108

CASH AND EQUIVALENTS, beginning of period
505

 
115

CASH AND EQUIVALENTS, end of period
$
220

 
$
223

See Notes to Condensed Consolidated Financial Statements


4


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 third quarter ended on September 9, 2011; our 2010 fourth quarter ended on December 31, 2010; and our 2010 third quarter ended on September 10, 2010. In our opinion, our financial statements reflect all normal and recurring adjustments necessary to present fairly our financial position as of September 9, 2011, and December 31, 2010, the results of our operations for the twelve and thirty-six weeks ended September 9, 2011, and September 10, 2010, and cash flows for the thirty-six weeks ended September 9, 2011, and September 10, 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 data associated with properties in Hawaii to our North American segments from our International segment.
Restricted Cash
Restricted cash in our Balance Sheets at the end of the 2011 third quarter and year-end 2010 is recorded as $50 million and $55 million, respectively, in the “Other current assets” line and $33 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.

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

5


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 No. 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 do not believe the adoption of this update will have a material impact 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.
Accounting Standards Update No. 2011-08 – “Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment” (“ASU No. 2011-08”)
ASU No. 2011-08 amends existing guidance by giving an entity the option to first assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount. If this is the case, companies will need to perform a more detailed two-step goodwill impairment test which is used to identify potential goodwill impairments and to measure the amount of goodwill impairment losses to be recognized, if any. ASU No. 2011-08 will be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, which for us will be our 2012 first quarter, with early adoption permitted. We do not believe the adoption of this update will have a material 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

6


participating in CAP for 2011. This program accelerates the examination of key transactions with the 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 third quarter of 2011, we decreased unrecognized tax benefits by $2 million from $34 million at the end of the 2011 second quarter primarily due to new information related to international and state tax issues. For the thirty-six weeks ended September 9, 2011, we decreased unrecognized tax benefits by $7 million from $39 million at year-end 2010 primarily due to the closing of the 2005 through 2008 IRS audit examinations and to new information related to international and state tax issues. The unrecognized tax benefits balance of $32 million at the end of the 2011 third quarter included $18 million of tax positions that, if recognized, would impact our effective tax rate.
The “Benefit (provision) for income taxes" caption in our Income Statements for both the twelve and thirty-six weeks ended September 9, 2011, reflect $32 million of income tax expense that we recorded to write-off certain deferred tax assets that we expect to transfer to Marriott Vacations Worldwide Corporation ("MVW") in conjunction with the planned spin-off of our timeshare operations and timeshare development business. We impaired these assets because we consider it "more likely than not" that MVW will be unable to realize the value of those deferred tax assets. Please see Footnote No. 17, “Planned Spin-off,” of the Notes to our Financial Statements for additional information regarding the planned transaction.
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 $21 million for the twelve weeks ended September 9, 2011 and September 10, 2010, respectively, and $65 million and $62 million for the thirty-six weeks ended September 9, 2011 and September 10, 2010, respectively. Deferred compensation costs related to unvested awards totaled $146 million and $113 million at September 9, 2011 and December 31, 2010, respectively.
RSUs
We granted 2.6 million RSUs during the first three quarters 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 three quarters 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 three quarters 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.

7



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

Other Information

At the end of the 2011 third quarter, 52 million shares were reserved under the Comprehensive Plan, including 26 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 September 9, 2011
 
At Year-End 2010
($ in millions)
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Cost method investments
$
31

 
$
24

 
$
60

 
$
63

Loans to timeshare owners – securitized
751

 
905

 
910

 
1,097

Loans to timeshare owners – non-securitized
251

 
272

 
170

 
176

Senior, mezzanine, and other loans – non-securitized
100

 
62

 
184

 
130

Restricted cash
33

 
33

 
30

 
30

Marketable securities
39

 
39

 
18

 
18

 
 
 
 
 
 
 
 
Total long-term financial assets
$
1,205

 
$
1,335

 
$
1,372

 
$
1,514

Non-recourse debt associated with securitized notes receivable
$
(711
)
 
$
(749
)
 
$
(890
)
 
$
(921
)
Senior Notes
(1,286
)
 
(1,428
)
 
(1,631
)
 
(1,771
)
Commercial paper
(403
)
 
(403
)
 

 

Other long-term debt
(141
)
 
(141
)
 
(142
)
 
(138
)
Other long-term liabilities
(106
)
 
(107
)
 
(71
)
 
(67
)
Long-term derivative liabilities
(1
)
 
(1
)
 
(1
)
 
(1
)
 
 
 
 
 
 
 
 
Total long-term financial liabilities
$
(2,648
)
 
$
(2,829
)
 
$
(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

8


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 three quarters 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.
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 third 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 third quarter was $39 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 third quarter, this investment had a fair value of $24 million, which was $18 million lower than our cost basis. We determined that this security was other-than-temporarily impaired as of the end of the 2011 third quarter and, correspondingly, we recognized $10 million of losses in the 2011 third quarter that were recorded in other comprehensive income as of the end of the 2011 second quarter, and we recognized $8 million of additional losses in the 2011 third quarter, both of which we reflected in the "(Losses) gains and other income" caption of our Income Statements for both the twelve and thirty-six weeks ended September 9, 2011.
We are also required to carry our derivative assets and liabilities at fair value. As of the end of our 2011 third quarter, we had derivative instruments in a long-term liability position of $1 million, which we 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.

In preparing our Timeshare segment to operate as an independent, publicly traded company following our proposed spin-off of MVW (see Footnote No. 17 "Planned Spin-off" for additional information), management assessed the Timeshare segment's intended use of excess undeveloped land and built inventory and the current market conditions for those assets. During the third quarter of 2011, in conjunction with our evaluation of these specific Timeshare assets and our resulting decisions to accelerate cash flow through the monetization of certain excess undeveloped land and to offer incentives to accelerate sales of excess built luxury fractional and residential inventory, we recorded $324 million ($234 million after-tax) of impairment charges, reflected in our 2011 third

9


quarter Income Statements in the “Timeshare Strategy - Impairment Charges” caption, to write down the carrying amounts of inventory and property and equipment to their respective fair values. For additional information, see Footnote No. 14, “Timeshare Strategy - Impairment Charges.”

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
 
Thirty-Six Weeks Ended
 
September 9,
2011
 
September 10,
2010
 
September 9,
2011
 
September 10,
2010
(in millions, except per share amounts)
 
 
 
 
 
 
 
Computation of Basic Earnings Per Share
 
 
 
 
 
 
 
Net (loss) income
$
(179
)
 
$
83

 
$
57

 
$
285

Weighted average shares outstanding
345.4

 
363.1

 
356.5

 
361.5

Basic (losses) earnings per share
$
(0.52
)
 
$
0.23

 
$
0.16

 
$
0.79

Computation of Diluted Earnings Per Share
 
 
 
 
 
 
 
Net (loss) income
$
(179
)
 
$
83

 
$
57

 
$
285

Weighted average shares outstanding
345.4

 
363.1

 
356.5

 
361.5

Effect of dilutive securities
 
 
 
 
 
 
 
Employee stock option and SARs plans

 
10.8

 
9.2

 
10.7

Deferred stock incentive plans

 
1.0

 
0.9

 
1.1

Restricted stock units

 
3.2

 
3.2

 
3.1

Shares for diluted earnings per share
345.4

 
378.1

 
369.8

 
376.4

Diluted (losses) earnings per share
$
(0.52
)
 
$
0.22

 
$
0.15

 
$
0.76


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. As we recorded a loss for the twelve weeks ended September 9, 2011, we did not include the following shares in the “Effect of dilutive securities” caption in the preceding table, because it would have been antidilutive to do so: 7.7 million employee stock option and SARs plan shares, 0.9 million deferred stock incentive plans shares, and 2.8 million restricted stock unit shares.
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 September 9, 2011, 4.2 million options and SARs, with exercise prices ranging from $32.16 to $49.03;
(b)
for the twelve-week period ended September 10, 2010, 2.5 million options and SARs, with exercise prices ranging from $34.11 to $49.03;
(c)
for the thirty-six week period ended September 9, 2011, 1.0 million options and SARs, with exercise prices ranging from $36.22 to $49.03; and
(d)
for the thirty-six week period ended September 10, 2010, 3.7 million options and SARs, with exercise prices ranging from $32.16 to $49.03.

7.
Inventory
Inventory, totaling $1,029 million as of September 9, 2011 and $1,489 million as of December 31, 2010, consists primarily of Timeshare segment interval, fractional ownership, and residential products totaling $1,011 million as of September 9, 2011 and $1,472 million as of December 31, 2010. Inventory totaling $18 million and $17 million as of September 9, 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

10


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.
In preparing our Timeshare segment to operate as an independent, publicly traded company following our proposed spin-off of the stock of MVW (see Footnote No. 17, "Planned Spin-off" for additional information), management assessed the Timeshare segment's intended use of excess undeveloped land and built inventory and the current market conditions for those assets. On September 8, 2011, management approved a plan for the Timeshare segment to accelerate cash flow through the monetization of certain excess undeveloped land and to offer incentives to accelerate sales of excess built luxury fractional and residential inventory. As the fair values of the undeveloped land and the excess built luxury fractional and residential inventory are less than their respective carrying values, we recorded an inventory impairment charge in the 2011 third quarter of $256 million to adjust the carrying value of the inventory to its fair value. Additionally, upon the approval of the plan in the 2011 third quarter, we reclassified $57 million of this undeveloped land previously in our development plans from inventory to property and equipment. See Footnote No. 14, “Timeshare Strategy-Impairment Charges,” for additional information.
We show the composition of our Timeshare segment inventory balances in the following table:
 
($ in millions)
September 9,
2011
 
December 31,
2010
Finished goods
$
492

 
$
732

Work-in-process
231

 
101

Land and infrastructure
288

 
639

 
$
1,011

 
$
1,472


8.
Property and Equipment
We show the composition of our property and equipment balances in the following table:
 
($ in millions)
September 9,
2011
 
December 31,
2010
Land
$
612

 
$
514

Buildings and leasehold improvements
966

 
854

Furniture and equipment
1,075

 
984

Construction in progress
159

 
204

 
2,812

 
2,556

Accumulated depreciation
(1,332
)
 
(1,249
)
 
$
1,480

 
$
1,307

As noted in Footnote No. 7, "Inventory," management approved a plan, on September 8, 2011, for the Timeshare segment to accelerate cash flow through the monetization of certain excess undeveloped land and to offer incentives to accelerate sales of excess built luxury fractional and residential inventory. As the nominal cash flows from the planned land sales and their estimated fair values are less than their carrying values, we recorded an impairment charge in the 2011 third quarter of $68 million to adjust the carrying value of the property and equipment to its fair value. Additionally, upon the approval of the plan, we reclassified $57 million of this undeveloped land previously in our development plans from inventory to property and equipment in the 2011 third quarter. See Footnote No. 14, “Timeshare Strategy-Impairment Charges,” for additional information.







11




9.
Notes Receivable
We show the composition of our notes receivable balances (net of reserves and unamortized discounts) in the following table:
 
($ in millions)
September 9,
2011
 
December 31,
2010
Loans to timeshare owners – securitized
$
864

 
$
1,028

Loans to timeshare owners – non-securitized
314

 
225

Senior, mezzanine, and other loans – non-securitized
109

 
191

 
1,287

 
1,444

Less current portion
 
 
 
Loans to timeshare owners – securitized
(113
)
 
(118
)
Loans to timeshare owners – non-securitized
(63
)
 
(55
)
Senior, mezzanine, and other loans – non-securitized
(9
)
 
(7
)
 
$
1,102

 
$
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)
September 9,
2011
 
December 31,
2010
Loans to timeshare owners
$
1,002

 
$
1,080

Loans to equity method investees
2

 
2

Other notes receivable
98

 
182

 
$
1,102

 
$
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
$
38

 
$
37

 
$
75

2012
46

 
113

 
159

2013
38

 
118

 
156

2014
32

 
120

 
152

2015
28

 
115

 
143

Thereafter
241

 
361

 
602

Balance at September 9, 2011
$
423

 
$
864

 
$
1,287

Weighted average interest rate at September 9, 2011
9.6
%
 
13.1
%
 
12.0
%
Range of stated interest rates at September 9, 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 September 9, 2011
$
200

 
$
63

 
$
263


12



Notes Receivable Unamortized Discounts (1) 
 
($ in millions)
Non-Securitized
Notes  Receivable
 
Securitized
Notes  Receivable
 
Total
Balance at year-end 2010
$
13

 
$

 
$
13

Balance at September 9, 2011
$
13

 
$

 
$
13

 
(1) 
The discounts for both September 9, 2011 and year-end 2010 relate entirely to our Senior, Mezzanine, and Other Loans.
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 third 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 first three quarters of 2011 and 2010, our average investment in impaired “Senior, mezzanine, and other loans” totaled $90 million and $135 million, respectively.
The following table summarizes the activity related to our “Senior, mezzanine, and other loans” notes receivable reserve for the first three quarters of 2011:
 
($ in millions)
Notes  Receivable
Reserve
Balance at year-end 2010
$
74

Additions
1

Reversals
(6
)
Transfers and other
9

Balance at September 9, 2011
$
78

At the end of the 2011 third quarter, past due senior, mezzanine, and other loans totaled $7 million.
Loans to Timeshare Owners
We reflect interest income associated with “Loans to timeshare owners” of $37 million and $41 million for the 2011 and 2010 third quarters, respectively, and $113 million and $129 million for the thirty-six weeks ended September 9, 2011 and September 10, 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 third quarter, $29 million was associated with securitized loans and $8 million was associated with non-securitized loans, compared with $30 million associated with securitized loans and $11 million associated with non-securitized loans recognized in the 2010 third quarter. Of the $113 million of interest income we recognized in the first three quarters of 2011, $91 million was associated with securitized loans and $22 million was associated with non-securitized loans, compared with $99 million associated with securitized loans and $30 million associated with non-securitized loans in the first three quarters of 2010.
The following table summarizes the activity related to our “Loans to timeshare owners” notes receivable reserve for the first three quarters of 2011:
 

13


($ in millions)
Non-Securitized
Notes  Receivable
Reserve
 
Securitized
Notes  Receivable
Reserve
 
Total
Balance at year-end 2010
$
129

 
$
89

 
$
218

Additions for current year contract sales
21

 

 
21

Write-offs
(54
)
 

 
(54
)
Defaulted note repurchase activity(1)
36

 
(36
)
 

Other(2)
(10
)
 
10

 

Balance at September 9, 2011
$
122

 
$
63

 
$
185

 
(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 September 9, 2011 and year-end 2010, we estimated average remaining default rates of 7.61 percent and 9.25 percent, respectively, for both non-securitized and securitized timeshare notes receivable. 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 September 9, 2011
$
102

 
$
14

 
$
116

Investment in loans on nonaccrual status at year-end 2010
$
113

 
$
15

 
$
128

Average investment in loans on non-accrual status during the first three quarters of 2011
$
108

 
$
14

 
$
122

Average investment in loans on non-accrual status during the first three quarters of 2010
$
116

 
$
8

 
$
124

We show the aging of the recorded investment (before reserves) in “Loans to timeshare owners” in the following table:
 
($ in millions)
September 9,
2011
31 – 90 days past due
$
34

91 – 150 days past due
19

Greater than 150 days past due
96

Total past due
149

Current
1,214

Total loans to timeshare owners
$
1,363



14



10.
Long-term Debt
We provide detail on our long-term debt balances in the following table:
 
($ in millions)
September 9,
2011
 
December 31,
2010
Non-recourse debt associated with securitized notes receivable, interest rates ranging from 0.20% to 7.20% (weighted average interest rate of 4.98%)
$
830

 
$
1,016

Less current portion
(119
)
 
(126
)
 
711

 
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)
306

 
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 0.4128% at September 9, 2011
403

 

$1,750 Credit Facility

 

Other
237

 
182

 
2,273

 
1,813

Less current portion
(361
)
 
(12
)
 
1,912

 
1,801

 
$
2,623

 
$
2,691

 
(1) 
Face amount and effective interest rate are as of September 9, 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, 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 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 September 9, 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

15


the 2011 second quarter. At the end of the 2011 second and third quarters, 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 three quarters of 2011. At September 9, 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
$
39

 
$
4

 
$
43

2012
119

 
361

 
480

2013
125

 
414

 
539

2014
127

 
72

 
199

2015
120

 
313

 
433

Thereafter
300

 
1,109

 
1,409

Balance at September 9, 2011
$
830

 
$
2,273

 
$
3,103

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
$

 
$
16

 
$
16

Balance at September 9, 2011
$

 
$
13

 
$
13

We paid cash for interest, net of amounts capitalized, of $94 million in the first three quarters of 2011 and $98 million in the first three quarters of 2010.

11.
Comprehensive Income and Capital Structure
We detail comprehensive (loss) income in the following table. We reclassified unrealized losses out of comprehensive (loss) income for both the twelve weeks and thirty-six weeks ended September 9, 2011 primarily to reflect recognized losses on available-for-sale securities due to other-than-temporary impairments.
 
 
Twelve Weeks Ended
 
Thirty-Six Weeks Ended
($ in millions)
September 9,
2011
 
September 10,
2010
 
September 9,
2011
 
September 10,
2010
Net (loss) income
$
(179
)
 
$
83

 
$
57

 
$
285

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(2
)
 
8

 
13

 
(11
)
Other derivative instrument adjustments
(11
)
 

 
(25
)
 
1

Unrealized losses on available-for-sale securities

 

 
(10
)
 

Reclassification of losses
8

 
3

 
8

 
3

Total other comprehensive loss, net of tax
(5
)
 
11

 
(14
)
 
(7
)
Comprehensive (loss) income
$
(184
)
 
$
94

 
$
43

 
$
278

The following table details changes in shareholders’ equity.
 

16


(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
)

 
Net income
57

 

 

 
57

 

 


 
Other comprehensive loss
(14
)
 

 

 

 

 
(14
)

 
Cash dividends ($0.2875 per share)
(102
)
 

 

 
(102
)
 

 

6.0

 
Employee stock plan issuance
129

 

 
13

 
(76
)
 
192

 

(36.5
)
 
Purchase of Treasury stock
(1,225
)
 

 

 

 
(1,225
)
 

336.4

 
Balance at September 9, 2011
$
430

 
$
5

 
$
3,657

 
$
3,165

 
$
(6,381
)
 
$
(16
)

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 at September 9, 2011 in the following table.
 
($ in millions)
Guarantee Type
Maximum Potential
Amount  of Future Fundings

 
Liability for Expected
Future Fundings

Debt service
$
69

 
$
6

Operating profit
147

 
56

Other
49

 
2

Total guarantees where we are the primary obligor
$
265

 
$
64

   
We included our liability for expected future fundings at September 9, 2011, in our Balance Sheet as follows: $4 million in the “Other current liabilities” and $60 million in the “Other long-term liabilities.”
Our guarantees listed in the preceding table include $25 million of operating profit guarantees and an $11 million debt service guarantee, all of which 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:
$106 million of guarantees related to Senior Living Services lease obligations of $66 million (expiring in 2013) and lifecare bonds of $40 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 $33 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

17


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 $51 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 September 9, 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 $13 million at September 9, 2011, as further discussed in Footnote No. 16, “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 $519 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 September 9, 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 September 9, 2011, we had the following commitments outstanding:
A commitment to invest up to $7 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 fourth 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, as follows: $3 million in 2011 and $8 million in 2012.
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.

18


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 $4 million, which we expect will be paid in 2011.
$5 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 $4 million of commitments 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. We do not expect to fund this commitment. The commitment is pledged as collateral for certain trust investments.
A commitment to invest up to $1 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 fourth 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 $65 million (€45 million) during the next three years.
At September 9, 2011, we had $78 million of letters of credit outstanding ($74 million under our Credit Facility and $4 million outside the Credit Facility), the majority of which related to our self-insurance programs. Surety bonds issued as of September 9, 2011, totaled $202 million, the majority of which federal, state and local governments requested in connection with our lodging operations, Timeshare segment operations, and self-insurance programs.

13.
Business Segments
We are a diversified hospitality company with operations in five business segments:
North American Full-Service Lodging, which includes the Marriott Hotels & Resorts, Marriott Conference Centers, JW Marriott, Renaissance Hotels, Renaissance ClubSport, and Autograph Collection properties located in the 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. 17, “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

19


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.
Revenues
 
 
Twelve Weeks Ended
 
Thirty-Six Weeks Ended
($ in millions)
September 9,
2011
 
September 10,
2010
 
September 9,
2011
 
September 10,
2010
North American Full-Service Segment
$
1,232

 
$
1,158

 
$
3,788

 
$
3,571

North American Limited-Service Segment
587

 
533

 
1,653

 
1,501

International Segment
293

 
264

 
860

 
796

Luxury Segment
362

 
323

 
1,138

 
1,053

Timeshare Segment
377

 
352

 
1,125

 
1,076

Total segment revenues
2,851

 
2,630

 
8,564

 
7,997

Other unallocated corporate
23

 
18

 
60

 
52

 
$
2,874

 
$
2,648

 
$
8,624

 
$
8,049

Net (Loss) Income
 
 
Twelve Weeks Ended
 
Thirty-Six Weeks Ended
($ in millions)
September 9,
2011
 
September 10,
2010
 
September 9,
2011
 
September 10,
2010
North American Full-Service Segment
$
71

 
$
55

 
$
238

 
$
209

North American Limited-Service Segment
97

 
82

 
267

 
223

International Segment
35

 
25

 
116

 
99

Luxury Segment
8

 
11

 
46

 
53

Timeshare Segment
(302
)
 
38

 
(238
)
 
96

Total segment financial results
(91
)
 
211

 
429

 
680

Other unallocated corporate
(81
)
 
(58
)
 
(201
)
 
(160
)
Interest expense and interest income(1)
(27
)
 
(25
)
 
(74
)
 
(79
)
Income taxes
20

 
(45
)
 
(97
)
 
(156
)
 
$
(179
)
 
$
83

 
$
57

 
$
285

 
(1) 
Of the $39 million and $117 million of interest expense shown on the Income Statement for the twelve and thirty-six weeks ended September 9, 2011, respectively, we allocated $10 million and $34 million, respectively, to our Timeshare Segment. Of the $41 million and $130 million of

20


interest expense shown on the Income Statement for the twelve and thirty-six weeks ended September 10, 2010, respectively, we allocated $12 million and $40 million, respectively, to our Timeshare segment.
Equity in Losses of Equity Method Investees
 
 
Twelve Weeks Ended
 
Thirty-Six Weeks Ended
($ in millions)
September 9,
2011
 
September 10,
2010
 
September 9,
2011
 
September 10,
2010
North American Full-Service Segment
$
1

 
$

 
$
1

 
$
1

North American Limited-Service Segment

 

 
(1
)
 
(6
)
International Segment
1

 
(2
)
 

 
(4
)
Luxury Segment
(6
)
 
(2
)
 
(8
)
 
(2
)
Timeshare Segment

 
(2
)
 

 
(10
)
Total segment equity in losses
(4
)
 
(6
)
 
(8
)
 
(21
)
Other unallocated corporate
2

 
1

 
2

 
1

 
$
(2
)
 
$
(5
)
 
$
(6
)
 
$
(20
)
Assets
 
 
At Period End
($ in millions)
September 9,
2011
 
December 31,
2010
North American Full-Service Segment
$
1,230

 
$
1,221

North American Limited-Service Segment
526

 
465

International Segment
1,023

 
822

Luxury Segment
904

 
871

Timeshare Segment
2,763

 
3,310

Total segment assets
6,446

 
6,689

Other unallocated corporate
2,019

 
2,294

 
$
8,465

 
$
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 $187 million. This 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.
Timeshare Strategy-Impairment Charges
In preparing our Timeshare segment to operate as an independent, public company following our proposed spin-off of the stock of MVW (see Footnote No. 17, "Planned Spin-off" for additional information), management assessed the Timeshare segment's intended use of excess undeveloped land and built inventory and the current market conditions for those assets. On September 8, 2011, management approved a plan for the Timeshare segment to accelerate cash flow through the monetization of certain excess undeveloped land in the U.S., Mexico, and the Bahamas over the next 18 to 24 months and to accelerate sales of excess built luxury fractional and residential inventory over the next three years. As a result, in accordance with the guidance for accounting for the impairment or disposal of long-lived assets, because the nominal cash flows from the planned land sales and the estimated fair values of the land and excess built luxury inventory were less than their respective carrying values, we recorded a pre-tax non-cash impairment charge of $324 million ($234 million after-tax) in our 2011 third quarter Income Statements under the “Timeshare strategy-impairment charges” caption.

We estimated the fair value of the land by using recent comparable sales data for the land parcels, which we determined were Level 3 inputs. We estimated the fair value of the excess built luxury fractional and residential

21


inventory using cash flow projections discounted at risk premiums commensurate with the market conditions of the related projects. We used Level 3 inputs for these discounted cash flow analyses and our assumptions included: growth rate and sales pace projections, additional sales incentives such as pricing discounts, and marketing and sales cost estimates.
    
Grouped by product type and/or geographic location, these impairment charges consisted of $203 million associated with undeveloped land parcels in North America associated with five timeshare properties, $113 million associated with nine North American luxury fractional and mixed use properties, $2 million related to one project in our European timeshare business, and $6 million of software previously under development that will not be completed and used under our new strategy.

The following table details the composition of these charges.
($ in millions)
 
 
Third Quarter 2011 Impairment Charge
 
Amount
Inventory impairment
 
$
256

Property and equipment impairment
 
68

Total
 
$
324

 
 
 

Additionally, upon the approval of the plan in the 2011 third quarter to dispose of certain undeveloped land parcels, we reclassified $57 million of these land parcels previously in our development plans from inventory to property and equipment.

We also reviewed the remainder of our Timeshare segment inventory assets and determined that there were no other adjustments needed to their carrying values.

15.
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. 18, “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 $65 million (€45 million) during the next three years.

16.
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

22


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 September 9, 2011, consolidated assets on our Balance Sheet included collateral for the obligations of those variable interest entities with a carrying amount of $919 million, comprised of $113 million of current notes receivable and $751 million of long-term notes receivable (each net of reserves), $5 million of interest receivable and $36 million and $14 million, respectively, of current and long-term restricted cash. Further, at September 9, 2011, consolidated liabilities on our Balance Sheet included liabilities for those variable interest entities with a carrying amount of $834 million, comprised of $4 million of interest payable, $119 million of current portion of long-term debt, and $711 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, for the thirty-six weeks ended September 9, 2011 we recognized $91 million of interest income, offset by $34 million of interest expense to investors.
We show our cash flows to and from the timeshare notes securitization variable interest entities in the following table:
 
($ in millions)
Thirty-Six Weeks Ended
 
September 9,
2011
 
September 10,
2010
Cash inflows:
 
 
 
Principal receipts
$
155

 
$
164

Interest receipts
92

 
99

Total
247

 
263

Cash outflows:
 
 
 
Principal to investors
(150
)
 
(160
)
Repurchases
(36
)
 
(49
)
Interest to investors
(32
)
 
(37
)
Total
(218
)
 
(246
)
Net Cash Flows
$
29

 
$
17

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 $36 million during the first three quarters of 2011 and $49 million during the first three quarters 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 $13 million and do not expect to recover this amount, which we have accrued and included in current liabilities. We do not have any

23


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 September 9, 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 $26 million at the end of the 2011 third quarter. In addition, as of the end of the 2011 third quarter 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.

17.
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 realization through 2015 of approximately $325 million to $350 million of cash tax benefits to Marriott, including approximately $70 million to $80 million for the 2011 full fiscal year and approximately $120 million to $130 million for the 2012 fiscal year, relating to the value of the timeshare business. For the thirty-six weeks ended September 9, 2011, we have already realized approximately $55 million of these cash tax benefits.
For the twelve and thirty-six weeks ended September 9, 2011, we recognized $8 million and $13 million, respectively, of transaction-related expenses associated with the planned spin-off. We anticipate spending $40 million to $50 million in cash for the 2011 full fiscal year for transaction-related costs, some of which we expect will be capitalized. While we are not completing our typical notes securitization this year, subsequent to the end of the 2011 third quarter we have already received most of the approximately $110 million we expect to receive under the MVW warehouse facility. Combined with approximately $40 million in expected proceeds from the sale of the preferred stock of MVW's U.S. holding company, Marriott expects to receive approximately $150 million in a cash distribution prior to the completion of the spin-off. This will have no impact to Marriott's earnings.
The new timeshare company, MVW, filed an initial Form 10 registration statement with the SEC on June 28, 2011, and filed amendments to that Form 10 registration statement on September 9, and September 30, 2011. We expect that the common stock of MVW will be listed on the New York Stock 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 early October, confirming that the distribution of shares of MVW 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,

24


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.

18.
Leases
As noted in Footnote No. 15, “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
(5
)
Present value of net minimum lease payments
$
65

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


25


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 three quarters of 2011 reflecting low supply growth, an improving economic climate in most developed markets around the world and strong economic growth in emerging markets, strong unit growth, and the impact of operating efficiencies across our company.
While there was some increased economic uncertainty globally in the 2011 third quarter, we remain focused on doing the things that we do well; that is, selling rooms, taking care of our guests, and making sure we control our costs. Our brands remain strong as a result of superior customer service with an emphasis on guest and associate satisfaction, the worldwide presence and quality of our brands, our Marriott Rewards and Ritz-Carlton Rewards loyalty programs, a multichannel central reservations system, and desirable property amenities. We, along with owners and franchisees, continue to invest in our brands by means of new, refreshed, and reinvented properties, new room and public space designs, and enhanced amenities and technology offerings. We continue to enhance the appeal of our proprietary, information-rich, and easy-to-use website, www.Marriott.com, through functionality and service improvements, and we expect to continue capturing an increasing proportion of property-level reservations via this cost-efficient channel.
In the third quarter of 2011 as compared to the year ago quarter, worldwide average daily rates increased 3.6 percent on a constant dollar basis to $130.11 for comparable systemwide properties, with RevPAR increasing 6.9 percent to $96.15 and occupancy increasing 2.3 percentage points to 73.9 percent. For the first three quarters of 2011, as compared to the first three quarters of 2010, worldwide average daily rates increased 3.4 percent on a constant dollar basis to $131.83 for comparable systemwide properties, with RevPAR increasing 6.7 percent to $92.87 and occupancy increasing 2.1 percentage points to 70.4 percent.
In the first three quarters of 2011 we saw demand strengthening in comparable properties in most markets outside North America. Demand at properties in the Middle East remained weak reflecting continued unrest in that region. While demand in Japan was weak in the first quarter of 2011 reflecting the impact of the aftermath of the earthquake and tsunami, demand began to improve in the 2011 second quarter and continued throughout the 2011 third quarter, but remains 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 first three quarters of 2011.
We monitor market conditions continuously and carefully price our rooms daily to meet individual hotel

26


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.
The hotels in our system serve both transient and group customers. Overall, business transient and leisure transient demand is strong, while group demand has improved modestly. Group customers typically book rooms and meeting space with significant lead times. Typically, two-thirds of group business is booked 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. Group business booked in earlier periods at lower rates continues to roll off, and with improving group demand, is being replaced with bookings reflecting higher rates.
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 September 9, 2011, we operated 44 percent of the hotel rooms in our worldwide system under management agreements, our franchisees operated 53 percent under franchise agreements, we owned or leased 2 percent, and 1 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 three quarters of 2011, we added 23,989 rooms (gross) to our system. Approximately 66 percent of new rooms were located outside the United States, 32 percent of the new rooms were associated with the new AC Hotels joint venture, and 16 percent of the room additions were conversions from competitor brands. We currently have more than 105,000 rooms in our lodging development pipeline. For the full 2011 fiscal year, we expect to add more than 30,000 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

27


expenses such as insurance, real estate taxes, capital spending reserves, and the like. As compared to the first three quarters of 2010, base management, incentive and franchise fees increased in the first three quarters of 2011 reflecting strengthening RevPAR, higher property-level margins, 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 Vacations Worldwide Corporation ("MVW")) through a special tax-free dividend to our shareholders in late 2011. Please see Footnote No. 17, “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. Timeshare segment contract sales for our timeshare, fractional, and residential products decreased in the first three quarters of 2011, compared to the first three quarters of 2010, largely due to difficult comparisons driven by sales promotions in the first three quarters of 2010 as well as the start-up impact of our shift from the sale of weeks-based to points-based products. This decline was partially offset by a net decrease in cancellation allowances that we recorded in the first three quarters of 2010 in anticipation that a portion of contract revenue previously recorded for certain residential and fractional projects would not be realized due to contract cancellations prior to closing.
In May of 2010, we began targeting more of our sales efforts towards our existing owner base as we launched our points-based Marriott Vacation Club Destinations program. Contract sales to existing owners totaled 60 percent for the first three quarters of 2011, compared to 52 percent of contract sales to existing owners for the first three quarters of 2010. While sales to existing customers were strong during the first three quarters of 2011, contract sales declined as compared to the first three quarters of 2010 due to fewer sales to new customers and a lower average contract price. Commencing in the 2011 third quarter, we are turning our focus for the Marriott Vacation Club Destinations program towards generating a greater number of new owners. In the 2011 third quarter, 43 percent of timeshare contract sales came from new customers, compared to 37 percent in the year ago quarter. 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.
In preparing our Timeshare segment to operate as an independent, publicly traded company following the proposed spin-off of the stock of MVW (see Footnote No. 17, "Planned Spin-off" for additional information), management assessed the Timeshare segment's intended use of excess undeveloped land and built inventory and the current market conditions for those assets. On September 8, 2011, management approved a plan for the Timeshare segment to accelerate cash flow through the monetization of certain excess undeveloped land and excess built luxury inventory. As a result, we recorded a pre-tax non-cash impairment charge of $324 million ($234 million after-tax) in our 2011 third quarter Income Statements under the "Timeshare strategy-impairment charges" caption. We discuss these charges in more detail under the caption "Timeshare Strategy-Impairment Charges" later in this Management's Discussion and Analysis section.

CONSOLIDATED RESULTS
The following discussion presents an analysis of results of our operations for the twelve weeks and thirty-six weeks ended September 9, 2011, compared to the twelve weeks and thirty-six weeks ended September 10, 2010.
Revenues
Twelve Weeks. Revenues increased by $226 million (9 percent) to $2,874 million in the third quarter of 2011 from $2,648 million in the third quarter of 2010, as a result of higher: cost reimbursements revenue ($145 million); owned, leased, corporate housing, and other revenue ($34 million); base management and franchise fees ($28

28


million); Timeshare sales and services revenue ($11 million); and incentive management fees ($8 million (comprised of a $1 million increase for North America and a $7 million increase outside of North America)).
The increase in owned, leased, corporate housing, and other revenue, to $254 million in the 2011 third quarter, from $220 million in the 2010 third quarter, primarily reflected $13 million of higher revenue from owned and leased properties, $13 million of increased total branding fees, and $8 million of higher hotel agreement termination fees. The increase in owned and leased revenue primarily reflected higher revenues due to increased demand at several leased properties. Combined branding fees associated with affinity card endorsements and the sale of branded residential real estate by others totaled $29 million and $16 million for the 2011 and 2010 third quarter, respectively.
The increases in base management fees, to $136 million in the 2011 third quarter from $123 million in the 2010 third quarter, and in franchise fees, to $124 million in the 2011 third quarter from $109 million in the 2010 third quarter, primarily reflected stronger RevPAR and, to a lesser extent, the impact of unit growth across the system and favorable foreign exchange rates. The increase in incentive management fees primarily reflected higher net property-level income resulting from higher property-level revenue and continued property-level cost controls and, to a lesser extent, new unit growth and favorable foreign exchange rates.
The increase in Timeshare sales and services revenue to $286 million in the 2011 third quarter, from $275 million in the 2010 third quarter, primarily reflected: (1) $12 million of higher development revenue from favorable reportability and higher sales volumes; and (2) $11 million of higher services revenue primarily from increased rental revenue driven by increased rates and occupancy; partially offset by (3) $7 million of lower other revenue which primarily reflected both lower Marriott Rewards revenue recognized due to the timing of redemptions and lower resales revenue; and (4) $5 million of lower financing revenue from lower interest income as a result of a lower mortgage portfolio balance. See “BUSINESS SEGMENTS: Timeshare” later in this report for additional information on our Timeshare segment.
Cost reimbursements revenue represents reimbursements of costs incurred on behalf of managed and franchised properties and relates, predominantly, to payroll costs at managed properties where we are the employer. As we record cost reimbursements based upon costs incurred with no added markup, this revenue and related expense has no impact on either our operating income or net income. The increase in cost reimbursements revenue, to $2,045 million in the 2011 third quarter from $1,900 million in the 2010 third 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 4,400 managed rooms and 11,980 franchised rooms to our system since the end of the 2010 third quarter.
Thirty-six Weeks. Revenues increased by $575 million (7 percent) to $8,624 million in the first three quarters of 2011 from $8,049 million in the first three quarters of 2010, as a result of higher: cost reimbursements revenue ($460 million); base management and franchise fees ($77 million); owned, leased, corporate housing, and other revenue ($23 million); incentive management fees ($14 million (comprised of a $4 million increase for North America and a $10 million increase outside of North America)); and Timeshare sales and services revenue ($1 million).
The increases in base management fees, to $419 million in the first three quarters of 2011 from $384 million in the first three quarters of 2010, and in franchise fees, to $347 million in the first three quarters of 2011 from $305 million in the first three quarters of 2010, primarily reflected stronger RevPAR and, to a lesser extent, the impact of unit growth across the system and favorable foreign exchange rates. The increase in incentive management fees primarily reflected higher net property-level income resulting from higher property-level revenue and continued property-level cost controls and, to a lesser extent, new unit growth and favorable foreign exchange rates.
The increase in owned, leased, corporate housing, and other revenue, to $727 million in the first three quarters of 2011, from $704 million in the first three quarters of 2010, reflected $16 million of higher total branding fees, $6 million of higher corporate housing and other revenue, and $4 million of higher hotel agreement termination fees, partially offset by $3 million of lower revenue from owned and leased properties. The decrease in owned and leased revenue primarily reflected lower revenues at a leased property in Japan as a result of the earthquake and tsunami

29


earlier in the year and the conversion of one property from owned to managed, partially offset by higher revenues at several leased properties due to increased demand. Combined branding fees associated with affinity card endorsements and the sale of branded residential real estate by others totaled $63 million and $47 million in the first three quarters of 2011 and 2010, respectively.
The increase in Timeshare sales and services revenue to $850 million in the first three quarters of 2011, from $849 million in the first three quarters of 2010, primarily reflected: (1) $22 million of higher services revenue from increased rental occupancies and rates; and (2) $13 million of higher development revenue which reflected favorable reportability primarily related to reserves on notes recorded in the first three quarters of 2010, partially offset by lower sales volumes; mostly offset by (3) $17 million of lower other revenue which primarily reflected both lower Marriott Rewards revenue recognized due to the timing of redemptions and lower resales revenue; and (4) $17 million of lower financing revenue from lower interest income as a result of a lower mortgage portfolio balance. See “BUSINESS SEGMENTS: Timeshare” later in this report for additional information on our Timeshare segment.
The increase in cost reimbursements revenue, to $6,160 million in the first three quarters of 2011 from $5,700 million in the first three quarters 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.
Timeshare Strategy-Impairment Charges
In preparing our Timeshare segment to operate as an independent, publicly traded company following our proposed spin-off of the stock of MVW (see Footnote No. 17, "Planned Spin-off" for additional information), management assessed the Timeshare segment's intended use of excess undeveloped land and built inventory and the current market conditions for those assets. On September 8, 2011, management approved a plan for the Timeshare segment to accelerate cash flow through the monetization of certain excess undeveloped land in the U.S., Mexico, and the Bahamas over the next 18 to 24 months and to accelerate sales of excess built luxury fractional and residential inventory over the next three years. As a result, in accordance with the guidance for accounting for the impairment or disposal of long-lived assets, because the nominal cash flows from the planned land sales and the estimated fair values of the land and excess built luxury inventory were less than their respective carrying values, we recorded a pre-tax non-cash impairment charge of $324 million ($234 million after-tax) in our 2011 third quarter Income Statements under the “Timeshare strategy-impairment charges” caption.

The following table details the composition of these charges.

($ in millions)
 
 
Third Quarter 2011 Impairment Charge
 
Amount
Inventory impairment
 
$
256

Property and equipment impairment
 
68

Total
 
$
324

 
 
 
    
For additional information related to these impairment charges, including how these impairments were determined and the impairment charges grouped by product type and/or geographic location, see Footnote No. 14, “Timeshare Strategy - Impairment Charges.”
Operating (Loss) Income
Twelve Weeks. Operating income decreased by $311 million to an operating loss of $144 million in the 2011 third quarter from operating income of $167 million in the 2010 third quarter. The decrease in operating income reflected Timeshare strategy-impairment charges of $324 million, a $31 million increase in general, administrative, and other expenses, and $20 million of lower Timeshare sales and services revenue net of direct expenses, partially offset by a $28 million increase in base management and franchise fees, $28 million of higher owned, leased,

30


corporate housing, and other revenue net of direct expenses and $8 million of higher incentive management fees. We discuss the reasons for the increases in base management and franchise fees and in incentive management fees as compared to the 2010 third quarter in the preceding “Revenues” section.
General, administrative, and other expenses increased by $31 million (21 percent) to $180 million in the third quarter of 2011 from $149 million in the third quarter of 2010. The increase primarily reflected the following 2011 third quarter items: $8 million of transaction-related expenses associated with the planned spin-off of the timeshare business; a $5 million impairment of deferred contract acquisition costs and a $5 million accounts receivable reserve, both related to one Luxury segment property whose owner filed for bankruptcy; $5 million related to an increase in the guarantee reserve for one North American Full-Service property and the write-off of contract acquisition costs; $4 million of increased other expenses primarily associated with higher costs in international markets and initiatives to enhance and grow our brands globally; $2 million of increased foreign exchange losses; and $3 million of higher compensation costs. An unfavorable variance from a $4 million reversal of excess accruals for net asset tax based on the receipt of final assessments from a taxing authority located outside the United States recorded in the 2010 third quarter further contributed to the increased expenses. These increased expenses were partially offset by $6 million of lower legal expenses.
The $31 million increase in total general, administrative, and other expenses consisted of a $15 million increase that we did not allocate to any of our segments; a $10 million increase allocated to our Luxury segment; a $4 million increase allocated to our North American Full-Service segment; a $1 million increase allocated to our International segment; and a $2 million increase allocated to our North American Limited-Service segment; partially offset by a $1 million decrease allocated to our Timeshare segment.
Timeshare sales and services revenue net of direct expenses totaled $36 million in the third quarter of 2011 and $56 million in the 2010 third quarter. The decrease of $20 million as compared to the third quarter of 2010, primarily reflected $19 million of lower other revenue, net of expenses and $4 million of lower financing revenue, net of expenses, partially offset by $3 million of higher development revenue net of product costs and marketing and selling costs. The decrease of $19 million in other revenue, net of expenses, primarily reflected both a $15 million unfavorable variance from a 2010 third quarter adjustment to the Marriott Rewards liability resulting from lower than anticipated cost of redemptions and $3 million of lower resales revenue, net of expenses. The decrease in financing revenue, net of expenses 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 higher development revenue for the reasons stated previously, mostly offset by higher product costs. See “BUSINESS SEGMENTS: Timeshare,” later in this report for additional information on our Timeshare segment.
The $28 million (400 percent) increase in owned, leased, corporate housing, and other revenue net of direct expenses was primarily attributable to $13 million of higher branding fees, $9 million of net stronger results at some owned and leased hotels primarily driven by higher RevPAR and property-level margins, and $8 million of higher hotel agreement termination fees.
Thirty-six Weeks. Operating income decreased by $294 million to $279 million in the first three quarters of 2011 from $573 million in the first quarters of 2010. The decrease reflected Timeshare strategy-impairment charges of $324 million, a $69 million increase in general, administrative, and other expenses and $26 million of lower Timeshare sales and services revenue net of direct expenses, partially offset by a $77 million increase in base management and franchise fees, $34 million of higher owned, leased, corporate housing, and other revenue net of direct expenses, and $14 million of higher incentive management fees. We address the reasons for the increases in base management and franchise fees and in incentive management fees as compared to the first three quarters of 2010 in the preceding “Revenues” section.
General, administrative, and other expenses increased by $69 million (16 percent) to $498 million in the first three quarters of 2011 from $429 million in the first three quarters of 2010. The increase primarily reflected the following items from the 2011 period: $16 million of higher compensation costs; $13 million of transaction-related expenses associated with the planned spin-off of the timeshare business; $13 million of increased other expenses primarily associated with higher costs in international markets and initiatives to enhance and grow our brands globally, a $5 million impairment of deferred contract acquisition costs and a $5 million accounts receivable

31


reserve, both related to one Luxury segment property whose owner filed for bankruptcy; a $5 million performance cure payment for a North American Full-Service property; and $4 million related to an increase in the guarantee reserve for one North American Full-Service property and the write-off of contract acquisition costs. An unfavorable variance from a $4 million reversal of excess accruals for net asset tax based on the receipt of final assessments from a taxing authority located outside the United States and a $6 million reversal of guarantee accruals, primarily related to a completion guarantee for which we satisfied the related requirements, both recorded in the year ago period, further contributed to the increased expenses. These increased expenses were partially offset by a $5 million reversal in 2011 of a loan loss provision related to one property with increased expected future cash flows.
The $69 million increase in total general, administrative, and other expenses consisted of a $33 million increase that we did not allocate to any of our segments; a $17 million increase allocated to our Luxury segment; a $12 million increase allocated to our North American Full-Service segment; a $3 million increase allocated to our International segment; a $3 million increase allocated to our North American Limited-Service segment; and a $1 million increase allocated to our Timeshare segment.
The $34 million (68 percent) increase in owned, leased, corporate housing, and other revenue net of direct expenses was primarily attributable to $16 million of higher branding fees, $10 million of net stronger results at some owned and leased properties due to higher RevPAR and property-level margins, $6 million of higher hotel agreement termination fees, net of 2010 termination costs, $4 million favorable impact of unit additions, net of unit deletions, and $4 million of decreased rent expense, partially offset by $6 million of lower results at a leased hotel in Japan that experienced lower demand as a result of the earthquake and tsunami earlier in the year.
Timeshare sales and services revenue net of direct expenses totaled $130 million in the first three quarters of 2011 and $156 million in the first three quarters of 2010. The decrease of $26 million as compared to the first three quarters of 2010, primarily reflected $19 million of lower other revenue, net of expenses and $17 million of lower financing revenue, net of expenses, partially offset by $11 million of higher development revenue net of product costs and marketing and selling costs. The $19 million decrease in other revenue, net of expenses primarily reflected both a $15 million unfavorable variance from an adjustment to the Marriott Rewards liability in the year ago period resulting from lower than anticipated cost of redemptions and $4 million of lower resales revenue, net of expenses due to lower closings. The $17 million decrease in financing revenue, net of expenses 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 $11 million reserve in the year ago period and lower 2011 product costs, partially offset by lower 2011 sales volumes. See “BUSINESS SEGMENTS: Timeshare,” later in this report for additional information on our Timeshare segment.
(Losses) Gains and Other Income
We show our (losses) gains and other income for the twelve and thirty-six weeks ended September 9, 2011, and September 10, 2010 in the following table:
 
 
Twelve Weeks Ended
 
Thirty-Six Weeks Ended
($ in millions)
September 9,
2011
 
September 10,
2010
 
September 9,
2011
 
September 10,
2010
Gains on sales of real estate and other
$
2

 
$
3

 
$
7

 
$
7

Income from cost method joint ventures

 

 

 

Impairment of equity securities
(18
)
 

 
(18
)
 

 
$
(16
)
 
$
3

 
$
(11
)
 
$
7

Twelve Weeks. The $18 million impairment of equity securities for the twelve weeks ended September 9, 2011 reflects an other-than-temporary impairment of marketable securities. For additional information on the impairment, see Footnote No. 5, “Fair Value of Financial Instruments.”
Thirty-six Weeks. The $18 million impairment of equity securities for the thirty-six weeks ended September 9, 2011 reflects an other-than-temporary impairment of marketable securities as noted in the preceding "Twelve

32


Weeks" discussion.
Interest Expense
Twelve Weeks. Interest expense decreased by $2 million (5 percent) to $39 million in the third quarter of 2011 compared to $41 million in the third quarter of 2010. This decrease was primarily driven by 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.
Thirty-six Weeks. Interest expense decreased by $13 million (10 percent) to $117 million in the first three quarters of 2011 compared to $130 million in the first three quarters of 2010. This decrease was primarily driven by: (1) a $6 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 $4 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. See the “LIQUIDITY AND CAPITAL RESOURCES” caption later in this report for additional information regarding our credit facility.
Interest Income and Income Tax
Twelve Weeks. Interest income decreased by $2 million (50 percent) to $2 million in the third quarter of 2011 compared to $4 million in the third quarter of 2010.
Our tax provision decreased by $65 million (144 percent) to a tax benefit of $20 million in the third quarter of 2011 from a tax provision of $45 million in the third quarter of 2010. The decrease was primarily due to pretax losses in the third quarter of 2011 and was partially offset by $32 million of income tax expense that we recorded in the 2011 third quarter to write-off certain deferred tax assets that we expect to transfer to MVW in conjunction with the planned spin-off of our timeshare operations and timeshare development business. We impaired these assets because we consider it "more likely than not" that MVW will be unable to realize the value of those deferred tax assets. Please see Footnote No. 17, “Planned Spin-off,” of the Notes to our Financial Statements for additional information regarding the planned transaction.
Thirty-six Weeks. Interest income decreased by $2 million (18 percent) to $9 million in the first three quarters of 2011 compared to $11 million in the first three quarters of 2010.
Our tax provision decreased by $59 million (38 percent) to a tax provision of $97 million in the first three quarters of 2011 from a tax provision of $156 million in the first three quarters of 2010. The decrease was primarily due to lower pretax income in 2011 and was partially offset by $32 million of tax expense we recorded in the 2011 period associated with the write-off of certain deferred tax assets as noted in the preceding "Twelve Weeks" discussion.
Equity in Losses
Twelve Weeks. Equity in losses of $2 million in the third quarter of 2011 decreased by $3 million from equity in losses of $5 million in the third quarter of 2010 and primarily reflected a $3 million reversal (based on facts and circumstances surrounding a Timeshare segment project, including progress on certain construction-related legal claims and potential funding of certain costs by one of our partners) of the $27 million funding liability we recorded in the Timeshare strategy-impairment charges (non-operating) caption of our 2009 third quarter Income Statements (see Footnote No. 18, "Timeshare strategy-impairment charges" of the 2010 Form 10-K for additional information), $2 million of increased earnings from stronger property-level performance at one International segment joint venture, and $1 million of lower losses for a Timeshare segment residential and fractional project joint venture, partially offset by $4 million of decreased earnings at two Luxury segment joint ventures.
Thirty-six Weeks. Equity in losses of $6 million in the first three quarters of 2011 decreased by $14 million from equity in losses of $20 million in the first three quarters of 2010 and primarily reflected $8 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

33


2010); a $3 million reversal of a 2009 funding liability as noted in the preceding "Twelve Weeks" discussion; $4 million of decreased losses at one North American Limited-Service and one International segment joint venture, primarily due to stronger property-level performance; and a favorable variance from joint venture impairment charges in the 2010 period of $3 million ($2 million associated with our North American Limited-Service segment and $1 million associated with our Timeshare segment). These favorable impacts were partially offset by $6 million of decreased earnings at two Luxury segment joint ventures.
Net (Loss) Income
Twelve Weeks. Net income decreased by $262 million to a net loss of $179 million in the third quarter of 2011 from net income of $83 million in the third quarter of 2010, and diluted earnings per share decreased by $0.74 per share to diluted losses of $0.52 per share from diluted earnings of $0.22 per share in the third quarter of 2010. As discussed in more detail in the preceding sections beginning with “Operating (Loss) Income,” the $262 million decrease in net income compared to the year-ago quarter was due to Timeshare strategy-impairment charges ($324 million), higher general, administrative, and other expenses ($31 million), lower Timeshare sales and services revenue net of direct expenses ($20 million), lower gains and other income ($19 million), and lower interest income ($2 million). Lower income taxes ($65 million), higher base management and franchise fees ($28 million), higher owned, leased, corporate housing, and other revenue net of direct expenses ($28 million), higher incentive management fees ($8 million), lower equity in losses ($3 million), and lower interest expense ($2 million) partially offset these items.
Thirty-six Weeks. Net income decreased by $228 million (80 percent) to $57 million in the first three quarters of 2011 from $285 million in the first three quarters of 2010, and diluted earnings per share decreased by $0.61 per share (80 percent) to $0.15 per share from $0.76 per share in the first three quarters of 2010. As discussed in more detail in the preceding sections beginning with “Operating (Loss) Income,” the $228 million decrease in net income compared to the prior year was due to Timeshare strategy-impairment charges ($324 million), higher general, administrative, and other expenses ($69 million), lower Timeshare sales and services revenue net of direct expenses ($26 million), lower gains and other income ($18 million), and lower interest income ($2 million). Higher base management and franchise fees ($77 million), lower income taxes ($59 million), higher owned, leased, corporate housing, and other revenue net of direct expenses ($34 million), higher incentive management fees ($14 million), lower equity in losses ($14 million), and lower interest expense ($13 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 differing abilities to take advantage of tax benefits and because of the tax policies of the jurisdictions in which they operate. As a result, effective tax rates and provision for income taxes can vary considerably among companies. EBITDA also excludes depreciation and amortization because companies utilize productive assets of different ages and use different methods of both acquiring and depreciating productive assets. These differences can result in considerable variability in the relative costs of productive assets and the depreciation and amortization expense among companies.

We also evaluate Adjusted EBITDA, another non-GAAP financial measure, as an indicator of operating performance. For both the twelve and thirty-six weeks ended September 9, 2011, our Adjusted EBITDA excludes Timeshare strategy-impairment charges totaling $324 million and $28 million of other charges as follows: an $18 million charge for an other-than-temporary impairment of marketable securities; and a $5 million impairment of deferred contract acquisition costs and a $5 million accounts receivable reserve, both related to one Luxury segment

34


property whose owner filed for bankruptcy. These items are discussed in the preceding "Timeshare Strategy-Impairment Charges," "(Losses) Gains and Other Income," and "Operating (Loss) Income" captions, respectively. We evaluate Adjusted EBITDA that excludes these items to allow for period-over-period comparisons of our ongoing core operations before material charges. EBITDA and Adjusted EBITDA also facilitate our comparison of results from our ongoing operations before material charges with results from other lodging companies.
EBITDA and Adjusted EBITDA have limitations and should not be considered in isolation or as substitutes for performance measures calculated in accordance with GAAP. Both of these non-GAAP measures exclude certain cash expenses that we are obligated to make. In addition, other companies in our industry may calculate EBITDA and Adjusted EBITDA differently than we do or may not calculate them at all, limiting EBITDA's and Adjusted EBITDA's usefulness as comparative measures.
We show our EBITDA and Adjusted EBITDA calculations and reconcile those measures with Net (Loss) Income in the following table.
 
 
Twelve Weeks Ended
 
Thirty-Six Weeks Ended
($ in millions)
September 9,
2011
 
September 10,
2010
 
September 9,
2011
 
September 10,
2010
Net (Loss) Income
$
(179
)
 
$
83

 
$
57

 
$
285

Interest expense
39

 
41

 
117

 
130

Tax provision
(20
)
 
45

 
97

 
156

Depreciation and amortization
40

 
40

 
116