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Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

  x Annual Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the Fiscal Year Ended December 31, 2014

OR

 

  ¨ Transition Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the Transition Period from                     to                     

Commission File 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 by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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 to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate 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 shorter period than the registrant was required to submit and post such files).    Yes  x    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.    ¨

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.

 

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

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

As of the last business day of the registrant’s most recently completed second fiscal quarter, June 30, 2014, 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 $15.7 billion.

As of February 20, 2015, the registrant had 171,692,071 shares of common stock outstanding.

Documents Incorporated by Reference:

 

Document

 

               Where Incorporated                

Proxy Statement   Part III (Items 10, 11, 12, 13 and 14)

 

 

 


Table of Contents

TABLE OF CONTENTS

 

         Page  
PART I   
  Forward-Looking Statements      1   
Item 1.   Business      1   
Item 1A.   Risk Factors      11   
Item 1B.   Unresolved Staff Comments      24   
Item 2.   Properties      24   
Item 3.   Legal Proceedings      24   
Item 4.   Mine Safety Disclosures      24   
PART II   
Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      25   
Item 6.   Selected Financial Data      28   
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations      28   
Item 7A.   Quantitative and Qualitative Disclosures about Market Risk      54   
Item 8.   Financial Statements and Supplementary Data      55   
Item 9.   Changes In and Disagreements with Accountants on Accounting and Financial Disclosure      55   
Item 9A.   Controls and Procedures      55   
Item 9B.   Other Information      56   
PART III   
Item 10.   Directors, Executive Officers and Corporate Governance      56   
Item 11.   Executive Compensation      58   
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      58   
Item 13.   Certain Relationships and Related Transactions and Director Independence      58   
Item 14.   Principal Accounting Fees and Services      58   
PART IV   

Item 15.

  Exhibits and Financial Statement Schedules      59   


Table of Contents

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, forward-looking 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. Factors that might cause such a difference include, but are not limited to, general economic conditions, our financial and business prospects, our capital requirements, our financing prospects, our relationships with associates and labor unions, our ability to consummate the spin-off of our vacation ownership business or realize the anticipated benefits of such transaction and the other risks and uncertainties disclosed under Item 1A. Risk Factors. We caution readers that any such statements are based on currently available operational, financial and competitive information, 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 statement to reflect current or future events or circumstances.

 

Item 1. Business

General

We are one of the largest hotel and leisure companies in the world, with 1,222 properties providing approximately 354,200 rooms in approximately 100 countries and 180,400 employees under our management at our owned and managed properties, vacation ownership resorts and corporate offices. We conduct our hotel and leisure business both directly and through our subsidiaries. We also own Starwood Vacation Ownership, Inc., a premier provider of world-class vacation experiences through villa-style resorts and privileged access to Starwood brands. On February 10, 2015, we announced plans to spin-off our vacation ownership business to stockholders as a separate, publicly traded company. The transaction, which is expected to be tax-free to stockholders, will be effected through a pro rata distribution of the new entity’s stock to existing Starwood stockholders. Please see Note 27, Subsequent Event, of the Notes to our Financial Statements for additional information.

The Starwood Preferred Guest (SPG) program is our award-winning proprietary frequent traveler, customer loyalty, and multi-brand marketing program that encourages our members to concentrate their stays within Starwood’s nine brands and to try new hotels in the Starwood family, allowing members to earn and redeem points for room stays, room upgrades and airline flights, with no blackout dates. Since its introduction in 1999, the SPG program has been one of the most innovative and rewarding loyalty program in the hospitality industry. In 2014, SPG members purchased over 50% of our room nights. In 2014, SPG expanded its loyalty program even further to include business-to-business customers by introducing SPG Pro. SPG Pro rewards customers who book their guests and events at Starwood hotels, encouraging even more business for each of our brands.

Our revenue and earnings are derived primarily from hotel operations, which include management fees and other fees earned from hotels we manage pursuant to management contracts, the receipt of franchise fees and other fees pursuant to franchise agreements and the operation of our owned hotels. We consider our hotels and resorts, including vacation ownership resorts, generally to be premier establishments with respect to desirability

 

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of location, size, facilities, physical condition, quality and variety of services offered in the markets in which they are located. Although obsolescence attributable to age, condition of facilities and style may adversely affect our hotels and resorts, we and the third-party owners of the managed and franchised hotels expend substantial funds to renovate and maintain our facilities in order to remain competitive. For further information see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources in this Annual Report.

Our hotel business is largely focused on the global operation of hotels and resorts primarily in the luxury and upper upscale segments of the lodging industry. We seek to acquire management or franchise rights with respect to, or interests in, properties in these segments. At December 31, 2014, our hotel business included 1,207 owned, managed or franchised hotels with approximately 346,600 rooms, comprising 36 hotels that we own or lease or in which we have a majority equity interest, 583 hotels managed by us on behalf of third-party owners (including entities in which we have a minority equity interest) and 588 hotels for which we receive franchise fees. Additionally, our vacation ownership and residential business included 15 stand-alone vacation ownership resorts and residential properties at December 31, 2014. All brands (other than the Four Points by Sheraton, the Aloft and Element brands) represent full-service properties that range in amenities from luxury hotels to more moderately priced hotels. Our Four Points by Sheraton, Aloft and Element brands are mostly select-service properties that cater to more value-oriented consumers.

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, 2014:

 

     Number of
Properties
     Rooms  

Managed and unconsolidated joint venture hotels

     583         193,900   

Franchised hotels

     588         139,200   

Owned hotels (a)

     36         13,500   

Vacation ownership resorts and stand-alone properties

     15         7,600   
  

 

 

    

 

 

 

Total properties

     1,222         354,200   
  

 

 

    

 

 

 

 

(a) Includes wholly owned, majority owned and leased hotels.

 

     Number of
Properties
     Rooms  

North America (and Caribbean)

     601         182,100   

Latin America (and Mexico)

     84         18,000   

Americas

     685         200,100   

Europe

     163         38,400   

Africa and the Middle East

     86         24,000   

Europe, Africa and the Middle East

     249         62,400   

Greater China

     146         53,200   

Rest of Asia

     142         38,500   

Asia Pacific

     288         91,700   
  

 

 

    

 

 

 

Total properties

     1,222         354,200   
  

 

 

    

 

 

 

We manage and operate our hotel business in three separate hotel segments: (i) the Americas, (ii) Europe, Africa and the Middle East (EAME), and (iii) Asia Pacific. Our vacation ownership and residential business is a separate segment. Note 25 to the consolidated financial statements presents further information about our segments.

For a discussion of our revenues, profits, assets and reportable segments, see our consolidated financial statements of this Annual Report, including the notes thereto.

 

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The Corporation was incorporated in 1980 under the laws of Maryland. Sheraton and Westin, Starwood’s largest brands, have been serving guests for more than 60 years. Starwood Vacation Ownership (including its predecessor, Vistana, Inc.) has been selling vacation ownership interests (VOIs) for more than 30 years.

Our principal executive offices are located at One StarPoint, Stamford, Connecticut 06902, and our telephone number is (203) 964-6000.

Hotel Business

Branded Hotel Management Business. Hotel and resort properties 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 branding, including marketing, centralized reservations, loyalty programs, and other centralized services, particularly in the sales and marketing area. We believe that companies, such as Starwood, that offer both hotel management services and well-established global brand names appeal to hotel owners by providing the full range of management, marketing, sales and reservation services.

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 typically include hiring, training and supervising the managers and employees that operate these facilities. For additional fees, we provide centralized reservation services, loyalty program services and coordinate national and international sales, advertising, marketing and other promotional services. We prepare and implement annual budgets for the hotels we manage and allocate property-owner funds for periodic maintenance and repair of buildings and furnishings. In addition to our owned and leased hotels, at December 31, 2014, we managed 583 hotels with approximately 193,900 rooms worldwide.

During the year ended December 31, 2014, we generated management fees by geographic area as follows:

 

North America (and Caribbean) (a)

     38.6

Latin America (and Mexico)

     3.7

Americas

     42.3

Europe

     13.4

Africa and the Middle East

     12.2

Europe, Africa and the Middle East

     25.6

Greater China

     19.0

Rest of Asia

     13.1

Asia Pacific

     32.1
  

 

 

 

Total

     100.0
  

 

 

 

 

(a) Management fees generated in the United States were 35.8% of total worldwide management fees.

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, loyalty program, 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, some 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, 2014, we opened 40 managed hotels with approximately 9,500 rooms, and 14 managed hotels with approximately 4,300 rooms exited our system. In addition, during 2014, we signed management agreements for 98 hotels with approximately 22,700 rooms, a small portion of which opened in 2014 and the majority of which will open in the future.

 

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Brand Franchising and Licensing. We franchise our Luxury Collection, Westin, Le Méridien, Sheraton, Four Points by Sheraton, Aloft and Element brands 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, loyalty program, national and international advertising and sales and marketing. We also review certain plans for the location and design of franchised hotels to conform to our brand standards. At December 31, 2014, there were 588 franchised properties with approximately 139,200 rooms.

During the year ended December 31, 2014, we generated franchise fees by geographic area as follows:

 

North America (and Caribbean) (a)

     82.1

Latin America (and Mexico)

     3.7

Americas

     85.8

Europe

     6.6

Africa and the Middle East

     0.4

Europe, Africa and the Middle East

     7.0

Greater China

     1.8

Rest of Asia

     5.4

Asia Pacific

     7.2
  

 

 

 

Total

     100.0
  

 

 

 

 

(a) Franchise fees generated in the United States were 71.7% of total worldwide franchise fees.

In addition to the franchise contracts we retained in connection with the sale of hotels during the year ended December 31, 2014, we opened 34 franchised hotels with approximately 5,400 rooms, and 13 franchised hotels with approximately 2,600 rooms exited our system. In addition, during 2014 we signed franchise agreements for 77 hotels with approximately 12,000 rooms, a portion of which opened in 2014 and a portion of which will open in the future.

Owned, Leased and Consolidated Joint Venture Hotels. Historically, we derived the majority of our revenues and operating income from our owned, leased and consolidated joint venture hotels and a significant portion of these results were driven by the hotels in North America. However, in 2006, we embarked upon our asset-light strategy and decided to sell a significant number of our owned hotel portfolio. The majority of these hotels were sold subject to long-term management or franchise contracts.

Total revenues generated from our owned, leased and consolidated joint venture hotels worldwide for the years ending December 31, 2014, 2013 and 2012 were $1,541 million, $1,612 million and $1,698 million, respectively (total revenues from our owned, leased and consolidated joint venture hotels in North America were $776 million, $829 million and $956 million for 2014, 2013 and 2012, respectively).

During the years ended December 31, 2014 and 2013, we earned revenues at our owned and leased hotels by geographic area as follows (1):

 

     2014
Revenues
    2013
Revenues
 

United States

     39     40

Europe

     27     27

Americas (Latin America & Canada) *

     25     23

Asia Pacific

     9     10
  

 

 

   

 

 

 

Total

     100     100
  

 

 

   

 

 

 

 

(1) Includes the revenues of hotels sold for the period prior to their sale.

 

* Includes U.S. territories

 

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During the years ended December 31, 2014 and 2013, we invested approximately $166 million and $252 million, respectively, for capital expenditures at owned hotels.

As discussed above, we have implemented a strategy of reducing our investment in owned real estate and increasing our focus on the management and franchise business. Since 2006, we have sold 87 hotels realizing cash proceeds of approximately $7.1 billion in numerous transactions, including cash proceeds net of closing costs of approximately $784 million from the sale of eight hotels during the year ended December 31, 2014.

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 system, broad customer and owner base and other resources and by taking advantage of our scale to reduce costs. The implementation of our strategy and financial planning is impacted by the uncertainty relating to geopolitical and economic environments around the world and its consequent impact on travel.

 

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Following the sale of a significant number of our hotels in the past few years, as of December 31, 2014, we own or lease 36 hotels as follows (not including vacation ownership properties):

 

U.S. Hotels:

  

Location

   Rooms  
The St. Regis, San Francisco    San Francisco, CA      260   
The St. Regis, New York    New York, NY      238   
The Phoenician, a Luxury Collection Resort, Scottsdale    Scottsdale, AZ      643   
W New York – Times Square    New York, NY      509   
The Westin Peachtree Plaza, Atlanta    Atlanta, GA      1,073   
The Westin Maui Resort & Spa, Ka’anapali    Maui, HI      759   
Sheraton Kauai Resort    Koloa, HI      394   
Sheraton Steamboat Resort    Steamboat Springs, CO      264   
Element Denver Park Meadows    Denver, CO      123   
The Tremont Chicago Hotel at Magnificent Mile    Chicago, IL      135   

International Hotels:

  

Location

   Rooms  
The St. Regis, Osaka    Osaka, Japan      160   
The St. Regis, Florence    Florence, Italy      100   
Park Tower, Buenos Aires    Buenos Aires, Argentina      181   
Hotel Alfonso XIII, Seville    Seville, Spain      151   
Hotel Imperial, Vienna    Vienna, Austria      138   
Hotel Maria Cristina, San Sebastian    San Sebastian, Spain      136   
The Gritti Palace, Venice    Venice, Italy      82   
Hotel Goldener Hirsch, Salzburg    Salzburg, Austria      70   
W Barcelona    Barcelona, Spain      473   
W London – Leicester Square    London, UK      192   
The Westin Resort & Spa, Cancun    Cancun, Mexico      379   
The Westin Excelsior, Rome    Rome, Italy      316   
The Westin Resort & Spa, Puerto Vallarta    Puerto Vallarta, Mexico      280   
The Westin Denarau Island Resort    Nadi, Fiji      273   
The Westin Resort & Spa, Los Cabos    Los Cabos, Mexico      243   
The Westin Excelsior, Florence    Florence, Italy      171   
Sheraton Centre Toronto Hotel    Toronto, Canada      1,371   
Le Centre Sheraton Montreal Hotel    Montreal, Canada      825   
Sheraton Maria Isabel Hotel & Towers    Mexico City, Mexico      755   
Sheraton Buenos Aires Hotel & Convention Center    Buenos Aires, Argentina      740   
Sheraton Rio Hotel & Resort    Rio de Janeiro, Brazil      539   
Sheraton Gateway Hotel in Toronto International Airport    Toronto, Canada      474   
Sheraton Lima Hotel & Convention Center    Lima, Peru      431   
Sheraton Fiji Resort    Nadi, Fiji      264   
Sheraton Paris Airport Hotel & Conference Centre    Paris, France      252   
Sheraton Diana Majestic Hotel, Milan    Milan, Italy      106   

 

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Vacation Ownership and Residential Business

We derive revenues and earnings from the development, ownership and operation of vacation ownership resorts, marketing and selling VOIs in the resorts and providing financing to customers who purchase such interests. Generally, these resorts are marketed under our brand names. Additionally, our revenues and earnings are derived from the development, marketing 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 under our brands developed by third-party owners.

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 the receivables generated from our sale of VOIs.

We have also entered into arrangements with several third-party owners for mixed use hotel projects that 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 residences to prospective purchasers. In consideration, we typically receive a licensing fee equal to a percentage of the gross sales revenue of the units sold.

On January 1, 2013, we transferred the Westin St. John, in St. John, U.S. Virgin Islands, from our Americas’ hotel segment to the vacation ownership and residential segment. For periods prior to January 1, 2013, hotel revenues and expenses of the Westin St. John are included in the Americas’ segment, whereas subsequent to the transfer date, those revenues and expenses are included in the vacation ownership and residential segment.

In late 2011, we completed the development of a wholly-owned residential project at the St. Regis Bal Harbour Resort in Miami, FL (Bal Harbour). During the year ended December 31, 2014, we closed sales of the last four units and this project is now sold out.

At December 31, 2014, we had 22 owned vacation ownership resorts in the United States, Mexico and the Bahamas, consisting of 14 stand-alone, seven mixed-use and one unconsolidated joint venture. At December 31, 2014, we were actively selling VOIs at 17 sites in our portfolio.

During 2014 and 2013, we invested approximately $84 million and $62 million, respectively, for vacation ownership and residential capital expenditures, including construction at the Westin St. John in St. John, U.S. Virgin Islands and the Westin Desert Willow in Palm Desert, CA.

As discussed earlier, on February 10, 2015, we announced plans to spin-off our vacation ownership business to stockholders as a separate, publicly traded company. Please see Note 27, Subsequent Event, of the Notes to our Financial Statements for additional information.

 

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Our Brands

Through our brands, we are well represented in major markets around the world. The following table reflects our hotel properties, by brand, as of December 31, 2014:

 

LOGO

 

(a) Excludes one independent hotel, and 14 stand alone and one unconsolidated joint venture vacation ownership properties totaling 7,600 rooms.

Our brand names include the following:

St. Regis® (luxury full-service hotels, resorts and residences) is for connoisseurs who desire the finest expressions of luxury. They provide flawless and bespoke service to high-end leisure and business travelers. St. Regis hotels are located in the ultimate locations within the world’s most desired destinations, important 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 upper 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 converges with local influences to create energizing spaces for guests to play or work by day or mix and mingle by night. Guests are invited into dynamic 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® service philosophy that grants its guests and local community access to what’s new and next.

Westin® (luxury and upper upscale full-service hotels, resorts and residences) provides innovative programs and instinctive services designed with our guests’ well-being in mind. Indulge in a deliciously wholesome menu, including exclusive SuperFoodsRx® dishes. Energize in the fitness studio with the 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,

 

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down, and patented pillow-top mattress. Whether an epic city center location or a refreshing resort destination, Westin ensures guests leave feeling better than when they arrived. Westin. For A Better You.

Le Méridien® (luxury and upper upscale full-service hotels, resorts and residences) is a Paris-born global hotel brand, currently represented by close to 100 properties in over 40 countries worldwide. Le Méridien aims to target the creative and curious-minded traveler: an audience eager to experience something new in every destination and discover things with a new perspective. A curated approach towards culture, the arts, and cuisine unlocks the destination for Le Méridien guests in special and inspiring ways. Signature to the experience is Le Méridien Hub – the brand’s unique lobby concept where a café inspired atmosphere and high impact art, music, and food & beverage experiences set the scene for guests to socialize and exchange ideas in a curated environment, and our Unlock Art program offering free access to local cultural institutions. Le Méridien is more than a hotel, it’s your key to unlocking unique destinations around the globe.

Sheraton® (luxury and upper upscale full-service hotels, resorts and residences) is our largest brand serving the needs of business and leisure travelers worldwide. For over 75 years this 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. Our social spaces define and differentiate Sheraton. The Link@SheratonSM is the heart of our lobby. Guests enjoy the upside of everything with Sheraton Club, designed with SPG members in mind. Sheraton Fitness by EXOS 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® (select-service hotels) delights the smart traveler with what is needed on the road for greater comfort and productivity. All at the honest value our guests deserve, with perks they don’t expect. Our guests start their day feeling energized and finish up relaxed, by kicking back with one of our Best Brews (local craft beer, coffee). Four Points is Best For Business.

Aloft® (select-service hotels) opened its first hotel in 2008 and has rapidly expanded to 91 properties in 15 countries by the end of 2014. Designed for global travelers who love open spaces, open thinking and open expression, Aloft is where travel creates possibilities. An affordable alternative for the tech-savvy and confidently social, Aloft caters to the global traveler. With a vibrant social scene at W XYZ® bar, modern authentic design throughout and technology that keeps up with the next gen traveler, Aloft is: Different. By Design.

Element® (extended stay hotels) first opened in 2008, providing a modern, upscale and intuitively designed hotel experience that allows travelers a place to thrive. Whether stopping by for a few days or settling in for a few weeks, Element hotels proves that time away from home doesn’t mean time away from life. All Element hotels are pursuing LEED certification furthering the green from the ground up sensibility of the brand. Extended Stay Reimagined.

Competition

The hotel and timeshare industries are highly competitive. Competition is generally based on quality and consistency of room, restaurant and meeting facilities and services, attractiveness of locations, availability of a global distribution system, price, the ability to earn and redeem loyalty program points and other factors. We believe that we compete favorably in these areas.

Our properties primarily compete with other hotels and resorts in their geographic markets, including facilities owned by local companies and facilities owned by national and international chains. Our principal competitors include other hotel operating companies, national and international hotel brands, and ownership companies (including hotel Real Estate Investment Trusts). 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.

 

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Intellectual Property

We operate in a highly competitive industry and our intellectual property, including brands, logos, trademarks, service marks, and trade dress, is an important component of our business. The success of our business depends, in part, on the increased recognition 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 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 may 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 of 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 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 damage or demolition, or certain renovations or remodeling. Environmental Laws also regulate 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 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.

U.S. Congress and some U.S. states are considering or have undertaken actions to regulate and reduce greenhouse gas emissions and/or other natural resources. New or revised laws and regulations or new interpretations of existing laws and regulations, such as those related to climate change, supply chain and water risk, 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 of real property may face liability for personal injury or property damage because of various 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 revenues 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.

 

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Comparability of Owned Hotel Results

We continually update and renovate our owned, leased and consolidated joint venture hotels. While 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 disasters, may cause a full or partial closure or sale of a hotel, and such events can 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, 2014, approximately 180,400 people were employed at our corporate offices, owned and managed hotels and vacation ownership resorts, of which approximately 29% were employed in the United States. At December 31, 2014, approximately 23% of the 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 relations have been 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, if necessary, amendments to those reports, a proxy statement and other information with the Securities and Exchange 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 Exchange. For more information on obtaining copies of our public filings at the New York Stock 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.

 

Item 1A. Risk Factors

Risks Relating to Our Business and Industry

We Are Subject to the Business, Financial and Operating Risks Common to the Hotel Business and Vacation Ownership and Residential Business, Any of Which Could Reduce Our Revenues and Limit Opportunities for Growth. Business, financial and operating risks common to the hotel business and vacation ownership and residential business include:

 

   

significant competition from hospitality providers in all parts of the world;

 

   

the costs and administrative burdens associated with complying with applicable laws and regulations in the U.S. and in all of the other countries in which we operate;

 

   

delays in or cancellations of planned or future development or refurbishment projects;

 

   

changes in desirability of geographic regions of the hotels or timeshare resorts in our business, geographic concentration of our operations and customers (including certain concentration in new and emerging markets), and shortages of desirable locations for development;

 

   

decreases in the demand for transient rooms, vacation ownership interests, residential products and related lodging services, including a reduction in business travel as a result of alternatives to in-person meetings (including virtual meetings hosted online or over private teleconferencing networks) or due to general economic conditions;

 

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decreased corporate or governmental travel-related budgets and spending, as well as cancellations, deferrals or renegotiations of group business such as industry conventions;

 

   

negative public perception of corporate travel-related activities;

 

   

statements, actions, or interventions by governmental officials related to travel, meetings or other aspects of hotel business and operations;

 

   

the impact of internet intermediaries and other new industry entrants on pricing and the value of our brands and our increasing reliance on technology;

 

   

health, safety and environmental laws, rules and regulations and other governmental and regulatory action;

 

   

changes in operating costs including, but not limited to, energy, water, labor costs (including the impact of labor shortages and unionization), food costs, workers’ compensation and health-care related costs, insurance and unanticipated costs such as acts of nature and their consequences;

 

   

disputes with owners of properties may lead to the termination of our management or franchise agreements or result in litigation;

 

   

the availability and cost of capital to allow us and hotel owners and franchisees to fund construction and renovations;

 

   

the financial condition of third-party owners, developers, franchisees and joint venture partners; and

 

   

cyclical over-building in the hotel business and residential and vacation ownership business.

Macroeconomic and Other Factors Beyond Our Control Can Adversely Affect and Reduce Demand For Our Products and Services. Macroeconomic and other factors beyond our control that could adversely affect and reduce demand for our products and services include, but are not limited to:

 

   

changes in general economic conditions, including low consumer confidence, unemployment levels and the severity and duration of downturns in the United States, Europe, Asia and elsewhere across the world;

 

   

war, political conditions and civil unrest, terrorist activities or threats and heightened travel security measures instituted in response thereto;

 

   

natural or man-made disasters, such as earthquakes, tsunamis, tornadoes, hurricanes, typhoons, floods, drought, volcanic eruptions, oil spills and nuclear incidents;

 

   

conditions which negatively shape public perception of travel, including travel-related accidents and travelers’ fears of exposures to contagious diseases;

 

   

the financial condition of the airline, automotive and other transportation-related industries;

 

   

the physical risks of climate change and/or availability and quality of natural resources, such as a secure and economical supply of water or energy in some locations; and

 

   

foreign exchange fluctuations.

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 and franchise contracts are typically long-term arrangements but most allow the hotel owner to terminate the agreement in certain circumstances. With respect to management agreements, such instances may include our failure to meet certain financial or performance criteria, the bankruptcy of the hotel owner and, in certain cases, the sale of the property. A significant loss of agreements due to premature terminations could adversely affect our operating results.

Factors outside of our control 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. The resolution of any disputes with property owners could be very expensive for us, even if the outcome is ultimately decided in our favor. We cannot predict the outcome of any arbitration or litigation, the effect of any negative judgment against us or the

 

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amount of any settlement that we may enter into with any third-party. An adverse result in any of these proceedings could materially adversely affect our results of operations. Furthermore, specific to our industry, some courts have applied principles of agency law and related fiduciary standards to managers of third-party hotel properties, which means that property owners may assert the right to terminate agreements even where the agreements do not expressly provide for termination. In the event of any such termination, we may need to enforce our right to damages for breach of contract and related claims and incur significant legal fees and expenses. Any damages we ultimately collect could be less than the projected value of the fees and other amounts we would have otherwise collected under the management agreement. Consequently, our operating results would be adversely affected if we could not maintain existing management or franchise agreements or obtain new agreements on as favorable terms as the existing agreements.

The Global Economy Generally May Continue to Impact Our Financial Results and Growth. Consumer demand for our services is closely linked to the performance of the general economy and is sensitive to business and personal discretionary spending levels. Weak economic conditions in Europe, Latin America and other parts of the world, potential disruptions in the U.S. economy, political instability and changes in government policies in some areas throughout the world, and the uncertainty over how long any of these conditions will continue, could have a negative impact on the hotel business and vacation ownership and residential business by decreasing the revenues and profitability of our owned properties, limiting the amount of fee revenues we are able to generate from our managed and franchised properties, and reducing overall demand for timeshare intervals. Substantial increases in air and ground travel costs and decreases in airline capacity could reduce demand for our hotel rooms and interval and fractional timeshare products. Accordingly, our financial results have been impacted by such economic conditions and both our future financial results and growth could be further harmed if recovery from the economic conditions stalls or such conditions worsen. 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 an economic downturn in the lodging industry, 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 24 of the consolidated financial statements.

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. Furthermore, new or existing competition that uses a business model that is different from our business model may challenge our ability to remain competitive. 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, the ability to earn and redeem loyalty program points, and consumer facing technology platforms and services. 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 hotels entails entering into and maintaining various management agreements, franchise agreements, and leases with property owners. We compete with other hotel companies for this business primarily on the basis of fees, contract terms, brand 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 hotels are influenced by contract terms offered by our competitors, among other things. We cannot assure you that any of our current arrangements will continue or that we will be able to enter into future collaborations, renew agreements, or enter into new agreements in the future on terms that are as favorable to us as those that exist today.

Degradation in the Quality or Reputation of Our Brands Could Adversely Affect Our Financial Results and Growth. For our owned, managed and franchised properties to remain attractive and competitive, the property owners and we have to spend money periodically to keep the properties well maintained, modernized and refurbished. This creates an ongoing need for cash. Third-party property owners may be unable to access

 

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capital or unwilling to spend available capital when necessary, even if required 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, act in accordance with applicable brand standards or project a consistent brand image could adversely affect the quality and reputation of our brands. Moreover, third-party owners or franchisees may be unwilling or unable to incur the cost of complying with brand standards for new and existing brands as such brands may evolve from time to time. If the reputation or perceived quality of our brands declines, our market share, reputation, business, financial condition or results of operations could be affected.

External Perception of Our Hotels Could Harm Our Brands and Reputation As Well As Reduce Our Revenues and Lower Our Profits. Our brands and our reputation are among our most important assets. Our ability to attract development partners and franchisees and to attract and retain guests depends, in part, upon the external perceptions of Starwood and our nine brands, the quality of our hotels and services and our corporate and management integrity. There is a risk to our brands and our reputation if we fail to act responsibly or comply with regulatory requirements in a number of areas, such as safety and security, sustainability, responsible tourism, environmental management, human rights and support for local communities. The considerable increase in the use of social media over recent years has greatly expanded the potential scope and scale, and increased the rapidity of the dissemination of the negative publicity that could be generated by any such adverse incident or failure. An adverse incident involving our associates or our guests, or in respect of our third-party vendors or owners and the industry, and any media coverage resulting therefrom, may harm our brands and reputation, cause a loss of consumer confidence in Starwood, our brands or the industry, and negatively impact our results or operations.

Any Failure to Protect our Intellectual Property Could Have a Negative Impact on the Value of Our Brands 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 and similar proceedings have 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. Actions 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 sufficient 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. Third parties may also make claims against us for infringing their intellectual property, including patent, copyright, industrial design, trademarks or similar rights that could result in causing us to change our property designs or other branding and result in substantial costs and diversion of resources.

Our Dependence On Hotel and Residential Development Exposes Us to Timing, Budgeting and Other Risks. We intend to participate in the development of hotel and residential components of hotel properties, as suitable opportunities arise, taking into consideration the general economic climate. In addition, the owners 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 and other required governmental permits and authorizations;

 

   

development costs incurred for projects that are not pursued to completion;

 

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so-called acts of God such as earthquakes, hurricanes, floods or fires that could adversely impact a project;

 

   

defects in design or construction that may result in additional costs to remedy or require all or a portion of a property to be closed during the period required to rectify the situation;

 

   

ability to raise capital;

 

   

funding that is dependent upon the pre-leasing, sell-out or completion of mixed-use project components other than the hotel; and

 

   

governmental restrictions on the nature or size of a project or timing of completion.

We cannot assure you that any development project, including sites held for development of vacation ownership resorts, will in fact be developed, and, if developed, the time period or the budget of such development may be greater than initially contemplated and the actual number of units or rooms constructed may be less than initially contemplated.

International Operations Are Subject to Unique Political and Monetary Risks that Could Adversely Affect our Financial Results and Growth. We have significant international operations which as of December 31, 2014 included 163 owned, managed or franchised properties in Europe (including 12 properties with majority ownership); 86 managed or franchised properties in Africa and the Middle East; 84 owned, managed or franchised properties in Latin America (including eight properties with majority ownership); and 288 owned, managed or franchised properties in the Asia Pacific region (including three properties with majority ownership). Additionally, our current growth strategy is heavily dependent upon growth in international markets. As of December 31, 2014, 78% of our pipeline represented growth outside North America. Further, 54% of our pipeline represents new properties in Asia Pacific and 36% represents new growth in China alone.

International operations generally are subject to various political, geopolitical, and other risks that are not present in U.S. operations. These risks include the difficulties involved in managing an organization doing business in many different countries, exposure to local economic conditions, potential adverse changes in the diplomatic relations between foreign countries and the United States, including the threat of international boycott or U.S. anti-boycott legislation, hostility from local populations, including the risk of war, acts of terrorism, political instability and civil unrest in the Middle East, Eastern Europe and elsewhere, restrictions on the repatriation of non-U.S. earnings and withdrawal of foreign investments, restriction on the ability to pay dividends and remit earnings to affiliated companies and management or franchise fees to the United States, uncertainty as to the enforceability of contractual rights and intellectual property rights under local law, conflicts between local law and United States law and compliance with complex and changing laws, regulations and policies. In addition, as described below, sales in international jurisdictions typically are made in local currencies, which subject us to risks associated with currency fluctuations. Currency devaluations and unfavorable changes in international monetary and tax policies could have a material adverse effect on our profitability and financing plans, as could other changes in the international regulatory climate and international economic conditions. If our international expansion plans are unsuccessful, our financial results could be materially adversely affected.

Exchange Rate Fluctuations and Foreign Exchange Hedging Arrangements Could Result in Significant Foreign Currency Gains and Losses and Impact Our Business Results. Conducting business in currencies other than the U.S. dollar subjects us to fluctuations in currency exchange rates that could have a negative impact on financial results. We earn revenues and incur expenses in foreign currencies as part of our operations outside of the U.S. As a result, fluctuations in currency exchange rates may significantly increase the amount of translated U.S. dollars required for expenses outside the U.S. or significantly decrease the U.S. dollars received from foreign currency revenues. We also have exposure to currency translation risk because, generally, the results of our business outside of the U.S. are reported in local currency and then translated to U.S. dollars for inclusion in our consolidated financial statements. As a result, changes between the foreign exchange rates and the U.S. dollar will affect the recorded amounts of our foreign assets, liabilities, revenues and expenses and could have a negative impact on financial results. Our exposure to foreign currency exchange rate fluctuations will grow if the relative contribution of our operations outside the U.S. increases.

 

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To attempt to mitigate foreign currency exposure, we may enter into foreign exchange hedging agreements with financial institutions to reduce certain of our exposures to fluctuations in currency exchange rates. However, these hedging agreements may not eliminate foreign currency risk entirely and involve costs and risks of their own in the form of transaction costs, credit requirements and counterparty risk.

Third-Party Internet Reservation or Booking Channels May Negatively Impact Our Revenues. Some of our hotel rooms are booked through third-party internet travel intermediaries such as Expedia.com®, Orbitz.com®, Booking.com®, and CTrip.com®, as well as lesser-known online travel service providers. In addition, travelers can book stays on websites that facilitate the short-term rental of homes and apartments from owners, thereby providing an alternative to hotel rooms. As the percentage of internet bookings increases, these intermediaries may be able to obtain more volume or better rates. Some internet reservation 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 identification, which is among our most important assets. Moreover, third-party reservation channels may be able to obtain higher commissions, reduced room rates or other significant contract concessions from us. Over time, consumers may develop loyalties to third-party internet reservations systems rather than to our online booking tools or our lodging brands. Although we expect to derive most of our revenues from traditional channels and our websites, our business and profitability could be adversely affected if customer loyalties significantly shift from our lodging brands to their travel services, diverting bookings away from our websites, or through their fees increasing the overall cost of internet bookings for our hotels.

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 utilized for property management, brand assurance and compliance, procurement, reservation systems, operation of our Starwood Preferred Guest customer loyalty program, distribution, revenue management and guest amenities. These technologies can be expected to require refinements, including complying with legal requirements in connection with privacy and/or security regulations, requirements, and commitments established by third parties such as the payment card industry and the US-EU Safe Harbor program, and there is the risk that advanced new technologies will be introduced. Further, the development and maintenance of these technologies 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.

Cyber Threats and the Risk of Data Breaches or Disruptions of Our Information Technology Systems Could Harm Our Brand and Adversely Affect Our Business. Our business involves the processing, use, storage and transmission of personal information regarding our employees, customers, hotel owners, and vendors for various business purposes, including marketing and promotional purposes. The protection of personal as well as proprietary information is critical to us. We are dependent on information technology networks and systems to process, transmit and store 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. We store and process such internal and customer information both at onsite facilities and at third-party owned facilities, including for example, in a third-party hosted cloud environment. The complexity of this infrastructure and the shared control and management of hotel systems contributes to the potential risk of security breaches. We rely on the security of our information systems, and those of our vendors, owners 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.

 

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Any compromise of our networks or systems, public disclosure, or loss of personal or proprietary information, non-compliance with contractual or legal obligations regarding personal information, or a violation of a privacy or security policy pertaining to personal 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 effect on our business, operations or financial condition.

Changes in Privacy Law Could Increase Our Operating Costs and/or Adversely Impact Our Ability to Market Our Products, Properties and Services Effectively. We are subject to numerous laws, regulations, and contractual obligations designed to protect personal information, including Member State implementation of the European Union Directive on Data Protection, other foreign data privacy laws, various U.S. federal and state laws, and credit card industry security standards and other applicable information security standards. We have established policies and procedures to help protect the privacy and security of our information. However, every year the number of laws, regulations, and information security requirements continue to grow, as does the complexity of such laws and requirements. Further, privacy regulations, on occasion, may be inconsistent from one jurisdiction to another. Compliance with applicable privacy regulations may increase our operating costs and/or adversely impact our ability to market our products, properties and services to our guests.

We Depend on Senior Management to Achieve Our Operating Strategies. Our future success depends in large part upon the efforts of our senior management. Competition for such personnel is intense. Furthermore, our headquarters are located in Stamford, Connecticut, an area where cost of living is higher than in other areas of the United States and as a result, we may need to pay more to attract senior talent than our competitors located elsewhere. There can be no assurance that we will continue to be successful in attracting and retaining top personnel. Accordingly, there can be no assurance that our senior management will be able to successfully execute and implement our operating strategies.

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. If an owner with a considerable portfolio of hotels were to leave our system, it may have a significant impact in certain of our markets and on our financial condition and results of operations.

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 or renovate hotels. When interest rates increase, the cost of acquiring, developing, expanding 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 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 Liabilities. Our properties and operations are subject to a number of Environmental Laws. Under such laws, we could be held liable for the costs of removing or cleaning up

 

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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 materials or wastes may be liable for the costs of extraction, 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 present in electrical equipment. A number of our hotels have USTs and equipment containing 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.

U.S. Congress, some U.S. states and various countries are considering or have undertaken actions to regulate and reduce greenhouse gas emissions and/or other natural resources. New or revised laws, taxes and regulations, or new interpretations of existing laws and regulations, such as those related to climate change, supply chain and water risk, 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, tax or new interpretations would depend upon the specific requirements enacted and cannot be determined at this time.

The potential for changes in the frequency, duration and severity of extreme weather events that may be a result of climate change could lead to significant property damage at our hotels and other assets, impact our ability to obtain insurance coverage in areas that are most vulnerable to such events, such as the coastal resort areas where we operate and have a negative effect on revenues.

We Could Be Adversely Affected by Violations of the U.S. Foreign Corrupt Practices Act and Similar Anti-Corruption Laws. Our business operations in countries outside the United States are subject to anti-corruption laws and regulations, including restrictions imposed by the U.S. 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 or any other person for the purpose of obtaining or retaining business. We operate in many parts of the world where government corruption has existed to some degree and, in certain circumstances, our compliance with anti-corruption laws may conflict with local customs and practices. We train our employees concerning compliance with anti-corruption laws, and notify our third-party hotel and resort owners that we require strict compliance with the anti-corruption laws of the jurisdictions where we operate. We also have policies, procedures and controls in place applicable to our employees and third-party business partners and agents who work with us or on our behalf in order to enforce and monitor internal and external compliance with anti-corruption laws. We cannot provide assurance that our internal controls and procedures will always protect us from reckless or criminal acts committed by our employees or third-parties with whom we work. If we are found liable for violations of the FCPA or similar anti-corruption laws in other jurisdictions, either due to our own acts or out of inadvertence, or due to the acts or inadvertence of others, we could suffer criminal or civil penalties which could have a material and adverse effect on our results of operations, financial condition and cash flows.

Failure to Comply With Sanction Laws May Adversely Impact Our Business. From time to time, the United States imposes sanctions that restrict U.S. companies from engaging in business activities with certain persons or entities, foreign countries, or foreign governments that it determines are adverse to U.S. foreign policy interests.

 

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For example, the United States has issued an executive order that prohibits U.S. companies from engaging in certain business activities with the government of Syria, a country that the United States has identified as a state sponsor of terrorism. During fiscal 2014, a foreign subsidiary of Starwood generated less than $15,000 of revenue from management and other fees from long standing relationships with 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 or any other country where we may have ongoing activities. If so, our existing activities may be adversely affected, depending on the nature of the sanctions that might be imposed.

Further, our activities in countries or with persons that are subject to U.S. sanction laws may reduce demand for our stock among certain investors. Any restrictions on Starwood’s ability to conduct its business operations across the world could negatively impact our financial results.

Our Insurance Policies May Not Cover All Potential Losses. We maintain insurance coverage for liability, property, business interruption, and other risks with respect to our owned and leased properties, and we may make select insurance programs available to owners of properties we manage or franchise. 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 aggregate limits or sublimits under the policies. Our property policies also provide coverage for earthquake, named windstorm and flood events. If an insurable event occurs that affects more than one of our owned hotels and/or managed or franchised hotels owned by third parties that participate in our insurance program, the claims from each affected hotel may be considered together per policy provisions to determine whether the per occurrence limit, annual aggregate limit or sub-limits, depending on the type of claim, have been reached. If the limits or sub-limits are exceeded, each affected hotel may 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 coverage of our policies or may be uninsurable or cost prohibitive to justify insuring against.

We may also encounter challenges with a Starwood and/or Third-Party Owners’ insurance provider regarding whether it can or will pay a claim(s) that we believe to be covered under the 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 or Businesses 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 investments, or that the ability to obtain such financing will not be restricted by the terms of our debt agreements.

We periodically review our business to identify properties or other assets that we believe either 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 identified properties and assets. There can be no assurance however, that we will be able to complete dispositions on commercially reasonable terms or at all or that any anticipated benefits will actually be received.

 

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In the future, we may develop and launch additional brands or make investments in new businesses that complement our existing businesses. For example, we recently entered into an agreement with Design Hotels, AG, a collection of independent hotels with design aesthetics distinct from our nine brands that allows greater coordination and cooperation between the companies. There can be no assurance regarding the level of acceptance of new brands or our investments in new businesses by the development and consumer marketplaces, that the cost incurred in developing and integrating new brands or investments will be recovered or that the anticipated benefits from these new brands or investments will be realized.

Investing Through Partnerships or Joint Ventures Decreases Our Ability to Manage Risk. In addition to acquiring or developing hotels and resorts or acquiring companies that complement our business directly, we have from time to time invested, and expect to continue to invest, as a co-venturer. Joint venturers often have shared control over the operation of the joint venture assets. Therefore, joint venture investments may involve risks such as the possibility that the co-venturer in an investment might become bankrupt or not have the financial resources to meet its obligations, and should a joint venture partner become bankrupt we could become liable for our partner’s share of joint venture liabilities. Also, our joint venture partner may have economic or business interests or goals that are inconsistent with our economic or business interests or goals, may be in a position to take action contrary to our instructions or may make requests contrary to our policies or objectives. Further, we may be unable to take action without the approval of our joint venture partners and, alternatively, our joint venture partners could take actions binding on the joint venture or partnership without our consent. Therefore, actions by a co-venturer might subject the assets owned by the joint venture or partnership to additional risk. There can be no assurance that our investments through partnerships or joint ventures will be successful despite these risks.

The Proposed Spin-Off of our Vacation Ownership Business May Not Be Consummated As or When Planned or At All, or Could Cause Unanticipated Issues. The proposed spin-off of our vacation ownership business may not be consummated as currently contemplated, including as a tax-free transaction, may not be consummated at all, or may encounter delays or other roadblocks that we do not currently anticipate, including any delays or other problems affecting the transfer of certain owned hotels to the vacation ownership business, or in obtaining any necessary regulatory approvals or consents, third-party consents or financing for the vacation ownership business. In addition, the transaction could create issues with our vacation ownership business prior to the consummation of the spin-off transaction, or our other businesses, that we do not currently contemplate. Disruptions in either general market conditions or in the lodging or timeshare business, in particular, could affect our ability to complete the transaction, or complete the transaction on the terms currently anticipated. The proposed spin-off is also subject to final approval by our Board of Directors, and our Board of Directors may withhold approval at any time, including immediately prior to the anticipated date of completion. Planning and executing the proposed spin-off will require significant time, effort, and expense, and may divert management’s attention from other aspects of our business operations, and any delays in completion of the proposed spin-off may increase the amount of time, effort, and expense that we devote to the transaction, which could adversely affect our operations.

In addition, if we complete the proposed spin-off, the actual impact on our business and financial results may differ materially from that which we anticipate. Specifically, the proposed transaction could adversely affect our relationships with our customers or employees (including those of the vacation ownership business) or disrupt our operations. The separated businesses could also face unanticipated problems in operating independently, and thus our stockholders may not achieve the anticipated benefits of being separate companies.

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 U.S. federal government, states or other jurisdictions 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 jurisdictions in which we sell VOIs grant the purchaser the right to rescind the purchase contract at any time within a statutory rescission period. Laws in some of the jurisdictions would impose liability on us as the developer of the resort for certain construction related defects. Although we believe that we are in material compliance with all applicable federal, state, local and foreign laws and regulations to which vacation

 

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ownership marketing, sales and operations are currently subject, changes in these requirements, or a determination by a regulatory authority that we were not in compliance, could adversely affect us. In particular, increased 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 (other than commissions in certain events), and general and administrative costs 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.

Our Revenues are Highly Dependent on the Travel Industry and Declines in or Disruptions to the Travel Industry, Such as Those Caused by Natural or Man-Made Disasters, Contagious Disease, Terrorist Activity, Political or Civil Unrest and War, May Adversely Affect Us. Our financial and operating performance may be adversely affected by so called “Acts of God.” Hurricanes, earthquakes, tsunamis, and other man-made or natural disasters in recent years, such as Hurricane Odile in Mexico, the earthquake and tsunami in Japan, and the spread or fear of spread of contagious diseases like Ebola, could cause a decline in the level of business and leisure travel in certain regions or as a whole, and reduce the demand for lodging. Actual or threatened war, terrorist activity, political unrest, or civil strife, such as recent events in Ukraine, Syria, Iran, and Egypt, and other geopolitical uncertainty could have a similar effect on our revenues or on our growth strategy. Any one or more of these events may reduce the overall demand for hotel rooms or limit the prices that we can obtain for them, both of which could adversely affect our profits.

Changes in U.S. Federal, State and Local or Foreign Tax Law, Interpretations of Existing Tax Law, or Adverse Determinations by Tax Authorities, Could Increase Our Tax Burden or Otherwise Adversely Affect Our Financial Condition or Results of Operations. We are subject to taxation at the federal, state or provincial and local levels in the U.S. and various other countries and jurisdictions. Our future effective tax rate could be affected by changes in the composition of earnings in jurisdictions with differing tax rates, changes in statutory rates and other legislative changes, including those that may result from the Base Erosion Profit Shifting, or BEPS, initiative being conducted by the Organization for Economic Co-operation and Development, or OECD. Furthermore, changes in the valuation of our deferred tax assets and liabilities or changes in determinations regarding the jurisdictions in which we are subject to tax or the amount of income allocated to such jurisdictions could negatively impact our effective tax rate. From time to time, the U.S. federal, state and local and foreign governments make substantive changes to tax rules and their application, which could result in materially higher corporate taxes than would be incurred under existing tax law and could adversely affect our financial condition or results of operations.

We record tax expense based in part on our estimates of expected future tax rates, reserves for uncertain tax positions in multiple tax jurisdictions, and valuation allowances related to certain net deferred tax assets, including net operating loss carryforwards. We are subject to ongoing and periodic tax audits and disputes relating to federal, state, local and foreign tax matters. For example, we are currently under audit by the Internal Revenue Service (IRS) for years 2007 through 2009. Through December 31, 2014, we received certain Notices of Proposed Adjustment from the IRS for such years; however, we disagree with the IRS on certain of these adjustments and intend to vigorously contest them, including pursuing all available remedies such as the IRS appeals process and litigation, if necessary. An unfavorable outcome from this or any other tax audit could result in higher tax costs, penalties and interest, thereby adversely impacting our financial condition or results of operations.

Failure to Compete Regarding Key Associates May Adversely Impact Our Business. Our success depends in large part on our ability to attract, retain, train, manage and engage our key associates. Our properties are staffed 24 hours a day, seven days a week by thousands of associates around the world. If we and our franchisees are unable to attract, retain, train and engage skilled associates, our ability to manage and staff our properties adequately could be impaired, which could reduce customer satisfaction. Staffing shortages in various parts of the world also could hinder our ability to grow and expand our businesses. Because payroll costs are a major component of the operating expenses at our hotels, a shortage of skilled labor could also require higher wages that would increase labor costs, which could adversely affect our results of operations.

 

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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, often in emerging markets where there are rising labor costs and strong competition in labor markets. Further, this will require us to increase our capabilities to enable hotels to open on time and successfully. There can be no assurance that we will be able to source and secure these new associates, or train and manage them, to the level required to make this strategy successful.

Collective Bargaining Activity Could Disrupt Our Operations, Increase Our Labor Costs or Interfere with the Ability of Our Management to Focus on Executing Our Business Strategies. Some of our properties are subject to collective bargaining agreements, similar agreements or regulations enforced by governmental authorities. If relationships with our associates or the unions that represent them become adverse, the properties we manage, franchise or own could experience labor disruptions such as strikes, lockouts and public demonstrations. Labor disruptions, which are generally more likely when collective bargaining agreements are being renegotiated, could harm our relationships with our associates or cause us to lose guests. Further, adverse publicity in the marketplace related to union messaging could further harm our reputation and reduce customer demand for our services. Labor regulation could lead to higher wage and benefit costs, changes in work rules that raise operating expenses, legal costs, and limitations on our ability or the ability of our third-party property owners and franchisees to take cost saving measures during economic downturns. We do not have the ability to control the negotiations of collective bargaining agreements covering unionized labor employed by third-party property owners and franchisees.

We and our third-party property owners and franchisees may also become subject to additional collective bargaining agreements in the future. Potential changes in regulatory schemes across the world could make it easier for unions to organize groups of our associates. If such changes take effect, more of our associates or other field personnel could be subject to increased organizational efforts, which could potentially lead to disruptions or require more of our management’s time to address unionization issues. These or similar agreements, legislation or changes in regulations could disrupt our operations, hinder our ability to cross-train and cross-promote our associates due to prescribed work rules and job classifications, reduce our profitability, or interfere with the ability of our management to focus on executing our business strategies.

The Cost of Compliance with the Americans with Disabilities Act and Similar Legislation outside the United States Could Be Substantial. We are subject to the Americans with Disabilities Act (ADA) and similar legislation in certain jurisdictions outside of the United States. Under the ADA, all public accommodations are required to meet certain federal requirements related to access and use by disabled persons. These regulations apply to accommodations first occupied after January 26, 1993; public accommodations built before January 26, 1993 are required to remove architectural barriers to disabled access where such removal is “readily achievable.” The regulations also mandate certain operational requirements that hotel operators must observe. The failure of a property to comply with the ADA could result in injunctive relief, fines, and awards of damages to private litigants or mandated capital expenditures to remedy such noncompliance. Any imposition of injunctive relief, fines, damage awards or capital expenditures could adversely affect the ability of an owner or franchisee to make payments under the applicable management or franchise agreement or negatively affect the reputation of our brands. If we fail to comply with the requirements of the ADA, we could be subject to fines, penalties, injunctive action, reputational harm and other business effects which could materially and negatively affect our performance and results of operations.

Changes to Accounting Rules or Regulations May Adversely Affect Our Financial Condition and Results of Operations. New accounting rules or regulations and varying interpretations of existing accounting rules or regulations have occurred and may occur in the future. A change in accounting rules or regulations may even affect our reporting of transactions completed before the change is effective, and future changes to accounting rules or regulations or the questioning of current accounting practices may adversely affect our financial condition and results of operations.

 

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Changes to Estimates or Projections Used to Assess the Fair Value of Our Assets, or Operating Results That are Lower Than Our Current Estimates at Certain Locations, May Cause Us to Incur Impairment Charges That Could Adversely Affect Our Results of Operations. Our total assets include goodwill, intangible assets with an indefinite life, other intangible assets with finite useful lives, and substantial amounts of long-lived assets, principally property and equipment, including hotel properties. We evaluate our goodwill and trademarks for impairment on an annual basis or at other times during the year if events or circumstances indicate that it is more likely than not that the fair value is below the carrying value. We evaluate intangible assets with finite useful lives and long-lived assets for impairment when circumstances indicate that the carrying amount may not be recoverable. Our evaluation of impairment requires us to make certain estimates and assumptions including projections of future results. After performing our evaluation for impairment, including an analysis to determine the recoverability of long-lived assets, we will record an impairment loss when the carrying value of the underlying asset, asset group or reporting unit exceeds its fair value. If the estimates or assumptions used in our evaluation of impairment change, we may be required to record additional impairment losses on certain of these assets. If these impairment losses are significant, our results of operations would be adversely affected.

Our Third-Party Licensees May Not Be Able to Sell Residential Properties Using Our Brands for a Profit or at Anticipated Prices. We license our brands to third parties in connection with the residential portions of certain properties that are developed using our brands. 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, changes in tax laws, or other factors affecting real estate markets. As a result, our third-party licensees may not be able to sell these residences, and we may not be able to license our brands for this purpose, for a profit or at the prices that they have anticipated.

Risks Relating to Debt Financing

Our Debt Service Obligations May Adversely Affect Our Cash Flow. As a result of our revolving credit facility and outstanding debt obligations, we are subject to: (i) the risk that cash flow from operations will be insufficient to meet required payments of principal and interest, (ii) restrictive covenants, including covenants relating to certain financial 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 terms of such refinancing will be favorable. Our leverage may have important consequences 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) a substantial decrease in operating cash flow, EBITDA (as defined in our credit facility) 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 and potential hotel owners must have access to capital. The availability of funds 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 recover loans and guarantee advances from hotel 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 May 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

 

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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 Ownership of Our Shares

Our Board of Directors May Issue Preferred Stock and Establish the Preferences and Rights of Such Preferred Stock. Our charter provides that the total number of shares of stock of all classes which the Corporation has authority to issue is 1,200,000,000, consisting of one billion shares of common 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 Bylaws Contain Provisions Which May Prevent Takeovers. Certain provisions of Maryland law permit our Board of Directors, without stockholder approval, to implement possible takeover defenses that are not currently in place, such as a classified board. 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 our Company. This appreciation may not occur and our stock may, in fact, depreciate in value.

 

Item 1B. Unresolved Staff Comments.

None.

 

Item 2. Properties.

Our hotel properties and vacation ownership and residential business properties are described in Part I, Item 1. Business, earlier in this report.

Our corporate headquarters are located at One StarPoint, Stamford, Connecticut, which lease expires in May 2034. In addition to our corporate headquarters, we lease space for our divisional offices, service centers and sales offices, both domestically and internationally.

We believe that our corporate headquarters and other leased space are in good condition and are sufficient and suitable for the conduct of our business. In the event we need to expand our operations, we believe that suitable space will be available on commercially reasonable terms.

 

Item 3. Legal Proceedings.

Information regarding Legal Proceedings is incorporated by reference from the “Litigation” section in Note 24, Commitments and Contingencies, of our consolidated financial statements set forth in Item 8. Financial Statements and Supplementary Data of this Annual Report, which is incorporated herein by reference.

 

Item 4. Mine Safety Disclosures.

Not applicable.

 

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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”.

The following table sets forth the quarterly range of the high and low sale prices of the Corporation Shares for the fiscal periods indicated as reported on the NYSE Composite Tape:

 

     High      Low  

2014

     

Fourth quarter

   $ 82.80       $ 68.53   

Third quarter

   $ 86.11       $ 76.84   

Second quarter

   $ 81.82       $ 72.97   

First quarter

   $ 82.81       $ 72.00   

2013

     

Fourth quarter

   $ 79.77       $ 64.40   

Third quarter

   $ 69.99       $ 61.92   

Second quarter

   $ 70.16       $ 59.21   

First quarter

   $ 63.95       $ 57.76   

Approximate Number of Equity Security Holders

As of February 20, 2015, there were approximately 11,000 holders of record of Corporation Shares.

Dividends

We declared cash dividends to holders of Corporation Shares for the fiscal years ended December 31, 2014 and 2013 as follows:

 

     Dividends
Declared
 

2014

  

Fourth quarter

   $ 1.00  (a) 

Third quarter

   $ 1.00  (a) 

Second quarter

   $ 1.00  (a) 

First quarter

   $ 1.00  (a) 

2013

  

Annual dividend

   $ 1.35  (b) 

 

(a) We declared regular quarterly dividends of $0.35 per share and special quarterly dividends of $0.65 per share in connection with cash realized from the completion of The St. Regis Bal Harbour residential project and sale of the hotel, to stockholders of record on March 11, 2014, June 6, 2014, September 5, 2014, and December 8, 2014, respectively, which were paid in the corresponding periods of March, June, September and December 2014.
(b) We declared an annual dividend in the fourth quarter of 2013 to stockholders of record on December 13, 2013, which was paid in December 2013.

In 2015, we expect to continue paying regular dividends on a quarterly basis.

 

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Conversion of Securities; Sale of Unregistered Securities

Units of SLC Operating Limited Partnership, our consolidated subsidiary, are convertible into Corporation Shares at the unit holders’ option, provided that we have the unilateral option to settle conversion requests in cash or Corporation Shares. At December 31, 2014 and 2013 there were approximately 127,000 and 158,000, respectively, of these units outstanding.

Issuer Purchases of Equity Securities

In the third quarter of 2014, our Board of Directors authorized a $1.1 billion increase to our share repurchase program. During the year ended December 31, 2014, we repurchased 20.3 million common shares at an average price of $80.45 for a total cost of approximately $1.636 billion. Since 2011, we have repurchased 31.5 million common shares for a total cost of approximately $2.272 billion. As of December 31, 2014, $79 million remained available under the share repurchase authorization. In January and early February, 2015, we spent this remaining authorization, and on February 9, 2015, our Board of Directors authorized a $750 million increase to our share repurchase program.

 

     Total Number
of Shares
Purchased
     Weighted
Average
Price Paid
per Share
     Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
     Maximum Number
(or Approximate
Dollar Value) of
Shares that May
Yet Be Purchased
Under the Program
(in millions)
 

October 1 to October 31, 2014

     2,797,665       $ 77.98         2,797,665       $ 470   

November 1 to November 30, 2014

     2,351,300       $ 76.91         2,351,300       $ 289   

December 1 to December 31, 2014

     2,643,590       $ 79.36         2,643,590       $ 79   
  

 

 

    

 

 

    

 

 

    

Total

     7,792,555       $ 78.12         7,792,555      
  

 

 

    

 

 

    

 

 

    

 

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STOCK RETURN PERFORMANCE AND CUMULATIVE 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 Hotels, Resorts & Cruise Lines Index (the S&P 500 Hotel) for the five fiscal years beginning after December 31, 2009 and ending December 31, 2014. The graph assumes that the value of the investments was $100 on December 31, 2009 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.

 

LOGO

 

      12/31/09    12/31/10    12/31/11    12/31/12    12/31/13    12/31/14

Starwood

   100.00    167.02    133.19    162.74    229.24    245.46

S&P 500

   100.00    114.82    117.22    135.83    179.36    203.60

S&P 500 Hotel

   100.00    152.99    123.59    154.48    198.91    246.18

Note: S&P 500 Hotel Index includes Carnival Corp, Marriott, Royal Caribbean, Starwood and Wyndham. Royal Caribbean was added in December 2014. S&P adjusts the weighting of the Index such that an addition or deletion of a company does not change the level of the Index and returns are only affected on a forward basis.

 

 

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Item 6. Selected Financial Data.

The following selected financial data should be read in conjunction with the information set forth under Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and related notes thereto (the Notes) beginning on page F-1 of this Annual Report.

 

     Year Ended December 31,  
     2014     2013     2012     2011     2010  
     (In millions, except per share data)  

Revenues

   $ 5,983      $ 6,115      $ 6,321      $ 5,624      $ 5,071   

Operating income

   $ 883      $ 925      $ 912      $ 630      $ 600   

Income from continuing operations (a)

   $ 643      $ 565      $ 470      $ 502      $ 310   

Diluted earnings per share from continuing operations

   $ 3.46      $ 2.92      $ 2.39      $ 2.57      $ 1.63   

Cash from operating activities

   $ 994      $ 1,151      $ 1,184      $ 641      $ 764   

Cash from (used for) investing activities

   $ 421      $ (158   $ 126      $ (176   $ (71

Cash used for financing activities

   $ (1,087   $ (678   $ (1,456   $ (755   $ (26

Aggregate cash distributions paid

   $ 735      $ 256      $ 242      $ 99      $ 93   

Cash distributions and dividends declared per Share

   $ 4.00      $ 1.35      $ 1.25      $ 0.50      $ 0.30   

 

(a) Amounts represent income from continuing operations attributable to Corporation Shares (i.e., excluding non-controlling interests).

 

     At December 31,  
     2014      2013      2012      2011      2010  
     (In millions)  

Total assets

   $ 8,659       $ 8,762       $ 8,855       $ 9,560       $ 9,776   

Long-term debt, net of current maturities

   $ 2,574       $ 1,523       $ 1,656       $ 2,596       $ 3,215   

 

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 our consolidated financial statements, which have been prepared in accordance with accounting 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 reported amounts of revenues and costs and expenses during the reporting periods. On an ongoing basis, 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, frequent guest program liability, self-insurance claims payable, restructuring costs, retirement 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.

 

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RESULTS OF OPERATIONS

The following discussion presents an analysis of results of our operations for the years ended December 31, 2014, 2013 and 2012.

For the year ended December 31, 2014, management fees, franchise fees and other income grew by 9.5% and Same-Store Worldwide Systemwide REVPAR increased 4.9% compared to 2013. All of our brands contributed to the continued growth in our fee business as each experienced increases in Worldwide Systemwide Same-Store REVPAR for the year ended December 31, 2014 compared to the prior year. Additionally, occupancies in North America, Europe and Greater China continued to rise.

At December 31, 2014, we had approximately 480 hotels in the active pipeline representing approximately 108,000 rooms. Of these rooms, 58% are in the upper upscale and luxury segments and 78% are outside of North America. During 2014, we signed 175 hotel management and franchise contracts (representing approximately 34,700 rooms). Also, during 2014, 74 new hotels and resorts (representing approximately 15,000 rooms) entered the system and 28 properties (representing approximately 7,000 rooms) exited the system.

In addition to our active pipeline, we have a 74% equity interest in Design Hotels AG, (Design Hotels) a company that represents and markets a distinct selection of over 280 independent hotels with approximately 22,000 rooms globally. Starwood and Design Hotels have recently entered into an agreement that allows greater coordination and cooperation between the companies. Our REVPAR metrics do not include revenue from Design Hotels.

An indicator of the performance of our hotels is REVPAR, as it measures the period-over-period change in rooms’ revenue for comparable properties. Along with REVPAR, we also evaluate our hotels by measuring the change in Average Daily Rate (ADR) and occupancy. This is particularly the case in the United States, where there is no impact on this measure from foreign currency exchange rates.

We continually update our owned, leased and consolidated joint venture hotels and include these hotels in our Same-Store Owned Hotel results. We also undertake major repositionings of hotels. While undergoing major repositionings, hotels are generally not operating at full capacity and, as such, these repositionings can negatively impact our hotel revenues and are not included in Same-Store Owned Hotel results.

Our SPG guest loyalty program continues to be an industry leader and innovator. The enhancements to the program in recent years, coupled with the introduction of programs like SPG Pro, helped us to attract the next wave of global, elite travelers and drove SPG occupancy rates to record levels. We continue to focus on digital innovation and personalization, which helps us better connect with guests and customers, sell through our own channels and deliver more personalized service, all while enhancing our brands.

We manage and operate our hotel business in three separate hotel segments: (i) the Americas, (ii) EAME, and (iii) Asia Pacific. Our vacation ownership and residential business is a separate segment.

On February 10, 2015, we announced plans to spin-off our vacation ownership business to stockholders as a separate, publicly traded company. The transaction, which is expected to be tax-free to stockholders, will be effected through a pro rata distribution of the new entity’s stock to existing Starwood stockholders. Please see Note 27, Subsequent Event, of the Notes to our Financial Statements for additional information.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes discussion of our consolidated operating results as well as discussion about each of our four segments. Additionally, Note 25 to the consolidated financial statements presents further information about our segments.

 

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Year Ended December 31, 2014 Compared with Year Ended December 31, 2013

Consolidated Results

 

     Year Ended
December 31,
2014
     Year Ended
December 31,
2013
     Increase /
(decrease)
from prior
year
    Percentage
change
from prior
year
 
     (in millions)  

Owned, Leased and Consolidated Joint Venture Hotels

   $ 1,541       $ 1,612       $ (71     (4.4 )% 

Management Fees, Franchise Fees and Other Income

     1,057         965         92        9.5

Vacation Ownership and Residential

     674         924         (250     (27.1 )% 

Other Revenues from Managed and Franchised Properties

     2,711         2,614         97        3.7
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Revenues

   $ 5,983       $ 6,115       $ (132     (2.2 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

The decrease in revenues from owned, leased and consolidated joint venture hotels was primarily due to lost revenues from 15 owned hotels that were sold or closed and two leased hotels converted to managed or franchised hotels in 2014 and 2013. These sold, closed, or converted hotels had revenues of $151 million in the year ended December 31, 2014, compared to $305 million for the corresponding period in 2013. Revenues at our Same-Store Owned Hotels (28 hotels for the year ended December 31, 2014 and 2013, excluding the 15 hotels sold or closed, two hotels converted to managed or franchised, and eight additional hotels undergoing significant repositionings or without comparable results in 2014 and 2013) increased 3.5%, or $35 million, to $1,043 million for the year ended December 31, 2014, when compared to $1,008 million in the corresponding period of 2013. Additionally, the eight hotels undergoing significant repositionings or without comparable results had revenues of $320 million for the year ended December 31, 2014 compared to $272 million for the year ended December 31, 2013. As of December 31, 2014, six of the eight hotels undergoing significant repositionings or without comparable results were open and available to operate their guestrooms at full capacity.

REVPAR at our worldwide Same-Store Owned Hotels was $167.99 for the year ended December 31, 2014, compared to $159.96 in the corresponding period in 2013. The increase in REVPAR at these worldwide Same-Store Owned Hotels resulted from an increase in ADR to $228.42 for the year ended December 31, 2014, compared to $223.56 for the corresponding period in 2013 and an increase in occupancy rates to 73.5% for the year ended December 31, 2014, compared to 71.5% in the corresponding period in 2013. Growth in REVPAR was particularly strong in the Southern and Western parts of the United States, Brazil and Mexico.

The increase in management fees, franchise fees and other income was primarily a result of a $53 million increase in management fees and franchise fees and an increase in other revenues of approximately $39 million. Total management and franchise fee revenues increased to $1,033 million for the year ended December 31, 2014, compared to $941 million for the corresponding period in 2013. Management fees increased 5.5% to $591 million and franchise fees increased 10.3% to $236 million. These increases were primarily due to the net addition of 47 managed or franchised hotels to our system in 2014 and a 4.9% increase in Worldwide Systemwide REVPAR, compared to the same period in 2013. For the year ended December 31, 2014, other income included approximately $45 million of fees associated with the termination of certain management and franchise contracts compared to $16 million in 2013. As of December 31, 2014, we had 583 managed properties and 588 franchised properties with approximately 333,100 rooms.

Total vacation ownership and residential revenue decreased $250 million to $674 million in the year ended December 31, 2014, when compared to the corresponding period in 2013, primarily due to fewer residential closings at Bal Harbour, as this project is now sold out. During the year ended December 31, 2014, we closed sales of four units at Bal Harbour and realized revenues of $20 million, compared to closings of 78 units and revenues of $266 million in 2013.

Vacation ownership revenues for the year ended December 31, 2014 increased $5 million, or 0.8%, to $643 million, compared to the corresponding period in 2013, as originated contract sales of vacation ownership intervals, number of contracts signed, and the average price per vacation ownership unit sold remained substantially consistent.

 

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Other revenues from managed and franchised properties increased primarily due to an increase in payroll costs commensurate with a rise in the overall cost of labor 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 and vacation ownership properties and franchisees and relate primarily to payroll costs at managed 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 or our net income.

 

     Year Ended
December 31,
2014
     Year Ended
December 31,
2013
     Increase /
(decrease)
from prior
year
     Percentage
change
from prior
year
 
     (in millions)  

Selling, General, Administrative and Other

   $ 402       $ 384       $ 18         4.7

Selling, general, administrative and other expenses increased $18 million to $402 million for the year ended December 31, 2014, when compared to the corresponding period in 2013, primarily due to an increase in costs commensurate with our growth and increased funding of certain loyalty and technology development costs.

 

     Year Ended
December 31,
2014
     Year Ended
December 31,
2013
     Increase /
(decrease)
from prior
year
     Percentage
change
from prior
year
 
     (in millions)  

Restructuring and Other Special Charges (Credits), Net

   $ (4    $ 1       $ (5      n/m   

n/m = not meaningful

During the year ended December 31, 2014, we reversed a $3 million reserve related to a note receivable associated with a previous disposition, which was collected.

During the year ended December 31, 2013, we decided to absorb certain technology related costs and expenses that we previously intended to collect from our managed and franchised properties. As a result, we recorded a $19 million charge, representing the costs and expenses incurred through the end of 2013 that are no longer intended to be recovered. The year ended December 31, 2013 also included approximately $5 million in severance costs related to a leased hotel we exited in 2014. These unfavorable charges were partially offset by a favorable adjustment to a legal reserve of approximately $22 million related to judgment and settlement, legal fees and expenses in regards to a long standing litigation.

 

     Year Ended
December 31,
2014
     Year Ended
December 31,
2013
     Increase /
(decrease)
from prior
year
     Percentage
change
from prior
year
 
     (in millions)  

Depreciation and Amortization

   $ 283       $ 267       $ 16         6.0

The increase in depreciation and amortization expense for the year ended December 31, 2014, when compared to the same period of 2013, was primarily due to additional depreciation related to the completion of certain hotel renovations, the new capital lease asset for our corporate headquarters, and information technology capital expenditures in the last twelve months, partially offset by decreased depreciation expense related to sold hotels.

 

     Year Ended
December 31,
2014
     Year Ended
December 31,
2013
     Increase /
(decrease)
from prior
year
     Percentage
change
from prior
year
 
     (in millions)  

Operating Income

   $ 883       $ 925       $ (42      (4.5 )% 

The decrease in operating income for the year ended December 31, 2014, when compared to the corresponding period of 2013, was primarily due to a $108 million decrease in operations (revenues less

 

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expenses) from residential sales at Bal Harbour which sold out in early 2014, an increase in selling, general, administrative and other expenses of $18 million, and a $16 million increase in depreciation and amortization, partially offset by a $92 million increase in management fees, franchise fees and other income and an increase in operations (revenues less expenses) of $10 million related to our owned, leased and consolidated joint venture hotels.

 

     Year Ended
December 31,
2014
     Year Ended
December 31,
2013
     Increase /
(decrease)
from prior
year
     Percentage
change
from prior
year
 
     (in millions)  

Equity Earnings and Gains and from Unconsolidated Ventures, Net

   $ 27       $ 26       $ 1         3.8

The increase in equity earnings and gains and from unconsolidated joint ventures, net for the year ended December 31, 2014, when compared to the same period of 2013, was primarily due to a $4 million impairment charge in 2013, partially offset by the operations at our Latin American unconsolidated joint ventures which were negatively impacted by unfavorable foreign currency exchange during the year ended December 31, 2014 compared to the corresponding period in 2013.

 

     Year Ended
December 31,
2014
     Year Ended
December 31,
2013
     Increase /
(decrease)
from prior
year
     Percentage
change
from prior
year
 
     (in millions)  

Net Interest Expense

   $ 94       $ 100       $ (6      (6.0 )% 

Net interest expense decreased $6 million for the year ended December 31, 2014, when compared to the same period of 2013, primarily due to foreign exchange gains and a lower average securitized vacation ownership debt balance, partially offset by an increase in our debt balance associated with borrowings to fund the significant increase in our share repurchase program, including the issuance of $650 million of senior notes during the third quarter of 2014 (see Note 13).

Our weighted average interest rate was approximately 3.90% at December 31, 2014, compared to 5.59% at December 31, 2013.

 

     Year Ended
December 31,
2014
     Year Ended
December 31,
2013
     Increase /
(decrease)
from prior
year
     Percentage
change
from prior
year
 
     (in millions)  

Loss on Early Extinguishment of Debt, Net

   $ 1       $       $ 1         n/m   

During the year ended December 2014, we recorded a loss of $1 million related to the write-off of certain deferred financing costs associated with the amendment of our Revolving Credit Facility (see Note 13).

 

     Year Ended
December  31,
2014
     Year Ended
December 31,
2013
     Increase /
(decrease)
from prior
year
     Percentage
change
from prior
year
 
     (in millions)  

Loss on Asset Dispositions and Impairments, Net

   $ 33       $ 23       $ 10         43.5

During the year ended December 31, 2014, we recorded a loss of $33 million, primarily due to a $23 million loss associated with four owned hotels which were sold subject to long-term franchise agreements, a $21 million loss associated with the conversion of a leased hotel to a managed hotel, a $13 million impairment charge on one owned hotel, whose book value exceeded its fair value, a $7 million impairment associated with one of our foreign unconsolidated joint ventures, and a loss of $7 million associated with the termination of our leasehold interest in a hotel which was converted to a franchised hotel. These losses were partially offset by approximately $31 million of previously deferred gains which were recognized primarily in connection with hotels that converted from managed hotels to franchised hotels, and a $10 million gain on the sale of our interest in an unconsolidated joint venture hotel (see Note 4).

 

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During the year ended December 31, 2013, we recorded a loss of $23 million primarily related to an impairment charge of approximately $19 million on two owned hotels, whose book values exceeded their fair values, a loss of approximately $11 million related to the disposition of various non-core assets associated with hotel renovation activities and a loss of $1 million, net, on the sales of five owned hotels, four of which were sold subject to franchise agreements and one of which was sold subject to a management agreement. These losses were partially offset by the receipt of insurance proceeds of approximately $5 million and a $4 million gain realized on the sale of a non-core asset (see Note 4).

 

     Year Ended
December 31,
2014
     Year Ended
December 31,
2013
     Increase /
(decrease)
from prior
year
     Percentage
change
from prior
year
 
     (in millions)  

Income Tax (Benefit) Expense

   $ 139       $ 263       $ (124      (47.1 )% 

The decrease in income tax expense primarily relates to a tax benefit, including foreign tax credits, on a portion of foreign earnings no longer considered permanently reinvested, recognition of a benefit for the favorable settlement of a foreign tax audit, recognition of capital attributes related to asset dispositions, and lower pretax income.

 

     Year Ended
December 31,
2014
     Year Ended
December 31,
2013
     Increase /
(decrease)
from prior
year
     Percentage
change
from prior
year
 
     (in millions)  

Discontinued Operations Gain (Loss), Net

   $ (10    $ 71       $ (81      n/m   

During the year ended December 31, 2014, the loss was primarily due to liabilities associated with an unfavorable ruling, during 2014, in connection with a previous disposition.

During the year ended December 31, 2013, the gain was primarily due to a tax benefit of $70 million we recorded as a result of the reversal of state income tax and interest reserves associated with an uncertain tax position, which was related to a previous disposition. The applicable statute of limitation for this tax position lapsed in 2013.

 

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Segment Results

The following table summarizes REVPAR, ADR and occupancy for our Same-Store Systemwide Hotels for the year ended December 31, 2014 and 2013. Same-Store Systemwide Hotels represent results for same-store owned, leased, managed and franchised hotels.

 

     Year Ended
December 31,
       
     2014     2013     Variance  

Worldwide (960 hotels with approximately 284,400 rooms)

      

REVPAR (1)

   $ 123.08      $ 117.31        4.9

ADR

   $ 175.64      $ 172.58        1.8

Occupancy

     70.1     68.0     2.1   

Americas (555 hotels with approximately 163,300 rooms)

      

REVPAR (1)

   $ 126.23      $ 118.96        6.1

ADR

   $ 172.76      $ 166.93        3.5

Occupancy

     73.1     71.3     1.8   

EAME (191 hotels with approximately 49,300 rooms)

      

REVPAR (1)

   $ 143.17      $ 138.36        3.5

ADR

   $ 214.83      $ 212.43        1.1

Occupancy

     66.6     65.1     1.5   

Asia Pacific (214 hotels with approximately 71,800 rooms)

      

REVPAR (1)

   $ 102.38      $ 99.33        3.1

ADR

   $ 156.10      $ 159.25        (2.0 )% 

Occupancy

     65.6     62.4     3.2   

The following table summarizes REVPAR, ADR and occupancy for our Same-Store Owned Hotels for the year ended December 31, 2014 and 2013. The results for the year ended December 31, 2014 and 2013 represent results for 28 owned, leased and consolidated joint venture hotels (excluding 15 hotels sold or closed, two leased hotels converted to managed or franchised, and eight additional hotels undergoing significant repositionings or without comparable results in 2014 and 2013).

 

     Year Ended
December 31,
       
     2014     2013     Variance  

Worldwide (28 hotels with approximately 10,900 rooms)

      

REVPAR (1)

   $ 167.99      $ 159.96        5.0

ADR

   $ 228.42      $ 223.56        2.2

Occupancy

     73.5     71.5     2.0   

Americas (15 hotels with approximately 8,300 rooms)

      

REVPAR (1)

   $ 143.81      $ 138.02        4.2

ADR

   $ 196.90      $ 193.60        1.7

Occupancy

     73.0     71.3     1.7   

EAME (10 hotels with approximately 1,900 rooms)

      

REVPAR (1)

   $ 279.86      $ 262.67        6.5

ADR

   $ 373.04      $ 355.76        4.9

Occupancy

     75.0     73.8     1.2   

Asia Pacific (3 hotels with approximately 700 rooms)

      

REVPAR (1)

   $ 145.48      $ 136.44        6.6

ADR

   $ 192.76      $ 199.66        (3.5 )% 

Occupancy

     75.5     68.3     7.2   

 

(1) REVPAR is calculated by dividing room revenue, which is derived from rooms and suites rented or leased, by total room nights available for a given period. REVPAR may not be comparable to similarly titled measures such as revenues.

 

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The following tables summarize segment revenues and segment earnings for the year ended December 31, 2014 and 2013.

 

                                           
Segment Revenues    Year Ended
December 31,
2014
     Year Ended
December 31,
2013
     Increase /
(decrease)
from prior
year
     Percentage
change
from prior
year
 
     (in millions)  

Americas

   $ 1,559       $ 1,548       $ 11         0.7

EAME

     597         615         (18      (2.9 )% 

Asia Pacific

     354         349         5         1.4

Vacation ownership and residential

     663         905         (242      (26.7 )% 
  

 

 

    

 

 

    

 

 

    

 

 

 

Total segment revenues

   $ 3,173       $ 3,417       $ (244      (7.1 )% 
  

 

 

    

 

 

    

 

 

    

 

 

 

 

                                           
Segment Earnings    Year Ended
December 31,
2014
     Year Ended
December 31,
2013
     Increase /
(decrease)
from prior
year
     Percentage
change
from prior
year
 
     (in millions)  

Americas

   $ 697       $ 617       $ 80         13.0

EAME

     220         220                 0.0

Asia Pacific

     228         221         7         3.2

Vacation ownership and residential

     169         276         (107      (38.8 )% 
  

 

 

    

 

 

    

 

 

    

 

 

 

Total segment earnings

   $ 1,314       $ 1,334       $ (20      (1.5 )% 
  

 

 

    

 

 

    

 

 

    

 

 

 

We primarily evaluate the operating performance of a segment based on segment earnings. We define segment earnings as net income attributable to our common stockholders before interest expense, taxes, depreciation and amortization, as well as our share of interest, depreciation and amortization associated with our unconsolidated joint ventures, excluding certain recurring and nonrecurring items, such as restructuring costs and other special charges (credits), gains (losses) on debt extinguishment and gains (losses) on asset dispositions and impairments. Residential revenue generated at hotel properties is recorded in the corresponding geographic hotel segment. General, administrative and other expenses directly related to the segments are included in the calculation of segment earnings, whereas corporate general, administrative, and other expenses are not included in the segment earnings calculation. In addition to revenues recorded within our four segments, we also have other revenues from managed and franchised properties, which represent the reimbursement of costs incurred on behalf of managed and franchised property owners. These revenues, together with the corresponding expenses, are not recorded within our segments. Other corporate unallocated revenues and earnings primarily relate to other license fee income and are also reported outside of segment revenues. Note 25 to the consolidated financial statements presents further information about our segments.

The Americas

Segment revenues increased $11 million in the year ended December 31, 2014, compared to the corresponding period in 2013. The increase in revenues was primarily related to a $61 million increase in management fees, franchise fees and other income, partially offset by a $41 million decrease in revenues from our owned, leased and consolidated joint venture hotels, and a $7 million decrease in residential revenues.

The increase in management fees, franchise fees and other income was primarily due to the net addition of 15 managed or franchised hotels since December 31, 2013 and a 6.1% increase in Same-Store Systemwide Hotel REVPAR for the year ended December 31, 2014 when compared to the corresponding period in 2013. Additionally, during the year ended December 31, 2014, we received termination fees of approximately $34 million associated with the termination of certain management and franchise contracts compared to approximately $3 million for the same period in 2013. As of December 31, 2014, the Americas segment had 161 managed properties and 488 franchised properties with approximately 181,900 rooms.

 

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The decrease in revenues from our owned, leased and consolidated joint venture hotels was primarily due to lost revenues from 12 owned hotels that were sold in 2014 and 2013. These sold hotels had revenues of $32 million in the year ended December 31, 2014 compared to $140 million for the corresponding period in 2013. Lost revenues from sold hotels were offset by a $45 million increase in revenues from six owned hotels without comparable results in 2014 and 2013 and a $22 million increase in Same-Store Owned Hotel revenues due to an increase in REVPAR of 4.2% to $143.81 for the year ended December 31, 2014 when compared to the corresponding period in 2013.

Segment earnings increased $80 million in the year ended December 31, 2014, compared to the corresponding period in 2013, primarily due to the increase in management fees, franchise fees and other income of $61 million discussed above, a $13 million increase in operations (revenues less expenses) related to our owned, leased and consolidated joint venture hotels, and a $10 million decrease in divisional overhead expenses, primarily due to higher legal costs in 2013 and foreign currency exchange gains in 2014. These increases were partially offset by a $7 million decrease in residential earnings.

EAME

Segment revenues decreased $18 million in the year ended December 31, 2014, compared to the corresponding period in 2013. The decrease in revenues was primarily related to a $20 million decrease in revenues from our owned, leased and consolidated joint venture hotels partially offset by a $2 million increase in management fees, franchise fees and other income.

The $20 million decrease in revenues from our owned, leased and consolidated joint venture hotels was primarily due to a $38 million decrease in revenues from two hotels sold or closed and two leased hotels that were converted to managed or franchised hotels during the year ended December 31, 2014. This decrease was partially offset by a $14 million increase in Same-Store Owned Hotel revenues due to an increase in REVPAR of 6.5% to $279.86 for the year ended December 31, 2014 compared to the corresponding period in 2013, and a $4 million increase in revenues from two owned hotels without comparable results in 2014 and 2013.

The increase in management fees, franchise fees and other income was primarily due to a 3.5% increase in Same-Store Systemwide Hotel REVPAR for the year ended December 31, 2014 when compared to the corresponding period in 2013 and the net addition of six managed or franchised hotels since December 31, 2013. As of December 31, 2014, the EAME segment had 189 managed properties and 48 franchised properties with approximately 60,200 rooms.

Segment earnings remained flat in the year ended December 31, 2014, compared to the corresponding period in 2013, as the increase in management fees, franchise fees and other income discussed above, and a $2 million increase in residential revenue, was offset by a $4 million increase in divisional overhead expenses.

Asia Pacific

Segment revenues increased $5 million in the year ended December 31, 2014, compared to the corresponding period in 2013. The increase in revenues was primarily related to a $14 million increase in management fees, franchise fees and other income, partially offset by a $9 million decrease in revenues from our owned, leased and consolidated joint venture hotels.

The increase in management fees, franchise fees and other income was due to the net addition of 25 managed or franchised hotels since December 31, 2013 and a 3.1% increase in Same-Store Systemwide Hotel REVPAR for the year ended December 31, 2014 compared to the corresponding period in 2013. REVPAR in Asia Pacific was negatively impacted by the unfavorable impact of foreign currency exchange rates during the year ended December 31, 2014 compared to the corresponding period in 2013. As of December 31, 2014, the Asia Pacific segment had 233 managed properties and 52 franchised properties with approximately 91,000 rooms.

The decrease in revenues from our owned, leased and consolidated joint venture hotels was primarily due to lost revenues from one owned hotel that was sold in late 2014.

Segment earnings increased $7 million in the year ended December 31, 2014, compared to the corresponding period in 2013, primarily driven by the $14 million increase in management fees, franchise fees

 

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and other income discussed above, partially offset by a $4 million increase in division overhead expenses and a $2 million decrease in operations (revenues less expenses) related to our owned, leased and consolidated joint venture hotels.

Vacation ownership and residential

Segment revenues decreased $242 million to $663 million for the year ended December 31, 2014 when compared to the corresponding period in 2013, primarily due to fewer residential closings at Bal Harbour in 2014, as this project is now sold out. Segment earnings decreased $107 million in the year ended December 31, 2014, compared to the corresponding period in 2013, primarily driven by the decrease in operating income from sales at Bal Harbour.

Revenues and expenses recognized at Bal Harbour for the year ended December 31, 2014, with comparable data for the same period in 2013, were as follows (in millions, except for units closed):

 

     Year Ended
December 31,
2014
    Year Ended
December 31,
2013
    Increase /
(decrease)
from prior
year
     Percentage
change
from prior
year
 
     (in millions)  

Residential sales revenues

   $ 20      $ 266      $ (246      (92.5 )% 

Residential expenses

     9        147        (138      (93.9 )% 
  

 

 

   

 

 

   

 

 

    

 

 

 

Operating income

   $ 11      $ 119      $ (108      (90.8 )% 
  

 

 

   

 

 

   

 

 

    

 

 

 

Operating income margin

     55.0     44.7        10.3
  

 

 

   

 

 

   

 

 

    

 

 

 

Units closed

     4        78        (74      (94.9 )% 
  

 

 

   

 

 

   

 

 

    

 

 

 

 

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Year Ended December 31, 2013 Compared with Year Ended December 31, 2012

Consolidated Results

 

     Year Ended
December 31,
2013
     Year Ended
December 31,
2012
     Increase /
(decrease)
from prior
year
    Percentage
change
from prior
year
 
     (in millions)  

Owned, Leased and Consolidated Joint Venture Hotels

   $ 1,612       $ 1,698       $ (86     (5.1 )% 

Management Fees, Franchise Fees and Other Income

     965         888         77        8.7

Vacation Ownership and Residential

     924         1,287         (363     (28.2 )% 

Other Revenues from Managed and Franchised Properties

     2,614         2,448         166        6.8
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Revenues

   $ 6,115       $ 6,321       $ (206     (3.3 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

The decrease in revenues from owned, leased and consolidated joint venture hotels was primarily due to lost revenues from 14 owned hotels that were sold in 2013 and 2012. These sold hotels had revenues of $48 million in the year ended December 31, 2013, compared to $186 million for the corresponding period in 2012. Revenues at our Same-Store Owned Hotels (36 hotels for the year ended December 31, 2013 and 2012, excluding the 14 hotels sold, one hotel transferred to our vacation ownership business and 11 additional hotels undergoing significant repositionings or without comparable results in 2013 and 2012) increased 4.1%, or $49 million, to $1,225 million for the year ended December 31, 2013, when compared to $1,176 million in the corresponding period of 2012. The one hotel transferred to our vacation ownership and residential segment on January 1, 2013 was previously in the Americas segment and had $29 million in revenues in 2012. Additionally, the 11 hotels undergoing significant repositionings or without comparable results had revenues of $312 million for the year ended December 31, 2013 compared to $281 million for the year ended December 31, 2012. As of December 31, 2013, nine of the 11 hotels undergoing significant repositionings or without comparable results were open and available to operate their guestrooms at full capacity.

REVPAR at our worldwide Same-Store Owned Hotels was $167.19 for the year ended December 31, 2013, compared to $160.51 in the corresponding period in 2012. The increase in REVPAR at these worldwide Same-Store Owned Hotels resulted from an increase in ADR to $230.17 for the year ended December 31, 2013, compared to $222.06 for the corresponding period in 2012 and an increase in occupancy rates to 72.6% for the year ended December 31, 2013, compared to 72.3% in the corresponding period in 2012. While REVPAR growth was particularly strong at our owned hotels in Miami, Florida, Phoenix, Arizona, Barcelona, Spain and Mexico City, Mexico, we experienced decreases in REVPAR at our owned hotels in Buenos Aires, Argentina, Rio de Janeiro, Brazil and London, England.

The increase in management fees, franchise fees and other income was primarily a result of a $65 million increase in management fees and franchise fees and an increase in other revenues of approximately $15 million. Total management and franchise fee revenues increased to $941 million for the year ended December 31, 2013, compared to $861 million for the corresponding period in 2012. Management fees increased 10.0% to $560 million and franchise fees increased 7.0% to $214 million. These increases were primarily due to the net addition of 42 managed or franchised hotels to our system in 2013 and a 4.2% increase in Worldwide Systemwide REVPAR, compared to the same period in 2012. For the year ended December 31, 2013, other income included approximately $16 million of fees associated with the termination of certain management and franchise contracts compared to $7 million in 2012. As of December 31, 2013, we had 563 managed properties and 551 franchised properties with approximately 323,300 rooms.

Total vacation ownership and residential revenue decreased $363 million to $924 million in the year ended December 31, 2013, when compared to the corresponding period in 2012, primarily due to fewer residential closings at Bal Harbour partially offset by an increase in vacation ownership revenues. During the year ended December 31, 2013, we closed sales of 78 units at Bal Harbour and realized revenues of $266 million, compared to closings of 188 units and revenues of $684 million in 2012.

 

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Vacation ownership revenues for the year ended December 31, 2013 increased $51 million, or 8.7%, to $638 million, compared to the corresponding period in 2012, primarily due to increased revenues from resort operations, which included the transfer of the Westin St. John, which had revenues of $24 million in 2013. Additionally, the increase in revenues was due to a decrease of $15 million in the loan loss provision, in the year ended December 31, 2013 when compared to the corresponding period in 2012, driven by improved performance in the portfolio, as well as an enhancement to our static pool methodology to include FICO as a credit quality indicator. The increases in 2013 were partially offset by an increase in the revenues deferred under the percentage of completion method, as compared to 2012. Originated contract sales of vacation ownership intervals and number of contracts signed increased 0.6% and 0.3%, respectively, in the year ended December 31, 2013 when compared to the corresponding period in 2012, and the average price per vacation ownership unit sold increased 0.3% to approximately $14,800.

Other revenues from managed and franchised properties increased primarily due to an increase in payroll costs commensurate with a rise in the overall cost of labor 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 and vacation ownership properties and franchisees and relate primarily to payroll costs at managed 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 or our net income.

 

                                                                                           
     Year Ended
December  31,
2013
     Year Ended
December  31,
2012
     Increase /
(decrease)

from prior
year
     Percentage
change
from prior
year
 
     (in millions)  

Selling, General, Administrative and Other

   $ 384       $ 370       $ 14         3.8

Selling, general, administrative and other expenses increased $14 million to $384 million for the year ended December 31, 2013, when compared to the corresponding period in 2012, primarily due to an $11 million increase in certain expenses in Asia Pacific, which increased primarily due to the growth in that region, a $7 million increase in our funding of certain loyalty and technology development costs, a $5 million increase in legal settlement costs, and an elective payment of $3 million to retain a management contract associated with a hotel that failed a performance test. These increases were partially offset by approximately $7 million of favorable benefits from the receipt of certain government incentives, in 2013, in connection with the relocation of our corporate headquarters and a decrease of $7 million in severance related costs, when compared to 2012.

 

                                                                                           
     Year Ended
December 31,
2013
     Year Ended
December  31,
2012
     Increase /
(decrease)

from prior
year
     Percentage
change

from  prior
year
 
     (in millions)  

Restructuring and Other Special Charges (Credits), Net

   $ 1       $ (12    $ 13         n/m    

During the year ended December 31, 2013, we decided to absorb certain technology related costs and expenses that we previously intended to collect from our managed and franchised properties. As a result, we recorded a $19 million charge, representing the costs and expenses incurred through the end of 2013 that are no longer intended to be recovered. The year ended December 31, 2013 also included approximately $5 million in severance costs related to a leased hotel we plan to exit in the near future. These unfavorable charges were partially offset by a favorable adjustment to a legal reserve of approximately $22 million related to judgment and settlement, legal fees and expenses in regards to a long standing litigation. During the year ended December 31, 2012, we recorded a favorable adjustment of $11 million to reverse a portion of our litigation reserve related to the same litigation.

 

                                                                                           
     Year Ended
December 31,
2013
     Year Ended
December 31,
2012
     Increase /
(decrease)
from prior
year
     Percentage
change
from prior
year
 
     (in millions)  

Depreciation and Amortization

   $ 267       $ 251       $ 16         6.4

 

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The increase in depreciation and amortization expense for the year ended December 31, 2013, when compared to the same period of 2012, was primarily due to additional depreciation related to the completion of certain hotel renovations and other capital expenditures in the last twelve months, partially offset by decreased depreciation expense related to sold hotels.

 

                                                                                           
     Year Ended
December 31,
2013
     Year Ended
December 31,
2012
     Increase /
(decrease)
from prior
year
     Percentage
change
from prior
year
 
     (in millions)  

Operating Income

   $ 925       $ 912       $ 13         1.4 %  

The increase in operating income for the year ended December 31, 2013, when compared to the corresponding period of 2012, was primarily due to the $77 million increase in management fees, franchise fees and other income, an increase in operations (revenues less expenses) from our vacation ownership and residential sales, excluding Bal Harbour, of $4 million and an increase in operations (revenues less expenses) of $13 million related to our owned, leased and consolidated joint venture hotels, offset by an increase of $13 million in restructuring and other special charges (credits), net, a $38 million decrease in operations (revenues less expenses) from residential sales at Bal Harbour, an increase in selling, general, administrative and other expenses of $14 million, and an increase of $16 million in depreciation and amortization.

 

                                                                                           
     Year Ended
December 31,
2013
     Year Ended
December 31,
2012
     Increase /
(decrease)
from prior
year
     Percentage
change
from prior
year
 
     (in millions)  

Equity Earnings and Gains and from Unconsolidated Ventures, Net

   $ 26       $ 25       $ 1         4.0 %  

The increase in equity earnings and gains and from unconsolidated joint ventures, net for the year ended December 31, 2013, when compared to the same period of 2012, was primarily due to an increase in operations, partially offset by certain non-recurring items in the current year.

 

                                                                                           
     Year Ended
December 31,
2013
     Year Ended
December 31,
2012
     Increase /
(decrease)
from prior
year
     Percentage
change
from prior
year
 
     (in millions)  

Net Interest Expense

   $ 100       $ 170       $ (70      (41.2 )% 

Net interest expense decreased $70 million for the year ended December 31, 2013, when compared to the same period of 2012, primarily due to lower average debt balances and a lower average interest rate. For the year ended December 31, 2013, interest expense decreased $77 million primarily due to the retirement of approximately $1,272 million of debt throughout 2012 with a weighted average interest rate of approximately 7.16% and the termination of a securitization we previously completed in 2005, partially offset by an increase of $10 million from the issuance, in December 2012, of $350 million of 3.125% Senior Notes due 2023.

Our weighted average interest rate was approximately 5.59% at December 31, 2013, compared to 5.86% at December 31, 2012.

 

                                                                                           
     Year Ended
December 31,
2013
     Year Ended
December 31,
2012
     Increase /
(decrease)
from prior
year
     Percentage
change
from prior
year
 
     (in millions)  

Loss on Early Extinguishment of Debt, Net

   $       $ 128       $ (128      (100.0 )% 

In December 2012, we redeemed all $500 million of our 7.875% Senior Notes due 2014 and partially redeemed $156 million of our 7.375% Senior Notes due 2015, $29 million of our 6.75% Senior Notes due 2018 and $40 million of our 7.15% Senior Notes due 2019 (the December 2012 Redemptions). We recognized a net charge of approximately $113 million, in the year ended December 31, 2012, associated with the December 2012 Redemptions, which primarily represents $108 million in tender premiums and other redemption costs and an

 

40


Table of Contents

$11 million charge to write-off unamortized deferred financing costs and unamortized issuance discounts, partially offset by gains on swap settlements of $6 million.

In June 2012, we redeemed all $495 million of our 6.25% Senior Notes due 2013. We recognized a net charge of approximately $15 million, in the year ended December 31, 2012, associated with this redemption, which represents $18 million in tender premiums and other redemption costs, partially offset by gains on swap settlements of $3 million.

 

     Year Ended
December 31,
2013
     Year Ended
December 31,
2012
     Increase /
(decrease)
from prior
year
     Percentage
change
from prior
year
 
     (in millions)  

Loss on Asset Dispositions and Impairments, Net

   $ 23       $ 21       $ 2         9.5

During the year ended December 31, 2013, we recorded a loss of $23 million primarily related to an impairment charge of approximately $19 million on two owned hotels, whose book values exceeded their fair values, a loss of approximately $11 million related to the disposition of various non-core assets associated with hotel renovation activities and a loss of $1 million, net, on the sales of five owned hotels, four of which were sold subject to franchise agreements and one of which was sold subject to a management agreement. These losses were partially offset by the receipt of insurance proceeds of approximately $5 million and a $4 million gain realized on the sale of a non-core asset (see Note 4).

During the year ended December 31, 2012, we recorded a loss of $9 million related to the impairment of our investment in an unconsolidated joint venture, a loss of $7 million related to the sale of one hotel, $2 million in losses related to the impairments of two hotels whose carrying values exceeded their fair values and a charge of $4 million to reflect the current market price less costs to sell two properties.

 

     Year Ended
December 31,
2013
     Year Ended
December 31,
2012
     Increase /
(decrease)
from prior
year
     Percentage
change
from prior
year
 
     (in millions)  

Income Tax Expense

   $ 263       $ 148       $ 115         77.7

The increase in income tax expense was primarily the result of higher pretax income in 2013 compared to 2012 and large tax benefits generated in 2012 as compared to 2013. Income tax expense increased approximately $65 million due to higher pretax income in 2013 compared to 2012, approximately $9 million for an increase in certain tax reserves, and approximately $6 million due to a higher effective tax rate in 2013. Incremental tax benefits in 2012 compared to 2013 amounted to approximately $35 million from hotel sales in 2012.

 

     Year Ended
December 31,
2013
     Year Ended
December 31,
2012
     Increase /
(decrease)
from prior
year
     Percentage
change
from prior
year
 
     (in millions)  

Discontinued Operations Gain (Loss), Net

   $ 71       $ 92       $ (21      (22.8 )% 

During the year ended December 31, 2013, the gain was primarily due to a tax benefit of $70 million we recorded as a result of the reversal of state income tax and interest reserves associated with an uncertain tax position, which was related to a previous disposition. The applicable statute of limitation for this tax position lapsed in 2013.

During the year ended December 31, 2012, we recorded a gain of $92 million (net of tax) primarily related to the gain of $78 million (net of tax) from the sale of one wholly owned hotel, which was sold unencumbered by a management or franchise agreement and a gain of $23 million (net of tax) from the favorable settlement of certain liabilities associated with a former subsidiary of ITT Corporation, which we acquired in 1998. These gains were partially offset by a loss of $5 million (net of tax) related to the impairment and loss on sale of four wholly-owned hotels and a loss of $5 million (net of tax) for accrued interest related to the uncertain tax position associated with a previous disposition.

 

41


Table of Contents

Segment Results

The following table summarizes REVPAR, ADR and occupancy for our Same-Store Systemwide Hotels for the year ended December 31, 2013 and 2012. Same-Store Systemwide Hotels represent results for same-store owned, leased, managed and franchised hotels.

 

     Year Ended
December 31,
       
     2013     2012     Variance  

Worldwide (941 hotels with approximately 276,100 rooms)

      

REVPAR (1)

   $ 119.15      $ 114.34        4.2

ADR

   $ 173.35      $ 169.31        2.4

Occupancy

     68.7     67.5     1.2   

Americas (556 hotels with approximately 164,800 rooms)

      

REVPAR (1)

   $ 118.35      $ 112.31        5.4

ADR

   $ 165.67      $ 159.35        4.0

Occupancy

     71.4     70.5     0.9   

EAME (191 hotels with approximately 48,900 rooms)

      

REVPAR (1)

   $ 139.67      $ 134.64        3.7

ADR

   $ 213.26      $ 207.74        2.7

Occupancy

     65.5     64.8     0.7   

Asia Pacific (194 hotels with approximately 62,400 rooms)

      

REVPAR (1)

   $ 105.49      $ 104.05        1.4

ADR

   $ 164.51      $ 168.21        (2.2 )% 

Occupancy

     64.1     61.9     2.2   

The following table summarizes REVPAR, ADR and occupancy for our Same-Store Owned Hotels for the year ended December 31, 2013 and 2012. The results for the year ended December 31, 2013 and 2012 represent results for 36 owned, leased and consolidated joint venture hotels (excluding 14 hotels sold, one transferred to vacation ownership and 11 additional hotels undergoing significant repositionings or without comparable results in 2013 and 2012).

 

     Year Ended
December 31,
       
     2013     2012     Variance  

Worldwide (36 hotels with approximately 12,700 rooms)

      

REVPAR (1)

   $ 167.19      $ 160.51        4.2

ADR

   $ 230.17      $ 222.06        3.7

Occupancy

     72.6     72.3     0.3   

Americas (21 hotels with approximately 9,200 rooms)

      

REVPAR (1)

   $ 140.34      $ 131.89        6.4

ADR

   $ 199.68      $ 189.30        5.5

Occupancy

     70.3     69.7     0.6   

EAME (11 hotels with approximately 2,300 rooms)

      

REVPAR (1)

   $ 266.16      $ 258.73        2.9

ADR

   $ 339.83      $ 335.31        1.3

Occupancy

     78.3     77.2     1.1   

Asia Pacific (4 hotels with approximately 1,200 rooms)

      

REVPAR (1)

   $ 184.23      $ 191.37        (3.7 )% 

ADR

   $ 231.61      $ 232.06        (0.2 )% 

Occupancy

     79.5     82.5     (3.0

 

(1) REVPAR is calculated by dividing room revenue, which is derived from rooms and suites rented or leased, by total room nights available for a given period. REVPAR may not be comparable to similarly titled measures such as revenues.

 

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The following tables summarize segment revenues and segment earnings for the year ended December 31, 2013 and 2012.

 

                                                                                           
Segment Revenues    Year Ended
December 31,
2013
     Year Ended
December 31,
2012
     Increase /
(decrease)
from prior
year
     Percentage
change
from prior
year
 
     (in millions)  

Americas

   $ 1,548       $ 1,627       $ (79      (4.9 )% 

EAME

     615         550         65         11.8

Asia Pacific

     349         337         12         3.6

Vacation ownership and residential

     905         1,271         (366      (28.8 )% 
  

 

 

    

 

 

    

 

 

    

 

 

 

Total segment revenues

   $ 3,417       $ 3,785       $ (368      (9.7 )% 
  

 

 

    

 

 

    

 

 

    

 

 

 

 

                                                                                           
Segment Earnings    Year Ended
December 31,
2013
     Year Ended
December 31,
2012
     Increase /
(decrease)
from prior
year
     Percentage
change
from prior
year
 
     (in millions)  

Americas

   $ 617       $ 581       $ 36         6.2

EAME

     220         179         41         22.9

Asia Pacific

     221         218         3         1.4

Vacation ownership and residential

     276         312         (36      (11.5 )% 
  

 

 

    

 

 

    

 

 

    

 

 

 

Total segment earnings

   $ 1,334       $ 1,290       $ 44         3.4
  

 

 

    

 

 

    

 

 

    

 

 

 

The Americas

Segment revenues decreased $79 million in the year ended December 31, 2013, compared to the corresponding period in 2012. The decrease in revenues was primarily related to a $130 million decrease in revenues from our owned, leased and consolidated joint venture hotels, partially offset by a $43 million increase in management fees, franchise fees and other income and a $4 million increase in residential revenues.

The decrease in revenues from our owned, leased and consolidated joint venture hotels was primarily due to decreased revenues from 14 owned hotels that were sold in 2013 and 2012. These sold hotels had revenues of $48 million in the year ended December 31, 2013 compared to $186 million for the corresponding period in 2012. Additionally, revenues decreased $29 million from the transfer of one hotel from the Americas segment to our vacation ownership and residential segment on January 1, 2013 and another $6 million from six owned hotels without comparable results in 2013 and 2012. Decreased revenue from sold, transferred and non-comparable hotels was partially offset by a $43 million increase in Same-Store Owned Hotel revenues due to an increase in REVPAR of 6.4% to $140.34 for the year ended December 31, 2013 when compared to the corresponding period in 2012.

The increase in management fees, franchise fees and other income was primarily due to the net addition of 23 managed or franchised hotels since December 31, 2012 and a 5.4% increase in Same-Store Systemwide Hotel REVPAR for the year ended December 31, 2013 when compared to the corresponding period in 2012. As of December 31, 2013, the Americas segment had 168 managed properties and 460 franchised properties with approximately 180,600 rooms.

Segment earnings increased $36 million in the year ended December 31, 2013, compared to the corresponding period in 2012, primarily due to the increase in management fees, franchise fees and other income of $43 million discussed above, an increase of $4 million in joint venture earnings and a $4 million increase in residential revenues, partially offset by a $7 million decrease in operations (revenues less expenses) from our owned, leased and consolidated joint venture hotels as a result of the asset sales discussed above. In addition, the increased earnings were offset by an increase in divisional overhead expenses of $10 million in the year ended December 31, 2013, compared to the corresponding period in 2012, primarily due to a $5 million increase in

 

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legal expenses and a $3 million increase related to an elective payment to retain a management contract associated with a hotel that failed a performance test.

EAME

Segment revenues increased $65 million in the year ended December 31, 2013, compared to the corresponding period in 2012. The increase in revenues was primarily related to a $48 million increase in revenues from our owned, leased and consolidated joint venture hotels and a $16 million increase in management fees, franchise fees and other income.

The $48 million increase in revenues from our owned, leased and consolidated joint venture hotels was primarily due to a $37 million increase in revenues from five owned or leased hotels that underwent major renovations during 2012 and were operating at full capacity as of December 31, 2013. Additionally, Same-Store Owned Hotel revenues increased $11 million for the year ended December 31, 2013 when compared to the corresponding period in 2012 as REVPAR increased 2.9% to $266.16 when compared to the corresponding period in 2012.

The increase in management fees, franchise fees and other income was primarily due to the receipt of approximately $10 million of fees associated with the termination of certain management contracts and a 3.7% increase in Same-Store Systemwide Hotel REVPAR for the year ended December 31, 2013 when compared to the corresponding period in 2012. Increases in REVPAR in Europe benefited from the favorable impact of foreign currency exchange during the year ended December 31, 2013, when compared to the corresponding period in 2012, while REVPAR in Africa and the Middle East was negatively impacted by the unfavorable impact of foreign currency exchange during the year ended December 31, 2013 when compared to the corresponding period in 2012. As of December 31, 2013, the EAME segment had 185 managed properties and 42 franchised properties with approximately 58,000 rooms.

Segment earnings increased $41 million in the year ended December 31, 2013, compared to the corresponding period in 2012, primarily due to a $20 million increase in operations (revenues less expenses) from our owned, leased and consolidated joint venture hotels, a $16 million increase in management fees, franchise fees and other income discussed above and a $7 million decrease in divisional overhead expenses, primarily driven by $9 million of severance related costs incurred in 2012, partially offset by the unfavorable impact of foreign currency exchange.

Asia Pacific

Segment revenues increased $12 million in the year ended December 31, 2013, compared to the corresponding period in 2012. The increase in revenues was primarily related to a $17 million increase in management fees, franchise fees and other income, partially offset by a $6 million decrease in revenues from our owned, leased and consolidated joint venture hotels.

The increase in management fees, franchise fees and other income was due to the net addition of 20 managed or franchised hotels during 2013 and a 1.4% increase in Same-Store Systemwide Hotel REVPAR for the year ended December 31, 2013 when compared to the corresponding period in 2012. Increases in REVPAR in China benefited from the favorable impact of foreign currency exchange during the year ended December 31, 2013, when compared to the corresponding period in 2012, while REVPAR at properties in the rest of Asia was negatively impacted by the unfavorable impact of foreign currency exchange during the year ended December 31, 2013 when compared to the corresponding period in 2012. As of December 31, 2013, the Asia Pacific segment had 210 managed properties and 49 franchised properties with approximately 84,700 rooms.

The decrease in revenues from our owned, leased and consolidated joint venture hotels was primarily due to a decrease in REVPAR of 3.7% due to a decrease in occupancy of 3.0% and a decrease in ADR of 0.2%, primarily driven by the unfavorable impact of foreign currency exchange during the year ended December 31, 2013, when compared to the corresponding period in 2012.

Segment earnings increased $3 million in the year ended December 31, 2013, compared to the corresponding period in 2012, primarily driven by the $17 million increase in management fees, franchise fees

 

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and other income discussed above, which was partially offset by an $11 million increase in overhead expenses, which increased primarily due to the growth in the region and a $3 million decrease in residential revenues.

Vacation ownership and residential

Total vacation ownership and residential services segment revenue decreased $366 million to $905 million for the year ended December 31, 2013 when compared to the corresponding period in 2012, primarily due to fewer residential closings at Bal Harbour in 2013, as this project was substantially sold out as of December 31, 2013. This decrease was partially offset by an increase in vacation ownership revenues, as discussed earlier. Segment earnings decreased $36 million in the year ended December 31, 2013, compared to the corresponding period in 2012, primarily driven by the decrease in operating income on sales at Bal Harbour due to the decrease in sales volume, partially offset by the increase in revenues from our various resort operations and the decrease in the loan loss provision.

Revenues and expenses recognized at Bal Harbour for the year ended December 31, 2013, with comparable data for the same period in 2012, were as follows (in millions, except for units closed):

 

     Year Ended
December 31,
2013
    Year Ended
December 31,
2012
    Increase /
(decrease)
from prior
year
     Percentage
change
from prior
year
 
     (in millions)  

Residential sales revenues

   $ 266      $ 684      $ (418      (61.1 )% 

Residential expenses

     147        527        (380      (72.1 )% 
  

 

 

   

 

 

   

 

 

    

 

 

 

Operating income

   $ 119      $ 157      $ (38      (24.2 )% 
  

 

 

   

 

 

   

 

 

    

 

 

 

Operating income margin

     44.7     23.0        21.7
  

 

 

   

 

 

   

 

 

    

 

 

 

Units closed

     78        188        (110      (58.5 )% 
  

 

 

   

 

 

   

 

 

    

 

 

 

The decrease in the cost of sales for the sale of each unit was due to an increase in the realized and projected revenue for the Bal Harbour project.

 

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LIQUIDITY AND CAPITAL RESOURCES

In 2014, we returned approximately $2.4 billion of capital to stockholders by adding special dividends of $2.60 per share, related to the sale of our Bal Harbour residential project and the sale of the hotel, in addition to our quarterly dividends, for a total of $4.00 per share paid in 2014, and by repurchasing 20.3 million common shares in 2014 for a total cost of approximately $1.6 billion. Since 2011, we have returned approximately $3.5 billion of capital to stockholders through dividends and stock repurchases. As of December 31, 2014, $79 million remained available under the share repurchase authorization and in January and early February 2015, we spent the remaining authorization. On February 9, 2015, our Board of Directors authorized a $750 million increase to our share repurchase program. We expect to continue paying regular dividends on a quarterly basis. Additionally, in 2014, we established a commercial paper program which gives us the ability to issue up to $1.75 billion of short term unsecured notes. We also issued $350 million of 3.75% Senior Notes due 2025 and $300 million of 4.50% Senior Notes due 2034.

On February 9, 2015, our Board of Directors declared a quarterly dividend of $0.375 per share, which is payable on March 26, 2015 to stockholders of record on March 5, 2015.

Cash From Operating Activities

Cash flow from operating activities is generated primarily from management and franchise revenues, operating income from our owned hotels and resorts and sales of VOIs. Cash flow from operations decreased to $994 million for the year ended December 31, 2014, compared to $1,151 million in 2013, primarily due to a decrease in residential closings at Bal Harbour, which was sold out in early 2014, partially offset by an increase in management fees and franchise fees and operations at our owned, leased and consolidated joint venture hotels. Other sources of cash are distributions from joint ventures, servicing financial assets and interest income. We use cash principally to fund our operating expenses, interest payments on debt, capital expenditures, dividend payments, share repurchases and property and income taxes. We believe that our cash from operations and our existing borrowing availability together with capacity for additional borrowings will be adequate to meet all funding requirements for our operating expenses, principal and interest payments on debt, capital expenditures, dividend payments, share repurchases and property and income taxes.

The ratio of our current assets to current liabilities was 0.95 and 1.04 as of December 31, 2014 and 2013, respectively. Consistent with industry practice, we sweep the majority of the cash at our owned hotels, in the same jurisdictions, on a daily basis and fund payables as needed through cash on hand or by drawing down on our existing revolving credit facility.

Cash From Investing Activities

Gross capital spending during the full year ended December 31, 2014 was as follows (in millions):

 

Maintenance Capital Expenditures (1):

  

Owned, leased and consolidated joint venture hotels

   $ 61   

Corporate and information technology

     146   
  

 

 

 

Subtotal

     207   
  

 

 

 

Vacation Ownership and Residential Capital Expenditures:

  

Net capital expenditures for inventory (2)

     (14

Development Capital

     183   
  

 

 

 

Total Capital Expenditures

   $ 376   
  

 

 

 

 

(1) Maintenance capital expenditures include renovations, asset replacements and improvements that extend the useful life of the asset.

 

(2) Represents gross inventory capital expenditures of $57 million less cost of sales, excluding residential, of $71 million.

 

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Gross capital spending during the year ended December 31, 2014 included approximately $207 million of maintenance capital and $183 million of development capital. Investment spending on gross vacation ownership interest inventory was $57 million, primarily related to construction at the Westin St. John in St. John, U.S. Virgin Islands and the Westin Desert Willow in Palm Desert, CA. Our capital expenditure program includes both offensive and defensive capital. Defensive spending is related to maintenance and renovations that we believe are necessary to stay competitive in the markets in which we operate. 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, as hotels in certain markets could become less desirable. The offensive capital expenditures, which primarily relate to new projects that we expect will generate a return, are also considered discretionary. We currently anticipate that our defensive capital expenditures for the full year 2015 (excluding vacation ownership inventory) will be approximately $200 million for maintenance, renovations, and technology capital. In addition, for the full year 2015, we currently expect to spend approximately $200 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, made non-controlling investments in joint ventures and provided certain guarantees and indemnifications. See Note 24 of the consolidated financial statements for discussion regarding the amount of loans we have outstanding with owners, unfunded loan commitments, equity and other potential contributions, surety bonds outstanding, performance guarantees and indemnifications we are obligated under, and investments in hotels and joint ventures.

We intend to finance the acquisition of additional hotel properties (including equity investments), hotel renovations, VOI construction, capital improvements, technology spend and other core and ancillary business acquisitions and investments and provide for general corporate purposes, (including dividend payments and share repurchases) from cash on hand, cash generated from operations, net proceeds from asset dispositions and the incurrence of debt.

We periodically review our business to identify assets that we believe either are non-core, no longer complement our business, or could be sold at significant premiums. As part of our asset-light strategy, we are focused on reducing our investment in owned real estate, enhancing our real estate returns and monetizing investments.

Since 2006, we have sold 87 hotels realizing cash proceeds of approximately $7.1 billion in numerous transactions, including cash proceeds net of closing costs of approximately $784 million from the sale of eight hotels during the year ended December 31, 2014 (see Note 4). To date, where we have sold hotels, we typically have not provided significant seller financing or other financial assistance to buyers. There can be no assurance, however, that we will be able to complete future dispositions on commercially reasonable terms or at all.

Cash Used for Financing Activities

In the third quarter of 2014, our Board of Directors authorized a $1.1 billion increase to our share repurchase program. During the year ended December 31, 2014, we repurchased 20.3 million common shares at a weighted average price of $80.45 for a total cost of approximately $1.636 billion. Since 2011, we have repurchased 31.5 million common shares for a total cost of approximately $2.272 billion, and as of December 31, 2014, $79 million remained available under the share repurchase authorization. In January and early February 2015, we spent the remaining authorization and, in February 2015, our Board of Directors authorized a $750 million increase to our share repurchase program (see Note 19).

In 2014, we paid $735 million of dividends consisting of four regular quarterly dividends totaling $1.40 per share and four special quarterly dividends totaling $2.60 per share. In December 2013, we paid a dividend of $256 million, or $1.35 per share.

 

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The following is a summary of our debt portfolio (excluding securitized vacation ownership debt and capital leases) as of December 31, 2014:

 

     Amount
Outstanding  at
December 31,
2014 (a)
     Weighted
Average
Interest Rate at
December 31,
2014
    Weighted
Average
Remaining
Term
 
     (Dollars in millions)            (In years)  

Floating Rate Debt

       

Revolving Credit Facility

   $ 5         11.91     5.2   

Commercial Paper

     634         0.45     5.2   

Mortgages and Other

     36         3.65     2.0   

Interest Rate Swaps

     250         5.21     4.0   
  

 

 

      

Total/Average

   $ 925         1.94     4.7   
  

 

 

      

Fixed Rate Debt

       

Senior Notes

   $ 1,861         5.30     7.9   

Mortgages and Other

     3         0.89     10.9   

Interest Rate Swaps

     (250      6.91     4.0   
  

 

 

      

Total/Average

   $ 1,614         5.04     8.6   
  

 

 

      

Total Debt

       

Total Debt and Weighted Average Terms

   $ 2,539         3.90     7.2   
  

 

 

      

 

(a) Excludes approximately $200 million of our share of unconsolidated joint venture debt and $156 million of capital lease obligations and $249 million of securitized vacation ownership debt, all of which is non-recourse.

During the year ended December 31, 2014, we established a Commercial Paper Program (Commercial Paper), which gives us the ability to issue up to $1.75 billion of short-term unsecured notes. Our Commercial Paper program does not have purchase commitments from buyers for our commercial paper; therefore, our ability to issue commercial paper is subject to market demand. We reserve unused capacity under our $1.75 billion Revolving Credit Facility (the Facility) to repay outstanding Commercial Paper borrowings in the event that the commercial paper market is not available to us for any reason when outstanding borrowings mature. We do not expect fluctuations in the demand for commercial paper to affect our liquidity, given our borrowing capacity under the Facility.

Additionally, in 2014, we completed a public offering of $350 million in aggregate principal amount of Senior Notes due 2025 (the 2025 Notes) and $300 million in aggregate principal amount of Senior Notes due 2034 (the 2034 Notes). The 2025 Notes bear interest at a fixed rate of 3.75% per annum and mature on March 15, 2025. The 2034 Notes bear interest at a fixed rate of 4.5% per annum and mature on October 1, 2034. We will pay interest on the 2025 Notes on March 15 and September 15 each year until maturity, beginning on March 15, 2015. We will pay interest on the 2034 Notes on April 1 and October 1 each year until maturity, beginning on April 1, 2015. We used the net proceeds for general corporate purposes, which included the repayment of commercial paper, repurchases of common stock and the payment of previously announced regular and special dividends to our stockholders.

Further, in 2014, we entered into the Fourth Amendment of the Facility. The amendment extended the maturity of the Facility by two years to February 2020. We paid fees of approximately $2 million in connection with this amendment and capitalized these costs as deferred financing costs. Additionally, in connection with this amendment, we recorded a net charge of approximately $1 million in the loss on early extinguishment of debt, net line item to write-off certain deferred financings costs.

Finally, in 2014, we entered into a master lease arrangement to lease the entire buildings and land where we are headquartered in Stamford, Connecticut. The term of this lease is 20 years, with two five-year extensions at

 

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our option. We have fixed annual payments of approximately $10 million, which escalate at 3% per year. As a result of this transaction, as of December 31, 2014, we have recorded a capital lease obligation of approximately $153 million with an interest rate of 5.76% (see Note 13).

In 2013, we terminated a securitization we completed in 2005 (the 2005 Securitization), including pay-down of all outstanding principal and interest due. The termination required a cash settlement of $21 million, $18 million of which was received and designated as pre-funding from the proceeds of a securitization we completed in 2012 (the 2012 Securitization). Upon termination, $19 million of receivables previously related to the 2005 Securitization were transferred to the 2012 Securitization with the remaining $2 million released to unsecuritized. We also terminated a securitization we completed in 2006 (the 2006 Securitization), which required a $12 million cash payment and resulted in the release of $12 million of vacation ownership notes receivable to unsecuritized.

The following is a summary of our unsecuritized and securitized debt less cash as of December 31, 2014:

 

     December 31,
2014
     December 31,
2013
 
     (in millions)  

Gross Unsecuritized Debt

   $ 2,695       $ 1,267   

less: cash (including restricted cash of $76 million in 2014 and $123 million in 2013

     (1,011      (739
  

 

 

    

 

 

 

Net Unsecuritized Debt

   $ 1,684       $ 528   
  

 

 

    

 

 

 

Gross Securitized Debt (non-recourse)

   $ 249       $ 355   

less: cash restricted for securitized debt repayments (not included above)

     (11      (14
  

 

 

    

 

 

 

Net Securitized Debt

   $ 238       $ 341   
  

 

 

    

 

 

 

Total Net Debt

   $ 1,922       $ 869   
  

 

 

    

 

 

 

We have evaluated the commitments of each of the lenders in the Facility, and we have reviewed our debt covenants. We do not anticipate any issues regarding the availability of funds under the Facility. The cost of borrowing of the Facility 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.

Our Facility is used to fund general corporate cash needs. As of December 31, 2014, we have availability of approximately $1.12 billion under the Facility. The Facility allows for multi-currency borrowing and, when drawn upon, has an applicable margin, inclusive of the commitment fee, of 1.20%, 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 covenants.

Based upon the current level of operations, management believes that our cash flow from operations, together with our significant cash balances, available borrowings under the Facility, issuance of Commercial Paper, and potentially additional borrowings will be adequate to meet anticipated requirements for dividend payments, 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 or on favorable terms. In addition, there can be no assurance that in our continuing business we will generate cash flow at or above historical levels, that currently anticipated results will be achieved or that we will be able to complete dispositions on commercially reasonable terms or at all. As of December 31, 2014, approximately $950 million, included in our cash balance above, resided in foreign countries. Subsequent to December 31, 2014, approximately $385 million of this cash was used to partially repay our Commercial Paper. The balance of offshore cash is deemed to be permanently invested in foreign countries and we could be subject to income taxes if we repatriated these amounts.

 

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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 existing debt or obtain additional financing at unfavorable rates. Our ability to make scheduled principal 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, financial, competitive, legislative and regulatory factors beyond our control.

We had the following contractual obligations outstanding as of December 31, 2014 (in millions) (1):

 

     Total      Due in Less
Than 1 Year
     Due in
1-3  Years
     Due in
3-5  Years
     Due After
5 Years
 

Debt (2)

   $ 2,539       $ 295       $ 34       $ 582       $ 1,628   

Interest payable

     816         109         177         140         390   

Capital lease obligations

     156         2         5         7         142   

Operating lease obligation

     1,007         80         142         118         667   

Unconditional purchase obligations (3)

     83         35         30         18           

Other long-term obligations

     19         1         4         4         10   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 4,620       $ 522       $ 392       $ 869       $ 2,837   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) This table excludes unrecognized tax benefits that would require cash outlays for $213 million, the timing of which is uncertain. Refer to Note 12 of the consolidated financial statements for additional discussion on this matter.

 

(2) Excludes securitized debt of $249 million, all of which is non-recourse.

 

(3) Includes commitments that may be reimbursed or satisfied by our managed and franchised properties.

We had the following commercial commitments outstanding as of December 31, 2014 (in millions):

 

     Total      Less Than
1 Year
     1-3 Years      3-5 Years      After 5
Years
 

Standby letters of credit

   $ 83       $ 79       $       $       $ 4   

Off-Balance Sheet Arrangements

As of December 31, 2014, our off-balance sheet arrangements include letters of credit of $83 million, unconditional purchase obligations of $83 million and surety bonds of $27 million. These items are discussed in greater detail in Item 8, Financial Statements and Supplementary Data.

 

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CRITICAL ACCOUNTING POLICIES

The preparation of our consolidated financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements, the reported amounts of revenues and expenses during the reporting periods and the related disclosures in the consolidated financial statements and accompanying footnotes.

We believe that of our significant accounting policies, which are described in Note 2, Significant Accounting Policies, in our consolidated financial statements, the following accounting policies are critical because they involve a higher degree of judgment, and the estimates required to be made were based on assumptions that are inherently uncertain. As a result, these accounting policies could materially affect our financial position, results of operations and related disclosures. On an ongoing basis, we evaluate these estimates and judgments based on historical experiences and various other factors that are believed to reflect the current circumstances. While we believe our estimates, assumptions and judgments are reasonable, they are based on information presently available. Actual results may differ significantly from these estimates due to changes in judgments, assumptions and conditions as a result of unforeseen events or otherwise, which could have a material effect on our financial position or results of operations. Management has discussed the development and selection of these critical accounting policies and estimates with the Audit Committee of the Board of Directors.

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) management fees and franchise fees; (3) vacation ownership and residential sales; (4) other revenues from managed and franchised properties. 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 our revenues:

 

   

Owned, Leased and Consolidated Joint Ventures — Represents revenue primarily derived from hotel operations, including the rental of rooms and food and beverage sales, from our owned, leased and 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. Revenue per available room (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.

 

   

Management Fees and Franchise Fees — Represents fees earned on hotels and resorts managed worldwide, usually under long-term contracts, franchise fees received in connection with the franchise of our Luxury Collection, Westin, Le Méridien, Sheraton, Four Points by Sheraton, Aloft and Element brand names, termination fees and the amortization of deferred gains related to sold properties for which we have 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. For any time during the year, when the provisions of our 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. Therefore, during periods prior to year-end, the incentive fees recorded may not be indicative of the eventual incentive fees that will be recognized at year-end as conditions and incentive hurdle calculations may not be final. Franchise fees are generally based on a percentage of hotel room revenues. As with our owned, leased and consolidated joint venture hotel revenues discussed above, these revenue sources are affected by conditions impacting the travel and hospitality industry as well as competition from other hotel management and franchise companies.

 

   

Vacation Ownership and Residential Sales — We recognize revenue from VOI sales 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, when the period of cancellation with refund has expired and receivables are deemed collectible. We determine the

 

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portion of revenues to recognize for sales accounted for under the percentage of completion method based on judgments and estimates including total project costs to complete. Additionally, we record reserves against these revenues based on expected default levels. Changes in costs could lead to adjustments to the percentage of completion status of a project, which may result in differences in the timing and amount of revenues recognized from the projects. We have also entered into licensing agreements with third-party developers to offer consumers branded condominiums or residences. Our fees from these agreements are generally based on the gross sales revenue of units sold. Residential 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.

 

   

Other Revenues from Managed and Franchised Properties — These revenues represent 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 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 Intangible Assets.    Goodwill and intangible assets arise in connection with acquisitions, including the acquisition of management and franchise contracts. We do not amortize goodwill and intangible assets with indefinite lives. Intangible assets with finite lives are amortized over their respective useful lives. In accordance with Accounting Standards Codification (ASC) Topic 350, Intangibles — Goodwill and Other, we review all goodwill and intangible assets for impairment annually (see Note 6), or upon the occurrence of a trigger event.

When testing goodwill for impairment, ASC Topic 350 permits us 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 the two-step impairment test is necessary. We also have the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. Impairment charges, if any, are recognized in operating results.

To determine how we test the goodwill of our reporting units for impairment, we consider the results of the previous year’s tests and the percentage by which the fair value of the reporting unit exceeded its carrying value, the performance of our current year operations and our expectations for future operations. We had no goodwill impairment charges in 2014, 2013 or 2012. Based on the most recent goodwill impairment test performed in 2014, we do not expect the goodwill of our reporting units will be impaired in the near future.

We may also qualitatively assess our indefinite lived intangible assets for impairment prior to performing the quantitative impairment test, utilizing the same methodology as described previously for our goodwill impairment assessment. If the quantitative analysis is required, we determine the fair value of our indefinite lived intangible assets primarily using the income approach, which requires us to make certain assumptions including growth in fees, operating expenses, inflation, income taxes and terminal value. We had no impairment charges related to our indefinite lived intangible assets in 2014, 2013 or 2012 as the qualitative assessments concluded that it was not more likely than not that the intangible assets were impaired or the quantitative analyses reflected that the fair values of the intangible assets significantly exceeded their book values.

Our finite lived intangibles are tested for impairment at least annually or whenever events or circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. During the years ended December 31, 2014, 2013 and 2012, we recorded no significant impairment charges related to finite lived intangible assets.

Frequent Guest Program.    Starwood Preferred Guest is our frequent guest incentive marketing program. SPG members earn points based on spending at our owned, managed 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 and airline travel. Points can be redeemed at substantially all of our owned, managed and franchised hotels as well as through other redemption opportunities with third parties, such as conversion to airline miles.

 

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We charge our owned, managed and franchised hotels the cost of operating the SPG program, including the estimated cost of our future redemption obligation, based on a percentage of our SPG members’ qualified expenditures. Our management and franchise agreements require that we are 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, we increase the SPG point liability for the amount of cash we receive from our 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 for other point redemption opportunities.

We consolidate 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 accompanying consolidated balance sheets. The total actuarially determined liability, as of December 31, 2014 and 2013 was $1,115 million and $1,036 million, respectively, of which $453 million and $313 million, respectively, was included in accrued expenses. A 10% reduction in the estimate of “breakage” would have increased the liability at December 31, 2014 by approximately $38 million.

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, sales of similar assets, appraisals and, if appropriate, current estimated net sales proceeds from pending offers. We evaluate the carrying value of our long-lived assets based on our plans, at the time, for such assets and such qualitative factors as future development in the surrounding area, status of expected local 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.

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 defaults for each year’s mortgage originations over the life of the respective notes and projects an estimated default rate. As of December 31, 2014 and 2013, the average estimated default rate for our pools of receivables was 9.2% and 9.3%, respectively.

We use the origination of the notes by brand (Sheraton, Westin, and Other) and the Fair Isaac Corporation (FICO) scores of the buyers as the primary credit quality indicator to calculate the loan loss reserve for the vacation ownership notes, 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, supplemented by the FICO scores of the buyers. In addition to quantitatively calculating the loan loss reserve based on our static pool analysis, we supplement the process by evaluating certain qualitative data, including the aging of the respective receivables and current default trends by brand and origination year.

Given the significance of our pools of VOI notes receivable, a change in the projected default rate can have a significant impact to our loan loss reserve requirements, with a 0.1% change estimated to have an impact of approximately $5 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. We consider loans to be in default upon reaching 120 days outstanding, at which point, we generally commence the repossession 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.

 

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For the hotel segments, 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 impaired loans, we establish 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. 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 only if the disposal represents a strategic shift that will have a major effect on our operations and financial results.

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 (see Note 24).

Income Taxes. We provide for income taxes in accordance with principles contained in ASC Topic 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 liabilities for the future tax consequences of events that have been recognized in our financial statements or tax returns.

Deferred tax assets and liabilities are measured 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 if it is more likely than not that a portion will not be realized. In assessing whether it is more likely than not that deferred tax assets will be realized, we consider all available evidence, both positive and negative, including our recent cumulative earnings experience and expectations of future available taxable income of the appropriate character by taxing jurisdiction, tax attribute carry back and carry forward periods available to us for tax reporting purposes, and prudent and feasible tax planning strategies.

We measure and recognize 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 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.

 

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 (see Note 21).

 

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At December 31, 2014, we were party to the following derivative instruments:

 

   

Forward contracts to hedge forecasted transactions for management and franchise fee revenues earned in foreign currencies. The aggregate dollar equivalent of the notional amounts was approximately $45 million. These contracts expire in 2015.

 

   

Forward foreign exchange contracts to manage the foreign currency exposure related to certain intercompany loans not deemed to be permanently invested. The aggregate dollar equivalent of the notional amounts of the forward contracts was approximately $1,928 million. These contracts expire in 2015.

 

   

Interest rate swap agreements to manage interest expense to modify our interest rate exposure by effectively converting debt with a fixed rate to a floating rate. The aggregate notional amount of the interest rate swaps was $250 million. The swaps expire in 2018 and 2019 when the related debt matures.

The following table sets forth the scheduled maturities and the total fair value of our indebtedness excluding securitized vacation ownership debt as of December 31, 2014 (in millions):

 

     Expected Maturity or Transaction Date
At December 31,
     Total at
December 31,
2014
    Total Fair
Value at
December 31,
2014
 
     2015      2016      2017      2018      2019      Thereafter       

Indebtedness

                      

Fixed rate

   $ 296       $ 2       $ 3       $ 225       $ 113       $ 1,131       $ 1,770      $ 1,890   

Average interest rate

                       5.11  

Floating rate

   $ 1       $ 31       $ 3       $ 151       $ 100       $ 639       $ 925      $ 925   

Average interest rate

                       1.94  

 

Item 8. 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.

None.

 

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 13a-15(e) and 15d-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 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this report 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 Item 8 of this Annual Report and are incorporated herein by reference.

 

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Item 9B. Other Information.

Not applicable.

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance.

Information regarding directors and corporate governance will be included in our proxy statement for the 2015 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, 2014 and such information is incorporated herein by reference.

Executive Officers of the Registrants

The following table includes certain information with respect to each of our executive officers.

 

Name

(listed alphabetically, after

Chief Executive Officer)

  

Position

Adam M. Aron

   Interim Chief Executive Officer and a Director

Jeffrey M. Cava

   Executive Vice President and Chief Human Resources Officer

Christie N. Hicks

   Senior Vice President, Starwood Sales Organization

Thomas B. Mangas

   Executive Vice President and Chief Financial Officer

Philip P. McAveety

   Executive Vice President and Chief Brand Officer

Martha C. Poulter

   Executive Vice President & Chief Information Officer

Sergio D. Rivera

   President, The Americas

Alan M. Schnaid

   Senior Vice President, Corporate Controller and Principal Accounting Officer

Kenneth S. Siegel

   Chief Administrative Officer, General Counsel and Secretary

Simon M. Turner

   President, Global Development

Biographies for our executive officers follow:

Adam M. Aron. Mr. Aron, 60, has been Interim Chief Executive Officer of the Company since February 14, 2015 and has served as a member of the Company’s Board of Directors since 2006. Since 2006, he has also been a Senior Operating Partner at Apollo Management L.P., a private equity, debt and capital markets investor, and Chief Executive Officer of World Leisure Partners, Inc., a leisure-related consultancy. He served as Chief Executive Officer of the Philadelphia 76ers, a professional basketball team, from 2011 to 2013. From 1996 through 2006, Mr. Aron was Chairman and Chief Executive Officer of Vail Resorts, Inc., an owner and operator of ski resorts and hotels. From 1993 through 1996, he was President and Chief Executive Officer of Norwegian Cruise Line Holdings Limited, a global cruise operator. Earlier in his career, Mr. Aron was Senior Vice President of Marketing for United Airlines and for the Hyatt Hotels Corporation. Mr. Aron is a director of Prestige Cruise Holdings and Norwegian Cruise Line Holdings Limited and a member of the Council on Foreign Relations.

Jeffrey M. Cava. Mr. Cava, 63, has been Executive Vice President and Chief Human Resources Officer since May 2008. Mr. Cava served as Executive Vice President Administration 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 has chaired the compensation committee of The Society for Human Resources Management, a non-profit global human resources professional organization.

 

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Christie N. Hicks. Ms. Hicks, 59, has been Senior Vice President, Starwood Sales Organization since December, 2009. Ms. Hicks has been with the Company since October, 1999, when she joined as Vice President, Global Sales, North America, a position she held until mid-2001. From June 2001 to October 2009, Ms. Hicks was Senior Vice President, Global Sales of the Company. Prior to joining the Company, Ms. Hicks held a number of sales positions with Hyatt Hotels and Resorts, a global hospitality company, including Vice President, National Sales. Ms. Hicks is a member of the board of directors of WINiT, Women In Travel – a not for profit organization focused on women’s leadership in the travel industry. Ms. Hicks recently resigned from her position as Senior Vice President, Starwood Sales Organization, and will no longer serve in this role after March 31, 2015.

Thomas B. Mangas. Mr. Mangas, 47, has been Executive Vice President and Chief Financial Officer of the Company since September 2014. Prior to joining the Company, Mr. Mangas served as Executive Vice President & Chief Executive Officer of Armstrong Floor Products, a division of Armstrong World Industries, Inc., a designer and manufacturer of floors, ceilings and cabinets, from November 2013 to September 2014, and as Senior Vice President & Chief Financial Officer of Armstrong World Industries, Inc. from February 2010 to November, 2013. Mr. Mangas spent 20 years at The Procter & Gamble Company in progressively senior roles and, from August 2008 to January 2010, served as Vice President, Finance & Accounting for the Global Beauty & Grooming business of The Procter & Gamble Company, a manufacturer of branded consumer packaged goods. Mr. Mangas is also a member of the board of directors and is chair of the audit committee of ATD Corporation, the indirect parent of American Tire Distributor Holdings Inc., a leading replacement tire distributor in the United States.

Philip P. McAveety. Mr. McAveety, 48, 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 Vice President, Brand Marketing, Europe, Middle East and Africa at Nike, Inc., a designer, developer and marketer of footwear, apparel and accessory products. Mr. McAveety is a member of the board of directors of Parques Reunidos Servicios Centrales S.A., a major owner and operator of leisure parks in Europe, the United States and Latin America. Mr. McAveety recently resigned from his position as Executive Vice President and Chief Brand Officer, and will no longer serve in this role after March 31, 2015.

Martha C. Poulter. Ms. Poulter, 47, has been Executive Vice President & Chief Information Officer of the Company since June 2014. Prior to joining the Company, Ms. Poulter spent eighteen years at GE Capital, a financial services provider, in progressively senior roles, most recently serving as Vice President, General Electric and Chief Information Officer, GE Capital from August 2010 to June 2014. From 2008 to 2010 Ms. Poulter served as Chief Information Officer for GE Capital, Americas and from 2007 to 2008 served as Chief Information Officer for GE Capital, Capital Solutions. From 1995 to 2007, Ms. Poulter held various positions for General Electric, Corporate Financial Services. Prior to joining GE Capital, Ms. Poulter held various positions with Southern New England Telephone, a telecommunications company.

Sergio D. Rivera. Mr. Rivera, 52, has been President, The Americas since July 1, 2014. Previously, Mr. Rivera was Co-President, The Americas since June 2012, and President and Chief Executive Officer of Starwood Vacation Ownership, a wholly owned subsidiary of the Company. Prior to 2008, Mr. Rivera held progressively senior management roles within the Company, including Controller, Vice President of Sales and Marketing, Senior Vice President of International Operations, and President of Global Real Estate. Mr. Rivera began his career with the Company through its predecessor company, Vistana Resorts, in 1989. Mr. Rivera is a member of the board of directors of Health Care REIT, Inc., an investor in healthcare real estate, the American Resort Development Association, a trade association representing the vacation ownership and resort development industries, and the Florida Chamber of Commerce.

Alan M. Schnaid. Mr. Schnaid, 48, served as Interim Chief Financial Officer of the Company from April 20l4 to September 2014, and has been Senior Vice President, Corporate Controller and Principal Accounting Officer of the Company since May 2005. Mr. Schnaid joined the Company in 1994 as Assistant Corporate Controller, became Corporate Controller in August 1994, Vice President in August 1996, and Senior Vice President in August 1998. Prior to joining the Company, Mr. Schnaid held accounting positions with Mazars and Company, Kenneth Leventhal and Company and Laventhol & Horwath. Mr. Schnaid is on the board

 

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of CommLoan.com, a privately held company providing a web based, turnkey, private labeled commercial mortgage platform to brokers, lenders and borrowers in the commercial real estate industry.

Kenneth S. Siegel. Mr. Siegel, 59, has been Chief Administrative Officer, General Counsel and Secretary since May 2006. From November 2000 to May 2006, Mr. Siegel held the position of Executive 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 technology industries, from January 2000 to November 2000. Prior to that time, he served as Senior Vice President, General Counsel and Corporate Secretary of IMS Health Incorporated, an information services 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 Emeritus of Cancer Hope Network, a non-profit entity, a Trustee of Minority Corporate Counsel Association, and a Trustee of Sacred Heart University.

Simon M. Turner. Mr. Turner, 53, has been President, Global Development since May 2008. From June 1996 to April 2008, he was a principal of Hotel Capital Advisers, Inc., a hotel investment advisory 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. He currently serves as a trustee of the Urban Land Institute and is a member of the Dean’s Advisory Board of the School of Hotel Administration at Cornell University.

 

Item 11. Executive Compensation.

Information regarding executive compensation 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, 2014 and such information is incorporated herein by reference.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Information regarding security ownership of certain beneficial owners and management and related stockholder matters 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, 2014 and such information is incorporated herein by reference.

 

Item 13. Certain Relationships and Related Transactions and Director Independence.

Information regarding certain relationships and related transactions and director independence 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, 2014 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, 2014 and such information is incorporated herein by reference.

 

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Item 15. Exhibits and Financial Statement Schedules.

 

  (a) The following documents are filed as part of this Annual Report:

 

  1-2. The financial statements and financial statement schedule listed in the Index to Financial Statements and Schedule following the signature pages hereof.

 

  3. Exhibits:

 

Exhibit
Number

  

Description of Exhibit

3.1    Articles of Amendment and Restatement of the Company, as of May 30, 2007 (incorporated by reference to Appendix A to the Company’s 2007 Notice of Annual Meeting and Proxy Statement (Commission File Number 001-07959) filed with the SEC on April 26, 2007).
3.2    Amended and Restated Bylaws of the Company, as amended and restated through June 30, 2013 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (Commission File Number 001-07959) filed with the SEC on July 1, 2013).
4.1    Termination Agreement dated as of April 7, 2006 between the Company and the Trust (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K (Commission File Number 001-07959) filed with the SEC on April 13, 2006 (the “April 13 Form 8-K”)).
4.2    Amended and Restated Rights Agreement, dated as of April 7, 2006, between the Company and American Stock Transfer and Trust Company, as Rights Agent (which includes the form of Amended and Restated Articles Supplementary of the Series A Junior Participating Preferred Stock as Exhibit A, the form of Rights Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Stock as Exhibit C) (incorporated by reference to Exhibit 4.2 of the April 13 Form 8-K).
4.3    Amended and Restated Indenture, dated as of November 15, 1995, as Amended and Restated 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 (Commission File Number 333-07221) filed November 13, 1996).
4.4    First Indenture Supplement, dated as of December 31, 1998, among ITT Corporation, the Company and The Bank of New York (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K (Commission File Number 001-07959) filed with the SEC on January 8, 1999).
4.5    Second Indenture Supplement, dated as of April 9, 2006, among the Company, Sheraton Holding 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).
4.6    Indenture, dated as of September 13, 2007, between the Company and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K (Commission File Number 001-07959) filed with the SEC on September 17, 2007 (the “September 17 Form 8-K”)).
4.7    Supplemental Indenture No. 2, dated as of May 23, 2008, between the Company and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K (Commission File Number 001-07959) filed with the SEC on May 28, 2008).
4.8    Supplemental Indenture No. 4, dated as of November 20, 2009, between the Company and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K (Commission File Number 001-07959) filed with the SEC on November 23, 2009).
4.9    Indenture, dated as of December 10, 2012, between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K (Commission File Number 001-07959) filed with the SEC on December 10, 2012 (the “December 10 Form 8-K”)).
4.10    Supplemental Indenture No. 1, dated as of December 10, 2012, between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.2 to the December 10 Form 8-K).

 

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Exhibit
Number

  

Description of Exhibit

4.11    Supplemental Indenture No. 2, dated as of September 15, 2014, between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K (Commission File Number 001-07959) filed with the SEC on September 15, 2014).
10.1    Third Amended and Restated Limited Partnership Agreement of SLC Operating Limited Partnership, dated January 6, 1999 (the “SLC LPA”), among the Company and the limited partners of SLC Operating Limited Partnership (incorporated by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K (Commission File Number 001-07959) for the fiscal year ended December 31, 1998).
10.2    Amendment to the SLC LPA, effective as of December 27, 2013 (incorporated by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K (Commission File Number 001-07959) for the fiscal year ended December 31, 2013 (the “2013 Form 10-K”)).
10.3    Form of Trademark License Agreement, dated as of December 10, 1997, between Starwood Capital Group, L.L.C. and Starwood Lodging Trust (incorporated by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-K (Commission File Number 001-07959) for the fiscal year ended December 31, 1997).
10.4    Credit Agreement, dated as of November 30, 2012, by and among the Company, certain of its subsidiaries, as borrowers, the lenders from time to time party thereto, JPMorgan Chase Bank, N.A., as administrative agent, Citigroup Global Markets Inc., as syndication agent, Bank of America, N.A., HSBC Bank USA, National Association and Wells Fargo Bank, National Association, as documentation agents (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (Commission File Number 001-07959) filed with the SEC on December 5, 2012).
10.5    First Amendment to Credit Agreement, dated as of February 6, 2013, by and among the Company, certain of its subsidiaries, as borrowers, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K (Commission File Number 001-07959) for the fiscal year ended December 31, 2012).
10.6    Second Amendment to Credit Agreement, dated as of January 3, 2014, by and among the Company, certain of its subsidiaries, as borrowers, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.6 to the 2013 Form 10-K).
10.7    Third Amendment to Credit Agreement, dated as of July 29, 2014, by and among the Company, certain of its subsidiaries, as borrowers, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders and other persons party thereto (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q (Commission File Number 001-07959) for the quarterly period ended September 30, 2014 (the “2014 Form 10-Q3”)).
10.8    Fourth Amendment to Credit Agreement, dated as of September 30, 2014, by and among the Company, certain of its subsidiaries, as borrowers, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders and other persons party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (Commission File Number 001-07959) filed with the SEC on October 2, 2014).
10.9    Starwood Hotels & Resorts Worldwide, Inc. 1999 Long-Term Incentive Compensation Plan (the “1999 LTIP”) (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q (Commission File Number 001-07959) for the quarterly period ended June 30, 1999 (the “1999 Form 10-Q2”)). *
10.10    First Amendment to the 1999 LTIP, dated as of August 1, 2001 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q (Commission File Number 001-07959) for the quarterly period ended September 30, 2001). *
10.11    Second Amendment to the 1999 LTIP (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q (Commission File Number 001-07959) for the quarterly period ended March 31, 2003 (the “2003 Form 10-Q1”)). *
10.12    Form of Non-Qualified Stock Option Agreement pursuant to the 1999 LTIP (incorporated by reference to Exhibit 10.30 to the Company’s Annual Report on Form 10-K (Commission File Number 001-07959) for the fiscal year ended December 31, 2004 (the “2004 Form 10-K”)). *

 

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Exhibit
Number

  

Description of Exhibit

10.13    Form of Restricted Stock Agreement pursuant to the 1999 LTIP (incorporated by reference to Exhibit 10.31 to the 2004 Form 10-K). *
10.14    Starwood Hotels & Resorts Worldwide, Inc. 2002 Long-Term Incentive Compensation Plan (the “2002 LTIP”) (incorporated by reference to Annex B of the Company’s 2002 Notice of Annual Meeting and Proxy Statement (Commission File Number 001-07959) filed with the SEC on April 12, 2002). *
10.15    First Amendment to the 2002 LTIP (incorporated by reference to Exhibit 10.1 to the 2003 Form 10-Q1). *
10.16    Form of Non-Qualified Stock Option Agreement pursuant to the 2002 LTIP (incorporated by reference to Exhibit 10.49 to the Company’s Annual Report on Form 10-K (Commission File Number 001-07959) for the fiscal year ended December 31, 2002 (the “2002 Form 10-K”)). *
10.17    Form of Restricted Stock Agreement pursuant to the 2002 LTIP (incorporated by reference to Exhibit 10.35 to the 2004 Form 10-K). *
10.18    Starwood Hotels & Resorts Worldwide, Inc. 2004 Long-Term Incentive Compensation Plan, amended and restated as of December 31, 2008 (“2004 LTIP”) (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K (Commission File Number 001-07959) filed with the SEC on January 6, 2009 (the “January 2009 Form 8-K”)). *
10.19    First Amendment to the 2004 LTIP (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q (Commission File Number 001-07959) for the quarterly period ended June 30, 2013). *
10.20    Form of Non-Qualified Stock Option Agreement pursuant to the 2004 LTIP (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q (Commission File Number 001-07959) for the quarterly period ended June 30, 2004). *
10.21    Form of Restricted Stock Agreement pursuant to the 2004 LTIP (incorporated by reference to Exhibit 10.38 to the 2004 Form 10-K). *
10.22    Form of Non-Qualified Stock Option Agreement pursuant to the 2004 LTIP (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (Commission File Number 001-07959) filed with the SEC February 13, 2006 (the “February 2006 Form 8-K”)). *
10.23    Form of Restricted Stock Agreement pursuant to the 2004 LTIP (incorporated by reference to Exhibit 10.1 to the February 2006 Form 8-K). *
10.24    Form of Amended and Restated Non-Qualified Stock Option Agreement pursuant to the 2004 LTIP (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q (Commission File Number 001-07959) for the period ended June 30, 2006 (the 2006 Form 10-Q2”)). *
10.25    Form of Amended and Restated Restricted Stock Agreement pursuant to the 2004 LTIP (incorporated by reference to Exhibit 10.2 to the 2006 Form 10-Q2). *
10.26    Form of 2013 Performance Share Agreement pursuant to the 2004 LTIP (incorporated by reference to Exhibit 10.24 to the 2013 Form 10-K). *
10.27    Form of 2013 Restricted Stock Award Agreement pursuant to the 2004 LTIP (incorporated by reference to Exhibit 10.24 to the 2013 Form 10-K). *
10.28    Annual Incentive Plan for Certain Executives, amended and restated as of December 2008 (incorporated by reference to Exhibit 10.2 to the January 2009 Form 8-K). *
10.29    Starwood Hotels & Resorts Worldwide, Inc. Amended and Restated Deferred Compensation Plan, effective as of January 22, 2008 (incorporate by reference to Exhibit 10.35 to the Company’s Annual Report on Form 10-K (Commission File Number 001-07959) for the fiscal year ended December 31, 2007). *
10.30    Starwood Hotels & Resorts Worldwide, Inc. 2013 Long-Term Incentive Compensation Plan (“2013 LTIP”) (incorporated by reference to Exhibit 4.4 to the Company’s Registration Statement on Form S-8 (Commission File Number 333-189674) filed June 28, 2013). *

 

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Exhibit
Number

  

Description of Exhibit

10.31    Form of Indemnification Agreement between the Company and each of its Directors and executive officers (incorporated by reference to Exhibit 10.10 to the Company’s Current Report on Form 8-K (Commission File Number 001-07959) filed with the SEC on November 25, 2009). *
10.32    Separation Agreement and General Release, dated February 16, 2015, between the Company and Frits van Paasschen (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 18, 2015). *
10.33    Form of Non-Qualified Stock Option Agreement between the Company and Frits van Paasschen pursuant to the 2004 LTIP (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q (Commission File Number 001-07959) for the period ended September 30, 2007 (the “2007 Form 10-Q3”)). *
10.34    Employment Agreement, dated as of November 13, 2003, between the Company and Vasant Prabhu (incorporated by reference to Exhibit 10.68 to the Company’s Annual Report on Form 10-K (Commission File Number 001-07959) for the fiscal year ended December 31, 2003). *
10.35    Letter Agreement, dated August 14, 2007, between the Company and Vasant Prabhu (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K (Commission File Number 001-07959) filed with the SEC on August 17, 2007 (the “August 17 Form 8-K”)). *
10.36    Amendment, dated as of December 30, 2008, to employment agreement between the Company and Vasant Prabhu (incorporated by reference to Exhibit 10.34 to the Company’s Annual Report on Form 10-K (Commission File Number 001-07959) for the fiscal year ended December 31, 2008 (the “2008 Form 10-K”)). *
10.37    Employment Agreement, dated as of September 25, 2000, between the Company and Kenneth Siegel (incorporated by reference to Exhibit 10.57 to the Company’s Annual Report on Form 10-K (Commission File Number 001-07959) for the fiscal year ended December 31, 2000). *
10.38    Letter Agreement, dated July 22, 2004 between the Company and Kenneth Siegel (incorporated by reference to Exhibit 10.73 to the 2004 Form 10-K). *
10.39    Amendment, dated as of December 30, 2008, to employment agreement between the Company and Kenneth S. Siegel (incorporated by reference to Exhibit 10.43 to the 2008 Form 10-K). *
10.40    Employment Agreement, dated as of August 2, 2007, between the Company and Bruce W. Duncan (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q (Commission File Number 001-07959) for the quarterly period ended June 30, 2007). *
10.41    Form of Restricted Stock Unit Agreement between the Company and Bruce W. Duncan pursuant to the 2004 LTIP (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q (Commission File Number 001-07959) for the period ended March 31, 2007). *
10.42    Amended and Restated Employment Agreement, dated as of April 18, 2013, by and between Starwood Hotels & Resorts Worldwide, Inc. and Frits van Paasschen (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (Commission File Number 001-07959) filed with the SEC on April 24, 2013). *
10.43    Form of Restricted Stock Unit Agreement between the Company and Frits van Paasschen pursuant to the 2004 LTIP (incorporated by reference to Exhibit 10.6 to the 2007 Form 10-Q3). *
10.44    Form of Restricted Stock Grant between the Company and Frits van Paasschen pursuant to the 2004 LTIP (incorporated by reference to Exhibit 10.7 to the 2007 Form 10-Q3). *
10.45    Form of Severance Agreement between the Company and each of Messrs. Siegel and Prabhu (incorporated by reference to Exhibit 10.57 to the 2008 Form 10-K). *
10.46    Letter Agreement, dated August 22, 2008, between the Company and Matthew Avril (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q (Commission File Number 001-07959) for the quarterly period ended March 31, 2009 (the “2009 Form 10-Q1”). *
10.47    Amendment, dated as of December 30, 2008, to employment agreement between the Company and Matthew Avril (incorporated by reference to Exhibit 10.2 to the 2009 Form 10-Q1). *
10.48    Amendment, dated as of December 15, 2011, to employment agreement between the Company and Matthew Avril (incorporated by reference to Exhibit 10.41 to the Company’s Annual Report on Form 10-K (Commission File Number 001-07959) for the fiscal year ended December 31, 2011). *

 

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Exhibit
Number

  

Description of Exhibit

10.49    Amended and Restated Severance Agreement, dated as of December 30, 2008, between the Company and Matthew Avril (incorporated by reference to Exhibit 10.3 to the 2009 Form 10-Q1). *
10.50    Retirement Agreement and Mutual General Release of Claims by and between Starwood International Licensing Company, S.A.R.L., Starwood Hotels & Resorts Worldwide, Inc. and Matthew E. Avril, dated as of April 12, 2012 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (Commission File Number 001-07959) filed with the SEC April 16, 2012). *
10.51    Letter Agreement, dated April 15, 2008, between the Company and Simon Turner (incorporated by reference to Exhibit 10.7 to the 2009 Form 10-Q1). *
10.52    Amendment, dated as of December 30, 2008, to employment agreement between the Company and Simon Turner (incorporated by reference to Exhibit 10.8 to the 2009 Form 10-Q1). *
10.53    Amended and Restated Severance Agreement, dated as of December 30, 2008, between the Company and Simon Turner (incorporated by reference to Exhibit 10.9 to the 2009 Form 10-Q1). *
10.54    Employment Agreement, dated August 27, 2012, between the Company and Sergio Rivera (incorporated by reference to Exhibit 10.24 to the 2013 Form 10-K). *
10.55    Severance Agreement, dated August 27, 2012, between the Company and Sergio Rivera (incorporated by reference to Exhibit 10.24 to the 2013 Form 10-K). *
10.56    Starwood Savings Restoration Plan (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q (Commission File Number 001-07959) for the quarterly period ended September 30, 2013). *
10.57    Employment Agreement, dated May 7, 2014, between the Company and Martha Poulter (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q (Commission File Number 001-07959) for the quarterly period ended June 30, 2014 (the “2014 Form 10-Q2”)). *
10.58    Severance Agreement, dated May 7, 2014, between the Company and Martha Poulter (incorporated by reference to Exhibit 10.2 to the 2014 Form 10-Q2). *
10.59    Form of Restricted Stock Award Agreement pursuant to the 2013 LTIP (incorporated by reference to Exhibit 10.3 to the 2014 Form 10-Q2). *
10.60    Employment Agreement, dated August 18, 2014, between the Company and Thomas B. Mangas (including the Non-Compete, Non-Solicitation, Confidentiality and Intellectual Property Agreement between the Company and Thomas B. Mangas) (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (Commission File Number 001-07959) filed with the SEC on August 27, 2014 (the “August 27 Form 8-K”)). *
10.61    Severance Agreement, dated August 18, 2014, between the Company and Thomas B. Mangas (incorporated by reference to Exhibit 10.2 to the August 27 Form 8-K). *
10.62    Form of Restricted Stock Award Retention Agreement Pursuant to the 2013 LTIP (incorporated by reference to Exhibit 10.3 to the 2014 Form 10-Q3). *
12.1    Calculation of Ratio of Earnings to Total Fixed Charges. +
21.1    List of our Subsidiaries. +
23.1    Consent of Ernst & Young LLP. +
31.1    Certification Pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 — Chief Executive Officer. +
31.2    Certification Pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 — Chief Financial Officer. +
32.1    Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code — Chief Executive Officer. +
32.2    Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code — Chief Financial Officer. +

 

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Exhibit
Number

  

Description of Exhibit

101    The following materials from Starwood Hotels & Resorts Worldwide, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2014 formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Equity, (v) the Consolidated Statements of Cash Flows, and (vi) notes to the consolidated financial statements. +

 

+ Filed herewith.

 

* Indicates management contract or compensatory plan or arrangement

The registrant hereby agrees to file with the Commission a copy of any instrument defining the rights of long-term debt holders of the registrant and its consolidated subsidiaries upon the request of the Commission.

 

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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 WORLDWIDE, INC.
    By:   /S/     ADAM M. ARON
      Adam M. Aron
      Interim Chief Executive Officer and Director
    Date: February 25, 2015

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

/S/    ADAM M. ARON

  

Interim Chief Executive Officer and

Director

   February 25, 2015
Adam M. Aron      
/S/    BRUCE W. DUNCAN    Chairman and Director    February 25, 2015
Bruce W. Duncan      
/S/    THOMAS B. MANGAS    Executive Vice President and Chief    February 25, 2015
Thomas B. Mangas    Financial Officer   
/S/    ALAN M. SCHNAID    Senior Vice President, Corporate    February 25, 2015
Alan M. Schnaid    Controller and Principal Accounting Officer   
/S/    CHARLENE BARSHEFSKY    Director    February 25, 2015
Charlene Barshefsky      
/S/    THOMAS E. CLARKE    Director    February 25, 2015
Thomas E. Clarke      
/S/    CLAYTON C. DALEY, JR.    Director    February 25, 2015
Clayton C. Daley, Jr.      
/S/    LIZANNE GALBREATH    Director    February 25, 2015
Lizanne Galbreath      
/S/    ERIC HIPPEAU    Director    February 25, 2015
Eric Hippeau      
/S/    AYLWIN B. LEWIS    Director    February 25, 2015
Aylwin B. Lewis      
/S/    STEPHEN R. QUAZZO    Director    February 25, 2015
Stephen R. Quazzo      
/S/    THOMAS O. RYDER    Director    February 25, 2015
Thomas O. Ryder      

 

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STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

INDEX TO FINANCIAL STATEMENTS AND SCHEDULE

 

     Page  

Management’s Report on Internal Control over Financial Reporting

     F-2   

Report of Independent Registered Public Accounting Firm

     F-3   

Report of Independent Registered Public Accounting Firm

     F-4   

Consolidated Balance Sheets as of December 31, 2014 and 2013

     F-5   

Consolidated Statements of Income for the Years Ended December 31, 2014, 2013 and 2012

     F-6   

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2014, 2013 and 2012

     F-7   

Consolidated Statements of Equity for the Years Ended December 31, 2014, 2013 and 2012

     F-8   

Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2013 and 2012

     F-9   

Notes to Financial Statements

     F-10   

Schedule:

  

Schedule II — Valuation and Qualifying Accounts

     S-1   

 

F-1


Table of Contents

Management’s Report on Internal Control over Financial Reporting

Management of Starwood Hotels & Resorts Worldwide, Inc. and its subsidiaries (“Company”) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) or 15d-15(f).

Our management assessed the effectiveness of the Company’s internal controls over financial reporting as of December 31, 2014. In making this assessment, the Company’s management used the criteria established in Internal Control-Integrated Framework (2013) 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, 2014, 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 consolidated 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


Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of Starwood Hotels & Resorts Worldwide, Inc.

We have audited Starwood Hotels & Resorts Worldwide, Inc.’s (the “Company”) internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (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 accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility 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 assurance regarding prevention or timely detection of 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, internal control over financial reporting may not prevent or detect 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, 2014, 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, 2014 and 2013 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, 2014 of the Company and our report dated February 25, 2015 expressed an unqualified opinion thereon.

/s/    Ernst & Young LLP

Stamford, Connecticut

February 25, 2015

 

F-3


Table of Contents

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, 2014 and 2013, 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, 2014. 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, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, 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.

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, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 25, 2015 expressed an unqualified opinion thereon.

/s/    Ernst & Young LLP

Stamford, Connecticut

February 25, 2015

 

F-4


Table of Contents

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except share data)

 

     December 31,  
     2014     2013  
ASSETS   

Current assets:

    

Cash and cash equivalents

   $ 935      $ 616   

Restricted cash

     84        134   

Accounts receivable, net of allowance for doubtful accounts of $63 and $59

     661        643   

Inventories

     236        217   

Securitized vacation ownership notes receivable, net of allowance for doubtful accounts of $4 and $6

     47        54   

Deferred income taxes

     199        211   

Prepaid expenses and other

     159        121   
  

 

 

   

 

 

 

Total current assets

     2,321        1,996   

Investments

     214        251   

Plant, property and equipment, net

     2,634        3,034   

Goodwill and intangible assets, net

     1,956        2,032   

Deferred income taxes

     596        591   

Other assets

     711        543   

Securitized vacation ownership notes receivable, net

     227        315   
  

 

 

   

 

 

 
   $ 8,659      $ 8,762   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY   

Current liabilities:

    

Short-term borrowings and current maturities of long-term debt

   $ 297      $ 2   

Accounts payable

     101        105   

Current maturities of long-term securitized vacation ownership debt

     73        97   

Accrued expenses

     1,307        1,092   

Accrued salaries, wages and benefits

     416        404   

Accrued taxes and other

     256        224   
  

 

 

   

 

 

 

Total current liabilities

     2,450        1,924   

Long-term debt

     2,398        1,265   

Long-term securitized vacation ownership debt

     176        258   

Deferred income taxes

     38        48   

Other liabilities

     2,069        1,904   
  

 

 

   

 

 

 
     7,131        5,399   
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholders’ equity:

    

Common stock; $0.01 par value; authorized 1,000,000,000 shares; outstanding 172,694,299 and 191,897,809 shares at December 31, 2014 and 2013, respectively

     2        2   

Additional paid-in capital

     47        661   

Accumulated other comprehensive loss

     (508     (335

Retained earnings

     1,984        3,032   
  

 

 

   

 

 

 

Total Starwood stockholders’ equity

     1,525        3,360   

Noncontrolling interest

     3        3   
  

 

 

   

 

 

 

Total equity

     1,528        3,363   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 8,659      $ 8,762   
  

 

 

   

 

 

 

The accompanying notes to financial statements are an integral part of the above statements.

 

F-5


Table of Contents

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In millions, except per share data)

 

         Year Ended December 31,      
       2014         2013         2012    

Revenues

      

Owned, leased and consolidated joint venture hotels

   $ 1,541      $ 1,612      $ 1,698   

Vacation ownership and residential sales and services

     674        924        1,287   

Management fees, franchise fees and other income

     1,057        965        888   

Other revenues from managed and franchised properties

     2,711        2,614        2,448   
  

 

 

   

 

 

   

 

 

 
     5,983        6,115        6,321   

Costs and Expenses

      

Owned, leased and consolidated joint venture hotels

     1,211        1,292        1,391   

Vacation ownership and residential

     497        632        961   

Selling, general, administrative and other

     402        384        370   

Restructuring and other special charges (credits), net

     (4     1        (12

Depreciation

     254        239        226   

Amortization

     29        28        25   

Other expenses from managed and franchised properties

     2,711        2,614        2,448   
  

 

 

   

 

 

   

 

 

 
     5,100        5,190        5,409   

Operating income

     883        925        912   

Equity earnings and gains from unconsolidated ventures, net

     27        26        25   

Interest expense, net of interest income of $3, $3 and $2

     (94     (100     (170

Loss on early extinguishment of debt, net

     (1            (128

Loss on asset dispositions and impairments, net

     (33     (23     (21
  

 

 

   

 

 

   

 

 

 

Income from continuing operations before taxes and noncontrolling interests

     782        828        618   

Income tax expense

     (139     (263     (148
  

 

 

   

 

 

   

 

 

 

Income from continuing operations

     643        565        470   

Discontinued operations:

      

Loss from operations, net of tax (benefit) expense of $0, $0 and $0

            (1       

Gain (loss) on dispositions, net of tax (benefit) expense of $(5), $(69) and $87

     (10     71        92   
  

 

 

   

 

 

   

 

 

 

Net income attributable to Starwood

   $ 633      $ 635      $ 562   
  

 

 

   

 

 

   

 

 

 

Earnings (Losses) Per Share — Basic

      

Continuing operations

   $ 3.49      $ 2.96      $ 2.44   

Discontinued operations

     (0.06     0.37        0.48   
  

 

 

   

 

 

   

 

 

 

Net income

   $ 3.43      $ 3.33      $ 2.92   
  

 

 

   

 

 

   

 

 

 

Earnings (Losses) Per Share — Diluted

      

Continuing operations

   $ 3.46      $ 2.92      $ 2.39   

Discontinued operations

     (0.06     0.36        0.47   
  

 

 

   

 

 

   

 

 

 

Net income

   $ 3.40      $ 3.28      $ 2.86   
  

 

 

   

 

 

   

 

 

 

Weighted average number of shares

     185        191        193   
  

 

 

   

 

 

   

 

 

 

Weighted average number of shares assuming dilution

     186        193        197   
  

 

 

   

 

 

   

 

 

 

Dividends declared per share

   $ 4.00      $ 1.35      $ 1.25   
  

 

 

   

 

 

   

 

 

 

The accompanying notes to financial statements are an integral part of the above statements.

 

F-6


Table of Contents

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

 

     Year Ended December 31,  
       2014         2013         2012    

Net income

   $ 633      $ 635      $ 562   

Other comprehensive income (loss), net of taxes:

      

Foreign currency translation adjustments

     (162     (20     25   

Defined benefit pension and postretirement plans activity

     (13     22        (11

Cash flow hedges net gains (losses)

     3        1        (4
  

 

 

   

 

 

   

 

 

 
     (172     3        10   

Comprehensive income

     461        638        572   

Comprehensive (income) loss attributable to noncontrolling interests

                     

Foreign currency translation adjustments attributable to noncontrolling interests

     (1              
  

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Starwood

   $ 460      $ 638      $ 572   
  

 

 

   

 

 

   

 

 

 

The accompanying notes to financial statements are an integral part of the above statements.

 

F-7


Table of Contents

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

CONSOLIDATED STATEMENTS OF EQUITY