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EX-32 - CERTIFICATION OF CHAIRMAN AND CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICE - Wyndham Destinations, Inc.wyn-ex32_2016930xq3.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - Wyndham Destinations, Inc.wyn-ex312_2016930xq3.htm
EX-31.1 - CERTIFICATION OF CHAIRMAN AND CHIEF EXECUTIVE OFFICER - Wyndham Destinations, Inc.wyn-ex311_2016930xq3.htm
EX-15 - LETTER RE: UNAUDITED INTERIM FINANCIAL INFORMATION - Wyndham Destinations, Inc.wyn-ex15_2016930xq3.htm
EX-12 - COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES - Wyndham Destinations, Inc.wyn-ex12_2016930xq3.htm
EX-10.1 - SEVENTH AMENDMENT, DATED AUGUST 23, 2016, INDENTURE AND SERVICING AGREEMENT - Wyndham Destinations, Inc.wyn-ex101_2016930xq3.htm


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, 2016
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 number. 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:
107,776,539 shares of common stock outstanding as of September 30, 2016.




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

We have reviewed the accompanying consolidated balance sheet of Wyndham Worldwide Corporation and subsidiaries (the "Company") as of September 30, 2016, and the related consolidated statements of income and comprehensive income for the three-month and nine-month periods ended September 30, 2016 and 2015, and the related consolidated statements of cash flows and equity for the nine-month periods ended September 30, 2016 and 2015. 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, 2015, and the related consolidated statements of income, comprehensive income, equity and cash flows for the year then ended prior to retrospective adjustments for a change in the Company’s method of presentation of debt issuance costs and deferred taxes (not presented herein); and in our report dated February 12, 2016, we expressed an unqualified opinion on those consolidated financial statements. We also audited the adjustments described in Note 1 that were applied to retrospectively adjust the December 31, 2015 consolidated balance sheet of Wyndham Worldwide Corporation and subsidiaries (not presented herein). In our opinion, such adjustments are appropriate and have been properly applied to the previously issued consolidated balance sheet in deriving the accompanying retrospectively adjusted consolidated balance sheet as of December 31, 2015.


/s/ Deloitte & Touche LLP
Parsippany, New Jersey
October 26, 2016




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


 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Net revenues
 
 
 
 
 
 
 
Service and membership fees
$
735

 
$
734

 
$
2,001

 
$
1,957

Vacation ownership interest sales
441

 
448

 
1,191

 
1,201

Franchise fees
203

 
192

 
513

 
517

Consumer financing
112

 
108

 
327

 
318

Other
82

 
82

 
247

 
231

Net revenues
1,573

 
1,564

 
4,279

 
4,224


Expenses
 
 
 
 
 
 
 
Operating
679

 
691

 
1,915

 
1,865

Cost of vacation ownership interests
47

 
43

 
115

 
123

Consumer financing interest
19

 
18

 
55

 
55

Marketing and reservation
242

 
218

 
645

 
624

General and administrative
173

 
200

 
545

 
562

Asset impairment

 
7

 

 
7

Restructuring
14

 
8

 
14

 
8

Depreciation and amortization
63

 
59

 
187

 
173

Total expenses
1,237

 
1,244

 
3,476

 
3,417


Operating income
336

 
320

 
803

 
807

Other (income)/expense, net
(3
)
 
(3
)
 
(19
)
 
(11
)
Interest expense
34

 
33

 
102

 
89

Early extinguishment of debt

 

 
11

 

Interest income
(2
)
 
(2
)
 
(6
)
 
(7
)
Income before income taxes
307

 
292

 
715

 
736

Provision for income taxes
110

 
102

 
267

 
265

Net income
197

 
190

 
448

 
471

Net income attributable to noncontrolling interest
(1
)
 

 
(1
)
 

Net income attributable to Wyndham shareholders
$
196

 
$
190

 
$
447

 
$
471


Earnings per share
 
 
 
 
 
 
 
Basic
$
1.79

 
$
1.62

 
$
4.03

 
$
3.96

Diluted
1.78

 
1.61

 
4.01

 
3.93

 
 
 
 
 
 
 
 
Cash dividends declared per share
$
0.50

 
$
0.42

 
$
1.50

 
$
1.26



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,
 
2016
 
2015
 
2016
 
2015
Net income
$
197

 
$
190

 
$
448

 
$
471

Other comprehensive income/(loss), net of tax
 
 
 
 
 
 
 
Foreign currency translation adjustments
11

 
(39
)
 
19

 
(95
)
Unrealized (losses)/gains on cash flow hedges
(1
)
 
4

 

 
4

Defined benefit pension plans

 

 
(1
)
 

Other comprehensive income/(loss), net of tax
10

 
(35
)
 
18

 
(91
)
Comprehensive income
207

 
155

 
466

 
380

Net income attributable to noncontrolling interest
(1
)
 

 
(1
)
 

Comprehensive income attributable to Wyndham shareholders
$
206

 
$
155

 
$
465

 
$
380



See Notes to Consolidated Financial Statements.
3

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



 
September 30,
2016
 
December 31,
2015
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
332

 
$
171

Trade receivables, net
542

 
586

Vacation ownership contract receivables, net
264

 
272

Inventory
287

 
295

Prepaid expenses
153

 
153

Other current assets
265

 
266

Total current assets
1,843

 
1,743

Long-term vacation ownership contract receivables, net
2,496

 
2,438

Non-current inventory
1,027

 
964

Property and equipment, net
1,358

 
1,399

Goodwill
1,549

 
1,563

Trademarks, net
724

 
726

Franchise agreements and other intangibles, net
380

 
397

Other non-current assets
366

 
361

Total assets
$
9,743

 
$
9,591

Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Securitized vacation ownership debt
$
200

 
$
209

Current portion of long-term debt
33

 
44

Accounts payable
392

 
394

Deferred income
464

 
483

Accrued expenses and other current liabilities
842

 
827

Total current liabilities
1,931

 
1,957

Long-term securitized vacation ownership debt
1,898

 
1,897

Long-term debt
3,318

 
3,031

Deferred income taxes
1,198

 
1,154

Deferred income
208

 
198

Other non-current liabilities
393

 
401

Total liabilities
8,946

 
8,638

Commitments and contingencies (Note 12)

 

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 218,162,618 shares in 2016 and 217,534,615 shares in 2015
2

 
2

Treasury stock, at cost – 110,479,733 shares in 2016 and 103,730,568 shares in 2015
(4,968
)
 
(4,493
)
Additional paid-in capital
3,949

 
3,923

Retained earnings
1,866

 
1,592

Accumulated other comprehensive loss
(56
)
 
(74
)
Total stockholders’ equity
793

 
950

Noncontrolling interest
4

 
3

Total equity
797

 
953

Total liabilities and equity
$
9,743

 
$
9,591


See Notes to Consolidated Financial Statements.
4

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


 
Nine Months Ended
 
September 30,
 
2016
 
2015
Operating Activities
 
 
 
Net income
$
448

 
$
471

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
187

 
173

Provision for loan losses
256

 
184

Deferred income taxes
73

 
32

Stock-based compensation
52

 
44

Excess tax benefits from stock-based compensation
(8
)
 
(17
)
Asset impairment

 
7

Loss on early extinguishment of debt
11

 

Non-cash interest
17

 
17

Net change in assets and liabilities, excluding the impact of acquisitions:
 
 
 
Trade receivables
45

 
28

Vacation ownership contract receivables
(295
)
 
(213
)
Inventory
(21
)
 
(16
)
Prepaid expenses
(1
)
 
4

Other current assets
4

 
38

Accounts payable, accrued expenses and other current liabilities
46

 
75

Deferred income
(18
)
 
(12
)
Other, net
(10
)
 
2

Net cash provided by operating activities
786

 
817

Investing Activities
 
 
 
Property and equipment additions
(136
)
 
(157
)
Net assets acquired, net of cash acquired
(37
)
 
(97
)
Payments of development advance notes
(6
)
 
(7
)
Proceeds from development advance notes
2

 
7

Equity investments and loans
(11
)
 
(12
)
Proceeds from asset sales
15

 
24

Decrease in securitization restricted cash
4

 
3

Increase in escrow deposit restricted cash
(2
)
 
(8
)
Other, net
(1
)
 
3

Net cash used in investing activities
(172
)
 
(244
)
Financing Activities
 
 
 
Proceeds from securitized borrowings
1,497

 
1,204

Principal payments on securitized borrowings
(1,506
)
 
(1,259
)
Proceeds from long-term debt
75

 
82

Principal payments on long-term debt
(114
)
 
(128
)
Proceeds from/(repayments of) commercial paper, net
295

 
(102
)
Proceeds from term loan and notes issued
325

 
348

Repurchase of notes
(327
)
 

Proceeds from vacation ownership inventory arrangements
20

 
65

Repayments of vacation ownership inventory arrangements
(26
)
 
(5
)
Dividends to shareholders
(169
)
 
(153
)
Repurchase of common stock
(469
)
 
(485
)
Excess tax benefits from stock-based compensation
8

 
17

Debt issuance costs
(15
)
 
(16
)
Net share settlement of incentive equity awards
(34
)
 
(42
)
Other, net
(2
)
 
(3
)
Net cash used in financing activities
(442
)
 
(477
)
Effect of changes in exchange rates on cash and cash equivalents
(11
)
 
(20
)
Net increase in cash and cash equivalents
161

 
76

Cash and cash equivalents, beginning of period
171

 
183

Cash and cash equivalents, end of period
$
332

 
$
259


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 (Loss)/ Income
 
Non-controlling Interest
 
Total Equity
Balance as of December 31, 2015
114

 
$
2

 
$
(4,493
)
 
$
3,923

 
$
1,592

 
$
(74
)
 
$
3

 
$
953

Net income

 

 

 

 
447

 

 
1

 
448

Other comprehensive income

 

 

 

 

 
18

 

 
18

Issuance of shares for RSU vesting
1

 

 

 

 

 

 

 

Net share settlement of incentive equity awards

 

 

 
(34
)
 

 

 

 
(34
)
Change in deferred compensation

 

 

 
52

 

 

 

 
52

Change in deferred compensation for Board of Directors

 

 

 
1

 

 

 

 
1

Repurchase of common stock
(7
)
 

 
(475
)
 

 

 

 

 
(475
)
Change in excess tax benefit on equity awards

 

 

 
8

 

 

 

 
8

Dividends

 

 

 

 
(173
)
 

 

 
(173
)
Other

 

 

 
(1
)
 

 

 

 
(1
)
Balance as of September 30, 2016
108


$
2


$
(4,968
)

$
3,949


$
1,866


$
(56
)

$
4

 
$
797



 
Common Shares Outstanding
 
Common Stock
 
Treasury Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income/(Loss)
 
Non-controlling Interest
 
Total Equity
Balance as of December 31, 2014
121

 
$
2

 
$
(3,843
)
 
$
3,889

 
$
1,183

 
$
24

 
$
2

 
$
1,257

Net income

 

 

 

 
471

 

 

 
471

Other comprehensive loss

 

 

 

 

 
(91
)
 

 
(91
)
Issuance of shares for RSU vesting
1

 

 

 

 

 

 

 

Net share settlement of incentive equity awards

 

 

 
(42
)
 

 

 

 
(42
)
Change in deferred compensation

 

 

 
44

 

 

 

 
44

Repurchase of common stock
(6
)
 

 
(485
)
 

 

 

 

 
(485
)
Change in excess tax benefit on equity awards

 

 

 
17

 

 

 

 
17

Dividends

 

 

 

 
(153
)
 

 

 
(153
)
Other

 

 

 

 

 

 
1

 
1

Balance as of September 30, 2015
116

 
$
2

 
$
(4,328
)
 
$
3,908

 
$
1,501

 
$
(67
)
 
$
3

 
$
1,019



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 2015 Consolidated Financial Statements included in its Annual Report filed on Form 10-K with the Securities and Exchange Commission (“SEC”) on February 12, 2016.

Business Description
The Company operates in the following business segments:
Hotel Group—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.
Destination Network—provides vacation exchange services and products to owners of intervals of vacation ownership interests (“VOIs”) and manages 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
Revenue from Contracts with Customers. In May 2014, the Financial Accounting Standards Board (“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. The guidance was effective for fiscal years beginning after December 15, 2016 and for interim periods within those fiscal years. In re-deliberations, the FASB approved a one-year deferral of the effective date of this guidance, such that it will be effective on January 1, 2018. The Company is currently evaluating the impact of the adoption of this guidance on the Consolidated Financial Statements.
Simplifying the Measurement of Inventory. In July 2015, the FASB issued guidance related to simplifying the measurement of inventory. This guidance requires an entity to measure inventory at the lower of cost or net realizable value, which consists of the estimated selling prices in the ordinary course of business, less reasonably predictable cost of completion, disposal, and transportation. This guidance is effective prospectively for fiscal years beginning after December 15, 2016 and for interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this guidance on the Consolidated Financial Statements.
Leases. In February 2016, the FASB issued guidance which requires companies generally to recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. This guidance is effective for fiscal years beginning after December 15, 2018 and for interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this guidance on the Consolidated Financial Statements.

7


Compensation - Stock Compensation. In March 2016, the FASB issued guidance which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2016 and for interim periods within those fiscal years, with early adoption permitted. The adoption of this guidance is expected to impact the Company's provision for income taxes on its Consolidated Statements of Income and its operating and financing cash flows on its Consolidated Statements of Cash Flows. The magnitude of such impacts are dependent upon the Company's future grants of stock-based compensation, the Company's stock price in relation to the fair value of awards on grant date, and the exercise behavior of the Company's equity compensation holders.
Financial Instruments - Credit Losses. In June 2016, the FASB issued guidance which amends the guidance on measuring credit losses on financial assets held at amortized cost. The guidance requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of this guidance on the Consolidated Financial Statements.
Statement of Cash Flows. In August 2016, the FASB issued guidance intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. This guidance requires retrospective transition method and is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this guidance on the Consolidated Financial Statements.

Recently Adopted Accounting Pronouncements
Consolidation. In February 2015, the FASB issued guidance related to management’s evaluation of consolidation for certain legal entities. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. The Company adopted the guidance on January 1, 2016, as required. There was no material impact on the Consolidated Financial Statements resulting from the adoption.
Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. In April 2015, the FASB issued guidance on determining whether a cloud computing arrangement contains a software license that should be accounted for as internal-use software. If a cloud computing arrangement does not contain a software license, it should be accounted for as a service contract. This guidance is effective for fiscal years beginning after December 15, 2015 and for interim periods within those fiscal years, with early adoption permitted. The Company adopted the guidance on January 1, 2016, as required. There was no material impact on the Consolidated Financial Statements resulting from the adoption.
Simplifying the Presentation of Debt Issuance Costs. In April 2015, the FASB issued guidance on the presentation of debt issuance costs. The guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts. In August 2015, the FASB further clarified its issued guidance by stating that the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred issuance costs ratably over the term of the line-of-credit arrangements. This guidance required retrospective application and is effective for fiscal years beginning after December 15, 2015 and for interim periods within those fiscal years, with early adoption permitted. The Company adopted the guidance on January 1, 2016, as required. Refer to the table below for the retrospective effect on the December 31, 2015 Consolidated Balance Sheet.
Simplifying the Accounting for Measurement-Period Adjustments. In September 2015, the FASB issued guidance simplifying the accounting for measurement-period adjustments related to a business combination. The guidance requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. This guidance is effective for fiscal years beginning after December 15, 2015 and for interim periods within those fiscal years, with early adoption permitted. The Company adopted the guidance on January 1, 2016, as required. There was no material impact on the Consolidated Financial Statements resulting from the adoption.
Income Taxes. In November 2015, the FASB issued guidance on the balance sheet classification of deferred taxes. The guidance requires deferred tax assets and liabilities to be classified as non-current in the Consolidated Balance Sheet. The guidance is effective for fiscal years beginning after December 15, 2016 and for interim periods within those fiscal years, with early adoption permitted. This guidance may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company early adopted the guidance on a retrospective basis on June 30, 2016. Refer to the table below for the retrospective effect on the December 31, 2015 Consolidated Balance Sheet.

8


The table below summarizes the changes to the Company’s December 31, 2015 Consolidated Balance Sheet as a result of the adoption of the following Accounting Standards Updates:
 
 
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Previously Reported Balance
 
Simplifying the Presentation of Debt Issuance Costs
 
Balance Sheet Classification of Deferred Taxes
 
Adjusted Balance
Assets
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
Deferred income taxes
 
$
126

 
$

 
$
(126
)
 
$

Total current assets
 
1,869

 

 
(126
)
 
1,743

Other non-current assets
 
360

 
(27
)
 
28

 
361

Total assets
 
9,716

 
(27
)
 
(98
)
 
9,591

 
 
 
 
 
 
 
 
 
Liabilities and Equity
 
 
 
 
 
 
 

Long-term securitized vacation ownership debt
 
$
1,921

 
$
(24
)
 
$

 
$
1,897

Long-term debt
 
3,034

 
(3
)
 

 
3,031

Deferred income taxes
 
1,252

 

 
(98
)
 
1,154

Total liabilities
 
8,763

 
(27
)
 
(98
)
 
8,638

Total liabilities and equity
 
9,716

 
(27
)
 
(98
)
 
9,591


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,
 
2016
 
2015
 
2016
 
2015
Net income attributable to Wyndham shareholders
$
196

 
$
190

 
$
447

 
$
471

Basic weighted average shares outstanding
109

 
117

 
111

 
119

SSARs (a), RSUs (b) and PSUs (c)
1

 
1

 
1

 
1

Diluted weighted average shares outstanding
110

 
118

 
112

 
120

Earnings per share:
 
 
 
 
 
 
 
Basic
$
1.79

 
$
1.62

 
$
4.03

 
$
3.96

Diluted
1.78

 
1.61

 
4.01

 
3.93

Dividends:
 
 
 
 
 
 
 
Aggregate dividends paid to shareholders
$
54

 
$
49

 
$
169

 
$
153


(a) 
Excludes stock-settled appreciation rights (“SSARs”) that would have been anti-dilutive to EPS.
(b) 
Includes unvested dilutive restricted stock units (“RSUs”) which are subject to future forfeitures.
(c) 
Excludes 0.6 million performance vested restricted stock units (“PSUs”) for both the three and nine months ended September 30, 2016 and 2015, as the Company has not met the required performance metrics.


9


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, 2015
79.2

 
$
3,712

 
$
46.85

For the nine months ended September 30, 2016
6.8

 
475

 
70.35

As of September 30, 2016
86.0

 
$
4,187

 
48.70


The Company had $891 million of remaining availability under its program as of September 30, 2016. The total capacity of the program was increased by proceeds received from stock option exercises.

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 third quarter of 2016, the Company completed five acquisitions for a total of $37 million in cash, net of cash acquired. The Company’s Destination Network segment completed three acquisitions for $20 million in cash, net of cash acquired. The preliminary purchase price allocations resulted primarily in the recognition of (i) $14 million of property and equipment, (ii) $11 million of definite-lived intangible assets with a weighted average life of 8 years, (iii) $10 million of goodwill, the majority of which is not expected to be deductible for tax purposes and (iv) $15 million of liabilities. Additionally, the Company’s Vacation Ownership segment completed two acquisitions for $17 million. The preliminary purchase price allocations resulted primarily in the recognition of $15 million of property and equipment. These acquisitions were not material to the Company’s results of operations, financial position or cash flows.

4.
Intangible Assets

Intangible assets consisted of:
 
As of September 30, 2016
 
As of December 31, 2015
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Unamortized Intangible Assets:
 
 
 
 
 
 
 
 
 
 
 
    Goodwill
$
1,549

 
 
 
 
 
$
1,563

 
 
 
 
    Trademarks
$
721

 
 
 
 
 
$
723

 
 
 
 
Amortized Intangible Assets:
 
 
 
 
 
 
 
 
 
 
 
    Franchise agreements
$
594

 
$
397

 
$
197

 
$
594

 
$
386

 
$
208

    Management agreements
153

 
52

 
101

 
153

 
46

 
107

    Trademarks
9

 
6

 
3

 
8

 
5

 
3

    Other
143

 
61

 
82

 
148

 
66

 
82

 
$
899

 
$
516

 
$
383

 
$
903

 
$
503

 
$
400



10


The changes in the carrying amount of goodwill are as follows:
 
Balance as of December 31, 2015
 
Goodwill Acquired During 2016
 
Foreign
Exchange
 
Balance as of September 30, 2016
 
 
 
 
 
 
 
 
Hotel Group
$
329

 
$

 
$

 
$
329

Destination Network
1,207

 
10

 
(24
)
 
1,193

Vacation Ownership
27

 

 

 
27

Total Company
$
1,563

 
$
10

 
$
(24
)
 
$
1,549


Amortization expense relating to amortizable intangible assets was as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Franchise agreements
$
3

 
$
3

 
$
11

 
$
11

Management agreements
3

 
3

 
8

 
7

Other
3

 
4

 
9

 
10

Total (*)
$
9

 
$
10

 
$
28

 
$
28

 
(*)  
Included as a component of depreciation and amortization on the Consolidated Statements of Income.
Based on the Company's amortizable intangible assets as of September 30, 2016, the Company expects related amortization expense as follows:
 
Amount
Remainder of 2016
$
9

2017
37

2018
36

2019
35

2020
33

2021
32



11


5.
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,
2016
 
December 31,
2015
Current vacation ownership contract receivables:
 
 
 
Securitized
$
238

 
$
248

Non-securitized
84

 
81

Current vacation ownership receivables, gross
322

 
329

Less: Allowance for loan losses
58

 
57

Current vacation ownership contract receivables, net
$
264

 
$
272

Long-term vacation ownership contract receivables:
 
 
 
Securitized
$
2,214

 
$
2,214

Non-securitized
843

 
748

Long-term vacation ownership receivables, gross
3,057

 
2,962

Less: Allowance for loan losses
561

 
524

Long-term vacation ownership contract receivables, net
$
2,496

 
$
2,438


During the three and nine months ended September 30, 2016, the Company’s securitized vacation ownership contract receivables generated interest income of $83 million and $247 million, respectively. During the three and nine months ended September 30, 2015, such amounts were $83 million and $248 million, respectively. Such interest income is included within consumer financing 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, 2016 and 2015, the Company originated vacation ownership contract receivables of $908 million and $818 million, respectively, and received principal collections of $613 million and $605 million, respectively. The weighted average interest rate on outstanding vacation ownership contract receivables was 13.9% and 13.8% as of September 30, 2016 and December 31, 2015, respectively.

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, 2015
$
581

Provision for loan losses
256

Contract receivables write-offs, net
(218
)
Allowance for loan losses as of September 30, 2016
$
619

 
Amount
Allowance for loan losses as of December 31, 2014
$
581

Provision for loan losses
184

Contract receivables write-offs, net
(181
)
Allowance for loan losses as of September 30, 2015
$
584

In accordance with the guidance for accounting for real estate time-sharing transactions, the Company recorded a provision for loan losses of $104 million and $256 million as a reduction of net revenues during the three and nine months ended September 30, 2016, respectively, and $78 million and $184 million for the three and nine months ended September 30, 2015, respectively.


12


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, 2016
 
700+
 
600-699
 
<600
 
No Score
 
Asia Pacific
 
Total
Current
$
1,718

 
$
1,020

 
$
149

 
$
118

 
$
241

 
$
3,246

31 - 60 days
14

 
26

 
17

 
5

 
2

 
64

61 - 90 days
9

 
14

 
11

 
3

 
1

 
38

91 - 120 days
7

 
11

 
10

 
2

 
1

 
31

Total
$
1,748

 
$
1,071

 
$
187

 
$
128

 
$
245

 
$
3,379

 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2015
 
700+
 
600-699
 
<600
 
No Score
 
Asia Pacific
 
Total
Current
$
1,623

 
$
1,023

 
$
163

 
$
115

 
$
231

 
$
3,155

31 - 60 days
16

 
25

 
17

 
5

 
2

 
65

61 - 90 days
10

 
14

 
11

 
3

 
1

 
39

91 - 120 days
7

 
11

 
11

 
2

 
1

 
32

Total
$
1,656

 
$
1,073

 
$
202

 
$
125

 
$
235

 
$
3,291

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.

13


6.
Inventory
Inventory consisted of:
 
September 30,
2016
 
December 31,
2015
Land held for VOI development
$
146

 
$
136

VOI construction in process
64

 
62

Inventory sold subject to conditional repurchase
128

 
155

Completed VOI inventory
657

 
604

Estimated recoveries
258

 
242

Destination network vacation credits and other
61

 
60

Total inventory
1,314

 
1,259

Less: Current portion (*)
287

 
295

Non-current inventory
$
1,027

 
$
964

 
(*) 
Represents inventory that the Company expects to sell within the next 12 months.

During the nine months ended September 30, 2016 and 2015, the Company transferred $48 million and $67 million, respectively, from property and equipment to VOI inventory. In addition to the inventory obligations listed below, as of September 30, 2016, the Company had $10 million of inventory accruals included in accounts payable on the Consolidated Balance Sheet. As of December 31, 2015, the Company had $27 million of inventory accruals of which $20 million was included in accrued expenses and other current liabilities and $7 million was included in accounts payable on the Consolidated Balance Sheet.

Inventory Sale Transactions
During 2015, the Company sold real property located in St. Thomas, U.S. Virgin Islands (“St. Thomas”) to a third-party developer, consisting of $80 million of vacation ownership inventory, in exchange for $80 million of cash consideration, of which $70 million was received in 2015 and $10 million was received in 2016. During the second quarter of 2016, the Company received $10 million of additional cash consideration from the third-party developer for the vacation ownership inventory property under development in St. Thomas. During 2013, the Company sold real property located in Las Vegas, Nevada and Avon, Colorado to a third-party developer, consisting of vacation ownership inventory and property and equipment.

The Company recognized no gain or loss on these sales transactions. In accordance with the agreements with the third-party developers, the Company has conditional rights and conditional obligations to repurchase the completed properties from the developers subject to the properties conforming to the Company's vacation ownership resort standards and provided that the third-party developers have not sold the properties to another party. Under the sale of real estate accounting guidance, the conditional rights and obligations of the Company constitute continuing involvement and thus the Company was unable to account for these transactions as a sale.

During 2014, the Company acquired the property located in Avon, Colorado from the third-party developer. In connection with this acquisition, the Company had an outstanding obligation of $32 million as of both September 30, 2016 and December 31, 2015, of which $11 million was included within accrued expenses and other current liabilities and $21 million was included within other non-current liabilities on the Consolidated Balance Sheets.

In connection with the Las Vegas, Nevada and St. Thomas properties, the Company had outstanding obligations of $131 million as of September 30, 2016, of which $39 million were included within accrued expenses and other current liabilities and $92 million were included within other non-current liabilities on the Consolidated Balance Sheet. During the nine months ended September 30, 2016, the Company paid $49 million to the third-party developer, of which $18 million was for vacation ownership inventory located in Las Vegas, Nevada and St. Thomas, $26 million was for its obligation under the vacation ownership inventory arrangements and $5 million was accrued interest. As of December 31, 2015, the Company had an outstanding obligation related to the Las Vegas, Nevada and St. Thomas properties of $157 million, of which $33 million was included within accrued expenses and other current liabilities and $124 million was included within other non-current liabilities on the Consolidated Balance Sheet.


14


The Company has guaranteed to repurchase the completed properties located in Las Vegas, Nevada and St. Thomas from the third-party developers subject to the properties meeting the Company’s vacation ownership resort standards and provided that the third-party developers have not sold the properties to another party. The maximum potential future payments that the Company could be required to make under these commitments was $273 million as of September 30, 2016.

7.
Long-Term Debt and Borrowing Arrangements
The Company’s indebtedness consisted of:
 
September 30,
2016
 
December 31,
2015
Securitized vacation ownership debt: (a)
 
 
 
Term notes (b)
$
1,818

 
$
1,867

Bank conduit facility (due August 2018)
280

 
239

Total securitized vacation ownership debt
2,098

 
2,106

Less: Current portion of securitized vacation ownership debt
200

 
209

Long-term securitized vacation ownership debt
$
1,898

 
$
1,897

Long-term debt: (c)
 
 
 
Revolving credit facility (due July 2020)
$
12

 
$
7

Commercial paper
404

 
109

Term loan (due March 2021)
323

 

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

 
316

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

 
299

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

 
14

$450 million 2.50% senior unsecured notes (due March 2018)
449

 
448

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

 
40

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

 
247

$650 million 4.25% senior unsecured notes (due March 2022) (e)
648

 
648

$400 million 3.90% senior unsecured notes (due March 2023) (f)
407

 
408

$350 million 5.10% senior unsecured notes (due October 2025) (g)
338

 
337

Capital leases
151

 
153

Other
18

 
49

Total long-term debt
3,351

 
3,075

Less: Current portion of long-term debt
33

 
44

Long-term debt
$
3,318

 
$
3,031

 
(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 (which legally are not liabilities of the Company) are collateralized by $2,560 million and $2,576 million of underlying gross vacation ownership contract receivables and related assets (which legally are not assets of the Company) as of September 30, 2016 and December 31, 2015, respectively.
(b) 
The carrying amounts of the term notes are net of debt issuance costs aggregating $24 million as of both September 30, 2016 and December 31, 2015.
(c) 
The carrying amounts of the senior unsecured notes and term loan are net of unamortized discounts of $12 million and $14 million as of September 30, 2016 and December 31, 2015, respectively. The carrying amounts of the senior unsecured notes and term loan are net of debt issuance costs of $4 million and $3 million as of September 30, 2016 and December 31, 2015, respectively.
(d) 
Includes $1 million of unamortized gains from the settlement of a derivative as of December 31, 2015.
(e) 
Includes $2 million of unamortized gains from the settlement of a derivative as of both September 30, 2016 and December 31, 2015.
(f) 
Includes $10 million and $11 million of unamortized gains from the settlement of a derivative as of September 30, 2016 and December 31, 2015, respectively.
(g) 
Includes $9 million and $10 million of unamortized losses from the settlement of a derivative as of September 30, 2016 and December 31, 2015, respectively.

15


Long-Term Debt
The Company’s $300 million 2.95% senior unsecured notes due in March 2017 are classified as long-term as it has the intent to refinance such debt on a long-term basis and the ability to do so with its available capacity under the Company’s revolving credit facility.

Debt Issuances
Sierra Timeshare 2016-1 Receivables Funding, LLC. During March 2016, the Company closed a series of term notes payable, Sierra Timeshare 2016-1 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 3.20%. The advance rate for this transaction was 88.85%. As of September 30, 2016, the Company had outstanding borrowings under these term notes of $306 million, net of debt issuance costs.

Sierra Timeshare 2016-2 Receivables Funding, LLC. During July 2016, the Company closed a series of term notes payable, Sierra Timeshare 2016-2 Receivables Funding, LLC, with an initial principal amount of $375 million, which are secured by vacation ownership contract receivables and bear interest at a weighted average coupon rate of 2.42%. The advance rate for this transaction was 90%. As of September 30, 2016, the Company had outstanding borrowings under these term notes of $334 million, net of debt issuance costs.

Sierra Timeshare Conduit Receivables Funding II, LLC. During August 2016, the Company renewed its securitized
timeshare receivables conduit facility for a two-year period through August 2018. 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.

Term Loan. During March 2016, the Company entered into a five-year $325 million term loan agreement which matures on March 24, 2021. The term loan currently bears interest at LIBOR plus a spread. As of September 30, 2016, the term loan had a weighted average interest rate of 2.01%. The term loan can be paid at the Company’s option in whole or in part at any time prior to maturity. The interest on the term loan will be subject to adjustments from time to time if there are downgrades to the Company’s credit ratings. The term loan requires principal payments, payable in equal quarterly installments, of 5% per annum of the original loan balance, commencing with the third anniversary of the loan, and 10% per annum of the original loan balance commencing with the fourth anniversary of the loan, with the remaining balance payable at maturity.

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, 2016, the Company had outstanding borrowings of $404 million at a weighted average interest rate of 1.14%, all of which were under its U.S. commercial paper program. As of December 31, 2015, the Company had outstanding borrowings of $109 million at a weighted average interest rate of 1.07%, all of which were under its U.S. commercial paper program. 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
During 2013, the Company entered into fixed to variable interest rate swap agreements (the “Swaps”) 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. During May 2015, the Company terminated the Swaps and received $17 million of cash which was included within other, net in operating activities on the Consolidated Statement of Cash Flows. The Company had $12 million and $13 million of deferred gains as of September 30, 2016 and December 31, 2015, respectively. Such gains were included within long-term debt on the Consolidated Balance Sheets. Such gains will be recognized within interest expense on the Consolidated Statements of Income over the remaining life of the senior unsecured notes.

Deferred Financing Costs
The Company adopted the guidance on the presentation of debt issuance costs on January 1, 2016, as required. As a result, the Company retrospectively applied the guidance to its December 31, 2015 Consolidated Balance Sheet. In addition, the Company has elected to continue to classify debt issuance costs related to the revolving credit facility and the bank conduit facility within other non-current assets on the Consolidated Balance Sheet. See Note 1 - Basis of Presentation for additional information regarding the adoption of the new guidance.


16


Maturities and Capacity
The Company’s outstanding debt as of September 30, 2016 matures as follows:
 
Securitized Vacation Ownership Debt
 
Long-Term Debt
 
Total
Within 1 year
$
200

 
$
333

(*) 
$
533

Between 1 and 2 years
193

 
478

 
671

Between 2 and 3 years
430

 
26

 
456

Between 3 and 4 years
202

 
497

 
699

Between 4 and 5 years
215

 
542

 
757

Thereafter
858

 
1,475

 
2,333

 
$
2,098

 
$
3,351

 
$
5,449

 
(*) 
Includes $300 million of senior unsecured notes that the Company classified as long-term debt as it has the intent to refinance such debt on a long-term basis and the ability to do so with its available capacity under the Company’s revolving credit facility.

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.

As of September 30, 2016, 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
280

 
12

 
          Letters of credit

 
1

 
          Commercial paper borrowings

 
404

(b) 
Available Capacity
$
370

 
$
1,083

 
 
(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.

Early Extinguishment of Debt
During the first quarter of 2016, the Company redeemed the remaining portion of its 6.00% senior unsecured notes for a total of $327 million. As a result, the Company incurred an $11 million loss during the nine months ended September 30, 2016, which is included within early extinguishment of debt on the Consolidated Statement of Income.

Interest Expense
During the three and nine months ended September 30, 2016, the Company incurred non-securitized interest expense of $34 million and $102 million, respectively, which primarily consisted of $35 million and $106 million of interest on long-term debt, partially offset by $1 million and $4 million of capitalized interest. 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 $118 million during the nine months ended September 30, 2016.

During the three and nine months ended September 30, 2015, the Company incurred non-securitized interest expense of $33 million and $89 million, respectively, which primarily consisted of $35 million and $94 million of interest on long-term debt, partially offset by $2 million and $5 million of capitalized interest. 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 $102 million during the nine months ended September 30, 2015.


17


Interest expense incurred in connection with the Company’s securitized vacation ownership debt during the three and nine months ended September 30, 2016 was $19 million and $55 million, respectively, and $18 million and $55 million during the three and nine months ended September 30, 2015, respectively, and is recorded within consumer financing interest on the Consolidated Statements of Income. Cash paid related to such interest was $38 million and $42 million during the nine months ended September 30, 2016 and 2015, respectively.

8.
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 non-recourse debt that is securitized through the SPEs is legally not a liability of the Company and thus, the creditors have no recourse to the Company for principal and interest.

The assets and liabilities of these vacation ownership SPEs are as follows:
 
September 30,
2016
 
December 31,
2015
Securitized contract receivables, gross (a)
$
2,452

 
$
2,462

Securitized restricted cash (b)
88

 
92

Interest receivables on securitized contract receivables (c)
20

 
20

Other assets (d)
4

 
5

Total SPE assets
2,564

 
2,579

Securitized term notes (e) (f)
1,818

 
1,867

Securitized conduit facilities (e)
280

 
239

Other liabilities (g)
2

 
2

Total SPE liabilities
2,100

 
2,108

SPE assets in excess of SPE liabilities
$
464

 
$
471

 
(a) 
Included in current ($238 million and $248 million as of September 30, 2016 and December 31, 2015, respectively) and non-current ($2,214 million as of both September 30, 2016 and December 31, 2015) vacation ownership contract receivables on the Consolidated Balance Sheets.
(b) 
Included in other current assets ($73 million as of both September 30, 2016 and December 31, 2015) and other non-current assets ($15 million and $19 million as of September 30, 2016 and December 31, 2015, respectively) on the Consolidated Balance Sheets.
(c) 
Included in trade receivables, net on the Consolidated Balance Sheets.
(d) 
Primarily includes deferred financing costs for the bank conduit facility and a security investment asset, which is included in other non-current assets on the Consolidated Balance Sheets.
(e) 
Included in current ($200 million and $209 million as of September 30, 2016 and December 31, 2015, respectively) and long-term ($1,898 million and $1,897 million as of September 30, 2016 and December 31, 2015, respectively) securitized vacation ownership debt on the Consolidated Balance Sheets.
(f) 
Includes deferred financing costs of $24 million as of both September 30, 2016 and December 31, 2015, related to securitized debt.

18


(g) 
Primarily includes accrued interest on securitized debt, 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 $927 million and $829 million as of September 30, 2016 and December 31, 2015, 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,
2016
 
December 31,
2015
SPE assets in excess of SPE liabilities
$
464

 
$
471

Non-securitized contract receivables
927

 
829

Less: Allowance for loan losses
619

 
581

Total, net
$
772

 
$
719


In addition to restricted cash related to securitizations, the Company had $61 million and $59 million of restricted cash related to escrow deposits as of September 30, 2016 and December 31, 2015, respectively, which are recorded within other current assets on the Consolidated Balance Sheets.

Midtown 45, NYC Property
During 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 four-year mortgage note and 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 which 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.

The assets and liabilities of the SPE are as follows:
 
September 30,
2016
 
December 31,
2015
Receivable for leased property and equipment (a)
$
16

 
$
47

Total SPE assets
16

 
47

Accrued expenses and other current liabilities

 
1

Long-term debt (b)
17

 
46

Total SPE liabilities
17

 
47

SPE deficit
$
(1
)
 
$

 
(a)  
Represents a receivable for assets leased to the Company which are reported within property and equipment, net on the Company’s Consolidated Balance Sheets.
(b) 
As of September 30, 2016, included $15 million relating to a mortgage note due in 2017 and $2 million of mandatorily redeemable equity both of which are included in current portion of long-term debt on the Consolidated Balance Sheet. As of December 31, 2015, included $42 million relating to a mortgage note due in 2017 and $4 million of mandatorily redeemable equity; $29 million was included in current portion of long-term debt on the Consolidated Balance Sheet.

During the nine months ended September 30, 2016 and 2015, the SPE conveyed $28 million and $23 million, respectively, of property and equipment to the Company. In addition, the Company subsequently transferred $36 million and $55 million of property and equipment to VOI inventory during the nine months ended September 30, 2016 and 2015, respectively.


19


9.
Fair Value
The Company measures its financial assets and liabilities at fair value on a recurring basis and utilizes the fair value hierarchy 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.

As of September 30, 2016, the Company had foreign exchange contracts resulting in $2 million of assets which are included within other current assets and $2 million of liabilities which are included within accrued expenses and other current liabilities on the Consolidated Balance Sheet. As of December 31, 2015, the Company had foreign exchange contracts resulting in $2 million of assets which are included within other current assets and $3 million of liabilities which are included within accrued expenses and other current liabilities on the Consolidated Balance Sheet. On a recurring basis, such assets and liabilities are remeasured at estimated fair value (all of which are Level 2) and thus are equal to the carrying 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, 2016
 
December 31, 2015
 
Carrying
Amount
 
Estimated Fair Value
 
Carrying
 Amount
 
Estimated Fair Value
Assets
 
 
 
 
 
 
 
Vacation ownership contract receivables, net
$
2,760

 
$
3,372

 
$
2,710

 
$
3,272

Debt
 
 
 
 
 
 
 
Total debt
5,449

 
5,595

 
5,181

 
5,234


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.


20


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 determines 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).

10.
Derivative Instruments and Hedging Activities
Foreign Currency Risk

The Company has foreign currency rate exposure to exchange rate fluctuations worldwide with particular exposure to the British pound, Euro, Canadian dollar and Australian dollar. The Company uses freestanding foreign currency forward contracts to manage a portion of its exposure to changes in foreign currency exchange rates associated with its foreign currency denominated receivables, payables and forecasted earnings of foreign subsidiaries. Additionally, the Company uses foreign currency forward contracts designated as cash flow hedges to manage a portion of its exposure to changes in 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 less than $1 million of losses during the three months ended September 30, 2016 and $5 million of losses during the three months ended September 30, 2015. The freestanding foreign currency contracts resulted in losses of $11 million and $10 million during the nine months ended September 30, 2016 and 2015, 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.

Gains or losses recognized in AOCI for both the three and nine months ended September 30, 2016 and 2015 were not material.


21


11.
Income Taxes
The Company files income tax returns in U.S. federal and state jurisdictions, as well as in foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examinations for years prior to 2013. In addition, with few exceptions, the Company is no longer subject to state and local or foreign income tax examinations for years prior to 2008.

The Company’s effective tax rate increased from 34.9% during the three months ended September 30, 2015 to 35.8% during the three months ended September 30, 2016 primarily due to a lower tax benefit from the release of reserves resulting from the expiration of statutes of limitation during the third quarter of 2016.

The Company’s effective tax rate increased from 36.0% during the nine months ended September 30, 2015 to 37.3% during the nine months ended September 30, 2016 primarily due to the lack of a tax benefit on the Venezuelan foreign exchange devaluation loss of $24 million incurred during the first quarter of 2016.

The Company made cash income tax payments, net of refunds, of $124 million and $181 million during the nine months ended September 30, 2016 and 2015, respectively.

Deferred Taxes

The Company adopted the guidance on the balance sheet classification of deferred taxes on June 30, 2016. As a result, the Company retrospectively applied the guidance to its December 31, 2015 Consolidated Balance Sheet. See Note 1 - Basis of Presentation for additional information regarding the adoption of the new guidance.

12.
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 hotel group 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 destination network 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 or acts or occurrences related to 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 or acts or occurrences related to 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.

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.


22


The Company believes that it has adequately accrued for such matters with reserves of $30 million and $29 million as of September 30, 2016 and December 31, 2015, 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, 2016, the potential exposure resulting from adverse outcomes of such legal proceedings could, in the aggregate, range up to $45 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.

Other Guarantees/Indemnifications
Hotel Group
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 the Company’s existing guarantees range from 8 to 10 years and provide for early termination provisions under certain circumstances. As of September 30, 2016, the maximum potential amount of future payments that may be made under these guarantees was $128 million with a combined annual cap of $45 million. These guarantees have a remaining weighted average life of approximately 7 years. As of September 30, 2016, the Company also had a conditional guarantee with a hotel that will become effective if all the necessary conditions are satisfied by the hotel owner. At the effective date, the maximum potential amount of future payments that may be made under this conditional guarantee is $45 million.

In connection with such performance guarantees, as of September 30, 2016, the Company maintained a liability of $23 million, of which $18 million was included in other non-current liabilities and $5 million was included in accrued expenses and other current liabilities on its Consolidated Balance Sheet. As of September 30, 2016, the Company also had a corresponding $33 million asset related to these guarantees, of which $29 million was included in other non-current assets and $4 million was included in other current assets on its Consolidated Balance Sheet. As of December 31, 2015, the Company maintained a liability of $25 million, of which $24 million was included in other non-current liabilities and $1 million was included in accrued expenses and other current liabilities on its Consolidated Balance Sheet. As of December 31, 2015, the Company also had a corresponding $35 million asset related to the guarantees, of which $31 million was included in other non-current assets and $4 million was included in other current assets on its Consolidated Balance Sheet. Such assets are being amortized on a straight-line basis over the life of the agreements. For the three and nine months ended September 30, 2016 and 2015, the amortization expense for the performance guarantees noted above was $1 million and $3 million, respectively.

For guarantees subject to recapture provisions, the Company had a receivable of $35 million as of September 30, 2016, of which $1 million was included in other current assets and $34 million was included in other non-current assets on its Consolidated Balance Sheet. As of December 31, 2015, the Company had a receivable of $32 million, of which $1 million was included in other current assets and $31 million was included in other non-current assets on its Consolidated Balance Sheet. Such receivable was the result of payments made to date that are subject to recapture and which the Company believes will be recoverable from future operating performance.

Vacation Ownership
The Company has guaranteed to repurchase completed properties located in Las Vegas, Nevada and St. Thomas from third-party developers subject to such properties meeting the Company’s vacation ownership resort standards and provided that the third-party developers have not sold such properties to another party (see Note 6 - Inventory).

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 Note 17 - Separation Adjustments and Transactions with Former Parent and Subsidiaries regarding contingent litigation liabilities resulting from the Separation.


23


13.
Accumulated Other Comprehensive (Loss)/Income
The components of AOCI are as follows:
 
Foreign
 
Unrealized
 
Defined
 
 
 
Currency
 
(Losses)/Gains
 
Benefit
 
 
 
Translation
 
on Cash Flow
 
Pension
 
 
Pretax
Adjustments
 
Hedges
 
Plans
 
AOCI
 Balance, December 31, 2015
$
(139
)
 
$

 
$
(9
)
 
$
(148
)
 Period change
(14
)
 

 
(1
)
 
(15
)
 Balance, September 30, 2016
$
(153
)
 
$

 
$
(10
)
 
$
(163
)
Tax