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 June 30, 2014
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from         to        
Commission File No. 001-32876
Wyndham Worldwide Corporation
(Exact name of registrant as specified in its charter)
Delaware
 
20-0052541
(State or other jurisdiction
of incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
22 Sylvan Way
 
07054
Parsippany, New Jersey
 
(Zip Code)
(Address of principal executive offices)
 
 
(973) 753-6000
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ     No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
þ
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
o
 
 
 
 
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o    No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date:
125,163,498 shares of common stock outstanding as of June 30, 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 June 30, 2014, the related consolidated statements of income and comprehensive income for the three-month and six-month periods ended June 30, 2014 and 2013 and the related consolidated statements of cash flows and equity for the six-month periods ended June 30, 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
July 24, 2014




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


 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Net revenues
 
 
 
 
 
 
 
Service and membership fees
$
616

 
$
583

 
$
1,205

 
$
1,152

Vacation ownership interest sales
382

 
347

 
685

 
611

Franchise fees
166

 
152

 
293

 
274

Consumer financing
106

 
106

 
211

 
211

Other
73

 
65

 
142

 
139

Net revenues
1,343

 
1,253

 
2,536

 
2,387


Expenses
 
 
 
 
 
 
 
Operating
572

 
548

 
1,106

 
1,056

Cost of vacation ownership interests
42

 
32

 
81

 
64

Consumer financing interest
17

 
20

 
35

 
40

Marketing and reservation
206

 
181

 
387

 
357

General and administrative
181

 
177

 
376

 
342

Depreciation and amortization
59

 
54

 
115

 
106

Total expenses
1,077

 
1,012

 
2,100

 
1,965


Operating income
266

 
241

 
436

 
422

Other income, net
(1
)
 
(2
)
 
(5
)
 
(3
)
Interest expense
29

 
34

 
56

 
66

Early extinguishment of debt

 

 

 
111

Interest income
(3
)
 
(2
)
 
(5
)
 
(4
)
Income before income taxes
241

 
211

 
390

 
252

Provision for income taxes
88

 
78

 
146

 
92

Net income
153

 
133

 
244

 
160

Net income attributable to noncontrolling interest

 

 
(1
)
 


Net income attributable to Wyndham shareholders
$
153

 
$
133

 
$
243

 
$
160


Earnings per share
 
 
 
 
 
 
 
Basic
$
1.21

 
$
0.99

 
$
1.91

 
$
1.18

Diluted
1.20

 
0.98

 
1.89

 
1.17

 
 
 
 
 
 
 
 
Cash dividends declared per share
$
0.35

 
$
0.29

 
$
0.70

 
$
0.58



See Notes to Consolidated Financial Statements.
2

Table of Contents
WYNDHAM WORLDWIDE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)


 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
153

 
$
133

 
$
244

 
$
160

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

 
(35
)
 
23

 
(67
)
Unrealized gain on cash flow hedges

 
1

 

 
2

Other comprehensive income/(loss), net of tax
11

 
(34
)
 
23

 
(65
)
Comprehensive income
164

 
99

 
267

 
95

Net income attributable to noncontrolling interest

 

 
(1
)
 

Comprehensive income attributable to Wyndham shareholders
$
164

 
$
99

 
$
266

 
$
95



See Notes to Consolidated Financial Statements.
3

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


 
June 30,
2014
 
December 31,
2013
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
247

 
$
194

Trade receivables, net
493

 
505

Vacation ownership contract receivables, net
296

 
305

Inventory
322

 
346

Prepaid expenses
167

 
153

Deferred income taxes
93

 
108

Other current assets
436

 
329

Total current assets
2,054

 
1,940

Long-term vacation ownership contract receivables, net
2,410

 
2,448

Non-current inventory
710

 
677

Property and equipment, net
1,553

 
1,555

Goodwill
1,601

 
1,590

Trademarks, net
723

 
723

Franchise agreements and other intangibles, net
418

 
429

Other non-current assets
388

 
379

Total assets
$
9,857

 
$
9,741

Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Securitized vacation ownership debt
$
187

 
$
184

Current portion of long-term debt
50

 
49

Accounts payable
525

 
360

Deferred income
579

 
451

Due to former Parent and subsidiaries
25

 
23

Accrued expenses and other current liabilities
801

 
723

Total current liabilities
2,167

 
1,790

Long-term securitized vacation ownership debt
1,704

 
1,726

Long-term debt
2,772

 
2,882

Deferred income taxes
1,198

 
1,173

Deferred income
197

 
192

Due to former Parent and subsidiaries
12

 
14

Other non-current liabilities
320

 
339

Total liabilities
8,370

 
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 216,616,466 shares in 2014 and 215,578,445 shares in 2013
2

 
2

Treasury stock, at cost – 91,619,119 shares in 2014 and 87,206,462 shares in 2013
(3,511
)
 
(3,191
)
Additional paid-in capital
3,864

 
3,858

Retained earnings
984

 
832

Accumulated other comprehensive income
145

 
122

Total stockholders’ equity
1,484

 
1,623

Noncontrolling interest
3

 
2

Total equity
1,487

 
1,625

Total liabilities and equity
$
9,857

 
$
9,741


See Notes to Consolidated Financial Statements.
4

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


 
Six Months Ended
 
June 30,
 
2014
 
2013
Operating Activities
 
 
 
Net income
$
244

 
$
160

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
115

 
106

Provision for loan losses
130

 
174

Deferred income taxes
33

 
27

Stock-based compensation
31

 
25

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

 
106

Non-cash interest
11

 
15

Net change in assets and liabilities, excluding the impact of acquisitions:
 
 
 
Trade receivables
24

 
(16
)
Vacation ownership contract receivables
(70
)
 
(79
)
Inventory
27

 
30

Prepaid expenses
(14
)
 
(35
)
Other current assets
(51
)
 
(77
)
Accounts payable, accrued expenses and other current liabilities
206

 
204

Deferred income
122

 
125

Other, net
4

 
5

Net cash provided by operating activities
793

 
758

Investing Activities
 
 
 
Property and equipment additions
(98
)
 
(104
)
Net assets acquired, net of cash acquired
(17
)
 
(128
)
Development advances
(10
)
 
(52
)
Equity investments and loans
(1
)
 
(1
)
Proceeds from asset sales
5

 

Decrease in securitization restricted cash
1

 
11

Increase in escrow deposit restricted cash
(37
)
 
(30
)
Other, net
(3
)
 
(1
)
Net cash used in investing activities
(160
)
 
(305
)
Financing Activities
 
 
 
Proceeds from securitized borrowings
824

 
660

Principal payments on securitized borrowings
(843
)
 
(763
)
Proceeds from long-term debt
44

 
310

Principal payments on long-term debt
(73
)
 
(272
)
Repayments of commercial paper, net
(103
)
 
(105
)
Proceeds from note issuances

 
843

Repurchase of notes

 
(636
)
Proceeds from vacation ownership inventory arrangement

 
87

Dividends to shareholders
(93
)
 
(80
)
Repurchase of common stock
(309
)
 
(313
)
Excess tax benefits from stock-based compensation
19

 
12

Debt issuance costs
(7
)
 
(12
)
Net share settlement of incentive equity awards
(44
)
 
(25
)
Other, net
(1
)
 

Net cash used in financing activities
(586
)
 
(294
)
Effect of changes in exchange rates on cash and cash equivalents
6

 
(12
)
Net increase in cash and cash equivalents
53

 
147

Cash and cash equivalents, beginning of period
194

 
195

Cash and cash equivalents, end of period
$
247

 
$
342


See Notes to Consolidated Financial Statements.
5

Table of Contents
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

 

 

 

 
243

 

 
1

 
244

Other comprehensive income

 

 

 

 

 
23

 

 
23

Issuance of shares for RSU vesting
1

 

 

 

 

 

 

 

Net share settlement of incentive equity awards

 

 

 
(44
)
 

 

 

 
(44
)
Change in deferred compensation

 

 

 
31

 

 

 

 
31

Repurchase of common stock
(4
)
 

 
(320
)
 

 

 

 

 
(320
)
Change in excess tax benefit on equity awards

 

 

 
19

 

 

 

 
19

Dividends

 

 

 

 
(91
)
 

 

 
(91
)
Balance as of June 30, 2014
125

 
$
2

 
$
(3,511
)
 
$
3,864

 
$
984

 
$
145

 
$
3

 
$
1,487



 
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

 

 

 

 
160

 

 

 
160

Other comprehensive loss

 

 

 

 

 
(65
)
 

 
(65
)
Issuance of shares for RSU vesting
1

 

 

 

 

 

 

 

Net share settlement of incentive equity awards

 

 

 
(25
)
 

 

 

 
(25
)
Change in deferred compensation

 

 

 
25

 

 

 

 
25

Repurchase of common stock
(5
)
 

 
(315
)
 

 

 

 

 
(315
)
Change in excess tax benefit on equity awards

 

 

 
12

 

 

 

 
12

Dividends

 

 

 

 
(81
)
 

 

 
(81
)
Balance as of June 30, 2013
133

 
$
2

 
$
(2,916
)
 
$
3,832

 
$
637

 
$
86

 
$
1

 
$
1,642



See Notes to Consolidated Financial Statements.
6

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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
Revenue from Contracts with Customers. In May 2014, the Financial Accounting Standards Board (the "FASB") issued guidance on revenue from contracts with customers. The guidance outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. This guidance is effective for fiscal years beginning after December 15, 2016 and for interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of this guidance on the Consolidated Financial Statements.
Foreign Currency Matters. In March 2013, the FASB 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.


7

Table of Contents

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
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Net income attributable to Wyndham shareholders
$
153

 
$
133

 
$
243

 
$
160

Basic weighted average shares outstanding
127

 
135

 
127

 
136

SSARs, RSUs and PSUs (a) (b)
1

(c) 
1

 
2

(c) 
1

Weighted average diluted shares outstanding
128

 
136

 
129

 
137

Earnings per share:
 
 
 
 
 
 
 
Basic
$
1.21

 
$
0.99

 
$
1.91

 
$
1.18

Diluted
1.20

 
0.98

 
1.89

 
1.17

Dividends:
 
 
 
 
 
 
 
Aggregate dividends paid to shareholders
$
45

 
$
39

 
$
93

 
$
80


(a) 
Includes unvested dilutive restricted stock units (“RSUs”) which are subject to future forfeitures.
(b) 
Excludes 681,000 performance vested restricted stock units ("PSUs") for both the three and six months ended June 30, 2014 and 834,000 for both the three and six months ended June 30, 2013, as the Company has not met the required performance metrics.
(c) 
Excludes 11,000 stock-settled stock appreciation rights ("SSARs") for both the three and six months ended June 30, 2014, as their inclusion would have been anti-dilutive to EPS.
    
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 six months ended June 30, 2014
4.4

 
320

 
72.45

As of June 30, 2014
67.1

 
$
2,730

 
40.68


The Company had $348 million of remaining availability in its program as of June 30, 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 half of 2014, the Company completed business acquisitions for $16 million in cash, net of cash acquired, and $1 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:
 
June 30,
2014
 
December 31,
2013
Current vacation ownership contract receivables:
 
 
 
Securitized
$
221

 
$
222

Non-securitized
134

 
140

 
355

 
362

Less: Allowance for loan losses
59

 
57

Current vacation ownership contract receivables, net
$
296

 
$
305

Long-term vacation ownership contract receivables:
 
 
 
Securitized
$
1,958

 
$
1,982

Non-securitized
965

 
975

 
2,923

 
2,957

Less: Allowance for loan losses
513

 
509

Long-term vacation ownership contract receivables, net
$
2,410

 
$
2,448


During the three and six months ended June 30, 2014, the Company’s securitized vacation ownership contract receivables generated interest income of $73 million and $143 million, respectively. During the three and six months ended June 30, 2013, such amounts were $76 million and $153 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 six months ended June 30, 2014 and 2013, the Company originated vacation ownership contract receivables of $474 million and $482 million, respectively, and received principal collections of $404 million and $403 million, respectively. The weighted average interest rate on outstanding vacation ownership contract receivables was 13.5% as of both June 30, 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
130

Contract receivables write-offs, net
(124
)
Allowance for loan losses as of June 30, 2014
$
572

 
Amount
Allowance for loan losses as of December 31, 2012
$
497

Provision for loan losses
174

Contract receivables write-offs, net
(149
)
Allowance for loan losses as of June 30, 2013
$
522

In accordance with the guidance for accounting for real estate timesharing transactions, the Company recorded a provision for loan losses of $70 million and $130 million as a reduction of net revenues during the three and six months ended June 30, 2014, respectively, and $90 million and $174 million during the three and six months ended June 30, 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 June 30, 2014
 
700+
 
600-699
 
<600
 
No Score
 
Asia Pacific
 
Total
Current
$
1,501

 
$
1,036

 
$
214

 
$
107

 
$
303

 
$
3,161

31 - 60 days
10

 
19

 
19

 
3

 
4

 
55

61 - 90 days
8

 
11

 
13

 
3

 
2

 
37

91 - 120 days
5

 
8

 
10

 
1

 
1

 
25

Total
$
1,524

 
$
1,074

 
$
256

 
$
114

 
$
310

 
$
3,278

 
 
 
 
 
 
 
 
 
 
 
 
 
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:
 
June 30,
2014
 
December 31,
2013
Land held for VOI development
$
102

 
$
102

VOI construction in process
110

 
84

Inventory sold subject to conditional repurchase (*)
123

 
123

Completed VOI inventory
401

 
422

Estimated recoveries
233

 
227

Exchange and rentals vacation credits and other
63

 
65

Total inventory
1,032

 
1,023

Less: Current portion
322

 
346

Non-current inventory
$
710

 
$
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. During the six months ended June 30, 2014, the Company transferred $18 million from property and equipment to VOI inventory.

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 $132 million as of June 30, 2014, of which $56 million was included within accrued expenses and other current liabilities and $76 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 June 30, 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:
 
June 30,
2014
 
December 31,
2013
Securitized vacation ownership debt: (a)
 
 
 
Term notes
$
1,600

 
$
1,648

Bank conduit facility
291

 
262

Total securitized vacation ownership debt
1,891

 
1,910

Less: Current portion of securitized vacation ownership debt
187

 
184

Long-term securitized vacation ownership debt
$
1,704

 
$
1,726

Long-term debt: (b)
 
 
 
Revolving credit facility (due July 2018)
$
16

 
$
23

Commercial paper
107

 
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)
448

 
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)
646

 
643

$400 million 3.90% senior unsecured notes (due March 2023) (e)
403

 
387

Capital leases
186

 
191

Other
99

 
114

Total long-term debt
2,822

 
2,931

Less: Current portion of long-term debt
50

 
49

Long-term debt
$
2,772

 
$
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 $2,287 million and $2,314 million of underlying gross vacation ownership contract receivables and related assets as of June 30, 2014 and December 31, 2013, respectively.
(b) 
The carrying amounts of the senior unsecured notes are net of unamortized discount of $16 million and $17 million as of June 30, 2014 and December 31, 2013, respectively.
(c) 
Includes $3 million of unamortized gains from the settlement of a derivative as of both June 30, 2014 and December 31, 2013.
(d) 
Includes a $2 million increase and $2 million decrease in the carrying value resulting from a fair value hedge derivative as of June 30, 2014 and December 31, 2013, respectively.
(e) 
Includes a $5 million increase and $10 million decrease in the carrying value resulting from a fair value hedge derivative as of June 30, 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 June 30, 2014, the Company had outstanding borrowings of $107 million at a weighted average interest rate of 0.63%, all of which was under its U.S. commercial paper program. As of December 31, 2013, the Company had $210 million of outstanding borrowings at a weighted average interest rate of 0.74% under its commercial paper programs. 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 June 30, 2014, the variable interest rates were 2.39% and

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2.30% for the 3.90% and 4.25% senior unsecured notes, respectively. The Company had a $7 million asset and a $12 million liability recorded as of June 30, 2014 and December 31, 2013, respectively, which represented the aggregate fair value of these interest rate swap agreements.

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 June 30, 2014, the Company had $366 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, of which $106 million was cash and $5 million was non-cash, during the six months ended June 30, 2013, which are included within early extinguishment of debt on the Consolidated Statement of Income.
Maturities and Capacity

The Company’s outstanding debt as of June 30, 2014 matures as follows:
 
Securitized Vacation Ownership Debt
 
Long-Term Debt
 
Total
Within 1 year
$
187

 
$
50

 
$
237

Between 1 and 2 years
262

 
51

 
313

Between 2 and 3 years
354

 
662

 
1,016

Between 3 and 4 years
180

 
477

 
657

Between 4 and 5 years
178

 
138

 
316

Thereafter
730

 
1,444

 
2,174

 
$
1,891

 
$
2,822

 
$
4,713


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 June 30, 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
291

 
16

 
          Letters of credit

 
9

 
          Commercial paper borrowings

 
107

(b) 
Available Capacity
$
359

 
$
1,368

 
 
(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 $29 million and $56 million during the three and six months ended June 30, 2014, respectively. Such amounts consist primarily of interest on long-term debt, partially offset by

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capitalized interest of $1 million and $2 million for the three and six months ended June 30, 2014, respectively, and are included within interest expense on the Consolidated Statements of Income. Cash paid related to interest on the Company's non-securitized debt was $56 million during the six months ended June 30, 2014.

The Company incurred non-securitized interest expense of $34 million and $66 million during the three and six months ended June 30, 2013, respectively. Such amounts consist primarily of interest on long-term debt, partially offset by capitalized interest of $1 million and $2 million for the three and six months ended June 30, 2013, respectively, and are included within interest expense on the Consolidated Statements of Income. Cash paid related to interest on the Company's non-securitized debt was $63 million during the six months ended June 30, 2013.

Interest expense incurred in connection with the Company's securitized vacation ownership debt during the three and six months ended June 30, 2014 was $17 million and $35 million, respectively, and $20 million and $40 million during the three and six months ended June 30, 2013, respectively, and is recorded within consumer financing interest on the Consolidated Statements of Income. Cash paid related to such interest was $26 million and $32 million during the six months ended June 30, 2014 and 2013, respectively.

7.
Variable Interest Entities
In accordance with the applicable accounting guidance for the consolidation of a variable interest entity ("VIE"), the Company analyzes its variable interests, including loans, guarantees, SPEs and equity investments to determine if an entity in which the Company has a variable interest is a VIE. If the entity is considered to be a VIE, the Company determines whether it would be considered the entity’s primary beneficiary. The Company consolidates into its financial statements those VIEs for which it has determined that it is the primary beneficiary.

Vacation Ownership Contract Receivables Securitizations

The Company pools qualifying vacation ownership contract receivables and sells them to bankruptcy-remote entities. Vacation ownership contract receivables qualify for securitization based primarily on the credit strength of the VOI purchaser to whom financing has been extended. Vacation ownership contract receivables are securitized through bankruptcy-remote SPEs that are consolidated within 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:
 
June 30,
2014
 
December 31,
2013
Securitized contract receivables, gross (a)
$
2,179

 
$
2,204

Securitized restricted cash (b)
91

 
92

Interest receivables on securitized contract receivables (c)
16

 
17

Other assets (d)
1

 
1

Total SPE assets (e)
2,287

 
2,314

Securitized term notes (f)
1,600

 
1,648

Securitized conduit facilities (f)
291

 
262

Other liabilities (g)
1

 
2

Total SPE liabilities
1,892

 
1,912

SPE assets in excess of SPE liabilities
$
395

 
$
402

 
(a) 
Included in current ($221 million and $222 million as of June 30, 2014 and December 31, 2013, respectively) and non-current ($1,958 million and $1,982 million as of June 30, 2014 and December 31, 2013, respectively) vacation ownership contract receivables on the Consolidated Balance Sheets.

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(b) 
Included in other current assets ($66 million and $64 million as of June 30, 2014 and December 31, 2013, respectively) and other non-current assets ($25 million and $28 million as of June 30, 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 $26 million and $28 million as of June 30, 2014 and December 31, 2013, respectively, related to securitized debt.
(f) 
Included in current ($187 million and $184 million as of June 30, 2014 and December 31, 2013, respectively) and long-term ($1,704 million and $1,726 million as of June 30, 2014 and December 31, 2013, respectively) securitized vacation ownership debt on the Consolidated Balance Sheets.
(g) 
Primarily includes accrued interest on securitized debt of $1 million and $2 million as of June 30, 2014 and December 31, 2013, respectively, 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 $1,099 million and $1,115 million as of June 30, 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:
 
June 30,
2014
 
December 31,
2013
SPE assets in excess of SPE liabilities
$
395

 
$
402

Non-securitized contract receivables
1,099

 
1,115

Less: Allowance for loan losses
572

 
566

Total, net
$
922

 
$
951

In addition to restricted cash related to securitizations, the Company had $100 million and $57 million of restricted cash related to escrow deposits as of June 30, 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:
 
June 30,
2014
 
December 31,
2013
Cash
$

 
$
4

Property and equipment, net
89

 
111

Total SPE assets
89

 
115

Accrued expenses and other current liabilities
2

 
2

Long-term debt (*)
95

 
107

Total SPE liabilities
97

 
109

SPE (deficit)/equity
$
(8
)
 
$
6

 
(*)  
As of June 30, 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.

During the second quarter of 2014, the Company purchased $28 million of property and equipment from the SPE.


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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
 
June 30, 2014
 
December 31, 2013
 
Fair Value
 
Level 2
 
Level 3
 
Fair Value
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
 
 
 
 
Derivatives: (a)
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
$
8

 
$
8

 
$

 
$
5

 
$
5

 
$

Foreign exchange contracts
2

 
2

 

 
2

 
2

 

Securities available-for-sale (b)

 

 

 
6

 

 
6

Total assets
$
10

 
$
10

 
$

 
$
13

 
$
7

 
$
6


Liabilities
 
 
 
 
 
 
 
 
 
 
 
Derivatives: (c)
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
$

 
$

 
$

 
$
13

 
$
13

 
$

Foreign exchange contracts
3

 
3

 

 
2

 
2

 

Total liabilities
$
3

 
$
3

 
$

 
$
15

 
$
15

 
$

 
(a) 
Included in other current assets ($2 million and $6 million as of June 30, 2014 and December 31, 2013, respectively) and other non-current assets ($8 million and $1 million as of June 30, 2014 and December 31, 2013, 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 Sheet.
(c) 
Included in accrued expenses and other current liabilities ($3 million and $2 million as of June 30, 2014 and December 31, 2013, respectively) and other non-current liabilities ($13 million as of December 31, 2013) 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:
 
June 30, 2014
 
December 31, 2013
 
Carrying
Amount
 
Estimated Fair Value
 
Carrying
 Amount
 
Estimated Fair Value
Assets
 
 
 
 
 
 
 
Vacation ownership contract receivables, net
$
2,706

 
$
3,295

 
$
2,753

 
$
3,326

Debt
 
 
 
 
 
 
 
Total debt
4,713

 
4,846

 
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 both the three and six months ended June 30, 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 gains or 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 both the three and six months ended June 30, 2014 and 2013.

Gains or losses recognized in AOCI for both the three and six months ended June 30, 2014 and 2013 were not material.

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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.

The Company’s effective tax rate decreased from 37.0% during the three months ended June 30, 2013 to 36.5% during the three months ended June 30, 2014 primarily due to tax credits generated in Puerto Rico, partially offset by an increase in state taxes.

The Company's effective tax rate increased from 36.5% during the six months ended June 30, 2013 to 37.4% during the six months ended June 30, 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, (ii) the lack of a tax benefit on the Venezuelan foreign exchange devaluation loss incurred during the first quarter of 2014 and (iii) an increase in state taxes. Such increases were partially offset by tax credits generated in Puerto Rico in the second quarter of 2014.

The Company made cash income tax payments, net of refunds, of $127 million and $96 million during the six months ended June 30, 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 Court granted WHR’s motion to certify its order denying WHR’s motion to dismiss for interlocutory appeal on June 23, 2014. The motion to dismiss filed by the Company, WHG and WHM was denied on June 23, 2014. 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

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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 $24 million and $22 million as of June 30, 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 respect to earnings and/or cash flows in any given reporting period. As of June 30, 2014, the potential exposure resulting from adverse outcomes of such legal proceedings could, in the aggregate, range up to $28 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 June 30, 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. The Company had an additional guarantee of $30 million with a $3 million cap for 2014 with no annual cap thereafter.

In connection with such performance guarantees, as of June 30, 2014, the Company maintained a liability of $37 million, of which $7 million was included in accrued expenses and other current liabilities and $30 million was included in other non-current liabilities on its Consolidated Balance Sheet. As of June 30, 2014, the Company also had a corresponding $41 million asset related to these guarantees, of which $4 million was included in other current assets and $37 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 $2 million for the three and six months ended June 30, 2014, respectively, and $1 million during both the three and six months ended June 30, 2013, respectively.

For guarantees subject to recapture provisions, the Company had a receivable of $31 million as of June 30, 2014, of which $6 million was included in other current assets and $25 million was included in other non-current assets on the Company's Consolidated Balance Sheet. As of December 31, 2013, the Company had a receivable of $24 million which was included in other non-current assets on the Company's Consolidated Balance Sheet. Such receivables were the result of payments made to date which are subject to recapture and which the Company believes will be recoverable from future operating performance.

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 June 30, 2014.


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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.

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
30

 

 

 
30

 Balance, June 30, 2014
$
141

 
$
(8
)
 
$
(4
)
 
$
129


 
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
(7
)
 

 

 
(7
)
 Balance, June 30, 2014
$
11

 
$
4

 
$
1

 
$
16


 
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
23

 

 

 
23

 Balance, June 30, 2014
$
152

 
$
(4
)
 
$
(3
)
 
$
145


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.

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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 June 30, 2014, 16.3 million shares remained available.

Incentive Equity Awards Granted by the Company

The activity related to incentive equity awards granted by the Company for the six months ended June 30, 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

 
72.96

 
0.2

 
72.97

 
0.1

 
72.97

Vested/exercised
(1.2
)
 
36.77

 
(0.3
)
 
30.61

 

 

Balance as of June 30, 2014
2.1

(b) (c) 
56.79

 
0.7

(d) 
57.98

 
1.2

(b) (e) 
25.19

 
(a) 
Primarily represents awards granted by the Company on February 27, 2014.
(b) 
Aggregate unrecognized compensation expense related to RSUs and SSARs was $109 million as of June 30, 2014, which is expected to be recognized over a weighted average period of 2.8 years.
(c) 
Approximately 2.0 million RSUs outstanding as of June 30, 2014 are expected to vest over time.
(d) 
Maximum aggregate unrecognized compensation expense was $26 million as of June 30, 2014.
(e) 
Approximately 1.0 million SSARs are exercisable as of June 30, 2014. The Company assumes that all unvested SSARs are expected to vest over time. SSARs outstanding as of June 30, 2014 had an intrinsic value of $62 million and have a weighted average remaining contractual life of 2.1 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
%


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Stock-Based Compensation Expense

The Company recorded stock-based compensation expense of $14 million and $30 million during the three and six months ended June 30, 2014, respectively, and $14 million and $25 million during the three and six months ended June 30, 2013, respectively, related to the incentive equity awards granted to key employees and senior officers by the Company. The Company recognized a net tax benefit of $6 million and $12 million during the three and six months ended June 30, 2014, respectively, and $6 million and $10 million during the three and six months ended June 30, 2013, respectively, for stock-based compensation arrangements on the Consolidated Statements of Income. During the six months ended June 30, 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 June 30, 2014, the Company’s APIC Pool balance was $97 million.

The Company paid $44 million and $25 million of taxes for the net share settlement of incentive equity awards during the six months ended June 30, 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 June 30,
 
2014
 
2013
 
Net Revenues
 
EBITDA
 
Net Revenues
 
EBITDA
Lodging (a)
$
283

 
$
87

 
$
262

 
$
78

Vacation Exchange and Rentals
402

 
89

 
376

 
85

Vacation Ownership
673

 
185

 
630

 
161

Total Reportable Segments
1,358

 
361

 
1,268

 
324

Corporate and Other (b)
(15
)
 
(35
)
 
(15
)
 
(27
)
Total Company
$
1,343

 
$
326

 
$
1,253

 
$
297

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reconciliation of EBITDA to Net income attributable to Wyndham shareholders
 
 
 
 
 
 
 
Three Months Ended June 30,
 
 
 
2014
 
 
 
2013
EBITDA
 
 
$
326

 
 
 
$
297

Depreciation and amortization
 
 
59

 
 
 
54

Interest expense
 
 
29

 
 
 
34

Interest income
 
 
(3
)
 
 
 
(2
)
Income before income taxes
 
 
241

 

 
211

Provision for income taxes
 
 
88

 
 
 
78

Net income attributable to Wyndham shareholders
 
 
$
153

 
 
 
$
133

 
(a) 
Includes $11 million and $10 million of intersegment trademark fees during the three months ended June 30, 2014 and 2013, respectively, which is offset in expenses primarily at the Company's Vacation Ownership segment and are eliminated in Corporate and Other. Additionally, includes $2 million and $1 million of hotel management reimbursable revenues for the three months ended June 30, 2014 and 2013, respectively, which are charged to the Company's Vacation Ownership segment and are eliminated in Corporate and Other.
(b) 
Includes the elimination of transactions between segments.

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Six Months Ended June 30,
 
2014
 
2013
 
Net Revenues
 
EBITDA
 
Net Revenues
 
EBITDA
Lodging (a)
$
520

 
$
151

 
$
485

 
$
137

Vacation Exchange and Rentals
781

 
174

 
750

 
179

Vacation Ownership
1,266

 
300

 
1,179

 
272

Total Reportable Segments
2,567

 
625

 
2,414

 
588

Corporate and Other (b)
(31
)
 
(69
)
 
(27
)
 
(57
)
Total Company
$
2,536