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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q/A
(Amendment No.1)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2013
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from         to        
Commission File No. 001-32876
Wyndham Worldwide Corporation
(Exact name of registrant as specified in its charter)
Delaware
 
20-0052541
(State or other jurisdiction
of incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
22 Sylvan Way
 
07054
Parsippany, New Jersey
 
(Zip Code)
(Address of principal executive offices)
 
 
(973) 753-6000
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ     No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
þ
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
 
 
 
 
(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 ¨    No þ
The number of shares outstanding of the issuer’s common stock was 135,872,434 shares as of March 31, 2013.



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Explanatory Note
Wyndham Worldwide Corporation (the “Company”) is filing this Amendment No. 1 on Form 10-Q/A (this “Amendment”) to its Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2013, which was originally filed on April 24, 2013 (the “Original Filing”). The certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 filed as Exhibit 32 to the Original Filing inadvertently referred to the incorrect quarterly period. In the Exhibit Index, the Company also referred to XBRL Exhibits as being furnished with the Original Report rather than filed and included incorrect descriptions for certain XBRL Exhibits. The purpose of this Amendment is to correct the foregoing. This Amendment does not modify or update other disclosures in, or exhibits to, the Original Filing.



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Table of Contents

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



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PART I — FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (Unaudited).

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Wyndham Worldwide Corporation
Parsippany, New Jersey 07054

We have reviewed the accompanying consolidated balance sheet of Wyndham Worldwide Corporation and subsidiaries (the "Company") as of March 31, 2013, and the related consolidated statements of income, comprehensive income/(loss), cash flows and equity for the three-month periods ended March 31, 2013 and 2012. 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, 2012, and the related consolidated statements of income, comprehensive income, equity and cash flows for the year then ended (not presented herein); and in our report dated February 15, 2013, 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, 2012 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Deloitte & Touche LLP
Parsippany, New Jersey
April 24, 2013



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


 
Three Months Ended
 
March 31,
 
2013
 
2012
Net revenues
 
 
 
Service and membership fees
$
569

 
$
504

Vacation ownership interest sales
263

 
271

Franchise fees
122

 
118

Consumer financing
105

 
103

Other
74

 
40

Net revenues
1,133

 
1,036


Expenses
 
 
 
Operating
506

 
442

Cost of vacation ownership interests
32

 
28

Consumer financing interest
21

 
23

Marketing and reservation
177

 
167

General and administrative
164

 
153

Depreciation and amortization
52

 
45

Total expenses
952

 
858


Operating income
181

 
178

Other income, net
(1
)
 
(3
)
Interest expense
32

 
33

Early extinguishment of debt
111

 
106

Interest income
(2
)
 
(2
)

Income before income taxes
41

 
44

Provision for income taxes
14

 
13


Net income
27

 
31

Net loss attributable to noncontrolling interest

 
1

Net income attributable to Wyndham shareholders
$
27

 
$
32


Earnings per share
 
 
 
Basic
$
0.19

 
$
0.22

Diluted
0.19

 
0.21

 
 
 
 
Cash dividends declared per share
$
0.29

 
$
0.23



See Notes to Consolidated Financial Statements.
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WYNDHAM WORLDWIDE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(In millions)
(Unaudited)


 
Three Months Ended
 
March 31,
 
2013
 
2012
Net income
$
27

 
$
31

Other comprehensive income/(loss), net of tax
 
 
 
Foreign currency translation adjustments
(32
)
 
38

Unrealized gain on cash flow hedges
1

 
2

Other comprehensive income/(loss), net of tax
(31
)
 
40

Comprehensive income/(loss)
(4
)
 
71

Net loss attributable to noncontrolling interest

 
1

Comprehensive income/(loss) attributable to Wyndham shareholders
$
(4
)
 
$
72



See Notes to Consolidated Financial Statements.
3

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


 
March 31,
2013
 
December 31,
2012
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
217

 
$
195

Trade receivables, net
614

 
442

Vacation ownership contract receivables, net
318

 
318

Inventory
365

 
379

Prepaid expenses
145

 
122

Deferred income taxes
152

 
157

Other current assets
330

 
253

Total current assets
2,141

 
1,866

Long-term vacation ownership contract receivables, net
2,493

 
2,571

Non-current inventory
686

 
698

Property and equipment, net
1,470

 
1,292

Goodwill
1,556

 
1,566

Trademarks, net
727

 
730

Franchise agreements and other intangibles, net
449

 
459

Other non-current assets
370

 
281

Total assets
$
9,892

 
$
9,463

Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Securitized vacation ownership debt
$
228

 
$
218

Current portion of long-term debt
254

 
326

Accounts payable
503

 
307

Deferred income
471

 
383

Due to former Parent and subsidiaries
22

 
22

Accrued expenses and other current liabilities
611

 
675

Total current liabilities
2,089

 
1,931

Long-term securitized vacation ownership debt
1,766

 
1,742

Long-term debt
2,707

 
2,276

Deferred income taxes
1,121

 
1,141

Deferred income
204

 
207

Due to former Parent and subsidiaries
17

 
17

Other non-current liabilities
244

 
218

Total liabilities
8,148

 
7,532

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 215,478,164 shares in 2013 and 214,812,395 shares in 2012
2

 
2

Treasury stock, at cost –79,908,170 shares in 2013 and 77,523,995 shares in 2012
(2,741
)
 
(2,601
)
Additional paid-in capital
3,818

 
3,820

Retained earnings
544

 
558

Accumulated other comprehensive income
120

 
151

Total stockholders’ equity
1,743

 
1,930

Noncontrolling interest
1

 
1

Total equity
1,744

 
1,931

Total liabilities and equity
$
9,892

 
$
9,463


See Notes to Consolidated Financial Statements.
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WYNDHAM WORLDWIDE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)


 
Three Months Ended
 
March 31,
 
2013
 
2012
Operating Activities
 
 
 
Net income
$
27

 
$
31

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
52

 
45

Provision for loan losses
84

 
96

Deferred income taxes
(5
)
 
14

Stock-based compensation
11

 
10

Excess tax benefits from stock-based compensation
(12
)
 
(25
)
Early extinguishment of debt
106

 
105

Non-cash interest
10

 
6

Net change in assets and liabilities, excluding the impact of acquisitions and dispositions:
 
 
 
Trade receivables
(182
)
 
(164
)
Vacation ownership contract receivables
(5
)
 
(48
)
Inventory
10

 
25

Prepaid expenses
(24
)
 
(11
)
Other current assets
(21
)
 
(41
)
Accounts payable, accrued expenses and other current liabilities
135

 
124

Due to former Parent and subsidiaries, net

 
(1
)
Deferred income
89

 
66

Other, net
(1
)
 
(4
)
Net cash provided by operating activities
274

 
228

Investing Activities
 
 
 
Property and equipment additions
(41
)
 
(33
)
Net assets acquired, net of cash acquired
(126
)
 

Development advances
(49
)
 
(2
)
Equity investments and loans
(2
)
 
(1
)
Increase in securitization restricted cash
(20
)
 
(31
)
Increase in escrow deposit restricted cash
(16
)
 
(8
)
Other, net
1

 
(1
)
Net cash used in investing activities
(253
)
 
(76
)
Financing Activities
 
 
 
Proceeds from securitized borrowings
455

 
616

Principal payments on securitized borrowings
(422
)
 
(478
)
Proceeds from long-term debt
202

 
834

Principal payments on long-term debt
(170
)
 
(1,012
)
Repayments of commercial paper, net
(71
)
 

Proceeds from note issuances
843

 
941

Repurchase of notes
(636
)
 
(755
)
Dividends to shareholders
(41
)
 
(37
)
Repurchase of common stock
(135
)
 
(156
)
Proceeds from stock option exercises

 
12

Excess tax benefits from stock-based compensation
12

 
25

Debt issuance costs
(5
)
 
(7
)
Net share settlement of incentive equity awards
(25
)
 
(41
)
Net cash provided by/(used in) financing activities
7

 
(58
)
Effect of changes in exchange rates on cash and cash equivalents
(6
)
 
3

Net increase in cash and cash equivalents
22

 
97

Cash and cash equivalents, beginning of period
195

 
142

Cash and cash equivalents, end of period
$
217

 
$
239


See Notes to Consolidated Financial Statements.
5

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


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

 
$
2

 
$
(2,601
)
 
$
3,820

 
$
558

 
$
151

 
$
1

 
$
1,931

Net income

 

 

 

 
27

 

 

 
27

Other comprehensive loss

 

 

 

 

 
(31
)
 

 
(31
)
Issuance of shares for RSU vesting
1

 

 

 

 

 

 

 

Net share settlement of incentive equity awards

 

 

 
(25
)
 

 

 

 
(25
)
Change in deferred compensation

 

 

 
11

 

 

 

 
11

Repurchase of common stock
(2
)
 

 
(140
)
 

 

 

 

 
(140
)
Change in excess tax benefit on equity awards

 

 

 
12

 

 

 

 
12

Dividends

 

 

 

 
(41
)
 

 

 
(41
)
Balance as of March 31, 2013
136

 
$
2

 
$
(2,741
)
 
$
3,818

 
$
544

 
$
120

 
$
1

 
$
1,744



 
Common Shares Outstanding
 
Common Stock
 
Treasury Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income
 
Non-controlling Interest
 
Total Equity
Balance as of December 31, 2011
147

 
$
2

 
$
(2,009
)
 
$
3,818

 
$
293

 
$
128

 
$

 
$
2,232

Net income

 

 

 

 
32

 

 
(1
)
 
31

Other comprehensive income

 

 

 

 

 
40

 

 
40

Exercise of stock options and SSARs

 

 

 
12

 

 

 

 
12

Issuance of shares for RSU vesting
2

 

 

 

 

 

 

 

Net share settlement of incentive equity awards

 

 

 
(41
)
 

 

 

 
(41
)
Change in deferred compensation

 

 

 
10

 

 

 

 
10

Repurchase of common stock
(3
)
 

 
(151
)
 

 

 

 

 
(151
)
Change in excess tax benefit on equity awards

 

 

 
25

 

 

 

 
25

Dividends

 

 

 

 
(35
)
 

 

 
(35
)
Other

 

 

 
1

 

 

 

 
1

Balance as of March 31, 2012
146

 
$
2

 
$
(2,160
)
 
$
3,825

 
$
290

 
$
168

 
$
(1
)
 
$
2,124



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 2012 Consolidated Financial Statements included in its Annual Report filed on Form 10-K with the Securities and Exchange Commission on February 15, 2013.

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

Recently Issued Accounting Pronouncements
Comprehensive Income. In February 2013, the Financial Accounting Standards Board issued guidance to improve the reporting of amounts reclassified out of accumulated other comprehensive income. The guidance amends the presentation of changes in accumulated other comprehensive income and requires an entity to disaggregate the total change of each component of other comprehensive income either on the face of the net income statement or as a separate disclosure in the notes. This guidance is effective prospectively for fiscal years beginning after December 15, 2012. The Company adopted the guidance on January 1, 2013, as required. There was no material impact on the Consolidated Financial Statements resulting from the adoption.


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2.
Earnings Per Share

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

The following table sets forth the computation of basic and diluted EPS (in millions, except per share data):
 
Three Months Ended
 
 
March 31,
 
 
2013
 
2012
 
Net income attributable to Wyndham shareholders
$
27

 
$
32

 
Basic weighted average shares
137

 
146

 
Stock options, SSARs and RSUs (a) (b)
1

 
2

 
Warrants

 
1

(c) 
Weighted average diluted shares (d)
138

 
149

 
Earnings per share:
 
 
 
 
Basic
$
0.19

 
$
0.22

 
Diluted
0.19

 
0.21

 

(a) 
Includes unvested dilutive restricted stock units (“RSUs”) which are subject to future forfeitures.
(b) 
Excludes 103,000 and 120,000 stock options and stock-settled stock appreciation rights ("SSARs") for the three months ended March 31, 2013 and 2012, respectively, as it would have been anti-dilutive to EPS.
(c) 
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.
(d) 
Excludes 840,000 and 609,000 performance vested restricted stock units ("PSUs") for the three months ended March 31, 2013 and 2012, respectively, as the Company has not met the required performance metrics.

Dividend Payments

During the quarterly periods ended March 31, 2013 and 2012, the Company paid cash dividends of $0.29 and $0.23 per share, respectively ($41 million and $37 million, respectively, in the aggregate).

Stock Repurchase Program

The following table summarizes stock repurchase activity under the current stock repurchase program:
 
Shares
 
Cost
 
Average Price
As of December 31, 2012
53.0

 
$
1,820

 
$
34.33

For the three months ended March 31, 2013
2.4

 
140

 
58.68

As of March 31, 2013
55.4

 
$
1,960

 
35.38


The Company had $367 million remaining availability in its program as of March 31, 2013.

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3.
Acquisitions

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

Vacation Ownership NYC Property. During January 2013, the Company entered into an agreement with a third party partner whereby the partner acquired the Alex hotel in New York City for $115 million through a special purpose entity ("SPE"). The Company is considered to be the primary beneficiary of the SPE and therefore the Company consolidated the SPE within its financial statements. The Company will manage and operate the hotel while it is converted into VOI inventory. The SPE's preliminary purchase price allocation for this hotel resulted in the recognition of $115 million of property and equipment, all of which was assigned to the Company's Vacation Ownership segment. Acquisition-related costs of $2 million are included in operating expenses in the accompanying Consolidated Statement of Income for the three months ended March 31, 2013. This SPE transaction is consistent with the Company's strategy to replenish VOI inventory utilizing its Wyndham Asset Affiliation Model ("WAAM"). The consolidation of the SPE was not material to the Company's results of operations, financial position or cash flows (see Note 8 - Variable Interest Entities for more detailed information).

4.
Intangible Assets

Intangible assets consisted of:
 
As of March 31, 2013
 
As of December 31, 2012
 
Gross
 
 
 
Net
 
Gross
 
 
 
Net
 
Carrying
 
Accumulated
 
Carrying
 
Carrying
 
Accumulated
 
Carrying
 
Amount
 
Amortization
 
Amount
 
Amount
 
Amortization
 
Amount
Unamortized Intangible Assets:
 
 
 
 
 
 
 
 
 
 
 
Goodwill
$
1,556

 
 
 
 
 
$
1,566

 
 
 
 
Trademarks
$
721

 
 
 
 
 
$
724

 
 
 
 
Amortized Intangible Assets:
 
 
 
 
 
 
 
 
 
 
 
Franchise agreements
$
594

 
$
344

 
$
250

 
$
594

 
$
340

 
$
254

Trademarks
8

 
2

 
6

 
7

 
1

 
6

Other
266

 
67

 
199

 
270

 
65

 
205

 
$
868

 
$
413

 
$
455

 
$
871

 
$
406

 
$
465


The changes in the carrying amount of goodwill are as follows:
 
 
 
Goodwill
 
Goodwill
 
 
 
 
 
Balance as of
 
Acquired
 
Acquired
 
Foreign
 
Balance as of
 
December 31, 2012
 
During 2013
 
During 2012
 
Exchange
 
March 31, 2013
Lodging
$
300

 
$

 
$

 
$

 
$
300

Vacation Exchange and Rentals
1,241

 
10

 
5

 
(27
)
 
1,229

Vacation Ownership
25

 

 
2

 

 
27

Total Company
$
1,566

 
$
10

 
$
7

 
$
(27
)
 
$
1,556




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Amortization expense relating to amortizable intangible assets was as follows:
 
Three Months Ended
 
March 31,
 
2013
 
2012
Franchise agreements
$
4

 
$
4

Trademarks and Other
5

 
4

Total (*)
$
9

 
$
8

 
(*)     Included as a component of depreciation and amortization on the Consolidated Statements of Income.

Based on the Company's amortizable intangible assets as of March 31, 2013, the Company expects related amortization expense as follows:
 
Amount
Remainder of 2013
$
27

2014
35

2015
34

2016
32

2017
32

2018
30


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:
 
March 31,
2013
 
December 31,
2012
Current vacation ownership contract receivables:
 
 
 
Securitized
$
254

 
$
252

Non-securitized
119

 
118

 
373

 
370

Less: Allowance for loan losses
55

 
52

Current vacation ownership contract receivables, net
$
318

 
$
318

Long-term vacation ownership contract receivables:
 
 
 
Securitized
$
2,097

 
$
2,149

Non-securitized
845

 
867

 
2,942

 
3,016

Less: Allowance for loan losses
449

 
445

Long-term vacation ownership contract receivables, net
$
2,493

 
$
2,571


During the three months ended March 31, 2013 and 2012, the Company’s securitized vacation ownership contract receivables generated interest income of $77 million and $76 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 three months ended March 31, 2013 and 2012, the Company originated vacation ownership contract receivables of $209 million and $240 million, respectively, and received principal collections of $204 million and $192 million, respectively. The weighted average interest rate on outstanding vacation ownership contract receivables was 13.4% as of both March 31, 2013 and December 31, 2012.


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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, 2012
$
497

Provision for loan losses
84

Contract receivables write-offs, net
(77
)
Allowance for loan losses as of March 31, 2013
$
504

 
Amount
Allowance for loan losses as of December 31, 2011
$
394

Provision for loan losses
96

Contract receivables write-offs, net
(81
)
Allowance for loan losses as of March 31, 2012
$
409


In accordance with the guidance for accounting for real estate timesharing transactions, the Company recorded a provision for loan losses of $84 million and $96 million as a reduction of net revenues during the three months ended March 31, 2013 and 2012, 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 300850 and are calculated based on information obtained from one or more of the three major U.S. credit reporting agencies that compile and report on a consumer’s credit history. The Company updates its records for all active VOI contract receivables with a balance due on a rolling monthly basis 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 policy described above):
 
As of March 31, 2013
 
700+
 
600-699
 
<600
 
No Score
 
Asia Pacific
 
Total
Current
$
1,368

 
$
1,052

 
$
325

 
$
95

 
$
316

 
$
3,156

31 - 60 days
11

 
20

 
18

 
4

 
5

 
58

61 - 90 days
7

 
13

 
14

 
2

 
2

 
38

91 - 120 days
10

 
28

 
22

 
2

 
1

 
63

Total
$
1,396

 
$
1,113

 
$
379

 
$
103

 
$
324

 
$
3,315

 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2012
 
700+
 
600-699
 
<600
 
No Score
 
Asia Pacific
 
Total
Current
$
1,459

 
$
1,064

 
$
274

 
$
94

 
$
312

 
$
3,203

31 - 60 days
13

 
26

 
23

 
3

 
5

 
70

61 - 90 days
10

 
14

 
17

 
2

 
2

 
45

91 - 120 days
13

 
30

 
23

 
1

 
1

 
68

Total
$
1,495

 
$
1,134

 
$
337

 
$
100

 
$
320

 
$
3,386


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:
 
March 31,
2013
 
December 31,
2012
Land held for VOI development
$
139

 
$
137

VOI construction in process
159

 
147

Completed inventory and vacation credits (a)(b)
753

 
793

Total inventory
1,051

 
1,077

Less: Current portion
365

 
379

Non-current inventory
$
686

 
$
698

 
(a) 
Includes estimated recoveries of $203 million and $202 million as of March 31, 2013 and December 31, 2012, respectively.
(b) 
Vacation credits relate to both the Company’s vacation ownership and vacation exchange and rentals businesses of which $67 million and $69 million as of March 31, 2013 and December 31, 2012, 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:
 
March 31,
2013
 
December 31,
2012
 
Securitized vacation ownership debt: (a)
 
 
 
 
Term notes
$
1,869

 
$
1,770

 
       Bank conduit facility
125

 
190

 
Total securitized vacation ownership debt
1,994

 
1,960

 
Less: Current portion of securitized vacation ownership debt
228

 
218

 
Long-term securitized vacation ownership debt
$
1,766

 
$
1,742

 
Long-term debt: (b)
 
 
 
 
Revolving credit facility (due July 2016)
$
34

 
$
85

 
Commercial paper
202

 
273

 
9.875% senior unsecured notes (due May 2014)

 
42

(c) 
$315 million 6.00% senior unsecured notes (due December 2016)
319

(d) 
361

(e) 
$300 million 2.95% senior unsecured notes (due March 2017)
298

 
298

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

 
248

(f) 
$450 million 2.50% senior unsecured notes (due March 2018)
447

 

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

 
248

(f) 
$250 million 5.625% senior unsecured notes (due March 2021)
246

 
246

 
$650 million 4.25% senior unsecured notes (due March 2022)
644

 
644

 
$400 million 3.90% senior unsecured notes (due March 2023)
397

 

 
Capital leases
187

 
105

 
Other
133

 
52

 
Total long-term debt
2,961

 
2,602

 
Less: Current portion of long-term debt
254

 
326

 
Long-term debt
$
2,707

 
$
2,276

 
 

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(a) 
Represents non-recourse debt that is securitized through bankruptcy-remote SPEs, the creditors of which have no recourse to the Company for principal and interest. These outstanding borrowings are collateralized by $2,512 million and $2,543 million of underlying gross vacation ownership contract receivables and related assets as of March 31, 2013 and December 31, 2012, respectively.
(b) 
The carrying amounts of the senior unsecured notes are net of unamortized discount of $19 million and $18 million as of March 31, 2013 and December 31, 2012, respectively.
(c) 
Aggregate principal balance as of December 31, 2012 was $43 million.
(d) 
Includes $4 million of unamortized gains from the settlement of a derivative.
(e) 
Aggregate principal balance as of December 31, 2012 was $357 million and includes $5 million of unamortized gains from the settlement of a derivative.
(f) 
Aggregate principal balance as of December 31, 2012 was $250 million.

2013 Debt Issuances

2.50% Senior Unsecured Notes. During February 2013, the Company issued senior unsecured notes, with face value of $450 million and bearing interest at a rate of 2.50%, for net proceeds of $447 million. Interest began accruing on February 22, 2013 and is payable semi-annually in arrears on March 1 and September 1 of each year, commencing on September 1, 2013. The notes will mature on March 1, 2018 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.

3.90% Senior Unsecured Notes. During February 2013, the Company issued senior unsecured notes, with face value of $400 million and bearing interest at a rate of 3.90%, for net proceeds of $397 million. Interest began accruing on February 22, 2013 and is payable semi-annually in arrears on March 1 and September 1 of each year, commencing on September 1, 2013. The notes will mature on March 1, 2023 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 2013-1 Receivables Funding, LLC. During March 2013, the Company closed a series of term notes payable, Sierra Timeshare 2013-1 Receivables Funding LLC, in the initial principal amount of $300 million at an advance rate of 91%. These borrowings bear interest at a weighted average coupon rate of 1.77% and are secured by vacation ownership contract receivables. As of March 31, 2013, the Company had $300 million of outstanding borrowings under these term notes.

Capital Lease. During the first quarter of 2013, the Company extended the lease on its corporate headquarters. As a result of this extension, the Company classified the lease as a capital lease and recorded a capital lease obligation of $85 million with a corresponding capital lease asset which was recorded net of deferred rent. Such transaction was non-cash and as such, is excluded from both the investing and financing activities within the Company's Consolidated Statement of Cash Flows.

Other. During January 2013, the Company entered into an agreement with a third party partner whereby the partner acquired a hotel through an SPE. The SPE financed the hotel acquisition with a $115 million four-year mortgage note, provided by related parties of such partner. The note accrues interest at 4.5% and the principal and interest is payable semiannually, commencing on July 24, 2013. In addition, the $9 million of mandatorily redeemable equity of the SPE is classified as long-term debt (see Note 8 - Variable Interest Entities for more detailed information).
Early Extinguishment of Debt

During the first quarter of 2013, the Company repurchased a portion of its 5.75% and 7.375% senior unsecured notes totaling $446 million through tender offers, repurchased $42 million of its 6.00% senior unsecured notes on the open market and executed a redemption option for the remaining $43 million outstanding on its 9.875% senior unsecured notes. As a result, the Company repurchased a total of $531 million of its outstanding senior unsecured notes and incurred expenses of $111 million during the three months ended March 31, 2013, which is included within early extinguishment of debt on the Consolidated Statement of Income.

During the first quarter of 2012, the Company repurchased a portion of its 9.875% and 6.00% senior unsecured notes through tender offers totaling $650 million. In connection with these tender offers, the Company incurred expenses of $106 million during the three months ended March 31, 2012, which is included within early extinguishment of debt on the Consolidated Statement of Income.

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Maturities and Capacity

The Company’s outstanding debt as of March 31, 2013 matures as follows:
 
Securitized Vacation Ownership Debt
 
Other
 
Total
Within 1 year
$
228

 
$
254

 
$
482

Between 1 and 2 years
237

 
47

 
284

Between 2 and 3 years
297

 
48

 
345

Between 3 and 4 years
214

 
695

 
909

Between 4 and 5 years
206

 
475

 
681

Thereafter
812

 
1,442

 
2,254

 
$
1,994

 
$
2,961

 
$
4,955


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

As of March 31, 2013, available capacity under the Company’s borrowing arrangements was as follows:
 
Securitized Bank Conduit Facility(a)
 
Revolving
Credit Facility
 
Total Capacity
$
650

 
$
1,000

 
Less: Outstanding Borrowings
125

 
34

 
          Letters of credit

 
11

 
          Commercial paper borrowings

 
202

(b) 
Available Capacity
$
525

 
$
753

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

Interest Expense

The Company incurred non-securitized interest expense of $32 million during the three months ended March 31, 2013. Such amounts consisted primarily of $33 million of interest on long-term debt, partially offset by $1 million of capitalized interest and are recorded within interest expense on the Consolidated Statement of Income. Cash paid related to interest on the Company's non-securitized debt was $49 million during the three months ended March 31, 2013.

The Company incurred non-securitized interest expense of $33 million during the three months ended March 31, 2012. Such amounts consisted primarily of $34 million of interest on long-term debt, partially offset by $1 million of capitalized interest and are recorded within interest expense on the Consolidated Statement of Income. Cash paid related to interest on the Company's non-securitized debt was $44 million during the three months ended March 31, 2012.

Interest expense incurred in connection with the Company's securitized vacation ownership debt during the three months ended March 31, 2013 and 2012 was $21 million and $23 million, respectively, and is recorded within consumer financing interest on the Consolidated Statements of Income. Cash paid related to such interest was $16 million and $18 million during the three months ended March 31, 2013 and 2012, respectively.

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8.
Variable Interest Entities

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

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

The assets and liabilities of these vacation ownership SPEs are as follows:
 
March 31,
2013
 
December 31,
2012
Securitized contract receivables, gross (a)
$
2,351

 
$
2,401

Securitized restricted cash (b)
140

 
121

Interest receivables on securitized contract receivables (c)
19

 
19

Other assets (d)
2

 
2

Total SPE assets (e)
2,512

 
2,543

Securitized term notes (f)
1,869

 
1,770

Securitized conduit facilities (f)
125

 
190

Other liabilities (g)
3

 
5

Total SPE liabilities
1,997

 
1,965

SPE assets in excess of SPE liabilities
$
515

 
$
578

 
(a) 
Included in current ($254 million and $252 million as of March 31, 2013 and December 31, 2012, respectively) and non-current ($2,097 million and $2,149 million as of March 31, 2013 and December 31, 2012, respectively) vacation ownership contract receivables on the Consolidated Balance Sheets.
(b) 
Included in other current assets ($84 million and $65 million as of March 31, 2013 and December 31, 2012, respectively) and other non-current assets ($56 million as of both March 31, 2013 and December 31, 2012) 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 $29 million and $28 million as of March 31, 2013 and December 31, 2012, respectively, related to securitized debt.
(f) 
Included in current ($228 million and $218 million as of March 31, 2013 and December 31, 2012, respectively) and long-term ($1,766 million and $1,742 million as of March 31, 2013 and December 31, 2012, 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 ($2 million as of both March 31, 2013 and December 31, 2012) and other non-current liabilities ($1 million and $3 million as of March 31, 2013 and December 31, 2012, respectively) on the Consolidated Balance Sheets.


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Table of Contents

In addition, the Company has vacation ownership contract receivables that have not been securitized through bankruptcy-remote SPEs. Such gross receivables were $964 million and $985 million as of March 31, 2013 and December 31, 2012, respectively. A summary of total vacation ownership receivables and other securitized assets, net of securitized liabilities and the allowance for loan losses, is as follows:
 
March 31,
2013
 
December 31,
2012
SPE assets in excess of SPE liabilities
$
515

 
$
578

Non-securitized contract receivables
964

 
985

Less: Allowance for loan losses
504

 
497

Total, net
$
975

 
$
1,066

In addition to restricted cash related to securitizations, the Company had $72 million and $56 million of restricted cash related to escrow deposits as of March 31, 2013 and December 31, 2012, respectively, which was recorded within other current assets on the Consolidated Balance Sheets.

Vacation Ownership NYC Property

During January 2013, the Company entered into an agreement with a third party partner whereby the partner acquired the Alex hotel in New York City through an SPE. The Company will manage and operate the hotel while the hotel is converted into VOI inventory. The SPE financed the hotel acquisition and planned renovations with a $115 million four-year mortgage note and $9 million of mandatorily redeemable equity provided by related parties of such partner. The Company has committed to purchase such VOI inventory from the SPE over a four year period in the amount of $146 million, of which $124 million will be used to repay the four-year mortgage note and the mandatorily redeemable equity of the SPE. The Company is considered to be the primary beneficiary of the SPE and therefore the Company consolidated the SPE within its financial statements.

The assets and liabilities of the SPE are as follows:
 
March 31,
2013
Cash
$
4

Property and equipment, net
115

Total SPE assets
119

Accrued expenses and other current liabilities
1

Long-term debt (*)
124

Total SPE liabilities
125

SPE liabilities in excess of SPE assets
$
(6
)
 
(*)  
Includes $115 million and $9 million of a four-year mortgage note and mandatorily redeemable equity, respectively, of which $27 million is included in current portion of long-term debt on the Consolidated Balance Sheet.

9.
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.


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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.

The following table summarizes information regarding assets and liabilities that are measured at fair value on a recurring basis:
 
As of
 
As of
 
March 31, 2013
 
December 31, 2012
 
Fair Value
 
Level 2
 
Level 3
 
Fair Value
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
 
 
 
 
Derivatives: (a)
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
2

 
2

 

 
2

 
2

 

Foreign exchange contracts
3

 
3

 

 
1

 
1

 

Securities available-for-sale (b)
6

 

 
6

 
6

 

 
6

Total assets
$
11

 
$
5

 
$
6

 
$
9

 
$
3

 
$
6


Liabilities
 
 
 
 
 
 
 
 
 
 
 
Derivatives: (c)
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
2

 
2

 

 
3

 
3

 

Foreign exchange contracts
2

 
2

 

 
1

 
1

 

Total liabilities
$
4

 
$
4

 
$

 
$
4

 
$
4

 
$

 
(a) 
Included in other current assets ($3 million and $1 million as of March 31, 2013 and December 31, 2012, respectively) and other non-current assets ($2 million as of both March 31, 2013 and December 31, 2012, respectively) on the Consolidated Balance Sheets; carrying value is equal to estimated fair value.
(b) 
Included in other non-current assets on the Consolidated Balance Sheets; carrying value is equal to estimated fair value.
(c) 
Included in accrued expenses and other current liabilities ($2 million and $1 million as of March 31, 2013 and December 31, 2012, respectively) and other non-current liabilities ($2 million and $3 million as of March 31, 2013 and December 31, 2012, respectively) on the Consolidated Balance Sheets; carrying value is equal to estimated fair value.

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

During 2012, the Company repaid upon maturity, its remaining Convertible Notes and its bifurcated conversion feature. Concurrent with the repayment, the Company settled the Call Options. 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 significant unobservable Level 3 inputs to determine fair value as of March 31, 2012:
 
Derivative Asset-Call Options
 
Derivative Liability- Bifurcated Conversion Feature
 
Securities Available-For-Sale
Balance as of December 31, 2011
$
24

 
$
(24
)
 
$
6

Change in fair value
8

 
(8
)
 

Balance as of March 31, 2012
$
32

 
$
(32
)
 
$
6



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The fair value of financial instruments is generally determined by reference to market values resulting from trading on a national securities exchange or in an over-the-counter market. In cases where quoted market prices are not available, fair value is based on estimates using present value or other valuation techniques, as appropriate. The carrying amounts of cash and cash equivalents, restricted cash, trade receivables, accounts payable and accrued expenses and other current liabilities approximate fair value due to the short-term maturities of these assets and liabilities. The carrying amounts and estimated fair values of all other financial instruments are as follows:
 
March 31, 2013
 
December 31, 2012
 
Carrying
Amount
 
Estimated Fair Value
 
Carrying
 Amount
 
Estimated Fair Value
Assets
 
 
 
 
 
 
 
Vacation ownership contract receivables, net
$
2,811

 
$
3,327

 
$
2,889

 
$
3,391

Debt
 
 
 
 
 
 
 
Total debt
4,955

 
5,140

 
4,562

 
4,811


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

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

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 accumulated other comprehensive income (“AOCI”) to earnings over the next 12 months is not material.

Interest Rate Risk

A portion of the debt used to finance the Company’s operations is exposed to interest rate fluctuations. The Company uses various hedging strategies and derivative financial instruments to create a desired mix of fixed and floating rate assets and liabilities. Derivative instruments currently used in these hedging strategies include swaps and interest rate caps. The derivatives used to manage the risk associated with the Company’s floating rate debt include freestanding derivatives and derivatives designated as cash flow hedges. The Company also used 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 adjustments to the carrying amount of the hedged debt. The amount of losses that the Company expects to reclassify from AOCI to earnings during the next 12 months is not material.

Gains/(losses) recognized in the income statement and in AOCI for the three months ended March 31, 2013 and 2012, were not material to the Company's financial statements.

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Table of Contents


11.
Income Taxes

The Company files income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examinations for years prior to 2008. 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 2004.

The Company’s effective tax rate increased from 29.5% during the three months ended March 31, 2012 to 34.1% during the three months ended March 31, 2013 primarily due to a state tax payment made during 2013 related to legacy matters.

The Company made cash income tax payments, net of refunds, of $22 million and $18 million during the three months ended March 31, 2013 and 2012, respectively.

12.
Commitments and Contingencies

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

Wyndham Worldwide Corporation Litigation

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

On June 26, 2012, the U.S. Federal Trade Commission ("FTC") filed a lawsuit in Federal District Court for the District of Arizona against the Company and its subsidiaries, Wyndham Hotel Group, LLC, Wyndham Hotels & Resorts Inc. and Wyndham Hotel Management Inc., alleging unfairness and deception-based violations of Section 5 of the FTC Act in connection with three prior data breach incidents involving a group of Wyndham brand hotels. The Company disputes the allegations in the lawsuit and is defending this lawsuit vigorously. The Company does not believe that the data breach incidents were material, nor does it expect that the outcome of the FTC litigation will have a material effect on the Company's results of operations, financial position or cash flows. On March 26, 2013, the Company's motion to transfer venue of the lawsuit from Arizona to the Federal District Court for the District of New Jersey was granted.

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


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The Company believes that it has adequately accrued for such matters with reserves of $27 million and $42 million as of March 31, 2013 and December 31, 2012, respectively. Such reserve is exclusive of matters relating to the Company’s separation. For matters not requiring accrual, the Company believes that such matters will not have a material effect on its results of operations, financial position or cash flows based on information currently available. However, litigation is inherently unpredictable and, although the Company believes that its accruals are adequate and/or that it has valid defenses in these matters, unfavorable results could occur. As such, an adverse outcome from such proceedings for which claims are awarded in excess of the amounts accrued, if any, could be material to the Company with respect to earnings or cash flows in any given reporting period. As of March 31, 2013, the potential exposure resulting from adverse outcomes of such legal proceedings could, in the aggregate, range up to approximately $30 million in excess of recorded accruals. However, the Company does not believe that the impact of such litigation should result in a material liability to the Company in relation to its consolidated financial position or liquidity.

Other Guarantees/Indemnifications

From time to time, the Company may enter into a hotel management agreement that provides the hotel owner with a guarantee of a certain level of profitability based upon various metrics. Under such an agreement, the Company would be required to compensate such hotel owner for any profitability shortfall over the life of the management agreement up to a specified aggregate amount. For certain agreements, the Company may be able to recapture a portion or all of the shortfall payments in the event that future operating results exceed targets. The terms of such guarantees generally range from 7 to 10 years and certain agreements may provide for early termination provisions under certain circumstances. As of March 31, 2013, the maximum potential amount of future payments to be made under these guarantees was approximately $130 million with a combined annual cap of $36 million.

In connection with such performance guarantees, as of March 31, 2013, the Company maintained a liability of $36 million of which $27 million was included in other non-current liabilities and $9 million was included in accrued expenses and other current liabilities on its Consolidated Balance Sheet. As of March 31, 2013, the Company also had a corresponding $36 million asset related to these guarantees, of which $27 million was included in other non-current assets and $9 million was included in other current assets on its Consolidated Balance Sheet. Such assets are being amortized on a straight-line basis over the life of the agreements. The amortization expense for the performance guarantees noted above was less than $1 million, in the aggregate, during the three months ended March 31, 2013.

Under such performance guarantees, the Company also had a $9 million receivable as of March 31, 2013 resulting from payments made to date which are subject to recapture. Such receivable was included in other non-current assets on the Company's Consolidated Balance Sheet.

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.

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13.  Accumulated Other Comprehensive Income

The components of AOCI are as follows:
 
Foreign
 
Unrealized
 
Defined
 
 
 
Currency
 
Gains/(Losses)
 
Benefit
 
 
 
Translation
 
on Cash Flow
 
Pension
 
 
Pretax
Adjustments
 
Hedges
 
Plans
 
AOCI
     Balance, December 31, 2012
$
137

 
$
(9
)
 
$
(8
)
 
$
120

     Period change
(44
)
 
2

 

 
(42
)
     Balance, March 31, 2013
$
93

 
$
(7
)
 
$
(8
)
 
$
78

 
Foreign
 
Unrealized
 
Defined
 
 
 
Currency
 
Gains/(Losses)
 
Benefit
 
 
 
Translation
 
on Cash Flow
 
Pension
 
 
Tax
Adjustments
 
Hedges
 
Plans
 
AOCI
     Balance, December 31, 2012
$
25

 
$
4

 
$
2

 
$
31

     Period change
12

 
(1
)
 

 
11

     Balance, March 31, 2013
$
37

 
$
3

 
$
2

 
$
42

 
Foreign
 
Unrealized
 
Defined
 
 
 
Currency
 
Gains/(Losses)
 
Benefit
 
 
 
Translation
 
on Cash Flow
 
Pension
 
 
Net of Tax
Adjustments
 
Hedges
 
Plans
 
AOCI
     Balance, December 31, 2012
$
162

 
$
(5
)
 
$
(6
)
 
$
151

     Period change
(32
)
 
1

 

 
(31
)
     Balance, March 31, 2013
$
130

 
$
(4
)
 
$
(6
)
 
$
120


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 March 31, 2013, 16.5 million shares remained available.

Incentive Equity Awards Granted by the Company

The activity related to incentive equity awards granted by the Company for the three months ended March 31, 2013 consisted of the following:
 
RSUs
 
SSARs
 
Number of RSUs
 
Weighted Average Grant Price
 
Number of SSARs
 
Weighted Average Exercise Price
Balance as of December 31, 2012
3.1

 
$
32.41

 
1.1

 
$
17.13

Granted
0.9

(b) 
60.24

 
0.1

(b) 
60.24

Vested/exercised
(1.2
)
 
28.89

 

 

Balance as of March 31, 2013 (a)
2.8

(c) 
42.36

 
1.2

(d) 
20.24

 
(a) 
Aggregate unrecognized compensation expense related to RSUs and SSARs was $119 million as of March 31, 2013, which is expected to be recognized over a weighted average period of 3 years.
(b) 
Represents awards granted by the Company on February 28, 2013.
(c) 
Approximately 2.7 million RSUs outstanding as of March 31, 2013 are expected to vest over time.

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(d) 
Approximately 1 million SSARs are exercisable as of March 31, 2013. The Company assumes that all unvested SSARs are expected to vest over time. SSARs outstanding as of March 31, 2013 had an intrinsic value of $54 million and have a weighted average remaining contractual life of 2.4 years.

On February 28, 2013, the Company approved grants of incentive equity awards totaling $54 million to key employees and senior officers of Wyndham in the form of RSUs and SSARs. These awards will vest ratably over a period of 4 years. In addition, on February 28, 2013, the Company approved a grant of incentive equity awards totaling $14 million to key employees and senior officers of Wyndham in the form of PSUs. These awards cliff vest on the third anniversary of the grant date, contingent upon the Company achieving certain performance metrics. As of March 31, 2013, there were approximately 840,000 PSUs outstanding with an aggregate unrecognized compensation expense of $25 million.

The fair value of SSARs granted by the Company on February 28, 2013 was estimated on the date of the grant using the Black-Scholes option-pricing model with the relevant weighted average assumptions outlined in the table below. Expected volatility is based on both historical and implied volatilities of the Company’s stock over the estimated expected life of the SSARs. The expected life represents the period of time the SSARs are expected to be outstanding and is based on historical experience given consideration to the contractual terms and vesting periods of the SSARs. The risk free interest rate is based on yields on U.S. Treasury strips with a maturity similar to the estimated expected life of the SSARs. The projected dividend yield was based on the Company’s anticipated annual dividend divided by the price of the Company’s stock on the date of the grant.
 
SSARs Issued on
 
February 28, 2013
Grant date fair value
$
19.93

Grant date strike price
$
60.24

Expected volatility
44.56
%
Expected life
5 years

Risk free interest rate
0.80
%
Projected dividend yield
1.93
%

Stock-Based Compensation Expense

The Company recorded stock-based compensation expense of $11 million and $10 million during the three months ended March 31, 2013 and 2012, 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 March 31, 2013 and 2012, for stock-based compensation arrangements on the Consolidated Statements of Income. During the three months ended March 31, 2013, the Company increased its pool of excess tax benefits available to absorb tax deficiencies (“APIC Pool”) by $12 million due to the vesting of RSUs and exercise of stock options. As of March 31, 2013, the Company’s APIC Pool balance was $74 million.

The Company paid $25 million and $41 million of taxes for the net share settlement of incentive equity awards during the three months ended March 31, 2013 and 2012, respectively. Such amounts are included within financing activities on the Consolidated Statements of Cash Flows.

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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), early extinguishment of debt, interest income (excluding consumer financing interest) and income taxes, each of which is presented on the Consolidated Statements of Income. The Company’s presentation of EBITDA may not be comparable to similarly-titled measures used by other companies.

 
Three Months Ended March 31,
 
2013
 
2012
 
Net Revenues
 
EBITDA
 
Net Revenues
 
EBITDA
Lodging
$
222

(b) 
$
58

 
$
185

(b) 
$
49

Vacation Exchange and Rentals
374

 
94

 
361

 
95

Vacation Ownership
549

 
111

 
501

 
103

Total Reportable Segments
1,145

 
263

 
1,047

 
247

Corporate and Other (a)
(12
)
 
(29
)
 
(11
)
 
(21
)
Total Company
$
1,133

 
234

 
$
1,036

 
226

Depreciation and amortization
 
 
52

 
 
 
45

Interest expense
 
 
32

 
 
 
33

Early extinguishment of debt
 
 
111

 
 
 
106

Interest income
 
 
(2
)
 
 
 
(2
)
Income before income taxes
 
 
$
41

 

 
$
44

 
(a)  
Includes the elimination of transactions between segments.
(b) 
Includes $8 million of inter-segment trademark fees during both the three months ended March 31, 2013 and 2012, which is offset in expenses primarily at the Company's Vacation Ownership segment. Transactions between segments are recorded at fair value and eliminated in consolidation.

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16.  Restructuring
2012 Restructuring Plans
During 2012, the Company committed to an organizational realignment initiative at its vacation exchange and rentals business, primarily focused on consolidating existing processes and optimizing its structure. Also during 2012, the Company implemented an organizational realignment initiative at its vacation ownership business, targeting the elimination of business function redundancies resulting from the Shell acquisition. During the three months ended March 31, 2013, the Company recorded $1 million of facility-related costs, reduced its liability with $1 million of cash payments and reversed $1 million of previously recorded personnel-related costs. The remaining liability of $5 million as of March 31, 2013 is expected to be paid in cash; $4 million of personnel-related by the end of 2013 and $1 million of facility-related by November 2015. From the commencement of the 2012 restructuring plan through March 31, 2013, the Company has incurred a total of $7 million of expenses in connection with such plan.
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. The remaining liability of $3 million as of March 31, 2013, all of which is facility-related, is expected to be paid in cash by the first quarter of 2020. From the commencement of the 2010 restructuring plan through March 31, 2013, the Company has incurred a total of $16 million of expenses in connection with such plan.
The activity related to costs associated with the Company's restructuring plans is summarized by category as follows:
 
Liability as of
 
Costs
 

 
Liability as of
 
December 31, 2012
 
Recognized/(Reversed)
 
Cash Payments
 
March 31,
2013
Personnel-related
$
6

 
$
(1
)
 
$
(1
)
 
$
4

Facility-related
5

 
1

 
(1
)
 
5

 
$
11

 
$

 
$
(2
)
 
$
9


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17.