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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, 2019
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from         to        
Commission file number 001-32876
WYNDHAM DESTINATIONS, INC.
(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.)
 
 
 
6277 Sea Harbor Drive
 
32821
Orlando, Florida
 
(Zip Code)
(Address of Principal Executive Offices)
 
 
(407) 626-5200
(Registrant’s Telephone Number, Including Area Code)
None
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock
WYND
New York Stock Exchange
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 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 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
þ
 
 
 
 
Accelerated filer
o
Non-accelerated filer
o
 
 
 
 
 
 
 
 
 
Smaller reporting company
o
 
 
 
 
 
 
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o    No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date:
93,618,323 shares of common stock outstanding as of March 31, 2019.



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.
 

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GLOSSARY OF TERMS
The following terms and acronyms appear in the text of this report and have the definitions indicated below:

Adjusted EBITDA
A non-GAAP measure, defined by the Company as Net income before Depreciation and amortization, Interest expense (excluding Consumer financing interest), Early extinguishment of debt, Interest income (excluding Consumer financing revenues) and Income taxes, each of which is presented on the Condensed Consolidated Statements of Income. Adjusted EBITDA also excludes stock-based compensation costs, separation and restructuring costs, transaction costs, impairments, and items that meet the conditions of unusual and/or infrequent.
AOCL
Accumulated Other Comprehensive Loss
Barclays
Barclays Bank PLC
Board
Board of Directors
Buyer
Compass IV Limited, an affiliate of Platinum Equity, LLC
Company
Wyndham Destinations, Inc. and its subsidiaries
EBITDA
Earnings Before Interest, Income Taxes and Depreciation/Amortization
EPS
Earnings Per Share
Exchange Act
Securities Exchange Act of 1934
FASB
Financial Accounting Standards Board
FICO
Fair Isaac Corporation
GAAP
Generally Accepted Accounting Principles in the United States
LIBOR
London Interbank Offered Rate
NQ
Non-Qualified stock options
PCAOB
Public Company Accounting Oversight Board
PSU
Performance-vested restricted Stock Units
RSU
Restricted Stock Unit
SEC
Securities and Exchange Commission
SPE
Special Purpose Entity
SOFR
Secured Overnight Financing Rate
Spin-off
Spin-off of Wyndham Hotels & Resorts, Inc.
SSAR
Stock-Settled Appreciation Rights
U.S.
United States of America
VIE
Variable Interest Entity
VOI
Vacation Ownership Interest
VPG
Volume Per Guest
Wyndham Hotels
Wyndham Hotels & Resorts, Inc.
Wyndham Destinations
Wyndham Destinations, Inc.
Wyndham Worldwide
Wyndham Worldwide Corporation



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PART I — FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited).
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of
Wyndham Destinations, Inc.

Results of Review of Interim Financial Statements
We have reviewed the accompanying condensed consolidated balance sheet of Wyndham Destinations, Inc. and subsidiaries (the "Company") as of March 31, 2019, the related condensed consolidated statements of income, comprehensive income, (deficit)/equity and cash flows for the three-month periods ended March 31, 2019 and 2018, and the related notes (collectively referred to as the "interim financial statements"). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying 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) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2018, and the related consolidated statements of income, comprehensive income, cash flows and equity for the year then ended (not presented herein); and in our report dated February 26, 2019, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2018, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results
The interim financial statements are the responsibility of the Company's management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our reviews in accordance with standards of the PCAOB. A review of interim financial statements 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 PCAOB, 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.


/s/ Deloitte & Touche LLP
Tampa, FL
May 1, 2019




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WYNDHAM DESTINATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share amounts)
(Unaudited)

 
Three Months Ended
 
March 31,
 
2019
 
2018
Net revenues
 
 
 
Service and membership fees
$
405

 
$
419

Vacation ownership interest sales
375

 
358

Consumer financing
125

 
118

Other
13

 
12

Net revenues
918

 
907

Expenses
 
 
 
Operating
397

 
403

Cost of vacation ownership interests
30

 
31

Consumer financing interest
26

 
19

Marketing
147

 
131

General and administrative
129

 
153

Separation and related costs
15

 
30

Restructuring
3

 

Depreciation and amortization
31

 
37

Total expenses
778

 
804

Operating income
140

 
103

Other (income), net
(11
)
 
(6
)
Interest expense
41

 
45

Interest (income)
(2
)
 
(1
)
Income before income taxes
112

 
65

Provision for income taxes
31

 
24

Income from continuing operations
81

 
41

Loss from operations of discontinued businesses, net of income taxes

 
(7
)
Loss on disposal of discontinued businesses, net of income taxes
(1
)
 

Net income attributable to Wyndham Destinations shareholders
$
80

 
$
34

 
 
 
 
Basic earnings per share
 
 
 
Continuing operations
$
0.86

 
$
0.41

Discontinued operations
(0.01
)
 
(0.07
)
 
$
0.85

 
$
0.34

Diluted earnings per share
 
 
 
Continuing operations
$
0.85

 
$
0.41

Discontinued operations

 
(0.07
)
 
$
0.85

 
$
0.34


See Notes to Condensed Consolidated Financial Statements.
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WYNDHAM DESTINATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)


 
Three Months Ended
 
March 31,
 
2019
 
2018
Net income attributable to Wyndham Destinations shareholders
$
80

 
$
34

Other comprehensive income, net of tax
 
 
 
Foreign currency translation adjustments
2

 
14

Unrealized loss on cash flow hedges

 
(1
)
Defined benefit pension plans

 
1

Other comprehensive income, net of tax
2

 
14

Comprehensive income
$
82

 
$
48



See Notes to Condensed Consolidated Financial Statements.
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WYNDHAM DESTINATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
(Unaudited)


 
March 31,
2019
 
December 31,
2018
Assets
 
 
 
Cash and cash equivalents
$
217

 
$
218

Restricted cash (VIE - $153 as of 2019 and $120 as of 2018)
186

 
155

Trade receivables, net
137

 
121

Vacation ownership contract receivables, net (VIE - $2,913 as of 2019 and $2,883 as of 2018)
3,020

 
3,037

Inventory
1,213

 
1,224

Prepaid expenses
175

 
153

Property and equipment, net
720

 
712

Goodwill
923

 
922

Other intangibles, net
108

 
109

Other assets
401

 
304

Assets of held-for-sale business
270

 
203

Total assets
$
7,370

 
$
7,158

Liabilities and (deficit)
 
 
 
Accounts payable
$
79

 
$
66

Accrued expenses and other liabilities
1,043

 
1,004

Deferred income
551

 
518

Non-recourse vacation ownership debt (VIE)
2,454

 
2,357

Debt
2,837

 
2,881

Deferred income taxes
749

 
736

Liabilities of held-for-sale business
241

 
165

Total liabilities
7,954

 
7,727

Commitments and contingencies (Note 16)

 

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

 

Common stock, $.01 par value, 600,000,000 shares authorized, 220,129,532 issued as of 2019 and 220,120,808 as of 2018
2

 
2

Treasury stock, at cost – 126,572,562 shares as of 2019 and 125,137,857 shares as of 2018
(6,103
)
 
(6,043
)
Additional paid-in capital
4,082

 
4,077

Retained earnings
1,480

 
1,442

Accumulated other comprehensive loss
(50
)
 
(52
)
Total stockholders’ (deficit)
(589
)
 
(574
)
Noncontrolling interest
5

 
5

Total (deficit)
(584
)
 
(569
)
Total liabilities and (deficit)
$
7,370

 
$
7,158


See Notes to Condensed Consolidated Financial Statements.
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WYNDHAM DESTINATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)


 
Three Months Ended
 
March 31,
 
2019
 
2018
Operating activities
 
 
 
Net income
$
80

 
$
34

Loss from operations of discontinued businesses, net of income taxes

 
7

Loss on disposal of discontinued businesses, net of income taxes
1

 

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
31

 
37

Provision for loan losses
109

 
92

Deferred income taxes
14

 
20

Stock-based compensation
5

 
18

Non-cash lease expense
8

 

Non-cash interest
5

 
5

Net change in assets and liabilities, excluding the impact of acquisitions and dispositions:
 
 
 
Trade receivables
(45
)
 
(54
)
Vacation ownership contract receivables
(91
)
 
(71
)
Inventory
(18
)
 
(39
)
Deferred income
45

 
43

Accounts payable, accrued expenses, prepaid expenses, other assets and other liabilities
12

 
(106
)
Other, net
(4
)
 
(9
)
Net cash provided by/(used in) operating activities - continuing operations
152

 
(23
)
Net cash provided by operating activities - discontinued operations

 
156

Net cash provided by operating activities
152

 
133

Investing activities
 
 
 
Property and equipment additions
(20
)
 
(14
)
Net assets acquired, net of cash acquired, and acquisition-related payments

 
(5
)
Proceeds from asset sales
6

 

Other, net
(1
)
 
(3
)
Cash used in investing activities - continuing operations
(15
)
 
(22
)
Cash used in investing activities - discontinued operations
(27
)
 
(8
)
Net cash used in investing activities
(42
)
 
(30
)
Financing activities
 
 
 
Proceeds from non-recourse vacation ownership debt
672

 
261

Principal payments on non-recourse vacation ownership debt
(572
)
 
(384
)
Proceeds from debt
608

 
1,436

Principal payments on debt
(660
)
 
(576
)
Repayments of commercial paper, net

 
(11
)
Repayment of notes
(1
)
 
(464
)
Repayments of vacation ownership inventory arrangement
(7
)
 
(7
)
Dividends to shareholders
(42
)
 
(70
)
Repurchase of common stock
(61
)
 
(76
)
Debt issuance costs
(5
)
 

Net share settlement of incentive equity awards

 
(32
)
Other, net

 
(2
)
Cash (used in)/provided by financing activities - continuing operations
(68
)
 
75

Cash used in financing activities - discontinued operations

 
(6
)
Net cash (used in)/provided by financing activities
(68
)
 
69

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

 
1

Net change in cash, cash equivalents and restricted cash
43

 
173

Cash, cash equivalents and restricted cash, beginning of period
404

 
416

Cash, cash equivalents and restricted cash, end of period
447

 
589

Less: Restricted cash
186

 
195

Less: Cash and restricted cash included in assets of discontinued operations and held-for-sale business
44

 
168

Cash and cash equivalents
$
217

 
$
226


See Notes to Condensed Consolidated Financial Statements.
7


WYNDHAM DESTINATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF (DEFICIT)/EQUITY
(In millions)
(Unaudited)



 
Common Shares Outstanding
 
Common Stock
 
Treasury Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive (Loss)/Income
 
Non-controlling Interest
 
Total (Deficit)
Balance as of December 31, 2018
95

 
$
2

 
$
(6,043
)
 
$
4,077

 
$
1,442

 
$
(52
)
 
$
5

 
$
(569
)
Net income

 

 

 

 
80

 

 

 
80

Other comprehensive income

 

 

 

 

 
2

 

 
2

Change in stock-based compensation

 

 

 
5

 

 

 

 
5

Repurchase of common stock
(1
)
 

 
(60
)
 

 

 

 

 
(60
)
Dividends ($0.45 per share)

 

 

 

 
(42
)
 

 

 
(42
)
Balance as of March 31, 2019
94


$
2


$
(6,103
)

$
4,082


$
1,480


$
(50
)

$
5

 
$
(584
)

 
Common Shares Outstanding
 
Common Stock
 
Treasury Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive (Loss)/Income
 
Non-controlling Interest
 
Total Equity
Balance as of December 31, 2017
100

 
$
2

 
$
(5,719
)
 
$
3,996

 
$
2,501

 
$
(11
)
 
$
5

 
$
774

Beginning balance adjustment due to change in accounting principle

 

 

 

 
(17
)
 

 

 
(17
)
Net income

 

 

 

 
34

 

 

 
34

Other comprehensive income

 

 

 

 

 
14

 

 
14

Issuance of shares for RSU vesting
1

 

 

 

 

 

 

 

Net share settlement of stock-based compensation

 

 

 
(32
)
 

 

 

 
(32
)
Change in stock-based compensation

 

 

 
21

 

 

 

 
21

Change in stock-based compensation for Board of Directors

 

 

 
1

 

 

 

 
1

Repurchase of common stock
(1
)
 

 
(76
)
 

 

 

 

 
(76
)
Dividends ($0.66 per share)(a)

 

 

 

 
(67
)
 

 

 
(67
)
Balance as of March 31, 2018
100

 
$
2

 
$
(5,795
)
 
$
3,986

 
$
2,451

 
$
3

 
$
5

 
$
652

 
(a) 
Represents dividends declared by Wyndham Worldwide Corporation prior to the spin-off of Wyndham Hotels & Resorts, Inc.


See Notes to Condensed Consolidated Financial Statements.
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WYNDHAM DESTINATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise noted, all amounts are in millions, except share and per share amounts)
(Unaudited)
1.
Background and Basis of Presentation
Background
Wyndham Destinations, Inc. and its subsidiaries (collectively, “Wyndham Destinations” or the “Company”), is a global provider of hospitality services and products. The Company operates in two segments: Vacation Ownership and Exchange & Rentals. The Vacation Ownership segment develops, markets and sells vacation ownership interests (“VOIs”) to individual consumers, provides consumer financing in connection with the sale of VOIs and provides property management services at resorts. The Exchange & Rentals segment provides vacation exchange services and products to owners of VOIs and manages and markets vacation rental properties primarily on behalf of independent owners.

During the fourth quarter of 2018, the Company decided to explore strategic alternatives for its North American vacation rentals business. The assets and liabilities of this business have been classified as held-for-sale as of March 31, 2019 and December 31, 2018. The business does not meet the criteria to be classified as a discontinued operation; therefore, the results are reflected within continuing operations on the Condensed Consolidated Statements of Income. See Note 6Held-for-Sale Business for further details.

During 2018, the Company completed the spin-off of Wyndham Hotels & Resorts, Inc. (“Spin-off”) and the sale of its European vacation rentals business.

The prior period Condensed Consolidated Financial Statements have been reclassified to reflect the results of the hotel business and European vacation rentals business as discontinued operations. See further detail in Note 5Discontinued Operations.

Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q include the accounts and transactions of Wyndham Destinations, as well as the entities in which Wyndham Destinations directly or indirectly has a controlling financial interest. The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.”). All intercompany balances and transactions have been eliminated in the Condensed Consolidated Financial Statements. In addition, certain prior period amounts have been reclassified to comply with newly adopted accounting standards. See further detail in Note 2New Accounting Pronouncements.

In presenting the Condensed Consolidated Financial Statements, management makes estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. Estimates, by their nature, are based on judgment and available information. Accordingly, actual results could differ from those estimates. In management’s opinion, the Condensed Consolidated Financial Statements contain all normal recurring adjustments necessary for a fair presentation of interim results reported. The results of operations reported for interim periods are not necessarily indicative of the results of operations for the entire year or any subsequent interim period. These Condensed Consolidated Financial Statements should be read in conjunction with the Company’s 2018 Consolidated Financial Statements included in its Annual Report filed on Form 10-K with the Securities and Exchange Commission on February 26, 2019.

2.
New Accounting Pronouncements
Recently Issued Accounting Pronouncements
Financial Instruments - Credit Losses. In June 2016, the Financial Accounting Standards Board (“FASB”) issued guidance which amends the guidance on measuring credit losses on financial assets held at amortized cost. The guidance requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of this guidance on its financial statements and related disclosures.

Simplifying the Test for Goodwill Impairment. In January 2017, the FASB issued guidance which simplifies the current two-step goodwill impairment test by eliminating Step 2 of the test. The guidance requires a one-step impairment test in

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

Recently Adopted Accounting Pronouncements
Leases. In February 2016, the FASB issued guidance for lease accounting. The guidance requires a lessee to recognize right-of-use assets and lease liabilities on the balance sheet for all lease obligations and disclose key information about leasing arrangements, such as the amount, timing, and uncertainty of cash flows arising from leases. The Company adopted this standard using the modified retrospective approach; therefore, the Company used the transition method practical expedient under ASU 2018-11 and prior year financial statements were not recast. As a result of the adoption, on January 1, 2019 the Company recognized $158 million of right-of-use assets and $200 million of related lease liabilities. Right-of-use assets were decreased by $42 million of tenant improvement allowances and deferred rent balances reclassified from other liabilities. Both the right-of-use assets and related lease liabilities recognized upon adoption included $21 million associated with the Company’s held-for-sale business. Right-of-use assets are included within Other assets and the related lease liabilities are included within Accrued and other liabilities on the balance sheet. The adoption of this standard did not have a material impact to the income statement related to existing leases; therefore a cumulative-effect adjustment was not recorded. The adoption of this standard did not materially impact consolidated net income, liquidity or compliance with our debt covenants under our current agreements. See Note 15 Leases for more information.

Implementation Costs in Cloud Computing Arrangements. In August 2018, the FASB issued guidance on implementation costs incurred in a cloud computing arrangement that is a service contract. This guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the guidance on capitalizing costs associated with developing or obtaining internal-use software and also adds certain disclosure requirements related to implementation costs incurred for internal-use software and cloud computing arrangements. This guidance is effective for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years, with early adoption permitted. The Company early adopted this guidance as of January 1, 2019 on a prospective basis. The adoption of this guidance did not have a material impact on the Company’s financial statements and related disclosures.

Stock Compensation - Improvements to Nonemployee Share-Based Payment Accounting. In June 2018, the FASB issued guidance intended to simplify nonemployee share-based payment accounting. This new guidance more closely aligns the accounting for share-based payment awards issued to employees and nonemployees. The Company adopted this guidance as of January 1, 2019 with no material impact to its Condensed Consolidated Financial Statements and related disclosures.

3.
Revenue Recognition
Vacation Ownership
The Company 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. The Company’s sales of VOIs are either cash sales or developer-financed sales. Developer financed sales are typically collateralized by the underlying VOI. Revenue is recognized on VOI sales upon transfer of control, which is defined as the point in time when a binding sales contract has been executed, the financing contract has been executed for the remaining transaction price, the statutory rescission period has expired and the transaction price has been deemed to be collectible.

For developer-financed sales, the Company reduces the VOI sales transaction price by an estimate of uncollectible consideration at the time of the sale. The Company’s estimates of uncollectible amounts are based largely on the results of the Company’s static pool analysis which relies on historical payment data by customer class.

In connection with entering into a VOI sale, the Company may provide its customers with certain non-cash incentives, such as credits for future stays at its resorts. For those VOI sales, the Company bifurcates the sale and allocates the sales price between the VOI sale and the non-cash incentive. Non-cash incentives generally have expiration periods of 18 months or less and are recognized at a point in time upon transfer of control.

The Company provides day-to-day property management services including oversight of housekeeping services, maintenance and certain accounting and administrative services for property owners’ associations and clubs. These services may also include reservation and resort renovation activities. Such agreements are generally for terms of one year or less, and are renewed automatically on an annual basis. The Company’s management agreements contain cancellation clauses,

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which allow for either party to cancel the agreement, by either a majority board vote or a majority vote of non-developer interests. The Company receives fees for such property management services which are collected monthly in advance and are based upon total costs to operate such resorts (or as services are provided in the case of resort renovation activities). Fees for property management services typically approximate 10% of budgeted operating expenses. The Company is entitled to consideration for reimbursement of costs incurred on behalf of the property owners’ association in providing the management services (“reimbursable revenue”). These reimbursable costs principally relate to the payroll costs for management of the associations, club and resort properties where the Company is the employer and are reflected as a component of Operating expenses on the Condensed Consolidated Statements of Income. The Company reduces its management fees for amounts it has paid to the property owners’ association that reflect maintenance fees for VOIs for which it retains ownership, as the Company has concluded that such payments are consideration payable to a customer.

Property management fee revenues are recognized when the services are performed and are recorded as a component of Service and membership fees on the Condensed Consolidated Statements of Income. Property management revenues, which are comprised of management fee revenue and reimbursable revenue, were $170 million and $164 million during the three months ended March 31, 2019 and 2018, respectively.

Exchange & Rentals
As a provider of vacation exchange services, the Company enters into affiliation agreements with developers of vacation ownership properties to allow owners of VOIs to trade their intervals for intervals at other properties affiliated with the Company’s vacation exchange brands and, for some members, for other leisure-related services and products. Additionally, as a marketer of vacation rental properties, generally the Company enters into contracts for exclusive periods of time with property owners to market the rental of such properties to rental customers.

The Company’s vacation exchange brands derive a majority of revenues from membership dues and fees for facilitating members’ trading of their intervals. Revenues from membership dues represent the fees paid by members or affiliated clubs on their behalf. The Company recognizes revenues from membership dues paid by the member on a straight-line basis over the membership period as the performance obligations are fulfilled through delivery of publications, if applicable, and by providing access to other travel-related products and services. Estimated net contract consideration payable by affiliated clubs for memberships are recognized as revenue over the term of the contract with the affiliated club in proportion to the estimated average monthly member count. Such estimates are adjusted periodically for changes in the actual and forecasted member activity. For additional fees, members have the right to exchange their intervals for intervals at other properties affiliated with the Company’s vacation exchange networks and, for certain members, for other leisure-related services and products. Fees for facilitating exchanges are recognized as revenue, net of expected cancellations, when these transactions have been confirmed to the member.

The Company’s vacation exchange brands also derive revenues from: (i) additional services, programs with affiliated resorts, club servicing and loyalty programs and (ii) additional exchange-related products that provide members with the ability to protect trading power or points, extend the life of deposits, and combine two or more deposits for the opportunity to exchange into intervals with higher trading power. Other vacation exchange related product fees are deferred and recognized as revenue upon the occurrence of a future exchange, other related transaction or event.

The Company earns revenue from its RCI Elite Rewards co–branded credit card program which is primarily generated by cardholder spending and the enrollment of new cardholders. The advance payments received under the program are recognized as a contract liability until the Company’s performance obligations have been satisfied. The program primarily contains two performance obligations: (i) brand performance services, for which revenue is recognized over the contract term on a straight-line basis, and (ii) issuance and redemption of loyalty points, for which revenue is recognized over time based upon the redemption pattern of the loyalty points earned under the program including an estimate of loyalty points that will expire without redemption.

The Company’s vacation rental brands derive revenue from fees associated with the rental of vacation rental properties managed and marketed by the Company on behalf of independent owners. The Company remits the rental fee received from the renter to the independent owner, net of the Company’s agreed-upon fee. The related revenue from such fees, net of expected refunds, is recognized over the renter’s stay. The Company’s vacation rental brands also derive revenues from additional services delivered to independent owners, vacation rental guests, and property owners’ associations that are generally recognized when the service is delivered.


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Other Items
The Company records property management services revenues and RCI Elite Rewards revenues for its Vacation Ownership and Exchange & Rentals segments in accordance with the guidance for reporting revenues gross as a principal versus net as an agent, which requires that these revenues be recorded on a gross basis.

Contract Liabilities
Contract liabilities generally represent payments or consideration received in advance for goods or services that the Company has not yet transferred to the customer. Contract liabilities as of March 31, 2019 and December 31, 2018 are as follows:
Contract Liabilities (a)
 
March 31, 2019
 
December 31, 2018
Deferred subscription revenue
 
$
227

 
$
220

Deferred VOI trial package revenue
 
130

 
125

Deferred VOI incentive revenue
 
99

 
96

Deferred exchange-related revenue (b)
 
58

 
56

Deferred co-branded credit card programs revenue
 
22

 
14

Deferred other revenue
 
16

 
8

Total
 
$
552

 
$
519

 
(a) 
There is $58 million and $42 million of deferred vacation rental revenue included in Liabilities of held-for-sale business on the Condensed Consolidated Balance Sheets for 2019 and 2018, respectively.
(b) 
Balance includes contractual liabilities to accommodate members for cancellations initiated by the Company due to unexpected events. These amounts are included within Accrued expenses and other liabilities on the Consolidated Balance Sheet.

In the Company’s vacation ownership business, deferred VOI trial package revenue represents consideration received in advance for a trial VOI, which allows customers to utilize a vacation package typically within one year of purchase. Deferred VOI incentive revenue represents payments received in advance for additional travel-related services and products at the time of a VOI sale. Revenue is recognized when a customer utilizes the additional services and products, which is typically within one year of the VOI sale.

Within the Company’s vacation exchange business, deferred subscription revenue represents billings and payments received in advance from members and affiliated clubs for memberships in the Company’s vacation exchange programs which are recognized in future periods. Deferred exchange-related revenue primarily represents payments received in advance from members for the right to exchange their intervals for intervals at other properties affiliated with the Company’s vacation exchange networks and for other leisure-related services and products which are generally recognized as revenue within one year. In the Company's vacation rentals business, deferred vacation rental revenue represents billings and payments received in advance of a customer’s rental stay which are generally recognized as revenue within one year.
Changes in contract liabilities for the three months ended March 31, 2019 follow:
 
 
Amount
Contract liabilities as of December 31, 2018
 
$
519

Additions
 
125

Revenue recognized
 
(92
)
Contract liabilities as of March 31, 2019
 
$
552


Capitalized Contract Costs
The Company’s vacation ownership business incurs certain direct and incremental selling costs in connection with VOI trial package and incentive revenues. Such costs are capitalized and subsequently amortized over the utilization period, which is typically within one year of the sale. These capitalized costs were $47 million as of March 31, 2019 and $45 million as of December 31, 2018, and are included within Other assets on the Condensed Consolidated Balance Sheet.

The Company’s vacation exchange and vacation rentals businesses incur certain direct and incremental selling costs to obtain contracts with customers in connection with subscription revenues, exchange–related revenues, and vacation rental revenues. Such costs, which are primarily comprised of commissions paid to internal and external parties and credit card

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processing fees, are deferred at the inception of the contract and recognized when the benefit is transferred to the customer. As of March 31, 2019 and December 31, 2018, these capitalized costs were $21 million and $22 million, respectively.

Practical Expedients
The Company has not adjusted the consideration for the effects of a significant financing component if it expected, at contract inception, that the period between when the Company satisfied the performance obligation and when the customer paid for that good or service was one year or less.

For contracts with customers that were modified prior to 2015, the Company did not retrospectively restate the revenue associated with the contract for those modifications. Instead, it reflected the aggregate effect of all prior modifications in determining (i) the performance obligations and transaction prices and (ii) the allocation of such transaction prices to the performance obligations.

Performance Obligations
A performance obligation is a promise in a contract with a customer to transfer a distinct good or service to the customer. The consideration received from a customer is allocated to each distinct performance obligation and recognized as revenue when, or as, each performance obligation is satisfied. The following table summarizes the Company’s remaining performance obligations for the twelve month periods set forth below:
 
 
4/1/2019 - 3/31/2020
 
4/1/2020 - 3/31/2021
 
4/1/2021 - 3/31/2022
 
Thereafter
 
Total
Subscription revenue
 
$
125

 
$
54

 
$
25

 
$
23

 
$
227

VOI trial package revenue
 
130

 

 

 

 
130

VOI incentive revenue
 
99

 

 

 

 
99

Exchange-related revenue
 
52

 
4

 
1

 
1

 
58

Co-branded credit card programs revenue
 
5

 
4

 
5

 
8

 
22

Other revenue
 
16

 

 

 

 
16

Total
 
$
427

 
$
62

 
$
31

 
$
32

 
$
552


Disaggregation of Net Revenues
The table below presents a disaggregation of the Company’s net revenues from contracts with customers by major services and products for each of the Company’s segments:
 
 
Three Months Ended
 
 
March 31,
 
 
2019
 
2018
Vacation Ownership
 
 
 
 
Vacation ownership interest sales
 
$
375

 
$
358

Property management fees and reimbursable revenues
 
170

 
164

Consumer financing
 
125

 
118

Fee-for-Service commissions
 

 
10

Ancillary revenues
 
13

 
11

Total Vacation Ownership
 
683

 
661

 
 
 
 
 
Exchange & Rentals
 
 
 
 
Exchange revenues
 
180

 
188

Vacation rental revenues
 
38

 
38

Ancillary revenues
 
18

 
20

Total Exchange & Rentals
 
236

 
246

 
 
 
 
 
Corporate and other
 
 
 
 
Eliminations
 
(1
)
 

 
 
 
 
 
Net revenues
 
$
918

 
$
907


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4.
Earnings Per Share
The computation of basic and diluted earnings per share (“EPS”) is based on net income attributable to Wyndham Destinations shareholders divided by the basic weighted average number of common shares and diluted weighted average number of common shares, respectively. The following table sets forth the computation of basic and diluted EPS (in millions, except per share data):
 
Three Months Ended
 
March 31,
 
2019
 
2018
Income from continuing operations attributable to Wyndham Destinations shareholders
$
81

 
$
41

Loss from operations of discontinued businesses attributable to Wyndham Destinations shareholders, net of tax

 
(7
)
Loss on disposal of discontinued businesses attributable to Wyndham Destinations shareholders, net of tax
(1
)
 

Net income attributable to Wyndham Destinations shareholders
$
80

 
$
34

 
 
 
 
Basic earnings per share
 
 
 
Continuing operations
$
0.86

 
$
0.41

Discontinued operations
(0.01
)
 
(0.07
)
 
$
0.85

 
$
0.34

Diluted earnings per share
 
 
 
Continuing operations
$
0.85

 
$
0.41

Discontinued operations

 
(0.07
)
 
$
0.85

 
$
0.34

 
 
 
 
Basic weighted average shares outstanding
94.4

 
100.1

Stock-settled appreciation rights (“SSARs”), RSUs (a) and PSUs (b)
0.3

 
0.7

Diluted weighted average shares outstanding (c)(d)
94.7

 
100.8

 
 
 
 
Dividends:
 
 
 
Aggregate dividends paid to shareholders
$
42

 
$
70


(a) 
Excludes 0.7 million restricted stock units (“RSUs”) that would have been anti-dilutive to EPS for the three months ended March 31, 2019, but could potentially dilute basic earnings per share in the future. The number of anti-dilutive RSUs for the three months ended March 31, 2018 was immaterial. Includes unvested dilutive RSUs which are subject to future forfeiture.
(b) 
Excludes 0.2 million and 0.5 million performance-vested stock units (“PSUs”) for the three months ended March 31, 2019 and 2018, respectively, as the Company has not met the required performance metrics. These PSUs could potentially dilute basic earnings per share in the future.
(c) 
Excludes 0.9 million outstanding stock awards that would have been anti-dilutive to EPS for the three months ended March 31, 2019, but could potentially dilute basic earnings per share in the future.
(d) 
The dilutive impact of the Company’s potential common stock is computed utilizing the treasury stock method using average market prices during the period.

Stock Repurchase Program
The following table summarizes stock repurchase activity under the current stock repurchase program:
 
Shares Repurchased
 
Cost
As of December 31, 2018
100.6

 
$
5,262

Repurchases
1.4

 
60

As of March 31, 2019
102.0

 
$
5,322


The Company had $756 million of remaining availability under its program as of March 31, 2019.


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5.
Discontinued Operations
During 2018, the Company completed the spin-off of its hotel business and the sale of its European vacation rentals business. As a result, the Company has classified the results of operations for these businesses as discontinued operations in its Condensed Consolidated Financial Statements and related notes. Discontinued operations include direct expenses clearly identifiable to the businesses being discontinued. The Company does not expect to incur significant ongoing expenses classified as discontinued operations except for certain tax adjustments that may be required as final tax returns are completed. Discontinued operations exclude the allocation of corporate overhead and interest. Discontinued operations included $32 million of separation and related costs during the three months ended March 31, 2018.
 
Prior to its classification as a discontinued operation, the hotel business comprised the Hotel Group segment and the European vacation rentals business was part of the former Destination Network segment, now known as Exchange & Rentals.

The following table presents information regarding certain components of income from discontinued operations, net of income taxes for the three months ended:
 
March 31,
 
2019
 
2018
Net revenues
$

 
$
409

Expenses:
 
 
 
Operating

 
191

Marketing

 
114

General and administrative

 
44

Separation and related costs

 
32

Depreciation and amortization

 
34

Total expenses

 
415

Other (income), net

 
(1
)
Interest (income)

 
(1
)
Provision for income taxes

 
3

Loss from operations of discontinued businesses, net of income taxes

 
(7
)
Loss on disposal of discontinued businesses, net of income taxes
(1
)
 

Loss on discontinued operations, net of income taxes
$
(1
)
 
$
(7
)

The following table presents information regarding certain components of cash flows from discontinued operations for the three months ended:
 
March 31, 2019
 
March 31, 2018
Cash flows provided by operating activities
$

 
$
156

Cash flows used in investing activities
(27
)
 
(8
)
Cash flows used in financing activities

 
(6
)
 
 
 
 
Non-cash items:
 
 
 
Depreciation and amortization

 
34

Stock-based compensation

 
3

Deferred income taxes

 
(12
)
 
 
 
 
Property and equipment additions

 
(20
)

6.
Held-for-Sale Business
During the fourth quarter of 2018, the Company decided to explore strategic alternatives for its North American vacation rentals business. The assets and liabilities of this business have been classified as held-for-sale as of March 31, 2019 and December 31, 2018. The business does not meet the criteria to be classified as a discontinued operation; therefore, the results are reflected within continuing operations on the Condensed Consolidated Statements of Income. This business is

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currently reported within the Exchange & Rentals segment.

Total assets of this business at March 31, 2019 were $270 million including $44 million Restricted cash, $113 million Trade receivables, net, $41 million Goodwill and other intangibles, net, $34 million Property & equipment, net and $33 million Other assets. Total liabilities of this business at March 31, 2019 were $241 million including $114 million Accounts payable, $58 million Deferred income and $61 million Accrued expenses and other liabilities.

Total assets of this business at December 31, 2018 were $203 million including $31 million Restricted cash, $82 million Trade receivables, net, $42 million Goodwill and other intangibles, net, $35 million Property & equipment, net and $8 million Other Assets. Total liabilities of this business at December 31, 2018 were $165 million including $87 million Accounts payable, $42 million Deferred income and $27 million Accrued expenses and other liabilities.

7.
Vacation Ownership Contract Receivables
The Company generates vacation ownership contract receivables by extending financing to the purchasers of its VOIs. Vacation ownership contract receivables, net consisted of:
 
March 31,
2019
 
December 31,
2018
Vacation ownership contract receivables:
 
 
 
Securitized
$
2,913

 
$
2,883

Non-securitized
828

 
888

Vacation ownership contract receivables, gross
3,741

 
3,771

Less: Allowance for loan losses
721

 
734

Vacation ownership contract receivables, net
$
3,020

 
$
3,037


The Company’s securitized vacation ownership contract receivables generated interest income of $99 million and $87 million during the three months ended March 31, 2019 and 2018, respectively. Such interest income is included within Consumer financing revenue on the Condensed Consolidated Statements of Income.

During the three months ended March 31, 2019 and 2018, the Company originated vacation ownership contract receivables of $322 million and $297 million, respectively, and received principal collections of $230 million and $226 million, respectively. The weighted average interest rate on outstanding vacation ownership contract receivables was 14.2% and 14.1% as of March 31, 2019 and December 31, 2018, respectively.

The activity in the allowance for loan losses on vacation ownership contract receivables was as follows:
 
Amount
Allowance for loan losses as of December 31, 2018
$
734

Provision for loan losses
109

Contract receivables write-offs, net
(122
)
Allowance for loan losses as of March 31, 2019
$
721

 
Amount
Allowance for loan losses as of December 31, 2017
$
691

Provision for loan losses
92

Contract receivables write-offs, net
(98
)
Allowance for loan losses as of March 31, 2018
$
685


In accordance with the guidance for accounting for real estate time-sharing transactions, the Company recorded a provision for loan losses of $109 million and $92 million as a reduction of net revenues during the three months ended March 31, 2019 and 2018, 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 Fair Isaac Corporation (“FICO”) score. A FICO score is a branded version of a consumer credit score widely used in the United

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States by the largest banks and lending institutions. FICO scores range from 300 to 850 and are calculated based on information obtained from one or more of the three major U.S. credit reporting agencies that compile and report on a consumer’s credit history. The Company updates its records for all active VOI contract receivables with a balance due on a rolling monthly basis 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, from 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 aging analysis of financing receivables using the most recently updated FICO scores (based on the policy described above):
 
As of March 31, 2019
 
700+
 
600-699
 
<600
 
No Score
 
Asia Pacific
 
Total
Current
$
1,963

 
$
1,032

 
$
189

 
$
137

 
$
251

 
$
3,572

31 - 60 days
21

 
30

 
16

 
5

 
2

 
74

61 - 90 days
14

 
19

 
14

 
3

 
1

 
51

91 - 120 days
11

 
16

 
15

 
2

 

 
44

Total
$
2,009

 
$
1,097

 
$
234

 
$
147

 
$
254

 
$
3,741

 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2018
 
700+
 
600-699
 
<600
 
No Score
 
Asia Pacific
 
Total
Current
$
1,996

 
$
1,041

 
$
166

 
$
135

 
$
246

 
$
3,584

31 - 60 days
22

 
35

 
18

 
6

 
2

 
83

61 - 90 days
15

 
22

 
13

 
3

 
1

 
54

91 - 120 days
12

 
17

 
16

 
4

 
1

 
50

Total
$
2,045

 
$
1,115

 
$
213

 
$
148

 
$
250

 
$
3,771


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.

8.
Inventory
Inventory consisted of:
 
March 31,
2019
 
December 31,
2018
Land held for VOI development
$
4

 
$
4

VOI construction in process
50

 
45

Inventory sold subject to repurchase
33

 
33

Completed VOI inventory
787

 
797

Estimated VOI recoveries
278

 
286

Exchange & Rentals vacation credits and other
61

 
59

Total inventory
$
1,213

 
$
1,224


During the three months ended March 31, 2019 and 2018, the Company transferred $15 million and $48 million, respectively, of VOI inventory to property and equipment. In addition to the inventory obligations listed below, the Company had $9 million and $6 million of inventory accruals included within Accounts payable on the Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018, respectively.


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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.

The Company recognized no gain or loss on these sales transactions. In accordance with these agreements with third-party developers, the Company has conditional rights and conditional obligations to repurchase the completed properties from the developers subject to the properties conforming to the Company's vacation ownership resort standards and provided that the third-party developers have not sold the properties to another party. The Company’s conditional rights and obligations constitute continuing involvement therefore prohibiting the Company from accounting for these transactions as sales.

During 2017, the Company acquired property located in Austin, Texas from a third-party developer for vacation ownership inventory and property and equipment.

The following table summarizes the activity related to the Company’s inventory obligations:
 
Avon
 
Las Vegas
 
Austin
 
Total
December 31, 2017
$
22

 
$
60

 
$
62

 
$
144

Purchases

 

 

 

Payments
(11
)
 
(16
)
 

 
(27
)
March 31, 2018
$
11

 
$
44

 
$
62

 
$
117

 
 
 
 
 
 
 
 
December 31, 2018
$
11

 
$
52

 
$
31

 
$
94

Purchases

 

 
1

 
1

Payments
(11
)
 
(18
)
 

 
(29
)
March 31, 2019
$

 
$
34

 
$
32

 
$
66

 
 
 
 
 
 
 
 
Reported in December 2018:
 
 
 
 
 
 
 
Accrued expenses and other liabilities
$
11

 
$
52

 
$
31

 
$
94

Total inventory obligations
$
11

 
$
52

 
$
31

 
$
94

 
 
 
 
 
 
 
 
Reported in March 2019:
 
 
 
 
 
 
 
Accrued expenses and other liabilities
$

 
$
34

 
$
32

 
$
66

Total inventory obligations
$

 
$
34

 
$
32

 
$
66


The Company has committed to repurchase the completed property located in Las Vegas, Nevada from a third-party developer subject to the property meeting the Company’s vacation ownership resort standards and provided that the third-party developer has not sold the property to another party. The maximum potential future payments that the Company may be required to make under these commitments was $142 million as of March 31, 2019.



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9.
Property and Equipment
Property and equipment, net, consisted of:
 
March 31, 2019
 
December 31, 2018
Land
$
32

 
$
30

Building and leasehold improvements
616

 
588

Furniture, fixtures and equipment
238

 
250

Capitalized software
611

 
604

Finance leases
10

 
12

Construction in progress
56

 
81

Total property and equipment
1,563

 
1,565

Less: Accumulated depreciation and amortization
843

 
853

Net property and equipment
$
720

 
$
712


10.
Debt
The Company’s indebtedness consisted of:
 
March 31,
2019
 
December 31,
2018
Non-recourse vacation ownership debt: (a)
 
 
 
Term notes (b)
$
2,002

 
$
1,839

$800 million bank conduit facility (due April 2020) (c)
452

 
518

Total
$
2,454

 
$
2,357

 
 
 
 
Debt: (d)
 
 
 
$1.0 billion secured revolving credit facility (due May 2023) (e)
$
161

 
$
181

$300 million secured term loan B (due May 2025)
295

 
296

$40 million 7.375% secured notes (due March 2020) 
40

 
40

$250 million 5.625% secured notes (due March 2021) 
249

 
249

$650 million 4.25% secured notes (due March 2022) (f)
649

 
649

$400 million 3.90% secured notes (due March 2023) (g)
404

 
405

$300 million 5.40% secured notes (due April 2024)
298

 
297

$350 million 6.35% secured notes (due October 2025) (h)
341

 
341

$400 million 5.75% secured notes (due April 2027) (i)
397

 
388

Finance leases
3

 
3

Other

 
32

Total
$
2,837

 
$
2,881

 
(a) 
Represents non-recourse debt that is securitized through bankruptcy-remote special purpose entities, the creditors of which have no recourse to the Company for principal and interest. These outstanding borrowings (which legally are not liabilities of the Company) are collateralized by $3.09 billion and $3.03 billion of underlying gross vacation ownership contract receivables and related assets (which legally are not assets of the Company) as of March 31, 2019 and December 31, 2018, respectively.
(b) 
The carrying amounts of the term notes are net of debt issuance costs aggregating $24 million and $21 million as of March 31, 2019 and December 31, 2018, respectively.
(c) 
The Company has borrowing capability under the Sierra Receivable Funding Conduit II 2008-A facility through April 2020. Borrowings under this facility are required to be repaid as the collateralized receivables amortize but no later than May 2021.
(d) 
The carrying amounts of the secured notes and term loan are net of unamortized discounts of $10 million and $11 million as of March 31, 2019 and December 31, 2018, respectively, and net of unamortized debt financing costs of $6 million as of March 31, 2019 and December 31, 2018, respectively.
(e) 
As of March 31, 2019, the weighted average interest rate on borrowings from this facility was 6.09%.
(f) 
Includes $1 million of unamortized gains from the settlement of a derivative as of March 31, 2019 and December 31, 2018.
(g) 
Includes $6 million of unamortized gains from the settlement of a derivative as of March 31, 2019 and December 31, 2018.
(h) 
Includes $7 million of unamortized losses from the settlement of a derivative as of March 31, 2019 and December 31, 2018.

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(i) 
Includes a $1 million increase and $8 million decrease in the carrying value resulting from a fair value hedge derivative as of March 31, 2019 and December 31, 2018, respectively. As of March 31, 2019, the variable interest rate on the notional portion of these notes was 4.66%, and the effective rate was 5.91%.

Sierra Timeshare 2019-1 Receivables Funding LLC
On March 20, 2019, the Company closed on a private placement of a series of term notes payable, issued by Sierra Timeshare 2019-1 Receivables Fundings LLC, with an initial principal amount of $400 million, which are secured by vacation ownership contract receivables and bear interest at a weighted average coupon rate of 3.57%. The advance rate for this transaction was 98.00%.

Maturities and Capacity
The Company’s outstanding debt as of March 31, 2019 matures as follows:
 
Non-recourse Vacation Ownership Debt
 
Debt
 
Total
Within 1 year
$
207

 
$
44

 
$
251

Between 1 and 2 years
210

 
253

 
463

Between 2 and 3 years
604

 
652

 
1,256

Between 3 and 4 years
221

 
407

 
628

Between 4 and 5 years
235

 
164

 
399

Thereafter
977

 
1,317

 
2,294

 
$
2,454

 
$
2,837

 
$
5,291


Required principal payments on the non-recourse vacation ownership debt are based on the contractual repayment terms of the underlying vacation ownership contract receivables. Actual maturities may differ as a result of prepayments by the vacation ownership contract receivable obligors.

As of March 31, 2019, available capacity under the Company’s borrowing arrangements was as follows:
 
Non-recourse Conduit Facilities (a)
 
Revolving
Credit Facilities (b)
Total capacity
$
800

 
$
1,000

Less: Outstanding borrowings
452

 
161

Less: Letters of credit

 
24

Available capacity
$
348

 
$
815

 
(a) 
Consists of the Company’s Sierra Receivable Funding Conduit II 2008-A facility. The capacity of this facility is subject to the Company’s ability to provide additional assets to collateralize additional non-recourse borrowings.
(b) 
Consists of the Company’s $1.0 billion revolving credit facility.

Debt Covenants
The revolving credit facilities and term loan B are subject to covenants including the maintenance of specific financial ratios as defined in the credit agreement. The financial ratio covenants consist of a minimum interest coverage ratio of at least 2.5 to 1.0 as of the measurement date and a maximum first lien leverage ratio not to exceed 4.25 to 1.0 as of the measurement date. The interest coverage ratio is calculated by dividing consolidated EBITDA (as defined in the credit agreement) by consolidated interest expense (as defined in the credit agreement), both as measured on a trailing 12-month basis preceding the measurement date. As of March 31, 2019, our interest coverage ratio was 6.3 to 1.0. The first lien leverage ratio is calculated by dividing consolidated first lien debt (as defined in the credit agreement) as of the measurement date by consolidated EBITDA (as defined in the credit agreement) as measured on a trailing 12-month basis preceding the measurement date. As of March 31, 2019, our first lien leverage ratio was 2.7 to 1.0. These ratios do not include interest expense or indebtedness related to any qualified securitization financing (as defined in the credit agreement). As of March 31, 2019, we were in compliance with all of the financial covenants described above.

Each of our non-recourse, securitized term notes, and the bank conduit facilities contain various triggers relating to the performance of the applicable loan pools. If the vacation ownership contract receivables pool that collateralizes one of our securitization notes fails to perform within the parameters established by the contractual triggers (such as higher default or delinquency rates), there are provisions pursuant to which the cash flows for that pool will be maintained in the

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securitization as extra collateral for the note holders or applied to accelerate the repayment of outstanding principal to the note holders. As of March 31, 2019, all of our securitized loan pools were in compliance with applicable contractual triggers.

Interest Expense
During the three months ended March 31, 2019, the Company incurred interest expense of $41 million on debt excluding non-recourse vacation ownership debt, including an offset of $1 million of capitalized interest. Such amounts are included within Interest expense on the Condensed Consolidated Statements of Income. Cash paid related to such interest was $40 million during the three months ended March 31, 2019.

During the three months ended March 31, 2018, the Company incurred interest expense of $45 million on debt excluding non-recourse vacation ownership debt, including an offset of less than $1 million of capitalized interest. Such amounts are included within Interest expense on the Condensed Consolidated Statements of Income. Cash paid related to such interest was $50 million during the three months ended March 31, 2018.

Interest expense incurred in connection with the Company’s non-recourse vacation ownership debt during the three months ended March 31, 2019 was $26 million and $19 million during the three months ended March 31, 2018 and is recorded within Consumer financing interest on the Condensed Consolidated Statements of Income. Cash paid related to such interest was $20 million and $11 million for the three months ended March 31, 2019 and 2018.

Transition from LIBOR
The Company is currently evaluating the impact of the transition from LIBOR as an interest rate benchmark to other potential alternative reference rates, including but not limited to the Secured Overnight Financing Rate (“SOFR”). Currently the Company has several debt and derivative instruments in place that reference LIBOR-based rates. The transition from LIBOR is estimated to take place in 2021 and management will continue to actively assess the related opportunities and risks involved in this transition.

11.
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, special purpose entities (“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 Company’s 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 arm’s-length basis based on market conditions. The activities of these SPEs are limited to (i) purchasing vacation ownership contract receivables from the Company’s vacation ownership subsidiaries, (ii) issuing debt securities and/or borrowing under a conduit facility to fund such purchases and (iii) entering into derivatives to hedge interest rate exposure. The bankruptcy-remote SPEs are legally separate from the Company. The receivables held by the bankruptcy-remote SPEs are not available to creditors of the Company and legally are not assets of the Company. Additionally, the non-recourse debt that is securitized through the SPEs is legally not a liability of the Company and thus, the creditors have no recourse to the Company for principal and interest.


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The assets and liabilities of these vacation ownership SPEs are as follows:
 
March 31,
2019
 
December 31,
2018
Securitized contract receivables, gross (a)
$
2,913

 
$
2,883

Securitized restricted cash (b)
153

 
120

Interest receivables on securitized contract receivables (c)
24

 
23

Other assets (d)
2

 
3

Total SPE assets
3,092

 
3,029

Non-recourse term notes (e) (f)
2,002

 
1,839

Non-recourse conduit facilities (e)
452

 
518

Other liabilities (g)
7

 
3

Total SPE liabilities
2,461

 
2,360

SPE assets in excess of SPE liabilities
$
631

 
$
669

 
(a) 
Included in Vacation ownership contract receivables, net on the Condensed Consolidated Balance Sheets.
(b) 
Included in Restricted cash on the Condensed Consolidated Balance Sheets.
(c) 
Included in Trade receivables, net on the Condensed Consolidated Balance Sheets.
(d) 
Primarily includes deferred financing costs for the bank conduit facility and a security investment asset, which is included in Other assets on the Condensed Consolidated Balance Sheets.
(e) 
Included in Non-recourse vacation ownership debt on the Condensed Consolidated Balance Sheets.
(f) 
Includes deferred financing costs of $24 million and $21 million as of March 31, 2019 and December 31, 2018, respectively, related to non-recourse debt.
(g) 
Primarily includes accrued interest on non-recourse debt, which is included in Accrued expenses and other liabilities on the Condensed 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 $828 million and $888 million as of March 31, 2019 and December 31, 2018, respectively.

A summary of total vacation ownership contract receivables and other securitized assets, net of non-recourse liabilities and the allowance for loan losses, is as follows:
 
March 31,
2019
 
December 31,
2018
SPE assets in excess of SPE liabilities
$
631

 
$
669

Non-securitized contract receivables
828

 
888

Less: Allowance for loan losses
721

 
734

Total, net
$
738

 
$
823


Saint Thomas, U.S. Virgin Islands Property
During 2015, the Company sold real property located in Saint Thomas, U.S. Virgin Islands to a third-party developer to construct VOI inventory through an SPE. In accordance with the agreements with the third-party developer, the Company has conditional rights and conditional obligations to repurchase the completed property from the developer subject to the property conforming to the Company's vacation ownership resort standards and provided that the third-party developer has not sold the property to another party.

As a result of a disruption to VOI sales caused by the impact of the hurricanes on Saint Thomas, U.S. Virgin Islands in 2017, there was a change in the economics of the transaction due to a reduction in the fair value of the assets of the SPE. As such, the Company is now considered the primary beneficiary for specified assets and liabilities of the SPE, and therefore consolidated $64 million of Property and equipment and $104 million of Debt on its Condensed Consolidated Balance Sheet. As a result of this consolidation, the Company incurred a non-cash $37 million loss due to a write-down of property and equipment to fair value. During the first quarter of 2019, the Company made its final purchase of VOI inventory from the SPE, and the debt was extinguished.


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The assets and liabilities of the Saint Thomas Property SPE are as follows:
 
December 31,
2018
Property and equipment, net
23

Total SPE assets
23

Debt (a)
32

Total SPE liabilities
32

SPE equity (deficit)
$
(9
)
 
(a) 
Included $32 million relating to mortgage notes, which were included in Debt on the Condensed Consolidated Balance Sheets as of December 31, 2018.

During the three months ended March 31, 2019 and 2018, the SPE conveyed $23 million and $8 million, respectively, of property and equipment to the Company.

12.
Fair Value
The Company measures its financial assets and liabilities at fair value on a recurring basis and utilizes the fair value hierarchy to determine such fair values. Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:

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

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

Level 3: Unobservable inputs used when little or no market data is available. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement falls has been determined based on the lowest level input (closest to Level 3) that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

As of March 31, 2019, the Company had interest rate swap contracts resulting in less than $1 million of assets which are included within Other assets on the Condensed Consolidated Balance Sheet. The Company also had foreign exchange contracts resulting in less than $1 million of liabilities which are included within Accrued expenses and other liabilities on the Condensed Consolidated Balance Sheet. On a recurring basis, such assets and liabilities are remeasured at estimated fair value (all of which are Level 2) and thus are equal to the carrying value.

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

The fair value of financial instruments is generally determined by reference to market values resulting from trading on a national securities exchange or in an over-the-counter market. In cases where quoted market prices are not available, fair value is based on estimates using present value or other valuation techniques, as appropriate. The carrying amounts of cash and cash equivalents, restricted cash, trade receivables, accounts payable and accrued expenses and other current liabilities approximate fair value due to the short-term maturities of these assets and liabilities.


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The carrying amounts and estimated fair values of all other financial instruments are as follows:
 
March 31, 2019
 
December 31, 2018
 
Carrying
Amount
 
Estimated Fair Value
 
Carrying
 Amount
 
Estimated Fair Value
Assets
 
 
 
 
 
 
 
Vacation ownership contract receivables, net
$
3,020

 
$
3,651

 
$
3,037

 
$
3,662

Debt
 
 
 
 
 
 
 
Total debt
$
5,291

 
$
5,326

 
$
5,238

 
$
4,604


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 non-recourse 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 debt, excluding finance leases, using Level 2 inputs based on indicative bids from investment banks and determines the fair value of its secured notes using quoted market prices (such secured notes are not actively traded).

13.
Derivative Instruments and Hedging Activities
Foreign Currency Risk
The Company has foreign currency rate exposure to exchange rate fluctuations worldwide with particular exposure to the British pound, Euro, the Canadian and Australian dollars and the Mexican peso. The Company uses freestanding foreign currency forward contracts to manage a portion of its exposure to changes in foreign currency exchange rates associated with its foreign currency denominated receivables, payables and forecasted earnings of foreign subsidiaries. Additionally, the Company has used foreign currency forward contracts designated as cash flow hedges to manage a portion of its exposure to changes in forecasted foreign currency denominated vendor payments. The amount of gains or losses relating to contracts designated as cash flow hedges that the Company expects to reclassify from Accumulated other comprehensive loss (“AOCL”) to earnings over the next 12 months is not material.

Interest Rate Risk
A portion of the debt used to finance the Company’s operations is exposed to interest rate fluctuations. The Company uses various hedging strategies and derivative financial instruments to create a desired mix of fixed and floating rate assets and liabilities. Derivative instruments currently used in these hedging strategies include swaps. Interest rate swaps are used to convert specific fixed-rate debt into variable-rate debt (i.e., fair value hedges) to manage the overall interest cost. For relationships designated as fair value hedges, changes in fair value of the derivatives were recorded in income with offsetting adjustments to the carrying amount of the hedged debt, resulting in an immaterial impact to the Condensed Consolidated Statements of Income.

Losses on derivatives recognized in AOCL for the three months ended March 31, 2019 and 2018 were not material.

14.
Income Taxes
The Company files income tax returns in the U.S. federal and state jurisdictions, as well as in foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examinations for years prior to 2015. In addition, with few exceptions, the Company is no longer subject to state, local or foreign income tax examinations for years prior to 2009.

The Company’s effective tax rate decreased from 36.9% during the three months ended March 31, 2018 to 27.7% during the three months ended March 31, 2019 primarily due to the absence of non-cash tax charges from certain internal restructurings associated with the sale of its European vacation rentals business during 2018; partially offset by excess tax benefits in relation to stock based compensation in 2018.

The Company made cash income tax payments, net of tax refunds, of $2 million and $70 million during the three months ended March 31, 2019 and 2018, respectively. In addition, the Company made cash income tax payments, net of refunds,

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of $5 million during the three months ended March 31, 2018 related to discontinued operations.

15. Leases
The Company adopted the new Leases accounting standard as of January 1, 2019, resulting in the recognition of $158 million of right-of-use assets and $200 million of related lease liabilities. Right-of-use assets were decreased by $42 million of tenant improvement allowances and deferred rent balances reclassified from other liabilities. Both the right-of-use assets and related lease liabilities recognized upon adoption included $21 million associated with the Company’s held-for-sale business. The new standard requires a lessee to recognize right-of-use assets and lease liabilities on the balance sheet for all lease obligations and disclose key information about leasing arrangements, such as the amount, timing, and uncertainty of cash flows arising from leases. We adopted the standard using the modified retrospective approach; therefore, prior year financial statements were not recast. We elected the package of transition provisions available for expired or existing contracts, which allowed us to carryforward our historical assessments of (i) whether contracts are leases or contain leases, (ii) lease classification and (iii) initial direct costs.

We lease property and equipment under finance and operating leases for our corporate headquarters, administrative functions, marketing and sales offices, and various other facilities and equipment. For leases with terms greater than 12 months, we record the related asset and obligation at the present value of lease payments over the term. Many of our leases include rental escalation clauses, lease incentives, renewal options and/or termination options that are factored into our determination of lease payments. The Company elected the hindsight practical expedient to determine the reasonably certain lease term for existing leases. The Company also made an accounting policy election to keep leases with an initial term of 12 months or less off the balance sheet and recognize the associated lease payments on a straight-line basis over the lease term in the income statement.

When available, we use the rate implicit in the lease to discount lease payments to present value; however, most of our leases do not provide a readily determinable implicit rate. Therefore, we must estimate our incremental borrowing rate to discount the lease payments based on information available at lease commencement. Our leases have remaining lease terms of one to 20 years, some of which include options to extend the leases for up to five years, and some of which include options to terminate the leases within one year.

As of March 31, 2019, the Company had right-of-use assets of $131 million and related lease liabilities of $171 million. Right-of-use assets are included within Other assets, and the related lease liabilities are included within Accrued and other liabilities on the balance sheet.

The table below presents certain information related to the lease costs for finance and operating leases:
 
Three Months Ended
 
March 31,
 
2019
Operating lease cost
$
9

 
 
Short-term lease cost
$
5

 
 
Finance lease cost:

Amortization of right-of-use assets

Interest on lease liabilities

Total finance lease cost
$


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The table below presents supplemental cash flow information related to leases:
 
Three Months Ended
 
March 31,
 
2019
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows from operating leases
$
10

Operating cash flows from finance leases
$

Financing cash flows from finance leases
$

Right-of-use assets obtained in exchange for lease obligations:
 
Operating leases
$
4

Finance leases
$


The table below presents the lease-related assets and liabilities recorded on the balance sheet:
 
Balance Sheet Classification
 
March 31, 2019
Operating Leases:
 
 
 
Operating lease right-of-use assets
Other assets
 
$
131

Operating lease liabilities
Accrued expenses and other liabilities
 
$
171

 
 
 
 
Finance Leases:
 
 
 
Finance lease assets (a)
Property and equipment, net
 
$
3

Finance lease liabilities
Debt
 
$
3

 
 
 
 
Weighted Average Remaining Lease Term:
 
 
 
Operating leases
 
 
9.5 years

Finance leases
 
 
2.4 years

Weighted Average Discount Rate:
 
 
 
Operating leases (b) 
 
 
6.8
%
Finance leases
 
 
4.2
%
 
(a)Presented net of accumulated depreciation.
(b)Upon adoption of the new lease standard, discount rates used for existing leases were established at January 1, 2019.

The table below presents maturities of lease liabilities as of March 31, 2019:
 
Operating Leases
 
Finance
Leases
Nine months ending December 31, 2019
$
29

 
$
1

2020
32

 
1

2021
27

 
1

2022
24

 

2023
22

 

Thereafter
99

 

Total minimum lease payments
233

 
3

Less: Amount of lease payments representing interest
(62
)
 

Present value of future minimum lease payments
$
171

 
$
3



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The table below presents future minimum lease payments required under non-cancelable operating leases as reported in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on February 26, 2019:
 
December 31, 2018
2019
$
34

2020
30

2021
26

2022
24

2023
22

Thereafter
99

Future minimum lease payments
$
235


During 2018, the Company incurred total rental expense of $61 million for continuing operations and $9 million for discontinued operations.

16.
Commitments and Contingencies
The Company is involved in claims, legal and regulatory proceedings, and governmental inquiries related to the Company’s business, none of which, in the opinion of management, is expected to have a material effect on our results of operations or financial condition.

Wyndham Destinations Litigation
The Company may be from time to time 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 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 or in relation to guest reservations and bookings; and negligence, breach of contract, fraud, consumer protection and other statutory claims by guests and other consumers for alleged injuries sustained at or acts or occurrences related to vacation ownership units or resorts or in relation to guest reservations and bookings; for its exchange & 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, guests and other consumers for alleged injuries sustained at or acts or occurrences related to affiliated resorts and vacation rental properties, or in relation to guest reservations and bookings; and for each of its businesses, bankruptcy proceedings involving efforts to collect receivables from a debtor in bankruptcy, employment matters including but not limited to, claims of wrongful termination, retaliation, discrimination, harassment and wage and hour claims, whistleblower claims, claims of infringement upon third parties’ intellectual property rights, claims relating to information security, privacy and consumer protection, fiduciary duty/trust claims, tax claims, environmental claims and landlord/tenant disputes.

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

The Company believes that it has adequately accrued for such matters with reserves of $14 million as of March 31, 2019 and December 31, 2018. Such reserves are exclusive of matters relating to the Company’s separation from Cendant, which is discussed in Note 21—Transactions with Former Parent and Former Subsidiaries. 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 March 31, 2019, the potential exposure resulting from adverse outcomes of such legal proceedings could, in the aggregate, range up to $49 million in excess of recorded accruals. However, the Company does not believe that the impact of such

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litigation should result in a material liability to the Company in relation to its consolidated financial position and/or liquidity.

Other Guarantees and Indemnifications
Vacation Ownership
The Company has committed to repurchase completed property located in Las Vegas, Nevada from a third-party developer subject to such property meeting the Company’s vacation ownership resort standards and provided that the third-party developer has not sold such property to another party. See Note 8Inventory for additional details.

For information on guarantees and indemnifications related to the Company’s former parent and subsidiaries see Note 22Transactions with Former Parent and Former Subsidiaries.
 

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17.    Accumulated Other Comprehensive (Loss)/Income
The components of Accumulated Other Comprehensive (Loss)/Income are as follows:
 
Foreign
 
Unrealized
 
Defined
 
Accumulated
 
Currency
 
(Losses)
 
Benefit
 
Other
 
Translation
 
on Cash Flow
 
Pension
 
Comprehensive
Pretax