2006 Annual Report

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In 2004, we estimated the fair value of each stock option granted on the date of grant using the Black-Scholes optionpricing method. Beginning in 2005 we began using a binomial method to estimate the fair value of each stock option or SAR granted. The assumptions for stock options for all years and employee SARs for 2006 are noted in the following table: 2006 2005 2004 Annual dividends $0.22 $0.18 $0.16 Expected volatility 30% 30% 31% Risk-free interest rate 4.5% 4.1% 3.7% Expected life (in years) 7 8 7 For Non-employee SARs issued in 2006, the only differences in the assumptions versus employee SARs are that a risk-free interest rate of 5.0 percent was used and an expected life of 10 years was used. We also issue deferred stock units to Non-employee directors. These Non-employee director deferred stock units vest within one year and are distributed upon election. At year-end 2006 and year-end 2005, there was approximately $152,000 and $149,000, respectively, in deferred costs related to Nonemployee director deferred stock units. We recognized sharebased expense associated with Non-employee director deferred stock units of $325,000, $593,000, and $503,000 for 2006, 2005 and 2004, respectively. During 2006 we granted 18,000 Nonemployee director deferred stock units with a weighted average grant-date fair value of $37. For each of 2005 and 2004, we granted 21,000 Non-employee director deferred stock units with weighted average grant-date fair values of $32 and $23, respectively. The aggregate intrinsic value of Non-employee director deferred stock units distributed during 2006, 2005 and 2004, was $1.7 million, $0.2 million and $10,000, respectively. At year-end 2006 and year-end 2005, there were 203,000 and 231,000, respectively, Non-employee deferred stock units outstanding, and the weighted average grant-date fair value of those outstanding deferred stock units was $21 and $19, respectively. Although the Comprehensive Plan also provides for issuance of deferred stock bonus awards, deferred stock awards, and restricted stock awards, our Compensation Policy Committee indefinitely suspended the issuance of deferred bonus stock commencing with our 2001 fiscal year and the issuance of both deferred stock awards and restricted stock awards commencing with the 2003 fiscal year. At year-end 2006 and year-end 2005, there was approximately $8 million and $14 million, respectively, in deferred compensation costs related to these suspended award programs, and the weighted average remaining term was two years for such award grants outstanding at year-end 2006. Share-based compensation expense associated with these suspended award programs was $6 million, $10 million and $12 million for 2006, 2005 and 2004, respectively. At year-end 2006, 71 million shares were reserved under the Comprehensive Plan including 44 million shares under the Stock Option Program and Share Appreciation Right Program. Under the provisions of FAS No. 123(R), the “Deferred compensation” line on our Consolidated Balance Sheet, a contra-equity line representing the amount of unrecognized share-based compensation 50 | MARRIOTT INTERNATIONAL, INC. 2006 costs, is no longer presented. Accordingly, in 2006 we reversed the amount that had been on the “Deferred compensation” line at year-end 2005 through the “Additional paid-in-capital” line on our Consolidated Balance Sheet. 5 | EARNINGS PER SHARE The following table illustrates the reconciliation of the earnings and number of shares used in the basic and diluted earnings per share calculations. (in millions, except per share amounts) 2006 2005 2004 Computation of Basic Earnings Per Share Income from continuing operations for basic earnings per share $ 717 $ 668 $ 594 Weighted average shares outstanding Basic earnings per share from 404.1 432.7 453.1 continuing operations $1.77 $1.55 $1.31 Computation of Diluted Earnings Per Share Income from continuing operations for diluted earnings per share $ 717 $ 668 $ 594 Weighted average shares outstanding Effect of dilutive securities Employee stock option and share 404.1 432.7 453.1 appreciation rights plan 20.2 19.0 16.8 Deferred stock incentive plan 3.4 7.5 8.5 Restricted stock units 2.5 3.1 1.8 Convertible debt — — 0.7 Shares for diluted earnings per share Diluted earnings per share from 430.2 462.3 480.9 continuing operations $1.66 $1.45 $1.24 We compute the effect of dilutive securities using the treasury stock method and average market prices during the period.We determine dilution based on earnings from continuing operations. 6 | INVENTORY Inventory, totaling $1,208 million and $1,164 million as of December 29, 2006 and December 30, 2005, respectively, consists primarily of Timeshare segment interval, fractional and whole ownership products totaling $1,166 million and $1,116 million as of December 29, 2006, and December 30, 2005, respectively. Inventory totaling $42 million and $48 million as of December 29, 2006, and December 30, 2005, respectively, relates to hotel operating supplies for the limited number of hotels we own or lease and synthetic fuel. We value Timeshare segment interval, fractional and whole ownership products and Synthetic Fuel segment inventory at the lower of cost or net realizable value and generally value operating supplies at the lower of cost (using the first-in, first-out method) or market. Timeshare segment interval, fractional and whole ownership products inventory, which has an operating cycle that exceeds twelve months, is classified as a current asset consistent with recognized industry practice.
7 | PROPERTY AND EQUIPMENT ($ in millions) 2006 2005 Land $ 316 $ 301 Buildings and leasehold improvements 724 659 Furniture and equipment 888 827 Construction in progress 215 132 2,143 1,919 Accumulated depreciation (905) (785) $1,238 $1,134 We record property and equipment at cost, including interest, rent and real estate taxes incurred during development and construction. Interest capitalized as a cost of property and equipment totaled $32 million in 2006, $30 million in 2005, and $16 million in 2004. We capitalize the cost of improvements that extend the useful life of property and equipment when incurred. These capitalized costs may include structural costs, equipment, fixtures, floor and wall coverings. All repair and maintenance costs are expensed as incurred. We compute depreciation using the straight-line method over the estimated useful lives of the assets (three to 40 years), and we amortize leasehold improvements over the shorter of the asset life or lease term. Depreciation expense totaled $155 million in 2006, $156 million in 2005, and $133 million in 2004. 8 | ACQUISITIONS AND DISPOSITIONS 2006 Acquisitions During 2006, we acquired one full-service property for $130 million including aggregate cash consideration of $46 million plus the assumption of debt. In addition we acquired three other fullservice properties for aggregate cash consideration of $134 million. We plan to sell all four properties to third-party owners, and we classified the balances related to these properties as “Assets held for sale” and “Liabilities of assets held for sale” on our Consolidated Balance Sheet. 2006 Dispositions In 2006 we sold our interest in the 50/50 joint venture with Whitbread PLC (“Whitbread”), which held 46 hotels consisting of more than 8,000 rooms, and we received approximately $164 million in cash, net of transaction costs, which was approximately equal to the investment’s book value. We continue to manage the hotels under the Marriott Hotels & Resorts and Renaissance Hotels & Resorts brands. For additional information regarding this joint venture, see Footnote No. 10,“Marriott and Whitbread Joint Venture.”We also sold our minority interest in five other joint ventures during 2006 for cash proceeds of $64 million and recognized gains of $43 million. Additionally, one cost method investee redeemed the preferred stock we held for $81 million in cash consideration, and we recognized income of $25 million on the redemption. During 2006 we also sold 10 full-service properties for cash proceeds of $487 million and recognized gains totaling $14 million. We accounted for each of the sales under the full accrual method in accordance with FAS No. 66,“Accounting for Sales of Real Estate,” and will continue to operate eight of the properties under long-term management agreements. The sold properties included eight properties purchased in 2005 from CTF Holdings Ltd. and certain of its affiliates (collectively “CTF”). For additional information regarding the CTF transaction, see the “2005 Acquisitions” caption later in this footnote. Prior to the sale of one property, balances associated with that property were reclassified in conformity with other “held and used” properties, in the first half of 2006 as the property was not expected to be sold, within one year of its classification as “held for sale.” In conjunction with that reclassification, we recorded depreciation expense of $2 million in the first half of 2006 that would have been recognized had the asset been continuously classified as “held and used.” Cash proceeds of $26 million for one hotel sold in 2006 are not reflected in the disposition proceeds of $487 million as the proceeds were initially recorded as a deposit because of a contingency and impacted the “Other investing activities” section of our Consolidated Statement of Cash Flows rather than dispositions. The contingency was subsequently resolved and sale of accounting was achieved in 2006. Other asset sales generated cash proceeds of $2 million. Late in 2006, we sold a 75 percent interest in a joint venture to a third party for its book value of $14 million. At the time of the sale, the joint venture’s only asset was a parcel of land. In conjunction with the sale, we made a $25 million bridge loan to the joint venture, which matures on February 28, 2007. Following the guidance found in EITF 98-8,“Accounting for Transfers of Investments That Are in Substance Real Estate,” and FAS No. 66, “Accounting for Sales of Real Estate,” due to our continuing involvement with the joint venture, we are consolidating the joint venture for the period of time that the bridge loan remains outstanding. Subsequent to the bridge loan’s repayment, we will account for our remaining interest in the joint venture under the equity method as required by APB 18,“The Equity Method of Accounting for Investments in Common Stock.” In 1988, the Company as landlord, entered into a 59-year ground lease with a lessee for land that was improved with a hotel that is owned by the lessee.The hotel was previously branded a Marriott property; however, currently it is not.The lease contains contractual rental increases over the term of the lease, and annual ground rent on the land currently totals approximately $5 million.The lease also contains a provision that permits the lessee, under certain circumstances, to purchase the land for a fixed price.The Company and the lessee have had various discussions concerning the land as well as the hotel. During the 2006 second quarter, it became probable that none of the proposed transactions were acceptable to both parties, and the lessee indicated its intent to exercise its option to purchase the land. Accordingly, in the 2006 second quarter, we reclassified the land from the “Property and equipment” caption in our Consolidated Balance Sheet to the “Assets held for sale” caption and recorded a $37 million non-cash charge to adjust the carrying amount to net realizable value. Additional amounts may be due us depending on the lessee’s use of the land subsequent to purchase; however, such amounts will only be recorded if and when paid. 2005 Acquisitions During the third quarter of 2005, we purchased from CTF Holdings Ltd. and certain of its affiliates (collectively “CTF”) 13 properties (in each case through a purchase of real estate, a purchase of the entity that owned the hotel, or an assignment of CTF’s leasehold MARRIOTT INTERNATIONAL, INC. 2006 | 51
Page 1 and 2: MARRIOTT INTERNATIONAL, INC. 2006 A
Page 3 and 4: Our Brands The Ritz-Carlton ® Hote
Page 5 and 6: As the brand catering to the “enj
Page 7 and 8: A Place to Achieve At Marriott, we
Page 9 and 10: A Place to Let Go For many, leisure
Page 11 and 12: To Our Shareholders J.W. MARRIOTT,
Page 13 and 14: Risk Factors FORWARD-LOOKING STATEM
Page 15 and 16: ownership could prevent potential c
Page 17 and 18: Management’s Discussion and Analy
Page 19 and 20: eceipt in 2005, of a $10 million te
Page 21 and 22: “Accounting for Real Estate Time-
Page 23 and 24: everage and other revenue, and new
Page 25 and 26: Comparable Company- Comparable Oper
Page 27 and 28: 2006 COMPARED TO 2005 Across our No
Page 29 and 30: increase in base management and inc
Page 31 and 32: The table below details the impact
Page 33 and 34: production, our synthetic fuel prod
Page 35 and 36: Dividends. In April 2006, our Board
Page 37 and 38: previously deferred and recognize t
Page 39 and 40: Consolidated Statement of Income Fi
Page 41 and 42: Consolidated Statement of Cash Flow
Page 43 and 44: Notes to Consolidated Financial Sta
Page 45 and 46: “Other long-term assets” line i
Page 47 and 48: FIN 48, only tax positions that mee
Page 49 and 50: 3 | INCOME TAXES See the “Future
Page 51: weighted average remaining term was
Page 55 and 56: 2004 Dispositions We sold two lodgi
Page 57 and 58: At year-end 2006, $1,123 million of
Page 59 and 60: the Series F Notes and Series G Not
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Page 63 and 64: Depreciation and Amortization ($ in
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Page 67 and 68: Selected Historical Financial Data
Page 69 and 70: Non-GAAP Financial Measure Reconcil
Page 71 and 72: Report of Independent Registered Pu
Page 73 and 74: Board of Directors [BACK ROW, LEFT

2006 Annual Report

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