Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
 
Form 10-Q
 
     
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 


For the quarterly period ended September 30, 2011
 
OR
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 


For the transition period from            to           
 
Commission File No. 001-32876
 
 
 
Wyndham Worldwide Corporation
(Exact name of registrant as specified in its charter)
 
     
Delaware
  20-0052541
(State or other jurisdiction
of incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
22 Sylvan Way
Parsippany, New Jersey
(Address of principal executive offices)
  07054
(Zip Code)
 
(973) 753-6000
(Registrant’s telephone number, including area code)
 
None
(Former name, former address and former fiscal year, if changed since last report)
 
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ     No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
The number of shares outstanding of the issuer’s common stock was 154,017,892 shares as of September 30, 2011.
 


 

Table of Contents
 
                 
        Page
 
  PART I     FINANCIAL INFORMATION        
  Item 1.     Financial Statements (Unaudited)     2  
        Report of Independent Registered Public Accounting Firm     2  
        Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2011 and 2010     3  
        Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010     4  
        Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010     5  
        Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2011 and 2010     6  
        Notes to Consolidated Financial Statements     7  
  Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations     27  
        Forward-Looking Statements     27  
  Item 3.     Quantitative and Qualitative Disclosures About Market Risks     45  
  Item 4.     Controls and Procedures     45  
             
  PART II     OTHER INFORMATION        
  Item 1.     Legal Proceedings     45  
  Item 1A.     Risk Factors     45  
  Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds     51  
  Item 3.     Defaults Upon Senior Securities     51  
  Item 5.     Other Information     51  
  Item 6.     Exhibits     52  
        Signatures     53  
 EX-10.1
 EX-12
 EX-15
 EX-31.1
 EX-31.2
 EX-32
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT


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PART I — FINANCIAL INFORMATION
 
Item 1.   Financial Statements (Unaudited).
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders of
Wyndham Worldwide Corporation
Parsippany, New Jersey
 
We have reviewed the accompanying consolidated balance sheet of Wyndham Worldwide Corporation and subsidiaries (the “Company”) as of September 30, 2011, the related consolidated statements of income for the three-month and nine-month periods ended September 30, 2011 and 2010, and the related consolidated statements of stockholders’ equity and of cash flows for the nine-month periods ended September 30, 2011 and 2010. These interim consolidated financial statements are the responsibility of the Company’s management.
 
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
 
Based on our reviews, we are not aware of any material modifications that should be made to such consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
 
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2010, and the related consolidated statements of income, stockholders’ equity and cash flows for the year then ended (not presented herein); and in our report dated February 21, 2011, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2010 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
 
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
October 26, 2011


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WYNDHAM WORLDWIDE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share amounts)
(Unaudited)
 
                                 
    Three Months Ended
    Nine Months Ended
 
    September 30,     September 30,  
    2011     2010     2011     2010  
 
Net revenues
                               
Service and membership fees
  $ 584     $ 464     $ 1,579     $ 1,298  
Vacation ownership interest sales
    320       308       855       796  
Franchise fees
    160       142       395       353  
Consumer financing
    105       107       310       318  
Other
    43       44       114       149  
                                 
Net revenues
    1,212       1,065       3,253       2,914  
                                 
Expenses
                               
Operating
    490       410       1,358       1,179  
Cost of vacation ownership interests
    35       52       115       138  
Consumer financing interest
    21       27       67       80  
Marketing and reservation
    182       149       472       410  
General and administrative
    157       101       422       394  
Asset impairment
          4       13       4  
Restructuring costs
                6        
Depreciation and amortization
    43       43       133       128  
                                 
Total expenses
    928       786       2,586       2,333  
                                 
Operating income
    284       279       667       581  
Other income, net
    (2 )     (1 )     (9 )     (6 )
Interest expense
    34       47       115       133  
Interest income
    (19 )     (2 )     (22 )     (3 )
                                 
Income before income taxes
    271       235       583       457  
Provision for income taxes
    96       79       222       157  
                                 
Net income
  $ 175     $ 156     $ 361     $ 300  
                                 
Earnings per share
                               
Basic
  $ 1.10     $ 0.88     $ 2.17     $ 1.68  
Diluted
    1.08       0.84       2.12       1.62  
                                 
Cash dividends declared per share
  $ 0.15     $ 0.12     $ 0.45     $ 0.36  
 
See Notes to Consolidated Financial Statements.


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WYNDHAM WORLDWIDE CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions, except share and per share amounts)
(Unaudited)
 
                 
    September 30,
    December 31,
 
    2011     2010  
 
Assets
               
Current assets:
               
Cash and cash equivalents
  $ 175     $ 156  
Trade receivables, net
    366       425  
Vacation ownership contract receivables, net
    294       295  
Inventory
    337       348  
Prepaid expenses
    104       104  
Deferred income taxes
    168       179  
Other current assets
    230       245  
                 
Total current assets
    1,674       1,752  
                 
Long-term vacation ownership contract receivables, net
    2,568       2,687  
Non-current inventory
    771       833  
Property and equipment, net
    1,088       1,041  
Goodwill
    1,483       1,481  
Trademarks, net
    731       731  
Franchise agreements and other intangibles, net
    434       440  
Other non-current assets
    273       451  
                 
Total assets
  $ 9,022     $ 9,416  
                 
                 
Liabilities and Stockholders’ Equity
               
Current liabilities:
               
Securitized vacation ownership debt
  $ 179     $ 223  
Current portion of long-term debt
    37       11  
Accounts payable
    221       274  
Deferred income
    390       401  
Due to former Parent and subsidiaries
    19       47  
Accrued expenses and other current liabilities
    690       619  
                 
Total current liabilities
    1,536       1,575  
                 
Long-term securitized vacation ownership debt
    1,551       1,427  
Long-term debt
    2,062       2,083  
Deferred income taxes
    1,076       1,021  
Deferred income
    187       206  
Due to former Parent and subsidiaries
    28       30  
Other non-current liabilities
    163       157  
                 
Total liabilities
    6,603       6,499  
                 
                 
Commitments and contingencies (Note 12)
               
                 
Stockholders’ equity:
               
Preferred stock, $.01 par value, authorized 6,000,000 shares, none issued and outstanding
           
Common stock, $.01 par value, authorized 600,000,000 shares, issued 212,207,966 shares in 2011 and 209,943,159 shares in 2010
    2       2  
Treasury stock, at cost—58,562,543 shares in 2011 and 36,555,242 shares in 2010
    (1,784 )     (1,107 )
Additional paid-in capital
    3,808       3,892  
Retained earnings/(accumulated deficit)
    260       (25 )
Accumulated other comprehensive income
    133       155  
                 
Total stockholders’ equity
    2,419       2,917  
                 
Total liabilities and stockholders’ equity
  $ 9,022     $ 9,416  
                 
 
See Notes to Consolidated Financial Statements.


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WYNDHAM WORLDWIDE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
                 
    Nine Months Ended
 
    September 30,  
    2011     2010  
 
Operating Activities
               
Net income
  $ 361     $ 300  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    133       128  
Provision for loan losses
    255       258  
Deferred income taxes
    63       63  
Stock-based compensation
    31       30  
Excess tax benefits from stock-based compensation
    (17 )     (14 )
Asset impairment
    13       4  
Non-cash interest
    21       51  
Net change in assets and liabilities, excluding the impact of acquisitions:
               
Trade receivables
    71       80  
Vacation ownership contract receivables
    (151 )     (163 )
Inventory
    71       56  
Prepaid expenses
    (2 )     12  
Other current assets
    17       13  
Accounts payable, accrued expenses and other current liabilities
    31       (60 )
Due to former Parent and subsidiaries, net
    (14 )     (161 )
Deferred income
    (27 )     (93 )
Other, net
    4       24  
                 
Net cash provided by operating activities
    860       528  
                 
Investing Activities
               
Property and equipment additions
    (153 )     (100 )
Net assets acquired, net of cash acquired
    (27 )     (159 )
Equity investments and development advances
    (8 )     (9 )
Proceeds from asset sales
    26       20  
Decrease/(increase) in securitization restricted cash
    13       (7 )
Increase in escrow deposit restricted cash
          (6 )
Other, net
    (10 )     1  
                 
Net cash used in investing activities
    (159 )     (260 )
                 
Financing Activities
               
Proceeds from securitized borrowings
    1,243       1,252  
Principal payments on securitized borrowings
    (1,163 )     (1,144 )
Proceeds from long-term debt
    1,771       1,099  
Principal payments on long-term debt
    (1,778 )     (1,534 )
Proceeds from note issuances
    245       494  
Repurchase of convertible notes
    (262 )     (197 )
Proceeds from call options
    155       105  
Repurchase of warrants
    (112 )     (75 )
Dividends to shareholders
    (76 )     (65 )
Repurchase of common stock
    (673 )     (188 )
Proceeds from stock option exercises
    11       36  
Excess tax benefits from stock-based compensation
    17       14  
Debt issuance costs
    (21 )     (29 )
Other, net
    (31 )     (23 )
                 
Net cash used in financing activities
    (674 )     (255 )
                 
Effect of changes in exchange rates on cash and cash equivalents
    (8 )     2  
                 
Net increase in cash and cash equivalents
    19       15  
Cash and cash equivalents, beginning of period
    156       155  
                 
Cash and cash equivalents, end of period
  $ 175     $ 170  
                 
 
See Notes to Consolidated Financial Statements.


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WYNDHAM WORLDWIDE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions)
(Unaudited)
 
                                                                 
                                  Retained
    Accumulated
       
                Treasury
    Additional
    Earnings/
    Other
    Total
 
    Common Stock     Stock     Paid-in
    (Accumulated
    Comprehensive
    Stockholders’
 
    Shares     Amount     Shares     Amount     Capital     Deficit)     Income     Equity  
 
Balance as of December 31, 2010
    210     $ 2       (37 )   $ (1,107 )   $ 3,892     $ (25 )   $ 155     $ 2,917  
Comprehensive income
                                                               
Net income
                                  361                
Currency translation adjustment, net of tax benefit of $2
                                        (25 )        
Unrealized gains on cash flow hedges, net of tax of $2
                                        3          
Total comprehensive income
                                                            339  
Exercise of stock options
                            10                   10  
Issuance of shares for RSU vesting
    2                                            
Change in deferred compensation
                            1                   1  
Repurchase of warrants
                            (112 )                 (112 )
Repurchase of common stock
                (22 )     (677 )                       (677 )
Change in excess tax benefit on equity awards
                            17                   17  
Dividends
                                  (76 )           (76 )
                                                                 
Balance as of September 30, 2011
    212     $ 2       (59 )   $ (1,784 )   $ 3,808     $ 260     $ 133     $ 2,419  
                                                                 
 
                                                                 
                                  Retained
    Accumulated
       
                Treasury
    Additional
    Earnings/
    Other
    Total
 
    Common Stock     Stock     Paid-in
    Accumulated
    Comprehensive
    Stockholders’
 
    Shares     Amount     Shares     Amount     Capital     Deficit     Income     Equity  
 
Balance as of December 31, 2009
    206     $ 2       (27 )   $ (870 )   $ 3,733     $ (315 )   $ 138     $ 2,688  
Comprehensive income
                                                               
Net income
                                  300                
Currency translation adjustment, net of tax benefit of $14
                                        1          
Reclassification of unrealized loss on cash flow hedge, net of tax benefit of $6
                                        8          
Unrealized gains on cash flow hedges, net of tax of $1
                                        2          
Total comprehensive income
                                                            311  
Exercise of stock options
    2                         36                   36  
Issuance of shares for RSU vesting
    2                                            
Change in deferred compensation
                            8                   8  
Reversal of net deferred tax liabilities from former Parent
                            190                   190  
Repurchase of warrants
                            (75 )                 (75 )
Repurchase of common stock
                (8 )     (191 )                       (191 )
Change in excess tax benefit on equity awards
                            11                   11  
Dividends
                                  (67 )           (67 )
                                                                 
Balance as of September 30, 2010
    210     $ 2       (35 )   $ (1,061 )   $ 3,903     $ (82 )   $ 149     $ 2,911  
                                                                 
 
See Notes to Consolidated Financial Statements.


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WYNDHAM WORLDWIDE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise noted, all amounts are in millions, except share and per share amounts)
(Unaudited)
 
 1.   Basis of Presentation
 
Wyndham Worldwide Corporation (“Wyndham” or the “Company”) is a global provider of hospitality services and products. The accompanying Consolidated Financial Statements include the accounts and transactions of Wyndham, as well as the entities in which Wyndham directly or indirectly has a controlling financial interest. The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America. All intercompany balances and transactions have been eliminated in the Consolidated Financial Statements.
 
In presenting the Consolidated Financial Statements, management makes estimates and assumptions that affect the amounts reported and related disclosures. Estimates, by their nature, are based on judgment and available information. Accordingly, actual results could differ from those estimates. In management’s opinion, the Consolidated Financial Statements contain all normal recurring adjustments necessary for a fair presentation of interim results reported. The results of operations reported for interim periods are not necessarily indicative of the results of operations for the entire year or any subsequent interim period. These financial statements should be read in conjunction with the Company’s 2010 Consolidated Financial Statements included in its Annual Report filed on Form 10-K with the Securities and Exchange Commission (“SEC”) on February 22, 2011.
 
 Business Description
 
The Company operates in the following business segments:
 
  ·   Lodging—franchises hotels in the upper upscale, upscale, upper midscale, midscale, economy and extended stay segments of the lodging industry and provides hotel management services for full-service hotels globally.
 
  ·   Vacation Exchange and Rentals—provides vacation exchange services and products to owners of intervals of vacation ownership interests (“VOIs”) and markets vacation rental properties primarily on behalf of independent owners.
 
  ·   Vacation Ownership—develops, markets and sells VOIs to individual consumers, provides consumer financing in connection with the sale of VOIs and provides property management services at resorts.
 
 Significant Accounting Policies
 
Intangible Assets.  The Company reviews its goodwill and other indefinite-lived intangible assets for impairment annually (during the fourth quarter of each year subsequent to completing its annual forecasting process), or more frequently if circumstances prescribed by the guidance for goodwill and other intangible assets are present.
 
Allowance for Loan Losses.  In the Company’s Vacation Ownership segment, the Company provides for estimated vacation ownership contract receivable defaults at the time of VOI sales by recording a provision for loan losses as a reduction of VOI sales on the Consolidated Statements of Income. The Company assesses the adequacy of the allowance for loan losses based on the historical performance of similar vacation ownership contract receivables using a technique referred to as static pool analysis, which tracks defaults for each year’s sales over the entire life of those contract receivables. The Company considers current defaults, past due aging, historical write-offs of contracts and consumer credit scores (FICO scores) in the assessment of borrower’s credit strength and expected loan performance. The Company also considers whether the historical economic conditions are comparable to current economic conditions. If current conditions differ from the conditions in effect when the historical experience was generated, the Company adjusts the allowance for loan losses to reflect the expected effects of the current environment on the collectability of its vacation ownership contract receivables.
 
Restricted Cash.  The largest portion of the Company’s restricted cash relates to securitizations. The remaining portion is comprised of cash held in escrow related to the Company’s vacation ownership business and cash held in all other escrow accounts. Restricted cash related to escrow deposits was $42 million as of both September 30, 2011 and December 31, 2010, respectively, and was recorded within other current assets on the Consolidated Balance Sheets for each period. See Note 8—Transfer and Servicing of Financial Assets for details of the Company’s restricted cash related to securitizations.


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 Recently Issued Accounting Pronouncements
 
Testing Goodwill for Impairment.  In September 2011, the Financial Accounting Standards Board (“FASB”) issued guidance on testing goodwill for impairment, which amends existing guidance by giving an entity the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If it is concluded that the fair value of a reporting unit is less than its carrying amount, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. This guidance is effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company believes the adoption of this guidance will not have a material impact on the Consolidated Financial Statements.
 
Presentation of Comprehensive Income.  In June 2011, the FASB issued guidance for the presentation of comprehensive income, which amends existing guidance by allowing only two options for presenting the components of net income and other comprehensive income: (i) in either a single continuous financial statement of comprehensive income or (ii) in two separate but consecutive financial statements, consisting of an income statement followed by a separate statement of other comprehensive income. This guidance is effective for interim and annual reporting periods beginning after December 15, 2011, with early adoption permitted. The Company believes the adoption of this guidance will not have a material impact on the Consolidated Financial Statements.
 
Fair Value Measurement.  In May 2011, the FASB issued guidance which generally provides a consistent definition of fair value and ensures that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. The guidance changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. This guidance is effective for interim and annual reporting periods beginning after December 15, 2011 and shall be applied on a prospective basis. The Company is currently evaluating the impact of the adoption of this guidance on the Consolidated Financial Statements.
 
Multiple-Deliverable Revenue Arrangements.  In October 2009, the FASB issued guidance on multiple-deliverable revenue arrangements, which requires an entity to apply the relative selling price allocation method and to estimate selling prices for all units of accounting, including delivered items, when vendor-specific objective evidence or acceptable third-party evidence does not exist. The guidance is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and shall be applied on a prospective basis. The Company adopted the guidance on January 1, 2011, as required. There was no material impact on the Consolidated Financial Statements resulting from the adoption.
 
 2.   Earnings Per Share
 
The computation of basic and diluted earnings per share (“EPS”) is based on the Company’s net income available to common stockholders divided by the basic weighted average number of common shares and diluted weighted average number of common shares, respectively.
 
The following table sets forth the computation of basic and diluted EPS (in millions, except per share data):
 
                                 
    Three Months Ended
    Nine Months Ended
 
    September 30,     September 30,  
    2011     2010     2011     2010  
 
Net income
  $ 175     $ 156     $ 361     $ 300  
                                 
Basic weighted average shares outstanding
    159       177       166       179  
Stock options, SSARs and RSUs (a)
    3       4       3       4  
Warrants (b)
          3       1       3  
                                 
Diluted weighted average shares outstanding
    162       184       170       186  
                                 
Earnings per share:
                               
Basic
  $ 1.10     $ 0.88     $ 2.17     $ 1.68  
Diluted
    1.08       0.84       2.12       1.62  
        ­ ­
  (a)   Includes unvested dilutive restricted stock units (“RSUs”) which are subject to future forfeitures.
 
  (b)   Represents the dilutive effect of warrants to purchase shares of the Company’s common stock related to the May 2009 issuance of the Company’s convertible notes (see Note 7—Long-Term Debt and Borrowing Arrangements).
 
The computations of diluted EPS do not include 3 million stock options and stock-settled stock appreciation rights (“SSARs”) for both the three and nine months ended September 30, 2011 as the effect of their inclusion would have been anti-dilutive to EPS. In addition, the three and nine months ended September 30, 2011 exclude approximately 350,000 performance-based stock units (“PSUs”) as the Company had not met the required performance metrics as of


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September 30, 2011 (see Note 14—Stock-Based Compensation for further details). The computations of diluted EPS for both the three and nine months ended September 30, 2010 do not include 4 million stock options and SSARs as the effect of their inclusion would have been anti-dilutive to EPS.
 
 Dividend Payments
 
During the quarterly periods ended March 31, June 30 and September 30, 2011, the Company paid cash dividends of $0.15 per share ($76 million in the aggregate). During the quarterly periods ended March 31, June 30 and September 30, 2010, the Company paid cash dividends of $0.12 per share ($65 million in the aggregate).
 
 Stock Repurchase Program
 
On both April 25, 2011 and August 11, 2011, the Company’s Board of Directors authorized an increase of $500 million to the Company’s existing stock repurchase program. As of September 30, 2011, the total authorization of the program was $1.5 billion. The following table summarizes stock repurchase activity under the current stock repurchase program:
 
                         
                Average
 
    Shares     Cost     Price  
 
As of December 31, 2010
    11.4     $ 295     $ 25.78  
For the nine months ended September 30, 2011
    22.0       677       30.74  
                         
As of September 30, 2011
    33.4     $ 972       29.05  
                         
 
The Company had $592 million remaining availability in its program as of September 30, 2011. The total capacity of this program is increased by proceeds received from stock option exercises.
 
 3.   Acquisitions
 
Assets acquired and liabilities assumed in business combinations were recorded on the Consolidated Balance Sheets as of the respective acquisition dates based upon their estimated fair values at such dates. The results of operations of businesses acquired by the Company have been included in the Consolidated Statement of Income since their respective dates of acquisition. The excess of the purchase price over the estimated fair values of the underlying assets acquired and liabilities assumed was allocated to goodwill. In certain circumstances, the allocations of the excess purchase price are based upon preliminary estimates and assumptions. Accordingly, the allocations may be subject to revision when the Company receives final information, including appraisals and other analyses. Any revisions to the fair values during the allocation period will be recorded by the Company as further adjustments to the purchase price allocations. Although, in certain circumstances, the Company has substantially integrated the operations of its acquired businesses, additional future costs relating to such integration may occur. These costs may result from integrating operating systems, relocating employees, closing facilities, reducing duplicative efforts and exiting and consolidating other activities. These costs will be recorded on the Consolidated Statement of Income as expenses.
 
During the third quarter of 2011, the Company completed the acquisitions of substantially all of the assets of two vacation rentals businesses for $27 million in cash, net of cash acquired. The preliminary purchase price allocations of these acquisitions resulted in the recognition of $10 million of goodwill, $15 million of definite-lived intangible assets with a weighted average life of 17 years and $1 million of trademarks, all of which were assigned to the Company’s Vacation Exchange and Rentals segment.
 
 4.   Intangible Assets
 
Intangible assets consisted of:
 
                                                 
    As of September 30, 2011     As of December 31, 2010  
    Gross
          Net
    Gross
          Net
 
    Carrying
    Accumulated
    Carrying
    Carrying
    Accumulated
    Carrying
 
    Amount     Amortization     Amount     Amount     Amortization     Amount  
 
Unamortized Intangible Assets:
                                               
Goodwill
  $ 1,483                     $ 1,481                  
                                                 
Trademarks
  $ 731                     $ 731                  
                                                 
Amortized Intangible Assets:
                                               
Franchise agreements
  $ 634     $ 333     $ 301     $ 634     $ 318     $ 316  
Other
    182       49       133       164       40       124  
                                                 
    $ 816     $ 382     $ 434     $ 798     $ 358     $ 440  
                                                 


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The changes in the carrying amount of goodwill are as follows:
 
                                 
    Balance at
    Goodwill
             
    December 31,
    Acquired
    Foreign
    Balance at
 
    2010     During 2011     Exchange     September 30, 2011  
 
Lodging
  $ 300     $     $     $ 300  
Vacation Exchange and Rentals
    1,181       10 (*)     (8 )     1,183  
                                 
Total Company
  $ 1,481     $ 10     $ (8 )   $ 1,483  
                                 
        ­ ­
  (*)   Relates to two tuck-in acquisitions completed during the third quarter of 2011 (see Note 3—Acquisitions).
 
Amortization expense relating to amortizable intangible assets was as follows:
 
                                 
    Three Months Ended
    Nine Months Ended
 
    September 30,     September 30,  
    2011     2010     2011     2010  
 
Franchise agreements
  $ 5     $ 5     $ 15     $ 15  
Other
    3       1       9       5  
                                 
Total (*)
  $ 8     $ 6     $ 24     $ 20  
                                 
        ­ ­
  (*)   Included as a component of depreciation and amortization on the Consolidated Statements of Income.
 
Based on the Company’s amortizable intangible assets as of September 30, 2011, the Company expects related amortization expense as follows:
 
         
    Amount  
 
Remainder of 2011
    8  
2012
    31  
2013
    30  
2014
    29  
2015
    29  
2016
    27  
 
 5.   Vacation Ownership Contract Receivables
 
The Company generates vacation ownership contract receivables by extending financing to the purchasers of its VOIs. Current and long-term vacation ownership contract receivables, net consisted of:
 
                 
          December 31,
 
    September 30, 2011     2010  
 
Current vacation ownership contract receivables:
               
Securitized
  $ 245     $ 266  
Non-securitized
    88       65  
                 
      333       331  
Less: Allowance for loan losses
    (39 )     (36 )
                 
Current vacation ownership contract receivables, net
  $ 294     $ 295  
                 
Long-term vacation ownership contract receivables:
               
Securitized
  $ 2,113     $ 2,437  
Non-securitized
    801       576  
                 
      2,914       3,013  
Less: Allowance for loan losses
    (346 )     (326 )
                 
Long-term vacation ownership contract receivables, net
  $ 2,568     $ 2,687  
                 
 
During the three and nine months ended September 30, 2011, the Company’s securitized vacation ownership contract receivables generated interest income of $79 million and $244 million, respectively. During the three and nine months ended September 30, 2010, such amounts were $88 million and $249 million, respectively.
 
Principal payments that are contractually due on the Company’s vacation ownership contract receivables during the next twelve months are classified as current on the Consolidated Balance Sheets. During the nine months ended September 30, 2011 and 2010, the Company originated vacation ownership contract receivables of $730 million and


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$744 million, respectively, and received principal collections of $579 million and $581 million, respectively. The weighted average interest rate on outstanding vacation ownership contract receivables was 13.3% and 13.1% at September 30, 2011 and December 31, 2010, respectively.
 
The activity in the allowance for loan losses on vacation ownership contract receivables was as follows:
 
         
    Amount  
 
Allowance for loan losses as of December 31, 2010
  $ (362 )
Provision for loan losses
    (255 )
Contract receivables write-offs, net
    232  
         
Allowance for loan losses as of September 30, 2011
  $ (385 )
         
 
In accordance with the guidance for accounting for real estate timesharing transactions, the Company recorded a provision for loan losses of $96 million and $255 million as a reduction of net revenues during the three and nine months ended September 30, 2011, respectively, and $85 million and $258 million during the three and nine months ended September 30, 2010, 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 receivable 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 300—850 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 so as to ensure that all VOI contract receivables are scored at least every six months. The Company groups all VOI contract receivables into five different categories: FICO scores ranging from 700 to 850, 600 to 699, Below 600, No Score (primarily comprised of consumers for whom a score is not readily available, including consumers declining access to FICO scores and non U.S. residents) and Asia Pacific (comprised of receivables in the Company’s Wyndham Vacation Resort Asia Pacific business for which scores are not readily available). The following table details an aged analysis of financing receivables using the most recently updated FICO scores (based on the update policy described above):
 
                                                 
    As of September 30, 2011  
    700+     600-699     <600     No Score     Asia Pacific     Total  
 
Current
  $ 1,419     $ 992     $ 345     $ 72     $ 281     $ 3,109  
31—60 days
    10       21       29       3       4       67  
61—90 days
    7       11       17       1       1       37  
91—120 days
    5       9       17       1       2       34  
                                                 
Total
  $ 1,441     $ 1,033     $ 408     $ 77     $ 288     $ 3,247  
                                                 
 
                                                 
    As of December 31, 2010  
    700+     600-699     <600     No Score     Asia Pacific     Total  
 
Current
  $ 1,415     $ 990     $ 426     $ 59     $ 297     $ 3,187  
31—60 days
    10       23       34       2       4       73  
61—90 days
    7       14       22       1       3       47  
91—120 days
    5       10       19       1       2       37  
                                                 
Total
  $ 1,437     $ 1,037     $ 501     $ 63     $ 306     $ 3,344  
                                                 
 
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.


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 6.   Inventory
 
Inventory consisted of:
 
                 
          December 31,
 
    September 30, 2011     2010  
 
Land held for VOI development
  $ 132     $ 131  
VOI construction in process
    201       229  
Completed inventory and vacation credits (a)(b)
    775       821  
                 
Total inventory
    1,108       1,181  
Less: Current portion
    337       348  
                 
Non-current inventory
  $ 771     $ 833  
                 
        ­ ­
  (a)   Includes estimated recoveries of $161 million and $148 million as of September 30, 2011 and December 31, 2010, respectively. Vacation credits relate to both the Company’s vacation ownership and vacation exchange and rentals businesses.
 
  (b)   Includes $76 million and $80 million as of September 30, 2011 and December 31, 2010, respectively, related to the Company’s vacation exchange and rentals business.
 
Inventory that the Company expects to sell within the next twelve months is classified as current on the Consolidated Balance Sheets.
 
 7.   Long-Term Debt and Borrowing Arrangements
 
The Company’s indebtedness consisted of:
 
                 
          December 31,
 
    September 30, 2011     2010  
 
Securitized vacation ownership debt: (a)
               
Term notes
  $ 1,512     $ 1,498  
Bank conduit facility (b)
    218       152  
                 
Total securitized vacation ownership debt
    1,730       1,650  
Less: Current portion of securitized vacation ownership debt
    179       223  
                 
Long-term securitized vacation ownership debt
  $ 1,551     $ 1,427  
                 
Long-term debt:
               
Revolving credit facility (due July 2016) (c)
  $ 169     $ 154  
6.00% senior unsecured notes (due December 2016) (d)
    812       798  
9.875% senior unsecured notes (due May 2014) (e)
    243       241  
3.50% convertible notes (due May 2012) (f)
    27       266  
7.375% senior unsecured notes (due March 2020) (g)
    247       247  
5.75% senior unsecured notes (due February 2018) (h)
    247       247  
5.625% senior unsecured notes (due March 2021) (i)
    245        
Vacation rentals capital leases (j)
    108       115  
Other
    1       26  
                 
Total long-term debt
    2,099       2,094  
Less: Current portion of long-term debt
    37       11  
                 
Long-term debt
  $ 2,062     $ 2,083  
                 
        ­ ­
  (a)   Represents non-recourse debt that is securitized through bankruptcy-remote special purpose entities (“SPEs”), the creditors of which have no recourse to the Company for principal and interest. These outstanding borrowings are collateralized by $2,502 million and $2,865 million of underlying gross vacation ownership contract receivables and related assets as of September 30, 2011 and December 31, 2010, respectively.
 
  (b)   Represents a $600 million, non-recourse vacation ownership bank conduit facility, with a term through June 2013 whose capacity is subject to the Company’s ability to provide additional assets to collateralize the facility. As of September 30, 2011, the total available capacity of the facility was $382 million.
 
  (c)   Total capacity of the revolving credit facility is $1.0 billion, which includes availability for letters of credit. As of September 30, 2011, the Company had $11 million of letters of credit outstanding and, as such, the total available capacity of the revolving credit facility was $820 million.
 
  (d)   Represents senior unsecured notes issued by the Company during December 2006. The balance as of September 30, 2011 represents $800 million aggregate principal less $2 million of unamortized discount, plus $14 million of unamortized gains from the settlement of a derivative.
 
  (e)   Represents senior unsecured notes issued by the Company during May 2009. The balance as of September 30, 2011 represents $250 million aggregate principal less $7 million of unamortized discount.


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  (f)   Represents convertible notes issued by the Company during May 2009, which includes debt principal, less unamortized discount, and a liability related to a bifurcated conversion feature. During the first nine months of 2011, the Company repurchased a portion of its outstanding 3.50% convertible notes, primarily through the completion of a cash tender offer (see “3.50% Convertible Notes” below for further details). The following table details the components of the convertible notes:
 
                 
    September 30, 2011     December 31, 2010  
 
Debt principal
  $ 12     $ 116  
Unamortized discount
    (1 )     (12 )
                 
Debt less discount
    11       104  
Fair value of bifurcated conversion feature (*)
    16       162  
                 
Convertible notes
  $ 27     $ 266  
                 
              ­ ­
  (*)   The Company also has an asset with a fair value equal to the bifurcated conversion feature, which represents cash-settled call options that the Company purchased concurrent with the issuance of the convertible notes (“Bifurcated Conversion Feature”).
 
  (g)   Represents senior unsecured notes issued by the Company during February 2010. The balance as of September 30, 2011 represents $250 million aggregate principal less $3 million of unamortized discount.
 
  (h)   Represents senior unsecured notes issued by the Company during September 2010. The balance as of September 30, 2011 represents $250 million aggregate principal less $3 million of unamortized discount.
 
  (i)   Represents senior unsecured notes issued by the Company during March 2011. The balance as of September 30, 2011 represents $250 million aggregate principal less $5 million of unamortized discount.
 
  (j)   Represents capital lease obligations with corresponding assets classified within property and equipment on the Consolidated Balance Sheets.
 
 2011 Debt Issuances
 
5.625% Senior Unsecured Notes.  On March 1, 2011, the Company issued senior unsecured notes, with face value of $250 million and bearing interest at a rate of 5.625%, for net proceeds of $245 million. Interest began accruing on March 1, 2011 and is payable semi-annually in arrears on March 1 and September 1 of each year, commencing on September 1, 2011. The notes will mature on March 1, 2021 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.
 
Sierra Timeshare 2011-1 Receivables Funding, LLC.  On March 25, 2011, the Company closed a series of term notes payable, Sierra Timeshare 2011-1 Receivables Funding LLC, in the initial principal amount of $400 million at an advance rate of 98%. These borrowings bear interest at a weighted average coupon rate of 3.70% and are secured by vacation ownership contract receivables. As of September 30, 2011, the Company had $290 million of outstanding borrowings under these term notes.
 
Sierra Timeshare Conduit Receivables Funding II, LLC.  On June 28, 2011, the Company renewed its securitized timeshare receivables conduit facility for a two-year period through June 2013. The facility bears interest at variable rates based on commercial paper rates and LIBOR rates plus a spread and has a capacity of $600 million.
 
Revolving Credit Facility.  On July 15, 2011, the Company replaced its $980 million revolving credit facility with a $1.0 billion five-year revolving credit facility that expires on July 15, 2016. This facility is subject to a fee of 22.5 basis points based on total capacity and bears interest at LIBOR plus 142.5 basis points. The interest rate of this facility is dependent on the Company’s credit ratings. As of September 30, 2011, the Company had $169 million of outstanding borrowings and $11 million of outstanding letters of credit and, as such, the total available remaining capacity was $820 million.
 
Sierra Timeshare 2011-2 Receivables Funding, LLC.  On August 31, 2011, the Company closed a series of term notes payable, Sierra Timeshare 2011-2 Receivables Funding LLC, in the initial principal amount of $300 million at an advance rate of 92%. These borrowings bear interest at a weighted average coupon rate of 4.01% and are secured by vacation ownership contract receivables. As of September 30, 2011, the Company had $274 million of outstanding borrowings under these term notes.
 
 3.50% Convertible Notes
 
During May 2009, the Company issued convertible notes (“Convertible Notes”) with face value of $230 million and bearing interest at a rate of 3.50%. Concurrent with such issuance, the Company purchased cash-settled call options (“Call Options”) and entered into warrant transactions (“Warrants”). The agreements for such transactions contain anti-dilution provisions that require certain adjustments to be made as a result of all quarterly cash dividend increases above $0.04 per share that occur prior to the maturity date of the Convertible Notes, Call Options and Warrants. During March 2010, the Company increased its quarterly dividend from $0.04 per share to $0.12 per share and, subsequently, during March 2011, from $0.12 per share to $0.15 per share. As a result of the dividend increase and


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required adjustments, as of September 30, 2011, the Convertible Notes had a conversion reference rate of 80.4364 shares of common stock per $1,000 principal amount (equivalent to a conversion price of $12.43 per share of the Company’s common stock), the conversion price of the Call Options was $12.43 and the exercise price of the Warrants was $19.68.
 
During the third quarter of 2010, the Company repurchased a portion of its Convertible Notes with a carrying value of $188 million ($81 million for the portion of Convertible Notes, including the unamortized discount, and $107 million for the related Bifurcated Conversion Feature) for $197 million, which resulted in a loss of $9 million during the third quarter of 2010. Such Convertible Notes had a face value of $92 million. Concurrent with the repurchase, the Company settled (i) a portion of the Call Options for proceeds of $105 million, which resulted in an additional loss of $2 million and (ii) a portion of the Warrants with payments of $75 million. As a result of these transactions, the Company made net payments of $167 million and incurred total losses of $11 million during the third quarter of 2010.
 
During the first nine months of 2011, the Company repurchased a portion of its remaining Convertible Notes with carrying value of $251 million primarily resulting from the completion of a cash tender offer ($95 million for the portion of Convertible Notes, including the unamortized discount, and $156 million for the related Bifurcated Conversion Feature) for $262 million. Concurrent with the repurchases, the Company settled (i) a portion of the Call Options for proceeds of $155 million, which resulted in an additional loss of $1 million, and (ii) a portion of the Warrants with payments of $112 million. As a result of these transactions, the Company made net payments of $219 million and incurred total losses of $12 million during the first nine months of 2011 and reduced the number of shares related to the Warrants to approximately 1 million as of September 30, 2011.
 
 Early Extinguishment of Debt
 
During each of the first two quarters of 2011 and during the third quarter of 2010, the Company repurchased a portion of its Convertible Notes and settled a portion of the related Call Options. In connection with these transactions, the Company incurred a loss of $12 million during the nine months ended September 30, 2011 and $11 million during the three and nine months ended September 30, 2010, which is included within interest expense on the Consolidated Statement of Income.
 
During the first quarter of 2010, in connection with the early extinguishment of the term loan facility, the Company effectively terminated a related interest rate swap agreement. This resulted in a reclassification of a $14 million unrealized loss from accumulated other comprehensive income (“AOCI”) to interest expense on the Consolidated Statement of Income. The Company incurred an additional $2 million of costs in connection with the early extinguishment of its term loan and revolving foreign credit facilities, which is also included within interest expense on the Consolidated Statement of Income.
 
 Covenants
 
The revolving credit facility is subject to covenants including the maintenance of specific financial ratios. The financial ratio covenants consist of a minimum consolidated interest coverage ratio and a maximum consolidated leverage ratio (both as defined in the credit agreement). In addition, the credit facility includes limitations on indebtedness of material subsidiaries; liens; mergers, consolidations, liquidations and dissolutions; sale of all or substantially all assets; and sale and leaseback transactions.
 
The unsecured notes contain various covenants including limitations on liens, limitations on potential sale and leaseback transactions and change of control restrictions. In addition, there are limitations on mergers, consolidations and potential sale of all or substantially all of the Company’s assets.
 
As of September 30, 2011, the Company was in compliance with all of the financial covenants described above.
 
Each of the Company’s non-recourse, securitized term notes and the bank conduit facility contain various triggers relating to the performance of the applicable loan pools. If the vacation ownership contract receivables pool that collateralizes one of the Company’s securitization notes fails to perform within the parameters established by the contractual triggers (such as higher default or delinquency rates), there are provisions pursuant to which the cash flows for that pool will be maintained in the securitization as extra collateral for the note holders or applied to accelerate the repayment of outstanding principal to the note holders. As of September 30, 2011, all of the Company’s securitized loan pools were in compliance with applicable contractual triggers.


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 Maturities and Capacity
 
The Company’s outstanding debt as of September 30, 2011 matures as follows:
 
                         
    Securitized
             
    Vacation
             
    Ownership
             
    Debt     Other     Total  
 
Within 1 year
  $ 179     $ 37 (*)   $ 216  
Between 1 and 2 years
    213       10       223  
Between 2 and 3 years
    353       254       607  
Between 3 and 4 years
    184       11       195  
Between 4 and 5 years
    181       181       362  
Thereafter
    620       1,606       2,226  
                         
    $ 1,730     $ 2,099     $ 3,829  
                         
        ­ ­
  (*)   Includes a liability of $16 million related to the Bifurcated Conversion Feature associated with the Company’s Convertible Notes.
 
As debt maturities of the securitized vacation ownership debt are based on the contractual payment terms of the underlying vacation ownership contract receivables, actual maturities may differ as a result of prepayments by the vacation ownership contract receivable obligors.
 
As of September 30, 2011, available capacity under the Company’s borrowing arrangements was as follows:
 
                 
    Securitized Bank
    Revolving Credit
 
    Conduit Facility (a)     Facility  
 
Total Capacity
  $ 600     $ 1,000  
Less: Outstanding Borrowings
    218       169  
                 
Available Capacity
  $ 382     $ 831 (b)
                 
        ­ ­
  (a)   The capacity of this facility is subject to the Company’s ability to provide additional assets to collateralize additional securitized borrowings.
 
  (b)   The capacity under the Company’s revolving credit facility includes availability for letters of credit. As of September 30, 2011, the available capacity of $831 million was further reduced to $820 million due to the issuance of $11 million of letters of credit.
 
 Interest Expense
 
Interest expense incurred in connection with the Company’s non-securitized debt was $37 million and $112 million during the three and nine months ended September 30, 2011, respectively, and $38 million and $110 million during the three and nine months ended September 30, 2010, respectively. The Company also incurred a loss of $12 million during the nine months ended September 30, 2011 and a loss of $11 million during the three and nine months ended September 30, 2010 in connection with the repurchase of a portion of its Convertible Notes and the settlement of the related Call Options, which is included within interest expense. Additionally, the Company recorded $16 million of costs incurred during the first quarter of 2010 for the early extinguishment of its term loan and revolving foreign credit facilities, which was included within interest expense during the nine months ended September 30, 2010. Cash paid related to such interest expense was $95 million and $80 million during the nine months ended September 30, 2011 and 2010, respectively. Such amounts exclude cash payments related to early extinguishment of debt costs.
 
Interest expense is partially offset on the Consolidated Statements of Income by capitalized interest of $3 million and $9 million during the three and nine months ended September 30, 2011, respectively, and $2 million and $4 million during the three and nine months ended September 30, 2010, respectively.
 
Cash paid related to consumer financing interest expense was $57 million and $68 million during the nine months ended September 30, 2011 and 2010, respectively.


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 8.   Transfer and Servicing of Financial Assets
 
The Company pools qualifying vacation ownership contract receivables and sells them to bankruptcy-remote entities. Vacation ownership contract receivables qualify for securitization based primarily on the credit strength of the VOI purchaser to whom financing has been extended. Vacation ownership contract receivables are securitized through bankruptcy-remote SPEs that are consolidated within the Consolidated Financial Statements. As a result, the Company does not recognize gains or losses resulting from these securitizations at the time of sale to the SPEs. Interest income is recognized when earned over the contractual life of the vacation ownership contract receivables. The Company services the securitized vacation ownership contract receivables pursuant to servicing agreements negotiated on an arms-length basis based on market conditions. The activities of these SPEs are limited to (i) purchasing vacation ownership contract receivables from the Company’s vacation ownership subsidiaries; (ii) issuing debt securities and/or borrowing under a conduit facility to fund such purchases; and (iii) entering into derivatives to hedge interest rate exposure. The bankruptcy-remote SPEs are legally separate from the Company. The receivables held by the bankruptcy-remote SPEs are not available to creditors of the Company and legally are not assets of the Company. Additionally, the creditors of these SPEs have no recourse to the Company for principal and interest.
 
The assets and liabilities of these vacation ownership SPEs are as follows:
 
                 
          December 31,
 
    September 30, 2011     2010  
 
Securitized contract receivables, gross (a)
  $ 2,358     $ 2,703  
Securitized restricted cash (b)
    124       138  
Interest receivables on securitized contract receivables (c)
    19       22  
Other assets (d)
    1       2  
                 
Total SPE assets (e)
    2,502       2,865  
                 
Securitized term notes (f)
    1,512       1,498  
Securitized conduit facilities (f)
    218       152  
Other liabilities (g)
    17       22  
                 
Total SPE liabilities
    1,747       1,672  
                 
SPE assets in excess of SPE liabilities
  $ 755     $ 1,193  
                 
        ­ ­
  (a)   Included in current ($245 million and $266 million as of September 30, 2011 and December 31, 2010, respectively) and non-current ($2,113 million and $2,437 million as of September 30, 2011 and December 31, 2010, respectively) vacation ownership contract receivables on the Consolidated Balance Sheets.
 
  (b)   Included in other current assets ($65 million and $77 million as of September 30, 2011 and December 31, 2010, respectively) and other non-current assets ($59 million and $61 million as of September 30, 2011 and December 31, 2010, respectively) on the Consolidated Balance Sheets.
 
  (c)   Included in trade receivables, net on the Consolidated Balance Sheets.
 
  (d)   Includes interest rate derivative contracts and related assets; included in other non-current assets on the Consolidated Balance Sheets.
 
  (e)   Excludes deferred financing costs of $24 million and $22 million as of September 30, 2011 and December 31, 2010, respectively, related to securitized debt.
 
  (f)   Included in current ($179 million and $223 million as of September 30, 2011 and December 31, 2010, respectively) and long-term ($1,551 million and $1,427 million as of September 30, 2011 and December 31, 2010, respectively) securitized vacation ownership debt on the Consolidated Balance Sheets.
 
  (g)   Primarily includes interest rate derivative contracts and accrued interest on securitized debt; included in accrued expenses and other current liabilities ($3 million as of both September 30, 2011 and December 31, 2010) and other non-current liabilities ($14 million and $19 million as of September 30, 2011 and December 31, 2010, respectively) on the Consolidated Balance Sheets.
 
In addition, the Company has vacation ownership contract receivables that have not been securitized through bankruptcy-remote SPEs. Such gross receivables were $889 million and $641 million as of September 30, 2011 and December 31, 2010, 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:
 
                 
          December 31,
 
    September 30, 2011     2010  
 
SPE assets in excess of SPE liabilities
  $ 755     $ 1,193  
Non-securitized contract receivables
    889       641  
Allowance for loan losses
    (385 )     (362 )
                 
Total, net
  $ 1,259     $ 1,472  
                 


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 9.   Fair Value
 
The guidance for fair value measurements requires disclosures about assets and liabilities that are measured at fair value. The following table presents information about the Company’s financial assets and liabilities that are measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair values. Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:
 
Level 1:  Quoted prices for identical instruments in active markets.
 
Level 2:  Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value driver is observable.
 
Level 3:  Unobservable inputs used when little or no market data is available.
 
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement falls has been determined based on the lowest level input (closest to Level 3) that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
 
                         
          Fair Value Measure on a
 
          Recurring Basis  
          Significant
    Significant
 
    As of
    Other
    Unobservable
 
    September 30,
    Observable
    Inputs
 
    2011     Inputs (Level 2)     (Level 3)  
 
Assets:
                       
Derivatives: (a)
                       
Call Options
  $ 16     $     $ 16  
Interest rate contracts
    7       7        
Foreign exchange contracts
    4       4        
Securities available-for-sale (b)
    6             6  
                         
Total assets
  $ 33     $ 11     $ 22  
                         
Liabilities:
                       
Derivatives: (c)
                       
Bifurcated Conversion Feature
  $ 16     $     $ 16  
Interest rate contracts
    14       14        
Foreign exchange contracts
    11       11        
                         
Total liabilities
  $ 41     $ 25     $ 16  
                         
        ­ ­
  (a)   Included in other current assets ($20 million) and other non-current assets ($7 million) on the Consolidated Balance Sheet.
 
  (b)   Included in other non-current assets on the Consolidated Balance Sheet.
 
  (c)   Included in current portion of long-term debt ($16 million), accrued expenses and other current liabilities ($11 million) and other non-current liabilities ($14 million) on the Consolidated Balance Sheet.
 


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          Fair Value Measure on a
 
          Recurring Basis  
          Significant
    Significant
 
    As of
    Other
    Unobservable
 
    December 31,
    Observable
    Inputs
 
    2010     Inputs (Level 2)     (Level 3)  
 
Assets:
                       
Derivatives: (a)
                       
Call Options
  $ 162     $     $ 162  
Interest rate contracts
    7       7        
Foreign exchange contracts
    4       4        
Securities available-for-sale (b)
    6             6  
                         
Total assets
  $ 179     $ 11     $ 168  
                         
Liabilities:
                       
Derivatives: (c)
                       
Bifurcated Conversion Feature
  $ 162     $     $ 162  
Interest rate contracts
    27       27        
Foreign exchange contracts
    12       12        
                         
Total liabilities
  $ 201     $ 39     $ 162  
                         
        ­ ­
  (a)   Included in other current assets ($5 million) and other non-current assets ($168 million) on the Consolidated Balance Sheet.
 
  (b)   Included in other non-current assets on the Consolidated Balance Sheet.
 
  (c)   Included in long-term debt ($162 million), accrued expenses and other current liabilities ($12 million) and other non-current liabilities ($27 million) on the Consolidated Balance Sheet.
 
The Company’s derivative instruments primarily consist of the Call Options and Bifurcated Conversion Feature related to the Convertible Notes, 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 (see Note 10—Derivative Instruments and Hedging Activities for more detail). 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 following table presents additional information about financial assets which are measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value as of September 30, 2011:
 
                         
    Fair Value Measurements Using
 
    Significant Unobservable Inputs (Level 3)  
          Derivative
       
          Liability-
       
    Derivative
    Bifurcated
    Securities
 
    Asset-Call
    Conversion
    Available-For-
 
    Options     Feature     Sale  
 
Balance as of December 31, 2010
  $ 162     $ (162 )   $ 6  
Convertible Notes activity (*)
    (156 )     156        
Change in fair value
    10       (10 )      
                         
Balance as of September 30, 2011
  $ 16     $ (16 )   $ 6  
                         
        ­ ­
  (*)   Represents the change in value resulting from the Company’s repurchase of a portion of its Convertible Notes and the settlement of a corresponding portion of the Call Options (see Note 7—Long-Term Debt and Borrowing Arrangements).
 
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

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amounts of cash and cash equivalents, restricted cash, trade receivables, accounts payable and accrued expenses and other current liabilities approximate fair value due to the short-term maturities of these assets and liabilities. The carrying amounts and estimated fair values of all other financial instruments are as follows:
 
                                 
    September 30, 2011     December 31, 2010  
          Estimated
          Estimated
 
    Carrying
    Fair
    Carrying
    Fair
 
    Amount     Value     Amount     Value  
 
Assets
                               
Vacation ownership contract receivables, net
  $ 2,862     $ 3,243     $ 2,982     $ 2,782  
Debt
                               
Total debt (a)
    3,829       3,974       3,744       3,871  
Derivatives
                               
Foreign exchange contracts (b)
                               
Assets
    4       4       4       4  
Liabilities
    (11 )     (11 )     (12 )     (12 )
Interest rate contracts (b)
                               
Assets
    7       7       7       7  
Liabilities
    (14 )     (14 )     (27 )     (27 )
Call Options
                               
Assets
    16       16       162       162  
        ­ ­
  (a)   As of September 30, 2011 and December 31, 2010, includes $16 million and $162 million, respectively, related to the Bifurcated Conversion Feature liability.
 
  (b)   Instruments are in net loss positions as of September 30, 2011 and December 31, 2010.
 
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 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.
 
The Company estimates the fair value of its securitized vacation ownership debt by obtaining 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 using indicative bids from investment banks and determines the fair value of its senior notes using quoted market prices.
 
In accordance with the guidance for equity method investments, during the first quarter of 2011, an investment in an international joint venture in the Company’s lodging business with a carrying amount of $13 million was written down due to the impairment of cash flows resulting from the Company’s partner having an indirect relationship with the Libyan government. Such write-down resulted in a $13 million charge, which is included within asset impairment on the Consolidated Statement of Income for the nine months ended September 30, 2011.
 
10.   Derivative Instruments and Hedging Activities
 
 Foreign Currency Risk
 
The Company uses freestanding foreign currency forward contracts and foreign currency forward contracts designated as cash flow hedges to manage its exposure to changes in foreign currency exchange rates associated with its foreign currency denominated receivables, forecasted earnings of foreign subsidiaries and forecasted foreign currency denominated vendor payments. The amount of gains or losses the Company expects to reclassify from other comprehensive income 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 fair value of the derivatives are recorded in income with offsetting


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adjustments to the carrying amount of the hedged debt. The impact of the change in fair value of the fair value hedges and hedged debt was not material during both the three and nine months ended September 30, 2011.
 
In connection with the early extinguishment of the term loan facility during the first quarter of 2010 (See Note 7—Long-Term Debt and Borrowing Arrangements), the Company effectively terminated a related interest rate swap agreement, which resulted in the reclassification of a $14 million unrealized loss from AOCI to interest expense on the Consolidated Statement of Income for the three months ended March 31, 2010. The amount of losses that the Company expects to reclassify from AOCI to earnings during the next 12 months is not material.
 
The following table summarizes information regarding the gain amounts recognized in AOCI:
 
                                 
    Three Months Ended
    Nine Months Ended
 
    September 30,     September 30,  
    2011     2010     2011     2010  
 
Derivatives designated as hedging instruments
                               
Interest rate contracts
  $ 1     $     $ 5     $ 2  
 
The following table summarizes information regarding the gain/(loss) recognized in income on the Company’s freestanding derivatives:
 
                                 
    Three Months Ended
    Nine Months Ended
 
    September 30,     September 30,  
    2011     2010     2011     2010  
 
Derivatives not designated as hedging instruments
                               
Foreign exchange contracts (a)
  $ (6 )   $ (8 )   $ (13 )   $ (11 )
Interest rate contracts
    1 (b)     4 (b)     7 (b)     11 (c)
Call Options
    (5 )     112       10       99  
Bifurcated Conversion Feature
    5       (112 )     (10 )     (99 )
                                 
Total
  $ (5 )   $ (4 )   $ (6 )   $  
                                 
        ­ ­
  (a)   Included within operating expenses on the Consolidated Statements of Income.
 
  (b)   Included primarily within interest expense on the Consolidated Statements of Income.
 
  (c)   Included within interest expense and consumer financing interest expense on the Consolidated Statements of Income.
 
The following table summarizes information regarding the Company’s derivative instruments as of September 30, 2011:
 
                         
    Assets     Liabilities  
    Balance Sheet Location   Fair Value     Balance Sheet Location   Fair Value  
 
Derivatives designated as hedging instruments
                       
Interest rate contracts
              Other non-current liabilities   $ 13  
                         
Derivatives not designated as hedging instruments
                       
Interest rate contracts
  Other non-current assets   $ 7     Other non-current liabilities   $ 1  
Foreign exchange contracts
  Other current assets     4     Accrued exp. & other current liabilities     11  
Call Options (*)
  Other current assets     16            
Bifurcated Conversion Feature (*)
            Current portion of long-term debt     16  
                         
Total derivatives not designated as hedging instruments
      $ 27         $ 28  
                         
        ­ ­
  (*)   See Note 7—Long-Term Debt and Borrowing Arrangements for further detail.


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The following table summarizes information regarding the Company’s derivative instruments as of December 31, 2010:
 
                         
    Assets     Liabilities  
    Balance Sheet Location   Fair Value     Balance Sheet Location   Fair Value  
 
Derivatives designated as hedging instruments
                       
Interest rate contracts
              Other non-current liabilities   $ 18  
                         
Derivatives not designated as hedging instruments
                       
Interest rate contracts
  Other non-current assets   $ 7     Other non-current liabilities   $ 9  
Foreign exchange contracts
  Other current assets     4     Accrued exp. & other current liabilities     12  
Call Options (*)
  Other non-current assets     162            
Bifurcated Conversion Feature (*)
            Current portion of long-term debt     162  
                         
Total derivatives not designated as hedging instruments
      $ 173         $ 183  
                         
        ­ ­
  (*)   See Note 7—Long-Term Debt and Borrowing Arrangements for further detail.
 
11.   Income Taxes
 
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examinations for years prior to 2006. In addition, with few exceptions, the Company is no longer subject to state and local, or non-U.S. income tax examinations for years prior to 2003.
 
The Company’s effective tax rate was 35.4% and 33.6% for the three months ended September 30, 2011 and 2010, respectively, and 38.1% and 34.4% for the nine months ended September 30, 2011 and 2010, respectively. The effective tax rates increased for both the three and nine month periods compared to the prior year primarily due to the absence of benefits derived from the prior year utilization of cumulative foreign tax credits, which is partially offset by the release of a tax valuation allowance during the third quarter of 2011.
 
The Company made cash income tax payments, net of refunds, of $89 million and $70 million during the nine months ended September 30, 2011 and 2010, respectively. Such payments exclude income tax related payments made to Cendant Corporation (now Avis Budget Group) (“Cendant” or “former Parent”).
 
12.   Commitments and Contingencies
 
The Company is involved in claims, legal proceedings and governmental inquiries related to the Company’s business.
 
 Wyndham Worldwide Litigation
 
The Company is involved in claims and legal actions arising in the ordinary course of its business including but not limited to: for its lodging business—breach of contract, fraud and bad faith claims between franchisors and franchisees in connection with franchise agreements and with owners in connection with management contracts, negligence, breach of contract, fraud, privacy, consumer protection and other statutory claims asserted in connection with alleged acts or occurrences at franchised or managed properties; for its vacation exchange and rentals business—breach of contract, fraud and bad faith claims by affiliates and customers in connection with their respective agreements, negligence, breach of contract, fraud, privacy, consumer protection and other statutory claims asserted by members and guests for alleged injuries sustained at affiliated resorts and vacation rental properties; for its vacation ownership business—breach of contract, bad faith, conflict of interest, fraud, privacy, 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, privacy, consumer protection and other statutory claims by guests for alleged injuries sustained at vacation ownership units or resorts; and for each of its businesses, bankruptcy proceedings involving efforts to collect receivables from a debtor in bankruptcy, employment matters involving claims of discrimination, harassment and wage and hour claims, claims of infringement upon third parties’ intellectual property rights, tax claims and environmental claims.
 
The Company believes that it has adequately accrued for such matters with reserves of $35 million as of September 30, 2011. Such amount is exclusive of matters relating to the Company’s separation from its former Parent (“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


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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 or cash flows in any given reporting period. 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.
 
 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.
 
13.   Accumulated Other Comprehensive Income
 
The components of AOCI as of September 30, 2011 are as follows:
 
                                 
          Unrealized
    Minimum
       
    Currency
    Gains/(Losses)
    Pension
       
    Translation
    on Cash Flow
    Liability
       
    Adjustments     Hedges, Net     Adjustment     AOCI  
 
Balance, December 31, 2010, net of tax benefit of $40
  $ 171     $ (15 )   $ (1 )   $ 155  
Current period change
    (25 )     3             (22 )
                                 
Balance, September 30, 2011, net of tax benefit of $40
  $ 146     $ (12 )   $ (1 )   $ 133  
                                 
 
The components of AOCI as of September 30, 2010 are as follows:
 
                                 
          Unrealized
    Minimum
       
    Currency
    Gains/(Losses)
    Pension
       
    Translation
    on Cash Flow
    Liability
       
    Adjustments     Hedges, Net     Adjustment     AOCI  
 
Balance, December 31, 2009, net of tax benefit of $32
  $ 166     $ (27 )   $ (1 )   $ 138  
Current period change
    1       10 (*)           11  
                                 
Balance, September 30, 2010, net of tax benefit of $39
  $ 167     $ (17 )   $ (1 )   $ 149  
                                 
        ­ ­
  (*)   Primarily represents the reclassification of an after-tax unrealized loss associated with the termination of an interest rate swap agreement in connection with the early extinguishment of the term loan facility (see Note 7—Long-Term Debt and Borrowing Arrangements).
 
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.
 
14.   Stock-Based Compensation
 
The Company has a stock-based compensation plan available to grant RSUs, SSARs, PSUs and other stock or cash-based awards to key employees, non-employee directors, advisors and consultants. Under the Wyndham Worldwide Corporation 2006 Equity and Incentive Plan, as amended, a maximum of 36.7 million shares of common stock may be awarded. As of September 30, 2011, 14.9 million shares remained available.


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 Incentive Equity Awards Granted by the Company
 
The activity related to incentive equity awards granted by the Company for the nine months ended September 30, 2011 consisted of the following:
 
                                 
    RSUs     SSARs  
          Weighted
          Weighted
 
    Number
    Average
    Number
    Average
 
    of RSUs     Grant Price     of SSARs     Exercise Price  
 
Balance as of December 31, 2010
    6.9     $ 12.35       2.2     $ 21.28  
Granted
    1.5 (b)     30.65       0.1 (b)     30.61  
Vested/exercised
    (2.8 )     11.64              
Canceled
    (0.5 )     14.74              
                                 
Balance as of September 30, 2011 (a)
    5.1 (c)     17.87       2.3 (d)     21.78  
                                 
        ­ ­
  (a)   Aggregate unrecognized compensation expense related to RSUs and SSARs was $73 million as of September 30, 2011 which is expected to be recognized over a weighted average period of 2.8 years.
 
  (b)   Primarily represents awards granted by the Company on February 24, 2011.
 
  (c)   Approximately 5 million RSUs outstanding as of September 30, 2011 are expected to vest over time.
 
  (d)   Approximately 1.7 million of the 2.3 million SSARs are exercisable as of September 30, 2011. The Company assumes that all unvested SSARs are expected to vest over time. SSARs outstanding as of September 30, 2011 had an intrinsic value of $20 million and have a weighted average remaining contractual life of 3 years.
 
On February 24, 2011, the Company approved grants of incentive equity awards totaling $46 million to key employees and senior officers of Wyndham in the form of RSUs and SSARs. These awards will vest ratably over a period of four years. In addition, on February 24, 2011, the Company approved a grant of incentive equity awards totaling $11 million to key employees and senior officers of Wyndham in the form of PSUs. These awards cliff vest on the third anniversary of the grant date, contingent upon the Company achieving certain performance metrics. As of September 30, 2011, there were approximately 350,000 PSUs outstanding with an aggregate unrecognized compensation expense of $8.6 million.
 
The fair value of SSARs granted by the Company on February 24, 2011 was estimated on the date of the grant using the Black-Scholes option-pricing model with the relevant weighted average assumptions outlined in the table below. Expected volatility is based on both historical and implied volatilities of the Company’s stock over the estimated expected life of the SSARs. The expected life represents the period of time the SSARs are expected to be outstanding and is based on the “simplified method”, as defined in Staff Accounting Bulletin 110. The risk free interest rate is based on yields on U.S. Treasury strips with a maturity similar to the estimated expected life of the SSARs. The projected dividend yield was based on the Company’s anticipated annual dividend divided by the price of the Company’s stock on the date of the grant.
 
         
    SSARs Issued on
 
    February 24, 2011  
 
Grant date fair value
  $ 11.22  
Grant date strike price
  $ 30.61  
Expected volatility
    50.83%  
Expected life
    4.25 yrs.  
Risk free interest rate
    1.85%  
Projected dividend yield
    1.96%  
 
 Stock-Based Compensation Expense
 
The Company recorded stock-based compensation expense of $10 million and $31 million during the three and nine months ended September 30, 2011, respectively, and $9 million and $30 million during the three and nine months ended September 30, 2010, respectively, related to the incentive equity awards granted by the Company. The Company recognized a net tax benefit of $4 million during the three months ended both September 30, 2011 and 2010 and $12 million during the nine months ended both September 30, 2011 and 2010 for stock-based compensation arrangements on the Consolidated Statements of Income. During the nine months ended September 30, 2011, the Company increased its pool of excess tax benefits available to absorb tax deficiencies (“APIC Pool”) by $17 million due to the vesting of RSUs and exercise of stock options. As of September 30, 2011, the Company’s APIC Pool balance was $29 million.


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The Company paid $30 million and $23 million of taxes for the net share settlement of incentive equity awards during the nine months ended September 30, 2011 and 2010, respectively. Such amount is included in other, net within financing activities on the Consolidated Statements of Cash Flows.
 
 Incentive Equity Awards
 
As of September 30, 2011, the Company had 1.9 million outstanding stock options, which were converted as a result of the Separation. These converted stock options had a weighted average exercise price of $38.78, had a weighted average remaining contractual life of 0.5 years and all 1.9 million options were exercisable. There were approximately 100,000 outstanding “in-the-money” stock options, which had an aggregate intrinsic value of $0.2 million.
 
15.   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), interest income (excluding consumer financing interest) and income taxes, each of which is presented on the Consolidated Statements of Income. The Company’s presentation of EBITDA may not be comparable to similarly-titled measures used by other companies.
 
                                 
    Three Months Ended September 30,  
    2011     2010  
    Net
          Net
       
    Revenues     EBITDA     Revenues     EBITDA  
 
Lodging
  $ 222     $ 67     $ 203     $ 67  
Vacation Exchange and Rentals
    436       131 (b)     330       103 (e)
Vacation Ownership
    559       149       533       123  
                                 
Total Reportable Segments
    1,217       347       1,066       293  
Corporate and Other (a)
    (5 )     (18 )(c)     (1 )     30 (c)
                                 
Total Company
  $ 1,212       329     $ 1,065       323  
                                 
Depreciation and amortization
            43               43  
Interest expense
            34               47 (f)
Interest income
            (19 )(d)             (2 )
                                 
Income before income taxes
          $ 271             $ 235  
                                 
        ­ ­
  (a)   Includes the elimination of transactions between segments.
 
  (b)   Includes a $4 million charge related to the write-off of foreign exchange translation adjustments associated with the liquidation of a foreign entity.
 
  (c)   Includes (i) $8 million and $52 million of a net benefit related to the resolution of and adjustment to certain contingent liabilities and assets resulting from the Separation during the three months ended September 30, 2011 and 2010, respectively, and (ii) $26 million and $23 million of corporate costs during the three months ended September 30, 2011 and 2010, respectively.
 
  (d)   Includes $16 million of interest income related to a refund of value added taxes.
 
  (e)   Includes $1 million related to costs incurred in connection with the Company’s acquisition of ResortQuest during September 2010.
 
  (f)   Includes $11 million of costs incurred for the repurchase of a portion of the Company’s Convertible Notes during the third quarter of 2010.
 


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    Nine Months Ended September 30,  
    2011     2010  
    Net
          Net
       
    Revenues     EBITDA     Revenues     EBITDA  
 
Lodging
  $ 561     $ 160 (b)   $ 525     $ 148 (h)
Vacation Exchange and Rentals
    1,152       330 (c)     912       261 (i)
Vacation Ownership
    1,550       376 (d)     1,483       310  
                                 
Total Reportable Segments
    3,263       866       2,920       719  
Corporate and Other (a)
    (10 )     (57 )(e)     (6 )     (4 )(e)
                                 
Total Company
  $ 3,253       809     $ 2,914       715  
                                 
Depreciation and amortization
            133               128  
Interest expense
            115 (f)             133 (j)
Interest income
            (22 )(g)             (3 )
                                 
Income before income taxes
          $ 583             $ 457  
                                 
        ­ ­
  (a)   Includes the elimination of transactions between segments.
 
  (b)   Includes a non-cash impairment charge of $13 million related to a write-down of an international joint venture in the Company’s lodging business.
 
  (c)   Includes (i) a $31 million net benefit resulting from a refund of value added taxes, (ii) $7 million of restructuring cost incurred in connection with a strategic initiative commenced by the Company during 2010 and (iii) a $4 million charge related to the write-off of foreign exchange translation adjustments associated with the liquidation of a foreign entity.
 
  (d)   Includes a $1 million benefit for the reversal of costs incurred as a result of various strategic initiatives commenced by the Company during 2008.
 
  (e)   Includes (i) $16 million and $51 million of a net benefit related to the resolution of and adjustment to certain contingent liabilities and assets resulting from the Separation during the nine months ended September 30, 2011 and 2010, respectively, and (ii) $73 million and $55 million of corporate costs during the nine months ended September 30, 2011 and 2010, respectively.
 
  (f)   Includes (i) $12 million of costs incurred for the repurchase of a portion of the Company’s Convertible Notes during the first nine months of 2011 and (ii) $3 million of interest related to value added tax accruals.
 
  (g)   Includes $16 million of interest income related to a refund of value added taxes.
 
  (h)   Includes $1 million related to costs incurred in connection with the Company’s acquisition of the Tryp brand during June 2010.
 
  (i)   Includes (i) $4 million related to costs incurred in connection with the Company’s acquisition of Hoseasons during March 2010 and (ii) $1 million related to costs incurred in connection with the Company’s acquisition of ResortQuest during September 2010.
 
  (j)   Includes (i) $16 million of costs incurred for the early extinguishment of the Company’s term loan and revolving foreign credit facilities during March 2010 and (ii) $11 million of costs incurred for the repurchase of a portion of the Company’s Convertible Notes during the third quarter of 2010.
 
16.   Restructuring
 
 2010 Restructuring Plan
 
During 2010, the Company committed to a strategic realignment initiative at its vacation exchange and rentals business targeted at reducing costs, primarily impacting the operations at certain vacation exchange call centers. During the nine months ended September 30, 2011, the Company incurred $7 million of incremental costs and reduced its liability with $8 million of cash payments. The remaining liability of $7 million is expected to be paid in cash; $6 million of facility-related by the first quarter of 2020 and $1 million of personnel-related by the third quarter of 2012. As of September 30, 2011, the Company has incurred $16 million of expenses related to the 2010 restructuring plan.
 
 2008 Restructuring Plan
 
During 2008, the Company committed to various strategic realignment initiatives targeted principally at reducing costs, enhancing organizational efficiency and consolidating and rationalizing existing processes and facilities. During the nine months ended September 30, 2011, the Company reversed $1 million of previously recorded facility-related expenses and reduced its liability with $6 million of cash payments. The remaining liability of $5 million, all of which is facility-related, is expected to be paid in cash by September 2017. As of September 30, 2011, the Company has incurred $124 million of expenses related to the 2008 restructuring plan.

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The activity related to the restructuring costs is summarized by category as follows:
 
                                 
    Liability as of
                Liability as of
 
    December 31,
    Costs
    Cash
    September 30,
 
    2010     Recognized     Payments     2011  
 
Personnel-related (a)
  $ 9     $     $ (8 )   $ 1 (c)
Facility-related
    11       6 (b)     (6 )     11 (d)
                                 
    $ 20     $ 6     $ (14 )   $ 12  
                                 
        ­ ­
  (a)   As of September 30, 2011, the Company had notified substantially all of the employees related to such costs.
 
  (b)   Includes $7 million of costs incurred at the Company’s vacation exchange and rentals business and $1 million of a reversal of previously recorded expenses at the Company’s vacation ownership business.
 
  (c)   Balance as of September 30, 2011 is recorded at the Company’s vacation exchange and rentals business.
 
  (d)   Includes $6 million and $5 million at the Company’s vacation exchange and rentals business and vacation ownership business, respectively, as of September 30, 2011.
 
17.   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 and Realogy and travel distribution services (“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 $49 million and $78 million as of September 30, 2011 and December 31, 2010, respectively. 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 certain unresolved contingent matters and certain 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 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 to satisfy its obligations for the Cendant legacy contingent liabilities. As of September 30, 2011, the letter of credit was $100 million.
 
As of September 30, 2011, the $49 million of Separation related liabilities is comprised of $40 million for tax liabilities, $4 million for liabilities of previously sold businesses of Cendant, $3 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, $19 million is recorded in current due to former Parent and subsidiaries and $28 million is recorded in long-term due to former Parent and subsidiaries as of September 30, 2011 on the 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 $2 million relating to guarantees is recorded in other current liabilities as of September 30, 2011 on the Consolidated Balance Sheet. The actual timing of payments relating to these liabilities is dependent on a variety of factors beyond the Company’s control. In addition, as of September 30, 2011, the Company had $2 million of receivables due from former Parent and subsidiaries primarily relating to income taxes, which is recorded in other current assets on the Consolidated Balance Sheet. Such receivables totaled $4 million as of December 31, 2010.


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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:
 
  ·   Lodging—franchises hotels in the upper upscale, upscale, upper midscale, midscale, economy and extended stay segments of the lodging industry and provides hotel management services for full-service hotels globally.
 
  ·   Vacation Exchange and Rentals—provides vacation exchange services and products to owners of intervals of vacation ownership interests (“VOIs”) and markets vacation rental properties primarily on behalf of independent owners.
 
  ·   Vacation Ownership—develops, markets and sells VOIs to individual consumers, provides consumer financing in connection with the sale of VOIs and provides property management services at resorts.
 
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 separate 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 based upon net revenues and EBITDA. Our presentation of EBITDA may not be comparable to similarly-titled measures used by other companies.


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OPERATING STATISTICS
 
The following table presents our operating statistics for the three months ended September 30, 2011 and 2010. See Results of Operations section for a discussion as to how these operating statistics affected our business for the periods presented.
 
                         
    Three Months Ended September 30,
    2011   2010   % Change
 
Lodging
                       
Number of rooms (a)
    611,200       605,700       0.9  
RevPAR (b)
  $ 39.49     $ 37.14       6.3  
Vacation Exchange and Rentals
                       
Average number of members (in 000s) (c)
    3,744       3,766       (0.6 )
Exchange revenue per member (d)
  $ 172.38     $ 173.44       (0.6 )
Vacation rental transactions (in 000s) (e)(f)
    370       322       14.9  
Average net price per vacation rental (f)(g)
  $ 701.81     $ 500.31       40.3  
Vacation Ownership
                       
Gross VOI sales (in 000s) (h)(i)
  $ 455,000     $ 412,000       10.4  
Tours (j)
    197,000       187,000       5.3  
Volume Per Guest (“VPG”) (k)
  $ 2,197     $ 2,081       5.6  
 
 
(a) Represents the number of rooms at lodging properties at the end of the period which are (i) under franchise and/or management agreements and (ii) for the period ended September 30, 2010, managed under an international joint venture.
 
(b) Represents revenue per available room and is calculated by multiplying the percentage of available rooms occupied during the period by the average rate charged for renting a lodging room for one day.
 
(c) Represents members in our vacation exchange programs who pay annual membership dues. For additional fees, such participants are entitled to exchange intervals for intervals at other properties affiliated with our vacation exchange business. In addition, certain participants may exchange intervals for other leisure-related services and products.
 
(d) Represents total annualized revenues generated from fees associated with memberships, exchange transactions, member-related rentals and other servicing for the period divided by the average number of vacation exchange members during the period.
 
(e) Represents the number of transactions that are generated in connection with customers booking their vacation rental stays through us. One rental transaction is recorded for each standard one-week rental.
 
(f) Includes the impact from the acquisitions of ResortQuest (September 2010), James Villa Holidays (November 2010) and a tuck-in acquisition (August 2011); therefore, such operating statistics for 2011 are not presented on a comparable basis to the 2010 operating statistics.
 
(g) Represents the net rental price generated from renting vacation properties to customers divided by the number of vacation rental transactions.
 
(h) Represents total sales of VOIs, including sales under the Wyndham Asset Affiliation Model (“WAAM”), before loan loss provisions. We believe that Gross VOI sales provides an enhanced understanding of the performance of our vacation ownership business because it directly measures the sales volume of this business during a given reporting period.
 
(i) The following table provides a reconciliation of Gross VOI sales to Vacation ownership interest sales for the three months ended September 30 (in millions):
 
                 
    2011     2010  
 
Gross VOI sales
  $ 455     $ 412  
Less: WAAM sales (1)
    (38 )     (20 )
                 
Gross VOI sales, net of WAAM sales
    417       392  
Less: Loan loss provision
    (96 )     (85 )
                 
Vacation ownership interest sales (2)
  $ 320     $ 308  
                 
        ­ ­
  (1)   Represents total sales of VOIs through our fee-for-service vacation ownership sales model designed to offer turn-key solutions for developers or banks in possession of newly developed inventory, which we will sell for a commission fee through our extensive sales and marketing channels.
 
  (2)   Amounts may not foot due to rounding.
 
(j) Represents the number of tours taken by guests in our efforts to sell VOIs.
 
(k) VPG is calculated by dividing Gross VOI sales (excluding tele-sales upgrades, which are non-tour upgrade sales) by the number of tours. Tele-sales upgrades were $21 million and $23 million during the three months ended September 30, 2011 and 2010, respectively. We have excluded non-tour upgrade sales in the calculation of VPG because non-tour upgrade sales are generated by a different marketing channel. We believe that VPG provides an enhanced understanding of the performance of our vacation ownership business because it directly measures the efficiency of this business’ tour selling efforts during a given reporting period.


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THREE MONTHS ENDED SEPTEMBER 30, 2011 VS. THREE MONTHS ENDED SEPTEMBER 30, 2010
 
Our consolidated results are as follows:
 
                         
    Three Months Ended September 30,  
    2011     2010     Change  
 
Net revenues
  $ 1,212     $ 1,065     $ 147  
Expenses
    928       786       142  
                         
Operating income
    284       279       5  
Other income, net
    (2 )     (1 )     (1 )
Interest expense
    34       47       (13 )
Interest income
    (19 )     (2 )     (17 )
                         
Income before income taxes
    271       235       36  
Provision for income taxes
    96       79       17  
                         
Net income
  $ 175     $ 156     $ 19  
                         
 
Net revenues increased $147 million (13.8%) for the three months ended September 30, 2011 compared with the same period last year principally resulting from:
 
  ·   $92 million of incremental revenues contributed by acquisitions;
 
  ·   $25 million of higher revenues from our vacation ownership business primarily due to increased VOI sales and WAAM commission revenues;
 
  ·   $23 million of higher royalty, marketing and reservation revenues due to higher RevPAR and the impact of a change in the classification of third-party reservation fees from operating expenses; and
 
  ·   $16 million of a favorable impact from foreign exchange.
 
Total expenses increased by $142 million (18.1%) for the three months ended September 30, 2011 compared with the same period last year principally reflecting:
 
  ·   $71 million of incremental expenses related to acquisitions;
 
  ·   a $44 million impact from the resolution of and adjustment to certain contingent liabilities and assets;
 
  ·   $12 million due to the impact of a change in the classification of third-party reservation fees from operating expenses;
 
  ·   $9 million of an unfavorable impact from foreign exchange; and
 
  ·   $6 million of higher operating expenses resulting principally from the revenue increase (excluding acquisitions).
 
Interest expense decreased $13 million during the three months ended September 30, 2011 compared with the same period last year primarily as a result of the absence of $11 million of costs incurred during the third quarter of 2010 for the repurchase of a portion of our 3.50% convertible notes.
 
Interest income increased $17 million during the three months ended September 30, 2011 primarily due to $16 million of interest received during the third quarter of 2011 related to a refund of value added taxes.
 
Our effective tax rate increased from 33.6% during the third quarter of 2010 to 35.4% during the third quarter of 2011 primarily due to the absence of benefits derived from the prior year utilization of cumulative foreign tax credits, which is partially offset by $13 million related to the release of a tax valuation allowance during the third quarter of 2011.
 
As a result of these items, net income increased $19 million (12.2%) compared to the third quarter of 2010.
 
During 2011, we expect:
 
  ·   net revenues of approximately $4.2 billion to $4.3 billion;
 
  ·   depreciation and amortization of approximately $180 million; and
 
  ·   interest expense, net (excluding early extinguishment of debt costs) of approximately $130 million to $135 million.
 
In addition, during 2012, we expect net revenues of approximately $4.4 billion to $4.6 billion.


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Following is a discussion of the results of each of our segments and Corporate and Other for the three months ended September 30, 2011 compared to September 30, 2010:
 
                                         
    Net Revenues   EBITDA
    2011     2010     % Change   2011     2010     % Change
 
Lodging
  $ 222     $ 203     9.4   $ 67     $ 67    
Vacation Exchange and Rentals
    436       330     32.1     131       103     27.2
Vacation Ownership
    559       533     4.9     149       123     21.1
                                         
Total Reportable Segments
    1,217       1,066     14.2     347       293     18.4
Corporate and Other (a)
    (5 )     (1 )   *     (18 )     30     *
                                         
Total Company
  $ 1,212     $ 1,065     13.8     329       323     1.9
                                         
Less: Depreciation and amortization
                        43       43      
Interest expense
                        34       47      
Interest income
                        (19 )     (2 )    
                                         
Income before income taxes
                      $ 271     $ 235      
                                         
 
 
(*) Not meaningful.
 
(a) Includes the elimination of transactions between segments.
 
Lodging
 
Net revenues increased by $19 million (9.4%) and EBITDA was flat during the third quarter of 2011 compared to the same period last year.
 
Net revenues reflect a $23 million increase in royalty, marketing and reservation revenues primarily due to (i) a 6.3% increase in RevPAR resulting from stronger occupancy and average daily rates, (ii) a 6.0% increase in our international system size and (iii) the impact of a $12 million increase related to a change in the classification of third-party reservation fees to revenues from operating expenses, which were misclassified as contra expenses in prior periods. This change in classification had no impact on EBITDA. Net revenue was also favorably impacted by a $2 million increase in reimbursable revenues in our hotel management business, which has no impact on EBITDA. Such increases were partially offset by a $4 million decrease in other ancillary services revenues and a $2 million decrease in other franchise fees.
 
In addition, EBITDA was also unfavorably impacted by (i) $13 million of higher marketing and reservation expenses resulting from higher revenues and timing of spend and (ii) $3 million of pre-opening costs for the Wyndham Grand Orlando Resort Bonnet Creek owned hotel (“Bonnet Creek Hotel”). Such reductions to EBITDA were offset partially by (i) $7 million of lower costs principally for ancillary services and (ii) $4 million of lower bad debt expense.
 
As of September 30, 2011, we had approximately 7,190 properties and 611,200 rooms in our system.
 
Additionally, our hotel development pipeline included approximately 870 hotels and 114,600 rooms, of which 62% were international and 58% were new construction as of September 30, 2011.
 
We expect net revenues of approximately $710 million to $730 million during 2011. In addition, as compared to 2010, we expect our operating statistics during 2011 to perform as follows:
 
  ·   RevPAR to be up 6% to 8%; and
 
  ·   number of rooms (including Tryp) to increase 1% to 3%.
 
Vacation Exchange and Rentals
 
Net revenues and EBITDA increased $106 million (32.1%) and $28 million (27.2%), respectively, during the third quarter of 2011 compared with the third quarter of 2010. EBITDA was unfavorably impacted by a loss of $4 million related to the write-off of foreign exchange translation adjustments resulting from the liquidation of a foreign entity. A weaker U.S. dollar compared to other foreign currencies contributed $16 million and $7 million in net revenues and EBITDA, respectively.
 
During the third quarter of 2011, we completed the acquisitions of substantially all of the assets of two vacation rental businesses in Colorado and Florida. This resulted in the addition of over 1,500 units to our portfolio. Our vacation exchange and rentals business now offers its leisure travelers access to approximately 99,000 vacation properties worldwide.
 
Acquisitions contributed $92 million of incremental net revenues (inclusive of $9 million of ancillary revenues) and $20 million of incremental EBITDA. EBITDA was also favorably impacted by the absence of $1 million of costs incurred


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in connection with the acquisition of ResortQuest during the third quarter of 2010. Due to the seasonality of revenue generation at these businesses, the earnings contributed from these acquisitions are highest in the third quarter.
 
Excluding the impact of $83 million of incremental vacation rental revenues from acquisitions and the favorable impact of foreign exchange movements of $13 million, net revenues generated from rental transactions and related services increased $3 million primarily due to a 1.4% increase in average net price per vacation rental. The increase in average net price per rental resulted from higher yield, primarily at our Landal GreenParks business, while rental transaction volume remained relatively flat.
 
Exchange and related service revenues, which primarily consist of fees generated from memberships, exchange transactions, member-related rentals and other member servicing, declined $2 million. Excluding $3 million of a favorable impact from foreign exchange movements, exchange and related service revenues decreased $5 million due to a 2.2% decrease in exchange revenue per member and a 0.6% decline in the average number of members. The decrease in exchange revenue per member is primarily due to lower exchange and member-rental transactions which we believe are the result of the impact of both Hurricane Irene and club memberships where there is a lower propensity to transact. Such declines were partially offset by an increase in other transaction fee revenue from combining deposited timeshare intervals, which allows members the ability to transact into higher-valued vacations.
 
In addition, EBITDA further reflects $5 million of favorable impacts from foreign exchange transactions and foreign exchange hedging contracts.
 
We expect net revenues of approximately $1.46 billion to $1.50 billion during 2011. In addition, as compared to 2010, we expect our operating statistics during 2011 to perform as follows:
 
  ·   vacation rental transactions to increase 16% to 18%;
 
  ·   average net price per vacation rental to increase 25% to 27%;
 
  ·   average number of members to be flat; and
 
  ·   exchange revenue per member to increase 1% to 3%.
 
Vacation Ownership
 
Net revenues and EBITDA increased $26 million (4.9%) and $26 million (21.1%), respectively, during the third quarter of 2011 compared with the third quarter of 2010.
 
Gross sales of VOIs, net of WAAM sales increased $25 million (6.4%) driven principally by a 5.6% increase in VPG and a 5.3% increase in tour flow. The increase in VPG is attributable to improved close rates, while the change in tour flow reflects our focus on marketing programs directed towards new owner generation. Our provision for loan losses increased $11 million primarily as a result of higher gross VOI sales and an unfavorable impact from the slow pace of the economic recovery. In addition, net revenues were favorably impacted by a $3 million increase in ancillary revenues, as a result of higher fees generated by other non-core operations.
 
Net revenues and EBITDA generated by WAAM increased by $11 million and $4 million, respectively, due to increased commissions earned on $18 million of higher VOI sales under WAAM.
 
Net revenues were unfavorably impacted by $2 million and EBITDA was favorably impacted by $4 million due to lower consumer financing revenues attributable to a decline in our contract receivables portfolio which was more than offset in EBITDA by a $6 million decrease in interest expense on our securitized debt. Compared to last year, our net interest income margin increased to 80% from 75% due to (i) a reduction in our weighted average interest rate to 4.8% from 6.5% and (ii) higher weighted average interest rates earned on our contract receivable portfolio, partially offset by $73 million of increased average borrowings on our securitized debt facilities.
 
In addition to the items discussed above, EBITDA was unfavorably impacted by increased expenses primarily resulting from:
 
  ·   $8 million of increased marketing expenses due to increased tours for new owner generation;
 
  ·   $5 million of increased costs associated with maintenance fees on unsold inventory; and
 
  ·   $4 million of increased employee related expenses.
 
Such increases were offset by:
 
  ·   $17 million of lower cost of VOI sales due to product mix and relative sales value adjustments; and
 
  ·   the absence of a $4 million non-cash impairment charge recorded during the third quarter of 2010.


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We expect net revenues of approximately $2.0 billion to $2.1 billion during 2011. In addition, as compared to 2010, we expect our operating statistics during 2011 to perform as follows:
 
  ·   gross VOI sales to be $1.5 billion to $1.6 billion (including approximately $100 million to $125 million related to WAAM);
 
  ·   tours to increase 5% to 8%; and
 
  ·   VPG to increase 2% to 4%.
 
Corporate and Other
 
Corporate and Other EBITDA decreased $48 million during the third quarter of 2011 compared to the same period during 2010 resulting primarily from (i) the absence of a $52 million net benefit recorded in the third quarter of 2010 related to the resolution of and adjustment to certain contingent liabilities and assets primarily due to the settlement of the IRS examination of Cendant’s taxable years 2003 through 2006 and (ii) $3 million of increased costs primarily related to data security enhancements. Such increases were offset partially by an $8 million net benefit recorded in the third quarter of 2011 related to the resolution of and adjustment to certain contingent liabilities and assets.


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NINE MONTHS ENDED SEPTEMBER 30, 2011 VS. NINE MONTHS ENDED SEPTEMBER 30, 2010
 
Our consolidated results are as follows:
 
                         
    Nine Months Ended September 30,  
    2011     2010     Change  
 
Net revenues
  $ 3,253     $ 2,914     $ 339  
Expenses
    2,586       2,333       253  
                         
Operating income
    667       581       86  
Other income, net
    (9 )     (6 )     (3 )
Interest expense
    115       133       (18 )
Interest income
    (22 )     (3 )     (19 )
                         
Income before income taxes
    583       457       126  
Provision for income taxes
    222       157       65  
                         
Net income
  $ 361     $ 300     $ 61  
                         
 
Net revenues increased $339 million (11.6%) for the nine months ended September 30, 2011 compared with the same period last year primarily resulting from:
 
  ·   $181 million of incremental revenues related to acquisitions;
 
  ·   $67 million of higher revenues from our vacation ownership business primarily due to increased VOI sales, WAAM commission revenues and property management fees, partially offset by the impact of a change in the reporting of fees related to incidental VOI operations;
 
  ·   $38 million of a favorable impact from foreign exchange;
 
  ·   $31 million of higher revenues in our lodging business due primarily from higher royalty, marketing and reservation fees resulting from stronger RevPAR and the impact of a change in the classification of third-party reservation fees from operating expenses; and
 
  ·   $26 million of increased revenue from our exchange and rentals business primarily due to improved yield at our vacation rentals business, higher rental transactions and the impact of a change in the classification of third-party sales commission fees to operating expenses.
 
Total expenses increased by $253 million (10.8%) for the nine months ended September 30, 2011 compared with the same period last year principally reflecting:
 
  ·   $149 million of incremental expenses related to acquisitions;
 
  ·   $66 million of higher operating expenses resulting from the revenue increases (excluding acquisitions);
 
  ·   a $35 million impact from the resolution of and adjustment to certain contingent liabilities and assets;
 
  ·   a $32 million unfavorable impact from foreign exchange;
 
  ·   $13 million for a non-cash impairment charge related to a write-down of an international joint venture in the lodging business due to our partner’s indirect relationship with the Libyan government; and
 
  ·   $11 million of increased costs primarily for data security enhancements.
 
Such expense increases were partially offset by (i) a $31 million net benefit resulting from a refund of value added taxes and (ii) $20 million of decreased litigation costs at our vacation ownership business.
 
Other income, net increased by $3 million primarily due to a gain on the redemption of a preferred stock investment allocated to us in connection with the Separation.
 
Interest expense decreased $18 million during the nine months ended September 30, 2011 compared with the same period last year primarily as a result of (i) the absence of $16 million of costs incurred during 2010 resulting from the early termination of our term loan and revolving foreign credit facilities, (ii) the absence of $11 million of costs incurred during the third quarter of 2010 for the repurchase of a portion of our 3.50% convertible notes and (iii) $5 million of higher capitalized interest in 2011 primarily as a result of construction of the Bonnet Creek Hotel. Such decreases were partially offset by (i) $12 million of costs incurred in 2011 for the repurchase of a portion of our 3.50% convertible notes and (ii) $3 million of interest related to non-US value-added taxes.


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Interest income increased $19 million during the nine months ended September 30, 2011 primarily due to $16 million of interest received in the third quarter of 2011 related to a refund of value added taxes.
 
Our effective tax rate increased from 34.4% during the nine months ended September 30, 2010 to 38.1% during the nine months ended September 30, 2011 primarily due to the absence of benefits derived from the prior year utilization of cumulative foreign tax credits, which is partially offset by $13 million related to the release of a tax valuation allowance during the third quarter of 2011.
 
As a result of these items, our net income increased $61 million (20.3%) compared to the first nine months of 2010.
 
Following is a discussion of the results of each of our segments and Corporate and Other for the nine months ended September 30, 2011 compared to September 30, 2010:
 
                                         
    Net Revenues   EBITDA
    2011     2010     % Change   2011     2010     % Change
 
Lodging
  $ 561     $ 525     6.9   $ 160     $ 148     8.1
Vacation Exchange and Rentals
    1,152       912     26.3     330       261     26.4
Vacation Ownership
    1,550       1,483     4.5     376       310     21.3
                                         
Total Reportable Segments
    3,263       2,920     11.7     866       719     20.4
Corporate and Other (a)
    (10 )     (6 )   *     (57 )     (4 )   *
                                         
Total Company
  $ 3,253     $ 2,914     11.6     809       715     13.1
                                         
Less: Depreciation and amortization
                        133       128      
Interest expense
                        115       133      
Interest income
                        (22 )     (3 )    
                                         
Income before income taxes
                      $ 583     $ 457      
                                         
 
 
(*) Not meaningful.
 
(a) Includes the elimination of transactions between segments.
 
Lodging
 
Net revenues and EBITDA increased by $36 million (6.9%) and $12 million (8.1%), respectively, during the nine months ended September 30, 2011 compared to the same period last year. Excluding the impact of a $13 million non-cash impairment charge related to the write-down of an international joint venture, EBITDA increased $25 million (16.9%).
 
Net revenues and EBITDA were favorably impacted by $5 million and $3 million, respectively, as a result of the Tryp hotel brand acquisition in the second quarter of 2010.
 
Excluding the impact of the Tryp acquisition, net revenues reflects a $42 million increase in royalty, marketing and reservation revenues primarily due to (i) a 7.0% increase in domestic RevPAR resulting from stronger occupancy, (ii) a 6.4% increase in our international system size and (iii) the impact of a $15 million increase related to a change in the classification of third-party reservation fees to revenues from operating expenses, which were misclassified as contra expenses in prior periods. This change in classification had no impact on EBITDA. Such increases were partially offset by an $11 million decrease in ancillary services revenues and other franchise fees.
 
In addition, EBITDA was also favorably impacted by (i) $17 million of lower costs principally associated with ancillary services and (ii) $7 million of lower bad debt expenses. Such decreases were partially offset by (i) $15 million of higher marketing and reservation expenses resulting primarily from higher revenues and (ii) $3 million of pre-opening costs for the Bonnet Creek Hotel.
 
Vacation Exchange and Rentals
 
Net revenues and EBITDA increased $240 million (26.3%) and $69 million (26.4%), respectively, during the nine months ended September 30, 2011 compared with the same period during 2010. EBITDA was favorably impacted by a $31 million net benefit resulting from a refund of value added taxes, which was partially offset by $7 million of higher costs related to organizational realignment initiatives and a loss of $4 million related to the write-off of foreign exchange translation adjustments resulting from the liquidation of a foreign entity. A weaker U.S. dollar compared to other foreign currencies contributed $38 million and $10 million in net revenues and EBITDA, respectively.
 
During the third quarter of 2011, we completed the acquisitions of substantially all of the assets of two vacation rental businesses in Colorado and Florida. This resulted in the addition of over 1,500 units to our portfolio. Our vacation exchange and rentals business now offers its leisure travelers access to approximately 99,000 vacation properties worldwide.


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Acquisitions contributed $176 million of incremental net revenues (inclusive of $22 million of ancillary revenues) and $24 million of incremental EBITDA. EBITDA was also favorably impacted by the absence of $5 million of costs incurred in connection with the acquisitions of Hoseasons and ResortQuest during the nine months ended September 30, 2010. Due to the seasonality of revenue generation at these businesses, the earnings contributed from these acquisitions are highest in the third quarter.
 
Excluding the impact of $154 million of incremental vacation rental revenues from acquisitions and the favorable impact of foreign exchange movements of $28 million, net revenues generated from rental transactions and related services increased $27 million due to a 4.7% increase in average net price per vacation rental and a 2.2% increase in rental transaction volume. The increase in average net price per vacation rental resulted from (i) higher yield at our Novasol and Landal GreenParks businesses and (ii) an $11 million impact primarily related to a change in the classification of third-party sales commission fees to operating expenses which were misclassified as contra revenue in the same period last year. This change in classification had no impact on EBITDA. Rental transaction volume increased primarily due to favorability at our Novasol and Landal GreenParks businesses.
 
Exchange and related service revenues, which primarily consist of fees generated from memberships, exchange transactions, member-related rentals and other member servicing, increased $10 million. Excluding $10 million of a favorable impact from foreign exchange movements, exchange and related service revenues remained flat primarily due to an increase in other transaction fee revenue from combining deposited timeshare intervals, which allows members the ability to transact into higher-valued vacations, and the impact of a $4 million increase related to a change in the classification of third-party credit card processing fees to operating expenses, which were misclassified as contra revenue in prior periods. This change in reporting had no impact on EBITDA. These increases were offset by lower exchange and member-rental transactions, which we believe are the result of the impact of club memberships where there is a lower propensity to transact.
 
In addition, EBITDA further reflects $7 million of higher volume-related costs.
 
Vacation Ownership
 
Net revenues and EBITDA increased $67 million (4.5%) and $66 million (21.3%), respectively, during the nine months ended September 30, 2011 compared with the nine months ended September 30, 2010.
 
Gross sales of VOIs, net of WAAM sales increased $57 million (5.4%) driven principally by an 8.1% increase in tour flow and a 1.5% increase in VPG. The increase in VPG is attributable to an increase in the average price per transaction, while the change in tour flow reflects our focus on marketing programs directed towards new owner generation. Our provision for loan losses declined $3 million primarily as a result of improved portfolio performance, partially offset by higher gross VOI sales. In addition, net revenues were unfavorably impacted by a $26 million decrease in ancillary revenues, primarily associated with a misclassification of fees related to incidental VOI operations. This change in classification from gross basis reporting in revenues to net basis reporting in operating expenses had no impact on EBITDA.
 
Net revenues and EBITDA generated by our WAAM increased by $23 million and $6 million, respectively, due to increased commissions earned on $38 million of higher VOI sales under our WAAM.
 
Property management net revenues and EBITDA increased $18 million and $7 million, respectively, resulting primarily from higher reimbursement revenues and higher fees for additional services. The reimbursement revenues have no impact on EBITDA.
 
Net revenues were unfavorably impacted by $8 million and EBITDA was favorably impacted by $5 million due to lower consumer financing revenues attributable to a decline in our contract receivables portfolio which was more than offset in EBITDA by a $13 million decrease in interest expense on our securitized debt. Compared to last year, our net interest income margin increased to 79% from 75% due to (i) a reduction in our weighted average interest rate to 5.2% from 7.2% and (ii) higher weighted average interest rates earned on our contract receivable portfolio, partially offset by $168 million of increased average borrowings on our securitized debt facilities.
 
In addition to the items discussed above, EBITDA was unfavorably impacted by increased expenses primarily resulting from:
 
  ·   $24 million of increased marketing expenses due to increased tours for new owner generation;
 
  ·   $23 million of increased costs associated with maintenance fees on unsold inventory; and
 
  ·   $9 million of increased sales costs.
 
Such decreases were partially offset by:
 
  ·   $23 million of lower cost of VOI sales due to product mix and relative sales value adjustments; and
 
  ·   $20 million of decreased litigation related costs.


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Corporate and Other
 
Corporate and Other EBITDA decreased $53 million during the nine months ended September 30, 2011 compared to the same period during 2010 resulting from:
 
  ·   the absence of a $51 million net benefit recorded in the third quarter of 2010 related to the resolution of and adjustment to certain contingent liabilities and assets primarily due to the settlement of the IRS examination of Cendant’s taxable years 2003 through 2006;
 
  ·   $11 million of increased costs primarily for data security enhancements;
 
  ·   $5 million of lower net gains from hedging activities; and
 
  ·   $5 million of higher employee-related costs.
 
Such increases in expenses were partially offset by:
 
  ·   a $16 million benefit from the resolution of and adjustment to certain contingent liabilities and assets during the nine months ended September 30, 2011; and
 
  ·   a $4 million gain related to the redemption of a preferred stock investment allocated to us in connection with the Separation.
 
RESTRUCTURING PLANS
 
2010 Restructuring Plan
 
In connection with the recent implementation of significant technology enhancements at our vacation exchange and rentals business during 2010, we committed to a strategic realignment initiative targeted at reducing costs, primarily impacting the operations at certain vacation exchange call centers. During the nine months ended September 30, 2011, we incurred $7 million of incremental costs and reduced our liability with $8 million of cash payments. As of September 30, 2011, the remaining liability of $7 million is expected to be paid in cash; $6 million of facility-related by the first quarter of 2020 and $1 million of personnel-related by the third quarter of 2012. We anticipate annual net savings of approximately $8 million from such initiative.
 
2008 Restructuring Plan
 
In response to a deteriorating global economy, during 2008, we committed to various strategic realignment initiatives targeted principally at reducing costs, enhancing organizational efficiency, reducing our need to access the asset-backed securities market and consolidating and rationalizing existing processes and facilities. During the nine months ended September 30, 2011, we reversed $1 million of previously recorded facility-related expenses and reduced our liability with $6 million of cash payments. As of September 30, 2011, the remaining liability was $5 million, all of which is facility-related, and is expected to be paid in cash by September 2017.
 
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
 
                         
    September 30,
  December 31,
   
    2011   2010   Change
 
Total assets
  $ 9,022     $ 9,416     $ (394 )
Total liabilities
    6,603       6,499       104  
Total stockholders’ equity
    2,419       2,917       (498 )
 
Total assets decreased $394 million from December 31, 2010 to September 30, 2011 primarily due to:
 
  ·   a $178 million decrease in other non-current assets primarily due to the settlement of a portion of our call options in connection with the repurchase of a portion of our 3.50% convertible notes;
 
  ·   a $120 million decrease in vacation ownership contract receivables, net primarily due to principal collections exceeding net loan originations;
 
  ·   a $73 million decrease in inventory primarily due to VOI sales and lower development spending during 2011;
 
  ·   a $59 million decrease in trade receivables, net, primarily due to seasonality at our European vacation rentals businesses, partially offset by increased receivables due to higher revenue at our lodging business; and


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  ·   a $15 million decrease in other current assets primarily due to decreased current securitized restricted cash resulting from the timing of cash that we are required to set aside in connection with vacation ownership contract receivables securitizations and the receipt of a value added tax refund.
 
Such decreases were partially offset by:
 
  ·   a $47 million increase in property and equipment primarily related to capital expenditures for information technology enhancements, construction of new bungalows at our Landal GreenParks business and construction of our Bonnet Creek Hotel, partially offset by current year depreciation of property and equipment; and
 
  ·   an increase of $19 million in cash and cash equivalents.
 
Total liabilities increased $104 million from December 31, 2010 to September 30, 2011 primarily due to:
 
  ·   an $80 million net increase in our securitized vacation ownership debt;
 
  ·   a $71 million increase in accrued expenses and other current liabilities primarily as a result of the timing of income tax payments and increased value added tax accruals; and
 
  ·   a $55 million increase in deferred income taxes primarily attributable to a change in the utilization of alternative minimum tax credits.
 
Such increases were partially offset by:
 
  ·   a $53 million decrease in accounts payable primarily due to seasonality at our vacation rentals businesses;
 
  ·   a $30 million decrease in deferred income primarily resulting from shorter membership terms at our vacation exchange and rentals business; and
 
  ·   a $30 million decrease in due to former Parent and subsidiaries as a result of the payment and settlement of certain legacy liabilities.
 
Total stockholders’ equity decreased $498 million from December 31, 2010 to September 30, 2011 primarily due to:
 
  ·   $677 million of share repurchases;
 
  ·   $112 million for the repurchase of warrants;
 
  ·   $76 million of dividends; and
 
  ·   $25 million of currency translation adjustments, net of tax.
 
Such decreases were partially offset by:
 
  ·   $361 million of net income; and
 
  ·   a $17 million increase to our pool of excess tax benefits available to absorb tax deficiencies due to the vesting of equity awards.
 
LIQUIDITY AND CAPITAL RESOURCES
 
Currently, our financing needs are supported by cash generated from operations and borrowings under our revolving credit facility. In addition, certain funding requirements of our vacation ownership business are met through the utilization of our bank conduit facility and the issuance of securitized debt to finance vacation ownership contract receivables. We believe that our net cash from operations, cash and cash equivalents, access to our revolving credit facility and continued access to the securitization and debt markets provide us with sufficient liquidity to meet our ongoing needs.
 
During July 2011, we replaced our $980 million revolving credit facility with a five-year $1.0 billion revolving credit facility that expires in July 2016. During June 2011, we renewed our securitized vacation ownership bank conduit facility to a two-year conduit facility that expires in June 2013 and has a total capacity of $600 million.
 
We may, from time to time, depending on market conditions and other factors, repurchase our outstanding indebtedness, including our convertible notes, whether or not such indebtedness trades above or below its face amount, for cash and/or in exchange for other securities or other consideration, in each case in open market purchases and/or privately negotiated transactions.


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CASH FLOWS
 
During the nine months ended September 30, 2011 and 2010, we had a net change in cash and cash equivalents of $19 million and $15 million, respectively. The following table summarizes such changes:
 
                         
    Nine Months Ended September 30,  
    2011     2010     Change  
 
Cash provided by/(used in):
                       
Operating activities
  $ 860     $ 528     $ 332  
Investing activities
    (159 )     (260 )     101  
Financing activities
    (674 )     (255 )     (419 )
Effects of changes in exchange rate on cash and cash equivalents
    (8 )     2       (10 )
                         
Net change in cash and cash equivalents
  $ 19     $ 15     $ 4  
                         
 
Operating Activities
 
During the nine months ended September 30, 2011, net cash provided by operating activities increased $332 million as compared to the nine months ended September 30, 2010 primarily reflecting $67 million of cash received for value added taxes comprised of a $51 million refund and $16 million of related interest income, of which $29 million is included in net income and $38 million is in working capital. Working capital further contributed to cash provided by operating activities due to:
 
  ·   the absence of a net payment of $145 million in 2010 relating to the IRS settlement, which was reflected within due to former Parent and subsidiaries;
 
  ·   $66 million of lower cash utilization resulting from the recognition of deferred ancillary revenues during 2010 at our vacation ownership business; and
 
  ·   the absence of a $51 million reduction in accrued liabilities recorded during the third quarter of 2010 related to the resolution of and adjustment to certain contingent liabilities and assets.
 
Investing Activities
 
During the nine months ended September 30, 2011, net cash used in investing activities decreased $101 million as compared to the nine months ended September 30, 2010, primarily reflecting $132 million of lower payments for acquisitions, partially offset by an increase of $53 million in capital spending primarily for construction on our Bonnet Creek Hotel and information technology related initiatives.
 
Financing Activities
 
During the nine months ended September 30, 2011, net cash used in financing activities increased $419 million as compared to the nine months ended September 30, 2010, which principally reflects:
 
  ·   $485 million of higher share repurchases,
 
  ·   $249 million of lower proceeds from the issuance of notes; and
 
  ·   $65 million of higher repurchases of our convertible notes.
 
Such increases in cash outflows were partially offset by $428 million of higher net proceeds related to non-securitized borrowings.
 
Convertible Debt.  We utilized some of our cash flow to retire a portion of our convertible debt and settle a related portion of call options (“Call Options”) and warrants (“Warrants”). During the first nine months of 2011, we repurchased approximately 90%, or $104 million face value, of our remaining 3.50% convertible notes that had a carrying value of $251 million, primarily through the completion of a cash tender offer ($95 million for the portion of convertible notes, including the unamortized discount, and $156 million for the related bifurcated conversion feature) for $262 million. Concurrent with the repurchases, we settled (i) a portion of the Call Options for proceeds of $155 million, which resulted in an additional loss of $1 million, and (ii) a portion of the Warrants with payments of $112 million. As a result of these transactions, we made net payments of $219 million and incurred total losses of $12 million during the first nine months of 2011. This transaction reduced the number of shares related to the Warrants to approximately 1 million as of September 30, 2011. As the Warrants had a dilutive effect when our common stock price exceeds the Warrant strike price of $19.76 per share, this transaction will result in reduced future share dilution if our common stock price continues to exceed the


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Warrant strike price. In addition, this transaction is expected to create economic value as we believe our common stock price will increase, resulting in a benefit that exceeds the cost of purchasing these Warrants.
 
Senior Unsecured Notes.  During the first quarter of 2011, we issued senior unsecured debt for net proceeds of $245 million. We utilized the proceeds from this debt issuance to reduce our outstanding indebtedness, including the repurchase of a portion of our outstanding 3.50% convertible notes and repayment of borrowings under the revolving credit facility, and for general corporate purposes. For further detailed information about such borrowings, see Note 7—Long-Term Debt and Borrowing Arrangements.
 
Capital Deployment
 
We are focusing on optimizing cash flow and seeking to deploy capital for the highest possible returns. Ultimately, our business objective is to transform our cash and earnings profile, primarily by rebalancing our cash streams to achieve a greater proportion of EBITDA from our fee-for-service businesses. We intend to continue to invest in select capital and technological improvements across our business. In addition, we may seek to acquire additional franchise agreements, hotel/property management contracts and exclusive agreements for vacation rental properties on a strategic and selective basis, either directly or through investments in joint ventures.
 
During the nine months ended September 30, 2011, we spent $161 million on capital expenditures, equity investments and development advances primarily on (i) information technology enhancement projects, (ii) $36 million for construction of our Bonnet Creek Hotel, (iii) construction of new bungalows at our Landal GreenParks business and (iv) equity investments and development advances. During 2011, we anticipate spending approximately $225 million to $240 million on capital expenditures (which includes costs related to the completion of our Bonnet Creek Hotel), equity investments and development advances. Additionally, in an effort to support growth in the Wyndham Hotels and Resorts brand, we plan on investing approximately $200 million in mezzanine and other financing over the next several years.
 
In addition, we spent $46 million relating to vacation ownership development projects (inventory) during the nine months ended September 30, 2011. We anticipate spending on average approximately $130 million annually from 2011 through 2014 on vacation ownership development projects (approximately $80 million to $90 million during 2011), including projects currently under development. We believe that our vacation ownership business currently has adequate finished inventory on our balance sheet to support vacation ownership sales. After factoring in the anticipated additional average spending of approximately $130 million annually from 2011 through 2014, we expect to have adequate inventory through at least 2015.
 
We expect that the majority of the expenditures that will be required to pursue our capital spending programs, strategic investments and vacation ownership development projects will be financed with cash flow generated through operations. Additional expenditures are financed with general unsecured corporate borrowings, including through the use of available capacity under our revolving credit facility.
 
Share Repurchase Program
 
We expect to generate annual net cash provided by operating activities less capital expenditures, equity investments and development advances in the range of approximately $600 million to $700 million annually over the next several years. A portion of this cash flow is expected to be returned to our shareholders in the form of share repurchases. On August 20, 2007, our Board of Directors (the “Board”) authorized a stock repurchase program that enabled us to purchase up to $200 million of our common stock. On July 22, 2010, the Board increased the authorization by $300 million and, further increased the authorization by $500 million on both April 25, 2011 and August 11, 2011, bringing the total share authorization to $1.5 billion. Under such program, we repurchased 11,426,202 shares at an average price of $25.78 for a cost of $295 million and repurchase capacity increased $53 million from proceeds received from stock option exercises as of December 31, 2010. During the first nine months of 2011, we repurchased 22,007,292 shares at an average price of $30.74 for a cost of $677 million and repurchase capacity increased $10 million from proceeds received from stock option exercises. Such repurchase capacity will continue to be increased by proceeds received from future stock option exercises.
 
During the period October 1, 2011 through October 25, 2011, we repurchased an additional 1.4 million shares at an average price of $29.19 for a cost of $40 million. We currently have $553 million remaining availability in our program. The amount and timing of specific repurchases are subject to market conditions, applicable legal requirements and other factors. Repurchases may be conducted in the open market or in privately negotiated transactions.
 
Dividend Policy
 
During the first quarter of 2011, we increased our dividend by 25%, from $0.12 to $0.15 per share of common stock outstanding, and as a result, we projected our dividend payout ratio to be approximately 28% of the midpoint of our then


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estimated 2011 net income after certain adjustments. During the quarterly periods ended March 31, June 30 and September 30, 2011, we paid a cash dividend of $0.15 per share of common stock issued and outstanding on the record date for the applicable dividend. We expect our dividend policy for the future is to increase dividends, at a minimum, at the rate of the growth of our business.
 
FINANCIAL OBLIGATIONS
 
Our indebtedness consisted of:
 
                 
    September 30,
    December 31,
 
    2011     2010  
 
Securitized vacation ownership debt: (a)
               
Term notes
  $ 1,512     $ 1,498  
Bank conduit facility (b)
    218       152  
                 
Total securitized vacation ownership debt
  $ 1,730     $ 1,650  
                 
Long-term debt:
               
Revolving credit facility (due July 2016) (c)
  $ 169     $ 154  
6.00% senior unsecured notes (due December 2016) (d)
    812       798  
9.875% senior unsecured notes (due May 2014) (e)
    243       241  
3.50% convertible notes (due May 2012) (f)
    27       266  
7.375% senior unsecured notes (due March 2020) (g)
    247       247  
5.75% senior unsecured notes (due February 2018) (h)
    247       247  
5.625% senior unsecured notes (due March 2021) (i)
    245        
Vacation rentals capital leases (j)
    108       115  
Other
    1       26  
                 
Total long-term debt
  $ 2,099     $ 2,094  
                 
 
 
(a) Represents non-recourse debt that is currently securitized through 12 bankruptcy-remote special purpose entities (“SPEs”), the creditors of which have no recourse to us for principal and interest. These outstanding borrowings are collateralized by $2,502 million and $2,865 million of underlying gross vacation ownership contract receivables and related assets as of September 30, 2011 and December 31, 2010, respectively.
 
(b) Represents a $600 million, non-recourse vacation ownership bank conduit facility, with a term through June 2013, whose capacity is subject to our ability to provide additional assets to collateralize the facility. As of September 30, 2011, the total available capacity of the facility was $382 million.
 
(c) The revolving credit facility has a total capacity of $1.0 billion, which includes availability for letters of credit. As of September 30, 2011, we had $11 million of letters of credit outstanding and, as such, the total available capacity of the revolving credit facility was $820 million.
 
(d) Represents senior unsecured notes we issued during December 2006. The balance as of September 30, 2011 represents $800 million aggregate principal less $2 million of unamortized discount, plus $14 million of unamortized gains from the settlement of a derivative.
 
(e) Represents senior unsecured notes we issued during May 2009. The balance as of September 30, 2011 represents $250 million aggregate principal less $7 million of unamortized discount.
 
(f) Represents convertible notes we issued during May 2009, which includes debt principal, less unamortized discount, and a liability related to a bifurcated conversion feature. During the first nine months of 2011, we repurchased a portion of our outstanding 3.50% convertible notes, primarily through the completion of a cash tender offer. The following table details the components of the convertible notes:
 
                 
    September 30,
    December 31,
 
    2011     2010  
 
Debt principal
  $ 12     $ 116  
Unamortized discount
    (1 )     (12 )
                 
Debt less discount
    11       104  
Fair value of bifurcated conversion feature(*)
    16       162  
                 
Convertible notes
  $ 27     $ 266  
                 
        ­ ­
  (*)   We also have an asset with a fair value equal to the bifurcated conversion feature, which represents cash-settled call options that we purchased concurrent with the issuance of the convertible notes.
 
(g) Represents senior unsecured notes we issued during February 2010. The balance as of September 30, 2011 represents $250 million aggregate principal less $3 million of unamortized discount.
 
(h) Represents senior unsecured notes we issued during September 2010. The balance as of September 30, 2011 represents $250 million aggregate principal less $3 million of unamortized discount.
 
(i) Represents senior unsecured notes we issued during March 2011. The balance as of September 30, 2011 represents $250 million aggregate principal less $5 million of unamortized discount.
 
(j) Represents capital lease obligations with corresponding assets classified within property and equipment on our Consolidated Balance Sheets.


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2011 Debt Issuances
 
During the nine months ended September 30, 2011, we issued senior unsecured notes, closed two term securitizations, renewed our securitized bank conduit facility, repurchased a portion of our 3.50% convertible notes and replaced our revolving credit facility. For further detailed information about such debt, see Note 7—Long-term Debt and Borrowing Arrangements.
 
Capacity
 
As of September 30, 2011, available capacity under our borrowing arrangements was as follows:
 
                 
    Securitized
       
    Bank Conduit
    Revolving Credit
 
    Facility (a)     Facility  
 
Total Capacity
  $ 600     $ 1,000  
Less: Outstanding Borrowings
    218       169  
                 
Available Capacity
  $ 382     $ 831 (b)
                 
 
 
(a) The capacity of this facility is subject to our ability to provide additional assets to collateralize additional securitized borrowings.
 
(b) The capacity under our revolving credit facility includes availability for letters of credit. As of September 30, 2011, the available capacity of $831 million was further reduced to $820 million due to the issuance of $11 million of letters of credit.
 
Transfer and Servicing of Financial Assets
 
We pool qualifying vacation ownership contract receivables and sell 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 currently securitized through 12 bankruptcy-remote SPEs that are consolidated within our Consolidated Financial Statements. As a result, we do 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. We service 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 our 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 us. The receivables held by the bankruptcy-remote SPEs are not available to our creditors and legally are not our assets. Additionally, the creditors of these SPEs have no recourse to us for principal and interest.
 
The assets and liabilities of these vacation ownership SPEs are as follows:
 
                 
    September 30,
    December 31,
 
    2011     2010  
 
Securitized contract receivables, gross
  $ 2,358     $ 2,703  
Securitized restricted cash
    124       138  
Interest receivables on securitized contract receivables
    19       22  
Other assets (a)
    1       2  
                 
Total SPE assets (b)
    2,502       2,865  
                 
Securitized term notes
    1,512       1,498  
Securitized conduit facilities
    218       152  
Other liabilities (c)
    17       22  
                 
Total SPE liabilities
    1,747       1,672  
                 
SPE assets in excess of SPE liabilities
  $ 755     $ 1,193  
                 
 
 
(a) Includes interest rate derivative contracts and related assets.
 
(b) Excludes deferred financing costs of $24 million and $22 million as of September 30, 2011 and December 31, 2010, respectively, related to securitized debt.
 
(c) Primarily includes interest rate derivative contracts and accrued interest on securitized debt.
 
In addition, we have vacation ownership contract receivables that have not been securitized through bankruptcy-remote SPEs. Such gross receivables were $889 million and $641 million as of September 30, 2011 and December 31, 2010,


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respectively. A summary of total vacation ownership receivables and other securitized assets, net of securitized liabilities and the allowance for loan losses, is as follows:
 
                 
    September 30,
    December 31,
 
    2011     2010  
 
SPE assets in excess of SPE liabilities
  $ 755     $ 1,193  
Non-securitized contract receivables
    889       641  
Allowance for loan losses
    (385 )     (362 )
                 
Total, net
  $ 1,259     $ 1,472  
                 
 
Covenants
 
The revolving credit facility is subject to covenants including the maintenance of specific financial ratios. The financial ratio covenants consist of a minimum consolidated interest coverage ratio of at least 3.0 to 1.0 as of the measurement date and a maximum consolidated leverage ratio not to exceed 3.75 to 1.0 as of the measurement date. The consolidated interest coverage ratio is calculated by dividing consolidated EBITDA (as defined in the credit agreement) by consolidated interest expense (as defined in the credit agreement), both as measured on a trailing 12 month basis preceding the measurement date. As of September 30, 2011, our consolidated interest coverage ratio was 10.4 times. Consolidated interest expense excludes, among other things, interest expense on any securitization indebtedness (as defined in the credit agreement). The consolidated leverage ratio is calculated by dividing consolidated total indebtedness (as defined in the credit agreement and which excludes, among other things, securitization indebtedness) as of the measurement date by consolidated EBITDA as measured on a trailing 12 month basis preceding the measurement date. As of September 30, 2011, our consolidated leverage ratio was 2.0 times. Covenants in this credit facility also include limitations on indebtedness of material subsidiaries; liens; mergers, consolidations, liquidations and dissolutions; sale of all or substantially all assets; and sale and leaseback transactions. Events of default in this credit facility include failure to pay interest, principal and fees when due; breach of a covenant or warranty; acceleration of or failure to pay other debt in excess of $50 million (excluding securitization indebtedness); insolvency matters; and a change of control.
 
The 6.00% senior unsecured notes, 9.875% senior unsecured notes, 7.375% senior unsecured notes, 5.75% senior unsecured notes and 5.625% senior unsecured notes contain various covenants including limitations on liens, limitations on potential sale and leaseback transactions and change of control restrictions. In addition, there are limitations on mergers, consolidations and potential sale of all or substantially all of our assets. Events of default in the notes include failure to pay interest and principal when due, breach of a covenant or warranty, acceleration of other debt in excess of $50 million and insolvency matters. The convertible notes do not contain affirmative or negative covenants, however, the limitations on mergers, consolidations and potential sale of all or substantially all of our assets and the events of default for our senior unsecured notes are applicable to such notes. Holders of the convertible notes have the right to require us to repurchase the convertible notes at 100% of principal plus accrued and unpaid interest in the event of a fundamental change, defined to include, among other things, a change of control, certain recapitalizations and if our common stock is no longer listed on a national securities exchange.
 
As of September 30, 2011, we were in compliance with all of the financial covenants described above.
 
Each of our non-recourse, securitized term notes and the bank conduit facility contain various triggers relating to the performance of the applicable loan pools. If the vacation ownership contract receivables pool that collateralizes one of our securitization notes fails to perform within the parameters established by the contractual triggers (such as higher default or delinquency rates), there are provisions pursuant to which the cash flows for that pool will be maintained in the securitization as extra collateral for the note holders or applied to accelerate the repayment of outstanding principal to the note holders. As of September 30, 2011, all of our securitized loan pools were in compliance with applicable contractual triggers.
 
LIQUIDITY RISK
 
Our vacation ownership business finances certain of its receivables through (i) an asset-backed bank conduit facility and (ii) periodically accessing the capital markets by issuing asset-backed securities. None of the currently outstanding asset-backed securities contains any recourse provisions to us other than interest rate risk related to swap counterparties (solely to the extent that the amount outstanding on our notes differs from the forecasted amortization schedule at the time of issuance).
 
We believe that our bank conduit facility, with a term through June 2013 and capacity of $600 million, combined with our ability to issue term asset-backed securities, should provide sufficient liquidity for our expected sales pace and we expect to have available liquidity to finance the sale of VOIs.


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Our $1.0 billion five-year revolving credit agreement, which expires in July 2016, contains a provision that is a condition of an extension of credit. The provision, which was standard market practice for issuers of our rating and industry at the time of our revolver renewal, allows the lenders to withhold an extension of credit if the representations and warranties we made at the time we executed the revolving credit facility agreement are not true and correct in all material respects at the time of request of the extension for credit including if a development or event has or would reasonably be expected to have a material adverse effect on our business, assets, operations or condition, financial or otherwise. The application of the material adverse effect provision contains exclusions for the impact resulting from disruptions in, or the inability of companies engaged in businesses similar to those engaged in by us and our subsidiaries to consummate financings in, the asset backed securities or conduit market.
 
We primarily utilize surety bonds at our vacation ownership business for sales and development transactions in order to meet regulatory requirements of certain states. In the ordinary course of our business, we have assembled commitments from twelve surety providers in the amount of $1.2 billion, of which we had $300 million outstanding as of September 30, 2011. The availability, terms and conditions, and pricing of such bonding capacity is dependent on, among other things, continued financial strength and stability of the insurance company affiliates providing such bonding capacity, the general availability of such capacity and our corporate credit rating. If such bonding capacity is unavailable, or alternatively, if the terms and conditions and pricing of such bonding capacity are unacceptable to us, our vacation ownership business could be negatively impacted.
 
Our liquidity position may also be negatively affected by unfavorable conditions in the capital markets in which we operate or if our vacation ownership contract receivables portfolios do not meet specified portfolio credit parameters. Our liquidity as it relates to our vacation ownership contract receivables securitization program could be adversely affected if we were to fail to renew or replace our conduit facility on its expiration date, or if a particular receivables pool were to fail to meet certain ratios, which could occur in certain instances if the default rates or other credit metrics of the underlying vacation ownership contract receivables deteriorate. Our ability to sell securities backed by our vacation ownership contract receivables depends on the continued ability and willingness of capital market participants to invest in such securities.
 
As of September 30, 2011, we had $382 million of availability under our asset-backed bank conduit facility. Any disruption to the asset-backed or commercial paper markets could adversely impact our ability to obtain such financings.
 
Our senior unsecured debt is rated BBB- by Standard and Poor’s (“S&P”). During February 2010, S&P assigned a “stable outlook” to our senior unsecured debt. During February 2010, Moody’s Investors Service upgraded our senior unsecured debt rating to Ba1 and during September 2010, assigned a “positive outlook”. A security rating is not a recommendation to buy, sell or hold securities and is subject to revision or withdrawal by the assigning rating organization. Reference in this report to any such credit rating is intended for the limited purpose of discussing or referring to aspects of our liquidity and of our costs of funds. Any reference to a credit rating is not intended to be any guarantee or assurance of, nor should there be any undue reliance upon, any credit rating or change in credit rating, nor is any such reference intended as any inference concerning future performance, future liquidity or any future credit rating.
 
SEASONALITY
 
We experience seasonal fluctuations in our net revenues and net income from our franchise and management fees, commission income earned from renting vacation properties, annual subscription fees or annual membership dues, as applicable, and exchange and member-related transaction fees and sales of VOIs. Revenues from franchise and management fees are generally higher in the second and third quarters than in the first or fourth quarters, because of increased leisure travel during the summer months. Revenues from vacation rentals are generally highest in the third quarter, when vacation rentals are highest. Revenues from vacation exchange and member-related transaction fees are generally highest in the first quarter, which is generally when members of our vacation exchange business plan and book their vacations for the year. Revenues from sales of VOIs are generally higher in the second and third quarters than in other quarters. The seasonality of our business may cause fluctuations in our quarterly operating results. As we expand into new markets and geographical locations, we may experience increased or different seasonality dynamics that create fluctuations in operating results different from the fluctuations we have experienced in the past.
 
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 our common stock to Cendant shareholders, we 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


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which we assumed and are responsible for 37.5%, while Realogy is responsible for the remaining 62.5%. The remaining amount of liabilities which we assumed in connection with the Separation was $49 million and $78 million as of September 30, 2011 and December 31, 2010, respectively. 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 certain unresolved contingent matters and certain 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, we would be responsible for a portion of the defaulting party or parties’ obligation(s). We 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 have been valued upon the Separation in accordance with the guidance for guarantees and recorded as liabilities on the 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 us and Avis Budget Group to satisfy its obligations for the Cendant legacy contingent liabilities. As of September 30, 2011, the letter of credit was $100 million.
 
As of September 30, 2011, the $49 million of Separation related liabilities is comprised of $40 million for tax liabilities, $4 million for liabilities of previously sold businesses of Cendant, $3 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, $19 million is recorded in current due to former Parent and subsidiaries and $28 million is recorded in long-term due to former Parent and subsidiaries as of September 30, 2011 on the Consolidated Balance Sheet. We will indemnify Cendant for these contingent liabilities and therefore any payments made to the third party would be through the former Parent. The $2 million relating to guarantees is recorded in other current liabilities as of September 30, 2011 on the Consolidated Balance Sheet. The actual timing of payments relating to these liabilities is dependent on a variety of factors beyond our control. See Contractual Obligations for the estimated timing of such payments. In addition, as of September 30, 2011, we had $2 million of receivables due from former Parent and subsidiaries primarily relating to income taxes, which is recorded in other current assets on the Consolidated Balance Sheet. Such receivables totaled $4 million as of December 31, 2010.
 
See Item 1A. Risk Factors for further information related to contingent liabilities.
 
CONTRACTUAL OBLIGATIONS
 
The following table summarizes our future contractual obligations for the twelve month periods set forth below:
 
                                                         
    10/1/11-
    10/1/12-
    10/1/13-
    10/1/14-
    10/1/15-
             
    9/30/12     9/30/13     9/30/14     9/30/15     9/30/16     Thereafter     Total  
 
Securitized debt (a)
  $ 179     $ 213     $ 353     $ 184     $ 181     $ 620     $ 1,730  
Long-term debt
    37       10       254       11       181       1,606       2,099  
Interest on securitized and long-term debt (b)
    213       207       196       179       171       177       1,143  
Operating leases
    80       59       41       41       38       253       512  
Other purchase commitments (c)
    217       24       9       4       3       133       390  
Contingent liabilities (d)
    21       28                               49  
                                                         
Total (e)
  $ 747     $ 541     $ 853     $ 419     $ 574     $ 2,789     $ 5,923  
                                                         
 
 
(a) Represents debt that is securitized through bankruptcy-remote SPEs, the creditors to which have no recourse to us for principal and interest.
 
(b) Estimated using the stated interest rates on our long-term debt and the swapped interest rates on our securitized debt.
 
(c) Primarily represents commitments for the development of vacation ownership properties. Total includes approximately $100 million of vacation ownership development commitments, which we may terminate at minimal cost.
 
(d) Primarily represents certain contingent litigation liabilities, contingent tax liabilities and 37.5% of Cendant contingent and other corporate liabilities, which we assumed and are responsible for pursuant to our separation from Cendant.
 
(e) Excludes $24 million of our liability for unrecognized tax benefits associated with the guidance for uncertainty in income taxes since it is not reasonably estimable to determine the periods in which such liability would be settled with the respective tax authorities.
 
CRITICAL ACCOUNTING POLICIES
 
In presenting our financial statements in conformity with generally accepted accounting principles, we are required to make estimates and assumptions that affect the amounts reported therein. Several of the estimates and assumptions we are required to make relate to matters that are inherently uncertain as they pertain to future events. However, events that are outside of our control cannot be predicted and, as such, they cannot be contemplated in evaluating such estimates and assumptions. If there is a significant unfavorable change to current conditions, it could result in a material adverse impact


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to our consolidated results of operations, financial position and liquidity. We believe that the estimates and assumptions we used when preparing our financial statements were the most appropriate at that time. These Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements included in the Annual Report filed on Form 10-K with the SEC on February 22, 2011, which includes a description of our critical accounting policies that involve subjective and complex judgments that could potentially affect reported results. While there have been no material changes to our critical accounting policies as to the methodologies or assumptions we apply under them, we continue to monitor such methodologies and assumptions.
 
Item 3.   Quantitative and Qualitative Disclosures About Market Risks.
 
We assess our market risk based on changes in interest and foreign currency exchange rates utilizing a sensitivity analysis that measures the potential impact in earnings, fair values and cash flows based on a hypothetical 10% change (increase and decrease) in interest and foreign currency rates. We used September 30, 2011 market rates to perform a sensitivity analysis separately for each of our market risk exposures. The estimates assume instantaneous, parallel shifts in interest rate yield curves and exchange rates. We have determined, through such analyses, that the impact of a 10% change in interest and foreign currency exchange rates and prices on our earnings, fair values and cash flows would not be material.
 
Item 4.   Controls and Procedures.
 
(a)  Disclosure Controls and Procedures.  Our management, with the participation of our Chairman and Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, our Chairman and Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective.
 
(b)  Internal Control Over Financial Reporting.  There have been no changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the period to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
PART II—OTHER INFORMATION
 
Item 1.   Legal Proceedings.
 
We are involved in various claims and lawsuits arising in the ordinary course of business, none of which, in the opinion of management, is expected to have a material adverse effect on our results of operations or financial condition. See Note 12 to the Consolidated Financial Statements for a description of claims and legal actions arising in the ordinary course of our business.
 
Item 1A.   RISK FACTORS.
 
Before you invest in our securities you should carefully consider each of the following risk factors and all of the other information provided in this report. We believe that the following information identifies the most significant risks that may impact us. However, the risks and uncertainties we face are not limited to those set forth in the risk factors described below. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business. In addition, past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods. If any of the following risks and uncertainties develops into an actual event, the event could have a material adverse effect on our business, financial condition or results of operations. In such case, the market price of our common stock could decline.
 
The hospitality industry is highly competitive and we are subject to risks relating to competition that may adversely affect our performance.
 
We will be adversely impacted if we cannot compete effectively in the highly competitive hospitality industry. Our continued success depends upon our ability to compete effectively in markets that contain numerous competitors, some of which may have significantly greater financial, marketing and other resources than we have. Competition may reduce fee structures, potentially causing us to lower our fees or prices, which may adversely impact our profits. New competition or existing competition that uses a business model that is different from our business model may put pressure on us to change our model so that we can remain competitive.


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Our revenues are highly dependent on the travel industry and declines in or disruptions to the travel industry, such as those caused by economic slowdown, terrorism, political strife, acts of God and war may adversely affect us.
 
Declines in or disruptions to the travel industry may adversely impact us. Risks affecting the travel industry include: economic slowdown and recession; economic factors, such as increased costs of living and reduced discretionary income, adversely impacting consumers’ and businesses’ decisions to use and consume travel services and products; terrorist incidents and threats (and associated heightened travel security measures); political strife; acts of God (such as earthquakes, hurricanes, fires, floods, volcanoes and other natural disasters); war; pandemics or threat of pandemics (such as the H1N1 flu); environmental disasters (such as the Gulf of Mexico oil spill); increased pricing, financial instability and capacity constraints of air carriers; airline job actions and strikes; and increases in gasoline and other fuel prices.
 
We are subject to operating or other risks common to the hospitality industry.
 
Our business is subject to numerous operating or other risks common to the hospitality industry including:
 
  ·   changes in operating costs, including inflation, energy, labor costs (including minimum wage increases and unionization), workers’ compensation and health-care related costs and insurance;
 
  ·   changes in desirability of geographic regions of the hotels or resorts in our business;
 
  ·   changes in the supply and demand for hotel rooms, vacation exchange and rental services and vacation ownership services and products;
 
  ·   seasonality in our businesses, which may cause fluctuations in our operating results;
 
  ·   geographic concentrations of our operations and customers;
 
  ·   increases in costs due to inflation that may not be fully offset by price and fee increases in our business;
 
  ·   availability of acceptable financing and cost of capital as they apply to us, our customers, current and potential hotel franchisees and developers, owners of hotels with which we have hotel management contracts, our RCI affiliates and other developers of vacation ownership resorts;
 
  ·   our ability to securitize the receivables that we originate in connection with sales of vacation ownership interests;
 
  ·   the risk that purchasers of vacation ownership interests who finance a portion of the purchase price default on their loans due to adverse macro or personal economic conditions or otherwise, which would increase loan loss reserves and adversely affect loan portfolio performance; that if such defaults occur during the early part of the loan amortization period we will not have recovered the marketing, selling, administrative and other costs associated with such vacation ownership interests; such costs will be incurred again in connection with the resale of the repossessed vacation ownership interest; and the value we recover in a default is not, in all instances, sufficient to cover the outstanding debt;
 
  ·   the quality of the services provided by franchisees, our vacation exchange and rentals business, resorts with units that are exchanged through our vacation exchange business and/or resorts in which we sell vacation ownership interests may adversely affect our image and reputation;
 
  ·   our ability to generate sufficient cash to buy from third-party suppliers the products that we need to provide to the participants in our points programs who want to redeem points for such products;
 
  ·   overbuilding in one or more segments of the hospitality industry and/or in one or more geographic regions;
 
  ·   changes in the number and occupancy and room rates of hotels operating under franchise and management agreements;
 
  ·   changes in the relative mix of franchised hotels in the various lodging industry price categories;
 
  ·   our ability to develop and maintain positive relations and contractual arrangements with current and potential franchisees, hotel owners, vacation exchange members, vacation ownership interest owners, resorts with units that are exchanged through our vacation exchange business and/or owners of vacation properties that our vacation rentals business markets for rental;
 
  ·   the availability of and competition for desirable sites for the development of vacation ownership properties; difficulties associated with obtaining entitlements to develop vacation ownership properties; liability under state and local laws with respect to any construction defects in the vacation ownership properties we develop;


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  and our ability to adjust our pace of completion of resort development relative to the pace of our sales of the underlying vacation ownership interests;
 
  ·   our ability to adjust our business model to generate greater cash flow and require less capital expenditures;
 
  ·   private resale of vacation ownership interests, which could adversely affect our vacation ownership resorts and vacation exchange businesses;
 
  ·   revenues from our lodging business are indirectly affected by our franchisees’ pricing decisions;
 
  ·   organized labor activities and associated litigation;
 
  ·   maintenance and infringement of our intellectual property;
 
  ·   the bankruptcy or insolvency of any one of our customers, which could impair our ability to collect outstanding fees or other amounts due or otherwise exercise our contractual rights;
 
  ·   increases in the use of third-party Internet services to book online hotel reservations; and
 
  ·   disruptions in relationships with third parties, including marketing alliances and affiliations with e-commerce channels.
 
We may not be able to achieve our growth objectives.
 
We may not be able to achieve our growth objectives for increasing our cash flows, the number of franchised and/or managed properties in our lodging business, the number of vacation exchange members in our vacation exchange business, the number of rental weeks sold by our vacation rentals business and the number of tours generated and vacation ownership interests sold by our vacation ownership business.
 
We may be unable to identify acquisition targets that complement our businesses, and if we are able to identify suitable acquisition targets, we may not be able to complete acquisitions on commercially reasonable terms. Our ability to complete acquisitions depends on a variety of factors, including our ability to obtain financing on acceptable terms and requisite government approvals. If we are able to complete acquisitions, there is no assurance that we will be able to achieve the revenue and cost benefits that we expected in connection with such acquisitions or to successfully integrate the acquired businesses into our existing operations.
 
Our international operations are subject to risks not generally applicable to our domestic operations.
 
Our international operations are subject to numerous risks including exposure to local economic conditions; potential adverse changes in the diplomatic relations of foreign countries with the U.S.; hostility from local populations; restrictions and taxes on the withdrawal of foreign investment and earnings; government policies against businesses owned by foreigners; investment restrictions or requirements; diminished ability to legally enforce our contractual rights in foreign countries; foreign exchange restrictions; fluctuations in foreign currency exchange rates; local laws might conflict with U.S. laws; withholding and other taxes on remittances and other payments by subsidiaries; and changes in and application of foreign taxation structures including value added taxes.
 
We are subject to risks related to litigation filed by or against us.
 
We are subject to a number of legal actions and the risk of future litigation as described under “Legal Proceedings”. We cannot predict with certainty the ultimate outcome and related damages and costs of litigation and other proceedings filed by or against us. Adverse results in litigation and other proceedings may harm our business.
 
We are subject to certain risks related to our indebtedness, hedging transactions, our securitization of certain of our assets, our surety bond requirements, the cost and availability of capital and the extension of credit by us.
 
We are a borrower of funds under our credit facilities, credit lines, senior notes and securitization financings. We extend credit when we finance purchases of vacation ownership interests. We use financial instruments to reduce or hedge our financial exposure to the effects of currency and interest rate fluctuations. We are required to post surety bonds in connection with our development activities. In connection with our debt obligations, hedging transactions, the securitization of certain of our assets, our surety bond requirements, the cost and availability of capital and the extension of credit by us, we are subject to numerous risks including:
 
  ·   our cash flows from operations or available lines of credit may be insufficient to meet required payments of principal and interest, which could result in a default and acceleration of the underlying debt;


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  ·   if we are unable to comply with the terms of the financial covenants under our revolving credit facility, including a breach of the financial ratios or tests, such non-compliance could result in a default and acceleration of the underlying revolver debt and under other debt instruments that contain cross-default provisions;
 
  ·   our leverage may adversely affect our ability to obtain additional financing;
 
  ·   our leverage may require the dedication of a significant portion of our cash flows to the payment of principal and interest thus reducing the availability of cash flows to fund working capital, capital expenditures or other operating needs;
 
  ·   increases in interest rates;
 
  ·   rating agency downgrades for our debt that could increase our borrowing costs;
 
  ·   failure or non-performance of counterparties to foreign exchange and interest rate hedging transactions;
 
  ·   we may not be able to securitize our vacation ownership contract receivables on terms acceptable to us because of, among other factors, the performance of the vacation ownership contract receivables, adverse conditions in the market for vacation ownership loan-backed notes and asset-backed notes in general and the risk that the actual amount of uncollectible accounts on our securitized vacation ownership contract receivables and other credit we extend is greater than expected;
 
  ·   our securitizations contain portfolio performance triggers which, if violated, may result in a disruption or loss of cash flow from such transactions;
 
  ·   a reduction in commitments from surety bond providers which may impair our vacation ownership business by requiring us to escrow cash in order to meet regulatory requirements of certain states;
 
  ·   prohibitive cost and inadequate availability of capital could restrict the development or acquisition of vacation ownership resorts by us and the financing of purchases of vacation ownership interests; and
 
  ·   if interest rates increase significantly, we may not be able to increase the interest rate offered to finance purchases of vacation ownership interests by the same amount of the increase.
 
Economic conditions affecting the hospitality industry, the global economy and credit markets generally may adversely affect our business and results of operations, our ability to obtain financing and/or securitize our receivables on reasonable and acceptable terms, the performance of our loan portfolio and the market price of our common stock.
 
The future economic environment for the hospitality industry and the global economy may continue to be challenged. The hospitality industry has experienced and may continue to experience significant downturns in connection with, or in anticipation of, declines in general economic conditions. The current economy has been characterized by higher unemployment, lower family income, lower business investment and lower consumer spending, leading to lower demand for hospitality services and products. Declines in consumer and commercial spending may adversely affect our revenues and profits.
 
Uncertainty in the equity and credit markets may negatively affect our ability to access short-term and long-term financing on reasonable terms or at all, which would negatively impact our liquidity and financial condition. In addition, if one or more of the financial institutions that support our existing credit facilities fails, we may not be able to find a replacement, which would negatively impact our ability to borrow under the credit facilities. Disruptions in the financial markets may adversely affect our credit rating and the market value of our common stock. If we are unable to refinance, if necessary, our outstanding debt when due, our results of operations and financial condition will be materially and adversely affected.
 
While we believe we have adequate sources of liquidity to meet our anticipated requirements for working capital, debt service and capital expenditures for the foreseeable future, if our cash flow or capital resources prove inadequate we could face liquidity problems that could materially and adversely affect our results of operations and financial condition.
 
Our liquidity as it relates to our vacation ownership contract receivables securitization program could be adversely affected if we were to fail to renew or replace our securitization warehouse conduit facility on its renewal date or if a particular receivables pool were to fail to meet certain ratios, which could occur in certain instances if the default rates or other credit metrics of the underlying vacation ownership contract receivables deteriorate. Our ability to sell securities backed by our vacation ownership contract receivables depends on the continued ability and willingness of capital market participants to invest in such securities. It is possible that asset-backed securities issued pursuant to our securitization programs could in the future be downgraded by credit agencies. If a downgrade occurs, our ability to complete other securitization transactions


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on acceptable terms or at all could be jeopardized, and we could be forced to rely on other potentially more expensive and less attractive funding sources, to the extent available, which would decrease our profitability and may require us to adjust our business operations accordingly, including reducing or suspending our financing to purchasers of vacation ownership interests.
 
Our businesses are subject to extensive regulation and the cost of compliance or failure to comply with such regulations may adversely affect us.
 
Our businesses are heavily regulated by federal, state and local governments in the countries in which our operations are conducted. In addition, domestic and foreign federal, state and local regulators may enact new laws and regulations that may reduce our revenues, cause our expenses to increase and/or require us to modify substantially our business practices. If we are not in compliance with applicable laws and regulations, including, among others, those governing franchising, timeshare, lending, privacy, marketing and sales, unfair and deceptive trade practices, telemarketing, licensing, labor, employment, health care, health and safety, accessibility, immigration, gaming, environmental (including climate change), and regulations applicable under the Office of Foreign Asset Control and the Foreign Corrupt Practices Act (and local equivalents in international jurisdictions), we may be subject to regulatory investigations or actions, fines, penalties and potential criminal prosecution.
 
We are subject to risks related to corporate responsibility.
 
Many factors influence our reputation and the value of our brands including perceptions of us held by our key stakeholders and the communities in which we do business. Businesses face increasing scrutiny of the social and environmental impact of their actions and there is a risk of damage to our reputation and the value of our brands if we fail to act responsibly or comply with regulatory requirements in a number of areas such as safety and security, sustainability, responsible tourism, environmental management, human rights and support for local communities.
 
We are dependent on our senior management.
 
We believe that our future growth depends, in part, on the continued services of our senior management team. Losing the services of any members of our senior management team could adversely affect our strategic and customer relationships and impede our ability to execute our business strategies.
 
Our inability to adequately protect and maintain our intellectual property could adversely affect our business.
 
Our inability to adequately protect and maintain our trademarks, trade dress and other intellectual property rights could adversely affect our business. We generate, maintain, utilize and enforce a substantial portfolio of trademarks, trade dress and other intellectual property that are fundamental to the brands that we use in all of our businesses. There can be no assurance that the steps we take to protect our intellectual property will be adequate. Any event that materially damages the reputation of one or more of our brands could have an adverse impact on the value of that brand and subsequent revenues from that brand. The value of any brand is influenced by a number of factors, including consumer preference and perception and our failure to ensure compliance with brand standards.
 
Disasters, disruptions and other impairment of our information technologies and systems could adversely affect our business.
 
Any disaster, disruption or other impairment in our technology capabilities could harm our business. Our businesses depend upon the use of sophisticated information technologies and systems, including technology and systems utilized for reservation systems, vacation exchange systems, hotel/property management, communications, procurement, member record databases, call centers, operation of our loyalty programs and administrative systems. The operation, maintenance and updating of these technologies and systems are dependent upon internal and third-party technologies, systems and services for which there are no assurances of uninterrupted availability or adequate protection.
 
Failure to maintain the security of personally identifiable and other information, non-compliance with our contractual or other legal obligations regarding such information, or a violation of the Company’s privacy and security policies with respect to such information, could adversely affect us.
 
In connection with our business, we and our service providers collect and retain significant volumes of certain types of personally identifiable and other information pertaining to our customers, stockholders and employees. The legal, regulatory and contractual environment surrounding information security and privacy is constantly evolving and the hospitality industry is under increasing attack by cyber-criminals in the U.S. and other jurisdictions in which we operate. A significant actual or potential theft, loss, fraudulent use or misuse of customer, stockholder, employee or our data by cybercrime or


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otherwise, non-compliance with our contractual or other legal obligations regarding such data or a violation of our privacy and security policies with respect to such data could adversely impact our reputation and could result in significant costs, fines, litigation or regulatory action against us.
 
The market price of our shares may fluctuate.
 
The market price of our common stock may fluctuate depending upon many factors, some of which may be beyond our control, including our quarterly or annual earnings or those of other companies in our industry; actual or anticipated fluctuations in our operating results due to seasonality and other factors related to our business; changes in accounting principles or rules; announcements by us or our competitors of significant acquisitions or dispositions; the failure of securities analysts to cover our common stock; changes in earnings estimates by securities analysts or our ability to meet those estimates; the operating and stock price performance of comparable companies; overall market fluctuations; and general economic conditions. Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations may adversely affect the trading price of our common stock.
 
Your percentage ownership in Wyndham Worldwide may be diluted in the future.
 
Your percentage ownership in Wyndham Worldwide may be diluted in the future because of equity awards that we expect will be granted over time to our directors, officers and employees as well as due to the exercise of options. In addition, our Board may issue shares of our common and preferred stock, and debt securities convertible into shares of our common and preferred stock, up to certain regulatory thresholds without shareholder approval.
 
Provisions in our certificate of incorporation and by-laws and under Delaware law may prevent or delay an acquisition of our Company, which could impact the trading price of our common stock.
 
Our certificate of incorporation and by-laws and Delaware law contain provisions that are intended to deter coercive takeover practices and inadequate takeover bids by making such practices or bids unacceptably expensive and to encourage prospective acquirers to negotiate with our Board rather than to attempt a hostile takeover. These provisions include a Board of Directors that is divided into three classes with staggered terms; elimination of the right of our stockholders to act by written consent; rules regarding how stockholders may present proposals or nominate directors for election at stockholder meetings; the right of our Board to issue preferred stock without stockholder approval; and limitations on the right of stockholders to remove directors. Delaware law also imposes restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding shares of common stock.
 
We cannot provide assurance that we will continue to pay dividends.
 
There can be no assurance that we will have sufficient surplus under Delaware law to be able to continue to pay dividends. This may result from extraordinary cash expenses, actual expenses exceeding contemplated costs, funding of capital expenditures, increases in reserves or lack of available capital. Our Board of Directors may also suspend the payment of dividends if the Board deems such action to be in the best interests of the Company or stockholders. If we do not pay dividends, the price of our common stock must appreciate for you to realize a gain on your investment in Wyndham Worldwide. This appreciation may not occur and our stock may in fact depreciate in value.
 
We are responsible for certain of Cendant’s contingent and other corporate liabilities.
 
Under the separation agreement and the tax sharing agreement that we executed with Cendant (now Avis Budget Group) and former Cendant units, Realogy and Travelport, we and Realogy generally are responsible for 37.5% and 62.5%, respectively, of certain of Cendant’s contingent and other corporate liabilities and associated costs, including certain contingent and other corporate liabilities of Cendant and/or its subsidiaries to the extent incurred on or prior to August 23, 2006, including liabilities relating to certain of Cendant’s terminated or divested businesses, the Travelport sale, the Cendant litigation described in this report, actions with respect to the separation plan and payments under certain contracts that were not allocated to any specific party in connection with the separation.
 
If any party responsible for the liabilities described above were to default on its obligations, each non-defaulting party (including Avis Budget) would be required to pay an equal portion of the amounts in default. Accordingly, we could, under certain circumstances, be obligated to pay amounts in excess of our share of the assumed obligations related to such liabilities including associated costs. On or about April 10, 2007, Realogy Corporation was acquired by affiliates of Apollo Management VI, L.P. and its stock is no longer publicly traded. The acquisition does not negate Realogy’s obligation to satisfy 62.5% of such contingent and other corporate liabilities of Cendant or its subsidiaries pursuant to the terms of the separation agreement. As a result of the acquisition, however, Realogy has greater debt obligations and its ability to satisfy


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its portion of these liabilities may be adversely impacted. In accordance with the terms of the separation agreement, Realogy posted a letter of credit in April 2007 for our and Cendant’s benefit to cover its estimated share of the assumed liabilities discussed above, although there can be no assurance that such letter of credit will be sufficient to cover Realogy’s actual obligations if and when they arise.
 
We may be required to write-off all or a portion of the remaining value of our goodwill or other intangibles of companies we have acquired.
 
Under generally accepted accounting principles, we review our intangible assets, including goodwill, for impairment at least annually or when events or changes in circumstances indicate the carrying value may not be recoverable. Factors that may be considered a change in circumstances, indicating that the carrying value of our goodwill or other intangible assets may not be recoverable, include a sustained decline in our stock price and market capitalization, reduced future cash flow estimates and slower growth rates in our industry. We may be required to record a significant non-cash impairment charge in our financial statements during the period in which any impairment of our goodwill or other intangible assets is determined, negatively impacting our results of operations and stockholders’ equity.
 
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds.
 
(c)  Below is a summary of our Wyndham Worldwide common stock repurchases by month for the quarter ended September 30, 2011:
 
ISSUER PURCHASES OF EQUITY SECURITIES