STARWOOD HOTEL & RESORTS WORLDWIDE, INC - FORM 10-Q

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EX-32.1 - EX-32.1 - STARWOOD HOTEL & RESORTS WORLDWIDE, INC	p15700exv32w1.htm
EX-32.2 - EX-32.2 - STARWOOD HOTEL & RESORTS WORLDWIDE, INC	p15700exv32w2.htm
EX-31.2 - EX-31.2 - STARWOOD HOTEL & RESORTS WORLDWIDE, INC	p15700exv31w2.htm
EX-31.1 - EX-31.1 - STARWOOD HOTEL & RESORTS WORLDWIDE, INC	p15700exv31w1.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

		For the Quarterly Period Ended September 30, 2009

		OR

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

		For the Transition Period from to

Commission File 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.)

1111 Westchester Avenue
White Plains, NY 10604
(Address of principal executive
offices, including zip code)

(914) 640-8100
(Registrant’s telephone number,
including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer þ	Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

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

Indicate the number of shares outstanding of the issuer’s classes of common stock, as of the latest practicable date:

187,009,911 shares of common stock, par value $0.01 per share, outstanding as of October 26, 2009.

TABLE OF CONTENTS


		Page
	PART I. Financial Information

Item 1.	Financial Statements	2
	Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008	3
	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2009 and 2008	4
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2009 and 2008	5
	Consolidated Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	42
Item 4.	Controls and Procedures	42

	PART II. Other Information

Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 6.	Exhibits	43

PART I. FINANCIAL INFORMATION


Item 1.		*Financial Statements.*

The following unaudited consolidated financial statements of Starwood Hotels & Resorts Worldwide, Inc. (the “Company”) are provided pursuant to the requirements of this Item. In the opinion of management, all adjustments necessary for fair presentation, consisting of normal recurring adjustments, have been included. The consolidated financial statements presented herein have been prepared in accordance with the accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009. See the notes to consolidated financial statements for the basis of presentation. Certain reclassifications have been made to the prior years’ financial statements to conform to the current year presentation. The consolidated financial statements should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this filing. Results for the three and nine months ended September 30, 2009 are not necessarily indicative of results to be expected for the full fiscal year ending December 31, 2009.

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

CONSOLIDATED BALANCE SHEETS
(In millions, except Share data)


	September 30,			December 31,
	2009			2008
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	113		$	389
Restricted cash		35			96
Accounts receivable, net of allowance for doubtful accounts of $60 and $49		466			552
Inventories		1,048			986
Prepaid expenses and other		136			143

Total current assets		1,798			2,166
Investments		335			372
Plant, property and equipment, net		3,475			3,599
Assets held for sale		82			10
Goodwill and intangible assets, net		2,190			2,235
Deferred tax assets		753			639
Other assets		641			682

	$	9,274		$	9,703


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term borrowings and current maturities of long-term debt	$	5		$	506
Accounts payable		130			171
Accrued expenses		1,164			1,274
Accrued salaries, wages and benefits		310			346
Accrued taxes and other		360			391

Total current liabilities		1,969			2,688
Long-term debt		3,357			3,502
Deferred income taxes		29			26
Other liabilities		1,977			1,843
		7,332			8,059

Commitments and contingencies
Stockholders’ equity:
Common stock; $0.01 par value; authorized 1,000,000,000 shares; outstanding 186,854,626 and 182,827,483 shares at September 30, 2009 and December 31, 2008, respectively		2			2
Additional paid-in capital		528			493
Accumulated other comprehensive loss		(307	)		(391	)
Retained earnings		1,698			1,517

Total Starwood stockholders’ equity		1,921			1,621
Noncontrolling interest		21			23

Total equity		1,942			1,644

	$	9,274		$	9,703

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

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per Share data)
(Unaudited)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
Revenues
Owned, leased and consolidated joint venture hotels	$	396		$	575		$	1,176		$	1,755
Vacation ownership and residential sales and services (includes loss of $2 in the nine months ended September 30, 2009 relating to note sale)		126			226			387			613
Management fees, franchise fees and other income		181			218			533			642
Other revenues from managed and franchised properties		515			516			1,459			1,564

		1,218			1,535			3,555			4,574
Costs and Expenses
Owned, leased and consolidated joint venture hotels		330			437			993			1,329
Vacation ownership and residential		102			155			306			472
Selling, general, administrative and other		102			113			291			381
Restructuring and other special charges (credits), net		2			22			24			32
Depreciation		71			73			213			216
Amortization		11			10			25			26
Other expenses from managed and franchised properties		515			516			1,459			1,564

		1,133			1,326			3,311			4,020
Operating income		85			209			244			554
Equity (losses) earnings and gains and (losses) from unconsolidated ventures, net		(3	)		3			(5	)		14
Interest expense, net of interest income of $0, $0, $2 and $3		(60	)		(48	)		(156	)		(150	)
(Loss) gain on asset dispositions and impairments, net		(27	)		(12	)		(66	)		(12	)

(Loss) income from continuing operations before taxes		(5	)		152			17			406
Income tax benefit (expense)		46			(38	)		160			(106	)

Income from continuing operations		41			114			177			300
Discontinued operations:
Gain (loss) on dispositions, net of tax benefit (expense) of $(1), $0, $1 and $(49)		(1	)		—			1			(49	)

Net income		40			114			178			251
Net loss (income) attributable to noncontrolling interests		—			(1	)		2			(1	)

Net income attributable to Starwood	$	40		$	113		$	180		$	250


Earnings (Loss) Per Share — Basic
Continuing operations	$	0.22		$	0.63		$	0.99		$	1.64
Discontinued operations		—			—			0.01			(0.27	)

Net income	$	0.22		$	0.63		$	1.00		$	1.37


Earnings (Loss) per Share — Diluted
Continuing operations	$	0.22		$	0.62		$	0.98		$	1.60
Discontinued operations		—			—			0.01			(0.27	)

Net income	$	0.22		$	0.62		$	0.99		$	1.33


Amounts attributable to Starwood’s Common Shareholders
Income from continuing operations	$	41		$	113		$	179		$	299
Discontinued operations		(1	)		—			1			(49	)

Net income	$	40		$	113		$	180		$	250


Weighted average number of shares		180			180			180			182

Weighted average number of shares assuming dilution		185			183			183			186

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

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
Net income	$	40		$	114		$	178		$	251
Other comprehensive income (loss), net of taxes:
Foreign currency translation adjustments		53			(122	)		75			(71	)
Pension liability adjustments		2			—			15			(6	)
Change in fair value of derivatives		(4	)		8			(6	)		5
Change in fair value of investments		—			(1	)		1			2

		51			(115	)		85			(70	)

Comprehensive income (loss)		91			(1	)		263			181
Comprehensive (income) loss attributable to noncontrolling interests		(1	)		(1	)		1			(1	)


Comprehensive income (loss) attributable to Starwood	$	90		$	(2	)	$	264		$	180

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

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)


	Nine Months Ended
	September 30,
	2009			2008
Operating Activities
Net income	$	178		$	251
Adjustments to net income:
Discontinued operations:
(Gain) loss on dispositions, net		(1	)		49
Depreciation and amortization		238			242
Amortization of deferred gains		(61	)		(63	)
Non-cash portion of restructuring and other special charges (credits), net		1			5
(Gain) loss on asset dispositions and impairments, net		66			12
Stock-based compensation expense		39			56
Excess stock based compensation		—			(15	)
Distributions in excess of equity earnings		28			16
(Gain) loss on the sale of VOI notes receivable		(1	)		(3	)
Non-cash portion of income tax (benefit) expense		(128	)		31
Other non-cash adjustments to net income		57			24
Decrease (increase) in restricted cash		58			3
Other changes in working capital		(97	)		(79	)
VOI notes receivable activity, net		36			(122	)
Accrued and deferred income taxes and other		(66	)		63

Cash (used for) from operating activities		347			470


Investing Activities
Purchases of plant, property and equipment		(144	)		(337	)
Proceeds from asset sales, net of transaction costs		98			14
(Issuance) collection of notes receivable, net		(1	)		2
Proceeds from investments, net		25			24
Other, net		(14	)		(16	)

Cash (used for) from investing activities		(36	)		(313	)


Financing Activities
Revolving credit facility and short-term borrowings (repayments), net		(56	)		(501	)
Long-term debt issued		482			977
Long-term debt repaid		(1,080	)		(3	)
Dividends paid		(165	)		(172	)
Proceeds from employee stock option exercises		1			120
Excess stock based compensation		—			15
Share repurchases		—			(593	)
Other, net		227			(26	)

Cash (used for) from financing activities		(591	)		(183	)

Exchange rate effect on cash and cash equivalents		4			(6	)

(Decrease) increase in cash and cash equivalents		(276	)		(32	)
Cash and cash equivalents — beginning of period		389			151

Cash and cash equivalents — end of period	$	113		$	119


Supplemental Disclosures of Cash Flow Information
Cash paid (received) during the period for:
Interest	$	108		$	116

Income taxes, net of refunds	$	(9	)	$	90

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

Note 1. Basis of Presentation

The accompanying consolidated financial statements represent the consolidated financial position and consolidated results of operations of Starwood Hotels & Resorts Worldwide, Inc. and its subsidiaries (the “Company” or “Starwood”).

The consolidated financial statements include the accounts of the Company and all of its controlled subsidiaries and partnerships. In consolidating, all material intercompany transactions are eliminated. We have evaluated all subsequent events through October 30, 2009, the date the consolidated financial statements were filed.

Starwood is one of the world’s largest hotel and leisure companies. The Company’s principal business is hotels and leisure, which is comprised of a worldwide hospitality network of approximately 980 full-service hotels, vacation ownership resorts and residential developments primarily serving two markets: luxury and upscale. The principal operations of Starwood Vacation Ownership, Inc. (“SVO”) include the acquisition, development and operation of vacation ownership resorts; marketing and selling vacation ownership interests (“VOIs”) in the resorts; and providing financing to customers who purchase such interests.

Note 2. Recently Issued Accounting Standards

Adopted Accounting Standards

In August 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2009-05, which supplements the guidance included in the FASB Accounting Standards Codification (“Codification”), Accounting Standards Codification (“ASC”) 820, Fair Value Measurements. This ASU clarifies how an entity should measure the fair value of liabilities and that the restrictions on the transfer of a liability should not be included in its fair value measurement. The effective date of this ASU is the first reporting period after August 26, 2009. The Company adopted this topic on September 30, 2009 and it had no effect on the Company’s consolidated financial statements.

In June 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards Codification ™ and the Hierarchy of Generally Accepted Accounting Principles a Replacement of FASB Statement No. 162” (“SFAS No. 168”), included in the Codification as ASC 105, Generally Accepted Accounting Principles. This topic is the source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in accordance with generally accepted accounting principles. This topic is effective for interim and annual reporting periods ending after September 15, 2009. The Company adopted this topic on September 30, 2009 and it had no effect on the Company’s consolidated financial statements.

In April 2009, the FASB issued FASB Staff Position (“FSP”) Issue No. Financial Accounting Standard (“FAS”) No. 157-4 “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions that are not Orderly” (“FSP FAS No. 157-4”), included in the Codification as ASC 820-10-65-4. This topic provides additional guidance for estimating fair value and is effective in reporting periods ending after June 15, 2009. On June 30, 2009, the Company adopted this topic, which did not have a material impact on its consolidated financial statements.

In April 2009, the FASB issued FSP No. FAS No. 107-1 and Accounting Principles Board (“APB”) No. 28-1 “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS No. 107-1 and APB No 28-1”), included in the Codification as ASC 825-10-65-1. This topic requires disclosures about the fair value of financial instruments for annual and interim reporting periods of publicly traded companies and is effective in reporting periods ending after June 15, 2009. On June 30, 2009, the Company adopted this topic, which did not have a material impact on its consolidated financial statements.

In April 2009, the FASB issued FSP Issue No. FAS No. 115-2 and FAS No. 124-2 “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS No. 115-2 and 124-2”), included in the Codification as ASC 320-10-65-1. This topic amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This topic is effective in reporting periods ending after June 15, 2009. On June 30, 2009, the Company adopted this topic, which did not have a material impact on its consolidated financial statements.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS No. 165”), included in the Codification as ASC 855, Subsequent Events. This topic establishes the period in which management of a reporting entity should evaluate events and transactions for recognition or disclosure in the financial statements. It also describes the circumstances under which an entity should recognize events or transactions that occur after the balance sheet date. This topic is effective for interim and annual reporting periods ending after June 15, 2009. On June 30, 2009, the Company adopted this topic, which did not have a material effect on its consolidated financial statements.

In June 2008, the FASB ratified FSP Issue No. Emerging Issues Task Force (“EITF”) 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities” (FSP No. EITF 03-6-1), included in the Codification as ASC 260-10-45-68B. This topic addresses whether instruments granted in share-based payment awards are participating securities prior to vesting and, therefore, must be included in the earnings allocation in calculating earnings per share under the two-class method. This topic requires that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend-equivalents be treated as participating securities in calculating earnings per share. This topic is effective for the Company beginning with the first interim period ending after December 15, 2008, and will be applied retrospectively to all prior periods. On January 1, 2009 the Company adopted this topic, which did not have an impact on its consolidated financial statements.

In April 2008, the FASB issued FSP No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP No. 142-3”), included in the Codification as ASC 350-30-50-4. This topic amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. This topic is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. On January 1, 2009, the Company adopted this topic, which did not have any impact on its consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133” (“SFAS No. 161”), included in the Codification as ASC 815-10-65-1. This topic requires enhanced disclosure related to derivatives and hedging activities. This topic must be applied prospectively to all derivative instruments and non-derivative instruments that are designated and qualify as hedging instruments and related hedged items for all financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company adopted this topic on January 1, 2009. See Note 12 for enhanced disclosures associated with the adoption.

Effective January 1, 2008, the Company adopted SFAS No. 157 related to its financial assets and liabilities and elected to defer the option of SFAS No. 157 for non-financial assets and non-financial liabilities as allowed by FSP No. SFAS 157-2 “Effective Date of FASB Statement No. 157,” which was issued in February 2008, included in the Codification as ASC 820, Fair Value Measurements and Disclosures. This topic defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value as follows:

	•		Level 1 — Quoted prices in active markets for identical assets or liabilities.

	•		Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

	•		Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

On January 1, 2009, the Company adopted the provisions of this topic relating to non-financial assets and non-financial liabilities. The adoption of this statement did not have a material impact on the Company’s consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”), which is a revision of SFAS 141, “Business Combinations”, included in the Codification as ASC 805-10-05-2. The primary requirements of this topic are as follows: (i.) Upon initially obtaining control, the acquiring entity in a business combination must recognize 100% of the fair values of the acquired assets, including goodwill, and assumed liabilities, with only limited exceptions even if the acquirer has not acquired 100% of its target. As a consequence, the current step acquisition model will be eliminated. (ii.) Contingent consideration arrangements will be fair valued at the acquisition date and included on that basis in the purchase price consideration. The concept of recognizing contingent consideration at a later date when the amount of that consideration is determinable beyond a reasonable doubt, will no longer be applicable. (iii.) All transaction costs will be expensed as incurred. This topic is effective as of the beginning of an entity’s first fiscal year beginning after December 15, 2008. The Company adopted this topic on January 1, 2009 and it did not have an impact on its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements — An Amendment of ARB No. 51, or SFAS No. 160” (“SFAS No. 160”), included in the Codification as ASC 810-10-65-1. This topic establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. Among other items, it requires that equity attributable to non-controlling interests be recognized in equity separate from that of the Company’s and that consolidated net income now includes the results of operations attributable to non-controlling interests. The Company adopted this topic on January 1, 2009 and it did not have a material impact on the Company’s consolidated financial statements. See the financial statements and Note 17 for the presentation and disclosure provisions.

Future Adoption of Accounting Standards

In January 2009, the FASB issued FSP Issue No. FAS No. 132(R)-1 “Employers Disclosures about Pensions and Other Postretirement Benefit Plan Assets” (“FSP FAS No. 132(R)-1”), included in the Codification as ASC 715-20-65-2. This topic provides guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. This topic is effective for fiscal years ending after December 15, 2009. The Company is currently evaluating the impact that this topic will have on its consolidated financial statements.

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140” (“SFAS No. 166”), expected to be included in the Codification as ASC 860, Transfers and Servicing. This topic improves the comparability of information that a reporting entity provides regarding transfers of financial assets and the effects on its financial statements. This topic is effective for interim and annual reporting periods ending after November 15, 2009. The Company is currently evaluating the effect that this topic will have on its consolidated financial statements.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS No. 167”), expected to be included in the Codification as ASC 810, Consolidation. This topic changes the consolidation guidance applicable to a variable interest entity. Among other things, it requires a qualitative analysis to be performed in determining whether an enterprise is the primary beneficiary of a variable interest entity. This topic is effective for interim and annual reporting periods ending after November 15, 2009. The Company has estimated that the adoption of this topic will require consolidation of its existing securitized loan vehicles as of September 30, 2009 resulting in additional assets of $225 million to $250 million, and liabilities will increase $250 million to $275 million. Additionally, vacation ownership pretax earnings are estimated to increase by $10 million to $15 million for 2010. The Company is still evaluating other aspects of the topic.

In October 2009, the FASB issued ASU 2009-13 which supersedes certain guidance in ASC 605-25, Revenue Recognition — Multiple Element Arrangements. This topic requires an entity to allocate arrangement consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. This topic is effective for annual reporting periods beginning after June 15, 2010. The Company is currently evaluating the impact that this topic will have on its consolidated financial statements.

Note 3. Earnings Per Share

Basic and diluted earnings per share are calculated using income from continuing operations attributable to Starwood’s common shareholders (i.e. excluding amounts attributable to non-controlling interests).

The following is a reconciliation of basic earnings per share to diluted earnings per share for income from continuing operations (in millions, except per Share data):


	Three Months Ended September 30,
	2009						2008
	Earnings		Shares		Per Share		Earnings		Shares		Per Share


Basic earnings from continuing operations	$	41		180	$	0.22	$	113		180	$	0.63
Effect of dilutive securities:
Employee stock options and restricted stock awards		—		5				—		3

Diluted earnings from continuing operations	$	41		185	$	0.22	$	113		183	$	0.62


	Nine Months Ended September 30,
	2009						2008
	Earnings		Shares		Per Share		Earnings		Shares		Per Share


Basic earnings from continuing operations	$	179		180	$	0.99	$	299		182	$	1.64
Effect of dilutive securities:
Employee stock options and restricted stock awards		—		3				—		4

Diluted earnings from continuing operations	$	179		183	$	0.98	$	299		186	$	1.60

Approximately 7,755,000 and 7,719,000 shares for the three months ended September 30, 2009 and 2008 and 9,699,000 and 5,728,000 shares for the nine months ended September 30, 2009 and 2008, respectively, were excluded from the computation of diluted shares, as their impact would have been anti-dilutive.

Note 4. Asset Dispositions and Impairments

During the third quarter of 2009, the Company sold a wholly-owned hotel for cash proceeds of approximately $90 million. This sale was subject to a long-term management contract, and the Company recorded a deferred gain of $8 million in connection with the sale. Also during the quarter, the Company sold another wholly-owned hotel for cash proceeds of approximately $6 million. The Company recorded a loss of approximately $3 million on this sale. Additionally, the Company recorded a $13 million impairment of an investment in a hotel management contract expected to be cancelled in the near term, a $6 million impairment of the Company’s retained economic interests in securitized loans (see Note 7), and a $3 million impairment of a property which is no longer in operation.

During the second quarter of 2009, the Company sold a wholly-owned hotel for cash proceeds of approximately $4 million. The Company recorded a loss of approximately $3 million on the sale. Also during the second quarter of 2009, the Company terminated the lease of a hotel prior to its original term. As a result, the Company wrote down its leasehold improvements to fair value, resulting in an impairment charge of $10 million.

During the first quarter of 2009, the Company sold a wholly-owned hotel in exchange for a long-term agreement to manage the hotel. The Company recorded a loss of approximately $5 million on the sale.

During the third quarter of 2008, the Company recorded losses of $16 million primarily related to the impairment of two separate investments in which the Company held minority interests, offset, in part, by a gain of approximately $4 million associated with the sale of one wholly-owned hotel for $15 million in cash.

Note 5. Assets Held for Sale

During the third quarter of 2009, the Company entered into purchase and sale agreements for the sale of certain non-core assets for total expected cash consideration of approximately $125 million. The Company received non-refundable deposits from the prospective buyers in these two separate transactions during the quarter. The Company

classified these assets and the estimated goodwill to be allocated as assets held for sale and ceased depreciating them.

During the first quarter of 2008, the Company entered into a purchase and sale agreement for the sale of a hotel for total consideration of $10 million. The Company received a non-refundable deposit from the prospective buyer during the first quarter of 2008. The Company recorded an impairment charge of approximately $1 million in the first quarter of 2008 related to this hotel. In December 2008, the Company and prospective buyer agreed to extend the closing period for up to 12 months and the prospective buyer paid the Company an incremental non-refundable deposit of approximately $2 million. During the second quarter of 2009, the agreement was terminated, and as a result, this hotel was reclassified as held for use.

Note 6.Other Assets

Other assets include the following (in millions):


	September 30,		December 31,
	2009		2008
VOI notes receivable, net	$	356	$	444
Other notes receivable, net		36		32
Prepaid taxes		127		130
Deposits and other		122		76

	$	641	$	682

Note 7. Notes Receivable Securitizations and Sales

From time to time, the Company securitizes, without recourse, its fixed rate VOI notes receivable. To accomplish these securitizations, the Company transfers a pool of VOI notes receivable to third-party special purpose entities (together with the special purpose entities in the next sentence, the “SPEs”) and the SPEs transfer the VOI notes receivable to qualifying special purpose entities (“QSPEs”). The Company continues to service the securitized VOI notes receivable pursuant to servicing agreements negotiated at arms-length based on market conditions; accordingly, the Company has not recognized any servicing assets or liabilities. All of the Company’s VOI notes receivable securitizations to date have qualified to be, and have been, accounted for as sales. In order to be accounted for as a sale, the transferor must surrender control of the financial assets and receive consideration other than beneficial interests in the transferred asset.

With respect to those transactions still outstanding at September 30, 2009, the Company retains economic interests (the “Retained Interests”) in securitized VOI notes receivables through SPE ownership of QSPE beneficial interests. The Retained Interests, which are comprised of subordinated interests and interest only strips in the related VOI notes receivable, provide credit enhancement to the third-party purchasers of the related QSPE beneficial interests. Retained Interests cash flows are limited to the cash available from the related VOI notes receivable, after servicing and other related fees, absorbing 100% of any credit losses on the related VOI notes receivable and QSPE fixed rate interest expense. With respect to those transactions still outstanding at September 30, 2009, the Retained Interests are classified and accounted for as “available-for-sale” securities. Securities are classified as “available for sale” if the Company does not have the intent and ability to hold these securities to maturity or these securities were not bought with the intent to be sold in the near term. These securities are reported at fair value, with credit losses recorded in the statement of income and other unrealized gains and losses reported in stockholders’ equity.

The Company’s securitization agreements provide the Company with the option, subject to certain limitations, to repurchase or replace defaulted VOI notes receivable at their outstanding principal amounts. Such activity totaled $8 million and $21 million during the three and nine months ended September 30, 2009, respectively, and $6 million and $17 million during the three and nine months ended September 30, 2008, respectively. The Company has been able to resell the VOIs underlying the VOI notes repurchased or replaced under these provisions without incurring significant losses. The Company’s replacement of the defaulted VOI notes receivable under the securitization agreements with new VOI notes receivable resulted in net gains of approximately $0 million and $2 million during the three and nine months ended September 30, 2009, respectively, and $1 million and $3 million during the three and nine months ended September 30, 2008, respectively, which are included in vacation ownership and residential sales and services in the Company’s consolidated statements of income.

In June 2009, the Company securitized approximately $181 million of VOI notes receivable (the “2009 Securitization”) resulting in cash proceeds of approximately $125 million. The Company retained $44 million of interests in the QSPE, which included $43 million of notes the Company effectively owned after the transfer and $1 million related to the interest only strip. The related loss on the 2009 Securitization of $2 million is included in vacation ownership and residential sales and services in the Company’s consolidated statements of income.

Key assumptions used in measuring the fair value of the Retained Interests at the time of the 2009 Securitization were as follows: an average discount rate of 12.8%, an average expected annual prepayment rate including defaults of 17.9%, and an expected weighted average remaining life of prepayable notes receivable of 52 months. These key assumptions are based on the Company’s historical experience.

Although the notes effectively owned after the transfer were measured at fair value on the transfer date, they require prospective accounting treatment as notes receivable and will be carried at the basis established at the date of transfer and accrete interest over time to return to the historical cost basis. If the Company deems such amount to be non-recoverable in the future, it will record a valuation allowance. As of September 30, 2009, the value of the notes that the Company effectively owned from the 2009 Securitization was approximately $45 million, which the Company classified as “Other assets” in its consolidated balance sheets. During the three and nine months ended September 30, 2009, the Company recorded $2 million of interest income associated with these effectively owned notes.

At September 30, 2009, the aggregate outstanding principal balance of VOI notes receivable that has been securitized was $356 million. The aggregate principal amount of those VOI notes receivables that were more than 90 days delinquent at September 30, 2009 was approximately $6 million.

Gross credit losses for all VOI notes receivable that have been securitized totaled $12 million and $30 million during the three and nine months ended September 30, 2009, respectively, and $9 million and $24 million during the three and nine months ended September 30, 2008, respectively.

The Company received aggregate cash proceeds of $5 million and $16 million from the Retained Interests during the three and nine months ended September 30, 2009, respectively, and $7 million and $21 million during the three and nine months ended September 30, 2008, respectively. The Company received aggregate servicing fees of $1 million and $3 million related to these VOI notes receivable in the three and nine months ended September 30, 2009 and 2008, respectively.

At the time of each VOI notes receivable securitization and at the end of each financial reporting period, the Company estimates the fair value of its Retained Interests using a discounted cash flow model. All assumptions used in the models are reviewed and updated, if necessary, based on current trends and historical experience. The key assumption used in measuring the fair value associated with its outstanding note securitizations was as follows: an average discount rate of 9.4%, an average expected annual prepayment rate including defaults of 16.2% and an expected weighted average remaining life of prepayable notes receivable of 80 months.

The fair value of the Company’s retained interest as of September 30, 2009 and December 31, 2008 was $7 million and $19 million with amortized cost basis of $8 million and $21 million, respectively. Other-than-temporary impairments related to other factors and recognized in accumulated other comprehensive income as of September 30, 2009 and December 31, 2008 totaled $1 million and $2 million, respectively. Total other-than-temporary impairments related to credit losses recorded in gain (loss) on asset dispositions and impairments totaled $6 million and $22 million for the three and nine months ended September 30, 2009, respectively, and $2 million during the three and nine months ended September 30, 2008.

The Company completed a sensitivity analysis on the net present value of the Retained Interests to measure the change in value associated with independent changes in individual key variables. The methodology applied unfavorable changes for the key variables of expected prepayment rates, discount rates and expected gross credit losses as of September 30, 2009. The decreases in value of the Retained Interests that would result from various independent changes in key variables are shown in the chart that follows (in millions). The factors may not move independently of each other.


Annual prepayment rate:
100 basis points-dollars	$	0.4
100 basis points-percentage		5.7	%
200 basis points-dollars	$	0.9
200 basis points-percentage		12.8	%
Discount rate:
100 basis points-dollars	$	0.2
100 basis points-percentage		2.5	%
200 basis points-dollars	$	0.3
200 basis points-percentage		4.9	%
Gross annual rate of credit losses:
100 basis points-dollars	$	2.9
100 basis points-percentage		42.2	%
200 basis points-dollars	$	4.0
200 basis points-percentage		57.4	%

Note 8. Fair Value

The following table represents the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2009 (in millions):


	Level 1		Level 2		Level 3		Total
Assets:
Interest rate swaps	$	—	$	8	$	—	$	8
Retained Interests		—		—		7		7

	$	—	$	8	$	7	$	15
Liabilities:
Forward contracts	$	—	$	1	$	—	$	1

The forward contracts are over the counter contracts that do not trade on a public exchange. The fair values of the contracts are based on inputs such as foreign currency spot rates and forward points that are readily available on public markets, and as such, are classified as Level 2. The Company considered both its credit risk, as well as its counterparties’ credit risk in determining fair value and no adjustment was made as it was deemed insignificant based on the short duration of the contracts and the Company’s rate of short-term debt.

The interest rate swaps are valued using an income approach. Expected future cash flows are converted to a present value amount based on market expectations of the yield curve on floating interest rates, which is readily available on public markets.

The Company estimates the fair value of its Retained Interests using a discounted cash flow model with unobservable inputs, which is considered Level 3. See Note 7 for the assumptions used to calculate the estimated fair value and sensitivity analysis based on changes in assumptions.

The following table presents a reconciliation of the Company’s Retained Interests measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2009 (in millions):


Balance at June 30, 2009	$	10
Total losses (realized/unrealized)
Included in earnings		(6	)
Included in other comprehensive income		1
Purchases, issuances, and settlements		2
Transfers in and/or out of Level 3		—

Balance at September 30, 2009	$	7


Balance at December 31, 2008	$	19
Total losses (realized/unrealized)
Included in earnings		(19	)
Included in other comprehensive income		1
Purchases, issuances, and settlements		6
Transfers in and/or out of Level 3		—

Balance at September 30, 2009	$	7

Note 9. Debt

Long-term debt and short-term borrowings consisted of the following (in millions):


	September 30,			December 31,
	2009			2008
Senior Credit Facilities:
Revolving Credit Facility, interest rate of 3.302% at September 30, 2009, maturing 2011	$	159		$	213
Term loans, interest rate of 3.313% at September 30, 2009, maturing 2011		300			1,375
Senior Notes, interest at 7.875%, maturing 2012		802			799
Senior Notes, interest at 6.250%, maturing 2013		604			601
Senior Notes, interest at 7.875%, maturing 2014		484			—
Senior Notes, interest at 7.375%, maturing 2015		449			449
Senior Notes, interest at 6.750%, maturing 2018		400			400
Mortgages and other, interest rates ranging from 5.800% to 8.560%, various maturities		164			171

		3,362			4,008
Less current maturities		(5	)		(506	)

Long-term debt	$	3,357		$	3,502

On April 27, 2009, the Company amended its revolving credit and term loan facilities (collectively with prior amendments the “Amended Credit Facilities”) with the consent of the lenders thereunder. The Amended Credit Facilities enhance the Company’s financial flexibility by increasing the Company’s maximum Consolidated Leverage Ratio (as defined in the Amended Credit Facilities) from 4.50x to 5.50x. Additionally, the definition of Consolidated EBITDA used in the Amended Credit Facilities has been modified to exclude certain cash severance expenses from Consolidated EBITDA. In connection with the amendment, the Company repaid $500 million of its term loan that was due June 2009 by drawing down on its revolver.

In connection with the amendment, the Company agreed to increase the pricing on the outstanding Amended Credit Facilities based upon the Company’s Consolidated Leverage Ratio, the Company’s unsecured debt rating and the type of loan borrowed. The margin increases range from 2.00% to 3.50% for term loans maintained as Eurodollar Loans, 1.75% to 3.00% for revolving loans maintained as Euro Rate Loans, and 0.00% to 1.50% for Base Rate and Canadian Prime Rate Loans. The applicable margin for the Facility Fee ranges from 0.25% to 0.50%. The amendment further modifies the Amended Credit Facilities by (i.) restricting the Company’s ability to pay dividends and repurchase stock depending on the Company’s free cash flow and Consolidated Leverage Ratio and (ii.) decreasing the Company’s permitted lien basket from 10% of Net Tangible Assets (as defined in the Amended

Credit Facilities) to 5% of Net Tangible Assets. An amendment fee of 50 basis points was also paid to all consenting lenders who approved the Amended Credit Facilities, with no amendment fee being paid on the repaid portion of the term loan.

On April 30, 2009, the Company launched and priced a public offering of $500 million of senior notes with a coupon rate of 7.875% (the “Notes”) due October 15, 2014, issued at a discount price of 96.285%. The Company received net proceeds of approximately $475 million on the settlement date of May 7, 2009. The proceeds were used to reduce the outstanding borrowings under its Amended Credit Facilities and for general purposes. Interest on the Notes is payable semi-annually on April 15 and October 15. The Company may redeem all or a portion of the Notes at any time at the Company’s option at a discount rate of Treasury plus 50 basis points. The Notes will rank pari passu with all other unsecured and unsubordinated obligations.

Note 10. Deferred Gains

The Company defers gains realized in connection with the sale of a property that the Company continues to manage through a long-term management agreement and recognizes the gains over the initial term of the related agreement. As of September 30, 2009 and December 31, 2008, the Company had total deferred gains of $1.117 billion and $1.151 billion, respectively, included in accrued expenses and other liabilities in the Company’s consolidated balance sheets. Amortization of deferred gains is included in management fees, franchise fees and other income in the Company’s consolidated statements of income and totaled approximately $21 million, $61 million, $21 million and $63 million in the three and nine months ended September 30, 2009, and September 30, 2008, respectively.

Note 11. Restructuring and Other Special Charges

During the three and nine months ended September 30, 2009, the Company recorded restructuring charges of $2 million and $24 million, respectively, in connection with its ongoing initiative of rationalizing its cost structure in light of the decline in growth in its business units. These charges were primarily related to severance costs.

During the three and nine months ended September 30, 2008, the Company recorded a $22 million and a $32 million, respectively, restructuring charge in connection with the Company’s ongoing initiative of rationalizing its cost structure with charges primarily related to severance and closure of vacation ownership sales centers.

Restructuring costs and other special charges, net, by segment are as follows (in millions):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2009		2008		2009		2008
Hotel	$	1	$	12	$	14	$	17
Vacation Ownership & Residential		1		10		10		15

Total	$	2	$	22	$	24	$	32

The Company had remaining accruals of $22 million and $41 million at September 30, 2009 and December 31, 2008, respectively, which are primarily recorded in accrued expenses and other liabilities. The following table summarizes activity in the restructuring and other special charges related accruals:


	December 31,		Expenses						Non-cash			September 30,
	2008		(Reversals)			Payments			Other			2009
Retained reserves established by Sheraton Holding prior to its merger with the Company in 1998	$	8	$	—		$	—		$	—		$	8
Le Méridien acquisition reserves		—		(2	)		—			2			—
Consulting fees associated with cost
reduction initiatives		3		2			(5	)		—			—
Severance		23		19			(35	)		—			7
Closure of vacation ownership facilities		7		5			(3	)		(2	)		7

Total	$	41	$	24		$	(43	)	$	—		$	22

Note 12. Derivative Financial Instruments

The Company, based on market conditions, enters into forward contracts to manage foreign exchange risk. The Company enters into forward contracts to hedge forecasted transactions based in certain foreign currencies, including the Euro, Canadian Dollar and Yen. These forward contracts have been designated and qualify as cash flow hedges, and their change in fair value is recorded as a component of other comprehensive income and reclassified into earnings in the same period or periods in which the forecasted transaction occurs. To qualify as a hedge, the Company needs to formally document, designate and assess the effectiveness of the transactions that receive hedge accounting. In the third quarter of 2009, we cancelled notional amounts of $4 million related to two hedges and received cash proceeds of approximately $0.3 million. The forecasted transaction is still expected to occur in the future and the change in fair value at the time of settlement was recorded in accumulated other comprehensive income. The notional dollar amounts of the outstanding Euro and Yen forward contracts at September 30, 2009 are $27 million and $4 million, respectively, with average exchange rates of 1.4 and 90.5, respectively, with terms of primarily less than one year. The Canadian forward contracts expired during the second quarter of 2009. The Company reviews the effectiveness of its hedging instruments on a quarterly basis and records any ineffectiveness into earnings. The Company discontinues hedge accounting for any hedge that is no longer evaluated to be highly effective. From time to time, the Company may choose to de-designate portions of hedges when changes in estimates of forecasted transactions occur. In the second quarter of 2009, the Company de-designated notional amounts of $4 million related to three hedges. Other than the de-designated portions, each of these hedges was highly effective in offsetting fluctuations in foreign currencies. An insignificant amount of gain due to ineffectiveness was recorded in the consolidated statements of income during 2009. Additionally, during the third quarter of 2009, nine forward contracts matured.

The Company also enters into forward contracts to manage foreign exchange risk on intercompany loans that are not deemed permanently invested. These forward contracts are not designated as hedges, and their change in fair value is recorded in the Company’s consolidated statements of income at each reporting period.

The Company enters into interest rate swap agreements to manage interest expense. The Company’s objective is to manage the impact of interest rates on the results of operations, cash flows and the market value of the Company’s debt. At September 30, 2009, the Company has six interest rate swap agreements with an aggregate notional amount of $500 million under which the Company pays floating rates and receives fixed rates of interest (“Fair Value Swaps”). The Fair Value Swaps hedge the change in fair value of certain fixed rate debt related to fluctuations in interest rates and mature in 2012, 2013 and 2014. The Fair Value Swaps modify the Company’s interest rate exposure by effectively converting debt with a fixed rate to a floating rate. These interest rate swaps have been designated and qualify as fair value hedges and have met the requirements to assume zero ineffectiveness.

In the Company’s most recent securitization transaction, the unconsolidated QSPE entered into a balance guaranteed interest rate swap to fix the interest rate on its debt in order to mitigate interest rate risk for the investors. In connection with the QSPE swap, the Company also entered into two swaps. The first swap provides a counterparty to the investors of the QSPE swap and is a balance guaranteed interest rate swap, with the Company paying a floating rate and receiving a fixed rate. To mitigate the potential impact of the floating to fixed swap, the Company also entered into a second swap, whereby the Company pays a fixed rate and receives a floating rate, with interest paid based on an expected amortization schedule rather than a balance guaranteed notional. The swaps do not qualify to receive hedge accounting, and, therefore, the change in fair values will be marked to market at each reporting period with the change in fair value recorded in the consolidated statements of income. The swaps have the legal right of offset and resulted in a net liability of $0.3 million as of September 30, 2009.

The counterparties to the Company’s derivative financial instruments are major financial institutions. The Company evaluates the bond ratings of the financial institutions and believes that credit risk is at an acceptable level.

The following tables summarize the fair value of our derivative instruments, the effect of derivative instruments on our Consolidated Statements of Comprehensive Income, the amounts reclassified from “Other comprehensive income” and the effect on the Consolidated Statements of Income during the quarter.

Fair Value of Derivative Instruments
(in millions)

September 30,

December 31,

2009

2008

Balance Sheet

Fair

Balance Sheet

Fair

Location

Value

Location

Value

Derivatives designated as hedging instruments

Asset Derivatives

Forward contracts

Prepaid and other

—

Prepaid and other

current assets

Interest rate swaps

Other assets

—

Total assets

September 30,

December 31,

2009

2008

Balance Sheet

Fair

Balance Sheet

Fair

Location

Value

Location

Value

Derivatives not designated as hedging instruments

Asset Derivatives

Forward contracts

Prepaid and other

—

Prepaid and other

—

current assets

Total assets

—

Liability Derivatives

Forward contracts

Accrued expenses

Total liabilities

Consolidated Statements of Income and Comprehensive Income
for the Three and Nine Months Ended September 30, 2009 and 2008
(in millions)


Balance at June 30, 2009	$	(4	)
Mark-to-market loss on forward exchange contracts		1
Reclassification of gain from OCI to management fees, franchise fees, and other income		3

Balance at September 30, 2009	$	—


Balance at December 31, 2008	$	(6	)
Mark-to-market gain on forward exchange contracts		—
Reclassification of gain from OCI to management fees, franchise fees, and other income		6

Balance at September 30, 2009	$	—


Balance at June 30, 2008	$	3
Mark-to-market gain on forward exchange contracts		(7	)
Reclassification of loss from OCI to management fees, franchise fees, and other income		(1	)

Balance at September 30, 2008	$	(5	)


Balance at December 31, 2007	$	—
Mark-to-market gain on forward exchange contracts		(3	)
Reclassification of loss from OCI to management fees, franchise fees, and other income		(2	)

Balance at September 30, 2008	$	(5	)


Derivatives Not	Location of Gain	Amount of Gain
Designated as Hedging	or (Loss) Recognized	or (Loss) Recognized
Instruments	in Income on Derivative	in Income on Derivative

		Three Months Ended
		September 30,
		2009			2008
Foreign forward exchange contracts	Interest expense, net	$	(1	)	$	9


Total (loss) gain included in income		$	(1	)	$	9


		Nine Months Ended
		September 30,
		2009			2008
Foreign forward exchange contracts	Interest expense, net	$	(8	)	$	4


Total (loss) gain included in income		$	(8	)	$	4

Note 13. Other Liabilities

In June 2009, the Company entered into an amendment to its existing co-branded credit card agreement (“Amendment”) with American Express and extended the term of its co-branding agreement. In connection with the Amendment, the Company received $250 million in cash in July 2009 and, in return, sold SPG points to American Express. In accordance with ASC 470-10-25-2, the Company has recorded the sale of these points as a financing arrangement with an implicit interest rate of 4.5%. The liability associated with this financing arrangement will be reduced ratably over a multi-year period beginning in October 2009. The portion of this liability to be redeemed in the next twelve months has been recorded in accrued expenses with the remaining balance recorded in other liabilities. In accordance with the terms of the Amendment, if the Company fails to comply with certain financial covenants the Company would have to repay the remaining liability and, if the Company does not repay such liability, the Company is required to pledge certain receivables as collateral for the remaining balance of the liability.

Note 14. Discontinued Operations

For the three months ended September 30, 2009, the Company recorded a $1 million tax charge in discontinued operations related to a 2008 administrative tax ruling for an unrelated taxpayer that impacts the tax liability associated with the disposition of one of its businesses several years ago.

For the nine months ended September 30, 2009 and 2008, the Company recorded a net benefit of $1 million and tax charges of $49 million, respectively, in discontinued operations. The Company recorded $2 million and $49 million of tax charges for the nine months ended September 30, 2009 and 2008, respectively, as a result of a 2008 administrative tax ruling discussed above. The charge for the nine months ended September 30, 2009 is offset by a benefit of approximately $3 million related to the final settlement of an uncertain tax position for an entity we sold several years ago.

Note 15. Pension and Postretirement Benefit Plans

The following table presents the components of net periodic benefit cost for the three and nine months ended September 30, 2009 and 2008 (in millions):


	Three Months Ended September 30,
	2009							2008
			Foreign							Foreign
	Pension		Pension			Postretirement		Pension		Pension			Postretirement
	Benefits		Benefits			Benefits		Benefits		Benefits			Benefits
Service cost	$	—	$	1.1		$	—	$	—	$	1.0		$	—
Interest cost		0.2		3.2			0.3		0.2		2.9			0.3
Expected return on plan assets		—		(2.5	)		—		—		(2.9	)		(0.1	)
Amortization of:
Actuarial loss		—		1.3			—		—		0.4			—
Prior service income		—		(0.1	)		—		—		(0.1	)		—

Net period benefit cost	$	0.2	$	3.0		$	0.3	$	0.2	$	1.3		$	0.2


	Nine Months Ended September 30,
	2009								2008
			Foreign								Foreign
	Pension		Pension			Postretirement			Pension		Pension			Postretirement
	Benefits		Benefits			Benefits			Benefits		Benefits			Benefits
Service cost	$	—	$	3.5		$	—		$	—	$	4.3		$	—
Interest cost		0.7		9.5			0.8			0.6		8.9			0.9
Expected return on plan assets		—		(7.5	)		(0.1	)		—		(8.8	)		(0.3	)
Amortization of:
Actuarial loss		—		3.7			—			—		1.2			—
Prior service income		—		(0.2	)		—			—		(0.3	)		—

Net periodic benefit cost	$	0.7	$	9.0		$	0.7		$	0.6	$	5.3		$	0.6

During the three and nine months ended September 30, 2009, the Company contributed approximately $2 million and $15 million, respectively, to its pension and post retirement benefit plans. For the remainder of 2009, the Company expects to contribute approximately $6 million to its pension and post-retirement benefit plans. A portion of these fundings will be reimbursed for costs related to employees of managed hotels.

Note 16. Income Taxes

The total amount of unrecognized tax benefits as of September 30, 2009, was $998 million, of which $150 million would affect the Company’s effective tax rate if recognized. The amount of unrecognized tax benefits includes approximately $499 million related to the February 1998 disposition of ITT World Directories which the Company strongly believes was completed on a tax deferred basis. In 2002, the IRS proposed an adjustment to tax the gain on disposition in 1998, and the issue has progressed to litigation in United States Tax Court. In January 2009, the Company and the IRS reached an agreement in principle to settle the litigation pertaining to the tax treatment of this transaction. Upon finalization of the agreement details, the Company expects to obtain a refund of over $200 million for previously paid tax. As a result, the Company expects to decrease its unrecognized tax benefits by approximately $499 million within the next twelve months. It is reasonably possible that zero to substantially all of the Company’s other remaining unrecognized tax benefits will reverse within the next twelve months.

During the three months ended September 30, 2009, a tax benefit of $10 million was recognized to reverse an interest accrual associated with the timing of taxable income recognition from VOI sales. Taxpayers that defer taxable income recognition through installment sale accounting are required to pay interest on the deferral in the tax year that the income is reported. The interest is due only if a taxpayer has a cash tax liability in the tax year of income recognition. The Company currently expects that it will not have a cash tax liability in the years when the deferred taxable income is recognized and therefore reversed the associated interest accrual.

The Company recognizes interest and penalties related to unrecognized tax benefits through income tax expense. As of September 30, 2009, the Company had $227 million accrued for the payment of interest and no accrued penalties.

The Company is subject to taxation in the U.S. federal jurisdiction, as well as various state and foreign jurisdictions. As of September 30, 2009, the Company is no longer subject to examination by U.S. federal taxing authorities for years prior to 2004 and to examination by any U.S. state taxing authority prior to 1998. All subsequent periods remain eligible for examination. In the significant foreign jurisdictions in which the Company operates, the Company is no longer subject to examination by the relevant taxing authorities for any years prior to 2001.

During the three months ended June 30, 2009, the Company entered into an Italian tax incentive program through which the tax basis of its Italian owned hotels were stepped up in exchange for paying $9 million of current tax over a three year period. As a result, the Company was able to recognize a tax benefit of $129 million to establish the deferred tax asset related to the basis step up. This benefit was offset by a $9 million tax charge to accrue the current tax payable under the program, resulting in a net benefit of $120 million.

Note 17. Stockholders’ Equity

The following table represents changes in stockholders equity that are attributable to Starwood’s stockholders and non-controlling interests (in millions).


	Equity Attributable to Starwood Stockholders
							Accumulated					Equity
					Additional		Other					Attributable to
	Shares				Paid-in		Comprehensive			Retained		Noncontrolling
	Shares		Amount		Capital		Loss			Earnings		Interests			Total
Balance at December 31, 2008		183	$	2	$	493	$	(391	)	$	1,517	$	23		$	1,644
Net income (loss)		—		—		—		—			180		(2	)		178
Stock option and restricted stock award transactions, net		4		—		31		—			—		—			31
Foreign currency translation		—		—		—		74			—		1			75
Pension liability adjustments		—		—		—		15			—		—			15
Change in fair value of derivatives and investments		—		—		—		(5	)		—		—			(5	)
ESPP stock issuances		—		—		4		—			—		—			4
Dividends		—		—		—		—			1		(1	)		—

Balance at September 30, 2009		187	$	2	$	528	$	(307	)	$	1,698	$	21		$	1,942

Share Issuances and Repurchases. During the three and nine months ended September 30, 2009, the Company issued an insignificant amount of common shares as a result of stock option exercises. The Company has not repurchased any common stock during 2009. In November 2007, the Board of Directors authorized the repurchase of up to $1 billion of common stock under the Company’s existing repurchase authorization (the “Share Repurchase Authorization”). As of September 30, 2009, no repurchase capacity remained available under the Share Repurchase Authorization.

Limited Partnership Units. At September 30, 2009, there were approximately 169,000 Operating Limited Partnership (the “Operating Partnership”) units outstanding. The Operating Partnership units are convertible into common shares at the unit holder’s option, provided that the Company has the option to settle conversion requests in cash or common shares.

Dividends. On January 9, 2009, the Company paid a dividend of $0.90 per share to shareholders of record on December 31, 2008.

Note 18. Stock-Based Compensation

In accordance with the Company’s 2004 Long-Term Incentive Compensation Plan, during the nine month period ended September 30, 2009, the Company granted approximately 5.3 million stock options that had a weighted average grant date fair value of $4.69 per option. The weighted average exercise price of these options was $11.39. In addition, the Company granted approximately 5.3 million restricted shares and restricted stock units that had a weighted average grant date fair value of $11.79 per share or unit.

The Company recorded stock-based employee compensation expense, including the estimated impact of 2009 reimbursements from third parties, of $13 million and $39 million in the three and nine months ended September 30, 2009 respectively, and $16 million and $56 million in the three and nine months ended September 30, 2008, respectively.

As of September 30, 2009, there was approximately $28 million of unrecognized compensation cost, net of estimated forfeitures, related to non-vested options, which is expected to be recognized, on a straight-line basis, over a weighted-average period of 3.19 years.

As of September 30, 2009, there was approximately $121 million of unrecognized compensation cost, net of estimated forfeitures, related to restricted stock and restricted stock units, which is expected to be recognized, on a straight-line basis, over a weighted-average period of 2.19 years.

Note 19. Fair Value of Financial Instruments

The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments (in millions):


	September 30, 2009				December 31, 2008
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Assets :
Restricted cash	$	7	$	7	$	6	$	6
VOI notes receivable		356		405		444		419
Other notes receivable		36		36		32		32

Total financial assets	$	399	$	448	$	482	$	457


Liabilities:
Long-term debt	$	3,357	$	3,366	$	3,502	$	2,725
Other long-term liabilities		8		8		7		7

Total financial liabilities	$	3,365	$	3,374	$	3,509	$	2,732


Off-Balance sheet:
Letters of credit	$	—	$	168	$	—	$	115
Surety bonds		—		47		—		91

Total Off-Balance sheet	$	—	$	215	$	—	$	206

The Company believes the carrying values of its financial instruments related to current assets and liabilities approximate fair value. The Company records its retained interests and derivative assets and liabilities at fair value. See Note 8 for recorded amounts and the methods and assumptions used to estimate fair value.

The carrying value of the Company’s restricted cash approximates its fair value. The Company estimates the fair value of its VOI notes receivable by discounting the expected future cash flows with discount rates commensurate with the risk of the underlying notes, primarily determined by the credit worthiness of the borrowers based on their Fair Isaac Corporation (“FICO”) scores. The fair value of other notes receivable is estimated based on terms of the instrument and current market conditions. These financial instrument assets are recorded in the other assets line item in the Company’s consolidated balance sheet.

The Company estimates the fair value of its publicly traded debt based on the bid prices in the public debt markets. The carrying amount of its floating rate debt is a reasonable basis of fair value due to the variable nature of the interest rates. The Company’s non-public fixed rate debt fair value is determined based upon discounted cash flows for the debt rates deemed reasonable for the type of debt, prevailing market conditions and the length to maturity for the debt. Other long-term liabilities represent a financial guarantee. The carrying value of this liability approximates its fair value based on expected funding under the guarantee.

The fair values of the Company’s letters of credit and surety bonds are estimated to be the same as the contract values based on the nature of the fee arrangements with the issuing financial institutions.

Note 20. Business Segment Information

The Company has two operating segments: hotels and vacation ownership and residential. The hotel segment generally represents a worldwide network of owned, leased and consolidated joint venture hotels and resorts operated primarily under the Company’s proprietary brand names including St. Regis^®, The Luxury Collection^®, Sheraton^®, Westin^®, W^®, Le Méridien^®, Aloft^®, Element^®, and Four Points^® by Sheraton as well as hotels and resorts which are managed or franchised under these brand names in exchange for fees. The vacation ownership and residential segment includes the development, ownership and operation of vacation ownership resorts, marketing and selling VOIs, providing financing to customers who purchase such interests and the sale of residential units.

The performance of the hotels and vacation ownership and residential segments is evaluated primarily on total segment operating income. Accordingly, items below this line item are not allocated to its segments.

The following table presents revenues, operating income, capital expenditures and assets for the Company’s reportable segments (in millions):


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
Revenues:
Hotel	$	1,053		$	1,270		$	3,054		$	3,855
Vacation ownership and residential		165			265			501			719

Total	$	1,218		$	1,535		$	3,555		$	4,574

Operating income:
Hotel	$	105		$	198		$	303		$	595
Vacation ownership and residential		17			63			60			119

Total segment operating income		122			261			363			714
Selling, general, administrative and other		(35	)		(30	)		(95	)		(128	)
Restructuring and other special charges, net		(2	)		(22	)		(24	)		(32	)

Operating income		85			209			244			554
Equity (losses) earnings and gains and (losses) from unconsolidated ventures, net:
Hotel		(4	)		1			(7	)		9
Vacation ownership and residential		1			2			2			5
Interest expense, net		(60	)		(48	)		(156	)		(150	)
(Loss) gain on asset dispositions and impairments, net		(27	)		(12	)		(66	)		(12	)

(Loss) income from continuing operations before taxes	$	(5	)	$	152		$	17		$	406

Capital expenditures:
Hotel	$	21		$	74		$	93		$	193
Vacation ownership and residential		7			26			34			80
Corporate		3			21			17			64

Total	$	31		$	121		$	144		$	337


	September 30,		December 31,
	2009		2008
Assets:
Hotel^(a)	$	6,198	$	6,728
Vacation ownership and residential^(b)		2,101		2,183
Corporate		975		792

Total	$	9,274	$	9,703


(a)		Includes $296 million and $315 million of investments in unconsolidated joint ventures at September 30, 2009 and December 31, 2008, respectively.

(b)		Includes $32 million and $38 million of investments in unconsolidated joint ventures at September 30, 2009 and December 31, 2008, respectively.

Note 21. Commitments and Contingencies

Variable Interest Entities. The Company has evaluated the 20 hotels in which it has a variable interest, generally in the form of investments, loans, guarantees, or equity. The Company determines if it is the primary beneficiary of the hotel by considering qualitative and quantitative factors. Qualitative factors include evaluating distribution terms, proportional voting rights, decision making ability, and the capital structure. Quantitatively, the Company evaluates financial forecasts under various scenarios to determine which variable interest holders would absorb over 50% of the expected losses of the hotel. The Company has determined it is not the primary beneficiary of any of the variable interest entities (“VIEs”) and therefore these entities are not consolidated in the Company’s financial statements.

In all cases, the VIEs associated with the Company’s variable interests are hotels for which the Company has entered into management or franchise agreements with the hotel owners. The Company is paid a fee primarily based on financial metrics of the hotel. The hotels are financed by the owners, generally in the form of working capital, equity, and debt.

At September 30, 2009, the Company has approximately $62 million of investments associated with 17 VIEs, equity investments of $11 million associated with one VIE, and a loan balance of $5 million associated with one VIE. As the Company is not obligated to fund future cash contributions under these agreements, the maximum loss equals the carrying value. In addition, the Company has not contributed amounts to the VIEs in excess of their contractual obligations.

At December 31, 2008, the Company had approximately $66 million of investments associated with 19 VIEs, equity investments of $10 million associated with one VIE, and a loan balance of $5 million associated with one VIE.

Guaranteed Loans and Commitments. In limited cases, the Company has made loans to owners of or partners in hotel or resort ventures for which the Company has a management or franchise agreement. Loans outstanding under this program totaled $28 million at September 30, 2009. The Company evaluates these loans for impairment, and at September 30, 2009, believes the net carrying value of these loans are collectible. Unfunded loan commitments aggregating $56 million were outstanding at September 30, 2009, none of which is expected to be funded in the next twelve months or in total. These loans typically are secured by pledges of project ownership interests and/or mortgages on the projects. The Company also has $110 million of equity and other potential contributions associated with managed or joint venture properties, $68 million of which is expected to be funded in the next twelve months.

Surety bonds issued on behalf of the Company as of September 30, 2009 totaled $47 million, the majority of which were required by state or local governments relating to our vacation ownership operations and by our insurers to secure large deductible insurance programs.

To secure management contracts, the Company may provide performance guarantees to third-party owners. Most of these performance guarantees allow the Company to terminate the contract rather than fund shortfalls if certain performance levels are not met. In limited cases, the Company is obliged to fund shortfalls in performance levels through the issuance of loans. As of September 30, 2009, excluding the Le Méridien management agreement mentioned below, the Company had three management contracts with performance guarantees with possible cash outlays of up to $70 million, $53 million of which, if required, would be funded over several years and would be largely offset by management fees received under these contracts. Many of the performance tests are multi-year tests, are tied to the results of a competitive set of hotels, and have exclusions for force majeure and acts of war and terrorism. The Company does not anticipate any significant funding under these performance guarantees in 2009. In connection with the acquisition of the Le Méridien brand in November 2005, the Company assumed the obligation to guarantee certain performance levels at one Le Méridien managed hotel for the periods 2007 through 2013. This guarantee is uncapped; however, the Company has estimated its exposure under this guarantee and does not anticipate that payments made under the guarantee will be significant in any single year. The Company has recorded a loss contingency for this guarantee of $8 million and $7 million, reflected in other liabilities in the accompanying consolidated balance sheets at September 30, 2009 and December 31, 2008, respectively. The Company does not anticipate losing a significant number of management or franchise contracts in 2009.

In connection with the purchase of the Le Méridien brand in November 2005, the Company was indemnified for certain of Le Méridien’s historical liabilities by the entity that bought Le Méridien’s owned and leased hotel portfolio. The indemnity is limited to the financial resources of that entity. However, at this time, the Company believes that it is unlikely that it will have to fund any of these liabilities.

In connection with the sale of 33 hotels to a third party in 2006, the Company agreed to indemnify the third party for certain pre-disposition liabilities, including operations and tax liabilities. At this time, the Company believes that it will not have to make any significant payments under such indemnities.

Litigation. The Company is involved in various legal matters that have arisen in the normal course of business, some of which include claims for substantial sums. Accruals have been recorded when the outcome is probable and can be reasonably estimated. While the ultimate results of claims and litigation cannot be determined, the Company does not expect that the resolution of all legal matters will have a material adverse effect on its consolidated results of operations, financial position or cash flow. However, depending on the amount and the timing, an unfavorable resolution of some or all of these matters could materially affect the Company’s future results of operations or cash flows in a particular period.


Item 2.		*Management’s Discussion and Analysis of Financial Condition and Results of Operations.*

Forward-Looking Statements

This report includes “forward-looking” statements, as that term is defined in the Private Securities Litigation Reform Act of 1995 or by the Securities and Exchange Commission in its rules, regulations and releases. Forward-looking statements are any statements other than statements of historical fact, including statements regarding our expectations, beliefs, hopes, intentions or strategies regarding the future. 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. Forward-looking statements are subject to 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, and those disclosed as risks in other reports filed by us with the Securities and Exchange Commission, including those described in Part I of our most recently filed Annual Report on Form 10-K. 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, we disclaim any obligation to review or update these forward-looking statements to reflect events or circumstances as they occur.

RESULTS OF OPERATIONS

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 us 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, we evaluate our 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.

We base our 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 judgments about the carrying value of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions and conditions.

CRITICAL ACCOUNTING POLICIES

We believe the following to be our critical accounting policies:

Revenue Recognition. Our revenues are primarily derived from the following sources: (1) hotel and resort revenues at our owned, leased and consolidated joint venture properties; (2) management and franchise revenues; (3) vacation ownership and residential revenues; (4) revenues from managed and franchised properties; and (5) other revenues which are ancillary to our operations. Generally, revenues are recognized when the services have been rendered. The following is a description of the composition of our revenues:

	•		Owned, Leased and Consolidated Joint Ventures — Represents revenue primarily derived from hotel operations, including the rental of rooms and food and beverage sales from owned, leased or consolidated joint venture hotels and resorts. Revenue is recognized when rooms are occupied and services have been rendered. These revenues are impacted by global economic conditions affecting the travel and hospitality industry as well as relative market share of the local competitive set of hotels. 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 change in rooms revenue for comparable properties.

	•		Management and Franchise Revenues — Represents fees earned on hotels managed worldwide, usually under long-term contracts, franchise fees received in connection with the franchise of our Sheraton, Westin,

			Four Points by Sheraton, Le Méridien, St. Regis, W, Luxury Collection, Aloft and Element brand names, termination fees and the amortization of deferred gains related to sold properties for which we have significant continuing involvement, offset by payments by us under performance and other guarantees. 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 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 — We recognize revenue from Vacation Ownership Interests (“VOIs”) 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 economies and, in particular, the U.S. economy, as well as interest rate and other economic conditions affecting the lending market. Revenue is generally recognized upon the buyer’s demonstration of a sufficient level of initial and continuing involvement. We determine the 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.

	•		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.

Frequent Guest Program. Starwood Preferred Guest (“SPG”) is our frequent guest incentive marketing program. SPG members earn points based on spending at our properties, as incentives to first time buyers of VOIs and residences and through participation in affiliated programs. Points can be redeemed at substantially all of our owned, leased, managed and franchised properties as well as through other redemption opportunities with third parties, such as conversion to airline miles. Properties are charged a fee based on hotel guests’ qualifying expenditures. Revenue is recognized by participating hotels and resorts when points are redeemed for hotel stays.

We, through the services of third-party actuarial analysts, determine the fair value of the future redemption obligation based on statistical formulas which project the timing of future point redemption based on historical experience, including an estimate of the “breakage” for points that will never be redeemed, and an estimate of the points that will eventually be redeemed as well as the cost of reimbursing hotels and other third parties in respect of other redemption opportunities for point redemptions. Actual expenditures for SPG may differ from the actuarially determined liability. The liability for the SPG program is included in other long-term liabilities and accrued expenses in the accompanying consolidated balance sheets. The total actuarially determined liability, including the estimated liability associated with the amended co-branded credit card agreement discussed in Liquidity and Capital Resources, as of September 30, 2009 and December 31, 2008 is $863 million and $662 million, respectively, of which $237 and $232 million, respectively, is included in accrued expenses. A 10% reduction in the “breakage” of points would result in an estimated increase of $86 million to the liability at September 30, 2009.

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, 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. In the fourth quarter of 2009, we expect to re-evaluate our current plans with regards to a number of vacation ownership properties.

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 properties for which we have significant continuing involvement (such as through a long-term management agreement) is deferred and recognized over the initial term of the related agreement. The operations of the properties held for sale prior to the sale date are recorded in discontinued operations unless we will have continuing involvement (such as through a management or franchise agreement) after the sale.

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 profit on a sale of a vacation ownership interest. We hold large amounts of homogeneous VOI notes receivable and therefore assess uncollectibility based on pools of receivables. In estimating our loss reserves, we use a technique referred to as static pool analysis, which tracks uncollectible notes for each year’s sales over the life of the respective notes and projects an estimated default rate that is used in the determination of our loan loss reserve requirements. As of September 30, 2009, the average estimated default rate for our pools of receivables was 9.4%. Given the significance of our respective 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 $3 million.

For the hotel segment, we measure the impairment of a loan based on the present value of expected future cash flows discounted at the loan’s original effective interest rate or the estimated fair value of the collateral. For 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.

Legal Contingencies. We are subject to various legal proceedings and claims, the outcomes of which are subject to significant uncertainty. An estimated loss from a loss contingency should be accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. We evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact our financial position or our results of operations.

Income Taxes. We provide for income taxes in accordance with principles contained in FASB ASC 740, Income Taxes. Under these principles, we recognize the amount of income tax payable or refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in our financial statements or tax returns. We also 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.

RESULTS OF OPERATIONS

The following discussion presents an analysis of results of our operations for the three and nine months ended September 30, 2009 and 2008.

The last twelve months have imposed significant pressures on the lodging industry. The present economic slowdown and the uncertainty over its breadth, depth and duration have had a negative impact on the hotel and vacation ownership and residential industries resulting in steep declines in demand for our hotel rooms and interval and fractional timeshare products. Many businesses around the world, including businesses participating in the Troubled Asset Relief Program (TARP), face restrictions on the ability to travel and hold conferences or events at resorts and luxury hotels. The negative publicity associated with such companies holding large events has resulted in cancellations and reduced bookings. In addition, the H1N1 (Swine Flu) virus has negatively impacted our business around the world and particularly our owned hotels in Latin America.

The current environment has pushed us to be aggressive in cutting costs, more stringent regarding our capital allocation, and to raise additional cash proceeds to improve our liquidity position. During the third quarter of 2009, we continued our activity value analysis project to streamline operations and reduce costs at divisional and corporate locations. A majority of our cost containment initiatives have been completed and implemented during previous quarters for which benefits are now being realized. We expect to realize annual run rate savings of approximately $100 million.

At September 30, 2009, we had approximately 350 hotels in the active pipeline representing approximately 85,000 rooms, driven by strong interest in all Starwood brands. Of these rooms, 71% are in the upper upscale and luxury segments and 76% are in international locations. During the third quarter of 2009, we signed 19 hotel management and franchise contracts representing approximately 4,200 rooms of which 15 are new builds and four are conversions from another brand and opened 27 new hotels and resorts representing approximately 5,200 rooms. Within the next few months, our system of hotels is expected to cross the 1,000 hotel milestone and more than 60% of our hotels will be new or freshly renovated in the past three years, positioning us well as the global economy stabilizes.

Historically, we have derived the majority of our revenues and operating income from our owned, leased and consolidated joint venture hotels and a significant portion of these results are driven by these hotels in North America. However, since early 2006, we have sold a significant number of hotels and, since the beginning of 2008 we sold or closed 14 wholly owned hotels, further reducing our revenues and operating income from owned, leased and consolidated joint venture hotels. The majority of these hotels were sold subject to long-term management or franchise contracts. Total owned revenues generated from these sold hotels were $3 million and $68 million for the three months ending September 30, 2009 and 2008, respectively, and $33 million and $168 million for the nine months ending September 30, 2009 and September 30, 2008, respectively.

An indicator of the performance of our owned, leased and consolidated joint venture hotels is REVPAR, as it measures the period-over-period change in rooms revenue for comparable properties. This is particularly the case in the United States where there is no impact on this measure from foreign exchange rates.

We continually update and renovate 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 Hotel results. We may continue to reposition our owned, leased and consolidated joint venture hotels as we pursue our brand and quality strategies. In addition, several owned hotels are located in regions which are seasonal and therefore, these hotels do not operate at full capacity throughout the year.

The following represents our top five markets in the United States by metropolitan area as a percentage of our total owned, leased and consolidated joint venture revenues for the three and nine months ended September 30, 2009 (with comparable data for 2008):

Top Five Metropolitan Areas in the United States as a % of Total Owned
Revenues for the Three Months Ended September 30, 2009 with Comparable Data
for the Same Period in 2008⁽¹⁾


	2009			2008
Metropolitan Area	Revenues			Revenues
New York, NY		13.8	%		12.6	%
Maui, HI		5.2	%		4.4	%
Chicago, IL		5.1	%		4.4	%
Boston, MA		4.8	%		4.2	%
San Francisco, CA		4.7	%		5.8	%

Top Five Metropolitan Areas in the United States as a % of Total Owned
Revenues for the Nine Months Ended September 30, 2009 with Comparable Data
for the Same Period in 2008⁽¹⁾


	2009			2008
Metropolitan Area	Revenues			Revenues
New York, NY		13.4	%		12.7	%
San Francisco, CA		5.7	%		5.6	%
Phoenix, AZ		5.2	%		5.7	%
Maui, HI		4.9	%		4.5	%
Boston, MA		4.6	%		3.7	%


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

The following represents our top five international markets as a percentage of our total owned, leased and consolidated joint venture revenues for the three and nine months ended September 30, 2009 (with comparable data for 2008):

Top Five International Markets as a % of Total Owned Revenues for the Three
Months Ended September 30, 2009 with Comparable Data for the Same Period in
2008⁽¹⁾


	2009			2008
International Market	Revenues			Revenues
Canada		9.4	%		8.9	%
Italy		8.7	%		10.5	%
Australia		5.6	%		5.0	%
Mexico		4.1	%		4.4	%
Austria		3.3	%		2.9	%

Top Five International Markets as a % of Total Owned Revenues for the Nine
Months Ended September 30, 2009 with Comparable Data for the Same Period in
2008⁽¹⁾


	2009			2008
International Market	Revenues			Revenues
Canada		9.1	%		9.0	%
Italy		7.9	%		8.9	%
Australia		5.0	%		4.9	%
Mexico		4.9	%		5.3	%
Austria		2.7	%		2.8	%


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

The following table summarizes REVPAR⁽¹⁾, Average Daily Rate (“ADR”) and occupancy for our Same-Store Owned Hotels for the three and nine months ended September 30, 2009 and 2008. The results for the three and nine months ended September 30, 2009 and 2008 represent results for 56 and 54, respectively, owned, leased and consolidated joint venture hotels (excluding 13 and 14, respectively, hotels sold and closed and 7 and 9, respectively, hotels undergoing significant repositionings or without comparable results in 2009 and 2008).


	Three Months Ended
	September 30,						Variance
	2009			2008
Worldwide (56 hotels with approximately 19,300 rooms)
REVPAR	$	130.48		$	170.14			(23.3	)%
ADR	$	185.66		$	229.49			(19.1	)%
Occupancy		70.3	%		74.1	%		(3.8	)

North America (30 hotels with approximately 11,800 rooms)
REVPAR	$	136.18		$	177.61			(23.3	)%
ADR	$	177.25		$	226.73			(21.8	)%
Occupancy		76.8	%		78.3	%		(1.5	)

International (26 hotels with approximately 7,500 rooms)
REVPAR	$	121.46		$	158.31			(23.3	)%
ADR	$	202.74		$	234.56			(13.6	)%
Occupancy		59.9	%		67.5	%		(7.6	)


	Nine Months Ended
	September 30,						Variance
	2009			2008
Worldwide (54 hotels with approximately 19,100 rooms)
REVPAR	$	124.37		$	176.97			(29.7	)%
ADR	$	191.67		$	240.81			(20.4	)%
Occupancy		64.9	%		73.5	%		(8.6	)

North America (28 hotels with approximately 11,600 rooms)
REVPAR	$	131.02		$	184.56			(29.0	)%
ADR	$	188.38		$	242.05			(22.2	)%
Occupancy		69.6	%		76.3	%		(6.7	)

International (26 hotels with approximately 7,500 rooms)
REVPAR	$	114.09		$	165.24			(31.0	)%
ADR	$	197.80		$	238.72			(17.1	)%
Occupancy		57.7	%		69.2	%		(11.5	)


(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.

The following discussion presents a forward looking analysis of goodwill impairment.

The hotel segment has approximately $1.365 billion of goodwill and is not currently considered to be at risk of failing the first step of the impairment evaluation, in which the fair value of the reporting unit must exceed its carrying value.

The vacation ownership and residential segment has approximately $241 million of goodwill. The segment generates revenues through development, marketing and selling of VOI’s, operating resorts, and providing financing to customers. As of the last annual impairment test completed in the fourth quarter of 2008, the fair value of the reporting unit exceeded its carrying value by approximately $100 million. Future cash flows are expected to be impacted by the revenue streams, new capital projects, the value of undeveloped land and projects under

development. A continued downturn in the economy would negatively impact these factors causing a decrease to this segment’s fair value. Additionally, a strategic decision to not build out future phases of an existing or proposed vacation ownership location would also impact fair value. Although year to date 2009 results are trending lower than projected, we have managed to substantially mitigate this decrease by continuing our focus on reducing costs and capital expenditures. However, the ability to forecast in this economic climate is a significant challenge. During the fourth quarter of 2009, we plan to perform an in depth review of certain vacation ownership projects to analyze the expected returns from such projects. Decisions associated with this review could result in an impairment of the goodwill as well as the carrying value of these vacation ownership projects.

Three Months Ended September 30, 2009 Compared with Three Months Ended September 30, 2008

Continuing Operations


	Three Months		Three Months		Increase/			Percentage
	Ended		Ended		(decrease)			change
	September 30,		September 30,		from prior			from prior
	2009		2008		year			year
	(in millions)

*Owned, Leased and Consolidated Joint Venture Hotels*	$	396	$	575	$	(179	)		(31.1	)%
*Management Fees, Franchise Fees and Other Income*		181		218		(37	)		(17.0	)%
*Vacation Ownership and Residential*		126		226		(100	)		(44.2	)%
*Other Revenues from Managed and Franchise Properties*		515		516		(1	)		(0.2	)%

*Total Revenues*	$	1,218	$	1,535	$	(317	)		(20.7	)%

The decrease in revenues from owned, leased and consolidated joint venture hotels was primarily due to the continued economic crisis in the United States and internationally. The decrease was also due to lost revenues from 14 wholly owned hotels that were sold or closed in 2008 and 2009. These sold or closed hotels had revenues of $3 million in the three months ended September 30, 2009 compared to $68 million in the three months ended September 30, 2008. Revenues at our Same-Store Owned Hotels (56 hotels for the three months ended September 30, 2009 and 2008, excluding the 13 hotels sold or closed and 7 additional hotels undergoing significant repositionings or without comparable results in 2009 and 2008) decreased 22.9%, or $106 million, to $356 million for the three months ended September 30, 2009 when compared to $462 million in the same period of 2008 due primarily to a decrease in REVPAR.

REVPAR at our worldwide Same-Store Owned Hotels decreased 23.3% to $130.48 for the three months ended September 30, 2009 when compared to the corresponding 2008 period. The decrease in REVPAR at these worldwide Same-Store Owned Hotels resulted from a 19.1% decrease in ADR to $185.66 for the three months ended September 30, 2009 compared to $229.49 for the corresponding 2008 period and a decrease in occupancy rates to 70.3% in the three months ended September 30, 2009 when compared to 74.1% in the same period in 2008. REVPAR at Same-Store Owned Hotels in North America decreased 23.3% for the three months ended September 30, 2009 when compared to the same period of 2008. REVPAR declined in substantially all of our major domestic markets. REVPAR at our international Same-Store Owned Hotels decreased by 23.3% for the three months ended September 30, 2009 when compared to the same period of 2008. REVPAR declined in most of our major international markets. REVPAR for Same-Store Owned Hotels internationally decreased 17.1% excluding the favorable effects of foreign currency translation.

The decrease in management fees, franchise fees and other income was primarily a result of a $28 million decrease in management and franchise revenues to $156 million for the three months ended September 30, 2009. The decrease was due to the significant decline in base and incentive management fees as a result of the global economic crisis, partially offset by the net addition of 42 managed and franchised hotels to our system since the third quarter of 2008. Other income decreased $9 million primarily due to the decreases in demand at our Bliss Spa business.

period in 2008. The decline in tour flow was a result of the economic climate and the resulting closure of underperforming sales centers. Additionally, the average contract amount per vacation ownership unit sold decreased 21.9% to approximately $15,000, driven by a higher sales mix of lower-priced inventory, including a higher percentage of lower-priced biennial inventory. Additionally, the decrease in vacation ownership and residential sales and services was due to a $42 million decrease in residential revenue. Residential revenue in the 2008 period included $39 million of license fees in connection with two St. Regis projects.

Other revenues from managed and franchised properties remained flat. 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 and our net income.

Three Months

Increase/

Percentage

Ended

(decrease)

change

September 30,

from prior

2009

2008

year

(in millions)

Selling, General, Administrative and Other

102

113

(11

)

(9.7

The decrease in selling, general, administrative and other expenses was primarily a result of our focus on reducing our cost structure in light of the declining business conditions in the current economic climate. Beginning in the middle of 2008, we began an activity value analysis project to review our cost structure across a majority of our corporate departments and divisional headquarters. A majority of the cost containment initiatives were completed and implemented during previous quarters and are now being realized.

Three Months

Increase/

Percentage

Ended

(decrease)

change

September 30,

from prior

2009

2008

year

(in millions)

Restructuring and Other Special Charges, Net

(20

)

(90.9

During the three months ended September 30, 2009, we recorded a $2 million restructuring charge primarily related to severance costs in connection with our ongoing initiative of rationalizing our cost structure in light of the current economic climate and the decline in activity in our business units.

During the three months ended September 30, 2008, we recorded a $22 million charge also related to our cost saving initiative. The charge primarily related to costs associated with the closure of a vacation ownership call center and two sales centers as well as severance costs associated with the reduction in force at our corporate offices.

Three Months

Increase/

Percentage

Ended

(decrease)

change

September 30,

from prior

2009

2008

year

(in millions)

Depreciation and Amortization

)

(1.2

Depreciation and amortization expense was $82 million for the three months ended September 30, 2009 when compared to the $83 million in the same period in 2008 as additional depreciation from capital expenditures made in the last twelve months were offset by reduced depreciation expense from sold hotels.

Three Months

Increase /

Percentage

Ended

(decrease)

change

September 30,

from prior

2009

2008

year

(in millions)

Operating Income

209

(124

)

(59.3

The decrease in operating income was primarily due to the decline in our core business units, hotels and vacation ownership, due to the severe impact from the global economic crisis and the 2008 license fee income as discussed above. These decreases were partially offset by the reduction in selling, general, administrative and other costs as a result of our activity value analysis costs savings project and other cost savings initiatives.

Three Months

Increase /

Percentage

Ended

(decrease)

change

September 30,

from prior

2009

2008

year

(in millions)

Equity Earnings and Gains and (Losses) from Unconsolidated Ventures, Net

)

n/m

Three Months

Increase /

Percentage

Ended

(decrease)

change

September 30,

from prior

2009

2008

year

(in millions)

Net Interest Expense

25.0

The increase in net interest expense was primarily due to higher interest rates in the three months ended September 30, 2009 when compared to the same period of 2008 and favorable exchange gains on cross-currency hedges recorded in interest expense in the prior year. Our weighted average interest rate was 6.39% at September 30, 2009 as compared to 5.73% at September 30, 2008.

Three Months

Increase /

Percentage

Ended

(decrease)

change

September 30,

from prior

2009

2008

year

(in millions)

Loss on Asset Dispositions and Impairments, Net

n/m

During the three months ended September 30, 2009, we recorded a net loss on dispositions of approximately $27 million, primarily related to the $13 million impairment of an investment in a hotel management contract expected to be cancelled in the near term, a $6 million impairment of our retained interest in vacation ownership mortgage receivables, a $3 million impairment of a property which is no longer in operations and the $3 million loss on the sale of a wholly-owned hotel.

During the three months ended September 30, 2008, we recorded losses of approximately $16 million on the impairment of two separate investments in which we held a minority interest, offset, in part, by a gain of approximately $4 million on the sale of one wholly owned hotel.

Three Months

Increase /

Percentage

Ended

(decrease)

change

September 30,

from prior

2009

2008

year

(in millions)

Income Tax (Benefit) Expense

(46

)

(84

)

n/m

The $84 million decrease in income tax expense primarily relates to a tax benefit of $42 million related to domestic asset dispositions and a benefit of $10 million related to the reversal of a deferred interest accrual associated with the deferral of taxable income. This accrual is no longer deemed necessary. The remaining decrease is primarily due to lower pretax income.

Discontinued Operations

For the three months ended September 30, 2009, we recorded a tax charge of $1 million as a result of a 2008 administrative tax ruling for an unrelated taxpayer that impacts the tax liability associated with the disposition of one of our businesses several years ago.

Nine Months Ended September 30, 2009 Compared with Nine Months Ended September 30, 2008

Continuing Operations


	Nine Months		Nine Months		Increase /			Percentage
	Ended		Ended		(decrease)			change
	September 30,		September 30,		from prior			from prior
	2009		2008		year			year
			(in millions)

*Owned, Leased and Consolidated Joint Venture Hotels*	$	1,176	$	1,755	$	(579	)		(33.0	)%
*Management Fees, Franchise Fees and Other Income*		533		642		(109	)		(17.0	)%
*Vacation Ownership and Residential*		387		613		(226	)		(36.9	)%
*Other Revenues from Managed and Franchise Properties*		1,459		1,564		(105	)		(6.7	)%

*Total Revenues*	$	3,555	$	4,574	$	(1,019	)		(22.3	)%

The decrease in revenues from owned, leased and consolidated joint venture hotels was primarily due to the continued economic crisis in the United States and internationally. The decrease was also due to lost revenues from 14 wholly owned hotels that were sold or closed in 2008 and 2009. These sold or closed hotels had revenues of $33 million in the nine months ended September 30, 2009 compared to $168 million in the nine months ended September 30, 2008. Revenues at our Same-Store Owned Hotels (54 hotels for the nine months ended September 30, 2009 and 2008, excluding the 14 hotels sold or closed and 9 additional hotels undergoing significant repositionings or without comparable results in 2009 and 2008) decreased 28.7%, or $416 million, to $1,031 million for the nine months ended September 30, 2009 when compared to $1,447 million in the same period of 2008 due primarily to a decrease in REVPAR.

REVPAR at our worldwide Same-Store Owned Hotels decreased 29.7% to $124.37 for the nine months ended September 30, 2009 when compared to the corresponding 2008 period. The decrease in REVPAR at these worldwide Same-Store Owned Hotels resulted from a 20.4% decrease in ADR to $191.67 for the nine months ended September 30, 2009 compared to $240.81 for the corresponding 2008 period and a decrease in occupancy rates to 64.9% in the nine months ended September 30, 2009 when compared to 73.5% in the same period in 2008. REVPAR at Same-Store Owned Hotels in North America decreased 29.0% for the nine months ended September 30, 2009 when compared to the same period of 2008. REVPAR declined in all of our major domestic markets. REVPAR at our international Same-Store Owned Hotels decreased by 31.0% for the nine months ended September 30, 2009 when compared to the same period of 2008. REVPAR declined in most of our major international markets. REVPAR for Same-Store Owned Hotels internationally decreased 22.6% excluding the favorable effects of foreign currency translation.

The decrease in management fees, franchise fees and other income was primarily a result of an $88 million decrease in management and franchise revenue to $449 million for the nine months ended September 30, 2009. The decrease was due to the significant decline in base and incentive management fees as a result of the global economic crisis, partially offset by the net addition of 42 managed and franchised hotels to our system since the third quarter of 2008. Other income decreased $21 million primarily due to decreases in demand at our Bliss Spa business, partially offset by the recognition of a $7 million non-refundable deposit associated with the sale of a joint venture interest that failed to materialize.

The decrease in vacation ownership and residential sales and services was primarily due to lower originated contract sales of VOI inventory, which represents vacation ownership revenues before adjustments for percentage of completion accounting and other deferrals. Originated contract sales of VOI inventory decreased 44.9% in the nine months ended September 30, 2009 when compared to the same period in 2008. This decline was primarily driven by lower tour flow which was down 19.7% for the nine months ended September 30, 2009 when compared to the same period in 2008. The decline in tour flow was a result of the economic climate and resulting closure of underperforming sales centers. Additionally, the average contract amount per vacation ownership unit sold decreased 24.3% to approximately $16,000, driven by a higher sales mix of lower-priced inventory, including a higher percentage of lower-priced biennial inventory. The decrease is also due to a $43 million decrease in residential revenue, as the 2008 period included license fees in connection with two St. Regis projects.

Other revenues from managed and franchised properties decreased primarily due to a decrease in costs, commensurate with the decline in revenues, at our managed and franchised hotels. 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 and our net income.

Nine Months

Increase /

Percentage

Ended

(decrease)

change

September 30,

from prior

2009

2008

year

(in millions)

Selling, General, Administrative and Other

291

381

(90

)

(23.6

Nine Months

Increase /

Percentage

Ended

(decrease)

change

September 30,

from prior

2009

2008

year

(in millions)

Restructuring and Other Special Charges, Net

)

(25.0

During the nine months ended September 30, 2009 and 2008, we recorded a $24 million and $32 million, respectively, of restructuring charges in connection with our ongoing initiative of rationalizing our cost structure in light of the current economic climate and the decline in activity in our business units. Charges during the 2009 period primarily relate to severance. The 2008 charges related to severance and the closure of vacation ownership sales galleries and one call center.

Nine Months

Increase /

Percentage

Ended

(decrease)

change

September 30,

from prior

2009

2008

year

(in millions)

Depreciation and Amortization

238

242

)

(1.7

Depreciation and amortization expense was $238 million for the nine months ended September 30, 2009 when compared to $242 million in the same period of 2008 as additional depreciation from capital expenditures made in the last twelve months were offset by reduced depreciation expense from sold hotels.

Nine Months

Increase /

Percentage

Ended

(decrease)

change

September 30,

from prior

2009

2008

year

(in millions)

Operating Income

244

554

(310

)

(56.0

The decrease in operating income was primarily due to the decline in our core business units, hotels and vacation ownership, due to the severe impact from the global economic crisis as discussed above. These decreases were partially offset by the reduction in selling, general, administrative and other costs as a result of our activity value analysis costs savings project and other cost savings initiatives.

Nine Months

Increase /

Percentage

Ended

(decrease)

change

September 30,

from prior

2009

2008

year

(in millions)

Equity Earnings and Gains and (Losses) from Unconsolidated Ventures, Net

)

(19

)

n/m

The decrease in equity earnings and gains and losses from unconsolidated joint ventures was primarily due to decreased operating results at several properties owned by joint ventures in which we hold non-controlling interests. The decrease also relates to a charge of approximately $4 million, in 2009, related to an unfavorable mark-to-market adjustment on a US dollar denominated loan in an unconsolidated venture in Mexico.

Nine Months

Increase /

Percentage

Ended

(decrease)

change

September 30,

from prior

2009

2008

year

(in millions)

Net Interest Expense

156

150

4.0

The increase in net interest expense was primarily due to higher interest rates in the nine months ended September 30, 2009 when compared to the same period of 2008 and favorable exchange gains on cross-currency hedges recorded in interest expense in the prior year. Our weighted average interest rate was 6.39% at September 30, 2009 as compared to 5.73% at September 30, 2008.

Nine Months

Increase /

Percentage

Ended

(decrease)

change

September 30,

from prior

2009

2008

year

(in millions)

Loss on Asset Dispositions and Impairments, Net

n/m

During the nine months ended September 30, 2009, we recorded a net loss on dispositions of approximately $66 million, primarily related to the $10 million impairment of leasehold improvements due to an early termination of a

leased hotel, a $7 million loss on the sale of two wholly-owned hotels, the $22 million impairment of our retained interests in vacation ownership mortgage receivables, the $13 million impairment of an investment in a hotel management contract expected to be cancelled in the near term and the $5 million impairment of certain technology-related fixed assets.

During the nine months ended September 30, 2008, we recorded losses of $16 million primarily related to the impairment of two separate investments in which we held minority interests, offset, in part, by a gain of $4 million on the sale of one wholly-owned hotel.

Nine Months

Increase /

Percentage

Ended

(decrease)

change

September 30,

from prior

2009

2008

year

(in millions)

Income Tax (Benefit) Expense

(160

)

106

(266

)

n/m

The $266 million decrease in income tax expense primarily relates to a deferred tax benefit of $120 million (net) in 2009 for an Italian tax incentive program in which the tax basis of land and buildings for the hotels we own in Italy was stepped-up to fair value in exchange for paying a current tax of $9 million. The remaining decrease is primarily relates to a total tax benefit of $50 million related to domestic asset dispositions. Additionally, a benefit of $10 million was recognized to reverse the deferred interest accrual associated with the deferral of taxable income. The remaining decrease is due to lower pretax income.

Discontinued Operations

For the nine months ended September 30, 2009 and 2008, we recorded tax benefits of $1 million and tax charges of $49 million, respectively. We recorded $2 million and $49 million of tax charges for the nine months ended September 30, 2009 and 2008, respectively, as a result of a 2008 administrative tax ruling for an unrelated taxpayer that impacts the tax liability associated with the disposition of one of our businesses several years ago. The charge for the nine months ended September 30, 2009 is offset by a benefit of approximately $3 million related to the final settlement of an uncertain tax position related to an entity we sold several years ago.

Seasonality and Diversification

The hotel and leisure industry is seasonal in nature; however, the periods during which our properties experience higher hotel revenue activities vary from property to property and depend principally upon location. Our revenues historically have generally been lower in the first quarter than in the second, third or fourth quarters.

LIQUIDITY AND CAPITAL RESOURCES

Cash From Operating Activities

Cash flow from operating activities is generated primarily from management and franchise revenues, operating income from our owned hotels and sales of VOIs and residential units. Other sources of cash are distributions from joint-ventures, servicing financial assets and interest income. These are the principal sources of cash used to fund our operating expenses, principal and interest payments on debt, capital expenditures, dividend payments, property and income taxes and share repurchases. We believe that our existing borrowing availability together with capacity for additional borrowings and cash from operations will be adequate to meet all funding requirements for our operating expenses, principal and interest payments on debt, capital expenditures, dividend payments and share repurchases in the foreseeable future.

Our cash flow from operating activities has been dramatically impacted by the severe economic crisis in the United States and globally. As a result, we have focused on reducing our cost structure and have significantly reduced our selling, general, administrative and other expenses, which are primarily cash charges. Beginning in the middle of 2008, we began an activity value analysis project to review our cost structure across a majority of our corporate departments and divisional headquarters. A majority of our cost containment initiatives were completed and implemented in previous quarters and the benefits are now being realized. These actions are expected to yield an annual run rate savings of approximately $100 million.

The majority of our cash flow is derived from corporate and leisure travelers and is dependent on the supply and demand in the lodging industry. In a recessionary economy, we experience significant declines in business and leisure travel. The impact of declining demand in the industry and higher hotel supply in key markets could have a material impact on our sources of cash. Our day-to-day operations are financed through a net working capital deficit, a practice that is common in our industry. The ratio of our current assets to current liabilities was 0.91 and 0.81 as of September 30, 2009 and December 31, 2008, respectively. Consistent with industry practice, we sweep the majority of the cash at our owned hotels on a daily basis and fund payables as needed by drawing down on our existing revolving credit facility.

State and local regulations governing sales of VOIs and residential properties allow the purchaser of a VOI or property to rescind the sale subsequent to its completion for a pre-specified number of days. In addition, cash payments received from buyers of products under construction are held in escrow during the period prior to obtaining a certificate of occupancy. These payments and the deposits collected from sales during the rescission period are the primary components of our restricted cash balances in our consolidated balance sheets.

The 2009 Securitization resulted in cash from operating activities and is discussed in our general liquidity discussion under cash from financing activities.

Cash Used for Investing Activities

Gross capital spending during the nine months ended September 30, 2009 was as follows (in millions):


Maintenance Capital Expenditures⁽¹⁾:
Owned, Leased and Consolidated Joint Venture Hotels	$	72
Corporate and information technology		17

Subtotal		89


Vacation Ownership and Residential Capital Expenditures ⁽²⁾:
Net capital expenditures for inventory (excluding St. Regis Bal Harbour)		18
Net expenditures for inventory — St. Regis Bal Harbour		85

Subtotal		103

Development Capital		79


Total Capital Expenditures	$	271


(1)		Maintenance capital expenditures include improvements, repairs, and maintenance.

(2)		Represents gross inventory capital expenditures of $157 less cost of sales of $54.

Gross capital spending during the nine months ended September 30, 2009 included approximately $89 million of maintenance capital, and $79 million of development capital. Investment spending on gross vacation ownership interest (“VOI”) and residential inventory was $157 million, primarily in Bal Harbour, Florida, Rancho Mirage, California, Orlando, Florida and Cancun, Mexico.

As a result of the global economic climate, we have scaled back our capital expenditures in 2009. Our capital expenditure program includes both offensive and defensive capital. Defensive spending is related to repairs, maintenance, and renovations that we believe is necessary to stay competitive in the markets we are in. Other than capital to address fire and life safety issues, we consider defensive capital to be discretionary, although reductions to this capital program could result in decreases to our cash flow from operations, as hotels in certain markets could become less desirable. The offensive capital expenditures, which are primarily related 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 2009 (excluding vacation ownership and residential inventory) will be approximately $150 million for maintenance, renovations, and technology capital. In addition, for the full year 2009, we currently expect to spend approximately $175 million for investment projects, including construction of the St. Regis Bal Harbour and 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 21 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), construction of the St. Regis Bal Harbour, hotel renovations, VOI and residential 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) through our credit facilities described below, through the net proceeds from dispositions, through the assumption of debt, and from cash generated from operations.

We periodically review our business to identify properties or other assets that we believe either are non-core (including hotels where the return on invested capital is not adequate), no longer complement our business, are in markets which may not benefit us as much as other markets during an economic recovery or could be sold at significant premiums. We are focused on enhancing real estate returns and monetizing investments.

Since 2006, we have sold 60 hotels realizing proceeds of approximately $5.1 billion in numerous transactions. There can be no assurance, however, that we will be able to complete future dispositions on commercially reasonable terms or at all.

The sale of two wholly-owned hotels in the third quarter of 2009 resulted in cash from investing activities but is discussed in our general liquidity discussion under cash from financing activities.

Cash Used for Financing Activities

The following is a summary of our debt portfolio (including capital leases) as of September 30, 2009:


	Amount
	Outstanding at			Interest Rate at
	September 30,			September 30,			Average
	2009 (a)			2009			Maturity
	(in millions)						(In years)
Floating Rate Debt
Senior Credit Facilities:
Revolving Credit Facilities	$	159			3.30	%		1.4
Term Loans		300			3.31	%		1.4
Mortgages and Other		40			5.80	%		3.3
Interest Rate Swaps		500			4.83	%

Total/Average	$	999			4.17	%		1.5


Fixed Rate Debt
Senior Notes	$	2,740			7.27	%		4.7
Mortgages and Other		123			7.50	%		8.5
Interest Rate Swaps		(500	)		7.06	%

Total/Average	$	2,363			7.33	%		4.8


Total Debt
Total Debt and Average Terms	$	3,362			6.39	%		4.3


(a)		Excludes approximately $562 million of our share of unconsolidated joint venture debt, all of which is non-recourse.

Due to the current credit liquidity crisis, we evaluated the commitments of each of the lenders in our Revolving Credit Facilities (the “Facilities”). In addition, we have reviewed our debt covenants and restrictions and do not anticipate any issues regarding the availability of funds under the Facilities.

On April 27, 2009, we amended our revolving credit and term loan facilities (collectively with prior amendments the “Amended Credit Facilities”) with the consent of the lenders thereunder. The Amended Credit Facilities enhance our financial flexibility by increasing our maximum Consolidated Leverage Ratio (as defined in the Amended Credit Facilities) from 4.50x to 5.50x. Additionally, the definition of Consolidated EBITDA used in the Amended Credit Facilities has been modified to exclude certain cash severance expenses from Consolidated EBITDA. In connection with the amendment, we repaid $500 million of our term loan that was due June 2009 by drawing down on our revolver (see Note 9).

During the second and third quarters of 2009, we entered into various transactions that resulted in cash proceeds of nearly $1 billion as outlined below:

On May 7, 2009, we completed a public offering of $500 million of 7.875% Senior Notes due 2014.

On June 5, 2009, we sold approximately $181 million of vacation ownership notes receivable realizing cash proceeds of $125 million. We recorded a loss on the sale of these receivables of approximately $2 million (see Note 7).

In June 2009, we entered into a multi-year extension and amendment to our existing co-branded credit card agreement (“Amendment”) with American Express. In connection with the Amendment, we received $250 million in cash in July 2009 and, in return, sold SPG points to American Express to be used by American Express in the future. In accordance with the terms of the Amendment, if we fail to comply with certain financial covenants, we are required to repay the remaining liability and, if we do not repay such liability, we are required to pledge certain receivables as collateral for the remaining balance of the liability.

During the third quarter of 2009, we sold two wholly-owned hotels for cash proceeds of approximately $96 million.

We used the proceeds from the above transactions to retire the outstanding balance on our 2010 bank term loan.

Our Facilities are used to fund general corporate cash needs. As of September 30, 2009, we have availability of over $1.575 billion under the Facilities. Our ability to borrow under the Facilities is subject to compliance with the terms and conditions under the Facilities, including certain leverage and coverage covenants. The covenant which is expected to be the most restrictive, based on the current economic downturn, is the Consolidated Leverage Ratio discussed above. We would expect that this covenant will limit our ability to borrow the full amounts available under the Facilities in 2009 (depending on the use of proceeds from such borrowing).

Our current credit ratings and outlook are as follows: S&P BB (stable outlook); Moody’s Ba1 (stable outlook); and Fitch BB+ (negative outlook). Our credit ratings were downgraded by S&P, Moody’s and Fitch in the first quarter of 2009, primarily due to the trends in the lodging industry and the impact of the current market conditions on our ability to meet our future debt covenants. The impact of the ratings could impact our current and future borrowing costs, which cannot be currently estimated.

Based upon the current level of operations, management believes that our cash flow from operations, together with our significant cash balances (approximately $155 million at September 30, 2009, including $42 million of short-term and long-term restricted cash), available borrowings under the Facilities (approximately $1.575 billion at September 30, 2009), our expected income tax refund of over $200 million, and our capacity for additional borrowings will be adequate to meet anticipated requirements for scheduled maturities, dividends, working capital, capital expenditures, marketing and advertising program expenditures, other discretionary investments, interest and scheduled principal payments and share repurchases for the foreseeable future. However, there can be no assurance that we will be able to refinance our indebtedness as it becomes due and, if refinanced, on favorable terms. 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.

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 commercial commitments outstanding as of September 30, 2009 (in millions):


			Amount of Commitment Expiration Per Period
			Less Than						After
	Total		1 Year		1-3 Years		3-5 Years		5 Years

Standby letters of credit	$	168	$	165	$	—	$	—	$	3


Item 3.		*Quantitative and Qualitative Disclosures about Market Risk.*

We enter into forward contracts to manage foreign exchange risk in forecasted transactions based on foreign currency interest rate swaps to hedge interest rate risk and to manage foreign exchange risk on intercompany loans that are not deemed permanently invested (see Note 12).


Item 4.		*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 (the “Exchange Act”)). Based upon the foregoing evaluation, our principal executive and principal financial officers concluded that our disclosure controls and procedures were effective and operating to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and to provide reasonable assurance that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

There has been no change in our internal control over financial reporting (as defined in Rules 13(a)-15(e) and 15(d)-15(e) 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.

PART II. OTHER INFORMATION


Item 1.		*Legal Proceedings.*

We are involved in various claims and lawsuits arising in the ordinary course of business, none of which, in the opinion of management, is expected to have a material adverse effect on our consolidated financial position or results of operations.


Item 1A.		*Risk Factors.*

The discussion of our business and operations should be read together with the risk factors contained in Item 1A of our (i) Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 and (ii) Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed with the Securities and Exchange Commission, which describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner. At September 30, 2009, there have been no material changes to the risk factors set forth in our (i) Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 and (ii) Annual Report on Form 10-K for the year ended December 31, 2008.


Item 6.		*Exhibits*.


31.1		Certification Pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 — Chief Executive Officer ⁽¹⁾

31.2		Certification Pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 — Chief Financial Officer ⁽¹⁾

32.1		Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code — Chief Executive Officer ⁽¹⁾

32.2		Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code — Chief Financial Officer ⁽¹⁾

101		The following materials from Starwood Hotels & Resorts Worldwide, Inc.’s Quarterly Report on Form 10-Q for the period ended September 30, 2009, 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 Cash Flows, and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text.⁽²⁾


(1)		Filed herewith

(2)		This exhibit is being furnished rather than filed, and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-K.

SIGNATURES

Pursuant to the requirements 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/ frits van paasschen

				Frits van Paasschen
				Chief Executive Officer and Director


		By:		/s/ Alan M. Schnaid

				Alan M. Schnaid
				Senior Vice President, Corporate Controller
				and Principal Accounting Officer

Date: October 30, 2009

STARWOOD HOTEL & RESORTS WORLDWIDE, INC - FORM 10-Q - October 29, 2009

Attached files

STARWOOD HOTEL & RESORTS WORLDWIDE, INC Reports