A BETTER WAY TO EXPERIENCE THE WORLD. 2012 PROXY STA STATEMENT TEMENT & 20 11 ANNUAL REPORT
2011 NEW OPENINGS The St. Regis Bangkok
W Retreat & Spa Bali – Seminyak
Sheraton Agoura Hills Hotel
The St. Regis Saadiyat Island Resort, Abu Dhabi
W St. Petersburg
The St. Regis Sanya Yalong Bay Resort
W Taipei
Sheraton At The Falls Hotel, Niagara Falls, New York
The St. Regis Shenzhen
Le Méridien Coimbatore
The St. Regis Tianjin
Le Méridien Koh Samui Resort & Spa
The Chatwal, New York City, a Luxury Collection Hotel
Le Méridien Oran Hotel & Convention Centre
The Liberty Hotel, Boston, a Luxury Collection Hotel Lugal, Ankara, a Luxury Collection Hotel The Naka Island, Phuket, a Luxury Collection Resort & Spa Villarrica Park Lake Hotel & Spa, Villarrica, a Luxury Collection Hotel & Spa W London – Leicester Square
The Westin Abu Dhabi Golf Resort & Spa The Westin Guadalajara The Westin Houston, Memorial City The Westin Lima Hotel & Convention Center The Westin Nanjing The New York Helmsley Hotel The Westin Pazhou The Westin Phoenix Downtown
Sheraton Baku Airport Sheraton Bangalore Hotel at Brigade Gateway Sheraton Beijing Dongcheng Hotel Sheraton Bijao Beach Resort Sheraton Changzhou Wujin Hotel Sheraton Changzhou Xinbei Hotel Sheraton Chongqing Hotel Sheraton Columbus Hotel at Capitol Square Sheraton Daqing Hotel Sheraton Detroit Metro Airport Sheraton Guangzhou Hotel
Sheraton Guangzhou Huadu Resort
Aloft Bangkok - Sukhumvit 11
Four Points by Sheraton Houston Hobby Airport
Sheraton Hangzhou Wetland Park Resort
Aloft Bogota Airport
Four Points by Sheraton Langkawi Resort
Sheraton Hiroshima Hotel
Aloft Coimbatore Singanallur
Sheraton Jinzhou Hotel
Aloft Haiyang
Four Points by Sheraton Long Island City/Queensboro Bridge
Sheraton Kansas City Hotel at Crown Center
Aloft Jacksonville Tapestry Park
Sheraton Montreal Airport Hotel
Aloft London Excel
Sheraton Omaha Hotel
Aloft Nanhai, Foshan
Sheraton Red Deer Hotel
Aloft New York Brooklyn
Sheraton Seoul D Cube City Hotel
Aloft Zhengzhou Shangjie
Sheraton Shanghai Hongkou Hotel
Four Points by Sheraton Barcelona Diagonal
Sheraton Shenzhou Peninsula Resort
Four Points by Sheraton College Station
Sheraton Stamford Hotel
Four Points by Sheraton Downtown Seattle Center
Sheraton Wilmington South Hotel
Four Points by Sheraton Hotel & Serviced Apartments, Pune
Sheraton Zhenjiang Hotel
Four Points by Sheraton Memphis East Four Points by Sheraton Minneapolis Airport Four Points by Sheraton Nashville - Brentwood Four Points by Sheraton Niagara Falls Four Points by Sheraton Peoria Downtown Four Points by Sheraton Qingdao, Chengyang Four Points by Sheraton San Antonio Airport Four Points by Sheraton Tripoli Four Points by Sheraton Visakhapatnam Four Points by Sheraton Zaporozhye
+ 9.7%
SAME STORE WORLDWIDE REVPAR
+140BPS
IN WORLDWIDE REVPAR INDEX
81
HOTELS OPENED, FOR A RECORD
20,900
ROOMS
112
NEW DEALS, BRINGING OUR PIPELINE TO ALMOST
90,000
ROOMS
DROVE GUEST SATISFACTION SCORES TO RECORD LEVELS SG&A GROWTH BELOW INFLATION,
+ 2.3%
DEAR FELLOW STOCKHOLDERS Starwood posted another great year in 2011. We grew REVPAR index and room count aster than the industry. We played oense in the marketplace. But we played it sae with our inances, as we enter 2012 with our strongest ever balance sheet. This has been Starwood’s game plan since the crisis has receded, and it is paying o as we urther distance ourselves rom the competition and accelerate our growth trajecto ry ry.. We delivered strong inancial results despite a turbulent global economy. As the most global company in our industry, we witness irsthand world events like the Arab Spring, the disaster in Japan or the euro-zone drama. Behind those headlines, though, we see encouraging trend lines. Our REVPAR gains were ueled by rapid economic growth in emerging markets and tight supply in the developed world. The global economic recovery continued through 2011, bringing occupancies close to pre-crisis levels. With many hotels ull on weeknights and during peak periods, we saw rates increase. For the ull year, higher rates accounted or over hal o our REVPAR gains. We are encouraged to see robust demand or business travel, which drives 75% o our total revenue. Corporate proits and cash on hand are at record levels, and companies are scouring the globe in search o growth opportunities. Against this backdrop, here are just a ew highlights rom the year: » We grew Same Store Worldwide REVPAR by 9.7% (or 7.4% in constant dollars) » We gained 140bps in Worldwide REVPAR index » We opened 81 hotels, or a record 20,900 rooms » We signed 112 new deals, bringing our pipeline to almost 90,000 rooms » We drove guest satisaction scores to record levels » We held our SG&A growth below inlation, up 2.3%
These strong results are thanks to the hard work o our 154,000 employees around the world. Our surveys tell us that our associates have never been more engaged, energized and committed to our global growth. We share a belie that people want a better way to experience the world. Those better experiences drive growth, brand loyalty and market-leading returns.
GLOBAL GROWTH Growing our ootprint o hotels is a key driver o value over the long term, and we will continue to generate and deliver on our pipeline o great new hotels year ater year. This momentum gives us the conidence to be selective in where we open hotels and in culling lagging ones rom our system. Between 2007 and 2011, Starwood opened 389 hotels. This equates to an averag e o 8% growth per year, and means over one-third o our properties are newly opened. Bear in mind also that this growth continued even in the wake o the Great Recession o 2008 and 2009. In the midst o the credit crisis, new hotel activity in the developed world ground to a halt. Factoring in the typical three-year gestation period or building a new hotel, you might have expected a drop in new hotel openings today. Filling the gap were a record number o conversions o existing hotels to our brands in the developed world. We also went rom strength to strength in emerging markets. During 2010 and 2011, we opened more hotels in Asia Paciic than our three largest US-based lodging competitors combined. Overall, emerging markets accounted or 61% o our new rooms last year, up rom 50% in 2010 and 31% in 2009. More importantly, the rise o these markets is the single biggest growth opportunity in our lietimes. Take T ake China, or example, where we are the le ading operator o our- and ive-star hotels, with almost 100 properties open today and another 100 in the
pipeline. Domestic travel volume there is already roughly equal to the US and likely to double in the next five years. China could one day be our largest market, eclipsing the 480 hotels we have today in the United States. Two-thirds of the 112 hotel deals we signed in Two-thirds 2011 were in emerging markets. This means we are positioned to lengthen our lead and strengthen our brands with great new hotels. Globalization is adding to the ranks of elite travelers like never before, and our brands have captured more than our fair share of that demand. Our luxury room count doubled during the last five years, which underscores the value of our investments in brands and in loyalty. A B ET TE R WAY TO EX PE RI EN CE TH E W OR LD
As we sell real estate, we are m aking a shift from owning hotels to owning guest relationships. Compelling brands, great service and best-in-class properties are three key ingredients to fostering these relationships. Starwood Preferred Guest ® (SPG) is what binds our brands and properties together. To T o great fanfare, we recently announced changes to our SPG program that will deepen our connection to global mega-travelers. Here is how these changes came to life, what it does for our guests and how it creates value for our hotel owners. In any branded business, the best marketing investments are geared to recruiting and retaining new brand-loyal customers and getting even more business from existing ones. The more targeted and the more focused on their needs, the better. Over the last five years, we’ve doubled our number of elite members, and spending per elite member is up 60%. Today, Today, the top 2% of our guests account for 30% of hotel profits. Our Platinum SPG members give us nearly 50 times the business of our average guest. Our first-mover advantage has enabled us to benefit from the rising wealth around the world. Today, T oday, 40% of our elite members live outside the US, and these mega-travelers are more diverse, more informed and more sophisticated than ever. We engaged in a dialog with these travelers, and what we learned made a lot of sense. High-end travelers want more than just a good deal. They want that personal touch, and to be treated in a special way. Their comments helped us to recast SPG. They told us that not all trips are equal and not all benefits matter. They asked for more milestones,
more reasons to stay after they reached a certain level and more choices. All of these are part of our program. They also wanted to know whether their loyalty with us over time counted for something, so we introduced lifetime status. Our guests asked for a more flexible definition of a stay. So we tested our ability to meet that need, and today we are offering 24-hour check-in for our most elite guests. Even in this digital age, they appreciated a oneon-one contact, which we have made a part of our program for our most loyal guests.
At Starwood, we are sticking to a cautiously confident worldview. Our caution is reflected in our conservative balance sheet and cost base. After all, the world remains an uncertain place. Our confidence is rooted in the long-term growth prospects for high-end travel and for our portfolio of brands. To lengthen our lead in 2012, we will stay on offense, targeting additional REVPAR index gains, opening more rooms than ever, signing the most hotel deals since the beginning of the crisis and further deepening our ties to elite guests.
We believe that the changes to SPG will not only set the program apart, but will take loyalty to a whole new level. A great benefit for guests means more business at our hotels. For every dollar, euro or yuan that we spend on the transformation, our experience tells us that we should expect to see over four times that amount in top-line growth. In other words, happy guests mean better returns for our owners, and stronger brands.
Thank you for your interest in Starwood. And, of course, we look forward to welcoming you as a Starwood guest in 2012.
DELIVER MARKET-LEADING RETURNS
We are focused on delivering market-leading returns for all of our stakeholders, and we have four financial levers at our disposal. It starts with driving REVPAR premiums, growing our footprint, holding down costs and unlocking the value of our balance sheet. As we have noted, 2011 was a strong year along each of these measures. We made progress in getting cash from the sale of our real estate assets. We sold two hotels and a joint venture in 2011 for net proceeds of $281 million. Other sources of cash include over $200 million from timeshare and $74 million from residential units at The St. Regis Bal Harbour Resort. We expect 2012 to build on our momentum. We will generate cash as we work toward our target of being at least 80% fee-driven. From Bal Harbour and from our timeshare business, we expect to generate $375 million in cash. When it comes to selling our owned hotels, we will continue to be patient and disciplined sellers, searching for the right prices, partners and management contracts. We also expect to continue to gain share. Our margins will grow, as REVPAR is driven by rising rates. Our corporate customers expect to keep hitting the road in 2012. Corporate negotiated rates are set to be up mid- to high-single digits, and our group meetings are being booked at higher rates as well.
FRITS VAN PAASSCHEN Chief Executive Officer
STARWOOD HOTELS & RESORTS WORLDWID WORL DWIDEE, IN INC C. 2012 201 2 PR OXY STATE MENT & 201 2011 1 ANNUAL REPOR T
This pa ge inten tional ly let blank.
Starwood Hotels & Resorts Worldwide, Inc. One StarPoint Stamford, CT 06902 March 21, 2012 Dear Stockholder: We cordially invite you to attend our 2012 Annual Meeting of Stockholders (the “Annual Meeting”), which will be held on Thursday, May 3, 2012, at 10:00 a.m., local time, at The St. Regis Bal Harbour Resort, 9703 Collins Avenue, Bal Harbour, Florida 33154. At the Annual Meeting, you will be asked to (i) elect ten director nominees to serve on our board of directors until the 2013 Annual Meeting of Stockholders, (ii) approve, on a non-binding advisory basis, the compen com pensat sation ion of our nam named ed exe execut cutive ive off office icers, rs, (ii (iii) i) rat ratify ify the app appoin ointme tment nt of Ern Ernst st & You Young ng LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2012 and (iv) act on any other matters that may be properly presented at the Annual Meeting or any adjournment or postponement thereof. We hope you will attend the Annual Meeting, but whether or not you are planning to attend, we encourage you to vote your shares. You can vote in person at the Annual Meeting or authorize proxies to vote your shares either by telephone, electronically through the Internet, or by completing, signing and returning your proxy card by mail prior to the Annual Meeting. To ensure your vote is counted, please vote as promptly as possible. We thank you for your continued support and look forward to seeing you at the Annual Meeting. Sincerely,
Frits van Paasschen
Bruce W. Duncan
Chief Executive Officer and President
Chairman of the Board
YOUR VOTE IS IMPORTANT. PLEASE PROMPTLY SUBMIT YOUR PROXY BY MAIL, TELEPHONE OR OVER THE INTERNET.
Starwood Hotels & Resorts Worldwide, Inc. One StarPoint Stamford, CT 06902
NOTICE OF ANNUAL MEETING OF STOCKHOLD STOCKHOLDERS ERS OF STARWOOD HOTELS & RESORTS WORLDWIDE, INC. DATE:
May 3, 2012
TIME:
10:00 a.m. local time
PLACE:
The St. Regis Bal Harbour Resort 9703 Collins Avenue Bal Harbour, Florida 33154
ITEMS OF BUSINESS:
1.
To el elec ectt te ten n di dire rect ctor orss to se serv rvee un unti till th thee 20 2013 13 An Annu nual al Me Meet etin ing g of Stockholders and until their successors are duly elected and qualify;
2.
To consid consider er and vo vote te upon a pr prop opos osal al to ap appr prov ove, e, on a no nonn-bi bind ndin ing g advisory basis, the compensation of our named executive officers;
3.
To consider consider and and vote upon upon a proposal proposal to ratify ratify the the appointme appointment nt of Ernst Ernst & Young LLP as our independent independent registered registered publi publicc accou accounting nting firm for fisca fiscall year 2012; and
4.
To transact transact such such other other business business as may may properly properly come come before before the meeti meeting ng or any postponement or adjournment thereof.
RECORD DATE:
Holders of record at the close of business on March 9, 2012 are entitled to notice of, and to vote at, the meeting and any adjournment or postponement thereof. By Order of the Board of Directors,
Kenneth S. Siegel Corporate Secretary
March 21, 2012 Stamford, Connecticut
THE BOARD OF DIRECTORS URGES YOU TO VOTE IN PERSON AT THE ANNUAL MEETING OR TO AUTHORIZE PROXIES TO VOTE YOUR SHARES BY TELEPHONE, THROUGH THE INTERNET OR BY COMPLETING, SIGNING AND RETURNING YOUR PROXY CARD PRIOR TO THE ANNUAL MEETING.
TABLE OF CONTENTS THE ANNUA ANNUAL L MEETI MEETING NG AND AND VOTIN VOTING G — QUES QUESTIO TIONS NS AND AND ANSWE ANSWERS RS . . . . . . . . . . . . . . . . . . . . . . CORPO COR PORA RATE TE GOV GOVERN ERNAN ANCE CE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ELECT EL ECTIO ION N OF DIR DIREC ECTO TORS RS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FI RM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ADVISORY ADVI SORY VOTE VOTE ON ON NAMED NAMED EXECUT EXECUTIVE IVE OFFI OFFICER CER COMP COMPENS ENSATI ATION ON . . . . . . . . . . . . . . . . . . . . . . . BENEFIC BENE FICIAL IAL OWNE OWNERSH RSHIP IP OF PRIN PRINCIP CIPAL AL STOCK STOCKHOLD HOLDERS ERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BENEFICIAL BENEFI CIAL OWNERSHI OWNERSHIP P OF DIRECTORS DIRECTORS AND EXECUTIVE EXECUTIVE OFFICER OFFICERS S ...................... EXECUTI EXEC UTIVE VE AND AND DIRECT DIRECTOR OR COMPE COMPENSA NSATIO TION N ............................................ EXEC EX ECUTI UTIVE VE OFF OFFIC ICER ERS S ................................................................ COMPEN COM PENSAT SATION ION DISC DISCUSS USSION ION AND AND ANALYS ANALYSIS IS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . COMPEN COM PENSAT SATION ION COMM COMMITT ITTEE EE REPOR REPORT T...... ....... ....... ....... ....... ....... ....... . 2011 201 1 SUMMAR SUMMARY Y COMPENS COMPENSATI ATION ON TABLE TABLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011 201 1 GRANTS GRANTS OF OF PLAN-B PLAN-BASE ASED D AWARDS AWARDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NARRATIVE DISCLOSURE TO SUMMARY COMPENSATION TABLE AND GRANTS OF PLAN-B PLA N-BASE ASED D AWARDS AWARDS SECT SECTION ION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . OUTSTAN OUT STANDIN DING G EQUITY EQUITY AWAR AWARDS DS AT 2011 2011 FISC FISCAL AL YEARYEAR-END END . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011 201 1 OPTION OPTION EXER EXERCIS CISES ES AND AND STOCK STOCK VESTED VESTED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011 201 1 NONQUAL NONQUALIFI IFIED ED DEFER DEFERRED RED COMP COMPENS ENSATI ATION ON . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . POTENTIAL POTENT IAL PAYMENTS PAYMENTS UPON UPON TERMINATIO TERMINATION N OR CHANGE CHANGE IN CONTROL CONTROL . . . . . . . . . . . . . . . . . . DIRECT DIR ECTOR OR COMPE COMPENSA NSATIO TION N........................................................... AUDIT AUD IT COM COMMI MITTE TTEE E REPO REPORT RT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . COMPENSATION COMPEN SATION COMMI COMMITTEE TTEE INTERLOCK INTERLOCKS S AND INSIDER INSIDER PARTICI PARTICIPATION PATION . . . . . . . . . . . . . . . . . CERTAIN CERT AIN RELA RELATIO TIONSH NSHIPS IPS AND AND RELATE RELATED D TRANSAC TRANSACTIO TIONS NS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . OTHER OTH ER MATT MATTER ERS S ...................................................................... SOLI SO LICI CITA TATI TION ON COS COSTS TS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HOUSE HOU SEHO HOLDI LDING NG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . STOCKHO STOC KHOLDER LDER PRO PROPOS POSALS ALS FOR FOR NEXT NEXT ANNUAL ANNUAL MEET MEETING ING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1 6 8 14 14 15 16 18 18 20 36 37 38 39 40 41 42 43 47 51 52 52 53 53 54 55
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. ONE STARPOINT STAMFORD, CT 06902
PROXY STATEMENT FOR 2012 ANNUAL MEETING OF STOCKHOLDERS Our Boa Board rd of Dir Direct ectors ors (th (thee “Bo “Board ard”) ”) sol solici icits ts you yourr pro proxy xy for the 201 2012 2 Ann Annual ual Meeting Meeting (th (thee “An “Annua nuall Meeting”) of Stockholders of Starwood Hotels & Resorts Worldwide, Inc., a Maryland corporation (“we,” “us,” “Starwood” or the “Company”), to be held on Thursday May 3, 2012, at 10:00 a.m. local time, at The St. Regis Bal Harbour Resort, 9703 Collins Avenue, Bal Harbour, Florida 33154, and at any postponement or adjournment thereof. Proxy materials or a Notice of Meeting and Internet Availability were first sent to stockholders on or about March 21, 2012.
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS. THE PROXY STATEMENT FOR THE 2012 ANNUAL MEETING OF STOCKHOLDERS AND THE ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2011 ARE AVAILABL AVAILABLE E AT www.starwood www.starwoodhotels.com/corporate/ hotels.com/corporate/investor_relations. investor_relations.html. html. THE ANNUAL MEETING AND VOTING — QUESTIONS AND ANSWERS What is the purpose of the Annual Meeting? At our Annual Meeting, stockholders will act upon the matters outlined in the Notice of Annual Meeting of Stockholders. These include the election of the ten director nominees, a non-binding advisory vote to approve the compensation of our named executive officers, ratification of the appointment of Ernst & Young LLP as our independen indep endentt regis registered tered public accounting accounting firm and any other matters matters that may be properly presented presented at the meeting. We are not aware of any matters to be presented at the meeting, other than those described in this proxy statement. If any matters not described in the proxy statement are properly presented at the meeting, or any adjournment or postponement thereof, the proxies may vote your shares pursuant to the discretionary authority granted in the proxy.
Why did I receive a notice in the mail regarding the Internet availability of the proxy materials instead of a paper copy of the proxy materials? The Securities and Exchange Commission has adopted rules permitting the electronic delivery of proxy materials.. In accordance materials accordance with those rules, rules, we have elect elected ed to provi provide de access to our proxy materials, materials, which include the Notice of Annual Meeting, Proxy Statement and Annual Report on Form 10-K for the fiscal year ended December 31, 2011, over the Internet at www.starwoodhotels.com/corporate/investor_relations.html. We sent a Notice of Meeting and Internet Availability of Proxy Materials (the “Notice”) to our stockholders of record and beneficial owners as of the close of business on March 9, 2012, directing them to a website where they can access the proxy materials and view instructions on how to authorize proxies to vote their shares over the Internet or by telephone. Stockholders who previously indicated a preference for paper copies of our proxy materials going forward received paper copies. If you received a Notice but would like to request paper copies of our proxy materials, you may still do so by following the instructions described in the Notice. Choosing Choosi ng to rec receiv eivee you yourr pro proxy xy mat materi erials als by ema email il wil willl sav savee us the cost of pri printi nting ng and mailing mailing the documents to you and will also help preserve environmental resources. Unless you affirmatively elect to receive paper copies of our proxy materials in the future by following the instructions included in the Notice, you will continue to receive a Notice directing you to a website for electronic access to our proxy materials. 1
When and where will the Annual Meeting be held? The Annual Meeting will be held on May 3, 2012 at 10:00 a.m., local time, at The St. Regis Bal Harbour Resort, 9703 Collins Avenue, Bal Harbour, Florida 33154. Seating will begin at 9:00 a.m. If you plan to attend the Annual Meeting and have a disability or require special assistance, please contact the Company’s Investor Relations department at (203) 351-3500.
Who can attend the Annual Meeting? Only stockholders of record at the close of business on March 9, 2012, the record date, or their duly authorize author ized d pro proxie xies, s, may att attend end the Ann Annual ual Mee Meetin ting. g. To gai gain n adm admitt ittanc ance, e, you mus mustt pre presen sentt val valid id pic pictur turee identification, such as a driver’s license or passport. If you hold your shares in “street name” (through a broker, bank or other nominee), you will also need to bring a copy of a brokerage statement or a letter from your broker or other nominee (in a name matching your photo identification) reflecting your stock ownership as of the record date. If you are a rep repres resent entati ative ve of a cor corpor porate ate or ins instit tituti utiona onall sto stockh ckhold older, er, you mus mustt pre presen sentt val valid id pho photo to identification, along with proof that you are a representative of such stockholder. Please Ple ase not notee tha thatt cam camera eras, s, pho phones nes,, or oth other er sim simila ilarr ele electr ctroni onicc dev device icess and the bri bringi nging ng of lar large ge bag bags, s, packages or sound or video recording equipment will not be permitted in the meeting room.
How many shares must be present to hold the Annual Meeting? In order for us to conduct the Annual Meeting, holders of a majority of the shares entitled to vote as of the close of business on the record date must be present in person or by proxy. This constitutes a quorum for the transaction of business at the Annual Meeting. You are counted as present if you attend the Annual Meeting and vote in person, if you properly authorize proxies to vote your shares over the Internet or by telephone or if you properly execute and return a proxy card by mail prior to the Annual Meeting. Abstentions and broker non-votes are counted as present for purposes of determining whether a quorum is present at the Annual Meeting. If a quorum is not present, the Annual Meeting will be adjourned until a quorum is obtained. Whether or not a quo quorum rum is pre presen sentt whe when n the Annual Meeting Meeting is con conven vened, ed, the presidin presiding g off office icerr may adjourn adjourn the Ann Annual ual Meeting to a date not more than 120 days after March 9, 2012, the record date, without notice other than announcement at the Annual Meeting. If a motion is made to adjourn the Annual Meeting, the persons named as proxies on the enclosed proxy card may vote your shares pursuant to the discretionary authority granted in the proxy.
Who is entitled to vote at the Annual Meeting? If you were a stockholder of record at the close of business on March 9, 2012, the record date, you are entitled to notice of, and to vote at, the Annual Meeting, or at any adjournment or postponement thereof, on any matter that is properly submitted to a vote. On March 9, 2012, there were 197,101,127 shares of common stock issued, outstanding and entitled to vote. Each owner of record on the record date is entitled to one vote for each share of common stock held.
How do I vote my shares? If you are a stockholder of record, you may vote in person at the Annual Meeting. If you are a stockholder of record who holds shares in “street name” (through a broker, bank or other nominee), you may also vote in person at the Annual Meeting provided you have legal authorization from such broker, bank or other In Person.
2
nominee to vote the shares held on your behalf. Please contact your broker, bank or other nominee for further informati infor mation on on such authorizati authorization. on. Ballo Ballots ts will be made available available and distr distribute ibuted d at the Annual Meeting. If you do not plan to attend the Annual Meeting or do not wish to vote in person, you may authorize proxies to vote your shares by written proxy, by telephone or over the Internet. If you are a stockholder of record and wish to authorize proxies to vote your shares by written proxy, you may request a proxy card at any time by following the instructions on the Notice. If you are a stockholder of record who holds shares in “street name” you should receive instructions on how you may vote by written proxy from your broker, bank or other nominee. By Written Proxy.
stockh ckhold older er of rec record ord and wish to authori authorize ze proxies proxies to vote your your By Telephone or Internet . If you are a sto shares by telephone or over the Internet, you may use the toll-free telephone number or access the electronic link to the proxy voting site by following the instructions on the Notice. If you are a stockholder of record who holds shares in “street name,” you may authorize proxies to vote your shares by telephone or over the Internet if your broker, bank or other nominee makes these methods available, in which case you will receive instructions with the proxy materials. Each share represented by a properly completed written proxy or properly authorized proxy by telephone or over the Internet will be voted at the Annual Meeting in accordance with the stockholder’s instructions specified in the proxy, unless such proxy has been revoked. If no instructions are specified, the shares will be voted “FOR” the election of each of the ten nominees for director named in this proxy statement, “FOR” the approval, on a non-binding advisory basis, of the compensation of our named executive officers, “FOR” ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for fiscal year 2012, and, with respect to other matters to properly come before the meeting, pursuant to the discretionary authority granted in the proxy to the proxy holder.
How many Notices will I receive? What does it mean if I receive more than one Notice? If you are a stockholder of record, you will receive only one Notice (or proxy card upon request) for all of the shares of common stock you hold in certificate form, book entry form and in any of our savings plans. If you are a stockholder of record who holds in “street name”, you will receive one Notice or voting instruction form for each account you have with a bank or broker. If you hold shares in multiples accounts, you may need to provide voting instructions for each account. Please sign and return all proxy cards or voting instruction forms you receive to ensure that all of the shares you hold are voted.
What if I hold shares through the Company’s 401(k) savings plan or employee stock purchase plan? If you participate in the Company’s Savings and Retirement Plan (the “Savings Plan”) or Employee Stock Purchase Plan (the “ESPP”), your proxy card or vote by telephone or over the Internet will serve as a voting instruction for the trustee of the Savings Plan or ESPP. Whether you authorize vote by proxy card, telephone or over the Internet, you must transmit your vote to the transfer agent on or prior to 11:59 p.m., Eastern Time on April 30, 2012. If you participate in the Savings Plan and your vote is not received by the transfer agent by that date or if you sign and return your proxy card without specifying your voting instructions, the trustee for the Savings Plan will vote your shares in the same proportion as the other shares for which such trustee has received timely voting instructions unless contrary to ERISA. If you participate in the ESPP and your proxy card is not received by the transfer agent by that date or if you sign and return your proxy card without specifying your voting instructions, the trustee of the ESPP will not vote your shares.
If I submit a proxy, may I later revoke it and/or change my vote? If you are a stockholder of record, you may revoke your proxy and change your vote at any time before the final vote at the Annual Meeting by: • signi signing ng and returning returning another another proxy card card with a later date; 3
• submit submittin ting g a pro proxy xy on a lat later er date by tel teleph ephone one or ove overr the Interne Internett (on (only ly your latest latest pro proxy xy will be counted); or • attending attending the meeting meeting and voting in pers person on if you hold your shares in your own name or, provided provided you have obtained a legal proxy from your broker, bank or other nominee, if you are a stockholder who holds in “street name.”
Are votes confidential? Who counts the votes? The votes of all stockholders are kept confidential except: • as necessary to meet applicable legal requirements requirements and to assert or defend claims claims for or against us; • in case of a conteste contested d proxy solicitat solicitation; ion; • if a stockholder makes a written comment comment on the proxy card or otherwise communicates communicates his or her vote to management; or • to allow the independent independent inspector of election election to certify the results of the vote. vote. We have retained Broadridge Financial Solutions to tabulate the votes. We have retained The Carideo Group, Inc. to act as independent inspector of the election.
How can I confirm my vote was counted? For the first time, and in furtherance of our commitment to the highest standards of corporate governance practices, we are offering our stockholders the opportunity to confirm their votes were cast in accordance with their instructions. We believe that the implementation of a vote confirmation mechanism promotes a more fair and transparent electoral process. Beginning April 18, 2012 through July 3, 2012, you may confirm your vote beginning twenty-four hours after your vote is received, whether it was cast by proxy card, electronically or telephonically. To obtain vote confirmation, log onto www.proxyvote.com using your control number (located on your Notice or proxy card) and receive confirmation on how your vote was cast. If you hold your shares through a bank or brokerage account, the ability to confirm your vote may be affected by the rules of your bank or broker and the confirmation will not confirm whether your bank or broker allocated the correct number of shares to you.
How does the Board recommend that I vote? The Board of Directors recommends that you vote: • “FOR” each of the ten director nominees; • “FOR” approval of the non-binding advisory vote on the compensation of our named executive officers; and • “FOR” rati ratifica fication tion of the appointment appointment of Ernst & Young LLP as our indep independen endentt regi registere stered d publi publicc accounting firm for fiscal year 2012.
What vote is needed to approve each proposal? The election of directors requires a plurality of votes cast in the election of directors at the Annual Meeting, either in person or by proxy. The ten nominees who receive the largest number of “FOR” votes will be elected to serve as directors until the 2013 Annual Meeting of Stockholders and until their successors are duly elected and qualify. Stockholders cannot cumulate votes in the election of directors. Brokers are not permitted to vote on the election elect ion of dire directors ctors without instructi instructions ons from the beneficial beneficial owner, so if you hold your shares through a broke brokerr or other nominee, your shares will not be voted in the election of directors unless you affirmatively vote your shares in accordance with the voting instructions provided by such broker or other nominee. Instructions to “ABSTAIN” will have no effect on the result of the vote. 4
Adoption Adopt ion of a resol resolutio ution n appro approving, ving, on a non-b non-bindi inding ng advis advisory ory basis, the compe compensat nsation ion of our named executive officers requires a majority of the votes cast at the Annual Meeting, either in person or by proxy. Abstentions and broker non-votes will have no effect on the result of the vote. The Board of Directors expects to take the result of the advisory vote into consideration when making future compensation decisions. The ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for fiscal year 2012 requires a majority of the votes cast at the Annual Meeting, either in person or by proxy. Brokers may vote uninstructed shares on this matter. Abstentions will have no effect on the result of the vote. If a majority of the votes cast are “AGAINST” ratification of the appointment of Ernst & Young, the Board of Directors and the Audit Committee will reconsider its appointment.
What are broker non-votes? If you hold shares through through a broke broker, r, bank or other nominee, you may give voting instructions instructions to such party and the broker, bank or other nominee must vote as you directed. If you do not give any instructions, the broker, bank or other nominee may vote on all routine matters, such as ratification of the appointment of an independent registered public accounting firm, at its discretion. A broker, bank or other nominee, however, may not vote uninstructed shares on non-routine matters, such as the election of directors or an advisory vote on executive compensation, at its discretion. This is referred to as a broker non-vote.
What happens if a director nominee does not receive a “majority” of the votes cast? Under our Bylaws, a director nominee, running uncontested, who receives more “WITHHELD” votes than “FOR” votes is required to tender his or her resignation for consideration by the Board of Directors. The Corporate Governance and Nominating Committee will then make a recommendation to the Board of Directors as to whether the Board of Directors should accept or reject such resignation. The Board of Directors will act on the tendered resignation and publicly disclose its decision within 90 days following certification of the election results. The director nominee in question will not participate in the deliberation process.
When are stockholder proposals for the 2013 Annual Meeting of Stockholders due? In order to be eligible for inclusion in our proxy statement for our 2013 Annual Meeting of Stockholders, stockholder proposals must be received no later than November 22, 2012. Stockholder proposals received after November 22, 2012 would be untimely. In order to be eligible for consideration at our 2013 Annual Meeting of Stockholders but not included in our proxy pro xy sta statem tement ent,, sto stockh ckhold older er pro propos posals als mus mustt be rec receiv eived ed no lat later er tha than n Feb Februa ruary ry 17, 201 2013 3 nor ear earlie lierr tha than n January 23, 2013. All stockholder proposals must be in writing and received by the deadlines described above at our principal executive offices at Starwood Hotels & Resorts Worldwide, Inc., One StarPoint, Stamford, Connecticut 06902, Attention: Kenneth S. Siegel, Corporate Secretary. Stockholder proposals must be in the form provided in our Bylaws and must include the information set forth in the Bylaws. If we do not receive the required information on a timely basis, the proposal may be excluded from the proxy statement and from consideration at the 2013 Annual Meeting of Stockholders.
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CORPORATE GOVERNANCE Overview Starwood Resorts & Hotels Worldwide, Inc. is committed to maintaining the highest standards of corporate governance and ethical business conduct across all aspects of its operations and decision-making processes. Important documents governing our corporate governance practices include our Charter, Bylaws, Corporate Governance Gover nance Guidelines, Guidelines, Board of Direc Directors tors Committee Committee Chart Charters, ers, Finance Code of Ethics, Code of Business Conduct and Ethics and Corporate Opportunity and Related Person Transaction Policy. These documents can be accessed on our website at www.starwoodhotels.com and are discussed in more detail below.
Board Leadership Structure Our board leadership structure currently consists of a Chairman (who is not the Chief Executive Officer and President of the Company), the Chief Executive Officer and President of the Company, nine outside directors and four committee Chairs. The Board of Directors believes that having a separate independent director serve as Chairman promotes clear, independent board leadership and engagement. The Board of Directors also believes it is well served by having the Chief Executive Officer and President of the Company serve as a member of the Board, as the Chief Executive Officer and President of the Company has primary responsibility for managing the Company’s day-to-day operations and, consequently, a unique understanding of the Company’s operations, and the hotel and leisure industry generally.
Board Role in Risk Oversight The Board of Directors regularly receives reports from members of the Company’s senior management regarding any strategic, operational, financial, legal, regulatory or reputational risk that the Company may be facing. The Board of Directors then reviews management’s assessment, discusses options for mitigating any such risk with management, and directs management to manage and minimize the Company’s exposure. Management is ultimately responsible for identifying any such risk, and for developing and implementing mitigation plans during the strategic planning process. The Board’s role is one of oversight. The Board’s committees assist it with the risk oversight function as follows: • the Aud Audit it Com Commit mittee tee ove overse rsees es the Com Compan pany’s y’s con contro trols ls and com compli plianc ancee act activi ivitie tiess and ove overse rsees es management’s process for identifying and quantifying risks facing the Company; • the Compensation Compensation and Optio Option n Comm Committee ittee oversees oversees risk assoc associate iated d with our compensation compensation policies and practices and structures the Company’s incentive compensation in a way that discourages the taking of excessive risks; • the Cor Corpor porate ate Gov Govern ernanc ancee and Nom Nomina inatin ting g Com Commit mittee tee ove overse rsees es Boa Board rd pro proces cesses ses and cor corpor porate ate governance-related risk; and • the Capital Committee oversees oversees risks related to our hotel portfolio, portfolio, capital improvement improvement plans and capital budgets, and any investments, divestitures, significant asset sales, mergers and acquisitions and other extraordinary transactions.
Corporate Governance Policies In add additi ition on to our Cha Charte rterr and Byl Bylaws aws,, we hav havee ado adopte pted d the Cor Corpor porate ate Gov Govern ernanc ancee Gui Guidel deline iness (th (thee “Guidelines”), which are posted on our website at www.starwoodhotels.com/corporate/investor_relations.html. The Guidelines address significant corporate governance matters and provide the framework for the Company’s corporate governance policies and practices including: board and committee composition, director and executive ownership guidelines, incentive recoupment and anti-hedging policies, and board and committee assessment. The Corporate Governance and Nominating Committee is responsible for overseeing and reviewing the Guidelines and for reporting and recommending to the Board of Directors any changes to the Guidelines. 6
We have adopted a Finance Code of Ethics (the “Finance Code”), applicable to our Chief Executive Officer, Chief Financial Officer, Corporate Controller, Controller, Corpo Corporate rate Treasurer, Treasurer, Senio Seniorr Vice President-Taxe President-Taxess and other pers pe rson onss pe perf rfor ormi ming ng si simi mila larr fu func ncti tion ons. s. Th Thee Fi Fina nanc ncee Co Code de is po post sted ed on th thee Co Comp mpan any’ y’ss we webs bsit itee at www.starwoodhotels.com/corporate/investor_relations.html. The Company intends to post amendments to, and waivers from, the Finance Code on its website, as required by applicable rules of the Securities and Exchange Commission (the “SEC”). The Company also has a Code of Business Conduct and Ethics (the “Code of Conduct”), applicable to all employees and directors, that addresses legal and ethical issues that may be encountered in carrying out their duties and responsibilities. Subject to applicable law, employees are required to report any conduct they believe to be a vio violat lation ion of the Code of Con Conduc duct. t. The Cod Codee of Conduct Conduct is posted posted on the Com Compan pany’s y’s website website at www.starwoodhotels.com/corporate/investor_relations.html. To further promote transparency and ensure accurate and adequate disclosure, the Company has established a Disclosure Committee comprised of certain senior executives, to design, establish and maintain the Company’s internal controls and other procedures with respect to the preparation of periodic reports required to be filed with the SEC, earnings releases and other written information that the Company decides to disclose to the investment community. The Disclosure Committee evaluates the effectiveness of the Company’s disclosure controls and procedures on a regular basis and maintains written records of its meetings. The Board of Directors also has certain policies relating to retirement and a change in a director’s principal occupation. One policy provides that directors who are not employees of the Company or any of its subsidiaries may not stand for re-election after reaching the age of 72 and that directors who are employees of the Company must retire from the Board upon retirement from the Company. Another policy provides that in the event a director changes his or her principal occupation (including through retirement), such director should voluntarily tender his or her resignation to the Board. The Company indemnifies its directors and officers to the fullest extent permitted by law so that they will be free fr ee fr from om un undu duee co conc ncer ern n ab abou outt pe pers rson onal al li liab abil ilit ity y in co conn nnec ecti tion on wi with th th thei eirr se serv rvic icee to th thee Co Comp mpan any. y. Indemnifi Indem nificati cation on is required pursuant to our Charter and the Company has enter entered ed into agreements agreements with its directors and executive officers undertaking a contractual obligation to provide the same.
Director Independence In accordance with New York Stock Exchange (the “NYSE”) rules, the Board of Directors makes an annual determination as to the independence of the directors and director nominees. A director or director nominee is not deemed dee med ind indepe epende ndent nt unl unless ess the Boa Board rd of Dir Direct ectors ors aff affirm irmati ativel vely y det determ ermine iness tha thatt suc such h dir direct ector or or dir direct ector or nominee has no material relationship with the Company, directly or as an officer, stockholder or partner of an organi org anizat zation ion tha thatt has a rel relati ations onship hip wit with h the Com Compan pany. y. The Boa Board rd of Dir Direct ectors ors obs observ erves es all cri criter teria ia for indepe ind epende ndence nce est establ ablish ished ed by the NYS NYSE E lis listin ting g sta standa ndards rds and oth other er gov govern erning ing law lawss and reg regula ulatio tions. ns. Whe When n assessing materiality of a director’s relationship with the Company, the Board of Directors considers all relevant facts and circumstances, not merely from the director’s standpoint, but from that of the persons or organizations with which the director has an affiliation, and the frequency or regularity of the services, whether the services are being carried carried out at arm’ arm’ss lengt length h in the ordin ordinary ary course of busin business ess and wheth whether er the servi services ces are being provided provided substa sub stanti ntiall ally y on the sam samee ter terms ms to the Company Company as tho those se pre prevai vailin ling g at the tim timee fro from m unr unrela elated ted parties parties for compar com parabl ablee tra transa nsacti ctions ons.. Mat Materi erial al rel relati ations onship hipss can inc includ ludee any com commer mercia cial, l, ban bankin king, g, con consul sultin ting, g, leg legal, al, accounting accou nting,, char charitabl itablee or other business business rela relations tionships hips each dire director ctor or dire director ctor nominee may have with the Company. In addition, the Board of Directors consults with the Company’s external legal counsel to ensure that the Boa Board’ rd’ss det determ ermina inatio tions ns are con consis sisten tentt wit with h all rel releva evant nt sec securi uritie tiess law lawss and oth other er app applic licabl ablee law lawss and regulations regarding the definition of “independent director,” including but not limited to those set forth in pertinent listing standards of the NYSE.
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Our Board of Directors has determined that each of the directors and director nominees, with the exception of Mr. van Paa Paassc sschen hen,, is “in “indep depend endent ent”” und under er the NYSE rul rules es and that the these se dir direct ectors ors have no mat materi erial al relationship with the Company that would prevent the directors from being considered independent. Mr. van Paasschen, as Chief Executive Officer and President of the Company, is not an “independent” director under the NYSE rules. In making this determination, the Board of Directors took into account that three of the non-employee direct dir ectors ors,, Mes Messrs srs.. Aro Aron n and Dal Daley ey and Ms. Gal Galbre breath ath,, hav havee no rel relati ations onship hip wit with h the Com Compan pany y exc except ept as a director and stockholder of the Company and that the remaining six non-employee directors have relationships with companies that do business with the Company that are consistent with the NYSE independence standards as well as independence standards adopted by the Board of Directors.
Communications with the Board The Company has adopted a policy which permits stockholders and other interested parties to contact the Board of Directors. If you are a stockholder or interested interested party and would like to contact the Board of Direct Directors, ors, you may send a letter to the Board of Directors, c/o the Corporate Secretary of the Company, One StarPoint, Stamford, Connect Conn ecticu icutt 0690 06902 2 or cont contact act us onl online ine at www.hotethics.com. It is imp import ortant ant that you ide identi ntify fy yourself yourself as a stockho sto ckholde lderr or an int intere ereste sted d par party ty in the corr correspo esponde ndence nce.. If the cor corres respond pondenc encee cont contains ains com complai plaints nts abou aboutt our Company’s accounting, internal or auditing matters or is directed to the non-employee directors, the Corporate Secreta Secr etary ry wil willl adv advise ise a mem member ber of the Audi Auditt Com Commit mittee tee.. If the cor corres respond pondenc encee con concer cerns ns oth other er mat matter ters, s, the Corporate Secretary will forward the correspondence to the director to whom it is addressed or otherwise as would be appropriate under the circumstances, attempt to handle the inquiry directly (for example where it is a request for information or a stock-related matter), or not forward the communication altogether if it is primarily commercial in nature or relates to an improper or irrelevant topic. At each regularly scheduled Board meeting, the Corporate Secretary or his designee will present a summary of all such communications received since the last meeting that were not forwarded and shall make those communications available to the directors upon request. This policy is also posted on the Company Company’s ’s website at www.starwoodhotels.com/corporate/investor_relations.html .
Posted Documents You may also obtain a free copy of any of the aforementioned posted documents by sending a letter to the Investor Relations Department of the Company, One StarPoint, Stamford, Connecticut 06902. Please note that the information on the Company’s website is not incorporated by reference in this proxy statement.
ELECTION OF DIRECTORS Under the Company’s Charter, each of the Company’s directors is elected to serve until the next annual meeting of stockholders and until his or her successor is duly elected and qualifies. Set forth below is information as of March 9, 2012 regarding the nominees of the Board of Directors for election as a director, which has been confirmed by each of them for inclusion in this proxy statement. Each nominee has agreed to serve on the Board of Directors if elected. If a nominee becomes unavailable for election, proxy holders and stockholders may vote for another nominee proposed by the Board of Directors or, as an alternative, the Board of Directors may reduce the number of directors to be elected at the meeting. On February 16, 2012, Kneeland C. Youngblood, a director of the Company since 2001, notified the Board of Directors of his intention not to stand for re-election at the Annual Meeting. Dr. Youngblood will continue to serve on the Board of Directors and the Compensation and Option and Audit Committees of the Board until immediately prior to the Annual Meeting.
The director nominees, if elected, will serve until the 2013 Annual Meeting or until their successor is duly elected and qualifies. Frits van Paasschen, 51, has been Chief Executive Officer and President of the Company since September 2007. From March 2005 until September 2007, he served as President and Chief Executive Officer of Molson Coors Brewing Company’s largest division, Coors Brewing Company, a brewing company, prior to its merger
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with Miller Brewing Company and the formation of MillerCoors LLC. Prior to joining Coors, from April 2004 until March 2005, Mr. van Paasschen worked independently independently through FPaasschen FPaasschen Consu Consultin lting, g, a consu consultin lting g company, and Mercator Investments, a private equity firm, evaluating, proposing, and negotiating private equity transactions. Prior thereto, Mr. van Paasschen spent seven years at Nike, Inc., a designer, developer and marketer of footw footwear, ear, apparel and acces accessory sory products, most rece recently ntly as Corpo Corporate rate Vice Presi President/ dent/Gener General al Manag Manager, er, Europe, Middle East and Africa from 2000 to 2004. From 1995 to 1997, Mr. van Paasschen served as Vice President, Finance and Planning at Disney Consumer Products, a business segment of The Walt Disney Company that extends the Disney brand to a range of merchandise, and earlier in his career was a management consultant for eight years at the global management consulting firm of McKinsey & Company and the Boston Consulting Group. Mr. van Paasschen has been a director of the Company since September 2007. The Corporate Governance and Nominating Committee considered these qualifications, his valuable insight and uni unique que und unders erstan tandin ding g of the Com Compan pany’s y’s ope operat ration ions, s, and the hot hotel el and lei leisur suree ind indust ustry ry gen genera erally lly,, his significant public company managerial experience, and a requirement under his employment agreement that he serve ser ve on the Com Compan pany’s y’s Boa Board rd of Dir Direct ectors ors (su (subje bject ct to cus custom tomary ary pro proced cedure uress and con condit dition ionss to Boa Board rd membership, including stockholder election) in making the determination that Mr. van Paasschen should be a nominee for director of the Company. Bruce W. Duncan, 60, has been President, Chief Executive Officer and a director of First Industrial Realty Trust, Tru st, Inc Inc., ., a rea reall est estate ate inv invest estmen mentt tru trust st tha thatt eng engage agess in the own owners ership hip,, man manage agemen ment, t, acq acquis uisiti ition, on, sal sale, e, develo dev elopme pment nt and red redeve evelop lopmen mentt of ind indust ustria riall rea reall est estate ate pro proper pertie ties, s, sin since ce Jan Januar uary y 200 2009. 9. He was a pri privat vatee investor prior to that time and since January 2006. From April to September 2007, Mr. Duncan served as Chief Executive Officer of the Company on an interim basis. He also has been a senior advisor to Kohlberg Kravis & Roberts & Co., a global investment firm, from July 2008 to January 2009. From May 2005 to December 2005, Mr. Duncan was Chief Executive Officer and Trustee of Equity Residential (“EQR”), a publicly traded real estate investment trust, and held various positions at EQR from March 2002 to December 2005, including President, Chief Executive Officer and Trustee from January 2003 to May 2005, and President and Trustee from March 2002 to December 2002. Mr. Duncan has served as a director of the Company since April 1999.
The Corporate Governance and Nominating Committee considered these qualifications, his experience as Chief Executive Officer of other publicly traded companies, and his tenure with the Company in making the determination that Mr. Duncan should be a nominee for director of the Company. Adam M. Aron, 57, has been Chief Executive Officer of the Philadelphia 76ers, a professional basketball team and Alternate Governor of the National Basketball Association since 2011 and, since 2006, has been the Chairman and Chief Executive Officer of World Leisure Partners, Inc., a leisure-related consultancy. From 1996 through 2006, Mr. Aron served as Chairman and Chief Executive Officer of Vail Resorts, Inc., an owner and operator of ski resorts and hotels. Mr. Aron is a director of Norwegian Cruise Line Limited, Prestige Cruise Holdings, Inc. and Cap Juluca Properties Ltd. In the past 5 years, Mr. Aron also served as a director of e-Miles LLC, FTD Group Group,, Inc., Rewards Network, Network, Inc. and Mara Marathon thon Acquisition Acquisition Corp. Mr. Aron has been a dire director ctor of the Company since August 2006.
The Corpor Corporate ate Govern Governance ance and Nomin Nominatin ating g Commi Committee ttee consi considered dered these quali qualificat fications, ions, his sign significa ificant nt experience in the leisure travel industry, his financial expertise, and his tenure with the Company in making the determination that Mr. Aron should be a nominee for director of the Company. Charlene Barshefsky , 61, has been Senior International Partner at the law firm of WilmerHale, LLP, in Washington, D.C. since September 2001. From March 1997 to January 2001, Ambassador Barshefsky was the United States Trade Representative, the chief trade negotiator and principal trade policymaker for the United States and a member of the President’s Cabinet. Ambassador Barshefsky has been a director of The Estee Lauder Companies, Compa nies, Inc. since July 2001, American Express Express Compa Company ny since July 2001, and Inte Intell Corpo Corporati ration on since
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January Januar y 200 2004. 4. Amb Ambass assado adorr Bar Barshe shefsk fsky y is a mem member ber of the Cou Counci ncill on For Foreig eign n Rel Relati ations ons,, a Tru Truste steee of the Howard Hughes Medical Institute and a member of the Global Advisory Board of Moelis & Company. In the past 5 years Ambassador Barshefsky also served as a director of Idenix Pharmaceuticals, Inc. and of the Council on Foreign Relations. She has been a director of the Company since October 2001. The Corpor Corporate ate Gover Governance nance and Nomin Nominating ating Committee Committee consi considered dered thes thesee quali qualificat fications, ions, her sign significa ificant nt public policy experience, her governance experience as a result of having served on a number of other public comp co mpan any y bo boar ards ds of di dire rect ctor orss an and d bo boar ard d co comm mmit itte tees es,, an and d he herr te tenu nure re wi with th th thee Co Comp mpan any y in ma maki king ng th thee determination that Ambassador Barshefsky should be a nominee for director of the Company. Thomas E. Clarke, 60, has been President of New Business Ventures of Nike, Inc., a designer, developer and marketer of footwear, apparel and accessory products, since 2001. Dr. Clarke joined Nike in 1980. He was appointed Divisional Vice President in charge of marketing in 1987, Corporate Vice President in 1990, and served as President and Chief Operating Officer from 1994 to 2000. Dr. Clarke previously held various positions with Nike, primarily in research, design, development and marketing. Dr. Clarke has also been a director of Newell Rubbermaid Inc., a global marketer of consumer and commercial products, since 2003. Dr. Clarke has been a director of the Company since April 2008.
The Corpo Corporate rate Governance and Nomin Nominatin ating g Commi Committee ttee consi considered dered these quali qualifica fications tions,, his exper expertise tise in brand marketing, and his tenure with the Company in making the determination that Dr. Clarke should be a nominee for director of the Company. Clayton C. Daley, Jr. , 60 , spent his entire professional career with The Procter & Gamble Company, a global consumer global consumer packaged packaged goods company, company, joi joinin ning g the company company in 197 1974, 4, and has hel held d a num number ber of key accounting accou nting and finan finance ce posit positions ions including including Chief Financial Financial Offic Officer er and Vice Chair for Proct Procter er & Gambl Gamble; e; Comptroller, U.S. Operations for Procter & Gamble USA; Vice President and Comptroller of Procter & Gamble International and Vice President and Treasurer. Mr. Daley retired from Procter & Gamble in October 2009. Mr. Daley has also been a director of Nucor Corporation since 2001 and Foster Wheeler, AG since 2009. In the past 5 years, Mr. Daley served as a director of Boy Scouts of America. In addition, Mr. Daley is Senior Advisor to TPG Capital. Mr. Daley has been a director of the Company since November 2008.
The Corporate Governance and Nominating Committee considered these qualifications, his experience in corporate strategy and planning for a global consumer products company, his financial expertise, and his tenure with the Company in making the determination that Mr. Daley should be a nominee for director of the Company. Lizanne Galbreath, 54, has been Managing Partner of Galbreath & Company, a real estate investment firm, since 1999. From April 1997 to 1999, Ms. Galbreath was Managing Director of LaSalle Partners/Jones Lang LaSalle, a real estate services and investment management firm, where she also served as a director. From 1984 to 1997, Ms. Galbreath served as a Managing Director, Chairman and Chief Executive Officer of The Galbreath Company, the predecessor entity of Galbreath & Company. Ms. Galbreath has been a director of the Company since May 2005.
The Corporate Governance and Nominating Committee considered these qualifications, her expertise in real estate, and her tenure with the Company in making the determination that Ms. Galbreath should be a nominee for director of the Company. Eric Hippeau, 60, has been a Partner with Lerer Ventures, a venture capital fund, since June 2011. From 2009 to 2011 he was the Chief Executive Officer of The Huffington Post, a news website. From 2000 to 2009, he was a Managing Partner of Softbank Capital, a technology venture capital firm. Mr. Hippeau served as Chairman and Chief Executive Officer of Ziff-Davis Inc., an integrated media and marketing company, from 1993 to March 2000 and held various other positions with Ziff-Davis from 1989 to 1993. In the past 5 years, Mr. Hippeau served as a director of Yahoo! Inc. Mr. Hippeau has been a director of the Company since April 1999.
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The Corpor Corporate ate Govern Governance ance and Nomin Nominatin ating g Commi Committee ttee consi considered dered these quali qualificat fications, ions, his sign significa ificant nt experience as a director (including at many privately held companies), and his tenure with the Company in making the determination that Mr. Hippeau should be a nominee for director of the Company. Stephen R. Quazzo, 52, is the Chief Executive Officer and has been the Managing Director and co-founder of Pearlmark Real Estate Partners, L.L.C., formerly known as Transwestern Investment Company, L.L.C., a real estate principal investment firm, since March 1996. From April 1991 to March 1996, Mr. Quazzo was President of Equity Institutional Investors, Inc., a private investment firm and a subsidiary of Equity Group Investments, Inc. Mr. Quazzo has been a director of the Company since April 1999.
The Corporate Governance and Nominating Committee considered these qualifications, his expertise in real estate, and his tenure with the Company in making the determination that Mr. Quazzo should be a nominee for director of the Company. Thomas O. Ryder, 67, retired as Chairman of the Board of The Reader’s Digest Association, Inc., a global media and direct marketing company, in January 2007, a position he had held since January 1, 2006. Mr. Ryder was Chairman of the Board and Chief Executive Officer of that company from April 1998 through December 31, 2005. In addition, Mr. Ryder was Chairman of the Board and Chairman of the Audit Committee of Virgin Mobile USA, Inc Inc., ., a wir wirele eless ss ser servic vicee pro provid vider, er, fro from m Oct Octobe oberr 200 2007 7 to Nov Novemb ember er 200 2009. 9. Mr. Ryd Ryder er was Pre Presid sident ent,, American Ameri can Expre Express ss Trave Travell Relat Related ed Servi Services ces Inter Internatio national, nal, a divis division ion of Amer American ican Express Compa Company, ny, which provides travel, financial and network services, from October 1995 to April 1998. In addition, he has been a director direc tor of Amazo Amazon.com n.com,, Inc. since November 2002, Quad/ Quad/Graphi Graphics, cs, Inc. since September September 2010, and RPX Corporation since December 2009. In the past 5 years, Mr. Ryder has also served as a director of World Color Press, Inc., a company acquired by Quad/Graphics, Inc. in July 2010. Mr. Ryder has been a director of the Company since April 2001.
The Corpo Corporate rate Gover Governance nance and Nomin Nominating ating Comm Committee ittee considered considered these qualification qualifications, s, his finan financial cial expertise, and his tenure with the Company in making the determination that Mr. Ryder should be a nominee for director of the Company. The Board of Directors unanimously recommends a vote “FOR” the election of each of these nominees.
Board Meeting, Committee Meeting and Annual Meeting Attendance Directors are expec Directors expected ted to atte attend nd Board of Direc Directors tors meetings, meetings, meetings of comm committee itteess on which they serve and the ann annual ual mee meetin ting g of sto stockh ckhold olders ers.. The Com Compan pany y enc encour ourage agess all dir direct ectors ors to att attend end all mee meetin tings gs and believes that attendance at the annual meeting is as important as attendance at meetings of the Board of Directors and its committees. All of our incumbent directors attended the 2011 Annual Meeting of Stockholders. During the year ended December 31, 2011, the Board of Directors held five meetings. In addition, directors attended meetings of individual Board of Directors committees. Each incumbent director who was a member of the Board of Directors in 2011 attended at least 75% of the meetings of the Board of Directors and the Board of Directors committees on which he or she served.
Board Committees The Boa Board rd of Dir Direct ectors ors has est establ ablish ished ed fou fourr sta standi nding ng com commit mittee tees: s: the Aud Audit it Com Commi mitte ttee, e, the Cap Capita itall Commi Com mitte ttee, e, the Com Compen pensat sation ion and Opt Option ion Com Commit mittee tee and the Cor Corpor porate ate Gov Govern ernanc ancee and Nom Nomina inatin ting g Committee. Each of the standing committees operates pursuant to a written charter adopted by the Board, which is ava availa ilable ble on the Com Compan pany’s y’s web websit sitee at www.starwoodhotels.com/corporate/investor_relations.html. Ea Each ch committee’s principal functions are described below: The Au The Audi ditt Co Comm mmiitt ttee ee,, wh whic ich h has has be been en est estab abllis ish hed in ac acccor orda danc ncee wi with th Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is currently Audit
Committee.
11
comprised compri sed of Mes Messrs srs.. Dal Daley ey (ch (chair airper person son), ), Aro Aron, n, Cla Clarke rke and You Youngb ngbloo lood, d, all of who whom m are “in “indep depend endent ent”” directors, as determined by the Board in accordance with the NYSE listing requirements and applicable federal securi sec uritie tiess law laws. s. The Board of Dir Direct ectors ors has det determ ermine ined d tha thatt eac each h of Mes Messrs srs.. Dal Daley ey and Aron is an “au “audit dit committee commi ttee financial financial exper expert” t” under federal securities securities laws. The Board of Direc Directors tors has adopt adopted ed a writ written ten charter for the Audit Committee Committee which states that the Audit Comm Committee ittee provides provides overs oversight ight regarding regarding accou accounting nting,, auditi aud iting ng and fin financ ancial ial rep report orting ing pra practi ctices ces of the Com Compan pany. y. The Aud Audit it Com Commit mittee tee sel select ectss and eng engage agess the Company’s independent registered public accounting firm to audit the Company’s annual consolidated financial statements state ments and discusses with it the scope and resul results ts of the audit. The Audit Committee Committee also discusses discusses with the independen indep endentt regis registered tered publi publicc accou accounting nting firm, and with mana managemen gement, t, finan financial cial accou accounting nting and repor reporting ting principle princ iples, s, polic policies ies and prac practices tices and the adequ adequacy acy of the Company’s accounting, accounting, fina financial ncial,, opera operating ting and disclosure controls. The Audit Committee met nine times during 2011. Capital Capit al Commi Committee. ttee. The Cap Capita itall Com Commit mittee tee is cur curren rently tly com compri prised sed of Mr. Qua Quazzo zzo (ch (chair airper person son), ), Ms. Galbreath and Messrs. Hippeau and Ryder, all of whom are “independent” directors, as determined by the Board in accordance with the NYSE listing requirements and applicable federal securities laws. The Capital Committee was established in November 2005 to exercise some of the power of the Board relating to, among other things, capital plans and needs, merge mergers rs and acquisitions, acquisitions, divestitures divestitures and other significant significant corporate corporate opportunities between meetings of the Board. The Capital Committee met six times during 2011. Compensati Compe nsation on and Optio Option n Commit Committee. tee. Und Under er the ter terms ms of its charter, charter, the Com Compen pensat sation ion and Opt Option ion Committee (the “Comp Committee “Compensat ensation ion Committee”) Committee”) is requi required red to consi consist st of thre threee or more memb members ers of the Board who meet the indep independen endence ce requi requireme rements nts of the NYSE, are “non-employee “non-employee directors” directors” pursu pursuant ant to Excha Exchange nge Act Rule 16b-3, and are “outside directors” for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”). The Compensation Committee is currently comprised of Messrs. Aron (chairperson), Clarke, Daley, Ryder and Youngblood, all of whom are “independent” directors, as determined by the Board in accordance accor dance with the NYSE list listing ing requi requireme rements nts and appli applicable cable federal securities securities laws. The Compe Compensati nsation on Committee makes recommendations to the Board with respect to the salaries and other compensation to be paid to the Company’s executive officers and other members of senior management, and administers the Company’s employ emp loyee ee ben benefi efits ts pla plans, ns, inc includ luding ing the Com Compan pany’s y’s 200 2004 4 Lon Long-T g-Term erm Inc Incent entive ive Com Compen pensat sation ion Pla Plan. n. The Compensation Committee met six times during 2011. Corpor Cor porate ate Gov Govern ernanc ancee and Nom Nomina inatin ting g Com Commit mittee tee.. The Cor Corpor porate ate Gov Govern ernanc ancee and Nom Nomina inatin ting g Committee (the “Gove Committee “Governanc rnancee Comm Committe ittee”) e”) is curre currently ntly compr comprised ised of Ambas Ambassador sador Barshefsky Barshefsky (chai (chairper rperson), son), Ms. Galbreath, and Messrs. Duncan and Hippeau, all of whom are “independent” directors, as determined by the Board in accordance with the NYSE listing requirements and applicable federal securities laws. The Governance Committee, operating pursuant to a written charter, was established in May 2004 and combines the functions of the Corporate Governance Committee and the Nominating Committee. The Governance Committee establishes, or assists in the establishment of, the Company’s governance policies (including policies that govern potential confli con flicts cts of int intere erest) st) and mon monito itors rs and adv advise isess the Com Compan pany y as to com compli plianc ancee wit with h tho those se pol polici icies. es. The Governance Committee reviews, analyzes, advises and makes recommendations to the Board with respect to situations, opportunities, relationships and transactions that are governed by such policies, such as opportunities in which a director or executive officer or their affiliates has a personal interest. In addition, the Governance Commi Com mitte tteee is res respon ponsib sible le for mak making ing rec recomm ommend endati ations ons for can candid didate atess to the Boa Board rd (ta (takin king g int into o acc accoun ountt suggestions made by officers, directors, employees and stockholders), recommending directors for service on Boar Bo ard d co comm mmit itte tees es,, de deve velo lopi ping ng an and d re revi view ewin ing g ba back ckgr grou ound nd in info form rmat atio ion n fo forr ca cand ndid idat ates es,, an and d ma maki king ng recomm rec ommend endati ations ons to the Boa Board rd of Dir Direct ectors ors for cha change ngess to the Gui Guidel deline iness rel relate ated d to the nom nomina inatio tion n or qualifications of directors or the size or composition of the Board of Directors. The Governance Committee met five times during 2011.
There are no firm prerequisites to qualify as a candidate for the Board, although the Board of Directors seeks a diver diverse se group of candi candidates dates who possess the backg background round,, skil skills ls and exper expertise tise relevant relevant to the business business of the Company, or candidates that possess a particular geographical or international perspective. The Board of 12
Directors looks for candidates with qualities that include strength of character, an inquiring and independent mind, practical wisdom and mature judgment. The Board of Directors seeks to insure that at least two-thirds of the directors are independent under the Guidelines, and that members of the Audit Committee meet the financial literacy requirements under the rules of the NYSE and at least one of them qualifies as an “audit committee financial expert” under applicable federal securities laws. The Governance Committee does not have a set policy for considering considering or weigh weighing ing diversity diversity in identifying identifying nomin nominees ees but does seek to have a diver diversity sity of backg background rounds, s, skills and perspectives among Board members, and considers how the background, skills and perspectives of the nominee would contribute to the total mix of backgrounds, skills and perspectives that would be available to the Board as a whole. The Governance Committee reviews the qualifications and backgrounds of the directors and the overall composition of the Board on an annual basis, and recommends to the full Board of Directors the slate of directors to be recommended for nomination for election at the next annual meeting of stockholders. The Board of Directors does not believe that its members should be prohibited from serving on boards and/ or committees of other organizations, and the Board of Directors has not adopted any guidelines limiting such activities. However, the Governance Committee and the full Board of Directors will take into account the nature of, and time involved in, a director’s service on other boards in evaluating the suitability of individual directors and in making its recommendations to Company stockholders. However, service on boards and/or committees of other organizations must be consistent with the Company’s conflict of interest policies. The Governance Committee may from time-to-time utilize the services of a search firm to help identify and evaluate candidates for director who meet the criteria and qualifications outlined above. The Governance Committee will consider candidates for nomination recommended by stockholders and submitted for consideration. Although it has no formal policy regarding stockholder candidates, the Governance Committee believes that stockholder candidates should be reviewed in substantially the same manner as other candidates. Under the Company’s current Bylaws, stockholder nominations of individuals to be elected as directors at an annual meeting of our stockholders must be made in writing and delivered to the Corporate Secretary of the Company, One StarPoint, Stamford, Connecticut 06902, and be received by the Corporate Secretary no later than the close of business on the 75th day nor earlier than the close of business on the 100th day prior to the first anniversar anniv ersary y of the preceding preceding year’ year’ss annua annuall meet meeting. ing. In accor accordance dance with the Compa Company’s ny’s current Bylaws, in addition to other required information specified in the Bylaws, such notice shall set forth as to each proposed nominee (i) the name, age and business address of each nominee proposed in such notice, and a statement as to the qualification of each nominee, (ii) the principal occupation or employment of each such nominee, (iii) the number of shares which are beneficially owned and owned of record by the nominating stockholder, and (iv) any other information concerning the nominee that must be disclosed of nominees in proxy solicitations regulated by Regulation Regul ation 14A of the Exchan Exchange ge Act, including, including, witho without ut limitation, limitation, such perso person’s n’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected. The Company provides a comprehensive orientation for all new directors. The process involves a corporate overview, one-on-one meetings with members of senior management and an orientation meeting. In addition, all directors direc tors are given written materials materials provi providing ding information information on the Compa Company’s ny’s business, business, its operations operations and decision-making processes.
Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Exchange Act requires that the Company’s directors and executive officers, and persons who own more than 10 percent of the outstanding shares of the Company, file with the SEC (and provide a copy to the Company) certain reports relating to their ownership of shares. To the Company’s knowledge, based solely on a review of the copies of these reports furnished to the Company Compa ny for the fiscal year ended December December 31, 2011, and writt written en repr represent esentatio ations ns from our directors and executive officers, all Section 16(a) filing requirements applicable to its directors, executive officers and greater than 10 percent beneficial owners were complied with for the most recent fiscal year. 13
RATIFICATION OF APPOINTMENT OF INDEPENDENT RATIFICATION REGISTERED REGISTERE D PUBLIC ACCOUNTING FIRM The Board of Directors has appointed and is requesting ratification by stockholders of the appointment of Ernst & Young LLP (“Ernst & Young”) as the Company’s independent registered public accounting firm for fiscal year 2012. While not required by law, the Board is asking its stockholders to ratify the selection of Ernst & Young as a matt matter er of good corpo corporate rate governance governance practice. practice. Repre Representa sentative tivess of Ernst & Young are expected to be present at the Annual Meeting, will have an opportunity to make a statement, if they desire to do so, and will be available to respond to appropriate questions. If the appointment of Ernst & Young is not ratified, the Board and the Aud Audit it Com Commit mittee tee wil willl rec recons onside iderr the sel select ection ion of Ern Ernst st & You Young ng as the ind indepe epende ndent nt reg regist istere ered d pub public lic accounting firm for fiscal year 2012. The Board of Directors unanimously recommends a vote “ FOR” ratification of the appointment of Ernst & Young as the Company’s independent registered public accounting firm for fiscal year 2012.
ADVISORY VOTE ON NAMED EXECUTIVE OFFICER COMPENSATION COMPENSATION The Board of Directors is committed to the highest standards of corporate governance and recognizes the significant interest of stockholders and investors in executive compensation matters. The Company has designed its executive compensation programs to attract, motivate, reward and retain the seniorr manag senio managemen ementt tale talent nt requi required red to achie achieve ve our corpo corporate rate objectives objectives and increase stockholder stockholder value value.. We believe that our compensation programs are centered on pay-for-performance principles and are strongly aligned with the long-term interests of our stockholders. See the discussion of the compensation of our named executive Compensation sation Discussion and Analys Analysis is beginning on page 20 of this proxy officers offic ers in the section entitled Compen statement. At last year’s annual meeting, we provided our stockholders with the opportunity to cast a non-binding advisory vote regarding the compensation of our named executive officers as disclosed in the proxy statement for the 2011 Annual Meeting of Stockholders. Our stockholders overwhelmingly approved the proposal, with more than 96% of the votes cast in favor of the proposal. We also asked our stockholders to indicate if we should hold a “sa “say-o y-on-p n-pay” ay” vot votee eve every ry one one,, two or thr three ee yea years. rs. Con Consis sisten tentt wit with h the recommen recommendat dation ion of our Board of Directors, our stockholders indicated by non-binding advisory vote their preference to hold a “say-on-pay” vote annually. After consideration of the 2011 voting results, and based upon its prior recommendation, our Board of Directors elected to hold “say-on-pay” votes on an annual basis. Accordingly, this year we are again asking our stockholde stock holders rs to indicate their support for the compensation compensation of our Chief Execu Executive tive Officer, Officer, Chief Financial Financial Office Off icerr and our thr three ee mos mostt hig highly hly com compen pensat sated ed exe execut cutive ive off office icers, rs, as det determ ermine ined d for 201 2011 1 (th (thee “Na “Named med Executive Execu tive Officers”) Officers”) as disc disclosed losed in the Compensation Compensation Discu Discussio ssion n and Analy Analysis, sis, compensation compensation tables and narrative discussion of this proxy statement, as required by Section 14A of the Exchange Act. The “say-on-pay” vote is not intended to address any specific item of compensation, but, rather, the overall compensation of our Named Executive Officers and the philosophy, policies and practices related thereto. We expect to hold the next “say-on-pay” vote in connection with our 2013 Annual Meeting of Stockholders. Accordingly, we are asking our stockholders to vote “ FOR” the following resolution at the Annual Meeting: “RESOLVED, “RESOL VED, that the Company’s stockholders stockholders hereby approve, on a non-b non-bindin inding g advis advisory ory basis basis,, the compensation paid to our Named Executive Officers, as disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, compensation tables and narrative discussion in our proxy statement for the 2012 Annual Meeting of Stockholders.”
14
Thiss “sa Thi “say-o y-on-p n-pay” ay” vot votee is adv adviso isory, ry, and the theref refore ore is not bin bindin ding g on the Com Compan pany, y, the Com Compen pensat sation ion Committee or the Board of Directors. However, the Compensation Committee and the Board of Directors value the opinions of our stockholders and expect to consider the outcome of the “say-on-pay” vote when making future compensation decisions. The Board of Directors unanimously recommends a vote “ FOR” the approval, on a non-binding advisory basis,, of the execu basis executive tive compensation compensation program for the Company’s Named Executive Executive Offi Officers cers as disc disclosed losed in the Compensation Discussion and Analysis, compensation tables and narrative discussion of this proxy statement.
BENEFICIAL OWNERSHIP OF PRINCIPAL STOCKHOLDERS STOCKHOLDERS The table below shows the number of Company shares beneficially owned by principal stockholders who beneficia benefi cially lly own more tha than n fiv fivee per percen centt of the Company’ Company’ss out outsta standi nding ng sha shares res as of Mar March ch 9, 201 2012. 2. The information in this table is based upon the latest filings of either a Schedule 13D, Schedule 13G or Form 13F (or amendments thereto) as filed by the respective stockholder with the SEC as of the date stated in the below footnotes. We calculate the stockholder’s percentage of ownership assuming the stockholder beneficially owned that number of shares on March 9, 2012, the record date for the Annual Meeting. Unless otherwise indicated, the stockholder had sole voting and dispositive power over the shares. Amount and Nature of Beneficial Ownership
Name and Address of Beneficial Owner
T. Ro Rowe we Pr Pric icee As Asso soci ciat ates es,, Inc Inc.( .(1) 1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 E. Pratt Street Baltimore, MD 21202 Wadd Wa ddel elll & Re Reed ed Fi Fina nanc ncia ial, l, In Inc. c.(2 (2)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6300 Lamar Avenue Overland Park, KS 66202 Thee Va Th Vang ngua uard rd Gr Grou oup, p, In Inc. c.(3 (3)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 Vanguard Blvd. Malvern, PA 19355
Percent of Class
19,5 19 ,508 08,6 ,619 19
9.90 9. 90% %
16,2 16 ,253 53,8 ,864 64
8.25 8. 25% %
10,3 10 ,379 79,3 ,391 91
5.27 5. 27% %
(1) Based on information information contained contained in a Sched Schedule ule 13G/A, dated February February 14, 2012 (the “Price Associates Associates 13G/ A”),, fil A”) filed ed by T. Row Rowee Pri Price ce Ass Associ ociate ates, s, Inc Inc.. (“P (“Pric ricee Ass Associ ociate ates”) s”) with the SEC, wit with h res respec pectt to the Company, reporting beneficial ownership as of December 31, 2011. The Price Associates 13G/A reports thatt Pri tha Price ce Ass Associ ociate atess has sol solee vot voting ing pow power er ove overr 6,5 6,587, 87,053 053 sha shares res and sol solee dis dispos positi itive ve pow power er ove overr 19,508,619 shares. These securities are owned by various individual and institutional investors which Price Associates serves as an investment adviser with power to direct investments and/or sole power to vote the securitie secur ities. s. For the purpo purposes ses of the reporting reporting requi requireme rements nts of the Exchange Act, Price Associates Associates is deeme deemed d to be a beneficial owner of such securities; however, Price Associates expressly disclaims that it is, in fact, the beneficial owner of such securities. (2) Based on informati information on contained contained in a Schedu Schedule le 13G/A, dated February February 14, 2012 (the “Waddell “Waddell & Reed 13G/ A”), A” ), fi file led d by Wa Wadd ddel elll & Re Reed ed Fi Fina nanc ncia ial, l, In Inc. c. (W (WDR DR”) ”),, Wa Wadd ddel elll & Re Reed ed Fi Fina nanc ncia iall Se Serv rvic ices es,, In Inc. c. (“WRFS (“W RFSI”) I”),, Wad Waddel delll & Ree Reed, d, Inc Inc.. (“W (“WRI” RI”), ), Wad Waddel delll & Ree Reed d Inv Invest estmen mentt Man Manage agemen mentt Com Compan pany y (“WRIMCO”), and Ivy Investment Management Company (“IICO”) (collectively “Waddell & Reed”) with the SEC, wit with h res respec pectt to the Com Compan pany y rep report orting ing ben benefi eficia ciall own owners ership hip as of Dec Decemb ember er 31, 201 2011. 1. The Waddell & Reed 13G/A reports that Waddell & Reed has sole voting power and sole dispositive power over 16,253,864 shares as follows: WDR holds 16,253,864 shares indirectly; WRFSI holds 3,646,205 shares indirectly; WRI holds 3,646,205 shares indirectly; WRIMCO holds 3,646,205 shares directly; and IICO holds 12,607,659 shares directly. 15
(3) Based on information information contained in a Schedule 13G/A, dated February 6, 2012 (the “Vanguard 13G/A”) filed by The Vanguard Group, Inc. (“Vanguard”) with the SEC, with respect to the Company, reporting beneficial ownership as of December 31, 2011. The Vanguard 13G/A reports that Vanguard has sole voting power over 271,130 shares, sole disp dispositi ositive ve power over 10,108 10,108,261 ,261 shares and share shared d dispo dispositiv sitivee power over 271,13 271 ,130 0 sha shares res.. Van Vangua guard rd Fid Fiduci uciary ary Tru Trust st Com Compan pany, y, a who wholly lly-ow -owned ned sub subsid sidiar iary y of Van Vangua guard, rd, hol holds ds 271,130 shares and directs the voting of those shares.
BENEFICIAL BENEFICIA L OWNERSHIP OF DIRECTOR DIRECTORS S AND EXECUTIVE OFFICERS The table below shows the beneficial ownership of Company shares of (i) each director, (ii) each nominee for director, (iii) our Chief Executive Officer, our Chief Financial Officer and each of the other three most highly paid executive officers and (iv) all directors and executive officers as a group, as of January 31, 2012. Beneficial ownership includes any shares that a director, nominee for director or executive officer may acquire pursuant to stock options and other derivative securities that are exercisable on that date or that will become exercisable within 60 days thereafter. Unless otherwise indicated, the stockholder had sole voting and dispositive power over the shares. Amount and Nature of Beneficia Benef iciall Owners Ownership hip
Name (Listed alphabetically alphabetically))
Adam M. Ar Adam Aron on . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Matthew E. Avril . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Char Ch arllen enee Ba Bars rshe heffsk sky y ........................................... Thomas E. Clarke . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Clay Cl ayto ton n C. Da Dale ley, y, Jr Jr.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bruc Br ucee W. W. Dun Dunca can n . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . Liza Li zann nnee Ga Galb lbrrea eatth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Eriic Hi Er Hipp ppea eau u .. . . .. . . . . . .. . . . . .. . . . . . .. . . . . .. . . . . . .. . . . . .. . . . . . Vasa Va san nt M. Pr Praabh bhu u .............................................. Steeph St phen en R. Qu Quaz azzzo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thom Th omas as O. Ry Ryde derr . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kenn Ke nnet eth h S. Si Sieege gell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sim Si mon M. Tu Turrne nerr . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Frits van Paasschen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kneeeland C. Youngblood . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kn All Directors, Nominees for Directors and executive officers as a group (17 (1 7 pe pers rso ons ns)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Percent of Clas Classs
55,378 55,3 78(1 (1))(2 (2)) 127,4 ,45 51(1) 45,7 45 ,769 69(1 (1))(4 (4)) 31,2 ,25 54(1) 28,2 28 ,286 86(1 (1)( )(4) 4)(5 (5)) 225, 22 5,97 979( 9(1) 1)(4 (4)( )(6) 6) 54,2 54 ,245 45(1 (1))(4 (4)) 68,0 68 ,069 69(1 (1))(4 (4)) 433 33,1 ,130 30(1 (1)) 79,5 79 ,509 09(1 (1))(7 (7)) 84,8 84 ,814 14(1 (1))(4 (4)) 287 87,4 ,451 51(1 (1)) 393 93,3 ,345 45(1 (1))(8 (8)) 845,8 ,86 63(1) 40,1 ,12 28(1) 3,0 3, 040 40,6 ,619 19(1 (1))
(3) (3) (3) (3)) (3 (3) (3)) (3 (3)) (3 (3)) (3 (3)) (3 (3)) (3 (3)) (3 (3)) (3 (3)) (3 (3)) (3 (3) (3) (3)) (3
(1) Includes Includes shares subject to presently exercisable exercisable options, options, and optio options, ns, restricted restricted stock and rest restricte ricted d stock units that will become exercisable or vest within 60 days of January 31, 2012, as follows: 32,970 for Mr. Aron; 127,451 for Mr. Avril; 29,614 for Ambassador Barshefsky; 112,047 for Mr. Jeffrey M. Cava; 24,860 for Dr. Clarke; 20,573 for Mr. Daley; 76,014 for Mr. Duncan; 40,593 for Ms. Galbreath; 40,593 for Mr. Hippeau; 117,151 for Mr. Philip P. McAveety; 409,780 for Mr. Prabhu; 40,593 for Mr. Quazzo; 40,593 for Mr. Ryder; 223,662 for Mr. Siegel; 366,405 for Mr. Turner; 843,832 for Mr. van Paasschen and 29,614 for Dr. Youngblood. (2) Incl Includes udes 10,000 10,000 shares shares owned jointly jointly with with spouse. spouse. (3) Les Lesss tha than n 1%. (4) Amount Amount includes includes the fol follow lowing ing number number of “ph “phant antom” om” stock units receive received d as a res result ult of the followi following ng directors’ election to defer directors’ annual fees: 4,056 for Ambassador Barshefsky; 4,198 for Mr. Daley; 7,300 for Mr. Duncan; 12,623 for Ms. Galbreath; 25,625 for Mr. Hippeau; and 20,579 for Mr. Ryder.
16
(5) Includes Includes 3,000 shares shares held by the Clayton C. Daley, Jr. Revocable Revocable Trust Trust of which Mr. Daley is a trustee trustee and beneficiary. (6) Includes Includes 121,866 121,866 shares held by The Bruce W. Duncan Revocabl Revocablee Trust of which Mr. Duncan Duncan is a trus trustee tee and beneficiary. (7) Includes Includes 33,020 shares shares held by a trus trustt of which Mr. Quazzo Quazzo is settlor and over which he shares investmen investmentt control, and 397 shares owned by Mr. Quazzo’s wife in a retirement account. (8) Incl Includes udes 19,958 19,958 shares shares owned jointly jointly with with spouse. spouse. The following table provides information as of December 31, 2011 regarding shares that may be issued under equity compensation plans maintained by the Company.
Equity Compensation Plan Information-December 31, 2011
Plan Category
Equity compensation plans approved by security holders . . . . . . . . . . . . . . . . . . . . . Equity compensation plans not approved by security holders . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (c)
Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a)
Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (b)
13,567,571
$15.14
—
—
—
13,567,571
$15.14
55,717,431
55,717,431(1)
(1) Does not include shares shares underlying underlying deferred restricte restricted d stock units units that vest over three years and may be settled in shares that were granted pursuant to the Annual Incentive Plan for Certain Executives, amended and restated restated as of Dec Decemb ember er 200 2008 8 (th (thee “Ex “Execu ecutiv tivee Pla Plan”) n”).. The Exe Execut cutive ive Pla Plan, n, as it was app approv roved ed by stockholders at the 2010 Annual Meeting, did not limit the number of deferred restricted stock units that may be issued. In addition, 10,048,154 shares remain available for issuance under our Employee Stock Purchase Plan, a stock purchase plan meeting the requirements of Section 423 of the Code.
17
EXECUTIVE EXECUTIV E AND DIRECTOR COMPENSATION I.
EXEC EX ECUTI UTIVE VE OFF OFFIC ICERS ERS Our executive officers and their positions as of March 9, 2012 are: Name (listed alphabetically, after Chief Executive Officer)
Frits van Paass Frits Paasschen chen . . . . . . . . . . . . . . . . . Matthe Mat thew w E. Avri Avrill . . . . . . . . . . . . . . . . . . . Jeffre Jef frey y M. Cava Cava . . . . . . . . . . . . . . . . . . . . Philip P. McAvee Philip McAveety ty . . . . . . . . . . . . . . . . . Vasant Vas ant M. M. Prabhu Prabhu . . . . . . . . . . . . . . . . . . Kenneth Kenne th S. Siege Siegell . . . . . . . . . . . . . . . . . . Simon Sim on M. Turn Turner er . . . . . . . . . . . . . . . . . . .
Position
Chief Execu Executive tive Offic Officer er and Presi President dent and a Direc Director tor Presid Pre sident ent,, Hotel Hotel Grou Group p Execut Exe cutive ive Vice Vice Pres Preside ident nt and and Chief Chief Human Human Reso Resourc urces es Officer Executive Execu tive Vice Presi President dent and and Chief Chief Brand Brand Officer Officer Vicee Chairm Vic Chairman an and and Chief Chief Finan Financia ciall Office Officerr Chief Admin Administr istrativ ativee Officer, Officer, Genera Generall Counsel Counsel and Secretary Presid Pre sident ent,, Global Global Dev Develo elopme pment nt
The biography for Mr. van Paasschen, our Chief Executive Officer and President, follows the table listing Election n of Direct Directors ors beginning on page 8 of this proxy statement. our dire directors ctors under the section enti entitled tled Electio Biographies for our other executive officers follow: Matthew E. Avril. Mr. Avril, 51, has been President, Hotel Group since September 2008. From May 2005 until August 2008, he was President and Managing Director of Operations for Starwood Vacation Ownership, Inc. (“SVO”), a subsidiary of the Company that focuses on the development and operation of vacation ownership resorts and marketing, selling and financing vacation ownership interests in the resorts; and immediately prior, from September 2002 to May 2005, served as Senior Vice President for SVO. Mr. Avril was with Vistana, Inc. (SVO’s predecessor entity) for the ten year period from January 1989 to December 1998, serving as its Executive Vice President and Chief Operating Officer and, prior to that, as the company’s Chief Financial Officer. Prior to joining Vistana, Mr. Avril, a certified public accountant, spent five years with KPMG Peat Marwick, a public accounting firm. Mr. Avril is also a member of the board of directors of API Technologies Corp. Jeffrey M. Cava. Mr. Cava, 60, has been Executive Vice President and Chief Human Resources Officer since May 2008. Mr. Cava served as Executive Vice President and Chief Human Resources Officer for Wendy’s International, Inc., a restaurant franchising company specializing in quick-service hamburgers, from June 2003 to May 2008. Prior to joining Wendy’s, Mr. Cava was Vice President and Chief Human Resources Officer for Nike, Inc., a designer, developer and marketer of footwear, apparel and accessory products; Vice President Human Resources for The Walt Disney Company, Consumer Products Group, a business segment of The Walt Disney Company that extends the Disney brand to a range of merchandise; and Vice President of Global Staffing, Training and Development for ITT Sheraton Corporation, a hotel company. Mr. Cava is also a member of the board of directors and chairs the compensation committee of The Society for Human Resources Management, a non-profit global human resources professional organization. Philip P. McAveety. Mr. McAveety, 45, has been Executive Vice President and Chief Brand Officer since April 2008. Prior to joining the company, Mr. McAveety was Global Brand Director of Camper, SL, a fashion footwear company, from January 2007 until March 2008. From July 1997 until December 2006, he served as Vicee Pre Vic Presid sident ent,, Bra Brand nd Mar Market keting ing,, Eur Europe ope,, Mid Middle dle Eas Eastt and Afr Africa ica at Nik Nike, e, Inc Inc., ., a des design igner, er, dev develo eloper per and marketer of footwear, apparel and accessory products. Vasant M. Prabhu. Mr. Prabhu, 52, has been Vice Chairman and Chief Financial Officer since February 2010. Prior to that, he was Executive Vice President and Chief Financial Officer since January 2004. Prior to joining the Company, Mr. Prabhu served as Executive Vice President and Chief Financial Officer for Safeway Inc., a North American food and drug retailer specializing in grocery and general merchandise, from September 2000 through December 2003. Mr. Prabhu was previously the President of the Information and Media Group at
18
the McGraw-Hill Companies, Inc., a provider of information services for the financial, education, commercial, and com commod moditi ities es mar market ket wor worldw ldwide ide,, fro from m Jun Junee 199 1998 8 to Aug August ust 200 2000, 0, and hel held d sev severa erall sen senior ior pos positi itions ons at divisions of PepsiCo, Inc., a global food, snack and beverage company, from June 1992 to May 1998. From August 1983 to May 1992 he was a partner at Booz Allen Hamilton Inc., an international management consulting firm. Mr. Prabhu is a member of the board of directors of Mattel, Inc. Kenneth S. Siegel. Mr. Siegel, 56, has been Chief Administrative Officer and General Counsel since May 2006. From November 2000 to May 2006, Mr. Siege Siegell held the posit position ion of Execu Executive tive Vice President and General Counsel. In February 2001, he was also appointed as the Secretary of the Company. Mr. Siegel was formerly the Senior Vice President and General Counsel of Gartner, Inc., a provider of research and analysis on information techno tec hnolog logy y ind indust ustrie ries, s, fro from m Jan Januar uary y 200 2000 0 to Nov Novemb ember er 200 2000. 0. Pri Prior or to tha thatt tim time, e, he ser served ved as Sen Senior ior Vice President, Presi dent, General Counsel and Corporate Secretary Secretary of IMS Health Incor Incorporat porated, ed, an info informati rmation on serv services ices company, and its predecessors from February 1997 to December 1999. Prior to that time, Mr. Siegel was a Partner in the law firm of Baker & Botts, LLP. Mr. Siegel is also a Trustee of Cancer Hope Network, a non-profit entity, a Trustee of Minority Corporate Counsel Association, and a Trustee of the American Hotel & Lodging Educational Foundation. Simon M. Turner. Mr. Turner, 50, has been President, Global Development since May 2008. From June 1996 to April 2008, he was a princ principal ipal of Hotel Capital Capital Advisers, Inc., a hotel investmen investmentt advis advisory ory firm. During this period, Mr. Turner served on the board of directors of Four Season Hotels, Inc., serving as a member of the Human Resources Committee and the Audit Committee. He was also a member of the board of directors of Fairmont Raffles Hotels International and was chairman of the Audit Committee. From July 1987 to May 1996, Mr. Turner was a member of the Investment Banking Department of Salomon Brothers, based in both New York and London.
19
II.
COMPENSATION COMPENSATI ON DISCUSSION AND ANALYSIS
Executive Summary Our executive compensation program is designed to attract, motivate and retain executive officers and other key employees who contribute to the Company’s success in a way that rewards performance and aligns ali gns pay wit with h our sto stockh ckhold olders ers’’ lon long-t g-term erm int intere erests sts.. The Com Compen pensat sation ion Com Commit mittee tee rev review iewss the Company’s overall compensation strategy for all employees, including our Named Executive Officers, on an annual basis. In the course of this review, the Compensation Committee considers the Company’s current compen com pensat sation ion pro progra grams ms and whe whethe therr to mod modify ify the them m or int introd roduce uce new pro progra grams ms to bet better ter mee meett the Company’s overall compensation objectives. Key highlights of our executive compensation program for fiscal 2011 included: Pay Decisions • Base Salaries Remained Generally Unaltered — the base salary of Mr. van Paasschen was the same as fiscal 2010; the base salaries of the other Named Executive Officers remained relatively unchanged compared to fiscal 2010, with the exception of Mr. Turner, whose salary went up 15.6% when compared to fiscal 2010, to more closely align with the median base salary of executives at peer companies. companies. Incentive tive Pay Largely Conting Contingent ent upon the Compan Company’s y’s Performance Performance — 75% of our Named • Incen Executive Execu tive Officers’ Officers’ tota totall targe targett annua annuall bonus opportunity opportunity was depen dependent dent upon the Company’s financial results, up 15% for Mr. van Paasschen and 25% for the other Named Executive Officers compared compa red to fisca fiscall 2010; maximum maximum payou payoutt elig eligibili ibility ty for the Compa Company ny financial portion portion of the annual bonus was 98% for 2011, compared with 120% in 2010. Decrea rease se in Equ Equity ity Gra Grants nts — the total equity • Dec equity gra grants nts made to our Named Exe Execut cutive ive Officers Officers decreased by approximately 2% when compared to fiscal 2010. CEO’ss Stoc Stock k Own Owners ership hip Req Requir uireme ement nt Inc Increa reased sed — Mr • CEO’ Mr.. va van n Pa Paas assc sche hen’ n’ss st stoc ock k ow owne ners rshi hip p requirement was increased to a multiple of six times his base salary, up one multiple when compared to fiscal 2010, to keep in line with market practices. Pay Practices Minimum imum Com Compen pensat sation ion Lev Levels els in our Exe Execut cutive ive Pla Plan n Rem Remove oved d to Bet Better ter Alig Align n Exe Execut cutive ive • Min Compensation to the Company’s Financial Results — minimum compensation levels tied to the Company’s financial results were previously removed so that bonus pool funding is based solely on the Company’s financial performance. • No More Tax Gross-Ups — except for tax gross-ups required to be paid under existing employment agreements, the Compensation Committee does not intend to approve any other tax gross-ups. • All Incentive Awards Subject to Clawback — all incentive awards received by any senior vice presid pre sident ent or mor moree sen senior ior off office icer, r, inc includ luding ing our Nam Named ed Exe Execut cutive ive Off Office icers, rs, rem remain ain sub subjec jectt to a clawback policy that mandates repayment in certain instances where there is a restatement of the Company’s financial statements. Hedging ging Activities Activities Lin Linked ked to Comp Company any Sto Stock ck — off • No Hed office icers rs and dir direct ectors ors of the Com Compan pany, y, including our Named Executive Officers, were required to refrain from engaging in any hedging or monetization transaction directly linked to Company stock. • Stock Ownership Requirements — all of our executive officers, including our Named Executive Officers, were required to hold a number of shares having a market value equal to or greater than a multiple of each executive’s base salary. • Formal Evaluation Process — the Compens Compensation ation Committee Committee conducte conducted d a formal performance performance review of Mr. van Paasschen and determined whether and to what extent the Company’s financial performance goals were achieved; Mr. van Paasschen, together with the Chief Human Resources Officer and with oversight and input from the Compensation Committee conducted a formal performance review of the other Named Executive Officers through the Performance Management Process. Compen pensat sation ion Con Consul sultan tants ts Reta Retaine ined d — th • Com thee Co Comp mpen ensa sati tion on Co Comm mmit itte teee re reta tain ined ed Me Meri ridi dian an Compensation Partners, LLC to assist it in the review and determination of compensation awards for the Named Executive Officers.
20
A.
Overview of Starwood’s Executive Compensation Program 1.
Program Progr am Objectiv Objectives es and and Other Other Conside Consideration rationss
Objectives. As a consumer lifestyle company with a branded hotel portfolio at its core, the Company operat ope rates es in a com compet petiti itive, ve, dyn dynami amicc and cha challe llengi nging ng bus busine iness ss env enviro ironme nment. nt. In ste step p wit with h thi thiss mis missio sion n and environment, the Company’s compensation program for our Named Executive Officers has the following key objectives: Attract and Retai Retain: n: We see • Attract seek k to att attrac ractt and retain retain tal talent ented ed exe execut cutive ivess fro from m wit within hin and outside outside the hospitali hospi tality ty indus industry try who under understand stand the impo importanc rtancee of innov innovatio ation, n, brand enhancement enhancement and consu consumer mer experience. We are working to reinvent the hospitality industry, and one element of this endeavor is to bring in key talent from other industries. Therefore, overall program competitiveness must take these other markets into account.
• We broadly target target total compensatio compensation n opportunities opportunities at the median (50 th percentile) of the market for target performance levels; however, we also review the range of values around the median, including the 25th and 75th perce percentil ntiles. es. Howev However, er, we belie believe ve that benchmarking benchmarking alone does not provide a complete basis for establishing compensation levels or design practices. • Actual Actual individu individual al com compen pensat sation ion may be abo above ve or bel below ow tar target geted ed lev levels els based on Com Compan pany y and individual performance, key responsibilities, unique market demands, and experience level. • Motivate: We see seek k to mot motiva ivate te our exe execut cutive ivess to sus sustai tain n hig high h per perfor forman mance ce and ach achiev ievee Com Compan pany y financial and strategic/operational goals over the course of business cycles in various market conditions. • However, our compensation programs programs are designed to not encourage excessive risk taking; we assess compen com pensat sateded-rel relate ated d ris risk k ann annual ually. ly. In add additi ition, on, we hav havee a pol policy icy whi which ch all allows ows us to rec recoup oup incentives paid in the event of a financial restatement. See the section entitled Potential Impact on Compensation for Executive Misconduct beginning on page 33 of this proxy statement. Interests: ests: We end • Align Inter endeav eavor or to ali align gn the int intere erests sts of sto stockh ckhold olders ers and our exe execut cutive ivess by lin linkin king g executive compensation to the Company’s annual business results and stock performance. Moreover, we strive str ive to kee keep p the exe execut cutive ive com compen pensat sation ion pro progra gram m tra transp nspare arent, nt, in lin linee wit with h mar market ket pra practi ctices ces and consistent with the highest standards of corporate governance practices. The following changes were designed to better align compensation with the creation and preservation of stockholder value:
• Tax gross-ups were eliminated eliminated for arrangements arrangements put in place in 2008 and thereafter. thereafter. • The structure structure for deter determini mining ng annua annuall incen incentive tive compensati compensation on under the Company’s Company’s Execu Executive tive Plan was revised so that with respect to the goal based upon the Company’s financial performance, the floor below which incentive compensation could not fall was removed, and with respect to bonus pool funding, funding is based entirely on the Company’s financial performance.
What the Pro What Progra gram m Int Intend endss to Re Rewar ward. d. Our execu executive tive compensation compensation program is stron strongly gly weigh weighted ted toward variable compensation tied to the Company’s annual business results and stock performance. Specifically, our compensation program for our Named Executive Officers is designed to ensure the following: Alignment with Stoc Stockhold kholders: ers: A sig • Alignment signif nifica icant nt por portio tion n of Nam Named ed Exe Execut cutive ive Off Office icerr com compen pensat sation ion is delivered deliv ered in the form of equit equity y incen incentive tivess with significant significant perf performan ormance ce and/o and/orr vest vesting ing requ requireme irements, nts, ensuring that long-term compensation is strongly linked to stockholder returns. Further, our executive officers, including our Named Executive Officers, are required to own a requisite amount of Company Ownership hip Guidelin Guidelines es be shares sha res.. See the sec sectio tion n ent entitl itled ed Share Owners begi ginn nnin ing g on pa page ge 35 of th this is pr prox oxy y statement.
• Achievement of Company Financial Objectives: A portion of Named Executive Officer compensation is tied directly to the Company’s financial performance. 21
• Achievement of Strategic/Operational Objectives: A portion of Named Executive Officer compensation is tied to achievement of specific individual objectives that are directly aligned with the execution of our business busin ess stra strategy. tegy. These objec objective tivess may be rela related ted to, amon among g other others, s, opera operationa tionall excel excellence lence,, brand enhancement, innovation, growth, cost containment/efficiency, customer experience and/or teamwork. • Overall Leadership and Stewardship of the Company: Leadership, teambuilding, and development of future fut ure tal talent ent are key suc succes cesss fac factor torss for the Com Compan pany y and a por portio tion n of Nam Named ed Exe Execut cutive ive Officer Officer compensation is dependent on satisfaction of core leadership competencies. 2.
Roles and Responsibilities
The Compensation Compensation Committee Committee is respo responsibl nsiblee for, among other things, the esta establish blishment ment and revi review ew of compensat compe nsation ion polic policies ies and programs for our executive executive offi officers cers and ensur ensuring ing that the executive executive offic officers ers are compensat compe nsated ed in a manne mannerr consi consisten stentt with the obje objective ctivess and principles principles outl outlined ined above. It also monitors monitors the Company’s executive succession plan, and reviews and monitors the Company’s performance as it affects the Company’s employees and the overall compensation policies for the Company’s employees. The Compensation Compensation Committee Committee makes all comp compensat ensation ion decisions with respe respect ct to our Named Execu Executive tive Office Off icers. rs. Our Chi Chief ef Exe Execut cutive ive Off Office icer, r, tog togeth ether er wit with h the Chi Chief ef Hum Human an Res Resour ources ces Off Office icer, r, rev review iewss the perfor per forman mance ce of eac each h oth other er Nam Named ed Exe Execut cutive ive Off Office icerr and pre presen sents ts to the Com Compen pensat sation ion Com Commit mittee tee his conclusions and recommendations, including salary adjustments and annual incentive compensation amounts (as described in more detail in the Annual Incentive Compensation section beginning on page 25 of this proxy statement). The Compensation Committee may exercise its discretion in modifying any recommended salary adjustments or awards to these executives. The role of the Company’s management is to provide reviews and recommendations for the Compensation Committee’ Commi ttee’ss consi considerat deration, ion, and to manag managee opera operationa tionall aspec aspects ts of the Compa Company’s ny’s compe compensati nsation on progr programs, ams, policies and governance. Direct responsibilities include, but are not limited to, (i) providing an ongoing review of the effectiveness of the compensation programs, including competitiveness, and alignment with the Company’s objective objec tives, s, (ii) recommending recommending changes, if neces necessary, sary, to ensur ensuree achi achieveme evement nt of all program objectives objectives and (iii)) reco (iii recommend mmending ing pay level levels, s, payou payoutt and/o and/orr award awardss for executive executive offic officers ers other than the Chief Execu Executive tive Offi Of fice cer. r. Ma Mana nage geme ment nt al also so pr prep epar ares es ta tall lly y sh shee eets ts wh whic ich h de desc scri ribe be an and d qu quan anti tify fy al alll co comp mpon onen ents ts of to tota tall compensation for our Named Executive Officers, including salary, annual incentive compensation, long-term incentive compensation, deferred compensation, outstanding equity awards, benefits, perquisites and potential severance sever ance and chang changee in contr control ol payme payments. nts. The Compe Compensati nsation on Comm Committee ittee reviews and consi considers ders these tall tally y sheets in making compensation decisions for our Named Executive Officers. The Compe Compensat nsation ion Comm Committee ittee directly engag engaged ed Meri Meridian dian Compe Compensati nsation on Part Partners, ners, LLC (“Mer (“Meridian idian”) ”) to assist it in the review and determination of compensation awards to the Named Executive Officers (including the Chief Executive Officer) for the 2011 performance period, as well as the annual fees or other compensation paid to our Boa Board. rd. Mer Meridi idian an wor worked ked wit with h man manage agemen mentt and the Com Compen pensat sation ion Com Commit mittee tee in rev review iewing ing the compensation structure of the Company and of the companies in the peer group. Meridian does not provide any services to the Company. At last year’s annual meeting, we provided our stockholders with the opportunity to cast a non-binding advisory vote regarding the compensation of our named executive officers as disclosed in the proxy statement for the 2011 Annual Meeting of Stockholders. Our stockholders overwhelmingly approved the proposal, with more than 96% of the votes cast in favor of the proposal. We also asked our stockholders to indicate if we should hold a “sa “say-o y-on-p n-pay” ay” vot votee eve every ry one one,, two or thr three ee yea years. rs. Con Consis sisten tentt wit with h the recommen recommendat dation ion of our Boa Board, rd, our stockholders indicated by non-binding advisory vote their preference to hold a “say-on-pay” vote annually. After considerat consi deration ion of the 2011 voting results, and based upon its prior recommendat recommendation, ion, our Board of Direc Directors tors elec el ecte ted d to ho hold ld “s “say ay-o -onn-pa pay” y” vo vote tess on an an annu nual al ba basi sis. s. In ad addi diti tion on,, th thee Co Comp mpen ensa sati tion on Co Comm mmit itte teee 22
considered the strong support for our “say-on-pay” proposal as evidence of our stockholders’ support for the named executive officer compensation decisions and actions that the Compensation Committee has been making. As a result, the Compensation Committee made no material changes in the structure of our named executive officer compensation program that were directly motivated by the results of our “say-on-pay” vote. We have, however, continued to review and make adjustments to this program as necessary to achieve our objectives described above.
3.
Risk Assessment
In setting compensation, our Compensation Committee also considers the risks to our stockholders, and the Company as a whole, arising out of our compensation programs. In February 2012, management held a special meeting meeti ng to discuss and asses assesss the risk profi profile le of our compensation compensation programs. programs. The Chief Human Resources Resources Office Off icer, r, our Chi Chief ef Adm Admini inistr strati ative ve Off Office icer, r, Gen Genera erall Cou Counse nsell and Sec Secret retary ary,, our Vic Vicee Cha Chairm irman an and Chi Chief ef Financ Fin ancial ial Off Office icerr and the Com Compan pany’s y’s ext extern ernal al leg legal al cou counse nsell for com compen pensat sation ion mat matter terss wer weree amo among ng the participan parti cipants ts in the speci special al meet meeting. ing. Their review consi considered dered risk-determi risk-determining ning chara characteri cteristics stics of the overa overall ll structure and individual components of our Company-wide compensation program, including our base salaries, incentive plans (both at the executive and property management levels) and equity plans. A report of the findings was provided to the Compensation Committee for its review and consideration. Following this assessment, we believe that the Company has instituted policies that align our executive officers’ interests with those of our stockholde stock holders rs witho without ut creat creating ing incentives incentives for our execu executive tive officers officers or other empl employees oyees to take risks that are reasonably likely to have a material adverse effect on the Company. For example, • Balance Acrosss the Compa Company, ny, indiv individual idual elements elements of our compensation compensation progr program am Balance of Compe Compensati nsation: on: Acros include base salaries, incentive compensation, and for certain of our employees, equity-based awards. By providing provi ding a mix of diffe different rent elements elements of compensation compensation which rewar reward d both short-term short-term and longlong-term term perfor per forman mance, ce, the Com Compan pany’s y’s com compen pensat sation ion pro progra grams, ms, as a who whole, le, pro provid videe a bal balanc anced ed app approa roach ch to incentivizing and retaining employees, without placing an inappropriate emphasis on any particular form of compensation. • Objective Formula and Pre-established Performance Measures Dictate Annual Incentives: Under the Execut Exe cutive ive Pla Plan, n, pay paymen mentt of ann annual ual inc incent entive ivess to our Nam Named ed Exe Execut cutive ive Off Office icers rs is sub subjec jectt to the satisfaction of specific company-wide annual performance targets determined under an incentive formula established by our Compensation Committee within the first 90 days of each fiscal year. Similarly, the Company’s employees other than the Named Executive Officers that are eligible to receive an annual incentive receive such incentive subject to the satisfaction of specific company-wide annual performance targets targe ts deter determined mined under an ince incentive ntive formula established established by our Compe Compensat nsation ion Commi Committee ttee.. These performance targets are directly and specifically tied to one or more of the following company-wide busine bus iness ss cri criter teria: ia: ear earnin nings gs bef before ore int intere erest, st, tax taxes, es, dep deprec reciat iation ion and amo amorti rtizat zation ion (or EBI EBITDA TDA), ), consolidated pre-tax earnings, net revenues, net earnings, operating income, earnings before interest and taxes, cash flow measures, return on equity, return on net assets employed or earnings per share for the applicable fiscal year. • Minimum and Maximum Thresholds for Annual Incentives: Each year our Compensation Committee establishes within the first 90 days of any fiscal year a threshold level of EBITDA that the Company must achieve in order for any bonus to be paid to our Named Executive Officers or other Company employees eligible eligi ble to rece receive ive an annua annuall incen incentive tive for any given year. The Executive Executive Plan also specifies specifies a maxim maximum um incentive amount, in dollars, that may be paid to any executive officer for any 12-month performance period. As a result of this threshold performance requirement and the design of our Executive Plan, incentive compensation is payable under our incentive plans only upon the attainment of performance targets related to business criteria that are in the interests of our stockholders. • Use of Long-Term Incentive Compensation: Equity-based long-term incentive compensation that vests over a period of years is a key component of total compensation of our executive employees. This vesting 23
period encourages our executives to focus on sustaining the Company’s long-term performance. These grants gra nts are als also o mad madee ann annual ually, ly, so exe execut cutive ivess alw always ays hav havee unv unvest ested ed awa awards rds tha thatt cou could ld dec decrea rease se significantly in value if our business is not managed for the long-term. • Share Ownership Guidelines: Our share ownership guidelines require our executive officers, including the Named Executive Officers, to hold that number of shares having a market value equal to or greater than tha n a mul multip tiple le of eac each h exe execut cutive ive’s ’s bas basee sal salary ary.. For the Chi Chief ef Exe Execut cutive ive Off Office icer, r, the mul multip tiple le was increased from five times base salary to six times base salary in 2011 to be more in line with market practices, and for the other Named Executive Officers, the multiple is four times base salary. A retention requirement of 35% is applied to restricted shares upon vesting (net shares after tax withholding) and shares obtained from option exercises until the executive meets the target, or if an executive falls out of compliance. See the section entitled Share Ownership Guidelines beginning on page 35 of this proxy stat st atem emen entt fo forr a de desc scri ript ptio ion n of th thee se secu curi riti ties es th that at co coun untt to towa ward rdss me meet etin ing g th thee ta targ rget et an and d ot othe herr considerations. Restrictions ons on Relat Related ed Party Trans Transacti actions: ons: We hav • Restricti havee a cor corpor porate ate opp opport ortuni unity ty and rel relate ated d per person son transa tra nsacti ction on app approv roval al pro proces cesss reg regard arding ing the rev review iew,, app approv roval al and rat ratifi ificat cation ion by our Gov Govern ernanc ancee Committee of all transactions with related parties, executive officers, and their respective family members Certain n Relatio Relationships nships and Relate Related d Trans Transactions actions and/orr corpo and/o corporate rate affiliates. affiliates. See the secti section on entit entitled led Certai beginning on page 52 of this proxy statement for a complete description of this policy.
• Incentive Recoupment Policy: We have an incentive recoupment policy that allows the Company to recover any annual incentive payment or long-term incentive payment to any individual executive at the seni se nior or vi vice ce pr pres esid iden entt le leve vell an and d ab abov ove, e, in incl clud udin ing g ou ourr Na Name med d Ex Exec ecut utiv ivee Of Offi fice cers rs,, un unde derr ce cert rtai ain n circumstances. See the section entitled Potential Impact on Compensation for Executive Misconduct beginning on page 33 of this proxy statement. • Anti-Hedging Policy: We hav havee an ant anti-h i-hedg edging ing pol policy icy tha thatt res restri tricts cts all off office icers rs and dir direct ectors ors fro from m engaging in short sales, entering into any derivative transactions, such as swaps, straddles, puts, or calls, or engaging in any hedging or monetization transactions, such as collars or forward sale contracts, that are directly linked to Company shares. • Internal Processes Further Restrict Risk: The Company has in place additional processes to limit risk to the Company from our compensation programs. Specifically, the Company has financial policies that restrict the amount of capital that any individual may deploy absent obtaining internal approvals, which reduces reduc es the risk of inapp inappropr ropriate iate expenditures expenditures by an indiv individual idual.. Furth Further, er, the processes processes and contr controls ols associated with respect to our compensation programs are audited each year to insure that expenditures have been approved within the Company’s guidelines and by required approval authorities. In addition, thee Co th Comp mpan any y en enga gage gess an ex exte tern rnal al co comp mpen ensa sati tion on co cons nsul ulti ting ng fi firm rm fo forr de desi sign gn an and d re revi view ew of ou ourr compensation programs, as well as external legal counsel to assist it with the periodic review of our compensation plans to ensure compliance with applicable laws and regulations.
B.
Elements Elem ents of Comp Compensat ensation ion 1.
Primar Pri maryy Elem Element entss
The primary elements of the Company’s compensation program for our Named Executive Officers are: • Bas Basee Sal Salary ary • Incen Incentive tive Compe Compensat nsation ion • Annua Annuall Incentive Incentive Compensa Compensation tion • Long-Term Incentive Compensation • Benef Benefits its and and Perquisi Perquisites tes 24
Total compensation for Named Executive Officers is evaluated against the peer group identified in this proxy statement. statement. Evaluated on this basis, the Compe Compensati nsation on Commi Committee ttee believes the actua actuall cash and equit equity y compen com pensat sation ion del delive ivered red for the 201 2011 1 per perfor forman mance ce yea yearr was app approp ropria riate te in lig light ht of the Com Compan pany’s y’s ove overal ralll performance and the performance of the particular executives. We describe each of the compensation elements below and explain why we pay each element and how we determine the amount of each element.
Base Salar Salary. y. The Com Compan pany y bel believ ieves es it is ess essent ential ial to pro provid videe our Nam Named ed Exe Execut cutive ive Off Office icers rs wit with h competitive base salaries that will enable the Company to continue to attract and retain critical senior executives from within and outside the hospitality industry. In the case of Named Executive Officers other than the Chief Executive Officer, base salary typically accounts for approximately 20% of total compensation at target (in other words, total compensation assuming performance goals are satisfied at targeted levels, but excluding benefits and perquisites). In the case of Mr. van Paasschen, base salary for 2011 was $1,250,000. As a result, base salary accounted for approximately 14% of total compensation at target for Mr. van Paasschen. Base salary serves as a minimum mini mum leve levell of compe compensati nsation on to Named Executive Executive Offi Officers cers in circu circumsta mstances nces when achi achieving eving Company financial and strategic/operational objectives becomes challenging and the level of incentive compensation is impacted. Salaries for Named Executive Officers are generally based on the responsibilities of each position, Company Compa ny and indiv individual idual performance, performance, unique marke markett deman demands ds and exper experience ience level. Salar Salaries ies are reviewed annually against similar positions among a group of peer companies developed by the Company and approved by the Compensation Committee after consultation with Meridian, consisting of similarly-sized hotel and property management companies as well as other companies representative of markets in which the Company competes Background round Information Information on the Execut Executive ive Compen Compensation sation for key executive talent. See the section entitled Backg Program — Use of Peer Data section beginning on page 34 of this proxy statement for a list of the peer companies used in this analysis. Similar to other companies, the Company generally seeks to position base salaries of our Named Executive Officers at or near the median base salary of the Company’s peer group for similar positions but also reviews the range of values around the median, including the 25 th and 75th percentile for reference purposes. See additional detail regarding base salaries in the section entitled Narrative Disclosure to Summary Summ ary Com Compen pensat sation ion Tab Table le and Gra Grants nts of Plan Plan-Ba -Based sed Awa Awards rds be begi ginn nnin ing g on pa page ge 39 of th this is pr prox oxy y statement. Incentive Incen tive Compe Compensati nsation. on. Inc Incent entive ive com compen pensat sation ion inc includ ludes es ann annual ual cas cash h bon bonus us awa awards rds und under er the Company’s Compan y’s Exe Execut cutive ive Pla Plan n and lon long-t g-term erm inc incent entive ive com compen pensat sation ion in the for form m of equ equity ity awa awards rds und under er the Company’s LTIP. Incentive compensation typically accounts for approximately 80% of total compensation at target (86% for Mr. van Paasschen in 2011), with annual cash bonus compensation and long-term incentive compensation accounting for 19% and 61%, respectively (29% and 57% for Mr. van Paasschen, respectively, in 2011). 201 1). The Com Compan pany y bel believ ieves es tha thatt thi thiss str struct ucture ure all allows ows it to pro provid videe eac each h Nam Named ed Exe Execut cutive ive Off Office icerr wit with h substantial incentive compensation opportunities if performance objectives are met. The Company believes that the allocation between base salary and incentive compensation is appropriate and beneficial because: • it promotes the Company’s competitive competitive position by allowing it to to provide Named Executive Officers Officers with above-median total competitive compensation if targets are met; • it targets and attracts highly motivated motivated and talented executives within and outside outside the hospitality industry; • it aligns senior management’s management’s interests interests with those of stockholders; stockholders; • it promotes achievement achievement of business and individual individual performance performance objectives; and • it provides long-term long-term incentives for Named Named Executive Officers to to remain in the Company’s Company’s employ. Annual Incentive Compensation. An Annu nual al ca cash sh bo bonu nuse sess ar aree a ke key y pa part rt of th thee Co Comp mpan any’ y’ss ex exec ecut utiv ivee compensat compen sation ion pro progra gram. m. The bon bonuse usess dir direct ectly ly lin link k the ach achiev ieveme ement nt of Com Compan pany y fin financ ancial ial and str strate ategic gic/ / operational performance objectives to executive pay. Annual bonuses also provide a complementary balance to
25
equity incentives (discussed below). Each Named Executive Officer has an annual opportunity to receive an incentive award under the stockholder-approved Executive Plan. If and when earned, awards are typically paid to Named Executive Officers partly in cash and, unless the Compensation Committee otherwise elects, partly as deferred stock awards (under the Executive Plan). The deferred stock awards generally vest over a three-year period. See additional detail regarding these deferred stock awards in the section entitled Long-Term Incentive Compensation beginning on page 30 of this proxy statement. Viewed Vie wed on a com combin bined ed bas basis, is, onc oncee min minimu imum m per perfor forman mance ce is att attain ained, ed, the ann annual ual bon bonus us pay paymen ments ts attributable to both Company financial and strategic/operational performance can range from 0% – 238% of target, not to exceed 200% for the Named Executive Officers. See additional detail regarding targets in the Narrative tive Disclosure to Summar Summaryy Compen Compensation sation Table and Grants of Plan-Based Awards section entitled Narra beginning on page 39 of this proxy statement. Minimum Threshold.
For the Named Executive Officers, an annual bonus award for 2011 was paid under the Executive Plan. Under the Execu Executive tive Plan, each year, the Compensation Compensation Committee Committee estab establish lishes, es, in advance, a thres threshold hold level of EBITDA that the Company must achieve in order for any bonus to be paid under the Executive Plan for that year (the “EP Thres Threshold” hold”). ). The Execu Executive tive Plan also speci specifies fies a maxim maximum um bonus amou amount, nt, in dolla dollars, rs, that may be paid to any executive for any 12-month performance period. When the threshold is established at the beginning of a year, the achievement of the threshold is considered substantially uncertain for purposes of Section 162(m), whic wh ich h is on onee of th thee re requ quir irem emen ents ts fo forr co comp mpen ensa sati tion on pa paid id un unde derr th thee Ex Exec ecut utiv ivee Pl Plan an to be de dedu duct ctib ible le as performance-based compensation under Section 162(m). For 2011, the EP Threshold was $820,000,000. Generally, a Named Executive Officer will receive payment of a bonus award under the Executive Plan only if he remains employed by the Company on the award payment date. However, subject to attaining the EP Threshold in the relevant year, pro rata awards may be paid at the discretion of the Compensation Committee in the event of death, disability, retirement or other termination of employment. Once the EP Threshold is achieved, the maximum annual bonus amount specified in the Executive Plan becomes available for each Named Executive Officer and the Compensation Committee may apply its discretion to reduce such amount to determine the actual bonus amount for each individual. To determine the actual bonus to be paid for a year under the Executive Plan, the Compensation Committee also establishes specific annual Company Compa ny fina financial ncial and stra strategic tegic/oper /operation ational al perfo performan rmance ce goals and a rela related ted targe targett bonus amount for each executive. These financial and strategic/operational goals are described below. Additional Performance Criteria.
If the EP Threshold Threshold under the Executive Executive Plan is met for a year, the Company’s Company’s perfo performanc rmancee in comparison comparison to the financial and strategic/operational goals for the year set by the Compensation Committee is then used to determine a Named Executive Officer’s actual bonus, as follows: Financial Goals The Company financial goals for Named Executive Officers under the Executive Plan consist of EBITDA and earnings per share targets, with each criteria accounting for half of the financial goal portion of the annual bonus. The Company deems EBITDA and EPS to be the most appropriate metrics to measure performance and has consistently used these metrics since 2009. As the Compensation Committee generally sets target bonus award opportuniti opportunities es above the median and moni monitors tors awards around the medi median, an, including including the 25 th and 75th percentile, among the Company’s peer group, the Company financial and strategic/operational goals to achieve such award leve levels ls are considered considered chall challengi enging ng but achievable, achievable, repr represent esenting ing a super superior ior leve levell of perfo performan rmance. ce. Consistent Consi stent with main maintaini taining ng these high stand standards ards and subj subject ect to achie achieving ving the EP Thres Threshold, hold, the Compe Compensati nsation on 26
Committee retains the ability to consider whether an adjustment of the financial goals for any year is necessitated by exceptional circumstances, for example, an unanticipated and material downturn in the business cycle that trigge tri ggers, rs, in res respon ponse, se, an inc increa reased sed foc focus us by the Com Compen pensat sation ion Com Commi mitte tteee on the Com Compan pany’s y’s per perfor forman mance ce relative to the industry. This ability is intended to be narrowly and infrequently used and, if applicable, the basis for its use would be detailed in the Company’s proxy statement. Performance against the financial goals determined 75% of Named Executive Officers’ total target annual bonus opportunity. Subject to achieving the EP Threshold, actual bonuses paid to Named Executive Officers for financial performance may range from 0% to 200% of the pre-determined target bonus for this category of performan perfo rmance, ce, as deter determined mined by the Compe Compensat nsation ion Commi Committee ttee.. For Named Execu Executive tive Officers, Officers, the Compa Company ny financial performance portion is based 50% on earnings per share and 50% on EBITDA of the Company. As noted above, once the EP Threshold is achieved, the minimum and maximum annual bonus amount specified in the Executive Plan becomes available for award. The maximum bonus payout for the applicable Compan Com pany y fin financ ancial ial per perfor forman mance ce met metric ric is lim limit ited ed to 200 200% % of tar target get (“M (“Maxi aximum mum”) ”) and the Com Compen pensat sation ion Committee may apply its discretion to reduce such amount to the actual bonus amount for each Named Executive Officer. The table below sets forth for each metric the performance levels for 2011 which would have resulted in 100% bonus payout (“Target”), the minimum performance level (“Minimum”) that would have resulted in a 40% bonus pool payout and the Maximum that would have resulted in a 200% target of bonus pool payout. In addition, the table sets forth the approximate mid-points of payout between the Minimum to Target and Target to Maximum and indicates the related required performance level: Minimum (40%)
Earnings per share . . . . . . Compan Com pany y EBI EBITDA TDA . . . . . .
Mid-point (70%)
Target (100%)
Mid-point (150%)
Maximum (200%)
$ 0.99 $ 1.39 $ 1.80 $ 2. 47 $ 3.15 $820,0 $82 0,000, 00,000 000 $92 $923,0 3,000, 00,000 000 $1, $1,025 025,00 ,000,0 0,000 00 $1, $1,196 196,00 ,000,0 0,000 00 $1, $1,367 367,00 ,000,0 0,000 00
For the 2011 performance performance period, “adjusted” “adjusted” EBITDA (which exceeded exceeded the EP Thres Threshold) hold) for purpo purposes ses of determining annual bonuses was $1,021,000,000. EBITDA was adjusted to exclude the impact of asset sales and changes in foreign exchange rates versus budgeted. Earnings per share from continuing operations for 2011 for bonus purposes was $1.76 which excludes tax benefits related to non-core items partially offset by restructuring, goodwill impairment and other special charges and debt extinguishment charges. Using the metrics described above resulted in a payout eligibility of 98% of target for the Company financial portion of the annual bonus for the 2011 fiscal year for the Named Executive Officers. Strategic/Operational Strategic/Operati onal Goals The stra strategic tegic/oper /operatio ational nal perfo performanc rmancee goals for Named Executive Executive Offic Officers ers under the Execu Executive tive Plan consists of “Big 5” and leadership competency objectives that link individual contributions to execution of our business strategy and major financial and operating goals. “Big 5” refers to each executive’s specific deliverables within the Company’s critical performance categories — win with talent, execute brilliantly, build great brands, delive del iverr glo global bal gro growth wth,, and dri drive ve out outsta standi nding ng res result ults. s. As par partt of a str struct ucture ured d pro proces cesss tha thatt cas cascad cades es dow down n throughout the Company, these objectives are developed at the beginning of the year, and they integrate and align an executive with the Company’s strategic and operational plan. Achievement of “Big 5” objectives typically accounts for 80% of the strategic/operational performance evaluation, and achievement of leadership competency objectives typically accounts for 20% of such evaluation. The portion of annual bonus awards attributable to strategic/operational management performance represents 25% of Named Executive Officers’ total target. Actual bonuses paid to Named Executive Officers for strategic/operational performance may range from 0% to 175% of the pre pre-de -deter termi mined ned tar target get amo amount unt for thi thiss cat catego egory ry of per perfor forman mance, ce, as det determ ermine ined d by the Com Compen pensat sation ion Committee. The strategic/operational performance goals are generally established at levels that are reasonably difficult to achieve relative to historical trends and future expectations, and that will generally require significant effort on the part of our Named Executive Officers to achieve. 27
Evaluation Process.
In the case of Mr. van Paasschen, the Compensation Committee conducts a formal performance review process proce ss each year duri during ng which the Compe Compensati nsation on Comm Committee ittee evaluates evaluates how Mr. van Paasschen performed performed against again st the strat strategic/ egic/opera operationa tional/tal l/talent ent manag managemen ementt perfo performan rmance ce goals established established for the prior year. The Compensation Committee also determines the extent to which the Company’s financial performance goals were achieved and whether the Company achieved the applicable minimum threshold(s) required to pay awards. With respect to the other Named Executive Officers, Mr. van Paasschen, together with the Chief Human Resour Res ources ces Off Office icerr and wit with h ove oversi rsight ght and inp input ut fro from m the Com Compen pensat sation ion Com Commi mitte ttee, e, con conduc ducts ts a for formal mal performan perfo rmance ce revi review ew proce process ss each year to evalu evaluate ate perf performan ormance ce again against st the offi officer’s cer’s strategic/ope strategic/operati rational onal perfor per forman mance ce goa goals ls for the pri prior or yea year. r. The Chi Chief ef Exe Execut cutive ive Off Office icerr con conduc ducts ts thi thiss eva evalua luatio tion n thr throug ough h the Performance Management Process (“PMP”), which results in a PMP rating for each executive. This PMP rating corresponds to a payout range under the Executive Plan determined annually by the Compensation Committee for that rating. As noted, for 2011 the portion of the Executive Plan payouts based on PMP ratings could range from 0% to 175% of target once the target has been adjusted to reflect the Company’s performance. Where necessary neces sary to prese preserve rve the compe competiti titive ve posit position ion of the Company’s compensation compensation scale, the Chief Executive Executive Officer may recommend a market adjustment to the base amount that is subject to this percentage. At the conclu con clusio sion n of his rev review iew,, the Chi Chief ef Exe Execut cutive ive Off Office icerr sub submit mitss his rec recomm ommend endati ations ons to the Com Compen pensat sation ion Committee for final review and approval. In determining the actual award payable to a Named Executive Officer under the Executive Plan, the Compensation Committee reviews the Chief Executive Officer’s evaluation and makes a final determination as to how the executive performed against his strategic/operational goals for the year. The Compensation Committee also determines, based on management’s report, the extent to which the Company’s Compa ny’s financial financial perfo performan rmance ce goals were achie achieved ved and whethe whetherr the Company achie achieved ved the applicable applicable minimum threshold(s) required to pay awards. The Chief Executive Officer also meets in executive session with the Board of Directors to inform the Board of Directors of his performance assessments regarding the Named Executive Execu tive Officers and the basis for the compe compensati nsation on recom recommenda mendations tions he prese presented nted to the Compensation Compensation Committee. The eva evalua luatio tion n of Mr. van Paa Paassc sschen hen and the oth other er Nam Named ed Exe Execut cutive ive Off Office icers rs wit with h res respec pectt to eac each h executive’s strategic/operational goals for 2011 is described below. Mr. van Paasschen’s accomplishments for 2011 show a clear connection between motivated associates, through strong brands, to better financial results: • drove record high associate associate engagement, according according to 138,000 responses to an annual survey; • reached record high guest guest satisfaction levels levels across system of nearly 1,100 hotels; • drove drove gro growth wth in rel relati ative ve bra brand nd per perfor forman mance ce to a rec record ord high for the Company, Company, based on rev revenu enuee per available room index measures from over 600 hotels where data is tracked; • opened opened a rec record ord number number of nea nearly rly 21,000 21,000 new rooms rooms in the sys system tem,, inc includ luding ing a rec record ord number number of conversions from other brands; • pushed pushed the Company’s Company’s innov innovatio ation n agend agendaa furt further her in guest relationsh relationships ips and loyal loyalty, ty, including including e-fo e-folio, lio, 24 hour check-in, and next generation Starwood Preferred Guest; and • delivered an increase in adjusted adjusted EBITDA of approximately approximately 17% and earnings per share from continuing continuing operations excluding special items of approximately 54%, as compared to fiscal year 2010. Generated significant cash through the sale of three hotels and timeshare and residential closings at the The St. Regis Bal Harbour Resort. In light of Mr. van Paasschen’s accomplishments and impact on the Company, the Compensation Committee awarded him a payout at 98% of target for the strategic/operational portion of the annual bonus, for a total annual bonus of $2,450,000 for 2011, representing 98% of his overall annual bonus target. 28
Mr. Avril’s accomplishments for the 2011 performance year included the following: • achieved achieved significant significant market share increases increases across all Compa Company ny brands, including including an 2.0% incr increase ease over last year in our North American division (fueled by a 2.2% increase in our Westin brand and a 1.4% increase in our Sheraton brand); • adjusted adjusted for asset sales, grew hotel group EBITDA EBITDA by 16% and owned hotels EBITDA by 12%, despite despite the challenging world events in Japan, the Middle East and Europe; • furthe furthered red str strong ong gro growth wth in the Com Compan pany’s y’s hot hotel el wor worldw ldwide ide por portfo tfolio lio by ope openin ning g 81 hot hotels els wit with h approximately 21,000 rooms; and • strengthened key relationships relationships with hotel owners, joint venture partners and our Company’s Company’s personnel to drive revenue, strong owner relations, and retention of management talent throughout our hotels. In light of Mr. Avril’s accomplishments in 2011, he received an “accomplished objectives” PMP performance rating ratin g and was award awarded ed a payou payoutt at 98% of target for the stra strategic tegic/oper /operation ational al portion of the annual bonus, for a total annual bonus of $736,715 for 2011, representing 98% of his overall annual bonus target. Mr. Prabhu’s accomplishments for the 2011 performance year included the following: • reduced reduced interest expense expense through effective effective use of fixe fixed d to vari variable able swaps and debt reduction. reduction. Vacat Vacation ion ownership receivable securitization achieved on favorable terms; • maintained maintained low effective effective tax rate with good tax planning planning on a global basis. Concluded Concluded 2004-06 IRS audit with a refund. Ensured structures are in place to continue tax effective hotel sales; • sustained sustained tight control of SG&A. Achie Achieved ved Company financial financial objectives objectives while maintaining maintaining a high level of control and compliance; and • informati information on tech technolog nology y organ organizat ization ion delivered on signi significa ficant nt proj projects ects while ensur ensuring ing a high level of operational stability and enhanced IT security. In light of Mr. Prabhu’s accomplishments, he received an “accomplished objectives” PMP performance rating and the Compensation Committee awarded him a payout at 98% of target for the strategic/operational portion of the annual bonus, for a total annual bonus of $736,715 for 2011, representing 98% of his overall annual bonus target. Mr. Siegel’s individual accomplishments for the 2011 performance year included the following: • provided provided legal support for over 112 new hotel management management and franchise franchise transactions, transactions, including including new deals, changes in ownership and re-engagements worldwide; strategic hotel sales; sale-and-manage-back transactions; corporate transactions including the execution of interest rate swap agreements, the early redemp red emptio tion n of our 201 2012 2 Sen Senior ior Not Notes, es, cor corpor porate ate res restru tructu cturin rings gs and the Com Compan pany’s y’s cur curren rentt sha share re repurchase program; • completed completed on budget the build-out and relocation relocation of two of the Company’s corporate corporate offices, offices, the offices in Scott Scottsdale sdale,, Arizo Arizona na and the Company’s new headq headquarte uarters rs at One StarPoint in Stam Stamford, ford, Connecticut, Connecticut, and the negotiation of the new lease for corporate offices in Atlanta, Georgia; • designed designed and executed a serie seriess of init initiati iatives ves to prote protect ct our most valu valuable able intangible intangible assets assets and trade secrets, including the roll-out of customized training on confidentiality obligations and the preservation of Company assets; and • made made sig signif nifica icant nt pro progre gress ss in lon long-t g-term erm Glo Global bal Cit Citize izensh nship ip goa goals, ls, inc includ luding ing ach achiev ieving ing sig signif nifica icant nt reductions in energy and water consumptions at our corporate offices and hotels. 29
In light of Mr. Siegel’s accomplishments, he received an “accomplished objectives” PMP performance rating and was awarded a payout at 98% of target for the strategic/operational portion of the annual bonus, for a total annual bonus of $625,720 for 2011, representing 98% of his overall annual bonus target. Mr. Turner’s accomplishments for the 2011 performance year included the following: • managed the Global Development Development team to execute agreements agreements for 70 new managed hotels hotels (approximately 20,000 rooms) and 42 new franchised hotels (approximately 9,000 rooms), a significant portion of which opened in 2011 and a portion of which will open in the future; • achieved achieved 4.2% global net rooms growth driven driven in large part by the opening of 81 new hotels represent representing ing approximately 21,000 rooms; • streamlin streamlined ed processes to maximize conversion conversion opportuniti opportunities es as evide evidenced nced by 32 conversion conversion deals signed in 2011 (versus 23 in 2010), 17 of which resulted in opened hotels in 2011 (versus 8 in 2010); and • completed strategic strategic asset sale transactions transactions generating net proceeds proceeds of $290 million. million. In light of Mr. Turner’s accomplishments in 2011, he received an “accomplished objectives” PMP performance rating ratin g and was award awarded ed a payou payoutt at 98% of target for the stra strategic tegic/oper /operation ational al portion of the annual bonus, for a total annual bonus of $735,020 for 2011, representing 98% of his overall annual bonus target. Overall, the Compensation Committee paid the Named Executive Officers individual bonuses under the Execut Exe cutive ive Pla Plan n at 98% of tar target get,, whi which ch ref reflec lected ted the tar target get pay payout out bas based ed upo upon n the Com Compan pany’s y’s fin financ ancial ial performance goals, and the contribution made by each of the Named Executive Officers under his strategic/ operational goals. Annual awards made to our Named Executive Officers under the Executive Plan with respect to 2011 performance are reflected in the 2011 Summary Compensation Table on page 37 of this proxy statement and described in the accompanying narrative. Long-Term Incentive Compensation. Like the annual incentives described above, long-term incentives are a key part of the Company’s executive compensation program. Long-term incentives are strongly tied to returns experienced by stockholders, providing a direct link between the interests of stockholders and the Named Executive Officers. Long-term incentive compensation for our Named Executive Officers consists primarily of equity compensation awards granted annually (in February of each year following the announcement of the Company’s earnings for the previous year) under the Company’s LTIP and secondarily of the portion of the Executive Plan awards that are deferred in the form of deferred stock awards. Taken together, approximately 60% of total compensation at target award levels is equity-based long-term incentive compensation.
The Com Compen pensat sation ion Com Commit mittee tee gra grants nts awa awards rds und under er the LTI LTIP P to Mr. van Paa Paassc sschen hen con consis sistin ting g of a combination of stock options and restricted stock. Mr. van Paasschen’s employment agreement, which reflects an emphasis on performance and long-term incentives, provides that in the event of strong financial and individual performance, Mr. van Paasschen benefits greatly in the form of long-term incentive compensation that, for the 2011 fiscal year, would not be less than $5,000,000. The Compensation Committee generally grants awards under the LTIP to all other Named Executive Officers consisting of a combination of stock options and restricted stock awards. For the other Named Executive Officers, compensation is also geared towards performance and long-term incentives, but to a lesser degree than Mr. van Paasschen. The Compensation Committee believes an emphasis on long-term equity compensation (through the use of stock options and restricted stock) is particularly appropriate for the leader of a management team committed to the creation of stockholder value. In 2011, for all Named Executive Officers, the Compensation Committee used a grant approach in which the awa award rd was art articu iculat lated ed as a dol dollar lar value. value. Und Under er thi thiss app approa roach, ch, an ove overal ralll awa award rd val value, ue, in dol dollar lars, s, was determined for each Named Executive Officer based upon our compensation strategy and competitive market positioni posit ioning ng takin taking g into account the Compa Company ny and individual individual perf performan ormance ce fact factors ors for the Named Executive Executive Officers described in the Annual Incentive Compensation section beginning on page 25 of the proxy statement. 30
The Compensation Committee determines the appropriate mix of restricted stock and stock options to be given to our Named Executive Officers. For 2011, the Compensation Committee determined that a split of 75% of restricted stock awards and 25% of stock options was the appropriate balance to maximize cost effectiveness and enc encour ourage age equ equity ity own owners ership hip amo among ng our man manage agemen ment. t. The num number ber of sha shares res of res restri tricte cted d sto stock ck was calculated by dividing 75% of the award value by the fair market value of the Company’s stock on the grant date. The number of stock options was determined by dividing the remaining 25% of the award value by the fair market value of the Company’s stock on the grant date and multiplying the result by two and one-half, which we believ bel ievee his histor torica ically lly app approx roxima imates tes the num number ber of opt option ionss det determ ermine ined d thr throug ough h for formal mal lat lattic ticee mod model el opt option ion valuation. The Named Executive Officers were able to elect a greater portion of options (up to 100% options). Based on the factors set forth above, including the Company’s performance and individual performance of each Named Executive Officer in 2011, the Compensation Committee believes that the equity award grants in 2011 were appropriate. The exercise price for each stock option is equal to fair market value of the Company’s common stock on Practices ces beginning on page 35 of this proxy the opt option ion gra grant nt dat date. e. See the sec sectio tion n ent entitl itled ed Equity Grant Practi statement for a description of the manner in which we determine fair market value for this purpose. Currently, most stock options vest in 25% increments annually starting with the first anniversary of the date of grant. For stock options granted granted in 2011, award awardss grant granted ed to assoc associates iates who are retirement-e retirement-eligi ligible, ble, as defin defined ed in the LTIP, vest in 16 equal quarterly periods. The only Named Executive Officer who currently meets the retirement criteria is Mr. Siegel, the Company’s Chief Administrative Officer, General Counsel and Secretary. Unexercised stock options expire eight years from the date of grant, or earlier in the event of termination of employment. Stock options provide compensation only when vested and only if the Company’s stock price appreciates and exceeds the exercise price of the option. Therefore, during business downturns, option awards may not represent any economic value to an executive. Named Exe Named Execut cutive ive Off Office icers rs hav havee a man mandat datory ory def deferr erral al of 25% of the their ir ann annual ual lon long-t g-term erm inc incent entive ive compensation awards under the Executive Plan in the form of deferred restricted stock units. The Compensation Committee has the discretion to reduce the percentage of an annual long-term incentive compensation award that must be deferred. The deferred amount (as increased by the percentage described below) is converted into a number of deferred restricted stock units determined by dividing the amount of the deferred award by the average of the high and low fair market value of a share on the date of grant. The deferred restricted stock units are subject to time-based vesting. Upon vesting, shares of the Company common stock equal to the number of vested units uni ts are del delive ivered red to the Nam Named ed Exe Execut cutive ive Off Office icer. r. As suc such, h, the awa awards rds com combin binee per perfor forman mancece-bas based ed compen com pensat sation ion wit with h a fur furthe therr lin link k to sto stockh ckhold older er int intere erests sts.. Fir First, st, amo amount untss mus mustt be ear earned ned bas based ed on ann annual ual Company financial and strategic/operational performance under the Executive Plan. Second, these already earned amounts are put at risk through a vesting schedule. Vesting occurs in installments over a three-year period. Third, these earned amounts become subject to share price performance. Primarily in consideration of this vesting risk being applied to already earned compensation (but also taking into account the enhanced stockholder alignment thatt res tha result ultss fro from m bei being ng sub subjec jectt to sha share re per perfor forman mance) ce),, the amo amount unt of the def deferr erred ed lon long-t g-term erm inc incent entive ive compensation amount is increased by 33%. For awards granted in 2009 or later, vesting will accelerate in the event of death, disability or retirement. Restricted stock and restricted stock unit awards provide some measure of mitigation of business cyclicality while maintaining a direct tie to share price. The Company seeks to enhance the link to stockholder performance by bui buildi lding ng a str strong ong ret retent ention ion inc incent entive ive int into o the equ equity ity pro progra gram. m. Con Conseq sequen uently tly,, for 201 2011 1 gra grants nts,, 100 100% % of restricted stock unit awards vest on the fiscal year end of the year immediately prior to the third anniversary of the date of grant and 100% of restricted stock awards vest on the third anniversary of the date of grant. For restricted stock granted in 2011, awards granted to associates who are retirement-eligible, as defined in the LTIP, vest in twelve equal quarterly periods. This vesting places an executive’s long-term compensation at risk to share price performance performance for a signi significan ficantt porti portion on of the business cycle, while encouraging encouraging long-term long-term rete retention ntion of executives. 31
Pursuant to his employment agreement, Mr. van Paasschen has agreed not to sell any shares earned under any stock awards or shares received upon the exercise of an option (except as may be withheld for taxes) without prior consultation with the Board of Directors. See additional detail regarding incentive awards in the section entitled 2011 Grants of Plan-Based Awards beginning on page 38 of this proxy statement.
Benefits Bene fits and Perqu Perquisit isites. es. perquisites, as described below.
Base salary and ince incentive ntive compensation compensation are suppl supplement emented ed by benef benefits its and
Perquisites. As reflected in the 2011 Summary Compensation Table below, the Company provides certain limited perquisites to select Named Executive Officers when necessary to provide an appropriate compensation package, particularly in connection with enabling the executives and their families to smoothly transition from previous positions which may require relocation. For example, Mr. van Paasschen may use the Company airplane whenever reasonable for both personal and business travel and the Company’s other Named Executive Officers may use the airplane whenever air travel is required for business. Depending on availability, family members of executive officers are permitted to accompany our executives on the Company airplane. The cost of that travel is imputed as income to the executive and included in the All Other Compensation column in the 2011 Summary Compensation Table, and the executive is fully responsible for any associated tax liability. The Company also reimburses Named Executive Officers generally for travel expenses and other out-of-pocket costs incurred with respect to attendance by their spouses at one meeting of the Board each year. Retirement Benefits. The Company maintains a tax-qualified retirement savings plan pursuant to Code section 401(k) (the “Savings Plan”) for a broadly-defined group of eligible employees that includes the Named Executive Officers. Eligible employees may contribute a portion of their eligible compensation to the Savings Plan on a before-tax basis, subject to certain limitations prescribed by the Code. Beginning in 2008, the Company matches 100% of the first 1% of eligible compensation and 50% of the next 6% of eligible compensation that an eligible employee contributes. These matching contributions, as adjusted for related investment returns, become fully vested upon the eligible employee’s completion of two years of service with the Company. Our Named Executive Officers, in addition to certain other eligible employees, are permitted to make additional deferrals of base pay and regular annual incentive awards under our nonqualified deferred compensation plan. This plan is discussed in further detail under the 2011 Nonqualified Deferred Compensation section beginning on page 42 of this proxy statement.
2. Change in Control Arrangements
On March 25, 2005, the Company adopted a policy proscribing certain terms of severance agreements triggered upon a change in control of the Company. Pursuant to the policy, the Company is required to seek stockholder approval of severance agreements with executive officers that provide Benefits (as defined in the policy) in excess of 2.99 times base salary plus such officer’s most recent annual incentive award. In 2006, the Board reviewed the change in control arrangements then in place with the Named Executive Officers and decided to enter into new change in control agreements with the Named Executive Officers at that time, which included Messrs. Prabhu and Siegel. In connection with the hiring of Mr. Turner in May 2008 as President, Global Development, and the promotion of Mr. Avril in September 2008 to President, Hotel Group, the Com Compan pany y ent entere ered d int into o cha change nge in con contro troll arr arrang angeme ements nts wit with h the these se exe execut cutive ivess tha thatt wer weree sim simila ilarr to the arrangements in place for the other Named Executive Officers (other than the Chief Executive Officer). Pursuant to the Compa Company’s ny’s 2008 policy decision decision to cease paying tax gross gross-ups -ups in chang changee in contr control ol agreements, agreements, the arrangements with Messrs. Turner and Avril do not provide for a tax gross-up if the benefits payable thereunder are subject to the excise tax under Section 280G of the Code. Instead, the benefits provided are reduced to the point that it would be more advantageous to the executive to pay the excise tax rather than reduce benefits furthe fur ther. r. The Com Compan pany y als also o inc includ luded ed cha change nge in con contro troll arr arrang angeme ements nts in Mr. van Paa Paassc sschen hen’s ’s emp employ loymen mentt agreement. 32
Potentiall Paymen Payments ts Upon These The se cha change nge in con contro troll arr arrang angeme ements nts are des descri cribed bed in mor moree det detail ail in the Potentia Termination or Chang Termination Changee in Control section beginning on page 43 of this proxy statement. The change in control severance agreements are intended to promote stability and continuity of senior management. The Company believes that the provision of severance pay to these Named Executive Officers upon a change in control aligns their interests with those of stockholders. By making severance pay available, the Company is able to mitigate executive concern over employment termination in the event of a change in control that benefits stockholders. In addition, the acceleration of equity compensation vesting in connection with a change in control provides these Named Executive Officers with protection against equity forfeiture due to termination and ample incentive to achieve Company goals, including facilitating a sale of the Company at the highest possible price per share, which would benefit both stockholders and executives. In addition, the Company acknowledges that seeking a new sen senior ior pos positi ition on is a lon long g and tim time-c e-cons onsumi uming ng pro proces cess. s. Las Lastly tly,, eac each h sev severa erance nce agr agreem eement ent per permit mitss the exec ex ecut utiv ivee to ma main inta tain in ce cert rtai ain n be bene nefi fits ts fo forr a pe peri riod od of tw two o ye year arss fo foll llow owin ing g te term rmin inat atio ion n an and d to re rece ceiv ivee outplacement services. The aggregate effect of our change in control provisions is intended to focus executives on maximizing value to stockholders. In addition, should a change in control occur, benefits will be paid only after a “double trigger” event as described in the Potential Payments Upon Termination or Change in Control section beginning on page 43 of this proxy statement. The Company believes benefit levels have been set to be competitive with peer group practices. 3. Additional Severance Arrangements
In 2007, the Company entered into a letter agreement with Mr. Prabhu clarifying that, pursuant to his employment agreement dated November 13, 2003, his severance included the acceleration of 50% of unvested stock options in the event that his employment was terminated without cause by us or by him for good reason. The clarification formally documented Mr. Prabhu’s existing severance arrangements as part of his employment with the Company. This additional additional severance severance arrangement arrangement is described described in more detai detaill begin beginning ning on page 43 of this proxy statement under the heading Potential Payments Upon Termination or Change in Control . 4. Potential Impact on Compensation for Executive Misconduct
If the Board of Directors determines that an executive officer has engaged in misconduct, the Board of Directors may take a range of actions to remedy the misconduct. In 2011 the Compensation Committee adopted an incen incentive tive recoupment recoupment policy that allows the Compa Company ny to recov recover er any annua annuall incen incentive tive payment or longlong-term term incentive award to any individual executive at the senior vice president level or above, including our Named Execut Exe cutive ive Off Office icers, rs, if the Board of Dir Direct ectors ors det determ ermine iness tha thatt (i) the Com Compan pany y is req requir uired ed to pre prepar paree an accounting financial restatement due to the material non-compliance of the Company with any financial reporting requireme requi rement nt under applicable applicable securities securities laws and the compensation compensation payment previously previously made was based on erroneous data; or (ii) the Board of Directors determines that the executive engaged in intentional misconduct that caused or substantially caused the need for a financial restatement and a lower payment would have been made to the executive based upon the restated financial results. In such circumstances the Company will, to the extent practicable, seek to recover from the individual executive the amount by which the individual executive’s payments for the relevant period exceeded the lower payment that would have been made based on the restated financial finan cial results. results. In addit addition, ion, the Compa Company’s ny’s LTIP provi provides des that the Compensation Compensation Committee Committee may cancel, suspend, withhold or otherwise restrict or limit any long-term incentive award to any participant under the LTIP, including inclu ding executive officers, officers, if the Compensation Compensation Commi Committee ttee determines determines that such parti participa cipant nt engag engaged ed in misconduct.
33
C. Background Information Information on the Executive Compensation Compensation Program 1.
Usee of Pe Us Peer er Da Data ta
In determining competitive compensation levels, the Compensation Committee reviews data prepared by Meridian, its executive compensation consultants, that reflect compensation practices for executives in direct hotel and property management companies. Due to the to the limited number of direct competitors of similar scale, a robust peer community requires expanding beyond these organizations to companies in related industries with a stron strong g brand focus, and/ and/or or with similar talent needs needs,, e.g., hospitality/en hospitality/entert tertainm ainment ent indus industrie tries, s, brand brand-depend dep endent ent com compan panies ies,, com compan panies ies of sim simila ilarr siz size, e, sca scale le and com comple plexit xity. y. To ass assess ess the app approp ropria riaten teness ess of including the company in Starwood’s peer group, the following eight screening criteria was used: (i) revenue size with stronger consideration given to companies within a range of one-third to three times Starwood’s revenue (given Starwood’s unique role in managing property revenues beyond those captured in its financial statements, a couple larger revenue companies were included); (ii) market capitalization with stronger consideration given to companies compa nies within a rang rangee of one-third one-third to three time timess Starw Starwood’s ood’s market capitalizati capitalization; on; (iii) EBITDA with stronger stron ger consideratio consideration n given to compa companies nies within a range of one-t one-third hird to thre threee time timess Starw Starwood’s ood’s EBITDA; (iv) financial performance with stronger consideration given to companies with financial results comparable to Starwo Sta rwood od in ter terms ms of 1-y 1-year ear,, 3-y 3-year ear and 5-y 5-year ear ann annual ualize ized d rev revenu enuee gro growth wth,, ope operat rating ing inc income ome and tot total al shareholde share holderr retur return; n; (v) direc directt compe competito titors; rs; (vi) rela related ted indus industrie tries, s, e.g. cruis cruisee lines lines,, enter entertainm tainment; ent; (vii (vii)) talen talentt competitors; and (viii) global complexity with stronger consideration given to companies with global scope, where whe re gre greate aterr tha than n 25% of rev revenu enues es are gen genera erated ted out outsid sidee U.S U.S.. The Com Compen pensat sation ion Com Commit mittee tee alo along ng wit with h Compan Com pany y rev review iewss the pee peerr gro group up bibi-ann annual ually ly to ens ensure ure it rep repres resent entss a rel releva evant nt mar market ket per perspe specti ctive. ve. The Compensation Committee utilizes the peer group for a broad set of comparative purposes, including levels of total compensation for executives and directors, pay mix, incentive plan design and equity usage and other terms of employment. The Company believes that by conducting the competitive analysis using a broad peer group, which includes companies outside the hospitality industry, it is able to attract and retain talented executives from outside outsi de the hospitality hospitality indus industry. try. The Compa Company’s ny’s experience experience has prove proven n that key execu executive tivess with diversified diversified experience prove to be major contributors to its continued growth and success. The peer group approved by the Compensation Committee for 2011 is set out below. We expect that it will be necessary to update the list periodically. Avon Products, Inc. Carn Ca rniv ival al Co Corp rpor orat atio ion n an and d Ca Carn rniv ival al pl plc* c* Thee Es Th Esttée La Laud uder er Co Com mpa pani nies es In Incc. H.J. Heinz Company Host Hotels & Resorts, Inc. Inte In terrCo Cont ntiine nen nta tall Ho Hottel elss Gr Gro oup PLC Kellogg Company Limited Brands, Inc. Marriott International, Inc. MGM Resorts International
NIKE, Inc. Ralp Ra lph h La Laur uren en Co Corp rpor orat atio ion n Roya Ro yall Ca Cari ribb bbea ean n Cr Crui uise sess Lt Ltd. d. Simon Property Group, Inc. Starbucks Corporation V.F. V. F. Co Corp rpor orat atio ion n The Walt Disney Company Wyndham Worldwide Corporation Yum! Brands, Inc.
* Carnival Carnival Corporation Corporation and Carni Carnival val plc are public companies with separate separate list listings ings and share shareholde holders rs but operate as if they are a single economic enterprise.
In comparison to the peer group used in 2010, H.J Heinz Company, InterContinental Hotels Group PLC, Ralph Lauren Corporation, Royal Caribbean Cruises Ltd., and V.F. Corporation were added to the 2011 peer group. gro up. The fol follow lowing ing com compan panies ies fro from m the 201 2010 0 pee peerr gro group up wer weree del delete eted: d: Coa Coach, ch, Inc Inc., ., Col Colgat gate-P e-Palm almoli olive ve Company, FedEx Corporation, McDonald’s Corporation, Staples, Inc. and Williams-Sonoma, Inc. In performing its competitive analysis for 2011, the Compensation Committee reviewed: • bas basee pay pay;; • target target and actua actuall total cash compe compensati nsation, on, consisting consisting of salar salary, y, target and actua actuall annual incentive incentive awards in prior years; 34
• direct total compensation compensation consisting of salary, salary, target and actual annual annual incentive awards, and the value of option and restricted stock/restricted stock unit awards; and • retir retirement ement benef benefits. its. When establishing target compensation levels for 2011, the Compensation Committee reviewed peer group data on payments to named executive officers as reported in proxy statements available as of February 2011 as provided by Meridian.
2. Tax Considerations
Section Secti on 162(m 162(m)) gener generally ally disallows disallows a feder federal al incom incomee tax deduction to publi publicc compa companies nies for incen incentive tive compensation in excess of $1,000,000 paid to the chief executive officer and to each of the three other most highly highl y comp compensat ensated ed execu executive tive offi officers cers (othe (otherr than the chief fina financial ncial offi officer). cer). Quali Qualified fied perf performan ormance-ba ce-based sed compensation is not subject to the deduction limit if certain requirements are met. The Company believes that compensation paid under the Executive Plan for 2011 meets these requirements and is generally fully deductible for federal income tax purposes. In addition, for federal income tax purposes, compensation earned under option grants is also fully deductible for federal tax purposes. In designing the Company’s compensation programs, the Compensation Committee carefully considers the effect of this provision together with other factors relevant to its business needs. In certain circumstances the Company may approve compensation that does not meet these requirements in order to advance the long-term intere int erests sts of its sto stockh ckhold olders ers.. In Feb Februa ruary ry 201 2010, 0, the Com Compen pensat sation ion Com Commit mittee tee app approv roved ed an inc increa rease se in Mr. van Paa Paassc sschen hen’s ’s bas basee sal salary ary fro from m $1, $1,000 000,00 ,000 0 to $1, $1,250 250,00 ,000. 0. For the 2011 and 2012 fis fiscal cal yea years, rs, the Compensati Compe nsation on Comm Committe itteee deter determined mined that Mr. van Paasschen’s Paasschen’s base salary should rema remain in $1,250 $1,250,000. ,000. The Company has historically taken, and intends to continue taking, reasonably practicable steps to minimize the impact of the loss of deductibility under Section 162(m).
3. Share Ownership Guidelines
The Company has adopt adopted ed shar sharee owner ownership ship guidelines guidelines for our executive executive offic officers, ers, including including the Named Executive Officers. Pursuant to the guidelines, the Named Executive Officers, including the Chief Executive Officer, are required to hold that number of shares having a market value equal to or greater than a multiple of each executive’s base salary. For the Chief Executive Officer, the multiple was increased from five times base salary to six times base salary in 2011 to be more in line with market practice, and for the other Named Executive Officers, the multiple is four times base salary. A retention requirement of 35% is applied to restricted shares upon vesting (net shares after tax withholding) and shares obtained from option exercises until the executive meets the target, or if an executive falls out of compliance shares owned, stock equivalents (vested/unvested restri res tricte cted d sto stock ck uni units) ts),, and unv unvest ested ed res restri tricte cted d sto stock ck (pr (pre-t e-tax) ax) cou count nt tow toward ardss mee meetin ting g own owners ership hip tar target gets. s. However, stock options do not count towards meeting the target. Officers have five years from the date of hire or, if lat later, er, the date the they y fir first st bec become ome subject subject to the policy, policy, to mee meett the ownershi ownership p req requir uireme ements nts.. All Named Executive Officers are in compliance with share ownership guidelines.
4. Equity Grant Practices
Determination of Option Exercise Prices. The Compensation Committee grants stock options with an exercise price equal to the fair market value of a share on the grant date. Under the LTIP, the fair market value of our common stock on a particular date is determined as the average of the high and low trading prices of a share on the NYSE on that date. 35
Timing of Equity Grants. The Compensation Committee generally makes annual equity compensation grants to Named Executive Officers following its first regularly scheduled meeting that occurs after the release of the Company’s earnings for the prior year (typically the grant date is February 28 th or the last business day prior to that date). The timing of this meeting is determined based on factors unrelated to the pricing of equity grants. The Compensation Committee (or its delegates), however, has discretion under unusual circumstances to award grants at other times in the year. The Compensation Committee approves equity compensation awards to a newly hired executive officer at the time that the Board of Directors meets to approve the executive’s employment package. Generally, the date on which the Board of Directors approves the employment package becomes the grant date of the newly-hired executive officer’s equity compensation awards. However, if the Company and the new executive officer enter into an empl employmen oymentt agree agreement ment regarding regarding the emplo employment yment relationship relationship,, the Company requi requires res the execu executive tive officer offic er to sign his employment employment agreement shortly shortly foll following owing the date of Board approval approval of the empl employmen oymentt package; the later of the date on which the executive officer signs his employment agreement or the date that the executive officer begins employment becomes the grant date of these equity compensation awards.
III. COMPENSATI COMPENSATION ON COMMITTEE COMMITTEE REPORT The Com Compen pensat sation ion and Opt Option ion Com Commit mittee tee of the Boa Board rd of Dir Direct ectors ors of Sta Starwo rwood od Hot Hotels els & Res Resort ortss Worldwide, Inc. has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company’s Proxy Statement for the 2012 Annual Meeting of Stockholders and incorporated by reference into the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011. COMPENSATION AND OPTION COMMITTEE Adam M. Aron, Chairman Thomas E. Clarke Clayton C. Daley, Jr. Thomas O. Ryder Kneeland C. Youngblood
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IV. 2011 SUMM SUMMARY ARY COMP COMPENSA ENSATION TION TAB TABLE LE The table below sets forth a summary of the compensation received by the Named Executive Officers for the past three years: Name and principal position (listed alphabetically following the Chie Ch ieff Ex Exec ecut utiv ivee Of Offi fice cer) r)
Year Ye ar
Salary ($)(1)
Frits van Paasschen . . . . . . . . C hi hie f Exec ut ut iv ive Office r and President
2011 2010 2009
1,250,000 1,208,333 1,000,000
Matthew E. Avril . . . . . . . . . . President, Hotel Group
2011 2010 2009
751,750 747,292 725,000
Vasant M. Prabhu . . . . . . . . . Vice Chairman and C hi hie f Fina nc nci al al Offi ce cer
2011 2010 2009
751,750 733,235 640,658
Kenneth S. Siegel . . . . . . . . . . Chief Administrative Officer, General Counsel and Secretary
2011 2010 2009
638,490 634,582 615,039
Simon M. Turner . . . . . . . . . . President, Global Development
2011 2010 2009
733,142 644,792 6 25,000 62
Stock awards ($)(2)
Option awards ($)(3)
Non-equity incentive plan compensation ($)(4)
All other compensation ($)(5)
3,997,530 3,956,262 150,125
1,125,465 1,210,395 5,151,077
2,450,000 3,000,000 1,700,000
32,863 19,927 60,432
8,855,858 9,394,917 8,861,634
1,574,435 1,550,838 44,269
450,186 484,167 1,545,324
736,715 902,100 616,250
10,557 9,901 25,654
3,523,643 3,694,298 2,956,497
2,174,427 2,312,035 1,298,096
630,256 726,243 1 ,2 ,287,769
736,715 902,100 544,559
11,198 9,800 27,085
4,304,346 4,683,413 4,005,358
— — —
1,600,725 1,468,148 46,166
461,442 459,953 1,957,411
625,720 766,188 522,784
11,981 9,800 26,914
3,338,358 3,338,671 3,168,314
— — —
1,314,216 693,824 34,369
1,125,465 1,888,226 2,575,538
735,020 778,500 531,250
9,800 9,800 27,910
3,917,643 4,015,142 3,794,067
Bonus ($) — — 800,000(6) — — — — — 2 07 07,191(6)
Total ($)
(1) Represents salary salary actually actually earned during the fiscal year listed. (2) Represent Representss the grant date fair value for restricted restricted stock and restricted restricted stock unit awards granted granted during the yearr com yea comput puted ed in acc accord ordanc ancee wit with h Fin Financ ancial ial Acc Accoun ountin ting g Sta Standa ndards rds Boa Board rd Acc Accoun ountin ting g Sta Standa ndards rds Codification 718, or ASC 718. For additional information, refer to Note 22 of the Company’s financial statements filed with the SEC as part of the Form 10-K for the year ended December 31, 2011. These amounts reflect the grant date fair value for these awards and do not correspond to the actual value that will be recognized by the Named Executive Officers. See the 2011 Grants of Plan-Based Awards Table on page 38 of this proxy statement for information on awards granted in 2011. (3) Represents the grant date fair value for stock option awards granted granted during the year year computed in accordance accordance with ASC 718. For additional information, refer to Note 22 of the Company’s financial statements filed with the SEC as part of the Form 10-K for the year ended December 31, 2011. These amounts reflect the grant date fair value for these awards and do not correspond to the actual value that will be recognized by the Named Executive Officers. See the 2011 Grants of Plan-Based Awards Table on page 38 of this proxy statement for information on awards granted in 2011. (4) Represent Representss cash awards paid in March 2012, 2012, 2011 and 2010 with respect respect to performance performance in 2011, 2010 and 2009, respectively, determined under the Executive Plan, as discussed under the section entitled Annual Incentive Compensation beginning on page 25 of this proxy statement. Cash incentive awards include the following amounts that were converted into restricted stock units and such number of restricted stock units was increased by 33% in accordance with the Executive Plan: Name
van Paasschen . . . . . . . . . . . . . . Avril . . . . . . . . . . . . . . . . . . . . . . Prabhu . . . . . . . . . . . . . . . . . . . . Siegel . . . . . . . . . . . . . . . . . . . . . . Turner . . . . . . . . . . . . . . . . . . . .
2011 Amount Deferred
2010 Amount Deferred
612,500 184,179 184,179 156,430 183,755
750,000 225,525 225,525 191,547 194,625
2009 Amount Deferred
625,000(A) 154,063 187,938(B) 130,696 132,813
(A) This amount amount is an aggregate aggregate of cash incentive incentive awards deferred deferred in resp respect ect of the 2009 fiscal year, which includ inc ludes es $20 $200,0 0,000 00 def deferr erred ed fro from m a spe specia ciall one one-ti -time me cas cash h bon bonus us enh enhanc anceme ement nt awa awarde rded d by the Compensation Committee. 37
(B) This amount amount is an aggregate aggregate of cash incentive incentive awards deferred deferred in resp respect ect of the 2009 fiscal year, which incl in clud udes es $5 $51, 1,79 798 8 de defe ferr rred ed fr from om a sp spec ecia iall on onee-ti time me ca cash sh bo bonu nuss en enha hanc ncem emen entt aw awar arde ded d by th thee Compensation Committee. (5) The amounts amounts reported in the “All Other Compensat Compensation” ion” for 2011 include Company Company contribution contributionss to the Compan Com pany’s y’s Sav Saving ingss Pla Plan, n, lif lifee ins insura urance nce pre premiu miums ms for Mr. van Paa Paassc sschen hen and tax gro grossss-up up pay paymen ments ts (inclu (in cludin ding g a pay paymen mentt to Mr. van Paa Paassc sschen hen in the amo amount unt of $18 $18,738 ,738). ). Eac Each h off office icer’s r’s per perqui quisit sites es and personal benefits for 2011 are less than $10,000, and no other item reported in this column for 2011 has a value that exceeds $10,000. (6) Repres Represent entss spe specia ciall one one-ti -time me cas cash h bon bonus us enh enhanc anceme ements nts awa awarde rded d by the Com Compen pensat sation ion Com Commit mittee tee in recognition of 2009 accomplishments.
V.
2011 GRAN GRANTS TS OF OF PLAN-B PLAN-BASED ASED AWAR AWARDS DS
The table below sets forth a summary of the grants of plan-based incentive awards to the Named Executive Officers made during 2011:
Name (listed alphabetically by name following the Chief Executive Officer)(a)
van Paasschen . . . . . .
Avril . . . . . . . . . . . . . .
Prabhu . . . . . . . . . . . .
Siegel . . . . . . . . . . . . .
Turner . . . . . . . . . . . .
Grant date (or year with Compensation respect to Committee non-equity Approval incentive plan date award)(b)(1) (c)(1)
2/28/2011 2/28/2011 3/01/2011 2011
2/17/2011 2/17/2011 (6)
2/28/2011 2/28/2011 3/01/2011 2011
2/17/2011 2/17/2011 (6)
2/28/2011 2/28/2011 3/01/2011 2011
2/17/2011 2/17/2011 (6)
2/28/2011 2/28/2011 3/01/2011 2011
2/17/2011 2/17/2011 (6)
2/28/2011 2/28/2011 3/01/2011 2011
2/17/2011 2/17/2011 (6)
Estimated Future Payouts Under Non-Equity Incentive Plan Awards(2) Threshold ($)(d)
Target ($)(e)
Maximum ($)(f)
All Other Stock Awards: Number of Shares of Stock or Units (#)(g)
All Other Option Awards: Exercise Grant Date Number of or Base Fair Value Securities Price of of Stock Underlying Option and Option Options Awards Awards (#)(h)(3) ($/Sh)(i)(4) ($)(j)(5)
50,995
61.28
1,125,465 3,750,030 997,496
20,398
61.28
450,186 1,500,012 299,921
28,557
61.28
630,256 2,100,004 299,921
20,908
61.28
461,442 1,537,515 254,746
50,995
61.28
1,125,465 1,249,989 258,852
61,195(7) 16,759(6) 1,000,000
2,500,000
5,000,000 24,478(7) 5,039(6)
300,700
751,750 75
1,503,500 34,269(7) 5,039(6)
300,700
751,750 75
1,503,500 25,090(7) 4,280(6)
255,396
638,490 63
1,276,980 20,398(7) 4,349(6)
300,008
750,020 75
1,500,040
(1) Grant date differs differs from Compensation Compensation Committee Committee approval date in accor accordance dance with the procedure outlined outlined in the section entitled Equity Grant Practices beginning on page 35 of this proxy statement. (2) Represent Representss the pote potential ntial values values of the awards granted granted to the Named Executive Executive Officers Officers under the Executive Executive Plan if the threshold, threshold, targe targett and maximum goals are satisfied satisfied for all appli applicable cable performance performance measures. measures. See detailed discussion of these awards in the section entitled Narrative Disclosure To Summary Compensation Table and Grants of Plan-Based Awards Section beginning on page 39 of this proxy statement. (3) The options options generally generally vest in equal installm installments ents on the first, second, third and fourth fourth anniversary anniversary of their grant. As of September 4, 2010, Mr. Siegel’s awards vest quarterly in equal installments over four years due to his retirement eligible status, as defined in the LTIP. As of December 15, 2014, Mr. Prabhu’s awards will vest in quarterly due to his retirement eligible status, as defined in the LTIP. (4) The exercise exercise price was determined determined by using the average average of the high and low price of shares on the grant date. 38
(5) Represent Representss the fair value of the awards disclosed disclosed in columns columns (g) and (h) on their respect respective ive grant dates. dates. For restricted stock and restricted stock units, fair value is calculated in accordance with ASC 718 using the average of the high and low price of shares on the grant date. For stock options, fair value is calculated in accordance with ASC 718 using a lattice valuation model. For additional information, refer to Note 22 of the Comp Co mpan any’ y’ss fi fina nanc ncia iall st stat atem emen ents ts fi file led d wi with th th thee SE SEC C as pa part rt of th thee Fo Form rm 10 10-K -K fo forr th thee ye year ar en ende ded d December 31, 2011. There can be no assurance that these amounts will correspond to the actual value that will be recognized by the Named Executive Officers. (6) On March 1, 2011, in accordance accordance with the Executive Executive Plan, 25% of Messrs. Messrs. van Paasschen, Paasschen, Avril, Prabhu, Prabhu, Siegel and Turner’s annual bonus with respect to 2010 performance was converted into restricted stock units and the number of units was increased by 33%. The amount included in Stock awards column in the 2011 Summary Compensation Table only includes the 33% increase, as the deferral of the bonus amount is disclosed separately. These restricted stock units vest in equal installments on the first, second and third fiscal year-ends following the date of grant, and vested units are distributed on the earlier of (i) the third fiscal year-end or (ii) a termination of employment. Dividends are paid to the Named Executive Officers in amounts amou nts equal to those paid to holde holders rs of share shares. s. No separ separate ate Compensation Compensation Committee Committee appro approval val was required for award of these deferred stock units, which are provided by plan terms. (7) This award award vests on the third anniversary anniversary of the grant date, date, except with respect respect to Mr. Siegel whose whose awards as of September 4, 2010, vest quarterly in equal installments over three years due to his retirement-eligible status, as defined in the LTIP. Dividends are accrued and paid upon vesting.
VI. NARRA NARRATIV TIVE E DIS DISCLO CLOSUR SURE E TO SUM SUMMAR MARY Y CO COMPE MPENSA NSATIO TION N TA TABL BLE E AN AND D GRA GRANTS NTS OF PLAN-BASED PLAN-BASE D AWARDS SECTION We describe below the Executive Plan awards granted to our Named Executive Officers in 2011. These Compensation sation Table beginning on page 37 of the proxy awards awa rds are reflecte reflected d in bot both h the 2011 Summary Compen statement and the 2011 Grants of Plan-Based Awards section beginning on page 38 of the proxy statement. Each of the Named Executive Officers received an award in March 2012 relating to his 2011 performance. The table below sets forth for each Named Executive Officer his salary, target award as both a percentage of salary salar y and a dolla dollarr amoun amount, t, actual award, the port portion ion of the award that is deferred into restricted restricted stock units and the related 33% increase in his restricted stock units.
Name
Salary ($)
van Paasschen . . . . . . . . . . . . . . . . 1,250,000 Avril . . . . . . . . . . . . . . . . . . . . . . . . 751,750 751,750 Prabhu . . . . . . . . . . . . . . . . . . . . . . Siegel . . . . . . . . . . . . . . . . . . . . . . . . 638,490 Turner . . . . . . . . . . . . . . . . . . . . . . 750,020
Award Target Relative to Salary (%)
Award Target ($)
200% 2,500,000 100% 751,750 100% 751,750 100% 638,490 100% 750,020
Actual Award ($)
Award Deferred into Restricted Stock Units ($)
Increased Award Deferred into Restricted Stock Units ($)
2,4 ,45 50,0 ,00 00 736,715 736,715 625,720 735,020
612,5 ,50 00 184,179 184,179 156,430 183,755
814,6 ,62 25 244,958 244,958 208,052 244,394
The following factors contributed to the Compensation Committee’s determination of the 2011 Executive Plan awards for the Named Executive Officers: • the Company’s 2011 financial financial performance as measured by EBIDTA and earnings earnings per share, • the strategic strategic and opera operationa tionall perfo performan rmance ce goals for each Named Executive Executive Officer Officer that link individual individual contributions to execution of our business strategy and major financial and operating goals, and • the bonuses paid to executive executive officers performing performing comparable functions functions in peer companies companies as further described in the Annual Incentive Compensation assessment beginning on page 25 of the proxy statement. 39
VII.
OUTSTANDING OUTSTAND ING EQUITY AWARDS AT 2011 2011 FISCAL YEAR-EN YEAR-END D
The following table provides information on the current holdings of stock options and stock awards by the Named Executive Officers as of December 31, 2011. This table includes unexercised and unvested stock options, unvested restricted stock and unvested restricted stock units. Each equity grant is shown separately for each Named Executive Officer. The market value of the stock awards is based on the closing price of a share on December 30, 2011, the last business day of the fiscal year, which was $47.97. Option awards
Name (listed alphabetically following the Chief Executive Officer)
van Paasschen . . . . . . . . . . . . . . .
Avril . . . . . . . . . . . . . . . . . . . . . . .
Prabhu . . . . . . . . . . . . . . . . . . . . .
Siegel . . . . . . . . . . . . . . . . . . . . . .
Turner . . . . . . . . . . . . . . . . . . . . .
Grant Date
9/24/2007 2/28/2008 2/27/2009 2/26/2010 2/28/2011 2/26/2010 3/01/2010 2/28/2011 3/01/2011 2/28/2007 2/28/2008 2/27/2009 2/26/2010 2/28/2011 2/28/2008 2/26/2010 3/01/2010 2/28/2011 3/01/2011 2/07/2006 2/28/2007 2/28/2008 2/27/2009 2/26/2010 2/28/2011 2/28/2008 2/27/2009 2/26/2010 3/01/2010 2/28/2011 3/01/2011 2/28/2007 2/28/2008 2/27/2009 2/26/2010 2/28/2011 2/28/2008 2/26/2010 3/01/2010 2/28/2011 3/01/2011 5/07/2008 2/27/2009 2/26/2010 2/28/2011 2/26/2010 3/01/2010 2/28/2011 3/01/2011
Stock awards
Number of Securities Underlying Unexercised OptionsExercisable (#)(1)(2)
Number of Securities Underlying Unexercised Options Unexercisable (#)(1)(2)
Option Exercise Price ($)(1)
Option Expiration Date
63,895 77,153 348,968 20,433 —
— 25,717 548 54 8,968 61,298 50,995
58.69 48.61 11.39 38.24 61.28
9/24/2015 2/28/2016 2/27 27//201 017 7 2/26/2018 2/28/2019 2/
20,723 — — — —
— 5,555 164,690 24,519 20,398
79,913 34,538 59,022 — 12,260 —
— — 19,674 137,242 36,779 28,557
34,538 28,933 104,304 13,589 3,921
— 1,928 130 13 0,380 17,469 16,987
33,806 118,857 31,876 —
33,806 274,484 274 95,625 50,995
65.15 48.61 11.39 38.24 61.28
48.80 65.15 48.61 11.39 38.24 61.28
65.15 48.61 11.39 38.24 61.28
53.25 11.39 38.24 61.28
Number of Shares or Units of Stock That Have Not Vested (#)
Market value of Shares or Units of Stock That Have Not Vested ($)
98,078(3) 7,156(4) 61,195(3) 11,172(4)
4,704,802 343,273 2,935,524 535,921
5,555(3) 39,231(3) 1,764(4) 24,478(3) 3,359(4)
266,473 1,881,911 84,619 1,174,210 161,131
6,558(3) 109,794(3) 58,847(3) 2,152(4) 34,269(3) 3,359(4)
314,587 5,266,818 2,822,891 103,231 1,643,884 161,131
1,928(3) 15,528(3) 1,496(4) 18,817(3) 2,853(4)
92,486 744,878 71,763 902,651 136,858
17,000(3) 1,520(4) 20,398(3) 2,899(4)
815,490 72,914 978,492 139,065
2/28/2015 2/28/2016 2/27/2017 2/ 2/26/2018 2/ 2/28/2019 2/
2/07/2014 2/28/2015 2/ 2/28/2016 2/27/2017 2/ 2/26/2018 2/28/2019 2/
2/28/2015 2/28/2016 2/27 27//201 017 7 2/26/2018 2/28/2019
5/07 07//201 016 6 2/27 27//201 017 7 2/26/2018 2/28/2019 2/
(1) In connection connection with the sale of 33 hotel hotelss to Host Hotels Hotels & Resor Resorts, ts, Inc. (or “Host”), “Host”), Company stockholde stockholders rs received 0.6122 Host shares and $0.503 in cash for each of their Class B Shares. Holders of Company 40
employee stock options and restricted stock did not receive this consideration while the market price of shares was reduced to reflect the payment of this consideration directly to the holders of the Class B Shares. In order to preserve the value of the Company’s options immediately before and after the Host transaction, the Company adjusted its stock options to reduce the strike price and increase the number of stock options using the intrinsic value method based on the share price immediately before and after the transaction. The option information provided reflects the number of options granted and the option exercise prices after these adjustments were made. As of December 31, 2011, this impacts Mr. Prabhu’s holdings only. (2) These options options generally generally vest in equal installm installments ents on the firs first, t, second, third and fourth anniversa anniversary ry of their grant. As of September 4, 2010, Mr. Siegel’s 2008, 2009, 2010 and 2011 awards vest quarterly in equal installments over four years due to his retirement-eligible status, as defined in the LTIP. As of December 15, 2014, Mr. Prabhu’s awards will vest quarterly due to his retirement-eligible status, as defined in the LTIP. (3) For awards granted granted in 2008, the restricted restricted stock or restricte restricted d stock units generally generally vest 75% on the third anniversary and 25% on the fourth anniversary of the date of grant. For awards granted in 2009, 2010 and 2011, the restricted stock or restricted stock units generally vest 100% on the third anniversary of their grant. gra nt. As of Sep Septem tember ber 4, 201 2010, 0, Mr. Siegel’s Siegel’s 2008, 2010 and 2011 awa awards rds vest qua quarte rterly rly in equ equal al installments due to his retirement eligible status, as defined in the LTIP. (4) These These res restri tricte cted d sto stock ck uni units ts ves vestt in equ equal al ins instal tallme lments nts on the first, first, sec second ond and third fiscal fiscal yea year-e r-ends nds following the date of grant, and are distributed on the earlier of: (a) the third fiscal year-end or (b) a termination of employment. Shares underlying the restricted stock units that vested as of December 31, 2011, but which shares will not be distributed to the Named Executive Officers until either December 31, 2012 or 2013, are non-forfeitable with respect to each Named Executive Officer and will be included in the 2011 Option Exercises and Stock Vested table for the year in which they are settled.
VIII.
2011 OPTION EXERCISE EXERCISES S AND STOCK VESTED
The following table discloses, for each Named Executive Officer, (i) option awards representing shares acquired pursuant to exercise of stock options during 2011; and (ii) stock awards representing (A) shares of restricted stock that vested in 2011 and (B) shares acquired in 2011 on account of vesting of restricted stock units. The table also discloses the value realized by the Named Executive Officer for each such event, calculated prior to the deduction of any applicable withholding taxes and brokerage commissions. Option Awards
Name
van Paasschen . . . . . . . . . . . . . . . . . . . . . . . . . Avril . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prabhu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Siegel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Turner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock Awards
Number of Shares Acquired on Exercise (#)
Value Realized on Exercise ($)
Number of Shares Acquired on Vesting (#)
Value Realized on Vesting ($)
— 96,074 108,621 — 18,385
— 4,379,200 4,083,261 — 925,041
88,662 84,088 55,111 43,852 12,984
4,017,527 4,168,058 3,143,017 2,186,718 628,296
41
IX.
2011 NONQUALI NONQUALIFIED FIED DEFERRED COMPENSATI COMPENSATION ON
The Company’s Deferred Compensation Plan (the “Plan”) permits eligible executives, including our Named Executive Officers, to defer up to 100% of their Executive Plan cash bonus award, as applicable, and up to 75% of their base salary for a calendar year. The Company does not contribute to the Plan. No Named Executive Officer made deferrals under the Plan in 2011.
Name
van Paasschen . . . . . . . . . . . Avril . . . . . . . . . . . . . . . . . . . Prabhu . . . . . . . . . . . . . . . . . Siegel . . . . . . . . . . . . . . . . . . Turner . . . . . . . . . . . . . . . . .
Executive Contributions in Last FY ($)
Registrant Contributions in Last FY ($)
Aggregate Earnings in Last FY ($)
Aggregate Withdrawals/ Distributions ($)
— — — — —
— — — — —
47,353 — — — —
— — — — —
Aggregate Balance at Last FYE ($)
632,729(1) — — — —
(1) $500,000 of this this amount previously previously was reported reported as salary salary in the Summary Summary Compensation Compensation Table. Deferral elections are made in December for base salary paid in pay periods beginning in the following calendar year. Deferral elections are made in June for annual incentive awards that are earned for performance in that calendar year but paid in March of the following year. Deferral elections are irrevocable. Elections as to the time and form of payment are made at the same time as the corresponding deferral election. A participant may elect to receive payment on February 1 of a calendar year while still employed or either 6 or 12 months following employment termination. Payment will be made immediately in the event a participant terminates employment on account of death, disability or on account of certain changes in control. A participant may elect to receive payment of his account balance in either a lump sum or in annual installments, so long as the account balance exceeds $50,000; otherwise payment will be made in a lump sum. If a participant elects an in-service distribution, the participant may change the scheduled distribution date or form of payment so long as the change is made at least 12 months in advance of the scheduled distribution date. Any such change must provide that distribution will commence at least five years later than the scheduled distribution date. If a participant elects to receive a distribution upon employment termination, that election and the cor corres respon pondin ding g for form m of pay paymen mentt ele electi ction on are irr irrevo evocab cable. le. Wit Withdr hdrawa awals ls for har hardsh dship ip tha thatt res result ult fro from m an unforeseeable emergency are available, but no other unscheduled withdrawals are permitted. The Plan uses the investment funds listed below as potential indices for calculating investment returns on a participant’s participan t’s Plan account balance. The deferrals the parti participan cipantt direc directs ts for investment investment into these funds are adjust adj usted ed bas based ed on a dee deemed med inv invest estmen mentt in the app applic licabl ablee fun funds. ds. The par partic ticipa ipant nt doe doess not act actual ually ly own the investments that he selects. The Company may, but is not required to, make identical investments pursuant to a variable universal life insurance product. When it does, participants have no direct interest in this life insurance. 1-Year Annualized Rate of Return (as of 2/28/11)
Name of Investment Fund
NVIT Mo NVIT Mone ney y Mar Marke kett — Cl Clas asss V . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PIMC PI MCO O VIT VIT To Tota tall Ret Retur urn n — Ad Admi min n Sha Share ress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fide Fi deli lity ty VI VIP P Hig High h Inc Incom omee — Se Serv rvic icee Cla Class ss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NVIT NV IT In Inv v Des Destt Mod Moder erat atee — Cl Clas asss 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . T. Ro Rowe we Pr Pric icee Equ Equit ity y In Inco come me — Cl Clas asss II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Drey Dr eyfu fuss Sto Stock ck In Inde dex x — In Init itia iall Sha Share ress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fide Fi deli lity ty VI VIP P II II Con Contr traf afun und d — Se Serv rvic icee Cla Class ss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NVIT NV IT Mi Mid d Cap Cap In Inde dex x Cla Class ss I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Drey Dr eyfu fuss IP IP Sma Small ll Ca Cap p St Stoc ock k In Inde dex x — Se Serv rvic icee Sha Share ress . . . . . . . . . . . . . . . . . . . . . . . . NVIT NV IT In Inte tern rnat atio iona nall Ind Index ex — Cla Class ss 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inve In vesc sco o V.I V.I.. Int Inter erna nati tion onal al Gr Grow owth th — Ser Serie iess I Sh Shar ares es . . . . . . . . . . . . . . . . . . . . . . . . . 42
–0.25% –0.2 5% 5.21 5. 21% % 5.78 5. 78% % 2.11 2. 11% % .99% .9 9% 4.61 4. 61% % 1.47 1. 47% % 1.47 1. 47% % 4.41 4. 41% % -8.4 -8 .44% 4% -1.3 -1 .32% 2%
X.
POTENTIAL PAYMENTS UPON TERMINATION TERMINATION OR CHANGE CHANGE IN CONTROL
The Company provides certain benefits benefits to our Named Executive Executive Offic Officers ers in the event of empl employmen oymentt termination, both in connection with a change in control and otherwise. These benefits are in addition to benefits available generally to salaried employees, such as distributions under the Company’s Savings Plan, disability insurance benefits and life insurance benefits. These benefits are described below.
A.
Terminati Termin ation on Bef Before ore Change Change in Con Contro trol: l: Inv Involu olunta ntary ry Oth Other er tha than n for Cause, Cause, Vol Volunt untary ary for Goo Good d Reason, Death or Disability
Pursuant to Mr. van Paasschen’s employment agreement, if Mr. van Paasschen’s employment is terminated by th thee Co Comp mpan any y ot othe herr th than an fo forr ca caus usee or by Mr Mr.. va van n Pa Paas assc sche hen n fo forr go good od re reas ason on,, th thee Co Comp mpan any y wi will ll pa pay y Mr. van Paasschen as a severance benefit (i) any accrued benefits; (ii) two times the sum of his base salary and target annual bonus and (iii) a pro rated target bonus for the year of termination. None of the other equity awards grante gra nted d to Mr. van Paa Paassc sschen hen wou would ld be acc accele elerat rated. ed. If Mr. van Paa Paassc sschen hen’s ’s emp employ loymen mentt wer weree ter termin minate ated d because of his death or permanent disability, Mr. van Paasschen (or his estate) would be entitled to receive, in addition to any accrued benefits, a pro-rated target bonus for the year of termination pursuant to the terms of the underlying award agreements, and all of his equity awards would accelerate and vest. Pursuant to Mr. Avril’s employment agreement, if Mr. Avril’s employment is terminated by the Company for any reason other than for cause, Mr. Avril will receive severance benefits of twelve months of base salary and the Company Company wil willl con contin tinue ue to pro provid videe med medica icall ben benefi efits ts cov covera erage ge for up to twe twelve lve months months aft after er the date of termination. In addition, Mr. Avril will also be entitled to acceleration of all of his restricted stock and options that were granted prior to August 19, 2008, but no acceleration for equity awards granted on or after August 19, 2008. If Mr. Avril’s employment were terminated because of his death or permanent disability, pursuant to the terms of the underlying award agreements, all of his equity awards would accelerate and vest. Pursuant to his employment agreement, if Mr. Prabhu’s employment is terminated by the Company for any reason other than for cause or by Mr. Prabhu for good reason, Mr. Prabhu will receive severance benefits of twelve months of base salary and the Company will continue to provide medical benefits coverage for up to twelve months after the date of termination. In addition, the Company will accelerate the vesting of 50% of Mr. Prabhu’s unvested restricted stock and options. The Company entered into a letter agreement on August 14, 2007 confirming the terms of the agreement as it relates to the acceleration of 50% of Mr. Prabhu’s unvested restricted stock and options if his employment is terminated by the Company without cause or is terminated by him vol volunt untari arily ly wit with h goo good d rea reason son.. If Mr. Pra Prabhu bhu’s ’s emp employ loymen mentt wer weree ter termin minate ated d bec becaus ausee of his dea death th or permanent disability, pursuant to the terms of the underlying award agreements, all of his equity awards would accelerate and vest. Pursuant to Mr. Siegel’s employment agreement, in the event Mr. Siegel’s employment is terminated by the Company for any reason other than for cause, Mr. Siegel will receive severance benefits of twelve months of base salary plus 100% of his target annual incentive and the Company will continue to provide medical benefits coverage for up to twelve months after the date of termination. If Mr. Siegel’s employment were terminated because of his death or permanent disability, pursuant to the terms of the underlying award agreements, all of his equity awards would accelerate and vest. Pursuant Pursua nt to Mr. Tur Turner ner’s ’s emp employ loymen mentt agr agreem eement ent,, if Mr. Tur Turner ner’s ’s emp employ loymen mentt is ter termi minat nated ed by the Compan Com pany y for any rea reason son other than for cau cause se or by Mr. Turner Turner for good reason, reason, Mr. Turner Turner wil willl rec receiv eivee severance benefits of twelve months base salary and the Company will continue to provide medical benefits coverage cover age for up to twel twelve ve months after the date of term terminat ination. ion. The recei receipt pt of such severance severance benefits benefits is subject to and conditioned upon Mr. Turner’s compliance with his agreement not to engage in competitive activities or solicit employees for a period of twelve months after the date of termination. If Mr. Turner’s employment we termin ter minate ated d bec becaus ausee of his dea death th or per perman manent ent dis disabi abilit lity, y, pur pursua suant nt to the ter term m of the und underl erlyin ying g awa award rd agreements, all of his equity awards would accelerate and vest. 43
B.
Terminati Term ination on in the Event Event of of Change Change in in Control Control
The Com Compan pany y has ent entere ered d int into o sev severa erance nce agr agreem eement entss wit with h eac each h of Mes Messrs srs.. Pra Prabhu bhu and Sie Siegel gel.. Eac Each h severance agreement provides for a term of three years, with automatic one-year extensions until either the executive or the Company notifies the other that such party does not wish to extend the agreement. If a Change in Control (as described below) occurs, the agreement will continue for at least 24 months following the date of such Change in Control. Each agreement provides that if, following a Change in Control, the executive’s employment is terminated without Cause (as defined in the agreement) or with Good Reason (as defined in the agreement), the executive would receive, receive, in addit addition ion to any accrued salary or norma normall post post-term -terminati ination on compe compensati nsation on and benefits in accordance with the Company’s retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the date of termination, the following: • two times the sum of his base salary salary plus the average of the annual annual bonuses earned earned by the executive executive in the three fiscal years ending immediately prior to the fiscal year in which the termination occurs or, if higher, the annual bonus earned in the immediately prior year; • continued continued medical medical benefits benefits for two years years,, reduced to the extent benefits benefits of the same type are received received by or made available to the executive from another employer; • a lump sum amount, amount, in cash, equal to the sum of (A) any unpaid unpaid incentive incentive compensati compensation on which had been allocated or awarded to the executive for any measuring period preceding termination under any annual or long-term incentive plan and which, as of the date of termination, is contingent only upon the continued employ emp loymen mentt of the exe execut cutive ive unt until il a sub subseq sequen uentt dat date, e, and (B) the agg aggreg regate ate val value ue of all con contin tingen gentt incentive compensation awards allocated or awarded to the executive for all then uncompleted periods under any such plan that the executive would have earned on the last day of the performance award period, perio d, assum assuming ing the achi achieveme evement, nt, at the target leve level, l, of the individual individual and corp corporate orate performance performance goals established with respect to such award; • immediate vesting of stock options, restricted restricted stock and restricted stock units units held by the executive under any stock option or incentive plan maintained by the Company; • outplacem outplacement ent services services suitable suitable to the executive’s executive’s position position for a peri period od of two years or, if earlier, until the first acceptance by the executive of an offer of employment, the cost of which will not exceed 20% of the executive’s base salary; • a lump sum payme payment nt of the executive’ executive’ss defer deferred red compensatio compensation n paid in accordance accordance with Section 409A distribution rules; and • immediate immediate vesting vesting of all unvested unvested 401(k 401(k)) contributions contributions in the executive’s executive’s 401(k) account account or payment by the Company of an amount equal to any such unvested amounts that are forfeited by reason of the executive’s termination of employment. In addition, to the extent that any executive becomes subject to the “golden parachute” excise tax imposed under Section 4999 of the Code, the executive would receive a gross-up payment in an amount sufficient to offset the effects of such excise tax. Under the severance agreements, a “Change in Control” is deemed to occur upon any of the following events: • any person becomes becomes the beneficial beneficial owner of secur securitie itiess of the Compa Company ny (not including in the securities securities beneficially owned by such person any securities acquired directly from the Company or its affiliates) representing 25% or more of the combined voting power of the Company; 44
• a majority of the directors cease cease to serve on the Company’s Board in connection connection with a successful hostile hostile proxy contest; O
a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than:
O
a merger or consolidation in which securities of the Company would represent at least 70% of the voting power of the surviving entity; or
• a merger or conso consolidat lidation ion effected effected to implement implement a reca recapital pitalizati ization on of the Compa Company ny in which no person becomes the beneficial owner of 25% or more of the voting power of the Company; or • approval of a plan of liquidation liquidation or dissolution by the stockholders stockholders or the consummation of a sale sale of all or substa sub stanti ntiall ally y all of the Company’ Company’ss ass assets ets,, oth other er tha than n a sal salee to an ent entity ity in whi which ch the Company’ Company’ss stockholders would hold at least 70% of the voting power in substantially the same proportions as their ownership of the Company immediately prior to such sale. However, a “Change in Control” does not incl in clud udee a tr tran ansa sact ctio ion n in wh whic ich h Co Comp mpan any y st stoc ockh khol olde ders rs co cont ntin inue ue to ho hold ld su subs bsta tant ntia iall lly y th thee sa same me proportionate ownership in the entity which would own all or substantially all of the Company’s assets following such transaction. Each of Messrs. Avril and Turner entered into similar change in control agreements in connection with their employment with the Company, provided that no tax gross-up is provided if such payments become subject to the excise tax. If such payments are subject to the excise tax, the benefits under the agreement will be reduced until the point where the executive is better off paying the excise tax rather than reducing the benefits. Mr. van Paasschen’s employment agreement provides that he would be entitled to the following benefits if his employment were terminated without cause or he resigned with good reason following a Change in Control: • two times times the sum of his base salary and target target annual annual bonus; • a lump sum paym payment, ent, in cash, equal to the unpaid incentive incentive compensati compensation on then subject to performance performance conditions, payable at the maximum level of performance; • immediate vesting of stock options, options, restricted stock and restricted restricted stock units held under any stock stock option or incentive plan maintained by the Company; • a lump sum payment of his nonqu nonqualifi alified ed deferred compensati compensation on paid in accor accordance dance with Section Section 409A distribution rules; and • immediate vesting of all unvested 401(k) contributions contributions in his 401(k) 401(k) account or payment by the Company of an amount equal to any such unvested amounts that are forfeited by reason of his termination of employment. In addition, to the extent that Mr. van Paasschen becomes subject to the “golden parachute” excise tax imposed under Section 4999 of the Code, he would receive a gross-up payment in an amount sufficient to offset the effects of such excise tax.
C.
Estimated Esti mated Payme Payments nts Upon Term Terminat ination ion
The tables below refle reflect ct the estimated estimated amou amounts nts payable to the Named Executive Officers Officers in the event their employmen emplo ymentt with the Compa Company ny had terminated terminated as of December 30, 2011 under various circumstan circumstances, ces, and includes amounts earned through that date. The actual amounts that would become payable in the event of an actual employment termination can only be determined at the time of such termination. 45
1.
Involuntary Invol untary Terminat Termination ion without Cause Cause or Voluntary Voluntary Termina Termination tion for Good Good Reason
The following table discloses the amounts that would have become payable on account of an involuntary termination without cause or a voluntary termination for good reason outside of the change in control context. Severance Pay ($)
Medical Benefits ($)
Vesting of Restricted Stock ($)(1)
Vesting of Stock Options ($)(2)
Total ($)
10,000,000 751,750 751,750 1,276,980 750,020
— 10,070 10,070 9,524 9,524
— 266,473 5,443,396 — —
— — 2,689,526 — —
10,000,000 1,028,293 8,894,742 1,286,504 759,544
Name
van Paasschen . . . . . . . . . . . Avril(3) . . . . . . . . . . . . . . . . . Prabhu . . . . . . . . . . . . . . . . . Siegel(3) . . . . . . . . . . . . . . . . Turner . . . . . . . . . . . . . . . . .
(1) Includ Includes es val values ues for hol holdin dings gs of res restri tricte cted d sto stock ck and restrict restricted ed sto stock ck uni units. ts. Wit With h res respec pectt to Mr. Prabhu, Prabhu, includes vested but deferred restricted stock units in accordance with the Executive Plan. (2) Exclu Excludes des vested vested stoc stock k options. options. (3) Messrs Messrs.. Sie Siegel gel and Avr Avril’ il’ss emp employ loymen mentt agr agreem eement entss pro provid videe for pay paymen ments ts in the eve event nt of inv involu olunta ntary ry termination other than for cause but do not provide for payments in the event of voluntary termination for good reason. 2. Termination on Account of Death or Disability Disabil ity
The following following table discloses discloses the amou amounts nts that would have become payable on accou account nt of a term terminati ination on on account of death or disability. Medical Benefits ($)
Vesting of Restricted Stock ($)(1)
Vesting of Stock Options ($)(2)
Total ($)
Name
Severance Pay ($)
van Paasschen(3) . . . . . . . . . . . .
2,500,000
—
9,474,075
33,646,640
45,620,715
Avril . . . . . . . . . . . . . . . . . . . . . . .
751,750
10,070
3,818,172
6,2 ,26 63,8 ,87 76
10,8 ,84 43,8 ,86 68
Prabhu . . . . . . . . . . . . . . . . . . . . .
751, 75 1,75 750 0
10,0 10 ,070 70
10,5 10 ,599 99,5 ,595 95
5,49 5, 498, 8,3 393
16,8 16 ,859 59,8 ,80 08
Siegel . . . . . . . . . . . . . . . . . . . . . .
1,276,980
9,524
2,1 ,16 60,665
8,8 ,88 88,2 ,26 64
12,3 ,33 35,4 ,43 33
Turner . . . . . . . . . . . . . . . . . . . . .
750,020
9,524
2,221,443
15,6 ,63 31,6 ,60 03
18,6 ,61 12,5 ,59 90
(1) Includes Includes values for holdings holdings of restricted restricted stock and restr restricted icted stock units. units. Inclu Includes des vested but deferred deferred restricted stock units in accordance with the Executive Plan. (2) Includ Includes es ves vested ted stock options options.. Ves Vested ted stock options options could be sub subjec jectt to los losss by the Named Named Exe Execut cutive ive Officers in the event of a termination for cause and certain other events but could not in the event of termination on account of death or disability. (3) Excludes Excludes $632,729 $632,729 of Mr. van Paasschen’s Paasschen’s nonqualifi nonqualified ed deferred deferred compensation compensation that is payable upon death, death, disability or certain changes in control as discussed in the 2011 Nonqua Nonqualified lified Defer Deferred red Compen Compensation sation section beginning on page 42.
46
3. Change in Control
The following table discloses the amounts that would have become payable on account of an involuntary termination without cause following a change in control or a voluntary termination with good reason following a change in control.
Name
van Paasschen(3) . . . . . Avril . . . . . . . . . . . . . . . Prabhu . . . . . . . . . . . . . Siegel . . . . . . . . . . . . . . . Turner . . . . . . . . . . . . . .
Vesting of Vesting of Severance Medical Restricted Stock 401(k) Tax Pay Benefits Stock Options Outplacement Payment Gross-Up ($) ($) ($)(1) ($)(2) ($) ($) ($)
12,500,000 4,05 4, 059, 9,45 450 0 4,05 4, 059, 9,45 450 0 3,44 3, 447, 7,84 846 6 3,80 3, 807, 7,06 060 0
4,848 27,39 27, 390 0 27,39 27, 390 0 25,90 25, 904 4 25,90 25, 904 4
9,474,075 33,646,640 3,81 3, 818, 8,17 172 2 6, 6,26 263, 3,87 876 6 10,59 10, 599, 9,59 595 5 5, 5,49 498, 8,39 393 3 2,16 2, 160, 0,66 665 5 8, 8,88 888, 8,26 264 4 2,22 2, 221, 1,44 443 3 15 15,6 ,631 31,6 ,603 03
— 150, 15 0,35 350 0 150, 15 0,35 350 0 127, 12 7,69 698 8 150, 15 0,00 004 4
— — — — —
— — — — —
Total ($)
55,625,563 14,3 14 ,319 19,2 ,238 38 20,3 20 ,335 35,1 ,178 78 14,6 14 ,650 50,3 ,377 77 21,8 21 ,836 36,0 ,014 14
(1) Includes Includes values for holdings holdings of restricted restricted stock and restr restricted icted stock units. units. Inclu Includes des vested but deferred deferred restricted stock units in accordance with the Executive Plan. (2) Includ Includes es ves vested ted stock options options.. Ves Vested ted stock options options could be sub subjec jectt to los losss by the Named Named Exe Execut cutive ive Officers in the event of a termination for cause and certain other events but could not in the event of an involuntary termination without cause following a change in control or a voluntary termination with good reason following a change in control. (3) If the amount of severance severance pay and other benefits benefits payable payable on change in control control is greater than three three times certain base period taxable compensation for Mr. van Paasschen, a 20% excise tax is imposed on the excess amount of such severance pay and other benefits. Excludes $632,729 of Mr. van Paasschen’s nonqualified deferred compensation that is payable upon death, disability or certain changes in control as discussed in the 2011 Nonqualified Deferred Compensation section beginning on page 42.
XI. DIRE DIRECTOR CTOR COMP COMPENSA ENSATION TION The Company uses a combination of cash and stock-based awards to attract and retain qualified candidates to serve on the Board. In setting director compensation, the Company considers the significant amount of time that members of the Board spend in fulfilling their duties to the Company as well as the skill level required by the Company of its directors. The current compensation structure is described below. For 2011, under the Company’s director share ownership guidelines, each non-employee director (“NonEmployee Director”) was required to own shares (or deferred compensation stock equivalents) that have a market price equal to four times the annua annuall Non-E Non-Employ mployee ee Director’s Director’s fees paid to such Non-E Non-Employ mployee ee Director. If any Non-Employee Director fails to satisfy this requirement, sales of shares by such Non-Employee Director shall be subject to a 35% retention requirement. Any new Non-Employee Director shall be given a period of three years to satisfy this requirement. Non-Employee Directors receive compensation for their services as described below.
A. An Annu nual al Fe Fees es Each Non Each Non-Em -Emplo ployee yee Dir Direct ector or rec receiv eives es an ann annual ual fee in the amount amount of $80 $80,00 ,000, 0, pay payabl ablee in fou fourr equ equal al installments of shares issued under our LTIP. The number of shares to be issued is based on the fair market value of a share using the average of the high and low price of the Company’s stock as of December 31 of the year prior to grant. A Non-Employee Director may elect to receive up to one-half of the annual fee in cash and to defer (at an annual interest rate of LIBOR plus 1 1/2 % for deferred cash amounts) any or all of such annual fee payable in cash. A Non-Employee Director is also permitted to elect to defer to a deferred unit account any or all of the annual fee payable in shares. Deferred cash or stock amounts are payable in accordance with the Non-Employee Director’s advance election. 47
Non-Employ Non-E mployee ee Direc Directors tors serving as membe members rs of the Audit Comm Committee ittee receive an addit additional ional annual fee payable in cash of $10,000 ($25,000 for the Chairman of the Audit Committee). The chairperson of each other committee of the Board receives an additional annual fee payable in cash of $12,500. The Chairman of the Board receives an additional fee of $150,000, payable quarterly in restricted stock units which vest in three years.
B. Att Attend endanc ancee Fee Feess Non-Employee Directors do not receive fees for attendance at meetings.
C. Equ Equity ity gra grant nt In 2011, each Non-Employee Director received an annual equity grant (made at the same time as the annual grant is made to Company employees) under our LTIP with a value of $125,000. The equity grant was delivered 50% in restricted stock units and 50% in stock options. The number of restricted stock units is determined by dividing the award value by the fair market value of the Company’s stock on the date of grant (fair market value is calculated as the average of the high and low share price on such date). The number of options is determined by dividing the award value by the fair market value of the Company’s stock on the date of grant (fair market value is calculated as the average of the high and low share price on such date) and multiplying by two and one half, which we believe historically approximates the number of options determined through formal lattice model option valuation. The options are fully vested and exercisable upon grant and are scheduled to expire eight years after the grant date. The restricted stock units awarded pursuant to the annual grant generally vest upon the earlier of (i) the third anniversary of the grant date and (ii) the date such person ceases to be a director of the Company.
D.
Starwood Starw ood Preferre Preferred d Guest Guest Program Program Points Points and Room Roomss
In 2011, each Non-Employee Non-Employee Director received received an annua annuall grant of 750,00 750,000 0 Star Starwood wood Preferred Preferred Guest (“SPG”) points to encourage them to visit and personally evaluate our properties.
E.
Other Comp Compensat ensation ion
The Company reimburses Non-Employee Directors for travel expenses, other out-of-pocket costs they incur when attending meetings and, for one meeting per year, expenses related to attendance by spouses.
48
We have summarized the compensation paid by the Company to our Non-Employee Directors in 2011 in the table below.
Name(1)
Adam M. Aron . . . . . . . . . . . . . . . . . . . . . . Charlene Barshefsky . . . . . . . . . . . . . . . . . Thomas E. Clarke . . . . . . . . . . . . . . . . . . . . Clayton C. Daley, Jr. . . . . . . . . . . . . . . . . . Bruce W. Duncan . . . . . . . . . . . . . . . . . . . . Lizanne Galbreath . . . . . . . . . . . . . . . . . . . Eric Hippeau . . . . . . . . . . . . . . . . . . . . . . . . Stephen R. Quazzo . . . . . . . . . . . . . . . . . . . Thomas O. Ryder . . . . . . . . . . . . . . . . . . . . Kneeland C. Youngblood . . . . . . . . . . . . . .
Fees earned or Paid in Cash ($)
Stock Awards(2) (3) ($)
Option Awards(4) ($)
All Other Compensation(5) ($)
Total ($)
22,500 52,500 50,000 65,000 — — — 12,500 — 50,000
142,402 102,454 102,454 102,454 292,446 142,402 142,402 142,402 142,402 102,454
49,276 49,276 49,276 49,276 49,276 49,276 49,276 49,276 49,276 49,276
18,750 21,240 18,750 35,005 20,150 19,086 34,763 18,750 20,510 18,750
232,928 225,470 220,480 251,735 361,872 210,764 226,441 222,928 212,188 220,480
(1) Mr. van Paassche Paasschen n is not inc includ luded ed in thi thiss tab table le because because he was an emp employ loyee ee of the Compan Company y and thus received no compensation for his services as a director. Mr. van Paasschen’s 2011 compensation from the Company is disclosed in the 2011 Summary Compensation Table on page 37. (2) As of December 31, 2011, every director, director, with the exception exception of Mr. Dunca Duncan, n, held 7,047 restricted restricted stock unitss that had not veste unit vested. d. As of December 31, 2011, Mr. Dunca Duncan n held 22,267 restricte restricted d stoc stock k units that had not vested. (3) Represent Representss the grant date fair value for stock (deferred (deferred and otherwise) otherwise) and restricted restricted stock unit awards granted during the year computed in accordance with ASC 718. For additional information, refer to Note 22 of the Company’s financial statements filed with the SEC as part of the Form 10-K for the year ended December 31, 2011. These amounts reflect the grant date fair value for these awards and do not correspond to the actual value that will be recognized by the Named Executive Officers. The grant date fair value of each stock award is set forth below: Director
Adam M. Aron . . . . . . . . . . . . . . . . . . . .
Charlene Barshefsky . . . . . . . . . . . . . . . .
Thomas E. Clarke . . . . . . . . . . . . . . . . . .
Clayton C. Daley, Jr. . . . . . . . . . . . . . . . .
Grant Date
Number of Shares of Stoc St ock/ k/Un Unit itss
Gran Gr antt Da Date te Fa Fair ir Va Valu luee ($ ($))
2/28/2011 3/31/2011 6/30/2011 9/30/2011 12/31/2011 2/28/2011 3/31/2011 6/30/2011 9/30/2011 12/31/2011 2/28/2011 3/31/2011 6/30/2011 9/30/2011 12/31/2011 2/28/2011 3/31/2011 6/30/2011 9/30/2011 12/31/2011
1,020 328 328 328 328 1,020 164 164 164 164 1,020 164 164 164 164 1,020 164 164 164 164
62,506 19,974 19,974 19,974 19,974 62,506 9,987 9,987 9,987 9,987 62,506 9,987 9,987 9,987 9,987 62,506 9,987 9,987 9,987 9,987
49
Director
Bruce W. Duncan . . . . . . . . . . . . . . . . . .
Lizanne Galbreath . . . . . . . . . . . . . . . . . .
Eric Hippeau . . . . . . . . . . . . . . . . . . . . . .
Stephen R. Quazzo . . . . . . . . . . . . . . . . .
Thomas O. Ryder . . . . . . . . . . . . . . . . . .
Kneeland C. Youngblood . . . . . . . . . . . .
Grant Date
Number of Shares of Stoc St ock/ k/Un Unit itss
Gran Gr antt Da Date te Fa Fair ir Va Valu luee ($ ($))
2/28/2011 3/31/2011 3/31/2011 6/30/2011 6/30/2011 9/30/2011 9/30/2011 12/31/2011 12/31/2011 2/28/2011 3/31/2011 6/30/2011 9/30/2011 12/31/2011 2/28/2011 3/31/2011 6/30/2011 9/30/2011 12/31/2011 2/28/2011 3/31/2011 6/30/2011 9/30/2011 12/31/2011 2/28/2011 3/31/2011 6/30/2011 9/30/2011 12/31/2011 2/28/2011 3/31/2011 6/30/2011 9/30/2011 12/31/2011
1,020 616 328 616 328 616 328 616 328 1,020 328 328 328 328 1,020 328 328 328 328 1,020 328 328 328 328 1,020 328 328 328 328 1,020 164 164 164 164
62,506 37,511 19,974 37,511 19,974 37,511 19,974 37,511 19,974 62,506 19,974 19,974 19,974 19,974 62,506 19,974 19,974 19,974 19,974 62,506 19,974 19,974 19,974 19,974 62,506 19,974 19,974 19,974 19,974 62,506 9,987 9,987 9,987 9,987
(4) Represent Representss the aggre aggregate gate grant date fair value for stock option option awards granted granted during the year computed computed in accord acc ordanc ancee wit with h ASC 718 718.. For add additi itiona onall inf inform ormati ation, on, ref refer er to Not Notee 22 of the Com Compan pany’s y’s fin financ ancial ial statements filed with the SEC as part of the Form 10-K for the year ended December 31, 2011. These amounts reflect the grant date fair value for these awards and do not correspond to the actual value that will be recognized by the directors. As of December 31, 2011, each director has the following aggregate number of stoc stock k optio options ns outs outstandi tanding: ng: Mr. Aron, 28,578; Ambassador Ambassador Barshefsky, Barshefsky, 25,222 25,222;; Dr. Clarke, 20,46 20,468; 8; Mr. Daley, 16,181; Mr. Duncan, 69,447; Ms. Galbreath, 36,201; Mr. Hippeau, 36,201; Mr. Quazzo, 36,201; Mr. Ryder, 36,201; Dr. Youngblood, 25,222. All directors received a grant of 2,550 options on February 28, 2011 with a grant date fair value of $49,276. (5) We reimburse reimburse Non-Employee Non-Employee Directors Directors for trave travell expenses and other out-of-pocke out-of-pockett costs they incur when atte at tend ndin ing g me meet etin ings gs an and, d, fo forr on onee me meet etin ing g pe perr ye year ar,, at atte tend ndan ance ce by sp spou ouse ses. s. In ad addi diti tion on,, in 20 2011 11 Non-Employee Directors received 750,000 SPG points valued at $18,750. Non-Employee Directors receive interest on deferred dividends. Pursuant to SEC rules, perquisites and personal benefits are not reported for any director for whom such amounts were less than $10,000 in the aggregate for 2011 but must be identified by type for each director for whom such amounts were equal to or greater than $10,000 in the aggregate. SEC rules do not require specification of the value of any type of perquisite or personal benefit provided to the Non-Employee Directors because no such value exceeded $25,000.
50
AUDIT COMMITTEE REPORT The information contained in this Audit Committee Report shall not be deemed to be “soliciting material” or “filed” or “incorporated by reference” in future filings with the SEC, or subject to the liabilities of Section 18 of the Exc Exchan hange ge Act Act,, exc except ept to the ext extent ent tha thatt the Com Compan panyy spe specif cifica ically lly incorpor incorporate atess it by ref refere erence nce int into o a document filed under the Securities Act of 1933, as amended, or the Exchange Act.
The Aud Audit it Com Commit mittee tee (th (thee “Au “Audit dit Com Commit mittee tee”) ”) of the Boa Board rd of Dir Direct ectors ors (th (thee “Bo “Board ard”) ”) of Sta Starwo rwood od Hotels & Resorts Worldwide, Inc. (the “Company”), which is comprised entirely of “independent” directors, as determined by the Board in accordance with the New York Stock Exchange (the “NYSE”) listing requirements and app applic licabl ablee fed federa erall sec securi uritie tiess law laws, s, ser serves ves as an ind indepe epende ndent nt and obj object ective ive par party ty to ass assist ist the Boa Board rd in fulfilling its oversight responsibilities including, but not limited to, (i) monitoring the quality and integrity of the Compan Com pany’s y’s fin financ ancial ial sta statem tement ents, s, (ii (ii)) mon monito itorin ring g com compli plianc ancee wit with h leg legal al and reg regula ulator tory y req requir uireme ements nts,, (iii)) asses (iii assessing sing the quali qualificat fications ions and indep independen endence ce of the indep independen endentt regis registered tered public accou accounting nting firm and (iv) establishing and monitoring the Company’s systems of internal controls regarding finance, accounting and legal compliance. compliance. The Audit Committee Committee operates under a writ written ten charter which meet meetss the requirements requirements of applicable federal securities laws and the NYSE requirements. In the first quarter of 2012, the Audit Committee reviewed and discussed the audited financial statements for the year ended December 31, 2011 with management, the Company’s internal auditors and the independent registered public accounting firm, Ernst & Young LLP, including the matters required to be discussed with the independent accountant by Statement of Auditing Standards No. 61, as amended. The Audit Committee also discussed with the independent registered public accounting firm matters relating to its independence, including a review of audit and non-audit fees and the written disclosures and letter from Ernst & Young LLP to the Audit Committee required pursuant to Rule 3526 of the Public Company Accounting Oversight Board regarding the independent accountants’ communications with the Audit Committee concerning independence. Based on the reviews and discussions referred to above, the Audit Committee recommended to the Board that the financial statements referred to above be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. Audit Committee of the Board of Directors Clayton C. Daley, Jr., Chairman Adam M. Aron Thomas E. Clarke Kneeland C. Youngblood
Audit Fees The aggregate amounts paid by the Company for the fiscal years ended December 31, 2011 and 2010 to the Company’s principal accounting firm, Ernst & Young, are as follows (in millions): 2011
2010
Audit Fe Audit Fees es(1 (1)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Audit Aud it-R -Rel elat ated ed Fee Fees( s(2) 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax Ta x Fee Fees( s(3) 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$6.6 $6.6 $0.8 $0 .8 $1.5 $1 .5
$5.6 $5.6 $0.9 $0 .9 $0.6 $0 .6
Tota To tall . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$8.9 $8 .9
$7.1 $7 .1
(1) Audit Audit fees inc includ ludee the fees paid for the ann annual ual audit, audit, the review review of qua quarte rterly rly financi financial al sta statem tement entss and assistance with financial reports required as part of regulatory and statutory filings and the audit of the Company’s internal controls over financial reporting with the objective of obtaining reasonable assurance about whether effective internal controls over financial reporting were maintained in all material respects. 51
(2) Audit-rel Audit-related ated fees include include fees for audit auditss of empl employee oyee benefit benefit plans, audit and accounting accounting consultation consultation and other attest services. (3) Tax fees include include domestic and foreign tax tax compliance and consultations regarding tax matters. The Company has adopted a policy which requires the Audit Committee of the Board of Directors to approve the hiring of any current or former employee (within the last five years) of the Company’s independent registered public accounting firm into any position (i) as a manager or higher, (ii) in its accounting or tax departments, (iii) where the hire would have direct involvement in providing information for use in its financial reporting repor ting systems, systems, or (iv) where the hire would be in a policy setting position. position. When under undertakin taking g its review, the Audit Committee Committee consi considers ders appli applicabl cablee laws, regulations regulations and relat related ed comm commentar entary y regar regarding ding the defi definitio nition n of “independence” for independent registered public accounting firms.
Pre-Approval of Services The Audit Committee pre-approves all services, including both audit and non-audit services, provided by the Company’s independent registered public accounting firm. The independent registered public accounting firm submits an audit services fee proposal, which also must be approved by the Audit Committee before the audit commences. The Audit Committee may delegate authority to one of its members to pre-approve all audit/ non-audit services by the independent registered public accounting firm, as long as these approvals are presented to the full Audit Committee at its next regularly scheduled meeting. Management submits to the Audit Committee all non-audit services that it recommends the independent regist reg istere ered d pub public lic accounti accounting ng fir firm m be eng engage aged d to pro provid videe and an est estima imate te of the fees to be pai paid d for each. Management and the independent registered public accounting firm must each confirm to the Audit Committee thatt the per tha perfor forman mance ce of the non non-au -audit dit ser servic vices es on the lis listt wou would ld not compromi compromise se the independ independenc encee of the registered public accounting firm and would be permissible under all applicable legal requirements. The Audit Commi Com mitte tteee mus mustt app approv rovee bot both h the lis listt of non non-au -audit dit ser servic vices es and the budget budget for eac each h suc such h ser servic vicee bef before ore commencement of the work. Management and the independent registered public accounting firm report to the Audit Committee at each of its regular meetings as to the non-audit services actually provided by the independent registered public accounting firm and the approximate fees incurred by the Company for those services. All audit and permissible non-audit services provided by Ernst & Young to the Company for the fiscal years ended December 31, 2011 and 2010 were pre-approved by the Audit Committee or our Board of Directors.
COMPENSATION COMPENSATI ON COMMITTE COMMITTEE E INTERLO INTERLOCKS CKS AND INSIDER PARTICIPATIO PARTICIPATION N The members of the Compensation Committee during fiscal year 2011 were all independent directors, and no mem member ber was an emp employ loyee ee or for former mer emp employ loyee ee of the Com Compan pany. y. Non Nonee of the Com Compen pensat sation ion Committe Committeee members had any relationship requiring disclosure under the Related Person Transaction Policy described below. During fiscal year 2011, none of our executive officers served on the compensation committee (or its equivalent) or board of directors of another entity whose officer served on our Compensation Committee.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS TRANSACTIONS The Board of Directors has adopted a Corporate Opportunity and Related Person Transaction Policy (the “Related Person Transaction Policy”), the purpose of which is to address the reporting, review and approval or ratification of transactions with directors, director nominees, executive officers, stockholders known to own of record or beneficially more than five percent of our shares (“5% Holders”) and each of the foregoing’s respective family members and/or corporate affiliates (collectively “Covered Persons”). As a general matter, we seek to avoid Related Person Transactions because they can involve potential or actual conflicts of interest and pose the risk that they may be, or be perceived to be, based on considerations other than the Company’s best interests. For 52
purposes of the policy, a “Related Person Transaction” means any transaction involving the Company in which a Covered Cover ed Perso Person n has a dire direct ct or indirect material material inte interest rest.. A tran transacti saction on invol involving ving entities entities contr controlle olled d by the Company shall be deemed a transaction in which the Company participates. However, we recognize that in some circumstances transactions between us and related persons may be incidental to the normal course of business or provide an opportunity that is in the best interests of the Company, or that is not inconsistent with the best interests of the Company, or is more efficient to pursue than an alternative transaction. The Board has charged the Governance Committee with establishing and periodically reviewing our Related Person Transaction Policy. A copy of the policy is posted on our website at www.starwoodhotels.com/corporate/investor_relations.html. The Related Person Transaction Policy also governs certain corporate opportunities to ensure that Corporate Opportunities are not pursued by Covered Persons unless and until the Company has determined that it is not intere int ereste sted d in pur pursui suing ng sai said d opp opport ortuni unity. ty. For pur purpos poses es of the pol policy icy,, a “Co “Corpo rporat ratee Opp Opport ortuni unity” ty” mea means ns any opportunit oppor tunity y (i) that is withi within n the Compa Company’s ny’s existing existing line of business or is one in which the Company either has an existing interest or a reasonable expectancy of an interest; and (ii) the Company is reasonably capable of pursuing. Under the Related Person Transaction Policy, except as otherwise provided, each director, executive officer, and 5% Holder is required to submit any such Related Person Transaction or Corporate Opportunity to the Governance Committee for review. In its review, the Governance Committee is to consider all relevant facts and circumstances to determine whether it should (i) reject the proposed transaction; (ii) conclude that the proposed transaction is appropriate and suggest that the Company pursue it on the terms presented or on different terms, and in the case of a Corporate Opportunity, suggest that the Company pursue the Corporate Opportunity on its own, with the party who brought the proposed transaction to the Company’s attention or with another third party; or (iii) ask the Board of Directors to consider the proposed transaction so that the Board of Directors may then take either of the actions described in (i) or (ii) above, and, at the Governance Committee’s option, in connection with (iii), make a recommendation to the Board of Directors. Any person bringing a proposed transaction to the Governance Committee is obligated to provide any and all information requested by the Governance Committee and, in the case of a director, such director must recuse himself or herself from any vote or other deliberation on the matter. The policy may be changed at any time by the Board of Directors.
OTHER MATTERS The Board of Directors is not aware of any matters not referred to in this proxy statement that may properly be presented for action at the Annual Meeting. The deadline for stockholders to submit matters for consideration at the Annual Meeting and have it included in these proxy materials was November 22, 2011, and the deadline for stockholders to submit matters for consideration at the Annual Meeting without having the proposal included in these proxy materials expired on February 20, 2012. However, if any other matter properly comes before the Annual Meeting, it is the intention of the persons named in the enclosed proxy to vote the shares represented thereby in accordance with their discretion.
SOLICITATION SOLICITATI ON COSTS The Company will pay the cost of soli solicitin citing g proxi proxies es for the Annual Meeting, Meeting, inclu including ding the cost of mailing. The solicitation is being made by mail and over the Internet and may also be made by telephone or in person using the services of a number of regular employees of the Company at nominal cost. The Company will reimburse reim burse banks, broke brokerage rage firms and other custo custodians dians,, nomin nominees ees and fiduciaries fiduciaries for expen expenses ses incurred in sending proxy materials to beneficial owners of shares. The Company has engaged D.F. King & Co., Inc. to solici sol icitt pro proxie xiess and to ass assist ist wit with h the dis distri tribut bution ion of pro proxy xy mat materi erials als for a fee of $19 $19,50 ,500 0 plu pluss rea reason sonabl ablee out-of-pocket expenses. 53
HOUSEHOLDING The SEC allows us to deliver a single proxy statement and annual report or Notice to an address shared by two or more of our stockholders. This delivery method, referred to as “householding,” can result in significant cost savings for us. In order to take advantage of this opportunity, the Company and banks and brokerage firms thatt hol tha hold d you yourr sha shares res hav havee del delive ivered red onl only y one pro proxy xy sta statem tement ent and ann annual ual rep report ort or Not Notice ice to mul multip tiple le stockholders who share an address unless one or more of the stockholders has provided contrary instructions. The Company will deliver promptly, upon written or oral request, a separate copy of the proxy statement and annual report or Notice to any stockholder at a shared address to which a single copy of the documents was delivered. A stockholder who wishes to receive a separate copy of the proxy statement and annual report or Notice, now or in the future, may obtain one, without charge, by addressing a request to Investor Relations, Starwood Hotels & Resorts Worldwide, Inc., One StarPoint, Stamford, Connecticut 06902 or by calling (203) 351-3500. You may also obtain a copy of the proxy statement and annual report from the investor relations page on the Company’s website (www.starwoodhotels.com/corporate/investor_relations.html). Stockholders of record sharing an address who are receiving multiple copies of proxy materials and annual reports or Notices and wish to receive a single copy of such materials in the future should submit their request by contacting us in the same manner. If you are the beneficial owner, but not the record holder, of the shares and wish to receive only one copy of the proxy statement and annual report or Notice in the future, you will need to contact your broker, bank or other nominee to request that only a single copy of each document be mailed to all stockholders at the shared address in the future.
54
STOCKHOLDER STOCKHOLD ER PROPOSALS FOR NEXT ANNUAL MEETING If you want to make a proposal for consideration at next year’s annual meeting and have it included in the Company’s Compa ny’s proxy materials, materials, the Company must recei receive ve your proposal proposal by Novem November ber 22, 2012, and the proposal must comply with the rules of the SEC. If you want to make a proposal or nominate a director for consideration at next year’s annual meeting without having the proposal included in the Company’s proxy materials, you must comply with the then current advanc adv ancee not notice ice pro provis vision ionss and oth other er req requir uireme ements nts set for forth th in the Com Compan pany’s y’s Byl Bylaws aws,, inc includ luding ing tha thatt the Company must receive your proposal on or after January 23, 2013 and on or prior to February 17, 2013, with certain exceptions if the date of next year’s annual meeting is advanced by more than 30 days or delayed by more than 60 days from the anniversary date of the 2012 Annual Meeting. If the Company does not receive your proposal or nomination by the appropriate deadline and in accordance with the terms of the Company’s Bylaws, then it may not properly be brought before the 2013 Annual Meeting of Stockholders. The fact that the Company may not insist upon compliance with these requirements should not be construed as a waiver by the Company of its right to do so at any time in the future. You should addre address ss your proposals proposals or nomi nominatio nations ns to the Corporate Secretary, Secretary, Starwood Hotels & Resor Resorts ts Worldwide Worldw ide,, Inc Inc., ., One Sta StarPo rPoint int,, Sta Stamf mford ord,, Con Connec necti ticut cut 069 06902, 02, Att Attent ention ion:: Ken Kennet neth h S. Sie Siegel gel,, Cor Corpor porate ate Secretary. By Order of the Board of Directors,
Kenneth S. Siegel Corporate Secretary
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General Directions To The St. Regis Bal Harbour Resort From Miami International Airport (MIA) • Proce Proceed ed east on State State Road 836. • Exit onto Interstate Interstate 95 North North towards Fort Lauderdale. • Take Exit 9 for Bal Harbour Harbour and turn right right onto 125th Street Street (922). (922). • Proceed east on 125th Street (922) as it becomes 123rd Street (Toll Road). • After 123rd becomes becomes 96th Street, Street, turn left onto Collins Avenue. Avenue. • The hotel hotel will will be on the the right. right.
From North • Follo Follow w Interstate Interstate 95 South South to Exit 9 for Bal Harbour Harbour.. • Turn left left onto 125th 125th Street Street (922). (922). • Proceed east on 125th Street (922) as it becomes 123rd Street (Toll Road). • After 123rd becomes becomes 96th Street, Street, turn left onto Collins Avenue. Avenue. • The hotel hotel will will be on the the right. right.
From Ft. Lauderdale International Airport (FLL) • Exit the airport airport via via Interstate Interstate 595. 595. • Proce Proceed ed west and exit exit onto Intersta Interstate te 95 South. • Take Exit 9 for Bal Harbour Harbour and turn left onto onto 125th Street Street (922). • Proceed east on 125th Street (922) as it becomes 123rd Street (Toll Road). • After 123rd becomes becomes 96th Street, Street, turn left onto Collins Avenue. Avenue. • The hotel hotel will will be on the the right. right.
From South • Follow Interstate Interstate 95 North North towards Fort Lauderdale. Lauderdale. • Take Exit 9 for Bal Harbour Harbour and turn right right onto 125th Street Street (922). (922). • Proceed east on 125th Street (922) as it becomes 123rd Street (Toll Road). • After 123rd becomes becomes 96th Street, Street, turn left onto Collins Avenue. Avenue. • The hotel hotel will will be on the the right. right.
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-K Í Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 2011 OR
‘ Transition Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Forr th Fo thee Tr Tran ansi siti tion on Pe Peri riod od fr from om
to Commission File Number: 1-7959
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. (Exact name of registrant as specified in its charter)
Maryland (State or other jurisdiction of incorporation or organization)
52-1193298 (I.R.S. employer identification no.)
One StarPoint Stamford, CT 06902 (Address of principal executive offices, including zip code)
(203) 964-6000 (Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act: Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share
New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate Indic ate by check mark mark if the registrant registrant is a well-known well-known seasoned issuer, issuer, as defined defined in Rule 405 of the Securities Securities Act.
Yes
Í
No ‘
Indicate by check Indicate check mark if the registran registrantt is not required required to file reports reports pursuant pursuant to Section Section 13 or Section Section 15(d) of the Act. Act. Yes ‘ No Í Note: Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections. 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 subje ct to such filin filing g requiremen requirements ts for the past past 90 days. days. Yes Í No ‘ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such such shorter shorter period period than the the registra registrant nt was require required d to submit submit and post post such such files). files). Yes Í No ‘ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K Í 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 definition of “large accelerated filer”, “accelerated filer” and smaller reporting company in Rule 12b-2 of the Exchange Act. Smaller reporting company ‘ Large accelerated filer Í Accelerated filer ‘ Non-accelerated filer ‘ (Do not check if smaller reporting company) Indicate by check check mark whether the registrant is a shell company (as defined defined in Rule 12b-2 of the Exchange Act). Act).
Yes ‘
No Í
As of the last business day of the registrant’s most recently completed second fiscal quarter, June 30, 2011, the aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant computed by reference to the closing sales price as quoted on the New York Stock Exchange was approximately $10.9 billion. As of February 10, 2012, the registrant had 196,106,079 shares of common stock outstanding. Documents Incorporated by Reference: Document
Proxy Statement
Where Incorporated
Part III (Items 10, 11, 12, 13 and 14)
TABLE OF CONTENTS Page
PART I
Forwar For ward-L d-Look ooking ing Stat Stateme ements nts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
Item It em 1.
Busi Bu sine ness ss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
Item It em 1A 1A..
Risk Ri sk Fa Fact ctor orss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6
Item It em 1B. 1B.
Unre Un reso solv lved ed Sta Staff ff Com Comme ment ntss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15
Item It em 2.
Prop Pr oper erti ties es . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15
Item It em 3.
Lega Le gall Pro Proce ceed edin ings gs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22
Item It em 4.
Mine Mi ne Sa Safe fety ty Di Disc sclo losu sure ress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22
PART II
Item 5.
Market for Regis Market Registran trants’ ts’ Commo Common n Equity Equity,, Relate Related d Stockho Stockholder lder Matt Matters ers and Issue Issuerr Purcha Purchases ses of Equ Equit ity y Secu Securi riti ties es . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22
Item It em 6.
Sele Se lect cted ed Fi Fina nanc ncia iall Data Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25
Item Ite m 7. 7.
Manage Man agemen ment’s t’s Dis Discus cussio sion n and and Ana Analys lysis is of Fin Financ ancial ial Con Condit dition ion and Res Result ultss of of Oper Operati ations ons . . .
25
Item Ite m 7A. 7A.
Quanti Qua ntitat tative ive and Qua Qualit litati ative ve Discl Disclosu osures res abo about ut Mark Market et Risk Risk . . . . . . . . . . . . . . . . . . . . . . . . . . .
42
Item It em 8.
Fina Fi nanc ncia iall Stat Statem emen ents ts and and Su Supp pple leme ment ntar ary y Data Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
43
Item Ite m 9. 9.
Change Cha ngess In In and and Dis Disagr agreem eement entss with with Acc Accoun ountan tants ts on Acc Accoun ountin ting g and and Fin Financ ancial ial Dis Disclo closur suree . . .
43
Item It em 9A. 9A.
Cont Co ntro rols ls and and Pro Proce cedu dure ress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
43
Item It em 9B. 9B.
Othe Ot herr Info Inform rmat atio ion n . . . . . .. . . . . .. . . . .. . . . .. . . . .. . . . . .. . . . . .. . . . . .. . . . .. . . . .. . . . .
44
PART III
Item Ite m 10. 10.
Direct Dir ectors ors,, Execu Executiv tivee Offic Officers ers and Cor Corpor porate ate Gov Govern ernanc ancee . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
44
Item It em 11. 11.
Exec Ex ecut utiv ivee Comp Compen ensa sati tion on . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
44
Item 12.
Security Ownershi Security Ownership p of Certai Certain n Beneficia Beneficiall Owners Owners and Manag Management ement and Relate Related d Stockhold Stockholder er Matt Ma tter erss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
44
Item Ite m 13. 13.
Certai Cer tain n Relat Relation ionshi ships ps and and Relate Related d Trans Transact action ionss and and Direc Director tor Ind Indepe epende ndence nce . . . . . . . . . . . . . . .
44
Item It em 14. 14.
Prin Pr inci cipa pall Acco Accoun unta tant nt Fee Feess and and Serv Servic ices es . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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PART IV
Item 15.
Exhibi Exh ibits, ts, Fina Financi ncial al State Statemen mentt Schedu Schedules les . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
44
This Annual Report is filed by Starwood Hotels & Resorts Worldwide, Inc., a Maryland corporation (the “Corporation”). Unless the context otherwise requires, all references to “we”, “us”, “our”, “Starwood”, or the “Company” refer to the Corporation and include those entities owned or controlled by the Corporation. PART I Forward-Looking Statements
This Annual Report contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are any statements other than statements of historical fact, including statements regarding the intent, belief or current expectations of Starwood, its directors or its officers with respect to the matters discussed in this Annual Report. In some cases, forwardlooking statements can be identified by the use of words such as “may,” “will,” “expects,” “should,” “believes,” “plans,” “anticipates,” “estimates,” “predicts,” “potential,” “continue,” or other words of similar meaning. Such forward-looking statements appear in several places in this Annual Report, including, without limitation, Item 1. Business and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. All forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those discussed in, or implied by, the forward-looking statements including, without limitation, the risks and uncertainties disclosed under Item 1A. Risk Factors. We caution readers that any such statements are based on curr currently ently available available opera operation tional, al, finan financial cial and compe competiti titive ve infor informati mation, on, and they should not place undue reliance on these forward-looking statements, which reflect management’s opinion only as of the date on which they were made. Except as required by law, Starwood undertakes no obligation to publicly update or revise any forward-looking statements to reflect current or future events or circumstances. Item 1.
Business
General
We are one of the world’s largest hotel and leisure companies. We conduct our hotel and leisure business both directly and through our subsidiaries. Our brand names include the following: St. Regis® (luxu (luxury ry full full-serv -service ice hotel hotels, s, resor resorts ts and resi residence dences) s) is for connoisseurs connoisseurs who desi desire re the finest expressions of luxury. They provide flawless and bespoke service to high-end leisure and business travelers. St. Regis Reg is hot hotels els are loc locate ated d in the ult ultima imate te loc locati ations ons wit within hin the wor world’ ld’ss mos mostt des desire ired d des destin tinati ations ons,, imp import ortant ant emerging markets and yet to be discovered paradises, and they typically have individual design characteristics to capture the distinctive personality of each location. The Luxury Collection® (luxury full-service hotels and resorts) is a group of unique hotels and resorts offering exceptional service to an elite clientele. From legendary palaces and remote retreats to timeless modern classics, these remarkable hotels and resorts enable the most discerning traveler to collect a world of unique, authentic and enriching experiences indigenous to each destination that capture the sense of both luxury and place. They are distinguished by magnificent decor, spectacular settings and impeccable service. W ® (luxury and upscale full-service hotels, retreats and residences) is where iconic design and cutting-edge lifestyle set the stage for exclusive and extraordinary experiences. Each hotel and retreat is uniquely inspired by its destination, where innovative design is inspired by local influences and creates energizing spaces to play or work by day or mix and mingle out by night. Guests are invited into extraordinary environments that combine entertainment, vibrant lounges, modern guestrooms, and innovative cocktail culture and cuisine. The beats per minute increase as the day transitions to night, amplifying the scene in every W Living Room for guests to socialize and see and be seen. W Hotels Worldwide, a global design powerhouse brought to life through W Happenings, exclusive partnerships and the signature Whatever/Whenever ® promises to grant its guests and local community alike access to What’s New/Next. Westin® (luxury and upscale full-service hotels, resorts and residences) provides innovative programs and instinctive services which transform every aspect of a guest’s stay into a revitalizing experience. Indulge in a deliciously wholesome menu including exclusive SuperFoodsRx ® dishe dishes. s. Energ Energize ize in the fitness studio with the
1
industry-leading WestinWORKOUT ®. Revive in the Heavenly ® Bath where luxurious touches create a spa-like experience. And of course, experience truly restorative sleep in the world-renowned Heavenly ® Bed—an oasis of lush sheets, down, and patented pillow-top mattress. Whether an epic city center location or refreshing resort destination, Westin ensures guests leave feeling better than when they arrived. Westin. For A Better You. Le Méridien® (luxury and upscale full-service hotels, resorts and residences) is a Paris-born hotel brand, currently represented by approximately 100 properties in 43 countries worldwide. Le Méridien aims to target the creative mind: an audience inspired by creativity who are eager to learn something new and see things in a different light. A curated approach towards the arts connects Le Méridien with the creative mind in an authentic and credible way. A cultural curator was engaged, responsible for integrating the arts into the guest experience and identifying the appropriate creative talents, a family of cultural innovators, LM100 TM, to define and enrich the guest experience through their dedicated tailor-made creations. This esteemed group comprises of a global array of visionaries, from painters to photographers, musicians to designers and chefs. Le Méridien is more than a hotel, it’s a way of life that provides “A New Perspective”. Sheraton® (luxury and upscale full-service hotels, resorts and residences) is our largest brand serving the needs of upscale business and leisure travelers worldwide. For over 75 years this full-service, iconic brand has welcomed guests, becoming a trusted friend to travelers and one of the world’s most recognized hotel brands. From being the first hotel brand to step into major international markets like China, to completely captivating entire destinations like Waikiki, Sheraton understands that travel is about bringing people together. In Sheraton lobbies you’ll find the Link@Sheraton SM experienced with Microsoft. The Sheraton Club is a social space where guests indulge in the upside of everything. Sheraton Fitness programmed by Core Performance, our signature fitness program, brings guests together as they train and eat healthy on the road. Sheraton transcends lifestyles, generations and geographies and will continue to welcome generation after generation of world travelers as The World’s Gathering Place. Four Points® (sel (selectect-servi service ce hotel hotels) s) delig delights hts the self self-suff -sufficien icientt trave traveler ler with what is neede needed d for greater comfort and productivity. Great Hotels. Great Rates. All at the honest value our guests deserve. Our guests start their day feeling energized and finish up relaxed, maybe even with one of our Best Brews (local craft beer). It’s the little indulgences that make their time away from home special. Aloft® (select-service hotels) first opened in 2008. It will already be opening its 55th property in 2012. Aloft provides new heights: an oasis where you least expect it, a spirited neighborhood outpost, a haven at the side of the road. Bring Bringing ing a cozy harmony of moder modern n elem elements ents to the classic on-the-road on-the-road tradition, tradition, Aloft offers a sassy sassy,, refreshing, ultra effortless alternative for both the business and leisure traveler. Fresh, fun, and fulfilling, Aloft is an experience to be discovered and rediscovered, destination after destination, as you ease on down the road. Style at a Steal. Element(SM) (extended stay hotels), a brand introduced in 2006 with the first hotel opened in 2008, provides a modern, upscale and intuitively designed hotel experience that allows guests to live well and feel in control. Inspired Inspi red by Westi Westin, n, Elem Element ent hotel hotelss promo promote te bala balance nce thro through ugh a thoug thoughtful htful,, upsca upscale le envir environme onment. nt. Decid Decidedly edly modern mod ern wit with h an emp emphas hasis is on nat nature ure,, Ele Elemen mentt is int intuit uitive ively ly con constr struct ucted ed wit with h an eff effici icient ent use of spa space ce tha thatt encourages guests to stay connected, feel alive, and thrive while they are away. Primarily all Element hotels are LEED certified, depicting the importance of the environment in today’s world. Space to live your life.
Through our brands, we are well represented in most major markets around the world. Our operations are reported in two business segments, hotels and vacation ownership and residential operations. Our revenue and earnings are derived primarily from hotel operations, which include management and other fees earned from hotels we manage pursuant to management contracts, the receipt of franchise and other fees and the operation of our owned hotels. Our hotel business emphasizes the global operation of hotels and resorts primarily in the luxury and upscale segment of the lodging industry. We seek to acquire interests in, or management or franchise rights with respect to properties in this segment. At December 31, 2011, our hotel portfolio included owned, leased, managed and franchised hotels totaling 1,076 hotels with approximately 315,300 rooms in approximately 100 countries, and is 2
comprised of 59 hotels that we own or lease or in which we have a majority equity interest, 518 hotels managed by us on behalf of third-party owners (including entities in which we have a minority equity interest) and 499 hotels for which we receive franchise fees. Our revenues and earnings are also derived from the development, ownership and operation of vacation ownership owner ship resorts, marketing marketing and selling vacation ownership interests interests (“VOI (“VOIs”) s”) in the resorts and provi providing ding financing to customers who purchase such interests. Generally these resorts are marketed under the brand names described descr ibed above. Addit Additional ionally, ly, our revenue and earn earnings ings are deriv derived ed from the devel developmen opment, t, mark marketing eting and selling of residential units at mixed use hotel projects owned by us as well as fees earned from the marketing and selling of residential units at mixed use hotel projects developed by third-party owners of hotels operated under our brands. At December 31, 2011, we had 22 owned vacation ownership resorts and residential properties (including 13 stand-alone, eight mixed-use and one unconsolidated joint venture) in the United States, Mexico and the Bahamas. Due to the global economic crisis and its impact on the long-term growth outlook for the timeshare industry, in 2009 we evaluated all of our existing vacation ownership projects, as well as land held for future vacation owners own ership hip pro projec jects. ts. At tha thatt tim time, e, we dec decide ided d not to ini initia tiate te any new vac vacati ation on own owners ership hip pro projec jects. ts. We als also o decided not to develop certain vacation ownership sites and future phases of certain existing projects. As the econom eco nomy y and mar market ket con condit dition ionss imp improv roved ed in 201 2011, 1, we com commen menced ced con constr struct uction ion on a fut future ure pha phase se at one timeshare location where we had ceased development. Our operations are in geographically diverse locations around the world. The following tables reflect our hotel and vacation ownership and residential properties by type of revenue source and geographical presence by major geographic area as of December 31, 2011: Number of Prop Pr oper erti ties es
Room Ro omss
Manage Mana ged d an and d un unco cons nsol olid idat ated ed jo join intt ve vent ntur uree ho hote tels ls . . . . . . . . . . . . . . . . . . . . . . . Fran Fr anch chis ised ed ho hote tels ls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owned hotels (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vaca Va cati tion on ow owne ners rshi hip p re reso sort rtss an and d st stan andd-al alon onee pr prop oper erti ties es . . . . . . . . . . . . . . . . . . .
518 518 499 49 9 59 13
172,90 172, 900 0 123, 12 3,00 000 0 19,4 ,40 00 7,00 7, 000 0
Tota To tall pro prope pert rtie iess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,08 1, 089 9
322, 32 2,30 300 0
(a) Incl Includes udes wholly wholly owned, owned, majority majority owned and leased leased hotels. hotels. Number of Prop Pr oper erti ties es
Room Ro omss
North Nort h Am Amer eric icaa (an (and d Ca Cari ribb bbea ean) n) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Eurrop Eu opee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asiia Pa As Paci cifi ficc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Afri Af rica ca and the Mi Midd ddle le Ea East st . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lati La tin n Am Ameeri rica ca . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
565 565 161 16 1 210 21 0 84 69
179,60 179, 600 0 39,0 39 ,00 00 66,9 66 ,90 00 21,6 21 ,60 00 15,2 15 ,20 00
Tota To tall pro prope pert rtie iess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,08 1, 089 9
322, 32 2,30 300 0
We have implemented a strategy of reducing our investment in owned real estate and increasing our focus on the management and franchise business. In furtherance of this strategy, since 2006, we have sold 65 hotels for approximately $5.6 billion. As a result, our primary business objective is to maximize earnings and cash flow by increasing the number of our hotel management contracts and franchise agreements; selling VOIs; and investing in real estate assets where there is a strategic rationale for doing so, which may include selectively acquiring interests in additional assets and disposing of non-core hotels (including hotels where the return on invested capital is not adequate) and “trophy” assets that may be sold at significant premiums. We plan to meet these objectives by leveraging our global assets, broad customer base and other resources and by taking advantage of our sca scale le to red reduce uce cos costs. ts. The imp implem lement entati ation on of our str strate ategy gy and fin financ ancial ial pla planni nning ng is imp impact acted ed by the uncertainty relating to geopolitical and economic environments around the world and its consequent impact on travel. 3
The Corporation was incorporated in 1980 under the laws of Maryland. Sheraton Hotels & Resorts and Westin Hotels & Resorts, Starwood’s largest brands, have been serving guests for more than 60 years. Starwood Vacation Ownership (and its predecessor, Vistana, Inc.) has been selling VOIs for more than 20 years. Our pri princi ncipal pal exe execut cutive ive off office icess are loc locate ated d at One Sta StarPo rPoint int,, Sta Stamfo mford, rd, Con Connec nectic ticut ut 069 06902, 02, and our telephone number is (203) 964-6000. For a full discussion discussion of our revenues, profits, profits, asset assetss and geographical geographical segments, see our consolidated consolidated financial statements of this Annual Report, including the notes thereto. For additional information concerning our business, see Item 2 Properties, of this Annual Report. Competition
The hotel and timeshare timeshare indus industry try is highl highly y compe competiti titive. ve. Compe Competiti tition on is generally based on quali quality ty and consistency of room, restaurant and meeting facilities and services, attractiveness of locations, availability of a global glo bal dis distri tribut bution ion sys system tem,, pri price, ce, the abi abilit lity y to ear earn n and red redeem eem loy loyalt alty y pro progra gram m poi points nts and oth other er fac factor tors. s. Management believes that we compete favorably in these areas. Our properties compete with other hotels and resorts in their geographic markets, including facilities owned by local interests and facilities owned by national and inter internatio national nal chain chains. s. Our princ principal ipal competitors competitors inclu include de other hotel oper operating ating companies, companies, natio national nal and international hotel brands, and ownership companies (including hotel REITs). We encounter strong competition as a hotel, resort, residential and vacation ownership operator. While some of our competitors are private management firms, several are large national and international chains that own and operate their own hotels, as well as manage hotels for third-party owners and sell VOIs, under a variety of brands that compete directly with our brands. Intellectual Property
We ope operat ratee in a hig highly hly com compet petiti itive ve ind indust ustry ry and our int intell ellect ectual ual pro proper perty, ty, inc includ luding ing bra brands nds,, log logos, os, trademark tradem arks, s, ser servic vicee mar marks, ks, and tra trade de dre dress ss is an im impor portan tantt com compon ponent ent of our bus busine iness. ss. The suc succes cesss of our business depends, in part, on the increase in awareness of our brands and our ability to further develop our brands globally through the use of our intellectual property. To that end, we apply to register, register and renew our intellectual property, enforce our rights against the unauthorized use of our intellectual property by third parties; and otherwise protect our intellectual property through strategies and in jurisdictions where we reasonably deem appropriate. Environmental Matters
We are subject to certain requirements and potential liabilities under various foreign and U.S. federal, state and local environmental laws, ordinances and regulations (“Environmental Laws”). Under such laws, we could be held liable for the costs of removing or cleaning up hazardous or toxic substances at, on, under, or in our currently or formerly owned or operated properties. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. The presence of hazardous or toxic substances may adversely affect the owner’s ability to sell or rent such real property or to borrow using such real property as collateral. Persons who arrange for the disposal or treatment of hazardous hazar dous or toxic wastes may be liab liable le for the costs of remov removal al or remed remediatio iation n of such waste wastess at the trea treatment tment,, storage or disposal facility, regardless of whether such facility is owned or operated by such person. We use certai cer tain n sub substa stance ncess and gen genera erate te cer certai tain n was wastes tes tha thatt may be dee deemed med haz hazard ardous ous or tox toxic ic und under er app appli licab cable le Environmental Laws, and we from time to time have incurred, and in the future may incur, costs related to cleaning up contamination resulting from historic uses of certain of our current or former properties or our treatm tre atment ent,, sto storag ragee or dis dispos posal al of was wastes tes at fac facili ilitie tiess own owned ed by oth others ers.. Oth Other er Env Enviro ironme nmenta ntall Law Lawss gov govern ern occupational exposure to asbestos-containing materials (“ACMs”) and require abatement or removal of certain ACMs (limited quantities of which are present in various building materials such as spray-on insulation, floor coverings, ceiling coverings, tiles, decorative treatments and piping located at certain of our hotels) in the event of da dama mage ge or de demo moli liti tion on,, or ce cert rtai ain n re reno nova vati tion onss or re remo mode deli ling ng.. En Envi viro ronm nmen enta tall La Laws ws al also so re regu gula late te polychlorinated biphenyls (“PCBs”), which may be present in electrical equipment. A number of our hotels have underground storage tanks (“USTs”) and equipment containing chlorofluorocarbons (“CFCs”); the operation and 4
subsequent removal or upgrading of certain USTs and the use of equipment containing CFCs also are regulated by Environmental Laws. In connection with our ownership, operation and management of our properties, we could be held liable for costs of remedial or other action with respect to PCBs, USTs or CFCs. Congress and some states are considering or have undertaken actions to regulate and reduce greenhouse gas emissions. New or revised laws and regulations or new interpretations of existing laws and regulations, such as those related to climate change, could affect the operation of our hotels and/or result in significant additional expense and operating restrictions. The cost impact of such legislation, regulation, or new interpretations would depend upon the specific requirements enacted and cannot be determined at this time. Environmental Laws are not the only source of environmental liability. Under common law, owners and operators operat ors of rea reall pro proper perty ty may fac facee lia liabil bility ity for per person sonal al inj injury ury or pro proper perty ty dam damage age bec becaus ausee of var variou iouss environmental conditions such as alleged exposure to hazardous or toxic substances (including, but not limited to, ACMs, PCBs and CFCs), poor indoor air quality, radon or poor drinking water quality. Although we have incurred and expect to incur remediation and various environmental-related costs during the ordinary course of operations, management does not anticipate that such costs will have a material adverse effect on our operations or financial condition. Seasonality and Diversification
The hotel industry is seasonal in nature; however, the periods during which our properties experience higher revenue activities vary from property to property and depend principally upon location. Generally, our revenues and operating income have been lower in the first quarter than in the second, third or fourth quarters. Comparability of Owned Hotel Results
We con contin tinual ually ly upd update ate and ren renova ovate te our own owned, ed, lea leased sed and con consol solida idated ted joi joint nt ven ventur turee hot hotels els.. Whi While le undergoing renovation, these hotels are generally not operating at full capacity and, as such, these renovations can negatively impact our owned hotel revenues and operating income. Other events, such as the occurrence of natural natur al disasters disasters may cause a full or part partial ial closure or sale of a hotel, and such events can negatively negatively impact our revenues and operating income. Finally, as we pursue our strategy of reducing our investment in owned real estate assets, the sale of such assets can significantly reduce our revenues and operating income from owned, leased and consolidated joint venture hotels. Employees
At December 31, 2011, approximately 154,000 people were employed at our corporate offices, owned and managed hotels and vacation ownership resorts, of which approximately 31% were employed in the United States Sta tes.. At Dec Decemb ember er 31, 201 2011, 1, app approx roxima imatel tely y 25% of the U.S. U.S.-ba -based sed emp employ loyees ees wer weree cov covere ered d by var variou iouss collective bargaining agreements providing, generally, for basic pay rates, working hours, other conditions of employmen emplo ymentt and orderly settlement settlement of labor disputes. disputes. Gener Generally ally,, labo laborr rela relations tions have been maintained maintained in a normal and satisfactory manner, and management believes that our employee relations are satisfactory. Where You Can Find More Information
We file an annual report on a Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendm ame ndment entss to tho those se rep report orts, s, a pro proxy xy sta statem tement ent and oth other er inf inform ormati ation on wit with h the Sec Securi uritie tiess and Exc Exchan hange ge Commission (“SEC”). Our SEC filings are available to the public over the Internet at the SEC’s website at http:// www.sec.gov. Our SEC filings are also available on our website at http://www.starwoodhotels.com/ corporate/ investor_relations.html as soon as reasonably practicable after they are filed with or furnished to the SEC. You may also read and copy any document we file with the SEC at its public reference room located at 100 F Street, NE, in Washington, D.C. 20549 on official business days during the hours of 10 a.m. to 3 p.m. Please call the SEC at (800) SEC-0330 for further information. Our filings with the SEC are also available at the New York Stock Sto ck Exc Exchan hange. ge. For mor moree inf inform ormati ation on on obt obtain aining ing copies copies of our public public fil filing ingss at the New Yor York k Sto Stock ck Exchange, you should call (212) 656-5060. You may also obtain a copy of our filings free of charge by calling Investor Relations at (203) 351-3500. 5
Item 1A.
Risk Factors.
Risks Relating to Hotel, Resort, Vacation Ownership and Residential Operations We Ar Aree Su Subje bject ct to Al Alll th thee Op Oper erat ating ing Ri Risk skss Co Comm mmon on to th thee Ho Hote tell an and d Va Vaca catio tion n Ow Owne ners rshi hip p an and d Residential Industries. Operating risks common to the hotel and vacation ownership and residential industries include:
• changes changes in gener general al economic condition conditions, s, including including the severity severity and durat duration ion of downt downturns urns in the Unite United d States, Europe and global economies; • impact of war and terrorist activity activity (including threatened terrorist terrorist activity) and heightened travel security security measures instituted in response thereto; • domestic and international political political and geopolitical geopolitical conditions; conditions; • travelers’ fears of exposures to to contagious diseases; diseases; • decrea decreases ses in the dem demand and for transien transientt roo rooms ms and rel relate ated d lod lodgin ging g ser servic vices, es, inc includ luding ing a red reduct uction ion in business travel as a result of general economic conditions; • decreases in demand or increases in supply for vacation ownership ownership interests; • the impact of internet internet intermediaries intermediaries on pricing and our increasing increasing reliance on technology; • cyclical over-building over-building in the hotel and vacation vacation ownership industries; • rest restri rict ctiv ivee ch chan ange gess in zo zoni ning ng an and d si simi mila larr la land nd us usee la laws ws an and d re regu gula lati tion onss or in he heal alth th,, sa safe fety ty an and d environmental laws, rules and regulations and other governmental and regulatory action; • chang changes es in travel travel patter patterns; ns; • changes changes in opera operating ting costs including, including, but not limited limited to, energ energy, y, labor costs (including (including the impa impact ct of unioni uni onizat zation ion), ), foo food d cos costs, ts, wor worker kers’ s’ com compen pensat sation ion and hea health lth-ca -care re rel relate ated d cos costs, ts, ins insura urance nce and unanticipated costs such as acts of nature and their consequences; • the costs and admi administr nistrative ative burdens associated associated with compl compliance iance with applicable applicable laws and regulations regulations,, including, among others, franchising, timeshare, privacy, licensing and labor and employment; • disput disputes es wit with h own owners ers of pro proper pertie ties, s, inc includ luding ing con condom domini inium um hot hotels els,, fra franch nchise isees es and hom homeow eowner ner associations which may result in litigation; • the availabi availabilit lity y and cost of cap capita itall to all allow ow us and potentia potentiall hot hotel el own owners ers and fra franch nchise isees es to fund construction, renovations and investments; • forei foreign gn exchange exchange fluctuat fluctuations; ions; • the financial financial condi condition tion of thir third-par d-party ty owner owners, s, project developers developers and franc franchise hisees, es, which may impact our ability to recover indemnity payments that may be owed to us and their ability to fund amounts required under development, management and franchise agreements and in most cases our recourse is limited to the equity value said party has in the property; • the financial condition condition of the airline industry industry and the impact impact on air travel; and • regulation or taxation of carbon dioxide dioxide emissions by airlines and other forms forms of transportation. If We Are Unable to Maintain Existing Management and Franchise Agreements or Obtain New Agreements on as Favorable Terms, our Operating Results May be Adversely Affected. We are impacted by our relationships with hotel owners and franchisees. Our hotel management contracts are typically long-term arrangements, but most allow the hotel owner to replace us in certain circumstances, such as the bankruptcy of the hotel owner or franchisee, the failure to meet certain financial or performance criteria and in certain cases, upon a sale of the property. Our ability to meet these financial and performance criteria is subject to, among other things, the risks common to hotel industries described above. Factors outside of our control, such as the current European sovereign debt crisis, could also have a significant negative impact on the financial condition and viability of our hotel property owners. Additionally, the nature of responsibilities under these management and franchise arrangements may give rise to disagreements with the property owners, making it difficult to maintain
6
positive rela positive relations tionships hips with current and poten potential tial hotel owner ownerss and franc franchise hisees. es. Conseq Consequentl uently, y, our opera operating ting results would be adversely affected if we could not maintain existing management, franchise or representation agreements or obtain new agreements on as favorable terms as the existing agreements. We and Our Third Party Licensees May Not Be Able to Sell Residential Properties Using our Brands for a Profit or at Anticipated Prices. We utilize our brands in connection with the residential portions of certain properties that we develop and license our brands to third parties to use in a similar manner for a fee. Residential properties using our brands could become less attractive due to changes in mortgage rates and the availability of mortgage financing generally, market absorption or oversupply in a particular market. As a result, we and our third party licensees may not be able to sell these residences for a profit or at the prices that we or they have anticipated. The Recent Recession in the Lodging Industry and the Global Economy Generally Will Continue to Impact Our Financial Results and Growth. The recent economic recession and continued economic uncertainty in the United States, Europe and much of the rest of the world has had a negative impact on the hotel and vacation ownership and residential industries. Substantial increases in air and ground travel costs and decreases in airline capacity have reduced demand for our hotel rooms and interval and fractional timeshare products. Accordingly, our financial results have been impacted by the economic recession and both our future financial results and growth could be further harmed if recovery from the economic recession slows or the economic recession becomes worse. In certain cases, we have entered into third party hotel management contracts which contain performance guarantees specifying that certain operating metrics will be achieved. As a result of the impact of the economic downturn on the lodging industry (and despite the stabilization in lodging that began in 2010), we may not meet the requisite performance levels, and we may be forced to loan or contribute monies to fund the shortfall of performance levels or terminate the management contract. For a more detailed description of our performance guarantees, see Note 25 of the consolidated financial statements.
Moreover, many busin Moreover, businesses esses,, parti particula cularly rly finan financial cial institutions, institutions, face restr restrictio ictions ns on the abili ability ty to trav travel el and hold conferences or events at resorts and luxury hotels. These restrictions as well as negative publicity associated with such companies holding large conference and corporate events has resulted in reduced corporate bookings that could impact our financial results in the future. Our Revenues, Profits, or Market Share Could Be Harmed If We Are Unable to Compete Effectively. The hotel, vacation ownership and residential industries are highly competitive. Our properties compete for customers with other hotel and resort properties, ranging from national and international hotel brands to independent, local and regional hotel operators, and, with respect to our vacation ownership resorts and residential projects, with owners reselling their VOIs, including fractional ownership, or apartments. We compete based on a number of factors, including quality and consistency of rooms, restaurant and meeting facilities and services, attractiveness of locations, availability of a global distribution system, price, and the ability to earn and redeem loyalty program points. Some of our competitors may have substantially greater marketing and financial resources than we do, and if we are unable to successfully compete in these areas, our operating results could be adversely affected.
Moreover, our present growth strategy for development of additional lodging facilities entails entering into and maintaining various management agreements, franchise agreements, and leases with property owners. We compet com petee wit with h oth other er hot hotel el com compan panies ies for thi thiss bus busine iness ss pri primar marily ily on the bas basis is of fee fees, s, con contra tract ct ter terms, ms, bra brand nd recognition, and reputation. In connection with entering into these agreements, we may be required to make investments in, or guarantee the obligations of, third parties or guarantee minimum income to third parties. The terms of our management agreements, franchise agreements, and leases for each of our lodging facilities are influenced by contract terms offered by our competitors, among other things. We cannot assure you that any of our cur curren rentt arr arrang angeme ements nts wil willl con contin tinue ue or tha thatt we wil willl be abl ablee to ent enter er int into o fut future ure col collab labora oratio tions, ns, ren renew ew agreements, or enter into new agreements in the future on terms that are as favorable to us as those that exist today. Our Businesses Are Capita Capitall Inten Intensive. sive. For our own owned, ed, man manage aged d and fra franch nchise ised d pro proper pertie tiess to rem remain ain attractive and competitive, the property owners and we have to spend money periodically to keep the properties well maintained, maintained, mode modernize rnized d and refurbished. refurbished. This creates an ongoi ongoing ng need for cash. Third-party Third-party property property owners may be unable to access capital or unwilling to spend available capital when necessary, even if required
7
by the terms of our management or franchise agreements. To the extent that property owners and we cannot fund expenditures from cash generated by operations, funds must be borrowed or otherwise obtained. Failure to make the investments necessary to maintain or improve such properties could adversely affect the reputation of our brands. Recent events, including the failures and near failures of financial services companies and the decrease in liquidity and available capital, have negatively impacted the capital markets for hotel and real estate investments. Any Failure to Protect our Trademarks Could Have a Negative Impact on the Value of Our Brand Names and Adversely Affect Our Business. We believe our trademarks are an important component of our business. We rely on trademark laws to protect our proprietary rights. The success of our business depends in part upon our continued ability to use our trademarks to increase brand awareness and further develop our brand in both domestic and international markets. From time to time, we apply to have certain trademarks registered and there is no guarantee that such trademark registrations will be granted. Further, monitoring the unauthorized use of our intellectual property is difficult. Litigation has been and may continue to be necessary to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. Litigation of this type could result in substantial costs and diversion of resources, may result in counterclaims or other claims against us and could significantly harm our results of operations. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States. We cannot assure you that all of the steps we have taken to protect our trademarks in the United States and foreign countries will be adequate to prevent imitation of our trademarks by others. The unauthorized reproduction of our trademarks could diminish the value of our brand and its market acceptance, competitive advantages or goodwill, which could adversely affect our business. Our Dependence on Hotel and Resort Development Exposes Us to Timing, Budgeting and Other Risks. We inte intend nd to devel develop op hotel and resor resortt prope propertie rtiess and residential residential components components of hote hotell prope propertie rties, s, as suitable opport opp ortuni unitie tiess ari arise, se, tak taking ing int into o con consid sidera eratio tion n the gen genera erall eco econom nomic ic cli climat mate. e. In add additi ition, on, the own owners ers and developers of new-build properties that we have entered into management or franchise agreements with are subject to these same risks which may impact the amount and timing of fees we had expected to collect from those properties. New project development has a number of risks, including risks associated with:
• construction delays or cost overruns that may increase project costs; • receipt of zoning, occupancy occupancy and other required required governmental permits permits and authorizations; authorizations; • development costs incurred incurred for projects that that are not pursued to to completion; • so-cal so-called led act actss of God suc such h as ear earthq thquak uakes, es, hur hurric ricane anes, s, flo floods ods or fir fires es tha thatt cou could ld adv advers ersely ely impact impact a project; • defects in design or construction construction that may result result in additional costs to remedy remedy or require all or a portion of a property to be closed during the period required to rectify the situation; • abili ability ty to raise raise capital capital;; and • governmental restrictions restrictions on the nature or size of a project project or timing of completion. completion. We cannot assur assuree you that any development development proj project, ect, including including site sitess held for devel developmen opmentt of vacat vacation ion owners owne rshi hip p re reso sort rts, s, wi will ll in fa fact ct be de deve velo lope ped, d, an and, d, if de deve velo lope ped, d, th thee ti time me pe peri riod od or th thee bu budg dget et of su such ch development may be greater than initially contemplated and the actual number of units or rooms constructed may be less than initially contemplated. significa ificant nt International Operations Are Subject to Unique Political and Monetary Risks. We have sign international operations which as of December 31, 2011 included 161 owned, managed or franchised properties in Europe (including 16 properties with majority ownership); 84 managed or franchised properties in Africa and the Middle East; 69 owned, managed or franchised properties in Latin America (including nine properties with majority ownership); and 210 owned, managed or franchised properties in the Asia Pacific region (including four proper pro pertie tiess wit with h maj majori ority ty own owners ership hip). ). Int Intern ernati ationa onall ope operat ration ionss gen genera erally lly are sub subjec jectt to var variou iouss pol politi itical cal,, 8
geopoliti geopol itical cal,, and oth other er ris risks ks tha thatt are not pre presen sentt in U.S U.S.. ope operat ration ions. s. The These se ris risks ks inc includ ludee exp exposu osure re to loc local al economic conditions, potential adverse changes in the diplomatic relations between foreign countries and the United States, hostility from local populations, including the risk of war and civil unrest, restrictions on the repatr rep atriat iation ion of non non-U. -U.S. S. ear earnin nings gs and wit withdr hdrawa awall of for foreig eign n inv invest estmen ments, ts, res restri tricti ction on on the abi abilit lity y to pay dividends and remit earnings to affiliated companies, uncertainty as to the enforceability of contractual rights under local law, conflicts between local law and United States law and compliance with complex and changing laws, law s, reg regula ulatio tions ns and pol polici icies. es. In add additi ition, on, sal sales es in int intern ernati ationa onall jur jurisd isdict iction ionss typ typica ically lly are mad madee in loc local al curren cur rencie cies, s, whi which ch sub subjec jectt us to ris risks ks ass associ ociate ated d wit with h cur curren rency cy flu fluctu ctuati ations ons.. Cur Curren rency cy dev devalu aluati ations ons and unfavorabl unfav orablee chang changes es in inter internati national onal monetary monetary and tax polic policies ies could have a mate material rial adverse effect on our profitability and financing plans, as could other changes in the international regulatory climate and international economic conditions. Additionally, our current growth strategy is heavily dependent upon growth in international markets. As of December Decemb er 31, 201 2011, 1, 85% of our pip pipeli eline ne rep repres resent ented ed int intern ernati ationa onall gro growth wth.. Fur Furthe ther, r, 61% of our pip pipeli eline ne represents new properties in Asia Pacific and 44% represents new growth in China alone. If our international expansion plans are unsuccessful, our financial results could be materially adversely affected. We Could be Adversely Affected by Violations of the U.S. Foreign Corrupt Practices Act. Our business operations in countries outside the United States are subject to anti-corruption laws and regulations, including restrictions imposed by the Foreign Corrupt Practices Act (“FCPA”). The FCPA and similar anti-corruption laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to government officials for the purpose of obtaining or retaining business. We operate in many parts of the world that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-corruption laws may conflict with local customs and practices. We train our employees concerning anticorruption laws and issues, and also require our third-party business partners and agents and others who work with us or on our behalf that they must comply with our anti-corruption policies. We also have procedures and controls in place to monitor internal and external compliance. We cannot provide assurance that our internal controls and procedures will always protect us from the reckless or criminal acts committed by our employees or third parties with whom we work. If we are found to be liable for violations of the FCPA or similar anticorruption laws in international jurisdictions, either due to our own acts or out of inadvertence, or due to the acts or inadvertence of others, we could suffer from criminal or civil penalties which could have a material and adverse effect on our results of operations, financial condition and cash flows. Third Party Internet Reservation Channels May Negatively Impact Our Bookings. Some of our hotel rooms are booked through third party internet travel intermediaries such as Travelocity.com ®, Expedia.com®, Orbitz.com® and Priceline.com ®. As the percentage of internet bookings increases, these intermediaries may be ablee to obt abl obtain ain hig higher her com commis missio sions, ns, red reduce uced d roo room m rat rates es or oth other er sig signif nifica icant nt con contra tract ct con conces cessio sions ns fro from m us. Moreover, some of these internet travel intermediaries are attempting to commoditize hotel rooms by increasing the importance of price and general indicators of quality (such as “three-star downtown hotel”) at the expense of brand identificatio identification. n. Over time consu consumers mers may devel develop op loyal loyalties ties to these third part party y inter internet net rese reservati rvations ons systems rather than to our lodging brands. Although we expect to derive most of our business from traditional channels and our websites, if the amount of sales made through internet intermediaries increases significantly, our business and profitability may be significantly harmed. A Failure to Keep Pace with Developments in Technology Could Impair Our Operations or Competitive Position. The hospitality industry continues to demand the use of sophisticated technology and systems including technology techn ology util utilized ized for prope property rty mana managemen gement, t, brand assur assurance ance and comp complianc liance, e, procu procureme rement, nt, reser reservati vation on systems, operation of our customer loyalty program, distribution and guest amenities. These technologies can be expected to require refinements, including to comply with the legal requirements such as privacy regulations and requirements established by third parties such as the payment card industry, and there is the risk that advanced new techn technologi ologies es will be intr introduce oduced. d. Furth Further, er, the devel developme opment nt and maintenance maintenance of thes thesee techn technologi ologies es may require significant capital. There can be no assurance that as various systems and technologies become outdated or new technology is required, we will be able to replace or introduce them as quickly as our competition or within budgeted costs and timeframes. Further, there can be no assurance that we will achieve the benefits that may have been anticipated from any new technology or system.
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Disasters, Disruptions and Other Impairment of Our Information Technologies and Systems Could Adversely Affect our Business. Our business involves the processing, use, storage and transmission of personal informati infor mation on rega regarding rding our empl employees oyees,, custo customers mers,, hotel owners, and vendor vendorss for vario various us busin business ess purpo purposes, ses, including marketing and promotional purposes. The protection of personal as well as proprietary information is critic cri tical al to us. We are sub subjec jectt to num numero erous us law lawss and reg regula ulatio tions ns des design igned ed to pro protec tectt per person sonal al inf inform ormati ation, on, including Member State implementation of the European Union Directive on Data Protection and various U.S. federal and state laws. We have established policies and procedures to help protect the privacy and security of our informat information ion.. How Howeve ever, r, eve every ry yea yearr the number number of law lawss and regulati regulations ons con contin tinues ues to gro grow, w, as doe doess the complexity of such laws. Further, privacy regulations, on occasion, may be inconsistent from one jurisdiction to another. anoth er. Compl Compliance iance with appli applicable cable privacy regulations regulations may incr increase ease our opera operating ting costs and/o and/orr adver adversely sely impact our ability to market our products, properties and services to our guests.
We are dep depend endent ent on inf inform ormati ation on tec techno hnolog logy y net networ works ks and sys system temss to pro proces cess, s, tra transm nsmit it and sto store re proprietary and personal information, and to communicate among our various locations around the world, which may include our reservation systems, vacation exchange systems, hotel/property management systems, customer and employee databases, call centers, administrative systems, and third party vendor systems. The complexity of this infrastructure contributes to the potential risk of security breaches. We rely on the security of our information systems and, those of our vendors and other authorized third parties, to protect our proprietary and personal information. Despite our efforts, information networks and systems may be vulnerable to threats such as system, network or Internet failures; computer hacking or business disruption; cyber-terrorism; viruses, worms or other malicious software programs; employee error, negligence, fraud, or misuse of systems; or other unauthorized attempts by third parties to access, modify or delete our proprietary and personal information. Although we have taken steps to address these concerns by implementing network security and internal controls, there can be no assurance that a system failure, unauthorized access, or breach will not occur. Any com compro promis misee of our net networ works ks or sys system tems, s, pub public lic dis disclo closur sure, e, or los losss of per person sonal al or pro propri prieta etary ry information could result in a disruption to our operations; damage to our reputation and a loss of confidence from our customers or employees; legal claims or proceedings, liability under laws that protect personal information, regulatory penalties, potentially resulting in significant monetary damages, regulatory enforcement actions, fines, and/or criminal or civil prosecution in one or more jurisdictions; and subjecting us to additional regulatory scrutiny, or additional costs and liabilities which could have a material adverse affect on our business, operations or financial condition. Significant Owners of Our Properties May Concentrate Risks. There is potential for a concentration of ownership of hotels operated under our brands by any single owner. Following the acquisition of the Le Méridien brand business and a large disposition transaction to one ownership group in 2006, single ownership groups own significant numbers of hotels operated by us. While the risks associated with such ownership are no different than exist generally (i.e., the financial position of the owner, the overall state of the relationship with the owner and their participation in optional programs and the impact on cost efficiencies if they choose not to participate), they are more concentrated. Our Real Estate Investments Subject Us to Numerous Risks. We are subject to the risks that generally relate to investments in real property because we own and lease hotels and resorts. The investment returns available from equity investments in real estate depend in large part on the amount of income earned and capital appreciation generated by the related properties, and the expenses incurred. In addition, a variety of other factors affect income from properties and real estate values, including governmental regulations, insurance, zoning, tax and eminent domain laws, interest rate levels and the availability of financing. For example, new or existing real estate zoning or tax laws can make it more expensive and/or time-consuming to develop real property or expand, modify mod ify or ren renova ovate te hot hotels els.. Whe When n int intere erest st rat rates es inc increa rease, se, the cos costt of acq acquir uiring ing,, dev develo elopin ping, g, exp expand anding ing or renovating real property increases and real property values may decrease as the number of potential buyers decreases. Similarly, as financing becomes less available, it becomes more difficult both to acquire and to sell real property. Finally, under eminent domain laws, governments can take real property. Sometimes this taking is for less compensation than the owner believes the property is worth. Any of these factors could have a material
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adverse impact on our results of operations or financial condition. In addition, equity real estate investments are difficult to sell quickly and we may not be able to adjust our portfolio of owned properties quickly in response to economic or other conditions. If our properties do not generate revenue sufficient to meet operating expenses, including debt service and capital expenditures, our income will be adversely affected. We May Be Subject to Environmental Environmental Liabilit Liabilities. ies. Our properties and operations are subject to a number of Enviro Env ironme nmenta ntall Law Laws. s. Und Under er suc such h law laws, s, we cou could ld be hel held d lia liable ble for the cos costs ts of rem removi oving ng or cle cleani aning ng up hazardous or toxic substances at, on, under, or in our currently or formerly owned or operated properties. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. The presence of hazardous or toxic substances may adversely affect the owner’s ability to sell or rent such real property or to borrow using such real property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic wastes may be liable for the costs of removal or remediation of such wastes at the treatment, storage or disposal facility, regardless of whether such facility is owned or operated by such person. We use certain substances and generate certain wastes that may be deemed hazardous or toxic under applicable Environmental Laws, and we from time to time have incurred, and in the future may incur, costs related to cleaning up contamination resulting from historic uses at certain of our current or former properties or our treatment, storage or disposal of wastes at facilities owned by others. Other Environmental Laws govern occupational exposure to ACMs and require abatement or removal of certain ACMs (limited quantities of which are present in various building materials such as spray-on insulation, floor coverings, ceiling coverings, tiles, decorative treatments and piping located at certain of our hotels) in the event of damage or demolition, or certain renovations or remodeling. Environmental Laws also regulate PCBs, which may be presen pre sentt in ele electr ctrica icall equ equipm ipment ent.. A num number ber of our hot hotels els hav havee UST USTss and equ equipm ipment ent con contai tainin ning g CFCs CFCs;; the operation and subsequent removal or upgrading of certain USTs and the use of equipment containing CFCs also are regulated by Environmental Laws. In connection with our ownership, operation and management of our properties, we could be held liable for costs of remedial or other action with respect to PCBs, USTs or CFCs.
Congress and some states are considering or have undertaken actions to regulate and reduce greenhouse gas emissions. New or revised laws and regulations or new interpretations of existing laws and regulations, such as those related to climate change, could affect the operation of our hotels and/or result in significant additional expense and operating restrictions on us. The cost impact of such legislation, regulation, or new interpretations would depend upon the specific requirements enacted and cannot be determined at this time. Risks Relating to Operations in Syria and Other Countries Subject to Sanction Laws
From time to time the United States may impose sanctions that prohibit U.S. companies from engaging in business activities with certain persons or foreign countries or governments that it determines are adverse to U.S. foreig for eign n pol policy icy int intere erests sts.. For exa exampl mple, e, the Uni United ted Sta States tes has iss issued ued an exe execut cutive ive ord order er tha thatt pro prohib hibits its U.S. companies from engaging in certain business activities with the government of Syria, a country that the United States Sta tes has ide identi ntifie fied d as a sta state te spo sponso nsorr of ter terror rorism ism.. Dur During ing fis fiscal cal 201 2011, 1, a for foreig eign n sub subsid sidiar iary y of Sta Starwo rwood od generated approximately $300,000 of revenue from management and other fees from existing hotels located in Syria. This amount constitutes significantly less than 1% of our worldwide annual revenues. We believe our activities in Syria are in full compliance with U.S. and local law. At any time, the United States may impose additional sanctions against Syria. If so, our existing activities in Syria may be adversely affected, or we may incur costs to respond to an executive order, depending on the nature of any further sanctions that might be imposed. In add additi ition, on, in 201 2011 1 the Uni United ted Sta States tes iss issued ued an exe execut cutive ive ord order er tha thatt pro prohib hibite ited d U.S. com compan panies ies fro from m transacting with the government of Libya and certain entities and individuals associated with the former Gaddafi regime. A foreign subsidiary of Starwood currently has a management contract for one hotel located in Libya, as well as three hotels outside Libya that are indirectly owned by the government of Libya. Although the restriction was released following the fall of the Gaddafi regime, the United States may impose additional sanctions against Libya at any time. Further, our activities in countries that are subject to U.S. sanction laws may reduce demand for our stock among cer among certai tain n inv invest estors ors.. Any res restri tricti ctions ons on Sta Starwo rwood’ od’ss abi abilit lity y to con conduc ductt its bus busine iness ss ope operat ration ionss in a jurisdiction that is subject to U.S. sanctions laws could negatively impact our financial results. 11
Risks Relating to Debt Financing Our Debt Service Obligations May Adversely Affect our Cash Flow. As a result of our debt obligations, we are subject to: (i) the risk that cash flow from operations will be insufficient to meet required payments of principal princ ipal and inte interest, rest, (ii) rest restricti rictive ve coven covenants, ants, including including coven covenants ants relating to cert certain ain finan financial cial ratios, and (iii) interest rate risk. Although we anticipate that we will be able to repay or refinance our existing indebtedness and any other indebtedness when it matures, there can be no assurance that we will be able to do so or that the termss of such refin term refinanci ancing ng will be favor favorable. able. Our lever leverage age may have important important consequences consequences including including the following: (i) our ability to obtain additional financing for acquisitions, working capital, capital expenditures or other purposes, if necessary, may be impaired or such financing may not be available on terms favorable to us and (ii (ii)) a sub substa stanti ntial al dec decrea rease se in ope operat rating ing cas cash h flo flow, w, EBI EBITDA TDA (as def define ined d in our cre credit dit agreemen agreements) ts) or a substantial increase in our expenses could make it difficult for us to meet our debt service requirements and restrictive covenants and force us to sell assets and/or modify our operations. We Have Little Control Over the Availability of Funds Needed to Fund New Investments and Maintain Existing Hotels. In order to fund new hotel investments, as well as refurbish and improve existing hotels, both we and current current and potentia potentiall hot hotel el own owners ers must hav havee acc access ess to cap capita ital. l. The ava availa ilabil bility ity of fun funds ds for new investments and maintenance of existing hotels depends in large measure on capital markets and liquidity factors over which we have little control. Current and prospective hotel owners may find hotel financing expensive and difficult to obtain. Delays, increased costs and other impediments to restructuring such projects may affect our ability to realize fees, recover loans and guarantee advances, or realize equity investments from such projects. Our ability to recov recover er loans and guarantee advances advances from hotel operations operations or from owners through the proceeds of hotel sales, refinancing of debt or otherwise may also affect our ability to raise new capital. In addition, downgrades of our public debt ratings by rating agencies could increase our cost of capital. A breach of a covenant could result in an event of default that, if not cured or waived, could result in an acceleration of all or a substantial portion of our debt. For a more detailed description of the covenants imposed by our debt obligations, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Cash Used for Financing Activities in this Annual Report. Volatility in the Credit Markets Will Continue to Adversely Impact Our Ability to Sell the Loans That Our Vacation Ownership Business Generates. Our vacation ownership business provides financing to purchasers of our vacation ownership units, and we attempt to sell interests in those loans in the securities markets. Volatility in the credit markets may impact the timing and volume of the timeshare loans that we are able to sell. Although we expect to realize the economic value of our vacation ownership note portfolio even if future note sales are temporarily or indefinitely delayed, such delays may result in either increased borrowings to provide capital to replace anticipated proceeds from such sales or reduced spending in order to maintain our leverage and return targets. Risks Relating to So-Called Acts of God, Terrorist Activity and War
Our financial and operating performance may be adversely affected by so-called acts of God, such as natural disasters, in locations where we own and/or operate significant properties and areas of the world from which we draw a large number of customers. Similarly, wars (including the potential for war), terrorist activity (including threats of terrorist activity), political unrest and other forms of civil strife and geopolitical uncertainty have caused cause d in the past, and may cause in the futur future, e, our resul results ts to diffe differr mater materiall ially y from anticipated anticipated results. results. In 2011, our hotels in Syria, Tunisia, Libya and Egypt experienced reduced bookings as a result of the political climate in these countries. If these conditions do not improve, our financial results could be negatively impacted. Risks Related to Pandemic Diseases
Our business could be materially and adversely affected by the effect of a pandemic disease on the travel industry. For exam industry. example, ple, the past outbreaks outbreaks of SARS and avia avian n flu had a severe impact on the travel industry, industry, and the recent outbreak of swine flu in Mexico had a similar impact. A prolonged recurrence of SARS, avian flu, swine swi ne flu or ano anothe therr pan pandem demic ic dis diseas easee als also o may res result ult in hea health lth or oth other er gov govern ernmen mentt aut author horiti ities es imp imposi osing ng restrictions on travel. Any of these events could result in a significant drop in demand for our hotel and vacation ownership businesses and adversely affect our financial condition and results of operations. 12
Our Insurance Policies May Not Cover All Potential Losses
We carry insurance insurance cover coverage age for general liability, liability, prope property, rty, business interruption, interruption, and other risks with respect to our owned and leased properties and we make available insurance programs for owners of properties we manage. These policies offer coverage terms and conditions that we believe are usual and customary for our industry. Generally, our “all-risk” property policies provide that coverage is available on a per occurrence basis and that, for each occurrence, there is a limit as well as various sub-limits on the amount of insurance proceeds we will receive in excess of applicable deductibles. In addition, there may be overall limits under the policies. Sub-limits exist for certain types of claims such as service interruption, debris removal, expediting costs or landscapin lands caping g repl replaceme acement, nt, and the doll dollar ar amoun amounts ts of these subsub-limi limits ts are significantly significantly lower than the dollar amount amo untss of the ove overal ralll cov covera erage ge lim limit. it. Our pro proper perty ty pol polici icies es als also o pro provid videe tha thatt for the cov covera erage ge of cri critic tical al earthquake (California and Mexico), hurricane and flood, all of the claims from each of our properties resulting from a particular insurable event must be combined together for purposes of evaluating whether the annual aggregate limits and sub-limits contained in our policies have been exceeded and any such claims will also be combined with the claims of owners of managed hotels that participate in our insurance program for the same purpose. Therefore, if insurable events occur that affect more than one of our owned hotels and/or managed hotels owned by third parties that participate in our insurance program, the claims from each affected hotel will be added together to determine whether the per occurrence limit, annual aggregate limit or sub-limits, depending on the type of claim, have been reached and if the limits or sub-limits are exceeded each affected hotel will only receive a proportional share of the amount of insurance proceeds provided for under the policy. In addition, under those circumstances, claims by third party owners will reduce the coverage available for our owned and leased properties. In addition, there are also other risks including but not limited to war, certain forms of terrorism such as nuclear, biological or chemical terrorism, political risks, some environmental hazards and/or acts of God that may be deemed to fall completely outside the general coverage limits of our policies or may be uninsurable or may be too expensive to justify insuring against. We may also encounter challenges with an insurance provider regarding whether it will pay a particular claim that we believe to be covered under our policy. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in a hotel or resort, as well as the anticipated future revenue from the hotel or resort. In that event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the property. Our Acquisitions/Dispositions and Investments in New Brands May Ultimately Not Prove Successful and We May Not Realize Anticipated Benefits
We consider corporate as well as property acquisitions and investments that complement our business. In many cases, we compete for these opportunities with third parties who may have substantially greater financial resources or different or lower acceptable financial metrics than we do. There can be no assurance that we will be able to identify acquisition or investment candidates or complete transactions on commercially reasonable terms or at all. If transactions are consummated, there can be no assurance that any anticipated benefits will actually be realized. Similarly, there can be no assurance that we will be able to obtain additional financing for acquisitions or inv invest estmen ments, ts, or tha thatt the ability ability to obt obtain ain such fin financ ancing ing will not be res restri tricte cted d by the terms of our debt agreements. We per period iodica ically lly rev review iew our bus busine iness ss to ide identi ntify fy pro proper pertie tiess or oth other er ass assets ets tha thatt we bel believ ievee eit either her are non-core, no longer complement our business, are in markets which may not benefit us as much as other markets during an economic recovery or could be sold at significant premiums. We are focused on restructuring and enhancing real estate returns and monetizing investments, and from time to time, may attempt to sell these identi ide ntifie fied d pro proper pertie tiess and assets. assets. The There re can be no ass assura urance nce,, how howeve ever, r, tha thatt we wil willl be abl ablee to com comple plete te dispositions on commercially reasonable terms or at all or that any anticipated benefits will actually be received. We may develop and launch additional brands in the future. There can be no assurance regarding the level of acc accept eptanc ancee of the these se bra brands nds in the dev develo elopme pment nt and con consum sumer er mar market ketpla places ces,, tha thatt the cos costt inc incurr urred ed in developing the brands will be recovered or that the anticipated benefits from these new brands will be realized. 13
Investing Through Partnerships or Joint Ventures Decreases Our Ability to Manage Risk
In addition to acqui acquiring ring or devel developing oping hotels and resor resorts ts or acqui acquiring ring companies companies that comp complemen lementt our business directly, we have from time to time invested, and expect to continue to invest, as a co-venturer. Joint venturers ventu rers often have shared control over the operation operation of the joint ventu venture re assets. Therefore, Therefore, join jointt ventu venture re invest inv estmen ments ts may inv involv olvee ris risks ks suc such h as the pos possib sibil ility ity tha thatt the coco-ven ventur turer er in an inv invest estmen mentt mig might ht bec become ome bankrupt or not have the financial resources to meet its obligations, or have economic or business interests or goals that are inconsistent with our business interests or goals, or be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives. Consequently, actions by a co-venturer might subject hotels and resorts owned by the joint venture to additional risk. Further, we may be unable to take action without the approval of our joint venture partners. Alternatively, our joint venture partners could take actions binding bindi ng on the joint ventu venture re witho without ut our consent. Additionally, Additionally, should a joint venture venture part partner ner become bankr bankrupt, upt, we could become liable for our partner’s share of joint venture liabilities. Our Vacation Ownership Business is Subject to Extensive Regulation and Risk of Default
We market and sell VOIs, which typically entitle the buyer to ownership of a fully-furnished resort unit for a one-week period on either an annual or an alternate-year basis. We also acquire, develop and operate vacation ownership resorts, and provide financing to purchasers of VOIs. These activities are all subject to extensive regulation by the federal government and the states in which vacation ownership resorts are located and in which VOIs are marketed and sold including regulation of our telemarketing activities under state and federal “Do Not Call” laws. In addition, the laws of most states in which we sell VOIs grant the purchaser the right to rescind the purchase contract at any time within a statutory rescission period. Although we believe that we are in material compliance with all applicable federal, state, local and foreign laws and regulations to which vacation ownership marketing, sales and operations are currently subject, changes in these requirements, or a determination by a regula reg ulator tory y aut author hority ity tha thatt we wer weree not in com compli plianc ance, e, cou could ld adv advers ersely ely aff affect ect us. In par partic ticula ular, r, inc increa reased sed regulations of telemarketing activities could adversely impact the marketing of our VOIs. We bear the risk of defaults under purchaser mortgages on VOIs. If a VOI purchaser defaults on the mortgage during the early part of the loan amortization period, we will not have recovered the marketing, selling (otherr than commissions (othe commissions in cert certain ain events), and gener general al and administrati administrative ve costs associated associated with such VOI, and such costs will be incurred again in connection with the resale of the repossessed VOI. Accordingly, there is no assurance that the sales price will be fully or partially recovered from a defaulting purchaser or, in the event of such defaults, that our allowance for losses will be adequate. Risks Related to Our Dependence on Senior Management and Our Ability to Achieve Our Growth Strategy
Our future success and our ability to manage future growth depend in large part upon the efforts of our senior man senior manage agemen mentt and our abi abilit lity y to att attrac ractt and ret retain ain key off office icers rs and oth other er hig highly hly qua qualif lified ied per person sonnel nel.. Competition for such personnel is intense. In the past several years, we have experienced significant changes in our senior management, including executive officers (see Item 10, Directors, Executive Officers and Corporate Governance of this Annual Report). There can be no assurance that we will continue to be successful in attracting and retaining qualified personnel. Accordingly, there can be no assurance that our senior management will be able to successfully execute and implement our growth and operating strategies. Over the last few years we have been pursuing a strategy of reducing our investment in owned real estate and increasing our focus on the management and franchise business. As a result, we are planning on substantially increasing the number of hotels we open every year and increasing the overall number of hotels in our system. This increase will require us to recruit and train a substantial number of new associates to work at these hotels as well as increasing our capabilities to enable hotels to open on time and successfully. There can be no assurance that our strategy will be successful. Tax Risks Evolving Government Regulation Could Impose Taxes or Other Burdens on Our Business. We rely upon generally available interpretations of tax laws and other types of laws and regulations in the countries and locales in which we operate. We cannot be sure that these interpretations are accurate or that the responsible taxing or
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other governmental authority is in agreement with our views. The imposition of additional taxes or requirements to change the way we conduct our business could cause us to have to pay taxes that we currently do not collect or pay or increase the costs of our services or increase our costs of operations. Our current business practice with our internet reservation channels is that the intermediary collects hotel occupancy tax from its customer based on the price that the intermediary paid us for the hotel room. We then remit these taxes to the various tax authorities. Several jurisdictions have stated that they may take the position that the tax is also applicable to the intermediaries’ gross profit on these hotel transactions. If jurisdictions take this position, they should seek the additional tax payments from the intermediary; however, it is possible that they may seek to collect the additional tax payment from us and we would not be able to collect these taxes from the customers. To the extent that any tax authority succeeds in asserting that the hotel occupancy tax applies to the gross revenue on these transactions, we believe that any additional tax would be the responsibility of the intermediary. However, it is possible that we might have additional tax exposure. In such event, such actions could have a material adverse effect on our business, results of operations and financial condition. Risks Relating to Ownership of Our Shares Our Board of Directors May Issue Preferred Stock and Establish the Preferences and Rights of Such Preferred Stock. Ou Ourr ch char arte terr pr prov ovid ides es th that at th thee to tota tall nu numb mber er of sh shar ares es of st stoc ock k of al alll cl clas asse sess wh whic ich h th thee Corporation Corpor ation has authority to issue is 1,200, 1,200,000,00 000,000, 0, consisting consisting of one bill billion ion shares of comm common on stock and 200 million shares of preferred stock. Our Board of Directors has the authority, without a vote of stockholders, to establish the preferences and rights of any preferred shares to be issued and to issue such shares. The issuance of preferred shares having special preferences or rights could delay or prevent a change in control even if a change in control would be in the interests of our stockholders. Since our Board of Directors has the power to establish the preferences and rights of preferred shares without a stockholder vote, our Board of Directors may give the holders preferences, powers and rights, including voting rights, senior to the rights of holders of our shares. Our Board of Directors May Implement Anti-Takeover Devices and Our Charter and Bylaws Contain Provisions which May Prevent Takeovers. Certain provisions of Maryland law permit our Board of Directors, without witho ut stock stockholde holderr appro approval, val, to impl implement ement possible possible takeo takeover ver defenses that are not currently currently in place, such as a classifie class ified d board board.. In addi addition, tion, our chart charter er conta contains ins provi provisions sions relating relating to rest restrict rictions ions on trans transferab ferabilit ility y of our common stock, which provisions may be amended only by the affirmative vote of our stockholders holding two-thirds of the votes entitled to be cast on the matter. As permitted under the Maryland General Corporation Law, our Bylaws provide that directors have the exclusive right to amend our Bylaws. We Cannot Provide Assurance That We Will Continue to Pay Dividends. There can be no assurance that we will continue to pay dividends. Our Board of Directors may suspend the payment of dividends if the Board deems such action to be in the best interests of the Company or stockholders. If we do not pay dividends, the price of our common stock must appreciate for you to realize a gain on your investment in the Company. This appreciation may not occur and our stock may, in fact, depreciate in value. Item 1B. Unresolved Staff Comments.
Not applicable. Item 2.
Properties.
We are one of the largest hotel and leisure companies in the world, with operations in approximately 100 countr cou ntries ies.. We con consid sider er our hot hotels els and res resort orts, s, inc includ luding ing vac vacati ation on own owners ership hip res resort ortss (to (toget gether her “Re “Resor sorts” ts”), ), generally to be premier establishments with respect to desirability of location, size, facilities, physical condition, qualit qua lity y and var variet iety y of ser servic vices es off offere ered d in the mar market ketss in whi which ch the they y are loc locate ated. d. Alt Althou hough gh obs obsole olesce scence nce attributable to age, condition of facilities, and style can adversely affect our Resorts, Starwood and third-party 15
owners of managed and franchised Resorts expend substantial funds to renovate and maintain their facilities in order to rema remain in compe competiti titive. ve. For further infor informati mation on see Item 7, Mana Managemen gement’s t’s Discussion Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources in this Annual Report. At Dec Decemb ember er 31, 201 2011 1 our hot hotel el bus busine iness ss inc includ luded ed 1,0 1,076 76 own owned, ed, man manage aged d or fra franch nchise ised d hot hotels els wit with h approximately 315,300 rooms and our owned vacation ownership and residential business included 13 standalone vacation ownership resorts and residential properties at December 31, 2011, predominantly under seven brands. All brands (other than the Four Points by Sheraton and the Aloft and Element brands) represent fullservice properties that range in amenities from luxury hotels and extended stay resorts to more moderately priced hotels. Our Four Points by Sheraton, Aloft and Element brands are select-service properties that cater to more value oriented consumers. The following table reflects our hotel and vacation ownership properties, by brand, as of December 31, 2011: Hotels, VOI and Residential(a) Prop Pr oper erti ties es
Room Ro omss
St. Re St. Regi giss an and d Lu Luxu xury ry Co Coll llec ecti tion on . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . W ............................................................. Wes esttin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Le Mér ériidi dien en . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sheera Sh rato ton n . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . Fou Fo ur Po Poin intts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Aloft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ind ndep epen ende den nt / Ot Oth her . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
104 104 41 190 19 0 99 421 42 1 159 15 9 55 20
20,500 20,5 00 12,0 ,00 00 74,5 74 ,50 00 25,6 25 ,60 00 148 14 8,4 ,40 00 27.9 27 .90 00 8,7 ,70 00 4,7 ,70 00
Tota To tall . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,08 1, 089 9
322, 32 2,30 300 0
(a) Includ Includes es vac vacati ation on own owners ership hip propert properties ies of whi which ch 13 are stand-a stand-alon lone, e, eig eight ht are mixed-u mixed-use se and one is an unconsolidated joint venture totaling rooms of 7,000. Hotel Business Managed and Franchised Hotels. Hotel and resort properties in the United States are often owned by entities that do not manage hotels or own a brand name. Hotel owners typically enter into management contracts with hotel management companies to operate their hotels. When a management company does not offer a brand affiliation, the hotel owner often chooses to pay separate franchise fees to secure the benefits of brand marketing, centralized reservations and other centralized administrative functions, particularly in the sales and marketing area. Management believes that companies, such as Starwood, that offer both hotel management services and well-established worldwide brand names appeal to hotel owners by providing the full range of management, marketing and reservation services. In 2011, we opened 80 managed and franchised hotels with approximately 21,000 rooms and 31 managed and franchised hotels with approximately 7,000 rooms left our system. Managed Hotels. We manage hotels worldwide, usually under a long-term agreement with the hotel owner (including entities in which we have a minority equity interest). Our responsibilities under hotel management contracts contr acts typically typically incl include ude hirin hiring, g, trai training ning and super supervisin vising g the mana managers gers and empl employees oyees that opera operate te these facili fac ilitie ties. s. For add additi itiona onall fee fees, s, we pro provid videe cen centra trali lized zed res reserv ervati ation on ser servic vices es and coo coordi rdinat natee nat nation ional al and international advertising and certain marketing and promotional services. We prepare and implement annual budget bud getss for the hot hotels els we man manage age and are res respon ponsib sible le for all alloca ocatin ting g pro proper pertyty-own owner er fun funds ds for per period iodic ic maintenance and repair of buildings and furnishings. In addition to our owned and leased hotels, at December 31,
16
2011,, we ma 2011 mana nage ged d 51 518 8 ho hote tels ls wi with th ap appr prox oxim imat atel ely y 17 172, 2,90 900 0 ro room omss wo worl rldwi dwide de.. Du Duri ring ng th thee ye year ar en ende ded d December 31, 2011, we generated management fees by geographic area as follows: United Unit ed Sta State tess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asia As ia Pa Paci cifi ficc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Euro Eu rope pe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Midd Mi ddle le Eas Eastt and and Afri Africa ca . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amer Am eric icas as (La (Lati tin n Amer Americ ica, a, Car Carib ibbe bean an & Ca Cana nada da)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
33.8% 33.8 % 28.0 28 .0% % 15.9 15 .9% % 13.7 13 .7% % 8.6% 8. 6%
Tota To tall . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100. 10 0.0% 0%
Management contracts typically provide for base fees tied to gross revenue and incentive fees tied to profits as well as fees for other services, including centralized reservations, national and international advertising and sales and marketing. In our experience, owners seek hotel managers that can provide attractively priced base, incentive and marketing fees combined with demonstrated sales and marketing expertise and operations-focused management designed to enhance profitability. Some of our management contracts permit the hotel owner to terminate the agreement when the hotel is sold or otherwise transferred to a third party, as well as if we fail to meet established performance criteria. In addition, many hotel owners seek equity, debt or other investments from us to help finance hotel renovations or conversions to a Starwood brand, so as to align the interests of the owner and Starwood. Our ability or willingness to make such investments may determine, in part, whether we will be offered, will accept or will retain a particular management contract. During the year ended December 31, 2011 20 11,, we op open ened ed 49 ma mana nage ged d ho hote tels ls wi with th ap appr prox oxim imat atel ely y 14 14,00 ,000 0 ro room oms, s, an and d 11 ma mana nage ged d ho hote tels ls wi with th approximately 4,000 rooms left our system. In addition, during 2011, we signed management agreements for 70 hotels with approximately 20,000 rooms, a small portion of which opened in 2011 and the majority of which will open in the future. Brand Franchising and Licensing. We franchise our Sheraton, Westin, Four Points by Sheraton, Luxury Collection, Le Méridien, Aloft and Element brand names and generally derive licensing and other fees from franchisees based on a fixed percentage of the franchised hotel’s room revenue, as well as fees for other services, including centralized reservations, national and international advertising and sales and marketing. In addition, a franchise franc hiseee may purch purchase ase hotel suppl supplies, ies, inclu including ding brand brand-spe -specific cific produ products, cts, from cert certain ain Starw Starwood-a ood-approv pproved ed vendors. We also review certain plans for, and the location of, franchised hotels and review their design. At December 31, 2011, there were 499 franchised properties with approximately 123,000 rooms. During the year ended December 31, 2011, we generated franchise fees by geographic area as follows:
United Unit ed Sta State tess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Euro Eu rope pe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Americ Ame ricas as (Lat (Latin in Amer America ica,, Caribb Caribbean ean & Canad Canada) a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asia As ia Pa Paci cifi ficc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Midd Mi ddle le Ea East st an and d Afr Afric icaa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
66.9% 66.9 % 9.8% 9. 8% 13.4% 13. 4% 9.2% 9. 2% 0.7% 0. 7%
Tota To tall . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100. 10 0.0% 0%
In addition to the franchise contracts we retained in connection with the sale of hotels during the year ended December 31, 2011, we opened 31 franchised hotels with approximately 7,000 rooms, and 20 franchised hotels with approximately 4,000 rooms left our system. In addition, during 2011 we signed franchise agreements for 42 hotels with approximately 9,000 rooms, a portion of which opened in 2011 and a portion of which will open in the future. Owned, Leased and Consolidated Joint Venture Hotels. Historically, we have derived the majority of our revenues and operating income from our owned, leased and consolidated joint venture hotels and a significant portion porti on of these results results are driven by these hotels in North America. America. However, beginning beginning in 2006, we emba embarked rked upon a strategy of selling a significant number of hotels. Since 2006 and through December 31, 2011, we have sold 65 wholly-owned hotels which has substantially reduced our revenues and operating income from owned, leased lea sed and con consol solida idated ted joi jointnt-ven ventur turee hot hotels els.. The maj majori ority ty of the these se hot hotels els wer weree sol sold d sub subjec jectt to lon long-t g-term erm
17
management or franchise contracts. To date, where we have sold hotels, we have not provided seller financing or other financial assistance to buyers. Total revenues generated from our owned, leased and consolidated joint venture hotels worldwide for the years ending December 31, 2011, 2010 and 2009 were $1.768 billion, $1.704 billion and $1.584 billion, respectively (total revenues from our owned, leased and consolidated joint venture hotels hot els in Nor North th Ame Americ ricaa wer weree $1. $1.001 001 billion, billion, $1. $1.067 067 bil billio lion n and $1.024 billion billion for 2011, 201 2010 0 and 2009, respectively). The following represents our top five markets in the United States by metropolitan area as a percentage of our total owned, leased and consolidated joint venture revenues for the years ended December 31, 2011 and 2010: Top Five Domestic Markets in the United States as a % of Total Owned Revenues for the Years Ended December 31, 2011 and 2010 (1) 2011 Revenues
Metropolitan Area
New Yor New York, k, NY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Hawa Ha waiii . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pho Ph oen eniix, AZ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . San Sa n Fra Franc ncis isco co,, CA CA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chiica Ch cag go, IL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12.4% 12.4 % 6.1 .1% % 5.3 .3% % 4.1% 4. 1% 3.1 .1% %
2010 Revenues
12.3% 12.3 % 6.2 6. 2% 5.0 5. 0% 4.0% 4. 0% 4.3 4. 3%
The following represents our top five international markets by country as a percentage of our total owned, leased and consolidated joint venture revenues for the years ended December 31, 2011 and 2010: Top Five International Markets as a % of Total Owned Revenues for the Years Ended December 31, 2011 and 2010 (1) 2011 Revenues
Country
Canada Cana da . . . . . . . Ita taly ly . . . . . . . . . Spaain . . . . . . . . Sp Ausstr Au tral aliia . . . . . Mex exiico . . . . . . .
.. .. .. .. ..
.. .. .. .. ..
.. .. .. .. ..
.. .. .. .. ..
.. .. .. .. ..
.. .. .. .. .. .. .. .. .. . .. .. .. .. .. .. . .. . .. .. .. .. .. .. . .. . .. .. .. .. .. .. . .. .. .. .. .. .. .. ..
.. .. .. .. ..
.. .. .. .. ..
.. .. .. .. ..
.. .. .. .. ..
.. .. .. .. ..
.. .. .. .. .. .. .. . .. . .. .. .. .. .. .. .. . .. .. .. .. .. .. .. . .. .. .. .. .. .. .. .. .. .. .. .. .. .
(1) Includes the revenues of hotels hotels sold for the period prior prior to their their sale.
18
11.0% 11.0 % 7.4 .4% % 5.9 .9% % 4.9 .9% % 4.2 .2% %
2010 Revenues
10.8% 10.8 % 7.1 7. 1% 5.6 5. 6% 4.1 4. 1% 4.1 4. 1%
Following the sale of a significant number of our hotels in the past three years, we currently own or lease 59 hotels as follows: Hotel
Location
Rooms
U.S. Hotels:
The St. Regis Hotel, New York St. Regis Hotel, San Francisco The Phoenician W New York – Times Square W Chicago Lakeshore W Los Angeles Westwood W New Orleans W New Orleans, French Quarter The Westin Maui Resort & Spa The Westin Peachtree Plaza, Atlanta The Westin San Francisco Airport The Westin St. John Resort & Villas Sheraton Kauai Resort Sheraton Steamboat Springs Resort Sheraton Suites Philadelphia Airport Aloft Lexington Aloft Philadelphia Airport Element Lexington Four Points by Sheraton Philadelphia Airport Four Points by Sheraton Tucson University Plaza The Manhattan at Times Square Tremont Hotel Clarion Hotel Cove Haven Resort Pocono Palace Resort Paradise Stream Resort Perimeter Hotel, Atlanta
New York, NY San Francisco, CA Scottsdale, AZ New York, NY Chicago, IL Los Angeles, CA New Orleans, LA New Orleans, LA Maui, HI Atlanta, GA San Francisco, CA St. John, Virgin Islands Kauai, HI Steamboat Springs, CO Philadelphia, PA Lexington, MA Philadelphia, PA Lexington, MA Philadelphia, PA Tucson, AZ New York, NY Chicago, IL San Francisco, CA Scranton, PA Scranton, PA Scranton, PA Atlanta, GA
19
229 260 643 509 520 258 410 98 759 1,068 397 175 394 207 251 136 136 123 177 150 659 135 251 276 189 144 275
International Hotels:
Location
St. Regis Grand Hotel, Rome St. Regis, Osaka St. Regis, Florence Hotel Gritti Palace Park Tower Hotel Alfonso XIII Hotel Imperial Hotel Goldener Hirsch Hotel Maria Cristina W Barcelona W London – Leicester Square The Westin Excelsior, Rome The Westin Resort & Spa, Los Cabos The Westin Resort & Spa, Puerto Vallarta The Westin Excelsior, Florence The Westin Resort & Spa Cancun The Westin Denarau Island Resort The Westin Dublin Hotel Sheraton Centre Toronto Hotel Sheraton On The Park Sheraton Rio Hotel & Resort Sheraton Diana Majestic Hotel Sheraton Ambassador Hotel Sheraton Lima Hotel & Convention Center Sheraton Santa Maria de El Paular Sheraton Fiji Resort Sheera Sh rato ton n Bu Buen enos os Ai Airres Ho Hote tell & Co Con nve vent ntio ion n Ce Cent nter er Sheraton Maria Isabel Hotel & Towers Sheraton Ga Gatteway Hotel in Toronto International Ai Airrport Le Centre Sheraton Montreal Hotel Sheraton Paris Airport Hotel & Conference Centre The Park Lane Hotel, London
20
Rome, Italy Tokyo, Japan Florence, Italy Venice, Italy Buenos Aires, Argentina Seville, Spain Vienna, Austria Salzburg, Austria San Sebastian, Spain Barcelona, Spain London, England Rome, Italy Los Cabos, Mexico Puerto Vallarta, Mexico Florence, Italy Cancun, Mexico Nadi, Fiji Dublin, Ireland Toronto, Canada Sydney, Australia Rio de Janeiro, Brazil Milan, Italy Monterrey, Mexico Lima, Peru Rascafria, Spain Nadi, Fiji Buen Bu enos os Ai Aire ress, Ar Arge gent ntin inaa Mexico City, Mexico Toronto, Canada Montreal, Canada Paris, France London, England
Rooms
161 160 100 90 181 147 138 69 136 473 192 316 243 280 171 379 273 163 1,377 557 542 106 229 431 44 264 742 74 2 755 474 825 252 303
An indicator of the performance of our owned, leased and consolidated joint venture hotels is revenue per available room (“REVPAR”), as it measures the period-over-period growth in rooms revenue for comparable properties. This is particularly the case in the United States where there is no impact on this measure from foreign exchange rates. The following following tabl tablee summ summariz arizes es REVPAR, average average dail daily y rates (“ADR”) and avera average ge occup occupancy ancy rates on a year-to-year basis for our 45 owned, leased and consolidated joint venture hotels (excluding six hotels sold or closed and 14 hotels undergoing significant repositionings or without comparable results in 2011 and 2010) (“Same-Store Owned Hotels”) for the years ended December 31, 2011 and 2010: Year Ended December 31, 2011
Worldwide (45 hotels with approximately 16,000 rooms) REVPAR (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ADR AD R . .. .. .. . .. .. .. .. .. .. . .. .. .. .. .. .. . .. .. .. .. .. .. . .. Occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . North America (22 hotels with approximately 9,000 rooms) REVPAR (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ADR AD R . .. .. .. . .. .. .. .. .. .. . .. .. .. .. .. .. . .. .. .. .. .. .. . .. Occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . International (23 hotels with approximately 7,000 rooms) REVPAR (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ADR AD R . .. .. .. . .. .. .. .. .. .. . .. .. .. .. .. .. . .. .. .. .. .. .. . .. Occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010
Variance
$159.1 $159 .12 2 $142.7 $142 .76 6 $218 $2 18.6 .65 5 $205 $2 05.4 .49 9 72.8 .8% % 69.5 .5% %
11.5% 11.5 % 6.4% 6. 4% 3.3
$164.7 $164 .78 8 $153.6 $153 .63 3 $215 $2 15.6 .60 0 $207 $2 07.4 .44 4 76.4 .4% % 74.1 .1% %
7.3% 7.3% 3.9% 3. 9% 2.3
$152.0 $152 .01 1 $129.1 $129 .11 1 $222 $2 22.9 .95 5 $202 $2 02.6 .64 4 68.2 .2% % 63.7 .7% %
17.7% 17.7 % 10.0 10 .0% % 4.5
(1) REVPAR is calculate calculated d by divid dividing ing room revenue, revenue, which is derived derived from rooms and suites rented rented or leased, by total room nights available for a given period. REVPAR may not be comparable to similarly titled measures such as revenues. During the years ended December 31, 2011 and 2010, we invested approximately $283 million and $184 million, respectively, for capital expenditures at owned hotels. These capital expenditures included renovation costs at The Westin Peachtree Plaza in Atlanta, GA, Sheraton Kauai Resort in Koloa, HI, The St. Regis Florence in Flo Floren rence, ce, Ita Italy, ly, Hot Hotel el Alf Alfons onso o XII XIIII in Sev Sevill ille, e, Spa Spain in and the pur purcha chase se of the Hotel Gol Golden dener er Hir Hirsch sch in Salzburg, Austria. The following table summarizes REVPAR, ADR and average occupancy rates for our same-store owned, leased, managed and franchised hotels (“Same-Store Systemwide Hotels”) on a year-to-year basis for the years ended December 31, 2011 and 2010. Year Ended December 31, 2011
Worldwide REVPAR (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ADR AD R . . .. .. .. . .. .. .. .. .. .. . .. .. .. .. .. .. . .. .. .. .. .. .. . .. Occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010
Variance
$114.5 $114 .56 6 $104.4 $104 .43 3 $168 $1 68.3 .37 7 $158 $1 58.5 .57 7 68.0 .0% % 65.9 .9% %
9.7% 9.7% 6.2% 6. 2% 2.1
North America REVPAR (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ADR AD R . . .. .. .. . .. .. .. .. .. .. . .. .. .. .. .. .. . .. .. .. .. .. .. . .. Occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . International
$108.5 $108 .57 7 $ 99 99.4 .47 7 $155 $1 55.1 .11 1 $148 $1 48.4 .45 5 70.0 .0% % 67.0 .0% %
9.1% 9.1% 4.5% 4. 5% 3.0
REVPAR (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ADR AD R . . .. .. .. . .. .. .. .. .. .. . .. .. .. .. .. .. . .. .. .. .. .. .. . .. Occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$123.4 $123 .40 0 $111.7 $111 .74 4 $189 $1 89.3 .36 6 $174 $1 74.1 .17 7 65.2 .2% % 64.2 .2% %
10.4% 10.4 % 8.7% 8. 7% 1.0
(1) REVPAR is calculate calculated d by divid dividing ing room revenue, revenue, which is derived derived from rooms and suites rented rented or leased, by total room nights available for a given period. REVPAR may not be comparable to similarly titled measures such as revenues. 21
Vacation Ownership and Residential Business
We develop, own and operate vacation ownership resorts, market and sell the VOIs in the resorts and, in many cases, provide financing to customers who purchase such ownership interests. Owners of VOIs can trade their interval for intervals at other Starwood vacation ownership resorts, intervals at certain vacation ownership resorts not otherwise sponsored by Starwood through an exchange company, or for hotel stays at Starwood properties. From time to time, we securitize or sell the receivables generated from our sale of VOIs. We have also entered into arrangements with several owners for mixed use hotel projects that will include a residential component. We have entered into licensing agreements for the use of certain of our brands to allow the owners to offer branded condominiums to prospective purchasers. In consideration, we typically receive a licensing fee equal to a percentage of the gross sales revenue of the units sold. The licensing arrangement generally terminates upon the earlier of sell-out of the units or a specified length of time. We recently completed the development of a residential project in Bal Harbour, Florida and are in the process of selling residential units. At December 31, 2011, we had 22 residential and vacation ownership resorts and sites in our portfolio with 17 actively selling VOIs and residences including one unconsolidated joint venture. During 2011 and 2010 we invested approximately $70 million and $151 million, respectively, for vacation ownership capital expenditures, including VOI construction at the Westin Desert Willow Villas in Palm Desert, CA, the Westin Lagunamar Ocean Resort in Cancun, as well as construction costs at The St. Regis Bal Harbour Resort in Miami Beach, FL (“St. Regis Bal Harbour”) . Due to the global economic crisis and its impact on the long-term outlook for the timeshare industry, during the fourth quarter of 2009, we compl completed eted a compr comprehens ehensive ive review of our vacat vacation ion ownership projects. projects. We decided at that time that no new projects were to be initiated, and that we would not develop three vacation ownership sites and future phases of certain existing projects. As a result, inventories, fixed assets and land values at certain projects were determined to be impaired and were written down to their fair value, resulting in a primarily non-cash pre-tax impairment charge in 2009 of $255 million. Additionally, in connection with this review rev iew of the bus busine iness, ss, we mad madee a dec decisi ision on to red reduce uce the pri pricin cing g of cer certai tain n inv invent entory ory at exi existi sting ng pro projec jects, ts, resulting in a pre-tax charge of $17 million. As a result of these decisions and future plans for the vacation ownership business, we also recorded a $90 million non-cash charge for the impairment of goodwill associated with wit h the vacation vacation ownershi ownership p rep report orting ing unit. As a res result ult of the economic economic recovery recovery,, in 201 2011, 1, we dec decide ided d to constr con struct uct add additi itiona onall tim timesh eshare are inv invent entory ory in a sma small ll por portio tion n of one of the pro projec jects ts whe where re we had cea ceased sed development. Item 3.
Legal Proceedings.
Information regarding Legal Proceedings is incorporated by reference from the “Litigation” section in Note 25, Comm Commitme itments nts and Conti Contingenc ngencies, ies, of our consolidated consolidated financial statements statements set forth in Item 8. Finan Financial cial Statements and Supplementary Data of this Annual Report, which is incorporated herein by reference. Item 4.
Mine Safety Disclosures.
Not applicable.
PART II Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock, par value $0.01 per share (“Corporation Shares”), is traded on the New York Stock Exchange (the “NYSE”) under the symbol “HOT”. 22
The following following tabl tablee sets forth the quart quarterly erly range of the high and low sale prices of the Corporation Corporation Shares for the fiscal periods indicated as reported on the NYSE Composite Tape: High
Low
2011
Fourth Four th qu quar arte terr . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thir Th ird d qua quart rter er . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Seco Se cond nd qua quart rter er . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Firs Fi rstt quar quarte terr . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$54.15 $54. 15 $59. $5 9.45 45 $61. $6 1.70 70 $65. $6 5.51 51
$35.78 $35.7 8 $37.8 $3 7.88 8 $50.8 $5 0.87 7 $54.9 $5 4.95 5
$62.72 $62. 72 $54. $5 4.25 25 $56. $5 6.65 65 $47. $4 7.52 52
$52.16 $52.1 6 $39.6 $3 9.60 0 $41.2 $4 1.28 8 $33.1 $3 3.15 5
2010
Fourth Four th qu quar arte terr . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thir Th ird d qua quart rter er . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Seco Se cond nd qua quart rter er . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Firs Fi rstt quar quarte terr . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Approximate Number of Equity Security Holders
As of February 10, 2012, there were approximately 14,000 holders of record of Corporation Shares. Dividends
The following table sets forth the frequency and amount of cash dividends declared by the Corporation to holders of Corporation Shares for the fiscal years ended December 31, 2011 and 2010: Dividends Declared
2011
Annu An nual al div divid iden end d . . . . .. . . . . .. . . . .. . . . .. . . . .. . . . .. . . . . .. . . . .. . . . .. . . . .. . . . .. .
$0.5 $0 .50 0(a)
2010
Annu An nual al div divid iden end d . . . . .. . . . . .. . . . .. . . . .. . . . .. . . . .. . . . . .. . . . .. . . . .. . . . .. . . . .. .
$0.3 $0 .30 0(b)
(a)) The (a The Co Corp rpor orat atio ion n de decl clar ared ed a di divi vide dend nd in th thee fo four urth th quar quarte terr of 20 2011 11 to sh shar areh ehol olde ders rs of re reco cord rd on December 15, 2011, which was paid in December 2011. (b)) Th (b Thee Co Corp rpor orat atio ion n de decl clar ared ed a di divi vide dend nd in th thee fo four urth th qu quar arte terr of 2010 2010 to shar shareh ehol olde ders rs of reco record rd on December 16, 2010, which was paid in December 2010. Conversion of Securities; Sale of Unregistered Securities
Units of SLC Operating Limited Partnership, our wholly-owned subsidiary, are convertible into Corporation Shares at the unit holders’ option, provided that we have the option to settle conversion requests in cash or Corporation Shares. At December 31, 2011 and 2010 there were approximately 159,000 and 166,000 of these units outstanding, respectively. Issuer Purchases of Equity Securities
During the year ended December 31, 2011, our Board of Directors authorized a share purchase program of $250 million. As of December 31, 2011, $250 million of repurchase capacity remained available under this program.
23
STOCK RETURN PERFORMANCE AND CUMULAT CUMULATIVE IVE TOTAL RETURN
Set forth below is a line graph comparing the cumulative total stockholder return on the Corporation Shares against the cumulative total return on the S&P 500 and the S&P 500 Hotel Index (the “S&P 500 Hotel”) for the five fiscal years beginning after December 31, 2006 and ending December 31, 2011. The graph assumes that the value of the investments was $100 on December 31, 2006 and that all dividends and other distributions were reinvested. The comparisons are provided in response to SEC disclosure requirements and are not intended to forecast or be indicative of future performance. 250 Starwood 200
S R A L L O D
S&P 500 S&P 500 Hotel
150
100
50
0 2006
2007
2008
2009
2010
2011
12/31/06
12/31/07
12/31/08
12/31/09
12/31/10
12/31/11
Starwood
$100.00
71.89
3 0.69 30
6 3.05 63
105.31
83.98
S&P 500
$100.00
105.49
66.47
84.06
96.74
98.76
S&P 500 Hotel
$100.00
87.56
45.28
70.57
108.15
87.28
24
Item 6.
Selected Financial Data.
The following selected financial data should be read in conjunction with the information set forth under Item 7, Manag Managemen ement’s t’s Discu Discussion ssion and Analy Analysis sis of Finan Financial cial Condition Condition and Resul Results ts of Opera Operations tions,, and our consolidated financial statements and related notes thereto (the “Notes”) beginning on page F-1 of this Annual Report. Year Ended December 31, 2011
2010
2009
2008
2007
(In millions, except per share data)
Revenu Reve nues es . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5 $5,62 ,624 4 $5 $5,0 ,071 71 $4 $4,6 ,696 96 Oper Op eraati ting ng inc ncom omee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 63 630 0 $ 60 600 0 $ 26 (a) Income (loss) from continuing operations . . . . . . . . . . . . . . . . . . $ 502 $ 310 $ (1) Dilu Di lute ted d ea earn rnin ings gs pe perr sh shar aree fr from om co cont ntin inui uing ng op oper erat atio ions ns . . . . . . . . . . $ 2.5 2.57 7 $ 1. 1.63 63 $ 0.00 0.00
$5,754 $5,75 4 $5 $5,9 ,999 99 $ 61 610 0 $ 84 841 1 $ 249 $ 532 $ 1.3 1.34 4 $ 2. 2.52 52
Cash fr Cash from om op oper erat atin ing g ac acti tivi viti ties es . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 64 641 1 $ Cash Ca sh fr from om (u (use sed d for for)) inv inves esti ting ng ac acti tivi viti ties es . . . . . . . . . . . . . . . . . . . . . $ (1 (176 76)) $ Cash Ca sh us used ed fo forr fin finan anci cing ng ac acti tivi viti ties es . . . . . . . . . . . . . . . . . . . . . . . . . . $ (775 (775)) $ Aggr Ag greega gate te ca cash sh dis isttri ribu buttio ions ns pai aid d . . . . . . . . . . . . . . . . . . . . . . . . . . $ 99 $ Cash Ca sh di dist stri ribu buti tion onss an and d di divi vide dend ndss de decl clar ared ed pe perr Sh Shar aree . . . . . . . . . . . . $ 0.5 0.50 0 $
$ $ $ $ $
764 764 (71) (7 1) (26) (2 6) 93 0.30 0. 30
$ $ $ $ $
571 571 116 11 6 (993 (9 93)) 165 16 5 0.20 0. 20
646 646 (172 (1 72)) (243 (2 43)) 172 17 2 0.90 0.9 0
$ $ $ $ $
884 884 (215 (2 15)) (712 (7 12)) 90 0.90 0. 90
(a) Amounts Amounts represent represent incom incomee from continuing continuing operations operations attributable attributable to Corpo Corporati ration on Share Sharess (i.e. excluding excluding non-controlling interests). At December 31, 2011
2010
2009
2008
2007
(In millions)
Totall ass Tota asset etss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $9 $9,56 ,560 0 $9 $9,7 ,776 76 $8 $8,7 ,761 61 $9 $9,70 ,703 3 $9 $9,6 ,622 22 Long Lo ng-t -ter erm m deb debt, t, ne nett of of cur curre rent nt ma matu turi riti ties es . . . . . . . . . . . . . . . . . . . . $2,59 $2,596 6 $3,2 $3,215 15 $2,9 $2,955 55 $3,50 $3,502 2 $3,5 $3,590 90 Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) discusses discu sses our conso consolida lidated ted fina financial ncial statements, statements, which have been prepared in accor accordance dance with accou accountin nting g principles generally accepted in the United States. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the report rep orted ed amo amount untss of rev revenu enues es and cos costs ts and exp expens enses es dur during ing the rep report orting ing per period iods. s. On an ong ongoin oing g bas basis, is, management evaluates its estimates and judgments, including those relating to revenue recognition, bad debts, inventories, investments, plant, property and equipment, goodwill and intangible assets, income taxes, financing operations opera tions,, freq frequent uent guest progr program am liabi liability lity,, self self-insu -insuranc rancee claim claimss payab payable, le, restr restructur ucturing ing costs costs,, reti retireme rement nt benefits and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making decisions about the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions and conditions.
25
CRITICAL ACCOUNTING POLICIES
We believe the following to be our critical accounting policies: Revenue Recognition. Our revenues are primarily derived from the following sources: (1) hotel and resort revenues at our owned, leased and consolidated joint venture properties; (2) vacation ownership interests and residential unit revenues; (3) management and franchise revenues; (4) revenues from managed and franchised properties; and (5) other revenues which are ancillary to our operations. Generally, revenues are recognized when the services have been rendered. The following is a description of the composition of our revenues:
• Owned, Leased and Conso Consolidat lidated ed Join Jointt Ventu Ventures res — Repre Represents sents revenue revenue prim primaril arily y deriv derived ed from hotel operations, including the rental of rooms and food and beverage sales from owned, leased or consolidated joint venture hotels and resorts. Revenue is recognized when rooms are occupied and services have been rendered. These revenues are impacted by global economic conditions affecting the travel and hospitality industry as well as relative market share of the local competitive set of hotels. REVPAR is a leading indicator of revenue trends at owned, leased and consolidated joint venture hotels as it measures the period-over-period growth in rooms revenue for comparable properties. • Vacati Vacation on Own Owners ership hip Interest Interestss and Res Reside identi ntial al Uni Units ts — We rec recogn ognize ize revenue revenue fro from m VOI sal sales es and financings and the sales of residential units which are typically a component of mixed use projects that include a hotel. Such revenues are impacted by the state of the global economy and, in particular, the U.S. economy, as well as interest rates and other economic conditions affecting the lending market. Revenue is generally recognized upon the buyer demonstrating a sufficient level of initial and continuing investment, the period of cancellation with refund has expired and receivables are deemed collectible. We determine the portion of revenues to recognize for sales accounted for under the percentage of completion method based on judgm judgments ents and esti estimate matess inclu including ding total proje project ct costs to compl complete. ete. Additionally, Additionally, we recor record d reserv res erves es aga agains instt the these se rev revenu enues es bas based ed on exp expect ected ed def defaul aultt lev levels els.. Cha Change ngess in cos costs ts cou could ld lea lead d to adjustments to the percentage of completion status of a project, which may result in differences in the timing tim ing and amo amount unt of rev revenu enues es rec recogn ognize ized d fro from m the pro projec jects. ts. We hav havee als also o ent entere ered d int into o lic licens ensing ing agreements with third-party developers to offer consumers branded condominiums or residences. Our fees from fro m the these se agr agreem eement entss are gen genera erally lly bas based ed on the gro gross ss sal sales es rev revenu enuee of uni units ts sol sold. d. Res Reside identi ntial al fee revenue is recorded in the period that a purchase and sales agreement exists, delivery of services and obligations has occurred, the fee to the owner is deemed fixed and determinable and collectability of the fees is reasonably assured. Residential revenue on whole ownership units is generally recorded using the completed contract method, whereby revenue is recognized only when a sales contract is completed or substantially completed. During the performance period, costs and deposits are recorded on the balance sheet. • Management Management and Franchise Franchise Fees — Repre Represents sents fees earned on hotel hotelss and resor resorts ts managed worldwide, worldwide, usuall usu ally y und under er lon long-t g-term erm con contra tracts cts,, fra franch nchise ise fee feess rec receiv eived ed in con connec nectio tion n wit with h the fra franch nchise ise of our Sheraton, Westin, Four Points by Sheraton, Le Méridien and Luxury Collection brand names, termination feess and the amo fee amorti rtizat zation ion of def deferr erred ed gai gains ns rel relate ated d to sol sold d pro proper pertie tiess for whi which ch we hav havee sig signif nifica icant nt continuing involvement. Management fees are comprised of a base fee, which is generally based on a perc pe rcen enta tage ge of gr gros osss re reve venu nues es,, an and d an in ince cent ntiv ivee fe fee, e, wh whic ich h is ge gene nera rall lly y ba base sed d on th thee pr prop oper erty ty’s ’s profitabi profi tability lity.. For any time during the year, when the provisions provisions of our mana managemen gementt contr contracts acts allow receipt of incentive fees upon termination, incentive fees are recognized for the fees due and earned as if the contract was terminated at that date, exclusive of any termination fees due or payable. Therefore, during dur ing per period iodss pri prior or to yea year-e r-end, nd, the inc incent entive ive fee feess rec record orded ed may not be ind indica icativ tivee of the eve eventu ntual al incentive fees that will be recognized at year-end as conditions and incentive hurdle calculations may not be fin final. al. Fra Franch nchise ise fee feess are generall generally y bas based ed on a per percen centag tagee of hot hotel el roo room m rev revenu enues. es. As wit with h hot hotel el revenues reven ues disc discussed ussed above, these reve revenue nue sour sources ces are affec affected ted by condi conditions tions impacting impacting the travel and hospitality industry as well as competition from other hotel management and franchise companies. • Other Revenues from Managed and Franchised Properties Properties – These revenues represent reimbursements reimbursements of costs incurred on behalf of managed hotel properties and franchisees. These costs relate primarily to payroll costs at managed properties where we are the employer. Since the reimbursements are made based 26
upon the costs incurred with no added margin, these revenues and corresponding expenses have no effect on our operating income or our net income. Goodwill and Intan Goodwill Intangible gible Asset Assets. s. Goodwi Goodwill ll and inta intangibl ngiblee asset assetss aris arisee in conne connection ction with acqui acquisiti sitions, ons, including inclu ding the acqui acquisiti sition on of mana managemen gementt contr contracts. acts. We do not amortize goodwill and intan intangibl giblee asset assetss with indefinite lives. Intangible assets with finite lives are amortized over their respective useful lives. We review all goodwill and intangible assets for impairment annually, or upon the occurrence of a trigger event. Impairment charges, if any, are recognized in operating results.
In Sep Septem tember ber 201 2011, 1, the Fin Financ ancial ial Acc Accoun ountin ting g Sta Standa ndards rds Boa Board rd (“F (“FASB ASB”) ”) iss issued ued ASU No. 201 2011-0 1-08, 8, “Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment”. This topic permits an entity to assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis to determine whether an additional impairment test is necessary. This topi to picc is fo forr an annu nual al an and d in inte teri rim m go good odwi will ll im impa pair irme ment nt te test stss pe perf rfor orme med d fo forr fi fisc scal al ye year arss be begi ginn nnin ing g af afte terr December 13, 2011 with early adoption allowed. We early adopted this topic during the fourth quarter of 2011 in conjunction with our annual impairment testing (see Note 7). Frequent Guest Program. Starwood Preferred Guest (“SPG”) is our frequent guest incentive marketing program. progra m. SPG mem member berss ear earn n poi points nts bas based ed on spe spendi nding ng at our own owned, ed, man manage aged d and fra franch nchise ised d hot hotels els,, as incentives to first-time buyers of VOIs and residences, and through participation in affiliated partners’ programs such suc h as coco-bra brande nded d cre credit dit cards. cards. Poi Points nts can be red redeem eemed ed at sub substa stanti ntiall ally y all of our own owned, ed, man manage aged d and franchised hotels as well as through other redemption opportunities with third parties, such as conversion to airline miles.
We charge our owned, managed and franchised hotels the cost of operating the SPG program, including the estimated estima ted cos costt of our fut future ure red redemp emptio tion n obl obliga igatio tion, n, bas based ed on a per percen centag tagee of our SPG mem member bers’ s’ qua qualif lified ied expenditures. The Company’s management and franchise agreements require that we be reimbursed for the costs of operating the SPG program, including marketing, promotions and communications and performing member services for the SPG members. As points are earned, the Company increases the SPG point liability for the amount of cash it receives from its managed and franchised hotels related to the future redemption obligation. For our owned hotels we record an expense for the amount of our future redemption obligation with the offset to the SPG point liability. When points are redeemed by the SPG members, the hotels recognize revenue and the SPG point liability is reduced. Through the services of third-party actuarial analysts, we determine the value of the future redemption obligation based on statistical formulas which project the timing of future point redemptions based on historical experience, including an estimate of the “breakage” for points that will never be redeemed, and an estimate of the points that will eventually be redeemed as well as the cost of reimbursing hotels and other third parties in respect of other redemption opportunities for point redemptions. We consolidate the assets and liabilities of the SPG program including the liability associated with the future red future redemp emptio tion n obl obliga igatio tion n whi which ch is inc includ luded ed in oth other er lon long-t g-term erm lia liabil biliti ities es and acc accrue rued d exp expens enses es in the accomp acc ompany anying ing con consol solida idated ted bal balanc ancee she sheets ets.. The tot total al act actuar uarial ially ly det determ ermine ined d lia liabil bility ity (se (seee Not Notee 17) 17),, as of December 31, 2011 and 2010 is $844 million and $753 million, respectively, of which $251 million and $225 million, respectively, is included in accrued expenses. Long-Lived Assets. We evaluate the carrying value of our long-lived assets for impairment by comparing the expected undiscounted future cash flows of the assets to the net book value of the assets if certain trigger events occur. If the expected undiscounted future cash flows are less than the net book value of the assets, the excess of the net book value over the estimated fair value is charged to current earnings. Fair value is based upon discounted cash flows of the assets at a rate deemed reasonable for the type of asset and prevailing market conditions condi tions,, sale saless of simi similar lar asset assets, s, appra appraisal isalss and, if appro appropria priate, te, curre current nt esti estimate mated d net sale saless proce proceeds eds from pending offers. We evaluate the carrying value of our long-lived assets based on our plans, at the time, for such assets ass ets and suc such h qua qualit litati ative ve fac factor torss as fut future ure dev develo elopme pment nt in the sur surrou roundi nding ng are area, a, sta status tus of exp expect ected ed loc local al competition and projected incremental income from renovations. Changes to our plans, including a decision to dispose of or change the intended use of an asset, can have a material impact on the carrying value of the asset.
27
Loan Loss Reserves. For the vacation ownership and residential segment, we record an estimate of expected uncollectibility on our VOI notes receivable as a reduction of revenue at the time we recognize a timeshare sale. We hold large amounts of homogeneous VOI notes receivable and therefore assess uncollectibility based on pools of receivables. In estimating loan loss reserves, we use a technique referred to as static pool analysis, which tracks tra cks def defaul aults ts for eac each h yea year’s r’s mor mortga tgage ge ori origin ginati ations ons ove overr the lif lifee of the res respec pectiv tivee not notes es and pro projec jects ts an estimated default rate. As of December 31, 2011, the average estimated default rate for our pools of receivables was 9.9%.
The primary credit quality indicator used by us to calculate the loan loss reserve for the vacation ownership notes is the origination of the notes by brand (Sheraton, Westin, and Other), as we believe there is a relationship between the default behavior of borrowers and the brand associated with the vacation ownership property they have acquired. In addition to quantitatively calculating the loan loss reserve based on its static pool analysis, we supplement the process by evaluating certain qualitative data, including the aging of the respective receivables, current default trends by brand and origination year, and the Fair Isaac Corporation (“FICO”) scores of the buyers. Given the significance of our respective pools of VOI notes receivable, a change in the projected default rate can have a significant impact to its loan loss reserve requirements, with a 0.1% change estimated to have an impact of approximately $4 million. We consider a VOI note receivable delinquent when it is more than 30 days outstanding. All delinquent loans are placed on nonaccrual status and we do not resume interest accrual until payment is made. Upon reachi rea ching ng 120 day dayss out outsta standi nding, ng, the loa loan n is con consid sidere ered d to be in def defaul aultt and we com commen mence ce the reposses repossessio sion n process. Uncollectible VOI notes receivable are charged off when title to the unit is returned to us. We generally do not modify vacation ownership notes that become delinquent or upon default. For the hotel segment, we measure the impairment of a loan based on the present value of expected future cash flows, discounted at the loan’s original effective interest rate, or the estimated fair value of the collateral. For imp impair aired ed loa loans, ns, we est establ ablish ish a spe specif cific ic imp impair airmen mentt res reserv ervee for the dif differ ferenc encee bet betwee ween n the rec record orded ed investment in the loan and the present value of the expected future cash flows or the estimated fair value of the collateral. We apply the loan impairment policy individually to all loans in the portfolio and do not aggregate loans for the purpose of applying such policy. For loans that we have determined to be impaired, we recognize interest income on a cash basis. Assets Held for Sale. We consider properties to be assets held for sale when management approves and commits to a formal plan to actively market a property or group of properties for sale and a signed sales contract and significant non-refundable deposit or contract break-up fee exist. Upon designation as an asset held for sale, we record the carrying value of each property or group of properties at the lower of its carrying value which includes allocable segment goodwill or its estimated fair value, less estimated costs to sell, and we stop recording depreciation expense. Any gain realized in connection with the sale of a property for which we have significant continuing involvement (such as through a long-term management agreement) is deferred and recognized over the initial term of the related agreement. The operations of the properties held for sale prior to the sale date are recorded in discontinued operations unless we will have continuing involvement (such as through a management or franchise agreement) after the sale. Legal Contingencies. We are subject to various legal proceedings and claims, the outcomes of which are subject to significant uncertainty. An estimated loss from a loss contingency should be accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. We evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact our financial position or our results of operations. Income Taxes. We provide for income taxes in accordance with principles contained in ASC 740, Income Taxes. Under these principles, we recognize the amount of income tax payable or refundable for the current year and deferred tax assets and liab liabilit ilities ies for the future tax conse consequenc quences es of event eventss that have been recognized recognized in our financial statements or tax returns.
28
Deferred tax asse Deferred assets ts and liab liabilit ilities ies are meas measured ured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period when the new rate is enacted. Deferred tax assets are evaluated evalu ated for futur futuree reali realizatio zation n and reduced by a valua valuation tion allowance allowance to the extent we beli believe eve a porti portion on will not be realized. We consider many factors when assessing the likelihood of future realization of our deferred tax assets, including our recent cumulative earnings experience and expectations of future taxable income by taxing jurisdiction, the carry-forward periods available to us for tax reporting purposes and tax attributes. We mea measur suree and rec recogn ognize ize the amo amount unt of tax ben benefi efitt tha thatt sho should uld be rec record orded ed for fin financ ancial ial sta statem tement ent purposes for uncertain tax positions taken or expected to be taken in a tax return. With respect to uncertain tax positions, we evaluate the recognized tax benefits for derecognition, classification, interest and penalties, interim period accounting and disclosure requirements. Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns.
RESULTS OF OPERATIONS
The following discussion presents an analysis of results of our operations for the years ended December 31, 2011, 2010 and 2009. The dif diffic ficult ult bus busine iness ss con condit dition ionss tha thatt pla plague gued d the glo global bal lod lodgin ging g ind indust ustry ry in 200 2008 8 and 200 2009 9 beg began an to stabilize stabi lize in 2010. The lodgi lodging ng recov recovery ery continued into 2011 as occupancies occupancies appro approached ached prior peak level levels, s, average daily rate increased, and new hotel supply in the developed world fell well below historic rates of growth. While we remain cautiously optimistic, we acknowledge that known and unknown challenges could slow down or derail the lodging recovery. As we move forward, we believe we are uniquely positioned, due to the strength of our brands, our high-end focus, and our geographic diversification. Starwood is particularly well positioned to take advantage of global growth through our operating teams that have worked in the emerging markets for decades. We also expect to grow in the developed world as we build out our underpenetrated brands in these markets. We believe that we have the highest quality pipeline in the industry as measured by percentage growth potential as well as our focus on valuable management contracts in the four and five star segments. We and our hotel owners have continued to invest capital in our hotels and provide innovative ways to utilize public space, such as our Link@Sheraton, which fosters relationships face-to-face or webcam-to-webcam, and also by maximizing guest room conveniences. Finally, we believe our SPG loyalty guest program is an industry leader. With our recently announced changes to the program, we expect to drive further loyalty from our SPG members as well as attract the next wave of global elite members. As the program is constantly refined and new promotions are offered, it provides rewards to our patrons while its growth in membership favorably impacts our results. results. As we move forward to 2012, we will continue continue to focu focuss on providing providing super superior ior guest experiences experiences for our business, leisure, and group customers while maintaining a commitment to controlling our costs. As dis discus cussed sed in Not Notee 2 of our con consol solida idated ted fin financ ancial ial sta statem tement ents, s, fol follow lowing ing the ado adopti ption on of ASU Nos Nos.. 2009-16 and 2009-17 on January 1, 2010, our statements of income beginning with the year ended December 31, 2010 no longer reflect securitization income, but instead report interest income, net charge-offs and certain other income associated with all securitized loan receivables, and interest expense associated with debt issued from the trusts to third-party investors in the same line items in our statements of income. Additionally, we no longer record initial gains or losses on new securitization activity since securitized vacation ownership notes receivable no longer receive sale accounting treatment. Finally, we no longer recognize gains or losses on the revaluation of the interest-only strip receivable as that asset is not recognized in a transaction accounted for as a secured borrowing. Our statement of income for the year ended December 31, 2009 has not been retrospectively adjusted to reflect the adoption of ASU Nos. 2009-16 and 2009-17. While the years ended December 31, 2010 and 2011 have been accounted for under the new accounting standards, these years are not comparable to 2009 amounts, particularly with regards to vacation ownership and residential sales and services and interest expense. 29
Year Ended December 31, 2011 Compared with Year Ended December 31, 2010 Continuing Operations Year Ended December 31, 2011
Year Ended December 31, 2010
Increase / (decrease) from prior year
Percentage change from prior year
(in millions)
Owned, Leased and Consolidated Joint Venture Hotels . . . . Vacation Ownership and Residential . . . . . . . . . . . . . . . . . . .
$1,768 814 703
$1,704 712 538
$ 64 102 165
3.8% 14.3% 30.7%
Other Revenues from Managed and Franchised Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,339
2,117
222
10.5%
Total Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$5,624
$5,071
$553
10.9%
Management Fees, F ees, Franchise Fees and Other Income . . . .
The increase in revenues from owned, leased and consolidated joint venture hotels was primarily due to increased REVPAR (as discussed below) at our existing owned, leased and consolidated joint venture hotels, offset in part by lost revenues from six wholly owned hotels sold or closed in 2011 and 2010. These sold or closed hotels had revenues of $56 million in the year ended December 31, 2011 compared to $158 million in the corres cor respon pondin ding g per period iod of 201 2010. 0. Rev Revenu enues es at our Sam Same-S e-Stor toree Own Owned ed Hot Hotels els (45 hot hotels els for the year end ended ed Decemb Dec ember er 31, 201 2011 1 and 201 2010, 0, exc exclud luding ing the six hot hotels els sol sold d or clo closed sed and 14 add additi itiona onall hot hotels els und underg ergoin oing g significant repositionings or without comparable results in 2011 and 2010) increased 9.4%, or $123 million, to $1.441 billion for the year ended December 31, 2011 when compared to $1.318 billion in the corresponding period of 2010 due primarily to an increase in REVPAR. REVPAR at our Same-Store Owned Hotels increased 11.5% to $159.12 for the year ended December 31, 2011 when compared to the corresponding 2010 period. The increase in REVPAR at these Same-Store Owned Hotels was driven by a 6.4% increase in ADR to $218.65 for the year ended December 31, 2011 compared to $205.49 for the corresponding 2010 period and an increase in occupancy rates to 72.8% for the year ended December 31, 2011 when compared to 69.5% in the corresponding period in 2010. REVPAR at Same-Store Owned Hotels in North America increased 7.3% for the year ended December 31, 2011 when compared to the corresponding period of 2010. REVPAR growth was particularly strong at our owned hotels in San Francisco, Californi Calif ornia, a, Maui, Hawaii and Scott Scottsdale sdale,, Arizo Arizona. na. REVPAR at our international international Same-Store Same-Store Owned Hotel Hotelss increased by 17.7% for the year ended December 31, 2011 when compared to the corresponding period of 2010. REVPAR for SameSame-Store Store Owned Hotel Hotelss inter internatio nationally nally increased increased 8.1% excluding the favor favorable able effects of foreign currency translation. The increase in management fees, franchise fees and other income was primarily a result of an $83 million or 12.0% increase in management and franchise revenue to $772 million for the year ended December 31, 2011 compared to $689 million in the corresponding period of 2010. Management fees increased $46 million or 11.2% and fra franch nchise ise fee feess inc increa reased sed $26 mil millio lion n or 16. 16.1% 1% com compar pared ed to the cor corres respon pondin ding g per period iod of 201 2010. 0. The These se increases were due to growth in REVPAR at existing hotels as well as the net addition of 38 managed and 11 franchised hotels to our system since the beginning of 2011. Additionally, other income increased approximately $19 mil millio lion, n, for the yea yearr end ended ed Dec Decemb ember er 31, 201 2011 1 whe when n com compar pared ed to the correspo correspondi nding ng per period iod of 201 2010, 0, primarily due to payments received on promissory notes that had previously been reserved due to uncertainty around collection. Total vacation ownership and residential sales and services revenue increased 30.7% to $703 million, for the year ended December 31, 2011 when compared to $538 million in 2010, primarily driven by residential sales related to the St. Regis Bal Harbour project which received its certificate of occupancy in late 2011. Originated contract sales of VOI inventory increased 6.1% for the year ended December 31, 2011, when compared to the corresponding period in 2010. This increase was primarily driven by increased tour flow from new buyers and improved sales performance from existing owner channels. The average contract amount per vacation ownership unit sold was relatively unchanged, for the year ended December 31, 2011 when compared to the corresponding 30
period of 2010, at approximately $14,900. Residential revenue increased approximately $125 million for the year ended December 31, 2011 primarily due to residential sales related to the St. Regis Bal Harbour project as discussed above. Other revenues from managed and franchised properties increased primarily due to an increase in payroll costs commensurate with increased occupancy at our existing managed hotels and payroll costs for the new hotels entering the system. These revenues represent reimbursements of costs incurred on behalf of managed hotel hot el and vac vacati ation on own owners ership hip pro proper pertie tiess and fra franch nchise isees es and rel relate ate pri primar marily ily to pay payrol rolll cos costs ts at man manage aged d properties where we are the employer. Since the reimbursements are made based upon the costs incurred with no added margin, these revenues and corresponding expenses have no effect on our operating income and our net income. Year Ended December 31, 2011
Year Ended December 31, 2010
Increase / (decrease) from prior year
Percentage change from prior year
(in millions)
Selling, General, Administrative and Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$352
$344
$8
2.3%
Selling, general, administrative and other expenses for the year ended December 31, 2011 increased 2.3% to $352 million, when compared to the corresponding period of 2010, primarily due to higher legal costs incurred in 2011, while results in 2010 benefitted from the reimbursement of legal costs as a result of a favorable legal settlement. This increase was partially offset by lower incentive compensation in 2011 compared to 2010. Year Ended December 31, 2011
Year Ended December 31, 2010
Increase / (decrease) from prior year
Percentage change from prior year
(in millions)
Restructuring, Goodwill Impairment and Other Special Charges (Credits), Net . . . . .
$68
$(75)
$143
n/m
During the year ended December 31, 2011, we recorded a charge of approximately $70 million related to an unfavorable decision in a lawsuit. During the year ended December 31, 2010, we received cash proceeds of $75 million in connection with the favorable settlement of a lawsuit. We recorded this settlement, net of the reimbursement of legal costs incurred in connection conne ction with the litigation, litigation, as a credi creditt to restructuring restructuring,, goodw goodwill ill impairment, impairment, and other special special (cred (credits) its) charges. Additionally, we recorded an $8 million credit related to the reversal of a reserve associated with an acquisition in 1998 as the liability is no longer deemed necessary. Year Ended December 31, 2011
Year Ended December 31, 2010
Increase / (decrease) from prior year
Percentage change from prior year
(in millions)
Depreciation and Amortization Amorti zation . . . . . . . . . . . .
$265
$285
$(20)
(7.0)%
The dec decrea rease se in dep deprec reciat iation ion exp expens ensee for the yea yearr end ended ed Dec Decemb ember er 31, 201 2011, 1, whe when n com compar pared ed to the corresponding period of 2010, was primarily due to reduced depreciation expense from sold hotels, partially offset by additional depreciation related to capital expenditures made in the last twelve months. Year Ended December 31, 2011
Year Ended December 31, 2010
Increase / (decrease) from prior year
Percentage change from prior year
(in millions)
Operating Income . . . . . . . . . . . . . . . . . . . . . .
$630
$600
$30
5.0%
The in The incr crea ease se in op oper erat atin ing g in inco come me fo forr th thee ye year ar en ende ded d De Dece cemb mber er 31 31,, 20 2011 11,, wh when en co comp mpar ared ed to th thee corresponding period of 2010, was primarily due to continued improvement in results from our owned and leased 31
hotels and the increase in management and franchise fees attributable to the increase in REVPAR as well as the net addition of 49 managed and franchised hotels to our system since the beginning of 2011. Additionally, reside res identi ntial al sal sales es at the St. Reg Regis is Bal Har Harbou bourr fav favora orably bly imp impact acted ed 201 2011 1 ope operat rating ing inc income ome by $27 mi milli llion. on. Operating income for the year ended December 31, 2011, as compared to 2010, was negatively impacted by a $70 million charge associated with an unfavorable legal decision in 2011, while 2010 benefited from a favorable settlement of a lawsuit of $75 million. Results were also negatively impacted by political unrest in the Middle East and North Africa, as well as the earthquake and tsunami in Japan. Year Ended December 31, 2011
Year Ended December 31, 2010
Increase / (decrease) from prior year
Percentage change from prior year
(in millions)
Equity Earnings (Losses) and Gains and Losses from Unconsolidated Ventures, Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$11
$10
$1
10.0%
The increase in equit equity y earni earnings ngs and gains and losse lossess from unconsolidat unconsolidated ed join jointt ventu ventures res for the year ended Decemb Dec ember er 31, 201 2011, 1, whe when n com compar pared ed to the cor corres respon pondin ding g per period iod of 201 2010 0 was pri primar marily ily due to imp improv roved ed operating opera ting results at sever several al prope properties rties owned by joint ventures ventures in which we hold non-controll non-controlling ing inte interests rests,, partially offset by unfavorable mark-to-market adjustments on US dollar denominated loans at several properties in Latin America. Year Ended December 31, 2011
Year Ended December 31, 2010
Increase / (decrease) from prior year
Percentage change from prior year
(in millions)
Net Interest Expense . . . . . . . . . . . . . . . . . . . .
$216
$236
$(20)
(8.5)%
The decrease decrease in net interest interest expense expense for the yea yearr end ended ed Dec Decemb ember er 31, 201 2011, 1, whe when n com compar pared ed to the corresponding period of 2010, was primarily due to a lower average debt balance and an increase in capitalized interest related to construction projects, primarily relating to the St. Regis Bal Harbour, partially offset by a $16 million charge for redemption premiums and other costs associated with the early payoff of all of our $605 million Senior Notes, which were originally issued in April 1, 2002 and due in May 2012. Our weighted average interest rate was 6.66% at December 31, 2011 as compared to 6.86% at December 31, 2010. Year Ended December 31, 2011
Year Ended December 31, 2010
Increase / (decrease) from prior year
Percentage change from prior year
(in millions)
Loss on Asset Dispositions Di spositions and Impairments, Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$—
$(39)
$(39)
100.0%
During the year ended December 31, 2011, we recorded an impairment charge of $31 million to write-off our noncontr noncontroll olling ing interest interest in a joi joint nt ven ventur turee tha thatt own ownss a hot hotel el in Tok Tokyo, yo, Japan, Japan, a $9 mil millio lion n los losss due to significa signi ficant nt renov renovatio ations ns and related asset reti retireme rements nts at two properties, properties, $7 mill million ion in loss losses es rela relating ting to the impairment of six hotels whose carrying value exceeded their book value and a $2 million loss on an investment in a management contract that was terminated during the period. These amounts were offset by a $50 million gain as a result of the write-up to fair value of our previously held noncontrolling interest in two hotels in which we obtained a controlling interest (see Note 4). During the year ended December 31, 2010, we recorded a net loss on dispositions of approximately $39 million, primarily related to a $53 million loss on the sale of one wholly-owned hotel (see Note 5) as well as a $4 million impairment of fixed assets that are being retired in connection with a significant renovation of a whollyowned hotel, and a $2 million impairment on one hotel whose carrying value exceeded its fair value. These charges were partially offset by a gain of $14 million from insurance proceeds received for a claim at a whollyowned hotel that suffered damage from a storm in 2008, a $5 million gain as a result of an acquisition of a 32
controlling interest in a joint venture in which we previously held a non-controlling interest (see Note 4) and a $4 million gain from the sale of non-hotel assets. Year Ended December 31, 2011
Year Ended December 31, 2010
Increase / (decrease) from prior year
Percentage change from prior year
(in millions)
Income Tax (Benefit) Expense . . . . . . . . . . . .
$(75) $27 $(102) n/m In 2011, we completed transactions that involved certain domestic and foreign subsidiaries. These transactions generat gene rated ed capi capital tal gai gains, ns, inc increa reased sed the tax basi basiss in sub subsid sidiar iaries ies incl includi uding ng U.S par partne tnersh rships ips and res result ulted ed in the inclusion of foreign earnings for U.S. tax purposes. The capital gains were largely reduced by the utilization of capital losses. Due to the uncertainty regarding our ability to generate capital gain income, the deferred tax asset associated with these capital losses was offset by a full valuation allowance prior to these transactions. These transactions resulted in a net tax benefit of $87 million. Additionally, during 2011, an income tax benefit of approximately $60 million was generated as the result of the sale of two wholly-owned hotels. Also, in 2011, the Intern Int ernal al Rev Revenue enue Service Service (“I (“IRS”) RS”) closed closed its audit in res respec pectt to tax years 2004 through through 2006 resultin resulting g in the recognition of a tax benefit of approximately $25 million, primarily for the reversal of tax and interest reserves. These benefits were partially offset by tax on increased pretax income and valuation allowance increases in 2011 compared to 2010. During 2010, the IRS closed its audit with respect to tax years 1998 through 2003 and we recognized a $42 million tax benefit in continuing operations, primarily associated with the refund of interest on taxes already paid. This benefit was partially offset by interest and taxes recorded on uncertain tax positions, which resulted in a charge of $23 million. Discontinued Operations, Net of Tax
During the year ended December 31, 2011, we recorded a loss of $13 million primarily related to an $18 million pre-tax loss from the sale of our interest in a consolidated joint venture, offset by a $10 million income tax benefit on the sale. Additionally, we recorded $5 million of interest charges related to an uncertain tax position. During the year ended December 31, 2010, we recorded a gain of $134 million related to the final settlement with the IRS regarding the disposition of World Directories Inc. a pre-tax gain of approximately $3 million ($36 million after tax) related to the sale of one wholly-owned hotel. The tax benefit was related to the realization of a high tax basis in this hotel that was generated through a previous transaction. Year Ended December 31, 2010 Compared with Year Ended December 31, 2009 Continuing Operations Year Ended December 31, 2010
Year Ended December 31, 2009
Increase / (decrease) from prior year
Percentage change from prior year
(in millions)
Owned, Leased and Consolidated Joint Venture Hotels . . . . . . . . . . . . . . . . . . . . . . .
$1,704
$1,584
$120
7.6%
Vacation Ownership and Residential . . . . . . .
712 538
658 523
54 15
8.2% 2.9%
Other Revenues from Managed and Franchised Properties . . . . . . . . . . . . . . . . .
2,117
1,931
186
9.6%
Total Revenues . . . . . . . . . . . . . . . . . . . . . . . .
$5,071
$4,696
$375
8.0%
Management Fees, Franchise Fees and Other Income . . . . . . . . . . . . . . . . . . . . . . . .
The increase in revenues from owned, leased and consolidated joint venture hotels was primarily due to improved REVPAR (as discussed below) at our existing owned, leased and consolidated joint venture hotels, offset in part by lost revenues from eight wholly owned hotels sold or closed in 2010 and 2009. These sold or closed hotels had revenues of $18 million in the year ended December 31, 2010 compared to $98 million in the corres cor respon pondin ding g per period iod of 200 2009. 9. Rev Revenu enues es at our Sam Same-S e-Stor toree Own Owned ed Hot Hotels els (54 hot hotels els for the year end ended ed 33
December 31, 2010 and 2009, excluding the eight hotels sold or closed and eight additional hotels undergoing significant repositionings or without comparable results in 2010 and 2009) increased 8.2%, or $107 million, to $1.421 billion for the year ended December 31, 2010 when compared to $1.314 billion in the corresponding period of 2009 due primarily to an increase in REVPAR. REVPAR at our Same-Store Owned Hotels increased 11.2% to $136.27 for the year ended December 31, 2010 when compared to the corresponding period of 2009. The increase in REVPAR at these Same-Store Owned Hotels resulted from a 2.6% increase in ADR to $196.62 for the year ended December 31, 2010 compared to $191.60 for the corresponding period of 2009 and an increase in occupancy rates to 69.3% in the year ended December 31, 2010 when compared to 64.0% in the corresponding period in 2009. REVPAR at Same-Store Owned Hotels in North America increased 11.6% for the year ended December 31, 2010 when compared to the correspond corre sponding ing period of 2009. REVPAR growth was part particula icularly rly strong at our owned hotels in New York, New York, Chicago, Illinois, Toronto, Canada and New Orleans, Louisiana. REVPAR at our international Same-Store Owned Hotels increased by 10.5% for the year ended December 31, 2010 when compared to the corresponding period per iod of 200 2009. 9. REVP REVPAR AR for Sam Same-S e-Stor toree Own Owned ed Hot Hotels els int intern ernati ationa onall lly y inc increa reased sed 11. 11.6% 6% exc exclud luding ing the unfavorable effects of foreign currency translation. The increase in management fees, franchise fees and other income was primarily a result of a $59 million or 9.4% increase in management and franchise revenue to $689 million for the year ended December 31, 2010 compared to $630 million in the corresponding period in 2009. Management fees increased $53 million or 14.9% and fra franch nchise ise fee feess inc increa reased sed $23 mil millio lion n or 16. 16.7% 7% com compar pared ed to the cor corres respon pondin ding g per period iod of 200 2009. 9. The These se increases were due to growth in REVPAR at existing hotels as well as the net addition of 27 managed and 65 franchised hotels to our system since the beginning of 2009. Total Tot al vac vacati ation on own owners ership hip and res reside identi ntial al sal sales es and ser servic vices es rev revenu enuee inc increa reased sed 2.9 2.9% % to $53 $538 8 mil millio lion n compared to $523 million in 2009 primarily driven by the impact of ASU 2009-17. Originated contract sales of VOI inventory decreased 3.1% for the year ended December 31, 2010 when compared to the corresponding period in 2009. This decline was primarily driven by lower tour flow which was down 6.8% for the year ended December 31, 2010 when compared to the corresponding period in 2009. The decline in tour flow was a result of the economic climate and resulting closure of fractional sales centers in the latter part of 2009. Additionally, the average avera ge contr contract act amoun amountt per vacation ownership unit sold decreased decreased 6.0% to appro approxima ximately tely $15,000, driven by price reductions and inventory mix. Residential revenue increased approximately $6 million in the year ended December 31, 2010 primarily due to the recognition of $4 million of marketing and license fees associated with a new hotel and residential project in Guangzhou, China which opened in 2010. Other revenues from managed and franchised properties increased primarily due to an increase in payroll costs commensurate with increased occupancy at our managed hotels and payroll costs for new hotels entering the system. These revenues represent reimbursements of costs incurred on behalf of managed hotel and vacation ownership properties and franchisees and relate primarily to payroll costs at managed properties where we are the employ emp loyer. er. Sin Since ce the rei reimbu mburse rsemen ments ts are mad madee bas based ed upo upon n the cos costs ts inc incurr urred ed wit with h no add added ed mar margin gin,, the these se revenues and corresponding expenses have no effect on our operating income and our net income. Year Ended December 31, 2010
Year Ended December 31, 2009
Increase / (decrease) from prior year
Percentage change from prior year
(in millions)
Selling, General, Administrative and Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$344
$314
$30
9.6%
The increase in selling, general, administrative and other expenses for the year ended December 31, 2010 was primarily a result of higher incentive based compensation when compared to the corresponding period of 2009. The increase was partially offset by the reimbursement of previously expensed legal costs in connection
34
with the favorable settlement of a lawsuit and an $8 million reversal of a guarantee liability which was favorably settled during the period (see Note 25). Year Ended December 31, 2010
Year Ended December 31, 2009
Increase / (decrease) from prior year
Percentage change from prior year
(in millions)
Restructuring, Goodwill Impairment and Other Special Charges (Credits), Net . . . . .
$(75)
$379
$454
n/m
During the year ended December 31, 2010, we received cash proceeds of $75 million in connection with the favorable settlement of a lawsuit. We recorded this settlement, net of the reimbursement of legal costs incurred in connection conne ction with the litigation, litigation, as a credi creditt to restructuring restructuring,, goodw goodwill ill impairment, impairment, and other special special (cred (credits) its) charges. Additionally, we recorded an $8 million credit related to the reversal of a reserve associated with an acquisition in 1998 as the liability is no longer deemed necessary. During the yea During yearr end ended ed Dec Decemb ember er 31, 200 2009, 9, we com comple pleted ted a com compre prehen hensiv sivee rev review iew of our vac vacati ation on ownership business. We decided not to develop certain vacation ownership sites and future phases of certain existing projects. As a result of these decisions, we recorded a primarily non-cash impairment charge of $255 million in the restructuring, goodwill impairment and other special charges (credits) line item. Additionally, we recorded a $90 million non-cash charge for the impairment of goodwill in the vacation ownership reporting unit. Throughout 2009, we also recorded restructuring and other special charges of $34 million related to our ongoing initiative of rationalizing our cost structure. These charges related to severance charges and costs to close vacation ownership sales galleries. Year Ended December 31, 2010
Year Ended December 31, 2009
Increase / (decrease) from prior year
Percentage change from prior year
(in millions)
Depreciation and Amortization Amorti zation . . . . . . . . . . . .
$285
$309
$(24)
7.8%
The dec decrea rease se in dep deprec reciat iation ion exp expens ensee for the yea yearr end ended ed Dec Decemb ember er 31, 201 2010, 0, whe when n com compar pared ed to the corresponding period of 2009, was due to reduced depreciation expense from sold hotels offset by additional capital expenditures made in the last twelve months. Year Ended December 31, 2010
Year Ended December 31, 2009
Increase / (decrease) from prior year
Percentage change from prior year
(in millions)
Operating Income . . . . . . . . . . . . . . . . . . . . . .
$600
$26
$574
n/m
The in The incr crea ease se in op oper erat atin ing g in inco come me fo forr th thee ye year ar en ende ded d De Dece cemb mber er 31 31,, 20 2010 10,, wh when en co comp mpar ared ed to th thee corresponding period of 2009, was primarily related to the restructuring, goodwill impairments and other special charge cha rgess (cr (credi edits) ts) favorabl favorablee ben benefi efitt of $75 million million in 201 2010 0 com compar pared ed to a cha charge rge of $37 $379 9 mil millio lion n in 200 2009. 9. Additi Add itiona onally lly,, the inc increa rease se in ope operat rating ing inc income ome was fav favora orably bly imp impact acted ed by im impro proved ved ope operat rating ing res result ultss in primarily all of our revenue streams. Year Ended December 31, 2010
Year Ended December 31, 2009
Increase / (decrease) from prior year
Percentage change from prior year
(in millions)
Equity Earnings (Losses) and Gains and Losses from Unconsolidated Ventures, Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10
$(4)
$14
n/m
The increase in equit equity y earni earnings ngs and gains and losse lossess from unconsolidat unconsolidated ed join jointt ventu ventures res for the year ended December 31, 2010, when compared to the same period of 2009, was primarily due to improved operating results at seve several ral properties properties owned by join jointt ventu ventures res in which we hold non-controll non-controlling ing interests. interests. The increase also 35
related to a charge of approximately $4 million, in 2009, related to an unfavorable mark-to-market adjustment on a US dollar denominated loan in an unconsolidated venture in Mexico. Year Ended December 31, 2010
Year Ended December 31, 2009
Increase / (decrease) from prior year
Percentage change from prior year
(in millions)
Net Interest Expense . . . . . . . . . . . . . . . . . . . .
$236
$227
$9
4.0%
The increase in net interest expense was primarily due to interest of $27 million on securitized debt related to the adoption of ASU No. 2009-17, partially offset by certain early debt extinguishment costs of $21 million that were incurred in 2009. Our weighted average interest rate was 6.86% at December 31, 2010 as compared to 6.73% at December 31, 2009. Year Ended December 31, 2010
Year Ended December 31, 2009
Increase / (decrease) from prior year
Percentage change from prior year
(in millions)
Loss on Asset Dispositions Di spositions and Impairments, Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(39)
$(91)
$52
n/m
During the year ended December 31, 2010, we recorded a net loss on dispositions of approximately $39 million, primarily related to a $53 million loss on the sale of one wholly-owned hotel (see Note 5) as well as a $4 million mill ion impairment impairment of fixed asset assetss that were being retired retired in connection connection with a signi significan ficantt renov renovation ation of a wholly-owned hotel, and a $2 million impairment on one hotel whose carrying value exceeded its fair value. These charges were partially offset by a gain of $14 million from insurance proceeds received for a claim at a wholly-owned hotel that suffered damage from a storm in 2008, a $5 million gain as a result of an acquisition of a controlling interest in a joint venture in which we previously held a non-controlling interest (see Note 4) and a $4 million gain from the sale of non-hotel assets. During the year ended December 31, 2009, we recorded a net loss on dispositions of approximately $91 million, primarily related to $41 million of impairment charges on six hotels whose carrying values exceeded their fair values, a $22 million impairment of our retained interests in vacation ownership mortgage receivables, a $13 mil millio lion n imp impair airmen mentt of an inv invest estmen mentt in a hot hotel el man manage agemen mentt con contra tract ct tha thatt was can cancel celled led,, a $5 mil millio lion n impairment of certain technology-related fixed assets and a $4 million loss on the sale of a wholly-owned hotel. Year Ended December 31, 2010
Year Ended December 31, 2009
Increase / (decrease) from prior year
Percentage change from prior year
(in millions)
Income Tax (Benefit) Expense . . . . . . . . . . . .
$27
$(293)
$320
n/m
The $320 million increase in income tax expense primarily related to 2009 items that did not recur in 2010, including a $120 million deferred tax benefit for an Italian tax incentive program in which the tax basis of land and building for the hotels we owned in Italy was stepped up to fair value in exchange for paying a current tax of $9 million, a $51 million tax benefit related to previously unrecognized foreign tax credits for prior tax years and a $10 million benefit to reverse the deferred interest accrual associated with the deferral of taxable income. The remaining increase was primarily due to higher pretax income in 2010, partially offset by a benefit of $42 million related to an IRS audit.
36
Discontinued Operations, Net of Tax
During the year ended December 31, 2010, we recorded a tax benefit of $134 million related to the final settlement with the IRS regarding the disposition of World Directories, Inc. and a pre-tax gain of approximately $3 million ($36 million after tax) related to the sale of one wholly-owned hotel. The tax benefit was related to the realization of a high tax basis in this hotel that was generated through a previous transaction. During the year ended December 31, 2009, we sold our Bliss spa business and other non-core assets for cash proceeds proce eds of $227 million. million. Revenu Revenues es and expenses from the Bliss spa busin business, ess, together together with revenues revenues and expenses from one hotel that was sold in 2010, were reported in discontinued operations resulting in a loss of $2 million, net of tax. In addition, the net gain on the assets sold in 2009 and the one hotel held for sale at December 31, 2009 has been recorded in discontinued operations resulting in income of $76 million, net of tax.
37
LIQUIDITY AND CAPITAL RESOURCES Cash From Operating Activities
Cash flow from operating operating activ activitie itiess is gener generated ated primarily primarily from management management and franc franchise hise revenues, operating income from our owned hotels and resorts and sales of VOIs and residential units. Other sources of cash are distributions from joint ventures, servicing financial assets and interest income. These are the principal sources of cash used to fund our operating expenses, interest payments on debt, capital expenditures, dividend payments payme nts and prope property rty and inco income me taxes taxes.. We beli believe eve that our exis existing ting borrowing borrowing avail availabili ability ty toget together her with capacity for additional borrowings and cash from operations will be adequate to meet all funding requirements for our operating expenses, principal and interest payments on debt, capital expenditures, dividends and share repurchases. The majority of our cash flow is derived from corporate and leisure travelers and is dependent on the supply and demand in the lodging industry. In a recessionary economy, we experience significant declines in business and leisure travel. travel. The impact of decli declining ning demand in the industry industry and higher hotel supply in key markets could have a material impact on our cash flow from operating activities. Our day day-to -to-da -day y ope operat ration ionss are fin financ anced ed thr throug ough h net wor workin king g cap capita ital, l, a pra practi ctice ce tha thatt is com common mon in our industry. The ratio of our current assets to current liabilities was 1.27 and 1.21 as of December 31, 2011 and 2010, respectively. Consistent with industry practice, we sweep the majority of the cash at our owned hotels on a daily basis and fund payables as needed by drawing down on our existing revolving credit facility. The majority of our restricted cash balance relates to cash used as collateral to reduce fees on letters of credit. Additionally, state and local regulations governing sales of VOIs and residential properties allow the purchaser of such a VOI or property to rescind the sale subsequent to its completion for a pre-specified number of days. In addition, cash payments received from buyers of units under construction are held in escrow during the period prior to obtaining a certificate of occupancy. These payments and the deposits collected from sales during the rescission period are another component of our restricted cash balances in our consolidated balance sheets. At December 31, 2011 and 2010, we had short-term restricted cash balances of $232 million and $53 million, respectively. During 2011, we completed the securitization of vacation ownership receivables resulting in proceeds of approximately $177 million and received a tax refund from the IRS of $45 million (see Note 14). Cash From Investing Activities
Gross capital spending during the full year ended December 31, 2011 was as follows (in millions): Maintenance Capital Expenditures (1):
Owned, Leased Owned, Leased and and Conso Consolid lidate ated d Joint Joint Ventu Venture re Hotel Hotelss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12 $129 9 Corpor Cor porate ate and and info inform rmati ation on techn technolo ology gy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124 Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
253 25 3
Vacation Ownership and Residential Capital Expenditures (2):
Net capita capitall expenditu expenditures res for for inventor inventory y (excludin (excluding g St. Regis Regis Bal Bal Harbour Harbour)) . . . . . . . . . . . . . . . . Capita Cap itall expen expendit diture uress for for inven inventor tory y — St. St. Regis Regis Bal Har Harbou bourr . . . . . . . . . . . . . . . . . . . . . . . . . . Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(43) 58
Development Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15 209 20 9
Total Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$477 $4 77
(1) Maintenan Maintenance ce capit capital al expen expenditur ditures es incl includes udes renovations, renovations, asset repl replaceme acements nts and impr improveme ovements nts that exten extend d the useful life of the asset. (2) Represents gross inventory capital expenditures of $165 less cost cost of sales of $150. 38
Gross capital spending during the year ended December 31, 2011 included approximately $253 million of maintenance capital, and $209 million of development capital. Investment spending on gross vacation ownership intere int erest st and res reside identi ntial al inv invent entory ory was $16 $165 5 mil millio lion, n, pri primar marily ily rel relate ated d to the con constr struct uction ion of our hot hotel el and reside res identi ntial al pro projec jectt in Bal Har Harbou bour, r, Flo Florid rida. a. Our cap capita itall exp expend enditu iture re pro progra gram m inc includ ludes es bot both h off offens ensive ive and defensive capital. Defensive spending is related to maintenance and renovations that we believe are necessary to stay competitive in the markets we are in. Other than capital to address fire and life safety issues, we consider defensive capital to be discretionary, although reductions to this capital program could result in decreases to our cash flow from operations, operations, as hotel hotelss in certain markets could become less desir desirable. able. The offen offensive sive capital expend exp enditu itures res,, whi which ch are primaril primarily y rel relate ated d to new pro projec jects ts tha thatt we exp expect ect wil willl gen genera erate te a ret return urn,, are als also o considered discretionary. We currently anticipate that our defensive capital expenditures for the full year 2012 (excluding vacation ownership and residential inventory) will be approximately $200 million for maintenance, reno re nova vati tion ons, s, an and d te tech chno nolo logy gy ca capi pita tal. l. In ad addi diti tion on,, fo forr th thee fu full ll ye year ar 20 2012 12,, we cu curr rren entl tly y ex expe pect ct to sp spen end d approximately $375 million for investment projects, various joint ventures and other investments. In order to secure management or franchise agreements, we have made loans to third-party owners, minority investments in joint ventures and provided certain guarantees and indemnifications related thereto. See Note 25 of the consolidated financial statements for discussion regarding the amount of loans we have outstanding with owners own ers,, unf unfund unded ed loa loan n com commi mitme tments nts,, equ equity ity and oth other er pot potent ential ial con contri tribut bution ions, s, sur surety ety bon bonds ds out outsta standi nding, ng, perfor per forman mance ce gua guaran rantee teess and ind indemn emnifi ificat cation ionss we are obl obliga igated ted und under, er, and inv invest estmen ments ts in hot hotels els and joi joint nt ventures. We intend to finance the acquisition of additional hotel properties (including equity investments), hotel renovation renov ations, s, VOI and resi residenti dential al const construct ruction, ion, capit capital al impr improveme ovements, nts, technology technology spend and other core and ancillary business acquisitions and investments and provide for general corporate purposes, (including dividend payments and share repurchases) through our credit facility described below, the net proceeds from dispositions, the assumption of debt, and from cash generated from operations. We periodically review our business to identify properties or other assets that we believe either are non-core (including hotels where the return on invested capital is not adequate), no longer complement our business, are in markets which may not benefit us as much as other markets during an economic recovery or could be sold at significant premiums. We are focused on enhancing real estate returns and monetizing investments. Since 200 Since 2006, 6, we hav havee sol sold d 65 hot hotels els rea realiz lizing ing pro procee ceeds ds of app approx roxim imate ately ly $5. $5.6 6 bil billio lion n in num numero erous us transactions (see Note 5 of the consolidated financial statements). There can be no assurance, however, that we will be able to complete future dispositions on commercially reasonable terms or at all. During the year ended December 31, 2011 asset sales resulted in gross cash proceeds from investing activities of approximately $280 million. In late 2011, we received certificates of occupancy for our St. Regis Bal Harbour project. As a result, we began closings of units that had previously been sold and, in the fourth quarter of 2011, $74 million of cash was released from escrow accounts related to these closings.
39
Cash Used for Financing Activities
The following is a summary of our debt portfolio (including capital leases) as of December 31, 2011: Amount Outstanding at December 31, 2011 (a)
Weighted Average Interest Rate at December 31, 2011
(Dollars in millions)
Weighted Average Maturity (In years)
Floating Rate Debt
Revolving Credit Facility . . . . . . . . . . . . . . . . . . . . . . . . . Mortgages and Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest Rate Swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
— 40 400
— 5.02% 4.69%
1. 9 5. 0
Total/Average . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 440
4.72%
5. 0
Senior Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgages and Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest Rate Swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,093 64 (400)
7.08% 7.46% 6.86%
3. 9 11. 5
Total/Average . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,757
7.14%
4. 1
$2,197
6.66%
4. 2
Fixed Rate Debt
Total Debt
Total Debt and Average Terms . . . . . . . . . . . . . . . . . . . . .
(a) Excludes Excludes approximate approximately ly $432 mill million ion of our share of uncon unconsoli solidated dated joint venture venture debt and secu securiti ritized zed vacation ownership debt of $532 million, all of which is non-recourse. For specifics related to our financing transactions, issuances, and terms entered into for the years ended December 31, 2011 and 2010, see Note 15 of the consolidated financial statements. We have evaluated the commit com mitmen ments ts of eac each h of the len lender derss in our Rev Revolv olving ing Cre Credit dit Fac Facili ility ty (th (thee “Fa “Facil cility ity”) ”) whi which ch mat mature uress on November 15, 2013. In addition, we have reviewed our debt covenants and do not anticipate any issues regarding the availability of funds under the Facility. On December 15, 2011, we redeemed all $605 million of our 7.875% Senior Notes, which would have matured in May 2012. We paid $628 million in connection with this early redemption, including $16 million for the call premium and other associated costs (see Note 15). Due to the adoption of ASU Nos. 2009-16 and 2009-17, as discussed in Notes 2, 9, and 10, our 2011 cash flows from financing activities include the borrowings and repayments of securitized vacation ownership debt. December 31, 2011
December 31, 2010
(in millions)
Gross Unsecuritized Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,1 $2 ,197 97
less: cash (including restricted cash of $212 million in 2011 and $44 mil illi lion on in 20 2010 10)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(666 (6 66))
(797 (7 97))
Net Unsecuritized Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,5 $1 ,531 31
$2, 2,06 060 0
Gross Securitized Debt (non-recourse) . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 532
$ 494
less: cash restricted for securitized debt repayments (not included above) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(22)
$2, 2,85 857 7
(19)
Net Securitized Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 510
$ 475
Total Net Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,0 $2 ,041 41
$2, 2,53 535 5
40
The cost of borrowing of the Facilities is determined by a combination of our leverage ratios and credit ratings. Changes in our credit ratings may result in changes in our borrowing costs. Downgrades in our credit ratings would likely increase the relative costs of borrowing and reduce our ability to issue long-term debt, whereas upgrades would likely reduce costs and increase our ability to issue long-term debt. A credit rating is not a recommendation to buy, sell or hold securities, is subject to revision or withdrawal at any time by the assigning rating organization and should be evaluated independently of any other rating. On February 1, 2012, our longterm debt rating was upgraded to investment grade by one of the major credit rating agencies. Our Facility is used to fund general corporate cash needs. As of December 31, 2011, we have availability of over $1.5 billion under the Facility. The Facility allows for multi-currency borrowing and, if drawn upon, would have an applicable margin, inclusive of the commitment fee, of 2.5% plus the applicable currency LIBOR rate. Our ability to borrow under the Facility is subject to compliance with the terms and conditions under the Facility, including certain leverage and coverage covenants. Based upon the curr current ent level of operations, operations, manag managemen ementt belie believes ves that our cash flow from opera operations tions,, togeth tog ether er wit with h our sig signif nifica icant nt cas cash h bal balanc ances, es, ava availa ilable ble bor borrow rowing ingss und under er the Fac Facili ility, ty, and our cap capaci acity ty for additional borrowings will be adequate to meet anticipated requirements for scheduled maturities (primarily our $500 million of Senior Notes due in early 2013), dividends, working capital, capital expenditures, marketing and advertising program expenditures, other discretionary investments, interest and scheduled principal payments and share repurchases for the foreseeable future. However, there can be no assurance that we will be able to refinance our indebtedness as it becomes due and, if refinanced, on favorable terms. Approximately $159 million, included in our cash balance above, is deemed to be permanently invested in foreign countries and we would be subject to income taxes if we repatriated these amounts. In addition, there can be no assurance that in our continuing busine bus iness ss we wil willl gen genera erate te cas cash h flo flow w at or abo above ve his histor torica icall lev levels els,, tha thatt cur curren rently tly ant antici icipat pated ed res result ultss wil willl be achieved or that we will be able to complete dispositions on commercially reasonable terms or at all. If we are unable to generate sufficient cash flow from operations in the future to service our debt, we may be required to sell additional assets at lower than preferred amounts, reduce capital expenditures, refinance all or a portion of our exis existing ting debt or obta obtain in addi additio tional nal financing financing at unfa unfavora vorable ble rates. Our abi ability lity to mak makee sche schedule duled d pri princip ncipal al payments, to pay interest on or to refinance our indebtedness depends on our future performance and financial results, which, to a certain extent, are subject to general conditions in or affecting the hotel and vacation ownership industries and to general economic, political, political, financia financial, l, competitive, legislative legislative and regulatory factors beyond our control. We had the following contractual obligations
(1)
outstanding as of December 31, 2011 (in millions):
Total
Due in Less Than 1 Year
Due in 1-3 Years
Due in 3-5 Years
Due After 5 Years
Debt(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest payable . . . . . . . . . . . . . . . . . . . . . Capital lease obligations (3) . . . . . . . . . . . . Operating lease obligation . . . . . . . . . . . . . Unconditional purchase obligations (4) . . . Other long-term obligations . . . . . . . . . . .
$2,195 659 2 1,455 174 1
$ 3 155 — 84 66 1
$1,007 263 — 177 93 —
$494 134 — 170 15 —
$ 691 107 2 1,024 — —
Total contractual obligations . . . . . . . . . . .
$4,486
$309
$1,540
$813
$1,824
(1) This table excludes excludes unrecognized unrecognized tax benefits that would require require cash outlays for $172 million, million, the timing of which is uncertain. Refer to Note 15 of the consolidated financial statements for additional discussion on this matter. In addition, the table excludes amounts related to the construction of our St. Regis Bal Harbour project that has a total project project cost of $759 million, million, of which $714 million has been paid through December December 31, 2011. (2) Excludes securitized securitized debt of $532 million, all all of which is non-recourse. (3) Exclu Excludes des subleas subleasee income income of $0 mill million. ion. (4) Includ Included ed in the these se bal balanc ances es are commitme commitments nts that may be rei reimbu mburse rsed d or sat satisf isfied ied by our managed managed and franchised properties. 41
We had the following commercial commitments outstanding as of December 31, 2011 (in millions):
Standby letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
Less Than 1 Ye Year ar
$171
$168
1-3 13 Ye Year arss
3-5 35 Ye Year arss
$—
After 5 Years
$—
$3
A dividend of $0.50 per share was paid in December 2011 to shareholders of record as of December 15, 2011. A dividend of $0.30 per share was paid in December 2010 to shareholders of record as of December 16, 2010. Off-Balance Sheet Arrangements
Our off off-ba -balan lance ce she sheet et arr arrang angeme ements nts inc includ ludee let letter terss of cre credit dit of $17 $171 1 mil millio lion, n, unc uncond onditi itiona onall pur purcha chase se obligations of $167 million and surety bonds of $21 million. These items are discussed in greater detail in Item 8, Financial Statements and Supplementary Data, and in the Notes. Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
In limited instances, we seek to reduce earnings and cash flow volatility associated with changes in interest rates and foreign currency exchange rates by entering into financial arrangements intended to provide a hedge against a portion of the risks associated with such volatility. We continue to have exposure to such risks to the extent they are not hedged. We enter into a derivative financial arrangement to the extent it meets the objectives described above, and we do not engage in such transactions for trading or speculative purposes. At December 31, 2011, we were party to the following derivative instruments: • Forward contracts to hedge forecasted forecasted transactions for management management and franchise fee revenues revenues earned in foreign forei gn curre currencies ncies.. The aggre aggregate gate dollar equi equivalen valentt of the notional amounts was appro approxima ximately tely $34 million. These contracts expire in 2012. • Forwar Forward d for foreig eign n exc exchan hange ge con contra tracts cts to man manage age the for foreig eign n cur curren rency cy exp exposu osure re rel relate ated d to cer certai tain n intercompa inter company ny loans not deem deemed ed to be perm permanent anently ly inves invested. ted. The aggre aggregate gate dollar equivalent equivalent of the notional amounts of the forward contracts was approximately $659 million. These contracts expire in 2012. The following table sets forth the scheduled maturities and the total fair value of our debt portfolio and other financial instruments as of December 31, 2011 (in millions, excluding average exchange rates): Expected Maturity or Transaction Date At December 31, 2012
2013
2014
2015
2016
Thereafter
$ 3
$254
$351
$453
$ 4
$692
$—
$251
$151
$
2
$35
$
$34
$ —
$ —
$ —
$—
$ —
Total at December 31, 2011
Total Fair Value at December 31, 2011
Liabilities
Fixed rate . . . . . . . . . . . . . . . . . . . . . . Average interest rate . . . . . . . . . . . . . Floating rate . . . . . . . . . . . . . . . . . . . . Average interest rate . . . . . . . . . . . . . Forward Foreign Exchange Hedge Contracts: Fixed (EUR) to Fixed (USD) . . . . . . . Average Exchange rate . . . . . . . . . . .
42
1
$1,757 7.14% $ 440 4.72%
$
3 1.44
$2,005 $ 440
$
3
Expected Maturity or Transaction Date At December 31, 2012
2013
2014
2015
2016
Thereafter
$104
$ —
$ —
$ —
$ —
$ —
$ 56
$ —
$ —
$ —
$ —
$ —
$ 14
$ —
$ —
$ —
$ —
$ —
$ 77
$ —
$ —
$ —
$ —
$ —
$
4
$ —
$ —
$ —
$ —
$ —
$ 38
$ —
$ —
$ —
$ —
$ —
$283
$ —
$ —
$ —
$ —
$ —
$ 65 $ 18
$ — $ —
$ — $ —
$ — $ —
$ — $ —
$ — $ —
Total at December 31, 2011
Total Fair Value at December 31, 2011
Forward Foreign Exchange Contracts:
Fixed (EUR) to Fixed (USD) . . . . . Average Exchange rate . . . . . . . . . . Fixed (CLP) to Fixed (USD) . . . . . . Average Exchange rate . . . . . . . . . . Fixed (THB) to Fixed (USD) . . . . . Average Exchange rate . . . . . . . . . . Fixed (JPY) to Fixed (USD) . . . . . . Average Exchange rate . . . . . . . . . . Fixed (MXP) to Fixed (USD) . . . . . Average Exchange rate . . . . . . . . . . Fixed (AUD) to Fixed (USD) . . . . . Average Exchange rate . . . . . . . . . . Fixed (CAD) to Fixed (USD) . . . . . Average Exchange rate . . . . . . . . . . Fixed (GBP) to Fixed (EUR) . . . . . Fixed (JPY) to Fixed (THB) . . . . . . Item 8.
$ — 1. 30 $ — . 00 $ — . 03 $ — . 01 $ — . 07 $ — . 98 $ (1) . 98 $ 1 $ —
$ — $ — $ — $ — $ — $ — $ (1 ( 1) $ 1 $ —
Financial Statements and Supplementary Data.
The financial statements and supplementary data required by this item appear beginning on page F-1 of this Annual Report and are incorporated herein by reference. Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable. Item 9A. Controls and Procedures.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive and principal financial officers, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13(a)-15(e) and 15(d)-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based upon the foregoing evaluation, our principal executive and principal financial officers concluded that our disclosure controls and procedures were effective and operating to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and to provide reasonable assurance that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. There has been no change in our internal control over financial reporting (as defined in Rules 13(a)-15(f) and 15( 15(d)d)-15( 15(f) f) und under er the Exc Exchan hange ge Act Act)) tha thatt occ occurr urred ed dur during ing the period period cov covere ered d by thi thiss rep report ort that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Management’s Report on Internal Control over Financial Reporting and the Report of the Corporation’s Independent Registered Public Accounting Firm are set forth in Part II of the Annual Report and are incorporated herein by reference . 43
Item 9B. Other Information.
Not applicable. PART III Item 10.
Directors, Executive Officers and Corporate Governance.
Information regarding directors, executive officers and corporate governance will be included in our proxy statement for the 2012 Annual Meeting of Stockholders (the “Proxy Statement”). The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the close of our fiscal year ended December 31, 2011 and such information is incorporated herein by reference. Item 11.
Executive Compensation.
Informati Inform ation on reg regard arding ing exe execut cutive ive com compen pensat sation ion wil willl be inc includ luded ed in our Pro Proxy xy Sta Statem tement ent.. The Pro Proxy xy Statement will be filed with the Securities and Exchange Commission within 120 days after the close of our fiscal year ended December 31, 2011 and such information is incorporated herein by reference. Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Informati Inform ation on reg regard arding ing sec securi urity ty own owners ership hip of cer certai tain n ben benefi eficia ciall own owners ers and man manage agemen mentt and rel relate ated d stockh sto ckhold older er mat matter terss wil willl be inc includ luded ed in our Proxy Sta Statem tement ent.. The Pro Proxy xy Sta Statem tement ent wil willl be fil filed ed wit with h the Securities and Exchange Commission within 120 days after the close of our fiscal year ended December 31, 2011 and such information is incorporated herein by reference. Item 13.
Certain Relationships and Related Transactions and Director Independence.
Information Informati on regar regarding ding cert certain ain rela relations tionships hips and rela related ted trans transactio actions ns and dire director ctor indep independen endence ce will be includ inc luded ed in our Pro Proxy xy Sta Statem tement ent.. The Pro Proxy xy Sta Statem tement ent wil willl be fil filed ed wit with h the Sec Securi uritie tiess and Exc Exchan hange ge Commission within 120 days after the close of our fiscal year ended December 31, 2011 and such information is incorporated herein by reference. Item 14.
Principal Accounting Fees and Services.
Information regarding principal accounting fees and services will be included in our Proxy Statement. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the close of our fiscal year ended December 31, 2011 and such information is incorporated herein by reference. Item 15.
Exhibits, Financial Statement Schedules.
(a) The following following document documentss are filed as part part of this Annual Annual Report: Report: 1-2.. The fin 1-2 financ ancial ial sta statem tement entss and fin financ ancial ial sta statem tement ent sch schedu edule le lis listed ted in the Ind Index ex to Fin Financ ancial ial Statements and Schedule following the signature pages hereof. 3.
Exhi Ex hibi bits ts::
44
Exhibit Number
2.1
2.2
3.1 3.2
3.3 3. 3
4.1 4.2
4.3
4.4
4.5
4.6
4.7
4.8 4.9
4.10
Description of Exhibit
Format For mation ion Agr Agreem eement ent,, dated dated as as of Nov Novemb ember er 11, 11, 1994 1994,, among among the Com Compan pany, y, Star Starwoo wood d Capit Capital al and and the Starwood Partners (incorporated by reference to Exhibit 2 to the Company’s Current Report on Form 8-K dated November 16, 1994). (The SEC file number of all filings made by the Company pursuant to the Securities Exchange Act of 1934, as amended, and referenced herein is 1-7959). Form For m of Ame Amendm ndment ent No. 1 to For Format mation ion Agr Agreem eement ent,, dated dated as of of July July 1995 1995,, among among the Com Compan pany y and and the Starwood Partners (incorporate (incorporated d by refer reference ence to Exhib Exhibit it 10.23 to the Company’s Registratio Registration n Statement on Form S-2 filed with the SEC on June 29, 1995 (Registration Nos. 33-59155 and 3359155-01)). Arti Ar ticl cles es of Amen Amendm dmen entt and Rest Restat atem emen entt of the Comp Compan any, y, as of May May 30, 2007 2007 (inc (incor orpo pora rate ted d by reference to Appendix A to the Company’s 2007 Notice of Annual Meeting and Proxy Statement). Amende Ame nded d and and Restat Restated ed Bylaw Bylawss of the Comp Company any,, as amen amended ded and res restat tated ed throu through gh April April 10, 2006 2006 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the SEC on April 13, 2006 (the “April 13 Form 8-K”). Amen Am endm dmen entt to Amen Amende ded d an and d Re Rest stat ated ed Byla Bylaws ws of the Comp Compan any, y, date dated d as of Marc March h 13 13,, 20 2008 08 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 18, 2008). Termin Ter minati ation on Agree Agreemen mentt dated dated as of April April 7, 2006 2006 betwe between en the the Compan Company y and the Trus Trustt (inco (incorpo rporat rated ed by reference to Exhibit 4.1 of the April 13 Form 8-K). Amen Am ende ded d and Rest Restat ated ed Righ Rights ts Agre Agreem emen ent, t, date dated d as of April April 7, 2006 2006,, betwe between en the the Compa Company ny and and American Stock Transfer and Trust Company, as Rights Agent (which includes the form of Amended and Res Restat tated ed Art Articl icles es Sup Supple plemen mentar tary y of the Ser Series ies A Jun Junior ior Par Partic ticipa ipatin ting g Pre Prefer ferred red Sto Stock ck as Exhibi Exh ibitt A, the form of Rig Rights hts Certific Certificate ate as Exh Exhibi ibitt B and the Sum Summar mary y of Rig Rights hts to Pur Purcha chase se Preferred Stock as Exhibit C) (incorporated by reference to Exhibit 4.2 of the April 13 Form 8-K). Amende Ame nded d and and Restat Restated ed Inden Indentur ture, e, dated dated as of of Novem November ber 15, 1995 1995,, as Amen Amended ded and Res Restat tated ed as as of December 15, 1995 between ITT Corporation (formerly known as ITT Destinations, Inc.) and the First National Bank of Chicago, as trustee (incorporated by reference to Exhibit 4.A.IV to the First Amendment to ITT Corporation’s Registration Statement on Form S-3 filed November 13, 1996). First Fir st Inden Indentur turee Supple Supplemen ment, t, dated dated as as of Dece Decembe mberr 31, 1998 1998,, among among ITT ITT Corpor Corporati ation, on, the the Compa Company ny and The Bank of New York (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on January 8, 1999). Second Sec ond Inde Indentu nture re Suppl Suppleme ement, nt, date dated d as of of April April 9, 9, 2006, 2006, among among the the Compa Company, ny, Sher Sherato aton n Holdin Holding g Corporation and Bank of New York Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.3 to the April 13 Form 8-K). Indent Ind enture ure,, dated dated as as of Apri Aprill 19, 19, 2002, 2002, among among the the Compa Company, ny, the the guar guarant antor or parti parties es named named the therei rein n and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s and Sheraton Holding Corporation’s Joint Registration Statement on Form S-4 filed with the SEC on November 19, 2002 (the “2002 Forms S-4”)). Inde In dent ntur ure, e, date dated d as of Septe Septemb mber er 13, 13, 2007, 2007, betw betwee een n the Comp Compan any y and the the U.S. U.S. Bank Bank Natio Nationa nall Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 17, 2007 (the “September 17 Form 8-K”)). Supple Sup pleme menta ntall Indent Indenture ure,, dated dated as of of Septe Septemb mber er 13, 13, 2007, 2007, betw between een the the Compa Company ny and and the U.S. U.S. Bank Bank National Association, Association, as trustee (incorporated (incorporated by reference to Exhibit 4.2 to the September 17 Form 8-K). Supp Su pple leme ment ntal al Inde Indent ntur uree No. 2, date dated d as of May 23, 23, 2008 2008,, betwe between en the the Compa Company ny and and U.S. U.S. Bank Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 28, 2008). Supple Sup plemen mental tal Inde Indentu nture re No. No. 3, dated dated as of of May 7, 7, 2009, 2009, betwe between en the the Compan Company y and the the U.S. U.S. Bank Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K files with the SEC on May 12, 2009).
45
Exhibit Number
4.11 4.1 1
10.1 10. 1
10.2 10. 2
10.3 10 .3
10.4 10.4 10.5 10. 5 10.6 10. 6
10.7
10.8 10.9 10 .9 10.10 10.11 10. 11 10.12 10.1 10 .13 3 10.14 10.15 10. 15
10.1 10 .16 6 10.17 10.1 10 .18 8
Description of Exhibit
Supple Sup plemen mental tal Inde Indentu nture re No. 4, 4, dated dated as of of Novemb November er 20, 20, 2009, 2009, betwe between en the the Compan Company y and the the U.S. U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 23, 2009). The reg regist istran rantt her hereby eby agr agrees ees to fil filee wit with h the Com Commis missio sion n a cop copy y of any ins instru trumen ment, t, inc includ luding ing indent ind enture ures, s, def defini ining ng the rig rights hts of lon long-t g-term erm deb debtt hol holder derss of the reg regist istran rantt and its con consol solida idated ted subsidiaries upon the request of the Commission. Third Thi rd Amende Amended d and Restate Restated d Limited Limited Partn Partners ership hip Agreem Agreement ent for for Operati Operating ng Partne Partnersh rship, ip, dated dated January 6, 1999, among the Company and the limited partners of Operating Partnership (incorporated by reference to Exhibit 10.2 to the 1998 Form 10-K). Form For m of Trade Trademar mark k Licens Licensee Agreem Agreement ent,, dated dated as of of Decemb December er 10, 10, 1997, 1997, betwe between en Starw Starwood ood Capi Capital tal and the Company (incorporated by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (the “1997 Form 10-K”)). Cred Cr edit it Agree Agreeme ment nt,, da date ted d as of Ap Apri rill 20 20,, 20 2010 10,, am amon ong g th thee Co Comp mpan any, y, certa certain in addit additio iona nall Do Doll llar ar Revolving Loan Borrowers, certain additional Alternate Currency Revolving Loan Borrowers, various Lenders, Deutsche Bank AG New York Branch, as Administrative Agent, JPMorgan Chase Bank, N.A., as Syndication Agent, Deutsche Bank Securities Inc., J.P. Morgan Securities Inc. and Banc of America Securities LLC, as Lead Arrangers and Book Running Managers, (the “Credit Agreement”) (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on April 22, 2010). First Fir st Ame Amendm ndment ent to Cre Credit dit Agr Agreem eement ent,, dated dated as of Mar March ch 23, 201 2011.+ 1.+ Second Sec ond Ame Amendm ndment ent to Cre Credit dit Agr Agreem eement ent,, dated dated as of Dec Decemb ember er 9, 2011 2011.. + Starwo Sta rwood od Hotels Hotels & Resor Resorts ts World Worldwid wide, e, Inc. Inc. 1999 LongLong-Ter Term m Incent Incentive ive Compe Compensa nsatio tion n Plan (the (the “1999 LTIP”) (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999 (the “1999 Form 10-Q2”)). * First Amend Amendment ment to the the 1999 1999 LTIP, LTIP, dated as of of August August 1, 2001 2001 (incor (incorporat porated ed by refer reference ence to Exhibi Exhibitt 10.1 to the Company’s Company’s Quarterly Report on Form 10-Q for the quarterly quarterly period ended Septe September mber 30, 2001). * Second Amendm Amendment ent to the 1999 LTIP (incor (incorporate porated d by by refere reference nce to Exhibi Exhibitt 10.2 10.2 to the 2003 10-Q1). * Form Fo rm of Non-Qu Non-Qual alif ifie ied d St Stoc ock k Op Opti tion on Agree Agreeme ment nt pursu pursuan antt to the 1999 1999 LT LTIP IP (inco (incorp rpor orat ated ed by reference to Exhibit 10.30 to the 2004 Form 10-K). * Form of of Restricte Restricted d Stock Agree Agreement ment pursu pursuant ant to the 1999 1999 LTIP LTIP (incorpor (incorporated ated by by reference reference to Exhibit Exhibit 10.31 to the 2004 Form 10-K). * Starwo Sta rwood od Hotels Hotels & Res Resort ortss Worldwid Worldwide, e, Inc. 2002 Long-T Long-Term erm Incent Incentive ive Compen Compensat sation ion Plan Plan (the “2002 LTIP”) (incorporated by reference to Annex B of the Company’s 2002 Proxy Statement). * First Amend Amendment ment to the the 2002 LTIP (inco (incorpora rporated ted by refe reference rence to Exhibit Exhibit 10.1 to to the 2003 10-Q1) 10-Q1).. * Form Fo rm of No Nonn-Qu Qual alif ifie ied d St Stoc ock k Op Opti tion on Ag Agre reem emen entt pu purs rsua uant nt to the 20 2002 02 LT LTIP IP (incor (incorpo pora rate ted d by reference to Exhibit 10.49 to the 2002 Form 10-K filed on February 28, 2003 (the “2002 10-K”)). * Form of of Restricte Restricted d Stock Agree Agreement ment pursu pursuant ant to the 2002 2002 LTIP LTIP (incorpor (incorporated ated by by reference reference to Exhibit Exhibit 10.35 to the 2004 Form 10-K). * 2004 200 4 Long-Ter Long-Term m Incenti Incentive ve Compens Compensati ation on Plan, Plan, amended amended and resta restated ted as of Decembe Decemberr 31, 2008 (“2004 (“200 4 LTIP” LTIP”)) (inco (incorpora rporated ted by refe reference rence to Exhib Exhibit it 10.3 to the Compa Company’s ny’s Current Report on Form 8-K filed with the SEC on January 6, 2009 (the “January 2009 8-K”)). * Form Fo rm of No Nonn-Qu Qual alif ifie ied d St Stoc ock k Op Opti tion on Ag Agre reem emen entt pu purs rsua uant nt to the 20 2004 04 LT LTIP IP (incor (incorpo pora rate ted d by reference to Exhibit 10.4 to the 2004 Form 10-Q2). * Form of of Restricte Restricted d Stock Agree Agreement ment pursu pursuant ant to the 2004 2004 LTIP LTIP (incorpor (incorporated ated by by reference reference to Exhibit Exhibit 10.38 to the 2004 Form 10-K). * Form Fo rm of No Nonn-Qu Qual alif ifie ied d St Stoc ock k Op Opti tion on Ag Agre reem emen entt pu purs rsua uant nt to the 20 2004 04 LT LTIP IP (incor (incorpo pora rate ted d by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed February 13, 2006 (the February 2006 Form 8-K”)). *
46
Exhibit Number
10.19 10.20
10.21 10.2 10 .22 2 10.23 10. 23
10.24 10. 24
10.25 10.26
10.27 10. 27
10.28
10.29 10. 29 10.30
10.31 10. 31 10.32 10. 32
10.33 10. 33 10.3 10 .34 4
10.35 10. 35 10.36 10.37 10.3 10 .38 8
Description of Exhibit
Form of of Restricte Restricted d Stock Agree Agreement ment pursu pursuant ant to the 2004 2004 LTIP LTIP (incorpor (incorporated ated by by reference reference to Exhibit Exhibit 10.1 to the February 2006 Form 8-K). * Form of Amended Amended and and Restate Restated d Non-Quali Non-Qualified fied Stock Stock Optio Option n Agreemen Agreementt pursuant pursuant to the the 2004 2004 LTIP (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2006 (the 2006 Form 10-Q2”)). * Form of Amended Amended and and Restate Restated d Restrict Restricted ed Stock Stock Agreeme Agreement nt pursuant pursuant to the the 2004 LTIP (incor (incorporat porated ed by reference to Exhibit 10.2 to the 2006 Form 10-Q2). * Annu An nual al In Ince cent ntiv ivee Pl Plan an fo forr Ce Cert rtai ain n Ex Exec ecut utiv ives es,, am amen ende ded d an and d re rest stat ated ed as of De Dece cemb mber er 20 2008 08 (incorporated by reference to Exhibit 10.2 to the January 2009 8-K). * Starwo Sta rwood od Hotels Hotels & Resorts Resorts Worldwi Worldwide, de, Inc. Inc. Amended Amended and Restat Restated ed Deferre Deferred d Compensa Compensatio tion n Plan, effective as of January 22, 2008 (incorporate by reference to Exhibit 10.35 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007). * Form For m of Ind Indemn emnifi ificat cation ion Agreeme Agreement nt between between the the Company Company and each each of its Direc Director torss and executiv executivee officers (incorporated by reference to Exhibit 10.10 to the Company’s Current Report on Form 8-K filed with the SEC on November 25, 2009). * Employment Emplo yment Agree Agreement, ment, date dated d as of of November November 13, 2003, 2003, between between the Compan Company y and Vasant Prabh Prabhu u (incorporated by reference to Exhibit 10.68 to the 2003 10-K). * Letterr Agreement Lette Agreement,, dated Augus Augustt 14, 2007, betwe between en the Compa Company ny and and Vasant Vasant Prabhu Prabhu (incor (incorporat porated ed by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed August 17, 2007 (the “August 17 Form 8-K”)). * Amendm Ame ndment ent,, dated as of Decembe Decemberr 30, 2008, to emplo employme yment nt agreem agreement ent betwee between n the Company Company and and Vasant Vas ant Pra Prabhu bhu (in (incor corpor porate ated d by ref refere erence nce to Exh Exhibi ibitt 10. 10.34 34 to the Com Compan pany’s y’s Ann Annual ual Rep Report ort on Form 10-K for the fiscal year ended December 31, 2008 (the “2008 Form 10-K”)). * Employment Emplo yment Agree Agreement, ment, dated as of Septe September mber 25, 2000, 2000, betwee between n the Compa Company ny and Kennet Kenneth h Siegel Siegel (incorporated by reference to Exhibit 10.57 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (the “2000 Form 10-K”)). * Letter Let ter Agreem Agreement ent,, dated July July 22, 2004 2004 between between the the Company Company and and Kenneth Kenneth Siegel Siegel (inco (incorpo rporat rated ed by reference to Exhibit 10.73 to the 2004 Form 10-K). * Letterr Agreemen Lette Agreement, t, dated dated August August 14, 2007, 2007, between between the Compan Company y and Kenne Kenneth th S. Siege Siegell (incorpo (incorporated rated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed August 17, 2007 (the “August 17 Form 8-K”)). * Amendm Ame ndment ent,, dated as of Decembe Decemberr 30, 2008, to emplo employme yment nt agreem agreement ent betwee between n the Company Company and and Kenneth S. Siegel (incorporated by reference to reference to Exhibit 10.43 to the 2008 Form 10-K). * Employ Emp loymen mentt Agreeme Agreement, nt, dated dated as of Augus Augustt 2, 2007, 2007, between between the the Company Company and and Bruce Bruce W. Duncan Duncan (incorporated by reference to Exhibit 10.5 to the Company’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2007). * Form For m of Restric Restricted ted Stock Stock Unit Agree Agreemen mentt between between the Compan Company y and Bruce Bruce W. Duncan Duncan pursuan pursuantt to the 2004 LTIP (incorporated by reference to Exhibit 10.2 to the 2007 Form 10-Q1). * Amen Am ende ded d an and d Re Rest stat ated ed Em Empl ploy oyme ment nt Ag Agre reem emen ent, t, da date ted d as of De Dece cemb mber er 30, 20 2008 08,, be betw twee een n th thee Comp Co mpan any y an and d Fr Frit itss va van n Pa Paas assc sche hen n (i (inc ncor orpo pora rate ted d by re refe fere renc ncee to Ex Exhi hibi bitt 10 10.5 .52 2 to th thee 20 2008 08 Form 10-K). * Form For m of Non-Quali Non-Qualifie fied d Stock Option Option Agreem Agreement ent betwee between n the Company Company and Frits Frits van van Paassche Paasschen n pursuant to the 2004 LTIP (incorporated by reference to Exhibit 10.5 to the 2007 Form 10-Q3). * Form of Restric Restricted ted Stock Stock Unit Unit Agreeme Agreement nt between between the the Company Company and and Frits Frits van van Paasschen Paasschen pursu pursuant ant to to the 2004 LTIP (incorporated by reference to Exhibit 10.6 to the 2007 Form 10-Q3). * Form of Restric Restricted ted Stock Stock Grant Grant between between the Company Company and Frits Frits van van Paassche Paasschen n pursuant pursuant to the the 2004 LTIP (incorporated by reference to Exhibit 10.7 to the 2007 Form 10-Q3). * Form Fo rm of Se Seve vera ranc ncee Ag Agre reem emen entt be betw twee een n th thee Co Comp mpan any y an and d ea each ch of Me Mess ssrs rs.. Si Sieg egel el and Prabhu Prabhu (incorporated by reference to Exhibit 10.57 to the 2008 Form 10-K). *
47
Exhibit Number
10.39
10.40 10. 40 10.41 10. 41 10.42 10.43 10.44 10. 44 10.45 12.1 12.1 21.1 21 .1 23.1 23 .1 31.1 31. 1 31.2 31. 2 32.1 32. 1 32.2 32. 2
Description of Exhibit
Letterr Agreement Lette Agreement,, dated dated August August 22, 22, 2008, 2008, between between the the Company Company and Matth Matthew ew Avril Avril (incorp (incorporate orated d by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2009 (the “2009 Form 10-Q1”). * Amendm Ame ndment ent,, dated as of Decembe Decemberr 30, 2008, to emplo employme yment nt agreem agreement ent betwee between n the Company Company and and Matthew Avril (incorporated by reference to Exhibit 10.2 to the 2009 Form 10-Q1). * Amendm Ame ndment ent,, dated as of Decembe Decemberr 15, 2011, to emplo employme yment nt agreem agreement ent betwee between n the Company Company and and Matthew Avril. *+ Amended Amend ed and and Restated Restated Sever Severance ance Agree Agreement ment,, dated dated as of Decemb December er 30, 30, 2008, 2008, between between the Compan Company y and Matthew Avril (incorporated by reference to Exhibit 10.3 to the 2009 Form 10-Q1). * Letterr Agreement Lette Agreement,, dated April 15, 2008, 2008, between between the Compan Company y and Simon Turne Turnerr (incorpo (incorporate rated d by reference to Exhibit 10.7 to the 2009 Form 10-Q1). * Amendm Ame ndment ent,, dated as of Decembe Decemberr 30, 2008, to emplo employme yment nt agreem agreement ent betwee between n the Company Company and and Simon Turner (incorporated by reference to Exhibit 10.8 to the 2009 Form 10-Q1). * Amended Amend ed and and Restated Restated Sever Severance ance Agree Agreement ment,, dated dated as of Decemb December er 30, 30, 2008, 2008, between between the Compan Company y and Simon Turner (incorporated by reference to Exhibit 10.9 to the 2009 Form 10-Q1). * Calcul Cal culati ation on of Rat Ratio io of Ear Earnin nings gs to Tot Total al Fix Fixed ed Cha Charge rges.+ s.+ List Li st of ou ourr Su Subs bsid idia iari ries es.. + Cons Co nsen entt of Er Erns nstt & Yo Youn ung g LL LLP. P. + Certif Cer tifica icatio tion n Pursuan Pursuantt to Rule Rule 13a-14 13a-14 under under the the Secur Securiti ities es Excha Exchange nge Act Act of 1934 1934 – Chief Chief Exec Executi utive ve Officer. + Certif Cer tifica icatio tion n Pursuan Pursuantt to Rule Rule 13a-14 13a-14 under under the the Securi Securitie tiess Exchang Exchangee Act of 1934 1934 – Chief Chief Fina Financi ncial al Officer. + Certif Cer tifica icatio tion n Pursua Pursuant nt to Sect Section ion 1350 1350 of of Chapte Chapterr 63 of Titl Titlee 18 of the the United United Stat States es Code Code – Chief Chief Executive Officer. + Certif Cer tifica icatio tion n Pursua Pursuant nt to Sect Section ion 1350 1350 of of Chapte Chapterr 63 of Titl Titlee 18 of the the United United Stat States es Code Code – Chief Chief Financial Officer. +
+ Filed herew herewith. ith. * Indicates management contract contract or compensatory plan or arrangement arrangement
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. STARWOOD HOTELS & RESORTS WORLD WIDE, INC.
By: / S / FRITS VAN PAASSCHEN Frits van Paasschen Chief Executive Officer and Director
Date: February 17, 2012 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated. Signature
Title
Date
Chief Chi ef Exe Execut cutive ive Off Office icerr and Dir Direct ector or
Februa Feb ruary ry 17, 201 2012 2
Chairman and Director
February 17, 2012
Executive Execut ive Vic Vicee Pre Presid sident ent and Chi Chief ef Financial Officer (Principal Financial Officer)
Februa Feb ruary ry 17, 201 2012 2
Febr Fe brua uary ry 17 17,, 20 2012 12
Alan M. Schnaid
Senior Seni or Vi Vice ce Pr Pres esid iden ent, t, Co Corp rpor orat atee Controller and Principal Accounting Officer
/s/
Director
February 17, 2012
Director
February 17, 2012
Director
February 17, 2012
Director
February 17, 2012
Director
February 17, 2012
Director
February 17, 2012
Director
February 17, 2012
Director
February 17, 2012
Director
February 17, 2012
/s/
FRITS VAN PAASSCHEN
Frits van Paasschen /s/
BRUCE W. D UNCAN
Bruce W. Duncan /s/
VASANT M. P RABHU
Vasant M. Prabhu /s/
ALAN M. S CHNAID
ADAM M. A RON
Adam M. Aron /s/
CHARLENE BARSHEFSKY
Charlene Barshefsky /s/
THOMAS E. C LARKE
Thomas E. Clarke /s/
CLAYTON C. D ALEY, J R.
Clayton C. Daley, Jr. /s/
LIZANNE GALBREATH
Lizanne Galbreath /s/
ERIC HIPPEAU
Eric Hippeau /s/
STEPHEN R. Q UAZZO
Stephen R. Quazzo /s/
THOMAS O. R YDER
Thomas O. Ryder /s/
KNEELAND C. Y OUNGBLOOD
Kneeland C. Youngblood 49
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. INDEX TO FINANCIAL STATEMENTS AND SCHEDULE Page
Managemen Manage ment’s t’s Repo Report rt on Inte Interna rnall Contro Controll over over Financ Financial ial Repo Reporti rting ng . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2 Report Rep ort of of Indepe Independe ndent nt Regis Register tered ed Publi Publicc Accoun Accountin ting g Firm Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3 Report Rep ort of of Indepe Independe ndent nt Regis Register tered ed Publi Publicc Accoun Accountin ting g Firm Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4 Consol Con solida idated ted Bala Balance nce Shee Sheets ts as as of Decem December ber 31, 31, 2011 2011 and and 2010 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5 Consolidate Consol idated d Statement Statementss of Income Income for for the Years Years Ended Ended December December 31, 2011, 2011, 2010 and and 2009 . . . . . . . . . . . F-6 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2011, 2010 and 2009 20 09 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7 F7 Consolidate Consol idated d Statemen Statements ts of Equity Equity for the the Years Years Ended Ended Decembe Decemberr 31, 2011, 2011, 2010 2010 and and 2009 . . . . . . . . . . . F-8 Consolidate Consol idated d Statemen Statements ts of Cash Cash Flows Flows for for the Years Ended Decem December ber 31, 31, 2011, 2011, 2010 and 2009 2009 . . . . . . . F-9 Notes Not es to to Financ Financial ial Stat Stateme ements nts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-10 F-10 Schedule: Schedu Sch edule le II II — Valuat Valuation ion and and Quali Qualifyi fying ng Accou Accounts nts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
F-1
Management’s Report on Internal Control over Financial Reporting
Managemen Manage mentt of Sta Starwo rwood od Hot Hotels els & Res Resort ortss Wor Worldw ldwide ide,, Inc Inc.. and its sub subsid sidiar iaries ies (“C (“Comp ompany any”) ”) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is define def ined d in Exc Exchan hange ge Act Rul Rulee 13a 13a-15 -15(f) (f) or 15( 15(d)d)-15( 15(f). f). Tho Those se rul rules es def define ine int intern ernal al con contro troll ove overr fin financ ancial ial reporting as a process designed to provide reasonable assurance regarding the reliability of financial reporting and the pre prepar parati ation on of fin financ ancial ial sta statem tement entss for ext extern ernal al pur purpos poses es in acc accord ordanc ancee wit with h gen genera erally lly acc accept epted ed accounting principles (“GAAP”) and includes those policies and procedures that: • Pertain to the maintenance of records that in reasonable reasonable detail accurately and fairly reflect reflect the transactions and dispositions of the assets of the Company; • Provide Provide reasonable reasonable assur assurance ance that the trans transactio actions ns are recor recorded ded as neces necessary sary to perm permit it the prepa preparati ration on of financial statements in accordance with GAAP, and the receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and • Provide reasonable assurance assurance regarding prevention or timely timely detection of unauthorized unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, Because limitations, internal control over fina financial ncial reporting reporting may not preve prevent nt or detec detectt misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate. Our management assessed the effectiveness of the Company’s internal controls over financial reporting as of December 31, 2011. In making this assessment, the Company’s management used the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on assessment and those criteria, management believes that, as of December 31, 2011, the Company’s internal control over financial reporting is effective. Management has engaged Ernst & Young LLP, the independent registered public accounting firm that audited the financial statements included in this Annual Report on Form 10-K, to attest to the Company’s internal control over financial reporting. The report is included herein.
F-2
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Starwood Hotels & Resorts Worldwide, Inc. We have audited Starwood Hotels & Resor Resorts ts Worl Worldwide dwide,, Inc.’ Inc.’ss (the “Company”) “Company”) inte internal rnal control over financial reporting financial reporting as of Decem December ber 31, 2011, based on crit criteria eria established established in Inter Internal nal Contr Control—I ol—Integr ntegrated ated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanyi accom panying ng Mana Managemen gement’s t’s Repor Reportt on Inter Internal nal Contr Control ol over Financial Reporting. Reporting. Our respo responsibi nsibility lity is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assura ass urance nce reg regard arding ing pre preven ventio tion n or ti timel mely y det detect ection ion of una unauth uthori orized zed acq acquis uisiti ition, on, use or dis dispos positi ition on of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, Because limitations, internal control over fina financial ncial reporting reporting may not preve prevent nt or detec detectt misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011 based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2011 and 2010 and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2011 of the Company and our report dated February 17, 2012, expressed an unqualified opinion thereon. /s/ New York, New York February 17, 2012
F-3
Ernst & Young LLP
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Starwood Hotels & Resorts Worldwide, Inc. We have audited the accompanying consolidated balance sheets of Starwood Hotels & Resorts Worldwide, Inc. (the “Company”) as of December 31, 2011 and 2010, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2011. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,, evid basis evidence ence supporting supporting the amounts and disc disclosur losures es in the financial financial state statement ments. s. An audit also incl includes udes assessing the accounting principles used and significant estimates made by management, as well as evaluating the ove overal ralll fin financ ancial ial sta statem tement ent pre presen sentat tation ion.. We bel believ ievee tha thatt our aud audits its pro provid videe a rea reason sonabl ablee bas basis is for our opinion. In our opi opinio nion, n, the fin financ ancial ial sta statem tement entss ref referr erred ed to abo above ve pre presen sentt fai fairly rly,, in all mat materi erial al res respec pects, ts, the consolidated financial position of the Company at December 31, 2011 and 2010, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 2 to the consolidated financial statements, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2009-16, Transfers and Servicing (Topic 860): Accounting for Trans Transfers fers of Financ Financial ial Asset Assetss (for (formerly merly State Statement ment of Finan Financial cial Accou Accounting nting Stand Standards ards (“SFAS”) No. 166), and ASU No. 2009-17, Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (formerly SFAS No. 167) on January 1, 2010. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2011, based on criter cri teria ia est establ ablish ished ed in Int Intern ernal al Con Contro trol-I l-Inte ntegra grated ted Fra Framew mework ork iss issued ued by the Com Commit mittee tee of Spo Sponso nsorin ring g Organizations of the Treadway Commission and our report dated February 17, 2012 expressed an unqualified opinion thereon. /s/ New York, New York February 17, 2012
F-4
Ernst & Young LLP
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. CONSOLIDATED BALANCE SHEETS CONSOLIDATED (In millions, except share data) December 31, 2011
ASSETS Current assets: Cash Ca sh an and d cas cash h equ equiv ival alen ents ts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rest Re stri rict cted ed ca cash sh . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acco Ac coun unts ts re rece ceiv ivab able le,, ne nett of al allo lowa wanc ncee fo forr do doub ubtf tful ul ac acco coun unts ts of $4 $46 6 an and d $4 $45 5.......... Inve In vent ntor oriies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securitized vacation ownership notes receivable, net of allowance for doubtful accounts of $10 and $10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Preepa Pr paiid ex expe pens nsees and and ot othe herr . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deffer De errred inc ncom omee tax taxees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 454 454 232 23 2 569 56 9 812 81 2
$ 753 753 53 513 51 3 802 80 2
64 125 125 278 27 8
59 126 126 315 31 5
2,53 2, 534 4 259 25 9 3,27 3, 270 0 2,05 2, 057 7 639 63 9 355 35 5 446 44 6
2,62 2, 621 1 312 31 2 3,32 3, 323 3 2,06 2, 067 7 664 66 4 381 38 1 408 40 8
Totall cur Tota curre rent nt as asse sets ts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inve In vest stme ment ntss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plan Pl ant, t, pr prop oper erty ty an and d equ equip ipme ment nt,, net net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Good Go odwi will ll an and d int intan angi gibl blee ass asset ets, s, ne nett . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Defe De ferr rreed in inco com me tax taxes es . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Othe Ot herr ass asset etss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Secu Se curi riti tize zed d vac vacat atio ion n own owner ersh ship ip no note tess rec recei eiva vabl ble, e, ne nett . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LIABILITIES LIABILITI ES AND STOCKHOLDERS’ EQUITY Current liabilities: Shor Sh ortt-te term rm bo borr rrow owin ings gs an and d cu curr rren entt ma matu turi riti ties es of lo long ng-t -ter erm m de debt bt . . . . . . . . . . . . . . . . . . . Acco Ac coun unts ts pa pay yab ablle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Curr Cu rren entt ma matu turi riti ties es of lo long ng-t -ter erm m se secu curi riti tize zed d va vaca cati tion on ow owne ners rshi hip p de debt bt . . . . . . . . . . . . . . . . Accr Ac crue ued d exp expen ense sess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accr Ac crue ued d sa sala lari ries es,, wag wages es an and d be bene nefi fits ts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accr Ac crue ued d ta taxe xess an and d ot othe herr . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tota To tall cur curre rent nt li liab abil ilit itie iess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-t Long -ter erm m deb debtt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long Lo ng-t -ter erm m se secu curi riti tize zed d va vaca cati tion on ow owne ners rshi hip p de debt bt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Defe De ferr rreed in inco com me tax axes es . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Othe Ot herr lia liabi bili liti ties es . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010
$9,5 ,56 60
$9,7 ,77 76
$
$
3 144 144 130 13 0 1,17 1, 177 7 375 37 5 163 16 3
9 138 138 127 12 7 1,10 1, 104 4 410 41 0 377 37 7
1,992 1,99 2 2,19 2, 194 4 402 40 2 46 1,97 1, 971 1
2,165 2,16 5 2,84 2, 848 8 367 36 7 24 1,88 1, 886 6
6,605
7,290
Commitments and contingencies Stockholders’ equity: Common stock; $0.01 par value; authorized 1,000,000,000 shares; outstanding 195, 19 5,91 913, 3,40 400 0 an and d 19 192, 2,97 970, 0,43 437 7 sh shar ares es at De Dece cemb mber er 31 31,, 20 2011 11 an and d 20 2010 10,, re resp spec ecti tive vely ly . . Addi Ad diti tion onal al pa paid id-i -in n cap capit ital al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accu Ac cumu mula late ted d oth other er co comp mpre rehe hens nsiv ivee los losss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reta Re tain ined ed ea earn rnin ings gs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2 963 96 3 (348 (3 48)) 2,33 2, 337 7
2 805 80 5 (283 (2 83)) 1,94 1, 947 7
Totall Sta Tota Starw rwoo ood d sto stock ckho hold lder ers’ s’ eq equi uity ty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nonc No nco ont ntrrol olllin ing g in intter ereest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,95 2, 954 4 1
2,47 2, 471 1 15
Tota To tall equ equit ity y . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. ..
2,95 2, 955 5
2,48 2, 486 6
$9,5 ,56 60
The accompanying notes to financial statements are an integral part of the above statements. F-5
$9,7 ,77 76
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. CONSOLIDATED STATEMENTS OF INCOME CONSOLIDATED (In millions, except per share data) Year Ended December 31,
Revenues Owned, Own ed, lea leased sed and and consol consolida idated ted join jointt ventu venture re hotel hotelss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vaca Va cati tion on ow owne ners rshi hip p an and d res resid iden enti tial al sa sale less an and d ser servi vice cess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mana Ma nage geme ment nt fe fees es,, fr fran anch chis isee fe fees es an and d oth other er in inco come me . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Oth er rev revenu enues es from man manage aged d and and fran franchi chised sed prop propert erties ies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011
2010
2009
$1,768 $1,768 703 70 3 814 81 4 2,339 2,3 39
$1,704 $1,704 538 53 8 712 71 2 2,117 2,1 17
$1,584 $1,584 523 658 1,931 1,9 31
5,624 Costs and Expenses Owned, Own ed, lea leased sed and con consol solida idated ted joi joint nt ven ventur turee hotel hotelss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vaca Va cati tion on ow owne ners rshi hip p and and re resi side dent ntia iall . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sell Se llin ing, g, ge gene nera ral, l, ad admi mini nist stra rati tive ve an and d ot othe herr . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rest Re stru ruct cturi uring ng,, go good odwi will ll im impa pair irme ment nt an and d ot othe herr sp spec ecia iall ch char arge gess (c (cre redi dits ts), ), ne nett . . . . . . . . . . . . . . . . . . Depr De prec ecia iati tion on . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amor Am orttiz izat atio ion n . . .. . . . . . .. . . . . .. . . . . .. . . . . .. . . . . .. . . . . .. . . . . . .. . . . . .. . . . . .. . . . . .. . Other Oth er exp expens enses es fro from m mana managed ged and fra franch nchise ised d prope properti rties es . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,449 1,449 521 52 1 352 35 2 68 235 23 5 30 2,339 2,3 39
5,071
4,696
1,395 1,395 405 40 5 344 34 4 (75) (7 5) 252 25 2 33 2,117 2,1 17
1,315 1,315 422 42 2 314 379 274 27 4 35 1,931 1,9 31
Operat Oper atin ing g inc incom omee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equi Eq uity ty ea earn rnin ings gs (l (los osse ses) s) an and d ga gain inss an and d lo loss sses es fr from om un unco cons nsol olid idat ated ed ve vent ntur ures es,, ne nett . . . . . . . . . . . . . . Intere Int erest st exp expens ense, e, net of int intere erest st inc income ome of $3, $2 and $3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain Ga in (l (los oss) s) on as asse sett di disp spos osit itio ions ns an and d im impa pair irme ment nts, s, ne nett . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,994 630 63 0 11 (216) (21 6) —
4,471 600 60 0 10 (236) (23 6) (39) (3 9)
4,670 26 (4)) (4 (227)) (227 (91)) (91
Incomee (l Incom (los oss) s) fr from om co cont ntin inui uing ng op oper erat atio ions ns be befo fore re ta taxe xess an and d no nonc ncon ontr trol olli ling ng in inte tere rest stss . . . . . . . . . . . Inco In come me ta tax x be bene nefi fitt (e (exp xpen ense se)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
425 425 75
335 33 5 (27) (27)
(296) (2 96) 293 293
308 30 8
(3)) (3
Income Inco me (l (los oss) s) fr from om co cont ntin inui uing ng op oper erat atio ions ns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Discontinued operations: Inco In come me (l (los oss) s) fr from om op oper erat atio ions ns,, ne nett of ta tax x (b (ben enef efit it)) ex expe pens nsee of $0 $0,, $0 an and d $( $(2) 2) . . . . . . . . . . . . . . Gain Ga in (l (los oss) s) on di disp spos osit itio ions ns,, ne nett of ta tax x (b (ben enef efit it)) ex expe pens nsee of $(5 $(5), ), $( $(166 166)) an and d $( $(35 35)) . . . . . . . . . . .
500 50 0
Net in Net inco come me . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nett (i Ne (inc ncom ome) e) lo loss ss at attr trib ibut utab able le to no nonc ncon ontr trol olli ling ng in inte tere rest stss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
487 48 7 2
475 47 5 2
Nett inc Ne incom omee att attri ribut butab able le to St Star arwo wood od . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 48 489 9
$ 47 477 7
Earnings (Losses) Per Share — Basic Continu Cont inuing ing ope operat ration ionss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disc Di scon onti tinu nued ed op oper erat atio ions ns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2.65 2.65 $ 1.7 1.70 0 (0.07) (0. 07) 0.91 0.91
$ 0.00 0.00 0.41 0. 41
Nett inc Ne incom omee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2. 2.58 58
$ 2. 2.61 61
$ 0. 0.41 41
Earnings (Losses) Per Share — Diluted Continu Cont inuing ing ope operat ration ionss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disc Di scon onti tinu nued ed op oper erat atio ions ns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2.57 2.57 $ 1.6 1.63 3 (0.06) (0. 06) 0.88 0.88
$ 0.00 0.00 0.41 0. 41
Nett inc Ne incom omee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2. 2.51 51
$ 0. 0.41 41
Amounts attributable to Starwood’s Common Shareholders Incom Inc omee (lo (loss ss)) fro from m con conti tinu nuin ing g ope opera rati tion onss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disc Di scon onti tinu nued ed op oper erat atio ions ns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— (13) (1 3)
(1) (1) 168 16 8
$ 2. 2.51 51
$ 502 502 $ 31 310 0 (13) (1 3) 167 167
(2) (2) 76 71 2 $
$
(1) 74
Nett inc Ne incom omee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 48 489 9
$ 47 477 7
Weig We ight hted ed av aver erag agee num numbe berr of of sha share ress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
189 18 9
183 18 3
180 18 0
Weig We ight hted ed av aver erag agee nu numb mber er of sh shar ares es as assu sumi ming ng di dilu luti tion on . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
195 19 5
190 19 0
180
Divide Div idends nds dec decla lared red per sha share re . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 0.5 0.50 0
$ 0.3 0.30 0
The accompanying notes to financial statements are an integral part of the above statements.
F-6
$
73
73
$ 0.2 0.20 0
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. CONSOLIDATED CONSOLIDA TED STATEMENTS OF COMPREHEN COMPREHENSIVE SIVE INCOME (In millions) Year Ended December 31, 2011
2010
2009
$487 $4 87
$475 $4 75
$ 71
(48) (4 8)
3
87
—
—
(13) (1 3)
(20) (20) — 1 1 2 —
(4) (4) — 1 (1)) (1 1 (1)) (1
10 23 5 — (6)) (6 3
Compre Comp rehe hens nsiv ivee inc incom omee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Comp Co mpre rehe hens nsiv ivee (i (inc ncom ome) e) lo loss ss at attr trib ibut utab able le to no nonc ncon ontr trol olli ling ng in inte tere rest stss . . . . . . . . . . . . . . Fore Fo reig ign n cu curr rren ency cy tr tran ansl slat atio ion n ad adju just stme ment ntss at attr trib ibut utab able le to no nonc ncon ontr trol olli ling ng in inte tere rest stss . . . . .
(64) 423 42 3 2 (1)) (1
(1) 474 47 4 2 1
109 180 18 0 2 (1)) (1
Comp Co mpre rehe hens nsiv ivee inc incom omee att attri ribu buta tabl blee to to Star Starwo wood od . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$424 $4 24
$477 $4 77
$181 $1 81
Net inc Net incom omee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income (loss), net of taxes: Fore Fo reig ign n cu curr rren ency cy tr tran ansl slat atio ion n adj adjus ustm tmen ents ts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reclassification of accumulated foreign currency translation adjustments on sold hote ho tells . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Defined benefit pension and postretirement benefit plans net gains (losses) arising duri du ring ng the yea earr . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nett cur Ne urttai ailm lmen entt an and d set etttle leme ment nt ga gaiins . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amor Am orti tiza zati tion on of ac actu tuar aria iall ga gain inss an and d lo loss sses es in incl clud uded ed in ne nett pe peri riod odic ic pe pens nsio ion n co cost st . . . Chan Ch ange ge in fai airr va vallue of de derriv ivaati tive vess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recl Re clas assi sifi fica cati tion on ad adju just stme ment ntss fo forr lo loss sses es (g (gai ains ns)) in incl clud uded ed in ne nett in inco come me . . . . . . . . . . . . . Chan Ch ange ge in fai airr va vallue of in inv ves esttme ment ntss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The accompanying notes to financial statements are an integral part of the above statements. F-7
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. CONSOLIDATED CONSOLIDA TED STATEMENTS OF EQUITY Equity Attributable to Starwood Stockholders
Shares Shares Sha res
Amount Amo unt
Additional Paid-in Capital (1)
Accumulated Other Comprehensive (Loss) Income (2)
Retained Earnings
Equity Attributable to Noncontrolling Interests
Total
$ 23 (2)
$1,644 71
(in millions)
Balance at December 31, 2008 . . . Net income (loss) . . . . . . . . . . . . . Stock option and restricted stock award transactions, net . . . . . . . ESPP stock issuances . . . . . . . . . . Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . Dividends declared . . . . . . . . . . . .
183 —
$ 2 —
$493 —
$(391) —
$1,517 73
4 —
— —
54 5
— —
— —
— —
54 5
— —
— —
— —
108 —
— (37)
1 (1)
109 (38)
Balance at December 31, 2009 . . . Net income (loss) . . . . . . . . . . . . . Stock option and restricted stock award transactions, net . . . . . . . ESPP stock issuances . . . . . . . . . . Impact of adoption of ASU No. 2009-17 . . . . . . . . . . . . . . . . Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . Dividends declared . . . . . . . . . . . .
187 —
2 —
552 —
(283) —
1,553 477
6 —
— —
248 5
— —
— —
— —
248 5
—
—
—
—
(26)
—
(26)
— —
— —
— —
— —
— (57)
(1) (3)
(1) (60)
Balance at December 31, 2010 . . . Net income (loss) . . . . . . . . . . . . . Stock option and restricted stock award transactions, net . . . . . . . ESPP stock issuances . . . . . . . . . . Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . Dividends declared . . . . . . . . . . . . Sale of controlling interest . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . .
193 —
2 —
805 —
(283) —
1,947 489
3 —
— —
154 5
— —
— —
— —
154 5
— — — —
— — — —
(65) — — —
— (99) — —
1 (1) (13) 1
(64) (100) (13) —
Balance at December 31, 2011 . . .
196
$ 2
— — — (1) $963
$(348)
$2,337
21 (2)
15 (2)
$ 1
1,845 475
2,486 487
$2,955
(1) Stock option option and restricted stock award transactio transactions ns are net of a tax (expense) (expense) benefit of $26 million, $28 million million and $(18) million in 2011, 2010, and 2009 respectively. (2) As of Decemb December er 31, 2011, this balanc balancee is compr comprised ised of $276 million of cumul cumulative ative translation translation adjustments adjustments and $75 million of net unrecognized actuarial losses, partially offset by $3 million of unrecognized gains on forward contracts.
The accompanying notes to financial statements are an integral part of the above statements.
F-8
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions) Year Ended December 31, 2011 Operating Activities Nett inc Ne incom omee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments to net income: Discontinued operations: (Gai (G ain) n) lo loss ss on di disp spos osit itio ions ns,, ne nett . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D ep epr ec ec ia ia titi on on a nd nd a mo mo rt rt iz iz at at io io n . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Othe Ot herr ad adju just stme ment ntss re rela lati ting ng to di disc scon onti tinu nued ed op oper erat atio ions ns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stoc St ockk-ba base sed d co comp mpen ensa sati tion on ex expe pens nsee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exce Ex cess ss st stoc ockk-ba base sed d co comp mpen ensa sati tion on ta tax x be bene nefi fitt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depr De prec ecia iati tion on an and d am amor orti tiza zati tion on . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amor Am orti tiza zati tion on of de defe ferr rred ed lo loan an co cost stss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NonNo n-ca cash sh po port rtion ion of re restr struc uctu turi ring ng,, go good odwil willl imp impai airm rmen entt an and d ot othe herr sp spec ecial ial ch char arge gess (c (cre redi dits ts), ), ne nett . . . . . . . . . . . . . . . . . . NonNo n-ca cash sh fo fore reig ign n cu curr rren ency cy (g (gai ains ns)) lo loss sses es,, ne nett . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amor Am orti tiza zati tion on of de defe ferr rred ed ga gain inss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prov Pr ovis isio ion n fo forr do doub ubtf tful ul ac acco coun unts ts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D is is tr tr ib ib ut ut io ion s i n e xc xc es es s ( de de fi fi ci ci t) t) of e qu qu itit y ea rn rn in ing s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain Ga in on sa sale le of VO VOII no note tess re rece ceiv ivab able le . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss Lo ss (g (gai ain) n) on as asse sett di disp spos osit itio ions ns an and d im impa pair irme ment nts, s, ne nett . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NonNo n-ca cash sh po port rtio ion n of in inco come me ta tax x ex expe pens nsee (b (ben enef efit it)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in working capital: Re st st ri ri ct ct ed ed c as as h . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acco Ac coun unts ts re rece ceiv ivab able le . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inve In vent ntor orie iess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prep Pr epai aid d ex expe pens nses es an and d ot othe herr . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acco Ac coun unts ts pa paya yabl blee an and d ac accr crue ued d ex expe pens nses es . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accr Ac crue ued d in inco come me ta taxe xess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Secu Se curi riti tize zed d VO VOII no note tess re rece ceiv ivab able le ac acti tivi vity ty,, ne nett . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VOII no VO note tess re rece ceiv ivab able le ac acti tivi vity ty,, ne nett . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Othe Ot her, r, ne nett . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 487 487
2010
$ 475 475
2009
$
71
13 — — 75 (22) (2 2) 265 26 5 11 — 12 (87) (8 7) 31 7 — — 63
(168)) (168 — — 72 (20) (2 0) 285 28 5 13 (7)) (7 (39) (3 9) (81) (8 1) 55 3 — 39 16
(76) (76) 8 — 53 — 309 30 9 10 332 33 2 (6)) (6 (82) (8 2) 72 30 (24) (2 4) 91 (260 (2 60))
( 27 27 ) (45) (4 5) (14) (1 4) (15) (1 5) 78 (195 (1 95)) (45) (4 5) 12 37
9 (22) (22) (110 (1 10)) 1 13 200 20 0 (29) (2 9) 1 58
46 63 (98) (9 8) 10 (44) (4 4) (50) (5 0) — 167 16 7 (51) (5 1)
641 64 1
764 76 4
571 57 1
Investing Activities Purc Pu rcha hase sess of pl plan ant, t, pr prop oper erty ty an and d eq equi uipm pmen entt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proc Pr ocee eeds ds fr from om as asse sett sal sales es,, ne nett . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Issu Is suan ance ce of no note tess re rece ceiv ivab able le . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C ol ol le le ct ct io ion o f n ot ot es es r ec ec ei ei va va bl bl e, e, n et et . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acqu Ac quis isit itio ions ns,, ne nett of ac acqu quir ired ed ca cash sh . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purc Pu rcha hase sess of in inve vest stme ment ntss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P ro ro ce ce ed eds f ro rom i nv nv es es tm tm en en ts ts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Othe Ot her, r, ne nett . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(385)) (385 290 29 0 (10) (1 0) 7 (28) (2 8) (8)) (8 4 (46) (4 6)
(227)) (227 148 14 8 (1)) (1 2 (18) (1 8) (32) (3 2) 49 8
(196)) (196 310 31 0 (4)) (4 2 — (5)) (5 35 (26) (2 6)
Cash Ca sh (u (use sed d fo for) r) fr from om in inve vest stin ing g ac acti tivi viti ties es . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(176 (1 76))
(71) (7 1)
Financing Activities Revo Re volv lvin ing g cr cred edit it fac facili ility ty an and d sh shor ortt-ter term m bo borr rrow owin ings gs (r (rep epay ayme ment nts) s),, ne nett . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long Lo ng-t -ter erm m de debt bt is issu sued ed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long Lo ng-t -ter erm m deb debtt rep repai aid d . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. Long Lo ng-t -ter erm m se secu curi riti tize zed d de debt bt is issu sued ed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long Lo ng-t -ter erm m sec secur urit itiz ized ed de debt bt re repa paid id . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Inc (I ncre reas ase) e) de decr crea ease se in re rest stri rict cted ed ca cash sh . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Divi Di vide dend ndss pai paid d . . .. .. .. .. . .. .. . .. .. . .. .. . .. .. .. .. . .. .. . .. .. . .. .. . .. .. . .. .. .. .. . .. .. . .. .. . .. .. . .. .. Proc Pr ocee eeds ds fr from om st stoc ock k op opti tion on ex exer erci cise sess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exce Ex cess ss st stoc ockk-ba base sed d co comp mpen ensa sati tion on ta tax x be bene nefi fitt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S ha ha re re r ep ep ur ur ch ch as as es es . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Othe Ot her, r, ne nett . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— 47 (650 (6 50)) 200 20 0 (162 (1 62)) (144 (1 44)) (99) (9 9) 70 22 — (39) (3 9)
(114 (1 14)) 3 (9)) (9 280 28 0 (224 (2 24)) — (93) (9 3) 141 14 1 20 — (30) (3 0)
(102)) (102 726 72 6 (1,6 (1 ,681 81)) — — — (165 (1 65)) 2 — — 227 22 7 (993 (9 93))
Cash Ca sh (u (use sed d fo for) r) fr from om op oper erat atin ing g ac acti tivi viti ties es . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash Ca sh (u (use sed d fo for) r) fr from om fin finan ancin cing g act activ iviti ities es . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(755 (7 55))
(26) (2 6)
Exch Ex chan ange ge ra rate te ef effe fect ct on ca cash sh an and d ca cash sh eq equi uiva vale lent ntss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(9)) (9
(1)) (1
Increa Incr ease se (d (dec ecre reas ase) e) in ca cash sh an and d ca cash sh eq equi uiva vale lent ntss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash Ca sh an and d ca cash sh eq equi uiva vale lent ntss — be begi ginn nnin ing g of pe peri riod od . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(299)) (299 753 75 3
116 11 6
4
666 666 87
(302)) (302 389 38 9
Cash Ca sh an and d ca cash sh eq equi uiva vale lent ntss — en end d of of per perio iod d . . . . .. .. .. .. . .. .. . .. .. . .. .. . .. .. . .. .. .. .. . .. .. . .. .. . .. .. . .. ..
$ 454 454
$ 753 753
$
87
Supplemental Disclosures of Cash Flow Information Cash paid (received) during the period for: Inte In tere rest st . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 204 204
$ 244 244
$
214 21 4
Inco In come me ta taxe xes, s, ne nett of of ref refun unds ds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 56
$(17 $( 171) 1)
$
12
NonNo n-ca cash sh ac acqu quis isit itio ion n of of Hot Hotel el Im Impe peri rial al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 57
$ —
$
—
The accompanying notes to financial statements are an integral part of the above statements. F-9
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. NOTES TO FINANCIAL STATEMENTS STATEMENTS Notee 1. Not
Basis Bas is of Pre Presen sentat tation ion
The accom accompanyi panying ng conso consolida lidated ted finan financial cial state statements ments repre represent sent the conso consolida lidated ted fina financial ncial posit position ion and consolidated consolidat ed resu results lts of oper operation ationss of Starw Starwood ood Hotels & Resor Resorts ts Worl Worldwide dwide,, Inc. and its subsidiaries subsidiaries (the “Company”). The Company is one of the world’s largest hotel and leisure companies. The Company’s principal business is hotels and leisure, which is comprised of a worldwide hospitality network of 1,089 full-service hotels, vacation ownership resorts and residential developments primarily serving two markets: luxury and upscale. The principal operations of Starwood Vacation Ownership, Inc. (“SVO”) include the development and operation of vacation ownership resorts; and marketing, selling and financing vacation ownership interests (“VOIs”) in the resorts. The consolidated financial statements include assets, liabilities, revenues and expenses of the Company and all of its controlled subsidiaries and partnerships. In consolidating, all material intercompany transactions are eliminated. We have evaluated all subsequent events through the date the consolidated financial statements were filed. In accordance with the guidance for noncontrolling interests in Accounting Standards Codification (“ASC”) 810, Consolidation, references in this report to our earnings per share, net income, and shareholders’ equity attributable to Starwood’s common shareholders do not include amounts attributable to noncontrolling interests. Note 2.
Significan Signi ficantt Accou Accounting nting Polic Policies ies
Cash and Cash Equivalents. Equivalents. The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Restricted Cash. The majority of the Company’s restricted cash relates to cash used as collateral to reduce fees on letters of credit. Restricted cash also consists of deposits received on sales of VOIs and residential properties that are held in escrow until a certificate of occupancy is obtained, the legal rescission period has expired and the deed of trust has been recorded in governmental property ownership records. At December 31, 2011 201 1 and 201 2010, 0, the Com Compan pany y had sho shortrt-ter term m res restri tricte cted d cas cash h bal balanc ances es of $23 $232 2 mil millio lion n and $53 mi milli llion, on, respectively. Inventories.. Inv Inventories Invent entori ories es are com compri prised sed pri princi ncipal pally ly of VOI VOIss of $26 $261 1 mil millio lion n and $30 $307 7 mil millio lion n as of December Decemb er 31, 201 2011 1 and 201 2010, 0, res respec pectiv tively ely,, res reside identi ntial al inv invent entory ory of $52 $521 1 mil millio lion n and $46 $462 2 mil millio lion n at December 31, 2011 and 2010, respectively, and hotel inventory. VOI and residential inventory is carried at the lower of cost or net realizable value and includes $37 million, $29 million and $31 million of capitalized interest incurr inc urred ed in 201 2011, 1, 201 2010 0 and 200 2009, 9, res respec pectiv tively ely.. Hot Hotel el inv invent entory ory inc includ ludes es ope operat rating ing sup suppli plies es and foo food d and beverage inventory items which are generally valued at the lower of FIFO cost (first-in, first-out) or market. Loan Loss Reserves. For the vac vacati ation on own owners ership hip and res reside identi ntial al seg segmen ment, t, the Com Compan pany y rec record ordss an estima est imate te of exp expect ected ed unc uncoll ollect ectibi ibilit lity y on its VOI not notes es rec receiv eivabl ablee as a red reduct uction ion of rev revenu enuee at the time it recognizes recog nizes a time timeshare share sale. The Compa Company ny holds large amounts of homog homogeneou eneouss VOI notes recei receivable vable and therefore assesses uncollectibility based on pools of receivables. In estimating loan loss reserves, the Company uses a technique referred to as static pool analysis, which tracks defaults for each year’s mortgage originations over the life of the respective notes and projects an estimated default rate. As of December 31, 2011, the average estimated default rate for the Company’s pools of receivables was 9.9%.
The primary credit quality indicator used by the Company to calculate the loan loss reserve for the vacation ownership notes is the origination of the notes by brand (Sheraton, Westin, and Other) as the Company believes there is a relationship between the default behavior of borrowers and the brand associated with the vacation ownership property they have acquired. In addition to quantitatively calculating the loan loss reserve based on its static pool analysis, the Company supplements the process by evaluating certain qualitative data, including the aging of the respective receivables, current default trends by brand and origination year, and the Fair Isaac Corporation (“FICO”) scores of the buyers. F-10
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. NOTES TO FINANCIAL STATEMENTS STATEMENTS
Given the significance of the Company’s respective pools of VOI notes receivable, a change in the projected default defau lt rate can have a signi significa ficant nt impa impact ct to its loan loss reserve requirements requirements,, with a 0.1% change estimated estimated to have an impact of approximately $4 million. The Company considers a VOI note receivable delinquent when it is more than 30 days outstanding. All delinquent loans are placed on nonaccrual status and the Company does not resume interest accrual until payment is mad made. e. Upo Upon n rea reachi ching ng 120 days out outsta standi nding, ng, the loa loan n is con consid sidere ered d to be in def defaul aultt and the Com Compan pany y commences the repossession process. Uncollectible VOI notes receivable are charged off when title to the unit is return ret urned ed to the Com Compan pany. y. The Com Compan pany y gen genera erally lly doe doess not mod modify ify vac vacati ation on own owners ership hip not notes es tha thatt bec become ome delinquent or upon default. For the hotel segment, the Company measures the impairment of a loan based on the present value of expected future cash flows, discounted at the loan’s original effective interest rate, or the estimated fair value of the collateral. For impaired loans, the Company establishes a specific impairment reserve for the difference between the recorded investment in the loan and the present value of the expected future cash flows or the estimated fair value of the collateral. The Company applies the loan impairment policy individually to all loans in the portfolio and does not aggregate loans for the purpose of applying such policy. For loans that the Company has determined to be impaired, the Company recognizes interest income on a cash basis. Assets Held for Sale. The Company considers properties to be assets held for sale when management approves and commits to a formal plan to actively market a property or group of properties for sale and a signed sales contract and significant non-refundable deposit or contract break-up fee exist. Upon designation as an asset held for sale, the Company records the carrying value of each property or group of properties at the lower of its carrying value which includes allocable segment goodwill or its estimated fair value, less estimated costs to sell, and the Company stops recording depreciation expense. Any gain realized in connection with the sale of a proper pro perty ty for whi which ch the Com Compan pany y has sig signif nifica icant nt con contin tinuin uing g inv involv olveme ement nt (su (such ch as thr throug ough h a lon long-t g-term erm management agreement) is deferred and recognized over the initial term of the related agreement (See Note 12). The operations of the properties held for sale prior to the sale date, if material, are recorded in discontinued operations unless the Company will have continuing involvement (such as through a management or franchise agreement) after the sale. Investments. Inv Invest estmen ments ts in joi joint nt ven ventur tures es are gen genera erally lly acc accoun ounted ted for und under er the equ equity ity met method hod of accounting when the Company has a 20% to 50% ownership interest or exercises significant influence over the venture. If the Company’s interest exceeds 50% or, if the Company has the power to direct the economic activities of the entity and the obligation to absorb losses, the results of the joint venture are consolidated herein. All other investments are generally accounted for under the cost method.
The fair market value of investments is based on the market prices for the last day of the period if the invest inv estmen mentt tra trades des on quo quoted ted exc exchan hanges ges.. For non non-tr -trade aded d inv invest estmen ments, ts, fai fairr val value ue is est estima imated ted bas based ed on the underlying value of the investment, which is dependent on the performance of the investment as well as the volatility inherent in external markets for these types of investments. In assessing potential impairment for these invest inv estmen ments, ts, the Com Compan pany y wil willl con consid sider er the these se fac factor torss as wel welll as for foreca ecaste sted d fin financ ancial ial per perfor forman mance ce of its investment. If these forecasts are not met, the Company may have to record impairment charges. Plant, Property and Equipment Equipment.. Plant Plant,, prope property rty and equip equipment ment,, incl including uding capitalized capitalized interest of $5 million, $2 million and $2 million incurred in 2011, 2010 and 2009, respectively, applicable to major project expenditures are recorded at cost. The cost of improvements that extend the life of plant, property and equipment are capitalized. These capitalized costs may include structural improvements, equipment and fixtures. Costs for normal repairs and maintenance are expensed as incurred. Depreciation is recorded on a straight-line basis over the estimated useful economic lives of 15 to 40 years for buildings and improvements; 3 to 10 years for furniture, fixtures and equipment; 3 to 20 years for information technology software and equipment; and the lesser of the
F-11
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. NOTES TO FINANCIAL STATEMENTS STATEMENTS
lease term or the economic useful life for leasehold improvements. Gains or losses on the sale or retirement of assets are included in income when the assets are retired or sold provided there is reasonable assurance of the collectability of the sales price and any future activities to be performed by the Company relating to the assets sold are insignificant. The Company evaluates the carrying value of its assets for impairment. For assets in use when the trigger events specified in ASC 360, Property Plant, and Equipment occur, the expected undiscounted future cash flows of the assets are compared to the net book value of the assets. If the expected undiscounted future cash flows are less than the net book value of the assets, the excess of the net book value over the estimated fair value is charged to current earnings. Fair value is based upon discounted cash flows of the assets at rates deemed reasonable for the typ typee of ass asset et and pre prevai vailin ling g mar market ket con condit dition ions, s, com compar parati ative ve sal sales es for sim simila ilarr ass assets ets,, app apprai raisal salss and and,, if appropriate, current estimated net sales proceeds from pending offers. Goodwill and Intangible Assets. Goodwill and intangible assets arise in connection with acquisitions, including the acquisition of management contracts. The Company does not amortize goodwill and intangible assets with indefinite lives. Intangible assets with finite lives are amortized on a straight-line basis over their respective useful lives. The Company reviews all goodwill and intangible assets for impairment annually, or upon the occurrence of a trigger event. Impairment charges, if any, are recognized in operating results. Frequent Guest Program. Starwood Preferred Guest ® (“SPG”) is the Company’s frequent guest incentive market mar keting ing pro progra gram. m. SPG mem member berss ear earn n poi points nts bas based ed on spe spendi nding ng at the Com Compan pany’s y’s own owned, ed, man manage aged d and franchised hotels, as incentives to first-time buyers of VOIs and residences, and through participation in affiliated partners’ programs such as co-branded credit cards. Points can be redeemed at substantially all of the Company’s owned, leased, managed and franc franchise hised d hotel hotelss as well as throu through gh other redemption redemption opportunitie opportunitiess with third parties, such as conversion to airline miles.
The Company charges its owned, managed and franchised hotels the cost of operating the SPG program, including the estimated cost of its future redemption obligation, based on a percentage of its SPG members qualified quali fied expenditures. expenditures. The Compa Company’s ny’s management management and franc franchise hise agreements agreements requi require re that the Compa Company ny be reimbursed for the costs of operating the SPG program, including marketing, promotions and communications, and performing member services for the SPG members. As points are earned, the Company increases the SPG point liability for the amount of cash it receives from its managed and franchised hotels related to the future redemp red emptio tion n obl obliga igatio tion. n. For its own owned ed hot hotels els the Com Compan pany y rec record ordss an exp expens ensee for the amount amount of its future future redemption obligation with the offset to the SPG point liability. When points are redeemed by the SPG members, the hotels recognize revenue and the SPG point liability is reduced. The Company, through the services of third-party actuarial analysts, determines the value of the future redemption obligation based on statistical formulas which project the timing of future point redemptions based on historical experience, including an estimate of the “breakage” for points that will never be redeemed, and an estimate estim ate of the points that will event eventually ually be redeemed as well as the cost of reim reimbursi bursing ng hotels and other thirdthirdparties in respect of other redemption opportunities for point redemptions. The Company consolidates the assets and liabilities of the SPG program including the liability associated with the future redemption obligation which is included in other long-term liabilities and accrued expenses in the accomp acc ompany anying ing con consol solida idated ted bal balanc ancee she sheets ets.. The tot total al act actuar uarial ially ly det determ ermine ined d lia liabil bility ity (se (seee Not Notee 17) 17),, as of December 31, 2011 and 2010, is $844 million and $753 million, respectively, of which $251 million and $225 million, respectively, is included in accrued expenses. Legal Contingencies. The Company is subject to various legal proceedings and claims, the outcomes of which are subject to significant uncertainty. ASC 450, Contingencies requires that an estimated loss from a loss contingency be accrued with a corresponding charge to income if it is probable that an asset has been impaired or
F-12
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. NOTES TO FINANCIAL STATEMENTS STATEMENTS
a liability has been incurred and the amount of the loss can be reasonably estimated. Disclosure of a contingency is required if there is at least a reasonable possibility that a loss has been incurred. The Company evaluates, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estima est imate te of the amo amount unt of los loss. s. Cha Change ngess in the these se fac factor torss cou could ld mat materi eriall ally y imp impact act the Com Compan pany’s y’s fin financ ancial ial position or its results of operations. Fair Value of Financial Instruments. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liabi liability lity in an order orderly ly tran transacti saction on betwe between en mark market et parti participan cipants ts on the measurement measurement date. The following following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value as follows;
• Level 1 — Quoted prices prices in active markets markets for identical assets assets or liabilities. liabilities. • Level 2 — Input Inputss other than Level 1 that are observable, observable, either directly directly or indirectly, indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. • Level 3 — Unobserva Unobservable ble inputs that are supported supported by little or no mark market et activity activity and that are significant significant to the fair value of the assets or liabilities. Derivative Financial Instruments Instruments.. The Company periodically enters into interest rate swap agreements, based on market conditions, to manage interest rate exposure. The net settlements paid or received under these agreement agree mentss are accrued consistent consistent with the term termss of the agreements agreements and are recog recognized nized in inter interest est expense over the term of the related debt.
The Company enters into forward contracts to manage exposure to foreign currency fluctuations. All foreign currency hedging instruments have an inverse correlation to the hedged assets or liabilities. Changes in the fair value of the derivative instruments are classified in the same manner as the classification of the changes in the underlying assets or liabilities due to fluctuations in foreign currency exchange rates. These forward contracts do not qualify as hedges. The Company periodically periodically ente enters rs into forward contracts contracts to manag managee forei foreign gn excha exchange nge risk based on marke markett conditions. The Company enters into forward contracts to hedge fluctuations in forecasted transactions based on foreign currencies that are billed in United States dollars. These forward contracts have been designated as cash flow hedges, and their change in fair value is recorded as a component of other comprehensive income. As a forecasted transaction occurs, the gain or loss is reclassified from other comprehensive income to management fees, franchise fees and other income. The Company does not enter into derivative financial instruments for trading or speculative purposes and monitors the financial stability and credit standing of its counterparties. Foreign Currency Translation. Balance sheet accounts are translated at the exchange rates in effect at each period end and income and expense accounts are translated at the average rates of exchange prevailing during the year. The national currencies of foreign operations are generally the functional currencies. Gains and losses from foreign exchange and the effect of exchange rate changes on intercompany transactions of a longterm investment nature are generally included in other comprehensive income. Gains and losses from foreign exchange rate changes related to intercompany receivables and payables that are not of a long-term investment nature are reported currently in costs and expenses and amounted to a net loss of $12 million in 2011, a net gain of $39 million in 2010 and a net gain of $6 million in 2009. Income Taxes. The Company provides for income income taxes in accor accordance dance with princ principle ipless cont contained ained in ASC Taxes.. Und 740, Income Taxes Under er these these pri princi nciple ples, s, the Com Compan pany y rec recogn ognize izess the amo amount unt of inc income ome tax pay payabl ablee or
F-13
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. NOTES TO FINANCIAL STATEMENTS STATEMENTS
refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in its financial statements or tax returns. Deferred Defer red tax asse assets ts and liab liabilit ilities ies are meas measured ured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period when the new rate is enacted. Deferred tax assets are evaluated for future realization and reduced by a valuation allowance to the extent the Company believes a portion porti on will not be realized. realized. The Company considers considers many factors when asses assessing sing the like likelihoo lihood d of future realization of its deferred tax assets, including its recent cumulative earnings experience and expectations of future taxable income by taxing jurisdiction, the carry-forward periods available to us for tax reporting purposes and tax attributes. The Company measures and recognizes the amount of tax benefit that should be recorded for financial statement purposes for uncertain tax positions taken or expected to be taken in a tax return. With respect to uncertain uncer tain tax posi positions tions,, the Compa Company ny evalu evaluates ates the recog recognized nized tax benef benefits its for derec derecognit ognition, ion, class classifica ification, tion, interest and penalties, interim period accounting and disclosure requirements. Judgment is required in assessing the future tax consequences of events that have been recognized in its financial statements or tax returns. Stock-Based Compensation. The Company calculates the fair value of share-based awards on the date of grant. Restricted stock awards are valued based on the share price. The Company has determined that a lattice valuation model would provide a better estimate of the fair value of options granted under its long-term incentive plans than a Black-Scholes model. The lattice valuation option pricing model requires the Company to estimate key assumptions such as expected life, volatility, risk-free interest rates and dividend yield to determine the fair value of share-based awards, based on both historical information and management decision regarding market factors facto rs and trends. The Company amortizes amortizes the share-based share-based comp compensat ensation ion expense over the period that the awards awa rds are exp expect ected ed to ves vest, t, net of est estima imated ted for forfei feitur tures. es. If the act actual ual for forfei feitur tures es dif differ fer fro from m man manage agemen mentt estimates, additional adjustments to compensation expense are recorded. Please refer to Note 22, Stock-Based Compensation. Revenue Recognition. The Com Compan pany’s y’s rev revenu enues es are pri primar marily ily der derive ived d fro from m the fol follow lowing ing sou source rces: s: (1) hot hotel el and res resort ort rev revenu enues es at the Com Compan pany’s y’s own owned, ed, lea leased sed and con consol solida idated ted joi joint nt ven ventur turee pro proper pertie ties; s; (2) vacation ownership and residential revenues; (3) management and franchise revenues; (4) revenues from managed and franchised properties; and (5) other revenues which are ancillary to the Company’s operations. Generally, revenues are recognized when the services have been rendered. Taxes collected from customers and submitted to taxing authorities are not recorded in revenue. The following is a description of the composition of revenues for the Company:
• Owned, Leased and Conso Consolida lidated ted Joint Ventures — Repre Represents sents revenue primarily primarily deri derived ved from hotel oper op erat atio ions ns,, in incl clud udin ing g th thee re rent ntal al of ro room omss an and d fo food od an and d be beve vera rage ge sa sale les, s, fr from om ow owne ned, d, le leas ased ed or consol con solida idated ted joi joint nt ven ventur turee hot hotels els and res resort orts. s. Rev Revenu enuee is rec recogn ognize ized d whe when n roo rooms ms are occ occupi upied ed and services have been rendered. • Vacation Vacation Ownership and Resid Residenti ential al — The The Compa Company ny recog recognizes nizes sales of vacat vacation ion ownership interests interests when the buyer has demonstrated a sufficient level of initial and continuing investment, the period of cancellation with refund has expired and receivables are deemed collectible. For sales that do not qualify for full revenue recognition as the project has progressed beyond the preliminary stages but has not yet reached completion, all revenue and profit are initially deferred and recognized in earnings through the percentage-of-completion method. The Company has also entered into licensing agreements with thirdparty par ty dev develo eloper perss to off offer er con consum sumers ers bra brande nded d con condom domini iniums ums or res reside idence nces. s. The fee feess fro from m the these se arrangements are generally based on the gross sales revenue of the units sold. Residential fee revenue is recorded in the period that a purchase and sales agreement exists, delivery of services and obligations has F-14
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. NOTES TO FINANCIAL STATEMENTS STATEMENTS
occurred, occurr ed, the fee to the owner is dee deemed med fixed and det determ ermina inable ble and col collec lectab tabili ility ty of the fees is reason rea sonabl ably y ass assure ured. d. Res Reside identi ntial al rev revenu enuee on who whole le own owners ership hip uni units ts is gen genera erally lly rec record orded ed usi using ng the completed contract method, whereby revenue is recognized only when a sales contract is completed or substantially completed. During the performance period, costs and deposits are recorded on the balance sheet. • Management Management and Franchise Franchise Fees — Represents Represents fees earned on hotel hotelss managed worldwide, worldwide, usually under long-term contracts, franchise fees received in connection with the franchise of the Company’s Sheraton, Westin, Four Points by Sheraton, Le Méridien, St. Regis, W, Luxury Collection, Aloft and Element brand names, termination fees and the amortization of deferred gains related to sold properties for which the Company has significant continuing involvement. Management fees are comprised of a base fee, which is generally based on a percentage of gross revenues, and an incentive fee, which is generally based on the property’s profitability. Base fee revenues are recognized when earned in accordance with the terms of the contract. For any time during the year, when the provisions of the management contracts allow receipt of incentive fees upon termination, incentive fees are recognized for the fees due and earned as if the contract was terminated at that date, exclusive of any termination fees due or payable. Franchise fees are generally based on a percentage of hotel room revenues and are recognized as the fees are earned and become due from the franchisee. • Other Revenues from Mana Managed ged and Franc Franchised hised Properties Properties — These These reven revenues ues repre represent sent reimbursemen reimbursements ts of costs incurred on behalf of managed hotel properties and franchisees. These costs relate primarily to payroll costs at managed properties where the Company is the employer. Since the reimbursements are made based upon the costs incurred with no added margin, these revenues and corresponding expenses have no effect on the Company’s operating income or net income. Insurance Retention. Through its captive insurance company, the Company provides insurance coverage for workers’ compensation, property and general liability claims arising at hotel properties owned or managed by the Company through policies written directly and through reinsurance arrangements. Estimated insurance claims payable represent expected settlement of outstanding claims and a provision for claims that have been incurred but not reported. These estimates are based on the Company’s assessment of potential liability using an analysis of available information including pending claims, historical experience and current cost trends. The amount of the ultimate liability liability may vary from these estimates. estimates. Esti Estimated mated costs of these self-insura self-insurance nce programs are accrued, based on the analysis of third-party actuaries. Costs Incurred to Sell VOIs. The Company capitalizes direct costs attributable to the sale of VOIs until the sales are recognized. Selling and marketing costs capitalized under this methodology were approximately $4 millio mil lion n and $3 mil millio lion n as of Dec Decemb ember er 31, 201 2011 1 and 2010, res respec pectiv tively ely,, and all such cap capita italiz lized ed cos costs ts are included in prepaid expenses and other assets in the accompanying consolidated balance sheets. Costs eligible for capitalization follow the guidelines of ASC 978, Real Estate – Time Sharing Activities. If a contract is cancelled, the Company charg charges es the unrecoverable unrecoverable direct selling and marke marketing ting costs to expen expense se and records forfeited forfeited deposits as income. VOI and Residential Inventory Costs. Real estate and development costs are valued at the lower of cost or net realizable value. Development costs include both hard and soft construction costs and together with real estate costs are allocated to VOIs and residential units on the relative sales value method. Interest, property taxes and certain other carrying costs incurred during the construction process are capitalized as incurred. Such costs associated with completed VOI and residential units are expensed as incurred. Advertising Costs. The Company enters enters into multi multi-med -media ia advertising advertising campaigns, campaigns, including including television, television, radio, internet and print advertisements. Costs associated with these campaigns, including communication and production produ ction costs, are aggre aggregated gated and expen expensed sed the first time that the adver advertisi tising ng takes place. If it becomes
F-15
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. NOTES TO FINANCIAL STATEMENTS STATEMENTS
apparent that the media campaign will not take place, all costs are expensed at that time. During the years ended December 31, 2011, 2010 and 2009, the Company incurred approximately $149 million, $132 million and $118 million of advertising expense, respectively, a significant portion of which was reimbursed by managed and franchised hotels. Use of Est Estimat imates. es. The prepa preparati ration on of finan financial cial statements statements in confo conformit rmity y with accou accountin nting g princ principle ipless generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications. Certa Certain in recla reclassif ssificat ications ions have been made to the prio priorr years years’’ fina financial ncial statements statements to conform to the current year presentation. Impact of Recently Issued Accounting Standards. Adopted Accounting Standards
In Sep Septem tember ber 201 2011, 1, the Fin Financ ancial ial Acc Accoun ountin ting g Sta Standa ndards rds Boa Board rd (“F (“FASB ASB”) ”) iss issued ued ASU No. 201 2011-0 1-08, 8, “Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment”. This topic permits an entity to assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis to determine whether an additional impairment test is necessary. This topi to picc is fo forr an annu nual al an and d in inte teri rim m go good odwi will ll im impa pair irme ment nt te test stss pe perf rfor orme med d fo forr fi fisc scal al ye year arss be begi ginn nnin ing g af afte terr December 15, 2011 with early adoption allowed. The Company early adopted this topic during the fourth quarter of 2011 in conjunction with its annual impairment testing (see Note 7). “Compensatio nsation-Retir n-Retirement ement Benefi BenefitstsIn Se Sept ptem embe berr 20 2011 11,, th thee FA FASB SB is issu sued ed AS ASU U No No.. 20 2011 11-0 -09, 9, “Compe Multiemployer Plans (Subtopic 715-80): Disclosures about an Employer’s Participation in a Multiemployer Plan”. This subtopic addresses concerns from users of financial statements on the lack of transparency about an
employer’s participation in a multiemployer pension plan. The disclosures also will indicate the financial health of all of the significant plans in which the employer participates and assist a financial statement user to access additional information that is available outside of the financial statements. The subtopic is effective for annual reporting periods ending after December 15, 2011. The Company adopted this topic as of December 31, 2011 (see Note 19). In July 2010, the FASB issued ASU No. 2010-20, “Receivables (Topic 310): Disclosures about the Credit Quality Qua lity of Fin Financ ancing ing Rec Receiv eivabl ables es and the Allo Allowan wance ce for Cre Credit dit Los Losses ses.” .” This topic requi requires res discl disclosure osuress of financ fin ancing ing rec receiv eivabl ables es and all allowa owance nce for cre credit dit los losses ses on a dis disagg aggreg regate ated d bas basis. is. The bal balanc ancee she sheet et rel relate ated d disclosures are required beginning at December 31, 2010 and the statements of income disclosures are required, beginning for the three months ended March 31, 2011. The Company adopted this topic on December 31, 2010 (see Note 10). In June 2009, the FASB issued ASU No. 2009-16, “Transfers and Servicing (Topic 860): Accounting for Transfers Trans fers of Financ Financial ial Assets Assets” ” (formerly Statement of Financial Accounting Standards (“SFAS”) No. 166), and ASU No. 2009-17, “Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities” (formerly SFAS No. 167). ASU No. 2009-16 amended the accounting for transfers of financial assets. Under ASU No. 2009-16, the qualifying special purpose entities (“QSPEs”) used in the Company’s securitization transactions are no longer exempt from consolidation. ASU No. 2009-17 prescribes an ongoing assessment of the Company’s involvement in the activities of the QSPEs and the Company’s rights or obligations to receive benefits or absorb losses of the trusts that could be potentially significant in order to determine whether those variable interest entities (“VIEs”) F-16
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. NOTES TO FINANCIAL STATEMENTS STATEMENTS
will be required to be consolidated in the Company’s financial statements. In accordance with ASU No. 2009-17, the Com Compan pany y con conclu cluded ded it is the primary primary ben benefi eficia ciary ry of the QSPEs and acc accord ording ingly, ly, the Com Compan pany y beg began an consolidating the QSPEs on January 1, 2010 (see Note 9). Using the carrying amounts of the assets and liabilities of the QSPEs as prescribed by ASU No. 2009-17 and any corresponding elimination of activity between the QSPEs and the Company resulting from the consolidation on January 1, 2010, the Company recorded a $417 million increase in total assets, a $444 million increase in total liabilities, a $26 million (net of tax) decrease in beginning retained earnings and a $1 million decrease to stockholders equity. The Company has additional VIEs whereby the Company was determined not to be the primary beneficiary (see Note 25). Beginning January 1, 2010, the Company’s statements of income no longer reflect activity related to its Retained Interests, but instead reflects activity related to its securitized vacation ownership notes receivable and the corresponding securitized debt, including interest income, loan loss provisions, and interest expense. Interest income and loan loss provisions associated with the securitized vacation ownership notes receivable are included in the vacation ownership and residential sales and services line item. The cash flows from borrowings and repayment repay mentss assoc associated iated with the securitized securitized vacation ownership ownership debt are now presented presented as cash flows from financing activities. The Company does not expect to recognize gains or losses from future securitizations as a result of the adoption of this new guidance. While the year ended December 31, 2011 and 2010 have been accounted for under the new accounting standards, these years are not comparable to 2009 amounts, particularly with regards to vacation ownership and residential sales and services and interest expense. In Oct Octobe oberr 200 2009, 9, the FAS FASB B iss issued ued ASU 200 2009-1 9-13 3 whi which ch sup supers ersede edess cer certai tain n gui guidan dance ce in ASC 605 605-25 -25,, Revenue Recognition – Multiple Element Arrangements. This topic requires an entity to allocate arrangement
consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. This topic is effective for annual reporting periods beginning after June 15, 2010. The Company adopted this topic on January 1, 2011 and it did not have a material impact on its consolidated financial statements. Note 3.
Earnings Earni ngs (Los (Losses) ses) per Share
The following is a reconciliation of basic earnings (losses) per share to diluted earnings (losses) per share for income (losses) from continuing operations attributable to Starwood’s common shareholders (in millions, except per share data): Year Ended December 31, 2011 Earnin Ear nings gs
Basic earnings (losses) from continuing operations attributable to Starwood’s common shareholders . . . . . . . . . . . . . . . .
Shares Sha res
$ 5 02
1 89
Employee options and restricted stock awards . . . . . . . . . . . . . . . . . . . . . . . . . .
—
6
Diluted earnings (losses) from continuing operations attributable to Starwood’s common shareholders . . . . . . . . . . . . . . . .
$ 5 02
1 95
2010 Per Sharee Shar
$2.65
Earn Ea rnin ings gs
Shar Sh ares es
$31 0
18 3
—
7
$31 0
19 0
2009 Per Share
Earnings (Los (L osse ses) s)
$1.70
$ ( 1) 1)
180
—
—
$ ( 1) 1)
180
Shar Sh ares es
Per Share
$0.00
Effect of dilutive securities:
$2.57
$1.63
$0.00
Approximately 1 million shares, 5 million shares and 12 million shares were excluded from the computation of diluted shares in 2011, 2010 and 2009, respectively, as their impact would have been anti-dilutive. F-17
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. NOTES TO FINANCIAL STATEMENTS STATEMENTS Note 4.
Significan Signi ficantt Acqui Acquisiti sitions ons
During the year ended December 31, 2011, the Company executed a transaction with its former partner in a joint venture that owned three luxury hotels in Austria. In connection with the transaction, the Company acquired substantially the entire interest in two of the hotels in exchange for its interest in the third hotel and a cash payment, by the Company, of approximately $27 million. The Company previously held a 47.4% ownership interest in the hotels. In accordance with ASC 805, Business Combinations, the Company accounted for this transa tra nsacti ction on as a ste step p acq acquis uisiti ition, on, rem remeas easure ured d its pre previo viousl usly y hel held d inv invest estmen mentt to fai fairr val value ue and rec record orded ed the approx app roxima imatel tely y $50 mil millio lion n dif differ ferenc encee bet betwee ween n fai fairr val value ue and its car carryi rying ng val value ue to the gai gain n (lo (loss) ss) on ass asset et dispositions and impairments, net, line item. The fair values of the assets and liabilities acquired have been recorded in the Company’s consolidated balance sheet, including the resulting goodwill of approximately $26 million. The Company entered into a long-term management contract for the hotel in which it exchanged its minority ownership interest and recorded a deferred gain of approximately $30 million in connection with this exchange. During the year ended December 31, 2010, the Company paid approximately $23 million to acquire a controlling interest in a joint venture in which it had previously held a non-controlling interest. The primary business of the joint venture is to develop, license and manage restaurant concepts. The acquisition took place after one of the Company’s former partners exercised its right to put its interest to the Company in accordance Business ss Combin Combinations, ations, the with wit h the terms of the joint venture venture agr agreem eement ent.. In acc accord ordanc ancee wit with h ASC 805, Busine Company accounted for this transaction as a step acquisition, remeasured its previously held investment to fair value and recorded the approximately $5 million difference between fair value and its carrying value to the gain (loss) on asset dispositions and impairments, net, line item. The fair values of the assets and liabilities acquired were recorded in Starwood’s consolidated balance sheet, including the resulting goodwill of approximately $26 million. The results of operations going forward from the acquisition date have been included in the Company’s consolidated statements of income. Note 5.
Asset Disp Dispositi ositions ons and Impai Impairment rmentss
During the year ended December 31, 2011, the Company sold two wholly-owned hotels for cash proceeds of approximately approxima tely $237 mill million. ion. These hotel hotelss were sold subje subject ct to long-term management management agreements, agreements, and the Company recorded deferred gains of approximately $66 million relating to the sales. Also during the year ended Decemb Dec ember er 31, 201 2011 1 the Company Company sol sold d its interest interest in a con consol solida idated ted joint venture venture for cash pro procee ceeds ds of approximately $44 million, with the buyer assuming $57 million of the Company’s debt (see Note 15). The Company recognized a pretax loss of $18 million in discontinued operations as a result of the sale (see Note 18). Additionally, during the year ended December 31, 2011, the Company recorded an impairment charge of $31 million to write-off its noncontrolling interest in a joint venture that owns a hotel in Tokyo, Japan, a $16 millio mil lion n los losss due to the imp impair airmen mentt of fix fixed ed ass assets ets tha thatt wer weree wri writte tten n dow down n in con connec nectio tion n wit with h sig signif nifica icant nt renovations and related asset retirements at two properties and losses relating to the impairment of six hotels whose carrying value exceeded their fair value. These amounts were partially offset by a $50 million gain as a result res ult of rem remeas easuri uring ng the fai fairr val value ue of its previous previously ly hel held d non noncon contro trolli lling ng int intere erest st in two hot hotels els in whi which ch it obtained a controlling interest (see Note 4). During Duri ng th thee ye year ar en ende ded d De Dece cemb mber er 31 31,, 20 2010 10,, th thee Co Comp mpan any y re reco cord rded ed a ne nett lo loss ss on di disp spos osit itio ions ns of approximately $39 million, primarily related to a $53 million loss on the sale of one wholly-owned hotel subject to a long-term management contract, a $4 million impairment of fixed assets that are being retired in connection with a significant renovation of a wholly-owned hotel, and a $2 million impairment on one hotel whose carrying value val ue exc exceed eeded ed its fair val value. ue. The These se cha charge rgess wer weree par partia tially lly off offset set by a gai gain n of $14 mil millio lion n fro from m ins insura urance nce proceeds received for a claim at a wholly-owned hotel that suffered damage from a storm in 2008, a $5 million F-18
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. NOTES TO FINANCIAL STATEMENTS STATEMENTS
gain as a result of an acquisition of a controlling interest in a joint venture in which we previously held a non-controlling interest (see Note 4) and a $4 million gain from the sale of non-hotel assets. During Durin g the year ended Decem December ber 31, 2009, the Compa Company ny recorded impairment impairment charges charges of $41 mill million ion relating to the impairment of six hotels. Also during 2009, as a result of market conditions at the time and the impact on the timeshare industry, the Company reviewed the fair value of its economic interests in securitized VOI notes receivable and concluded these interests were impaired. The fair value of the Company’s investment in these retained interests was determined by estimating the net present value of the expected future cash flows, based on expected default and prepayment rates resulting in an impairment charge of $22 million. Additionally, the Company recorded losses of $18 million, primarily related to impairments of hotel management contracts, certain technology-related fixed assets and an investment in which the Company holds a minority interest. During the years ended December 31, 2011, 2010 and 2009, the Company reviewed the recoverability of its carrying values of its owned hotels and determined that certain hotels were impaired, as discussed above. The fair values of the hotels were estimated by using discounted cash flows, comparative sales for similar assets and recent letters of intent to sell certain assets. Impairment charges included above totaling $7 million, $2 million and $41 million, relating to six, one and six hotels, were recorded in the years ended December 31, 2011, 2010 and 2009, respectively. These assets are reported in the hotels operating segment. Note 6.
Plant,, Proper Plant Property ty and Equip Equipment ment
Plant, property and equipment consisted of the following (in millions): December 31, 2011
Land an Land and d imp impro rove veme ment ntss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buil Bu ildi ding ngss and and im impr prov ovem emen ents ts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Furn Fu rnit itur ure, e, fi fixt xtur ures es an and d equ equip ipme ment nt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cons Co nstr truc ucttio ion n wo worrk in pr pro oce cess ss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lesss accu Les accumul mulate ated d depre deprecia ciatio tion n and and amor amortiz tizati ation on . . . . . . . . . . . . . . . . . . . . . . . . . .
$
614 614 3,06 3, 066 6 1,85 1, 859 9 244 24 4
5,783 (2,513 (2, 513)) $ 3,2 ,270 70
2010
$
600 600 3,30 3, 300 0 1,90 1, 901 1 170 17 0
5,971 (2,648 (2, 648)) $ 3,3 ,32 23
The above balances include unamortized capitalized computer software costs of $155 million and $132 million at December 31, 2011 and 2010 respectively. Amortization of capitalized computer software costs was $32 million, $36 million and $36 million for the years ended December 31, 2011, 2010 and 2009, respectively.
F-19
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. NOTES TO FINANCIAL STATEMENTS STATEMENTS Note 7.
Goodwill Goodw ill and Intan Intangibl giblee Assets Assets
The changes in the carrying amount of goodwill for the years ended December 31, 2011 and 2010 is as follows (in millions): Hotel Segment
Vacation Ownership Segment
Total
Balan Bal ancce at Jan anua uary ry 1, 20 2010 10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cumulative translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . Asset dispositions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,3 $1 ,332 32 26 (8) (10) 8
$15 151 1 — — — —
$1,4 $1 ,48 83 26 (8) (10) 8
Bala Ba lanc ncee at De Dece cemb mber er 31 31,, 20 2010 10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,3 $1 ,348 48
$151 $1 51
$1,4 $1 ,499 99
Balan Bal ancce at Jan anua uary ry 1, 20 2011 11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cumulative translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . Asset dispositions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,3 $1 ,348 48 26 (11) (33) (1)
$15 151 1 — — — —
$1,4 $1 ,49 99 26 (11) (33) (1)
Bala Ba lanc ncee at De Dece cemb mber er 31 31,, 20 2011 11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,3 $1 ,329 29
$151 $1 51
$1,4 $1 ,480 80
In 201 2011, 1, the Company Company ear early ly ado adopte pted d ASU 201 2011-0 1-08 8 (th (thee “To “Topic pic”) ”) to con consid sider er imp impair airmen mentt for its two reporting units, hotel and vacation ownership. The Topic allows companies to perform a qualitative assessment of goodwill, to determine if the two-step goodwill impairment test is necessary. The determination depends on whether it is more likely than not that the fair value of a reporting unit is greater than the carrying amount. The Company concluded that the two-step goodwill impairment test is not required for either the hotel or vacation ownership reporting unit. The vacation ownership reporting unit results reflected a 30%, or $237 million, excess of fair value over book value in step 1 of the 2010 impairment test. The Company considered the fact that the 2011 results for the vacation ownership business exceeded expectations and evaluated other factors, such as discount rates and market rates of return for the business, all of which indicate an excess of fair value over book value. Based on this evaluation of internal and external qualitative factors, the Company concluded the two-step goodwill impairment test is not required for the vacation ownership reporting unit. The Company considered similar factors for the hotel business. In the hotel reporting unit, results reflected a 135%, or $8.6 billion, excess of fair value over book value in step one of the 2010 impairment test. The internal and external factors affecting this business indicate that the fair value of the hotel reporting unit continues to significantly exceed its carrying value and therefore, the Company concluded the two-step goodwill impairment test is not required for the hotel reporting unit. Prior to the adoption of the Topic in 2011, the Company performed its annual goodwill impairment test as of Octoberr 31, 201 Octobe 2010 0 for its hot hotel el and vac vacati ation on own owners ership hip rep report orting ing uni units ts and det determ ermine ined d tha thatt the there re was no impairment of its goodwill. The fair value was calculated using a discounted cash flow model, in which the underlying cash flows were derived from management’s current financial projections. The two key assumptions used in the fair value calculation are the discount rate and the capitalization rate in the terminal period, which were 10% and 2%, respectively.
F-20
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. NOTES TO FINANCIAL STATEMENTS STATEMENTS
Intangible assets consisted of the following (in millions): December 31, 2011
2010
Tradem Trad emar arks ks and and tra trade de nam names es . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mana Ma nage geme ment nt an and d fra franc nchi hise se ag agre reem emen ents ts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Othe Ot herr . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 313 412 41 2 16
$ 309 377 37 7 78
Accu Ac cumu mula late ted d amo amort rtiz izat atio ion n . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .
741 (164 (1 64))
764 (196 (1 96))
$ 577
$ 568
The intangible assets related to management and franchise agreements have finite lives, and accordingly, the Company recorded amortization expense of $29 million, $33 million, and $35 million, respectively, during the years ended December 31, 2011, 2010 and 2009. The other intangible assets noted above have indefinite lives. Amortization expense relating to intangible assets with finite lives for each of the years ended December 31, is expected to be as follows (in millions): 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 2013 20 13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2014 20 14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2015 20 15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 20 16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notee 8. Not
$29 $29 $29 $2 9 $29 $2 9 $28 $2 8 $28 $2 8
Other Oth er As Asset setss
Other assets include the following (in millions): December 31, 2011
2010
VOI not VOI notes es re rece ceiv ivab able le,, net net of of all allow owan ance ce of $4 $46 6 and and $6 $69 9 . . .. . .. . .. . .. . .. . .. . .. . .. Prep Pr epai aids ds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depo De posi sits ts an and d oth other er . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 93 104 10 4 158 15 8
$132 $1 32 88 161 16 1
Tota To tall . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$355 $3 55
$381 $3 81
See Note 10 for discussion relating to VOI notes receivable. Note 9.
Transfers Trans fers of Finan Financial cial Asse Assets ts
As discussed in Note 2, the Company adopted ASU 2009-16 and ASU 2009 -17 on January 1, 2010. As a result res ult,, the Com Compan pany y con conclu cluded ded it has var variab iable le int intere erests sts in the ent entiti ities es ass associ ociate ated d wit with h its fiv fivee out outsta standi nding ng securitiz secur itization ation transactions. transactions. As thes thesee secur securitiz itization ationss consi consist st of simi similar, lar, homog homogenous enous loans, they have been aggregated for disclosure purposes. The Company applied the variable interest model and determined it is the primary prima ry benef beneficiar iciary y of thes thesee VIEs. In makin making g this determinatio determination, n, the Company evaluated evaluated the activities activities that significantly impact the economics of the VIEs, including the management of the securitized notes receivable and any related non-performing loans. The Company also evaluated its retention of the residual economic interests in the related VIEs. The Company is the servicer of the securitized mortgage receivables. The Company also has the F-21
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. NOTES TO FINANCIAL STATEMENTS STATEMENTS
option, subject to certain limitations, to repurchase or replace VOI notes receivable, that are in default, at their outsta out standi nding ng pri princi ncipal pal amo amount unts. s. Suc Such h act activi ivity ty tot totale aled d $31 mil millio lion n and $38 mil millio lion n dur during ing 201 2011 1 and 201 2010, 0, respectively. The Company has been able to resell the VOIs underlying the VOI notes repurchased or replaced under these provisions without incurring significant losses. The Company holds the risk of potential loss (or gain) as the last to be paid out by proceeds of the VIEs under the terms of the agreements. As such, the Company holds both the power to direct the activities of the VIEs and obligation to absorb the losses (or benefits) from the VIEs. The securitization agreements are without recourse to the Company, except for breaches of representations and warranties. Based on the right of the Company to fund defaults at its option, subject to certain limitations, it intends to do so until the debt is extinguished to maintain the credit rating of the underlying notes. Upon transfer of vacation ownership notes receivable to the VIEs, the receivables and certain cash flows derived from them become restricted for use in meeting obligations to the VIE creditors. The VIEs utilize trusts which have ownership of cash balances that also have restrictions, the amounts of which are reported in restricted cash. The Company’s interests in trust assets are subordinate to the interests of third-party investors and, as such, may not be realized by the Company if needed to absorb deficiencies in cash flows that are allocated to the investors in the trusts’ debt (see Note 16). The Company is contractually obligated to receive the excess cash flows (spread between the colle collection ctionss on the notes and third part party y oblig obligatio ations ns defi defined ned in the securitizatio securitization n agreem agr eement ents) s) fro from m the VIE VIEs. s. Suc Such h act activi ivity ty tot totale aled d $44 mil millio lion n and $43 mil milli lion on dur during ing 201 2011 1 and 201 2010, 0, respectively, and is classified in cash and cash equivalents. Duri Du ring ng th thee ye year ar en ende ded d De Dece cemb mber er 31 31,, 20 2011 11,, th thee Co Comp mpan any y co comp mple lete ted d th thee 20 2011 11 se secu curi riti tiza zati tion on of approximately $210 million of vacation ownership notes receivable. The securitization transaction did not qualify as a sal salee for accounti accounting ng pur purpos poses es and and,, acc accord ording ingly, ly, no gai gain n or los losss was recogniz recognized. ed. Of the $210 mil millio lion n securitized in the 2011-A transaction, $200 million was previously unsecuritized and approximately $10 million had previously been securitized in the 2003 securitization which was terminated in connection with the 2011 securitiz secur itization ation.. The 2003 secur securitiz itization ation was term terminate inated, d, inclu including ding pay-d pay-down own of all outst outstandin anding g princ principal ipal and interest inter est due. The net cash proce proceeds eds from the securitizati securitization, on, afte afterr term terminat ination ion of the 2003 secur securitiz itization ation and associated deal costs, were approximately $177 million. During Duri ng th thee ye year ar en ende ded d De Dece cemb mber er 31 31,, 20 2010 10,, th thee Co Comp mpan any y co comp mple lete ted d th thee 20 2010 10 se secu curi riti tiza zati tion on of approximately $300 million of vacation ownership notes receivable. The securitization transaction did not qualify as a sale for accounting purposes and, accordingly, no gain or loss was recognized. Approximately $93 million of proceeds from this transaction were used to terminate the securitization completed in June 2009 by repaying the outsta out standi nding ng pri princi ncipal pal and int intere erest st on the sec securi uritiz tized ed deb debt. t. In con connec nectio tion n wit with h the ter termin minati ation, on, a cha charge rge of $5 million was recorded to interest expense, relating to the settlement of a balance guarantee interest rate swap and the write-off of deferred financing costs. The net cash proceeds from the securitization after termination of the 2009 securitization and associated deal costs were approximately $180 million. See Note 10 for disclosures and amounts related to the securitized vacation ownership notes receivable consolidated on the Company’s balance sheets as of December 31, 2011 and 2010. Prior to the adoption of ASU 2009-16 and 2009-17, the Company completed securitizations of its VOI notes receivables, which qualified for sales treatment. Retained Interests cash flows were limited to the cash available from the related VOI notes receivable, after servicing and other related fees, absorbing 100% of any credit losses on the related VOI notes receivable and QSPE fixed rate interest expense. The Company’s replacement of the defaulted VOI notes receivable under the securitization agreements with new VOI notes receivable resulted in net gains of approximately $3 million during 2009, which are included in vacation ownership and residential sales and services in the Company’s consolidated statements of income. F-22
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. NOTES TO FINANCIAL STATEMENTS STATEMENTS
In June 2009, the Company securitized approximately $181 million of VOI notes receivable (the “2009-A Securitization”) resulting in cash proceeds of approximately $125 million. The Company retained $44 million of interests in the QSPE, which included $43 million of notes the Company effectively owned after the transfer and $1 million related to the interest only strip. The related loss on the 2009-A Securitization of $2 million was included in vacation ownership and residential sales and services in the Company’s consolidated statements of income. In December 2009, the Company securitized securitized approximately approximately $200 mill million ion of VOI notes recei receivabl vablee (the “2009-B “2009 -B Secur Securitiza itization” tion”)) resul resulting ting in cash proceeds of appro approxima ximately tely $166 million. The Compa Company ny reta retained ined $31 million of inte interest restss in the QSPE, which included $22 mill million ion of notes the Compa Company ny effectively effectively owned after the transfer and $9 million related to the interest only strip. The related gain on the 2009-B Securitization of $19 million is incl included uded in vacat vacation ion ownership and resid residenti ential al sale saless and services in the Company’s consolidated consolidated statements of income. In December 2009, the Company entered into an amendment with the third-party beneficial interest owner regarding the notes issued in the 2009-A Securitization (the 2009-A Amendment). The amendment to the terms included a reduction of the coupon rate and an increase in the effective advance rate. As the increase in the advance rate produced additional cash proceeds of $9 million, this resulted effectively in additional loans sold to the QSPE from the original over collateralization. The related gain on the 2009-A Amendment of $4 million was included in vacation ownership and residential sales and services in the Company’s consolidated statements of income. Notee 10. Not
Notes Not es Rec Receiv eivabl ablee
Notes Not es rec receiv eivabl ablee (ne (nett of res reserv erves) es) rel relate ated d to the Com Compan pany’s y’s vac vacati ation on own owners ership hip loa loans ns con consis sistt of the following (in millions): December 31,
Vacation Vacati on owne ownersh rship ip loan loans-s s-secu ecurit ritize ized d . . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . . Vaca Va cati tion on ow owne ners rshi hip p loa loans ns-u -uns nsec ecur urit itiz ized ed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: current portion Vaca Va cati tion on ow owne ners rshi hip p lloa oans ns-s -sec ecur urit itiz ized ed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vaca Va cati tion on ow owne ners rshi hip p loa loans ns-u -uns nsec ecur urit itiz ized ed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011
2010
$510 $510 113 11 3
$467 $467 152 15 2
623
619
(64) (64) (20) (2 0)
(59) (59) (20) (2 0)
$539
$540
The cur curren rentt and lon long-t g-term erm mat maturi uritie tiess of uns unsecu ecurit ritize ized d VOI not notes es rec receiv eivabl ablee are inc includ luded ed in acc accoun ounts ts receivable and other assets, respectively, in the Company’s consolidated balance sheets. The Company records interest income associated with VOI notes in its vacation ownership and residential sale and services line item in its consolidated statements of income. Interest income related to the Company’s VOI notes receivable was as follows (in millions): Year Ended December 31,
Vacati Vaca tion on ow owne ners rshi hip p loa loans ns-s -sec ecur urit itiz ized ed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vaca Va cati tion on ow owne ners rshi hip p lo loan anss-un unse secu curi riti tize zed d ................................
F-23
2011
2010
2009
$64 $64 21
$66 $66 21
$— 48
$85
$87
$48
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. NOTES TO FINANCIAL STATEMENTS STATEMENTS
The following tables present future maturities of gross VOI notes receivable (in millions) and interest rates: Secu Se curi riti tize zed d
Unse Un secu curi riti tize zed d
Tota To tall
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
73 77 79 78 283
$
29 14 12 14 100
$
102 91 91 92 383
Balance at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . .
$
590
$
169
$
759
Wei eigh ghte ted d Av Aver erag agee In Intter ereest Ra Rattes . . . . . . . . . . . . . . . . . . . . . . . .
12.8 12 .84% 4%
11.8 11 .89% 9%
12. 2.5 58%
Ran Ra nge of in intter eres estt rat ates es . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5 to 17 17% %
5 to 17 17% %
5 to 17 17% %
For the vac vacati ation on own owners ership hip and res reside identi ntial al seg segmen ment, t, the Com Compan pany y rec record ordss an est estima imate te of exp expect ected ed uncollectibility on its VOI notes receivable as a reduction of revenue at the time it recognizes profit on a timeshare sale. The Company holds large amounts of homogeneous VOI notes receivable and therefore assesses uncollectibility based on pools of receivables. In estimating loss reserves, the Company uses a technique referred to as static pool analysis, which tracks uncollectible notes for each year’s sales over the life of the respective notes and projects an estimated default rate that is used in the determination of its loan loss reserve requirements. As of December 31, 2011, the average estimated default rate for the Company’s pools of receivables was 9.9%. The activity and balances for the Company’s loan loss reserve are as follows (in millions): Secu Se curi riti tize zed d
Balance at December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provisions for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Write-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$— — —
Unse Un secu curi riti tize zed d
Tota To tall
$ 91 64 (61)
$ 91 64 (61)
Balance at December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provisions for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Write-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adoption of ASU No. 2009-17 . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— 14 — 77 (9)
94 32 (52) (4) 9
94 46 (52) 73 —
Balance at December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provisions for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Write-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
82 2 — (4)
79 27 (54) 4
161 29 (54) —
Balance at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$80
$ 56
$136
The primary credit quality indicator used by the Company to calculate the loan loss reserve for the vacation ownership notes is the origination of the notes by brand (Sheraton, Westin, and Other) as the Company believes there is a relationship between the default behavior of borrowers and the brand associated with the vacation ownership property they have acquired. In addition to quantitatively calculating the loan loss reserve based on its static pool analysis, the Company supplements the process by evaluating certain qualitative data, including the aging of the respective receivables, current default trends by brand and origination year, and the FICO scores of the buyers. F-24
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. NOTES TO FINANCIAL STATEMENTS STATEMENTS
Given the significance of the Company’s respective pools of VOI notes receivable, a change in the projected default defau lt rate can have a signi significa ficant nt impa impact ct to its loan loss reserve requirements requirements,, with a 0.1% change estimated estimated to have an impact of approximately $4 million. The Company considers a VOI note receivable delinquent when it is more than 30 days outstanding. All delinquent loans are placed on nonaccrual status and the Company does not resume interest accrual until payment is mad made. e. Upo Upon n rea reachi ching ng 120 days out outsta standi nding, ng, the loa loan n is con consid sidere ered d to be in def defaul aultt and the Com Compan pany y commences the repossession process. Uncollectible VOI notes receivable are charged off when title to the unit is return ret urned ed to the Com Compan pany. y. The Com Compan pany y gen genera erally lly doe doess not mod modify ify vac vacati ation on own owners ership hip not notes es tha thatt bec become ome delinquent or upon default. Past due balances of VOI notes receivable by credit quality indicators are as follows (in millions):
As of December 31, 2011: Sheraton . . . . . . . . . . . . . . . . . . . . . . . Westin . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . .
As of December 31, 2010: Sheraton . . . . . . . . . . . . . . . . . . . . . . . Westin . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . .
Note No te 11 11..
30-59 Days Past Due
60-89 Days Past Due
>90 Days Past Due
Total Past Due
Current
Total Receivables
$ 5 3 1
$3 2 1
$26 17 4
$34 22 6
$321 345 31
$355 367 37
$ 9
$6
$47
$62
$697
$759
$ 6 5 1
$4 3 1
$30 33 4
$40 41 6
$314 342 37
$354 383 43
$12
$8
$67
$87
$693
$780
Fair Fa ir Va Valu luee
The following table presents the Compa Company’s ny’s fair value hierarchy hierarchy for its finan financial cial assets and liabi liabiliti lities es measured at fair value on a recurring basis as of December 31, 2011 (in millions):
Assets: Interest Rate Swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forward contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Level 1
Level 2
Level 3
Total
$— —
$12 3
$— —
$12 3
$—
$15
$—
$15
The forward contracts are over the counter contracts that do not trade on a public exchange. The fair values of the contracts are based on inputs such as foreign currency spot rates and forward points that are readily available avail able on publi publicc mark markets, ets, and as such, are clas classifie sified d as Level 2. The Company considered considered both its cred credit it risk, as well as its count counterpar erparties ties’’ credi creditt risk in deter determini mining ng fair value and no adju adjustmen stmentt was made as it was deeme deemed d insignificant based on the short duration of the contracts and the Company’s rate of short-term debt. The interest rate swaps are valued using an income approach. Expected future cash flows are converted to a present value amount based on market expectations of the yield curve on floating interest rates, which is readily available on public markets. F-25
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. NOTES TO FINANCIAL STATEMENTS STATEMENTS Notee 12. Not
Deferr Def erred ed Gai Gains ns
The Company defers gains realized in connection with the sale of a property for which the Company continues to manage the property through a long-term management agreement and recognizes the gains over the initial term of the related agreement. As of December 31, 2011 and 2010, the Company had total deferred gains of $1.018 bill billion ion and $1.01 $1.011 1 bill billion, ion, respectively, respectively, included included in accrued expenses and other liabiliti liabilities es in the Compan Com pany’s y’s con consol solida idated ted bal balanc ancee she sheets ets.. Amo Amorti rtizat zation ion of def deferr erred ed gai gains ns is inc includ luded ed in man manage agemen mentt fee fees, s, franchise fees and other income in the Company’s consolidated statements of income and totaled approximately $87 million, $81 million and $82 million in 2011, 2010 and 2009, respectively. Note 13.
Restructu Rest ructuring, ring, Goodwi Goodwill ll Impairmen Impairmentt and Other Special Special Charges Charges (Credit (Credits), s), Net
Restructur Restr ucturing, ing, Goodwill Impairment Impairment and Other Special Charges (Credits) (Credits) by opera operating ting segment are as follows (in millions): Year Ended December 31, 2011
2010
2009
Segment Hote Ho tell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vaca Va cati tion on Ow Owne ners rshi hip p & Re Resi side dent ntia iall . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$70 $70 (2)) (2
$(74)) $(74 (1)) (1
$ 21 358 35 8
Tota To tall . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$68 $6 8
$(75 $( 75))
$379 $3 79
During the year ended December 31, 2011, the Company recorded a charge of $70 million related to an unfavorable decision in a lawsuit (see Note 25) and a credit of $2 million to adjust previously recorded reserves to the amounts the Company now expects to pay. During Dur ing the year end ended ed Dec Decemb ember er 31, 201 2010, 0, the Company Company rec receiv eived ed cas cash h pro procee ceeds ds of $75 mil millio lion n in connectio connec tion n wit with h the fav favora orable ble set settle tlemen mentt of a law lawsui suit. t. The Com Compan pany y rec record orded ed thi thiss set settle tlemen ment, t, net of the reimbursement of legal costs incurred in connection with the litigation, as a credit to restructuring, goodwill impairment, and other special charges (credits) line item. Additionally, the Company recorded a credit of $8 million as a liability associated with an acquisition in 1998 that was no longer deemed necessary (see Note 25). During the year ended December 31, 2009, the Company completed a comprehensive review of its vacation ownership owner ship business. business. The Company decided not to develop certain vacation vacation owner ownership ship sites and futur futuree phase phasess of certain existing projects. As a result of these decisions, the Company recorded a primarily non-cash impairment charge of $255 million. The impairment included a charge of approximately $148 million primarily related to land held for development; a charge of $64 million for the reduction in inventory values at four properties; the writewri te-off off of fix fixed ed ass assets ets of $21 mi milli llion; on; fac facili ility ty exi exitt cos costs ts of $15 million million and $7 mil millio lion n in oth other er cos costs. ts. Additionally, as a result of this decision and the economic climate at that time, the Company recorded a $90 million non-cash charge for the impairment of goodwill in the vacation ownership reporting unit. Additiona Additi onally lly,, in 200 2009, 9, the Com Compan pany y rec record orded ed res restru tructu cturin ring g and oth other er spe specia ciall cha charge rgess of $34 mi milli llion, on, primarily related to severance charges and costs to close vacation ownership sales galleries, associated with its ongoing initiative of rationalizing its cost structure. In determining determining the fair value associated associated with the impa impairme irment nt charg charges es the Compa Company ny primarily primarily used the income and market approaches. Under the income approach, fair value was determined based on estimated future cash flows taking into consideration items such as operating margins and the sales pace of vacation ownership intervals, discounted using a rate commensurate with the inherent risk of the project. Under the market approach, fair value was determined with the comparable sales of similar assets and appraisals. F-26
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. NOTES TO FINANCIAL STATEMENTS STATEMENTS
The Company had remaining restructuring accruals of $89 million as of December 31, 2011, primarily recorded in accrued expenses. Notee 14. Not
Income Inc ome Tax Taxes es
Income tax data from continuing operations of the Company is as follows (in millions): Year Ended December 31, 2011
2010
2009
$ 16 165 5 260 26 0
$ 85 250 25 0
$ (76 76)) (220 (2 20))
Pretax income
U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. Forrei Fo eign gn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 425
$335
$(296)
$(21 $( 215) 5) (21) 88
$ (6 (61) 1) 18 43
$ (84) (84) 12 38
(148)
—
(34)
62 (11) (1 1) 22
22 (7)) (7 12
(117) (18 18)) (124)
73
27
(259)
$ 27
$(293)
Provision (benefit) for income tax
Current: U.S. U. S. fe fede dera rall . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State and local . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred: U.S U. S. federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stat St atee and lo loca call . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (75)
No pro provis vision ion has bee been n mad madee for U.S U.S.. tax taxes es pay payabl ablee on und undist istrib ribute uted d for foreig eign n ear earnin nings gs amo amount unting ing to approximately $2.3 billion as of December 31, 2011 since these amounts are permanently reinvested. If such earnings were repatriated, additional tax expense may result, although the calculation of such additional taxes is not practicable. Deferred income taxes represent the tax effect of the differences between the book and tax bases of assets and lia liabil biliti ities es plu pluss car carryf ryforw orward ard ite items. ms. The com compos positi ition on of net def deferr erred ed tax bal balanc ances es wer weree as fol follow lowss (in millions): December 31, 2011
2010
Curren Curr entt def defer erre red d tax tax asse assets ts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long Lo ng-t -ter erm m def defer erre red d tax tax as asse sets ts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Curr Cu rren entt def defer erre red d tax tax li liab abil ilit itie iess (1) (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long Lo ng-t -ter erm m def defer erre red d tax tax li liab abil ilit itie iess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$278 $278 639 63 9 (7)) (7 (46) (4 6)
$315 $315 664 66 4 (4)) (4 (24) (2 4)
Defe De ferr rred ed inc incom omee taxe taxess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$864 $8 64
$951 $9 51
(1) Included in the Accrued taxes taxes and other line item in the consolidated consolidated balance sheets. F-27
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. NOTES TO FINANCIAL STATEMENTS STATEMENTS
The tax effect of the temporary differences and carryforward items that give rise to deferred taxes were as follows (in millions): December 31, 2011
Plant, Plan t, pr prop oper erty ty an and d equ equip ipme ment nt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Int ntaang ngiibl bles es . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inv nven ento torrie iess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deffer De erre red d ga gain inss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inv nves estm tmen entts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reccei Re eiva vabl bles es (ne nett of re rese serrve ves) s) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accr Ac crue ued d ex expe pens nses es an and d ot othe herr re rese serv rves es . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Empl Em ploy oyee ee be bene nefi fits ts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nett op Ne oper erat atin ing g lo loss ss,, ca capi pita tall lo loss ss an and d ta tax x cr cred edit it ca carr rryf yfor orwa ward rdss . . . . . . . . . . . . . . . . . . Othe Ot herr . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010
$ (23) (23) $ (1 (17) 7) (11 11)) 177 177 118 140 14 0 350 346 34 6 133 (4) 9 85 201 20 1 181 18 1 61 79 257 25 7 406 40 6 (6) (45 45))
Less Le ss va valu luat atio ion n all allow owan ance ce . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,089 (225 (2 25))
Defe De ferr rred ed in inco come me ta taxe xess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 86 864 4
1,348 (397 (3 97)) $ 95 951 1
At December 31, 2011, the Company had federal net operating losses, which have varying expiration dates extending through 2031, of approximately $15 million. The Company also had federal general business credits of approximately $21million, which have varying expiration dates extending through 2030. The Company expects to realize substantially all of the tax benefit associated with these attributes. At December 31, 2011, the Company had state net operating losses, which have varying expiration dates extending exten ding through 2028, of appr approxima oximately tely $1.6 bill billion. ion. The Compa Company ny also had stat statee tax credit carryforwards carryforwards of $21 mil millio lion n whi which ch are indefini indefinite te or wil willl ful fully ly exp expire ire by 202 2026. 6. The Com Compan pany y has est establ ablish ished ed a val valuat uation ion allowance against the majority of these attributes as it is unlikely that the tax benefit of these attributes will be realized prior to expiration. At December 31, 2011 the Company had foreign net operating losses and capital losses, which are indefinite or have varying expiration expiration dates extending extending thro through ugh 2020, of appro approxima ximately tely $283 mill million ion and $22 million, respec res pecti tivel vely. y. The Com Compan pany y als also o had tax cre credit dit car carryf ryforw orward ardss of app approx roxima imatel tely y $13 mil millio lion n in for foreig eign n jurisdictions. The tax credit carryforwards available in foreign jurisdictions are indefinite or will fully expire by 2020. The Company has established a valuation allowance against the majority of these attributes as it is unlikely that the tax benefit of these attributes will be realized prior to expiration.
F-28
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. NOTES TO FINANCIAL STATEMENTS STATEMENTS
A reconciliation of the tax provision of the Company at the U.S. statutory rate to the provision for income tax as reported is as follows (in millions): Year Ended December 31, 2011
2010
2009
Tax pro Tax provi visi sion on at U.S U.S.. sta statu tuto tory ry ra rate te . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. U. S. st stat atee an and d loc ocal al inc ncom omee tax axes es . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax Ta x on rep epat atri riat atio ion n of fo fore reiign ea earn rniing ngss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fore Fo reig ign n ta tax x ra rate te di diff ffer eren enti tial al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax on capital gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chaang Ch ngee in as assset ba basi siss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nondeductible goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in uncertain tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax Ta x set etttle leme ment ntss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax Ta x on as asse sett di disp spos osit itio ion ns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chan Ch ange ge in va valu luat atio ion n al allo lowa wanc nces es . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 149 (19) (1 9) 25 (64) (6 4) 334 (13 130) 0) 9 8 (25) (2 5) (60) (6 0) (304 (3 04)) 2
$117 $1 17 (2)) (2 (19) (1 9) (70) (7 0) 99 — 3 23 (42) (4 2) 1 (99) (9 9) 16
$(10 $( 104) 4) (3) (45 45)) (25) (2 5) — (120 (1 20)) 39 9 1 (32 32)) — (13)
Prov Pr ovis isio ion n for for in inco come me ta tax x (be (bene nefi fit) t) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (7 (75) 5)
$ 27
$(29 $( 293) 3)
The foreign tax rate differential benefit primarily relates to the Company’s operations in Luxembourg and Singapore. In 2011, the Company completed transactions that involved certain domestic and foreign subsidiaries. These transactions transacti ons gener generated ated capital gain gains, s, incre increased ased the tax basis in subsi subsidiari diaries es inclu including ding U.S. partn partnersh erships ips and resulted in the inclusion of foreign earnings for U.S. tax purposes. The capital gains were largely reduced by the utilization of capital losses. Due to the uncertainty regarding the Company’s ability to generate capital gain income, incom e, the deferred tax asset associated associated with these capit capital al losses was offse offsett by a full valuation valuation allowance allowance prior to these transactions. During 2009, the Company entered into an Italian tax incentive program through which the tax basis of its Italian owned hotels was adjusted resulting in a $120 million tax benefit. During 2011, the IRS closed its audit with respect to tax years 2004 through 2006 resulting in a $25 million tax benefit primarily related to the reversal of tax and interest reserves. During 2010, the IRS closed its audit with respect to tax years 1998 through 2003 and the Company recognized a $42 million tax benefit in continuing operations primarily associated with the refund of interest on taxes previously paid. Also in 2010, as a result of the 199 1998 8 thr throug ough h 200 2003 3 aud audit it clo closur sure, e, the Com Compan pany y rec recogn ognize ized d a $13 $134 4 mi milli llion on tax ben benefi efitt in dis discon contin tinued ued operations primarily related to the portion of the tax no longer due. As of December 31, 2011, the Company had approximately $153 million of total unrecognized tax benefits, of which $42 million would affect its effective tax rate if recognized. A reconciliation of the beginning and ending balance of unrecognized tax benefits is as follows (in millions): Year Ended December 31, 2011
2010
Beginn Begi nnin ing g of of Yea Yearr . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Add Ad ditions based on tax positions related to the current year . . . . . . . . . . Add Ad ditions for tax positions of prior years . . . . . . . . . . . . . . . . . . . . . . . . Sett Se ttle leme ment ntss wi with th ta tax x au auth thor orit itie iess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Red Re ductions for tax positions in prior years . . . . . . . . . . . . . . . . . . . . . . . Redu Re duct ctio ions ns du duee to th thee la laps psee of ap appl plic icab able le st stat atut utes es of li limi mita tati tion onss . . . . . .
$ 51 510 0 24 36 (407 (4 07)) (6) (4)) (4
$ 99 999 9 29 18 (499 (4 99)) (5) (32) (3 2)
$1,0 $1 ,003 03 4 2 (7)) (7 (1) (2)) (2
End En d of of Yea Yearr . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 153 153
$ 510 510
$ 99 999 9
F-29
2009
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. NOTES TO FINANCIAL STATEMENTS STATEMENTS
It is reasonably possible that approximately $25 million of the Company’s unrecognized tax benefits as of December 31, 2011 will reverse within the next twelve months. The Company recognizes interest and penalties related to unrecognized tax benefits through income tax expense. The Company had $74 million and $92 million accrued for the payment of interest as of December 31, 2011 201 1 and December December 31, 2010, res respec pectiv tively ely.. The Company Company did not hav havee any reserves reserves for penaltie penaltiess as of December 31, 2011 and 2010. The Company is subject to taxation in the U.S. federal jurisdiction, as well as various state and foreign jurisdictions. As of December 31, 2011, the Company is no longer subject to examination by U.S. federal taxing authorities for years prior to 2007 and to examination by any U.S. state taxing authority prior to 1998. All subsequent periods remain eligible for examination. In the significant foreign jurisdictions in which the Company operates, opera tes, the Compa Company ny is no longer subj subject ect to exami examinatio nation n by the rele relevant vant taxing authorities authorities for any years prior to 2001. Note No te 15 15..
Debt De bt
Long-term debt and short-term borrowings consisted of the following (in millions): December 31, 2011
Senior Credit Facility: Revo Re volv lvin ing g Cre Credi ditt Fac Facil ilit ity, y, ma matu turi ring ng 20 2013 13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Seni Se nior or No Note tes, s, in inte tere rest st at 7. 7.87 875% 5%,, set settl tled ed 20 2011 11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Seni Se nior or No Note tes, s, in inte tere rest st at 6.2 6.25% 5%,, mat matur urin ing g 201 2013 3 . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . Seni Se nior or No Note tes, s, in inte tere rest st at 7.8 7.875 75%, %, ma matu turi ring ng 20 2014 14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Seni Se nior or No Note tes, s, in inte tere rest st at 7.3 7.375 75%, %, ma matu turi ring ng 20 2015 15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Seni Se nior or No Note tes, s, in inte tere rest st at 6.7 6.75% 5%,, mat matur urin ing g 201 2018 8 . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . Seni Se nior or No Note tes, s, in inte tere rest st at 7.1 7.15% 5%,, mat matur urin ing g 201 2019 9 . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . Mortga Mor tgages ges and oth other, er, int intere erest st rat rates es ran rangin ging g fro from m 1.0 1.00% 0% to 9.0 9.00%, 0%, var variou iouss mat maturi uritie tiess . . . . . . . .
$
— — 500 50 0 497 49 7 450 45 0 400 40 0 245 24 5 105
2010
$
— 609 60 9 504 50 4 490 49 0 450 45 0 400 40 0 245 24 5 159
Less Le ss cu curr rren entt mat matur urit itie iess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,1 ,197 97 2,857 2,85 7 (3)) (3 (9) (9)
Long Lo ng-t -ter erm m debt debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,19 $2 ,194 4
F-30
$2,8 $2 ,848 48
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. NOTES TO FINANCIAL STATEMENTS STATEMENTS
Aggregate debt maturities for each of the years ended December 31 are as follows (in millions): 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2012 3 2013 20 13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 505 505 2014 20 14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 502 50 2 2015 20 15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 455 45 5 2016 20 16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Ther Th erea eaft fter er . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 693 69 3 $2,197 The Company maintains lines of credit under which bank loans and other short-term debt are drawn. In addition, additi on, sma smalle llerr cre credit dit lin lines es are mai mainta ntaine ined d by the Com Compan pany’s y’s for foreig eign n sub subsid sidiar iaries ies.. The Com Compan pany y had approximately $1.5 billion of available borrowing capacity under its domestic and foreign lines of credit as of December 31, 2011. The short-term borrowings under these lines of credit at December 31, 2011 and 2010 were de minimus. The Company is subject to certain restrictive debt covenants under its short-term borrowing and long-term debt obligations including defined financial covenants, limitations on incurring additional debt, ability to pay divide div idends nds,, esc escrow row acc accoun ountt fun fundin ding g req requir uireme ements nts for deb debtt ser servic vice, e, cap capita itall exp expend enditu itures res,, tax pay paymen ments ts and insurance premiums, among other restrictions. The Company was in compliance with all of the short-term and long-term debt covenants at December 31, 2011. During the year ended December During December 31, 2011, the Company entered entered into a credi creditt agree agreement ment which provided a loan of approximately $38 million, which is due in 2016, and is secured by one of its owned hotels. Proceeds from this loan were used to pay off an existing credit agreement that was due in 2012. During the year ended December 31, 2011, the Company redeemed all of the outstanding 7.875% Senior Notes due 201 Notes 2012, 2, whi which ch had a pri princi ncipal pal amo amount unt of app approx roxima imatel tely y $60 $605 5 mil millio lion. n. In con connec nectio tion n wit with h thi thiss transaction, the Company terminated two interest rate swaps related to the 7.875% Senior Notes, which had notional amounts totaling $200 million (see Note 23). As a result of the early redemption of the 7.875% Senior Notes, the Company recorded a net charge of approximately $16 million in interest expense, net of interest income line item in its statement of income, representing the tender premiums, swap settlements and other related redemption costs. During the year ended December 31, 2011, the Company sold its interest in a consolidated joint venture which resulted in the buyer assuming approximately $57 million of the Company’s mortgage debt. During the year ended December 31, 2011, the Company entered into two interest rate swaps with a total notional amount of $100 million, whereby the Company pays floating and receives fixed interest rates (see Note 23). On April 20, 2010, the Company entered into a $1.5 billion senior credit facility. The facility matures on November 15, 2013 and replaces the previous $1.875 billion revolving credit agreement, which would have matured on February 11, 2011. The new facility includes an accordion feature under which the Company may increa inc rease se the rev revolv olving ing loa loan n com commit mitmen mentt by up to $37 $375 5 mil millio lion n sub subjec jectt to cer certai tain n con condit dition ionss and ban bank k commitments. The multi-currency facility enhances the Company’s financial flexibility and is expected to be used for general corporate purposes. The Company had no borrowings under the senior credit facility and $171 million of letters of credit outstanding as of December 31, 2011. F-31
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. NOTES TO FINANCIAL STATEMENTS STATEMENTS Note 16.
Securitize Secur itized d Vacati Vacation on Owner Ownership ship Debt
Long-term and short-term securitized vacation ownership debt consisted of the following (in millions): December 31,
2003 sec 2003 securi uritiz tizati ation, on, int intere erest st rat rates es ran rangin ging g fro from m 3.9 3.95% 5% to 6.9 6.96%, 6%, set settle tled d 201 2011 1 ...... 2005 20 05 se secu curi riti tiza zati tion on,, in inte tere rest st ra rate tess ra rang ngin ing g fr from om 5. 5.25 25% % to 6. 6.29 29%, %, ma matu turi ring ng 20 2018 18 . . . . 2006 20 06 se secu curi riti tiza zati tion on,, in inte tere rest st ra rate tess ra rang ngin ing g fr from om 5. 5.28 28% % to 5. 5.85 85%, %, ma matu turi ring ng 20 2018 18 . . . . 2009 20 09 se secu curi riti tiza zati tion ons, s, in inte tere rest st ra rate te at 5. 5.81 81%, %, ma matu turi ring ng 20 2016 16 . . . . . . . . . . . . . . . . . . . . 2010 201 0 sec securi uritiz tizati ation, on, int intere erest st rat rates es ran rangin ging g fro from m 3.6 3.65% 5% to 4.7 4.75%, 5%, mat maturi uring ng 202 2021 1 .... 2011 20 11 se secu curi riti tiza zati tion on,, in inte tere rest st ra rate tess ra rang ngin ing g fr from om 3. 3.67 67% % to 4. 4.82 82%, %, ma matu turi ring ng 20 2026 26 . . . .
2011
2010
$ — 37 27 92 190 186 18 6
$ 17 55 39 128 12 8 255 —
Less Le ss cu curr rren entt mat matur urit itie iess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
532 (130 (1 30))
494 (127 (1 27))
Long Lo ng-t -ter erm m deb debtt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 402
$ 367
During the years ended December 31, 2011 and 2010, interest expense associated with securitized vacation ownership debt was $22 million and $27 million, respectively. Notee 17. Not
Other Oth er Lia Liabil biliti ities es
Other liabilities consisted of the following (in millions): December 31, 2011
Deferr Defe rred ed ga gain inss on on ass asset et sa sale less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (a) SPG point liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Defe De ferr rred ed re reve venu nuee in incl clud udin ing g VO VOII an and d re resi side dent ntia iall sa sale less . . . . . . . . . . . . . . . . . . . . . . . Ben Be nef efiit pla lan n li liab abiili liti ties es . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ins nsur uran ancce re rese serrve vess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Othe Ot herr . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010
$ 933 933 724 17 74 47 176
$ 930 930 702 23 61 46 124 12 4
$1,9 $1 ,971 71
$1,8 $1 ,886 86
(a) Includes Includes the actuariall actuarially y determined determined liability liability related to the SPG program and the liability liability associate associated d with the American Express transaction discussed below. During the year ended Decembe Decemberr 31, 2009, the Company entered into an amendm amendment ent to its existing co-branded co-branded credit card agreement (“Amendment”) with American Express and extended the term of its co-branding agreement to June 15, 2015. In connection with the Amendment in July 2009, the Company received $250 million in cash toward the purchase of future SPG points by American Express. In accordance with ASC 470, Debt , the Company has recorded this transaction as a financing arrangement with an implicit interest rate of 4.5%. The Amendment requires a fixed amount of $50 million per year to be deducted from the $250 million advance over the five year period regardless of the total amount of points purchased. As a result, the liability associated with this financing arrangement is being reduced ratably over a five year period beginning in October 2009. In accordance with the terms of the Amendment, if the Company fails to comply with certain financial covenants, the Company would have to repay the remain remaining ing balance of the liabi liability, lity, and, if the Compan Company y does not pay such liabi liability, lity, the Company is F-32
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. NOTES TO FINANCIAL STATEMENTS STATEMENTS
required to pledge certain receivables as collateral for the remaining balance of the liability. As of December 31, 2011, a liability of $72 million related to the Amendment is recorded in other liabilities. Note 18.
Discontin Disc ontinued ued Opera Operations tions
Summary of financial information for discontinued operations is as follows (in millions): Year Ended December 31, 2011
2010
2009
$(13)) $(13 $—
$168 $168 $ (1 (1))
$76 $76 $ (2 (2))
Income Statement Data
Gain (l Gain (los oss) s) on di disp spos osit itio ion, n, ne nett of of tax tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inco In come me (l (los oss) s) fr from om op oper erat atio ions ns,, net net of ta tax x ...........................
During the year ended December 31, 2011, the Company recorded a loss of $13 million, including an $18 million pretax loss from the sale of its interest in a consolidated joint venture, offset by a $10 million income tax benefit on the sale. Additionally, the Company recorded a $5 million charge related to interest on an uncertain tax position associated with a disposition in a prior year. During the year ended December 31, 2010, the Company recorded a tax benefit of $134 million related to the final settlement with the IRS regarding the World Directories disposition (see Note 14) and a pretax gain of approximately $3 million ($36 million after tax) related to the sale of one wholly-owned hotel for $78 million. The tax benefit was related to the realization of a high tax basis in this hotel that was generated through a previous transaction. For the year ended December 31, 2009, the $76 million (net of tax) gain on dispositions includes the gains from the sale of the Company’s Bliss spa business, other non-core assets and three hotels. The operations from the Bliss spa business, and the revenues and expenses from one hotel, which was in the process of being sold and was later sold in 2010, are included in discontinued operations, resulting in a loss of $2 million, net of tax. Note 19.
Employee Empl oyee Bene Benefit fit Plan
During the year ended December 31, 2011, the Company recorded net actuarial losses of $20 million (net of tax) related to various employee benefit plans. These losses were recorded in other comprehensive income. The amorti amo rtizat zation ion of the net act actuar uarial ial los loss, s, a com compon ponent ent of oth other er com compre prehen hensiv sivee inc income ome,, for the yea yearr end ended ed December 31, 2011 was $1 million (net of tax). Included in accumulated other comprehensive (loss) income at December 31, 2011 are unrecognized net actuarial losses of $85 million ($75 million, net of tax) that have not yet been recognized in net periodic pension cost. The actua actuarial rial loss incl included uded in accum accumulate ulated d other comprehensi comprehensive ve (los (loss) s) incom incomee that is expec expected ted to be recognized in net periodic pension cost during the year ended December 31, 2012 is $2 million ($2 million, net of tax). Defined Benefit and Postretirement Benefit Plans. The Com Compan pany y and its sub subsid sidiar iaries ies spo sponso nsorr or previously sponsored previously sponsored numer numerous ous funde funded d and unfun unfunded ded domes domestic tic and inte internati rnational onal pensi pension on plans plans.. All defined benefit plans covering U.S. employees are frozen. Certain plans covering non-U.S. employees remain active.
The Company also sponsors the Starwood Hotels & Resorts Worldwide, Inc. Retiree Welfare Program. This plan provides health care and life insurance benefits for certain eligible retired employees. The Company has prefun pre funded ded a por portio tion n of the lif lifee ins insura urance nce obl obliga igatio tions ns thr throug ough h tru trust st fun funds ds whe where re suc such h pre prefun fundin ding g can be accomplished on a tax effective basis. The Company also funds this program on a pay-as-you-go basis. F-33
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. NOTES TO FINANCIAL STATEMENTS STATEMENTS
The following table sets forth the benefit obligation, fair value of plan assets, the funded status and the accumulated benefit obligation of the Company’s defined benefit pension and postretirement benefit plans at December 31 (in millions): Domestic Pension Benefits 2011
2010
Foreign Pension Benefits 2011
2010
Postretirement Benefits 2011
2010
Change in Benefit Obligation
Benefi Bene fitt obl oblig igat atio ion n at at beg begin inni ning ng of ye year ar . . . . . . . . . . . . . . . . . . . . . . . . . $ 19 $ 17 $183 $183 $178 $178 $ 20 $ 19 Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — — — Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1 10 10 1 1 Actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 18 5 1 2 Effect of foreign exchange rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (1) (3) — — Plan participant contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — 1 1 Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) (1) (5) (7) (3) (3) Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 1 — — — Bene Be nefi fitt ob obli liga gati tion on at en end d of ye year ar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 20 $ 19
$206 $2 06 $1 $183 83
$ 20 $ 20
Change in Plan Assets
Fair va Fair valu luee of pl plan an as asse sets ts at be begi ginn nnin ing g of ye year ar . . . . . . . . . . . . . . . . . . . . $ — $ — $176 $176 $159 $159 $ 1 $ 1 Actual return on plan assets, net of expenses . . . . . . . . . . . . . . . . . . — — 12 14 — — Employer contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1 8 13 1 2 Plan participant contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — 1 1 Effect of foreign exchange rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (1) (3) — — Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) (1) (5) (7) (3) (3) Fair Fa ir va valu luee of pl plan an as asse sets ts at en end d of ye year ar . . . . . . . . . . . . . . . . . . . . . . . . .
$—
$—
$190 $1 90 $1 $176 76
$—
$ 1
Unfu Un fund nded ed sta statu tuss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(20 $( 20)) $( $(19 19)) $ (1 (16) 6) $ (7 (7)) $( $(20 20)) $( $(19 19))
Accu Ac cumu mula late ted d be bene nefi fitt ob obli liga gati tion on . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 20 $ 19 $2 $205 05 $1 $182 82
n/aa n/
n/aa n/
Proj Pr ojec ecte ted d be bene nefi fitt ob obli liga gati tion on . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 20 $ 19 $1 $140 40 $1 $121 21
n/aa n/
n/aa n/
Accu Ac cumu mula late ted d be bene nefi fitt ob obli liga gati tion on . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 20 $ 19 $1 $140 40 $1 $121 21
n/aa n/
n/aa n/
Faiir va Fa vallue of pl plan an as assset etss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$—
n/a
n/aa n/
Plans with Accumulated Benefit Obligations in Excess of Plan Assets
$—
$105 $1 05 $ 97
The net underfunded status of the plans at December 31, 2011 was $56 million, of which $72 million is recorded in other liabilities, $3 million is recorded in accrued expenses and $19 million is recorded in other assets in the accompanying balance sheet. All dom domest estic ic pen pensio sion n pla plans ns are fro frozen zen pla plans, ns, whe whereb reby y emp employ loyees ees do not acc accrue rue add additi itiona onall ben benefi efits. ts. Therefore, at December 31, 2011 and 2010, the projected benefit obligation is equal to the accumulated benefit obligation.
F-34
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. NOTES TO FINANCIAL STATEMENTS STATEMENTS
The following table presents the components of net periodic benefit cost for the years ended December 31 (in millions): Domestic Pension Benefits
Foreign Pension Benefits
Postretirement Benefits
2011
2010
2009
2011
2010
2009
2011
2010
2009
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . Expected return on plan assets . . . . . . . . . . Amortization of net actuarial loss . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Settlement and curtailment (gain) loss . . . .
$— 1 — — — —
$— 1 — — — —
$— 1 — — — —
$— 10 (12) 1 1 —
$— 10 (10) 1 — —
$ 5 13 (10) 5 — (4)
$— 1 — — — —
$— 1 — — — —
$— 1 — — — —
Net periodic benefit cost . . . . . . . . . . . . . . .
$ 1
$ 1
$ 1
$—
$ 1
$ 9
$ 1
$ 1
$ 1
For measurement purposes, a 9% annual rate of increase in the per capita cost of covered health care benefits benef its was assum assumed ed for 2012, gradually decreasing decreasing to 5% in 2020. A one-p one-perce ercentage ntage point change in assum assumed ed health care cost trend rates would have approximately a $0.9 million effect on the postretirement obligation and a nominal impact on the total of service and interest cost components of net periodic benefit cost. The majority of partic par ticipa ipants nts in the For Foreig eign n Pen Pensio sion n Pla Plans ns are emp employ loyees ees of man manage aged d hot hotels els,, for which the Company Company is reimbursed for costs related to their benefits. The impact of these reimbursements is not reflected above. The weighted average assumptions used to determine benefit obligations at December 31 were as follows:
Discou Disc ount nt ra rate te . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rate Ra te of co comp mpeens nsat atio ion n in inccre reaase . . . . . . . . . . . . . . . . . . . . . . . . . . .
Domestic Pension Benefits
Foreign Pension Benefits
Postretirement Benefits
2011
2011
2011
2010
2010
2010
4.25% 5.00 4.25% 5.00% % 4.6 4.68% 8% 5.34 5.34% % 4.0 4.00% 0% 4.75 4.75% % n/aa n/ n/a 3. 3.2 26% 3. 3.64 64% % n/ n/aa n/a
The wei weight ghted ed ave averag ragee ass assump umptio tions ns use used d to det determ ermine ine net per period iodic ic ben benefi efitt cos costt for the yea years rs end ended ed December 31 were as follows: Domestic Pension Benefits 2011
Discou Disc ount nt ra rate te . . . . . . . . . . . . . . . . . . . . . Rate of compensation increase . . . . . . . . Expe Ex peccte ted d re retu turrn on pl plaan as asse setts . . . . . . . .
2010
Foreign Pension Benefits 2009
2011
2010
Postretirement Benefits 2009
2011
2010
2009
5.00% 5.00 % 5.5 5.51% 1% 5.99 5.99% % 5.34% 5.34% 5. 5.93 93% % 6.19% 6.19% 4. 4.75 75% % 5.50% 5.50% 6.00 6.00% % n/a n/a n/a 3.64% 3.5 3.50% 3.9 3.93% n/a n/a n/a n/a n/aa n/ n/a 6. 6.5 52% 6.56 6.56% % 6. 6.2 25% 7.10 7.10% % 7. 7.10 10% % 7. 7.50 50% %
The Company’s investment objectives are to minimize the volatility of the value of the assets and to ensure the assets are sufficient to pay plan benefits. The target asset allocation is 62% debt securities and 38% equity securities. A number of factors were considered in the determination of the expected return on plan assets. These factors included current and expected allocation of plan assets, the investment strategy, historical rates of return and Company and investment expert expectations for investment performance over approximately a ten year period.
F-35
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. NOTES TO FINANCIAL STATEMENTS STATEMENTS
The following table presents the Company’s fair value hierarchy of the plan assets measured at fair value on a recurring basis as of December 31, 2011 (in millions): Level 1
Level 2
Level 3
Total
Assets: Mutual Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Collective Trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity Index Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bond Index Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$55 — — —
$ — 5 67 63
$— — — —
$ 55 5 67 63
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$55
$135
$—
$190
The following table presents the Company’s fair value hierarchy of the plan assets measured at fair value on a recurring basis as of December 31, 2010 (in millions): Level 1
Level 2
Level 3
Total
Assets: Mutual Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Collective Trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity Index Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bond Index Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$44 — — —
$ — 5 72 56
$— — — —
$ 44 5 72 56
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$44
$133
$—
$177
The mutual funds are valued using quoted market prices in active markets. The collective collective trusts, equity index funds and bond index funds are not publicly publicly trade traded d but are value valued d based on the underlying assets which are publicly traded. The following table represents the Company’s expected pension and postretirement benefit plan payments for the next five years and the five years thereafter (in millions):
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2017-2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Domestic Pension Benefits
Foreign Pension Benefits
$1 $1 $1 $1 $1 $7
$ 7 $ 8 $ 9 $ 9 $10 $56
Postretirement Benefits
$2 $2 $2 $2 $1 $6
The Company expects to contribute $12 million to the plans during 2012. A significant portion of the contributions relate to the Foreign Pension Plans, which the Company is reimbursed. Defined Contribution Plans. The Compa Company ny and its subsidiaries subsidiaries spons sponsor or vario various us defin defined ed contr contributi ibution on plans, pla ns, inc includ luding ing the Sta Starwo rwood od Hot Hotels els & Res Resort ortss Wor Worldw ldwide ide,, Inc Inc.. Sav Saving ingss and Ret Retire iremen mentt Pla Plan, n, whi which ch is a “401(k “40 1(k)” )” pla plan. n. The plan all allows ows particip participati ation on by emp employ loyees ees on U.S. payroll payroll who are at lea least st age 21. Eac Each h participant may contribute on a pretax basis between 1% and 50% of his or her eligible compensation to the plan subject to certain maximum limits. Eligible employees are automatically enrolled after 90 days (unless they opt out). A company-paid matching contribution is provided to participants who have completed at least one year of
F-36
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. NOTES TO FINANCIAL STATEMENTS STATEMENTS
service. The amount of expense for matching contributions totaled $15 million in 2011, $13 million in 2010, and $15 million in 2009. The plan includes as an investment choice, the Company’s publicly traded common stock. The balances held in the Company’s stock were $67 million and $87 million at December 31, 2011 and 2010, respectively. Multi-Employer Pension Plans. Certa Certain in empl employees oyees are cover covered ed by union sponsored sponsored mult multi-em i-employe ployerr pension plans pursuant to agreements between the Company and various unions. The Company’s participation in these plans is outlined in the table below (in millions):
Pension Fund
New York Hotel Trades Council and Hotel Association of New York City, Inc. Pens Pe nsio ion n Fun Fund d . .. .. .. .. .. .. .. .. .. .. . Other Funds . . . . . . . . . . . . . . . . . . . . . . . . .
EIN/ Pension Plan Number
13-1 13 -176 7642 4242 42/0 /001 01
Total Contributions . . . . . . . . . . . . . . . . . . .
Pension Protection Act Zone Status 2011
Yell Ye llow ow (a)
2010
Yellow (b)
Contributions 2011
2 010 20
2 009 20
$4 5
$4 5
$5 4
$9
$9
$9
(a) As of of Janua January ry 1, 1, 2011 2011 (b) As of Janua January ry 1, 2010 2010 Eligible employees at the Company’s owned hotels in New York City participate in the New York Hotel Trades Council and Hotel Association of New York City, Inc. Pension Fund. The Company contributions are based on a percentage of all union employee wages as dictated by the collective bargaining agreement that expires on June 30, 2012. The Company’s contributions did not exceed 5% of the total contributions to the pension fund in 2011, 2010 or 2009. The pension fund has implemented a funding improvement plan and the Company has not paid a surcharge. Multi-Employer Health Plans. Certain employees are covered by union sponsored multi-employer health plans pursuant pursuant to agre agreement ementss betwe between en the Company and vario various us union unions. s. The plan benef benefits its can inclu include de medic medical, al, dental and life insurance for eligible participants and retirees. The Company contributions to these plans, which were charged to expense during 2011, 2010 and 2009, was approximately $26 million, $27 million and $29 million, respectively. Note 20.
Leases Leas es and Renta Rentals ls
The Company leases certain equipment for the hotels’ operations under various lease agreements. The leases extend for varying periods through 2016 and generally are for a fixed amount each month. In addition, several of the Company’s hotels are subject to leases of land or building facilities from third parties, which extend for varying periods through 2096 and generally contain fixed and variable components. The variable components of leases of land or building facilities are primarily based on the operating profit or revenues of the related hotels. The Company’s minimum future rents at December 31, 2011 payable under non-cancelable operating leases with third parties are as follows (in millions): 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 2013 20 13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2014 20 14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2015 20 15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 20 16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ther Th erea eaft fter er . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-37
$
84 89 88 86 84 1,02 1, 024 4
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. NOTES TO FINANCIAL STATEMENTS STATEMENTS
Rent expense under non-cancelable operating leases consisted of the following (in millions): Year Ended December 31, 2011
Min iniimum ren entt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contingent rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sublease rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 21.
2010
2009
$104 $1 04 9 (4)
$90 $90 6 (5)
$89 $89 2 (3)
$109
$91
$88
Stockholde Stock holders’ rs’ Equi Equity ty
Share Repurchases. In December 2011, the Company’s Board of Directors authorized a share repurchase program of $250 million. During the years ended December 31, 2011 and 2010, the Company did not repurchase any Com Compan pany y com common mon sha shares res.. As of Dec Decemb ember er 31, 201 2011, 1, $25 $250 0 mil millio lion n of rep repurc urchas hasee cap capaci acity ty rem remain ained ed available under this program. Note 22.
Stock-Bas Stock -Based ed Compe Compensati nsation on
In 2004, the Company adopted the 2004 Long-Term Incentive Compensation Plan (“2004 LTIP”), which superseded the 2002 Long-Term Incentive Compensation Plan (“2002 LTIP”) and provides the terms of equity award grants to directors, officers, employees, consultants and advisors. Although no additional awards will be granted under the 2002 LTIP, the Company’s 1999 Long-Term Incentive Compensation Plan or the Company’s 1995 Share Option Plan, the provisions under each of the previous plans will continue to govern awards that have been granted and remain outstanding under those plans. The aggregate award pool for non-qualified or incentive stock options, performance shares, restricted stock and units or any combination of the foregoing which are available to be granted under the 2004 LTIP at December 31, 2011 was approximately 56 million. Compensation expense, net of reimbursements during 2011, 2010 and 2009 was approximately $75 million, $72 million and $53 million, respectively, resulting in tax benefits of $29 million, $28 million and $21 million, respectively. As of December 31, 2011, there was approximately $76 million of unrecognized compensation cost, net of estimated forfeitures, including the impact of reimbursement from third parties, which is expected to be recognized over a weighted-average period of 1.5 years on a straight-line basis. The Com Compan pany y uti utiliz lizes es the Lat Lattic ticee mod model el to cal calcul culate ate the fai fairr val value ue opt option ion gra grants nts.. Wei Weight ghted ed ave averag ragee assumptions used to determine the fair value of option grants were as follows: Year Ended December 31, 2011
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Volatility: Neaar term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ne Long term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Yield curve: 6 month . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-38
2010
2009
0.75%
0.7 .75 5%
3.5 .50 0%
36.0 .0% % 44.0 .0% % 6 yrs.
37.0 .0% % 45.0 .0% % 6 yrs.
74.0 .0% % 43.0 .0% % 7 yrs.
0.18% 0.25% 1.18% 2.13% 3.42%
0.1 .19 9% 0.32% 1.36% 2.30% 3.61%
0.4 .45 5% 0.72% 1.40% 1.99% 3.02%
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. NOTES TO FINANCIAL STATEMENTS STATEMENTS
The dividend yield is estimated based on the current expected annualized dividend payment and the average expected price of the Company’s common shares during the same periods. The estimated volatility is based on a combination of historical share price volatility as well as implied volatility based on market analysis. The historical share price volatility was measured over an 8-year period, which is equal to the contractual term of the options. The weighted average volatility for 2011 grants was 39%. The exp expect ected ed lif lifee rep repres resent entss the per period iod tha thatt the Com Compan pany’s y’s sto stockck-bas based ed awa awards rds are exp expect ected ed to be outsta out standi nding ng and was det determ ermine ined d bas based ed on an act actuar uarial ial cal calcul culati ation on usi using ng his histor torica icall exp experi erienc ence, e, giv giving ing consideration to the contractual terms of the stock-based awards and vesting schedules. The yield curve (risk-free interest rate) is based on the implied zero-coupon yield from the U.S. Treasury yield curve over the expected term of the option. The following table summarizes the Company’s stock option activity during 2011: Options (In Millions)
Weighted Average Exercise Price Per Share
Outstanding at December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited, Canceled or Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8.7 0.3 (2.3) —
$29.7 .72 2 61.28 31.0 .01 1 —
Outstanding at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.7
$30.7 .70 0
Exercisable at De Deccember 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.6
$39.5 .53 3
The weighted-average fair value per option for options granted during 2011, 2010 and 2009 was $21.84, $14.73, and $4.69, respectively, and the service period is typically four years. The total intrinsic value of options exercised during 2011, 2010 and 2009 was approximately $62 million, $115 million and $1 million, respectively, resulting in tax benefits of approximately $23 million, $44 million and $0.3 million, respectively. The agg aggreg regate ate int intrin rinsic sic val value ue of out outsta standi nding ng opt option ionss as of Dec Decemb ember er 31, 201 2011 1 was $12 $128 8 mil millio lion. n. The aggregate intrinsic value of exercisable options as of December 31, 2011 was $39 million. The weighted-average contractual life was 4.1 years for outstanding options and 3.0 years for exercisable option as of December 31, 2011. The Company recognizes compensation expense, equal to the fair market value of the stock on the date of grant for restricted stock and unit grants, over the service period. The weighted-average fair value per restricted stock or unit granted during 2011, 2010 and 2009 was $60.77, $37.33 and $11.15, respectively. The service period is typically three or four years except in the case of restricted stock and units issued in lieu of a portion of an annual cash bonus where the restr restricti iction on perio period d is typically typically in equal installments installments over a two year period, or in equal installments on the first, second and third fiscal year ends following grant date with distribution on the third fiscal year end. The fair value of restricted stock and units for which the restrictions lapsed during 2011, 2010 and 2009 was approximately $154 million, $62 million and $33 million, respectively.
F-39
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. NOTES TO FINANCIAL STATEMENTS STATEMENTS
The following table summarizes the Company’s restricted stock and units activity during 2011: Number of Restricted Stock and Units
Weighted Average Grant Date Value Per Share
(In Millions)
Outstanding at December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lapse of restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited or Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8.5 1.3 (2.7) (0.2)
$28.11 60.77 42.71 27.24
Outstanding at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . .
6.9
$29.54
2002 Employee Em ployee Stock Purchase Plan
In April 2002, the Board of Directors adopted (and in May 2002 the shareholders approved) the Company’s 2002 Employee Stock Purchase Plan (the “ESPP”) to provide employees of the Company with an opportunity to purchase shares through payroll deductions and reserved 11,988,793 shares for issuance under the ESPP. The ESPP commenced in October 2002. All full-time employees who have completed 30 days of continuous service and who are employed by the Company Compa ny on U.S. payrolls are eligible to part participa icipate te in the ESPP. Eligible employees employees may cont contribut ributee up to 20% of their total cash compensation to the ESPP. Amounts withheld are applied at the end of every three-month accumulat accum ulation ion period to purchase shares. The value of the shares (determined (determined as of the begin beginning ning of the offering offering period) that may be purchased by any participant in a calendar year is limited to $25,000. The purchase price to employees is equal to 95% of the fair market value of shares at the end of each period. Participants may withdraw their contributions at any time before shares are purchased. Approximately 110,000 shares were issued under the ESPP during the year ended December 31, 2011 at purchase prices ranging from $42.33 to $58.05. Approximately 117,000 shares were issued under the ESPP during the year ended December 31, 2010 at purchase prices ranging from $36.77 to $54.00. Note 23.
Derivativ Deri vativee Financia Financiall Instrum Instruments ents
The Company, based on market conditions, enters into forward contracts to manage foreign exchange risk. The Company enters into forward contracts to hedge forecasted transactions based in certain foreign currencies, including the Euro, Canadian Dollar and Yen. These forward contracts have been designated and qualify as cash flow hedges, and their change in fair value is recorded as a component of other comprehensive income and reclassified into earnings in the same period or periods in which the forecasted transaction occurs. To qualify as a hedge, the Company needs to formally document, designate and assess the effectiveness of the transactions that receive hedge accounting. The notional dollar amount of the outstanding Euro forward contracts at December 31, 2011 are $34 million, with average exchange rates of 1.4, with terms of primarily less than one year. The Yen forward contracts expired during 2011. The Company reviews the effectiveness of its hedging instruments on a quarterly basis and records any ineffectiveness into earnings. The Company discontinues hedge accounting for any hedge that is no longer evaluated to be highly effective. From time to time, the Company may choose to de-designate portions of hedges when changes in estimates of forecasted transactions occur. Each of these hedges was highly effective in offsetting fluctuations in foreign currencies. The Company also enters into forward contracts to manage foreign exchange risk on intercompany loans that are not deemed permanently permanently invested. invested. These forwa forward rd contracts contracts are not desig designated nated as hedge hedges, s, and their change in fair value is recorded in the Company’s consolidated statements of income during each reporting period. F-40
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. NOTES TO FINANCIAL STATEMENTS STATEMENTS
The Com Compan pany y ent enters ers int into o int intere erest st rat ratee swa swap p agr agreem eement entss to man manage age int intere erest st exp expens ense. e. The Com Compan pany’s y’s objective is to manage the impact of interest rates on the results of operations, cash flows and the market value of the Com Compan pany’s y’s debt. At Dec Decemb ember er 31, 201 2011, 1, the Company Company had six int intere erest st rat ratee swa swap p agr agreem eement entss wit with h an aggregate notional amount of $400 million under which the Company pays floating rates and receives fixed rates of interest (“Fair Value Swaps”). The Fair Value Swaps hedge the change in fair value of certain fixed rate debt relate rel ated d to flu fluctu ctuati ations ons in int intere erest st rat rates es and mature mature in 201 2013 3 and 2014. The Fair Val Value ue Swa Swaps ps mod modify ify the Company’s interest rate exposure by effectively converting debt with a fixed rate to a floating rate. These interest ratee swa rat swaps ps hav havee bee been n des design ignate ated d and qua qualif lify y as fai fairr val value ue hed hedges ges.. Dur During ing the fou fourth rth quarter quarter of 201 2011, 1, the Company terminated its 2012 interest rate swap agreements, resulting in a gain of approximately $2 million, through interest expense. The counterparties to the Company’s derivative financial instruments are major financial institutions. The Company evaluates the bond ratings of the financial institutions and believes that credit risk is at an acceptable level. The following following table tabless summ summariz arizee the fair value of the Company’s derivative derivative instruments, instruments, the effe effect ct of derivative instruments on its Consolidated Statements of Comprehensive Income, the amounts reclassified from “Other comprehensive income” and the effect on the Consolidated Statements of Income during the year.
Fair Value of Derivative Instruments (in millions) December 31, 2011 Balance Sheet Location
December 31, 2010 Fair Value
Balance Sheet Location
Fair Value
Derivatives designated as hedging instruments Asset Derivatives
Forwar Forw ard d co cont ntra ract ctss . . . . . Interest rate swaps . . . . .
Prepai Prep aid d an and d ot othe herr cu curr rren entt as asse sets ts Other assets
Total assets . . . . . . . .
$ 3 12
Prepai Prep aid d an and d ot othe herr cu curr rren entt as asse sets ts Other assets Ot
$15 December 31, 2011 Balance Sheet Location
$— 16 $16
December 31, 2010 Fair Value
Balance Sheet Location
Fair Value
Derivatives not designated as hedging instruments Asset Derivatives
Forw Fo rwar ard d co cont ntra ract ctss . . . . .
Prep Pr epai aid d an and d ot othe herr cu curr rren entt as asse sets ts
Total assets . . . . . . . .
$—
Prep Pr epai aid d an and d ot othe herr cu curr rren entt as asse sets ts
$—
$— $—
Liability Derivatives
Forward contracts . . . . .
A ccrued expenses Ac
$—
Total liabilities . . . . . .
$— F-41
Accrued expenses
$ 9 $ 9
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. NOTES TO FINANCIAL STATEMENTS STATEMENTS Consolidated Statements of Income and Comprehensive Income For the Years Ended December 31, 2011 and 2010 (in millions)
Balanc Bala ncee at Dec Decem embe berr 31, 31, 2009 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mark-t Mar k-to-m o-mark arket et loss loss (ga (gain) in) on forw forward ard exc exchan hange ge cont contrac racts ts . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reclassification of gain (loss) from OCI to management fees, franchise fees, and other inco in come me . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$— 1
Bala Ba lanc ncee at Dec Decem embe berr 31, 31, 2010 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$—
Balanc Bala ncee at Dec Decem embe berr 31, 31, 2010 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mark-t Mar k-to-m o-mark arket et loss loss (ga (gain) in) on forw forward ard exc exchan hange ge cont contrac racts ts . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reclassification of gain (loss) from OCI to management fees, franchise fees, and other inco in come me . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$— (1)
Bala Ba lanc ncee at Dec Decem embe berr 31, 31, 2011 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (3 (3))
(1)) (1
(2)) (2
Amount of Gain or (Loss) Recognized in Income on Derivative Derivatives Not Designated as Hedging Derivatives Instruments
Foreign forward exchange contracts . . . . . .
Location of Gain or (Loss) Recognized in Income on Derivative
Interest expense, net
Total (loss) gain included in income . . . . . .
F-42
Year Ended December 31, 2011
2010
2009
$5
$(45)
$(15)
$5
$(45)
$(15) $(
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. NOTES TO FINANCIAL STATEMENTS STATEMENTS Note 24.
Fair Value Value of Financia Financiall Instrume Instruments nts
The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments (in millions): Dece De cemb mber er 31 31,, 20 2011 11 Carrying Amount
Assets: Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VOI notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securitized vacation ownership notes receivable . . . . . . Other notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2 93 446 26
Fair Value
$
2 109 551 26
Dece De cemb mber er 31 31,, 20 2010 10 Carrying Amount
$
10 132 408 19
Fair Value
$
10 153 492 19
Total financial assets . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 567
$ 688
$ 569
$ 674
Liabilities: Long Lo ng--te terrm deb ebtt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term securitized debt . . . . . . . . . . . . . . . . . . . . . . .
$2,1 $2 ,194 94 402
$2,4 $2 ,442 42 412
$2,8 $2 ,848 48 367
$3,1 $3 ,12 20 373
Tota To tall fi fina nanc ncia iall li liab abil ilit itie iess . . . . . . . . . . . . . . . . . . . . . . .
$2,5 $2 ,596 96
$2,8 $2 ,854 54
$3,2 $3 ,215 15
$3,4 $3 ,493 93
Off-Balance sheet: Letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Surety bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
— —
$ 171 21
$
— —
$ 159 23
Total Off-Balance sheet . . . . . . . . . . . . . . . . . . . . . . . .
$
—
$ 192
$
—
$ 182
The Company believes the carrying values of its financial instruments related to current assets and liabilities approximate fair value. The Company records its derivative assets and liabilities at fair value. See Note 11 for recorded amounts and the method and assumption used to estimate fair value. The carrying value of the Company’s restricted cash approximates its fair value. The Company estimates the fair value of its VOI notes receivable receivable and secur securitiz itized ed VOI notes recei receivable vable using assumptions assumptions related to curre current nt securitization market transactions. The amount is then compared to a discounted expected future cash flow model using a discount rate commensurate with the risk of the underlying notes, primarily determined by the credit worthiness of the borrowers based on their FICO scores. The results of these two methods are then evaluated to conclude on the estimated fair value. The fair value of other notes receivable is estimated based on terms of the instrument and current market conditions. These financial instrument assets are recorded in the other assets line item in the Company’s consolidated balance sheet. The Company estimates the fair value of its publicly traded debt based on the bid prices in the public debt markets. The carrying amount of its floating rate debt is a reasonable basis of fair value due to the variable nature of the interest rates. The Company’s non-public, securitized debt, and fixed rate debt fair value is determined based upon discounted cash flows for the debt rates deemed reasonable for the type of debt, prevailing market conditions and the length to maturity for the debt. Other long-term liabilities represent a financial guarantee that the Company expects to fund. The carrying value of this liability approximates its fair value based on expected funding amount under the guarantee.
F-43
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. NOTES TO FINANCIAL STATEMENTS STATEMENTS
The fair values of the Company’s letters of credit and surety bonds are estimated to be the same as the contract values based on the nature of the fee arrangements with the issuing financial institutions. Note 25.
Commitme Comm itments nts and Conti Contingenci ngencies es
The Company had the following contractual obligations outstanding as of December 31, 2011 (in millions): Total
Due in Less Than 1 Year
Due in 1-3 Years
Due in 3-5 Years
Due After 5 Years
Unconditional purchase obligations (a) . . . . . . . . . . . . . Other long-term obligations . . . . . . . . . . . . . . . . . . . . .
$174 1
$66 1
$93 —
$15 —
$— —
Total contractual obligations . . . . . . . . . . . . . . . . . . . .
$175
$67
$93
$15
$—
(a) Included in these these balances are commitments that that may be reimbursed reimbursed or satisfied satisfied by the the Company’s managed managed and franchised properties. The Com Compan pany y had the fol follow lowing ing com commer mercia ciall com commit mitmen ments ts out outsta standi nding ng as of Dec Decemb ember er 31, 201 2011 1 (in millions): Amount of Commitment Expiration Expiration Per Period
Standby letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
Less Than 1 Year
1-3 Years
3-5 Years
After 5 Years
$171
$168
$—
$—
$3
Variable Interest Entities. The Company has evaluated hotels in which it has a variable interest, which is general gene rally ly in the form of inve investm stments ents,, loan loans, s, guar guarant antees, ees, or equi equity. ty. The Comp Company any determines determines if it is the primary primary beneficiary of the hotel by primarily considering the qualitative factors. Qualitative factors include evaluating if the Company has the power to control the VIE and has the obligation to absorb the losses and rights to receive the benefits of the VIE, that could potentially be significant to the VIE. The Company has determined it is not the primary beneficiary of these VIEs and therefore these entities are not consolidated in the Company’s financial statements. See Note 9 for the VIEs in which the Company is deemed the primary beneficiary and has consolidated the entities.
The 18 VIEs associated with the Company’s variable interests represents entities that own hotels for which the Company has entered into management or franchise agreements with the hotel owners. The Company is paid a fee primarily based on financial metrics of the hotel. The hotels are financed by the owners, generally in the form of working capital, equity, and debt. At December 31, 2011, the Company has approximately $83 million of investments and a loan balance of $9 million associated with 16 VIEs. As the Company is not obligated to fund future cash contributions under these agreements, the maximum loss equals the carrying value. In addition, the Company has not contributed amounts to the VIEs in excess of their contractual obligations. Additiona Additi onally lly,, the Com Compan pany y has app approx roxima imatel tely y $5 mil millio lion n of inv invest estmen ments ts and cer certai tain n per perfor forman mance ce guarantees associated with two VIEs. During the year ended December 31, 2011 and 2010, respectively, the Company recorded a $1 million and $3 million charge to selling, general and administrative expenses, relating to one of these VIEs, for a performance guarantee relating to a hotel managed by the Company. The maximum remaining funding exposure of this guarantee is $1 million. The Company’s remaining performance guarantees have possible cash outlays of up to $63 million, $62 million of which, if required, would be funded over several years and would be largely offset by management fees received under these contracts. Guaranteed Loans and Commitments. In limited cases, the Company has made loans to owners of or partners in hotel or resort ventures for which the Company has a management or franchise agreement. Loans
F-44
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. NOTES TO FINANCIAL STATEMENTS STATEMENTS
outstanding under this program totaled $13 million at December 31, 2011. The Company evaluates these loans for impairment, and at December 31, 2011, believes these loans are collectible. Unfunded loan commitments aggregating $19 million were outstanding at December 31, 2011, none of which is expected to be funded in the future. These loans typically are secured by pledges of project ownership interests and/or mortgages on the projects. The Company also has $94 million of equity and other potential contributions associated with managed or joint venture properties, $48 million of which is expected to be funded in 2012. Surety bonds issued on behalf of the Company at December 31, 2011 totaled $21 million, the majority of which were required by state or local governments relating to the Company’s vacation ownership operations and by its insurers to secure large deductible insurance programs. To secure management contracts, the Company may provide performance guarantees to third-party owners. Most of these performance guarantees allow the Company to terminate the contract rather than fund shortfalls if certai cer tain n per perfor forman mance ce lev levels els are not met met.. In lim limite ited d cas cases, es, the Company Company is obl obliga igated ted to fun fund d sho shortf rtfall allss in performance levels through the issuance of loans. Many of the performance tests are multi-year tests, are tied to the results of a competitive set of hotels, and have exclusions for force majeure and acts of war and terrorism. The Company does not anticipate any significant funding under performance guarantees or losing a significant number of management or franchise contracts in 2012. In connection connection with the acqui acquisiti sition on of the Le Méridien brand in Novem November ber 2005, the Compa Company ny assumed the obligatio oblig ation n to guarantee certain certain perfo performan rmance ce level levelss at one Le Méridien managed hotel for the periods 2007 through 2014. During the year ended December 31, 2010, the Company reached an agreement with the owner of this property to fully release the Company of its performance guarantee obligation in return for a payment of approx app roxima imatel tely y $1 mil millio lion n to the own owner. er. Add Additi itiona onally lly,, in con connec nectio tion n wit with h thi thiss set settle tlemen ment, t, the ter term m of the management contract was extended by five years. As a result of this settlement, the Company recorded a credit to selling, general, administrative and other expenses of approximately $8 million for the difference between the carrying amount of the guarantee liability and the cash payment of $1 million. In co conn nnec ecti tion on wi with th th thee pu purc rcha hase se of th thee Le Mé Méri ridi dien en br bran and d in No Nove vemb mber er 20 2005 05,, th thee Co Comp mpan any y wa wass indemnified for certain of Le Méridien’s historical liabilities by the entity that bought Le Méridien’s owned and leased hotel portfolio. The indemnity is limited to the financial resources of that entity. However, at this time, the Company believes that it is unlikely that it will have to fund any of these liabilities. In connection with the sale of 33 hotels in 2006, the Company agreed to indemnify the buyer for certain liabilities, including operations and tax liabilities. At this time, the Company believes that it will not have to make any material payments under such indemnities. Litigation. The Company is involved in various legal matters that have arisen in the normal course of business, some of which include claims for substantial sums. Accruals have been recorded when the outcome is probab pro bable le and can be rea reason sonabl ably y est estim imate ated. d. Whi While le the ult ultima imate te res result ultss of cla claims ims and lit litiga igatio tion n can cannot not be determined, the Company does not expect that the resolution of all legal matters will have a material adverse effectt on its consolidated effec consolidated results of opera operation tions, s, finan financial cial position position or cash flow. However, depending depending on the amount and the timing, an unfavorable resolution of some or all of these matters could materially affect the Company’s future results of operations or cash flows in a particular period.
In August 2009, Sheraton Operating Corporation (“Sheraton”) filed a lawsuit as plaintiff in the Supreme Court of the State of New York (the “Court”) against Castillo Grand LLC (“Castillo”) asserting claims arising outt of a di ou disp sput utee ov over er a ho hote tell de deve velo lopm pmen entt co cont ntra ract ct.. Tw Two o ea earl rlie ierr la laws wsui uits ts ar aris isin ing g ou outt of th thee sa same me ho hote tell development contract filed by Castillo against Sheraton in federal court had been dismissed for lack of subject matter matt er juris jurisdicti diction. on. Casti Castillo llo file filed d count countercl erclaims aims in the state court action alleging, alleging, among other things, that Sheraton’s breach of contract resulted in design changes and construction delays. The matter was tried to the Court and, on November 18, 2011, the Court issued its Post Trial Decision ruling in favor of Castillo on some F-45
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. NOTES TO FINANCIAL STATEMENTS STATEMENTS
claims and counterclaims and in favor of Sheraton on others. Overall, the decision is unfavorable to Sheraton. Judgment has not as yet been entered, pending the Court’s consideration of post-trial applications for the award of attorney’s fees and expenses. As a result of this decision, the Company recorded a reserve for this matter resulting in a pretax charge of $70 million. The legal decision is not final and Starwood intends to appeal. Collective Bargaining Agreements. At December 31, 2011, approximately 25% of the Company’s U.S.based employees were covered by various collective bargaining agreements, providing, generally, for basic pay rates, working hours, other conditions of employment and orderly settlement of labor disputes. Generally, labor relati rel ations ons hav havee bee been n mai mainta ntaine ined d in a nor normal mal and sat satisf isfact actory ory man manner ner,, and man manage agemen mentt bel believ ieves es tha thatt the Company’s employee relations are satisfactory. Environmental Matters. The Company is subject to certain requirements and potential liabilities under various federal, state and local environmental laws, ordinances and regulations. Such laws often impose liability without regard to whether the current or previous owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Although the Company has incurred and expects to incur remediation and other environmental costs during the ordinary course of operations, management anticipates that such costs will not have a material adverse effect on the operations or financial condition of the Company. Captive Insurance Company. Estimated insurance claims payable at December 31, 2011 and 2010 were $70 million and $72 million, million, respe respectiv ctively. ely. At Decem December ber 31, 2011 and 2010, standby letters letters of credi creditt amoun amounting ting to $60 million and $64 million, respectively, had been issued to provide collateral for the estimated claims. The letters of credit are guaranteed by the Company. ITT Industries. In 1995, the former ITT Corporation, renamed ITT Industries, Inc. (“ITT Industries”), distributed to its stockholders all of the outstanding shares of common stock of ITT Corporation, then a wholly owned subsidiary of ITT Industries (the “Distribution”). In connection with this Distribution, ITT Corporation, which whi ch was the then n nam named ed ITT Des Destin tinati ations ons,, Inc Inc., ., cha change nged d its nam namee to ITT Cor Corpor porati ation. on. Sub Subseq sequen uentt to the acquisition of ITT Corporation in 1998, the Company changed the name of ITT Corporation to Sheraton Holding Corporation.
For purposes of governing certain of the ongoing relationships between the Company and ITT Industries after the Distribution and spin-off of ITT Corporation and to provide for an orderly transition, the Company and ITT Industries have entered into various agreements including a spin-off agreement, Employee Benefits Services and Liability Agreement, Tax Allocation Agreement and Intellectual Property Transfer and License Agreements. The Company may be liable to or due reimbursement from ITT Industries relating to the resolution of certain pre-spin-off matters under these agreements. Based on available information, management does not believe that these matters matters would have a mate material rial impact on the Company’s consolidated consolidated results of opera operations tions,, finan financial cial position or cash flows. During the year ended December 31, 2010, the Company reversed a liability related to the 1998 acquisition (see Note 13). Note 26. 26.
Business Busi ness Segment Segment and and Geographic Geographical al Informatio Information n
The Company Company has two ope operat rating ing seg segmen ments: ts: hot hotels els and vacation vacation ownershi ownership p and resident residential ial.. The hotel segment generally represents a worldwide network of owned, leased and consolidated joint venture hotels and resorts resor ts opera operated ted primarily primarily under the Compa Company’s ny’s proprietary proprietary brand names inclu including ding St. Regis ®, The Luxury Collection®, Sheraton®, Westin®, W®, Le Méridien®, Four Points® by Sheraton, Aloft ® and Element® as well as hotels and resorts which are managed or franchised under these brand names in exchange for fees. The vacation ownership and residential segment includes the development, ownership and operation of vacation ownership resorts, marketing and selling VOIs, providing financing to customers who purchase such interests, licensing fees from branded condominiums and residences and the sale of residential units. F-46
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. NOTES TO FINANCIAL STATEMENTS STATEMENTS
The performance of the hotels and vacation ownership and residential segments is evaluated primarily on operating profit before corporate selling, general and administrative expense, interest expense, net of interest income, incom e, losse lossess on asse assett dispo dispositi sitions ons and impa impairme irments, nts, rest restructu ructuring ring and other special charges (credits) (credits) and income tax benefit (expense). The Company does not allocate these items to its segments. The following table presents revenues, operating income, assets and capital expenditures for the Company’s reportable segments (in millions): 2011
2010
2009
Revenues: Hote Ho tell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vaca Va cati tion on ow owne ners rshi hip p an and d re resi side dent ntia iall . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$4,7 $4 ,756 56 868 86 8
$4,38 $4 ,383 3 688 68 8
$4,0 $4 ,022 22 674 67 4
Tota To tall . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$5,6 $5 ,624 24
$5,07 $5 ,071 1
$4,6 $4 ,696 96
Operating income: Hote Ho tell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vaccat Va atiion own wner ersshi hip p an and d re resi sid den enttia iall . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 694 694 160 16 0
$ 571 571 105 10 5
$ 471 471 73
Total se Tot segm gmeent ope perrat atiing inc ncom omee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sell Se llin ing, g, ge gene nera ral, l, ad admi mini nist stra rati tive ve an and d oth other er . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rest Re stru ruct ctur urin ing, g, go good odwi will ll im impa pair irme ment nt an and d ot othe herr sp spec ecia iall ch char arge ges, s, ne nett . . . . . . . . . . . . . . .
854 854 (156 (1 56)) (68) (6 8)
676 676 (151 (1 51)) 75
544 544 (139 (1 39)) (379 (3 79))
Operaati Oper ting ng inc ncom omee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity earnings and gains and losses from unconsolidated ventures, net: Hotel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vacation ownership and residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inte In tere rest st ex expe pens nse, e, ne nett . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss Lo ss on as asse sett di disp spos osit itio ions ns an and d im impa pair irme ment nts, s, ne nett . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
630 63 0
600 60 0
26
8 3 (216 (2 16)) —
8 2 (236 (2 36)) (39) (3 9)
(5) 1 (227 (2 27)) (91) (9 1)
Income (loss) from continuing operations before taxes and noncontrolling inte in tere rest stss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 42 425 5
$ 33 335 5
$ (2 (296 96))
Depreciation and amortization: Hote Ho tell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vaccat Va atiion own wner ersshi hip p an and d re resi sid den enttia iall . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 191 191 22 52
$ 207 207 27 51
$ 229 229 27 53
Tota To tall . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 26 265 5
$ 28 285 5
$ 30 309 9
F-47
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. NOTES TO FINANCIAL STATEMENTS STATEMENTS 2011
2010
2009
Capital expenditures: Hote Ho tell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vaca Va cati tion on ow owne ners rshi hip p an and d re resi side dent ntia iall . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corp Co rpor oraate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 283 283 70 124 12 4
$ 184 184 $171 $171 151 15 1 145 14 5 42 27
Total (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 47 477 7
$ 37 377 7
Assets: Hotel (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vacation ownership and residential (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corp Co rpor orat atee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$6,162 $6,16 2 2,20 2, 207 7 1,191 1,1 91
$6,440 $6,4 40 2,13 2, 139 9 1,19 1, 197 7
Tota To tall . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$9,56 $9 ,560 0
$9,7 $9 ,776 76
$343 $3 43
(a) Includes Includes $385 million, million, $227 million, million, and $196 million million of prope property, rty, plant, plant, and equipment expendit expenditures ures as of December 31, 2011, 2010, and 2009, respectively. Additional expenditures included in the amounts above consist of vacation ownership inventory and investments in management contracts. (b) Includes Includes $229 million million and $294 million million of investments investments in unconsolidate unconsolidated d joint ventures at December December 31, 2011 and 2010, respectively. (c) Includes Includes $30 million million and $27 million of investments investments in unconsolida unconsolidated ted joint ventures ventures at December December 31, 2011 and 2010, respectively. The following table presents revenues and long-lived assets by geographical region (in millions): Revenues
Long-Lived Assets
2011
2010
2009
2011
2010
United States . . . . . . . . . . . . . . . . . . . . . . . . All other international . . . . . . . . . . . . . . . . .
$3,5 ,56 61 2,063
$3,3 ,31 12 1,759
$3,3 ,38 87 1,309
$2,0 ,02 23 1,506
$2,186 1,449
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$5,6 ,62 24
$5,0 ,07 71
$4,6 ,69 96
$3,5 ,52 29
$3,635
There were no individual international countries which comprised over 10% of the total revenues of the Company for the years ended December 2011, 2010 or 2009, or 10% of the total long-lived assets of the Company as of December 31, 2011 or 2010.
F-48
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. NOTES TO FINANCIAL STATEMENTS STATEMENTS Note 27.
Quarterly Quart erly Resul Results ts (Unaud (Unaudited ited)) Three Months Ended Marc Ma rch h 31
June Ju ne 30
Sept Se ptem embe berr 30
Dece De cemb mber er 31
Year Ye ar
(In millions, except per share data)
2011
Rev Re venues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,,295 $1
$1, 1,4 426
$1,372
$1,531
$5, 5,6 624
Cost Co stss an and d exp xpen ense sess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,,17 $1 175 5
$1,,24 $1 249 9
$1,2 $1 ,210 10
$1,3 $1 ,360 60
$4,,99 $4 994 4
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . .
$
27
$ 15 0
$ 165
$ 158
$ 50 0
Net (income) loss from continuing operations attributable to noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2
$
$
$
$
Income (loss) from continuing operations attributable to Starwood’s common shareholders . . . . . . . . . . . . . . . . . . . . .
$
29
$ 15 0
$ 165
$ 158
$ 50 2
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
( 1)
$ (19)
$
$
9
$ (13)
Net income attributable to Starwood . . . . . . . . . . . . . . . . . . . . . .
$
28
$ 13 1
$ 16 3
$ 167
$ 48 9
Income (loss) from continui uin ng operations . . . . . . . . . . . . . . .
$ 0.16 0.16
$ 0.79 0.79
$ 0.8 0.88
$ 0. 0.82
$ 2.65 2.65
Disc Di scon onttinu nueed op oper eraati tion onss . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (0 (0..01 01))
$ (0 (0..10 10))
$ (0 (0..01 01))
$ 0.05 0.05
$ (0 (0..07 07))
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 0.15
$ 0.69
$ 0 .8 .87
$ 0 .8 .87
$ 2.58
Earnings per share:
—
—
(2)
—
2
(a)
Basic —
Diluted — Income (loss) from continui uin ng operations . . . . . . . . . . . . . . .
$ 0.15 0.15
$ 0.77 0.77
$ 0.8 0.85
$ 0. 0.80
$ 2.57 2.57
Disc Di scon onttinu nueed op oper eraati tion onss . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (0 (0..01 01))
$ (0 (0..09 09))
$ (0 (0..01 01))
$ 0.05 0.05
$ (0 (0..06 06))
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 0.14
$ 0.68
$ 0 .8 .84
$ 0 .8 .85
$ 2.51
Rev Re venues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,,187 $1
$1, 1,2 289
$1,255
$1,340
$5, 5,0 071
Cost Co stss an and d exp xpen ense sess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,,10 $1 102 2
$1,,15 $1 152 2
$1,1 $1 ,133 33
$1,0 $1 ,084 84
$4,,47 $4 471 1
Income (loss) from continuing operations . . . . . . . . . . . . . . . . .
$
28
$
79
$
$ 206
$ 30 8
Net (income) loss from continuing operations attributable to noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2
$
—
$
$
$
Income (loss) from continuing operations attributable to Starwood’s common shareholders . . . . . . . . . . . . . . . . . . . . .
$
30
$
79
$
(5)
$ 206
$ 31 0
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
—
$
35
$
(1)
$ 133
$ 16 7
Net income attributable to Starwood . . . . . . . . . . . . . . . . . . . . . .
$
30
$ 11 4
$
(6)
$ 339
$ 47 7
Income (loss) from continui uin ng operations . . . . . . . . . . . . . . .
$ 0.16 0.16
$ 0.44 0.44
$(0..03) $(0
$ 1.1 1.13
$ 1.70 1.70
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
—
$ 0 .1 .19
$ 0 .0 .00
$ 0 .7 .72
$ 0 .9 .91
Net inc nco ome . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 0.16
$ 0.63
$(0..03) $(0
$ 1.8 1.85
$ 2.61
2010
Earnings per share:
(5) —
—
2
(a)
Basic —
Diluted — Income (loss) from continui uin ng operations . . . . . . . . . . . . . . .
$ 0.16 0.16
$ 0.42 0.42
$(0..03) $(0
$ 1.0 1.08
$ 1.63 1.63
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
—
$ 0 .1 .19
$ 0 .0 .00
$ 0 .7 .70
$ 0 .8 .88
Net inc nco ome . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 0.16
$ 0.61
$(0..03) $(0
$ 1.7 1.78
$ 2.51
(a) Amounts presented presented are are attributable attributable to Starwood’s common shareholders. shareholders. F-49
SCHEDULE II STARWOOD HOTELS & RESORTS WORLDWIDE, INC. VALUATION VALUATI ON AND QUALIFYING ACCOUNTS (In millions) Additions (Deductions)
Balance January 1,
2011 Trade receivables — allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes receivable — allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reserves included in accrued and other liabilities: Restructuring and other special charges . . . . . . . 2010 Trade receivables — allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes receivable — allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reserves included in accrued and other liabilities: Restructuring and other special charges . . . . . . . 2009 Trade receivables — allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes receivable — allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reserves included in accrued and other liabilities: Restructuring and other special charges . . . . . . .
Charged to/reversed from Expenses
$ 32 32
$
5
$202
$ 28 28
$ 29
Charged to/from Other Accounts (a)
$
Payments/ Other
(1)
Balance December 31,
$ (7 (7)
$ 29 29
$ —
$(55)
$175
$ 68
$
(7)
$ (1)
$ 89
$ 33 33
$ 15 15
$
(3)
$(13)
$ 32 32
$139
$ 36 36
$ 78
$(51)
$202
$ 34
$ (7 ( 75)
$
8
$ 62
$ 29
$ 31 31
$
7
$
5
$(10)
$ 33 33
$135
$ 65 65
$
(1)
$(60)
$139
$ 41
$379
$(332)
$(54)
$ 34
(a) Charg Charged ed to/fro to/from m other other account accounts: s: Description of Charged to/from Other Accounts
2011 Accr Ac crue ued d exp expen ense sess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Othe Ot herr lia liabi bili liti ties es . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(1)) (1 (7) (7)
Tota To tall cha charg rged ed to to/f /fro rom m oth other er ac acco coun unts ts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(8)) (8
$
(3) (3) 8 78
2010 Accr Ac crue ued d exp expen ense sess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accr Ac crue ued d sal salar arie ies, s, wa wage gess an and d be bene nefi fits ts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impa Im pact ct of AS ASU U No. No. 20 2009 09-1 -17 7 (se (seee No Note te 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tota To tall cha charg rged ed to to/f /fro rom m oth other er ac acco coun unts ts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 83
2009 Plan Pl ant, t, pr prop oper erty ty an and d equ equip ipme ment nt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Good Go odwi will ll . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inve In vent ntor ory y . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . Inve In vest stme ment ntss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acccou Ac ount ntss rec receeiv ivaabl blee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acccru Ac rueed ex expe pens nsees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(17 $( 178) 8) (90) (9 0) (61) (6 1) (5)) (5 2 4
Tota To tall cha charg rged ed to to/f /fro rom m oth other er ac acco coun unts ts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(32 $( 328) 8)
S-1
STARWOOD HOTELS & RESORTS WORLDWID WORL DWIDEE, IN INC C. 2012 201 2 PR OXY STATE MENT & 201 2011 1 ANNUAL REPOR T
CORPORATE HEADQUARTERS Starwood Hotels & Resorts Worldwide, Inc. One StarPoint Stamord, Connecticut 06902 203 964 6000 www.starwoodhotels.com
FORM 10-K AND OTHER INVESTOR INFORMATION A copy o the Annual Report o Starwood Hotels & Resorts Worldwide, Inc. (“Starwood”) or Form 10-K iled with the Securities and Exchange Commission may be obtained through the ollowing channels:
INVESTOR RELATIONS Starwood Hotels & Resorts Worldwide, Inc. One StarPoint Stamord, Connecticut 06902 203 351 3500
[email protected]
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Note: This Annual Report contains orward-looking statements within the meaning o ederal securities regulations. Forward-looking statements are not guarantees o uture perormance and involve risks and uncertainties and other actors that may cause actual results to dier materially rom those anticipated at the time the orward-looking statements are made. Further results, perormance and achievements may be aected by general economic conditions including the timing and robustness o a recovery rom the current global economic downturn, the impact o war and terrorist activity, business and inancing conditions, oreign exchange luctuations, cyclicality o the real estate, including the sale o residential units, and the hotel and vacation ownership businesses, operating risks associated with the sale o residential units, hotel and vacation ownership businesses, relationships with associates, customers and property owners, the impact o the Internet reservation channels, our reliance on technology, domestic and international political and geopolitical conditions, competition, governmental and regulatory actions (including the impact o changes in US and oreign tax laws and their interpretation), travelers’ ears o exposure to contagious diseases, risk associated with the level o our indebtedness, risk associated with potential acquisitions and dispositions and other circumstances and uncertainties. These risks and uncertainties are presented in detail in our ilings with the Securities and Exchange Commission. Although we believe the expectations relected in such orward-looking statements are based upon reasonable assumptions, we can give no assurance that our expectations will be attained or that results will not materially dier. We undertake no obligation to publicly update or revise any orward-looking statement, whether as a result o new inormation, uture events or otherwise. ©2012 Starwood Hotels & Resorts Worldwide, Inc. All Rights Reserved. Alot, Element, Four Points, Le Méridien, Sheraton, St. Regis, The Luxury Collection, W, Westin and their logos are the trademarks o Starwood Hotels & Resorts Worldwide, Inc., or its afliates.
PICTURED FROM TOP LEFT THE ST. REGIS BANGKOK, THAILAND // THE CHATWAL, NEW YORK YORK CITY, A LUXURY COLLECTION HOTEL, UNITED STATES STATES // W RETREAT & SPA SPA BALI – SEMINYAK, SEMINYAK, INDONESIA // LE MERIDIEN KOH SAMUI RESORT & SPA, SPA, THAILAND // THE WESTIN ABU DHABI GOLF RESORT & SPA, UNITED ARAB EMIRATES // SHERATON SEOUL D CUBE CITY HOTEL, SOUTH KOREA // ALOFT JACKSONVILLE TAPESTRY PARK, UNITED STATES STATES // ELEMENT LAS VEGAS SUMMERLIN, UNITED STATES STATES // FOUR POINTS BY SHERATON SHERATON BARCELONA DIAGONAL, SPAIN PICTURED ON FRONT COVER W TAIPEI, TAIWAN
