10-Q 1 mar-q22013x10q.htm 10-Q MAR-Q2.2013-10Q
 
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 June 30, 2013
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: 303,181,480 shares of Class A Common Stock, par value $0.01 per share, outstanding at July 19, 2013.






MARRIOTT INTERNATIONAL, INC.
FORM 10-Q TABLE OF CONTENTS
 
 
 
Page No.
 
 
 
Part I.
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows - 184 Days Ended June 30, 2013 and 168 Days Ended June 15, 2012
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Part II.
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 
 



1


PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
($ in millions, except per share amounts)
(Unaudited)
 
 
91 Days Ended June 30, 2013
 
84 Days Ended June 15, 2012
 
184 Days Ended June 30, 2013
 
168 Days Ended June 15, 2012
REVENUES
 
 
 
 
 
 
 
Base management fees
$
166

 
$
141

 
$
319

 
$
265

Franchise fees
177

 
145

 
328

 
271

Incentive management fees
64

 
56

 
130

 
106

Owned, leased, corporate housing, and other revenue
246

 
264

 
470

 
481

Cost reimbursements
2,610

 
2,170

 
5,158

 
4,205

 
3,263

 
2,776

 
6,405

 
5,328

OPERATING COSTS AND EXPENSES
 
 
 
 
 
 
 
Owned, leased, and corporate housing-direct
195

 
203

 
383

 
398

Reimbursed costs
2,610

 
2,170

 
5,158

 
4,205

General, administrative, and other
179

 
160

 
359

 
307

 
2,984

 
2,533

 
5,900

 
4,910

OPERATING INCOME
279

 
243

 
505

 
418

Gains and other income
10

 
5

 
13

 
7

Interest expense
(29
)
 
(34
)
 
(60
)
 
(67
)
Interest income
5

 
3

 
8

 
7

Equity in losses
(2
)
 
(8
)
 
(2
)
 
(9
)
INCOME BEFORE INCOME TAXES
263

 
209

 
464

 
356

Provision for income taxes
(84
)
 
(66
)
 
(149
)
 
(109
)
NET INCOME
$
179

 
$
143

 
$
315

 
$
247

EARNINGS PER SHARE-Basic
 
 
 
 
 
 
 
Earnings per share
$
0.58

 
$
0.44

 
$
1.02

 
$
0.75

EARNINGS PER SHARE-Diluted
 
 
 
 
 
 
 
Earnings per share
$
0.57

 
$
0.42

 
$
0.99

 
$
0.72

CASH DIVIDENDS DECLARED PER SHARE
$
0.1700

 
$
0.1300

 
$
0.3000

 
$
0.2300

See Notes to Condensed Consolidated Financial Statements

2


MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in millions)
(Unaudited)

 
91 Days Ended June 30, 2013
 
84 Days Ended June 15, 2012
 
184 Days Ended June 30, 2013
 
168 Days Ended June 15, 2012
Net income
$
179

 
$
143

 
$
315

 
$
247

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments

 
(17
)
 
(13
)
 
(6
)
Other derivative instrument adjustments, net of tax
(1
)
 
4

 
6

 
1

Unrealized gain (loss) on available-for-sale securities, net of tax

 
(3
)
 
4

 
(1
)
Reclassification of (gains) losses, net of tax
(7
)
 
1

 
(7
)
 
1

Total other comprehensive loss, net of tax
(8
)
 
(15
)
 
(10
)
 
(5
)
Comprehensive income
$
171

 
$
128

 
$
305

 
$
242


See Notes to Condensed Consolidated Financial Statements


3


MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in millions)
 
 
(Unaudited)
 
 
 
June 30,
2013
 
December 28,
2012
ASSETS
 
 
 
Current assets
 
 
 
Cash and equivalents
$
108

 
$
88

Accounts and notes receivable
1,006

 
1,028

Current deferred taxes, net
206

 
280

Prepaid expenses
60

 
57

Other
24

 
22

 
1,404

 
1,475

Property and equipment
1,634

 
1,539

Intangible assets
 
 
 
Goodwill
874

 
874

Contract acquisition costs and other
1,117

 
1,115

 
1,991

 
1,989

Equity and cost method investments
228

 
216

Notes receivable
152

 
180

Deferred taxes, net
665

 
676

Other
303

 
267

 
$
6,377

 
$
6,342

LIABILITIES AND SHAREHOLDERS’ DEFICIT
 
 
 
Current liabilities
 
 
 
Current portion of long-term debt
$
50

 
$
407

Accounts payable
554

 
569

Accrued payroll and benefits
770

 
745

Liability for guest loyalty programs
586

 
593

Other
507

 
459

 
2,467

 
2,773

Long-term debt
3,037

 
2,528

Liability for guest loyalty programs
1,459

 
1,428

Other long-term liabilities
907

 
898

Shareholders’ deficit
 
 
 
Class A Common Stock
5

 
5

Additional paid-in-capital
2,578

 
2,585

Retained earnings
3,662

 
3,509

Treasury stock, at cost
(7,684
)
 
(7,340
)
Accumulated other comprehensive loss
(54
)
 
(44
)
 
(1,493
)
 
(1,285
)
 
$
6,377

 
$
6,342


See Notes to Condensed Consolidated Financial Statements

4


MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions)
(Unaudited)
 
 
184 Days Ended June 30, 2013
 
168 Days Ended June 15, 2012
OPERATING ACTIVITIES
 
 
 
Net income
$
315

 
$
247

Adjustments to reconcile to cash provided by operating activities:
 
 
 
Depreciation and amortization
74

 
67

Income taxes
85

 
113

Liability for guest loyalty programs
20

 
21

Asset impairments and write-offs
11

 
4

Working capital changes and other
105

 
(35
)
Net cash provided by operating activities
610

 
417

INVESTING ACTIVITIES
 
 
 
Capital expenditures
(148
)
 
(257
)
Dispositions

 
4

Loan advances
(4
)
 
(2
)
Loan collections and sales
43

 
106

Equity and cost method investments
(16
)
 
(12
)
Contract acquisition costs
(26
)
 
(19
)
Other
(68
)
 
(39
)
Net cash used in investing activities
(219
)
 
(219
)
FINANCING ACTIVITIES
 
 
 
Commercial paper/credit facility, net
553

 
147

Issuance of long-term debt

 
590

Repayment of long-term debt
(403
)
 
(352
)
Issuance of Class A Common Stock
70

 
48

Dividends paid
(93
)
 
(67
)
Purchase of treasury stock
(498
)
 
(550
)
Other

 
(11
)
Net cash used in financing activities
(371
)
 
(195
)
INCREASE IN CASH AND EQUIVALENTS
20

 
3

CASH AND EQUIVALENTS, beginning of period
88

 
102

CASH AND EQUIVALENTS, end of period
$
108

 
$
105

See Notes to Condensed Consolidated Financial Statements


5


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,” (iii) our Condensed Consolidated Balance Sheets as our “Balance Sheets,” (iv) our properties, brands, or markets in the United States and Canada as “North America” or “North American,” and (v) our properties, brands, or markets outside of the United States and Canada as “international.” In addition, references throughout to numbered "Footnotes" refer to the numbered Notes in these Notes to Condensed Consolidated Financial Statements, unless otherwise noted.
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 28, 2012, (“2012 Form 10-K”). Certain terms not otherwise defined in this Form 10-Q have the meanings specified in our 2012 Form 10-K.
Preparation of financial statements that conform 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.
Beginning with our 2013 fiscal year, we changed our financial reporting cycle to a calendar year-end reporting cycle and an end-of-month quarterly reporting cycle. Accordingly, our 2013 fiscal year began on December 29, 2012 (the day after the end of the 2012 fiscal year) and will end on December 31, 2013, and our 2013 quarters include the three month periods ended March 31, June 30, September 30, and December 31, except that the period ended March 31, 2013 also included December 29, 2012 through December 31, 2012. Our future fiscal years will begin on January 1 and end on December 31. Historically, our fiscal year was a 52-53 week fiscal year that ended on the Friday nearest to December 31, and our quarterly reporting cycle included twelve week periods for the first, second, and third quarters and a sixteen week period (or in some cases a seventeen week period) for the fourth quarter. We have not restated and do not plan to restate historical results.
The table below shows the reporting periods as we refer to them in this report, their date ranges, and the number of days in each:
Reporting Period
Date Range
Number of Days
2013 second quarter
April 1, 2013 - June 30, 2013
91
2012 second quarter
March 24, 2012 - June 15, 2012
84
2013 first half
December 29, 2012 - June 30, 2013
184
2012 first half
December 31, 2011 - June 15, 2012
168
2013 fiscal year
December 29, 2012 - December 31, 2013
368
2012 fiscal year
December 31, 2011 - December 28, 2012
364


6


As a result of the change in our calendar, our 2013 second quarter had 7 more days of activity than our 2012 second quarter, and our 2013 first half had 16 more days of activity than our 2012 first half. While our 2013 full fiscal year will have only 4 more days, our 2013 third quarter will have 8 additional days, and our 2013 fourth quarter will have 20 fewer days than the corresponding periods in 2012.
In our opinion, our Financial Statements reflect all normal and recurring adjustments necessary to present fairly our financial position as of June 30, 2013, and December 28, 2012, the results of our operations for the 91 days and 184 days ended June 30, 2013, and 84 days and 168 days ended June 15, 2012, and cash flows for the 184 days ended June 30, 2013, and 168 days ended June 15, 2012. 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.

2.
New Accounting Standards
Accounting Standards Update No. 2013-02 - “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (“ASU No. 2013-02”)
ASU No. 2013-02, which we adopted in our 2013 first quarter, amends existing guidance by requiring disclosure of the changes in the components of accumulated other comprehensive income for the current period and additional information about items reclassified out of accumulated other comprehensive income. Our adoption of this update required additional disclosures but did not have a material impact on our Financial Statements. Please see Footnote No. 10, "Comprehensive Income and Capital Structure" for those additional disclosures.
Future Adoption of Accounting Standards
Accounting Standards Update No. 2013-11 - “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (“ASU No. 2013-11”)
ASU No. 2013-11 provides financial statement presentation guidance on whether an unrecognized tax benefit must be presented as either a reduction to a deferred tax asset or separately as a liability. ASU No. 2013-11 will be effective for interim or annual periods beginning after December 15, 2013, which for us will be our 2014 first quarter. 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. The Internal Revenue Service ("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"), which accelerates IRS examination of key transactions with the goal of resolving any issues before the taxpayer files its return, for the 2010 through 2013 tax years. For the 2010 and 2011 tax years all but one issue, which we are appealing, have been resolved, including all matters that could affect the Company's cash tax benefits related to our spin-off in 2011 of our timeshare operations and timeshare development business. The audits for the 2012 and 2013 tax years are currently ongoing. Various foreign, state, and local income tax returns are also under examination by the applicable taxing authorities.
For the 2013 second quarter, we increased our unrecognized tax benefits by $1 million from $28 million at the end of the 2013 first quarter chiefly due to new information related to a federal issue. For the 2013 first half, our unrecognized tax benefits remained unchanged from $29 million at year-end 2012. The unrecognized tax benefits balance of $29 million at the end of the 2013 second quarter included $13 million of tax positions that, if recognized, would impact our effective tax rate.
As a large taxpayer, the IRS and other taxing authorities continually audit us. We anticipate resolving an international issue which arose in 2011 related to financing activity during the next 12 months for which we have an unrecognized tax benefit of $5 million.

7


On January 2, 2013, the American Taxpayer Relief Act of 2012 (the "Act") was signed into law. Some of the provisions contained in the Act were retroactive, and we recognized a $3 million benefit in the 2013 first half related to the Act.

4.
Share-Based Compensation
Under our Stock and Cash Incentive Plan (the “Stock Plan”), we award: (1) stock options (our "Stock Option Program") to purchase our Class A Common Stock (our “common stock”); (2) stock appreciation rights (“SARs”) for our common stock (our “SAR Program”); (3) restricted stock units (“RSUs”) of our common stock; and (4) deferred stock units. We grant awards at exercise prices or strike prices that equal the market price of our common stock on the date of grant.
We recorded share-based compensation expense for award grants of $25 million for the 2013 second quarter, $19 million for the 2012 second quarter, $47 million for the 2013 first half, and $38 million for the 2012 first half. Deferred compensation costs related to unvested awards totaled $168 million at June 30, 2013 and $122 million at December 28, 2012.
RSUs
We granted 2.5 million RSUs during the 2013 first half to certain officers and key employees, and those units vest generally over four years in equal annual installments commencing one year after the grant date. We also granted 0.2 million service and performance RSUs ("S&P RSUs") during the 2013 first half to certain named executive officers. In addition to generally being subject to pro-rata annual vesting conditioned on continued service consistent with the standard form of RSU, these S&P RSUs are also subject to the satisfaction of a performance condition, expressed as an EBITDA goal. RSUs, including S&P RSUs, granted in the 2013 first half had a weighted average grant-date fair value of $37.
SARs and Stock Options
We granted 0.7 million SARs and 0.1 million stock options to officers, key employees, and directors during the 2013 first half. These SARs and options generally expire ten years after the grant date and both vest and may be exercised in cumulative installments of one quarter at the end of each of the first four years following the grant date. The weighted average grant-date fair value of SARs granted in the 2013 first half was $13 and the weighted average exercise price was $39. The weighted average grant-date fair value of stock options granted in the 2013 first half was $13 and the weighted average exercise price was $39.
On the grant date, we use a binomial lattice-based valuation model to estimate the fair value of each SAR and option granted. This valuation model uses a range of possible stock price outcomes over the term of the SAR and option, discounted back to a present value using a risk-free rate. Because of the limitations with closed-form valuation models, such as the Black-Scholes model, we have determined that this more flexible binomial model provides a better estimate of the fair value of our options and SARs because it takes into account employee and non-employee director exercise behavior based on changes in the price of our stock and also allows us to use other dynamic assumptions.
We used the following assumptions to determine the fair value of the SARs and stock options we granted during the 2013 first half:
Expected volatility
30 - 31%

Dividend yield
1.17
%
Risk-free rate
1.8 - 1.9%

Expected term (in years)
8 - 10

In making these assumptions, we base expected volatility on the historical movement of Marriott's stock price. We base risk-free rates on the corresponding U.S. Treasury spot rates for the expected duration at the date of grant,

8


which we convert to a continuously compounded rate. The dividend yield assumption takes into consideration both historical levels and expectations of future payout. The weighted average expected terms for SARs and options are an output of our valuation model which utilizes historical data in estimating the period of time that the SARs and options are expected to remain unexercised. We calculate the expected terms for SARs and options for separate groups of retirement eligible and non-retirement eligible employees. Our valuation model also uses historical data to estimate exercise behaviors, which includes determining the likelihood that employees will exercise their SARs and options before expiration at a certain multiple of stock price to exercise price. In recent years, non-employee directors have generally exercised grants in their last year of exercisability.
Other Information
As of the end of the 2013 second quarter, we had reserved 35 million shares under the Stock Plan, including 13 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 noncurrent financial assets and liabilities that qualify as financial instruments, determined under current guidance for disclosures on the fair value of financial instruments, in the following table:
 
At June 30, 2013
 
At December 28, 2012
($ in millions)
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Senior, mezzanine, and other loans
$
152

 
$
152

 
$
180

 
$
172

Marketable securities and other debt securities
101

 
100

 
56

 
56

 
 
 
 
 
 
 
 
Total long-term financial assets
$
253

 
$
252

 
$
236

 
$
228

Senior Notes
$
(1,835
)
 
$
(1,954
)
 
$
(1,833
)
 
$
(2,008
)
Commercial paper
(1,071
)
 
(1,071
)
 
(501
)
 
(501
)
Other long-term debt
(126
)
 
(132
)
 
(130
)
 
(139
)
Other long-term liabilities
(60
)
 
(60
)
 
(69
)
 
(69
)
 
 
 
 
 
 
 
 
Total long-term financial liabilities
$
(3,092
)
 
$
(3,217
)
 
$
(2,533
)
 
$
(2,717
)
We estimate the fair value of our senior, mezzanine, and other loans, including the current portion, by discounting cash flows using risk-adjusted rates, both of which are Level 3 inputs.
We are required to carry our marketable securities at fair value. Our marketable securities include 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, which we value using directly observable Level 1 inputs. The carrying value of these marketable securities at the end of our 2013 second quarter was $35 million. In the 2013 second quarter, we acquired a $65 million mandatorily redeemable preferred equity ownership interest in an entity that owns three hotels that we manage. We account for this investment as a debt security (with an amortized cost of $66 million at the end of the 2013 second quarter, including accrued interest income) and we included it in the "Marketable securities and other debt securities" caption in the preceding table. We estimated the $65 million fair value of this debt security by discounting cash flows using risk-adjusted rates, both of which are Level 3 inputs. The debt security matures in 2015 subject to annual extensions through 2018. We do not intend to sell the debt security and it is not more likely than not that we will be required to sell the investment before recovery of the amortized cost basis, which may be maturity.
In the 2013 second quarter, we received $22 million in net cash proceeds for the sale of a portion of our shares of a publicly traded company (with an amortized cost of $14 million at the date of sale) and recognized an $8 million gain in the "Gains and other income" caption of our Income Statements. This gain included recognition of unrealized gains that we recorded in other comprehensive income as of the end of the 2013 first quarter. See

9


Footnote No. 10, "Comprehensive Income and Capital Structure" for additional information on the reclassification of these unrealized gains from accumulated other comprehensive income.
We estimate the fair value of our other long-term debt, including the current portion and excluding leases, using expected future payments discounted at risk-adjusted rates, both of which are Level 3 inputs. We determine the fair value of our senior notes using quoted market prices, which are directly observable Level 1 inputs. As noted in Footnote No. 9, "Long-term Debt," even though our commercial paper borrowings generally have short-term maturities of 30 days or less, we classify outstanding commercial paper borrowings as long-term based on our ability and intent to refinance them on a long-term basis. As we are a frequent issuer of commercial paper, we use pricing from recent transactions as Level 2 inputs in estimating fair value. At the end of the 2013 second quarter and year-end 2012, we determined that the carrying value of our commercial paper approximated its fair value due to the short maturity. Our other long-term liabilities largely consist of guarantees. As noted in Footnote No. 11, "Contingencies," we measure our liability for guarantees at fair value on a nonrecurring basis, that is when we issue or modify a guarantee, using Level 3 internally developed inputs. At the end of the 2013 second quarter and year-end 2012, we determined that the carrying values of our guarantee liabilities approximated their fair values based on Level 3 inputs.
See the “Fair Value Measurements” caption of Footnote No. 1, “Summary of Significant Accounting Policies” of our 2012 Form 10-K for more information on the input levels we use in determining fair value.

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:
 
 
91 Days Ended June 30, 2013
 
84 Days Ended June 15, 2012
 
184 Days Ended June 30, 2013
 
168 Days Ended June 15, 2012
(in millions, except per share amounts)
 
 
 
 
 
 
 
Computation of Basic Earnings Per Share
 
 
 
 
 
 
 
Net income
$
179

 
$
143

 
$
315

 
$
247

Weighted average shares outstanding
306.7

 
327.9

 
309.3

 
330.8

Basic earnings per share
$
0.58

 
$
0.44

 
$
1.02

 
$
0.75

Computation of Diluted Earnings Per Share
 
 
 
 
 
 
 
Net income
$
179

 
$
143

 
$
315

 
$
247

Weighted average shares outstanding
306.7

 
327.9

 
309.3

 
330.8

Effect of dilutive securities
 
 
 
 
 
 
 
Employee stock option and SARs plans
4.0

 
6.6

 
4.2

 
6.7

Deferred stock incentive plans
0.8

 
0.8

 
0.8

 
0.9

Restricted stock units
2.5

 
2.7

 
3.0

 
3.1

Shares for diluted earnings per share
314.0

 
338.0

 
317.3

 
341.5

Diluted earnings per share
$
0.57

 
$
0.42

 
$
0.99

 
$
0.72

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.
Pursuant to 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 2013 second quarter, 0.4 million options and SARs;
(b)
for the 2012 second quarter, 1.0 million options and SARs;
(c)
for the 2013 first half, 0.4 million options and SARs; and
(d)
for the 2012 first half, 1.0 million options and SARs.

10



7.
Property and Equipment
The following table shows the composition of our property and equipment balances at the end of the 2013 second quarter and year-end 2012:
 
 
At Period End
($ in millions)
June 30,
2013
 
December 28,
2012
Land
$
600

 
$
590

Buildings and leasehold improvements
701

 
703

Furniture and equipment
868

 
854

Construction in progress
480

 
383

 
2,649

 
2,530

Accumulated depreciation
(1,015
)
 
(991
)
 
$
1,634

 
$
1,539


The following table shows the composition of these property and equipment balances that we recorded as capital leases:
 
At Period End
($ in millions)
June 30,
2013
 
December 28,
2012
Land
$
30

 
$
30

Buildings and leasehold improvements
142

 
143

Furniture and equipment
39

 
38

Construction in progress
7

 
4

 
218

 
215

Accumulated depreciation
(86
)
 
(82
)
 
$
132

 
$
133


8.
Notes Receivable
The following table shows the composition of our notes receivable balances (net of reserves and unamortized discounts) at the end of the 2013 second quarter and year-end 2012:
 
At Period End
($ in millions)
June 30,
2013
 
December 28,
2012
Senior, mezzanine, and other loans
$
201

 
$
242

Less current portion
(49
)
 
(62
)
 
$
152

 
$
180



11


The following table shows the expected future principal payments (net of reserves and unamortized discounts) as well as interest rates for our notes receivable as of the end of the 2013 second quarter:
 
Notes Receivable Principal Payments (net of reserves and unamortized discounts) and Interest Rates ($ in millions)
 
Amount
2013
 
$
31

2014
 
47

2015
 
73

2016
 
2

2017
 
1

Thereafter
 
47

Balance at June 30, 2013
 
$
201

Weighted average interest rate at June 30, 2013
 
4.9
%
Range of stated interest rates at June 30, 2013
 
0 to 10.2%


The following table shows the unamortized discounts for our notes receivable at the end of the 2013 second quarter and year-end 2012:

Notes Receivable Unamortized Discounts ($ in millions)
 
Total
Balance at year-end 2012
 
$
11

Balance at June 30, 2013
 
$
12


At the end of the 2013 second quarter, our recorded investment in impaired “Senior, mezzanine, and other loans” was $106 million, and we had a $91 million notes receivable reserve representing an allowance for credit losses, leaving $15 million of our investment in impaired loans, for which we had no related allowance for credit losses. At year-end 2012, our recorded investment in impaired “Senior, mezzanine, and other loans” was $93 million, and we had a $79 million notes receivable reserve representing an allowance for credit losses, leaving $14 million of our investment in impaired loans, for which we had no related allowance for credit losses. Our average investment in impaired “Senior, mezzanine, and other loans” totaled $101 million for the 2013 second quarter, $99 million for the 2013 first half, $97 million for the 2012 second quarter and $99 million for the 2012 first half.
The following table summarizes the activity related to our “Senior, mezzanine, and other loans” notes receivable reserve for the 2013 first half:
 
($ in millions)
Notes  Receivable
Reserve
Balance at year-end 2012
$
79

Reversals
(1
)
Write-offs
1

Transfers and other
12

Balance at June 30, 2013
$
91

Past due senior, mezzanine, and other loans totaled $6 million at the end of the 2013 second quarter.


12


9.
Long-term Debt
We provide detail on our long-term debt balances in the following table as of the end of the 2013 second quarter and year-end 2012:
 
 
At Period End
($ in millions)
June 30,
2013
 
December 28,
2012
Senior Notes:
 
 
 
Series G, interest rate of 5.810%, face amount of $316, maturing November 10, 2015 (effective interest rate of 6.69%)(1)
$
310

 
$
309

Series H, interest rate of 6.200%, face amount of $289, maturing June 15, 2016 (effective interest rate of 6.37%)(1)
289

 
289

Series I, interest rate of 6.375%, face amount of $293, maturing June 15, 2017 (effective interest rate of 6.53%)(1)
292

 
292

Series J, matured February 15, 2013

 
400

Series K, interest rate of 3.000%, face amount of $600, maturing March 1, 2019 (effective interest rate of 4.47%)(1)
595

 
594

Series L, interest rate of 3.250%, face amount of $350, maturing September 15, 2022 (effective interest rate of 3.35%)(1)
349

 
349

Commercial paper, average interest rate of 0.39% at June 30, 2013
1,071

 
501

$1,750 Credit Facility

 
15

Other
181

 
186

 
3,087

 
2,935

Less current portion
(50
)
 
(407
)
 
$
3,037

 
$
2,528

 
(1) 
Face amount and effective interest rate are as of June 30, 2013.

All of our 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.
In the 2013 first quarter, we made a $411 million cash payment of principal and interest to retire, at maturity, all of our outstanding Series J Notes.
On July 18, 2013, after the end of the second quarter, we amended and restated our multicurrency revolving credit agreement (the “Credit Facility”) to extend the facility's expiration from June 23, 2016 to July 18, 2018 and increase the facility size from $1,750 million to $2,000 million 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, share repurchases, and letters of credit. The availability of the Credit Facility also supports our commercial paper program. Borrowings under the Credit Facility generally 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 based on our public debt rating. While any outstanding commercial paper borrowings and/or borrowings under our Credit Facility generally have short-term maturities, we classify the outstanding borrowings as long-term based on our ability and intent to refinance the outstanding borrowings on a long-term basis. See the “Cash Requirements and Our Credit Facilities” caption later in this report in the “Liquidity and Capital Resources” section for information on our available borrowing capacity at June 30, 2013.

13


We show future principal payments for our debt as of the end of the 2013 second quarter in the following table:

Debt Principal Payments ($ in millions)
 
Amount
2013
 
$
47

2014
 
7

2015
 
318

2016
 
1,368

2017
 
301

Thereafter
 
1,046

Balance at June 30, 2013
 
$
3,087

We paid cash for interest, net of amounts capitalized, of $46 million in the 2013 first half and $44 million in the 2012 first half.

10.
Comprehensive Income and Capital Structure
The following table details the changes in common shares outstanding and shareholders’ deficit for the 2013 first half:

(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
310.9

 
Balance at year-end 2012
$
(1,285
)
 
$
5

 
$
2,585

 
$
3,509

 
$
(7,340
)
 
$
(44
)

 
Net income
315

 

 

 
315

 

 


 
Other comprehensive loss
(10
)
 

 

 

 

 
(10
)

 
Cash dividends ($0.3000 per share)
(93
)
 

 

 
(93
)
 

 

4.6

 
Employee stock plan issuance
80

 

 
(7
)
 
(69
)
 
156

 

(12.4
)
 
Purchase of treasury stock
(500
)
 

 

 

 
(500
)
 

303.1

 
Balance at June 30, 2013
$
(1,493
)
 
$
5

 
$
2,578

 
$
3,662

 
$
(7,684
)
 
$
(54
)


The following table details the accumulated other comprehensive income (loss) activity for the 2013 first half:

($ in millions)
Foreign Currency Translation Adjustments
 
Other Derivative Instrument Adjustments
 
Unrealized Gains on Available-For-Sale Securities
 
Accumulated Other Comprehensive Loss
Balance at year-end 2012
$
(32
)
 
$
(19
)
 
$
7

 
$
(44
)
Other comprehensive income (loss) before reclassifications (1)
(13
)
 
6

 
4

 
(3
)
Amounts reclassified from accumulated other comprehensive loss

 
(1
)
 
(6
)
 
(7
)
Net other comprehensive income (loss)
(13
)
 
5

 
(2
)
 
(10
)
Balance at June 30, 2013
$
(45
)
 
$
(14
)
 
$
5

 
$
(54
)
(1) 
We present the portions of other comprehensive income (loss) before reclassifications for the 2013 first half that relate to other derivative instrument adjustments net of $1 million of deferred taxes and the portions that relate to unrealized gains on available-for-sale securities net of $2 million of deferred taxes.

14



The following table details the effect on net income of significant amounts reclassified out of accumulated other comprehensive loss for the 2013 second quarter and 2013 first half:

($ in millions)
 
Amounts Reclassified from Accumulated Other Comprehensive Loss
 
 
Accumulated Other Comprehensive Loss Components
 
91 Days Ended June 30, 2013
 
184 Days Ended June 30, 2013
 
Income Statement Line Item Affected
Other derivative instrument adjustments
 
 
 
 
 
 
Other, net
 
$
1

 
$
1

 
Net income
 
 
 
 
 
 
 
Unrealized gains on available-for-sale securities
 
 
 
 
 
 
Sale of an available-for-sale security
 
$
10

 
$
10

 
Gains and other income

 
10

 
10

 
Income before income taxes

 
(4
)
 
(4
)
 
Provision for income taxes

 
$
6

 
$
6

 
Net income

11.
Contingencies
Guarantees
We issue guarantees to certain lenders and hotel owners, chiefly to obtain long-term management contracts. The guarantees generally have a stated maximum funding amount 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 that we or our joint venture partners are building.
We measure and record our liability for the fair value of a guarantee on a nonrecurring basis, that is when we issue or modify a guarantee, using Level 3 internally developed inputs. We generally base our calculation of the estimated fair value of a guarantee on the income approach or the market approach, depending on the type of guarantee. For the income approach, we use internally developed discounted cash flow and Monte Carlo simulation models that include the following assumptions, among others: projections of revenues and expenses and related cash flows based on assumed growth rates and demand trends; historical volatility of projected performance; the guaranteed obligations; and applicable discount rates. We base these assumptions on our historical data and experience, industry projections, micro and macro general economic condition projections, and our expectations. For the market approach, we use internal analyses based primarily on market comparable data and our assumptions about market capitalization rates, credit spreads, growth rates, and inflation. We show the maximum potential amount of our future guarantee fundings and the carrying amount of our liability for guarantees for which we are the primary obligor at June 30, 2013 in the following table:
($ in millions)
Guarantee Type
Maximum Potential
Amount  of Future Fundings

 
Liability for  Guarantees
Debt service
$
87

 
$
6

Operating profit
109

 
50

Other
15

 
2

Total guarantees where we are the primary obligor
$
211

 
$
58

We included our liability at June 30, 2013 for guarantees for which we are the primary obligor in our Balance Sheet as follows: $4 million in the “Other current liabilities” and $54 million in the “Other long-term liabilities.”

15


Our guarantees listed in the preceding table include $25 million of debt service guarantees and $5 million of operating profit guarantees that will not be in effect until the underlying properties open and we begin to operate the properties or certain other events occur.
The preceding table does not include the following guarantees:
$110 million of guarantees for Senior Living Services lease obligations of $81 million (expiring in 2018) and lifecare bonds of $29 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 $4 million of the lifecare bonds; HCP, Inc., as successor by merger to CNL Retirement Properties, Inc. (“CNL”), is the primary obligor on $24 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. Our liability for these guarantees had a carrying value of $3 million at June 30, 2013. In 2011 Sunrise provided us $3 million cash collateral to cover potential exposure under the existing lease and bond obligations for 2012 and 2013. In conjunction with our consent of the extension in 2011 of certain lease obligations for an additional five-year term until 2018, Sunrise provided us an additional $1 million cash collateral and an $85 million letter of credit issued by Key Bank to secure our exposure under the lease guarantees for the continuing leases during the extension term and certain other obligations of Sunrise. During the extension term, Sunrise agreed to make an annual payment to us from the cash flow of the continuing lease facilities, subject to a $1 million annual minimum. In the 2013 first quarter, Sunrise merged with Health Care REIT, Inc., and Sunrise's management business was acquired by an entity formed by affiliates of Kohlberg Kravis Roberts & Co. LP, Beecken Petty O'Keefe & Co., Coastwood Senior Housing Partners LLC, and Health Care REIT. In conjunction with this acquisition, Sunrise funded an additional $2 million cash collateral and certified that the $85 million letter of credit remains in full force and effect.
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 $37 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 $5 million (€4 million) of which remained at June 30, 2013. 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.
Certain guarantees and commitments relating to the timeshare business, which were outstanding at the time of the 2011 Timeshare spin-off and for which we became secondarily liable as part of the spin-off. These Marriott Vacations Worldwide Corporation ("MVW") payment obligations, for which we currently have a total exposure of $24 million, relate to a project completion guarantee, various letters of credit, and several guarantees. MVW has indemnified us for these obligations. At the end of the 2013 second quarter, we expect these obligations will expire as follows: $3 million in 2013, $1 million in 2014, $6 million in 2020, and $14 million (18 million Singapore Dollars) in 2022. We have not funded any amounts under these obligations, and do not expect to do so in the future. Our liability for these obligations had a carrying value of $2 million at June 30, 2013.
A guarantee for a lease, originally entered into in 2000, for which we became secondarily liable in 2012 as a result of our sale of the ExecuStay corporate housing business to Oakwood. Oakwood has indemnified us for the obligations under this guarantee. Our total exposure at the end of the 2013 second quarter for this guarantee is $11 million in future rent payments if the lease is terminated through 2013 and will be reduced to $6 million if the lease is terminated from 2014 through the end of the lease in 2019. Our liability for this guarantee had a carrying value of $1 million at June 30, 2013.

16


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 we note in the preceding paragraphs, as of June 30, 2013, we had the following commitments outstanding:
A commitment to invest up to $10 million of equity for a noncontrolling interest in a partnership that plans 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 $9 million of this commitment as follows: $8 million in 2014, and $1 million in 2015. We do not expect to fund the remaining $1 million of this commitment.
A commitment to invest up to $23 million of equity for noncontrolling interests in partnerships that plan to purchase or develop limited-service properties in Asia. We expect to fund $23 million of this commitment as follows: $5 million in 2013, $13 million in 2014, and $5 million in 2015.
A commitment, with no expiration date, to invest up to $11 million in a joint venture for development of a new property. We expect to fund this commitment as follows: $8 million in 2014 and $3 million in 2015.
A commitment to invest $20 million in the renovation of a leased hotel. We expect to fund this commitment by the end of 2015.
We have a right and under certain circumstances an obligation to acquire our joint venture partner’s remaining 45 percent interest in two joint ventures over the next eight years at a price based on the performance of the ventures. We made a $12 million (€9 million) deposit in conjunction with this contingent obligation in 2011, $8 million (€6 million) in deposits in 2012, and in the 2013 first quarter we acquired an additional five percent noncontrolling interest of each venture, applying $5 million (€4 million) of those deposits. The remaining deposits are refundable to the extent we do not acquire our joint venture partner’s remaining interests.
We have a right and under certain circumstances an obligation during the next year to acquire the landlord’s interest in the real estate property and attached assets of a hotel that we lease for approximately $43 million (€33 million), which we record as part of our capital lease liability.
Various commitments for the purchase of information technology hardware, software, and maintenance services in the normal course of business totaling $63 million. We expect to fund these commitments as follows: $51 million in 2013, $7 million in 2014, and $5 million in 2015.
Several commitments aggregating $33 million with no expiration date and which we do not expect to fund.

17



A commitment to invest up to $10 million for additional mandatorily redeemable preferred equity ownership interest in an entity that owns three hotels under certain circumstances. We do not expect to fund this commitment, which expires in 2015 subject to annual extensions through 2018.
At June 30, 2013, we had $68 million of letters of credit outstanding ($67 million outside the Credit Facility and $1 million under our Credit Facility), the majority of which were for our self-insurance programs. Surety bonds issued as of June 30, 2013, totaled $126 million, the majority of which federal, state and local governments requested in connection with our self-insurance programs.
Legal Proceedings
On January 19, 2010, several former Marriott employees (the "plaintiffs") filed a putative class action complaint against us and the Stock Plan (the "defendants"), alleging that certain equity awards of deferred bonus stock granted to the plaintiffs and other current and former employees for fiscal years 1963 through 1989 are subject to vesting requirements under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), that are in certain circumstances more rapid than those set forth in the awards. The plaintiffs seek damages, class attorneys' fees and interest, with no amounts specified. The action is proceeding in the United States District Court for the District of Maryland (Greenbelt Division) and Dennis Walter Bond Sr. and Michael P. Steigman are the current named plaintiffs. The parties completed limited discovery concerning the issues of statute of limitations and class certification. We opposed Plaintiffs' motion for class certification in October 2012, and we filed a motion for summary judgment on the issue of statute of limitations in December 2012. A hearing on both issues was held on June 7, 2013, after which we submitted a post-hearing supplemental brief and plaintiffs responded. We and the Stock Plan have denied all liability, and while we intend to vigorously defend against the claims being made by the plaintiffs, we can give you no assurance about the outcome of this lawsuit. We currently cannot estimate the range of any possible loss to the Company because an amount of damages is not claimed, there is uncertainty as to whether a class will be certified and if so as to the size of the class, and the possibility of our prevailing on our statute of limitations defense may significantly limit any claims for damages.
In March 2012, the Korea Fair Trade Commission ("KFTC") obtained documents from two of our managed hotels in Seoul, Korea in connection with an investigation which we believe is focused on pricing of hotel services within the Seoul region. Since then, the KFTC has conducted additional fact-gathering at those two hotels and also has collected information from another Marriott managed hotel located in Seoul. We understand that the KFTC also has sought documents from numerous other hotels in Seoul and other parts of Korea that we do not operate, own or franchise. We have not yet received a complaint or other legal process. We are cooperating with this investigation.

12.
Business Segments
We are a diversified lodging company with operations in four business segments:
North American Full-Service Lodging, which includes the Marriott Hotels, Marriott Conference Centers, JW Marriott, Renaissance Hotels, Renaissance ClubSport, Gaylord Hotels 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, and TownePlace Suites properties located in the United States and Canada, and, before its sale in the 2012 second quarter, our Marriott ExecuStay corporate housing business;
International Lodging, which includes the Marriott Hotels, JW Marriott, Renaissance Hotels, Autograph Collection, Courtyard, AC Hotels by Marriott, Fairfield Inn & Suites, Residence Inn, and Marriott Executive Apartments properties located outside the United States and Canada; and

18


Luxury Lodging, which includes The Ritz-Carlton, Bulgari Hotels & Resorts, and EDITION properties worldwide (together with residential properties associated with some of The Ritz-Carlton hotels).
We evaluate the performance of our segments based largely on the results of the segment without allocating corporate expenses, income taxes, or indirect general, administrative, and other expenses. We allocate gains and losses, equity in earnings or losses from our joint ventures, and divisional general, administrative, and other expenses 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. "Other unallocated corporate" includes license fees we receive from our credit card programs and license fees from MVW.
We aggregate the brands presented within our segments considering their similar economic characteristics, types of customers, distribution channels, the regulatory business environments and operations within each segment and our organizational and management reporting structure.

Revenues
 
($ in millions)
91 Days Ended June 30, 2013
 
84 Days Ended June 15, 2012
 
184 Days Ended June 30, 2013
 
168 Days Ended June 15, 2012
North American Full-Service Segment
$
1,678

 
$
1,373

 
$
3,340

 
$
2,674

North American Limited-Service Segment
663

 
591

 
1,275

 
1,123

International Segment
406

 
306

 
746

 
577

Luxury Segment
447

 
428

 
914

 
827

Total segment revenues
3,194

 
2,698

 
6,275

 
5,201

Other unallocated corporate
69

 
78

 
130

 
127

 
$
3,263

 
$
2,776

 
$
6,405

 
$
5,328

Net Income (Loss)
 
($ in millions)
91 Days Ended June 30, 2013
 
84 Days Ended June 15, 2012
 
184 Days Ended June 30, 2013
 
168 Days Ended June 15, 2012
North American Full-Service Segment
$
129

 
$
110

 
$
245

 
$
199

North American Limited-Service Segment
136

 
106

 
241

 
190

International Segment
37

 
46

 
72

 
81

Luxury Segment
23

 
25

 
56

 
46

Total segment financial results
325

 
287

 
614

 
516

Other unallocated corporate
(38
)
 
(47
)
 
(98
)
 
(100
)
Interest expense and interest income
(24
)
 
(31
)
 
(52
)
 
(60
)
Income taxes
(84
)
 
(66
)
 
(149
)
 
(109
)
 
$
179

 
$
143

 
$
315

 
$
247


19


Equity in Losses of Equity Method Investees
($ in millions)
91 Days Ended June 30, 2013
 
84 Days Ended June 15, 2012
 
184 Days Ended June 30, 2013
 
168 Days Ended June 15, 2012
North American Full-Service Segment
$
2

 
$
1

 
$
2

 
$
1

North American Limited-Service Segment
1

 
1

 
2

 
1

International Segment
(1
)
 
2

 
(1
)
 
2

Luxury Segment
(2
)
 
(10
)
 
(3
)
 
(11
)
Total segment equity in losses

 
(6
)
 

 
(7
)
Other unallocated corporate
(2
)
 
(2
)
 
(2
)
 
(2
)
 
$
(2
)
 
$
(8
)
 
$
(2
)
 
$
(9
)

Assets
 
 
At Period End
($ in millions)
June 30,
2013
 
December 28,
2012
North American Full-Service Segment
$
1,525

 
$
1,517

North American Limited-Service Segment
495

 
492

International Segment
1,105

 
1,056

Luxury Segment
1,262

 
1,174

Total segment assets
4,387

 
4,239

Other unallocated corporate
1,990

 
2,103

 
$
6,377

 
$
6,342


13.
Variable Interest Entities
Under 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 analysis to determine if we must consolidate a variable interest entity as its primary beneficiary.
In the 2013 second quarter, we purchased a $65 million mandatorily redeemable preferred equity ownership interest in an entity that owns three hotels, which we also manage. Please see Footnote No. 5, "Fair Value of Financial Instruments" for further information on the purchase and Footnote No. 11, "Contingencies" for information on the commitment we entered into as part of this transaction. Based on qualitative and quantitative analyses, we concluded that the entity in which we invested is a variable interest entity because it is capitalized primarily with debt. We did not consolidate the entity because we do not have the power to direct the activities that most significantly impact the entity's economic performance. Inclusive of our contingent future funding commitment, our maximum exposure to loss at the end of the 2013 second quarter is $76 million.
In conjunction with the transaction with CTF that we describe more fully in our Annual Report on Form 10-K for 2007 in Footnote No. 8, “Acquisitions and Dispositions,” under the caption “2005 Acquisitions,” we manage hotels on behalf of tenant entities that are 100 percent owned by CTF, which lease the hotels from third-party owners. Due to certain provisions in the management agreements, we account for these contracts as operating leases. At June 30, 2013, we managed four hotels on behalf of three tenant entities. The entities have minimal equity and minimal assets, consisting of hotel working capital and furniture, fixtures, and equipment. As part of the 2005 transaction, CTF 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 for two of these properties and partially for the other two properties.

20


The trust account was fully depleted prior to year-end 2011. 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 have the power to direct the activities that most significantly impact the entities' economic performance. We are liable for rent payments for two of the four hotels if there are cash flow shortfalls. Future minimum lease payments through the end of the lease term for these hotels totaled approximately $8 million at the end of the 2013 second quarter. In addition, as of the end of the 2013 second quarter we are liable for rent payments of up to an aggregate cap of $5 million for the two 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.

21


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.
Any number of risks and uncertainties could cause actual results to differ materially from those we express in our forward-looking statements, including the risks and uncertainties we describe 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 statement. 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
Change in Reporting Cycle
As further detailed in Footnote No. 1, "Basis of Presentation," beginning with our 2013 fiscal year, we changed our financial reporting cycle to a calendar year-end reporting cycle and an end-of-month quarterly reporting cycle. Accordingly, our 2013 fiscal year began on December 29, 2012 (the day after the end of the 2012 fiscal year) and will end on December 31, 2013. The table below shows the reporting periods as we refer to them in this report, their date ranges, and the number of days in each.
Reporting Period
Date Range
Number of Days
2013 second quarter
April 1, 2013 - June 30, 2013
91
2012 second quarter
March 24, 2012 - June 15, 2012
84
2013 first half
December 29, 2012 - June 30, 2013
184
2012 first half
December 31, 2011 - June 15, 2012
168

As a result of these differences in our reporting periods, we had seven more days of activity in our 2013 second quarter than we had in our 2012 second quarter, which we estimate resulted in $25 million of additional combined base management fee, franchise fee, and incentive management fee revenues and $20 million of additional operating income. Likewise, we had 16 more days of activity in our 2013 first half than we had in our 2012 first half, which we estimate resulted in $62 million of additional combined base management fee, franchise fee, and incentive management fee revenues and $45 million of additional operating income. We discuss other aspects of the estimated impacts from the reporting period changes in more detail in the following sections beginning with “Revenues.”
Lodging Business
We are a worldwide operator, franchisor, and licensor of hotels and timeshare properties in 72 countries and territories under numerous brand names. We also develop, operate, and market residential properties and provide services to home/condominium owner associations. At the end of the 2013 second quarter, we had 3,847 properties (666,132 rooms) in our system, including 37 home and condominium products (4,067 units) for which we manage the related owners’ associations.

22


We earn base management fees and in some cases incentive management fees from the properties that we manage, and we earn franchise fees on the properties that others operate under franchise agreements with us. Base fees typically consist of a percentage of property-level revenue while incentive fees typically consist of a percentage of net house profit adjusted for a specified owner return. Net house profit is calculated as gross operating profit (house profit) less noncontrollable expenses such as insurance, real estate taxes, capital spending reserves, and the like.
We use or license our trademarks for the sale of residential real estate, either in conjunction with hotel development or on a stand-alone basis, under our The Ritz-Carlton, EDITION, JW Marriott, Autograph Collection, and Marriott brand names. Third-party developers typically build and sell residences with little, if any, of our capital at risk. While the worldwide residential market is very large, the luxurious nature of our residential properties, the quality and exclusivity associated with our brands, and the hospitality services that we provide, all serve to make our residential properties distinctive.
Under our business model, we typically manage or franchise hotels, rather than own them. At June 30, 2013, we operated 43 percent of the hotel rooms in our worldwide system under management agreements, our franchisees operated 54 percent under franchise agreements, unconsolidated joint ventures that we have an interest in held management and provided services to franchised hotels for 1 percent, and we owned or leased only 2 percent.
Our emphasis on long-term management contracts and franchising tends to provide more stable earnings in periods of economic softness, while adding new hotels to our system generates growth, typically with little or no investment by the company. This strategy has driven substantial growth while minimizing financial leverage and risk in a cyclical industry. In addition, we believe minimizing our capital investments and adopting a strategy of recycling the investments that we do make maximizes and maintains our financial flexibility.
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 costs both at company-operated properties and at the corporate level ("above-property"). Our brands remain strong as a result of skilled management teams, dedicated associates, superior customer service with an emphasis on guest and associate satisfaction, significant distribution, our Marriott Rewards and The Ritz-Carlton Rewards loyalty programs, a multichannel reservations system, and desirable property amenities. We strive to effectively leverage our size and broad distribution.
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 address, through various means, hotels in the system that do not meet standards. We continue to enhance the appeal of our proprietary, information-rich, and easy-to-use website, Marriott.com, and of our associated mobile smartphone applications and mobile website that connect to 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.
Our profitability, as well as that of owners and franchisees, has benefited from our approach to property-level and above-property productivity. Properties in our system continue to maintain very tight cost controls. We also control above-property costs, some of which we allocate to hotels, by remaining focused on systems, processing, and support areas.
Lodging Performance Measures
We believe Revenue per Available Room ("RevPAR"), which we calculate by dividing room sales for comparable properties by room nights available to guests for the period, is 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 statistics, including occupancy and average daily rate, throughout this report reflect the three and six calendar months ended June 30, 2013 or June 30, 2012, as applicable. For the properties located in countries that use currencies other than the U.S. dollar, the comparisons to the prior year period are on a constant U.S. dollar basis. We calculate constant dollar statistics by applying exchange rates for the current period to the prior comparable period.

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Lodging Results
Conditions for our lodging business continued to improve in the 2013 first half, reflecting generally low supply growth, a favorable economic climate in many markets around the world, improved pricing in most markets, and a year-over-year increase in the number of properties in our system. Demand was particularly strong at luxury properties, followed by full-service properties, and limited-service properties. However, continuing uncertainty in the United States, particularly associated with government austerity and its impact on the overall economy, had a dampening effect on short-term group customer demand, particularly in the northeast United States. Government and government-related demand was constrained due to government spending restrictions, including in Washington D.C. and the surrounding areas. For full year 2012, we estimate that government and government-related business made up 5 percent of room nights across our North American system.
Comparable worldwide systemwide average daily rates for the three months ended June 30, 2013 increased 3.2 percent on a constant dollar basis to $144.33, RevPAR increased 4.7 percent to $109.17, and occupancy increased 1.1 percentage points to 75.6 percent, compared to the same period a year ago. Comparable worldwide systemwide average daily rates for the six months ended June 30, 2013 increased 3.5 percent on a constant dollar basis to $144.14, RevPAR increased 4.7 percent to $103.16, and occupancy increased 0.8 percentage points to 71.6 percent, compared to the same period a year ago.
Demand in the United States was strongest in the West and more moderate in the East. Transient demand was particularly strong in the western United States where we continued to eliminate discounts, manage business into higher rated price categories, and raise room rates. In the northeast United States, weak group demand in the region, new supply in the city of New York, and weak government and government-related business in Washington D.C. constrained RevPAR improvement. In Europe, many economies continue to struggle, demand remained weak in markets more dependent on regional travel, and new supply constrained RevPAR growth in a few markets. Demand was strong in the United Arab Emirates, more modest in Qatar, and remained weak in Egypt and Jordan. Demand in the Asia Pacific region continued to moderate, and RevPAR in Greater China increased modestly in the 2013 first half, compared to the year-ago period, reflecting declines in government-related travel due to the country's change in leadership, moderating economic growth, and new supply in several markets. Thailand and Indonesia had strong demand and RevPAR in the 2013 first half.
We monitor market conditions and carefully price our rooms daily in accordance with individual property demand levels, generally increasing room rates as demand increases. We also modify the mix of our business to increase revenue as demand changes. Demand for higher rated rooms improved in most markets in the 2013 first half, which allowed us to reduce discounting and special offers for transient business in many markets. This mix improvement benefited average daily rates. For our company-operated properties, we continue to focus on enhancing property-level house profit margins and actively pursue productivity improvements.
The properties in our system serve both transient and group customers. Business transient and leisure transient demand were strong in the 2013 first half. For group business, two-thirds is typically booked before the year of arrival and one-third is booked in the year of arrival. Also, during an economic recovery, group pricing tends to lag transient pricing due to the significant lead times for group bookings. During the recent economic recession, large group meeting planners scheduled smaller and fewer meetings to take place in 2013 than was previously typical. As the U.S. economy recovered, we shifted our mix of business, replacing this lower level of large advance-purchase groups with smaller, last-minute group bookings and transient business. However, last-minute group demand weakened during the first two quarters of 2013 and attendance was below meeting planner expectations for some government or government-related group events that took place. This lower short-term group demand was largely related to weak corporate business and soft government demand at many properties, as well as very high occupancy rates at some hotels that could not accommodate additional group business. In addition, some properties with high occupancy rates chose to shift the mix of their business to transient business paying higher room rates.
While the short-term group demand shortfalls were mitigated by strong transient demand leading to strong occupancy rates, property-level food and beverage revenues increased year over year more slowly than room revenue, as transient guests typically spend less on food and beverage than group customers. In addition, group

24


spending on food and beverage was more cautious in the 2013 first half due to the somewhat uncertain economic climate and government spending restrictions.
As of the end of the 2013 second quarter, the group revenue pace for company-operated Marriott Hotels brand properties in North America for the remainder of 2013 is up 4 percent, which is unchanged from the end of the 2013 first quarter. At the same time, our group booking pace for company-operated Marriott Hotels brand properties in North America is up 2 percent for 2014, compared to a 1 percent decline in group booking pace for 2014 a year ago, reflecting improved long-term group demand.
Lodging System Growth and Pipeline
During the 2013 first half, we added 11,460 rooms (gross) to our system. Approximately 38 percent of new rooms are located outside the United States and 24 percent of the room additions are conversions from competitor brands. At the end of the 2013 second quarter, we have over 140,000 rooms in our lodging development pipeline. For the 2013 full year, we expect to add approximately 30,000 rooms (gross) to our system. We expect approximately 10,000 rooms to exit the system during the 2013 full year, largely due to financial and quality issues. The figures in this paragraph do not include residential and timeshare units.



CONSOLIDATED RESULTS
The following discussion presents our analysis of the significant items of the results of our operations for the 2013 second quarter compared to the 2012 second quarter, and the 2013 first half compared to the 2012 first half.
Revenues
Second Quarter. Revenues increased by $487 million (18 percent) to $3,263 million in the 2013 second quarter from $2,776 million in the 2012 second quarter as a result of higher cost reimbursements revenue ($440 million), higher franchise fees ($32 million), higher base management fees ($25 million), and higher incentive management fees ($8 million) for North America, partially offset by lower owned, leased, and other revenue ($18 million). We estimate that the $487 million increase in revenues included $25 million of combined base management fee, franchise fee, and incentive management fee revenues due to the additional seven days of activity in the 2013 second quarter compared to the 2012 second quarter.
Cost reimbursements revenue represents reimbursements of costs incurred on behalf of managed, franchised, and licensed properties and relates, predominantly, to payroll costs at managed properties where we are the employer, but also includes reimbursements for other costs, such as those associated with our Marriott Rewards and Ritz-Carlton Rewards programs. 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 $440 million increase in total cost reimbursements revenue, to $2,610 million in the 2013 second quarter from $2,170 million in the 2012 second quarter, reflected the impact of higher property-level demand and growth across the system. Since the end of the 2012 second quarter, our managed rooms increased by 7,904 rooms and our franchised rooms increased by 13,264 rooms, net of hotels exiting the system.
The $25 million increase in total base management fees, to $166 million in the 2013 second quarter from $141 million in the 2012 second quarter, mainly reflected the additional seven days of activity (approximately $10 million), stronger RevPAR due to increased demand ($5 million), the impact of unit growth across the system ($5 million), primarily driven by the Gaylord brand properties we began managing in the fourth quarter of 2012, and our recognition of previously deferred fees for a portfolio of hotels ($2 million). The $32 million increase in total franchise fees, to $177 million in the 2013 second quarter from $145 million in the 2012 second quarter, primarily reflected the additional seven days of activity (approximately $14 million), stronger RevPAR due to increased demand ($6 million), increased relicensing fees primarily for certain North American Limited-Service properties ($5 million), and the impact of unit growth across the system ($3 million). The $8 million increase in incentive management fees from $56 million in the 2012 second quarter to $64 million in the 2013 second quarter largely

25


reflected higher net property-level revenue, particularly for full-service hotels in North America, which resulted in higher property-level income and margins.
The $18 million decrease in owned, leased, corporate housing, and other revenue, to $246 million in the 2013 second quarter, from $264 million in the 2012 second quarter, predominantly reflected $19 million of lower corporate housing revenue due to the sale of the ExecuStay corporate housing business in the 2012 second quarter, and $1 million of lower owned and leased revenue, partially offset by $2 million of higher branding fees. Lower owned and leased revenue reflected a $2 million business interruption payment received in the 2012 second quarter from a utility company for our leased property in Japan, partially offset by the additional seven days of activity. Combined branding fees for credit card endorsements and the sale of branded residential real estate by others totaled $29 million in the 2013 second quarter and $27 million in the 2012 second quarter.
First Half. Revenues increased by $1,077 million (20 percent) to $6,405 million in the 2013 first half from $5,328 million in the 2012 first half as a result of higher cost reimbursements revenue ($953 million), higher franchise fees ($57 million), higher base management fees ($54 million), and higher incentive management fees ($24 million) comprised of a $21 million increase for North America and a $3 million increase outside of North America, partially offset by lower owned, leased, and other revenue ($11 million). We estimate that the $1,077 million increase in revenues included $62 million of combined base management fee, franchise fee, and incentive management fee revenues due to the additional 16 days of activity in the 2013 first half compared to the 2012 first half.
The $953 million increase in total cost reimbursements revenue, to $5,158 million in the 2013 first half from $4,205 million in the 2012 first half, reflected the impact of higher property-level demand and growth across the system.
The $54 million increase in total base management fees, to $319 million in the 2013 first half from $265 million in the 2012 first half, mainly reflected the additional 16 days of activity (approximately $25 million), stronger RevPAR due to increased demand ($10 million), the impact of unit growth across the system ($9 million), primarily driven by Gaylord brand properties we began managing in the fourth quarter of 2012, a favorable variance from fee reversals in the 2012 first half to reflect contract revisions ($3 million), our recognition of previously deferred fees for a hotel portfolio ($2 million), and favorable foreign exchange rates ($2 million). The $57 million increase in total franchise fees, to $328 million in the 2013 first half from $271 million in the 2012 first half, primarily reflected the additional 16 days of activity (approximately $30 million), stronger RevPAR due to increased demand ($10 million), increased relicensing fees primarily for certain North American Limited-Service properties ($6 million), the impact of unit growth across the system ($6 million), and an increase in MVW license fees ($3 million). The $24 million increase in incentive management fees from $106 million in the 2012 first half to $130 million in the 2013 first half largely reflected higher net property-level revenue, particularly for full-service hotels in North America, which resulted in higher property-level income and margins ($17 million) and fees for the additional 16 days of activity (approximately $7 million).
The $11 million decrease in owned, leased, corporate housing, and other revenue, to $470 million in the 2013 first half, from $481 million in the 2012 first half, reflected $35 million of lower corporate housing revenue due to the sale of the ExecuStay corporate housing business in the 2012 second quarter, partially offset by $12 million of higher branding fees, $7 million of higher owned and leased revenue, $3 million of higher other revenue, and $2 million of higher hotel agreement termination fees. Higher owned and leased revenue reflected strong demand and the additional 16 days of activity, partially offset by a $2 million business interruption payment received in the 2012 second quarter from a utility company for our leased property in Japan. Combined branding fees for credit card endorsements and the sale of branded residential real estate by others totaled $55 million in the 2013 first half and $43 million in the 2012 first half.

Operating Income
Second Quarter. Operating income increased by $36 million to $279 million in the 2013 second quarter from $243 million in the 2012 second quarter. The $36 million increase in operating income reflected a $32 million

26


increase in franchise fees, a $25 million increase in base management fees, an $8 million increase in incentive management fees, partially offset by a $19 million increase in general, administrative and other expenses and $10 million of lower owned, leased, corporate housing, and other revenue net of direct expenses. Approximately $20 million of the net increase in operating income was due to the additional seven days of activity in the 2013 second quarter. We discuss the reasons for the increases in base management fees, franchise fees, and incentive management fees compared to the 2012 second quarter in the preceding “Revenues” section.
The $10 million (16 percent) decrease in owned, leased, corporate housing, and other revenue net of direct expenses was largely attributable to $10 million of lower owned and leased revenue, net of direct expenses and $2 million of lower corporate housing revenue, net of direct expenses, partially offset by $2 million of higher branding fees (which included a $3 million increase in branding fees from the additional seven days of activity). Lower owned and leased revenue, net of direct expenses primarily reflected $5 million in net weaker results predominantly at several International segment leased properties, $4 million in costs related to three International segment leases we terminated, and a $2 million business interruption payment received in the 2012 second quarter from a utility company for our leased property in Japan, partially offset by approximately a $3 million increase from the additional seven days of activity.
General, administrative, and other expenses increased by $19 million (12 percent) to $179 million in the 2013 second quarter from $160 million in the 2012 second quarter. The increase largely reflected approximately $11 million of expenses related to the additional seven days of activity, and the following 2013 second quarter items: $7 million of impairment and accelerated amortization of deferred contract acquisition costs primarily for properties that left our system; a $5 million performance cure payment for an International segment property; $3 million of higher compensation and other overhead expenses; and $3 million of increased other expenses primarily associated with higher costs in international markets and branding and service initiatives to enhance and grow our brands globally. These increases were partially offset by favorable variances from the following 2012 second quarter items: accelerated amortization of $7 million of deferred contract acquisition costs for a North American Full-Service segment property that exited our system; and $3 million of guarantee accruals. The $19 million increase in total general, administrative, and other expenses included $3 million that we did not allocate to any of our segments, and $16 million that we allocated as follows: $8 million to our International segment, $6 million to our Luxury segment, $1 million to our North American Full-Service segment, and $1 million to our North American Limited-Service segment.
First Half. Operating income increased by $87 million to $505 million in the 2013 first half from $418 million in the 2012 first half. The $87 million increase in operating income reflected a $57 million increase in franchise fees, a $54 million increase in base management fees, a $24 million increase in incentive management fees, and $4 million of higher owned, leased, corporate housing, and other revenue net of direct expenses, partially offset by a $52 million increase in general, administrative and other expenses. Approximately $45 million of the net increase in operating income was due to the additional 16 days of activity in the 2013 first half. We discuss the reasons for the increases in base management fees, franchise fees, and incentive management fees compared to the 2012 first half in the preceding “Revenues” section.
The $4 million (5 percent) increase in owned, leased, corporate housing, and other revenue, net of direct expenses was largely attributable to $12 million of higher branding fees (which included a $3 million increase in branding fees from the additional 16 days of activity), $2 million of higher hotel agreement termination fees, and $3 million of higher other revenue, partially offset by $12 million of lower owned and leased revenue, net of direct expenses. Lower owned and leased revenue, net of direct expenses was primarily due to $6 million in net weaker results predominantly at several International segment leased properties, $6 million in costs related to three International segment leases we terminated, and a $2 million business interruption payment received in the 2012 second quarter from a utility company for our leased property in Japan, partially offset by a $5 million increase from the additional 16 days of activity.
General, administrative, and other expenses increased by $52 million (17 percent) to $359 million in the 2013 first half from $307 million in the 2012 first half. The increase largely reflected approximately $25 million of expenses related to the additional 16 days of activity, as well as the following 2013 first half items: $9 million of higher compensation and other overhead expenses (including $2 million associated with a change in estimate for

27


incentive compensation paid in the 2013 first quarter related to 2012); $9 million of increased other expenses primarily associated with higher costs in international markets and branding and service initiatives to enhance and grow our brands globally; $7 million of impairment and accelerated amortization of deferred contract acquisition costs primarily for properties that left our system; a $5 million performance cure payment for an International segment property; $3 million of increased expenses due to unfavorable foreign exchange rates; and $3 million of amortization of deferred contract acquisition costs related to the Gaylord brand and hotel management company acquisition. These increases were partially offset by a favorable variance from the accelerated amortization of $8 million of deferred contract acquisition costs in the 2012 first half for a North American Full-Service segment property that exited our system. The $52 million increase in total general, administrative, and other expenses included $21 million that we did not allocate to any of our segments, and $31 million that we allocated as follows: $14 million to our International segment, $11 million to our Luxury segment, $3 million to our North American Full-Service segment, and $3 million to our North American Limited-Service segment.
Gains and Other Income
We show our gains and other income for the 2013 and 2012 second quarters and first halves in the following table:
($ in millions)
91 Days Ended June 30, 2013
 
84 Days Ended June 15, 2012
 
184 Days Ended June 30, 2013
 
168 Days Ended June 15, 2012
Gains on sales of real estate and other
$
1

 
$
3

 
$
3

 
$
5

Gain on sale of joint venture and other investments
8

 

 
9

 

Income from cost method joint ventures
1

 
2

 
1

 
2

 
$
10

 
$
5

 
$
13

 
$
7

Second Quarter. In the 2013 second quarter, we recognized a gain of $8 million, reflected in the "Gain on sale of joint venture and other investments" caption above, on the sale of a portion of our shares of a publicly traded company. See Footnote No. 5, "Fair Value of Financial Instruments" for additional information on the sale.
First Half. In the 2013 first half, we recognized a gain of $8 million on the sale of a portion of our shares of a publicly traded company as noted in the preceding "Second Quarter" discussion.
Interest Expense
Second Quarter. Interest expense decreased by $5 million (15 percent) to $29 million in the 2013 second quarter compared to $34 million in the 2012 second quarter. This decrease in interest expense principally reflected a net $6 million decrease due to retirements, before the 2013 second quarter, of Senior Notes originally issued at higher interest rates, net of issuances of Senior Notes at lower interest rates, as well as $2 million of increased capitalized interest associated with construction projects largely to develop three EDITION hotels. These decreases in interest expense were partially offset by interest expense related to the additional seven days of activity in the 2013 second quarter.
First Half. Interest expense decreased by $7 million (10 percent) to $60 million in the 2013 first half compared to $67 million in the 2012 first half. This decrease in interest expense principally reflected $6 million of increased capitalized interest associated with construction projects largely to develop three EDITION hotels and a net $6 million decrease due to retirements, before the 2013 second quarter, of Senior Notes originally issued at higher interest rates, net of issuances of Senior Notes at lower interest rates. These decreases in interest expense were partially offset by interest expense related to the additional 16 days of activity in the 2013 first half.
Interest Income and Income Tax
Second Quarter. Interest income increased by $2 million (67 percent) to $5 million in the 2013 second quarter compared to $3 million in the 2012 second quarter. This increase in interest income primarily reflected $2 million earned on the $65 million mandatorily redeemable preferred equity ownership interest acquired in the 2013 second quarter. See Footnote No. 5, "Fair Value of Financial Instruments" for more information on the acquisition.

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Our tax provision increased by $18 million (27 percent) to $84 million in the 2013 second quarter compared to $66 million in the 2012 second quarter. The increase over the year-ago quarter resulted from higher income before income taxes, principally due to increased demand and the additional seven days of activity.
First Half. Interest income increased by $1 million (14 percent) to $8 million in the 2013 first half compared to $7 million in the 2012 first half. This increase in interest income primarily reflected $2 million earned on the mandatorily redeemable preferred equity ownership interest discussed in the preceding "Second Quarter" discussion.
Our tax provision increased by $40 million (37 percent) to $149 million in the 2013 first half compared to $109 million in the 2012 first half. The increase over the year-ago half resulted from higher income before income taxes, principally due to increased demand and the additional 16 days of activity, and a higher effective tax rate in the 2013 first half (32 percent in 2013 and 31 percent in 2012) due to lower tax provision to tax return true-up benefits in 2013.
Equity in Losses
Second Quarter. Equity in losses of $2 million in the 2013 second quarter decreased by $6 million from equity in losses of $8 million in the 2012 second quarter. The decrease primarily reflected a favorable variance from the following 2012 second quarter items: (1) $8 million of losses for a Luxury segment joint venture, primarily related to impairment of certain underlying residential properties; and (2) a $2 million loan loss provision for certain notes receivable due from another Luxury segment joint venture. The decrease also reflected $2 million of increased earnings in 2013 for a corporate joint venture (not allocated to one of our segments). These favorable variances were partially offset by a $4 million impairment charge in the 2013 second quarter associated with a corporate joint venture (not allocated to one of our segments) that we determined was fully impaired because we do not expect to recover the investment and $2 million of decreased earnings at an International segment joint venture.
First Half. Equity in losses of $2 million in the 2013 first half decreased by $7 million from equity in losses of $9 million in the 2012 first half. The decrease primarily reflected a favorable variance from the following 2012 first half items: (1) $8 million of losses for a Luxury segment joint venture, primarily related to impairment of certain underlying residential properties; and (2) a $2 million loan loss provision for certain notes receivable due from another Luxury segment joint venture. The decrease also reflected $2 million of increased earnings in 2013 for a corporate joint venture (not allocated to one of our segments). These favorable variances were partially offset by a $4 million impairment charge in the 2013 second quarter associated with a corporate joint venture (not allocated to one of our segments) that we determined was fully impaired because we do not expect to recover the investment and $3 million of decreased earnings at an International segment joint venture.
Net Income
Second Quarter. Net income increased by $36 million to $179 million in the 2013 second quarter from $143 million in the 2012 second quarter, and diluted earnings per share increased by $0.15 per share (36 percent) to $0.57 per share from $0.42 per share in the 2012 second quarter. As discussed in more detail in the preceding sections beginning with “Revenues” or as shown in the Consolidated Statements of Income, the $36 million increase in net income compared to the year-ago quarter was due to higher franchise fees ($32 million), higher base management fees ($25 million), higher incentive management fees ($8 million), lower equity in losses ($6 million), lower interest expense ($5 million), higher gains and other income ($5 million), and higher interest income ($2 million). These increases were partially offset by higher general, administrative, and other expenses ($19 million), higher income taxes ($18 million), and lower owned, leased, corporate housing, and other revenue net of direct expenses ($10 million).
First Half. Net income increased by $68 million to $315 million in the 2013 first half from $247 million in the 2012 first half, and diluted earnings per share increased by $0.27 per share (38 percent) to $0.99 per share from $0.72 per share in the 2012 first half. As discussed in more detail in the preceding sections beginning with “Revenues” or as shown in the Consolidated Statements of Income, the $68 million increase in net income compared to the year-ago period was due to higher franchise fees ($57 million), higher base management fees ($54 million), higher incentive management fees ($24 million), lower interest expense ($7 million), lower equity in

29


losses ($7 million), higher gains and other income ($6 million), higher owned, leased, corporate housing, and other revenue net of direct expenses ($4 million), and higher interest income ($1 million). These increases were partially offset by higher general, administrative, and other expenses ($52 million) and higher income taxes ($40 million).
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 believe that EBITDA is a meaningful 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.
EBITDA has limitations and should not be considered in isolation or as a substitute for performance measures calculated under GAAP. This non-GAAP measure excludes certain cash expenses that we are obligated to make. Other companies in our industry may also calculate EBITDA differently than we do or may not calculate it at all, limiting EBITDA's usefulness as a comparative measure.
We show our 2013 and 2012 second quarter and first half EBITDA calculations and reconcile those measures with Net Income in the following table:
($ in millions)
91 Days Ended June 30, 2013
 
84 Days Ended June 15, 2012
 
184 Days Ended June 30, 2013
 
168 Days Ended June 15, 2012
Net Income
$
179

 
$
143

 
$
315

 
$
247

Interest expense
29

 
34

 
60

 
67

Tax provision
84

 
66

 
149

 
109

Depreciation and amortization
37

 
38

 
74

 
67

Less: Depreciation reimbursed by third-party owners
(4
)
 
(4
)
 
(9
)
 
(8
)
Interest expense from unconsolidated joint ventures
1

 
4

 
2

 
8

Depreciation and amortization from unconsolidated joint ventures
3

 
8

 
6

 
14

EBITDA
$
329

 
$
289

 
$
597

 
$
504


BUSINESS SEGMENTS
We are a diversified lodging company with operations in four business segments: North American Full-Service Lodging, North American Limited-Service Lodging, International Lodging, and Luxury Lodging. See Footnote No. 12, “Business Segments,” to our Financial Statements for further information on our segments including how we aggregate our individual brands into each segment and other information about each segment, including revenues and assets, as well as a reconciliation of segment results to net income.
We added 145 properties (30,176 rooms) and 48 properties (10,048 rooms) exited our system since the end of the 2012 second quarter. These figures do not include residential units. During that time we also added 2 residential properties (140 units) and no residential properties exited the system.
See the "CONSOLIDATED RESULTS" caption earlier in this report for additional information.

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Second Quarter. Total segment financial results increased by $38 million to $325 million in the 2013 second quarter from $287 million in the 2012 second quarter, and total segment revenues increased by $496 million to $3,194 million in the 2013 second quarter, an 18 percent increase from revenues of $2,698 million in the 2012 second quarter.
The quarter-over-quarter increase in segment revenues of $496 million was a result of a $456 million increase in cost reimbursements revenue, a $31 million increase in franchise fees, a $25 million increase in base management fees, and an $8 million increase in incentive management fees, partially offset by a $24 million decrease in owned, leased, corporate housing, and other revenue. The quarter-over-quarter increase in segment results of $38 million across our lodging business reflected a $31 million increase in franchise fees, a $25 million increase in base management fees, an $8 million increase in incentive management fees, and $6 million of decreased joint venture equity losses, partially offset by a $16 million increase in general, administrative, and other expenses, a $15 million decrease in owned, leased, corporate housing, and other revenue net of direct expenses, and $1 million of lower gains and other income. For more information on the variances see the preceding sections beginning with “Revenues.”
In the 2013 second quarter, 34 percent of our managed properties paid incentive management fees to us versus 30 percent in the 2012 second quarter. In addition, in the 2013 second quarter, 52 percent of our incentive fees came from properties outside the United States, versus 60 percent in the 2012 second quarter. In North America, 19 percent of managed properties paid incentive management fees to us in the 2013 second quarter, compared to 13 percent in the 2012 second quarter. Further, in North America, 20 North American Full-Service segment properties, 20 North American Limited-Service segment properties, and 1 Luxury segment property earned a combined $4 million in incentive management fees in the 2013 second quarter, but did not earn any incentive management fees in the year-ago quarter.
See “Statistics” below for detailed information on Systemwide RevPAR and Company-operated RevPAR by segment, region, and brand.
First Half. Total segment financial results increased by $98 million to $614 million in the 2013 first half from $516 million in the 2012 first half, and total segment revenues increased by $1,074 million to $6,275 million in the 2013 first half, a 21 percent increase from revenues of $5,201 million in the 2012 first half.
The year-over-year increase in segment revenues of $1,074 million was a result of a $965 million increase in cost reimbursements revenue, a $55 million increase in franchise fees, a $54 million increase in base management fees, and a $24 million increase in incentive management fees, partially offset by a $24 million decrease in owned, leased, corporate housing, and other revenue. The year-over-year increase in segment results of $98 million across our lodging business reflected a $55 million increase in franchise fees, a $54 million increase in base management fees, a $24 million increase in incentive management fees, and $7 million in decreased joint venture equity losses, partially offset by a $31 million increase in general, administrative, and other expenses, a $9 million decrease in owned, leased, corporate housing, and other revenue net of direct expenses, and $2 million of lower gains and other income. For more information on the variances see the preceding sections beginning with “Revenues.”
In the 2013 first half, 38 percent of our managed properties paid incentive management fees to us versus 32 percent in the 2012 first half. In addition, in the 2013 first half, 52 percent of our incentive fees came from properties outside the United States, versus 61 percent in the 2012 first half. In North America, 23 percent of managed properties paid incentive management fees to us in the 2013 first half, compared to 16 percent in the 2012 first half. Further, in North America, 21 North American Full-Service segment properties, 26 North American Limited-Service segment properties, and 2 Luxury segment properties earned a combined $5 million in incentive management fees in the 2013 first half, but did not earn any incentive management fees in the 2012 first half.

Summary of Properties by Brand
Including residential properties, we added 43 lodging properties (6,203 rooms) during the 2013 second quarter, while 18 properties (3,225 rooms) exited the system, increasing our total properties to 3,847 (666,132

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rooms). These figures include 37 home and condominium products (4,067 units), for which we manage the related owners’ associations.
Unless otherwise indicated, our references to Marriott Hotels throughout this report include JW Marriott and Marriott Conference Centers, references to Renaissance Hotels include Renaissance ClubSport, and references to Fairfield Inn & Suites include Fairfield Inn.

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At June 30, 2013, we operated, franchised, and licensed the following properties by brand:
 
 
Company-Operated
 
Franchised / Licensed
 
Other (3)
Brand
Properties
 
Rooms
 
Properties
 
Rooms
 
Properties
 
Rooms
U.S. Locations
 
 
 
 
 
 
 
 
 
 
 
Marriott Hotels
135

 
69,957

 
181

 
55,105

 

 

Marriott Conference Centers
10

 
2,915

 

 

 

 

JW Marriott
15

 
9,735

 
7

 
2,914

 

 

Renaissance Hotels
34

 
15,666

 
41

 
11,805

 

 

Renaissance ClubSport

 

 
2

 
349

 

 

Gaylord Hotels
5

 
8,098

 

 

 

 

Autograph Collection

 

 
26

 
6,917

 

 

The Ritz-Carlton
38

 
11,356

 

 

 

 

The Ritz-Carlton-Residential (1)
30

 
3,598

 

 

 

 

Courtyard
275

 
43,200

 
549

 
72,533

 

 

Fairfield Inn & Suites
3

 
1,055

 
686

 
61,800

 

 

SpringHill Suites
29

 
4,582

 
272

 
30,747

 

 

Residence Inn
123

 
17,854

 
489

 
55,997

 

 

TownePlace Suites
22

 
2,440

 
196

 
19,190

 

 

Timeshare (2)

 

 
48

 
10,560

 

 

Total U.S. Locations
719

 
190,456

 
2,497

 
327,917

 

 

 
 
 
 
 
 
 
 
 
 
 
 
Non-U.S. Locations
 
 
 
 
 
 
 
 
 
 
 
Marriott Hotels
136

 
40,242

 
34

 
10,120

 

 

JW Marriott
34

 
12,544

 
4

 
1,016

 

 

Renaissance Hotels
55

 
18,365

 
22

 
6,725

 

 

Autograph Collection
1

 
308

 
12

 
1,385

 
5

 
348

The Ritz-Carlton
42

 
12,655

 

 

 

 

The Ritz-Carlton-Residential (1)
7

 
469

 

 

 

 

The Ritz-Carlton Serviced Apartments
4

 
579

 

 

 

 

EDITION
1

 
78

 

 

 

 

AC Hotels by Marriott

 

 

 

 
75

 
8,491

Bulgari Hotels & Resorts
2

 
117

 
1

 
85

 

 

Marriott Executive Apartments
27

 
4,295

 

 

 

 

Courtyard
57

 
12,322

 
56

 
9,797

 

 

Fairfield Inn & Suites

 

 
14

 
1,716

 

 

SpringHill Suites

 

 
2

 
299

 

 

Residence Inn
6

 
749

 
17

 
2,480

 

 

TownePlace Suites

 

 
2

 
278

 

 

Timeshare (2)

 

 
15

 
2,296

 

 

Total Non-U.S. Locations
372

 
102,723

 
179

 
36,197

 
80

 
8,839

 
 
 
 
 
 
 
 
 
 
 
 
Total
1,091

 
293,179

 
2,676

 
364,114

 
80

 
8,839

 
(1)
Represents projects where we manage the related owners’ association. We include residential pro