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 March 31, 2014
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
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date:
127,305,731 shares of common stock outstanding as of March 31, 2014.



Table of Contents

Table of Contents

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



Table of Contents

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, 2014, and the related consolidated statements of income, comprehensive income/(loss), cash flows and equity for the three-month periods ended March 31, 2014 and 2013. These interim financial statements are the responsibility of the Company's management.

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


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




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


 
Three Months Ended
 
March 31,
 
2014
 
2013
Net revenues
 
 
 
Service and membership fees
$
590

 
$
569

Vacation ownership interest sales
303

 
263

Franchise fees
127

 
122

Consumer financing
105

 
105

Other
68

 
74

Net revenues
1,193

 
1,133


Expenses
 
 
 
Operating
534

 
506

Cost of vacation ownership interests
39

 
32

Consumer financing interest
17

 
21

Marketing and reservation
181

 
177

General and administrative
195

 
164

Depreciation and amortization
56

 
52

Total expenses
1,022

 
952


Operating income
171

 
181

Other income, net
(3
)
 
(1
)
Interest expense
27

 
32

Early extinguishment of debt

 
111

Interest income
(2
)
 
(2
)

Income before income taxes
149

 
41

Provision for income taxes
59

 
14


Net income
$
90

 
$
27


Earnings per share
 
 
 
Basic
$
0.70

 
$
0.19

Diluted
0.69

 
0.19

 
 
 
 
Cash dividends declared per share
$
0.35

 
$
0.29



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,
 
2014
 
2013
Net income
$
90

 
$
27

Other comprehensive income/(loss), net of tax
 
 
 
Foreign currency translation adjustments
12

 
(32
)
Unrealized gain on cash flow hedges

 
1

Other comprehensive income/(loss), net of tax
12

 
(31
)
Comprehensive income/(loss)
$
102

 
$
(4
)


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,
2014
 
December 31,
2013
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
203

 
$
194

Trade receivables, net
742

 
505

Vacation ownership contract receivables, net
300

 
305

Inventory
336

 
346

Prepaid expenses
157

 
153

Deferred income taxes
102

 
108

Other current assets
399

 
329

Total current assets
2,239

 
1,940

Long-term vacation ownership contract receivables, net
2,408

 
2,448

Non-current inventory
693

 
677

Property and equipment, net
1,554

 
1,555

Goodwill
1,594

 
1,590

Trademarks, net
723

 
723

Franchise agreements and other intangibles, net
425

 
429

Other non-current assets
386

 
379

Total assets
$
10,022

 
$
9,741

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

 
$
184

Current portion of long-term debt
52

 
49

Accounts payable
602

 
360

Deferred income
591

 
451

Due to former Parent and subsidiaries
23

 
23

Accrued expenses and other current liabilities
675

 
723

Total current liabilities
2,135

 
1,790

Long-term securitized vacation ownership debt
1,787

 
1,726

Long-term debt
2,834

 
2,882

Deferred income taxes
1,199

 
1,173

Deferred income
195

 
192

Due to former Parent and subsidiaries
14

 
14

Other non-current liabilities
334

 
339

Total liabilities
8,498

 
8,116

Commitments and contingencies (Note 11)

 

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

 

Common stock, $.01 par value, authorized 600,000,000 shares, issued 216,460,609 shares in 2014 and 215,578,445 shares in 2013
2

 
2

Treasury stock, at cost – 89,287,543 shares in 2014 and 87,206,462 shares in 2013
(3,341
)
 
(3,191
)
Additional paid-in capital
3,850

 
3,858

Retained earnings
877

 
832

Accumulated other comprehensive income
134

 
122

Total stockholders’ equity
1,522

 
1,623

Noncontrolling interest
2

 
2

Total equity
1,524

 
1,625

Total liabilities and equity
$
10,022

 
$
9,741


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,
 
2014
 
2013
Operating Activities
 
 
 
Net income
$
90

 
$
27

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
56

 
52

Provision for loan losses
60

 
84

Deferred income taxes
29

 
(5
)
Stock-based compensation
16

 
11

Excess tax benefits from stock-based compensation
(19
)
 
(12
)
Loss on early extinguishment of debt

 
106

Non-cash interest
6

 
10

Net change in assets and liabilities, excluding the impact of acquisitions:
 
 
 
Trade receivables
(228
)
 
(182
)
Vacation ownership contract receivables
(6
)
 
(5
)
Inventory
22

 
10

Prepaid expenses
(4
)
 
(24
)
Other current assets
(36
)
 
(21
)
Accounts payable, accrued expenses and other current liabilities
184

 
135

Deferred income
137

 
89

Other, net
8

 
(1
)
Net cash provided by operating activities
315

 
274

Investing Activities
 
 
 
Property and equipment additions
(46
)
 
(41
)
Net assets acquired, net of cash acquired
(14
)
 
(126
)
Development advances
(1
)
 
(49
)
Equity investments and loans

 
(2
)
Proceeds from asset sales
4

 

Increase in securitization restricted cash
(19
)
 
(20
)
Increase in escrow deposit restricted cash
(12
)
 
(16
)
Other, net

 
1

Net cash used in investing activities
(88
)
 
(253
)
Financing Activities
 
 
 
Proceeds from securitized borrowings
653

 
455

Principal payments on securitized borrowings
(584
)
 
(422
)
Proceeds from long-term debt
25

 
202

Principal payments on long-term debt
(55
)
 
(170
)
Repayments of commercial paper, net
(27
)
 
(71
)
Proceeds from note issuances

 
843

Repurchase of notes

 
(636
)
Dividends to shareholders
(48
)
 
(41
)
Repurchase of common stock
(152
)
 
(135
)
Excess tax benefits from stock-based compensation
19

 
12

Debt issuance costs
(6
)
 
(5
)
Net share settlement of incentive equity awards
(44
)
 
(25
)
Net cash provided by/(used in) financing activities
(219
)
 
7

Effect of changes in exchange rates on cash and cash equivalents
1

 
(6
)
Net increase in cash and cash equivalents
9

 
22

Cash and cash equivalents, beginning of period
194

 
195

Cash and cash equivalents, end of period
$
203

 
$
217


See Notes to Consolidated Financial Statements.
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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, 2013
128

 
$
2

 
$
(3,191
)
 
$
3,858

 
$
832

 
$
122

 
$
2

 
$
1,625

Net income

 

 

 

 
90

 

 

 
90

Other comprehensive income

 

 

 

 

 
12

 

 
12

Issuance of shares for RSU vesting
1

 

 

 

 

 

 

 

Net share settlement of incentive equity awards

 

 

 
(44
)
 

 

 

 
(44
)
Change in deferred compensation

 

 

 
16

 

 

 

 
16

Repurchase of common stock
(2
)
 

 
(150
)
 

 

 

 

 
(150
)
Change in excess tax benefit on equity awards

 

 

 
19

 

 

 

 
19

Dividends

 

 

 

 
(45
)
 

 

 
(45
)
Other

 

 

 
1

 

 

 

 
1

Balance as of March 31, 2014
127

 
$
2

 
$
(3,341
)
 
$
3,850

 
$
877

 
$
134

 
$
2

 
$
1,524



 
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



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 2013 Consolidated Financial Statements included in its Annual Report filed on Form 10-K with the Securities and Exchange Commission on February 14, 2014.

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

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


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

The following table sets forth the computation of basic and diluted EPS (in millions, except per share data):
 
Three Months Ended
 
March 31,
 
2014
 
2013
Net income
$
90

 
$
27

Basic weighted average shares outstanding
128

 
137

SSARs, RSUs and PSUs (a) (b) (c)
2

 
1

Weighted average diluted shares outstanding
130

 
138

Earnings per share:
 
 
 
Basic
$
0.70

 
$
0.19

Diluted
0.69

 
0.19

Dividends:
 
 
 
Aggregate dividends paid to shareholders
$
48

 
$
41


(a) 
Includes unvested dilutive restricted stock units (“RSUs”) which are subject to future forfeitures.
(b) 
Excludes 11,000 and 103,000 stock-settled stock appreciation rights ("SSARs") for the three months ended March 31, 2014 and 2013, respectively, as their inclusion would have been anti-dilutive to EPS.
(c) 
Excludes 681,000 and 840,000 performance vested restricted stock units ("PSUs") for the three months ended March 31, 2014 and 2013, respectively, as the Company has not met the required performance metrics.
    
Stock Repurchase Program

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

 
$
2,410

 
$
38.44

For the three months ended March 31, 2014
2.1

 
150

 
72.00

As of March 31, 2014
64.8

 
$
2,560

 
39.52


The Company had $518 million of remaining availability in its program as of March 31, 2014. The total capacity of the program was increased by proceeds received from stock option exercises.

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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.

During the first quarter of 2014, the Company completed business acquisitions for $13 million in cash, net of cash acquired, and $4 million of contingent consideration. The preliminary purchase price allocations resulted in the recognition of (i) $9 million of inventory, all of which was allocated to the Company's Vacation Ownership segment, and (ii) $2 million of goodwill, none of which is expected to be deductible for tax purposes, and $3 million of definite-lived intangible assets with a weighted average life of 12 years, all of which were assigned to the Company's Vacation Exchange and Rentals segment. These acquisitions were not material to the Company's results of operations, financial position or cash flows.

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

 
$
222

Non-securitized
135

 
140

 
358

 
362

Less: Allowance for loan losses
58

 
57

Current vacation ownership contract receivables, net
$
300

 
$
305

Long-term vacation ownership contract receivables:
 
 
 
Securitized
$
1,976

 
$
1,982

Non-securitized
937

 
975

 
2,913

 
2,957

Less: Allowance for loan losses
505

 
509

Long-term vacation ownership contract receivables, net
$
2,408

 
$
2,448


During the three months ended March 31, 2014 and 2013, the Company’s securitized vacation ownership contract receivables generated interest income of $70 million and $77 million, respectively. Such interest income is included in consumer financing revenues on the Consolidated Statements of Income.

Principal payments that are contractually due on the Company’s vacation ownership contract receivables during the next twelve months are classified as current on the Consolidated Balance Sheets. During the three months ended March 31, 2014 and 2013, the Company originated vacation ownership contract receivables of $210 million and $209 million, respectively. For both the three months ended March 31, 2014 and 2013, the Company received principal collections of $204 million. The weighted average interest rate on outstanding vacation ownership contract receivables was 13.5% as of both March 31, 2014 and December 31, 2013.


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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, 2013
$
566

Provision for loan losses
60

Contract receivables write-offs, net
(63
)
Allowance for loan losses as of March 31, 2014
$
563

 
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

In accordance with the guidance for accounting for real estate timesharing transactions, the Company recorded a provision for loan losses of $60 million and $84 million as a reduction of net revenues during the three months ended March 31, 2014 and 2013, respectively.
Credit Quality for Financed Receivables and the Allowance for Credit Losses

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

The following table details an aged analysis of financing receivables using the most recently updated FICO scores (based on the policy described above):
 
As of March 31, 2014
 
700+
 
600-699
 
<600
 
No Score
 
Asia Pacific
 
Total
Current
$
1,479

 
$
1,036

 
$
228

 
$
113

 
$
294

 
$
3,150

31 - 60 days
12

 
20

 
16

 
3

 
4

 
55

61 - 90 days
7

 
13

 
12

 
2

 
2

 
36

91 - 120 days
5

 
9

 
12

 
2

 
2

 
30

Total
$
1,503

 
$
1,078

 
$
268

 
$
120

 
$
302

 
$
3,271

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

 
$
1,060

 
$
224

 
$
108

 
$
280

 
$
3,187

31 - 60 days
10

 
24

 
20

 
4

 
4

 
62

61 - 90 days
7

 
13

 
13

 
2

 
2

 
37

91 - 120 days
5

 
11

 
13

 
3

 
1

 
33

Total
$
1,537

 
$
1,108

 
$
270

 
$
117

 
$
287

 
$
3,319


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

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5.
Inventory
Inventory consisted of:
 
March 31,
2014
 
December 31,
2013
Completed VOI inventory
$
413

 
$
422

Estimated recoveries
225

 
227

Inventory sold subject to conditional repurchase (*)
123

 
123

VOI construction in process
103

 
84

Land held for VOI development
102

 
102

Exchange and rentals vacation credits and other
63

 
65

Total inventory
1,029

 
1,023

Less: Current portion
336

 
346

Non-current inventory
$
693

 
$
677

 
(*)
Comprised of $85 million of VOI construction in process and $38 million of land held for VOI development.

Inventory that the Company expects to sell within the next twelve months is classified as current on the Consolidated Balance Sheets.

Inventory Sale Transactions
During 2013, the Company sold real property located in Las Vegas, Nevada and Avon, Colorado to a third-party developer, consisting of vacation ownership inventory and property and equipment in exchange for cash consideration and a note receivable. The Company recognized no gain or loss on these transactions.

In connection with such transactions, the Company had outstanding obligations of $131 million as of March 31, 2014, of which $50 million was included within accrued expenses and other current liabilities and $81 million was included within other non-current liabilities on the Consolidated Balance Sheet. As of December 31, 2013, the Company had outstanding obligations of $129 million, of which $47 million was included within accrued expenses and other current liabilities and $82 million was included within other non-current liabilities on the Consolidated Balance Sheet. In addition, the Company had a note receivable of $31 million and $30 million, as of March 31, 2014 and December 31, 2013, respectively, which was included within other current assets on the Consolidated Balance Sheets. Interest on the note receivable accrues at 3% per annum and is expected to be paid with the principal at maturity in December 2014 (see Note 11 - Commitments and Contingencies for more detailed information).

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6.
Long-Term Debt and Borrowing Arrangements
The Company’s indebtedness consisted of:
 
March 31,
2014
 
December 31,
2013
Securitized vacation ownership debt: (a)
 
 
 
Term notes
$
1,823

 
$
1,648

Bank conduit facility
156

 
262

Total securitized vacation ownership debt
1,979

 
1,910

Less: Current portion of securitized vacation ownership debt
192

 
184

Long-term securitized vacation ownership debt
$
1,787

 
$
1,726

Long-term debt: (b)
 
 
 
Revolving credit facility (due July 2018)
$
10

 
$
23

Commercial paper
184

 
210

$315 million 6.00% senior unsecured notes (due December 2016) (c)
318

 
318

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

 
298

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

 
14

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

 
447

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

 
40

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

 
246

$650 million 4.25% senior unsecured notes (due March 2022) (d)
645

 
643

$400 million 3.90% senior unsecured notes (due March 2023) (e)
395

 
387

Capital leases
188

 
191

Other
100

 
114

Total long-term debt
2,886

 
2,931

Less: Current portion of long-term debt
52

 
49

Long-term debt
$
2,834

 
$
2,882

 
(a) 
Represents non-recourse debt that is securitized through bankruptcy-remote special purpose entities ("SPEs"), the creditors of which have no recourse to the Company for principal and interest. These outstanding borrowings are collateralized by $2,328 million and $2,314 million of underlying gross vacation ownership contract receivables and related assets as of March 31, 2014 and December 31, 2013, respectively.
(b) 
The carrying amounts of the senior unsecured notes are net of unamortized discount of $17 million as of both March 31, 2014 and December 31, 2013.
(c) 
Includes $3 million of unamortized gains from the settlement of a derivative as of both March 31, 2014 and December 31, 2013.
(d) 
Includes a $2 million adjustment to the carrying value resulting from a fair value hedge derivative as of December 31, 2013. There is no adjustment to the carrying value as of March 31, 2014.
(e) 
Includes a $2 million and $10 million adjustment to the carrying value resulting from a fair value hedge derivative as of March 31, 2014 and December 31, 2013, respectively.

Commercial Paper

The Company maintains U.S. and European commercial paper programs with a total capacity of $750 million and $500 million, respectively. As of March 31, 2014, the Company had outstanding borrowings of $156 million and $28 million on its U.S. and European commercial paper programs, respectively. The Company considers outstanding borrowings under its commercial paper programs to be a reduction of available capacity on its revolving credit facility.

Fair Value Hedges

The Company has fixed to variable interest rate swap agreements with notional amounts of $400 million of its 3.90% senior unsecured notes and $100 million of its 4.25% senior unsecured notes. The fixed interest rates on these notes were effectively modified to a variable LIBOR-based index. As of March 31, 2014, the variable interest rates were 2.39% and 2.30% for the 3.90% and 4.25% senior unsecured notes, respectively. The Company had a $2 million liability recorded as of March 31, 2014, which represented the aggregate fair value of these interest rate swap agreements.

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2014 Debt Issuances

Sierra Timeshare 2014-1 Receivables Funding, LLC. During March 2014, the Company closed a series of term notes payable, Sierra Timeshare 2014-1 Receivables Funding, LLC, in the initial principal amount of $425 million at an advance rate of 88%. These borrowings bear interest at a weighted average coupon rate of 2.15% and are secured by vacation ownership contract receivables. As of March 31, 2014, the Company had $425 million of outstanding borrowings under these term notes.

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.
Maturities and Capacity

The Company’s outstanding debt as of March 31, 2014 matures as follows:
 
Securitized Vacation Ownership Debt
 
Long-Term Debt
 
Total
Within 1 year
$
192

 
$
52

 
$
244

Between 1 and 2 years
231

 
50

 
281

Between 2 and 3 years
290

 
661

 
951

Between 3 and 4 years
199

 
476

 
675

Between 4 and 5 years
198

 
209

 
407

Thereafter
869

 
1,438

 
2,307

 
$
1,979

 
$
2,886

 
$
4,865


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

 
$
1,500

 
Less: Outstanding Borrowings
156

 
10

 
          Letters of credit

 
9

 
          Commercial paper borrowings

 
184

(b) 
Available Capacity
$
494

 
$
1,297

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

Interest Expense

The Company incurred non-securitized interest expense of $27 million during the three months ended March 31, 2014. Such amount consists primarily of $28 million of interest on long-term debt, partially offset by $1 million of capitalized interest and is included within interest expense on the Consolidated Statement of Income. Cash paid related to interest on the Company's non-securitized debt was $42 million during the three months ended March 31, 2014.


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The Company incurred non-securitized interest expense of $32 million during the three months ended March 31, 2013. Such amount consists primarily of $33 million of interest on long-term debt, partially offset by $1 million of capitalized interest and is included 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.

Interest expense incurred in connection with the Company's securitized vacation ownership debt during the three months ended March 31, 2014 and 2013 was $17 million and $21 million, respectively, and is recorded within consumer financing interest on the Consolidated Statements of Income. Cash paid related to such interest was $13 million and $16 million during the three months ended March 31, 2014 and 2013, respectively.

7.
Variable Interest Entities
In accordance with the applicable accounting guidance for the consolidation of VIEs, 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,
2014
 
December 31,
2013
Securitized contract receivables, gross (a)
$
2,199

 
$
2,204

Securitized restricted cash (b)
110

 
92

Interest receivables on securitized contract receivables (c)
17

 
17

Other assets (d)
2

 
1

Total SPE assets (e)
2,328

 
2,314

Securitized term notes (f)
1,823

 
1,648

Securitized conduit facilities (f)
156

 
262

Other liabilities (g)
2

 
2

Total SPE liabilities
1,981

 
1,912

SPE assets in excess of SPE liabilities
$
347

 
$
402

 
(a) 
Included in current ($223 million and $222 million as of March 31, 2014 and December 31, 2013, respectively) and non-current ($1,976 million and $1,982 million as of March 31, 2014 and December 31, 2013, respectively) vacation ownership contract receivables on the Consolidated Balance Sheets.
(b) 
Included in other current assets ($80 million and $64 million as of March 31, 2014 and December 31, 2013, respectively) and other non-current assets ($30 million and $28 million as of March 31, 2014 and December 31, 2013, respectively) on the Consolidated Balance Sheets.
(c) 
Included in trade receivables, net on the Consolidated Balance Sheets.
(d) 
Includes interest rate derivative contracts and related assets; included in other non-current assets on the Consolidated Balance Sheets.
(e) 
Excludes deferred financing costs of $30 million and $28 million as of March 31, 2014 and December 31, 2013, respectively, related to securitized debt.

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(f) 
Included in current ($192 million and $184 million as of March 31, 2014 and December 31, 2013, respectively) and long-term ($1,787 million and $1,726 million as of March 31, 2014 and December 31, 2013, respectively) securitized vacation ownership debt on the Consolidated Balance Sheets.
(g) 
Primarily includes accrued interest on securitized debt of $2 million as of both March 31, 2014 and December 31, 2013, which is included in accrued expenses and other current liabilities on the Consolidated Balance Sheets.

In addition, the Company has vacation ownership contract receivables that have not been securitized through bankruptcy-remote SPEs. Such gross receivables were $1,072 million and $1,115 million as of March 31, 2014 and December 31, 2013, respectively. A summary of total vacation ownership receivables and other securitized assets, net of securitized liabilities and the allowance for loan losses, is as follows:
 
March 31,
2014
 
December 31,
2013
SPE assets in excess of SPE liabilities
$
347

 
$
402

Non-securitized contract receivables
1,072

 
1,115

Less: Allowance for loan losses
563

 
566

Total, net
$
856

 
$
951

In addition to restricted cash related to securitizations, the Company had $75 million and $57 million of restricted cash related to escrow deposits as of March 31, 2014 and December 31, 2013, respectively, which are recorded within other current assets on the Consolidated Balance Sheets.

Midtown 45, NYC Property

During January 2013, the Company entered into an agreement with a third party partner whereby the partner acquired the Midtown 45 property in New York City through an SPE. The Company is managing and operating the property for rental purposes while the Company converts it into VOI inventory. The SPE financed the acquisition and planned renovations with a $115 million four-year mortgage note and $9 million of mandatorily redeemable equity provided by related parties of such partner. 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,
2014
 
December 31,
2013
Cash
$

 
$
4

Property and equipment, net
111

 
111

Total SPE assets
111

 
115

Accrued expenses and other current liabilities
1

 
2

Long-term debt (*)
95

 
107

Total SPE liabilities
96

 
109

SPE assets in excess of SPE liabilities
$
15

 
$
6

 
(*)  
As of March 31, 2014, included $88 million for a four-year mortgage note and $7 million of mandatorily redeemable equity, of which $31 million was included in current portion of long-term debt on the Consolidated Balance Sheet. As of December 31, 2013, included $99 million for a four-year mortgage note and $8 million of mandatorily redeemable equity, of which $30 million was included in current portion of long-term debt on the Consolidated Balance Sheet.

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

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

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

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

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

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, 2014
 
December 31, 2013
 
Fair Value
 
Level 2
 
Level 3
 
Fair Value
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
 
 
 
 
Derivatives: (a)
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
$
2

 
$
2

 
$

 
$
5

 
$
5

 
$

Foreign exchange contracts
1

 
1

 

 
2

 
2

 

Securities available-for-sale (b)

 

 

 
6

 

 
6

Total assets
$
3

 
$
3

 
$

 
$
13

 
$
7

 
$
6


Liabilities
 
 
 
 
 
 
 
 
 
 
 
Derivatives: (c)
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
$
4

 
$
4

 
$

 
$
13

 
$
13

 
$

Foreign exchange contracts
2

 
2

 

 
2

 
2

 

Total liabilities
$
6

 
$
6

 
$

 
$
15

 
$
15

 
$

 
(a) 
Included in other current assets ($2 million and $6 million as of March 31, 2014 and December 31, 2013, respectively) and other non-current assets ($1 million as of both March 31, 2014 and December 31, 2013) 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.
(c) 
Included in accrued expenses and other current liabilities ($2 million as of both March 31, 2014 and December 31, 2013) and other non-current liabilities ($4 million and $13 million as of March 31, 2014 and December 31, 2013, respectively) on the Consolidated Balance Sheets; carrying value is equal to estimated fair value.

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


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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, 2014
 
December 31, 2013
 
Carrying
Amount
 
Estimated Fair Value
 
Carrying
 Amount
 
Estimated Fair Value
Assets
 
 
 
 
 
 
 
Vacation ownership contract receivables, net
$
2,708

 
$
3,289

 
$
2,753

 
$
3,326

Debt
 
 
 
 
 
 
 
Total debt
4,865

 
4,980

 
4,841

 
4,928


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

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

9.
Derivative Instruments and Hedging Activities
Foreign Currency Risk

The Company uses freestanding foreign currency forward contracts and foreign currency forward contracts designated as cash flow hedges to manage its exposure to changes in foreign currency exchange rates associated with its foreign currency denominated receivables, forecasted earnings of foreign subsidiaries and forecasted foreign currency denominated vendor payments. 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. The impact of the freestanding foreign currency contracts was not material to the Company’s Consolidated Statements of Income during the three months ended March 31, 2014 and 2013.

Interest Rate Risk

A portion of the debt used to finance the Company’s operations is exposed to interest rate fluctuations. The Company uses various hedging strategies and derivative financial instruments to create a desired mix of fixed and floating rate assets and liabilities. Derivative instruments currently used in these hedging strategies include swaps and interest rate caps. The derivatives used to manage the risk associated with the Company’s floating rate debt include freestanding derivatives and derivatives designated as cash flow hedges. The Company also uses swaps to convert specific fixed-rate debt into variable-rate debt (i.e., fair value hedges) to manage the overall interest cost. For relationships designated as fair value hedges, changes in the fair value of the derivatives are recorded in income with offsetting adjustments to the carrying amount of the hedged debt. The amount of losses that the Company expects to reclassify from AOCI to earnings during the next 12 months is not material. The impact of the freestanding derivatives was not material to the Company’s Consolidated Statements of Income during the three months ended March 31, 2014 and 2013.

Gains or losses recognized in AOCI for both the three months ended March 31, 2014 and 2013 were not material.

10.
Income Taxes
The Company files income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examinations for years prior to 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 2006.

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The Company’s effective tax rate increased from 34.1% during the three months ended March 31, 2013 to 39.6% during the three months ended March 31, 2014 primarily due to (i) the absence of a tax benefit derived from the loss on the early extinguishment of debt during the first quarter of 2013, and (ii) the lack of a tax benefit on the Venezuelan foreign exchange devaluation loss incurred during the first quarter of 2014.

The Company made cash income tax payments, net of refunds, of $13 million and $22 million during the three months ended March 31, 2014 and 2013, respectively.

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

Wyndham Worldwide Corporation Litigation

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

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

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

The Company believes that it has adequately accrued for such matters with reserves of $25 million and $22 million as of March 31, 2014 and December 31, 2013, respectively. Such reserves are exclusive of matters relating to the Company’s separation from Cendant ("Separation"). For matters not requiring accrual, the Company believes that such matters will not have a material effect on its results of operations, financial position or cash flows based on information currently available. However, litigation is inherently unpredictable and, although the Company believes that its accruals are adequate and/or that it has valid defenses in these matters, unfavorable results could occur. As such, an adverse outcome from such proceedings for which claims are awarded in excess of the amounts accrued, if any, could be material to the Company with

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respect to earnings and/or cash flows in any given reporting period. As of March 31, 2014, the potential exposure resulting from adverse outcomes of such legal proceedings could, in the aggregate, range up to approximately $26 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

Lodging

From time to time, the Company may enter into a hotel management agreement that provides the hotel owner with a guarantee of a certain level of profitability based upon various metrics. Under such an agreement, the Company would be required to compensate such hotel owner for any profitability shortfall over the life of the management agreement up to a specified aggregate amount. For certain agreements, the Company may be able to recapture all or a portion of the shortfall payments in the event that future operating results exceed targets. The terms of such guarantees generally range from 7 to 10 years and certain agreements may provide for early termination provisions under certain circumstances. As of March 31, 2014, the maximum potential amount of future payments that may be made under these guarantees was $136 million with a combined annual cap of $39 million.

In connection with such performance guarantees, as of March 31, 2014, the Company maintained a liability of $41 million, of which $10 million was included in accrued expenses and other current liabilities and $31 million was included in other non-current liabilities on its Consolidated Balance Sheet. As of March 31, 2014, the Company also had a corresponding $45 million asset related to these guarantees, of which $7 million was included in other current assets and $38 million was included in other non-current assets on its Consolidated Balance Sheet. As of December 31, 2013, the Company maintained a liability of $45 million, of which $8 million was included in accrued expenses and other current liabilities and $37 million was included in other non-current liabilities on its Consolidated Balance Sheet. As of December 31, 2013, the Company also had a corresponding $43 million asset related to the guarantees, of which $4 million was included in other current assets and $39 million was included in other non-current assets on its Consolidated Balance Sheet. Such assets are being amortized on a straight-line basis over the life of the agreements. The amortization expense for the performance guarantees noted above was $1 million and less than $1 million for the three months ended March 31, 2014 and 2013, respectively.

Under such performance guarantees, the Company also had receivables of $25 million and $24 million as of March 31, 2014 and December 31, 2013, respectively, resulting from payments made to date which are subject to recapture and which the Company believes will be recoverable from future operating performance. Such receivables were included in other non-current assets on the Company's Consolidated Balance Sheets.

Vacation Ownership

The Company guarantees its vacation ownership subsidiary's obligations to repurchase completed property in Las Vegas, Nevada and Avon, Colorado from a third party developer subject to the properties meeting the Company's vacation ownership resort standards and provided that the third party developer has not sold the properties to another party. The maximum potential future payments that the Company could be required to make under these commitments were $365 million as of March 31, 2014.

Cendant Litigation

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

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

 
$
(8
)
 
$
(4
)
 
$
99

 Period change
15

 

 

 
15

 Balance, March 31, 2014
$
126

 
$
(8
)
 
$
(4
)
 
$
114


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

 
$
4

 
$
1

 
$
23

 Period change
(3
)
 

 

 
(3
)
 Balance, March 31, 2014
$
15

 
$
4

 
$
1

 
$
20


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

 
$
(4
)
 
$
(3
)
 
$
122

 Period change
12

 

 

 
12

 Balance, March 31, 2014
$
141

 
$
(4
)
 
$
(3
)
 
$
134


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.


13.  
Stock-Based Compensation
The Company has a stock-based compensation plan available to grant RSUs, SSARs, PSUs and other stock or cash-based awards to key employees, non-employee directors, advisors and consultants. Under the Wyndham Worldwide Corporation 2006 Equity and Incentive Plan, as amended, a maximum of 36.7 million shares of common stock may be awarded. As of March 31, 2014, 16.3 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 three months ended March 31, 2014 consisted of the following:

 
RSUs
 
PSUs
 
SSARs
 
Number of RSUs
 
Weighted Average Grant Price
 
Number of PSUs
 
Weighted Average Grant Price
 
Number of SSARs
 
Weighted Average Exercise Price
Balance as of December 31, 2013
2.6

 
$
43.11

 
0.8

 
$
43.36

 
1.1

 
$
21.43

Granted (a)
0.7

 
72.97

 
0.2

 
72.97

 
0.1

 
72.97

Vested/exercised
(1.2
)
 
36.77

 
(0.3
)
 
30.61

 

 

Balance as of March 31, 2014
2.1

(b) (c) 
56.72

 
0.7

(d) 
57.98

 
1.2

(b) (e) 
25.19

 
(a) 
Represents awards granted by the Company on February 27, 2014.
(b) 
Aggregate unrecognized compensation expense related to RSUs and SSARs was $121 million as of March 31, 2014, which is expected to be recognized over a weighted average period of 3.0 years.
(c) 
Approximately 2.0 million RSUs outstanding as of March 31, 2014 are expected to vest over time.
(d) 
Maximum aggregate unrecognized compensation expense was $27 million as of March 31, 2014.
(e) 
Approximately 1.0 million SSARs are exercisable as of March 31, 2014. The Company assumes that all unvested SSARs are expected to vest over time. SSARs outstanding as of March 31, 2014 had an intrinsic value of $59 million and have a weighted average remaining contractual life of 2.3 years.

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

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

Grant date strike price
$
72.97

Expected volatility
35.86
%
Expected life
5.1 years

Risk free interest rate
1.54
%
Projected dividend yield
1.92
%

Stock-Based Compensation Expense

The Company recorded stock-based compensation expense of $16 million and $11 million during the three months ended March 31, 2014 and 2013, respectively, related to the incentive equity awards granted by the Company. The Company recognized a net tax benefit of $6 million and $4 million during the three months ended March 31, 2014 and 2013, respectively, for stock-based compensation arrangements on the Consolidated Statements of Income. During the three months ended March 31, 2014, the Company increased its pool of excess tax benefits available to absorb tax deficiencies (“APIC Pool”) by $19 million due to the vesting of RSUs and PSUs. As of March 31, 2014, the Company’s APIC Pool balance was $97 million.

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The Company paid $44 million and $25 million of taxes for the net share settlement of incentive equity awards during the three months ended March 31, 2014 and 2013, respectively. Such amounts are included within financing activities on the Consolidated Statements of Cash Flows.

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

 
Three Months Ended March 31,
 
2014
 
2013
 
Net Revenues
 
EBITDA
 
Net Revenues
 
EBITDA
Lodging (a)
$
237

(c) 
$
64

 
$
222

 
$
58

Vacation Exchange and Rentals
379

 
85

 
374

 
94

Vacation Ownership
593

 
115

 
549

 
111

Total Reportable Segments
1,209

 
264

 
1,145

 
263

Corporate and Other (b)
(16
)
 
(34
)
 
(12
)
 
(29
)
Total Company
$
1,193

 
$
230

 
$
1,133

 
$
234

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reconciliation of EBITDA to Net Income
 
 
 
 
 
 
 
Three Months Ended March 31,
 
 
 
2014
 
 
 
2013
EBITDA
 
 
$
230

 
 
 
$
234

Depreciation and amortization
 
 
56

 
 
 
52

Interest expense
 
 
27

 
 
 
32

Early extinguishment of debt
 
 

 
 
 
111

Interest income
 
 
(2
)
 
 
 
(2
)
Income before income taxes
 
 
149

 

 
41

Provision for income taxes
 
 
59

 
 
 
14

Net income
 
 
$
90

 
 
 
$
27

 
(a) 
Includes $9 million and $8 million of intersegment trademark fees during the three months ended March 31, 2014 and 2013, respectively, which is offset in expenses primarily at the Company's Vacation Ownership segment and are eliminated in Corporate and Other.
(b) 
Includes the elimination of transactions between segments.
(c) 
Includes $2 million of hotel management reimbursable revenues which are charged to the Company's Vacation Ownership segment and are eliminated in Corporate and Other.

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Table of Contents

15.
Restructuring
During the fourth quarter of 2013, the Company committed to an organizational realignment initiative at its lodging business, primarily focused on optimizing its marketing structure. During the three months ended March 31, 2014, the Company reduced its liability with $3 million of cash payments. The remaining liability of $4 million as of March 31, 2014 is expected to be paid in cash primarily by the end of 2014.

In addition to the restructuring plan implemented during 2013, the Company has a remaining liability of $4 million as of March 31, 2014 for prior restructuring plans.

The activity associated with the Company's restructuring plans is summarized by category as follows:
 
Liability as of
 
 
 
Liability as of
 
December 31, 2013
 
Cash Payments
 
March 31, 2014
Personnel-related
$
6

 
$
(3
)
 
$
3

Facility-related
4

 

 
4

Contract terminations
1

 

 
1

 
$
11

 
$
(3
)
 
$
8



16.
Separation Adjustments and Transactions with Former Parent and Subsidiaries
Transfer of Cendant Corporate Liabilities and Issuance of Guarantees to Cendant and Affiliates

Pursuant to the Separation and Distribution Agreement, upon the distribution of the Company’s common stock to Cendant shareholders, the Company entered into certain guarantee commitments with Cendant (pursuant to the assumption of certain liabilities and the obligation to indemnify Cendant 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 $39 million as of both March 31, 2014 and December 31, 2013. 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 (formerly known as Cendant) to satisfy its obligations for the Cendant legacy contingent liabilities. As of March 31, 2014, the letter of credit was $53 million.

As of March 31, 2014, the $39 million of Separation related liabilities is comprised of $35 million for tax liabilities, $1 million for liabilities of previously sold businesses of Cendant, $1 million for other contingent and corporate liabilities and $2 million of liabilities where the calculated guarantee amount exceeded the contingent liability assumed at the Separation Date. In connection with these liabilities, $23 million is included within current due to former Parent and subsidiaries and $14 million is included within long-term due to former Parent and subsidiaries as of March 31, 2014 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 included within other current liabilities as of March 31, 2014 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, the Company had $1 million, as of both March 31, 2014 and December 31, 2013, of receivables due from former Parent and subsidiaries primarily relating to income taxes, which is included within other current assets on the Consolidated Balance Sheets.

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Table of Contents

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

RESULTS OF OPERATIONS

Discussed below are our key operating statistics, consolidated results of operations and the results of operations for each of our reportable segments. The reportable segments presented below represent our operating segments for which discrete financial information is available and which is utilized on a regular basis by our chief operating decision maker to assess performance and to allocate resources. In identifying our reportable segments, we also consider the nature of services provided by our operating segments. Management evaluates the operating results of each of our reportable segments based upon net revenues and "EBITDA" (a non-GAAP measure), 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. Our presentation of EBITDA may not be comparable to similarly-titled measures used by other companies.

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Table of Contents

OPERATING STATISTICS
The table below presents our operating statistics for the three months ended March 31, 2014 and 2013. These operating statistics are the drivers of our revenue and therefore provide an enhanced understanding of our businesses. Refer to the Results of Operations section for a discussion as to how these operating statistics affected our business for the periods presented.
 
Three Months Ended March 31,
 
2014
 
2013
 
% Change
Lodging
 
 
 
 
 
Number of rooms (a)
646,900

 
631,800

 
2.4
RevPAR (b)
$
32.30

 
$
31.05

 
4.0
Vacation Exchange and Rentals
 
 
 
 
 
Average number of members (in 000s) (c)
3,727

 
3,668

 
1.6
Exchange revenue per member (d)
$
200.78

 
$
210.96

 
(4.8)
Vacation rental transactions (in 000s) (e) (f)
429

 
423

 
1.4
Average net price per vacation rental (f) (g)
$
410.04

 
$
392.64

 
4.4
Vacation Ownership
 
 
 
 
 
Gross VOI sales (in 000s) (h) (i)
$
410,000

 
$
384,000

 
6.8
Tours (in 000s) (j)
170

 
163

 
4.3
Volume Per Guest (“VPG”) (k)
$
2,272

 
$
2,211

 
2.8
 
(a) 
Represents the number of rooms at lodging properties at the end of the period which are under franchise and/or management agreements, or are company owned.
(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 paid annual membership dues as of the end of the period or within the allowed grace period.
(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 during the period 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 acquisitions from the acquisition dates forward. Therefore, such operating statistics for 2014 are not presented on a comparable basis to the 2013 operating statistics.
(g) 
Represents the net rental price generated from renting vacation properties to customers and other related rental servicing fees during the period divided by the number of vacation rental transactions during the period.
(h) 
Represents total sales of VOIs, including sales under the Wyndham Asset Affiliation Model ("WAAM") Fee-for-Service, before the net effect of percentage-of-completion ("POC") accounting and loan loss provisions. We believe that Gross VOI sales provide 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 March 31 (in millions):
 
2014
 
2013
 
Gross VOI sales
$
410

 
$
384

(2) 
Less: WAAM Fee-for-Service sales (1)
44

 
36

 
Gross VOI sales, net of WAAM Fee-for-Service sales
366

 
347

(3) 
Less: Loan loss provision
60

 
84

 
Less: Impact of POC accounting
3

 

 
Vacation ownership interest sales
$
303

 
$
263

 
 
(1) Represents total sales of VOIs through our WAAM Fee-for-Service 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. WAAM Fee-for-Service commission revenues amounted to $33 million and $24 million for the three months ended March 31, 2014 and 2013, respectively.
(2) 
Includes $13 million of Gross VOI sales under our WAAM Just-in-Time inventory acquisition model which enables us to acquire and own completed timeshare units close to the timing of the sales of such units and to offer financing to the purchaser. This significantly reduces the period between the deployment of capital to acquire inventory and the subsequent return on investment which occurs at the time of its sale to a timeshare purchaser. 
(3) 
Amounts may not foot due to rounding.

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(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 $25 million and $24 million during the three months ended March 31, 2014 and 2013, 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's tour selling efforts during a given reporting period.
THREE MONTHS ENDED MARCH 31, 2014 VS. THREE MONTHS ENDED MARCH 31, 2013
Our consolidated results are as follows:
 
Three Months Ended March 31,
 
2014
 
2013
 
Favorable/(Unfavorable)
Net revenues
$
1,193

 
$
1,133

 
$
60

Expenses
1,022

 
952

 
(70
)
Operating income
171

 
181

 
(10
)
Other income, net
(3
)
 
(1
)
 
2