Attached files

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EX-15 - LETTER RE: UNAUDITED INTERIM FINANCIAL INFORMATION - Wyndham Destinations, Inc.wyn-ex15_2014930xq3.htm
EX-12 - COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES - Wyndham Destinations, Inc.wyn-ex12_2014930xq3.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - Wyndham Destinations, Inc.wyn-ex312_2014930xq3.htm
EX-32 - CERTIFICATION OF CHAIRMAN AND CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICE - Wyndham Destinations, Inc.wyn-ex32_2014930xq3.htm
EX-10.1 - FIFTH AMENDMENT, DATED AS OF AUGUST 28, 2014, INDENTURE AND SERVICING AGREEMENT - Wyndham Destinations, Inc.wyn-ex101_2014930xq3.htm
EX-31.1 - CERTIFICATION OF CHAIRMAN AND CHIEF EXECUTIVE OFFICER - Wyndham Destinations, Inc.wyn-ex311_2014930xq3.htm
EXCEL - IDEA: XBRL DOCUMENT - Wyndham Destinations, Inc.Financial_Report.xls


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from         to        
Commission File No. 001-32876
Wyndham Worldwide Corporation
(Exact name of registrant as specified in its charter)
Delaware
 
20-0052541
(State or other jurisdiction
of incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
22 Sylvan Way
 
07054
Parsippany, New Jersey
 
(Zip Code)
(Address of principal executive offices)
 
 
(973) 753-6000
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ     No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
þ
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
o
 
 
 
 
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o    No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date:
123,262,818 shares of common stock outstanding as of September 30, 2014.




Table of Contents

 
 
Page
PART I
FINANCIAL INFORMATION
 
Item 1.
 
 
 
 
 
 
 
Item 2.
 
Item 3.
Item 4.
PART II
OTHER INFORMATION
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 




PART I — FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (Unaudited).

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Wyndham Worldwide Corporation
Parsippany, New Jersey 07054

We have reviewed the accompanying consolidated balance sheet of Wyndham Worldwide Corporation and subsidiaries (the "Company") as of September 30, 2014, the related consolidated statements of income and comprehensive income for the three-month and nine-month periods ended September 30, 2014 and 2013 and the related consolidated statements of cash flows and equity for the nine-month periods ended September 30, 2014 and 2013. These interim financial statements are the responsibility of the Company's management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2013, and the related consolidated statements of income, comprehensive income, equity and cash flows for the year then ended (not presented herein); and in our report dated February 14, 2014, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2013 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.



/s/ Deloitte & Touche LLP
Parsippany, New Jersey
October 24, 2014




WYNDHAM WORLDWIDE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share amounts)
(Unaudited)


 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Net revenues
 
 
 
 
 
 
 
Service and membership fees
$
717

 
$
680

 
$
1,922

 
$
1,833

Vacation ownership interest sales
415

 
384

 
1,101

 
995

Franchise fees
189

 
186

 
482

 
460

Consumer financing
108

 
107

 
319

 
318

Other
85

 
70

 
226

 
208

Net revenues
1,514

 
1,427

 
4,050

 
3,814


Expenses
 
 
 
 
 
 
 
Operating
613

 
589

 
1,721

 
1,645

Cost of vacation ownership interests
49

 
43

 
129

 
107

Consumer financing interest
18

 
19

 
52

 
60

Marketing and reservation
227

 
213

 
614

 
570

General and administrative
188

 
186

 
564

 
528

Asset impairment
8

 

 
8

 

Depreciation and amortization
60

 
54

 
175

 
160

Total expenses
1,163

 
1,104

 
3,263

 
3,070


Operating income
351

 
323

 
787

 
744

Other income, net

 
(2
)
 
(5
)
 
(6
)
Interest expense
28

 
31

 
84

 
97

Early extinguishment of debt

 

 

 
111

Interest income
(2
)
 
(2
)
 
(6
)
 
(6
)
Income before income taxes
325

 
296

 
714

 
548

Provision for income taxes
119

 
109

 
265

 
201

Net income
206

 
187

 
449

 
347

Net income attributable to noncontrolling interest

 

 
(1
)
 
(1
)

Net income attributable to Wyndham shareholders
$
206

 
$
187

 
$
448

 
$
346


Earnings per share
 
 
 
 
 
 
 
Basic
$
1.65

 
$
1.42

 
$
3.55

 
$
2.58

Diluted
1.64

 
1.40

 
3.51

 
2.55

 
 
 
 
 
 
 
 
Cash dividends declared per share
$
0.35

 
$
0.29

 
$
1.05

 
$
0.87



See Notes to Consolidated Financial Statements.
2

WYNDHAM WORLDWIDE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)


 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
206

 
$
187

 
$
449

 
$
347

Other comprehensive (loss)/income, net of tax
 
 
 
 
 
 
 
Foreign currency translation adjustments
(89
)
 
39

 
(66
)
 
(28
)
Unrealized gain/(loss) on cash flow hedges
1

 
(1
)
 
1

 
1

Other comprehensive (loss)/income, net of tax
(88
)
 
38

 
(65
)
 
(27
)
Comprehensive income
118

 
225

 
384

 
320

Net income attributable to noncontrolling interest

 

 
(1
)
 
(1
)
Comprehensive income attributable to Wyndham shareholders
$
118

 
$
225

 
$
383

 
$
319



See Notes to Consolidated Financial Statements.
3

WYNDHAM WORLDWIDE CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
(Unaudited)



 
September 30,
2014
 
December 31,
2013
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
252

 
$
194

Trade receivables, net
461

 
505

Vacation ownership contract receivables, net
290

 
305

Inventory
306

 
346

Prepaid expenses
143

 
153

Deferred income taxes
97

 
108

Other current assets
293

 
329

Total current assets
1,842

 
1,940

Long-term vacation ownership contract receivables, net
2,411

 
2,448

Non-current inventory
703

 
677

Property and equipment, net
1,522

 
1,555

Goodwill
1,571

 
1,590

Trademarks, net
719

 
723

Franchise agreements and other intangibles, net
405

 
429

Other non-current assets
384

 
379

Total assets
$
9,557

 
$
9,741

Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Securitized vacation ownership debt
$
192

 
$
184

Current portion of long-term debt
49

 
49

Accounts payable
310

 
360

Deferred income
460

 
451

Due to former Parent and subsidiaries
26

 
23

Accrued expenses and other current liabilities
774

 
723

Total current liabilities
1,811

 
1,790

Long-term securitized vacation ownership debt
1,749

 
1,726

Long-term debt
2,873

 
2,882

Deferred income taxes
1,185

 
1,173

Deferred income
201

 
192

Due to former Parent and subsidiaries
12

 
14

Other non-current liabilities
315

 
339

Total liabilities
8,146

 
8,116

Commitments and contingencies (Note 11)

 

Stockholders’ equity:
 
 
 
Preferred stock, $.01 par value, authorized 6,000,000 shares, none issued and outstanding

 

Common stock, $.01 par value, authorized 600,000,000 shares, issued 216,856,137 shares in 2014 and 215,578,445 shares in 2013
2

 
2

Treasury stock, at cost – 93,666,719 shares in 2014 and 87,206,462 shares in 2013
(3,672
)
 
(3,191
)
Additional paid-in capital
3,875

 
3,858

Retained earnings
1,146

 
832

Accumulated other comprehensive income
57

 
122

Total stockholders’ equity
1,408

 
1,623

Noncontrolling interest
3

 
2

Total equity
1,411

 
1,625

Total liabilities and equity
$
9,557

 
$
9,741


See Notes to Consolidated Financial Statements.
4

WYNDHAM WORLDWIDE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)


 
Nine Months Ended
 
September 30,
 
2014
 
2013
Operating Activities
 
 
 
Net income
$
449

 
$
347

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
175

 
160

Provision for loan losses
200

 
275

Deferred income taxes
24

 
42

Stock-based compensation
43

 
38

Excess tax benefits from stock-based compensation
(34
)
 
(13
)
Asset impairment
8

 

Loss on early extinguishment of debt

 
106

Non-cash interest
17

 
21

Net change in assets and liabilities, excluding the impact of acquisitions:

 

Trade receivables
47

 
12

Vacation ownership contract receivables
(156
)
 
(171
)
Inventory
50

 
25

Prepaid expenses
8

 
(14
)
Other current assets
13

 
(11
)
Accounts payable, accrued expenses and other current liabilities
38

 
(4
)
Deferred income
20

 
44

Other, net
(3
)
 
1

Net cash provided by operating activities
899

 
858

Investing Activities
 
 
 
Property and equipment additions
(149
)
 
(153
)
Net assets acquired, net of cash acquired
(18
)
 
(128
)
Development advances
(15
)
 
(54
)
Equity investments and loans
(10
)
 
(3
)
Proceeds from asset sales
5

 
6

Decrease in securitization restricted cash
2

 
19

Decrease/(increase) in escrow deposit restricted cash
1

 
(6
)
Other, net
(1
)
 
2

Net cash used in investing activities
(185
)
 
(317
)
Financing Activities
 
 
 
Proceeds from securitized borrowings
1,412

 
1,203

Principal payments on securitized borrowings
(1,381
)
 
(1,276
)
Proceeds from long-term debt
67

 
377

Principal payments on long-term debt
(117
)
 
(327
)
Proceeds/(repayments) of commercial paper, net
28

 
(108
)
Proceeds from note issuances

 
843

Repurchase of notes

 
(636
)
Proceeds from vacation ownership inventory arrangement

 
87

Dividends to shareholders
(136
)
 
(119
)
Repurchase of common stock
(477
)
 
(473
)
Excess tax benefits from stock-based compensation
34

 
13

Debt issuance costs
(14
)
 
(18
)
Net share settlement of incentive equity awards
(63
)
 
(26
)
Other, net
(1
)
 
(4
)
Net cash used in financing activities
(648
)
 
(464
)
Effect of changes in exchange rates on cash and cash equivalents
(8
)
 
(3
)
Net increase in cash and cash equivalents
58

 
74

Cash and cash equivalents, beginning of period
194

 
195

Cash and cash equivalents, end of period
$
252

 
$
269


See Notes to Consolidated Financial Statements.
5

WYNDHAM WORLDWIDE CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
(In millions)
(Unaudited)


 
Common Shares Outstanding
 
Common Stock
 
Treasury Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income
 
Non-controlling Interest
 
Total Equity
Balance as of December 31, 2013
128

 
$
2

 
$
(3,191
)
 
$
3,858

 
$
832

 
$
122

 
$
2

 
$
1,625

Net income

 

 

 

 
448

 

 
1

 
449

Other comprehensive loss

 

 

 

 

 
(65
)
 

 
(65
)
Issuance of shares for RSU vesting
1

 

 

 

 

 

 

 

Net share settlement of incentive equity awards

 

 

 
(63
)
 

 

 

 
(63
)
Change in deferred compensation

 

 

 
43

 

 

 

 
43

Change in deferred compensation for Board of Directors

 

 

 
1

 

 

 

 
1

Repurchase of common stock
(6
)
 

 
(481
)
 

 

 

 

 
(481
)
Change in excess tax benefit on equity awards

 

 

 
34

 

 

 

 
34

Dividends

 

 

 

 
(134
)
 

 

 
(134
)
Other

 

 

 
2

 

 

 

 
2

Balance as of September 30, 2014
123

 
$
2

 
$
(3,672
)
 
$
3,875

 
$
1,146

 
$
57

 
$
3

 
$
1,411



 
Common Shares Outstanding
 
Common Stock
 
Treasury Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income
 
Non-controlling Interest
 
Total Equity
Balance as of December 31, 2012
137

 
$
2

 
$
(2,601
)
 
$
3,820

 
$
558

 
$
151

 
$
1

 
$
1,931

Net income

 

 

 

 
346

 

 
1

 
347

Other comprehensive loss

 

 

 

 

 
(27
)
 

 
(27
)
Issuance of shares for RSU vesting
1

 

 

 

 

 

 

 

Net share settlement of incentive equity awards

 

 

 
(26
)
 

 

 

 
(26
)
Change in deferred compensation

 

 

 
38

 

 

 

 
38

Repurchase of common stock
(8
)
 

 
(475
)
 

 

 

 

 
(475
)
Change in excess tax benefit on equity awards

 

 

 
13

 

 

 

 
13

Dividends

 

 

 

 
(119
)
 

 

 
(119
)
Balance as of September 30, 2013
130

 
$
2

 
$
(3,076
)
 
$
3,845

 
$
785

 
$
124

 
$
2

 
$
1,682



See Notes to Consolidated Financial Statements.
6


WYNDHAM WORLDWIDE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise noted, all amounts are in millions, except share and per share amounts)
(Unaudited)

1.
Basis of Presentation
Wyndham Worldwide Corporation (“Wyndham” or the “Company”) is a global provider of hospitality services and products. The accompanying Consolidated Financial Statements include the accounts and transactions of Wyndham, as well as the entities in which Wyndham directly or indirectly has a controlling financial interest. The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America. All intercompany balances and transactions have been eliminated in the Consolidated Financial Statements.

In presenting the Consolidated Financial Statements, management makes estimates and assumptions that affect the amounts reported and related disclosures. Estimates, by their nature, are based on judgment and available information. Accordingly, actual results could differ from those estimates. In management’s opinion, the Consolidated Financial Statements contain all normal recurring adjustments necessary for a fair presentation of interim results reported. The results of operations reported for interim periods are not necessarily indicative of the results of operations for the entire year or any subsequent interim period. These financial statements should be read in conjunction with the Company’s 2013 Consolidated Financial Statements included in its Annual Report filed on Form 10-K with the Securities and Exchange Commission on February 14, 2014.

Business Description
The Company operates in the following business segments:
Lodging—primarily franchises hotels in the upscale, upper midscale, midscale, economy and extended stay segments and provides hotel management services for full-service and select limited-service hotels.
Vacation Exchange and Rentals—provides vacation exchange services and products to owners of intervals of vacation ownership interests (“VOIs”) and markets vacation rental properties primarily on behalf of independent owners.
Vacation Ownership—develops, markets and sells VOIs to individual consumers, provides consumer financing in connection with the sale of VOIs and provides property management services at resorts.

Recently Issued Accounting Pronouncements
Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern. In August 2014, the Financial Accounting Standards Board (the “FASB”) issued guidance on disclosure of uncertainties about an entity’s ability to continue as a going concern. This guidance addresses management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and to provide related footnote disclosures. Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued. The guidance is effective for fiscal years ending after December 15, 2016 and for interim periods within those fiscal years, with early adoption permitted. The Company will adopt this guidance on January 1, 2015, and it believes the adoption of this guidance will not have a material impact on the Consolidated Financial Statements.

Revenue from Contracts with Customers. In May 2014, the FASB issued guidance on revenue from contracts with customers. The guidance outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. This guidance is effective for fiscal years beginning after December 15, 2016 and for interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of this guidance on the Consolidated Financial Statements.

Foreign Currency Matters. In March 2013, the FASB issued guidance on a parent’s accounting for the cumulative translation adjustment upon derecognition of a subsidiary or group of assets within a foreign entity. The guidance requires that the parent release any related cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. This guidance is effective prospectively for fiscal years beginning after December 15, 2013 and for interim periods within those fiscal years. The Company adopted the guidance on January 1, 2014, as required. There was no material impact on the Consolidated Financial Statements resulting from the adoption.

7


2.
Earnings Per Share
The computation of basic and diluted earnings per share (“EPS”) is based on net income attributable to Wyndham shareholders divided by the basic weighted average number of common shares and diluted weighted average number of common shares, respectively.

The following table sets forth the computation of basic and diluted EPS (in millions, except per share data):
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2014
 
2013
 
2014
 
2013
 
Net income attributable to Wyndham shareholders
$
206

 
$
187

 
$
448

 
$
346

 
Basic weighted average shares outstanding
124

 
131

 
126

 
134

 
SSARs, RSUs and PSUs (a) (b)
2

(c) 
2

 
2

(c) 
2

(d) 
Weighted average diluted shares outstanding
126

 
133

 
128

 
136

 
Earnings per share:
 
 
 
 
 
 
 
 
Basic
$
1.65

 
$
1.42

 
$
3.55

 
$
2.58

 
Diluted
1.64

 
1.40

 
3.51

 
2.55

 
Dividends:
 
 
 
 
 
 
 
 
Aggregate dividends paid to shareholders
$
44

 
$
39

 
$
136

 
$
119

 

(a) 
Includes unvested dilutive restricted stock units (“RSUs”) which are subject to future forfeitures.
(b) 
Excludes 423,000 performance vested restricted stock units (“PSUs”) for both the three and nine months ended September 30, 2014 and 828,000 for both the three and nine months ended September 30, 2013, as the Company has not met the required performance metrics.
(c) 
Excludes 15,000 and 10,000 stock-settled stock appreciation rights (“SSARs”) for the three and nine months ended September 30, 2014, respectively, as their inclusion would have been anti-dilutive to EPS.
(d) 
Excludes 69,000 SSARs for the nine months ended September 30, 2013, as their inclusion would have been anti-dilutive to EPS.
    
Stock Repurchase Program

The following table summarizes stock repurchase activity under the current stock repurchase program (in millions, except per share data):
 
Shares
 
Cost
 
 Average Price Per Share
As of December 31, 2013
62.7

 
$
2,410

 
$
38.44

For the nine months ended September 30, 2014
6.5

 
481

 
74.45

As of September 30, 2014
69.2

 
$
2,891

 
41.80


The Company had $187 million of remaining availability under its program as of September 30, 2014. The total capacity of the program was increased by proceeds received from stock option exercises.

8


3.
Acquisitions
Assets acquired and liabilities assumed in business combinations were recorded on the Consolidated Balance Sheets as of the respective acquisition dates based upon their estimated fair values at such dates. The results of operations of businesses acquired by the Company have been included in the Consolidated Statements of Income since their respective dates of acquisition. The excess of the purchase price over the estimated fair values of the underlying assets acquired and liabilities assumed was allocated to goodwill. In certain circumstances, the allocations of the excess purchase price are based upon preliminary estimates and assumptions. Accordingly, the allocations may be subject to revision when the Company receives final information, including appraisals and other analyses. Any revisions to the fair values during the allocation period will be recorded by the Company as further adjustments to the purchase price allocations. Although, in certain circumstances, the Company has substantially integrated the operations of its acquired businesses, additional future costs relating to such integration may occur. These costs may result from integrating operating systems, relocating employees, closing facilities, reducing duplicative efforts and exiting and consolidating other activities. These costs will be recorded on the Consolidated Statements of Income as expenses.

During the nine months ended September 30, 2014, the Company completed three business acquisitions for $16 million in cash, net of cash acquired, and $2 million of contingent consideration, related to prior year acquisitions. The preliminary purchase price allocations resulted in the recognition of $9 million of inventory which was allocated to the Company’s Vacation Ownership segment. In addition, the Company recognized $2 million of goodwill, none of which is expected to be deductible for tax purposes, and $3 million of definite-lived intangible assets with a weighted average life of 12 years, both of which were allocated to the Company’s Vacation Exchange and Rentals segment. These acquisitions were not material to the Company’s results of operations, financial position or cash flows.

4.
Vacation Ownership Contract Receivables
The Company generates vacation ownership contract receivables by extending financing to the purchasers of its VOIs. Current and long-term vacation ownership contract receivables, net consisted of:
 
September 30,
2014
 
December 31,
2013
Current vacation ownership contract receivables:
 
 
 
Securitized
$
223

 
$
222

Non-securitized
126

 
140

 
349

 
362

Less: Allowance for loan losses
59

 
57

Current vacation ownership contract receivables, net
$
290

 
$
305

Long-term vacation ownership contract receivables:
 
 
 
Securitized
$
1,996

 
$
1,982

Non-securitized
939

 
975

 
2,935

 
2,957

Less: Allowance for loan losses
524

 
509

Long-term vacation ownership contract receivables, net
$
2,411

 
$
2,448


During the three and nine months ended September 30, 2014, the Company’s securitized vacation ownership contract receivables generated interest income of $74 million and $217 million, respectively. During the three and nine months ended September 30, 2013, such amounts were $73 million and $226 million, respectively. Such interest income is included in consumer financing revenues on the Consolidated Statements of Income.

Principal payments that are contractually due on the Company’s vacation ownership contract receivables during the next twelve months are classified as current on the Consolidated Balance Sheets. During the nine months ended September 30, 2014 and 2013, the Company originated vacation ownership contract receivables of $754 million and $785 million, respectively, and received principal collections of $598 million and $614 million, respectively. The weighted average interest rate on outstanding vacation ownership contract receivables was 13.6% and 13.5% as of September 30, 2014 and December 31, 2013, respectively.


9


The activity in the allowance for loan losses on vacation ownership contract receivables was as follows:
 
Amount
Allowance for loan losses as of December 31, 2013
$
566

Provision for loan losses
200

Contract receivables write-offs, net
(183
)
Allowance for loan losses as of September 30, 2014
$
583

 
Amount
Allowance for loan losses as of December 31, 2012
$
497

Provision for loan losses
275

Contract receivables write-offs, net
(211
)
Allowance for loan losses as of September 30, 2013
$
561

In accordance with the guidance for accounting for real estate timesharing transactions, the Company recorded a provision for loan losses of $70 million and $200 million as a reduction of net revenues during the three and nine months ended September 30, 2014, respectively, and $102 million and $275 million during the three and nine months ended September 30, 2013, respectively.

Credit Quality for Financed Receivables and the Allowance for Credit Losses
The basis of the differentiation within the identified class of financed VOI contract receivables is the consumer’s FICO score. A FICO score is a branded version of a consumer credit score widely used within the U.S. by the largest banks and lending institutions. FICO scores range from 300850 and are calculated based on information obtained from one or more of the three major U.S. credit reporting agencies that compile and report on a consumer’s credit history. The Company updates its records for all active VOI contract receivables with a balance due on a rolling monthly basis to ensure that all VOI contract receivables are scored at least every six months. The Company groups all VOI contract receivables into five different categories: FICO scores ranging from 700 to 850, 600 to 699, Below 600, No Score (primarily comprised of consumers for whom a score is not readily available, including consumers declining access to FICO scores and non U.S. residents) and Asia Pacific (comprised of receivables in the Company’s Wyndham Vacation Resort Asia Pacific business for which scores are not readily available).

The following table details an aged analysis of financing receivables using the most recently updated FICO scores (based on the policy described above):
 
As of September 30, 2014
 
700+
 
600-699
 
<600
 
No Score
 
Asia Pacific
 
Total
Current
$
1,538

 
$
1,043

 
$
195

 
$
112

 
$
279

 
$
3,167

31 - 60 days
11

 
22

 
16

 
3

 
3

 
55

61 - 90 days
6

 
11

 
12

 
2

 
1

 
32

91 - 120 days
5

 
10

 
11

 
2

 
2

 
30

Total
$
1,560

 
$
1,086

 
$
234

 
$
119

 
$
285

 
$
3,284

 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2013
 
700+
 
600-699
 
<600
 
No Score
 
Asia Pacific
 
Total
Current
$
1,515

 
$
1,060

 
$
224

 
$
108

 
$
280

 
$
3,187

31 - 60 days
10

 
24

 
20

 
4

 
4

 
62

61 - 90 days
7

 
13

 
13

 
2

 
2

 
37

91 - 120 days
5

 
11

 
13

 
3

 
1

 
33

Total
$
1,537

 
$
1,108

 
$
270

 
$
117

 
$
287

 
$
3,319

The Company ceases to accrue interest on VOI contract receivables once the contract has remained delinquent for greater than 90 days. At greater than 120 days, the VOI contract receivable is written off to the allowance for loan losses. In accordance with its policy, the Company assesses the allowance for loan losses using a static pool methodology and thus does not assess individual loans for impairment separate from the pool.

10


5.
Inventory
Inventory consisted of:
 
September 30,
2014
 
December 31,
2013
Land held for VOI development
$
133

 
$
102

VOI construction in process
118

 
84

Inventory sold subject to conditional repurchase (*)
93

 
123

Completed VOI inventory
371

 
422

Estimated recoveries
233

 
227

Exchange and rentals vacation credits and other
61

 
65

Total inventory
1,009

 
1,023

Less: Current portion
306

 
346

Non-current inventory
$
703

 
$
677

 
(*)
As of September 30, 2014, included $85 million of VOI construction in process and $8 million of land held for VOI development. As of December 31, 2013, included $85 million of VOI construction in process and $38 million of land held for VOI development.

Inventory that the Company expects to sell within the next twelve months is classified as current on the Consolidated Balance Sheets. During 2014, the Company transferred $18 million from property and equipment to VOI inventory.

Inventory Sale Transactions
During 2013, the Company sold real property located in Las Vegas, Nevada and Avon, Colorado to a third-party developer, consisting of $123 million of vacation ownership inventory and $3 million property and equipment. Total consideration was $126 million, of which $96 million was cash and $30 million was a note receivable. The Company recognized no gain or loss on these transactions.

In accordance with the agreements with the third party developer, the Company has conditional rights and a conditional obligation to repurchase the completed properties from the developer subject to the properties conforming to the Company's vacation ownership resort standards and provided that the third-party developer has not sold the properties to another party. Under the sale of real estate accounting guidance, the conditional rights and obligation of the Company constitute continuing involvement and thus the Company was unable to account for these transactions as a sale.

During September 2014, the Company reacquired a portion of the real property located in Las Vegas, Nevada from the third-party developer for $30 million in exchange for cancellation of the $30 million note receivable. In addition, the Company received $1 million of accrued interest on such note. The Company recognized no gain or loss on this transaction.
In connection with such transactions, the Company had outstanding obligations of $103 million as of September 30, 2014, of which $27 million was included within accrued expenses and other current liabilities and $76 million was included within other non-current liabilities on the Consolidated Balance Sheet. As of December 31, 2013, the Company had outstanding obligations of $129 million, of which $47 million was included within accrued expenses and other current liabilities and $82 million was included within other non-current liabilities on the Consolidated Balance Sheet. As of December 31, 2013, the Company had a $30 million note receivable which was included within other current assets on the Consolidated Balance Sheet and accrued interest at 3% per annum (see Note 11 - Commitments and Contingencies for more detailed information).



11


6.
Long-Term Debt and Borrowing Arrangements
The Company’s indebtedness consisted of:
 
September 30,
2014
 
December 31,
2013
Securitized vacation ownership debt: (a)
 
 
 
Term notes
$
1,670

 
$
1,648

Bank conduit facility
271

 
262

Total securitized vacation ownership debt
1,941

 
1,910

Less: Current portion of securitized vacation ownership debt
192

 
184

Long-term securitized vacation ownership debt
$
1,749

 
$
1,726

Long-term debt: (b)
 
 
 
Revolving credit facility (due July 2018)
$
18

 
$
23

Commercial paper
237

 
210

$315 million 6.00% senior unsecured notes (due December 2016) (c)
317

 
318

$300 million 2.95% senior unsecured notes (due March 2017)
299

 
298

$14 million 5.75% senior unsecured notes (due February 2018)
14

 
14

$450 million 2.50% senior unsecured notes (due March 2018)
448

 
447

$40 million 7.375% senior unsecured notes (due March 2020)
40

 
40

$250 million 5.625% senior unsecured notes (due March 2021)
247

 
246

$650 million 4.25% senior unsecured notes (due March 2022) (d)
646

 
643

$400 million 3.90% senior unsecured notes (due March 2023) (e)
401

 
387

Capital leases
175

 
191

Other
80

 
114

Total long-term debt
2,922

 
2,931

Less: Current portion of long-term debt
49

 
49

Long-term debt
$
2,873

 
$
2,882

 
(a) 
Represents non-recourse debt that is securitized through bankruptcy-remote special purpose entities (“SPEs”), the creditors of which have no recourse to the Company for principal and interest. These outstanding borrowings are collateralized by $2,326 million and $2,314 million of underlying gross vacation ownership contract receivables and related assets as of September 30, 2014 and December 31, 2013, respectively.
(b) 
The carrying amounts of the senior unsecured notes are net of unamortized discount of $15 million and $17 million as of September 30, 2014 and December 31, 2013, respectively.
(c) 
Includes $2 million and $3 million of unamortized gains from the settlement of a derivative as of September 30, 2014 and December 31, 2013, respectively.
(d) 
Includes a $1 million increase and $2 million decrease in the carrying value resulting from a fair value hedge derivative as of September 30, 2014 and December 31, 2013, respectively.
(e) 
Includes a $4 million increase and $10 million decrease in the carrying value resulting from a fair value hedge derivative as of September 30, 2014 and December 31, 2013, respectively.

Debt Issuances
Sierra Timeshare 2014-1 Receivables Funding, LLC. During March 2014, the Company closed a series of term notes payable, Sierra Timeshare 2014-1 Receivables Funding, LLC, with an initial principal amount of $425 million, which are secured by vacation ownership contract receivables and bear interest at a weighted average coupon rate of 2.15%. The advance rate for this transaction was 88%. As of September 30, 2014, the Company had $315 million of outstanding borrowings under these term notes.

Sierra Timeshare 2014-2 Receivables Funding, LLC. During July 2014, the Company closed a series of term notes payable, Sierra Timeshare 2014-2 Receivables Funding LLC, with an initial principal amount of $350 million, which are secured by vacation ownership contract receivables and bear interest at a weighted average coupon rate of 2.12%. The advance rate for this transaction was 91%. As of September 30, 2014, the Company had $319 million of outstanding borrowings under these term notes.


12


Sierra Timeshare Conduit Receivables Funding II, LLC. During August 2014, the Company renewed its securitized timeshare receivables conduit facility for a two-year period through August 2016. The facility has a total capacity of $650 million and bears interest at variable rates based on commercial paper rates and LIBOR rates plus a spread.

Commercial Paper
The Company maintains U.S. and European commercial paper programs with a total capacity of $750 million and $500 million, respectively. As of September 30, 2014, the Company had outstanding borrowings of $237 million at a weighted average interest rate of 0.59%, all of which was under its U.S. commercial paper program. As of December 31, 2013, the Company had $210 million of outstanding borrowings at a weighted average interest rate of 0.74% under its commercial paper programs. The Company considers outstanding borrowings under its commercial paper programs to be a reduction of available capacity on its revolving credit facility.

Fair Value Hedges
The Company has fixed to variable interest rate swap agreements on its 3.90% and 4.25% senior unsecured notes with notional amounts of $400 million and $100 million, respectively. The fixed interest rates on these notes were effectively modified to a variable LIBOR-based index. As of September 30, 2014, the variable interest rates on the notional portion of the 3.90% and 4.25% senior unsecured notes were 2.38% and 2.29% respectively. The Company had a $6 million asset and a $12 million liability recorded as of September 30, 2014 and December 31, 2013, respectively, which represented the aggregate fair value of these interest rate swap agreements.

Early Extinguishment of Debt
During the first quarter of 2013, the Company repurchased a portion of its 5.75% and 7.375% senior unsecured notes totaling $446 million through tender offers, repurchased $42 million of its 6.00% senior unsecured notes on the open market and executed a redemption option for the remaining $43 million outstanding on its 9.875% senior unsecured notes. As a result, the Company repurchased a total of $531 million of its outstanding senior unsecured notes and incurred expenses of $111 million, of which $106 million was cash and $5 million was non-cash, during the nine months ended September 30, 2013, which are included within early extinguishment of debt on the Consolidated Statement of Income.

Maturities and Capacity
The Company’s outstanding debt as of September 30, 2014 matures as follows:
 
Securitized Vacation Ownership Debt
 
Long-Term Debt
 
Total
Within 1 year
$
192

 
$
49

 
$
241

Between 1 and 2 years
210

 
45

 
255

Between 2 and 3 years
407

 
648

 
1,055

Between 3 and 4 years
184

 
731

 
915

Between 4 and 5 years
183

 
14

 
197

Thereafter
765

 
1,435

 
2,200

 
$
1,941

 
$
2,922

 
$
4,863


Debt maturities of the securitized vacation ownership debt are based on the contractual payment terms of the underlying vacation ownership contract receivables. As such, actual maturities may differ as a result of prepayments by the vacation ownership contract receivable obligors.


13


As of September 30, 2014, available capacity under the Company’s borrowing arrangements was as follows:
 
Securitized Bank
   Conduit Facility (a)
 
Revolving
Credit Facility
 
Total Capacity
$
650

 
$
1,500

 
Less: Outstanding Borrowings
271

 
18

 
          Letters of credit

 
2

 
          Commercial paper borrowings

 
237

(b) 
Available Capacity
$
379

 
$
1,243

 
 
(a) 
The capacity of this facility is subject to the Company’s ability to provide additional assets to collateralize additional securitized borrowings.
(b) 
The Company considers outstanding borrowings under its commercial paper programs to be a reduction of the available capacity of its revolving credit facility.

Interest Expense
The Company incurred non-securitized interest expense of $28 million and $84 million during the three and nine months ended September 30, 2014, respectively. Such amounts consist primarily of interest on long-term debt, partially offset by $2 million and $4 million of capitalized interest and $1 million and $2 million of gains resulting from the ineffectiveness of the fair value hedges for the three and nine months ended September 30, 2014, respectively. Such amounts are included within interest expense on the Consolidated Statements of Income. Cash paid related to interest on the Company’s non-securitized debt was $98 million during the nine months ended September 30, 2014.

The Company incurred non-securitized interest expense of $31 million and $97 million during the three and nine months ended September 30, 2013, respectively. Such amounts consist primarily of interest on long-term debt, partially offset by $1 million and $3 million of capitalized interest for the three and nine months ended September 30, 2013, respectively, and $1 million of gains resulting from the ineffectiveness of the fair value hedges for both the three and nine months ended September 30, 2013. Such amounts are included within interest expense on the Consolidated Statements of Income. Cash paid related to interest on the Company’s non-securitized debt was $112 million during the nine months ended September 30, 2013.

Interest expense incurred in connection with the Company’s securitized vacation ownership debt during the three and nine months ended September 30, 2014 was $18 million and $52 million, respectively, and $19 million and $60 million during the three and nine months ended September 30, 2013, respectively, and is recorded within consumer financing interest on the Consolidated Statements of Income. Cash paid related to such interest was $39 million and $47 million during the nine months ended September 30, 2014 and 2013, respectively.

7.
Variable Interest Entities
In accordance with the applicable accounting guidance for the consolidation of a variable interest entity (“VIE”), the Company analyzes its variable interests, including loans, guarantees, SPEs and equity investments to determine if an entity in which the Company has a variable interest is a VIE. If the entity is considered to be a VIE, the Company determines whether it would be considered the entity’s primary beneficiary. The Company consolidates into its financial statements those VIEs for which it has determined that it is the primary beneficiary.

Vacation Ownership Contract Receivables Securitizations
The Company pools qualifying vacation ownership contract receivables and sells them to bankruptcy-remote entities. Vacation ownership contract receivables qualify for securitization based primarily on the credit strength of the VOI purchaser to whom financing has been extended. Vacation ownership contract receivables are securitized through bankruptcy-remote SPEs that are consolidated within the Consolidated Financial Statements. As a result, the Company does not recognize gains or losses resulting from these securitizations at the time of sale to the SPEs. Interest income is recognized when earned over the contractual life of the vacation ownership contract receivables. The Company services the securitized vacation ownership contract receivables pursuant to servicing agreements negotiated on an arms-length basis based on market conditions. The activities of these SPEs are limited to (i) purchasing vacation ownership contract receivables from the Company’s vacation ownership subsidiaries; (ii) issuing debt securities and/or borrowing under a conduit facility to fund such purchases; and (iii) entering into derivatives to hedge interest rate exposure. The bankruptcy-remote SPEs are legally separate from the Company. The receivables held by the bankruptcy-remote SPEs are not available to creditors of the Company and legally are not assets of the Company. Additionally, the creditors of these SPEs have no recourse to the Company for principal and interest.

14



The assets and liabilities of these vacation ownership SPEs are as follows:
 
September 30,
2014
 
December 31,
2013
Securitized contract receivables, gross (a)
$
2,219

 
$
2,204

Securitized restricted cash (b)
89

 
92

Interest receivables on securitized contract receivables (c)
16

 
17

Other assets (d)
2

 
1

Total SPE assets (e)
2,326

 
2,314

Securitized term notes (f)
1,670

 
1,648

Securitized conduit facilities (f)
271

 
262

Other liabilities (g)
1

 
2

Total SPE liabilities
1,942

 
1,912

SPE assets in excess of SPE liabilities
$
384

 
$
402

 
(a) 
Included in current ($223 million and $222 million as of September 30, 2014 and December 31, 2013, respectively) and non-current ($1,996 million and $1,982 million as of September 30, 2014 and December 31, 2013, respectively) vacation ownership contract receivables on the Consolidated Balance Sheets.
(b) 
Included in other current assets ($66 million and $64 million as of September 30, 2014 and December 31, 2013, respectively) and other non-current assets ($23 million and $28 million as of September 30, 2014 and December 31, 2013, respectively) on the Consolidated Balance Sheets.
(c) 
Included in trade receivables, net on the Consolidated Balance Sheets.
(d) 
Includes interest rate derivative contracts and related assets; included in other non-current assets on the Consolidated Balance Sheets.
(e) 
Excludes deferred financing costs of $28 million as of both September 30, 2014 and December 31, 2013, related to securitized debt.
(f) 
Included in current ($192 million and $184 million as of September 30, 2014 and December 31, 2013, respectively) and long-term ($1,749 million and $1,726 million as of September 30, 2014 and December 31, 2013, respectively) securitized vacation ownership debt on the Consolidated Balance Sheets.
(g) 
Primarily includes accrued interest on securitized debt of $1 million and $2 million as of September 30, 2014 and December 31, 2013, respectively, which is included in accrued expenses and other current liabilities on the Consolidated Balance Sheets.

In addition, the Company has vacation ownership contract receivables that have not been securitized through bankruptcy-remote SPEs. Such gross receivables were $1,065 million and $1,115 million as of September 30, 2014 and December 31, 2013, respectively. A summary of total vacation ownership receivables and other securitized assets, net of securitized liabilities and the allowance for loan losses, is as follows:
 
September 30,
2014
 
December 31,
2013
SPE assets in excess of SPE liabilities
$
384

 
$
402

Non-securitized contract receivables
1,065

 
1,115

Less: Allowance for loan losses
583

 
566

Total, net
$
866

 
$
951

In addition to restricted cash related to securitizations, the Company had $61 million and $57 million of restricted cash related to escrow deposits as of September 30, 2014 and December 31, 2013, respectively, which are recorded within other current assets on the Consolidated Balance Sheets.

Midtown 45, NYC Property
During January 2013, the Company entered into an agreement with a third party partner whereby the partner acquired the Midtown 45 property in New York City through an SPE. The Company is managing and operating the property for rental purposes while the Company converts it into VOI inventory. The SPE financed the acquisition and planned renovations with a $115 million four-year mortgage note and $9 million of mandatorily redeemable equity provided by related parties of such partner. At the time of the agreement, the Company committed to purchase such VOI inventory from the SPE over a four year period in the amount of $146 million, of which $124 million will be used to repay the four-year mortgage note and the mandatorily redeemable equity of the SPE. The Company is considered to be the primary beneficiary of the SPE and therefore the Company consolidated the SPE within its financial statements.


15


The assets and liabilities of the SPE are as follows:
 
September 30,
2014
 
December 31,
2013
Cash
$

 
$
4

Property and equipment, net
66

 
111

Total SPE assets
66

 
115

Accrued expenses and other current liabilities
1

 
2

Long-term debt (*)
77

 
107

Total SPE liabilities
78

 
109

SPE (deficit)/equity
$
(12
)
 
$
6

 
(*)  
As of September 30, 2014, included $71 million for a four-year mortgage note and $6 million of mandatorily redeemable equity, of which $31 million was included in current portion of long-term debt on the Consolidated Balance Sheet. As of December 31, 2013, included $99 million for a four-year mortgage note and $8 million of mandatorily redeemable equity, of which $30 million was included in current portion of long-term debt on the Consolidated Balance Sheet.

During 2014, the Company purchased $51 million of property and equipment from the SPE.

8.
Fair Value
The following table presents information about the Company’s financial assets and liabilities that are measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair values. Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:

Level 1: Quoted prices for identical instruments in active markets.

Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value driver is observable.

Level 3: Unobservable inputs used when little or no market data is available.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement falls has been determined based on the lowest level input (closest to Level 3) that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.


16


The following table summarizes information regarding assets and liabilities that are measured at fair value on a recurring basis:
 
As of
 
As of
 
September 30, 2014
 
December 31, 2013
 
Fair Value
 
Level 2
 
Level 3
 
Fair Value
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
 
 
 
 
Derivatives: (a)
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
$
7

 
$
7

 
$

 
$
5

 
$
5

 
$

Foreign exchange contracts
2

 
2

 

 
2

 
2

 

Securities available-for-sale (b)

 

 

 
6

 

 
6

Total assets
$
9

 
$
9

 
$

 
$
13

 
$
7

 
$
6


Liabilities
 
 
 
 
 
 
 
 
 
 
 
Derivatives: (c)
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
$
1

 
$
1

 
$

 
$
13

 
$
13

 
$

Foreign exchange contracts
7

 
7

 

 
2

 
2

 

Total liabilities
$
8

 
$
8

 
$

 
$
15

 
$
15

 
$

 
(a) 
Included in other current assets ($2 million and $6 million as of September 30, 2014 and December 31, 2013, respectively) and other non-current assets ($7 million and $1 million as of September 30, 2014 and December 31, 2013, respectively) on the Consolidated Balance Sheets; carrying value is equal to estimated fair value.
(b) 
Included in other non-current assets on the Consolidated Balance Sheet.
(c) 
Included in accrued expenses and other current liabilities ($7 million and $2 million as of September 30, 2014 and December 31, 2013, respectively) and other non-current liabilities ($1 million and $13 million as of September 30, 2014 and December 31, 2013, respectively) on the Consolidated Balance Sheets; carrying value is equal to estimated fair value.

The Company’s derivative instruments primarily consist of pay-fixed/receive-variable interest rate swaps, pay-variable/receive-fixed interest rate swaps, interest rate caps, foreign exchange forward contracts and foreign exchange average rate forward contracts. For assets and liabilities that are measured using quoted prices in active markets, the fair value is the published market price per unit multiplied by the number of units held without consideration of transaction costs. Assets and liabilities that are measured using other significant observable inputs are valued by reference to similar assets and liabilities. For these items, a significant portion of fair value is derived by reference to quoted prices of similar assets and liabilities in active markets. For assets and liabilities that are measured using significant unobservable inputs, fair value is primarily derived using a fair value model, such as a discounted cash flow model.

The fair value of financial instruments is generally determined by reference to market values resulting from trading on a national securities exchange or in an over-the-counter market. In cases where quoted market prices are not available, fair value is based on estimates using present value or other valuation techniques, as appropriate. The carrying amounts of cash and cash equivalents, restricted cash, trade receivables, accounts payable and accrued expenses and other current liabilities approximate fair value due to the short-term maturities of these assets and liabilities. The carrying amounts and estimated fair values of all other financial instruments are as follows:
 
September 30, 2014
 
December 31, 2013
 
Carrying
Amount
 
Estimated Fair Value
 
Carrying
 Amount
 
Estimated Fair Value
Assets
 
 
 
 
 
 
 
Vacation ownership contract receivables, net
$
2,701

 
$
3,298

 
$
2,753

 
$
3,326

Debt
 
 
 
 
 
 
 
Total debt
4,863

 
4,950

 
4,841

 
4,928


The Company estimates the fair value of its vacation ownership contract receivables using a discounted cash flow model which it believes is comparable to the model that an independent third party would use in the current market. The model uses Level 3 inputs consisting of default rates, prepayment rates, coupon rates and loan terms for the contract receivables portfolio as key drivers of risk and relative value that, when applied in combination with pricing parameters, determines the fair value of the underlying contract receivables.

17



The Company estimates the fair value of its securitized vacation ownership debt by obtaining Level 2 inputs comprised of indicative bids from investment banks that actively issue and facilitate the secondary market for timeshare securities. The Company estimates the fair value of its other long-term debt, excluding capital leases, using Level 2 inputs based on indicative bids from investment banks and determines the fair value of its senior notes using quoted market prices (such senior notes are not actively traded).

9.
Derivative Instruments and Hedging Activities
Foreign Currency Risk

The Company uses freestanding foreign currency forward contracts and foreign currency forward contracts designated as cash flow hedges to manage its exposure to changes in foreign currency exchange rates associated with its foreign currency denominated receivables, forecasted earnings of foreign subsidiaries and forecasted foreign currency denominated vendor payments. Gains and losses relating to freestanding foreign currency contracts are included in operating expenses on the Company’s Consolidated Statements of Income and are substantially offset by the earnings effect from the underlying items that were economically hedged. The freestanding foreign currency contracts resulted in losses of $12 million and $11 million during the three and nine months ended September 30, 2014, respectively, and gains of $8 million and $6 million during the three and nine months ended September 30, 2013, respectively. The amount of gains or losses relating to contracts designated as cash flow hedges that the Company expects to reclassify from accumulated other comprehensive income (“AOCI”) to earnings over the next 12 months is not material.

Interest Rate Risk

A portion of the debt used to finance the Company’s operations is exposed to interest rate fluctuations. The Company uses various hedging strategies and derivative financial instruments to create a desired mix of fixed and floating rate assets and liabilities. Derivative instruments currently used in these hedging strategies include swaps and interest rate caps. The derivatives used to manage the risk associated with the Company’s floating rate debt include freestanding derivatives and derivatives designated as cash flow hedges. The Company also uses swaps to convert specific fixed-rate debt into variable-rate debt (i.e., fair value hedges) to manage the overall interest cost. For relationships designated as fair value hedges, changes in the fair value of the derivatives are recorded in income with offsetting adjustments to the carrying amount of the hedged debt. The amount of gains or losses that the Company expects to reclassify from AOCI to earnings during the next 12 months is not material. The impact of the freestanding derivatives was not material to the Company’s Consolidated Statements of Income during both the three and nine months ended September 30, 2014 and 2013.

Gains or losses recognized in AOCI for both the three and nine months ended September 30, 2014 and 2013 were not material.

10.
Income Taxes
The Company files income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examinations for years prior to 2011. In addition, with few exceptions, the Company is no longer subject to state and local, or non-U.S. income tax examinations for years prior to 2006.

The Company made cash income tax payments, net of refunds, of $187 million and $134 million during the nine months ended September 30, 2014 and 2013, respectively.


18


11.
Commitments and Contingencies
The Company is involved in claims, legal and regulatory proceedings and governmental inquiries related to the Company’s business.

Wyndham Worldwide Corporation Litigation
The Company is involved in claims, legal and regulatory proceedings and governmental inquiries arising in the ordinary course of its business including but not limited to: for its lodging business-breach of contract, fraud and bad faith claims between franchisors and franchisees in connection with franchise agreements and with owners in connection with management contracts, negligence, breach of contract, fraud, employment, consumer protection and other statutory claims asserted in connection with alleged acts or occurrences at owned, franchised or managed properties or in relation to guest reservations and bookings; for its vacation exchange and rentals business-breach of contract, fraud and bad faith claims by affiliates and customers in connection with their respective agreements, negligence, breach of contract, fraud, consumer protection and other statutory claims asserted by members and guests for alleged injuries sustained at affiliated resorts and vacation rental properties and consumer protection and other statutory claims asserted by consumers; for its vacation ownership business-breach of contract, bad faith, conflict of interest, fraud, consumer protection and other statutory claims by property owners’ associations, owners and prospective owners in connection with the sale or use of VOIs or land, or the management of vacation ownership resorts, construction defect claims relating to vacation ownership units or resorts, and negligence, breach of contract, fraud, consumer protection and other statutory claims by guests for alleged injuries sustained at vacation ownership units or resorts; and for each of its businesses, bankruptcy proceedings involving efforts to collect receivables from a debtor in bankruptcy, employment matters which may include claims of retaliation, discrimination, harassment and wage and hour claims, claims of infringement upon third parties’ intellectual property rights, claims relating to information security, privacy and consumer protection, tax claims and environmental claims.

On June 26, 2012, the U.S. Federal Trade Commission (“FTC”) filed a lawsuit in Federal District Court for the District of Arizona against the Company and its subsidiaries, Wyndham Hotel Group, LLC (“WHG”), Wyndham Hotels & Resorts Inc. (“WHR”) and Wyndham Hotel Management Inc. (“WHM”), alleging unfairness and deception-based violations of Section 5 of the FTC Act in connection with three prior data breach incidents involving a group of Wyndham brand hotels. The Company, WHG, WHR and WHM dispute the allegations in the lawsuit and are defending this lawsuit vigorously. The Company does not believe that the data breach incidents were material, nor does it expect that the outcome of the FTC litigation will have a material effect on the Company’s results of operations, financial position or cash flows. On March 26, 2013, the Company’s, WHG’s, WHR’s and WHM’s motion to transfer venue of the lawsuit from Arizona to the Federal District Court for the District of New Jersey was granted. WHR’s motion to dismiss the lawsuit was denied on April 7, 2014. The Court granted WHR’s motion to certify its order denying WHR’s motion to dismiss for interlocutory appeal on June 23, 2014. The motion to dismiss filed by the Company, WHG and WHM was denied on June 23, 2014. On July 29, 2014, the Third Circuit Court of Appeals granted WHR’s request to file an interlocutory appeal of the District Court’s denial of its motion to dismiss. WHR filed its brief in support of its interlocutory appeal on October 6, 2014. The Company is unable at this time to estimate any loss or range of reasonably possible loss.

The Company records an accrual for legal contingencies when it determines, after consultation with outside counsel, that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In making such determinations, the Company evaluates, among other things, the degree of probability of an unfavorable outcome and, when it is probable that a liability has been incurred, the Company’s ability to make a reasonable estimate of loss. The Company reviews these accruals each reporting period and makes revisions based on changes in facts and circumstances including changes to its strategy in dealing with these matters.

The Company believes that it has adequately accrued for such matters with reserves of $24 million and $22 million as of September 30, 2014 and December 31, 2013, respectively. Such reserves are exclusive of matters relating to the Company’s separation from Cendant (“Separation”). For matters not requiring accrual, the Company believes that such matters will not have a material effect on its results of operations, financial position or cash flows based on information currently available. However, litigation is inherently unpredictable and, although the Company believes that its accruals are adequate and/or that it has valid defenses in these matters, unfavorable results could occur. As such, an adverse outcome from such proceedings for which claims are awarded in excess of the amounts accrued, if any, could be material to the Company with respect to earnings and/or cash flows in any given reporting period. As of September 30, 2014, the potential exposure resulting from adverse outcomes of such legal proceedings could, in the aggregate, range up to $28 million in excess of recorded accruals. However, the Company does not believe that the impact of such litigation should result in a material liability to the Company in relation to its consolidated financial position or liquidity.


19


Other Guarantees/Indemnifications
Lodging
From time to time, the Company may enter into a hotel management agreement that provides the hotel owner with a guarantee of a certain level of profitability based upon various metrics. Under such an agreement, the Company would be required to compensate such hotel owner for any profitability shortfall over the life of the management agreement up to a specified aggregate amount. For certain agreements, the Company may be able to recapture all or a portion of the shortfall payments in the event that future operating results exceed targets. The terms of such guarantees generally range from 7 to 10 years and certain agreements may provide for early termination provisions under certain circumstances. As of September 30, 2014, the maximum potential amount of future payments that may be made under these guarantees was $136 million with a combined annual cap of $39 million. The Company had an additional guarantee of $30 million with a $3 million cap for 2014 with no annual cap thereafter.

In connection with such performance guarantees, as of September 30, 2014, the Company maintained a liability of $35 million, of which $4 million was included in accrued expenses and other current liabilities and $31 million was included in other non-current liabilities on its Consolidated Balance Sheet. As of September 30, 2014, the Company also had a corresponding $40 million asset related to these guarantees, of which $4 million was included in other current assets and $36 million was included in other non-current assets on its Consolidated Balance Sheet. As of December 31, 2013, the Company maintained a liability of $45 million, of which $8 million was included in accrued expenses and other current liabilities and $37 million was included in other non-current liabilities on its Consolidated Balance Sheet. As of December 31, 2013, the Company also had a corresponding $43 million asset related to the guarantees, of which $4 million was included in other current assets and $39 million was included in other non-current assets on its Consolidated Balance Sheet. Such assets are being amortized on a straight-line basis over the life of the agreements. The amortization expense for the performance guarantees noted above was $1 million and $3 million for the three and nine months ended September 30, 2014, respectively, and $1 million and $2 million for the three and nine months ended September 30, 2013, respectively.

For guarantees subject to recapture provisions, the Company had a receivable of $31 million as of September 30, 2014, of which $6 million was included in other current assets and $25 million was included in other non-current assets on the Company’s Consolidated Balance Sheet. As of December 31, 2013, the Company had a receivable of $24 million which was included in other non-current assets on the Company’s Consolidated Balance Sheet. Such receivables were the result of payments made to date which are subject to recapture and which the Company believes will be recoverable from future operating performance.

Vacation Ownership
The Company guarantees its vacation ownership subsidiary’s obligations to repurchase completed property in Las Vegas, Nevada and Avon, Colorado from a third party developer subject to the properties meeting the Company’s vacation ownership resort standards and provided that the third party developer has not sold the properties to another party. The maximum potential future payments that the Company could be required to make under these commitments were $365 million as of September 30, 2014.

The Company entered into a management agreement that provides a guarantee of a certain level of profitability based upon various metrics. As of September 30, 2014, the maximum potential amount of future payments that may be made under this guarantee was $11 million with an annual cap of $1 million.

Cendant Litigation
Under the Separation agreement, the Company agreed to be responsible for 37.5% of certain of Cendant’s contingent and other corporate liabilities and associated costs, including certain contingent litigation. Since the Separation, Cendant settled the majority of the lawsuits pending on the date of the Separation. See also Note 16 - Separation Adjustments and Transactions with Former Parent and Subsidiaries regarding contingent litigation liabilities resulting from the Separation.


20


12.
Accumulated Other Comprehensive Income
The components of AOCI are as follows:
 
Foreign
 
Unrealized
 
Defined
 
 
 
Currency
 
Gains/(Losses)
 
Benefit
 
 
 
Translation
 
on Cash Flow
 
Pension
 
 
Pretax
Adjustments
 
Hedges
 
Plans
 
AOCI
 Balance, December 31, 2013
$
111

 
$
(8
)
 
$
(4
)
 
$
99

 Period change
(67
)
 
2

 

 
(65
)
 Balance, September 30, 2014
$
44

 
$
(6
)
 
$
(4
)
 
$
34


 
Foreign
 
Unrealized
 
Defined
 
 
 
Currency
 
Gains/(Losses)
 
Benefit
 
 
 
Translation
 
on Cash Flow
 
Pension
 
 
Tax
Adjustments
 
Hedges
 
Plans
 
AOCI
 Balance, December 31, 2013
$
18

 
$
4

 
$
1

 
$
23

 Period change
1

 
(1
)
 

 

 Balance, September 30, 2014
$
19

 
$
3

 
$
1

 
$
23


 
Foreign
 
Unrealized
 
Defined
 
 
 
Currency
 
Gains/(Losses)
 
Benefit
 
 
 
Translation
 
on Cash Flow
 
Pension
 
 
Net of Tax
Adjustments
 
Hedges
 
Plans
 
AOCI
 Balance, December 31, 2013
$
129

 
$
(4
)
 
$
(3
)
 
$
122

 Period change
(66
)
 
1

 

 
(65
)
 Balance, September 30, 2014
$
63

 
$
(3
)
 
$
(3
)
 
$
57


Currency translation adjustments exclude income taxes related to investments in foreign subsidiaries where the Company intends to reinvest the undistributed earnings indefinitely in those foreign operations.


21


13.  
Stock-Based Compensation
The Company has a stock-based compensation plan available to grant RSUs, SSARs, PSUs and other stock or cash-based awards to key employees, non-employee directors, advisors and consultants. Under the Wyndham Worldwide Corporation 2006 Equity and Incentive Plan, as amended, a maximum of 36.7 million shares of common stock may be awarded. As of September 30, 2014, 16.6 million shares remained available.

Incentive Equity Awards Granted by the Company
The activity related to incentive equity awards granted by the Company for the nine months ended September 30, 2014 consisted of the following:
 
RSUs
 
PSUs
 
SSARs
 
Number of RSUs
 
Weighted Average Grant Price
 
Number of PSUs
 
Weighted Average Grant Price
 
Number of SSARs
 
Weighted Average Exercise Price
Balance as of December 31, 2013
2.6

 
$
43.11

 
0.8

 
$
43.36

 
1.1

 
$
21.43

Granted (a)
0.7

 
72.94

 
0.2

 
72.97

 
0.1

 
72.97

Vested/exercised
(1.2
)
 
36.76

 
(0.3
)
 
30.61

 
(0.5
)
 
3.69

Balance as of September 30, 2014
2.1

(b) (c) 
56.45

 
0.7

(d) 
57.99

 
0.7

(b) (e) 
40.09

 
(a) 
Primarily represents awards granted by the Company on February 27, 2014.
(b) 
Aggregate unrecognized compensation expense related to RSUs and SSARs was $95 million as of September 30, 2014, which is expected to be recognized over a weighted average period of 2.7 years.
(c) 
Approximately 2.0 million RSUs outstanding as of September 30, 2014 are expected to vest over time.
(d) 
Maximum aggregate unrecognized compensation expense was $23 million as of September 30, 2014.
(e) 
Approximately 487,000 SSARs are exercisable as of September 30, 2014. The Company assumes that all unvested SSARs are expected to vest over time. SSARs outstanding as of September 30, 2014 had an intrinsic value of $30 million and have a weighted average remaining contractual life of 2.8 years.

On February 27, 2014, the Company granted incentive equity awards totaling $54 million to key employees and senior officers of Wyndham in the form of RSUs and SSARs. These awards will vest ratably over a period of four years. In addition, on February 27, 2014, the Company approved a grant of incentive equity awards totaling $14 million to key employees and senior officers of Wyndham in the form of PSUs. These awards cliff vest on the third anniversary of the grant date, contingent upon the Company achieving certain performance metrics.

The fair value of SSARs granted by the Company on February 27, 2014 was estimated on the date of the grant using the Black-Scholes option-pricing model with the relevant weighted average assumptions outlined in the table below. Expected volatility is based on both historical and implied volatilities of the Company’s stock over the estimated expected life of the SSARs. The expected life represents the period of time the SSARs are expected to be outstanding and is based on historical experience given consideration to the contractual terms and vesting periods of the SSARs. The risk free interest rate is based on yields on U.S. Treasury strips with a maturity similar to the estimated expected life of the SSARs. The projected dividend yield was based on the Company’s anticipated annual dividend divided by the price of the Company’s stock on the date of the grant.
 
SSARs Issued on
 
February 27, 2014
Grant date fair value
$
20.36

Grant date strike price
$
72.97

Expected volatility
35.86
%
Expected life
5.1 years

Risk free interest rate
1.54
%
Projected dividend yield
1.92
%


22


Stock-Based Compensation Expense
The Company recorded stock-based compensation expense of $13 million and $43 million during the three and nine months ended September 30, 2014, respectively, and $13 million and $38 million during the three and nine months ended September 30, 2013, respectively, related to the incentive equity awards granted to key employees and senior officers by the Company. The Company recognized a net tax benefit of $5 million and $17 million during the three and nine months ended September 30, 2014, respectively, and $5 million and $15 million during the three and nine months ended September 30, 2013, respectively, for stock-based compensation arrangements on the Consolidated Statements of Income. During the nine months ended September 30, 2014, the Company increased its pool of excess tax benefits available to absorb tax deficiencies (“APIC Pool”) by $34 million due to the vesting of RSUs, PSUs and SSARS. As of September 30, 2014, the Company’s APIC Pool balance was $112 million.

The Company paid $63 million and $26 million of taxes for the net share settlement of incentive equity awards during the nine months ended September 30, 2014 and 2013, respectively. Such amounts are included within financing activities on the Consolidated Statements of Cash Flows.

14.
Segment Information
The reportable segments presented below represent the Company’s operating segments for which separate financial information is available and which is utilized on a regular basis by its chief operating decision maker to assess performance and to allocate resources. In identifying its reportable segments, the Company also considers the nature of services provided by its operating segments. Management evaluates the operating results of each of its reportable segments based upon net revenues and “EBITDA”, which is defined as net income before depreciation and amortization, interest expense (excluding consumer financing interest), early extinguishment of debt, interest income (excluding consumer financing interest) and income taxes, each of which is presented on the Consolidated Statements of Income. The Company’s presentation of EBITDA may not be comparable to similarly-titled measures used by other companies.

 
Three Months Ended September 30,
 
2014
 
2013
 
Net Revenues
 
EBITDA
 
Net Revenues
 
EBITDA
Lodging (a)
$
315

 
$
100

 
$
297

 
$
95

Vacation Exchange and Rentals
512

 
159

 
470

 
141

Vacation Ownership
704

 
188

 
677

 
176

Total Reportable Segments
1,531

 
447

 
1,444

 
412