HYATT HOTELS CORP, 10-Q filed on 10/31/2012
Quarterly Report
Document And Entity Information
9 Months Ended
Sep. 30, 2012
Oct. 26, 2012
Common Class A
Oct. 26, 2012
Common Class B
Entity Registrant Name
Hyatt Hotels Corp 
 
 
Entity Central Index Key
0001468174 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Document Type
10-Q 
 
 
Document Period End Date
Sep. 30, 2012 
 
 
Document Fiscal Year Focus
2012 
 
 
Document Fiscal Period Focus
Q3 
 
 
Amendment Flag
false 
 
 
Trading Symbol
 
 
Entity Common Stock, Shares Outstanding
 
45,387,810 
118,614,584 
Condensed Consolidated Statements Of Income (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Sep. 30, 2012
Sep. 30, 2011
REVENUES:
 
 
 
 
Owned and leased hotels
$ 503 
$ 470 
$ 1,504 
$ 1,386 
Management and franchise fees
68 
66 
227 
211 
Other revenues
22 
18 
59 
49 
Other revenues from managed properties
384 
343 
1,159 
1,062 
Total revenues
977 
897 
2,949 
2,708 
DIRECT AND SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES:
 
 
 
 
Owned and leased hotels
382 
360 
1,148 
1,086 
Depreciation and amortization
88 
75 
263 
218 
Other direct costs
21 
18 
Selling, general, and administrative
75 
58 
238 
199 
Other costs from managed properties
384 
343 
1,159 
1,062 
Direct and selling, general, and administrative expenses
937 
844 
2,829 
2,583 
Net gains (losses) and interest income from marketable securities held to fund operating programs
(15)
18 
(7)
Equity earnings (losses) from unconsolidated hospitality ventures
(5)
(6)
Interest expense
(18)
(15)
(53)
(42)
Asset Impairments
(1)1
(2)1
Other income (loss), net
(5)
(15)
12 
(21)
INCOME BEFORE INCOME TAXES
20 
91 
59 
(PROVISION) BENEFIT FOR INCOME TAXES
(19)
NET INCOME
23 
13 
72 
59 
NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS
NET INCOME ATTRIBUTABLE TO HYATT HOTELS CORPORATION
$ 23 
$ 14 
$ 72 
$ 61 
EARNINGS PER SHARE - Basic
 
 
 
 
Net income - Basic
$ 0.14 
$ 0.08 
$ 0.44 
$ 0.35 
Net income attributable to Hyatt Hotels Corporation - Basic
$ 0.14 
$ 0.08 
$ 0.44 
$ 0.36 
EARNINGS PER SHARE - Diluted
 
 
 
 
Net income - Diluted
$ 0.14 
$ 0.08 
$ 0.44 
$ 0.35 
Net income attributable to Hyatt Hotels Corporation - Diluted
$ 0.14 
$ 0.08 
$ 0.44 
$ 0.36 
Condensed Consolidated Statements of Comprehensive Income (Loss) (USD $)
In Millions, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Sep. 30, 2012
Sep. 30, 2011
NET INCOME
$ 23 
$ 13 
$ 72 
$ 59 
Other Comprehensive Income (Loss), Foreign Currency Transaction and Translation Adjustment, Net of Tax
28 
(53)
23 
(15)
Other Comprehensive Income (Loss), Available-for-sale Securities Adjustment, Net of Tax
(2)
(2)
Other Comprehensive Income (Loss), Unrealized Gain on Derivatives Arising During Period, Net of Tax
(11)
(9)
Other Comprehensive Income (Loss), Net of Tax
29 
(66)
25 
(26)
Comprehensive Income (Loss), Net of Tax, Including Portion Attributable to Noncontrolling Interest
52 
(53)
97 
33 
Comprehensive Loss, Net of Tax, Attributable to Noncontrolling Interest
Comprehensive Income (Loss), Net of Tax, Attributable to Parent
$ 52 
$ (52)
$ 97 
$ 35 
Condensed Consolidated Statements of Comprehensive Income (Loss) (Parenthetical) (USD $)
In Millions, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Sep. 30, 2012
Sep. 30, 2011
Other Comprehensive Income (Loss), Foreign Currency Translation Adjustment, Tax
$ (3)
$ 0 
$ (2)
$ 3 
Other Comprehensive Income (Loss), Available-for-sale Securities, Tax
(2)
(2)
Other Comprehensive Income (Loss), Unrealized Gain (Loss) on Derivatives Arising During Period, Tax
$ 0 
$ (6)
$ 0 
$ (5)
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, except Share data, unless otherwise specified
Sep. 30, 2012
Dec. 31, 2011
Allowance for receivables
$ 9 
$ 10 
Preferred stock, par value
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
10,000,000 
10,000,000 
Preferred stock, outstanding
Common Class A
 
 
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
1,000,000,000 
1,000,000,000 
Common stock, outstanding
46,233,680 
44,683,934 
Common stock, issued
46,269,953 
44,720,207 
Treasury stock, shares
36,273 
36,273 
Common Class B
 
 
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
451,472,717 
452,472,717 
Common stock, outstanding
118,614,584 
120,478,305 
Common stock, issued
118,614,584 
120,478,305 
Condensed Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Sep. 30, 2012
Dec. 31, 2011
ASSETS
 
 
Cash and cash equivalents
$ 446 
$ 534 
Restricted cash
49 
27 
Short-term investments
542 
588 
Receivables, net of allowances of $9 and $10 at September 30, 2012 and December 31, 2011, respectively
542 
225 
Inventories
82 
87 
Prepaids and other assets
63 
78 
Prepaid income taxes
24 
29 
Deferred tax assets
54 
23 
Assets held for sale
74 
Total current assets
1,876 
1,591 
Investments
298 
280 
Property and equipment, net
4,109 
4,043 
Financing receivables, net of allowances
132 
360 
Goodwill
134 
102 
Intangibles, net
378 
359 
Deferred tax assets
216 
197 
Other assets
593 
575 
TOTAL ASSETS
7,736 
7,507 
LIABILITIES AND EQUITY
 
 
Current maturities of long-term debt
Accounts payable
113 
144 
Accrued expenses and other current liabilities
362 
306 
Accrued compensation and benefits
131 
114 
Liabilities held for sale
Total current liabilities
613 
568 
Long-term debt
1,219 
1,221 
Other long-term liabilities
999 
890 
Total liabilities
2,831 
2,679 
Commitments and contingencies (see Note 12)
   
   
EQUITY:
 
 
Preferred stock, $0.01 par value per share, 10,000,000 shares authorized and none outstanding as of September 30, 2012 and December 31, 2011
Common stock
Additional paid-in capital
3,360 
3,380 
Retained earnings
1,589 
1,517 
Treasury stock at cost, 36,273 shares at September 30, 2012 and December 31, 2011
(1)
(1)
Accumulated other comprehensive loss
(55)
(80)
Total stockholders' equity
4,895 
4,818 
Noncontrolling interests in consolidated subsidiaries
10 
10 
Total equity
4,905 
4,828 
TOTAL LIABILITIES AND EQUITY
$ 7,736 
$ 7,507 
Condensed Consolidated Statements Of Cash Flows (USD $)
In Millions, unless otherwise specified
9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
NET INCOME
$ 72 
$ 59 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
263 
218 
Deferred income taxes
(18)
(13)
Asset Impairments
1
Provisions on hotel loans
Equity losses from unconsolidated hospitality ventures, including distributions received
21 
Foreign currency losses
Loss on sale of real estate
Realized gains from other marketable securities
(9)
Net unrealized (gains) losses from other marketable securities
(8)
19 
Working capital changes and other
42 
34 
Net cash provided by operating activities of continuing operations
366 
338 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
Purchases of marketable securities and short-term investments
(283)
(241)
Proceeds from marketable securities and short-term investments
351 
231 
Contributions to investments
(52)
(31)
Proceeds from Sale of Investments
52 
Acquisitions, net of cash acquired
(180)
(688)
Capital expenditures
(210)
(216)
Issuance of Notes Receivable
(53)
(2)
Proceeds from sales of real estate
90 
Real estate sale proceeds transferred to escrow as restricted cash
(35)
Proceeds from sale of assets held for sale
18 
Real estate sale proceeds transferred from escrow to cash and cash equivalents
132 
Increase in restricted cash - investing
(19)
(55)
Other investing activities
(25)
(8)
Net cash used in investing activities of continuing operations
(419)
(805)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
Proceeds from issuance of debt, net of issuance costs
519 
Repayments of long-term debt
(54)
Repurchase of common stock
(33)
(396)
Other financing activities
(13)
Net cash provided by (used in) financing activities of continuing operations
(30)
56 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
(5)
(9)
NET DECREASE IN CASH AND CASH EQUIVALENTS
(88)
(420)
CASH AND CASH EQUIVALENTS-BEGINNING OF YEAR
534 
1,110 
CASH AND CASH EQUIVALENTS CONTINUING OPERATIONS-END OF PERIOD
446 
690 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 
Cash paid during the period for interest
64 
45 
Cash paid during the period for income taxes
37 
35 
Non-cash investing activities are as follows:
 
 
Equity contribution of property and equipment, net
10 
Equity contribution of long-term debt
25 
Change in accrued capital expenditures
(35)
16 
Contributions to investments (see Note 3)
20 
Acquired capital lease
$ 0 
$ 7 
Organization
Organization
ORGANIZATION
Hyatt Hotels Corporation, a Delaware corporation, and its consolidated subsidiaries (“Hyatt Hotels Corporation”) provide hospitality services on a worldwide basis through the management, franchising and ownership of hospitality related businesses. As of September 30, 2012, we operated or franchised 250 full service hotels consisting of 104,239 rooms, in 45 countries throughout the world. We hold ownership interests in certain of these hotels. As of September 30, 2012, we operated or franchised 223 select service hotels with 29,560 rooms in the United States. We hold ownership interests in certain of these hotels. We develop, operate, manage, license or provide services to Hyatt-branded timeshare, fractional and other forms of residential or vacation properties.
As used in these Notes and throughout this Quarterly Report on Form 10-Q, the terms “Company,” “HHC,” “we,” “us,” or “our” mean Hyatt Hotels Corporation and its consolidated subsidiaries.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information or footnotes required by GAAP for complete annual financial statements. As a result, this Quarterly Report on Form 10-Q should be read in conjunction with the Consolidated Financial Statements and accompanying Notes in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (the “2011 Form 10-K”).
We have eliminated all intercompany transactions in our condensed consolidated financial statements. We consolidate entities for which we either have a controlling financial interest or are considered to be the primary beneficiary.
Management believes that the accompanying condensed consolidated financial statements reflect all adjustments, which are all of a normal recurring nature, considered necessary for a fair presentation of the interim periods.
Recently Issued Accounting Standards
Recently Issued Accounting Standards
RECENTLY ISSUED ACCOUNTING STANDARDS
Adopted Accounting Standards

Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ASU 2011-04 is intended to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards. The amendments in ASU 2011-04 clarify the intent of the Financial Accounting Standards Board ("FASB") with regard to the application of existing fair value measurement requirements and change some requirements for measuring or disclosing information about fair value measurements. The provisions of ASU 2011-04 became effective for public companies in the first reporting period beginning after December 15, 2011. The adoption of ASU 2011-04 enhanced the disclosure of the fair value of certain financial assets and liabilities that are not required to be recorded at fair value within our financial statements. See Note 4 for discussion of fair value.

In June 2011, the FASB released Accounting Standards Update No. 2011-05 (“ASU 2011-05”), Comprehensive Income (Topic 220): Presentation of Comprehensive Income. ASU 2011-05 requires companies to present total comprehensive income, the components of net income, and the components of other comprehensive income in either a continuous statement or in two separate but consecutive statements. The amendments of ASU 2011-05 eliminate the option for companies to present the components of other comprehensive income within the statement of changes of stockholders' equity. The provisions of ASU 2011-05 became effective for public companies in fiscal years beginning after December 15, 2011. The adoption of ASU 2011-05 changed our presentation of comprehensive income.

In September 2011, the FASB released Accounting Standards Update No. 2011-08 (“ASU 2011-08”), Intangibles-Goodwill and Other (Topic 350): Testing for Goodwill Impairment. ASU 2011-08 gives companies the option to perform a qualitative assessment before calculating the fair value of the reporting unit. Under the guidance in ASU 2011-08, if this option is selected, a company is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The provisions of ASU 2011-08 became effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, but early adoption was permitted. We adopted ASU 2011-08 during the quarter ended March 31, 2012, but since our annual goodwill impairment test is not performed until the fourth quarter we did not apply its provisions during the nine months ended September 30, 2012. We do not expect ASU 2011-08 to materially impact our condensed consolidated financial statements.

In December 2011, the FASB released Accounting Standards Update No. 2011-12 (“ASU 2011-12”), Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. ASU 2011-12 defers only those changes in ASU 2011-05 that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income. The provisions of ASU 2011-12 became effective for public companies in fiscal years beginning after December 15, 2011. The adoption of ASU 2011-12 did not materially impact our condensed consolidated financial statements.

Future Adoption of Accounting Standards

In December 2011, the FASB released Accounting Standards Update No. 2011-10 (“ASU 2011-10”), Property, Plant and Equipment (Topic 360): Derecognition of in Substance Real Estate-a Scope Clarification (a consensus of the FASB Emerging Issues Task Force). ASU 2011-10 clarifies when a parent (reporting entity) ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary's nonrecourse debt, the reporting entity should apply the guidance for Real Estate Sale (Subtopic 360-20). The provisions of ASU 2011-10 become effective for public companies for fiscal years and interim periods within those years, beginning on or after June 15, 2012. The adoption of ASU 2011-10 is not expected to materially impact our condensed consolidated financial statements.

In December 2011, the FASB released Accounting Standards Update No. 2011-11 (“ASU 2011-11”), Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. ASU 2011-11 requires companies to provide new disclosures about offsetting and related arrangements for financial instruments and derivatives. The provisions of ASU 2011-11 are effective for annual reporting periods beginning on or after January 1, 2013, and are required to be applied retrospectively. When adopted, ASU 2011-11 is not expected to materially impact our condensed consolidated financial statements.

In July 2012, the FASB released Accounting Standards Update No. 2012-02 (“ASU 2012-02”), Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. ASU 2012-02 gives companies the option to perform a qualitative assessment before calculating the fair value of the indefinite-lived intangible asset. Under the guidance in ASU 2012-02, if this option is selected, a company is not required to calculate the fair value of the indefinite-lived intangible unless the entity determines it is more likely than not that its fair value is less than its carrying amount. The provisions of ASU 2012-02 are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, but early adoption is permitted. We have elected not to early adopt the provisions of ASU 2012-02, but when adopted, we do not expect ASU 2012-02 to materially impact our condensed consolidated financial statements.
Equity And Cost Method Investments
Equity And Cost Method Investments
    EQUITY AND COST METHOD INVESTMENTS
We have investments that are recorded under both the equity and cost methods of accounting. These investments are considered to be an integral part of our business and are strategically and operationally important to our overall results. Our equity and cost method investment balances recorded at September 30, 2012 and December 31, 2011 are as follows:
 
 
September 30, 2012
 
December 31, 2011
Equity method investments
$
225

 
$
207

Cost method investments
73

 
73

Total investments
$
298

 
$
280



During the three months ended September 30, 2012, we sold our interest in two joint ventures classified as equity method investments, which were included in our owned and leased segment, to a third party for $52 million. Each venture owns a hotel that we currently manage. At the time of the sale we signed agreements with the third party purchaser to extend our existing management agreements for the hotels owned by the ventures by ten years. A $28 million pre-tax gain on the sale will be deferred and amortized over the life of the extended management agreements. During the nine months ended September 30, 2012, we invested $45 million in a joint venture, which is classified as an equity method investment, to develop, own and operate a hotel property in the State of Hawaii.

During the nine months ended September 30, 2011, we contributed $20 million to a newly formed joint venture with Noble Investment Group ("Noble") in return for a 40% ownership interest in the venture (see Note 6). In addition, the Company and Noble agreed to invest in the strategic new development of select service hotels in the United States. Under that agreement, we are required to contribute up to a maximum of 40% of the equity necessary to fund up to $80 million (i.e. $32 million) of such new development.
During the three months ended September 30, 2012 there were no impairments related to our equity method investments. During the nine months ended September 30, 2012 we recorded $1 million in impairment charges in equity earnings (losses) from unconsolidated hospitality ventures related to a vacation ownership property.
Income from cost method investments included in our condensed consolidated statements of income for the three and nine months ended September 30, 2012 and 2011 was insignificant.
The following table presents summarized financial information for all unconsolidated ventures in which we hold an investment that is accounted for under the equity method.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Total revenues
$
268

 
$
244

 
$
762

 
$
712

Gross operating profit
93

 
83

 
246

 
230

Income from continuing operations
11

 
16

 
14

 
39

Net income
11

 
16

 
14

 
39

Fair Value Measurement
Fair Value Measurement
FAIR VALUE MEASUREMENT
Fair value is defined 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). GAAP establishes a valuation hierarchy for prioritizing the inputs and the hierarchy places greater emphasis on the use of observable market inputs and less emphasis on unobservable inputs. When determining fair value, an entity is required to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of the hierarchy are as follows:
Level One—Fair values based on unadjusted quoted prices in active markets for identical assets and liabilities;
Level Two—Fair values based on quoted market prices for similar assets and liabilities in active markets, quoted prices in inactive markets for identical assets and liabilities, and inputs other than quoted market prices that are observable for the asset or liability;
Level Three—Fair values based on inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. Valuation techniques could include the use of discounted cash flow models and similar techniques.
We have various financial instruments that are measured at fair value including certain marketable securities and derivative instruments. We currently do not have non-financial assets or non-financial liabilities that are required to be measured at fair value on a recurring basis.
We utilize the market approach and income approach for valuing our financial instruments. The market approach utilizes prices and information generated by market transactions involving identical or similar assets and liabilities and the income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). For instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the classification of fair value assets and liabilities within the fair value hierarchy.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of September 30, 2012 and December 31, 2011, we had the following financial assets and liabilities measured at fair value on a recurring basis:
 
 
September 30, 2012
 
Quoted Prices in
Active Markets for
Identical Assets
(Level One)
 
Significant Other
Observable Inputs
(Level Two)
 
Significant
Unobservable Inputs
(Level Three)
Marketable securities included in
short-term investments, prepaids and
other assets and other assets
 
 
 
 
 
 
 
Mutual funds
$
271

 
$
271

 
$

 
$

Equity securities
9

 
9

 

 

U.S. government obligations
108

 

 
108

 

U.S. government agencies
80

 

 
80

 

Corporate debt securities
559

 

 
559

 

Mortgage-backed securities
21

 

 
21

 

Asset-backed securities
10

 

 
10

 

Municipal and provincial notes and bonds
14

 

 
14

 

Marketable securities recorded in
cash and cash equivalents
 
 
 
 
 
 
 
Interest bearing money market funds
89

 
89

 

 

Derivative instruments
 
 
 
 
 
 
 
Interest rate swaps
2

 

 
2

 

Foreign currency forward contracts
(4
)
 

 
(4
)
 


 
December 31, 2011
 
Quoted Prices in
Active Markets for
Identical Assets
(Level One)
 
Significant Other
Observable Inputs
(Level Two)
 
Significant
Unobservable Inputs
(Level Three)
Marketable securities included in short-term investments, prepaids and other assets and other assets
 
 
 
 
 
 
 
Mutual funds
$
242

 
$
242

 
$

 
$

Equity securities
35

 
35

 

 

U.S. government obligations
102

 

 
102

 

U.S. government agencies
132

 

 
132

 

Corporate debt securities
487

 

 
487

 

Mortgage-backed securities
23

 

 
21

 
2

Asset-backed securities
7

 

 
7

 

Municipal and provincial notes and bonds
14

 

 
14

 

Marketable securities recorded in cash and cash equivalents
 
 
 
 
 
 
 
Interest bearing money market funds
60

 
60

 

 

Derivative instruments
 
 
 
 
 
 
 
Interest rate swaps
7

 

 
7

 

Foreign currency forward contracts
(1
)
 

 
(1
)
 


During the three and nine months ended September 30, 2012, there were no transfers between levels of the fair value hierarchy. During the three and nine months ended September 30, 2011, we transferred an equity security from Level Two to Level One and there were no transfers in and out of Level Three of the fair value hierarchy. Our policy is to recognize transfers in and transfers out as of the end of each quarterly reporting period.
Marketable Securities
We hold marketable securities to fund certain operating programs and for investment purposes. Our portfolio of marketable securities consists of various types of U.S. Treasury securities, mutual funds, common stock, and fixed income securities, including government agencies, municipal, provincial and corporate bonds. The fair value of our mutual funds and certain equity securities were classified as Level One as they trade with sufficient frequency and volume to enable us to obtain pricing information on an ongoing basis. The remaining securities, except for certain mortgage-backed securities at December 31, 2011, were classified as Level Two due to the use and weighting of multiple market inputs being considered in the final price of the security. Market inputs include quoted market prices from active markets for identical securities, quoted market prices for identical securities in inactive markets, and quoted market prices in active and inactive markets for similar securities.
We invest a portion of our cash balance into short-term interest bearing money market funds that have a maturity of less than ninety days. Consequently, the balances are recorded in cash and cash equivalents. The funds are held with open-ended registered investment companies and the fair value of the funds is classified as Level One as we are able to obtain market available pricing information on an ongoing basis.
Included in our portfolio of marketable securities are investments in debt and equity securities classified as available for sale. At September 30, 2012 and December 31, 2011 these were as follows:
 
 
September 30, 2012
 
Cost or Amortized
Cost
 
Gross Unrealized
Gain
 
Gross Unrealized
Loss
 
Fair Value
Corporate debt securities
$
462

 
$
7

 
$
(7
)
 
$
462

U.S. government agencies and municipalities
41

 

 

 
41

Equity securities
9

 

 

 
9

Total
$
512

 
$
7

 
$
(7
)
 
$
512

 
 
December 31, 2011
 
Cost or Amortized
Cost
 
Gross Unrealized
Gain
 
Gross Unrealized
Loss
 
Fair Value
Corporate debt securities
$
406

 
$
5

 
$
(5
)
 
$
406

U.S. government agencies and municipalities
93

 

 

 
93

Equity securities
9

 

 
(2
)
 
7

Total
$
508

 
$
5

 
$
(7
)
 
$
506



Gross realized gains and losses on available for sale securities were insignificant for the three and nine months ended September 30, 2012 and 2011.
The table below summarizes available for sale fixed maturity securities by contractual maturity at September 30, 2012. Actual maturities may differ from contractual maturities because certain securities may be called or prepaid with or without call or prepayment penalties. Securities not due at a single date are allocated based on weighted average life. Although a portion of our available for sale fixed maturity securities mature after one year, we have chosen to classify the entire portfolio as current. The portfolio’s objectives are to preserve capital, provide liquidity to satisfy operating requirements, working capital purposes and strategic initiatives and capture a market rate of return. Therefore, since these securities represent funds available for current operations, the entire investment portfolio is classified as current assets.
 
 
September 30, 2012
Contractual Maturity
Cost or Amortized
Cost
 
Fair Value
Due in one year or less
$
300

 
$
300

Due in one to two years
203

 
203

Total
$
503

 
$
503


The impact to net income from total gains or losses included in net gains (losses) and interest income from marketable securities held to fund operating programs due to the change in unrealized gains or losses relating to assets still held at the reporting date for the three and nine months ended September 30, 2012 and 2011 were insignificant.
Derivative Instruments
Our derivative instruments are foreign currency exchange rate instruments and interest rate swaps. The instruments are valued using an income approach with factors such as interest rates and yield curves, which represent market observable inputs and are generally classified as Level Two. Credit valuation adjustments may be made to ensure that derivatives are recorded at fair value. These adjustments include amounts to reflect counterparty credit quality and our nonperformance risk. As of September 30, 2012 and December 31, 2011, the credit valuation adjustments were insignificant. See Note 9 for further details on our derivative instruments.
Mortgage Backed Securities
During the nine months ended September 30, 2012, we sold mortgage backed securities that had been classified as Level 3 at December 31, 2011. The following table provides a reconciliation of the beginning and ending balances for the mortgage backed securities measured at fair value using significant unobservable inputs (Level 3):
 
Fair Value Measurements at Reporting Date Using Significant Unobservable Inputs (Level 3) - Mortgage Backed Securities
 
2012
 
2011
Balance at January 1,
$
2

 
$
2

Transfers into (out of) Level Three

 

Settlements
(2
)
 

Total gains (losses) (realized or unrealized)

 

Balance at June 30,
$

 
$
2

Transfers into (out of) Level Three

 

Settlements

 

Total gains (losses) (realized or unrealized)

 

Balance at September 30,
$

 
$
2



Other Financial Instruments
We estimated the fair value of financing receivables using discounted cash flow analysis based on current market assumptions for similar types of arrangements. Based upon the availability of market data, we have classified our financing receivables as Level Three. The primary sensitivity in these calculations is based on the selection of appropriate interest and discount rates. Fluctuations in these assumptions will result in different estimates of fair value. For further information on financing receivables, see Note 5.
We estimated the fair value of debt, excluding capital leases, which consists of our Senior Notes. Our Senior Notes are classified as Level Two due to the use and weighting of multiple market inputs in the final price of the security. Market inputs include quoted market prices from active markets for identical securities, quoted market prices for identical securities in inactive markets, and quoted market prices in active and inactive markets for similar securities.
The carrying amounts and fair values of our other financial instruments are as follows:

 
Asset (Liability)
 
September 30, 2012
 
Carrying Value
 
Fair Value
 
Quoted Prices in
Active Markets for
Identical Assets
(Level One)
 
Significant Other
Observable Inputs
(Level Two)
 
Significant
Unobservable Inputs
(Level Three)
Financing receivables
 
 
 
 
 
 
 
 
 
Secured financing to hotel owners
$
312

 
$
315

 
$

 
$

 
$
315

Vacation ownership mortgage receivable
40

 
41

 

 

 
41

Unsecured financing to hotel owners
69

 
69

 

 

 
69

Debt, excluding capital lease obligations
(1,008
)
 
(1,127
)
 

 
(1,127
)
 


 
Asset (Liability)
 
December 31, 2011
 
Carrying Value
 
Fair Value
 
Quoted Prices in
Active Markets for
Identical Assets
(Level One)
 
Significant Other
Observable Inputs
(Level Two)
 
Significant
Unobservable Inputs
(Level Three)
Financing receivables
 
 
 
 
 
 
 
 
 
Secured financing to hotel owners
$
312

 
$
311

 
$

 
$

 
$
311

Vacation ownership mortgage receivable
42

 
42

 

 

 
42

Unsecured financing to hotel owners
16

 
15

 

 

 
15

Debt, excluding capital lease obligations
(1,008
)
 
(1,059
)
 

 
(1,059
)
 

Financing Receivables
Financing Receivables
5.    FINANCING RECEIVABLES
We have divided our financing receivables, which include loans and other financing arrangements, into three portfolio segments based on their initial measurement, risk characteristics and our method for monitoring or assessing credit risk. These portfolio segments correspond directly with our assessed class of receivables and are as follows:
Secured Financing to Hotel Owners—These financing receivables are senior secured mortgage loans and are collateralized by hotel properties currently in operation. These loans consist primarily of a $278 million mortgage loan receivable to an unconsolidated hospitality venture which was formed to acquire ownership of a hotel property in Waikiki, Hawaii, and which is accounted for under the equity method. This mortgage receivable has interest set at one-month LIBOR+3.75% due monthly and a stated maturity date of July 2013 and was therefore reclassified from a long-term to a current receivable during the three months ended September 30, 2012. Secured financing to hotel owners also includes financing provided to certain franchisees for the renovation and conversion of certain franchised hotels. These franchisee loans accrue interest at fixed rates ranging between 5.0% and 5.5%.
Vacation Ownership Mortgage Receivables—These financing receivables are comprised of various mortgage loans related to our financing of vacation ownership interval sales. As of September 30, 2012, the weighted-average interest rate on vacation ownership mortgage receivables was 14.0%.
Unsecured Financing to Hotel Owners—These financing receivables are primarily made up of individual unsecured loans and other types of financing arrangements provided to hotel owners. During the nine months ended September 30, 2012, we entered into a loan agreement to provide a $50 million mezzanine loan for the construction of a hotel that we will manage. Under the loan agreement, interest accrues at the greater of one-month LIBOR plus 5.0%, or 6.5%. Our other financing receivables have stated maturities and interest rates. However, the expected repayment terms may be dependent on the future cash flows of the hotels and these instruments, therefore, are not considered loans as the repayment dates are not fixed or determinable. Because these arrangements are not considered loans, we do not include them in our impaired loans analysis. Since these receivables may come due earlier than the stated maturity date, the expected maturity dates have been excluded from the maturities table below.
The three portfolio segments of financing receivables and their balances at September 30, 2012 and December 31, 2011 are as follows:
 
 
September 30, 2012
 
December 31, 2011
Secured financing to hotel owners
$
319

 
$
319

Vacation ownership mortgage receivables at various interest rates with varying payments through 2022
48

 
50

Unsecured financing to hotel owners
147

 
91

 
514

 
460

Less allowance for losses
(93
)
 
(90
)
Less current portion included in receivables, net
(289
)
 
(10
)
Total long-term financing receivables
$
132

 
$
360


Financing receivables held by us as of September 30, 2012 are scheduled to mature as follows:
Year Ending December 31,
Secured Financing to Hotel Owners
 
Vacation Ownership Mortgage Receivables
2012
$
1

 
$
2

2013
279

 
7

2014
1

 
8

2015
38

 
7

2016

 
7

2017

 
5

Thereafter

 
12

Total
319

 
48

Less allowance
(7
)
 
(8
)
Net financing receivables
$
312

 
$
40


Allowance for Losses and Impairments
We individually assess all loans in the secured financing to hotel owners portfolio and the unsecured financing to hotel owners portfolio for impairment. We assess the vacation ownership mortgage receivables portfolio, which consists entirely of loans, for impairment on an aggregate basis. We do not assess, for impairment, our other financing arrangements included in unsecured financing to hotel owners. However, we do regularly evaluate our reserves for these other financing arrangements and record provisions in the financing receivables allowance as necessary. Impairment charges for loans within all three portfolios and reserves related to our other financing arrangements are recorded as provisions in the financing receivables allowance. We consider the provisions on all of our portfolio segments to be adequate based on the economic environment and our assessment of the future collectability of the outstanding loans.
The following tables summarize the activity in our financing receivables allowance for the nine months ended September 30, 2012 and 2011:
 
Secured Financing
 
Vacation Ownership
 
Unsecured Financing
 
Total
Allowance at January 1, 2012
$
7

 
$
8

 
$
75

 
$
90

  Provisions

 
3

 
6

 
9

  Write-offs

 
(3
)
 
(3
)
 
(6
)
  Recoveries

 

 
(2
)
 
(2
)
Allowance at June 30, 2012
$
7

 
$
8

 
$
76

 
$
91

  Provisions

 
1

 
2

 
3

  Write-offs

 
(1
)
 

 
(1
)
  Recoveries

 

 

 

Allowance at September 30, 2012
$
7

 
$
8

 
$
78

 
$
93


 
Secured Financing
 
Vacation Ownership
 
Unsecured Financing
 
Total
Allowance at January 1, 2011
$
4

 
$
10

 
$
68

 
$
82

  Provisions

 
1

 
3

 
4

  Other Adjustments

 

 
1

 
1

  Write-offs
(1
)
 
(2
)
 

 
(3
)
  Recoveries

 

 

 

Allowance at June 30, 2011
$
3

 
$
9

 
$
72

 
$
84

  Provisions
4

 
2

 
2

 
8

  Other Adjustments

 

 
(2
)
 
(2
)
  Write-offs

 
(2
)
 

 
(2
)
  Recoveries

 

 

 

Allowance at September 30, 2011
$
7

 
$
9

 
$
72

 
$
88


Note: Amounts included in other adjustments represent currency translation on foreign currency denominated financing receivables.
We routinely evaluate loans within financing receivables for impairment. To determine whether an impairment has occurred, we evaluate the collectability of both interest and principal. A loan is considered to be impaired when the Company determines that it is probable that we will not be able to collect all amounts due under the contractual terms. We do not record interest income for impaired loans unless cash is received, in which case the payment is recorded to other income (loss), net in the accompanying condensed consolidated statements of income. During the three months ended September 30, 2012, we recorded insignificant impairment charges for loans. During the nine months ended September 30, 2012, we recorded impairment charges of $3 million for loans. During the three months ended September 30, 2011, we established an allowance of $4 million for loans to hotel owners that we deemed to be impaired, which was recognized within other income (loss), net in the accompanying condensed consolidated statements of income. The gross value of our impaired loans and related reserve does increase, outside of impairments recognized, due to the accrual and related reserve of interest income on these loans.
An analysis of our loans included in secured financing to hotel owners and unsecured financing to hotel owners had the following impaired amounts at September 30, 2012 and December 31, 2011, all of which had a related allowance recorded against them:
Impaired Loans
September 30, 2012
 
Gross Loan Balance (Principal and Interest)
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Loan Balance
Secured financing to hotel owners
$
40

 
$
40

 
$
(7
)
 
$
40

Unsecured financing to hotel owners
53

 
46

 
(49
)
 
50


Impaired Loans
December 31, 2011
 
Gross Loan Balance (Principal and Interest)
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Loan Balance
Secured financing to hotel owners
$
41

 
$
40

 
$
(7
)
 
$
40

Unsecured financing to hotel owners
51

 
46

 
(46
)
 
51


Interest income recognized on these impaired loans within other income (loss), net on our condensed consolidated statements of income for the three and nine months ended September 30, 2012 and 2011 was as follows:
Interest Income
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Secured financing to hotel owners
$
1

 
$
1

 
$
2

 
$
2

Unsecured financing to hotel owners

 

 

 


Credit Monitoring
On an ongoing basis, we monitor the credit quality of our financing receivables based on payment activity. We categorize our financing receivables as follows:
Past-due Receivables—We determine financing receivables to be past-due based on the contractual terms of each individual financing receivable agreement.
Non-Performing Receivables—Receivables are determined to be non-performing based upon the following criteria: (1) if interest or principal is greater than 90 days past due for secured financing to hotel owners and unsecured financing to hotel owners; (2) 120 days past due for vacation ownership mortgage receivables; (3) if an impairment charge has been recorded for a loan or a provision established for our other financing arrangements. For the three and nine months ended September 30, 2012 and 2011, no interest income was accrued for secured financing to hotel owners and unsecured financing to hotel owners greater than 90 days past due and for vacation ownership receivables greater than 120 days past due. For the three and nine months ended September 30, 2012 and 2011, insignificant interest income was accrued for vacation ownership receivables greater than 90 days and less than 120 days.
If a financing receivable is non-performing, we place the financing receivable on non-accrual status. We only recognize interest income when received for financing receivables on non-accrual status. Accrual of interest income is resumed when the receivable becomes contractually current and collection doubts are removed.
The following tables summarize our aged analysis of past-due financing receivables by portfolio segment, the gross balance of financing receivables greater than 90 days past-due and the gross balance of financing receivables on non-accrual status as of September 30, 2012 and December 31, 2011:
 
Analysis of Financing Receivables
September 30, 2012
 
Receivables
Past Due
 
Greater than 90 Days Past Due
 
Receivables on
Non-Accrual
Status
Secured financing to hotel owners
$

 
$

 
$
40

Vacation ownership mortgage receivables
2

 

 

Unsecured financing to hotel owners *
3

 
3

 
80

Total
$
5

 
$
3

 
$
120


Analysis of Financing Receivables
December 31, 2011
 
Receivables
Past Due
 
Greater than 90 Days Past Due
 
Receivables on
Non-Accrual
Status
Secured financing to hotel owners
$

 
$

 
$
41

Vacation ownership mortgage receivables
3

 

 

Unsecured financing to hotel owners *
6

 
6

 
76

Total
$
9

 
$
6

 
$
117


* Certain of these receivables have been placed on non-accrual status and we have recorded allowances for these receivables based on estimates of the future cash flows available for payment of these financing receivables. However, a majority of these payments are not past due.
Acquisitions, Dispositions, and Discontinued Operations
Acquisitions Dispositions And Discontinued Operations
ACQUISITIONS, DISPOSITIONS, AND DISCONTINUED OPERATIONS
We continually assess strategic acquisitions and dispositions to complement our current business.
Acquisitions
Hyatt Regency Mexico City—During the nine months ended September 30, 2012, we acquired all of the outstanding shares of capital stock of a company that owned a full service hotel in Mexico City, Mexico in order to expand our presence in the region. The total purchase price was approximately $202 million. As part of the purchase, we acquired cash and cash equivalents of $12 million, resulting in a net purchase price of $190 million. We began managing this property during the nine months ended September 30, 2012 and have rebranded it as Hyatt Regency Mexico City.
In conjunction with the acquisition, we entered into a holdback escrow agreement. Pursuant to the holdback escrow agreement, we withheld $11 million from the purchase price and placed it into an escrow account, which was classified as restricted cash on our condensed consolidated balance sheet. During the three months ended September 30, 2012 we released $1 million from escrow to the seller. The remaining funds in the escrow account will be released to the seller, less any indemnity claims, upon satisfaction of the release terms of the holdback escrow agreement within the nine months following the close of the transaction. Because we expect the terms of the holdback escrow agreement to be satisfied, we have recorded a corresponding liability in accrued expenses and other current liabilities on our condensed consolidated balance sheet.
The following table summarizes the preliminary estimated fair value of the identifiable assets acquired and liabilities assumed in our owned and leased hotels segment for the acquisition (in millions):
Cash and cash equivalents
$
12

Other current assets
4

Land, property, and equipment
190

Intangibles
12

Total assets
218

Current liabilities
4

Other long-term liabilities
42

Total liabilities
46

     Total net assets acquired
$
172


The acquisition created goodwill of Mexican Peso ("MXP") 410 million, or $30 million at the date of acquisition, which is not deductible for tax purposes and is recorded within our owned and leased segment. The definite lived intangibles, which are substantially comprised of management intangibles, will be amortized over a weighted average useful life of 17 years. Within the other long-term liabilities is a $41 million deferred tax liability, the majority of which relates to property and equipment.
The results of the Hyatt Regency Mexico City since the acquisition date have been included in our condensed consolidated financial statements.  The following table presents the results of this property since the acquisition date on a stand-alone basis (in millions):
 
Hyatt Regency Mexico City's operations included in 2012 results
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2012
 
September 30, 2012
Revenues
$
11

 
$
16

Income from continuing operations

 
1


The following table presents our revenues and income from continuing operations on a pro forma basis as if we had completed the acquisition and rebranding of the Hyatt Regency Mexico City as of January 1, 2011 (in millions):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Pro forma revenues
$
977

 
$
908

 
$
2,967

 
$
2,741

Pro forma income from continuing operations
23

 
13

 
74

 
61


The above 2012 pro forma income from continuing operations for the three and nine months ended September 30, 2012 excludes $1 million of transaction costs that were recorded to other income (loss), net on our condensed consolidated statements of income. The nine months ended September 30, 2011 pro forma income from continuing operations was adjusted to include these charges.
LodgeWorks—During the nine months ended September 30, 2011, we acquired from LodgeWorks, L.P. and its private equity partners (collectively, "LodgeWorks"), 19 hotels, management rights to an additional four hotels, and other assets for a purchase price of approximately $632 million. We acquired an additional hotel during the fourth quarter of 2011 for a purchase price of approximately $29 million. Together, these acquisitions resulted in an aggregate purchase of 20 hotels, four management agreements, and other assets at a purchase price of approximately $661 million. Of the four hotels for which we acquired management rights, three joined our portfolio in 2011 and one joined our portfolio in 2012. The number of assets within our owned and leased hotels segment increased as a result of this acquisition.
In conjunction with the acquisition, we entered into a holdback escrow agreement with LodgeWorks. Pursuant to the holdback escrow agreement, we withheld approximately $19 million from the purchase price which we placed into an escrow account, and which was classified as restricted cash on our condensed consolidated balance sheet. The funds in the escrow account will be released, less any indemnity claims, to LodgeWorks upon the hotels meeting certain profitability measures set forth in the holdback escrow agreement after a minimum of 18 months following the acquisition close date. Because we expect the hotels to meet the profitability measures within the next 12 months, we have recorded a liability in accrued expenses and other current liabilities on our condensed consolidated balance sheet. The hotels have until the end of calendar year 2018 to meet the profitability measures set forth in the holdback escrow agreement. If the measures are not met at that time, the funds will be returned to us.
Woodfin Suites—During the nine months ended September 30, 2011, we acquired three Woodfin Suites properties in California for a total purchase price of approximately $77 million and rebranded them as Hyatt Summerfield Suites and, subsequently, as Hyatt House hotels.  
Dispositions
Hyatt Place and Hyatt Summerfield Suites—During the nine months ended September 30, 2011, we sold six Hyatt Place and two Hyatt Summerfield Suites properties to a newly formed joint venture with an affiliate of Noble Investment Group, LLC, in which the Company holds a 40% ownership interest. The properties were sold for a combined sale price of $110 million, or $90 million net of our $20 million contribution to the new joint venture. The sale resulted in a pretax loss of $2 million, which has been recognized in other income (loss), net on our condensed consolidated statements of income. In conjunction with the sale, we entered into a long-term franchise agreement with the joint venture for each property. The six Hyatt Place and two Hyatt Summerfield Suites hotels continue to be operated as Hyatt-branded hotels and the two Hyatt Summerfield Suites hotels were subsequently rebranded as Hyatt House properties. The operating results and financial positions of these hotels prior to the sale remain within our owned and leased hotels segment.
Hyatt Regency Minneapolis—During the nine months ended September 30, 2011, we entered into an agreement with third parties to form a new joint venture, the purpose of which was to own and operate the Hyatt Regency Minneapolis. We contributed a fee simple interest in the Hyatt Regency Minneapolis to the joint venture as part of our equity interest, subject to a $25 million loan to the newly formed joint venture. HHC has guaranteed the repayment of the loan (see Note 12). In conjunction with our contribution, we entered into a long-term management contract with the joint venture. The terms of the joint venture provide for capital contributions by the non-HHC partners that will be used to complete a full renovation of the Hyatt Regency Minneapolis.
Like-Kind Exchange Agreements
In conjunction with the sale of three Hyatt Place properties during the nine months ended September 30, 2011, we entered into a like-kind exchange agreement with an intermediary. Pursuant to the like-kind exchange agreement, the proceeds from the sales of these three hotels were placed into an escrow account administered by the intermediary. Therefore, we classified the net proceeds of $35 million as restricted cash on our condensed consolidated balance sheet as of June 30, 2011 which was subsequently utilized during the third quarter of 2011 as part of the purchase of hotels and other assets from LodgeWorks, L.P. and its private equity partners.
During the nine months ended September 30, 2011, we released the net proceeds from the 2010 sales of Grand Hyatt Tampa Bay and Hyatt Regency Greenville of $56 million and $15 million, respectively, from restricted cash on our condensed consolidated balance sheet, as a like-kind exchange agreement was not consummated within applicable time periods. The net proceeds of $26 million from the sale of Hyatt Deerfield were utilized in a like-kind exchange agreement to acquire one of the Woodfin Suites properties.
Assets Held for Sale
During the third quarter of 2012, we committed to a plan to sell seven Hyatt Place properties and one Hyatt House property to a third party and classified the value of this portfolio as assets held for sale in the amount of $74 million, and liabilities held for sale in the amount of $3 million at September 30, 2012. The sale transaction was completed in October 2012. Details of the assets and liabilities held-for-sale are as follows:
 
Assets and Liabilities Held for Sale at September 30, 2012
Assets held-for-sale:
 
   Property and Equipment, net
$
70

   Receivables
2

   Intangibles, net
2

Total assets held-for sale:
$
74

 
 
Liabilities held-for-sale:
 
    Accrued expenses and other current liabilities
$
3

Total liabilities held-for-sale:
$
3



During the nine months ended September 30, 2011, we closed on the sale of a Company owned airplane to a third party for net proceeds of $18 million. The transaction resulted in a small pre-tax gain upon sale.
Goodwill And Intangible Assets
Goodwill And Intangible Assets
GOODWILL AND INTANGIBLE ASSETS
We review the carrying value of all our goodwill by comparing the carrying value of our reporting units to their fair values in a two-step process. We define a reporting unit at the individual property or business level. We are required to perform this comparison at least annually or more frequently if circumstances indicate that a possible impairment exists. When determining fair value in step one, we utilize internally developed discounted future cash flow models, third party appraisals and, if appropriate, current estimated net sales proceeds from pending offers. We then compare the estimated fair value to our carrying value. If the carrying value is in excess of the fair value, we must determine our implied fair value of goodwill to measure if any impairment charge is necessary.
Goodwill was $134 million at September 30, 2012 and $102 million at December 31, 2011. The increase in goodwill is due to the acquisition of the Hyatt Regency Mexico City which created goodwill of MXP 410 million, or $30 million at the date of the acquisition. Using exchange rates as of September 30, 2012 the goodwill related to the Mexico City acquisition was $32 million (see Note 6). During the three and nine months ended September 30, 2012 and 2011, no impairment charges were recorded related to goodwill.

Definite lived intangible assets primarily include contract acquisition costs, acquired lease rights, and acquired franchise and management intangibles. Contract acquisition costs and franchise and management intangibles are generally amortized on a straight-line basis over their contract terms, which range from approximately 5 to 40 years and 10 to 30 years, respectively. Acquired lease rights are amortized on a straight-line basis over the lease term. Definite lived intangibles are tested for impairment whenever events or circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. During the three months ended September 30, 2012, we classified $2 million of franchise and management intangible assets as held for sale (see Note 6). There were no impairment charges related to intangible assets with definite lives during the three and nine months ended September 30, 2012 and 2011.
The following is a summary of intangible assets at September 30, 2012 and December 31, 2011:
 
 
September 30, 2012
 
Weighted
Average Useful
Lives in Years
 
December 31, 2011
Contract acquisition costs
$
188

 
23
 
$
167

Acquired lease rights
139

 
112
 
133

Franchise and management intangibles
122

 
25
 
115

Other
9

 
10
 
7

 
458

 
 
 
422

Accumulated amortization
(80
)
 
 
 
(63
)
Intangibles, net
$
378

 
 
 
$
359


Amortization expense relating to intangible assets was as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Amortization expense
$
7

 
$
4

 
$
19

 
$
12

Debt
Debt Disclosure [Text Block]
DEBT
Long-term debt, net of current maturities, at September 30, 2012 and December 31, 2011 was $1,219 million and $1,221 million, respectively.
Senior Notes - During the three months ended September 30, 2011, we issued and sold $250 million of 3.875% senior notes due August 15, 2016, at a public offering price of 99.571% (the “2016 Notes”), and $250 million of 5.375% senior notes due August 15, 2021, at a public offering price of 99.846% (the “2021 Notes”).
We received net proceeds of approximately $494 million from the sale of the 2016 Notes and the 2021 Notes, after deducting underwriters' discounts and offering expenses payable by the Company of approximately $4 million, which we used for general corporate purposes. Interest on the 2016 Notes and 2021 Notes is payable semi-annually on February 15 and August 15 of each year, beginning on February 15, 2012.
9.26% Twenty-Five Year Mortgage - During the nine months ended September 30, 2011, we exercised the prepayment option on our 9.26% Twenty-Five Year Mortgage, secured by one of our wholly owned hotels, and paid the outstanding balance of $53 million. The loan had an original maturity date of 2021, and no penalties were incurred upon exercise of our prepayment option.
Revolving Credit Facility - During the three months ended September 30, 2011, we entered into an Amended and Restated Credit Agreement with a syndicate of lenders that amended and restated our prior revolving credit facility to increase the borrowing availability under the facility from $1.1 billion to $1.5 billion and extend the facility's expiration from June 29, 2012 to September 9, 2016. Interest rates on outstanding borrowings are either LIBOR-based or based on an alternate base rate, with margins in each case based on our credit rating or, in certain circumstances, our credit rating and leverage ratio, and includes a facility fee. As of September 30, 2012, the applicable rate for a one-month borrowing would have been LIBOR plus 1.375%, or 1.589%, inclusive of the facility fee. There was no outstanding balance on this credit facility at September 30, 2012 or December 31, 2011. We did, however, have $99 million in outstanding undrawn letters of credit that are issued under our revolving credit facility (which reduces the availability thereunder by the corresponding amount) as of September 30, 2012 and December 31, 2011.
Derivative Instruments
Derivative Instruments
DERIVATIVE INSTRUMENTS
It is our policy that derivative transactions are executed only to manage exposures arising in the normal course of business and not for the purpose of creating speculative positions or trading. As a result of the use of derivative instruments, we are exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. To mitigate the counterparty credit risk, we have a policy of only entering into contracts with carefully selected major financial institutions based upon their credit rating and other factors. Our derivative instruments do not contain credit-risk related contingent features.
All derivatives are recognized on the balance sheet at fair value. Changes in the fair value of a derivative that is qualified, designated and highly effective as a cash flow hedge are recorded in accumulated other comprehensive loss on the balance sheet until they are reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Changes in the fair value of a derivative that is qualified, designated and highly effective as a fair value hedge, along with the gain or loss on the hedged asset or liability that is attributable to the hedged risk are recorded in current earnings. Changes in the fair value of undesignated derivative instruments and the ineffective portion of designated derivative instruments are reported in current period earnings. Cash flows from designated derivative financial instruments are classified within the same category as the item being hedged on the statement of cash flows. Cash flows from undesignated derivative financial instruments are included in the investing category on the statement of cash flows.
Interest Rate Swap Agreements—In the normal course of business, we are exposed to the impact of interest rate changes due to our borrowing activities. Our objective is to manage the risk of interest rate changes on the results of operations, cash flows, and the market value of our debt by creating an appropriate balance between our fixed and floating-rate debt. Interest rate derivative transactions, including interest rate swaps, are entered to maintain a level of exposure to interest rates which the Company deems acceptable.
As of September 30, 2012 and December 31, 2011, we held a total of four and eight $25 million interest rate swap contracts, respectively, each of which expires on August 15, 2015. Taken together, these swap contracts effectively convert a total of $100 million and $200 million, as of September 30, 2012 and December 31, 2011, respectively, of the $250 million of senior notes issued in August 2009 with a maturity date of August 15, 2015 (the “2015 Notes”) to floating rate debt based on three-month LIBOR plus a fixed rate component. The fixed rate component of the four remaining swaps varies by contract, ranging from 4.5675% to 4.77%. The interest rate swaps were designated as a fair value hedge as their objective is to protect the 2015 Notes against changes in fair value due to changes in the three-month LIBOR interest rate. The swaps were designated as fair value hedges at inception and at September 30, 2012 and December 31, 2011 were highly effective in offsetting fluctuations in the fair value of the 2015 Notes. At September 30, 2012 and December 31, 2011, the fixed to floating interest rate swaps were recorded within other assets at a value of $2 million and $7 million, respectively, offset by a fair value adjustment to long-term debt of $2 million and $8 million, respectively. At September 30, 2012 and December 31, 2011, the difference between the other asset value and fair market value adjustment to long-term debt includes the ineffective portion of the swap life-to-date in an insignificant amount and $1 million, respectively.
During the three and nine months ended September 30, 2012, we terminated three and four $25 million interest rate swap contracts, respectively, for which we received cash payments of $6 million and $8 million, respectively, to settle the fair value of the swaps. The cash payments received during the three and nine months ended September 30, 2012 included $1 million of accrued interest. These amounts are included within the carrying value of long-term debt at September 30, 2012. The cash received from the terminations will be amortized as a benefit to interest expense over the remaining term of the 2015 Notes.
Interest Rate Lock—During the nine months ended September 30, 2011, we entered into treasury-lock derivative instruments with $250 million of notional value to hedge a portion of the risk of changes in the benchmark interest rate associated with the senior notes issued in August 2011 (see Note 8), as changes in the benchmark interest rate would result in variability in cash flows related to such debt. These derivative instruments were designated as cash flow hedges at inception and were highly effective in offsetting fluctuations in the benchmark interest rate. Changes in the fair value relating to the effective portion of the lock were recorded in accumulated other comprehensive loss and the corresponding fair value was included in prepaids and other assets.
During the three months ended September 30, 2011, we settled the treasury-lock derivative instruments. The $14 million loss on the settlement was recorded to accumulated other comprehensive loss and will be amortized to interest expense over the remaining life of the 2021 Notes. For the three and nine months ended September 30, 2012, the amount of incremental interest expense was insignificant and $1 million, respectively. For the three and nine months ended September 30, 2011, the amount of incremental interest expense was insignificant.
Foreign Currency Exchange Rate Instruments—We transact business in various foreign currencies and utilize foreign currency forward contracts to offset the risks associated with the effects of certain foreign currency exposures. Our strategy is to have increases or decreases in our foreign currency exposures offset by gains or losses on the foreign currency forward contracts to mitigate the risks and volatility associated with foreign currency transaction gains or losses. These foreign currency exposures typically arise from intercompany loans and other intercompany transactions. Our foreign currency forward contracts generally settle within 12 months. We do not use these forward contracts for trading purposes. We do not designate these forward contracts as hedging instruments. Accordingly, we record the fair value of these contracts as of the end of our reporting period to our condensed consolidated balance sheets with changes in fair value recorded in our condensed consolidated statements of income within other income (loss), net for both realized and unrealized gains and losses. The balance sheet classification for the fair values of these forward contracts is to prepaids and other assets for unrealized gains and to accrued expenses and other current liabilities for unrealized losses.
The U.S. dollar equivalent of the notional amount of the outstanding forward contracts, the majority of which relate to intercompany loans, with terms of less than one year, is as follows (in U.S. dollars):
 
September 30, 2012
 
December 31, 2011
Pound Sterling
$
155

 
$
126

Swiss Franc
45

 
59

Korean Won
31

 
33

Canadian Dollar
29

 
27

Total notional amount of forward contracts
$
260

 
$
245


Certain energy contracts at our hotel properties include derivatives. However, we qualify for and have elected the normal purchases or sales exemption for these derivatives.
The effects of derivative instruments on our condensed consolidated financial statements were as follows as of September 30, 2012December 31, 2011 and for the three and nine month periods ended September 30, 2012 and 2011:
Fair Values of Derivative Instruments
 
Asset Derivatives
 
Liability Derivatives
 
Balance Sheet
Location
 
September 30,
2012
 
December 31,
2011
 
Balance Sheet Location
 
September 30,
2012
 
December 31,
2011
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
Other assets
 
$
2

 
$
7

 
Other long-term
liabilities
 
$

 
$

Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts
Prepaids and
other assets
 

 

 
Accrued expenses and
other current liabilities
 
4

 
1

Total derivatives
 
 
$
2

 
$
7

 
 
 
$
4

 
$
1


Effect of Derivative Instruments on Income
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
Location of
Gain (Loss)
 
2012
 
2011
 
2012
 
2011
Fair value hedges:
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
 
 
 
 
 
 
 
 
Gains on derivatives
Other income (loss), net*
 
$

 
$
2

 
$
1

 
$
3

Losses on borrowings
Other income (loss), net*
 

 
(2
)
 
(1
)
 
(3
)
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
Location of
Gain (Loss)
 
2012
 
2011
 
2012
 
2011
Cash flow hedges:
 
 
 
 
 
 
 
 
 
Interest rate locks
 
 
 
 
 
 
 
 
 
Amount of gain (loss) recognized in accumulated other comprehensive income (loss) on derivative (effective portion)
Accumulated other comprehensive loss
 
$

 
$
(18
)
 
$

 
$
(14
)
Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into income (effective portion)
Interest expense
 

 

 

 

Amount of gain (loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing)
Other income (loss), net**
 

 

 

 

 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
Location of
Gain (Loss)
2012
 
2011
 
2012
 
2011
Derivatives not designated as hedges:
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts
Other income (loss), net
 
$
(7
)
 
$
3

 
$
(9
)
 
$
(5
)
 
*
For the three and nine months ended September 30, 2012 and 2011, there was an insignificant loss recognized in income related to the ineffective portion of these hedges. No amounts were excluded from the assessment of hedge effectiveness for the three and nine months ended September 30, 2012 and 2011.

**
For the nine months ended September 30, 2011, there was an insignificant gain recognized in income related to the ineffective portion of these hedges. No amounts were excluded from the assessment of hedge effectiveness for the nine months ended September 30, 2011.
Employee Benefit Plans
Employee Benefit Plans
EMPLOYEE BENEFIT PLANS
Descriptions of our employee benefit plans and the related costs incurred for the three and nine months ended September 30, 2012 and 2011 are provided below:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Defined benefit plan
$

 
$

 
$
1

 
$
1

Defined contribution plans
8

 
9

 
26

 
26

Deferred compensation plan
1

 
2

 
6

 
6



Defined Benefit Plan—We sponsor a frozen unfunded supplemental defined benefit executive retirement plan for certain former executives.
Defined Contribution Plans—We provide retirement benefits to certain qualified employees under the Retirement Savings Plan (a qualified plan under Internal Revenue Code Section 401(k)), the Field Retirement Plan (a nonqualified plan), and other similar plans. We record expenses related to the Retirement Savings Plan based on a percentage of qualified employee contributions on stipulated amounts; a substantial portion of these contributions are included in the other revenues from managed properties and other costs from managed properties lines in the condensed consolidated statements of income as the costs of these programs are largely related to employees located at lodging properties managed by us and are therefore paid for by the property owners.
Deferred Compensation Plan—We provide a deferred compensation plan in which contributions and investment elections are determined by the employees. The Company also provides contributions according to preapproved formulas. A portion of these contributions relate to hotel property level employees, which are reimbursable to us and are included in the other revenues from managed properties and other costs from managed properties lines in the condensed consolidated statements of income. As of September 30, 2012 and December 31, 2011, the plan is fully funded in a rabbi trust. The assets of the plan are primarily invested in mutual funds, which are recorded in other assets in the condensed consolidated balance sheets. The related deferred compensation liability is recorded in other long-term liabilities.
Income Taxes
Income Tax Disclosure
INCOME TAXES

The effective income tax rates for the three months ended September 30, 2012 and 2011 were a benefit of 17.0% and 63.7%, respectively. The effective income tax rates for the nine months ended September 30, 2012 and 2011 were a provision of 20.7% and a benefit of 0.1%, respectively.

For the three months ended September 30, 2012, the effective tax rate is lower than the U.S. statutory federal income tax rate of 35% primarily due to the recognition of foreign tax credits of $8 million and a benefit of $3 million from a reduction in statutory tax rates enacted by foreign jurisdictions during the quarter. In addition, a benefit of $2 million was realized due to the release of tax reserves related to issues that were resolved with our ongoing U.S. federal tax audit of prior years.

For the nine months ended September 30, 2012, the effective tax rate is lower than the U.S. statutory federal income tax rate of 35% primarily due to the recognition of foreign tax credits of $17 million, a release of $5 million in reserves for interest related to our treatment for expensing certain renovation costs in prior years and a benefit of $3 million from a reduction in statutory tax rates enacted by foreign jurisdictions during the quarter. The rate was further reduced by a benefit of $2 million that was realized due to the release of tax reserves related to issues that were resolved with our U.S. federal tax audit of prior years. These benefits are partially offset by a provision of approximately $7 million resulting from a reduction in the deferred tax assets of certain non-consolidated investments as well as a provision of approximately $7 million (including $2 million of interest and penalties) for uncertain tax positions in foreign jurisdictions.

For the three months ended September 30, 2011, the effective tax rate differed from the U.S. statutory federal income tax rate of 35% primarily due to net benefit of $3 million resulting from decreases in our uncertain tax positions (inclusive of interest and penalties), a benefit of $2 million from a reduction in statutory tax rates enacted by foreign jurisdictions during the quarter, and a benefit from the earnings of foreign jurisdictions that are taxed at lower rates. For the nine months ended September 30, 2011, the effective tax rate differed from the U.S. statutory federal income tax rate of 35% primarily due to a $12 million benefit related to the release of a valuation allowance against certain foreign net operating losses, a benefit of $2 million from a reduction in statutory tax rates enacted by foreign jurisdictions during the first nine months, and a benefit from the earnings of foreign jurisdictions that are taxed at lower rates.

Total unrecognized tax benefits were $163 million and $175 million at September 30, 2012 and December 31, 2011 respectively, of which $48 million, would impact the effective tax rate if recognized. It is reasonably possible that a reduction of up to $53 million of unrecognized tax benefits could occur within twelve months resulting from the resolution of audit examinations and the expiration of certain tax statutes of limitations.
Commitments And Contingencies
Commitments And Contingencies
COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, we enter into various commitments, guarantees, surety bonds, and letter of credit agreements, which are discussed below:
Guarantees and Commitments—As of September 30, 2012, we are committed, under certain conditions, to lend or invest up to $521 million, net of any related letters of credit, in various business ventures.
Included in the $521 million in commitments are the following:

Our share of a hospitality venture’s commitment to purchase a hotel within a to-be completed building in New York City for a total purchase price of $375 million. The hospitality venture will be funded upon the purchase of the hotel, and our share of the purchase price commitment is 66.67% (or approximately $250 million). In accordance with the purchase agreement, we have agreed to fund a $50 million letter of credit as security towards this future purchase obligation. The agreement stipulates that the purchase of the completed property is contingent upon the completion of certain contractual milestones. The $50 million funded letter of credit is included as part of our total letters of credit outstanding at September 30, 2012, and therefore netted against our future commitments amount disclosed above. For further discussion, see the “Letters of Credit” section of this footnote below.

Our commitment to develop, own and operate a hotel property in the State of Hawaii through a joint venture formed in 2010. The expected remaining commitment under the joint venture agreement at September 30, 2012, is $72 million.
Certain of our hotel lease or management agreements contain performance tests that stipulate certain minimum levels of operating performance. These performance test clauses give us the option to fund any shortfall in profit performance. If we choose not to fund the shortfall, the hotel owner has the option to terminate the lease or management contract. As of September 30, 2012, there were no amounts recorded in accrued expenses and other current liabilities related to these performance test clauses.
Additionally, from time to time we may guarantee hotel owners certain levels of hotel profitability based on various metrics. Certain of our management agreements require us to make payments if specified thresholds are not achieved and we have recorded a $1 million and a $3 million charge under one of these agreements in the three and nine months ended September 30, 2012, respectively. Under a separate agreement, we had $2 million accrued as of September 30, 2012. The remaining maximum potential payments related to these agreements are $26 million.
We have entered into various loan, lease completion and repayment guarantees related to investments held in hotel operations. The maximum exposure under these agreements as of September 30, 2012 is $109 million. With respect to repayment guarantees related to two joint venture properties, the Company has agreements with its respective partners that require each partner to pay a pro-rata portion of the guarantee based on each partner’s ownership percentage. Assuming successful enforcement of these agreements with respect to these two joint ventures, our maximum exposure under our various loan, lease completion and repayment guarantees as of September 30, 2012, would be $81 million. As of September 30, 2012, the maximum exposure includes $25 million of a loan repayment agreement guarantee related to our contribution of our interest in Hyatt Regency Minneapolis to a newly formed joint venture (see Note 6).
Surety Bonds—Surety bonds issued on our behalf totaled $24 million at September 30, 2012, and primarily relate to workers’ compensation, taxes, licenses, and utilities related to our lodging operations.
Letters of Credit—Letters of credit outstanding on our behalf as of September 30, 2012 totaled $120 million, the majority of which relate to our ongoing operations. Of the $120 million letters of credit outstanding, $99 million reduces the available capacity under the revolving credit facility.
Capital Expenditures—As part of our ongoing business operations, significant expenditures are required to complete renovation projects that have been approved.
Other —We act as general partner of various partnerships owning hotel properties that are subject to mortgage indebtedness. These mortgage agreements generally limit the lender’s recourse to security interests in assets financed and/or other assets of the partnership and/or the general partner(s) thereof.
In conjunction with financing obtained for our unconsolidated hospitality ventures, we may provide standard indemnifications to the lender for loss, liability or damage occurring as a result of our actions or actions of the other joint venture owners.
We are subject from time to time to various claims and contingencies related to lawsuits, taxes, and environmental matters, as well as commitments under contractual obligations. Many of these claims are covered under current insurance programs, subject to deductibles. We recognize a liability associated with such commitments and contingencies when a loss is probable and reasonably estimable. Although the liability for these matters cannot be determined at this point, based on information currently available, we do not expect that the ultimate resolution of such claims and litigation will have a material effect on our condensed consolidated financial statements.
Equity
Equity
EQUITY
Stockholders’ Equity and Noncontrolling InterestsThe following table details the equity activity for the nine months ended September 30, 2012 and 2011, respectively.
 
 
Stockholders’
equity
 
Noncontrolling interests
in consolidated
subsidiaries
 
Total equity
Balance at January 1, 2012
$
4,818

 
$
10

 
$
4,828

Net income
72

 

 
72

Other comprehensive income
25

 

 
25

Repurchase of common stock
(35
)
 

 
(35
)
Issuance of common stock shares to directors
1

 

 
1

Issuance of common stock through employee stock purchase plan
2

 

 
2

Share based payment activity
12

 

 
12

Balance at September 30, 2012
$
4,895

 
$
10

 
$
4,905

 
 
 
 
 
 
Balance at January 1, 2011
$
5,118

 
$
13

 
$
5,131

Net income (loss)
61

 
(2
)
 
59

Other comprehensive loss
(26
)
 

 
(26
)
Repurchase of common stock
(396
)
 

 
(396
)
Issuance of common stock shares to directors
1

 

 
1

Issuance of common stock through employee stock purchase plan
2

 

 
2

Share based payment activity
16

 

 
16

Balance at September 30, 2011
$
4,776

 
$
11

 
$
4,787


 
Accumulated Other Comprehensive LossThe following table details the accumulated other comprehensive loss activity for the nine months ended September 30, 2012 and 2011, respectively.

 
Balance at
January 1, 2012
 
Current period other comprehensive income (loss)
 
Balance at
September 30, 2012
Foreign currency translation adjustments
$
(64
)
 
$
23

 
$
(41
)
Unrealized gain (loss) on AFS securities
(2
)
 
2

 

Unrecognized pension cost
(6
)
 

 
(6
)
Unrealized loss on derivative instruments
(8
)
 

 
(8
)
Accumulated Other Comprehensive Loss
$
(80
)
 
$
25

 
$
(55
)
 
 
 
 
 
 
 
Balance at
January 1, 2011
 
Current period other comprehensive income (loss)
 
Balance at
September 30, 2011
Foreign currency translation adjustments
$
(33
)
 
$
(15
)
 
$
(48
)
Unrealized loss on AFS securities

 
(2
)
 
(2
)
Unrecognized pension cost
(5
)
 

 
(5
)
Unrealized loss on derivative instruments

 
(9
)
 
(9
)
Accumulated Other Comprehensive Loss
$
(38
)
 
$
(26
)
 
$
(64
)
2012 Share RepurchaseDuring the three months ended September 30, 2012 the Company announced that the Board of Directors authorized the repurchase of up to $200 million of the Company's common stock. These repurchases may be made from time to time in the open market, in privately negotiated transactions, or otherwise, including pursuant to a Rule 10b5-1 plan, at prices that the Company deems appropriate and subject to market conditions, applicable law and other factors deemed relevant in the Company's sole discretion. During the three months ended September 30, 2012, the Company repurchased 911,244 shares of Class A common stock at an average price of $38.78 per share, for an aggregate purchase price of $35 million, excluding related expenses. The $35 million of share repurchases was settled in cash during the quarter with the exception of $2 million that was recorded as accrued expenses at September 30, 2012 as the share settlement occurred prior to period end but the related cash payment was not settled until October. The shares repurchased represented less than 1% of the Company's total shares of common stock outstanding prior to the repurchase. The shares of Class A common stock were repurchased on the open market, retired, and returned to authorized and unissued status.
2011 Share RepurchaseDuring the nine months ended September 30, 2011, we repurchased 8,987,695 shares of Class B common stock for $44.03 per share, the closing price of the Company’s Class A common stock on May 13, 2011, for an aggregate purchase price of approximately $396 million. The shares repurchased represented approximately 5.2% of the Company’s total shares of common stock outstanding prior to the repurchase. The shares of Class B common stock were repurchased from trusts for the benefit of certain Pritzker family members in privately-negotiated transactions and were retired, thereby reducing the total number of shares outstanding and reducing the shares of Class B common stock authorized and outstanding by the repurchased share amount.
Stock-Based Compensation
Stock-Based Compensation
STOCK-BASED COMPENSATION
As part of our long-term incentive plan, we award Stock Appreciation Rights (“SARs”), Restricted Stock Units (“RSUs”), Performance Share Units (“PSUs”), and Performance Vested Restricted Stock ("PSSs") to certain employees. Compensation expense and unearned compensation figures within this note exclude amounts related to employees of our managed hotels as this expense has been and will continue to be reimbursed by our third party hotel owners and is recorded on the lines other revenues from managed properties and other costs from managed properties. Compensation expense related to these awards for the three and nine months ended September 30, 2012 and 2011 was as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Stock appreciation rights
$
2

 
$
2

 
$
6

 
$
6

Restricted stock units
4

 
4

 
10

 
10

Performance share units and Performance vested restricted stock

 

 
1

 
1


Stock Appreciation Rights—Each vested SAR gives the holder the right to the difference between the value of one share of our Class A common stock at the exercise date and the value of one share of our Class A common stock at the grant date. Vested SARs can be exercised over their life as determined by the plan. All SARs have a 10-year contractual term and are settled in shares of our Class A common stock. The Company is accounting for these SARs as equity instruments.
During the nine months ended September 30, 2012, the Company granted 405,877 SARs to employees with a weighted average grant date fair value of $17.29. The fair value of each SAR was estimated on the date of grant using the Black-Scholes-Merton option-valuation model.
Restricted Stock Units—The Company grants both RSUs that may be settled in stock and RSUs that may be settled in cash. Each vested stock-settled RSU will be settled with a single share of our Class A common stock. The value of the stock-settled RSUs was based on the closing stock price of our Class A common stock as of the grant date. We record compensation expense earned for RSUs on a straight-line basis from the date of grant. In certain situations we also grant cash-settled RSUs which are recorded as a liability instrument. The liability and related expense for cash-settled RSUs are insignificant as of, and for the three and nine months ended September 30, 2012. During the nine months ended September 30, 2012, the Company granted a total of 463,846 RSUs (an insignificant portion of which are cash-settled RSUs) to employees which, with respect to stock-settled RSUs, had a weighted average grant date fair value of $41.06.
Performance Share Units and Performance Vested Restricted Stock—The Company has granted to certain executive officers both PSUs, which are restricted stock units, and PSSs, which are performance vested restricted stock. The number of PSUs that will ultimately vest and be paid out in Class A common stock and the number of PSSs that will ultimately vest with no further restrictions on transfer depends upon the performance of the Company at the end of the applicable three year performance period relative to the applicable performance target. During the nine months ended September 30, 2012, the Company granted to its executive officers a total of 209,569 PSSs, which vest in full if the maximum performance metric is achieved. At the end of the performance period, the PSSs that did not vest will be forfeited. The PSSs had a weighted average grant date fair value of $41.29. The performance period is three years beginning January 1, 2012 and ending December 31, 2014. The PSSs will vest at the end of the performance period only if the performance threshold is met; there is no interim performance metric.
Our total unearned compensation for our stock-based compensation programs as of September 30, 2012 was $15 million for SARs, $33 million for RSUs and $3 million for PSUs and PSSs, which will be recorded to compensation expense primarily over the next four years with respect to SARs and RSUs and over the next three years with respect to PSUs and PSSs. The amortization for certain RSU awards extends to nine years.
Related-Party Transactions
Related-Party Transactions
    RELATED-PARTY TRANSACTIONS
In addition to those included elsewhere in the notes to the condensed consolidated financial statements, related-party transactions entered into by us are summarized as follows:
Leases—Our corporate headquarters has been located at the Hyatt Center in Chicago, Illinois, since 2005. A subsidiary of the Company holds a master lease for a portion of the Hyatt Center and has entered into sublease agreements with certain related parties. During the nine months ended September 30, 2012, one of these sublease agreements was amended to reduce the related party's occupied space. As a result, we received a payment of $4 million, representing the discounted future sublease payments, less furniture and fixtures acquired. During the nine months ended September 30, 2011, we agreed to a new sublease agreement with a related party which resulted in a $5 million loss on the transaction, which is recorded in other income (loss), net on the condensed consolidated statements of income. Future sublease income from sublease agreements with related parties under our master lease is $12 million.
Legal Services—A partner in a law firm that provided services to us throughout the nine months ended September 30, 2012 and 2011 is the brother-in-law of our Executive Chairman. We incurred $1 million and insignificant amounts in legal fees with this firm for the three months ended September 30, 2012 and 2011, respectively. We incurred legal fees with this firm of $2 million for both nine month periods ended September 30, 2012 and 2011. Legal fees, when expensed, are included in selling, general and administrative expenses. As of September 30, 2012, and December 31, 2011, we had insignificant amounts due to the law firm.
Gaming—We had a Gaming Space Lease Agreement with HCC Corporation ("HCC"), a related party, whereby it leased approximately 20,990 square feet of space at the Hyatt Regency Lake Tahoe Resort, Spa and Casino, where it operated a casino. In connection with the Gaming Space Lease Agreement, we also provided certain sales, marketing and other general and administrative services to HCC under a Casino Facilities Agreement. In exchange for such services, HCC paid us fees based on the type of services being provided and for complimentary goods and services provided to casino customers. We received $1 million for the three months ended September 30, 2011 and $2 million for the nine months ended September 30, 2011 under this agreement. During the third quarter of 2011, the relevant related party agreements terminated. The new agreements for the casino are with an unrelated third party.
Other Services—A member of our board of directors is a partner in a firm whose affiliates own hotels from which we recorded management and franchise fees of $2 million and $1 million during the three months ended September 30, 2012 and 2011, respectively, and $5 million and $4 million during the nine months ended September 30, 2012 and 2011, respectively. As of both September 30, 2012 and December 31, 2011, we had $1 million due from these properties.
Equity Method Investments—We have equity method investments in entities that own properties for which we provide management and/or franchise services and receive fees. We recorded fees of $9 million for both three month periods ended September 30, 2012 and 2011. We recorded fees of $28 million and $27 million for the nine months ended September 30, 2012 and 2011, respectively. As of September 30, 2012 and December 31, 2011, we had receivables due from these properties of $11 million and $7 million, respectively. In addition, in some cases we provide loans or guarantees (see Note 12) to these entities. Our ownership interest in these equity method investments generally varies from 8 to 50 percent.
Share RepurchaseDuring the nine months ended September 30, 2011, we repurchased 8,987,695 shares of Class B common stock for $44.03 per share, the closing price of the Company’s Class A common stock on May 13, 2011, for an aggregate purchase price of approximately $396 million. The shares repurchased represented approximately 5.2% of the Company’s total shares of common stock outstanding prior to the repurchase. The shares of Class B common stock were repurchased from trusts for the benefit of certain Pritzker family members in privately-negotiated transactions and were retired, thereby reducing the total number of shares outstanding and reducing the shares of Class B common stock authorized and outstanding by the repurchased share amount.
Segment Information
Segment Information
SEGMENT INFORMATION
Our operating segments are components of the business which are managed discretely and for which discrete financial information is reviewed regularly by the chief operating decision maker to assess performance and make decisions regarding the allocation of resources. Our chief operating decision maker is the Chief Executive Officer. The Company announced on May 2, 2012 the intent to realign its corporate and regional operations to enhance organizational effectiveness and adaptability. The organizational changes are expected to be effective during the fourth quarter of 2012. The Company's chief operating decision maker continued to assess performance and make decisions regarding the allocation of resources on the basis of our historical operating segments through the period ended September 30, 2012. Accordingly, we continue to define our reportable segments as follows:
Owned and Leased Hotels—This segment derives its earnings from owned and leased hotel properties located predominantly in North America but also from certain international locations and, for purposes of segment Adjusted EBITDA, includes our pro rata share of the Adjusted EBITDA of our unconsolidated hospitality ventures, based on our ownership percentage of each venture.
North American Management and Franchising—This segment derives its earnings from services provided, including hotel management and licensing of our family of brands to franchisees located in the U.S., Canada and the Caribbean. This segment’s revenues also include the reimbursement of costs incurred on behalf of managed hotel property owners and franchisees with no added margin, and include in costs and expenses these reimbursed costs.
These costs relate primarily to payroll costs at managed properties where the Company is the employer. These revenues and costs are recorded on the lines other revenues from managed properties and other costs from managed properties, respectively. The intersegment revenues relate to management fees that are collected from the Company’s owned hotels, which are eliminated in consolidation.
International Management and Franchising—This segment derives its earnings from services provided, including hotel management and licensing of our family of brands to franchisees located in countries outside of the U.S., Canada and the Caribbean. This segment’s revenues also include the reimbursement of costs incurred on behalf of managed hotel property owners and franchisees with no added margin, and include in costs and expenses these reimbursed costs. These costs relate primarily to reservations, marketing and IT costs. These revenues and costs are recorded on the lines other revenues from managed properties and other costs from managed properties, respectively. The intersegment revenues relate to management fees that are collected from the Company’s owned hotels, which are eliminated in consolidation.
Our chief operating decision maker evaluates performance based on each segment’s Adjusted EBITDA. We define Adjusted EBITDA as net income attributable to Hyatt Hotels Corporation plus our pro-rata share of unconsolidated hospitality ventures' Adjusted EBITDA before equity earnings (losses) from unconsolidated hospitality ventures; asset impairments; other income (loss), net; net loss attributable to noncontrolling interests; depreciation and amortization; interest expense; and (provision) benefit for income taxes.
The table below shows summarized consolidated financial information by segment. Included within Corporate and other are unallocated corporate expenses, revenues and expenses on our vacation ownership properties, and the results of our co-branded credit card.
 
(in millions)
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
North American Management and Franchising
 
 
 
 
 
 
 
Revenues
$
422