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1. | 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 March 31, 2011, we operate or franchise 232 full-service hotels consisting of 99,341 rooms, in 43 countries throughout the world. We hold ownership interests in certain of these hotels. As of March 31, 2011, we operate or franchise 196 select-service hotels with 25,111 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, 2010 (the "2010 Form 10-K").
We have eliminated all intercompany transactions in our condensed consolidated financial statements. We do not consolidate the financial statements of any company in which we have an ownership interest of 50% or less unless we control that company.
Management believes that the accompanying condensed consolidated financial statements reflect all adjustments, including normal recurring items, considered necessary for a fair presentation of the interim periods.
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2. | RECENTLY ISSUED ACCOUNTING STANDARDS |
Adopted Accounting Standards
In December 2010, the Financial Accounting Standards Board ("FASB") released Accounting Standards Update No. 2010-28 ("ASU 2010-28"), Intangibles-Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. The update requires a company to perform Step 2 of the goodwill impairment test if the carrying value of the reporting unit is zero or negative and adverse qualitative factors indicate that it is more likely than not that a goodwill impairment exists. The qualitative factors to consider are consistent with the existing guidance and examples in Topic 350, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. The requirements in ASU 2010-28 became effective for public companies in the first annual period beginning after December 15, 2010. The adoption of ASU 2010-28 on January 1, 2011 did not materially impact our condensed consolidated financial statements.
In December 2010, the FASB released Accounting Standards Update No. 2010-29 ("ASU 2010-29"), Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations. ASU 2010-29 specifies that when a public company completes a business combination(s), the company should disclose revenue and earnings of the combined entity as though the business combination(s) occurred as of the beginning of the comparable prior annual reporting period. The update also expands the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the pro forma revenue and earnings. The requirements in ASU 2010-29 became effective for business combinations that occur on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The adoption of ASU 2010-29 on January 1, 2011 did not materially impact our condensed consolidated financial statements.
In January 2010, the FASB released Accounting Standards Update No. 2010-06 ("ASU 2010-06"), Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurement. The update required the Company to (a) disclose significant transfers in and out of Levels One and Two, in addition to transfers in and out of Level Three and (b) separately disclose purchases, sales, issuances, and settlements of our Level Three securities. Additionally, ASU 2010-06 clarifies the information we currently disclose regarding our valuation techniques, inputs used in those valuation models, and the level of detail at which fair value disclosures should be provided. We adopted the Level One and Two disclosure requirements of ASU 2010-06 as of January 1, 2010 with no material impact on our condensed consolidated financial statements. As of January 1, 2011, we adopted the disclosure requirements related to Level Three activity on a gross basis, with no material impact on our fair value disclosures. See Note 4 for a discussion of fair value.
Future Adoption of Accounting Standards
In January 2011, the FASB released Accounting Standards Update No. 2011-01 ("ASU 2011-01"), Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20, which deferred the disclosure requirements surrounding troubled debt restructurings. These disclosures are effective for reporting periods ending on or after June 15, 2011. We do not expect the disclosures related to troubled debt restructurings will have a material impact on our current financing receivable disclosures.
In April 2011, the FASB released Accounting Standards Update No. 2011-02 ("ASU 2011-02"), Receivables (Topic 310): A Creditor's Determination of Whether a Restructuring is a Troubled Debt Restructuring. ASU 2011-02 clarifies the guidance for determining whether a restructuring constitutes a troubled debt restructuring. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must conclude that 1) the restructuring constitutes a concession and 2) the debtor is experiencing financial difficulties. ASU 2011-02 also requires companies to disclose the troubled debt restructuring disclosures that were deferred by ASU 2011-01. The guidance in ASU 2011-02 is effective for public companies in the first reporting period ending on or after June 15, 2011, but the amendment must be applied retrospectively to the beginning of the annual period of adoption. ASU 2011-02 is not expected to materially impact our condensed consolidated financial statements.
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3. | EQUITY AND COST METHOD INVESTMENTS |
We have investments that are recorded under both the equity and cost methods. 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 March 31, 2011 and December 31, 2010 are as follows:
March 31, 2011 | December 31, 2010 | |||||||
Equity method investments |
$ | 178 | $ | 175 | ||||
Cost method investments |
70 | 70 | ||||||
Total investments |
$ | 248 | $ | 245 | ||||
Income from cost method investments included in our condensed consolidated statements of income for the three months ended March 31, 2011 and 2010 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.
For the Three Months Ended March 31, |
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2011 | 2010 | |||||||
Total revenues |
$ | 239 | $ | 205 | ||||
Gross operating profit |
76 | 62 | ||||||
Income (loss) from continuing operations |
11 | (16 | ) | |||||
Net income (loss) |
$ | 11 | $ | (16 | ) | |||
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4. | 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 derivatives 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.
As of March 31, 2011 and December 31, 2010, we had the following financial assets and liabilities measured at fair value on a recurring basis:
March 31, 2011 | Quoted Prices in Active Markets for Identical Assets (Level One) |
Significant Other Observable Inputs (Level Two) |
Significant Unobservable Inputs (Level Three) |
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Marketable securities included in short-term investments, prepaids and other assets and other assets |
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Mutual funds |
$ | 257 | $ | 257 | $ | - | $ | - | ||||||||
Equity securities |
48 | 40 | 8 | - | ||||||||||||
U.S. government obligations |
97 | - | 97 | - | ||||||||||||
U.S. government agencies |
65 | - | 65 | - | ||||||||||||
Corporate debt securities |
451 | - | 451 | - | ||||||||||||
Mortgage-backed securities |
19 | - | 17 | 2 | ||||||||||||
Asset-backed securities |
10 | - | 10 | - | ||||||||||||
Other |
3 | - | 3 | - | ||||||||||||
Marketable securities recorded in cash and cash equivalents |
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Interest bearing money market funds |
678 | 678 | - | - | ||||||||||||
Derivative instruments |
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Interest rate swaps |
3 | - | 3 | - | ||||||||||||
Foreign currency forward contracts |
(3 | ) | - | (3 | ) | - | ||||||||||
December 31, 2010 |
Quoted Prices in Active Markets for Identical Assets (Level One) |
Significant Other Observable Inputs (Level Two) |
Significant Unobservable Inputs (Level Three) |
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Marketable securities included in short-term investments, prepaids and other assets and other assets |
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Mutual funds |
$ | 244 | $ | 244 | $ | - | $ | - | ||||||||
Equity securities |
50 | 41 | 9 | - | ||||||||||||
U.S. government obligations |
101 | - | 101 | - | ||||||||||||
U.S. government agencies |
61 | - | 61 | - | ||||||||||||
Corporate debt securities |
451 | - | 451 | - | ||||||||||||
Mortgage-backed securities |
16 | - | 14 | 2 | ||||||||||||
Asset-backed securities |
11 | - | 11 | - | ||||||||||||
Other |
1 | - | 1 | - | ||||||||||||
Marketable securities recorded in cash and cash equivalents |
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Interest bearing money market funds |
699 | 699 | - | - | ||||||||||||
Commercial paper |
3 | - | 3 | - | ||||||||||||
Derivative instruments |
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Interest rate swaps |
4 | - | 4 | - | ||||||||||||
Foreign currency forward contracts |
(4 | ) | - | (4 | ) | - |
Our portfolio of marketable securities consists of various types of U.S. Treasury securities, mutual funds, common stock, and fixed income securities, including government 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, 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.
Included in our portfolio of marketable securities are investments in debt and equity securities classified as available for sale. At March 31, 2011 and December 31, 2010 these were as follows:
March 31, 2011 | ||||||||||||||||
Cost or Amortized Cost |
Gross Unrealized Gain |
Gross Unrealized Loss |
Fair Value | |||||||||||||
Corporate debt securities |
$ | 367 | $ | 3 | $ | (2 | ) | $ | 368 | |||||||
U.S. government agencies |
32 | - | - | 32 | ||||||||||||
Equity securities |
9 | - | (1 | ) | 8 | |||||||||||
Total |
$ | 408 | $ | 3 | $ | (3 | ) | $ | 408 | |||||||
December 31, 2010 | ||||||||||||||||
Cost or Amortized Cost |
Gross Unrealized Gain |
Gross Unrealized Loss |
Fair Value | |||||||||||||
Corporate debt securities |
$ | 366 | $ | 2 | $ | (2 | ) | $ | 366 | |||||||
U.S. government agencies |
28 | - | - | 28 | ||||||||||||
Equity securities |
9 | - | - | 9 | ||||||||||||
Total |
$ | 403 | $ | 2 | $ | (2 | ) | $ | 403 | |||||||
Gross realized gains and losses on available for sale securities were insignificant for the three months ended March 31, 2011 and 2010.
The table below summarizes available for sale fixed maturity securities by contractual maturity at March 31, 2011. 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 primary objective is to maximize return, but it also is intended to provide liquidity to satisfy operating requirements, working capital purposes and strategic initiatives. Therefore, since these securities represent funds available for current operations, the entire investment portfolio is classified as current assets.
March 31, 2011 | ||||||||
Contractual Maturity |
Cost or Amortized Cost |
Fair Value | ||||||
Due in one year or less |
$ | 247 | $ | 248 | ||||
Due in one to two years |
152 | 152 | ||||||
Total |
$ | 399 | $ | 400 | ||||
We invest a portion of our cash balance into short-term interest bearing money market funds that have a dollar-weighted average portfolio maturity of sixty days or less. 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.
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 March 31, 2011 and December 31, 2010, the credit valuation adjustments were not material. See Note 8 for further details on our derivative instruments.
Due to limited observability of market data and limited activity during the quarters ended March 31, 2011 and 2010, we classified the fair value of certain of our mortgage-backed securities as Level Three. However, these securities are held within an investment-grade portfolio with many of these securities having a credit rating of AAA/Aaa.
During the three months ended March 31, 2011 and 2010, there were no transfers between levels of the fair value hierarchy. Our policy is to recognize transfers in and transfers out as of the end of each quarterly reporting period. The following table provides a reconciliation of the beginning and ending balances for the assets 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 |
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2011 | 2010 | |||||||
Balance at January 1, |
$ | 2 | $ | 2 | ||||
Transfers into (out of) Level Three |
- | - | ||||||
Purchases |
- | - | ||||||
Issuances |
- | - | ||||||
Settlements |
- | - | ||||||
Total gains (losses) (realized or unrealized) |
- | - | ||||||
Balance at March 31, |
$ | 2 | $ | 2 | ||||
The amount of total gains (losses) included in net gains 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 months ended March 31, 2011 and 2010 were insignificant.
The carrying amounts and fair values of our other financial instruments are as follows:
Asset (Liability) | ||||||||||||||||
March 31, 2011 | December 31, 2010 | |||||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||
Financing receivables |
$ | 383 | $ | 385 | $ | 386 | $ | 392 | ||||||||
Debt, excluding capital lease obligations |
(556 | ) | (583 | ) | (558 | ) | (596 | ) |
We estimated the fair value of financing receivables using discounted cash flow analyses based on current market inputs for similar types of arrangements. 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 our senior unsecured notes based on observable market data. We estimated the fair value of our mortgages, notes payable and other long-term debt instruments using discounted cash flow analysis based on current market inputs for similar types of arrangements. The primary sensitivity in these calculations is based on the selection of appropriate discount rates. Fluctuations in these assumptions will result in different estimates of fair value.
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5. | FINANCING RECEIVABLES |
We define financing receivables as financing arrangements that represent a contractual right to receive money either on demand or on fixed or determinable dates and that are recognized as an asset on our condensed consolidated balance sheets. We record all financing receivables at amortized cost in current and long-term receivables. We recognize interest income as earned and provide an allowance for cancellations and defaults. We have divided our financing receivables into three portfolio segments based on the level at which we develop and document a systematic methodology to determine the allowance for credit losses. Based on their initial measurement, risk characteristics and our method for monitoring and assessing credit risk, we have determined the class of financing receivables to correspond to our identified portfolio segments. The three portfolio segments of financing receivables and their balances at March 31, 2011 and December 31, 2010 are as follows:
March 31, 2011 | December 31, 2010 | |||||||
Secured financing to hotel owners |
$ | 325 | $ | 326 | ||||
Vacation ownership mortgage receivables at various interest rates with varying payments through 2018 |
53 | 55 | ||||||
Unsecured financing to hotel owners |
88 | 87 | ||||||
466 | 468 | |||||||
Less allowance for losses |
(83 | ) | (82 | ) | ||||
Less current portion included in receivables |
(17 | ) | (11 | ) | ||||
Total long-term financing receivables |
$ | 366 | $ | 375 | ||||
Secured Financing to Hotel Owners—These financing receivables are senior, secured mortgage loans and are collateralized by underlying hotel properties currently in operation. These loans consist primarily of a $278 million mortgage loan receivable to an unconsolidated hospitality venture, which is accounted for under the equity method, and was formed to acquire ownership of a hotel property in Waikiki, Hawaii. This mortgage receivable has interest set at 30-day LIBOR+3.75% due monthly and a stated maturity date of July 2011 with two, one-year options to extend through 2013. We currently expect that the loan will be extended beyond 2011 and have classified it as long-term. Secured financing to hotel owners also includes financing provided to certain franchisees for the renovations and conversion of certain franchised hotels. These franchisee loans accrue interest at fixed rates ranging between 5.5% and 7.5%. Secured financing to hotel owners held by us as of March 31, 2011 are scheduled to mature as follows:
Year Ending December 31, |
Amount | |||
2011 |
$ | 1 | ||
2012 |
17 | |||
2013 |
278 | |||
2014 |
- | |||
2015 |
29 | |||
2016 |
- | |||
Thereafter |
- | |||
Total secured financing to hotel owners |
325 | |||
Less allowance |
(3 | ) | ||
Net secured financing to hotel owners |
$ | 322 | ||
Vacation Ownership Mortgage Receivables—These financing receivables are comprised of various mortgage loans related to our financing of vacation ownership interval sales. As of March 31, 2011, the weighted-average interest rate on vacation ownership mortgage receivables was 14.0%. Vacation ownership mortgage receivables held by us as of March 31, 2011 are scheduled to mature as follows:
Year Ending December 31, |
Amount | |||
2011 |
$ | 5 | ||
2012 |
7 | |||
2013 |
8 | |||
2014 |
8 | |||
2015 |
8 | |||
2016 |
7 | |||
Thereafter |
10 | |||
Total vacation ownership mortgage receivables |
53 | |||
Less allowance |
(10 | ) | ||
Net vacation ownership mortgage receivables |
$ | 43 | ||
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. These financing receivables have stated maturities and interest rates. The repayment terms vary and may be dependent on the future cash flows of the hotel.
Analysis of Financing Receivables—The following table includes our aged analysis of past due financing receivables by portfolio segment, the gross balance of financing receivables on non-accrual status and the allowance for credit losses and the related investment balance as of March 31, 2011 and December 31, 2010, based on impairment method:
Analysis of Financing Receivables |
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As of March 31, 2011 |
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Total Past Due |
Current | Total Financing Receivable |
Receivables on Non-Accrual Status |
Related Allowance for Credit Losses |
Recorded Investment >90 Days and Accruing |
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Secured financing to hotel owners |
$ | - | $ | 325 | $ | 325 | $ | 40 | $ | (3 | ) | $ | - | |||||||||||
Vacation ownership mortgage receivables |
3 | 50 | 53 | - | (10 | ) | 1 | |||||||||||||||||
Unsecured financing to hotel owners |
12 | 76 | 88 | 70 | (70 | ) | - | |||||||||||||||||
Total |
$ | 15 | $ | 451 | $ | 466 | $ | 110 | $ | (83 | ) | $ | 1 | |||||||||||
Analysis of Financing Receivables |
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As of December 31, 2010 |
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Total Past Due |
Current | Total Financing Receivable |
Receivables on Non-Accrual Status |
Related Allowance for Credit Losses |
Recorded Investment >90 Days and Accruing |
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Secured financing to hotel owners |
$ | - | $ | 326 | $ | 326 | $ | 41 | $ | (4 | ) | $ | - | |||||||||||
Vacation ownership mortgage receivables |
3 | 52 | 55 | - | (10 | ) | 1 | |||||||||||||||||
Unsecured financing to hotel owners |
13 | 74 | 87 | 69 | (68 | ) | - | |||||||||||||||||
Total |
$ | 16 | $ | 452 | $ | 468 | $ | 110 | $ | (82 | ) | $ | 1 | |||||||||||
Credit Monitoring—On an ongoing basis, we monitor the credit quality of our financing receivables based on payment activity. We determine financing receivables to be past-due based on the contractual terms of each individual financing receivable agreement. Of our total past due amounts at March 31, 2011, $1 million and $12 million of our vacation ownership mortgage receivables and our unsecured financing to hotel owners, respectively, are greater than 90 days past due. Of our total past due amounts at December 31, 2010, $1 million and $13 million of our vacation ownership mortgage receivables and our unsecured financing to hotel owners, respectively, are greater than 90 days past due.
We assess credit quality indicators based on whether financing receivables are performing or non-performing. We consider receivables non-performing if interest or principal is greater than 90 days past due for secured financing to hotel owners and unsecured financing to hotel owners or 120 days past due for vacation ownership mortgage receivables. Receivables not meeting these criteria are considered to be performing. If we consider a financing receivable to be non-performing or impaired, we will place the financing receivable on non-accrual status. We will recognize interest income when received for non-accruing finance receivables. Accrual of interest income is resumed when the receivable becomes contractually current and collection doubts are removed.
Allowance for Credit Losses—We individually assess all loans and other financing arrangements in the secured financing to hotel owners portfolio and in the unsecured financing to hotel owners portfolio for impairment. We assess the vacation ownership mortgage receivables portfolio for impairment on a collective basis.
The following table summarizes the activity in our financing receivables reserve for the three month period ended March 31, 2011:
Allowance for Credit Losses |
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For the Three Months Ended March 31, 2011 |
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Beginning Balance January 1, 2011 |
Provisions | Other Additions |
Write-offs | Recoveries | Ending Balance March 31, 2011 |
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Secured financing to hotel owners |
$ | 4 | $ | - | $ | - | $ | (1 | ) | $ | - | $ | 3 | |||||||||||
Vacation ownership mortgage receivables |
10 | 1 | - | (1 | ) | - | 10 | |||||||||||||||||
Unsecured financing to hotel owners |
68 | 1 | 1 | - | - | 70 | ||||||||||||||||||
Total |
$ | 82 | $ | 2 | $ | 1 | $ | (2 | ) | $ | - | $ | 83 | |||||||||||
Amounts included in other additions represent currency translation on foreign currency denominated financing receivables.
For the three months ended March 31, 2010, we recorded insignificant provisions for our secured financing to hotel owners and vacation ownership mortgage receivables and $3 million in provisions for our unsecured financing to hotel owners.
Our unsecured financing to hotel owners consists primarily of receivables due on future contractual maturity dates. The payments under these contractual agreements are contingent upon future cash flows of the underlying hospitality properties. Although the majority of these payments are not past due, these receivables have been placed on non-accrual status and we have provided allowances for these owner receivables based on estimates of the future cash flows available for payment of these receivables. 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.
Impaired Loans—To determine whether an impairment has occurred, we evaluate the collectability of both interest and principal. A financing receivable is considered to be impaired when the Company determines that it is probable that it will not be able to collect all amounts due under the contractual terms. We do not record interest income for impaired receivables unless cash is received, in which case the payment is recorded to other income, net in the accompanying condensed consolidated statements of income.
An analysis of impaired loans at March 31, 2011 and December 31, 2010, all of which had a related allowance recorded against them, was as follows:
Impaired Loans |
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For the Three Months Ended March 31, 2011 |
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Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
Average Recorded Investment |
Interest Income Recognized |
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Secured financing to hotel owners |
$ | 40 | $ | 40 | $ | (3 | ) | $ | 40 | $ | 1 | |||||||||
Unsecured financing to hotel owners |
48 | 44 | (43 | ) | 48 | - | ||||||||||||||
For the Year Ended December 31, 2010 |
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Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
Average Recorded Investment |
Interest Income Recognized |
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Secured financing to hotel owners |
$ | 41 | $ | 40 | $ | (4 | ) | $ | 40 | $ | 2 | |||||||||
Unsecured financing to hotel owners |
47 | 43 | (42 | ) | 45 | - |
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6. | ACQUISITIONS, DISPOSITIONS, AND DISCONTINUED OPERATIONS |
We continually assess strategic acquisitions and dispositions to complement our current business.
Dispositions
Hyatt Regency Minneapolis—During the first quarter of 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. The loan was obtained during the quarter and the proceeds from the loan were retained by HHC. HHC has guaranteed the repayment of the loan (see Note 11). 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.
Hyatt Regency Greenville—In September 2010, we sold the Hyatt Regency Greenville for $15 million, net of closing costs. In conjunction with the sale we entered into a like-kind exchange agreement with an intermediary. Pursuant to the like-kind exchange agreement, the proceeds from the sale of the hotel were placed into an escrow account administered by the intermediary. During the three months ended March 31, 2011, we released the $15 million of restricted cash related to the sale, as a like-kind exchange agreement was not consummated within applicable time periods.
Hyatt Regency Boston—In March 2010, we sold the Hyatt Regency Boston for net proceeds of $113 million to Chesapeake Lodging Trust, an entity in which we own a 4.9% interest, resulting in a pretax gain of $6 million. The hotel continues to be operated as a Hyatt-branded hotel and we will continue to manage the hotel under a long-term management contract. The gain on sale was deferred and is being recognized in management and franchise fees over the term of the management contract, within our North American management and franchising segment. The operations of the hotel prior to the sale remain within our owned and leased hotels segment. In conjunction with the sale we entered into a like-kind exchange agreement with an intermediary. Pursuant to the like-kind exchange agreement, the proceeds from the sale of the hotel were placed into an escrow account administered by an intermediary as of March 31, 2010. During 2010, we released the $113 million of restricted cash related to the sale, as a like-kind exchange agreement was not consummated within applicable time periods.
Discontinued Operations—The operating results, assets, and liabilities of the following business have been reported separately as discontinued operations in the condensed consolidated balance sheets and condensed consolidated statements of income. Upon disposition, we will not have any continuing involvement in these operations.
Amerisuites Orlando—During 2010, we committed to a plan to sell the Amerisuites Orlando property. As a result, we classified the assets and liabilities of this property as held for sale in 2010. Based on a valuation of the property, the Company determined the fair value of the property was below the book value of the assets. As such, a pre-tax impairment loss of approximately $4 million was recorded as part of the loss from discontinued operations during the first quarter of 2010. The property was subsequently sold during the third quarter of 2010.
Assets Held for Sale
During 2010, we committed to a plan to sell a Company owned airplane. As a result, we classified the value of the airplane as assets held for sale in the amount of $18 million at December 31, 2010. During the first quarter of 2011, we closed on the sale of the airplane to a third party for net proceeds of $18 million. The transaction resulted in a marginal pre-tax gain upon sale.
|
7. | 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 $102 million at March 31, 2011 and December 31, 2010. During the three months ended March 31, 2011 and 2010, no impairment charges were recorded related to goodwill.
Definite lived intangible assets primarily include acquired management and franchise contracts, contract acquisition costs, and acquired lease rights. Franchise contracts are amortized on a straight-line basis over their contract terms, which are typically 20 years. Contract acquisition costs are generally amortized on a straight-line basis over the life of the management contracts, which range from approximately 5 to 40 years. 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. There were no impairment charges related to intangible assets with definite lives during the three months ended March 31, 2011 and 2010.
The following is a summary of intangible assets at March 31, 2011 and December 31, 2010:
March 31, 2011 |
Weighted Average Useful Lives |
December 31, 2010 | ||||||||||
Contract acquisition costs |
$ | 155 | 23 | $ | 150 | |||||||
Acquired lease rights |
135 | 114 | 130 | |||||||||
Franchise intangibles |
50 | 20 | 50 | |||||||||
Brand intangibles |
11 | 7 | 11 | |||||||||
Other |
7 | 14 | 8 | |||||||||
358 | 349 | |||||||||||
Accumulated amortization |
(73 | ) | (69 | ) | ||||||||
Intangibles, net |
$ | 285 | $ | 280 | ||||||||
Amortization expense relating to intangible assets for the three months ended March 31, 2011 and 2010 was $3 million and $3 million, respectively.
|
8. | 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 income 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 March 31, 2011 and 2010, we held four $25 million interest rate swap contracts, each of which expires on August 15, 2015 and effectively converted a total of $100 million of the $250 million of senior unsecured notes issued on August 10, 2009 with a maturity date of August 15, 2015 ("2015 Notes") to floating rate debt based on three-month LIBOR plus a fixed rate component. The fixed rate component of each swap varies by contract, ranging from 2.68% to 2.9675%. The fixed to floating 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 March 31, 2011 and December 31, 2010 were highly effective in offsetting fluctuations in the fair value of the 2015 Notes. At March 31, 2011, the fixed to floating interest rate swaps were recorded within other assets at a value of $3 million, offset by a fair value adjustment to long-term debt of $3 million. At December 31, 2010, the fixed to floating interest rate swaps were recorded within other assets at a value of $4 million, offset by a fair value adjustment to long-term debt of $4 million.
We had one other interest rate swap that was not designated as a hedge, and therefore was marked-to-market each period through earnings. This derivative was held as an economic hedge to convert a variable interest rate exposure to a fixed rate. The balance sheet classification for the fair value of the interest rate swap was to other assets for unrealized gains and to other long-term liabilities for unrealized losses. The outstanding interest rate swap agreement was for a notional amount less than $1 million and matured during the three months ended March 31, 2010.
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, 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 US dollars):
March 31, 2011 | December 31, 2010 | |||||||
Pound Sterling |
$ | 67 | $ | 66 | ||||
Swiss Franc |
47 | 47 | ||||||
Korean Won |
43 | 43 | ||||||
Euro |
- | 19 | ||||||
Australian Dollar |
1 | 1 | ||||||
Total notional amount of forward contracts |
$ | 158 | $ | 176 | ||||
Certain energy contracts at our hotel facilities 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 March 31, 2011, December 31, 2010 and for the three months ended March 31, 2011 and 2010:
Fair Values of Derivative Instruments
Asset Derivatives | Liability Derivatives | |||||||||||||||||||||||
Balance Sheet Location |
March 31, 2011 |
December 31, 2010 |
Balance Sheet Location |
March 31, 2011 |
December 31, 2010 |
|||||||||||||||||||
Derivatives designated as hedging instruments |
||||||||||||||||||||||||
Interest rate swaps |
Other assets | $ | 3 | $ | 4 | Other long-term liabilities | $ | - | $ | - | ||||||||||||||
Derivatives not designated as hedging instruments |
||||||||||||||||||||||||
Foreign currency forward contracts |
|
Prepaids and other assets |
|
- | - |
|
Accrued expenses and other current |
|
3 | 4 | ||||||||||||||
Total derivatives |
$ | 3 | $ | 4 | $ | 3 | $ | 4 | ||||||||||||||||
Effect of Derivative Instruments on Income
Location of Gain (Loss) |
Three Months Ended March 31, | |||||||||||
2011 | 2010 | |||||||||||
Fair value hedges: |
||||||||||||
Interest rate swaps |
||||||||||||
Losses on derivatives |
Other income, net* | $ | (1 | ) | $ | - | ||||||
Gains on borrowings |
Other income, net* | 1 | - | |||||||||
|
Location of Gain (Loss) |
Three Months Ended March 31, | ||||||||||
2011 | 2010 | |||||||||||
Derivatives not designated as hedges: |
||||||||||||
Foreign currency forward contracts |
Other income, net | $ | (2 | ) | $ | 12 | ||||||
* | For the three months ended March 31, 2011 and 2010, there was an insignificant gain and an insignificant loss, respectively, recognized in income related to the ineffective portion of these hedges. No amounts were excluded from the assessment of hedge effectiveness for the three months ended March 31, 2011 and 2010. |
|
9. | EMPLOYEE BENEFIT PLANS |
Defined Benefit Plans—We sponsor a frozen unfunded supplemental defined benefit executive retirement plan for certain former executives. Refer to the table below for costs related to this plan.
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. Refer to the table below for costs related to these plans.
Deferred Compensation Plans—Historically, we have provided nonqualified deferred compensation for certain employees through several different plans. These plans were funded through contributions to rabbi trusts. In 2010 these plans were consolidated into the Amended and Restated Hyatt Corporation Deferred Compensation Plan. Contributions and investment elections are determined by the employees. The Company also provides contributions according to a preapproved formula. 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 March 31, 2011 and December 31, 2010, the plans are fully funded in rabbi trusts. The assets of the plans 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. Refer to the table below for costs related to these plans.
The costs incurred for our employee benefit plans for the three months ended March 31, 2011 and 2010 were as follows:
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Defined benefit plan |
$ | - | $ | - | ||||
Defined contribution plans |
9 | 8 | ||||||
Deferred compensation plans |
3 | 2 |
|
10. | INCOME TAXES |
The effective income tax rate from continuing operations for the three months ended March 31, 2011 and 2010 was 37.8% and 70.4%, respectively. For the three months ended March 31, 2011, the effective tax rate exceeds the U.S. statutory federal income tax rate of 35% due primarily to tax contingencies of $2 million (including $1 million of interest and penalties), partially offset by foreign earnings subject to tax at rates below the U.S. rate. For the 2010 period, the effective tax rate differed from U.S. statutory federal income tax rate of 35% primarily due to an increase in unrecognized tax benefits of $4 million (including $3 million of interest and penalties), an adjustment to deferred taxes of $2 million due to an international tax rate change, and other adjustments to deferred taxes of $2 million.
For 2011, the provision for income taxes has been calculated using an estimated annual effective tax rate as prescribed under GAAP. For 2010 we calculated the effective tax rate based on the year-to-date financials ("cut-off method") because we believed this method more accurately presented the effective tax rate for that period.
Total unrecognized tax benefits at March 31, 2011 and December 31, 2010 were $88 million and $89 million, respectively, of which $52 million and $50 million, respectively, would impact the effective tax rate if recognized.
|
11. | COMMITMENTS AND CONTINGENCIES |
In the ordinary course of business, we enter into various guarantees, commitments, surety bonds, and letter of credit agreements, which are discussed below:
Guarantees and Commitments—As of March 31, 2011, we are committed, under certain conditions, to loan or invest up to $543 million in various business ventures.
Included in the $543 million in commitments is our share of a recently formed hospitality venture's commitment to purchase a hotel within a to-be constructed 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%. In accordance with the purchase agreement, we have agreed to fund a letter of credit as security towards this future purchase obligation. As of March 31, 2011, the letter of credit is valued at $5 million. The agreement stipulates that subsequent increases in the value of the letter of credit to $10 million and $50 million as well as the purchase of the completed property are each contingent upon the completion of certain contractual milestones. The $5 million funded letter of credit is included as part of our total letters of credit outstanding at March 31, 2011 and therefore netted against our future commitments amount disclosed above. For further discussion see the "Letters of Credit" section of this Note below.
Also included in the $543 million above is our commitment to invest in a joint venture in order to develop, own and operate a hotel property in the State of Hawaii. While our final investment is contingent upon the amount of debt financing placed by the joint venture, the maximum remaining commitment under the joint venture agreement at March 31, 2011 is $122 million.
Certain of our hotel lease or management agreements contain performance tests that stipulate certain minimum levels of operating performance. These performance test clauses provide us the option to fund a 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 March 31, 2011, an insignificant amount was recorded in accrued expenses related to these performance test clauses.
Additionally, from time to time we may guarantee certain of our hotel owners certain levels of hotel profitability based on various metrics. We have management agreements where we are required to make payments based on specified thresholds and have recorded a $1 million charge under one of these agreements in the three months ended March 31, 2011. Under a separate agreement, we had $5 million accrued as of March 31, 2011. The remaining maximum potential payments related to these agreements are $35 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 March 31, 2011 is $47 million. For a certain repayment guarantee related to one joint venture property, the Company has agreements with its 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 this particular joint venture, our maximum exposure under the various agreements described above as of March 31, 2011 would be $43 million. As of March 31, 2011, the maximum exposure includes $25 million of a loan repayment agreement guarantee related to our contribution of Hyatt Regency Minneapolis to a newly formed joint venture (see Note 6).
Surety Bonds—Surety bonds issued on our behalf totaled $22 million at March 31, 2011, 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 March 31, 2011, totaled $79 million, the majority of which relate to our ongoing operations. Of the $79 million letters of credit outstanding, $72 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 in various partnerships owning hotel facilities 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.
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. For those matters not covered by insurance we recognize liabilities associated with such commitments and contingencies when a loss is probable and reasonably estimable. Although the ultimate 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 adverse effect on our condensed consolidated financial statements.
|
12. | EQUITY |
Stockholders' Equity and Noncontrolling Interest—The following table details the equity activity for the three months ended March 31, 2011 and 2010, respectively.
Stockholders' equity |
Noncontrolling interests in consolidated subsidiaries |
Total equity |
||||||||||
Balance at January 1, 2011 |
$ | 5,118 | $ | 13 | $ | 5,131 | ||||||
Net income |
10 | - | 10 | |||||||||
Other comprehensive income |
23 | - | 23 | |||||||||
Attribution of share based payments |
5 | - | 5 | |||||||||
Balance at March 31, 2011 |
$ | 5,156 | $ | 13 | $ | 5,169 | ||||||
Balance at January 1, 2010 |
$ | 5,016 | $ | 24 | $ | 5,040 | ||||||
Net income |
5 | - | 5 | |||||||||
Other comprehensive income |
4 | - | 4 | |||||||||
Purchase of shares in noncontrolling interests |
(3 | ) | (1 | ) | (4 | ) | ||||||
Attribution of share based payments |
4 | - | 4 | |||||||||
Balance at March 31, 2010 |
$ | 5,026 | $ | 23 | $ | 5,049 | ||||||
Comprehensive Income—Comprehensive income primarily relates to reported earnings (losses) and foreign currency translation.
Comprehensive income consists of the following:
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Net Income |
$ | 10 | $ | 5 | ||||
Other comprehensive income, net of taxes: |
||||||||
Foreign currency translation adjustments |
23 | 4 | ||||||
Total comprehensive income |
$ | 33 | $ | 9 | ||||
Comprehensive loss attributable to noncontrolling interests |
- | - | ||||||
Comprehensive income attributable to Hyatt Hotels Corporation |
$ | 33 | $ | 9 | ||||
|
13. | STOCK-BASED COMPENSATION |
As part of our long-term incentive plan, we award Stock Appreciation Rights ("SARs"), Restricted Stock Units ("RSUs") and Performance Share Units ("PSUs") 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 months ended March 31, 2011 and 2010 was as follows:
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Stock appreciation rights |
$ | 2 | $ | 3 | ||||
Restricted stock units |
2 | 1 | ||||||
Performance share units |
- | - |
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. The SARs are settled in shares of our Class A common stock. The Company is accounting for these SARs as equity instruments.
During the three months ended March 31, 2011, the Company granted 359,062 SARs to employees with a weighted average grant date fair value of $19.08. The fair value of each SAR was estimated based 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 period ended, March 31, 2011. During the three months ended March 31, 2011, the Company granted a total of 484,685 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 $41.74.
Performance Share Units—In March 2011 the Compensation Committee of our Board of Directors granted to certain senior executives PSUs, which are restricted stock units that vest based on satisfaction of certain performance targets. The number of PSUs that will ultimately vest and be paid out in Class A common stock will range from 0 to 200 percent of the target amount stated in each executive's award agreement based upon the performance of the Company relative to the applicable performance target. The target number of PSUs granted total 99,660 with a weighted average grant date fair value of $41.74. The performance period is a three year period beginning January 1, 2011 ending December 31, 2013. The PSUs will vest at the end of the performance period only if the performance target is met and there is no interim performance metric.
Our total unearned compensation for our stock-based compensation programs as of March 31, 2011 was $22 million for SARs, $42 million for RSUs and $4 million for PSUs, which will be recorded to compensation expense over the next eleven years.
|
14. | 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 have been located at the Hyatt Center in Chicago, Illinois since 2005. The Hyatt Center was owned by a related party until December 20, 2010, when it was sold to a third party. We recorded, in selling, general and administrative expenses, $2 million during the three months ended March 31, 2010 for rent, taxes and our share of operating expenses and shared facility costs under the lease while the building was owned by a related party. A subsidiary of Hyatt Hotels Corporation holds a master lease for a portion of the Hyatt Center and has entered into sublease agreements with certain related parties. Future sublease income for this space from related parties is $18 million.
Legal Services—A partner in a law firm that provided services to us throughout the three months ended March 31, 2011 and 2010 is the brother-in-law of our Executive Chairman. We incurred legal fees with this firm of $1 million and $2 million, for the three months ended March 31, 2011 and 2010, respectively. Legal fees, when expensed, are included in selling, general and administrative expenses. As of March 31, 2011 and December 31, 2010, we had $1 million and insignificant amounts, respectively, due to the law firm.
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 $8 million and $8 million for the three months ended March 31, 2011 and 2010, respectively. As of March 31, 2011 and December 31, 2010, we had receivables due from these properties of $10 million and $8 million, respectively. In addition, in some cases we provide loans or guarantees (see Note 11) to these entities. Our ownership interest in these equity method investments generally varies from 8 to 50 percent.
|
15. | 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. We 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 includes 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 includes 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; gains on sale of real estate; asset impairments; other income, net; discontinued operations, net of tax; net loss attributable to noncontrolling interests; depreciation and amortization; interest expense; and provision for income taxes.
The table below shows summarized consolidated financial information by segment. Included within Corporate and other are unallocated corporate expenses and revenues and expenses on our vacation ownership properties.
Three Months Ended March 31, | ||||||||
(in millions) | 2011 | 2010 | ||||||
North American Management and Franchising |
||||||||
Revenues |
$ | 392 | $ | 347 | ||||
Intersegment Revenues (a) |
14 | 16 | ||||||
Adjusted EBITDA |
40 | 31 | ||||||
Depreciation and Amortization |
3 | 3 | ||||||
International Management and Franchising |
||||||||
Revenues |
51 | 48 | ||||||
Intersegment Revenues (a) |
4 | 4 | ||||||
Adjusted EBITDA |
20 | 14 | ||||||
Depreciation and Amortization |
- | - | ||||||
Owned and Leased Hotels |
||||||||
Revenues |
432 | 451 | ||||||
Adjusted EBITDA |
75 | 82 | ||||||
Depreciation and Amortization |
66 | 65 | ||||||
Corporate and other |
||||||||
Revenues |
18 | 15 | ||||||
Adjusted EBITDA (b) |
(26 | ) | (15 | ) | ||||
Depreciation and Amortization |
2 | 2 | ||||||
Eliminations (a) |
||||||||
Revenues |
(18 | ) | (20 | ) | ||||
Adjusted EBITDA |
- | - | ||||||
Depreciation and Amortization |
- | - | ||||||
TOTAL |
||||||||
Revenues |
$ | 875 | $ | 841 | ||||
Adjusted EBITDA |
109 | 112 | ||||||
Depreciation and Amortization |
71 | 70 |
(a) | Intersegment revenues are included in the segment revenue totals and eliminated in Eliminations. |
(b) | The three months ended March 31, 2010 includes a favorable settlement of approximately $8 million for a construction dispute at one of our vacation ownership properties. |
The table below provides a reconciliation of our consolidated Adjusted EBITDA to EBITDA and a reconciliation of EBITDA to net income attributable to Hyatt Hotels Corporation for the three months ended March 31, 2011 and 2010.
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Adjusted EBITDA |
$ | 109 | $ | 112 | ||||
Equity earnings (losses) from unconsolidated hospitality ventures |
3 | (8 | ) | |||||
Other income, net |
3 | 16 | ||||||
Discontinued operations, net of tax |
- | (2 | ) | |||||
Pro rata share of unconsolidated hospitality ventures Adjusted EBITDA |
(15 | ) | (14 | ) | ||||
EBITDA |
100 | 104 | ||||||
Depreciation and amortization |
(71 | ) | (70 | ) | ||||
Interest expense |
(13 | ) | (12 | ) | ||||
Provision for income taxes |
(6 | ) | (17 | ) | ||||
Net income attributable to Hyatt Hotels Corporation |
$ | 10 | $ | 5 | ||||
|
17. | OTHER INCOME, NET |
Other income, net includes interest income, gains (losses) on other marketable securities and foreign currency losses; including gains (losses) on foreign currency exchange rate instruments (see Note 8). The table below provides a reconciliation of the components in other income, net for the three months ended March 31, 2011 and 2010, respectively:
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Interest income |
$ | 5 | $ | 5 | ||||
Gains (losses) on other marketable securities |
(1 | ) | 11 | |||||
Foreign currency losses |
(1 | ) | (1 | ) | ||||
Other |
- | 1 | ||||||
Other income, net |
$ | 3 | $ | 16 | ||||
|
March 31, 2011 | December 31, 2010 | |||||||
Equity method investments |
$ | 178 | $ | 175 | ||||
Cost method investments |
70 | 70 | ||||||
Total investments |
$ | 248 | $ | 245 | ||||
For the Three Months Ended March 31, |
||||||||
2011 | 2010 | |||||||
Total revenues |
$ | 239 | $ | 205 | ||||
Gross operating profit |
76 | 62 | ||||||
Income (loss) from continuing operations |
11 | (16 | ) | |||||
Net income (loss) |
$ | 11 | $ | (16 | ) | |||
|
March 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 |
$ | 257 | $ | 257 | $ | - | $ | - | ||||||||
Equity securities |
48 | 40 | 8 | - | ||||||||||||
U.S. government obligations |
97 | - | 97 | - | ||||||||||||
U.S. government agencies |
65 | - | 65 | - | ||||||||||||
Corporate debt securities |
451 | - | 451 | - | ||||||||||||
Mortgage-backed securities |
19 | - | 17 | 2 | ||||||||||||
Asset-backed securities |
10 | - | 10 | - | ||||||||||||
Other |
3 | - | 3 | - | ||||||||||||
Marketable securities recorded in cash and cash equivalents |
||||||||||||||||
Interest bearing money market funds |
678 | 678 | - | - | ||||||||||||
Derivative instruments |
||||||||||||||||
Interest rate swaps |
3 | - | 3 | - | ||||||||||||
Foreign currency forward contracts |
(3 | ) | - | (3 | ) | - | ||||||||||
December 31, 2010 |
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 |
$ | 244 | $ | 244 | $ | - | $ | - | ||||||||
Equity securities |
50 | 41 | 9 | - | ||||||||||||
U.S. government obligations |
101 | - | 101 | - | ||||||||||||
U.S. government agencies |
61 | - | 61 | - | ||||||||||||
Corporate debt securities |
451 | - | 451 | - | ||||||||||||
Mortgage-backed securities |
16 | - | 14 | 2 | ||||||||||||
Asset-backed securities |
11 | - | 11 | - | ||||||||||||
Other |
1 | - | 1 | - | ||||||||||||
Marketable securities recorded in cash and cash equivalents |
||||||||||||||||
Interest bearing money market funds |
699 | 699 | - | - | ||||||||||||
Commercial paper |
3 | - | 3 | - | ||||||||||||
Derivative instruments |
||||||||||||||||
Interest rate swaps |
4 | - | 4 | - | ||||||||||||
Foreign currency forward contracts |
(4 | ) | - | (4 | ) | - |
March 31, 2011 | ||||||||||||||||
Cost or Amortized Cost |
Gross Unrealized Gain |
Gross Unrealized Loss |
Fair Value | |||||||||||||
Corporate debt securities |
$ | 367 | $ | 3 | $ | (2 | ) | $ | 368 | |||||||
U.S. government agencies |
32 | - | - | 32 | ||||||||||||
Equity securities |
9 | - | (1 | ) | 8 | |||||||||||
Total |
$ | 408 | $ | 3 | $ | (3 | ) | $ | 408 | |||||||
December 31, 2010 | ||||||||||||||||
Cost or Amortized Cost |
Gross Unrealized Gain |
Gross Unrealized Loss |
Fair Value | |||||||||||||
Corporate debt securities |
$ | 366 | $ | 2 | $ | (2 | ) | $ | 366 | |||||||
U.S. government agencies |
28 | - | - | 28 | ||||||||||||
Equity securities |
9 | - | - | 9 | ||||||||||||
Total |
$ | 403 | $ | 2 | $ | (2 | ) | $ | 403 | |||||||
March 31, 2011 | ||||||||
Contractual Maturity |
Cost or Amortized Cost |
Fair Value | ||||||
Due in one year or less |
$ | 247 | $ | 248 | ||||
Due in one to two years |
152 | 152 | ||||||
Total |
$ | 399 | $ | 400 | ||||
Fair Value Measurements at Reporting Date Using Significant Unobservable Inputs (Level 3) - Mortgage Backed Securities |
||||||||
2011 | 2010 | |||||||
Balance at January 1, |
$ | 2 | $ | 2 | ||||
Transfers into (out of) Level Three |
- | - | ||||||
Purchases |
- | - | ||||||
Issuances |
- | - | ||||||
Settlements |
- | - | ||||||
Total gains (losses) (realized or unrealized) |
- | - | ||||||
Balance at March 31, |
$ | 2 | $ | 2 | ||||
Asset (Liability) | ||||||||||||||||
March 31, 2011 | December 31, 2010 | |||||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||
Financing receivables |
$ | 383 | $ | 385 | $ | 386 | $ | 392 | ||||||||
Debt, excluding capital lease obligations |
(556 | ) | (583 | ) | (558 | ) | (596 | ) |
|
March 31, 2011 | December 31, 2010 | |||||||
Secured financing to hotel owners |
$ | 325 | $ | 326 | ||||
Vacation ownership mortgage receivables at various interest rates with varying payments through 2018 |
53 | 55 | ||||||
Unsecured financing to hotel owners |
88 | 87 | ||||||
466 | 468 | |||||||
Less allowance for losses |
(83 | ) | (82 | ) | ||||
Less current portion included in receivables |
(17 | ) | (11 | ) | ||||
Total long-term financing receivables |
$ | 366 | $ | 375 | ||||
Year Ending December 31, |
Amount | |||
2011 |
$ | 1 | ||
2012 |
17 | |||
2013 |
278 | |||
2014 |
- | |||
2015 |
29 | |||
2016 |
- | |||
Thereafter |
- | |||
Total secured financing to hotel owners |
325 | |||
Less allowance |
(3 | ) | ||
Net secured financing to hotel owners |
$ | 322 | ||
Year Ending December 31, |
Amount | |||
2011 |
$ | 5 | ||
2012 |
7 | |||
2013 |
8 | |||
2014 |
8 | |||
2015 |
8 | |||
2016 |
7 | |||
Thereafter |
10 | |||
Total vacation ownership mortgage receivables |
53 | |||
Less allowance |
(10 | ) | ||
Net vacation ownership mortgage receivables |
$ | 43 | ||
Analysis of Financing Receivables |
||||||||||||||||||||||||
As of March 31, 2011 |
||||||||||||||||||||||||
Total Past Due |
Current | Total Financing Receivable |
Receivables on Non-Accrual Status |
Related Allowance for Credit Losses |
Recorded Investment >90 Days and Accruing |
|||||||||||||||||||
Secured financing to hotel owners |
$ | - | $ | 325 | $ | 325 | $ | 40 | $ | (3 | ) | $ | - | |||||||||||
Vacation ownership mortgage receivables |
3 | 50 | 53 | - | (10 | ) | 1 | |||||||||||||||||
Unsecured financing to hotel owners |
12 | 76 | 88 | 70 | (70 | ) | - | |||||||||||||||||
Total |
$ | 15 | $ | 451 | $ | 466 | $ | 110 | $ | (83 | ) | $ | 1 | |||||||||||
Analysis of Financing Receivables |
||||||||||||||||||||||||
As of December 31, 2010 |
||||||||||||||||||||||||
Total Past Due |
Current | Total Financing Receivable |
Receivables on Non-Accrual Status |
Related Allowance for Credit Losses |
Recorded Investment >90 Days and Accruing |
|||||||||||||||||||
Secured financing to hotel owners |
$ | - | $ | 326 | $ | 326 | $ | 41 | $ | (4 | ) | $ | - | |||||||||||
Vacation ownership mortgage receivables |
3 | 52 | 55 | - | (10 | ) | 1 | |||||||||||||||||
Unsecured financing to hotel owners |
13 | 74 | 87 | 69 | (68 | ) | - | |||||||||||||||||
Total |
$ | 16 | $ | 452 | $ | 468 | $ | 110 | $ | (82 | ) | $ | 1 | |||||||||||
Allowance for Credit Losses |
||||||||||||||||||||||||
For the Three Months Ended March 31, 2011 |
||||||||||||||||||||||||
Beginning Balance January 1, 2011 |
Provisions | Other Additions |
Write-offs | Recoveries | Ending Balance March 31, 2011 |
|||||||||||||||||||
Secured financing to hotel owners |
$ | 4 | $ | - | $ | - | $ | (1 | ) | $ | - | $ | 3 | |||||||||||
Vacation ownership mortgage receivables |
10 | 1 | - | (1 | ) | - | 10 | |||||||||||||||||
Unsecured financing to hotel owners |
68 | 1 | 1 | - | - | 70 | ||||||||||||||||||
Total |
$ | 82 | $ | 2 | $ | 1 | $ | (2 | ) | $ | - | $ | 83 | |||||||||||
Impaired Loans |
||||||||||||||||||||
For the Three Months Ended March 31, 2011 |
||||||||||||||||||||
Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
Average Recorded Investment |
Interest Income Recognized |
||||||||||||||||
Secured financing to hotel owners |
$ | 40 | $ | 40 | $ | (3 | ) | $ | 40 | $ | 1 | |||||||||
Unsecured financing to hotel owners |
48 | 44 | (43 | ) | 48 | - | ||||||||||||||
For the Year Ended December 31, 2010 |
||||||||||||||||||||
Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
Average Recorded Investment |
Interest Income Recognized |
||||||||||||||||
Secured financing to hotel owners |
$ | 41 | $ | 40 | $ | (4 | ) | $ | 40 | $ | 2 | |||||||||
Unsecured financing to hotel owners |
47 | 43 | (42 | ) | 45 | - |
|
March 31, 2011 |
Weighted Average Useful Lives |
December 31, 2010 | ||||||||||
Contract acquisition costs |
$ | 155 | 23 | $ | 150 | |||||||
Acquired lease rights |
135 | 114 | 130 | |||||||||
Franchise intangibles |
50 | 20 | 50 | |||||||||
Brand intangibles |
11 | 7 | 11 | |||||||||
Other |
7 | 14 | 8 | |||||||||
358 | 349 | |||||||||||
Accumulated amortization |
(73 | ) | (69 | ) | ||||||||
Intangibles, net |
$ | 285 | $ | 280 | ||||||||
|
March 31, 2011 | December 31, 2010 | |||||||
Pound Sterling |
$ | 67 | $ | 66 | ||||
Swiss Franc |
47 | 47 | ||||||
Korean Won |
43 | 43 | ||||||
Euro |
- | 19 | ||||||
Australian Dollar |
1 | 1 | ||||||
Total notional amount of forward contracts |
$ | 158 | $ | 176 | ||||
Asset Derivatives | Liability Derivatives | |||||||||||||||||||||||
Balance Sheet Location |
March 31, 2011 |
December 31, 2010 |
Balance Sheet Location |
March 31, 2011 |
December 31, 2010 |
|||||||||||||||||||
Derivatives designated as hedging instruments |
||||||||||||||||||||||||
Interest rate swaps |
Other assets | $ | 3 | $ | 4 | Other long-term liabilities | $ | - | $ | - | ||||||||||||||
Derivatives not designated as hedging instruments |
||||||||||||||||||||||||
Foreign currency forward contracts |
|
Prepaids and other assets |
|
- | - |
|
Accrued expenses and other current |
|
3 | 4 | ||||||||||||||
Total derivatives |
$ | 3 | $ | 4 | $ | 3 | $ | 4 | ||||||||||||||||
Effect of Derivative Instruments on Income
Location of Gain (Loss) |
Three Months Ended March 31, | |||||||||||
2011 | 2010 | |||||||||||
Fair value hedges: |
||||||||||||
Interest rate swaps |
||||||||||||
Losses on derivatives |
Other income, net* | $ | (1 | ) | $ | - | ||||||
Gains on borrowings |
Other income, net* | 1 | - | |||||||||
|
Location of Gain (Loss) |
Three Months Ended March 31, | ||||||||||
2011 | 2010 | |||||||||||
Derivatives not designated as hedges: |
||||||||||||
Foreign currency forward contracts |
Other income, net | $ | (2 | ) | $ | 12 | ||||||
* | For the three months ended March 31, 2011 and 2010, there was an insignificant gain and an insignificant loss, respectively, recognized in income related to the ineffective portion of these hedges. No amounts were excluded from the assessment of hedge effectiveness for the three months ended March 31, 2011 and 2010. |
|
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Defined benefit plan |
$ | - | $ | - | ||||
Defined contribution plans |
9 | 8 | ||||||
Deferred compensation plans |
3 | 2 |
|
Stockholders' equity |
Noncontrolling interests in consolidated subsidiaries |
Total equity |
||||||||||
Balance at January 1, 2011 |
$ | 5,118 | $ | 13 | $ | 5,131 | ||||||
Net income |
10 | - | 10 | |||||||||
Other comprehensive income |
23 | - | 23 | |||||||||
Attribution of share based payments |
5 | - | 5 | |||||||||
Balance at March 31, 2011 |
$ | 5,156 | $ | 13 | $ | 5,169 | ||||||
Balance at January 1, 2010 |
$ | 5,016 | $ | 24 | $ | 5,040 | ||||||
Net income |
5 | - | 5 | |||||||||
Other comprehensive income |
4 | - | 4 | |||||||||
Purchase of shares in noncontrolling interests |
(3 | ) | (1 | ) | (4 | ) | ||||||
Attribution of share based payments |
4 | - | 4 | |||||||||
Balance at March 31, 2010 |
$ | 5,026 | $ | 23 | $ | 5,049 | ||||||
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Net Income |
$ | 10 | $ | 5 | ||||
Other comprehensive income, net of taxes: |
||||||||
Foreign currency translation adjustments |
23 | 4 | ||||||
Total comprehensive income |
$ | 33 | $ | 9 | ||||
Comprehensive loss attributable to noncontrolling interests |
- | - | ||||||
Comprehensive income attributable to Hyatt Hotels Corporation |
$ | 33 | $ | 9 | ||||
|
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Stock appreciation rights |
$ | 2 | $ | 3 | ||||
Restricted stock units |
2 | 1 | ||||||
Performance share units |
- | - |
|
Three Months Ended March 31, | ||||||||
(in millions) | 2011 | 2010 | ||||||
North American Management and Franchising |
||||||||
Revenues |
$ | 392 | $ | 347 | ||||
Intersegment Revenues (a) |
14 | 16 | ||||||
Adjusted EBITDA |
40 | 31 | ||||||
Depreciation and Amortization |
3 | 3 | ||||||
International Management and Franchising |
||||||||
Revenues |
51 | 48 | ||||||
Intersegment Revenues (a) |
4 | 4 | ||||||
Adjusted EBITDA |
20 | 14 | ||||||
Depreciation and Amortization |
- | - | ||||||
Owned and Leased Hotels |
||||||||
Revenues |
432 | 451 | ||||||
Adjusted EBITDA |
75 | 82 | ||||||
Depreciation and Amortization |
66 | 65 | ||||||
Corporate and other |
||||||||
Revenues |
18 | 15 | ||||||
Adjusted EBITDA (b) |
(26 | ) | (15 | ) | ||||
Depreciation and Amortization |
2 | 2 | ||||||
Eliminations (a) |
||||||||
Revenues |
(18 | ) | (20 | ) | ||||
Adjusted EBITDA |
- | - | ||||||
Depreciation and Amortization |
- | - | ||||||
TOTAL |
||||||||
Revenues |
$ | 875 | $ | 841 | ||||
Adjusted EBITDA |
109 | 112 | ||||||
Depreciation and Amortization |
71 | 70 |
(a) | Intersegment revenues are included in the segment revenue totals and eliminated in Eliminations. |
(b) | The three months ended March 31, 2010 includes a favorable settlement of approximately $8 million for a construction dispute at one of our vacation ownership properties. |
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Adjusted EBITDA |
$ | 109 | $ | 112 | ||||
Equity earnings (losses) from unconsolidated hospitality ventures |
3 | (8 | ) | |||||
Other income, net |
3 | 16 | ||||||
Discontinued operations, net of tax |
- | (2 | ) | |||||
Pro rata share of unconsolidated hospitality ventures Adjusted EBITDA |
(15 | ) | (14 | ) | ||||
EBITDA |
100 | 104 | ||||||
Depreciation and amortization |
(71 | ) | (70 | ) | ||||
Interest expense |
(13 | ) | (12 | ) | ||||
Provision for income taxes |
(6 | ) | (17 | ) | ||||
Net income attributable to Hyatt Hotels Corporation |
$ | 10 | $ | 5 | ||||
|
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Interest income |
$ | 5 | $ | 5 | ||||
Gains (losses) on other marketable securities |
(1 | ) | 11 | |||||
Foreign currency losses |
(1 | ) | (1 | ) | ||||
Other |
- | 1 | ||||||
Other income, net |
$ | 3 | $ | 16 | ||||
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