Attached files

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EX-15 - LETTER RE: UNAUDITED INTERIM FINANCIAL INFORMATION - Wyndham Destinations, Inc.wyn-ex15_2017331xq1.htm
EX-32 - CERTIFICATION OF CHAIRMAN AND CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICE - Wyndham Destinations, Inc.wyn-ex32_2017331xq1.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - Wyndham Destinations, Inc.wyn-ex312_2017331xq1.htm
EX-31.1 - CERTIFICATION OF CHAIRMAN AND CHIEF EXECUTIVE OFFICER - Wyndham Destinations, Inc.wyn-ex311_2017331xq1.htm
EX-12 - COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES - Wyndham Destinations, Inc.wyn-ex12_2017331xq1.htm
EX-10.1 - AMENDMENT NO. 5 TO EMPLOYMENT AGREEMENT GEOFFREY A. BALLOTTI - Wyndham Destinations, Inc.wyn-ex101_2017331xq1.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 March 31, 2017
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
(Do not check if a smaller reporting company)
 
Smaller reporting company
o
 
 
 
 
 
 
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
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:
104,353,845 shares of common stock outstanding as of March 31, 2017.




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. Condensed 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 condensed consolidated balance sheet of Wyndham Worldwide Corporation and subsidiaries (the "Company") as of March 31, 2017, and the related condensed consolidated statements of income, comprehensive income, cash flows and equity for the three-month periods ended March 31, 2017 and 2016. 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 condensed 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, 2016, and the related consolidated statements of income, comprehensive income, cash flows and equity for the year then ended (not presented herein); and in our report dated February 17, 2017, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2016 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
April 26, 2017




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


 
Three Months Ended
 
March 31,
 
2017
 
2016
Net revenues
 
 
 
Service and membership fees
$
636

 
$
634

Vacation ownership interest sales
351

 
342

Franchise fees
141

 
138

Consumer financing
111

 
107

Other
80

 
82

Net revenues
1,319

 
1,303


Expenses
 
 
 
Operating
601

 
613

Cost of vacation ownership interests
36

 
37

Consumer financing interest
18

 
18

Marketing and reservation
195

 
192

General and administrative
193

 
186

Asset impairments
5

 

Restructuring
7

 

Depreciation and amortization
63

 
62

Total expenses
1,118

 
1,108


Operating income
201

 
195

Other (income)/expense, net
(2
)
 
(10
)
Interest expense
33

 
33

Early extinguishment of debt

 
11

Interest income
(2
)
 
(2
)
Income before income taxes
172

 
163

Provision for income taxes
31

 
67

Net income
$
141

 
$
96


Earnings per share
 
 
 
Basic
$
1.34

 
$
0.85

Diluted
1.33

 
0.84

 
 
 
 
Cash dividends declared per share
$
0.58

 
$
0.50



See Notes to Condensed Consolidated Financial Statements.
2

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


 
Three Months Ended
 
March 31,
 
2017
 
2016
Net income
$
141

 
$
96

Other comprehensive income/(loss), net of tax
 
 
 
Foreign currency translation adjustments
29

 
36

Unrealized gains on cash flow hedges

 
1

Defined benefit pension plans

 
(1
)
Other comprehensive income/(loss), net of tax
29

 
36

Comprehensive income
$
170

 
$
132



See Notes to Condensed Consolidated Financial Statements.
3

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



 
March 31,
2017
 
December 31,
2016
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
222

 
$
185

Trade receivables, net
842

 
610

Vacation ownership contract receivables, net
260

 
262

Inventory
324

 
315

Prepaid expenses
188

 
144

Other current assets
466

 
296

Total current assets
2,302

 
1,812

Long-term vacation ownership contract receivables, net
2,498

 
2,515

Non-current inventory
1,038

 
1,035

Property and equipment, net
1,360

 
1,340

Goodwill
1,615

 
1,603

Trademarks, net
737

 
734

Franchise agreements and other intangibles, net
386

 
393

Other non-current assets
407

 
387

Total assets
$
10,343

 
$
9,819

Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Securitized vacation ownership debt
$
191

 
$
195

Current portion of long-term debt
40

 
34

Accounts payable
740

 
468

Deferred income
628

 
500

Accrued expenses and other current liabilities
750

 
835

Total current liabilities
2,349

 
2,032

Long-term securitized vacation ownership debt
1,947

 
1,946

Long-term debt
3,535

 
3,337

Deferred income taxes
1,298

 
1,214

Deferred income
199

 
197

Other non-current liabilities
349

 
375

Total liabilities
9,677

 
9,101

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, 218,711,513 issued as of 2017 and 218,198,050 shares in 2016
2

 
2

Treasury stock, at cost – 114,470,868 shares in 2017 and 112,617,112 shares in 2016
(5,268
)
 
(5,118
)
Additional paid-in capital
3,952

 
3,966

Retained earnings
2,060

 
1,977

Accumulated other comprehensive loss
(84
)
 
(113
)
Total stockholders’ equity
662

 
714

Noncontrolling interest
4

 
4

Total equity
666

 
718

Total liabilities and equity
$
10,343

 
$
9,819


See Notes to Condensed Consolidated Financial Statements.
4

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


 
Three Months Ended
 
March 31,
 
2017
 
2016
Operating Activities
 
 
 
Net income
$
141

 
$
96

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
63

 
62

Provision for loan losses
85

 
63

Deferred income taxes
80

 
41

Stock-based compensation
15

 
14

Excess tax benefits from stock-based compensation

 
(6
)
Asset impairments
5

 

Loss on early extinguishment of debt

 
11

Non-cash interest
6

 
5

Net change in assets and liabilities, excluding the impact of acquisitions:
 
 
 
Trade receivables
(229
)
 
(219
)
Vacation ownership contract receivables
(55
)
 
(43
)
Inventory
(32
)
 
(1
)
Prepaid expenses
(43
)
 
(24
)
Other current assets
(122
)
 
(27
)
Accounts payable, accrued expenses and other current liabilities
196

 
178

Deferred income
122

 
105

Other, net
6

 
6

Net cash provided by operating activities
238

 
261

Investing Activities
 
 
 
Property and equipment additions
(35
)
 
(43
)
Net assets acquired, net of cash acquired
(10
)
 

Payments of development advance notes
(3
)
 
(2
)
Proceeds from development advance notes
2

 

Equity investments and loans
(2
)
 
(6
)
Proceeds from asset sales
5

 

Increase in securitization restricted cash
(23
)
 
(22
)
Increase in escrow deposit restricted cash
(26
)
 
(17
)
Other, net
13

 

Net cash used in investing activities
(79
)
 
(90
)
Financing Activities
 
 
 
Proceeds from securitized borrowings
593

 
643

Principal payments on securitized borrowings
(596
)
 
(620
)
Proceeds from long-term debt
544

 
25

Principal payments on long-term debt
(579
)
 
(42
)
(Repayments of)/proceeds from commercial paper, net
(206
)
 
234

Proceeds from notes issued and term loan
694

 
325

Repayment/repurchase of notes
(300
)
 
(327
)
Proceeds from vacation ownership inventory arrangements

 
1

Repayments of vacation ownership inventory arrangements
(22
)
 
(5
)
Dividends to shareholders
(64
)
 
(60
)
Repurchase of common stock
(147
)
 
(168
)
Excess tax benefits from stock-based compensation

 
6

Debt issuance costs
(6
)
 
(7
)
Net share settlement of incentive equity awards
(30
)
 
(30
)
Other, net
(5
)
 
(2
)
Net cash used in financing activities
(124
)
 
(27
)
Effect of changes in exchange rates on cash and cash equivalents
2

 
3

Net increase in cash and cash equivalents
37

 
147

Cash and cash equivalents, beginning of period
185

 
171

Cash and cash equivalents, end of period
$
222

 
$
318


See Notes to Condensed Consolidated Financial Statements.
5

WYNDHAM WORLDWIDE CORPORATION
CONDENSED 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, 2016
106

 
$
2

 
$
(5,118
)
 
$
3,966

 
$
1,977

 
$
(113
)
 
$
4

 
$
718

Net income

 

 

 

 
141

 

 

 
141

Other comprehensive income

 

 

 

 

 
29

 

 
29

Net share settlement of incentive equity awards

 

 

 
(30
)
 

 

 

 
(30
)
Change in deferred compensation

 

 

 
15

 

 

 

 
15

Change in deferred compensation for Board of Directors

 

 

 
1

 

 

 

 
1

Repurchase of common stock
(2
)
 

 
(150
)
 

 

 

 

 
(150
)
Dividends

 

 

 

 
(58
)
 

 

 
(58
)
Balance as of March 31, 2017
104


$
2


$
(5,268
)

$
3,952


$
2,060


$
(84
)

$
4

 
$
666



 
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

 

 

 

 
96

 

 

 
96

Other comprehensive income

 

 

 

 

 
36

 

 
36

Issuance of shares for RSU vesting
1

 

 

 

 

 

 

 

Net share settlement of incentive equity awards

 

 

 
(30
)
 

 

 

 
(30
)
Change in deferred compensation

 

 

 
14

 

 

 

 
14

Repurchase of common stock
(3
)
 

 
(175
)
 

 

 

 

 
(175
)
Change in excess tax benefit on equity awards

 

 

 
6

 

 

 

 
6

Dividends

 

 

 

 
(60
)
 

 

 
(60
)
Balance as of March 31, 2016
112

 
$
2

 
$
(4,668
)
 
$
3,913

 
$
1,628

 
$
(38
)
 
$
3

 
$
840



See Notes to Condensed Consolidated Financial Statements.
6


WYNDHAM WORLDWIDE CORPORATION
NOTES TO CONDENSED 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 Condensed 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 Condensed 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 Condensed Consolidated Financial Statements.

In presenting the Condensed 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 Condensed 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 Condensed Consolidated Financial Statements should be read in conjunction with the Company’s 2016 Consolidated Financial Statements included in its Annual Report filed on Form 10-K with the Securities and Exchange Commission on February 17, 2017.

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 also requires disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Entities have the option to apply the new guidance under a retrospective approach to each prior reporting period presented or a modified retrospective approach with the cumulative effect of initially applying the new guidance recognized at the date of initial application within the statement of financial position. The Company currently expects to adopt the new guidance utilizing the full retrospective transition method on its effective date of January 1, 2018.
The initial analysis identifying areas that will be impacted by the new guidance is substantially complete, and the Company is currently analyzing the potential impacts to its financial statements and related disclosures. The Company believes the most significant impacts relating to its Hotel Group segment are the accounting for initial fees, upfront costs and marketing and reservations expenses. The Company expects royalty and marketing and reservation fees to remain substantially unchanged. Specifically, under the new guidance, the Company expects initial fees to be recognized ratably over the life of the noncancelable period of the franchise agreement and incremental upfront contract costs to be deferred and expensed over the life of the noncancelable period of the franchise agreement. Marketing and reservations revenues earned in excess of costs incurred will no longer be accrued as a liability for future marketing and reservation costs; marketing or reservation costs incurred in excess of revenues earned will continue to be expensed as incurred.
The Company believes the most significant impacts relating to its Destination Network segment are the accounting for vacation rental revenues and other vacation exchange related product fees. Specifically, under the new guidance, the Company expects (i) approximately thirty percent of its vacation rental revenue will no longer be recognized in the period that the rental reservation is booked and, instead, will be recognized over the term of the guest stay and (ii) other vacation exchange related products fees to be deferred and recognized upon the occurrence of a future vacation exchange or other

7


transaction. The Company expects vacation exchange transaction fees to remain substantially unchanged. The Company is continuing to evaluate the potential impacts of this new guidance on its vacation exchange membership fees.
The Company expects the recognition of its Vacation Ownership segment revenues to remain substantially unchanged. However, the Company is continuing its assessment specifically on the accounting for collectability of VOI sales revenue based on pending industry clarification which may identify other impacts. The Company expects revenue from certain travel packages utilized to market its VOI products to be presented on a gross basis within other revenues.
The Company is continuing to evaluate the potential impacts of this new guidance on its Wyndham Rewards loyalty program as well as its co-branded credit card programs at the Company’s Hotel Group and Destination Network segments.
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 its financial statements and related disclosures.
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 its financial statements and related disclosures.
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 the 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 believes the impact of this new guidance will result in development advance notes and escrow deposits being recorded within operating activities and securitization restricted cash being recorded within financing activities on its Condensed Consolidated Statements of Cash Flows. The following table summarizes the effect of the new guidance:
 
Three Months Ended March 31,
Increase/(decrease):
2017
 
2016
Operating Activities
$
(27
)
 
$
(19
)
Investing Activities
50

 
41

Financing Activities
(23
)
 
(22
)
Intra-Entity Transfers of Assets Other Than Inventory. In October 2016, the FASB issued guidance which requires companies to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This guidance requires the modified retrospective approach 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 its financial statements and related disclosures.
Restricted Cash. In November 2016, the FASB issued guidance which requires amounts generally described as restricted cash and cash equivalents be included with cash and cash equivalents when reconciling the total beginning and ending amounts for the periods shown on the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. The Company will adopt this new guidance on January 1, 2018, using a retrospective transition method. As such, restricted cash of $207 million and $149 million, as of March 31, 2017 and December 31, 2016, respectively, will be included within the beginning and ending cash and cash equivalents amounts on the Company’s Condensed Consolidated Statements of Cash Flows.
Clarifying the Definition of a Business. In January 2017, the FASB issued guidance clarifying the definition of a business, which assists entities when evaluating whether transactions should be accounted for as acquisitions of businesses or assets. This guidance is effective on a prospective basis for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of this guidance on its financial statements and related disclosures.
Simplifying the Test for Goodwill Impairment. In January 2017, the FASB issued guidance which simplifies the current two-step goodwill impairment test by eliminating Step 2 of the test. The guidance requires a one-step impairment test in which an entity compares the fair value of a reporting unit with its carrying amount and recognizes an impairment charge

8


for the amount by which the carrying amount exceeds the reporting unit’s fair value, if any. This guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, and should be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of the adoption of this guidance on its financial statements and related disclosures.

Recently Adopted Accounting Pronouncements
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 adopted the guidance on January 1, 2017, as required. There was no material impact on its financial statements and related disclosures.
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 Company adopted the guidance on January 1, 2017, as required. The Company elected to use the prospective transition method and as such, the excess tax benefits from stock-based compensation was presented as part of operating activities within its current period Condensed Consolidated Statement of Cash Flows. In addition, the excess tax benefit of $4 million has been recognized within the provision for income taxes on the current period Condensed Consolidated Statement of Income.

2.
Earnings Per Share
The computation of basic and diluted earnings per share (“EPS”) is based on net income 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
 
March 31,
 
2017
 
2016
Net income
$
141

 
$
96

Basic weighted average shares outstanding
105

 
113

Stock-settled appreciation rights (“SSARs”), RSUs (a) and PSUs (b)
1

 
1

Diluted weighted average shares outstanding
106

 
114

Earnings per share:
 
 
 
Basic
$
1.34

 
$
0.85

Diluted
1.33

 
0.84

Dividends:
 
 
 
Aggregate dividends paid to shareholders
$
64

 
$
60


(a) 
Excludes 0.5 million and 1.0 million of restricted stock units (“RSUs”) for the three months ended March 31, 2017 and 2016, respectively, that would have been anti-dilutive to EPS. Includes unvested dilutive RSUs which are subject to future forfeiture.
(b) 
Excludes 0.4 million and 0.6 million performance vested restricted stock units (“PSUs”) for the three months ended March 31, 2017 and 2016, respectively, 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, 2016
88.1

 
$
4,337

 
$
49.22

For the three months ended March 31, 2017
1.9

 
150

 
80.93

As of March 31, 2017
90.0

 
$
4,487

 
49.88


The Company had $591 million of remaining availability under its program as of March 31, 2017.

3.
Acquisitions
Assets acquired and liabilities assumed in business combinations were recorded on the Condensed 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 Condensed 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 Condensed Consolidated Statements of Income as expenses.

During the first quarter of 2017, the Company completed two acquisitions at its Destination Network segment for $10 million, net of cash acquired and $1 million of contingent consideration The preliminary purchase price allocations resulted primarily in the recognition of (i) $13 million of other assets, (ii) $4 million of goodwill, none of which is expected to be deductible for tax purposes, (iii) $3 million of trademarks, (iv) $3 million of definite-lived intangible assets with a weighted average life of 6 years and (v) $12 million of liabilities. 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:
 
March 31,
2017
 
December 31,
2016
Current vacation ownership contract receivables:
 
 
 
Securitized
$
229

 
$
235

Non-securitized
88

 
84

Current vacation ownership receivables, gross
317

 
319

Less: Allowance for loan losses
57

 
57

Current vacation ownership contract receivables, net
$
260

 
$
262

Long-term vacation ownership contract receivables:
 
 
 
Securitized
$
2,220

 
$
2,254

Non-securitized
840

 
825

Long-term vacation ownership receivables, gross
3,060

 
3,079

Less: Allowance for loan losses
562

 
564

Long-term vacation ownership contract receivables, net
$
2,498

 
$
2,515



10


The Company’s securitized vacation ownership contract receivables generated interest income of $82 million during both the three months ended March 31, 2017 and 2016. Such interest income is included within consumer financing on the Condensed 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 Condensed Consolidated Balance Sheets. During the three months ended March 31, 2017 and 2016, the Company originated vacation ownership contract receivables of $280 million and $245 million, respectively, and received principal collections of $225 million and $202 million, respectively. The weighted average interest rate on outstanding vacation ownership contract receivables was 13.9% as of both March 31, 2017 and December 31, 2016.

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, 2016
$
621

Provision for loan losses
85

Contract receivables write-offs, net
(87
)
Allowance for loan losses as of March 31, 2017
$
619

 
Amount
Allowance for loan losses as of December 31, 2015
$
581

Provision for loan losses
63

Contract receivables write-offs, net
(75
)
Allowance for loan losses as of March 31, 2016
$
569

In accordance with the guidance for accounting for real estate time-sharing transactions, the Company recorded a provision for loan losses of $85 million and $63 million as a reduction of net revenues during the three months ended March 31, 2017 and 2016, 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).


11


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 March 31, 2017
 
700+
 
600-699
 
<600
 
No Score
 
Asia Pacific
 
Total
Current
$
1,709

 
$
996

 
$
167

 
$
123

 
$
247

 
$
3,242

31 - 60 days
15

 
24

 
14

 
4

 
2

 
59

61 - 90 days
10

 
16

 
11

 
3

 
1

 
41

91 - 120 days
7

 
13

 
11

 
3

 
1

 
35

Total
$
1,741

 
$
1,049

 
$
203

 
$
133

 
$
251

 
$
3,377

 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2016
 
700+
 
600-699
 
<600
 
No Score
 
Asia Pacific
 
Total
Current
$
1,733

 
$
1,010

 
$
149

 
$
120

 
$
232

 
$
3,244

31 - 60 days
19

 
32

 
17

 
4

 
2

 
74

61 - 90 days
11

 
16

 
11

 
3

 
1

 
42

91 - 120 days
8

 
14

 
13

 
2

 
1

 
38

Total
$
1,771

 
$
1,072

 
$
190

 
$
129

 
$
236

 
$
3,398

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.

5.
Inventory
Inventory consisted of:
 
March 31,
2017
 
December 31,
2016
Land held for VOI development
$
146

 
$
146

VOI construction in process
35

 
59

Inventory sold subject to conditional repurchase
112

 
163

Completed VOI inventory
752

 
667

Estimated VOI recoveries
257

 
256

Destination network vacation credits and other
60

 
59

Total inventory
1,362

 
1,350

Less: Current portion (*)
324

 
315

Non-current inventory
$
1,038

 
$
1,035

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

During the three months ended March 31, 2017 and 2016, the Company transferred $17 million and $6 million, respectively, from property and equipment to VOI inventory. In addition to the inventory obligations listed below, the Company had $7 million and $8 million of inventory accruals as of March 31, 2017 and December 31, 2016, respectively, included within accounts payable on the Condensed Consolidated Balance Sheets.


12


Inventory Sale Transactions
During 2015 and 2016, the Company sold real property located in St. Thomas, U.S. Virgin Islands (“St. Thomas”) to a third-party developer, consisting of vacation ownership inventory. 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 $21 million as of March 31, 2017, of which $11 million was included within accrued expenses and other current liabilities and $10 million was included within other non-current liabilities on the Condensed Consolidated Balance Sheet. During the three months ended March 31, 2017, the Company paid $11 million to the third-party developer, of which $9 million was for vacation ownership inventory and $2 million was to satisfy a portion of its inventory obligation. As of December 31, 2016, the Company had an outstanding obligation of $32 million, 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 Condensed Consolidated Balance Sheet.

In connection with the Las Vegas, Nevada and St. Thomas properties, the Company had outstanding obligations of $112 million as of March 31, 2017, of which $40 million was included within accrued expenses and other current liabilities and $72 million was included within other non-current liabilities on the Condensed Consolidated Balance Sheet. During the three months ended March 31, 2017, the Company paid $54 million to the third-party developer, of which $32 million was for vacation ownership inventory located in Las Vegas, Nevada and St. Thomas, $20 million was for its obligation under the vacation ownership inventory arrangements and $2 million was for accrued interest. As of December 31, 2016, the Company had an outstanding obligation related to the Las Vegas, Nevada and St. Thomas properties of $166 million, of which $74 million was included within accrued expenses and other current liabilities and $92 million was included within other non-current liabilities on the Condensed Consolidated Balance Sheet.

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 $238 million as of March 31, 2017.


13


6.
Long-Term Debt and Borrowing Arrangements
The Company’s indebtedness consisted of:
 
March 31,
2017
 
December 31,
2016
Securitized vacation ownership debt: (a)
 
 
 
Term notes (b)
$
1,902

 
$
1,857

Bank conduit facility (due August 2018)
236

 
284

Total securitized vacation ownership debt
2,138

 
2,141

Less: Current portion of securitized vacation ownership debt
191

 
195

Long-term securitized vacation ownership debt
$
1,947

 
$
1,946

Long-term debt: (c)
 
 
 
Revolving credit facility (due July 2020)
$
8

 
$
14

Commercial paper
221

 
427

Term loan (due March 2021)
324

 
323

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

 
300

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

 
14

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

 
449

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

 
40

$250 million 5.625% senior unsecured notes (due March 2021)
248

 
248

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

 
648

$400 million 3.90% senior unsecured notes (due March 2023) (e)
406

 
407

$300 million 4.15% senior unsecured notes (due April 2024)
297

 

$350 million 5.10% senior unsecured notes (due October 2025) (f)
339

 
338

$400 million 4.50% senior unsecured notes (due April 2027) (g)
396

 

Capital leases
141

 
143

Other
44

 
20

Total long-term debt
3,575

 
3,371

Less: Current portion of long-term debt
40

 
34

Long-term debt
$
3,535

 
$
3,337

 
(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 $2,582 million and $2,601 million of underlying gross vacation ownership contract receivables and related assets (which legally are not assets of the Company) as of March 31, 2017 and December 31, 2016, respectively.
(b) 
The carrying amounts of the term notes are net of debt issuance costs aggregating $25 million and $24 million as of March 31, 2017 and December 31, 2016, respectively.
(c) 
The carrying amounts of the senior unsecured notes and term loan are net of unamortized discounts of $16 million and $11 million as of March 31, 2017 and December 31, 2016, respectively. The carrying amounts of the senior unsecured notes and term loan are net of debt issuance costs of $5 million and $4 million as of March 31, 2017 and December 31, 2016, respectively.
(d) 
Includes $2 million of unamortized gains from the settlement of a derivative as of both March 31, 2017 and December 31, 2016.
(e) 
Includes $9 million of unamortized gains from the settlement of a derivative as of both March 31, 2017 and December 31, 2016.
(f) 
Includes $9 million of unamortized losses from the settlement of a derivative as of both March 31, 2017 and December 31, 2016.
(g) 
Includes a $1 million increase in the carrying value resulting from a fair value hedge derivative as of March 31, 2017.
Long-Term Debt
The Company’s $14 million 5.75% senior unsecured notes due February 2018 and $450 million 2.5% senior unsecured notes due in March 2018 are classified as long-term as the Company has the intent to refinance such debt on a long-term basis and the ability to do so with available capacity under its revolving credit facility.


14


Debt Issuances
Sierra Timeshare 2017-1 Receivables Funding, LLC. During March 2017, the Company closed a series of term notes payable, Sierra Timeshare 2017-1 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 2.97%. The advance rate for this transaction was 90%. As of March 31, 2017, the Company had outstanding borrowings under these term notes of $345 million, net of debt issuance costs.

4.15% Senior Unsecured Notes. During March 2017, the Company issued senior unsecured notes, with face value of $300 million and bearing interest at a rate of 4.15%, for net proceeds of $297 million. The interest on the senior unsecured notes will be subject to adjustments from time to time if there are downgrades to the credit ratings assigned to the notes. Interest began accruing on March 21, 2017 and is payable semi-annually in arrears on April 1 and October 1 of each year, commencing on October 1, 2017. The notes will mature on April 1, 2024 and are redeemable at the Company’s option at any time, in whole or in part, at the stated redemption prices plus accrued interest through the redemption date. These notes rank equally in right of payment with all of the Company’s other senior unsecured indebtedness.

4.50% Senior Unsecured Notes. During March 2017, the Company issued senior unsecured notes, with face value of $400 million and bearing interest at a rate of 4.50%, for net proceeds of $397 million. The interest on the senior unsecured notes will be subject to adjustments from time to time if there are downgrades to the credit ratings assigned to the notes. Interest began accruing on March 21, 2017 and is payable semi-annually in arrears on April 1 and October 1 of each year, commencing on October 1, 2017. The notes will mature on April 1, 2027 and are redeemable at the Company’s option at any time, in whole or in part, at the stated redemption prices plus accrued interest through the redemption date. These notes rank equally in right of payment with all of the Company’s other senior unsecured indebtedness.

Other. During 2015, the Company entered into an agreement with a third-party partner whereby the partner would develop and construct VOI inventory through an SPE. The SPE financed the development and construction with a four-year bank mortgage note. During the first quarter of 2017, the third-party partner met certain conditions of the agreement, which resulted in the Company committing to purchase $51 million of VOI inventory located in Clearwater, Florida, from the SPE over a two-year period. Such proceeds from the purchase will be used by the SPE to repay the mortgage notes. The Company is considered to be the primary beneficiary for specified assets and liabilities of the SPE and, therefore, the Company consolidated such assets and liabilities within its financial statements. As of March 31, 2017, the Company’s obligation under the notes was $44 million, with principal and interest payable tri-annually (see Note 7 - Variable Interest Entities for further details).

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 March 31, 2017, the Company had outstanding borrowings of $221 million at a weighted average interest rate of 1.51%, all of which were under its U.S. commercial paper program. As of December 31, 2016, the Company had outstanding borrowings of $427 million at a weighted average interest rate of 1.36%, 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
The Company has pay-variable/receive-fixed interest rate swap agreements (the “Swaps”) on its 4.50% senior unsecured notes with notional amounts of $400 million. The fixed interest rates on these notes were effectively modified to a variable LIBOR-based index. As of March 31, 2017, the variable interest rates on the notional portion of the 4.50% senior unsecured notes were 3.14%. The aggregate fair value of the Swaps resulted in less than $1 million of assets as of March 31, 2017. Such assets were included within other non-current assets on the Condensed Consolidated Balance Sheet.

During 2013, the Company entered into 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. 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 Condensed Consolidated Statement of Cash Flows. The Company had $11 million of deferred gains as of March 31, 2017 and December 31, 2016, respectively. Such gains were included within long-term debt on the Condensed Consolidated Balance Sheets. Such gains are being recognized as a reduction to interest expense on the Condensed Consolidated Statements of Income over the remaining life of the senior unsecured notes.


15


Maturities and Capacity
The Company’s outstanding debt as of March 31, 2017 matures as follows:
 
Securitized Vacation Ownership Debt
 
Long-Term Debt
 
Total
Within 1 year
$
191

 
$
503

(*) 
$
694

Between 1 and 2 years
214

 
33

 
247

Between 2 and 3 years
355

 
54

 
409

Between 3 and 4 years
205

 
812

 
1,017

Between 4 and 5 years
221

 
659

 
880

Thereafter
952

 
1,514

 
2,466

 
$
2,138

 
$
3,575

 
$
5,713

 
(*) 
Includes $463 million of senior unsecured notes that are classified as long-term debt as the Company has the intent to refinance such debt on a long-term basis and the ability to do so with available capacity under its revolving credit facility.

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 March 31, 2017, 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
236

 
8

 
          Letters of credit

 
1

 
          Commercial paper borrowings

 
221

(b) 
Available Capacity
$
414

 
$
1,270

 
 
(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 three months ended March 31, 2016, which is included within early extinguishment of debt on the Condensed Consolidated Statement of Income.

Interest Expense
During the three months ended March 31, 2017, the Company incurred non-securitized interest expense of $33 million, which primarily consisted of $34 million of interest on long-term debt, partially offset by $1 million of capitalized interest. Such amounts are included within interest expense on the Condensed Consolidated Statement of Income. Cash paid related to interest on the Company’s non-securitized debt was $52 million during the three months ended March 31, 2017.

During the three months ended March 31, 2016, the Company incurred non-securitized interest expense of $33 million, which primarily consisted of $34 million of interest on long-term debt, partially offset by $1 million of capitalized interest. Such amounts are included within interest expense on the Condensed Consolidated Statement of Income. Cash paid related to interest on the Company’s non-securitized debt was $53 million during the three months ended March 31, 2016.

Interest expense incurred in connection with the Company’s securitized vacation ownership debt during both the three months ended March 31, 2017 and 2016 was $18 million, and is recorded within consumer financing interest on the Condensed Consolidated Statements of Income. Cash paid related to such interest was $12 million during both the three months ended March 31, 2017 and 2016.


16


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 its 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:
 
March 31,
2017
 
December 31,
2016
Securitized contract receivables, gross (a)
$
2,449

 
$
2,489

Securitized restricted cash (b)
113

 
90

Interest receivables on securitized contract receivables (c)
20

 
21

Other assets (d)
3

 
4

Total SPE assets
2,585

 
2,604

Securitized term notes (e) (f)
1,902

 
1,857

Securitized conduit facilities (e)
236

 
284

Other liabilities (g)
2

 
2

Total SPE liabilities
2,140

 
2,143

SPE assets in excess of SPE liabilities
$
445

 
$
461

 
(a) 
Included in current ($229 million and $235 million as of March 31, 2017 and December 31, 2016, respectively) and non-current ($2,220 million and $2,254 million as of March 31, 2017 and December 31, 2016, respectively) vacation ownership contract receivables on the Condensed Consolidated Balance Sheets.
(b) 
Included in other current assets ($94 million and $75 million as of March 31, 2017 and December 31, 2016, respectively) and other non-current assets ($19 million and $15 million as of March 31, 2017 and December 31, 2016, respectively) on the Condensed Consolidated Balance Sheets.
(c) 
Included in trade receivables, net on the Condensed Consolidated Balance Sheets.
(d) 
Primarily includes deferred financing costs for the bank conduit facility and a security investment asset, which are included in other non-current assets on the Condensed Consolidated Balance Sheets.
(e) 
Included in current ($191 million and $195 million as of March 31, 2017 and December 31, 2016, respectively) and long-term ($1,947 million and $1,946 million as of March 31, 2017 and December 31, 2016, respectively) securitized vacation ownership debt on the Condensed Consolidated Balance Sheets.
(f) 
Includes deferred financing costs of $25 million and $24 million as of March 31, 2017 and December 31, 2016, respectively related to securitized debt.
(g) 
Primarily includes accrued interest on securitized debt, which is included in accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheets.


17


In addition, the Company has vacation ownership contract receivables that have not been securitized through bankruptcy-remote SPEs. Such gross receivables were $928 million and $909 million as of March 31, 2017 and December 31, 2016, 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:
 
March 31,
2017
 
December 31,
2016
SPE assets in excess of SPE liabilities
$
445

 
$
461

Non-securitized contract receivables
928

 
909

Less: Allowance for loan losses
619

 
621

Total, net
$
754

 
$
749


In addition to restricted cash related to securitizations, the Company had $94 million and $59 million of restricted cash related to escrow deposits as of March 31, 2017 and December 31, 2016, respectively, which are recorded within other current assets on the Condensed 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. Such proceeds from the purchase were used by the SPE to repay the four-year mortgage note and the mandatorily redeemable equity. The Company is considered to be the primary beneficiary of the SPE and therefore, the Company consolidated the SPE within its financial statements. During the first quarter of 2017, the Company made its final purchase of VOI inventory from the SPE.

Clearwater, FL Property
During 2015, the Company entered into an agreement with a third-party partner whereby the partner would develop and construct VOI inventory through an SPE. During the first quarter of 2017, the third-party partner met certain conditions of the agreement, which resulted in the Company committing to purchase $51 million of VOI inventory from the SPE over a two-year period. Such proceeds from the purchase will be used by the SPE to repay the mortgage notes. The Company is considered to be the primary beneficiary for specified assets and liabilities of the SPE and, therefore, the Company consolidated (non-cash) $51 million of both property and equipment and long-term debt on its Condensed Consolidated Balance Sheet.

The assets and liabilities of the Midtown 45, NYC Property and Clearwater, FL Property SPEs are as follows:
 
March 31,
2017
 
December 31,
2016
Receivable for leased property and equipment (a)
$

 
$
16

Property and equipment, net
44

 

Total SPE assets
44

 
16

Long-term debt (b)
44

 
17

Total SPE liabilities
44

 
17

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 Condensed Consolidated Balance Sheet.
(b) 
As of March 31, 2017, included $44 million relating to a two-year mortgage note, of which $25 million was included in current portion of long-term debt on the Condensed Consolidated Balance Sheet. As of December 31, 2016, included $15 million relating to a four-year 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 Condensed Consolidated Balance Sheet.


18


During the three months ended March 31, 2017 and 2016, the SPE conveyed $22 million and $15 million, respectively of property and equipment to the Company.

8.
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 March 31, 2017, the Company had foreign exchange contracts resulting in $1 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 Condensed Consolidated Balance Sheet. As of December 31, 2016, the Company had foreign exchange contracts resulting in $1 million of assets which are included within other current assets and $1 million of liabilities which are included within accrued expenses and other current liabilities on the Condensed 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:
 
March 31, 2017
 
December 31, 2016
 
Carrying
Amount
 
Estimated Fair Value
 
Carrying
 Amount
 
Estimated Fair Value
Assets
 
 
 
 
 
 
 
Vacation ownership contract receivables, net
$
2,758

 
$
3,331

 
$
2,777

 
$
3,344

Debt
 
 
 
 
 
 
 
Total debt
5,713

 
5,810

 
5,512

 
5,579


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.


19


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 has foreign currency rate exposure to exchange rate fluctuations worldwide with particular exposure to the British pound, Euro and the Canadian and Australian dollars. 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, forecasted earnings of foreign subsidiaries and intercompany borrowings that are denominated in currencies other than the Company’s underlying functional currency. During the first quarter of 2017, the Company undertook an internal restructuring to realign the capital structure of certain subsidiaries to minimize the exposure to changes in foreign currency exchange on certain intercompany borrowings.

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 Condensed 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 $2 million of gains during the three months ended March 31, 2017 and $4 million of losses during the three months ended March 31, 2016. 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 the three months ended March 31, 2017 and 2016 were not material.

10.
Income Taxes
The Company files income tax returns in the 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 2009.

The Company’s effective tax rate decreased from 41.1% during the three months ended March 31, 2016 to 18.0% during the three months ended March 31, 2017 primarily due to (i) a tax benefit on foreign currency losses recognized from an internal restructuring undertaken to realign the organizational and capital structure of certain foreign operations, (ii) a tax benefit associated with the recently adopted stock-based compensation pronouncement during 2017 and (iii) the absence of the Venezuelan foreign exchange devaluation loss during 2016 for which the Company was unable to recognize a tax benefit.

The Company made cash income tax payments, net of refunds, of $77 million and $16 million during the three months ended March 31, 2017 and 2016, respectively.


20


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 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 wrongful termination, 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, fiduciary duty/trust claims, tax claims, environmental claims and landlord/tenant disputes.

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 $38 million and $40 million as of March 31, 2017 and December 31, 2016, 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. The Company had receivables of $14 million as of March 31, 2017 for certain matters which are covered by insurance and were included in other current assets on its Condensed Consolidated Balance Sheet. As of March 31, 2017, 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 term of the guarantee and/or 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 original terms of the Company’s existing guarantees range from 8 to 10 years.


21


The Company has three guarantees as of March 31, 2017, for which the maximum potential amount of future payments that the Company may be required to fund was $115 million with a combined annual cap of $27 million. These guarantees have a remaining life of approximately 6 to 8 years with a weighted average life of approximately 6 years. One of these guarantees has a recapture provision and, as such, the Company had receivables of $5 million and $4 million as of March 31, 2017 and December 31, 2016, respectively. Such receivables were included within other non-current assets on its Condensed Consolidated Balance Sheets. Such receivables were the result of payments made to date that are subject to recapture and which the Company believes will be recoverable from future operating performance.

As of March 31, 2017, the Company has an additional guarantee with a recapture provision under which the Company may be required to fund a maximum of $36 million. Such guarantee terminates in July 2020. The related hotel management agreement, which terminates in July 2038, also provides that the Company may have to fund future operating profitability shortfalls in excess of the maximum guarantee through the term of the management agreement. In the event the Company chooses not to fund any future operating profitability shortfalls, the hotel owner may terminate the hotel management agreement without penalty and the Company would be required to pay liquidated damages. The Company had a $37 million receivable related to this guarantee as of March 31, 2017, of which $5 million was included in other current assets and $32 million was included in other non-current assets on its Condensed Consolidated Balance Sheet. As of December 31, 2016, the Company had a $32 million receivable related to this guarantee which was included in other non-current assets on its Condensed Consolidated Balance Sheet. Such receivables were the result of payments made to date that are subject to recapture and which the Company believes will be recoverable from future operating performance.

In connection with such performance guarantees, as of March 31, 2017, the Company maintained a liability of $19 million, of which $17 million was included in other non-current liabilities and $2 million was included in accrued expenses and other current liabilities on its Condensed Consolidated Balance Sheet. As of March 31, 2017, the Company also had a corresponding $31 million asset related to these guarantees, of which $27 million was included in other non-current assets and $4 million was included in other current assets on its Condensed Consolidated Balance Sheet. As of December 31, 2016, the Company maintained a liability of $24 million, of which $17 million was included in other non-current liabilities and $7 million was included in accrued expenses and other current liabilities on its Condensed Consolidated Balance Sheet. As of December 31, 2016, the Company also had a corresponding $32 million asset related to the guarantees, of which $28 million was included in other non-current assets and $4 million was included in other current assets on its Condensed 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 for both the three months ended March 31, 2017 and 2016, respectively.

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 5 - 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 16 - Separation Adjustments and Transactions with Former Parent and Subsidiaries regarding contingent litigation liabilities resulting from the Separation.


22


12.
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, 2016
$
(225
)
 
$

 
$
(7
)
 
$
(232
)
 Period change
32

 

 

 
32

 Balance, March 31, 2017
$
(193
)
 
$

 
$
(7
)
 
$
(200
)
Tax
 
 
 
 
 
 
 
 Balance, December 31, 2016
$
116

 
$
1

 
$
2

 
$
119

 Period change
(3
)
 

 

 
(3
)
 Balance, March 31, 2017
$
113

 
$
1

 
$
2

 
$
116

Net of Tax
 
 
 
 
 
 
 
 Balance, December 31, 2016
$
(109
)
 
$
1

 
$
(5
)
 
$
(113
)
 Period change
29

 

 

 
29

 Balance, March 31, 2017
$
(80
)
 
$
1

 
$
(5
)
 
$
(84
)

 
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
30

 
1

 
(1
)
 
30

 Balance, March 31, 2016
$
(109
)
 
$
1

 
$
(10
)
 
$
(118
)
Tax
 
 
 
 
 
 
 
 Balance, December 31, 2015
$
70

 
$
1

 
$
3

 
$
74

 Period change
6

 

 


6

 Balance, March 31, 2016
$
76

 
$
1

 
$
3

 
$
80

Net of Tax
 
 
 
 
 
 
 
 Balance, December 31, 2015
$
(69
)
 
$
1

 
$
(6
)
 
$
(74
)
 Period change
36

 
1

 
(1
)
 
36

 Balance, March 31, 2016
$
(33
)
 
$
2

 
$
(7
)
 
$
(38
)

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.


23


13.  
Stock-Based Compensation
The Company has a stock-based compensation plan available to grant RSUs, PSUs, SSARs and other stock-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 March 31, 2017, 15.4 million shares remained available.

Incentive Equity Awards Granted by the Company
The activity related to incentive equity awards granted by the Company for the three months ended March 31, 2017 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, 2016
1.7

 
$
75.81

 
0.6

 
$
77.84

 
0.5

 
$
68.78

Granted (a)
0.7

 
83.24

 
0.3

 
83.24

 

 

Vested / exercised
(0.7
)
 
73.61

 
(0.2
)
 
72.97

 

 

Canceled
(0.1
)
 
77.78

 

 

 

 

Balance as of March 31, 2017
1.6

(b) (c) 
79.60

 
0.7

(d) 
81.41

 
0.5

(e) (f) 
68.78

 
(a) 
Represents awards granted by the Company on February 28, 2017.
(b) 
Aggregate unrecognized compensation expense related to RSUs was $126 million as of March 31, 2017, which is expected to be recognized over a weighted average period of 3.0 years.
(c) 
Approximately 1.6 million RSUs outstanding as of March 31, 2017 are expected to vest over time.
(d) 
Maximum aggregate unrecognized compensation expense was $42 million as of March 31, 2017, which is expected to be recognized over a weighted average period of 2.3 years.
(e) 
Aggregate unrecognized compensation expense related to SSARs was $3 million as of March 31, 2017, which is expected to be recognized over a weighted average period of 2.3 years.
(f) 
Approximately 0.3 million SSARs are exercisable as of March 31, 2017. The Company assumes that all unvested SSARs are expected to vest over time. SSARs outstanding as of March 31, 2017 had an intrinsic value of $9 million and have a weighted average remaining contractual life of 3.1 years.

On February 28, 2017, the Company granted incentive equity awards totaling $54 million to key employees and senior officers in the form of RSUs. These awards will vest ratably over a period of four years. In addition, on February 28, 2017, the Company approved a grant of incentive equity awards totaling $21 million to key employees and senior officers 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.

Stock-Based Compensation Expense
The Company adopted the stock compensation guidance on January 1, 2017, as required. The Company elected to use the prospective transition method and as such, the excess tax benefits from stock-based compensation was presented as part of operating activities within its current period Condensed Consolidated Statement of Cash Flows. In addition, the Company included a net benefit of $4 million within provision for income taxes on the current period Condensed Consolidated Statement of Income.

The Company recorded stock-based compensation expense of $15 million and $14 million during the three months ended March 31, 2017, and 2016, respectively related to incentive equity awards granted to key employees and senior officers.

The Company paid $30 million of taxes for the net share settlement of incentive equity awards during both the three months ended March 31, 2017 and 2016. Such amounts are included within financing activities on the Condensed Consolidated Statements of Cash Flows.


24


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 revenues) and income taxes, each of which is presented on the Condensed Consolidated Statements of Income. The Company believes that EBITDA is a useful measure of performance for its industry segments which, when considered with GAAP measures, the Company believes gives a more complete understanding of its operating performance. The Company’s presentation of EBITDA may not be comparable to similarly-titled measures used by other companies.

 
Three Months Ended March 31,
 
2017
 
2016
 
Net Revenues
 
EBITDA
 
Net Revenues
 
EBITDA
Hotel Group
$
298

(b)
$
85

 
$
295

(d)
$
84

Destination Network
391

(c)
102

 
385

(c)
81

Vacation Ownership
648

 
118

 
641

 
136

Total Reportable Segments
1,337

 
305

 
1,321

 
301

Corporate and Other (a)
(18
)
 
(39
)
 
(18
)
 
(34
)
Total Company
$
1,319

 
$
266

 
$
1,303

 
$
267

 
 
 
 
 
 
 
 
Reconciliation of net income to EBITDA
 
 
 
 
 
 
 
 
 
Three Months Ended March 31,
 
 
 
 
 
2017
 
2016
Net income
 
 
 
 
$
141

 
$
96

Provision for income taxes
 
 
 
 
31

 
67

Depreciation and amortization
 
 
 
 
63

 
62

Interest expense
 
 
 
 
33

 
33

Early extinguishment of debt
 
 
 
 

 
11

Interest income
 
 
 
 
(2
)
 
(2
)
EBITDA
 
 
 
 
$
266

 
$
267

 
(a) 
Includes the elimination of transactions between segments.
(b) 
Includes $16 million of intersegment revenues comprised of (i) $13 million of licensing fees for use of the Wyndham trade name and (ii) $3 million of other fees primarily associated with the Wyndham Rewards program. Such revenues are offset in expenses at the Company’s Vacation Ownership segment.
(c) 
Includes $2 million of intersegment revenues comprised of call center operations and support services provided to the Company’s Hotel Group segment.
(d) 
Includes $16 million of intersegment revenues comprised of (i) $13 million of licensing fees for use of the Wyndham trade name, (ii) $2 million of other fees primarily associated with the Wyndham Rewards program and (iii) $1 million of room revenues at a Company owned hotel. Such revenues are offset in expenses at the Company’s Vacation Ownership segment.


25


15.
Restructuring, Impairments and Other Charges
2017 Restructuring Plans

During the first quarter of 2017, the Company recorded $7 million of restructuring charges, all of which were personnel-related and consisted of (i) $6 million at its corporate operations which focused on rationalizing its sourcing function and outsourcing certain information technology functions and (ii) $1 million at its Hotel Group segment which primarily focused on realigning its brand operations. The remaining liability of $7 million as of March 31, 2017 is expected to be paid by the end of 2017.

2016 Restructuring Plans

During 2016, the Company recorded $15 million of charges related to restructuring initiatives, primarily focused on enhancing organizational efficiency and rationalizing existing facilities which included the closure of four vacation ownership sales offices. In connection with these initiatives, the Company initially recorded $12 million of personnel-related costs, a $2 million non-cash charge and $2 million of facility-related expenses. It subsequently reversed $1 million of previously recorded personnel-related costs and reduced its liability with $5 million of cash payments. During the three months ended March 31, 2017, the Company reduced its liability with $4 million of cash payments. The remaining liability of $4 million as of March 31, 2017 is expected to be paid primarily by the end of 2017.

The Company has additional restructuring plans which were implemented prior to 2016. The remaining liability of $1 million as of March 31, 2017, all of which is related to leased facilities, is expected to be paid by 2020.

The activity associated with all of the Company’s restructuring plans is summarized by category as follows:

 
Liability as of
 
Costs
 
Cash
 
Liability as of
 
December 31, 2016
 
Recognized
 
Payments
 
March 31, 2017
Personnel-related
$
6

 
$
7

(*) 
$
(4
)
 
$
9

Facility-related
3

 

 

 
3

 
$
9

 
$
7

 
$
(4
)
 
$
12

 
(*) 
Represents severance costs resulting from a reduction of 66 employees.

Impairments

During the first quarter of 2017, the Company incurred a $5 million non-cash impairment charge related to the write-down of assets resulting from the decision to abandon a new product initiative at the Company’s vacation ownership business. Such charge is recorded within asset impairments on the Condensed Consolidated Statement of Income.

Other Charges

During the first quarter of 2016, the Company incurred a $24 million foreign exchange loss, primarily impacting cash, resulting from the Venezuelan government’s decision to devalue the exchange rate of its currency. Such loss is recorded within operating expenses on the Condensed Consolidated Statement of Income.


26


16.
Separation Adjustments and Transactions with Former Parent and Subsidiaries
Transfer of Cendant Corporate Liabilities and Issuance of Guarantees to Cendant and Affiliates
Pursuant to the Separation and Distribution Agreement, upon the distribution of the Company’s common stock to Cendant shareholders, the Company entered into certain guarantee commitments with Cendant (pursuant to the assumption of certain liabilities and the obligation to indemnify Cendant, Realogy and Travelport for such liabilities) and guarantee commitments related to deferred compensation arrangements with each of Cendant and Realogy. These guarantee arrangements primarily relate to certain contingent litigation liabilities, contingent tax liabilities, and Cendant contingent and other corporate liabilities, of which the Company assumed and is responsible for 37.5% while Realogy is responsible for the remaining 62.5%. The remaining amount of liabilities which were assumed by the Company in connection with the Separation was $23 million as of both March 31, 2017 and December 31, 2016. These amounts were comprised of certain Cendant corporate liabilities which were recorded on the books of Cendant as well as additional liabilities which were established for guarantees issued at the date of Separation, related to unresolved contingent matters and others that could arise during the guarantee period. Regarding the guarantees, if any of the companies responsible for all or a portion of such liabilities were to default in its payment of costs or expenses related to any such liability, the Company would be responsible for a portion of the defaulting party or parties’ obligation(s). The Company also provided a default guarantee related to certain deferred compensation arrangements related to certain current and former senior officers and directors of Cendant, Realogy and Travelport. These arrangements were valued upon the Separation in accordance with the guidance for guarantees and recorded as liabilities on the Condensed Consolidated Balance Sheets. To the extent such recorded liabilities are not adequate to cover the ultimate payment amounts, such excess will be reflected as an expense to the results of operations in future periods.

As a result of the sale of Realogy on April 10, 2007, Realogy was required to post a letter of credit in an amount acceptable to the Company and Avis Budget Group (formerly known as Cendant) to satisfy its obligations for the Cendant legacy contingent liabilities. As of March 31, 2017, the letter of credit was $53 million.

As of March 31, 2017, the Separation related liabilities of $23 million is comprised of $20 million for tax liabilities, $1 million for other contingent and corporate liabilities and $2 million of liabilities where the calculated guarantee amount exceeded the contingent liability assumed at the Separation Date. In connection with these liabilities, as of March 31, 2017, $10 million was recorded within accrued expenses and other current liabilities and $13 million was recorded within other non-current liabilities on the Condensed Consolidated Balance Sheet. As of December 31, 2016, the Company had $23 million of Separation related liabilities of which $10 million was recorded within accrued expenses and other current liabilities and $13 million was recorded within other non-current liabilities on the Condensed Consolidated Balance Sheet. The Company will indemnify Cendant for these contingent liabilities and therefore any payments made to the third-party would be through the former Parent. The actual timing of payments relating to these liabilities is dependent on a variety of factors beyond the Company’s control. In addition, the Company had $1 million of receivables due from former Parent and subsidiaries primarily relating to income taxes, as of both March 31, 2017 and December 31, 2016, which were included within other current assets on the Condensed Consolidated Balance Sheets.


27


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

FORWARD-LOOKING STATEMENTS
This report includes “forward-looking” statements, as that term is defined by the Securities and Exchange Commission (“SEC”) in its rules, regulations and releases. Forward-looking statements are any statements other than statements of historical fact, including statements regarding our expectations, beliefs, hopes, intentions or strategies regarding the future. In some cases, forward-looking statements can be identified by the use of words such as “may,” “expects,” “should,” “believes,” “plans,” “anticipates,” “estimates,” “predicts,” “potential,” “continue,” or other words of similar meaning. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those discussed in, or implied by, the forward-looking statements. Factors that might cause such a difference include, but are not limited to, general economic conditions, our financial and business prospects, our capital requirements, our financing prospects, our relationships with associates, and those disclosed as risks under “Risk Factors” in Part II, Item 1A of this report. We caution readers that any such statements are based on currently available operational, financial and competitive information, and they should not place undue reliance on these forward-looking statements, which reflect management’s opinion only as of the date on which they were made. Except as required by law, we disclaim any obligation to review or update these forward-looking statements to reflect events or circumstances as they occur.

BUSINESS AND OVERVIEW
We are a global provider of hospitality services and products and operate our business in the following three 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.

RESULTS OF OPERATIONS
Discussed below are our key operating statistics, consolidated results of operations and the results of operations for each of our reportable segments. The reportable segments presented below represent our operating segments for which discrete financial information is available and which is utilized on a regular basis by our chief operating decision maker to assess performance and to allocate resources. In identifying our reportable segments, we also consider the nature of services provided by our operating segments. Management evaluates the operating results of each of our reportable segments and corporate and other 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 revenues) and income taxes, each of which is presented on the Condensed Consolidated Statements of Income. We believe that EBITDA is a useful measure of performance for our industry segments and, when considered with GAAP measures, gives a more complete understanding of our operating performance. Our presentation of EBITDA may not be comparable to similarly-titled measures used by other companies.

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OPERATING STATISTICS
The table below presents our operating statistics for the three months ended March 31, 2017 and 2016. These operating statistics are the drivers of our revenues and therefore provide an enhanced understanding of our businesses. Refer to the Results of Operations section for a discussion as to how these operating statistics affected our business for the periods presented.
 
Three Months Ended March 31,
 
2017
 
2016
 
% Change
Hotel Group(a)
 
 
 
 
 
Number of rooms (b)
699,800

 
679,100

 
3.0
RevPAR (c)
$
31.73

 
$
31.59