Contract acquisition costs and other

125

^[1]

135

Assets, Current, Total

2,963

^[1]

3,406

Property and equipment

1,371

^[1]

1,443

Intangible assets

Goodwill

875

^[1]

875

734

^[1]

710

Goodwill And Intangible Assets, Net, Total

1,609

^[1]

1,585

Equity and cost method investments

257

^[1]

346

Notes receivable

Loans to equity method investees

^[1]

Loans to timeshare owners

438

^[1]

607

Other notes receivable

^[1]

173

Notes, Loans and Financing Receivable, Net, Noncurrent, Total

533

^[1]

830

Other long-term receivables

^[1]

158

Deferred taxes, net

1,012

^[1]

727

Current portion of long-term debt

443

^[1]

408

Assets, Total

8,267

^[1]

8,903

Current liabilities

137

^[1]

120

Accounts payable

559

^[1]

704

Accrued payroll and benefits

603

^[1]

633

Liability for guest loyalty program

438

^[1]

446

Timeshare segment deferred revenue

^[1]

Other payables and accruals

679

^[1]

560

Liabilities, Current, Total

2,491

^[1]

2,533

Long-term debt

2,523

^[1]

2,975

Liability for guest loyalty program

1,171

^[1]

1,090

Self-insurance reserves

231

^[1]

204

Other long-term liabilities

866

^[1]

710

Marriott shareholders' equity

Class A Common Stock

^[1]

Additional paid-in-capital

3,556

^[1]

3,590

Retained earnings

3,038

^[1]

3,565

Treasury stock, at cost

(5,622)

^[1]

(5,765)

Accumulated other comprehensive income (loss)

^[1]

(15)

Stockholders' Equity Attributable to Parent, Total

985

^[1]

1,380

Noncontrolling interests

^[1]

Total Shareholders' Equity

985

^[1]

1,391

Liabilities and Stockholders' Equity, Total

$ 8,267

^[1]

$ 8,903

[1]

Unaudited

Statement Of Cash Flows Indirect (Unaudited) (USD $)
In Millions, unless otherwise specified

9 Months Ended

Sep. 11, 2009

Sep. 05, 2008

OPERATING ACTIVITIES

Net (loss) income

$ (459)

$ 359

Adjustments to reconcile to cash provided by operating activities:

Depreciation and amortization

124

130

Income taxes

(195)

223

Timeshare activity, net

(273)

Timeshare strategy-impairment charges

752

Liability for guest loyalty program

Restructuring costs and other charges, net

Asset impairments and write-offs

Working capital changes and other

169

Net cash provided by operating activities

597

555

INVESTING ACTIVITIES

Capital expenditures

(112)

(220)

Dispositions

Loan advances

(50)

(20)

Loan collections and sales

Equity and cost method investments

(27)

(4)

Contract acquisition costs

(26)

(124)

Net cash used in investing activities

(51)

(130)

(367)

FINANCING ACTIVITIES

Commercial paper/credit facility, net

(259)

226

Issuance of long-term debt

Repayment of long-term debt

(159)

(192)

Issuance of Class A Common Stock

Dividends paid

(63)

(84)

Purchase of treasury stock

(428)

Net cash used in financing activities

(471)

(403)

DECREASE IN CASH AND EQUIVALENTS

(4)

(215)

CASH AND EQUIVALENTS, beginning of period

134

332

CASH AND EQUIVALENTS, end of period

$ 130

^[1]

$ 117

[1]

Unaudited

1.Basis of Presentation

9 Months Ended

Sep. 11, 2009

1.Basis of Presentation

1.	Basis of Presentation

The condensed consolidated financial statements present the results of operations, financial position, and cash flows of Marriott International, Inc. (“Marriott,” and together with its subsidiaries “we,” “us,” or the “Company”). In accordance with Financial Accounting Standards (“FAS”) No. 160, “Noncontrolling Interests in Consolidated Financial Statements-an Amendment of ARB No. 51” (“FAS No. 160”), references in this report to our earnings per share, net income and shareholders’ equity attributable to Marriott do not include noncontrolling interests (previously known as minority interests), which we report separately. Please see Footnote No. 2, “New Accounting Standards,” for additional information on this accounting standard adopted in the 2009 first quarter.

The accompanying condensed consolidated financial statements have not been audited. We have condensed or omitted certain information and footnote disclosures normally included in financial statements presented in accordance with U.S. generally accepted accounting principles (“GAAP”). We believe our disclosures are adequate to make the information presented not misleading. You should, however, read the condensed consolidated financial statements in conjunction with the consolidated financial statements and notes to those financial statements in our Annual Report on Form 10-K for the fiscal year ended January 2, 2009 (“2008 Form 10-K”). Certain terms not otherwise defined in this quarterly report have the meanings specified in our 2008 Form 10-K.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, the reported amounts of revenues and expenses during the reporting periods, and the disclosures of contingent liabilities. Accordingly, ultimate results could differ from those estimates. We have reclassified certain prior year amounts to conform to our 2009 presentation. Because we discontinued our synthetic fuel business in 2007, we have segregated the balances and activities of the synthetic fuel reportable segment and reported them as discontinued operations for all periods presented.

On May 1, 2009, the Board of Directors declared the issuance of a stock dividend of a 0.00369 share of common stock for each outstanding share of common stock of the Company, payable on July 30, 2009, to shareholders of record on June 25, 2009. On August 6, 2009, the Board of Directors declared the issuance of a stock dividend of a 0.00379 share of common stock for each outstanding share of common stock of the Company, payable on September 3, 2009, to shareholders of record on August 20, 2009. For periods prior to the stock dividends, all share and per share data in our condensed consolidated financial statements and related notes have been retroactively adjusted to reflect the second and third quarter stock dividends using factors of 0.00360 and 0.00370, respectively, adjusted downward to reflect cash that was paid in lieu of fractional shares on July 30, 2009, and September 3, 2009 to shareholders as of the dates of record.

Our 2009 third quarter ended on September 11, 2009; our 2008 fourth quarter ended on January 2, 2009; and our 2008 third quarter ended on September 5, 2008. In our opinion, the accompanying condensed consolidated financial statements reflect all normal and recurring adjustments necessary to present fairly our financial position as of September 11, 2009, and January 2, 2009, the results of our operations for the twelve and thirty-six weeks ended September 11, 2009, and September 5, 2008, and cash flows for the thirty-six weeks ended September 11, 2009, and September 5, 2008. Interim results may not be indicative of fiscal year performance because of seasonal and short-term variations. We have eliminated all material intercompany transactions and balances between entities consolidated in these financial statements. We have evaluated all subsequent events through October 9, 2009, the date the financial statements were issued.

Description containing the entire organization, consolidation and basis of presentation of financial statements disclosure. May be provided in more than one note to the financial statements, as long as users are provided with an understanding of (1) the significant judgments and assumptions made by an enterprise in determining whether it must consolidate a VIE and/or disclose information about its involvement with a VIE, (2) the nature of restrictions on a consolidated VIE's assets reported by an enterprise in its statement of financial position, including the carrying amounts of such assets, (3) the nature of, and changes in, the risks associated with an enterprise's involvement with the VIE, and (4) how an enterprise's involvement with the VIE affects the enterprise's financial position, financial performance, and cash flows. Describes procedure if disclosures are provided in more than one note to the financial statements.

+ References+ Details

2.New Accounting Standards

9 Months Ended

Sep. 11, 2009

2.New Accounting Standards

2.	New Accounting Standards

Financial Accounting Standards No. 141 (Revised 2007), “Business Combinations” (“FAS No. 141(R)”)

We adopted FAS No. 141(R) on January 3, 2009, the first day of our 2009 fiscal year. FAS No. 141(R) significantly changed the accounting for business combinations. Under FAS No. 141(R), an acquiring entity is required to recognize all the assets acquired and all the liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. Transaction costs are no longer included in the measurement of the business acquired. Instead, these costs are expensed as they are incurred. FAS No. 141(R) also includes a substantial number of new disclosure requirements. FAS No. 141(R) applies to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, which for us was the beginning of our 2009 fiscal year. The adoption of FAS No. 141(R) did not have a material impact on our financial statements.

Financial Accounting Standards No. 157, “Fair Value Measurements” (“FAS No. 157”)

We adopted FAS No. 157 on December 29, 2007, the first day of our 2008 fiscal year. FASB Staff Position (“FSP”) FAS No. 157-2, “Effective Date of Financial Accounting Standards Board (“FASB”) Statement No. 157” (“FSP FAS No. 157-2”), amended FAS No. 157 by delaying its effective date, by one year, for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. In accordance with FSP FAS No. 157-2, we adopted the provisions of FAS No. 157 to non-financial assets and non-financial liabilities in the first quarter of 2009. See Footnote No. 6, “Fair Value Measurements,” for additional information. The adoption did not have a material impact on our financial statements.

Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements-an Amendment of ARB No. 51” (“FAS No. 160”)

We adopted FAS No. 160 on January 3, 2009, the first day of our 2009 fiscal year. FAS No. 160 establishes new accounting and reporting standards for noncontrolling interests, previously known as minority interests, in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of noncontrolling interests as equity in the consolidated financial statements separate from the parent’s equity. The amount of net income or loss attributable to the noncontrolling interests is included in consolidated net income on the face of the income statement. FAS No. 160 clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize a gain or loss in net income attributable to Marriott when a subsidiary is deconsolidated. Such gain or loss is measured using the fair value of the noncontrolling equity investment on the deconsolidation date. FAS No. 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interests. FAS No. 160 is applied prospectively for fiscal years and interim periods within those fiscal years, beginning with the current fiscal year, except for the presentation and disclosure requirements, which are applied retrospectively for all periods presented. The adoption of FAS No. 160 did not have a material impact on our financial statements. See Footnote No. 14, “Comprehensive Income and Capital Structure,” for related disclosures.

Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133” (“FAS No. 161”)

We adopted FAS No. 161 on January 3, 2009, the first day of our 2009 fiscal year. FAS No. 161 requires enhanced disclosure of derivatives and hedging activities in order to improve the transparency of financial reporting. Under FAS No. 161, entities are required to provide enhanced disclosures relating to: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedge items are accounted for under FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“FAS No. 133”), and its related interpretations; and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. FAS No. 161 is applied prospectively to all derivative instruments and non-derivative instruments that are designated and qualify as hedging instruments and related hedged items accounted for under FAS No. 133 for all financial statements issued for fiscal years and interim periods beginning with our current fiscal year. See Footnote No. 16, “Derivative Instruments,” for the related disclosures. The adoption of FAS No. 161 did not have a material impact on our financial statements.

FSP FAS No. 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination that Arise from Contingencies” (“FSP FAS No. 141(R)-1”)

We adopted FSP FAS No. 141(R)-1 on January 3, 2009, the first day of our 2009 fiscal year. FSP FAS No. 141(R)-1 applies to all assets acquired and all liabilities assumed in a business combination that arise from contingencies. FSP FAS No. 141(R)-1 states that the acquirer will recognize such an asset or liability if the acquisition-date fair value of that asset or liability can be determined during the measurement period. If it cannot be determined during the measurement period, then the asset or liability should be recognized at the acquisition date if the following criteria, consistent with FAS No. 5, “Accounting for Contingencies,” are met: (1) information available before the end of the measurement period indicates that it is probable that an asset existed or that a liability had been incurred at the acquisition date, and (2) the amount of the asset or liability can be reasonably estimated. The adoption of FSP FAS No. 141(R)-1 did not have a material impact on our financial statements.

FSP FAS No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP FAS No. 142-3”)

We adopted FSP FAS No. 142-3 on January 3, 2009, the first day of our 2009 fiscal year. FSP FAS No. 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FAS No. 142, “Goodwill and Other Intangible Assets” (“FAS No. 142”). This FSP is intended to improve the consistency between the useful life of an intangible asset under FAS No. 142 and the period of expected cash flows used to measure the fair value of the asset. FSP FAS No. 142-3 requires an entity to disclose information related to the extent to which the expected future cash flows associated with the asset are affected by the entity’s intent and/or ability to renew or extend the arrangement. The adoption of FSP FAS No. 142-3 did not have a material impact on our financial statements.

EITF Issue 08-6, “Equity Method Investment Accounting Considerations” (“EITF 08-6”)

We adopted Emerging Issues Task Force (“EITF”) 08-6 on January 3, 2009, the first day of our 2009 fiscal year concurrently with the adoption of FAS No. 141(R) and FAS No. 160. The intent of EITF 08-6 is to clarify the accounting for certain transactions and impairment considerations related to equity method investments as modified by the provisions of FAS No. 141(R) and FAS No. 160. The adoption of EITF 08-6 did not have a material impact on our financial statements.

FSP FAS No. 115-2 and FAS No. 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS No. 115-2 and FAS No. 124-2”)

We adopted FSP FAS No. 115-2 and FAS No. 124-2 in the second quarter of 2009. FSP FAS No. 115-2 and FAS No. 124-2 modifies the other-than-temporary impairment guidance for debt securities through increased consistency in the timing of impairment recognition and enhanced disclosures related to the credit and noncredit components of impaired debt securities that are not expected to be sold. In addition, increased disclosures are required for both debt and equity securities regarding expected cash flows, credit losses, and securities with unrealized losses. The adoption of FSP FAS No. 115-2 and FAS No. 124-2 did not have a material impact on our financial statements.

FSP FAS No. 107-1 and APB Opinion No. 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS No. 107-1 and APB Opinion No. 28-1”)

We adopted FSP FAS No. 107-1 and APB Opinion No. 28-1 in the second quarter of 2009. FSP FAS No. 107-1 and APB Opinion No. 28-1 requires fair value disclosures for financial instruments that are not reflected in the Condensed Consolidated Balance Sheets at fair value. Prior to the issuance of FSP FAS No. 107-1 and APB Opinion No. 28-1, the fair values of those assets and liabilities were disclosed only annually. With the issuance of FSP FAS No. 107-1 and APB Opinion No. 28-1, we are now required to disclose this information on a quarterly basis, providing quantitative and qualitative information about fair value estimates for all financial instruments not measured in the Condensed Consolidated Balance Sheets at fair value. Please see Footnote No. 7, “Fair Value of Financial Instruments” for the relevant disclosures. The adoption of FSP FAS No. 107-1 and APB Opinion No. 28-1 did not have a material impact on our financial statements.

FSP 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”)

We adopted FSP FAS No. 157-4 in the second quarter of 2009. FSP FAS No. 157-4 clarifies the methodology to be used to determine fair value when there is no active market or where the price inputs being used represent distressed sales. FSP FAS No. 157-4 also reaffirms the objective of fair value measurement, as stated in FAS No. 157, which is to reflect how much an asset would be sold for in an orderly transaction. It also reaffirms the need to use judgment to determine if a formerly active market has become inactive, as well as to determine fair values when markets have become inactive. The adoption of FSP FAS No. 157-4 did not have a material impact on our financial statements.

Financial Accounting Standards No. 165, “Subsequent Events” (“FAS No. 165”)

We adopted FAS No. 165 in the second quarter of 2009. FAS No. 165 establishes the accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. See Footnote No. 1, “Basis of Presentation,” for the related disclosures. The adoption of FAS No. 165 did not have a material impact on our financial statements.

Future Adoption of Accounting Standards

The FASB issued the following two new accounting standards on June 12, 2009.

Financial Accounting Standards No. 166, “Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140” (“FAS No. 166”) and Financial Accounting Standards No. 167, “Amendments to FASB Interpretation No. 46(R)” (“FAS No. 167”)

FAS No. 166 amends FAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” by: eliminating the concept of a qualifying special-purpose entity (“QSPE”); clarifying and amending the derecognition criteria for a transfer to be accounted for as a sale; amending and clarifying the unit of account eligible for sale accounting; and requiring that a transferor initially measure at fair value and recognize all assets obtained (for example beneficial interests) and liabilities incurred as a result of a transfer of an entire financial asset or group of financial assets accounted for as a sale. Additionally, on and after the effective date, existing QSPEs (as defined under previous accounting standards) must be evaluated for consolidation by reporting entities in accordance with the applicable consolidation guidance. FAS No. 166 requires enhanced disclosures about, among other things, a transferor’s continuing involvement with transfers of financial assets accounted for as sales, the risks inherent in the transferred financial assets that have been retained, and the nature and financial effect of restrictions on the transferor’s assets that continue to be reported in the statement of financial position.

FAS No. 166 will be effective as of the beginning of interim and annual reporting periods that begin after November 15, 2009, which for us would be January 2, 2010, the first day of our 2010 fiscal year.

FAS No. 167 amends FIN 46(R), “Consolidation of Variable Interest Entities,” and changes the consolidation guidance applicable to a variable interest entity (“VIE”). It also amends the guidance governing the determination of whether an enterprise is the primary beneficiary of a VIE, and is, therefore, required to consolidate an entity, by requiring a qualitative analysis rather than a quantitative analysis. The qualitative analysis will include, among other things, consideration of who has the power to direct the activities of the entity that most significantly impact the entity’s economic performance and who has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. This standard also requires continuous reassessments of whether an enterprise is the primary beneficiary of a VIE. Previously, FIN 46(R) required reconsideration of whether an enterprise was the primary beneficiary of a VIE only when specific events had occurred. QSPEs, which were previously exempt from the application of this standard, will be subject to the provisions of this standard when it becomes effective. FAS No. 167 also requires enhanced disclosures about an enterprise’s involvement with a VIE.

FAS No. 167 will be effective as of the beginning of interim and annual reporting periods that begin after November 15, 2009, which for us would be January 2, 2010, the first day of our 2010 fiscal year.

We expect that the initial adoption of FAS No. 166 and FAS No. 167 in our 2010 first quarter will require our consolidation of 13 existing qualifying special purpose entities associated with past securitization transactions. Accordingly, we expect to record a one-time non-cash after-tax charge of approximately $70 million to $95 million ($115 million to $155 million pre-tax) in the 2010 first quarter, representing the cumulative effect of a change in accounting principle. The cumulative effect will consist primarily of the reestablishment of notes receivable (net of reserves) associated with those securitization transactions, more than offset by the elimination of residual interests that we initially recorded in connection with those transactions, the impact of recording debt obligations associated with third party interests held in the special purpose entities and related adjustments to inventory balances. We anticipate that our adoption of these standards will have the following impacts on our balance sheet: (1) assets will increase by approximately $950 million to $1,025 million, primarily representing the consolidation of notes receivable; (2) liabilities will increase by approximately $1,020 million to $1,120 million, primarily representing the consolidation of debt obligations associated with third party interests; and (3) shareholders’ equity will decrease by approximately $70 million to $95 million.

The ongoing impact of the adoption in subsequent periods could in the future also prevent us from meeting the derecognition criteria of FAS No. 166, and, accordingly, prevent us from achieving sale accounting for securitization transactions because the underlying securitization vehicles may require consolidation. On an ongoing basis, we estimate that we will report an annual increase in income from continuing operations before income taxes of approximately $30 million to $50 million, primarily attributable to the difference between interest income on notes held (net of interest expense to third party debt holders) and the previously recorded accretion income attributed to residual interests for our past securitization transactions. Future securitizations may also have an earnings impact but such amounts are not included in these estimates.

Accounting Standards Update No. 2009-05 “Fair Value Measurements and Disclosures (Topic 820) Measuring Liabilities at Fair Value” (“ASU No. 2009-5”)

The FASB issued ASU No. 2009-5, which amends Subtopic 820-10, “Fair Value Measurements and Disclosures-Overall” for the fair value measurement of liabilities, on August 28, 2009. ASU No. 2009-5 provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, an entity is required to measure fair value utilizing one or more of the following techniques: (1) a valuation technique that uses the quoted market price of an identical liability or similar liabilities when traded as assets; or (2) another valuation technique that is consistent with the principles of Topic 820, such as a present value technique. ASU No. 2009-5 will be effective for the first reporting period after the issuance, which for us would be the fourth quarter of 2009. We do not expect ASU No. 2009-5 to have a material impact on our financial statements.

6.Fair Value Measurements

9 Months Ended

Sep. 11, 2009

6.Fair Value Measurements

6.	Fair Value Measurements

FAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. FAS No. 157 details the disclosures that are required for items measured at fair value.

We have various financial instruments we must measure on a recurring basis under FAS No. 157, including certain marketable securities, derivatives, and residual interests related to our asset securitizations. We also apply the provisions of FAS No. 157 to various non-recurring measurements for our financial and non-financial assets and liabilities, which included the impairment of a joint venture investment, and two security deposits in the first quarter of 2009 and the impairment of Timeshare segment inventory, property and equipment, anticipated fundings in conjunction with certain purchase commitments, and a joint venture investment in the third quarter of 2009. See Footnote No. 19, “Restructuring Costs and Other Charges,” and Footnote No. 18, “Timeshare Strategy-Impairment Charges,” for further information. We measure our assets and liabilities using inputs from the following three levels of the fair value hierarchy:

Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date.

Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

Level 3 includes unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability. We develop these inputs based on the best information available, including our own data.

In accordance with the fair value hierarchy, the following table shows the fair value as of September 11, 2009, of those assets and liabilities that we must measure at fair value on a recurring basis and that we classify as “Other current assets,” “Other assets,” “Other payables and accruals,” and “Other long-term liabilities”:


*($ in millions)*	Fair Value Measurements as of September 11, 2009
Description	Balance at September 11, 2009			Level 1			Level 2			Level 3
Assets:
Residual interests	$	174		$	—		$	—		$	174
Marketable securities		31			15			16			—

Liabilities:
Derivative instruments		(10	)		(4	)		(4	)		(2	)

The following tables summarize the changes in fair value of our Level 3 assets and liabilities for the twelve and thirty-six weeks ended September 11, 2009:


*($ in millions)*	Fair Value Measurements of Assets and Liabilities Using Level 3 Inputs
	Residual Interests			Derivative Instruments
Beginning balance at June 19, 2009	$	180		$	(1	)
Total gains (losses) (realized or unrealized)
Included in earnings		10			(1	)
Purchases, sales, issuances, and settlements		(16	)		—

Ending balance at September 11, 2009	$	174		$	(2	)


Gains (losses) for the third quarter of 2009 included in earnings attributable to the change in unrealized gains or losses relating to assets still held at the reporting date	$	10		$	(1	)


*($ in millions)*	Fair Value Measurements of Assets and Liabilities Using Level 3 Inputs
	Residual Interests			Derivative Instruments
Beginning balance at January 3, 2009	$	221		$	(15	)
Total gains (losses) (realized or unrealized)
Included in earnings		(1	)		—
Purchases, sales, issuances, and settlements		(46	)		13

Ending balance at September 11, 2009	$	174		$	(2	)


Gains (losses) for the first three quarters of 2009 included in earnings attributable to the change in unrealized gains or losses relating to assets still held at the reporting date	$	(1	)	$	—

As discussed in more detail in Footnote No. 12, “Asset Securitizations,” we periodically sell notes receivable originated by our Timeshare segment. We continue to service the notes after the sale, and we retain servicing assets and other interests in the notes and account for these assets and interests as residual interests. At the dates of sale and at the end of each reporting period, we estimate the fair value of our residual interests using a discounted cash flow model. These transactions may utilize interest rate swaps to protect the net interest margin associated with the beneficial interest.

The most significant estimate involved in the measurement process is the discount rate, followed by the default rate and the loan prepayment rate. Estimates of these rates are based on management’s expectations of future prepayment rates and default rates, reflecting our historical experience, industry trends, current market interest rates, expected future interest rates, and other considerations. Actual prepayment rates, default rates, and discount rates could differ from those projected by management due to changes in a variety of economic factors, including prevailing interest rates and the availability of alternative financing sources to borrowers. If actual prepayments of the notes being serviced were to occur more slowly than had been projected, or if actual default rates or actual discount rates are lower than expected, the carrying value of servicing assets could increase and accretion and servicing income would exceed previously projected amounts. Conversely, if actual prepayments occur at a faster than projected pace, or if actual default or actual discount rates are higher than we expect, the carrying value of servicing assets could decrease and accretion and servicing income would be below previously projected amounts. Accordingly, the residual interests actually realized, could differ from the amounts initially or currently recorded.

The discount rates we use in determining the fair values of our residual interests are based on the volatility characteristics (i.e., defaults and prepayments) of the residual assets. We assume increases in the default and prepayment rates and discount the resulting cash flows with a low risk rate to derive a stressed asset value. The low risk rate approximates credit spreads in the current market. Using our base case cash flows, we then determine the discount rate, which when applied to the base case cash flows, produces the stressed asset value, which we assume approximates an exit price for the residual assets. We adjust discount rates quarterly as interest rates, credit spreads, and volatility characteristics in the market fluctuate.

We treat our residual interests as trading securities under the provisions of FAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and accordingly, we record realized and unrealized gains or losses related to these assets in the “Timeshare sales and services” revenue caption in our Condensed Consolidated Statements of Income. During the twelve weeks ended September 11, 2009, and September 5, 2008, we recorded trading gains of $10 million and $12 million, respectively. During the thirty-six weeks ended September 11, 2009 and September 5, 2008, we recorded trading losses of $1 million and gains of $14 million, respectively.

For our first quarter 2009 note sale, we used the following key assumptions to measure the fair value of the residual interests, including servicing assets, at the date of sale: average discount rate of 13.57 percent; average expected annual prepayments, including defaults, of 19.27 percent; expected weighted average life of prepayable notes receivable, excluding prepayments and defaults, of 73 months; and expected weighted average life of prepayable notes receivable, including prepayments and defaults, of 38 months. Our key assumptions are based on experience with notes receivable and servicing assets.

We used the following key assumptions in measuring the fair value of the residual interests in our 13 outstanding Timeshare note sales as of September 11, 2009: an average discount rate of 17.07 percent; an average expected annual prepayment rate, including defaults, of 15.56 percent; an expected weighted average life of prepayable notes receivable, excluding prepayments and defaults, of 57 months; and an expected weighted average life of prepayable notes receivable, including prepayments and defaults, of 37 months.

We completed a stress test on the fair value of the residual interests as of the end of the 2009 third quarter to measure the change in value associated with independent changes in individual key variables. This methodology applied unfavorable changes that would be statistically significant for the key variables of prepayment rate, discount rate, and weighted average remaining term. Before we applied any of these stress test changes, we determined that the fair value of the residual interests was $174 million as of September 11, 2009.

Applying the stress tests, we concluded that each change to a variable shown in the table below would have the following impact on the valuation of our residual interests at the end of the 2009 third quarter.


	Decrease in Quarter- End Valuation ($ in millions)		Percentage Decrease
100 basis point increase in the prepayment rate	$	4	2.2	%
200 basis point increase in the prepayment rate		8	4.7	%
100 basis point increase in the discount rate		4	2.5	%
200 basis point increase in the discount rate		9	4.9	%
Two month decline in the weighted average remaining term		1	0.8	%
Four month decline in the weighted average remaining term		3	1.6	%

We value our Level 3 input derivatives using valuations that are calibrated to the initial trade prices. Subsequent valuations are based on unobservable inputs to the valuation model including interest rates and volatilities. We record realized and unrealized gains and losses on these derivative instruments in gains from the sale of timeshare notes receivable, which are recorded within the “Timeshare sales and services” revenue caption in our Condensed Consolidated Statements of Income.

In connection with the first quarter 2009 note sale, on the date of transfer, we recorded notes that we effectively owned after the transfer at a fair value of $81 million. We used a discounted cash flow model, including Level 3 inputs, to determine the fair value of notes we effectively owned after the transfer. We based the discount rate we used in determining the fair value on the methodology described earlier in this footnote. Other assumptions, such as default and prepayment rates, are consistent with those used in determining the fair value of our residual interests. For additional information, see Footnote No. 12, “Asset Securitizations.”

During the first quarter of 2009, we recorded $79 million of impairment charges for two of our security deposits and one joint venture investment, prior to the application of an $11 million liability remaining from 2008. These charges are reflected in our thirty-six week Condensed Consolidated Statements of Income as $49 million in the “General, administrative, and other” caption and $30 million in the “Equity in (losses) earnings” caption. For additional information, see Footnote No. 19, “Restructuring Costs and Other Charges.”

During the third quarter of 2009, we recorded an other-than-temporary impairment charge related to marketable equity securities. This charge is reflected in our twelve and thirty-six week Condensed Consolidated Statements of Income as $5 million in the “(Losses) gains and other income” caption. We measure these securities using Level 1 inputs on a recurring basis.

During the third quarter of 2009, in conjunction with our evaluation of the entire Timeshare portfolio and our resulting decisions to adjust the business strategy to reflect current market conditions, we recorded $685 million of impairment charges in accordance with FAS No. 157 for inventory, property and equipment, anticipated fundings in conjunction with certain purchase commitments, and one joint venture investment. We reflect these charges in our twelve and thirty-six week Condensed Consolidated Statements of Income as $614 million in the “Timeshare strategy – impairment charges” caption and $71 million in the “Timeshare strategy-impairment charges (non-operating)” caption. For additional information, see Footnote No. 18, “Timeshare Strategy-Impairment Charges.”

This element represents the disclosure related to the fair value measurement of assets and liabilities which includes [financial] instruments measured at fair value that are classified in stockholders' equity. Such assets and liabilities may be measured on a recurring or nonrecurring basis. The disclosures which may be required or desired include: (1) for assets and liabilities measured on a recurring basis, disclosure may include: (a) the fair value measurements at the reporting date; (b) the level within the fair value hierarchy in which the fair value measurements in their entirety fall, segregating fair value measurements using quoted prices in active markets for identical assets or liabilities (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3); (c) for fair value measurements using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances, separately presenting changes during the period attributable to the following: (i) total gains or losses for the period (realized and unrealized), segregating those gains or losses included in earnings (or changes in net assets), and a description of where those gains or losses included in earnings (or changes in net assets) are reported in the statement of income (or activities); (ii) purchases, sales, issuances, and settlements (net); (iii) transfers in and transfers out of Level 3 (for example, transfers due to changes in the observability of significant inputs); (d) the amount of the total gains or losses for the period in subparagraph (c) (i) above included in earnings (or changes in net assets) that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held at the reporting date and a description of where those unrealized gains or losses are reported in the statement of income (or activities); (e) the valuation technique(s) used to measure fair value and a discussion of changes in valuation techniques, if any, during the period and (2) for assets and liabilities that are measured at fair value on a nonrecurring basis (for example, impaired assets) disclosure may include, in addition to (a) above: (a) the reasons for the fair value measurements recorded; (b) the same as (b) above; (c) for fair value measurements using significant unobservable inputs (Level 3), a description of the inputs and the information used to develop the inputs; and (d) the valuation technique(s) used to measure fair value and a discussion of changes, if any, in the valuation technique(s) used to measure similar assets and/or liabilities in prior periods.

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7.Fair Value of Financial Instruments

9 Months Ended

Sep. 11, 2009

7.Fair Value of Financial Instruments

7.	Fair Value of Financial Instruments

We adopted FSP FAS No. 107-1 and APB Opinion No. 28-1 as of March 28, 2009, the first day of our 2009 second quarter. The guidance requires quarterly fair value disclosures for financial instruments rather than annual disclosure.

We believe that the fair values of our current assets and current liabilities approximate their reported carrying amounts. The carrying values and the fair values of non-current financial assets and liabilities, that qualify as financial instruments per FAS No. 107, “Disclosures about Fair Value of Financial Instruments,” are shown in the following table.


	At September 11, 2009						At Year-End 2008
*($ in millions)*	Carrying Amount			Fair Value			Carrying Amount			Fair Value
Cost method investments	$	40		$	32		$	37		$	36
Long-term notes receivable		533			519			830			817
Residual interests and effectively owned notes		197			197			135			135
Restricted cash		18			18			51			51
Marketable securities		31			31			24			24
Other long-term receivables		23			22			24			24

Total long-term financial assets	$	842		$	819		$	1,101		$	1,087

Long-term debt	$	(2,492	)	$	(2,473	)	$	(2,941	)	$	(2,720	)
Other long-term liabilities		(90	)		(86	)		(92	)		(92	)
Long-term derivative liabilities		(6	)		(6	)		(20	)		(20	)

Total long-term financial liabilities	$	(2,588	)	$	(2,565	)	$	(3,053	)	$	(2,832	)

We estimate the fair value of our cost method investments by applying a cap rate to stabilized earnings. We estimate the fair value of our long-term notes receivables using various methods, which include discounting cash flows using risk-adjusted rates and applying historical results from our most recent securitization transaction to our unsold notes receivables. The carrying value of our restricted cash approximates its fair value, and we estimate the fair value of our other long-term receivables by discounting future cash flows at risk-adjusted rates. The carrying value of our marketable securities at September 11, 2009, of $31 million includes $15 million in equity securities in one entity and $16 million in debt securities of the U.S. Government, its sponsored agencies and other U.S. corporations invested for our self-insurance programs. Our residual interests, marketable securities, and restricted cash are included within the “Other long-term assets” caption on our Condensed Consolidated Balance Sheets.

We estimate the fair value of our long-term debt, excluding leases, using a combination of quoted market prices and expected future payments discounted at risk-adjusted rates. Other long-term liabilities represent guarantee costs and reserves and deposit liabilities. The carrying value of these liabilities approximates their fair values.

Our residual interests related to our timeshare securitizations, marketable securities, and derivative liabilities are carried at fair value. Please see Footnote No. 6, “Fair Value Measurements,” for additional information on the methods and assumptions used to estimate the fair value of these financial instruments and for further information on the effectively held notes. We include our long-term derivative liabilities within the “Other long-term liabilities” caption on our Condensed Consolidated Balance Sheets. See Footnote No. 16, “Derivative Instruments” for additional information.

This item represents the complete disclosure regarding the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments, assets, and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the Company is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risk is are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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12.Asset Securitizations

9 Months Ended

Sep. 11, 2009

12.Asset Securitizations

12.

Asset Securitizations

As noted in Footnote No. 12, “Asset Securitizations,” in our 2008 Form 10-K, we periodically sell, without recourse, through special purpose entities, notes receivable originated by our Timeshare segment in connection with the sale of timeshare interval and fractional products. We continue to service the notes and transfer all proceeds collected to special purpose entities. We retain servicing assets and other interests in the notes and account for these assets and interests as residual interests. Residual interests at September 11, 2009, and January 2, 2009, totaled $174 million and $221 million, respectively, and included servicing assets totaling $12 million and $12 million, respectively. The interests are limited to the present value of cash available after paying financing expenses and program fees and absorbing credit losses.

We have inherent risk for changes in fair value of the servicing assets but do not deem the risk significant and therefore, do not use other financial instruments to mitigate this risk. The changes in servicing assets for the twelve weeks and thirty-six weeks ended September 11, 2009, measured using the fair value method appear in the following table:


*($ in millions)*	Servicing Assets Twelve Weeks Ended September 11, 2009			Servicing Assets Thirty-Six Weeks Ended September 11, 2009
Fair value at beginning of period	$	13		$	12
Servicing from securitizations		—			3
Changes in fair value ⁽¹⁾		(1	)		(3	)

Fair value at end of period	$	12		$	12

⁽¹⁾	Principally represents changes due to collection/realization of expected future cash flows over time and changes in fair value due to changes in key variables listed below.

At the end of the third quarter of 2009, $1,168 million of principal due from timeshare interval and fractional owners remained outstanding in 13 special purpose entities formed in connection with our timeshare note sales. Delinquencies of more than 90 days amounted to $16 million. The impact to us from delinquencies, and our maximum exposure to loss as a result of our involvement with these special purpose entities, is limited to our residual interests, which we value based on a discounted cash flow model, as discussed in Footnote No. 6, “Fair Value Measurements.” Please see the “Timeshare Residual Interests Valuation” caption within the “Restructuring Costs and Other Charges” section of the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section for additional information on the risks associated with our residual interests. Under the terms of our timeshare note sales, we have the right, at our option, to repurchase defaulted mortgage notes at par. The transaction documents typically limit such repurchases to ten percent of the transaction’s initial mortgage balance, but during the 2009 third quarter investors in two of our outstanding note sale transactions agreed to increase the applicable limit to 15 percent. In cases where we have chosen to exercise this repurchase right, we have been able to resell the timeshare units underlying the defaulted loans without incurring material losses, although we may not be able to do so in the future.

Cash flows between us and third-party purchasers during the thirty-six weeks ended September 11, 2009, and September 5, 2008 were as follows: net proceeds to us from new timeshare note sales of $181 million and $237 million, respectively; voluntary repurchases by us of defaulted notes (over 150 days overdue) of $58 million and $37 million, respectively; servicing fees received by us of $5 million and $5 million, respectively; and cash flows received from our retained interests of $54 million and $69 million, respectively.

We earned contractually specified servicing fees for the twelve weeks ended September 11, 2009 and September 5, 2008 totaling $2 million and $2 million, respectively, which we reflected within the changes in fair value to the servicing assets. Contractually specified late and ancillary fees earned for the twelve weeks ended September 11, 2009 and September 5, 2008, totaled $2 million for both periods. We reflect servicing fees and late and ancillary fees within the “Timeshare sales and services” line item on our Condensed Consolidated Statements of Income.

We earned contractually specified servicing fees for the thirty-six weeks ended September 11, 2009 and September 5, 2008 totaling $5 million and $5 million, respectively, which we reflected within the changes in fair value to the servicing assets. Contractually specified late and ancillary fees earned for the thirty-six weeks ended September 11, 2009 and September 5, 2008, totaled $5 million for both periods.

In March 2009, prior to the end of our first quarter, we completed a private placement of approximately $205 million of floating-rate Timeshare Loan Backed Notes with a bank-administered commercial paper conduit. We contributed approximately $284 million of notes receivable originated by our Timeshare segment in connection with the sale of timeshare interval and fractional ownership products to a newly formed special purpose entity. On the same day, the special purpose entity issued approximately $205 million of the entity’s notes. In connection with the private placement of notes receivable, we received proceeds of approximately $181 million, net of costs, and retained $94 million of residual interests in the special purpose entity, which included $81 million of notes we effectively owned after the transfer and $13 million related to the servicing assets and interest only strip. We measured all residual interests at fair market value on the date of the transfer. The notes effectively owned after the transfer require accounting treatment as notes receivable and are carried at the basis established at the date of transfer unless we deem them non-recoverable in the future. If that were to occur, we would record a valuation allowance.

In connection with the first quarter 2009 note sale, we recorded a $1 million loss, which was included within the “Timeshare sales and services” line item on our Condensed Consolidated Statements of Income. See “Asset Securitizations” later in this report in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for information regarding disruption in the credit markets.

As of September 11, 2009, the value of the notes that we effectively owned from the 2009 note sale was approximately $82 million, which we classified as “Other assets” in our Condensed Consolidated Balance Sheets. During the thirty-six weeks ended September 11, 2009, we recorded approximately $6 million of interest income associated with these effectively owned notes, $3 million of which we recognized during the third quarter.

Provides the disclosures pertaining to a transferor's continuing involvement in financial assets that it has transferred in a securitization or asset-backed financing arrangement, the nature of any restrictions on assets reported by an entity in its statement of financial position that relate to a transferred financial asset (including the carrying amounts of such assets), how servicing assets and servicing liabilities are reported, and (for securitization or asset-backed financing arrangements accounted for as sales) when a transferor has continuing involvement with the transferred financial assets and transfers of financial assets accounted for as secured borrowings, how the transfer of financial assets affects an entity's financial position, financial performance, and cash flows.

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15.Contingencies

9 Months Ended

Sep. 11, 2009

15.Contingencies

15.

Contingencies

Guarantees

We issue guarantees to certain lenders and hotel owners primarily to obtain long-term management contracts. The guarantees generally have a stated maximum amount of funding and a term of three to 10 years. The terms of guarantees to lenders generally require us to fund if cash flows from hotel operations are inadequate to cover annual debt service or to repay the loan at the end of the term. The terms of the guarantees to hotel owners generally require us to fund if the hotels do not attain specified levels of operating profit. Guarantee fundings to lenders and hotel owners are generally recoverable as loans repayable to us out of future hotel cash flows and/or proceeds from the sale of hotels. We also enter into project completion guarantees with certain lenders in conjunction with hotels and Timeshare segment properties that we or our joint venture partners are building.

The maximum potential amount of future fundings for guarantees where we are the primary obligor and the carrying amount of the liability for expected future fundings at September 11, 2009, are as follows:


*($ in millions)*
Guarantee Type	Maximum Potential Amount of Future Fundings		Liability for Expected Future Fundings at September 11, 2009
Debt service	$	37	$	1
Operating profit		152		26
Other		102		7

Total guarantees where we are the primary obligor	$	291	$	34

The liability for expected future fundings at September 11, 2009, is included in our Condensed Consolidated Balance Sheets as follows: $6 million in the “Other payables and accruals” line item and $28 million in the “Other long-term liabilities” line item.

Our guarantees of $291 million listed in the preceding table include $33 million of operating profit guarantees that will not be in effect until the underlying properties open and we begin to operate the properties, along with $3 million of debt service guarantees that will not be in effect until the underlying debt has been funded, and $9 million of other guarantees that will not be in effect until certain requirements are met.

The guarantees of $291 million in the preceding table do not include $179 million of guarantees that we anticipate will expire in the years 2011 through 2013, related to Senior Living Services lease obligations totaling $123 million and lifecare bonds totaling $56 million for which we are secondarily liable. Sunrise Senior Living, Inc. (“Sunrise”) is the primary obligor of the leases and $8 million of the lifecare bonds, and CNL Retirement Properties, Inc., which subsequently merged with Health Care Property Investors, Inc. (“HCP”), is the primary obligor of $46 million of the lifecare bonds. Five Star is the primary obligor of the remainder of the lifecare bonds. Prior to our sale of the Senior Living Services business in 2003, these preexisting guarantees were guarantees by us of obligations of consolidated Senior Living Services subsidiaries. Sunrise and HCP have indemnified us for any guarantee fundings we may be called on to make in connection with these lease obligations and lifecare bonds. While we currently do not expect to fund under the guarantees, according to recent SEC filings made by Sunrise there has been a significant deterioration in Sunrise’s financial position and access to liquidity; accordingly, Sunrise’s continued ability to meet these guarantee obligations cannot be assured.

The table also does not include lease obligations for which we became secondarily liable when we acquired the Renaissance Hotel Group N.V. in 1997, consisting of annual rent payments of approximately $6 million and total remaining rent payments through the initial term of approximately $64 million. Most of these obligations expire at the end of 2020. CTF Holdings Ltd. (“CTF”) had originally made available €35 million in cash collateral in the event that we are required to fund under such guarantees. Approximately €7 million ($9 million) of this cash collateral remained at the end of the 2009 third quarter. Our contingent liability exposure of approximately $64 million will decline to the extent that CTF obtains releases from the landlords or these hotels exit the system. Since the time we assumed these guarantees, we have not funded any amounts and we do not expect to fund any amounts under these guarantees in the future.

In addition to the guarantees noted in the preceding table, we have provided a project completion guarantee to a lender for a project with an estimated aggregate total cost of $586 million. Payments for cost overruns for this project will be satisfied by the joint venture through contributions from the partners, and we are liable on a several basis with our partners in an amount equal to our pro rata ownership in the joint venture, which is 34 percent. We do not expect to fund under the guarantee. At the end of the 2009 third quarter, the carrying value of the liabilities associated with this project completion guarantee was $6 million. We have provided a project completion guarantee to another lender for a project with an estimated aggregate total cost of CAD $466 million (USD $427 million). Payments for cost overruns for this project will be satisfied by the joint venture through contributions from the partners, and we are liable on a several basis with our partners in an amount equal to our pro rata ownership in the joint venture, which is 20 percent. We do not expect to fund under the guarantee. At September 11, 2009, the carrying value of the liabilities associated with this project completion guarantee was $3 million.

In addition to the guarantees described in the preceding paragraphs, in conjunction with financing obtained for specific projects or properties owned by joint ventures in which we are a party, we may provide industry standard indemnifications to the lender for loss, liability, or damage occurring as a result of the actions of the other joint venture owner or our own actions.

Commitments and Letters of Credit

In addition to the guarantees noted previously, we had the following commitments outstanding as of September 11, 2009:

•

$5 million of loan commitments we have extended to owners of lodging properties, under which we expect to fund approximately $3 million, in two to three years. We do not expect to fund the remaining $2 million of commitments, $1 million of which will expire in two to three years and $1 million of which will expire after six years.

•

Commitments to invest up to $50 million of equity for noncontrolling interests in partnerships that plan to purchase North American full-service and limited-service properties or purchase or develop hotel-anchored mixed-use real estate projects. We expect to fund $40 million of these commitments in two to three years and $10 million after three years. If not funded, $30 million of these investment commitments will expire within three years, and $20 million will expire in more than three years.

•

A commitment, with no expiration date, to invest up to $12 million in a joint venture for development of a new property that we expect to fund in two to three years.

•

A commitment, with no expiration date, to invest up to $7 million in a joint venture that we do not expect to fund.

•

A commitment, subject to certain conditions, to invest up to $50 million (€35 million) into a new fund, which we expect will be capitalized and launched within six to 18 months, to purchase or develop Marriott brand hotels in Western Europe that will be managed exclusively by us. After the initial closing of the fund, we expect that our commitment will expire after four years subject to a one-year extension option with funding occurring over time during that period.

•

A commitment to invest up to $29 million (€20 million) in a joint venture in which we are a partner. We do not expect to fund under this commitment.

•

We have two commitments aggregating to $139 million to purchase units upon completion of construction for use in our Asia Pacific points and the Ritz-Carlton Destination Club programs. We have already made deposits of $21 million in conjunction with these commitments, and we expect to make the remaining payment of $118 million in 2010.

At September 11, 2009, we also had $118 million of letters of credit outstanding, the majority of which related to our self-insurance programs. Surety bonds issued as of September 11, 2009, totaled $405 million, the majority of which were requested by federal, state or local governments related to our lodging operations, including our Timeshare segment and self-insurance programs.

16.Derivative Instruments

9 Months Ended

Sep. 11, 2009

16.Derivative Instruments

16.

Derivative Instruments

We adopted FAS No. 161 on January 3, 2009, the first day of our 2009 fiscal year. FAS No. 161 enhances the current disclosure framework for derivative instruments and hedging activities. In this initial year of adoption, we have elected not to present earlier periods for comparative purposes.

The designation of a derivative instrument as a hedge and its ability to meet the FAS No. 133 hedge accounting criteria determine how the change in fair value of the derivative instrument will be reflected in the Condensed Consolidated Financial Statements. A derivative qualifies for hedge accounting if, at inception, the derivative is expected to be highly effective in offsetting the underlying hedged cash flows or fair value and the documentation standards of FAS No. 133 are fulfilled at the time we enter into the derivative contract. A hedge is designated as a cash flow hedge, fair value hedge, or a net investment in foreign operations hedge based on the exposure being hedged. The asset or liability value of the derivative will change in tandem with its fair value. Changes in fair value, for the effective portion of qualifying hedges, are recorded in other comprehensive income (“OCI”). The derivative’s gain or loss is released from OCI to match the timing of the underlying hedged cash flows effect on earnings.

We review the effectiveness of our hedging instruments on a quarterly basis, recognize current period hedge ineffectiveness immediately in earnings, and discontinue hedge accounting for any hedge that we no longer consider to be highly effective. We recognize changes in fair value for derivatives not designated as hedges or those not qualifying for hedge accounting in current period earnings. Upon termination of cash flow hedges, we release gains and losses from OCI based on the timing of the underlying cash flows, unless the termination results from the failure of the intended transaction to occur in the expected timeframe. Such untimely transactions require us to immediately recognize in earnings gains and losses previously recorded in OCI.

Changes in interest rates, foreign exchange rates, and equity securities expose us to market risk. We manage our exposure to these risks by monitoring available financing alternatives, as well as through development and application of credit granting policies. We also use derivative instruments, including cash flow hedges, net investment in foreign operations hedges, fair value hedges, and other derivative instruments, as part of our overall strategy to manage our exposure to market risks associated with fluctuations in interest rates and foreign currency exchange rates. As a matter of policy, we only enter into transactions that we believe will be highly effective at offsetting the underlying risk, and we do not use derivatives for trading or speculative purposes.

Our use of derivative instruments to manage market risks exposes us to the risk that a counterparty could default on a derivative contract. Our financial instrument counterparties are high-quality investment or commercial banks with significant experience with such instruments. We manage our exposure to counterparty risk by requiring specific minimum credit standards for our counterparties and by spreading our derivative contracts among diverse counterparties. As of September 11, 2009, we had derivative contracts outstanding with seven investment grade counterparties.

In the event that we were to default under a derivative contract or similar obligation, our derivative counterparty would generally have the right, but not the obligation, to require immediate settlement of some or all open derivative contracts at their then-current fair value. Although the netting terms of our derivative contracts vary by agreement, in a settlement following a default, the liability positions under some of these contracts would be netted against the asset positions with the same counterparty. At September 11, 2009, we had open derivative contracts in a liability or net liability position with a total fair value of $10 million.

During the first three quarters of 2009, we used the following derivative instruments to mitigate our interest rate and foreign currency exchange rate risks:

Cash Flow Hedges

During 2008, we entered into interest rate swaps to manage interest rate risk associated with forecasted timeshare note sales. During 2008, eleven swaps were designated as cash flow hedges under FAS No. 133. We terminated nine of the eleven swaps in 2008 and recognized a $6 million loss in “Timeshare sales and services” revenue in our 2008 full-year income statement. The remaining two swaps became ineffective in the fourth quarter of 2008. We recognized a $12 million loss in “Timeshare sales and services” revenue in our full-year 2008 income statement and no longer accounted for them as cash flow hedges under FAS No. 133. We terminated these swaps in the first quarter of 2009 and recognized no additional gain or loss.

During 2009 and fiscal years 2008 and 2007, we entered into forward foreign exchange contracts to hedge the risk associated with forecasted transactions for contracts and fees denominated in foreign currencies. These contracts have terms of less than three years. During the 2009 third quarter, we entered into foreign exchange option contracts to hedge the risk associated with forecasted transactions for contracts and fees denominated in foreign currencies. These contracts have terms of less than one year.

Net Investment Hedges

During 2009, we entered into forward foreign exchange contracts to manage our risk of currency exchange rate volatility associated with certain of our investments in foreign operations. The contracts offset the gains and losses associated with translation adjustments for various investments in foreign operations.

Fair Value Hedges

In 2003, we entered into an interest rate swap to address interest rate risk. Under this agreement, which has an aggregate notional amount of $92 million and matures in 2010, we receive a floating rate of interest and pay a fixed rate of interest. The swap modifies our interest rate exposure by effectively converting a note receivable with a fixed rate to a floating rate. We classify this swap as a fair value hedge under FAS No. 133 and we recognize the change in the fair value of the swap, as well as the change in the fair value of the underlying note receivable, in interest income. Due to the structure of the swap, the change in its fair value moves in tandem with the change in fair value of the underlying note receivable. The hedge is highly effective and, therefore, we reported no net gain or loss during the first three quarters of 2009.

Derivatives not Designated as Hedging Instruments Under FAS No. 133

In certain note sale transactions, we use interest rate swaps to limit the variability in the value of the excess spread (or the difference between the loan portfolio average fixed coupon rate and the variable rate expected by the note investors) due to changing interest rates. Although we expect to receive the excess spread, we provide interest rate swaps for the benefit of the investors in the event the underlying notes do not perform as expected. The interest rate swaps used in some conduit note sale transactions move inversely to the movement in the excess spread and thus provide a natural hedge in the transaction. We use multiple interest rate swaps, including differential swaps, in some of the term asset backed securities transactions that largely offset one another to the extent that the sold notes prepay within expectations. Given the natural hedges provided by both of these types of transactions, we did not apply FAS No. 133 hedge accounting to these interest rate swaps. In certain deals, we sell a portfolio of fixed-coupon consumer loans to investors who require a variable rate of return. If unhedged, an increase in the variable rate of those deals would compress the excess spread; therefore, we enter into these interest rate swaps to preserve the excess spread at the level expected by the investors.

At the end of the 2009 third quarter, we had six such swap agreements with expiration dates ranging from 2013 to 2022. Due to market conditions, we were required to enter into a differential swap, representing two of our six outstanding swaps, related to our retained interests for our 2009 first quarter note sale.

We do not apply the standards of FAS No. 133 to some of our foreign exchange contracts because there is no material timing difference between the recognition of the gain or loss on the underlying asset or liability and the gain or loss on the derivative instrument. During the first three quarters of 2009 and for fiscal year 2008, we entered into these forward contracts to hedge foreign currency denominated net monetary assets and/or liabilities. We anticipate entering into similar contracts when these contracts expire in the fourth quarter of 2009. Examples of monetary assets and liabilities that we hedge include, but are not limited to, cash, receivables, payables, and debt. Pursuant to FAS No. 52, “Foreign Currency Translation,” the gains or losses on such forward contracts are computed by multiplying the foreign currency amount of the forward contract by the difference between the spot rate at the balance sheet date and the spot rate at the date of inception of the forward contract (or the spot rate last used to measure a gain or loss on that contract for an earlier period).

The following tables summarize the fair value of our derivative instruments, and the effect of derivative instruments on our Condensed Consolidated Statements of Income and “Comprehensive income.”

Fair Value of Derivative Instruments


*($ in millions)*	Balance Sheet Location	Fair Value at September 11, 2009			Notional Amount at September 11, 2009
Derivatives designated as hedging instruments under FAS No. 133 ⁽¹⁾

Asset Derivatives
Foreign exchange forwards ⁽²⁾	Other payables and accruals	$	—		$	3

Liability Derivatives
Interest rate swaps	Other long-term liabilities		(4	)		92
Foreign exchange forwards ⁽²⁾	Other payables and accruals		(3	)		44
Net investment hedges	Other payables and accruals		—			16

Total liabilities under FAS No. 133		$	(7	)


Derivatives not designated as hedging instruments under FAS No. 133 ⁽¹⁾

Asset Derivatives
Interest rate swaps ⁽²⁾	Other long-term liabilities	$	4		$	198
Foreign exchange forwards ⁽²⁾	Other payables and accruals		—			23

Total asset derivatives not under FAS No. 133		$	4


Liability Derivatives
Interest rate swaps ⁽²⁾	Other long-term liabilities	$	(6	)	$	265
Foreign exchange forwards ⁽²⁾	Other payables and accruals		(1	)		261

Total liability derivatives not under FAS No. 133		$	(7	)

⁽¹⁾	See Footnote No. 6, “Fair Value Measurements,” for additional information on the fair value of our derivative instruments.

⁽²⁾	Certain derivatives are subject to master netting agreements in accordance with FASB Interpretation No. 39.

The Effect of Derivative Instruments on the Condensed Consolidated Statement of Income


*($ in millions)*	Location of Gain (Loss) Recognized in Income	Gain (Loss) Recognized in Income
		Twelve Weeks Ended September 11, 2009			Thirty-Six Weeks Ended September 11, 2009
FAS No. 133 cash flow hedges

Foreign exchange forwards	Base management fees	$	2		$	5
Foreign exchange forwards	Franchise fees		—			1

Total gain from FAS No. 133 cash flow hedges			2			6


Derivatives not designated as hedging instruments under FAS No. 133
Interest rate swaps	Timeshare sales and services	$	(1	)	$	—
Foreign exchange forwards	General, administrative, and other		(4	)		(12	)

Total (loss) from derivatives not under FAS No. 133			(5	)		(12	)

Total (loss) recognized in income		$	(3	)	$	(6	)

The Effect of Derivative Instruments on the Statement of Comprehensive Income ^(1),
(2)


*($ in millions)*	FAS No. 133 Cash Flow Hedges Foreign Exchange Forwards			FAS No. 133 Net Investment Foreign Exchange Forwards
Deferred gains (losses) from derivatives in OCI at January 3, 2009	$	6		$	1
Gains (losses) recognized in OCI from derivatives		3			1
Gains (losses) reclassified from OCI (effective portion) to:
Base management fees		(1	)		—
Franchise fees		(1	)		—

Deferred gains (losses) from derivatives in OCI at March 27, 2009		7			2
Gains (losses) recognized in OCI from derivatives		(3	)		(1	)
Gains (losses) reclassified from OCI (effective portion) to:
Base management fees		(2	)		—
Franchise fees		—			—

Deferred gains (losses) from derivatives in OCI at June 19, 2009		2			1
Gains (losses) recognized in OCI from derivatives		—			(1	)
Gains (losses) reclassified from OCI (effective portion) to:
Base management fees		(2	)		—

Deferred gains (losses) from derivatives in OCI at September 11, 2009	$	—		$	—

Forecasted reclassification of derivative gains (losses) from OCI in the next 12 months
Base management fees	$	—		$	—

Total forecasted recognition of derivative gains (losses)	$	—		$	—

⁽¹⁾

For additional information, see Footnote No. 14, “Comprehensive Income and Capital Structure.”

⁽²⁾

There was no ineffective portion of our derivatives in the first three quarters of 2009; therefore, no amount required reclassification from OCI due to ineffectiveness.

17.Business Segments

9 Months Ended

Sep. 11, 2009

17.Business Segments

17.

Business Segments

We are a diversified hospitality company with operations in five business segments:

•

North American Full-Service Lodging, which includes the Marriott Hotels & Resorts, Marriott Conference Centers, JW Marriott Hotels & Resorts, Renaissance Hotels & Resorts, and Renaissance ClubSport properties located in the continental United States and Canada;

•

North American Limited-Service Lodging, which includes the Courtyard, Fairfield Inn, SpringHill Suites, Residence Inn, TownePlace Suites, and Marriott ExecuStay properties located in the continental United States and Canada;

•

International Lodging, which includes the Marriott Hotels & Resorts, JW Marriott Hotels & Resorts, Renaissance Hotels & Resorts, Courtyard, Fairfield Inn, Residence Inn, and Marriott Executive Apartments properties located outside the continental United States and Canada;

•

Luxury Lodging, which includes The Ritz-Carlton and Bulgari Hotels & Resorts properties worldwide (together with adjacent residential properties associated with some Ritz-Carlton hotels), as well as Edition, for which no properties are yet open; and

•

Timeshare, which includes the development, marketing, operation, and sale of Marriott Vacation Club, The Ritz-Carlton Destination Club, Ritz-Carlton Residences, and Grand Residences by Marriott timeshare, fractional ownership, and residential properties worldwide.

We evaluate the performance of our segments based primarily on the results of the segment without allocating corporate expenses, interest expense, income taxes, or indirect general, administrative, and other expenses. With the exception of the Timeshare segment, we do not allocate interest income to our segments. Because note sales are an integral part of the Timeshare segment, we include note sale gains or (losses) in our Timeshare segment results. We also include interest income associated with our Timeshare segment notes in our Timeshare segment results because financing sales are an integral part of that segment’s business. Additionally, we allocate other gains and losses, equity in earnings or losses from our joint ventures, divisional general, administrative, and other expenses, and income or losses attributable to noncontrolling interests to each of our segments. “Other unallocated corporate” represents that portion of our revenues, general, administrative, and other expenses, equity in earnings or losses, and other gains or losses that are not allocable to our segments.

We aggregate the brands presented within our North American Full-Service, North American Limited-Service, International, Luxury, and Timeshare segments considering their similar economic characteristics, types of customers, distribution channels, the regulatory business environment of the brands and operations within each segment and our organizational and management reporting structure.


Revenues

	Twelve Weeks Ended				Thirty-Six Weeks Ended
*($ in millions)*	September 11, 2009		September 5, 2008		September 11, 2009		September 5, 2008
North American Full-Service Segment	$	1,074	$	1,239	$	3,382	$	3,917
North American Limited-Service Segment		489		544		1,401		1,570
International Segment		259		342		756		1,093
Luxury Segment		296		357		971		1,147
Timeshare Segment		330		463		962		1,326

Total segment revenues		2,448		2,945		7,472		9,053
Other unallocated corporate		23		18		56		42

	$	2,471	$	2,963	$	7,528	$	9,095

(Loss) Income from Continuing Operations Attributable to Marriott



	Twelve Weeks Ended						Thirty-Six Weeks Ended
*($ in millions)*	September 11, 2009			September 5, 2008			September 11, 2009			September 5, 2008
North American Full-Service Segment	$	51		$	66		$	191		$	290
North American Limited-Service Segment		77			103			182			301
International Segment		25			50			89			179
Luxury Segment		7			17			—			66
Timeshare Segment		(681	)		49			(733	)		123

Total segment financial results		(521	)		285			(271	)		959
Other unallocated corporate		(65	)		(58	)		(136	)		(183	)
Interest expense, interest income, and provision for loan losses		(89	)		(25	)		(174	)		(83	)
Income taxes		209			(108	)		129			(324	)

	$	(466	)	$	94		$	(452	)	$	369

Net Losses Attributable to Noncontrolling Interests


	Twelve Weeks Ended						Thirty-Six Weeks Ended
*($ in millions)*	September 11, 2009			September 5, 2008			September 11, 2009			September 5, 2008
International Segment	$	—		$	—		$	—		$	(1	)
Timeshare Segment		4			15			11			21

Total segment net losses attributable to noncontrolling interests		4			15			11			20
Provision for income taxes		(1	)		(5	)		(4	)		(7	)

	$	3		$	10		$	7		$	13

Equity in (Losses) Earnings of Equity Method Investees


	Twelve Weeks Ended						Thirty-Six Weeks Ended
*($ in millions)*	September 11, 2009			September 5, 2008			September 11, 2009			September 5, 2008
North American Full-Service Segment	$	1		$	1		$	1		$	2
North American Limited-Service Segment		(1	)		—			(5	)		1
International Segment		(4	)		(1	)		(5	)		—
Luxury Segment		—			(1	)		(31	)		(1	)
Timeshare Segment		(4	)		2			(6	)		9

Total segment equity in (losses) earnings		(8	)		1			(46	)		11
Other unallocated corporate		(4	)		1			(4	)		15

	$	(12	)	$	2		$	(50	)	$	26

Assets


	At Period End
*($ in millions)*	September 11, 2009		January 2, 2009
North American Full-Service Segment	$	1,182	$	1,287
North American Limited-Service Segment		491		467
International Segment		867		832
Luxury Segment		653		715
Timeshare Segment		2,814		3,636

Total segment assets		6,007		6,937
Other unallocated corporate		2,260		1,966

	$	8,267	$	8,903

We estimate that, for the 20-year period from 2009 through 2028, the cost of completing improvements and currently planned amenities for our owned timeshare properties will be approximately $2.9 billion. See Footnote No. 9, “Inventory” for additional information about the current weak demand environment.

18.Timeshare Strategy-Impairment Charges

9 Months Ended

Sep. 11, 2009

18.Timeshare Strategy-Impairment Charges

18.

Timeshare Strategy-Impairment Charges

In response to the difficult business conditions that the Timeshare segment’s timeshare, luxury residential, and luxury fractional real estate development businesses continue to experience, we evaluated our entire Timeshare portfolio in the 2009 third quarter. In order to adjust the business strategy to reflect current market conditions, on September 22, 2009, we approved plans for our Timeshare segment to take the following actions: (1) for our luxury residential projects, reduce prices, convert certain proposed projects to other uses, sell some undeveloped land, and not pursue further Marriott-funded residential development projects; (2) reduce prices for existing luxury fractional units; (3) continue short-term promotions for our U.S. timeshare business and defer the introduction of new projects and development phases; and (4) for our European timeshare and fractional resorts, continue promotional pricing and marketing incentives and not pursue further development. We designed these plans, which primarily relate to luxury residential and fractional resorts, to stimulate sales, accelerate cash flow, and reduce investment spending.

As a result of these decisions, we recorded third quarter 2009 pretax charges totaling $752 million in our Consolidated Statements of Income ($502 million after-tax), including $614 million of pretax charges impacting operating income under the “Timeshare strategy-impairment charges” caption, and $138 million of pretax charges impacting non-operating income under the “Timeshare strategy-impairment charges (non-operating)” caption. These $752 million of pretax impairment charges are non-cash, except for $27 million associated with future mezzanine loan fundings in 2009 and $21 million related to purchase commitments expected to be funded in 2010.

Grouped by product type and/or geographic location, these impairment charges consist of $295 million associated with five luxury residential projects, $299 million associated with nine North American luxury fractional projects, $93 million related to one North American timeshare project, $51 million related to the four projects in our European timeshare and fractional business, and $14 million associated with two Asia Pacific timeshare resorts. The following table details the composition of these charges.


*($ in millions)*	Impairment Charge
Third Quarter 2009 Operating Income Charge
Inventory impairment	$	529
Property and equipment impairment		64
Other impairments		21

Total operating income charge		614

Third Quarter 2009 Non-Operating Income Charge
Joint venture impairment		71
Loan impairment		40
Funding liability		27

Total non-operating income charge		138
Total	$	752

In accordance with FAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we made these impairment adjustments to inventory, property and equipment and one joint venture investment to adjust the carrying value of each underlying asset to our estimate of its fair value as of the end of the 2009 third quarter, including fully impairing the joint venture investment. We estimated the fair value of the underlying assets using probability-weighted cash flow models that reflected our expectations of future performance discounted at risk-free interest rates commensurate with the remaining life of the related projects, using the guidance specified in FAS No. 157. We used Level 3 inputs for our discounted cash flow analyses. Our assumptions included: growth rate and sales pace projections, additional pricing discounts resulting from the business decisions we made, development cancellations resulting in shorter project life cycles, marketing and sales cost estimates, and in certain instances alternative uses to comply with FAS No. 157’s highest and best use provisions. In some instances, we took into account appraisals, which we deemed to be Level 3 inputs, for the fair value of the underlying assets.

We also determined that certain loans likely will not be repaid. As a result, we fully reserved the loans in accordance with FAS No. 114, “Accounting by Creditors for Impairment of a Loan,” based on the present value of the loans’ expected cash flows discounted at the loans’ effective interest rates.

Our funding liability relates to management’s intention to provide financial support to one of our variable interest entities through the end of 2009 based upon significant milestones related to the project and our history of support for the entity’s operations in order to ensure the completion of this project. We do not anticipate repayment from the variable interest entity and have accordingly expensed these amounts. The funding liability meets the criteria of probable and reasonably estimable, in accordance with the guidance in FAS No. 5, “Accounting for Contingencies.”

Other impairments primarily relate to our anticipated fundings in conjunction with certain purchase commitments, a portion of which we do not expect to recover because the projected fair value of the assets to be purchased under the commitments will be below the amount we expect to fund. We measured the projected fair value of the assets using probability-weighted cash flow models with Level 3 inputs, in accordance with FAS No. 157. Our assumptions included: growth rate and sales pace projections, additional pricing discounts as a result of the business decisions made, marketing and sales cost estimates, and in certain instances alternative uses to comply with FAS No. 157’s highest and best use provisions.

19.Restructuring Costs and Other Charges

9 Months Ended

Sep. 11, 2009

19.Restructuring Costs and Other Charges

19.

Restructuring Costs and Other Charges

During the latter part of 2008, we experienced a significant decline in demand for hotel rooms both domestically and internationally as a result, in part, of the recent failures and near failures of a number of large financial service companies in the fourth quarter of 2008 and the dramatic downturn in the economy. Our capital intensive Timeshare business was also hurt both domestically and internationally by the downturn in market conditions and particularly the significant deterioration in the credit markets, which resulted in our decision not to complete a note sale in the fourth quarter of 2008 (although we did complete a note sale in the first quarter of 2009). These declines resulted in reduced management and franchise fees, cancellation of development projects, reduced timeshare contract sales, and anticipated losses under guarantees and loans. In the fourth quarter of 2008, we put certain company-wide cost-saving measures in place in response to these declines, with individual company segments and corporate departments implementing further cost saving measures. Upper-level management responsible for the Timeshare segment, hotel operations, development, and above-property level management of the various corporate departments and brand teams individually led these decentralized management initiatives. The various initiatives resulted in aggregate restructuring costs of $55 million that we recorded in the fourth quarter of 2008. We also recorded $137 million of other charges in the 2008 fourth quarter. For information regarding the fourth quarter 2008 charges, see Footnote No. 20, “Restructuring Costs and Other Charges,” in our 2008 Form 10-K.

Restructuring Costs

As part of the restructuring actions we began in the fourth quarter of 2008, we initiated further cost savings measures in the 2009 first, second, and third quarters associated with our Timeshare segment, hotel development, above-property level management, and corporate overhead. These further measures resulted in additional restructuring costs of $44 million in the first three quarters of 2009, $9 million of which were incurred in the third quarter. These 2009 restructuring costs included: (1) $16 million in severance costs related to the reduction of 970 employees, $4 million of which we incurred in the third quarter for 116 employees terminated during the quarter (the majority of whom were given notice of termination by September 11, 2009); (2) $27 million in facilities exit costs incurred in the second and third quarters of 2009, $5 million of which we incurred in the third quarter; and (3) $1 million related to the write-off of capitalized costs relating to development projects no longer deemed viable in the second quarter of 2009. The severance costs do not reflect amounts billed out separately to owners for property-level severance costs. The $4 million of severance costs we recorded in the 2009 third quarter reflected a portion of the $6 million to $9 million in costs that, as disclosed in our Quarterly Report on Form 10-Q for the quarterly period ended June 19, 2009 (“2009 Second Quarter Form 10-Q”), we expected to incur in the third through fourth quarters of 2009. Of the $5 million of facilities exit costs we recorded in the 2009 third quarter, $3 million reflected a portion of the $2 million to $4 million in costs that, as disclosed in our 2009 Second Quarter Form 10-Q, we expected to incur in the third through fourth quarters of 2009, and $2 million reflected incremental costs that we incurred as a result of further cost savings measures we implemented in the 2009 third quarter.

As part of the restructuring efforts in our Timeshare segment, we reduced and consolidated sales channels in the United States and closed down certain operations in Europe in the fourth quarter of 2008. We recorded Timeshare restructuring costs of $28 million in the 2008 fourth quarter. We recorded further Timeshare restructuring costs in the first three quarters of 2009 of $38 million including: (1) $10 million in severance costs, of which $2 million were incurred in the third quarter of 2009; (2) $27 million in facility exit costs incurred in the second and third quarters of 2009, primarily associated with noncancelable lease costs in excess of estimated sublease income arising from the reduction in personnel, ceased use of certain lease facilities, and $8 million in fixed asset impairments incurred in the second and third quarters; and (3) $1 million related to the write-off of capitalized costs relating to development projects no longer deemed viable in the second quarter of 2009. In connection with these initiatives, we expect to incur an additional $1 million related to severance and fringe benefits and $2 million to $3 million related to ceasing use of additional noncancelable leases in 2009. We expect to complete the portion of our restructuring efforts related to our Timeshare segment by year-end 2009.

As part of the hotel development restructuring efforts across several of our Lodging segments in the fourth quarter of 2008, we discontinued certain development projects that required our investment. We recorded restructuring costs in the 2008 fourth quarter of $24 million. We recorded further hotel development restructuring costs in the first three quarters of 2009 of $2 million for severance and fringe benefit costs, of which $1 million was incurred in the third quarter of 2009. We expect to complete this restructuring by year-end 2009 and do not expect to incur additional expenses in connection with these initiatives.

We also implemented restructuring initiatives by reducing above property-level lodging management personnel and corporate overhead. We incurred 2008 fourth quarter restructuring costs of $3 million primarily reflecting severance and fringe benefit costs. We recorded further restructuring costs in the second and third quarters of 2009 of $3 million and $1 million, respectively, for severance and fringe benefit costs. In connection with these initiatives, we expect to incur at least an additional $2 million related to severance and fringe benefits in 2009. We expect to complete this restructuring by year-end 2009.

Other Charges

We also incurred $150 million of other charges in the first three quarters of 2009, of which a net $1 million credit was recorded in the third quarter of 2009, as detailed in the following paragraphs.

Security Deposit and Joint Venture Asset Impairments

We sometimes issue guarantees to lenders and other third parties in connection with financing transactions and other obligations. As a result of the continued downturn in the economy, certain hotels have experienced significant declines in profitability and accordingly, may experience cash flow shortfalls. In the fourth quarter of 2008, we concluded based on cash flow projections that we would fund certain cash flow shortfalls in two portfolios of hotels in order to prevent draws against the related security deposits and the potential conversion of the related management contracts to franchise agreements, even though the related guarantees had expired. We did not deem these fundings to be fully recoverable and recorded a corresponding charge of $16 million for the amount we expected to fund but not recover. However, in the first quarter of 2009 we decided not to continue funding, as the expected incremental funding levels had increased to unacceptable levels.

As a result of the Company’s decisions to stop funding these cash flow shortfalls and based on our internal analysis of expected future discounted cash flows, we determined that we may not recover two security deposits totaling $49 million. We used Level 3 inputs for our discounted cash flows analysis in accordance with FAS No. 157. Our assumptions included property level pro forma financial information, growth rates, and inflation. We recorded an impairment charge of $49 million in the first quarter of 2009 to fully reserve these security deposits in the “General, administrative, and other expenses” caption in our Condensed Consolidated Statements of Income. In the 2009 first quarter, we applied the remaining $11 million of the $16 million liability established in the fourth quarter of 2008 against this impairment. In the tables that follow, see the “Impairment of investments and other” caption, which includes the $49 million impairment charge, and the “Reserves for expected fundings” caption, which includes the $11 million reduction in the liability.

We expect that one project in development, in which the Company has a joint venture investment, will generate lower operating results than we had previously anticipated due to the continued downturn in the economy, and have concluded that it is highly unlikely that we will receive a return on or of our investment without first fully funding potentially significant incremental capital, which we are not inclined to do. As a result, based on our internal analysis of expected discounted future cash flows using Level 3 inputs in accordance with FAS No. 157, we determined that our investment in that joint venture was fully impaired. The Level 3 inputs we used in our analysis were based on assumptions regarding property level pro forma financial information, fundings of debt service obligations, growth rates, and inflation. We recorded an impairment charge of $30 million in the 2009 first quarter in the “Equity in (losses) earnings” caption in our Condensed Consolidated Statements of Income. See the “Impairment of investments and other” caption in the tables that follow that includes this charge.

Accounts Receivable-Bad Debts and Charges for Guarantees

We expect to fund under cash flow guarantees for two properties that have experienced cash flow shortfalls. We do not deem these guarantee fundings to be recoverable, and have therefore recorded a charge of $2 million during the 2009 second quarter and $1 million during the 2009 third quarter to reflect these obligations. During the 2009 second quarter, we also reserved a $1 million accounts receivable balance, which on analysis we deemed to be uncollectible as a result of the unfavorable hotel operating environment. We have recorded these charges in the “General, administrative, and other expenses” caption in our Condensed Consolidated Statements of Income. See the “Accounts receivable and guarantee charges” caption in the tables that follow that includes these charges.

Reserves for Loan Losses

From time to time, we advance loans to owners of properties that we manage. As a result of the continued downturn in the economy, certain hotels have experienced significant declines in profitability and the owners may not be able to meet debt service obligations to us or, in some cases, to third-party lending institutions. In the first quarter of 2009, we determined that two loans made by us may not be repaid. Due to the expected loan losses, we fully reserved these loans and recorded a charge of $42 million in the first quarter of 2009. We also recorded an additional $1 million in the second quarter of 2009 related to two loans, and the total $43 million is reflected in the “Provision for loan losses” caption in our Condensed Consolidated Statements of Income. See the “Reserves for loan losses” caption in the tables that follow, which includes this provision.

Timeshare Residual Interests Valuation

The fair market value of our residual interests in timeshare notes sold declined in the first quarter of 2009 primarily due to an increase in the market rate of interest at which we discount future cash flows to estimate the fair market value of the retained interests. The fair market value of our residual interests in timeshare notes sold also declined in the second quarter of 2009 primarily due to certain previously securitized loan pools reaching performance triggers, partially offset by a decrease in the market rate of interest at which we discount future cash flows to estimate the fair market value of the retained interests. The increase in the market rate of interest in the 2009 first quarter reflected an increase in defaults caused by the continued deteriorating economic conditions. As a result of this change, we recorded an $11 million charge in the 2009 first quarter. Seven previously securitized loan pools reached performance triggers as a result of increased defaults; one pool in March 2009, and the other six pools in April and May 2009. These performance triggers effectively redirected the excess spread we typically receive each month to accelerate returns to investors. As a result, we recorded a $2 million charge in the first quarter of 2009 and a $17 million charge in the 2009 second quarter. The $17 million unfavorable impact of these performance triggers was partially offset by a $5 million favorable impact from changes in assumptions related to discount rate, defaults and prepayments, resulting in a net $12 million charge in the second quarter of 2009. In the 2009 third quarter, loan performance improved sufficiently in three of the seven previously securitized loan pools, curing the performance triggers and resulting in a $3 million benefit to residual interest. We recorded these charges in the “Timeshare sales and services” caption in our Condensed Consolidated Statements of Income. See the “Residual interests valuation” caption in the tables that follow, which includes these charges. The tables summarizing the changes to our Level 3 assets and liabilities in Footnote No. 6, “Fair Value Measurements,” reflect the $22 million in total charges for the first three quarters of 2009 on the “Included in earnings” line, which also reflects a partial offset due to other changes in the underlying assumptions that impact the fair value of the residual interests and the cure of the performance triggers in the 2009 third quarter.

Timeshare Contract Cancellation Allowances

Our financial statements reflect net contract cancellation allowances of $4 million recorded in the first quarter of 2009, $1 million recorded in the second quarter of 2009, and $1 million recorded in the third quarter of 2009, in anticipation that a portion of contract revenue and costs previously recorded for certain projects under the percentage-of-completion method will not be realized due to contract cancellations prior to closing. We have an equity method investment in one of these projects, and accordingly, we reflected $3 million of the $6 million in the first three quarters of 2009 in the “Equity in (losses) earnings” caption in our Condensed Consolidated Statements of Income. The remaining net $3 million of contract cancellation allowances consisted of a reduction in revenue, net of adjustments to product costs and other direct costs and was recorded in Timeshare sales and services revenue, net of direct costs. See the “Contract cancellation allowances” caption in the tables that follow, which includes this net allowance.

Timeshare Software Development Write-off

During the second quarter of 2009, we recorded an impairment of $7 million for the write-off of capitalized software development costs related to a software project we have decided not to further develop. We concluded that continued development of this software was not cost effective given continued cost savings initiatives associated with the challenging business environment and we will instead pursue alternative lower cost solutions.

Summary of Restructuring Costs and Other Charges

The following table is a summary of the restructuring costs and other charges we recorded in the first three quarters of 2009 and through the third quarter of 2009, as well as our remaining liability at the end of the third quarter of 2009:


*($ in millions)*	Restructuring Costs and Other Charges Liability at January 2, 2009		Total Charge (Reversal) in the First Three Quarters of 2009			Cash Payments in the First Three Quarters of 2009		Restructuring Costs and Other Charges Liability at September 11, 2009		Total Cumulative Restructuring Costs through the 2009 Third Quarter ⁽³⁾
Severance-Timeshare	$	11	$	10		$	17	$	4	$	24
Facilities exit costs-Timeshare		5		27	⁽¹⁾		4		20		32
Development cancellations-Timeshare		—		1			—		—		10

Total restructuring costs-Timeshare		16		38			21		24		66

Severance-hotel development		2		2			2		2		4
Development cancellations-hotel development		—		—			—		—		22

Total restructuring costs-hotel development		2		2			2		2		26

Severance-above property-level management		2		4			3		3		7

Total restructuring costs-above property-level management		2		4			3		3		7

Total restructuring costs	$	20	$	44		$	26	$	29	$	99

Impairment of investments and other		—		79			—		—
Accounts receivable and guarantee charges		—		4			—		3
Reserves for expected fundings		16		(11	)		4		1
Reserves for loan losses		—		43			—		—
Residual interests valuation		—		22			—		—
Contract cancellation allowances		—		6			—		—
Software development write-off		—		7			—		—

Total other charges		16		150	⁽²⁾		4		4

Total restructuring costs and other charges	$	36	$	194		$	30	$	33

⁽¹⁾	Reflects $8 million of non-cash facilities exit costs related to fixed asset impairments.

⁽²⁾	Reflects $158 million of non-cash other charges, which exclude the $11 million reversal of reserves for expected fundings and $3 million of guarantee charges.

⁽³⁾	Includes charges recorded in the 2008 fourth quarter through the 2009 third quarter.

The following tables provide further detail on the restructuring costs and other charges incurred in the third quarter of 2009, first three quarters of 2009, and cumulative restructuring costs incurred through the third quarter of 2009, including a breakdown of these charges by segment:

Third Quarter 2009 and Cumulative

Operating Income Impact


*($ in millions)*	North American Full-Service Segment		North American Limited- Service Segment			International Segment		Luxury Segment		Timeshare Segment		Other Unallocated Corporate		Total
Restructuring Costs-Third Quarter 2009:
Severance	$	—	$	—		$	—	$	—	$	2	$	2	$	4
Facilities exit costs		—		—			—		—		5		—		5
Development cancellations		—		—			—		—		—		—		—

Total restructuring costs-third quarter 2009	$	—	$	—		$	—	$	—	$	7	$	2	$	9

Restructuring Costs-First Three Quarters 2009:
Severance	$	—	$	—		$	2	$	—	$	10	$	4	$	16
Facilities exit costs		—		—			—		—		27		—		27
Development cancellations		—		—			—		—		1		—		1

Total restructuring costs-first three quarters 2009	$	—	$	—		$	2	$	—	$	38	$	4	$	44

Restructuring Costs-Cumulative through Third Quarter 2009⁽¹⁾:
Severance	$	—	$	—		$	2	$	1	$	24	$	8	$	35
Facilities exit costs		—		—			—		—		32		—		32
Development cancellations		—		—			—		—		10		22		32

Total restructuring costs-cumulative through third quarter 2009	$	—	$	—		$	2	$	1	$	66	$	30	$	99

Other Charges-First Three Quarters 2009:
Impairment of investments and other	$	7	$	42		$	—	$	—	$	—	$	—	$	49
Accounts receivable and guarantee charges		—		—			3		1		—		—		4
Reversal of charges related to expected fundings		—		(11	)		—		—		—		—		(11	)
Residual interests valuation		—		—			—		—		22		—		22
Contract cancellation allowances		—		—			—		—		3		—		3
Software development write-off		—		—			—		—		7		—		7

Total other charges-first three quarters 2009	$	7	$	31		$	3	$	1	$	32	$	—	$	74

⁽¹⁾	Includes charges recorded in the 2008 fourth quarter through the 2009 third quarter.

First Three Quarters 2009 Non-Operating

Impact


*($ in millions)*	Provision for Loan Losses		Equity in Earnings		Total
Impairment of investments-Luxury segment	$	—	$	30	$	30
Reserves for loan losses ⁽¹⁾		43		—		43
Contract cancellation allowances-Timeshare segment		—		3		3

Total	$	43	$	33	$	76

⁽¹⁾	Includes $14 million loan loss provision related to Limited-Service properties and a $29 million loan loss provision related to a Luxury project in development.

The following table provides further detail on restructuring costs we expect to incur in the fourth quarter of 2009, including a breakdown by segment:

Fourth Quarter 2009

Expected Operating Income Impact


*($ in millions)*	Luxury Segment		Timeshare Segment		Other Unallocated Corporate		Total
Severance	$	1	$	1	$	1	$	3
Facilities exit costs		—		2-3		—		2-3
Development cancellations		—		—		—		—

Total restructuring costs	$	1	$	3-4	$	1	$	5-6

20.Variable Interest Entities

9 Months Ended

Sep. 11, 2009

20.Variable Interest Entities

20.

Variable Interest Entities

In accordance with FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities” (“FIN 46(R)”), we analyze our variable interests, including loans, guarantees, and equity investments, to determine if the entity in which we have a variable interest is a variable interest entity. Our analysis includes both quantitative and qualitative reviews. We base our quantitative analysis on the forecasted cash flows of the entity, and our qualitative analysis on our review of the design of the entity, its organizational structure including decision-making ability and financial agreements. We also use our quantitative and qualitative analyses to determine if we must consolidate a variable interest entity as the primary beneficiary.

We have an equity investment in and a loan receivable due from a variable interest entity that develops and markets fractional ownership and residential interests, and we consolidate the entity because we are the primary beneficiary. We concluded that the entity is a variable interest entity because the voting rights are not proportionate to the economic interests. The loan we provided to the entity replaced the original senior loan, and at September 11, 2009, had a principal balance of $76 million and an accrued interest balance of $25 million. The variable interest entity uses the loan facility to fund its net cash flow. The loan’s outstanding principal balance increased by $2 million compared to the quarter ended June 19, 2009. At September 11, 2009, the carrying amount of consolidated assets included within our Condensed Consolidated Balance Sheet that are collateral for the variable interest entity’s obligations totaled $58 million and comprised $55 million of real estate held for development, property, equipment, and other assets and $3 million of cash. Further, at September 11, 2009, the carrying amount of the consolidated liabilities and noncontrolling interests included within our Condensed Consolidated Balance Sheets for this variable interest entity totaled $16 million and the noncontrolling interest was reduced to zero. The creditors of this entity do not have general recourse to our credit. We have contracted to purchase the noncontrolling interest in the entity for less than $1 million. The acquisition will occur in stages, and commenced with our initial acquisition of 3 percent of the noncontrolling interest in the entity that occurred during the 2009 third quarter. The acquisition is expected to be completed in the 2010 third quarter.

Our Timeshare segment uses several special purpose entities to maintain ownership of real estate in certain jurisdictions in order to facilitate sales within the Asia Pacific Points Club (the “Asia Club”). We also use a special purpose entity to maintain ownership of real estate for sale of a Portfolio membership in the Ritz-Carlton Destination Club (“RCDC Club”). Although we have no equity ownership in the Asia or RCDC Clubs themselves, we absorb the variability in the assets of the Asia or RCDC Clubs to the extent that inventory has not been sold to the ultimate Asia or RCDC Club member. The Asia and RCDC Clubs are variable interest entities because the equity investment at risk is not sufficient to permit the entities to finance their activities without additional support from other parties. We determined that we were the primary beneficiary of these entities based upon the proportion of variability that we absorb compared to Asia or RCDC Club members. At September 11, 2009, the carrying amount of inventory associated with the Asia Club was $63 million, of which $36 million resulted from the consolidation of these special purpose entities and $27 million resulted from inventory and deposits in wholly owned subsidiaries that will be transferred to the Asia Club structure in the future in order to facilitate the sale of the real estate interests. At September 11, 2009, the carrying amount of inventory associated with the RCDC Club was $8 million, all of which resulted from the consolidation of the special purpose entity. The creditors of these entities do not have general recourse to our credit.

We have an equity investment in and a loan receivable due from a variable interest entity that develops and markets fractional ownership and residential interests, and we do not consolidate the entity because we are not the primary beneficiary. We concluded that the entity is a variable interest entity because the equity investment at risk is not sufficient to permit the entity to finance its activities without additional support from other parties. We have determined that we are not the primary beneficiary as another party, within a de facto agent group, is most closely associated with the entity. During the 2009 third quarter, we advanced $4 million in additional loans to fund progress towards completion of the project and intend to continue funding through the end of 2009. We subsequently fully impaired our equity investment and certain loans receivable due from the entity. We will likely fund up to $33 million, which we believe is our maximum exposure to loss, and do not expect to recover this amount, which has been accrued and is included in current liabilities. See Footnote No. 18, “Timeshare Strategy-Impairment Charges,” for additional information.

In conjunction with the transaction with CTF described more fully in Footnote No. 8, “Acquisitions and Dispositions,” of our Annual Report on Form 10-K for the fiscal year ended December 28, 2007, under the caption “2005 Acquisitions,” we manage certain hotels on behalf of five tenant entities 100 percent owned by CTF, which lease the hotels from third-party owners. Due to certain provisions in the management agreements, we account for these contracts as operating leases. At the end of the 2009 third quarter, the number of hotels totaled 14. The entities have minimal equity and minimal assets comprised of hotel working capital and furniture, fixtures, and equipment. In conjunction with the 2005 transaction, CTF had placed money in a trust account to cover cash flow shortfalls and to meet rent payments. In turn, we released CTF from their guarantees fully in connection with eight of these properties and partially in connection with the other six properties. At the end of the 2009 third quarter, the trust account held approximately $17 million. The tenant entities are variable interest entities because the holder of the equity investment at risk, CTF, lacks the ability through voting rights to make key decisions about the entities’ activities that have a significant effect on the success of the entities. We do not consolidate the entities because we do not bear the majority of the expected losses. We are secondarily liable (after exhaustion of funds from the trust account) for rent payments for eight of the 14 hotels in the event that there are cash flow shortfalls. Future minimum lease payments through the end of the lease term for these eight hotels totaled approximately $82 million. In addition, we are secondarily liable for rent payments of up to an aggregate cap of $37 million for the six other hotels in the event that there are cash flow shortfalls. Our maximum exposure to loss is limited to the rent payments and certain other tenant obligations under the lease for which we are secondarily liable.